1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 000-22915.
CARRIZO OIL & GAS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0415919
----- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
14811 ST. MARY'S LANE, SUITE 148, HOUSTON, TEXAS 77079
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(281) 496-1352
--------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No
--- ---
The number of shares outstanding of the registrant's common stock, par value
$0.01 per share, as of August 11, 1999, the latest practicable date, was
10,375,000.
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CARRIZO OIL & GAS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Balance Sheets
- As of June 30, 1999 and December 31, 1998 2
Condensed Statements of Operations
- For the three-month and six-month periods ended
June 30, 1998 and 1999 3
Condensed Statements of Cash Flows
- For the six-month periods ended June 30, 1998 and
1999 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Items 1-6. 18
SIGNATURES 20
3
CARRIZO OIL & GAS, INC.
CONDENSED BALANCE SHEETS
December 31, June 30,
1998 1999
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,187,656 $ 213,477
Accounts receivable, net of allowance for doubtful accounts of zero and 4,227,365 3,088,224
$480,000 at December 31, 1998 and June 30, 1999, respectively
Advances to operators 1,192,079 1,060,884
Other current assets 117,614 114,113
------------ ------------
Total current assets 6,724,714 4,476,698
PROPERTY AND EQUIPMENT, net (full-cost method of accounting for oil and gas
properties) 57,878,191 61,583,761
OTHER ASSETS 385,127 233,922
------------ ------------
$ 64,988,032 $ 66,294,381
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 10,003,376 $ 5,860,042
Dividends payable 720,360 753,141
Other current liabilities 275,116 125,625
Current maturities of long-term debt 930,000 10,525,982
------------ ------------
Total current liabilities 11,928,852 17,264,790
LONG-TERM DEBT (Note 4) 11,126,000 7,799,952
DEFERRED INCOME TAXES -- --
MANDATORILY REDEEMABLE PREFERRED STOCK (10,000,000 shares
authorized with 320,110.53 and 334,623.71 issued and outstanding at December
31, 1998 and June 30, 1999, respectively) (Note 5) 30,730,695 32,293,494
SHAREHOLDERS' EQUITY:
Warrants (Note 5) 300,000 300,000
Common Stock (40,000,000 shares authorized with 10,375,000 issued and
Outstanding at December 31, 1998 and June 30, 1999, respectively) 103,750 103,750
Additional paid-in capital 32,845,727 32,845,727
Retained earnings (deficit) (21,907,082) (24,313,332)
Deferred compensation (139,910) --
------------ ------------
11,202,485 8,936,145
------------ ------------
$ 64,988,032 $ 66,294,381
============ ============
The accompanying notes are an integral part
of these financial statements.
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CARRIZO OIL & GAS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
OIL AND NATURAL GAS REVENUES $ 1,848,765 $ 1,925,265 $ 4,187,647 $ 3,767,580
COSTS AND EXPENSES:
Oil and natural gas operating expenses 653,364 636,840 1,282,809 1,380,545
Depreciation, depletion and amortization 860,862 985,053 1,620,367 1,928,244
General and administrative 558,280 480,474 1,392,633 1,187,999
----------- ----------- ----------- -----------
Total costs and expenses 2,072,506 2,102,367 4,295,809 4,496,788
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (223,741) (177,102) (108,162) (729,208)
OTHER INCOME AND EXPENSES:
Interest income 80,033 6,879 273,537 13,364
Interest expense -- (343,397) (57,731) (603,779)
Capitalized interest -- 340,306 54,646 600,688
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (143,708) (173,314) 162,290 (718,935)
INCOME TAXES (36,934) 7,002 83,529 14,004
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (106,774) (180,316) 78,761 (732,939)
CUMULATIVE EFFECT OF CHANGE IN METHOD OF
REPORTING COSTS OF START-UP ACTIVITIES (Note 6) -- -- -- 77,731
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (106,774) $ (180,316) $ 78,761 $ (810,670)
=========== =========== =========== ===========
LESS: DIVIDENDS AND ACCRETION ON
PREFERRED SHARES (741,444) (806,736) (1,411,938) (1,595,579)
----------- ----------- ----------- -----------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (848,218) $ (987,052) $(1,333,177) $(2,406,249)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (Note 3) $ (.08) $ (.10) $ (.13) $ (.22)
BASIC AND DILUTED LOSS PER COMMON SHARE OF CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (Notes 3 and 6) -- -- -- (.01)
----------- ----------- ----------- -----------
BASIC AND DILUTED LOSS PER COMMON SHARE (Note 3) $ (.08) $ (.10) $ (.13) $ (.23)
=========== =========== =========== ===========
The accompanying notes are an integral part
of these financial statements.
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CARRIZO OIL & GAS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
For the Six
Months Ended
June 30,
-------------------------------
1998 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 78,761 $ (810,671)
Adjustment to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation, depletion and amortization 1,620,367 1,928,244
Deferred income taxes 42,409 --
Cumulative effect of change in accounting principle -- 77,732
Changes in assets and liabilities-
Accounts receivable 119,088 1,139,141
Other assets (42,366) (89,416)
Accounts payable, trade (5,145,559) 2,277,632
Other current liabilities (760) (149,4,1)
------------ ------------
Net cash provided by (used) in
operating activities (3,328,060) 4,373,171
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, accrual basis (18,758,396) (5,327,514)
Adjustment to cash basis 1,934,147 (251,031)
Advance to operators (1,460,854) 131,195
------------ ------------
Net cash used in
investing activities (18,285,103) (5,447,350)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock 28,810,431 --
Proceeds from long-term debt -- 100,000
Debt repayments (7,950,000) --
------------ ------------
Net cash provided by
financing activities 20,860,431 100,000
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (752,732) (974,179)
CASH AND CASH EQUIVALENTS, beginning of period 2,674,837 1,187,656
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,922,105 $ 213,477
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (net of amounts capitalized) $ 3,085 $ 3,091
============ ============
The accompanying notes are an integral part
of these financial statements.
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CARRIZO OIL & GAS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND PRINCIPLES OF COMBINATION:
The condensed financial statements included herein have been prepared by Carrizo
Oil & Gas, Inc. (the Company), and are unaudited, except for the balance sheet
at December 31, 1998, which has been prepared from the audited financial
statements at that date. The financial statements reflect necessary adjustments,
all of which were of a recurring nature, and are in the opinion of management
necessary for a fair presentation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The Company
believes that the disclosures presented are adequate to allow the information
presented not to be misleading. The condensed financial statements included
herein should be read in conjunction with the audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
The Company was formed in 1993 and is the surviving entity after a series of
combination transactions (the Combination). The Combination included the
following transactions: (a) Carrizo Production, Inc. (a Texas corporation and an
affiliated entity with ownership substantially the same as Carrizo), was merged
into Carrizo and the outstanding shares of capital stock of Carrizo Production,
Inc., were exchanged for an aggregate of 343,000 shares of common stock of
Carrizo; (b) Carrizo acquired Encinitas Partners Ltd. (a Texas limited
partnership of which Carrizo Production, Inc., served as the general partner) as
follows: Carrizo acquired from the shareholders who serve as directors of
Carrizo their limited partner interests in Encinitas Partners Ltd. for an
aggregate consideration of 468,533 shares of common stock and, on the same date,
Encinitas Partners Ltd. was merged into Carrizo and the outstanding limited
partner interests in Encinitas Partners Ltd. were exchanged for an aggregate of
860,699 shares of common stock; (c) La Rosa Partners Ltd. (a Texas limited
partnership of which Carrizo served as the general partner) was merged into
Carrizo and the outstanding limited partner interests in La Rosa Partners Ltd.
were exchanged for an aggregate of 48,700 shares of common stock; and (d)
Carrizo Partners Ltd. (a Texas limited partnership of which Carrizo served as
the general partner) was merged into Carrizo and the outstanding limited partner
interests in Carrizo Partners Ltd. were exchanged for an aggregate of 569,068
shares of common stock.
