ITEM 1. AND ITEM 2.
ITEM 3. 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 or results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3) to Form 10-K, the following information is included in Part I of this Form 10-K.
The following table sets forth certain information with respect to executive officers of the Company:
Set forth below is a description of the backgrounds of each of the executive officers of the Company:
S.P. Johnson IV has served as the President, Chief Executive Officer and a director of the Company since December 1993. Prior to that, he worked 15 years for Shell Oil Company. His managerial positions included Operations Superintendent, Manager of Planning and Finance and Manager of Development Engineering. Mr. Johnson is a Registered Petroleum Engineer and has a B.S. in Mechanical Engineering from the University of Colorado.
Frank A. Wojtek has served as the Chief Financial Officer, Vice President, Secretary, Treasurer and a director of the Company since 1993. In addition, from 1992 to 1997, Mr. Wojtek was the Assistant to the Chairman of the Board of Reading & Bates Corporation ("Reading & Bates") (an offshore drilling company). Mr. Wojtek also holds the positions of Vice President and Secretary /Treasurer for Loyd and Associates, Inc. (a private financial consulting and investment banking firm). Mr. Wojtek held the positions of Vice President and Chief Financial Officer of Griffin-Alexander Drilling Company from 1984 to 1987, Treasurer of Chiles-Alexander International Inc. from 1987 to 1989 and Vice President and Chief Financial Officer of India Offshore Inc. from 1989 to 1992, all of which are companies in the offshore drilling industry. Mr. Wojtek is a Certified Public Accountant and holds a B.B.A. in Accounting from the University of Texas.
George F. Canjar has been head of the Company's exploration activities since joining the Company in July 1996 and was elected Vice President of Exploration Development in June 1997. Prior thereto he worked for over 15 years for Shell Oil Company and its overseas affiliates where he held various technical and managerial positions, including Technical Manager-Geology & Petrophysics, Section Head Geology & Seismology and Team Leader for numerous integrated production, development, exploration and project execution groups. Mr. Canjar is a Registered Petroleum Engineer, Registered Geologist and has a B.S. in Geological Engineering from the Colorado School of Mines.
Kendall A. Trahan has been head of the Company's land activities since joining the Company in March 1997 and was elected Vice President of Land of the Company in June 1997. From 1994 to February 1997, he served as a Director of Joint Ventures Onshore Gulf Coast for Vastar Resources, Inc. From 1982 to 1994, he worked as an Area Landman and then a Division Landman and Director of Business Development for Arco Oil & Gas Company. Prior to that, Mr. Trahan served as a Staff Landman for Amerada Hess Corporation and as an independent Landman. He is a Certified Professional Landman and holds a B.S. degree from the University of Southwestern Louisiana.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock, par value $0.01 per share (the "Common Stock"), has been publicly traded through the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol CRZO since the Company's initial public offering (the "Offering") effective August 6, 1997. The following table sets forth the quarterly high and low bid prices for each indicated quarter.
There were approximately 60 shareholders of record (excluding brokerage firms and other nominees) of the Company's Common Stock as of March 23, 2000.
The Company has not paid any dividends in the past and does not intend to pay cash dividends on its Common Stock in the foreseeable future. The Company currently intends to retain any earnings for the future operation and development of its business, including exploration, development and acquisition activities. The Company's revolving line of credit with Compass Bank (the "Company Credit Facility") and the terms of its 9% Senior Subordinated Notes, restrict the Company's ability to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
RECENT SALES OF UNREGISTERED SECURITIES
On December 15, 1999, the Company consummated the transactions (the "Financing") contemplated by a Securities Purchase Agreement dated December 15, 1999 (the "Securities Purchase Agreement") among the Company, CB Capital Investors, L.P. ("Chase"), Mellon Ventures, L.P. ("Mellon"), Paul B. Loyd, Jr., Douglas A.P. Hamilton and Steven A. Webster (excluding the Company, the "Investors"). Such transactions included (i) the payment by the Investors of an aggregate purchase price of $30,000,000, (ii) the sale of an aggregate of $22,000,000 principal amount of 9% Senior Subordinated Notes due 2007 (the "Notes") to the Investors, (iii) the sale of an aggregate of 3,636,364 shares of the Company's Common Stock for $2.20 per share to the Investors, (iv) the sale of warrants (the "Warrants") to purchase up to 2,760,189 shares of the Company's Common Stock (the "Warrant Shares") at the exercise price of $2.20 per share, subject to adjustments, to the Investors, (v) the execution of the Shareholders Agreement dated December 15, 1999 (the "Shareholders Agreement") among the Company, Chase, Mellon, Paul B. Loyd, Jr., Douglas A.P. Hamilton, Steven A. Webster, S.P. Johnson IV, Frank A. Wojtek and DAPHAM Partnership, L.P., (vi) the execution and delivery of the Warrant Agreement dated December 15, 1999 (the "Warrant Agreement") among the Company, Chase, Mellon, Paul B. Loyd, Jr., Douglas A.P. Hamilton and Steven A. Webster, (vii) the execution of the Registration Rights Agreement dated December 15, 1999 ("Chase Registration Rights Agreement") among the Company, Chase and Mellon, (viii) the execution of the Amended and Restated Registration Rights Agreement dated December 15, 1999 ("Amended Founders Registration Rights Agreement") among the Company, Paul B. Loyd, Jr., Douglas A.P. Hamilton, Steven A. Webster, S.P. Johnson IV, Frank A. Wojtek and DAPHAM Partnership, L.P., and (ix) the execution of a Compliance Sideletter dated December 15, 1999 among the Company, Chase and Mellon (the "Compliance Sideletter").
The Warrants are exercisable at any time prior to the expiration date on December 15, 2007 for the purchase of an aggregate of 2,760,189 shares of Common Stock at an exercise price of $2.20 per share, subject to certain adjustments.
Each Warrant may be exercised by (i) paying the exercise price in cash or (ii) on a cashless basis by exercising the Warrant for a number of net Warrant Shares equal to the number of Warrant Shares issuable upon exercise of the Warrant minus the number of shares obtained by dividing (A) the product of the exercise price times the number of net Warrant Shares issuable upon exercise of the Warrant by (B) the average market price during the 4-day trading period preceding the date of exercise.
The number and kind of Warrant Shares issued and the exercise price are subject to adjustment in certain circumstances, including (i) if the Company pays a dividend in Common Stock or distributes shares of its Common Stock, subdivides, splits or reclassifies its outstanding shares of Common Stock into a larger number of shares of Common Stock, or combines its outstanding shares of Common Stock into a smaller number of shares of Common Stock, (ii) if the Company issues shares of Common Stock or securities exercisable or exchangeable for or convertible into shares of Common Stock for no consideration or for less than the market value (as specified in the Warrant) of the Common Stock, subject to certain exceptions, (iii) if the Company distributes any of its equity securities (other than Common Stock or options) to the holders of the Common Stock on a pro rata basis, (iv) if the Company engages in a consolidation, merger or business combination, sells all of its assets to another person or entity, or enters into certain capital reorganizations or reclassifications of the capital stock of the Company or (v) the Company takes certain other actions affecting its Common Stock.
The sale of the shares of Common Stock, the Notes and the Warrants pursuant to the Securities Purchase Agreement is exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof as a transaction not involving a public offering.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The financial information of the Company set forth below for each of the five years ended December 31, 1999, has been derived from the audited combined financial statements of the Company. The following table also sets forth certain pro forma income taxes, net income and net income per share information. The information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited financial statements of the Company and the related notes thereto included elsewhere herein.
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(1) On May 16, 1997, Carrizo and a number of affiliated entities were combined with the Company in a series of transactions in connection with its initial public offering (the "Combination Transactions"). Prior to that date, Carrizo and those other entities were not required to pay federal income taxes due to their status as partnerships or Subchapter S corporations. The amounts shown reflect pro forma income taxes that represent federal income taxes which would have been reported under Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," had Carrizo and such entities been tax-paying entities during each of the periods presented. See Notes 2 and 4 to the Company's financial statements. Management of the Company believes that EBITDA and operating cash flow may provide additional information about the Company's ability to meet its future requirements for debt service, capital expenditures and working capital. EBITDA and operating cash flow are financial measures commonly used in the oil and gas industry and should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. Because EBITDA excludes some, but not all, items that affect net income and because operating cash flow excludes changes in assets and liabilities and these measures may vary among companies, the EBITDA and operating cash flow data presented above may not be comparable to similarly titled measures of other companies.
(2) Adjusted EBITDA represents earnings before interest expense, income taxes, depreciation, depletion, amortization and writedown of oil and gas properties.
(3) Operating cash flow represents cash flows from operating activities prior to changes in assets and liabilities.
