-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R+8KnOOqd70wUQD2ui5LrBD7Lw+xewQljJIOStc69sWim0H18yzHPksOtOCWNEKH ievDd7kDgJ7qAEL6dGP6gg== 0000950129-97-002414.txt : 19970616 0000950129-97-002414.hdr.sgml : 19970616 ACCESSION NUMBER: 0000950129-97-002414 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19970613 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARRIZO OIL & GAS INC CENTRAL INDEX KEY: 0001040593 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 760415919 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-29187 FILM NUMBER: 97623780 BUSINESS ADDRESS: STREET 1: 14811 ST MARYS LANE STREET 2: STE 148 CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 2814961352 MAIL ADDRESS: STREET 1: CARRIZO OIL & GAS INC STREET 2: 14811 ST MARYS LANE STE 148 CITY: HOUSTON STATE: TX ZIP: 77079 S-1 1 CARRIZO OIL & GAS, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 13, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- CARRIZO OIL & GAS, INC. (Exact name of registrant as specified in its charter) TEXAS 1311 76-0415919 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
CARRIZO OIL & GAS, INC. 14811 ST. MARY'S LANE, SUITE 148 HOUSTON, TEXAS 77079 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) S. P. JOHNSON IV PRESIDENT AND CHIEF EXECUTIVE OFFICER CARRIZO OIL & GAS, INC. 14811 ST. MARY'S LANE, SUITE 148 HOUSTON, TEXAS 77079 (281) 496-1352 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- Copies to: GENE J. OSHMAN T. MARK KELLY BAKER & BOTTS, L.L.P. VINSON & ELKINS L.L.P. 3000 ONE SHELL PLAZA 1001 FANNIN, SUITE 2500 HOUSTON, TEXAS 77002-4995 HOUSTON, TEXAS 77002-6760 (713) 229-1234 (713) 758-2222
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] --------------------- CALCULATION OF REGISTRATION FEE
==================================================================================================================== PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(1) OFFERING PRICE(2)(3) REGISTRATION FEE - -------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share........... -- -- $37,375,000 $11,326 ==================================================================================================================
(1) In accordance with Rule 457(o) under the Securities Act of 1933, as amended, the number of shares being registered and the proposed maximum offering price per share are not included in this table. (2) Estimated solely for the purpose of calculating the registration fee. (3) Includes shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE 13, 1997 2,500,000 SHARES [LOGO] CARRIZO OIL & GAS, INC. COMMON STOCK ($0.01 PAR VALUE) All of the shares of Common Stock offered hereby are being sold by Carrizo Oil & Gas, Inc. (the "Company"). Application will be made for inclusion of the Common Stock on the Nasdaq National Market under the symbol "CZOG." Prior to the Offering, there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for factors to be considered in determining the initial public offering price. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGE 11. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
============================================================================================================== UNDERWRITING PRICE DISCOUNTS AND PROCEEDS TO TO PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------------------------------------- Per Share............................... $ $ $ - -------------------------------------------------------------------------------------------------------------- Total(3)................................ $ $ $ ==============================================================================================================
(1) See "Underwriting" for indemnification arrangements. (2) The estimated expenses of $ are payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to an additional 375,000 shares of Common Stock solely to cover over-allotments. If this option is exercised in full, total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock offered hereby are being offered by the several Underwriters, subject to prior sale and acceptance by the Underwriters and subject to their right to reject any order in whole or in part. It is expected that the Common Stock will be available for delivery on or about , 1997 at the offices of Schroder Wertheim & Co. Incorporated, New York, New York. SCHRODER WERTHEIM & CO. JEFFERIES & COMPANY, INC. , 1997 3 [MAP SHOWING LOCATIONS OF THE COMPANY'S PROJECT AREAS] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus (i) gives effect to the Combination Transactions (as defined below under "-- The Combination Transactions") and the issuance of approximately 2,290,000 shares of Common Stock pursuant to such transactions, (ii) assumes that the Underwriters' over-allotment option will not be exercised and (iii) has been adjusted to reflect the 521-for-one split of the Common Stock effected in June 1997. Unless otherwise indicated by the context, references herein to "Carrizo" mean Carrizo Oil & Gas, Inc., a Texas corporation that is the issuer of the Common Stock offered hereby, and references to the "Company" mean Carrizo and its corporate and partnership subsidiaries and predecessors. Certain terms used herein relating to the oil and natural gas industry are defined in the Glossary of Certain Industry Terms included elsewhere in this Prospectus. THE COMPANY OVERVIEW Carrizo is an independent oil and gas company engaged in the exploration, development, exploitation and production of natural gas and crude oil. The Company's operations are currently focused onshore in proven oil and gas producing trends along the Gulf Coast, primarily in Texas and Louisiana in the Frio, Wilcox and Vicksburg trends. The Company believes that the availability of economic onshore 3-D seismic surveys has fundamentally changed the risk profile of oil and gas exploration in these regions. Recognizing this change, the Company has aggressively sought to control significant prospective acreage blocks for targeted, proprietary, 3-D seismic surveys. As of May 31, 1997, the Company had assembled approximately 322,000 gross acres under lease or option. Approximately 75% of the Company's current acreage position is covered by 3-D seismic data that the Company has acquired, or is in the process of acquiring, in its first 15 seismic surveys. The Company expects to acquire additional 3-D seismic data during the remainder of 1997 and 1998 that will cover substantially all of its remaining current acreage position. From the data generated by its first seven proprietary seismic surveys, covering 200 square miles, 94 drillsites have been identified. The Company's capital budgets for 1997 and 1998 of approximately $22.6 million and $54.2 million, respectively, include amounts for the acquisition of additional 3-D seismic data and for the drilling of 67 gross wells (24.6 net) in 1997 with a 37% average working interest and the drilling of 147 gross wells (67.5 net) in 1998 with an anticipated 46% average working interest. In addition, the Company anticipates that as its 3-D seismic data is further evaluated, additional prospects will be generated for drilling beyond 1998. Typically, the Company's primary drilling targets have been shallow (from 4,000 to 7,000 feet), normally pressured reservoirs that generally involve moderate cost (averaging $200,000 to $500,000 per completed well) and risk. Many of these drilling prospects also have secondary, deeper, over-pressured targets which have greater economic potential but generally involve higher cost (averaging $1 million to $2 million per completed well) and risk. The Company often seeks to sell a portion of these deeper prospects to reduce its exploration risk and financial exposure while still allowing the Company to retain significant upside potential. Deeper targets have been identified in seven of the Company's 67 prospects budgeted for drilling in 1997. The Company operates the majority of its projects through the exploratory phase but may relinquish operator status to qualified partners in the production phase to control costs and focus resources on the higher-value exploratory phase. As of May 31, 1997, the Company operated 66 producing oil and gas wells, which accounted for 57% of the wells in which the Company had an interest. 3 5 The Company seeks to increase its exposure to projects in its core areas through the use of a broad project generation network, including outside regional geologists, joint venture partners and its internal geophysical team. Similarly, the Company uses contract geoscientists with expertise in a particular project area, the prospect generation teams of its industry partners and its internal geophysical staff to identify drillsites. The Company believes that this strategy has enhanced its ability to control general and administrative expenses, which averaged $0.27 per Mcfe of production for the first quarter of 1997. The Company has experienced rapid increases in reserves, production and earnings before interest expense, income taxes, depreciation, depletion and amortization ("EBITDA") since its inception in 1993 due to the growth