Simultaneous with the Combination, the Company completed its initial public
offering (the Offering) of 2,875,000 shares of its common stock at a public
offering price of $11.00 per share. The Offering provided the Company with
proceeds of approximately $28.1 million, net of expenses.
The Combination was accounted for as a reorganization of entities as prescribed
by Securities and Exchange Commission (SEC) Staff Accounting Bulletin 47 because
of the high degree of common ownership among, and the common control of, the
combining entities. Accordingly, the accompanying financial statements have been
prepared using the historical costs and results of operations of the affiliated
entities. There were no significant differences in accounting methods or their
application among the combining entities. All intercompany balances have been
eliminated. Certain reclassifications have been made to prior period amounts to
conform to the current period's financial statement presentation.
2. GOING CONCERN:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Due principally to depressed oil and
gas prices, the Company's operating cash flows have decreased significantly in
1998 and through the second quarter of 1999. The Company projects that, after
considering advances and borrowing base adjustments obtained through the second
quarter of 1999, and without further increases in borrowing base capacity under
its existing revolving credit facility, debt repayments totaling approximately
$10,705,982 will be required in the 12 months ended June 30, 2000. The Company
raised $2 million in additional financing under its existing credit facility in
March 1999; however, proceeds were utilized to fund the Company's ongoing
drilling program and for working capital. The Company must find additional oil
and gas reserves in order to significantly increase the financing available
through its existing revolving credit facility.
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The Company projects that its cash sources will exceed its planned needs for
cash in 1999. Such cash sources include additional borrowings subject to
borrowing availability, cash flows from currently producing properties along
with those nearing completion or pending pipeline hookup and projected net cash
flows from wells to be drilled. Cash needs in 1999 include debt requirements,
working capital, drilling expenditures, lease bonus payments, geological and
geophysical costs on its active exploration projects and cash general and
administrative costs. The Company also has specific plans which involve, among
other things, cost reductions, hedging activities to lock in higher prices and
the drilling of high probability exploration and development prospects that it
believes will generate the necessary borrowing capacity and cash flow to fund
its 1999 obligations. There are no assurances, however, that the Company will be
able to generate cash flows sufficient to pay all of its 1999 obligations as
they become due because of the sensitivity of such cash flow projections to
factors such as oil and natural gas sales price volatility, production levels,
operating cost fluctuations, and other variables inherent in the oil and gas
industry. The current uncertainties surrounding the sufficiency of its future
cash flows and the lack of firm commitments for additional capital raise
substantial doubt about the ability of the Company to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
During the second quarter of 1999, the Company entered into an Exploration
Agreement with Palace Exploration Company, an Oklahoma oil & gas company, to
drill and, if successful, develop a minimum of 27 of Carrizo's exploration
prospects during the nine months ended March 31, 2000. In exchange for earning
50 percent of Carrizo's working interest in each of the prospects, Palace has
agreed to pay approximately 71 percent of the drilling costs for such wells.
Palace also has the right to participate in certain additional 1999 wells on
substantially the same terms, as Carrizo identifies such prospects. The
agreement provides that Carrizo will retain control of well operations. Palace
has certain termination rights in the event of continued adverse drilling
results. The joint exploration program includes wells ranging in expected depths
from 5,800 feet to over 14,000 feet. Most of the prospects were internally
generated with approximately 90 percent located in South Texas and approximately
10 percent located in South Louisiana. It is anticipated that the total drilling
cost of the minimum 27 gross well program will exceed $10 million.
As of June 30, 1999 and December 31, 1998, respectively, the Company had
$39,121,247 and $37,060,418 of investment in unevaluated properties. In order to
fully realize this investment through the exploration and development of these
properties, additional capital resources above the amount currently available
from the borrowing base, net cash flow from operations and the Exploration
Agreement will be necessary to fund such capital expenditures. The Company is
continuing to seek additional financing from a variety of sources, including new
common or preferred equity investors and additional debt financing. No assurance
can be given that additional financing will be available by these or other means
on terms acceptable to the Company. Without a continued increase in commodity
prices, successful drilling or raising additional capital, the Company
anticipates that it will be required to limit or defer its planned oil and gas
exploration and development program, which could adversely affect the
recoverability and ultimate value of the Company's oil and gas properties. The
Company has the ability to control the pace of drilling in projects where it has
a 100 percent working interest. In other projects where the Company only has a
partial ownership, the Company generally has the right, but not the obligation,
to participate for its percentage interest in drilling wells and can decline to
participate if it does not have sufficient capital resources at the time such
drilling operations commence. The Company may also transfer its right to
participate in drilling wells in exchange for cash, a reversionary interest, or
some combination thereof or may seek to sell or transfer all or a portion of its
interest in undeveloped properties.