(4) Net income (loss) for the year ended December 31, 1999 excludes and earnings per share for the year ended December 31, 1999 includes the discount on the redemption of the Company's Preferred Stock in the amount of $21,868,413.
(5) Debt repayments include amounts refinanced.
Forward Looking Statements. The statements contained in all parts of this document, (including any portion attached hereto) including, but not limited to, those relating to the Company's schedule, targets, estimates or results of future drilling, including the number, timing and results of wells, budgeted wells, increases in wells, expected working or net revenue interests, prospects budgeted and other future capital expenditures, risk profile of oil and gas exploration, acquisition of 3-D seismic data (including number, timing and size of projects), use of proceeds from the Company's initial public offering and the sale of shares of Preferred Stock and the warrants, 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, future hiring, future exploration activity 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," "budgeted", "targeted", "potential" "estimate," "expect," "may," "project," "believe" and similar expressions 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 its 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 herein and in the Company's other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 70, 57 and 32 wells in 1997, 1998 and 1999 respectively. The Company has budgeted to drill 45 gross wells (14.1 net) in 2000; however, in order to drill the expected number of wells the Company will need to obtain additional financing and the actual number of wells drilled will vary depending upon the Company's ability to obtain this financing, success of drilling program, weather delays and other factors. If the Company drills the number of wells it has budgeted for 2000, depreciation, depletion and amortization are expected to increase and oil and gas operating expenses are expected to increase over levels incurred in 1999. The Company has typically retained the majority of its interests in shallow, normally pressured prospects and sold a portion of its interests in deeper, over-pressured prospects.
The financial statements set forth herein are prepared on the basis of a combination of Carrizo and the entities that were a party to the Combination Transactions. Carrizo and the entities combined with it in the Combination Transactions were not required to pay federal income taxes due to their status as partnerships or Subchapter S corporations, which are not subject to federal income taxation. Instead, taxes for such periods were paid by the shareholders and partners of such entities. On May 16, 1997, Carrizo terminated its status as an S corporation and thereafter became subject to federal income taxes. In accordance with SFAS No. 109, "Accounting for Income Taxes," the Company established a deferred tax liability in the second quarter of 1997, resulting in a noncash charge to income of approximately $1.6 million.
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 approximately $3,000,000.
Prior to the Offering, Carrizo conducted its oil and natural gas operations directly, with industry partners and through the following affiliated entities: Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd. and Placedo Partners Ltd. Concurrently with the closing of the Offering, Combination Transactions were closed. The Combination Transactions consisted of the following: (i) Carrizo Production, Inc. merged into Carrizo; (ii) Carrizo acquired Encinitas Partners Ltd. in two steps: (a) Carrizo acquired the limited partner interests in Encinitas Partners Ltd. held by certain of the Company's directors and (b) Encinitas Partners Ltd. merged into Carrizo; (iii) La Rosa Partners Ltd. merged into Carrizo; and (iv) Carrizo Partners Ltd. merged into Carrizo. As a result of the merger of Carrizo and Carrizo Partners Ltd., Carrizo became the owner of all of the partnership interest in Placedo Partners Ltd.
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% discount rate) of estimated future net after-tax cash flows from proved oil and gas reserves, such excess costs are charged to operations. At December 31, 1998, the Company recorded a full cost ceiling test write down of its oil and natural gas properties of $20.3 million primarily as a result of declines in product pricing and revisions to prior estimates of proved reserves. Once incurred, a write-down of oil and gas properties is not reversible at a later date.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Oil and natural gas revenues for 1999 increased 30% to $10.2 million from $7.9 million in 1998. Production volumes for natural gas in 1999 increased 22% to 3235.0 MMcf from 2,655.1 MMcf in 1998. Realized average natural gas prices decreased 3% to $2.23 per Mcf in 1999 from $2.31 per Mcf in 1998. Production volumes for oil in 1999 increased 28% to 179.3 MBbls from 140.0 MBbls 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 Matagorda Project wells in the second half of 1999. Natural gas production increased primarily as a result of the Jones Branch acquisition, the completion of the Matagorda Project area wells and the Cedar Point Project Area well in the second half of 1999 offset by the natural decline of existing wells.
Average oil prices increased 37% to $16.80 per barrel in 1999 from $12.30 per barrel in 1998.
The following table summarizes production volumes, average sales prices and operating revenues for the Company's oil and natural gas operations for the years ended December 31, 1998 and 1999:
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(1) Including impact of hedging.
Oil and natural gas operating expenses for 1999 increased 10% to $3.0 million from $2.8 million in 1998. Oil and natural gas operating expenses increased primarily as a result of the addition of new oil and gas wells drilled and completed since December 31, 1998 offset by a reduction in costs on older producing fields. Operating expenses per equivalent unit in 1999 decreased to $.70 per Mcfe from $.79 per Mcfe in 1998. The per unit cost decreased primarily as a result of the addition of new wells with high production rates during 1999 and the implementation of cost control measures in certain oil producing fields offset by decreased production of natural gas as wells naturally decline.
Depreciation, depletion and amortization ("DD&A") expense for 1999 increased nine percent to $4.3 million from $4.0 million in 1998. This increase was primarily due to the 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.
Primarily as a result of quantity revisions and depressed commodity prices, the Company recorded a write-down of oil and gas properties of $20.3 million in 1998. Prior to 1998 and during 1999 the Company was not required to record any such write-downs.
General and administrative expense for 1999 decreased 18% to $2.2 million from $2.7 million for 1998 reflecting the cost control measures implemented in the fourth quarter of 1998 and first quarter of 1999.
Interest expense, net of amounts capitalized, for 1999 increased 305% to $35,000 from $9,000 in 1998. This increase was primarily due to higher interest expense in 1999 which was not available to be capitalized. The Company expects future interest costs to increase as a result of its issuance of $22 million principal amount of senior subordinated notes in December 1999.
Income tax benefits changed from $2.2 million to $1.1 million based on improvements in the expected results which influence future taxable income. The Company adjusted its valuation allowance in the fourth quarter of 1999 on net operating loss carryforwards expected to be realized which resulted in a deferred income tax benefit of $1.1 million.
Dividends and accretion of discount on preferred stock decreased to $2.4 million in 1999 from $2.9 in 1998 as a result of the redemption of preferred stock in the fourth quarter of 1999. As a result of this redemption, no future charges will be accrued.
Net income for 1999 increased to $1.7 million from a loss of $22.2 million in 1998 as a result of the factors described above.
The redemption of the Company's mandatorily redeemable preferred stock at a discount resulted in a credit of $21,868,413 which is included in net income available to common shareholders, net of stock dividends paid to the holders of the preferred stock of $2,417,358.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Oil and natural gas revenues for 1998 decreased 10% to $7.9 million from $8.7 million in 1997. Production volumes for natural gas in 1998 decreased 3% to 2,655.1 MMcf from 2,749.2 MMcf in 1997. Average natural gas prices decreased 4% to $2.31 per Mcf in 1998 from $2.41 per Mcf in 1997. Production volumes for oil in 1998 increased 24% to 140 MBbls from 112.5 MBbls in 1997. Average oil prices decreased 34% to $12.30 per barrel in 1998 from $18.66 per barrel in 1997.
The following table summarizes production volumes, average sales prices and operating revenues for the Company's oil and natural gas operations for the years ended December 31, 1997 and 1998:
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(1) Including impact of hedging.
Oil and natural gas operating expenses for 1998 increased 19% to $2.8 million from $2.3 million in 1997. Oil and natural gas operating expenses increased primarily as a result of the addition of new oil and gas wells drilled and completed since December 31, 1996. Operating expenses per equivalent unit in 1998 increased to $.81 per Mcfe from $.68 per Mcfe in 1997. The per unit cost increased primarily as a result of decreased production of natural gas as wells naturally decline.
DD&A expense for 1998 increased 68% to $4.0 million from $2.4 million in 1997. This increase was primarily due to the increased production, additional land, seismic and drilling costs.
Primarily as a result of quantity revisions and depressed commodity prices, the Company recorded a write-down of oil and gas properties of $20.3 million in 1998.
General and administrative expense for 1998 increased 68% to $2.7 million from $1.6 million for 1997 reflecting ramp-up expenses relating to the hiring of additional technical and administrative staff to handle the Company's increased level of exploration activities and operations as well as other costs related to being a public company.
Interest expense for 1998 decreased 94% to $9,000 from $151,000 in 1997. This decrease was primarily due to lower interest expense in 1998 which allowed a larger percentage of the interest to be capitalized.
As a result of the adoption of SFAS 109 in the second quarter of 1997, the Company recorded a one-time non-cash charge to income of $1.6 million to establish a deferred tax liability.
Dividends and accretion of discount on preferred stock increased to $2.9 million in 1998 from none in 1997 as a result of the sale of preferred stock in the first quarter of 1998.