of its 3-D based drilling and development activities. From January 1, 1996 to March 31, 1997, the Company participated in the drilling of 29 gross wells (8.9 net) with a commercial well success rate of approximately 79%. This drilling success contributed to the Company's total proved reserves as of March 31, 1997 of approximately 38.8 Bcfe, with a PV-10 Value of $30.4 million. From inception through March 31, 1997, the Company's average finding and development cost was approximately $0.47 per Mcfe. The Company's production has increased 125% from 321 MMcfe for the three months ended March 31, 1996 to 721 MMcfe for the three months ended March 31, 1997. EBITDA has also increased significantly from $328,000 for the three months ended March 31, 1996 to $1.1 million for the three months ended March 31, 1997. In addition to its core exploratory operations, the Company operates a heavy oil project in Anderson County, Texas which, as of March 31, 1997, contained proved reserves of approximately 3.6 MMBbls of 19 degrees API gravity crude oil. The project produces from a depth of 500 feet and utilizes a tertiary steam drive as an enhanced oil recovery process. During the first quarter of 1997, the Company produced 107 Bbls/d of oil from this project, which averaged a $0.65 per Bbl premium over West Texas Intermediate crude due to the produced oil's suitability as a lube oil feedstock. The Company's management team has extensive energy industry experience. S.P. Johnson IV, the Company's President and Chief Executive Officer, has 18 years of industry experience, including 15 years with Shell Oil Company where he served in various managerial positions. The Company's technical and operating employees have an average of 15 years of industry experience, in many cases with major and large independent oil companies, including Shell Oil Company, Vastar Resources, Inc., Pennzoil Company and Tenneco Inc. The Company's Board of Directors and major shareholders include its Chairman, Steven A. Webster, who is also Chairman and Chief Executive Officer of Falcon Drilling Company Inc., and Paul B. Loyd, Jr., the Chairman and Chief Executive Officer of Reading & Bates Corporation. The Company believes that its future growth will be driven by the drilling and development of existing identified opportunities as well as new 3-D based prospects that are continually being identified from its growing project portfolio. The Company intends to use the proceeds of this Offering to accelerate its drilling and development activities, expand its prospective acreage acquisition program and increase the number and size of, and working interest in, additional 3-D based projects. BUSINESS STRATEGY The Company's business strategy is to profitably expand its reserve base, production levels and EBITDA through the following key elements: Aggressive Acreage and Seismic Acquisition Program. The Company seeks to control significant prospective acreage positions in proven producing trends and then acquire 3-D seismic data to evaluate this acreage. The Company believes that recent technical improvements and cost reductions of onshore 3-D seismic surveys and oil and gas drilling techniques have changed the risk/reward profile of exploration in these regions and allow for the profitable exploration and development of previously undetected or uneconomic drilling prospects. The Company believes that 4 6 its existing large acreage position and seismic database will generate a significant inventory of drillsites over the next several years. Focused Exploration. The Company intends to maintain its exploration focus primarily in the onshore Gulf Coast region, which it believes offers numerous advantages, including: (i) geologic trends that are prone to the accumulation of significant oil and gas reserves in multiple target zones, (ii) a large number of over-looked or under-exploited drilling prospects, (iii) familiarity of the Company's personnel with the geology of the region, (iv) established relationships with other regional participants and (v) availability of pipeline and operating infrastructure. Based on the results to date of its exploration activities, the Company believes that significant undiscovered reserves remain in this region, and the Company plans to utilize its existing database of 3-D seismic and geologic data and its knowledge of the region's producing fields and trends to further expand its operations within this core region. Leveraged Project and Drillsite Generation Program. The Company maintains a flexible and diversified approach to project