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3. EARNINGS PER COMMON SHARE:
Supplemental earning per share information is provided below:
For the Three Months Ended June 30,
---------------------------------------------------------------------------------------
Income (Loss) Shares Per-Share Amount
1998 1999 1998 1999 1998 1999
--------------------------- -------------------------- ------------------------
Net Loss $ (106,774) $ (180,316)
Less: Dividends and accretion
on preferred stock (741,444) (806,736)
------------ ------------
Basic Earnings per Share
Net Loss available to
common shareholders (848,218) (987,052) 10,375,000 10,375,000 $ (0.08) $ (0.10)
=========== ==========
Stock Options -- -- 87,445 --
------------ ------------ ---------- ----------
Diluted Earnings per Share Net
Loss available to common
shareholders plus assumed
conversions $ (848,218) $ (987,052) 10,462,445 10,375,000 $ (0.08) $ (0.10)
============ ============ ========== ========== =========== ==========
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For the Six Months Ended June 30,
-----------------------------------------------------------------------------------
Income (Loss) Shares Per-Share Amount
1998 1999 1998 1999 1998 1999
------------------------- ----------------------- -----------------------------
Net Income (loss) before
cumulative effect of change in
accounting principle $ 78,761 $ (732,939)
Less: Dividends and accretion
on preferred stock (1,411,938) (1,595,579)
----------- -----------
Basic Earnings per Share before
cumulative change in
accounting principle
Net Loss available to
common shareholders (1,333,177) (2,328,518) 10,375,000 10,375,000 $ (0.13) $ (0.22)
============ ==============
Stock Options -- -- 105,810 --
----------- ----------- ---------- ----------
Diluted Earnings per Share before
cumulative effect of change in
accounting principle
Net Loss available to common
shareholders plus assumed
conversions $(1,333,177) $(2,328,518) 10,480,810 10,375,000 $ (0.13) $ (0.22)
=========== =========== ========== ========== ============ ==============
Cumulative effect of change in
accounting principle $ -- $ (77,731)
Basic Earnings per Share of
cumulative effect of change in
accounting principle
Net Loss available to common
shareholders $ -- $ (77,731) 10,375,000 10,375,000 $ -- $ (0.01)
============ ==============
Stock Options -- -- 105,810 --
----------- ----------- ---------- ----------
Diluted Earnings per Share before
cumulative effect of change in
accounting principle
Net Loss available to common
shareholders plus assumed
conversions $ -- $ (77,731) 10,480,810 10,375,000 $ -- $ (0.01)
=========== =========== ========== ========== ============ ==============
Net Income (loss) $ 78,761 $ (810,670)
Less: Dividends and accretion
on preferred stock (1,411,938) (1,595,579)
----------- -----------
Basic Earnings per Share
Net Loss available to common
shareholders (1,333,177) (2,406,249) 10,375,000 10,375,000
$ (0.13) $ (0.23)
============ ==============
Stock Options -- -- 105,810 --
----------- ----------- ---------- ----------
Diluted Earnings per Share Net
Loss available to common
shareholders plus assumed
conversions $(1,333,177) $(2,406,249) 10,480,810 10,375,000 $ (0.13) $ (0.23)
=========== =========== ========== ========== ============ ==============
Net income (loss) per common share has been computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the periods. The Company had outstanding 250,000 and 443,500 stock
options and 1,000,000 warrants, during the three months and six months ended
June 30, 1998 and 1999, respectively, which were antidilutive and were not
included in the calculation because the exercise price of these instruments
exceeded the underlying market value of the options and warrants.
4. FINANCING ARRANGEMENTS:
In connection with the Offering, the Company entered into an amended revolving
credit agreement with Compass Bank (the "Company Credit Facility"), to provide
for a maximum loan amount of $25 million, subject to borrowing base
limitations. The maximum loan amount was amended to $10 million in April, 1999.
Under the Company Credit Facility, the principal outstanding is due and payable
upon maturity in June 2000 with interest due monthly. The Company Credit
Facility was subsequently amended in September 1998 to provide for a term loan
under the facility
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(the "Term Loan") in addition to the revolving credit facility limited by the
Company's borrowing base. The Term Loan was initially due and payable upon
maturity in September 1999. The interest rate for borrowings is calculated at a
floating rate based on the Compass index rate or LIBOR plus 2 percent. The
Company's obligations are secured by certain of its oil and gas properties and
cash or cash equivalents included in the borrowing base.
Under the Company Credit Facility, Compass, in its sole discretion, will make
semiannual borrowing base determinations based upon the proved oil and natural
gas properties of the Company. Compass may redetermine the borrowing base and
the monthly borrowing base reduction at any time and from time to time. The
Company may also request borrowing base redeterminations in addition to its
required semiannual reviews at the Company's cost. As of June 30, 1999 and
December 31, 1998, respectively, the borrowing base was $6,273,287 and
$6,076,000 and borrowings outstanding were $5,451,000 and $5,056,000.
Proceeds from the Borrowing Base portions of this credit facility have been
used to provide funding for exploration and development activity. Substantially
all of Carrizo's oil and natural gas property and equipment is pledged as
collateral under this facility. At June 30, 1999 and December 31, 1998
borrowings under this facility totaled $5,451,000 and $5,056,000, respectively,
with an additional $523,287 and $1,020,000, respectively, available for future
borrowings. Borrowings outstanding under the Term Loan portion of the facility
were $9,000,000 and $7,000,000 at June 30, 1999 and December 31, 1998,
respectively. The facility was also available for letters of credit, two and
one of which have been issued for $299,000 and $224,000 at June 30, 1999 and
December 31, 1998, respectively. The term loan is guaranteed by certain members
of the Board of Directors.
The Company is subject to certain covenants under the terms of the Company
Credit Facility, including, but not limited to, (a) maintenance of specified
tangible net worth and (b) maintenance of a ratio of quarterly cash flow (net
income plus depreciation and other noncash charges, less noncash income) to
quarterly debt service (payments made for principal in connection with the
credit facility plus payments made for principal other than in connection with
such credit facility) of no less than 1.25 to 1.00. The Company Credit Facility
also places restrictions on, among other things, (a) incurring additional
indebtedness, loans and liens, (b) changing the nature of business or business
structure, (c) selling assets and (d) paying dividends. In March 1999, the
Company Credit Facility was amended to decrease the required specified tangible
net worth covenant.
In March 1999, the Company borrowed an additional $2 million on the term loan
portion of the Company Credit Facility increasing the total outstanding
borrowing under the Term Loan to $9 million. Certain members of the Board of
Directors have guaranteed the Term Loan. The maturity date of the Term Loan was
amended to provide for twelve monthly installments of $750,000 beginning January
1, 2000. The Company also received a deferral of principal payments due under
the borrowing base facility until July 1, 1999. At such time, the available
borrowing base portion of the loan will be reviewed and is expected to begin to
reduce ratably at $325,000 per month with any difference between the available
borrowing base and amounts outstanding being currently due. Should the Company
be able to add sufficient value to its borrowing base through drilling
activities, the required principal payments would be reduced. Certain members of
the Board of Directors have provided approximately $4 million in collateral
primarily in the form of marketable securities to secure the borrowing base
facility.
5. MANDATORILY REDEEMABLE PREFERRED STOCK:
In January 1998, the Company consummated the sale of 300,000 shares of
Preferred Stock and Warrants to purchase 1,000,000 shares of Common Stock to
affiliates of Enron Corp. The net proceeds received by the Company from this
transaction were approximately $28.8 million and were used primarily for oil
and natural gas exploration and development activities in Texas and Louisiana
and to repay related indebtedness. The Preferred Stock provides for annual
cumulative dividends of $9.00 per share, payable quarterly in cash or, at the
option of the Company until January 15, 2002, in additional shares of Preferred
Stock. The Company expects to continue payment in kind dividends due in 1999.
Dividend payments for the six months ended June 30, 1999 were made by the
issuance of an additional 14,838.54 shares of Preferred Stock. As of July 15,
1999 there were 342,125.23 shares of Preferred Stock outstanding.