Net income for 1998 decreased to a loss of $22.2 million from income of $31,000 in 1997 as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has made and will be required to make oil and gas capital expenditures substantially in excess of its net cash flow from operations in order to complete the exploration and development of its existing properties.
The Company will require additional sources of financing to fund drilling expenditures on properties currently owned by the Company and to fund leasehold costs and geological and geophysical cost on its activities exploration projects.
While the Company believes that the recent financing consummated in December 1999 (see Financing Arrangements below) will provide sufficient capital to carry out the Company's 2000 exploration plans, management of the Company continues to seek financing for its capital program from a variety of sources. No assurance can be given that the Company will be able to obtain additional financing on terms that would be acceptable to the Company. The Company's inability to obtain additional financing could have a material adverse effect on the Company. Without raising additional capital, the Company anticipates that it may 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's primary sources of liquidity have included proceeds from the initial public offering from the December 1999 sale of Subordinated Notes, Common Stock and Warrants, the 1998 sale of shares of Preferred Stock and Warrants, funds generated by operations, equity capital contributions, borrowings, primarily under revolving credit facilities and the Palace Agreement.
Cash flows provided by operations (after changes in working capital) were $3.1 million, $2.4 million and $2.2 million for 1997, 1998 and 1999, respectively. The decrease in cash flows provided by operations in 1998 as compared to 1997 was due primarily to decreases in commodity prices. The decrease in cash flows provided by operations in 1999 as compared to 1998 was due primarily to the decrease in current liabilities offset by increases in commodity prices.
The Company has budgeted capital expenditures in 2000 of approximately $13.9 million of which $2.3 is expected to be used to fund 3-D seismic surveys and land acquisitions and $11.6 million of which is expected to be used for drilling activities in the Company's project areas. The Company has budgeted to drill approximately 45 gross wells (14.1 net) in 2000. The actual number of wells drilled and capital expended is dependent upon available financing, cash flow, drilling rigs and other factors.
The Company has continued to reinvest a substantial portion of its cash flows into increasing its 3-D prospect portfolio, improving its 3-D seismic interpretation technology and funding its drilling program. Oil and gas capital expenditures were $32.2 million, $36.6 and $10.3 million for 1997, 1998 and 1999, respectively. The Company's drilling efforts resulted in the successful completion of 46 gross wells (17.5 net) in 1997, 31 gross wells (10.3 net) in 1998 and 18 gross wells (3.2 net) in 1999.
FINANCING ARRANGEMENTS
In connection with the Offering, Carrizo entered into an amended revolving credit facility with Compass Bank (the "Company Credit Facility") to provide for a maximum loan amount of $25 million, subject to borrowing base limitations. The principal outstanding is due and payable in January 2002, with interest due monthly. The Company Credit Facility was amended in March 1999 to provide for a maximum loan amount under such facility of $10 million. The interest rate on all revolving credit loans is calculated, at the Company's option, at a floating rate based on the Compass index rate or LIBOR plus 2 percent. The Company's obligations are secured by substantially all of its oil and gas properties and cash or cash equivalents included in the borrowing base. Certain members of the Board of Directors have provided collateral, primarily in the form of marketable securities, to secure the revolving credit loans. As of March 1, 2000, the aggregate amount of this collateral was approximately $5.5 million.
Under the Company Credit Facility, Compass, in its sole discretion, will make semiannual borrowing base determinations based upon the proved oil and natural gas properties of the Company. Compass may also redetermine the borrowing base and the monthly borrowing base reduction at any time at its discretion. The Company may also request borrowing base redeterminations in additions to the required semiannual reviews at the Company's cost.
In December 1997, the Company Credit Facility was amended to provide for a term loan of $3 million, bearing interest at the Index Rate. The amount outstanding under the $3 million term loan as of December 31, 1998 was $3 million, which was repaid in January 1999.
In September, 1998, the Company Credit Facility was further amended to provide for an additional $7 million term loan bearing interest at the Index Rate, of which $7 million was borrowed in the fourth quarter of 1998. In March 1999, the Company Credit Facility was further amended to increase the $7 million term loan by $2 million. In December 1999, $2 million principal amount of the term loan was repaid with proceeds from the sale from the Subordinated Notes, Common Stock and Warrants.
Certain members of the Board of Directors have guaranteed the term loan. As currently amended pursuant to an amendment dated December 1999, interest on the term loan is payable monthly, bearing interest at the Index Rate. Unless preceded by the Term Loan Maturity Date (as defined below), principal payments on the term loan are not due until June 1, 2000, whereupon the term loan is repayable in consecutive monthly installments in the amount $290,000 each, beginning July 1, 2000 through December 1, 2000, and thereafter in the amount of $440,000, beginning January 1, 2001 until the Term Loan Maturity Date, when the entire principal balance, plus interest, is payable. Term Loan Maturity Date means the earlier of: (1) the date of closing of the issuance of additional equity of the Company, if the net proceeds of such issuance are sufficient to repay in full the term loan; (2) the date of closing of the issuance of convertible subordinated debt of the Company, if the proceeds of such issuance are sufficient to repay in full the term loan; (3) the date of repayment of the revolving credit loans and the termination of the revolving commitment; and (4) July 1, 2001.
The Company is subject to certain covenants under the terms of the Company Credit Facility, including but not limited to (a) maintenance of specified tangible net worth, (b) a ratio of quarterly EBITDA (earnings before interest, taxes, depreciation and amortization) to quarterly debt service of not less than 1.25 to 1.00, and (c) a specified minimum amount of working capital. The Company Credit Facility also places restrictions on, among other things, (a) incurring additional indebtedness, guaranties, loans and liens, (b) changing the nature of business or business structure, (c) selling assets and (d) paying dividends.
Proceeds of the revolving credit loans have been used to provide funding for exploration and development activity. At December 31, 1998, and 1999, outstanding revolving credit loans totaled $5,056,000 and $5,876,000, respectively, with an additional $1,020,000 and $1,208,392, respectively, available for future borrowings. The outstanding amount of the term loan was $7,000,000 at December 31, 1998 and 1999. The Company Credit Facility also provides for the issuance of letters of credit, one of which has been issued for $224,000 at December 31, 1998 and 1999. The weighted average interest rates for 1998 and 1999 on the Company Credit Facility were 8 and 9 percent, respectively.
In November 1999, Messrs. Hamilton, Webster and Loyd provided a bridge loan in the amount of $2,000,000, to the Company, secured by certain oil and natural gas properties. This bridge loan bore interest at 14% per annum. Also in consideration for the bridge loan, the Company assigned to Messrs. Hamilton, Webster and Loyd an aggregate 1.0% overriding royalty interest ("ORRI") in the Huebner #1 and Fondren Letulle #1 wells (combined with the prior assignment, a 2% overriding royalty interest), a .8794% ORRI in Neblett #1 (N.La.Copita), a 1.0466% ORRI in STS 104-5#1, a 1.544% ORRI in USX Hematite #1, a 2.0% ORRI in Huebner #2 and a 2.0% ORRI in Buckhart #1. On December 15, 1999 the bridge loan was repaid in its entirety with proceeds from the sale of Common Stock, Subordinated Notes and Warrants. Such overriding royalty interests are limited to the well bore and proportionately reduced to the Company's working interest in the well.
In December 1999, the Company consummated the sale of $22 million principal amount of 9% Senior Subordinated Notes due 2007 (the "Subordinated Notes") to an investor group led by CB Capital Investors, L.P. which included certain members of the Board of Directors. The Subordinated Notes were sold at a discount of $688,761 which is being amortized over the life of the notes. Interest is payable quarterly beginning March 31, 2000. The Company may elect, for a period of five years, to increase the amount of the Subordinated Notes for up to 60% of the interest which would otherwise be payable in cash. Concurrent with the sale of the notes, the Company consummated the sale of 3,636,364 shares of Common Stock at a price of $2.20 per share and Warrants to purchase up to 2,760,189 shares of the Company's Common Stock at an exercise price of $2.20 per share. For accounting purposes, the Warrants are valued at $0.25 per Warrant. The sale was made to an investor group led by CB Capital Investors, L.P. which included certain members of the Board of Directors. The Warrants have an exercise price of $2.20 per share and expire in December 2007.