identification to increase its exposure to projects in its core areas. The Company's project areas have been identified by a broad network that includes contract geoscientists who have expertise in a particular project area, the exploration teams of several industry partners as well as the Company's internal geophysical team. This approach has enabled the Company to increase the number and diversity of projects from which the Company has developed its exploration program while controlling the costs associated with these operations. Similarly, in identifying specific drillsites within a project area, the Company's internal exploration team has worked with outside contract geoscientists and joint venture partners. Prospects with Attractive Risk/Reward Balance. The Company seeks to retain significant working interest positions in exploration prospects that fit its risk/reward criteria. Many of the Company's exploration prospects contain both primary targets with shallower, normally pressured reservoirs that generally involve moderate cost and risk, as well as secondary targets that consist of deeper, over-pressured and often larger reservoirs but involve higher cost and risk. The Company typically retains all or the majority of its interests in the shallow targets and often sells a portion of its interests in the deeper targets to industry partners in order to mitigate its exploration risk and fund the anticipated capital requirements for the retained portion of these targets. The Company believes that this strategy affords it significant upside potential with reduced overall risk. 5 7 CURRENT EXPLORATORY PROJECTS The Company is currently evaluating 32 exploration project areas. As of May 31, 1997, the Company had an existing 3-D seismic database of 661 square miles and was acquiring an additional 436 square miles of data (totaling 1,097 square miles of 3-D seismic data). To date, all project areas for which seismic data has been interpreted have yielded multiple prospects and drillsites. The Company is continuing to receive and interpret data covering these project areas and believes that each project area has the potential for additional prospects and drillsites. For additional information as to these project areas, see "Business -- Significant Project Areas." 1997-1998 EXPLORATION PROGRAM
SQ. MILES OF 3-D GROSS SEISMIC DATA AT TOTAL ACREAGE MAY 31, 1997 1997 LEASED OR ---------------------- AND UNDER BUDGETED 1997 1998 1998 AVERAGE OPTION AT EXISTING FOR BUDGETED BUDGETED BUDGETED AVERAGE NET MAY 31, OR BEING ACQUISITION GROSS GROSS GROSS WORKING REVENUE PROJECT AREAS 1997 ACQUIRED 1997-1998 WELLS(1) WELLS(2) WELLS INTEREST(3) INTEREST(3) ------------- --------- -------- ----------- -------- -------- -------- ----------- ----------- TEXAS Starr/Hidalgo........... 4,888 340(4) -- 11 15 26 50.0% 37.5% Encinitas/Kelsey........ 9,110 32 -- 14 1 15 27.5% 23.0% Buckeye................. 16,280 22 20 9 11 20 50.0% 39.0% La Rosa................. 8,260 22 -- 2(2) 4 6 31.5% 23.6% Mexican Sweetheart...... 29,421 40 -- -- 8 8 25.0% 18.8% McFaddin Ranch.......... 5,300 15 -- 1 4 5 37.5% 28.1% Cologne................. 25,160 40 -- 2(2) 8 10 25.0% 18.8% South Cabeza Creek...... 10,406 20 -- 1(2) 4 5 52.5% 39.4% East McFaddin........... 6,640 11 -- 3 -- 3 20.0% 16.5% Hiawatha................ 14,985 22 -- 10 4 14 42.0% 31.5% Western 325............. -- 320(4) -- -- 5 5 50.0% 37.5% Lance................... 16,000 30 -- 3 5 8 25.0% 19.3% Highway 59.............. 3,947 -- 20 -- 4 4 20.0% 15.0% Geronimo................ 66,161 107 -- 5 10 15 15.0% 11.3% RPP Welder.............. 26,585 60 -- -- 10 10 15.0% 11.3% Midway.................. 3,040 -- 15 2(2) 4 6 50.0% 37.5% Lost Bridge............. 1,625 16 -- 1(2) 3 4 50.0% 37.5% Drake 202............... 12,000 -- 19 -- -- -- 100.0% 82.8% Other (11 Areas)........ 57,605 -- 291 -- 42 42 72.5% 56.9% LOUISIANA North Chalkley.......... 640 -- 20 1 2 3 18.0% 14.2% Atchafalaya............. 3,400 -- -- 1 2 3 55.4% 41.5% Live Oak................ 350 -- -- 1 1 2 20.0% 15.0% ------- ----- --- -- --- --- TOTAL..................... 321,803 1,097 385 67 147 214 ======= ===== === == === ===