The Preferred Stock is required to be redeemed by the Company (i) on January 8,
2005, or (ii) after a request for redemption from the holders of at least
30,000 shares of the Preferred Stock (or, if fewer than such number of shares
of Preferred Stock are outstanding, all of the outstanding shares of Preferred
Stock) and the occurrence of the following events: (a) the Company has failed
at any point in time to declare and pay any two dividends in the amount then
due and payable on or before the date the second of such dividends is due and
such dividends remain unpaid at such time, (b) the Company breaches certain
other covenants concerning the payment of dividends or other distributions on
or redemption or acquisition of shares of its capital stock ranking at parity
with or junior to the
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Preferred Stock, (c) for two consecutive fiscal quarterly periods the quarterly
Cash Flow (as defined below) of the Company is less than the amount of the
dividends accrued in respect to the Preferred Stock, (d) the Company fails to
pay certain amounts due on indebtedness for borrowed money or there has
otherwise been an acceleration of such indebtedness for borrowed money, (e)
there is a violation of the Shareholders' Agreement that is not waived or (f)
the Company sells, leases, exchanges or otherwise disposes of all or
substantially all of its property and assets which transaction does not provide
for the redemption of the Series A Preferred Stock. "Cash Flow" means net
income prior to preferred dividends and accretion (i) plus (to the extent
included in net income prior to preferred dividends and accretion)
depreciation, depletion and amortization and other non-cash charges and losses
on the sale of property (ii) minus non-cash income items and required principal
payments on indebtedness for borrowed money with a maturity from the original
date of incurrence of such indebtedness of six months or greater (excluding
voluntary prepayments and refinancing, but including prepayments (other than in
connection with refinancing) which would otherwise be due under such
indebtedness within a 60-day period following the date of such prepayment). The
Preferred Stock also may be redeemed at the option of the Company at any time
in whole or in part. All redemptions are at a price per share, together with
dividends accumulated and unpaid to the date of redemption, decreasing over
time from an initial rate of $104.50 per share to $100.00 per share. If the
Company fails to meet its redemption obligations, the holders of the Preferred
Stock will generally have the right, voting separately as a class, to elect
additional directors, which in most cases will constitute a majority of the
board.
The Preferred Stockholder has advised the Company that they disagree with the
calculation of Cash Flow (as defined above) for the first quarter of 1999
because they believe that capitalized interest and capitalized geological,
geophysical and land costs are "non-cash income" items and as such should be
deducted from cash flow for purposes of the Test. The Company believes that
these items are neither "non-cash" nor "income" and therefore has advised the
Preferred Stockholder that the Company strongly disagrees with the Preferred
Stockholders' position regarding the treatment of these items. Based upon the
Company's calculation of Cash Flow, which is consistent with prior quarters, for
the three months ended June 30, 1999 the Cash Flow was greater than the amount
of the dividends accrued with respect to the Preferred Stock for such period,
and the Company has advised the Preferred Stockholder that based upon its
calculations the Company believes that it has met the Cash Flow test for the
quarter. The Company has also prepared the Cash Flow test for the quarter ended
June 30, 1999 on a basis the Company believes is consistent with the Preferred
Stockholders' advice to the Company. Based upon this calculation, the Company
believes that it has also met the Cash Flow test for the quarter on this
alternative basis. The Company, however, has not been advised by the Preferred
Stockholder as to whether or not the Preferred Stockholder concurs with such
calculation. There can be no assurance as to whether the Company's Cash Flow for
future periods will exceed the amount of the dividends to be accrued with
respect to the Preferred Stock.
6. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
On January 1, 1999 the Company adopted the American Institute of Certified
Public Accountants Statement of Position 98-5, which provides guidance on the
accounting for start up costs that required the recording of the cumulative
effect of a change in accounting principle to write off unamortized
organization costs of $77,731.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 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 is assessing the impact Statement No. 133
will have on its financial accounting and disclosures and intends to adopt the
provisions of such statement in accordance with the requirements provided by
the statement.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected certain aspects of the Company's financial position
and results of operations during the periods included in the accompanying
unaudited condensed financial statements. This discussion should be read in
conjunction with the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the annual financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and the unaudited condensed financial statements
included elsewhere herein. Unless otherwise indicated by the context,
references herein to "Carrizo" or "Company" mean Carrizo Oil & Gas, Inc., a
Texas corporation that is the registrant.
GENERAL OVERVIEW
The Company began operations in September 1993 and initially focused on the
acquisition of producing properties. As a result of the increasing availability
of economic onshore 3-D seismic surveys, the Company began to obtain 3-D
seismic data and options to lease substantial acreage in 1995 and began to
drill its 3-D based prospects in 1996. The Company drilled 53 wells in 1998 and
eight wells through the six months ended June 30, 1999. The Company originally
budgeted to drill a total of 18 to 44 gross wells (4.6 to 17.5 net) in 1999.
The Company currently has budgeted to drill 29 gross wells (7.7 net) for the
last six months of 1999. Accordingly, depreciation, depletion and amortization,
oil and gas operating expenses and production are expected to increase. The
Company has typically retained the majority of its interests in shallow,
normally pressured prospects and sold a portion of its interests in deeper,
overpressured prospects.
The Company has primarily grown through the internal development of properties
within its exploration project areas, although the Company acquired properties
with existing production in the Camp Hill Project in late 1993, the Encinitas
Project in early 1995 and the La Rosa Project in 1996. The Company made these
acquisitions through the use of limited partnerships with Carrizo or Carrizo
Production, Inc. as the general partner. In addition, in November 1998, the
Company acquired assets in Wharton County, Texas in the Jones Branch project
area for $3,000,000.
The Company's revenues, profitability, future growth and ability to borrow
funds or obtain additional capital, and the carrying value of its properties
are substantially dependent on the success of the Company's exploration program
and the prevailing prices of oil and natural gas. It is impossible to predict
future oil and natural gas price movements with certainty. Declines in prices
received for oil and natural gas may have an adverse effect on the Company's
financial condition, liquidity, ability to finance capital expenditures, and
results of operations. Lower prices may also impact the amount of reserves that
can be produced economically by the Company.
Due to the instability of oil and natural gas prices, in 1995 the Company began
utilizing, from time to time, certain hedging instruments (e.g., NYMEX futures
contracts) for a portion of its oil and gas production to achieve a more
predictable cash flow, as well as to reduce the exposure to price fluctuations.
The Company's hedging arrangements apply to only a portion of its production,
provide only partial price protection against declines in oil and natural gas
prices and limit potential gains from future increases in prices. Such hedging
arrangements may expose the Company to risk of financial loss in certain
circumstances, including instances where production is less than expected, the
Company's customers fail to purchase contracted quantities of oil or natural
gas, or a sudden unexpected event materially impacts oil or natural gas prices.
The Company accounts for all these transactions as hedging activities and,
accordingly, gains and losses from hedging activities are included in oil and
gas revenues during the period the hedged transactions occur. Historically,
gains and losses from hedging activities have not been material. The Company
expects that the amount of hedges that it has in place will vary from time to
time. The Company entered in hedging transactions covering 420 Mmcf and 1,080
Mmcf at an average price (Houston Ship Channel) of $1.98 and $2.07 resulting in
a loss of $85,000 and a gain of $32,000 for the three and six months ended June
30, 1999, respectively. The Company also entered in hedging transactions
covering 18,000 Bbls at an average price of $15.45 resulting in a loss of
$56,000 for the three and six months ended June 30, 1999. Further, the Company
entered in hedging transactions covering 364 and 544 Mmcf at an average price
(Houston Ship Channel) of $2.15 and $2.42 resulting in a loss of $11,000 and a
gain of $129,000 for the three and six months ended June 30, 1998,
respectively. The Company had outstanding hedge positions as of June 30, 1999
and 1998, respectively, covering 720 Mmcf for July-December 1999 and 124 Mmcf
for July 1998 at an average price of $1.93 and $2.15 (Houston Ship Channel).