The Company is subject to certain covenants under the terms under the related Securities Purchase Agreement, including but not limited to, (a) maintenance of a specified Tangible Net Worth, (b) maintenance of a ratio of EBITDA (earnings before interest, taxes depreciation and amortization) to quarterly Debt Service (as defined in the agreement) of not less than 1.00 to 1.00, and (c) limit its capital expenditures to a specified amount for the year ended December 31, 2000, and thereafter to an amount equal to the Company's EBITDA for the immediately prior fiscal year as well as limits on the Company's ability to (i) incur indebtedness, (ii) incur or allow liens, (iii) engage in mergers, consolidations, sales of assets and acquisitions, (iv) declare dividends and effect certain distributions (including restrictions on distributions upon the Common Stock), (v) engage in transactions with affiliates, (vi) make certain repayments and prepayments, including any prepayment of the Company's term loan, any subordinated debt, indebtedness that is guaranteed or credit-enhanced by any affiliate of the Company, and prepayments that effect certain permanent reductions in revolving credit facilities.
Of the approximately $29,000,000 net proceeds of this financing, $12,060,000 was used to fund the Enron Repurchase described below and related expenses, $2,025,000 was used to repay the bridge loan extended to the Company by its outside directors, $2 million was used to repay a portion of the Compass Term Loan, $1 million was used to repay a portion of the Compass Borrowing Base Facility, and the Company expects the remaining proceeds to be used to fund the Company's ongoing exploration and development program and general corporate purposes.
In 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 provided 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. Dividend payments for the 12 months ended December 31, 1999 were made by the issuance of an additional 22,508.23 shares of Preferred Stock.
In December 1999, the Company consummated the repurchase of all the outstanding shares of Preferred Stock and 750,000 Warrants for $12 million. At the same time, the Company reduced the exercise price of the remaining 250,000 Warrants from $11.50 per share to $4.00 per share.
ABILITY TO MANAGE GROWTH AND ACHIEVE BUSINESS STRATEGY
The Company's growth has placed, and is expected to continue to place, a significant strain on the Company's financial, technical, operational and administrative resources. The Company has relied in the past and expects to continue to rely on project partners and independent contractors that have provided the Company with seismic survey planning and management, project and prospect generation, land acquisition, drilling and other services. At December 31, 1999, the Company had 26 full-time employees. There will be additional demands on the Company's financial, technical, operational and administrative resources and continued reliance by the Company on project partners and independent contractors, and these strains on resources, additional demands and continued reliance may negatively affect the Company. The Company's ability to grow will depend upon a number of factors, including its ability to obtain leases or options on properties for 3-D seismic surveys, its ability to acquire additional 3-D seismic data, its ability to identify and acquire new exploratory sites, its ability to develop existing sites, its ability to continue to retain and attract skilled personnel, its ability to maintain or enter into new relationships with project partners and independent contractors, the results of its drilling program, hydrocarbon prices, access to capital and other factors. Although the Company intends to continue to upgrade its technical, operational and administrative resources and to increase its ability to provide internally certain of the services previously provided by outside sources, there can be no assurance that it will be successful in doing so or that it will be able to continue to maintain or enter into new relationships with project partners and independent contractors. The failure of the Company to continue to upgrade its technical, operational and administrative resources or the occurrence of unexpected expansion difficulties, including difficulties in recruiting and retaining sufficient numbers of qualified personnel to enable the Company to expand its seismic data acquisition and drilling program, or the reduced availability of project partners and independent contractors that have historically provided the Company seismic survey planning and management, project and prospect generation, land acquisition, drilling and other services, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company has only limited experience operating and managing field operations, and there can be no assurances that the Company will be successful in doing so. Any increase in the Company's activities as an operator will increase its exposure to operating hazards. See "Business and Properties -- Operating Hazards and Insurance." The Company's lack of capital will also constrain its ability to grow and achieve its business strategy. There can be no assurance that the Company will be successful in achieving growth or any other aspect of its business strategy.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
In September 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging activities - Deferral of the Effective Date of SFAS No. 133" is effective for fiscal years beginning after June 15, 2000. A Company may also implement the Statement as of the beginning of any fiscal quarter after issuance. Statement No. 133 cannot be applied retroactively. Statement No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1998 and, at the company's election, before January 1, 1999. The Company routinely enters into financial instrument contracts to hedge price risks associated with the sale of crude oil and natural gas. Statement No. 133 amends, modifies and supercedes significantly all of the authoritative literature governing the accounting for and disclosure of derivative financial instruments and hedging activities. As a result, adoption of Statement No. 133 will impact the accounting for and disclosure of the Company's operations. The Company intends to adopt the provisions of such statement in accordance with the requirements provided by the statement. Management is currently assessing the financial statement impact; however, such impact is not ascertainable at this time.
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Company's revenues, future rate of growth, results of operations, financial condition and ability to borrow funds or obtain additional capital, as well as the carrying value of its properties, are substantially dependent upon prevailing prices of oil and natural gas. Historically, the markets for oil and natural gas have been volatile, and such markets are likely to continue to be volatile in the future. Prices for oil and natural gas are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond the control of the Company. These factors include the level of consumer product demand, weather conditions, domestic and foreign governmental regulations, the price and availability of alternative fuels, political conditions in the Middle East, the foreign supply of oil and natural gas, the price of foreign imports and overall economic conditions. It is impossible to predict future oil and natural gas price movements with certainty. Declines in oil and natural gas prices may materially adversely affect the Company's financial condition, liquidity, and ability to finance planned capital expenditures and results of operations. Lower oil and natural gas prices also may reduce the amount of oil and natural gas that the Company can produce economically. Oil and natural gas prices have declined in the recent past and there can be no assurance that prices will recover or will not decline further. See "Business and Properties -- Marketing."
The Company periodically reviews the carrying value of its oil and natural gas properties under the full cost accounting rules of the Commission. Under these rules, capitalized costs of proved oil and natural gas properties may not exceed the present value of estimated future net revenues from proved reserves, discounted at 10%. Application of this ceiling test generally requires pricing future revenue at the unescalated prices in effect as of the end of each fiscal quarter and requires a write-down for accounting purposes if the ceiling is exceeded, even if prices were depressed for only a short period of time. The Company may be required to write down the carrying value of its oil and natural gas properties when oil and natural gas prices are depressed or unusually volatile. On December 31, 1998, the Company recorded a full cost ceiling test write down of its oil and natural gas properties of $20.3 million because its carrying cost of proved reserves was in excess of the present value of estimated future net revenues from those reserves. If additional write-downs are required, they would result in additional charges to earnings, but would not impact cash flow from operating activities. Once incurred, a write-down of oil and natural gas properties is not reversible at a later date.
In order to reduce its exposure to short-term fluctuations in the price of oil and natural gas, the Company periodically enters into hedging arrangements. The Company's hedging arrangements apply to only a portion of its production and provide only partial price protection against declines in oil and natural gas 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. In addition, the Company's hedging arrangements limit the benefit to the Company of increases in the price of oil and natural gas. Total natural gas purchased and sold under swap arrangements during the years ended December 31, 1997, 1998 and 1999 were 0 Bbls, 0 Bbls and 45,200 Bbls, respectively, and 210,000 MMBTU, 1,760,000 MMBTU and 2,050,000 MMBTU, respectively. Income and (losses)
realized by the Company under such swap arrangements were $48,000, $167,000 and $(412,000) for the years ended December 31, 1997, 1998 and 1999, respectively. The Company had outstanding no hedge positions as of December 31, 1998. At December 31, 1999, the Company had 300,000 MMBtu and 30,250 Bbls of outstanding hedge positions (at an average price of $2.23 per MMBtu and $25.60 per Bbl for January through June 2000.) See "Business and Properties -- Marketing."
ITEM 7A.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
COMMODITY RISK. The Company's major market risk exposure is the commodity pricing applicable to its oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to natural gas. The effects of such pricing volatility have been discussed above, and such volatility is expected to continue. A 10% fluctuation in the price received for oil and gas production would have an approximate $1.0 million impact on the Company's annual revenues and operating income.
To mitigate some of this risk, the Company engages periodically in certain limited hedging activities but only to the extent of buying protection price floors. Costs and any benefits derived from these price floors are accordingly recorded as a reduction or increase, as applicable, in oil and gas sales revenue and were not significant for any year presented. The costs to purchase put options are amortized over the option period. The Company does not hold or issue derivative instruments for trading purposes. Income and (losses) realized by the Company related to these instruments were $48,000, and $167,000 and $(412,000) or $4.38, and $10.54 and $(5.64) per MMBtu for the years ended December 31, 1997, 1998 and 1999, respectively.
INTEREST RATE RISK. The Company's exposure to changes in interest rates results from its floating rate debt. In regards to its Revolving Credit Facility, the result of a 10% fluctuation in short-term interest rates would impact 2000 cash flow by approximately $120,000.