The Company also had outstanding hedge positions as of June 30, 1999 covering
36,000
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Bbls for July-December 1999 at an average price of $15.45. The fair market
value of the hedge positions as June 30, 1999 is approximately $(669,000).
The Company uses the full-cost method of accounting for its oil and gas
properties. Under this method, all acquisition, exploration and development
costs, including any general and administrative costs that are directly
attributable to the Company's acquisition, exploration and development
activities, are capitalized in a "full-cost pool" as incurred. The Company
records depletion of its full-cost pool using the unit-of-production method. To
the extent that such capitalized costs in the full-cost pool (net of
depreciation, depletion and amortization and related deferred taxes) exceed the
present value (using a 10 percent discount rate) of estimated future net
after-tax cash flows from proved oil and gas reserves, such excess costs are
charged to operations. A ceiling test write-down was not required for the three
months and six months ended June 30, 1999 and 1998. Once incurred, a write-down
of oil and gas properties is not reversible at a later date.
RECENT EXPLORATION AGREEMENT
During the second quarter of 1999, the Company entered into an Exploration
Agreement with Palace Exploration Company, an Oklahoma oil & gas company, to
drill and, if successful, develop a minimum of 27 of Carrizo's exploration
prospects during the nine months ended March 31, 2000. In exchange for earning
50 percent of Carrizo's working interest in each of the prospects, Palace has
agreed to pay approximately 71 percent of the drilling costs for such wells.
Palace also has the right to participate in certain additional 1999 wells on
substantially the same terms, as Carrizo identifies such prospects. The
agreement provides that Carrizo will retain well operations. Palace has certain
termination rights in the event of continued adverse drilling results. The
joint exploration program includes wells ranging in expected depths from 5,800
feet to over 14,000 feet. Most of the prospects were internally generated with
approximately 90 percent located in South Texas and approximately 10 percent
located south Louisiana. It is anticipated that the total drilling cost of the
minimum 27 gross well program will exceed $10 million.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999,
Compared to the Three Months Ended June 30, 1998
Oil and natural gas revenues for the three months ended June 30, 1999 increased
4 percent to $1,925,000 from $1,849,000 for the same period in 1998. Production
volumes for natural gas during the three months ended June 30, 1999 increased
12 percent to 697,268 from 623,998 for the same period in 1998. Average gas
prices decreased 13 percent to $1.97 per Mcf in the second quarter of 1999 from
$2.28 per Mcf in the same period in 1998. Production volumes for oil in the
second quarter of 1999 increased 16 percent to 42,562 Bbls from 36,639 Bbls for
the same period in 1998. Average oil prices increased 16 percent to $12.92 per
barrel in the second quarter of 1999 from $11.71 per barrel in the same period
in 1998. The increase in oil production was due primarily to the Jones Branch
acquisition during the fourth quarter of 1998. Natural gas production increased
primarily as a result of the Jones Branch acquisition and the completion of the
Musselman Ranches #2 offset by the natural decline of existing wells. Oil and
natural gas revenues include the impact of hedging activities as discussed
above under "General Overview."
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
three months ended June 30, 1998 and 1999:
1999 Period
Compared to 1998 Period
June 30 ------------------------------
--------------------------- Increase % Increase
1998 1999 (Decrease) (Decrease)
------------ ------------ ---------- ----------
Production volumes-
Oil and condensate (Bbls) 36,639 42,562 5,923 16%
Natural gas (Mcf) 623,998 697,268 73,270 12%
Average sales prices-(1)
Oil and condensate (per Bbl) $ 11.71 $ 12.92 $ 1.21 10%
Natural gas (per Mcf) 2.28 1.97 (.31) (13)%
Operating revenues-
Oil and condensate $ 428,998 $ 550,047 $ 121,049 28%
Natural gas 1,419,767 1,375,218 (44,549) (3)%
---------- ---------- ----------
Total $1,848,765 $1,925,265 $ 76,500 4%
========== ========== ==========
- ---------------------
(1) Includes impact of hedging activities.
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Oil and natural gas operating expenses for the three months ended June 30, 1999
decreased 3 percent to $637,000 from $653,000 for the same period in 1998
primarily due to a reduction in costs on older producing fields offset by the
addition of new production. Operating expenses per equivalent unit decreased to
$.67 per Mcfe in the second quarter of 1999 from $.77 per Mcfe in the same
period in 1998 as a result of the increase in production of natural gas and
cost control measures implemented in certain oil producing fields.
Depreciation, depletion and amortization (DD&A) expense for the three months
ended June 30, 1999 increased 14 percent to $985,000 from $861,000 for the same
period in 1998. This increase was due to increased amortization of deferred
loan costs, increased production and additional seismic and drilling costs
offset by the lower asset base resulting from the ceiling test write-down in
the fourth quarter of 1998. General and administrative expense for the three
months ended June 30, 1999 decreased 14 percent to $480,000 from $558,000 for
the same period in 1998 primarily as a result of cost control measures
implemented in the first quarter of 1999.
Interest income for the three months ended June 30, 1999 decreased to $7,000
from $80,000 in the second quarter of 1999 as a result of declining cash
balances. Net interest expense for the three months ended June 30, 1999,
increased to $3,000 from zero from in the same period in 1998. Capitalized
interest increased to $340,000 in the second quarter of 1999 from zero in the
second quarter of 1998 reflecting higher debt levels in the 1999 quarter.
Loss before income taxes for the three months ended June 30, 1999 decreased to
a loss of $173,000 from a loss of $144,000 in the same period in 1998. Net loss
for the three months ended June 30, 1999 decreased to a loss of $180,000 from a
loss of $107,000 for the same period in 1998 primarily as a result of the
factors described above.
Six Months Ended June 30, 1999,
Compared to the Six Months Ended June 30, 1998
Oil and natural gas revenues for the six months ended June 30, 1999 decreased
10 percent to $3,768,000 from $4,188,000 for the same period in 1998.
Production volumes for natural gas during the six months ended June 30, 1999
increased 5 percent to 1,400,962 Mcf from 1,331,169 Mcf for the same period in
1998. Average gas prices decreased 21 percent to $1.94 per Mcf in the first
half of 1999 from $2.47 per Mcf in the same period in 1998. Production volumes
for oil in the first half of 1999 increased 29 percent to 90,321 Bbls from
69,814 Bbls for the same period in 1998. Average oil prices decreased 10
percent to $11.55 per barrel in the first half of 1999 from $12.89 per barrel
in the same period in 1998. The increase in oil production was due primarily to
the Jones Branch Acquisition during the fourth quarter of 1998. Natural gas
production increased primarily as a result of Jones Branch acquisition and the
completion of the Musselman Ranches #2 offset by the natural decline of
existing wells. Oil and natural gas revenues include the impact of hedging
activities as discussed above under "General Overview."
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the six
months ended June 30, 1998 and 1999:
1999 Period
Compared to 1998 Period
June 30 ------------------------------
------------------------- Increase % Increase
1998 1999 (Decrease) (Decrease)
---------- ---------- ---------- ----------
Production volumes-
Oil and condensate (Bbls) 69,814 90,321 20,507 29%
Natural gas (Mcf) 1,331,169 1,400,962 69,793 5%
Average sales prices-(1)
Oil and condensate (per Bbl) $ 12.89 $ 11.55 $ (1.34) (10)%
Natural gas (per Mcf) 2.47 1.94 (.53) (21)%
Operating revenues-
Oil and condensate $ 899,687 $1,043,484 $ 143,797 16%
Natural gas 3,287,960 2,724,096 (563,864) (17)%
---------- ---------- ----------
Total $4,187,647 $3,767,580 $ (420,067) (10)%
========== ========== ==========
- -------------------
(2) Includes impact of hedging activities.
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Oil and natural gas operating expenses for the six months ended June 30, 1999
increased 8 percent to $1,381,000 from $1,283,000 for the same period in 1998
primarily due to the addition of new wells offset by a reduction in costs on
older producing fields. Operating expenses per equivalent unit decreased to
$.71 per Mcfe in the first half of 1999 from $.73 per Mcfe in the same period
in 1998 as a result of increased production of natural gas and the
implementation of cost control measures in certain oil producing fields during
the first quarter of 1999.
Depreciation, depletion and amortization (DD&A) expense for the six months
ended June 30, 1999 increased 19 percent to $1,928,000 from $1,620,000 for the
same period in 1998. This increase was due to additional seismic and drilling
costs. General and administrative expense for the six months ended June 30,
1999 decreased 15 percent to $1,188,000 from $1,393,000 for the same period in
1998 primarily as a result of cost control measures implemented in the first
quarter of 1999.
Interest income for the six months ended June 30, 1999 decreased to $13,000
from $274,000 in the first half of 1998. Net interest expense for the six
months ended June 30, 1999 and 1998 was unchanged. Capitalized interest
decreased to $601,000 in the first half of 1999 from $55,000 in the first half
of 1998 reflecting higher debt levels in 1999.
Income (loss) before income taxes for the six months ended June 30, 1999
decreased to a loss of $719,000 from income of $162,000 for the same period in
1998. Net income (loss) for the six months ended June 30, 1999 decreased to a
loss of $811,000 from income of $79,000 for the same period in 1998 primarily
as a result of the factors described above and the charge of $78,000 for the
cumulative effect of change in method of reporting costs of start-up
activities.
LIQUIDITY AND CAPITAL RESOURCES
Note 2 to the Financial Statements notes that the financial statements have
been prepared assuming the Company will continue as a going concern but also
notes the uncertainties about the Company's future ability to pay its
obligations when they become due and the lack of firm commitments for
additional capital raised substantial doubt about the ability of the Company to
continue as a going concern. As stated in that note, the financial statements
do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern. See Note 2 in the Notes to the Company's Financial Statements.
The Company has made and will be required to make oil and gas capital
expenditures substantially in excess of its net cash flow from operations in
order to complete the exploration and development of its existing properties.
The Company will require additional sources of financing to fund drilling
expenditures on properties currently owned by the Company and to fund leasehold
costs and geological and geophysical cost on its active exploration projects.
Management of the Company continues to seek financing for its capital program
from a variety of sources. The Company is seeking common or preferred equity
investors. The Company is also seeking additional debt financing. No assurance
can be given that the Company will be able to obtain additional financing by
these or other means on terms that would be acceptable to the Company. The
Company's inability to obtain additional financing would have a material
adverse effect on the Company. Without raising additional capital, the Company
anticipates that it will be required to limit or defer its planned oil and gas
exploration and development program, which could adversely affect the
recoverability and ultimate value of the Company's oil and gas properties. The
Company may also be required to pursue other financial alternatives, which
could include sales of assets or a sale or merger of the Company.
The Company's primary sources of liquidity have included proceeds from the
Offering and from the sale of shares of Preferred Stock and the Warrants, funds
generated by operations, equity capital contributions and borrowings, primarily
under revolving credit facilities.
Cash flows provided by (used in) operations (after changes in working capital)
were $(3,328,060) and $4,373,171 for the six months ended June 30, 1998 and
1999, respectively. The decrease in cash flows used in operations in 1999 as
compared to 1998 was due primarily to increases in trade accounts payable in
1998.
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The Company originally budgeted capital expenditures in 1999 of approximately
$2.2 million to $9.5 million of which $500,000 was expected to be used to fund
3-D seismic surveys and land acquisitions and $1.7 million to $ 9.0 million of
which was expected to be used for drilling activities in the Company's project
areas. The Company originally budgeted to drill approximately 18 to 44 gross
wells (4.6 to 17.8 net) in 1999. The Company has budgeted capital expenditures
for the last six months of 1999 of $4.1 million of which $500,00 is expected to
be used to fund 3-D seismic surveys and land acquisitions and $3.6 million of
which is expected to be used for drilling activities in the Company's project
areas. The Company has budgeted to drill approximately 29 gross wells (7.7 net)
in the last six months of 1999. The actual number of wells drilled and capital
expended is dependent upon available financing and cash flow. This decrease in
planned drilling activity resulted primarily from the lack of availability of
capital resources.
The Company has continued to reinvest a substantial portion of its cash flows
into increasing its 3-D prospect portfolio, improving its 3-D seismic
interpretation technology and funding its drilling program. Oil and gas capital
expenditures were $5.8 million for the six months ended June 30, 1999. The
Company's drilling efforts resulted in the successful completion of 31 gross
wells (10.3 net) during the year ended December 31, 1998 and six gross wells
(1.0 net) during the six months ended June 30, 1999.
FINANCING ARRANGEMENTS
In connection with the Offering, the Company entered into an amended revolving
credit agreement with Compass Bank (the "Company Credit Facility"), to provide
for a maximum loan amount of $25 million, subject to borrowing base
limitations. The maximum borrowing base loan amount was amended to $10 million
in April, 1999. Under the Company Credit Facility, the principal outstanding is
due and payable upon maturity in June 2000 with interest due monthly. The
Company Credit Facility was amended in September 1998 to provide for a term
loan under the facility (the "Term Loan") in addition to the revolving credit
facility limited by the Company's borrowing base. The Term Loan was initially
due and payable upon maturity in September 1999. The interest rate for
borrowings is calculated at a floating rate based on the Compass index rate or
LIBOR plus 2 percent. The Company's obligations are secured by certain of its
oil and gas properties and cash or cash equivalents included in the borrowing
base.