FINANCIAL INSTRUMENTS & DEBT MATURITIES. The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, bank borrowings and subordinated notes payable. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the highly liquid nature of these short-term instruments. The fair values of the bank and vendor borrowings approximate the carrying amounts as of December 31, 1999 and 1998, and were determined based upon interest rates currently available to the Company for borrowings with similar terms. Maturities of the debt are $3,542,742 in 2000, $6,388,953 in 2001, $5,576,000 in 2002 and the balance in 2007.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included elsewhere in this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to information under the caption "Proposal 1-Election of Directors" and to the information under the caption "Section 16(a) Reporting Delinquencies" in the Company's definitive Proxy Statement (the "2000 Proxy Statement") for its 2000 annual meeting of shareholders. The 2000 Proxy Statement will be filed with the Securities and Exchange Commission (the "Commission") not later than 120 days subsequent to December 31, 1999.
Pursuant to Item 401(b) of Regulation S-K, the information required by this item with respect to executive officers of the Company is set forth in Part I of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the 2000 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the 2000 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 1999.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required by this item is incorporated herein by reference to the 2000 Proxy Statement which will be filed with the Commission not later than 120 days subsequent to December 31, 1999.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
THE RESPONSE TO THIS ITEM IS SUBMITTED IN A SEPARATE SECTION OF THIS REPORT.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules and other statements for which provision is made in the applicable regulations of the Commission have been omitted because they are not required under the relevant instructions or are inapplicable.
(a)(3) EXHIBITS
+2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of June 6, 1998 (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, 1998).
+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, 1998).
+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) and Amendment No. 2 (Incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K dated December 15, 1999).
+4.1 -- First Amended, Restated, and Combined Loan Agreement between the Company and Compass Bank dated August 28, 1998 (Incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
+4.2 -- First Amendment to First Amended, Restated, and Combined Loan Agreement between the Company and Compass Bank dated December 23, 1998 (Incorporated herein by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998).
+4.3 -- Second Amendment to First Amended, Restated, and Combined Loan Agreement between the Company and Compass Bank dated December 30, 1998 (Incorporated herein by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). The Company is a party to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, the Company agrees
to furnish a copy of such instruments to the Commission upon request.
+4.4 -- Fourth Amendment to First Amended, Restated, and Combined Loan Agreement by and between Carrizo Oil & Gas, Inc. and Compass Bank (Incorporated herein by reference to Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
+4.5 -- Limited Guaranty by Douglas A. P. Hamilton for the benefit of Compass Bank (Incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
+4.6 -- Notice of Final Agreement with respect to a term loan from Compass Bank (Incorporated herein by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
+4.7 -- Limited Guaranty by Paul B. Loyd, Jr. for the benefit of Compass Bank (Incorporated herein by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
+4.8 -- Limited Guaranty by Steven A. Webster for the benefit of Compass Bank (Incorporated herein by reference to Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
+10.1 -- Incentive Plan of the Company (Incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)).
+10.2 -- Employment Agreement between the Company and S.P. Johnson IV (Incorporated herein by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)).
+10.3 -- Employment Agreement between the Company and Frank A. Wojtek (Incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)).
+10.4 -- Employment Agreement between the Company and Kendall A. Trahan (Incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)).
+10.5 -- Employment Agreement between the Company and George Canjar (Incorporated herein by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)).
+10.6 -- Indemnification Agreement between the Company and each of its directors and executive officers (Incorporated herein by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998).
+10.7 -- S Corporation Tax Allocation, Payment and Indemnification Agreement among the Company and Messrs. Loyd, Webster, Johnson, Hamilton and Wojtek (Incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)).
+10.8 -- S Corporation Tax Allocation, Payment and Indemnification Agreement among Carrizo Production, Inc. and Messrs. Loyd, Webster, Johnson, Hamilton and Wojtek (Incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)).
+10.9 -- Form of Amendment to Executive Officer Employment Agreement. (Incorporated herein by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated January 8, 1999).
+10.10 -- Amended Enron Warrant Certificates (Incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated December 15, 1999).
+10.11 -- Securities Purchase Agreement dated December 15, 1999 among the Company, CB Capital Investors, L.P., Mellon Ventures, L.P., Paul B. Loyd, Jr., Douglas A.P. Hamilton and Steven A. Webster (Incorporated herein by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated December 15, 1999).
+10.12 -- Shareholders Agreement dated December 15, 1999 among the Company, CB Capital Investors, L.P., Mellon Ventures, L.P., Paul B. Loyd, Jr., Douglas A.P. Hamilton, Steven A. Webster, S.P. Johnson IV, Frank A. Wojtek and DAPHAM Partnership, L.P. (Incorporated herein by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated December 15, 1999).
+10.13 -- Warrant Agreement dated December 15, 1999 among the Company, CB Capital Investors, L.P., Mellon Ventures, L.P., Paul B. Loyd, Jr., Douglas A.P. Hamilton and Steven A. Webster (Incorporated herein by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated December 15, 1999).
+10.14 -- Registration Rights Agreement dated December 15, 1999 among the Company, CB Capital Investors, L.P. and Mellon Ventures, L.P. (Incorporated herein by reference to Exhibit 99.4 to the Company's Current Report on Form 8-K dated December 15, 1999).
+10.15 -- Amended and Restated Registration Rights Agreement dated December 15, 1999 among the Company, Paul B. Loyd, Jr., Douglas A.P. Hamilton, Steven A. Webster, S.P. Johnson IV, Frank A. Wojtek and DAPHAM Partnership, L.P. (Incorporated herein by reference to Exhibit 99.5 to the Company's Current Report on Form 8-K dated December 15, 1999).
+10.16 -- Compliance Sideletter dated December 15, 1999 among the Company, CB Capital Investors, L.P. and Mellon Ventures, L.P. (Incorporated herein by reference to Exhibit 99.6 to the Company's Current Report on Form 8-K dated December 15, 1999).
+10.17 -- Form of Amendment to Executive Officer Employment Agreement (Incorporated herein by reference to Exhibit 99.7 to the Company's Current Report on Form 8-K dated December 15, 1999).
+10.18 -- Form of Amendment to Director Indemnification Agreement (Incorporated herein by reference to Exhibit 99.8 to the Company's Current Report on Form 8-K dated December 15, 1999).
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Ryder Scott Company Petroleum Engineers.
23.3 -- Consent of Fairchild, Ancell & Wells, Inc.
27.1 -- Financial Data Schedule.
99.1 -- Summary of Reserve Report of Ryder Scott Company Petroleum Engineers as of December 31, 1999.
99.2 -- Summary of Reserve Report of Fairchild, Ancell & Wells, Inc. as of December 31, 1999.
- ----------
+ Incorporated by reference as indicated.
REPORTS ON FORM 8-K
On December 3, 1999, the Company filed a Current Report on Form 8-K to report under Item 5 thereof that it had signed agreements relating to certain of the transactions later describe in the December 22, 1999 Form 8-K.
On December 22, 1999, the Company filed a Current Report on Form 8-K to report under Item 5 thereof of the following transactions:
(a) the sale of $22,000.00 face value 9% Senior Subordinated Notes due 2007.
(b) the sale of 3,634,364 shares of the Company's Common Stock for $2.20 per share.
(c) the sale of Warrants to purchase up to 2,760,189 shares of the Company's Common Stock at $2.20 per share.
(d) the repurchase of all the Company's outstanding Preferred Stock, the repurchase of 750,000 of the Company's outstanding Warrants and the reduction of the exercise price of the remaining 250,000 Warrants from $11.50 to $4.00 per share.
(e) the Company's execution of a securities purchase agreement, a Shareholders' Agreement, new and amended registration rights agreements, a compliance sideletter, amendments to employment agreements, bylaws and certain other agreements.
(f) the execution of the Ninth Amendment to the First Amended Restated and Combined Loan Agreement dated August 28, 1997, between the Company and Compass Bank.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CARRIZO OIL & GAS, INC.
By: /s/ FRANK A. WOJTEK ------------------------------------- Frank A. Wojtek Chief Financial Officer, Vice President, Secretary and Treasurer
Date: March 30, 2000.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
CARRIZO OIL & GAS, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Carrizo Oil & Gas, Inc.:
We have audited the accompanying balance sheets of Carrizo Oil & Gas, Inc. (a Texas corporation) as of December 31, 1998 and 1999, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1999, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
As explained in Note 9 to the financial statements, effective January 1, 1999, the Company changed its method of accounting for start up costs.
ARTHUR ANDERSEN LLP
Houston, Texas March 17, 2000
CARRIZO OIL & GAS, INC.
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
CARRIZO OIL & GAS, INC.
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
CARRIZO OIL & GAS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (NOTES 1 AND 2)
The accompanying notes are an integral part of these financial statements.
CARRIZO OIL & GAS, INC.