Under the Company Credit Facility, Compass, in its sole discretion, will make
semiannual borrowing base determinations based upon the proved oil and natural
gas properties of the Company. Compass may redetermine the borrowing base and
the monthly borrowing base reduction at any time and from time to time. The
Company may also request borrowing base redeterminations in addition to its
required semiannual reviews at the Company's cost. As of June 30, 1999 and
December 31, 1998, respectively, the borrowing base was $6,273,287 and
$6,076,000 and borrowings outstanding were $5,451,000 and $5,056,000.
Proceeds from the Borrowing Base portions of this credit facility have been
used to provide funding for exploration and development activity. Substantially
all of Carrizo's oil and natural gas property and equipment is pledged as
collateral under this facility. At June 30, 1999 and December 31, 1998
borrowings under this facility totaled $5,451,000 and $5,056,000, respectively,
with and an additional $523,287 and $1,020,000, respectively, available for
future borrowings. Borrowings outstanding under the Term Loan portion of the
facility were $9,000,000 and $7,000,000 at June 30, 1999 and December 31, 1998,
respectively. The facility was also available for letters of credit, two and
one of which have been issued for $299,000 and $224,000 at June 30, 1999 and
December 31, 1998, respectively. The term loan is guaranteed by certain members
of the Board of Directors.
The Company is subject to certain covenants under the terms of the Company
Credit Facility, including, but not limited to, (a) maintenance of specified
tangible net worth and (b) maintenance of a ratio of quarterly cash flow (net
income plus depreciation and other noncash charges, less noncash income) to
quarterly debt service (payments made for principal in connection with the
credit facility plus payments made for principal other than in connection with
such credit facility) of no less than 1.25 to 1.00. The Company Credit Facility
also places restrictions on, among other things, (a) incurring additional
indebtedness, loans and liens, (b) changing the nature of business or business
structure, (c) selling assets and (d) paying dividends. In March 1999, the
Company Credit Facility was amended to decrease the required specified tangible
net worth covenant.
In March 1999, the Company borrowed an additional $2 million on the term loan
portion of the Company Credit Facility increasing the total outstanding
borrowing under the Term Loan to $9 million. Certain members of the Board of
Directors have guaranteed the Term Loan. The maturity date of the Term Loan was
amended to provide for twelve monthly installments of $750,000 beginning
January 1, 2000. The Company also received a deferral of principal payments due
under the borrowing base facility until July 1, 1999. At such time, the
available borrowing base portion of the loan will be reviewed and is expected
to begin to reduce ratably at $325,000 per month with any
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difference between the available borrowing base and amounts outstanding being
currently due. Should the Company be able to add sufficient value to its
borrowing base through drilling activities, the required principal payments
would be reduced. Certain members of the Board of Directors have provided
approximately $4 million in collateral primarily in the form of marketable
securities to secure the borrowing base facility.
In January 1998, the Company consummated the sale of 300,000 shares of
Preferred Stock and Warrants to purchase 1,000,000 shares of Common Stock to
affiliates of Enron Corp. The net proceeds received by the Company from this
transaction were approximately $28.8 million and were used primarily for oil
and natural gas exploration and development activities in Texas and Louisiana
and to repay related indebtedness. The Preferred Stock provides for annual
cumulative dividends of $9.00 per share, payable quarterly in cash or, at the
option of the Company until January 15, 2002, in additional shares of Preferred
Stock. The Company expects to continue payment in kind dividends due in 1999.
Dividend payments for the six months ended June 30, 1999 were made by the
issuance of an additional 14,838.54 shares of Preferred Stock. As of July 15,
1999 there were 342,125.23 shares of Preferred Stock outstanding.
The Preferred Stock is required to be redeemed by the Company (i) on January 8,
2005, or (ii) after a request for redemption from the holders of at least
30,000 shares of the Preferred Stock (or, if fewer than such number of shares
of Preferred Stock are outstanding, all of the outstanding shares of Preferred
Stock) and the occurrence of the following events: (a) the Company has failed
at any point in time to declare and pay any two dividends in the amount then
due and payable on or before the date the second of such dividends is due and
such dividends remain unpaid at such time, (b) the Company breaches certain
other covenants concerning the payment of dividends or other distributions on
or redemption or acquisition of shares of its capital stock ranking at parity
with or junior to the Preferred Stock, (c) for two consecutive fiscal quarterly
periods the quarterly Cash Flow (as defined below) of the Company is less than
the amount of the dividends accrued in respect to the Preferred Stock, (d) the
Company fails to pay certain amounts due on indebtedness for borrowed money or
there has otherwise been an acceleration of such indebtedness for borrowed
money, (e) there is a violation of the Shareholders' Agreement that is not
waived or (f) the Company sells, leases, exchanges or otherwise disposes of all
or substantially all of its property and assets which transaction does not
provide for the redemption of the Series A Preferred Stock. "Cash Flow" means
net income prior to preferred dividends and accretion (i) plus (to the extent
included in net income prior to preferred dividends and accretion)
depreciation, depletion and amortization and other non-cash charges and losses
on the sale of property (ii) minus non-cash income items and required principal
payments on indebtedness for borrowed money with a maturity from the original
date of incurrence of such indebtedness of six months or greater (excluding
voluntary prepayments and refinancing, but including prepayments (other than in
connection with refinancing) which would otherwise be due under such
indebtedness within a 60-day period following the date of such prepayment). The
Preferred Stock also may be redeemed at the option of the Company at any time
in whole or in part. All redemptions are at a price per share, together with
dividends accumulated and unpaid to the date of redemption, decreasing over
time from an initial rate of $104.50 per share to $100.00 per share. If the
Company fails to meet its redemption obligations, the holders of the Preferred
Stock will generally have the right, voting separately as a class, to elect
additional directors, which in most cases will constitute a majority of the
board.
The Preferred Stockholder has advised the Company that they disagree with the
calculation of Cash Flow (as defined above) for the first quarter of 1999
because they believe that capitalized interest and capitalized geological,
geophysical and land costs are "non-cash income" items and as such should be
deducted from cash flow for purposes of the Test. The Company believes that
these items are neither "non-cash" nor "income" and therefore has advised the
Preferred Stockholder that the Company strongly disagrees with the Preferred
Stockholders' position regarding the treatment of these items. Based upon the
Company's calculation of Cash Flow, which is consistent with prior quarters, for
the three months ended June 30, 1999 the Cash Flow was greater than the amount
of the dividends accrued with respect to the Preferred Stock for such period,
and the Company has advised the Preferred Stockholder that based upon its
calculations the Company believes that it has met the Cash Flow test for the
quarter. The Company has also prepared the Cash Flow test for the quarter ended
June 30, 1999 on a basis the Company believes is consistent with the Preferred
Stockholders' advice to the Company. Based upon this calculation, the Company
believes that it has also met the Cash Flow test for the quarter on this
alternative basis. The Company, however, has not been advised by the Preferred
Stockholder as to whether or not the Preferred Stockholder concurs with such
calculation. There can be no assurance as to whether the Company's Cash Flow for
future periods will exceed the amount of the dividends to be accrued with
respect to the Preferred Stock.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company's results of operations and cash flows are affected by changing oil
and gas prices. If the price of oil and gas increases (decreases), there could
be a corresponding increase (decrease) in the operating cost that the Company
is required to bear for operations, as well as an increase (decrease) in
revenues. Inflation has had a minimal effect on the Company.