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
CARRIZO OIL & GAS, INC
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS, COMBINATION AND OFFERING
NATURE OF OPERATIONS
Carrizo Oil & Gas, Inc. (Carrizo, a Texas corporation; together with its affiliates and predecessors, the Company) is an independent energy company engaged in the exploration, development, exploitation and production of oil and natural gas. Its operations are focused on Texas and Louisiana Gulf Coast trends, primarily the Frio, Wilcox and Vicksburg trends. The Company has acquired or is in the process of acquiring 1,841 square miles of 3-D seismic data. Additionally, the Company has assembled approximately 195,464 gross acres under lease or option.
The exploration for oil and gas is a business with a significant amount of inherent risk requiring large amounts of capital. The Company intends to finance the exploration and development of its significant 3-D seismic data and its acreage under lease or option through cash from operations, existing credit facilities or arrangements with other industry participants. Should the sources of capital currently available to the Company not be sufficient to explore and develop its prospects and meet current and near-term obligations, the Company may be required to seek additional sources of financing which may not be available on terms acceptable to the Company. This lack of additional financing could force the Company to curtail its planned drilling program.
THE COMBINATION
Carrizo was formed in 1993 and is the surviving entity after a series of combination transactions (the Combination) consummated on August 11, 1997. The Combination included the following transactions: (a) Carrizo Production, Inc. (a Texas corporation and an affiliated entity with ownership identical to 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 (the Common Stock); (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 (the Founders) 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.
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 were prepared using the historical costs and results of operations of the affiliated entities up to the date of the Combination. 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.
INITIAL PUBLIC OFFERING
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.
SALE OF SENIOR SUBORDINATED NOTES, COMMON STOCK AND WARRANTS
In December 1999, the Company consummated the sale of $22 million principal amount of 9% Senior Subordinated Notes due 2007 (the "Subordinated Notes") to an investor group led by CB Capital Investors, L.P. which included certain members of the Board of Directors. The Subordinated Notes were sold at a discount of $688,761 which is being amortized over the life of the notes. Interest is payable quarterly beginning March 31, 2000. The Company may elect, for a period of five years, to increase the amount of the Subordinated Notes for up to 60% of the interest which would otherwise be payable in cash. Concurrent with the sale of the notes, the Company consummated the sale of 3,636,364 shares of Common Stock at a price of $2.20 per share and Warrants to purchase up to 2,760,189 shares of the Company's Common Stock at an exercise price of $2.20 per share. For accounting purposes, the Warrants are valued at $0.25 per Warrant. The sale was made to an investor group led by CB Capital Investors, L.P. which included certain members of the Board of Directors. The Warrants have an exercise price of $2.20 per share and expire in December 2007.
Of the approximately $29,000,000 net proceeds of this financing, $12,060,000 was used to fund the Enron Repurchase described below and related expenses, $2,025,000 was used to repay the bridge loan extended to the Company by its outside directors, $2 million was used to repay a portion of the Compass Term Loan, $1 million was used to repay a portion of the Compass Borrowing Base Facility, and the Company expects the remaining proceeds to be used to fund the Company's ongoing exploration and development program and general corporate purposes.
In December 1999, the Company consummated the repurchase of all the outstanding shares of Preferred Stock and 750,000 Warrants for $12 million. At the same time, the Company reduced the exercise price of the remaining 250,000 Warrants from $11.50 per share to $4.00 per share.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OIL AND NATURAL GAS PROPERTIES
Investments in oil and natural gas properties are accounted for using the full-cost method of accounting. All costs directly associated with the acquisition, exploration and development of oil and natural gas properties are capitalized. Such costs include lease acquisitions, seismic surveys, and drilling and completion equipment. As of December 31, 1998 and 1999, the Company also capitalized as oil and natural gas properties $279,896 and $139,910, respectively, of deferred compensation related to stock options granted to personnel directly associated with exploration activities. (See Note 7.)
Oil and natural gas properties are amortized based on the unit-of-production method using estimates of proved reserve quantities. Investments in unproved properties are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. Unevaluated properties are evaluated quarterly for impairment on a property-by-property basis. If the results of an
assessment indicate that the properties are impaired, the amount of impairment is added to the proved oil and natural gas property costs to be amortized. The amortizable base includes estimated future development costs and, where significant, dismantlement, restoration and abandonment costs, net of estimated salvage values. The depletion rate per thousand cubic feet equivalent (Mcfe) for 1997, 1998 and 1999, was $0.69, $1.06 and $1.00, respectively.
Dispositions of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves.
The net capitalized costs of proved oil and gas properties are subject to a "ceiling test," which limits such costs to the estimated present value, discounted at a 10 percent interest rate, of future net cash flows from proved reserves, based on current economic and operating conditions. If net capitalized costs exceed this limit, the excess is charged to operations through depreciation, depletion and amortization. No write-down of the Company's oil and natural gas assets was necessary in 1997 or 1999. Primarily as a result of downward reserve quantity revisions combined with depressed oil and natural gas prices, the Company recorded a ceiling test write-down of $20,305,448 in 1998.
Depreciation of other property and equipment is provided using the straight-line method based on estimated useful lives ranging from five to 10 years.
FINANCING COSTS
Long-term debt financing costs included in other assets of $300,005 and $985,315 as of December 31, 1998 and 1999, respectively, are being amortized over the term of the loans (through January 1, 2002 for a credit facility and through December 15, 2007 for subordinated notes payable).
STATEMENTS OF CASH FLOWS
For statement of cash flow purposes, all highly liquid investments with original maturities of three months or less are considered to be cash equivalents.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, receivables, payables and long-term debt. The carrying amount of cash, receivables and payables approximates fair value because of the short-term nature of these items. The carrying amount of long-term debt (except the subordinated notes payable) approximates fair value as the individual borrowings bear interest at floating market interest rates.
HEDGING ACTIVITIES
The Company periodically enters into hedging arrangements to manage price risks related to oil and natural gas sales and not for speculative purposes. The Company's hedging arrangements apply only to 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. For financial reporting purposes, gains and losses related to hedging are recognized as income with the hedged item when the hedged transaction occurs. Should the necessary correlation between the hedged item and the designated hedging instrument be lost, the future gain or loss would no longer be deferred and would be recognized in the period the correlation is lost. Total oil and natural gas quantities sold under swap arrangements in 1997, 1998, and 1999 were 0 Bbls, 0 Bbls and 45,200 Bbls, respectively, and 210,000 MMBtu, 1,760,000 MMBtu, and 2,050,000 MMBtu, respectively. Hedging gains (losses) are included in oil and natural gas revenues and amounted to $48,000, $167,000 and ($412,000) for the years ended December 31, 1997, 1998 and 1999, respectively. At December 31, 1998, the Company had no outstanding hedged positions. At December 31, 1999, the Company had 300,000 MMBtu and 30,200 Bbls of outstanding hedge positions (at an average price of $2.33 per MMBtu and $25.60 per Bbl for January through June 2000 production.) The instruments had a fair market value of $2,000 at December 31, 1999.
INCOME TAXES
Through May 15, 1997, Carrizo and its affiliated entities had elected to be treated as S Corporations under the Internal Revenue Code or were otherwise not taxed as entities for federal income tax purposes. The taxable income or loss was therefore allocated to the equity owners of Carrizo and the affiliated entities. The Company entered into tax indemnification agreements with the founders of the Company pertaining to periods in which the Company was an S Corporation.
On May 16, 1997, Carrizo terminated its status as an S corporation and thereafter became subject to federal income taxes. The Company, beginning with the termination of its tax exempt status, provides income taxes for the difference in the tax and financial reporting bases of its assets and liabilities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The termination of its tax exempt status in 1997 required the Company to establish a deferred tax liability, which resulted in a one-time noncash charge to income in 1997 of $1,623,000. Had Carrizo been a taxpaying entity prior to May 17, 1997, its net income and earnings per share would have been as follows:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates include depreciation, depletion and amortization of proved oil and natural gas properties. Oil and natural gas reserve estimates, which are the basis for unit-of-production depletion and the ceiling test, are inherently imprecise and are expected to change as future information becomes available.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivable result from oil and natural gas sales or joint interest billings to third parties in the oil and natural gas industry. This concentration of customers and joint interest owners may impact the Company's overall credit risk in that these entities may be similarly affected by changes in economic and other conditions. Historically, the Company has not experienced credit losses on such receivables.
EARNINGS PER SHARE
Supplemental earnings per share information is provided below:
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. During the years ended December 31, 1997, 1998 and 1999, respectively, the Company had outstanding 250,000, 443,550 and 799,620 stock options, respectively, and warrants to purchase 1,000,000 and 3,010,189 shares of common stock at December 31, 1998 and 1999, respectively, which were antidilutive and were therefore not included in the calculation because the exercise price of these instruments exceeded the underlying market value of the options and warrants.
CONTINGENCIES
Liabilities and other contingencies are recognized upon determination of an exposure, which when analyzed indicates that it is both probable that an asset has been impaired or that a liability has been incurred and that the amount of such loss is reasonably estimatable. Costs to remedy or defend against such contingencies are charged to the liability, if one exists, or otherwise to income.
NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging activities - Deferral of the Effective Date of SFAS No. 133" is effective for fiscal years beginning after June 15, 2000. A Company may also implement the Statement as of the beginning of any fiscal quarter after issuance. Statement No. 133 cannot be applied retroactively. Statement No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1998 and, at the company's election, before January 1, 1999. The Company routinely enters into financial instrument contracts to hedge price risks associated with the sale of crude oil and natural gas. Statement No. 133 amends, modifies and supercedes significantly all of the authoritative literature governing the accounting for and disclosure of derivative financial instruments and hedging activities. As a result, adoption of Statement No. 133 will impact the accounting for and disclosure of the Company's operations. The Company intends to adopt the provisions of such statement in accordance with the requirements provided by the statement. Management is currently assessing the financial statement impact; however, such impact is not determinable at this time.
3. PROPERTY AND EQUIPMENT
At December 31, 1998 and 1999, property and equipment consisted of the following:
Oil and natural gas properties not subject to amortization consist of the cost of undeveloped leaseholds, undesignated seismic costs, exploratory wells in progress, and secondary recovery projects before the assignment of proved reserves. These unproved costs are reviewed periodically by management for impairment, with the impairment provision included in the cost of oil and natural gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by the Company and other operators, the terms of oil and natural gas leases not held by production, production response to secondary recovery activities and available funds for exploration and development. Of the $38,145,486 of unproved property costs at December 31, 1999 being excluded from the amortizable base, $11,817,865, $22,161,588 and $4,166,033 were incurred in 1997, 1998 and 1999, respectively. The Company expects it will complete its evaluation of the properties representing the majority of these costs within the next two years.
4. INCOME TAXES
Actual income tax expense differs from income tax expense computed by applying the U.S. federal statutory corporate rate of 35 percent to pretax income as follows:
Deferred income tax provisions result from temporary differences in the recognition of income and expenses for financial reporting purposes and for tax purposes. At December 31, 1998 and 1999, the tax effects of these temporary differences resulted principally from the following:
The net deferred income tax asset is classified as follows:
Realization of the net deferred tax asset is dependent on the Company's ability to generate taxable earnings in the future. Management believes that it is more likely than not that the deferred tax asset, net of the valuation allowance, will be fully realized. The Company has net operating loss carryforwards totaling approximately $12 million which begin expiring in 2012.
5. LONG-TERM DEBT:
At December 31, 1998 and 1999, long-term debt consisted of the following:
In connection with the Offering, Carrizo amended its existing credit facility with Compass Bank ("Compass"), to provide for a maximum loan amount of $25 million, subject to borrowing base limitations. Under this facility, the principal outstanding is due and payable upon maturity in January 2002, with interest due monthly. This facility was subsequently amended in September 1998 to provide for a term loan under the facility (the "Term Loan") in addition to the then existing revolving credit facility limited by the Company's borrowing base (the "Borrowing Base Facility"). The Borrowing Base Facility was amended in March, 1999 to provide for a maximum loan amount under such facility of $10 million. Substantially all of Carrizo's oil and natural gas property and equipment is pledged as collateral under this facility. The interest rate for both borrowings is calculated at a floating rate based on the Compass index rate or LIBOR plus 2 percent. The Company's obligations are secured by certain of its oil and gas properties and cash or cash equivalents included in the borrowing base. The Borrowing Base Facility and the Term Loan are referred to collectively as the "Company Credit Facility". Proceeds from the Borrowing Base portions of this credit facility have been used to provide funding for exploration and development activity.
Under the Borrowing Base Facility, Compass, in its sole discretion, will make semiannual borrowing base determinations based upon the proved oil and natural gas properties of the Company. Compass may also redetermine the borrowing base and the monthly borrowing base reduction at any time at its discretion. The Company may also request borrowing base redeterminations in addition to the required semiannual reviews at the Company's cost.
At December 31, 1998 and 1999, amounts outstanding under the Borrowing Base Facility totaled $5,056,000 and $5,876,000, respectively, with an additional $1,020,000 and $1,208,392, respectively, available for future borrowings. The Borrowing Base totaled $7,308,382 at December 31, 1999. The Borrowing Base Facility was also available for letters of credit, one of which has been issued for $224,000 at December 31, 1998 and 1999. The weighted average interest rates for 1998 and 1999 on the Facility were 8 and 9 percent, respectively. Certain members of the Board of Directors have provided $4 million in collateral primarily in the form of marketable securities to secure the Borrowing Base Facility.
The Term Loan was initially due and payable upon maturity in September 1999. The Company had $7,000,000 outstanding under the Term Loan at December 31, 1998. In March 1999, the Company borrowed an additional $2 million on the term loan portion of the Company Credit Facility, increasing outstanding borrowings under the Term Loan to $9 million. In March 1999, the maturity date of the Term Loan was amended to provide for twelve monthly installments of $750,000 beginning January 1, 2000. In December 1999, the additional $2 million under the term loan was repaid with proceeds from the sale of subordinated notes, common stock and warrants leaving $7,000,000 outstanding at December 31, 1999. The repayment terms were also amended to provide for $1.74 million of principal due ratably over the last six months of 2000, $2.64 million of principal due ratably over the first six months of 2001, and the balance due in July 2001. Certain members of the Board of Directors have guaranteed the Term Loan.
The Company is subject to certain covenants under the terms of the Company Credit Facility, including but not limited to (a) maintenance of specified tangible net worth, (b) a ratio of quarterly EBITDA (earnings before interest, taxes, depreciation and amortization) to quarterly debt service of not less than 1.25 to 1.00, and (c) a specified minimum amount of working capital. The Company Credit Facility also places restrictions on, among other things, (a) incurring additional indebtedness, guaranties, loans and liens, (b) changing the nature of business or business structure, (c) selling assets and (d) paying dividends. In March 1999, the Company Credit Facility was amended to decrease the required specified tangible net worth covenant.
In November 1999, certain members of the Board of Directors provided a bridge loan in the amount of $2,000,000 to the Company secured by certain oil and natural gas properties. This bridge loan bore interest at 14% per annum. Also, in consideration for the bridge loan, the Company assigned to those members of the Board of Directors an overriding royalty interest in certain of the Company's producing properties. The bridge loan was repaid from the proceeds of the sale of Subordinated notes, common stock and warrants.
In December 1999, the Company consummated the sale of $22 million principal amount of 9% Senior Subordinated Notes due 2007 (the "Subordinated Notes") to an investor group led by CB Capital Investors, L.P. which included certain members of the Board of Directors. As discussed in Note 7, the Company also sold Common Stock and Warrants to this investor group. The Subordinated Notes were sold at a discount of $688,761, which is being amortized over the life of the notes. Interest is payable quarterly beginning March 31, 2000. The Company may elect to increase the amount of the Subordinated Notes for 60% of the interest which would otherwise be payable in cash. Such Senior Subordinated Notes had a fair market value at December 31, 1999 (16 days subsequent to issuance) of approximately $22 million.
The Company is subject to certain covenants under the terms under the Subordinated Notes securities purchase agreement, including but not limited to, (a) maintenance of a specified tangible net worth, (b) maintenance of a ratio of EBITDA (earnings before interest, taxes, depreciation and amortization) to quarterly Debt Service (as defined in the agreement) of not less than 1.00 to 1.00, and (c) a limitation of its capital expenditures to a specified amount for the year ended December 31, 2000 and thereafter equal to the Company's EBITDA for the immediately prior fiscal year.
Estimated maturities of long-term debt are $3,542,742 in 2000, $6,388,953 in 2001, $5,576,000 in 2002 and the remainder in 2007.
During 1999, Carrizo restructured certain current accounts payable into vendor notes, extending the payment dates through 2001. Such notes totaled $2,931,695 at December 31, 1999 and bear interest at rates of 8 percent to 10 percent. The weighted average interest rates of such notes was 9 percent in 1999.
6. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not expect these matters to have a materially adverse effect on the financial position or results of operations of the Company.
At December 31, 1999, Carrizo was obligated under a noncancelable operating lease for office space. Rent expense for the years ended December 31, 1997, 1998 and 1999, was $80,000, $108,700 and $108,700, respectively. The Company is obligated for remaining lease payments in 2000 of $54,350.
7. SHAREHOLDERS' EQUITY
On June 4, 1997, the board of directors authorized a 521-for-1 split of the Company's common stock and increased the number of authorized shares to 40 million shares of common stock and 10 million shares of preferred stock. All common share amounts presented in these financial statements are presented on a retroactive, post-split basis.