YEAR 2000
The "Year 2000 Issue" is a general term used to refer to certain business
implications of the arrival of the new millennium. In simple terms, on January
1, 2000, all computerized systems that use the two-digit convention to identify
the applicable year, including both information technology systems and
non-information technology systems that use embedded technology, could fail
completely or create erroneous data as a result of the system failing to
recognize the two digit internal date "00" as representing the year 2000.
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The Company has completed its initial assessment of Year 2000 compliance of its
internal information technology systems, which consist primarily of financial
and accounting systems and geological evaluation systems, and does not believe
that these systems have any material issues with respect to Year 2000
compliance. The Company's internal information technology systems are all new
and widely utilized. Its vendors have advised the Company that all of these
systems are either Year 2000 compliant or can be easily upgraded to be Year
2000 compliant. The Company anticipates that its Year 2000 remediation efforts
for information technology systems, consisting primarily of software upgrades,
will continue through 1999, and anticipates incurring less than $10,000 in
connection with these efforts.
The Company has not identified any non-information technology systems that use
embedded technology on which it relies and which it believes is likely to have
a Year 2000 problem; however such assessment is expected to continue through
1999.
Like every other business enterprise, the Company is at risk from Year 2000
failures on the part of its major business counterparts, including suppliers
and service providers, as well as potential failures in public and private
infrastructure services, including electricity, water, gas, transportation and
communications.
Through communications with industry partners and others, the Company is also
evaluating the risk presented by potential Year 2000 non-compliance of third
parties. Because such risks vary substantially, companies are being contacted
based on the estimated magnitude of the risk posed to the Company by their
potential Year 2000 non-compliance. The Company anticipates that these efforts
will continue through 1999 and will not result in significant costs to the
Company.
The Company believes that its most likely worst-case scenario Year 2000 failure
would be a shutdown of the pipeline systems into which it markets its natural
gas production. Should this occur, the Company would be forced to curtail its
production as there is no alternate way to market its production. Revenues
would be negatively impacted for the period of the curtailment. While the
pipeline operators do not anticipate such an event, there can be no assurance
that it will not occur. The Company is not insured for any resulting lost
revenues.
The Company's assessment of its Year 2000 issues involves many assumptions.
There can be no assurance that the Company's assumptions will prove accurate,
and actual results could differ significantly from the assumptions. In
conducting its Year 2000 compliance efforts, the Company has relied primarily
on vendor representations with respect to its internal computerized systems and
representations from third parties with which the Company has business
relationships and has not independently verified these representations. There
can be no assurance that these representations will prove to be accurate. A
Year 2000 failure could result in a business disruption that adversely affects
the Company's business, financial condition or results of operations. The
Company is unlikely to be insured for Year 2000 losses should they occur.
Although it is not currently aware of any likely business disruption, the
Company is developing contingency plans, such as alternate methods of measuring
its natural gas sales volumes, to address Year 2000 failures and expects this
work to continue through 1999.
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PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
From time to time the Company is a party to various legal proceedings
arising in the ordinary course of business. The Company is not currently a
party to any litigation that it believes could have a material adverse
effect on the financial position of the Company.
Item 2 - Changes in Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
(A) Annual Meeting of Shareholders on May 25, 1999.
(B) Set forth below are the results of the voting with respect to each
matter acted upon at the meeting (proxy totals in thousands):
Broker
For Against Withheld Abstain Non votes
--- ------ -------- ------- ---------
Election of Directors 9,088,126 9,271
S. P. Johnson IV 9,088,126 9,271
Frank A. Wojtek 9,088,126 9,271
Steven A. Webster 9,088,126 9,271
Douglas A. P. Hamilton 9,088,126 9,271
Paul B. Loyd, Jr. 9,088,126 9,271
Approval of the Appointment
of Arthur Andersen L.L.P. as
Independent Public
Accountants 9,086,597 10,800
Item 5 - Other Information
FORWARD LOOKING STATEMENTS
The statements contained in all parts of this document, including, but
not limited to, those relating to the Company's schedule, targets, estimates or
results of future drilling, budgeted wells, increases in wells, budgeted and
other future capital expenditures, use of offering proceeds, effects of
litigation, expected production or reserves, increases in reserves, acreage
working capital requirements, hedging activities, the ability of expected
sources of liquidity to implement its business strategy, matters relating to
the Palace Agreement, including cost of wells and any effect of that agreement,
the effects of the Year 2000 issue and any other statements regarding future
operations, financial results, business plans and cash needs and other
statements that are not historical facts are forward looking statements. When
used in this document, the words "anticipate," "estimate," "expect," "may,"
"project," "believe" and similar expression are intended to be among the
statements that identify forward looking statements. Such statements involve
risks and uncertainties, including, but not limited to, those relating to the
Company's dependence on its exploratory drilling activities, the volatility of
oil and natural gas prices, the need to replace reserves depleted by
production, operating risks of oil and natural gas operations, the Company's
dependence on its key personnel, factors that affect the Company's ability to
manage its growth and achieve its business strategy, risks relating to, limited
operating history, technological changes, significant capital requirements of
the Company, the potential
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impact of government regulations, litigation, competition, the uncertainty of
reserve information and future net revenue estimates, property acquisition
risks and other factors detailed in the Company's Annual Report on Form 10-K
and other filings with the Securities and Exchange Commission. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated.
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
Exhibit
Number Description
------- -----------
+2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners
Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P.
Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of June 6, 1997 (Incorporated
herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-29187)).
+3.1 -- Amended and Restated Articles of Incorporation of the Company (Incorporated herein by
reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
+3.2 -- Statement of Resolution Establishing Series of Shares Designated 9% Series A Preferred Stock
(Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
+3.3 -- Amended and Restated Bylaws of the Company, as amended by Amendment No. 1 (incorporated herein
by reference to Exhibit 3.2 to the Company's Registration Statement on Form 8-A (Registration
No. 000-22915).
4.1 -- Sixth Amendment to First Amended, Restated and Combined Loan Agreement by and between Carrizo Oil
& Gas, Inc. and Compass Bank dated April 23, 1999. Incorporated by reference to Exhibit 4.4 to
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
4.5 -- Amended and Restated Limited Guaranty, Paul B. Loyd, Jr. dated March 22, 1999.
10.1 -- Exploration Agreement dated June 22, 1999 between the Company and Palace Exploration Company.
27.1 -- Financial Data Schedule.
+ Incorporated herein by reference as indicated.
Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Carrizo Oil & Gas, Inc.
(Registrant)
Date: August 16, 1999 By: /s/ S. P. Johnson, IV
--------------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 16, 1999 By: /s/ Frank A. Wojtek
--------------------------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Exploration Agreement
27.1 Financial Data Schedule