In December 1999, the Company consummated the sale of 3,636,364 shares of its Common Stock at a price of $2.20 per share and Warrants to purchase up to 2,760,189 shares of the Company's Common Stock valued at $0.25 per Warrant to an investor group led by CB Capital Investors, L.P. which included certain members of the Board of Directors. The Warrants have an exercise price of $2.20 per share and expire December 2007.
In connection with an initial public offering, the Company recorded deferred compensation related to the March 1997 stock option agreement as additional paid-in capital and an offsetting contra-equity account. This compensation accrual is based on the difference between the option price and the fair value of Carrizo's common stock when the options were granted (using an estimate of the initial public offering common stock price as an estimate of fair value). The deferred compensation was amortized in the period in which the options vest, which resulted in $279,896 and $139,910 being recorded in the years ended December 31, 1998 and 1999, respectively.
On July 19, 1996, and March 1, 1997, the Company entered into separate stock option agreements (the "Pre-IPO Options") with two executives of Carrizo whereby such employees were granted the option to purchase 138,825 shares and 83,295 shares of Carrizo common stock, respectively, at an exercise price of $3.60 per share. The options vested ratably through August 1, 1998, and March 1, 1999, respectively. The Company did not record any compensation expense related to the July, 1996 options because the related exercise price was at or above the estimated fair value of Carrizo's common stock at the time such options were granted.
The following table summarizes information for the options outstanding at December 31, 1999:
In June of 1997, the Company established the Incentive Plan of Carrizo Oil & Gas, Inc. ("the Incentive Plan"). The Company accounts for this plan under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost been determined consistent with SFAS No. 123 "Accounting for Stock Based Compensation" for all options, the Company's net income and earnings per share would have been as follows:
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1997, 1998 and 1999: risk free interest rate of 6.26%, 5.81% and 6.81% respectively, expected dividend yield of 0%, expected life of 10 years and expected volatility of 39.4%, 80.6% and 70.0%, respectively.
The Company may grant options ("Incentive Plan Options") to purchase up to 1,000,000 shares under the Incentive Plan and has granted options on 605,000 shares through December 31, 1999. Under the Incentive Plan, the option exercise price equals the stock market price on the date of grant. Options granted under the plan vest ratably over three years and have a term of ten years. Through December 31, 1999, no stock options had been exercised. A summary of the status of the Company's stock options at December 31, 1997, 1998 and 1999 is presented in the table below:
8. 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 this transaction were approximately $28.8 million. A portion of the proceeds were used to repay indebtedness. The remaining proceeds were used primarily for oil and natural gas exploration and development activities in Texas and Louisiana. The Preferred Stock provided 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. During 1999, the Company issued preferred stock dividends to the holders of the Preferred Stock of 29,684.39 shares.
In December 1999, the Company consummated the repurchase of all the outstanding shares of Preferred Stock and 750,000 Warrants for $12 million. At the same time, the Company reduced the exercise price of the remaining 250,000 Warrants from $11.50 per share to $4.00 per share. This repurchase at a discount resulted in a credit of $21,868,413 which is included in net income available to common shareholders, net of stock dividends paid to the holders of the preferred stock of $2,417,358.
9. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
On January 1, 1999 the Company adopted the American Institute of Certified Public Accountants Statement of Position ("SOP") 98-5, which provides guidance on the accounting for start up costs. SOP 98-5 requires that start up costs be expensed as incurred. The cumulative effect of this change in accounting principle to write off unamortized organization costs is $77,731 in 1999.
10. BUSINESS COMBINATION
During the fourth quarter of 1998, Carrizo acquired from Hall Houston Oil Company, Hall Houston 1996 Exploration and Development Facility Overriding Trust and Hall Houston Oil Company Employee Royalty Trust (referred to collectively as "Hall Houston") certain proved oil and gas properties located in Wharton County, Texas (the Hall Houston Properties Acquisition) for approximately $3 million.
The Hall Houston Properties Acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase cost was recorded as evaluated oil and gas properties. The results of operations of the acquired Hall Houston properties are included in the results of operations beginning on the date acquired. The following table reflects certain unaudited pro forma information for the periods presented as if the Hall Houston Properties Acquisition had occurred on January 1, 1997.
11. RELATED-PARTY TRANSACTIONS
In August 1996, the Company entered into the Master Technical Services Agreement (the MTS Agreement) with Reading & Bates Development Co. (R&B), which is a subsidiary of R&B Falcon Corporation, a company that was created by the merger of Falcon Drilling, Inc. and Reading & Bates Corporation. Mr. Loyd, a member of the board of the Company, was the chairman of the board, president, chief executive officer and a director of Reading & Bates Corporation. Under the MTS Agreement, certain employees of the Company provide engineering and technical services to R&B at market rates in connection with R&B's technical service, procurement and construction projects in offshore drilling and floating production. The Company provided $103,161 in service fees under this agreement in 1997. No services were performed under this agreement in 1998 or 1999.
The Company had an agreement with Loyd & Associates Inc., which is owned by Paul Loyd, a director of Carrizo, and Frank Wojtek, vice president, chief financial officer and a director of Carrizo, to provide certain financial consulting and administrative services at market rates to the Company. Payments were made monthly and total payments to Loyd & Associates Inc. for services rendered were $38,113 in 1997. These expenditures were included in general and administrative expenses for each year. This arrangement was terminated in August, 1997 concurrent with the Company's initial public offering.
In September, 1998 and March, 1999, certain members of the Board of Directors guaranteed a portion of the Company's outstanding indebtedness, provided a bridge loan of $2 million which was repaid in December 1999, and purchased a portion of the subordinated notes payable.
During the year ended December 31, 1999, the Company incurred drilling costs in the amount of $130,742 with R & B Falcon Corporation. Messrs. Loyd, Webster, Hamilton and Chavkin are members of the Board of Directors of both the Company and R & B Falcon Corporation ("R & B"). In addition, Mr. Loyd was the chairman of the board, president and chief executive officer of R & B and Mr. Webster was the Vice Chairman of R & B. It is management's opinion that these transactions were performed at prevailing market rates.
12. SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED)
The following disclosures provide unaudited information required by SFAS No. 69, "Disclosures About Oil and Gas Producing Activities."
COSTS INCURRED
Costs incurred in oil and natural gas property acquisition, exploration and development activities are summarized below:
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(1) Excludes capitalized interest on unproved properties of $699,625, $291,496 and 1,547,879 for the years ended December 31, 1997, 1998 and 1999, respectively.
OIL AND NATURAL GAS RESERVES
Proved reserves are estimated quantities of oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves that can reasonably be expected to be recovered through existing wells with existing equipment and operating methods.
Proved oil and natural gas reserve quantities at December 31, 1998 and 1999, and the related discounted future net cash flows before income taxes are based on estimates prepared by Ryder Scott Company and Fairchild, Ancell & Wells, Inc., independent petroleum engineers. Such estimates have been prepared in accordance with guidelines established by the Securities and Exchange Commission.
The Company's net ownership interests in estimated quantities of proved oil and natural gas reserves and changes in net proved reserves, all of which are located in the continental United States, are summarized below:
STANDARDIZED MEASURE
The standardized measure of discounted future net cash flows relating to the Company's ownership interests in proved oil and natural gas reserves as of year-end is shown below:
Future cash flows are computed by applying year-end prices of oil and natural gas to year-end quantities of proved oil and natural gas reserves. Average prices used in computing year end 1997, 1998 and 1999 future cash flows were $16.37, $10.15 and $23.40 for oil, respectively and $2.56, $2.18 and $2.35 for natural gas, respectively. Future operating expenses and development costs are computed primarily by the Company's petroleum engineers by estimating the expenditures to be incurred in developing and producing the Company's proved oil and natural gas reserves at the end of the year, based on year end costs and assuming continuation of existing economic conditions.
Future income taxes are based on year-end statutory rates, adjusted for tax basis and applicable tax credits. A discount factor of 10 percent was used to reflect the timing of future net cash flows. The standardized measure of discounted future net cash flows is not intended to represent the replacement cost or fair market value of the Company's oil and natural gas properties. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs, and a discount factor more representative of the time value of money and the risks inherent in reserve estimates.
CHANGE IN STANDARDIZED MEASURE --
Changes in the standardized measure of future net cash flows relating to proved oil and natural gas reserves are summarized below:
Sales of oil and natural gas, net of oil and natural gas operating expenses, are based on historical pretax results. Sales of oil and natural gas properties, extensions and discoveries, purchases of minerals in place and the changes due to revisions in standardized variables are reported on a pretax discounted basis, while the accretion of discount is presented on an after-tax basis.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
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(1) The sum of individual quarterly net income per common share may not agree with year-to-date net income per common share as each period's computation is based on the weighted average number of common shares outstanding during that period.
EXHIBIT INDEX
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