- --------------- (1) Consists of identified drillsites included in the Company's 1997 capital budget that are fully evaluated, leased and have been or are scheduled to be drilled during 1997, except as otherwise indicated. Of these budgeted wells, 19 had been drilled as of May 31, 1997. (2) Consists of wells included in the Company's 1997 and 1998 capital budgets, but as to which 3-D seismic data has either not been obtained or fully evaluated, or for which the Company has not yet acquired leases or option rights. The number of wells indicated is based upon statistical results of drilling activities in 3-D project areas that the Company believes are geologically similar. (3) Anticipated as of May 31, 1997. (4) Represents non-proprietary "group shoots" in which the Company is a participant. 6 8 Although the Company has budgeted to drill the number of wells set forth in the preceding table, there can be no assurance that these wells will be drilled at all or within the expected time frame. In particular, budgeted wells that are based upon statistical results of drilling activities in other project areas are subject to greater uncertainties than wells for which drillsites have been identified. The final determination with respect to the drilling of any budgeted wells will be dependent upon a number of factors, including (i) the results of exploration efforts and the acquisition, review and analysis of the seismic data, (ii) the availability of sufficient capital resources by the Company and the other participants for the drilling of the prospects, (iii) the approval of the prospects by other participants after additional data has been compiled, (iv) the economic and industry conditions at the time of drilling, including prevailing and anticipated prices for oil and natural gas and the availability of drilling rigs and crews, (v) the financial resources and results of the Company, and (vi) the availability of leases on reasonable terms and permitting for the prospect. There can be no assurance that any of the budgeted wells identified on the preceding table will, if drilled, encounter reservoirs of commercially productive oil or natural gas. See "Risk Factors -- Dependence on Exploratory Drilling Activities," "-- Reserve Replacement Risk" and " -- Uncertainty of Reserve Information and Future Net Revenue Estimates." THE COMBINATION TRANSACTIONS The Company currently conducts its operations through a number of affiliated entities that will be combined in a series of transactions at the time of the closing of the Offering (the "Combination Transactions"). As a result of the Combination Transactions, the Company will issue approximately 2,290,000 shares of Common Stock in exchange for the equity interests in these entities that it does not currently own. See "Certain Transactions -- The Combination Transactions." THE OFFERING Common Stock offered by the Company.......................... 2,500,000 shares Common Stock to be outstanding after the Offering............... 10,000,000 shares(1) Proposed Nasdaq National Market Symbol......................... CZOG Use of proceeds.................. To accelerate the Company's exploration and development program, to repay indebtedness and for general corporate purposes, including funding the acquisition of additional acreage and 3-D seismic data. See "Use of Proceeds." - --------------- (1) Assumes approximately 2,290,000 shares will be issued in connection with the Combination Transactions. Does not include (i) approximately 220,000 shares of Common Stock issuable pursuant to options at an exercise price per share equal to the initial public offering price that will be granted to directors, officers and employees of the Company concurrent with the Offering and (ii) 222,120 shares of Common Stock issuable pursuant to outstanding options at a weighted average exercise price of $3.60 per share (including vested options for 99,954 shares). See "Management -- Incentive Plan." 7 9 SUMMARY COMBINED FINANCIAL AND OPERATING DATA The financial information of the Company set forth below for the three years ended December 31, 1996 has been derived from the audited combined financial statements of the Company. The financial information set forth below as of March 31, 1997 and for the three months ended March 31, 1996 and 1997 is derived from unaudited financial statements of the Company. The results of operations for the interim periods are not necessarily indicative of a full year's operations. The following table also sets forth certain pro forma net income per share information. The information should be read in conjunction with "Capitalization," "Selected Combined Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the combined financial statements of the Company and the related notes thereto included elsewhere in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------- ------------------- 1994 1995 1996 1996 1997 ------ ------- ------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Oil and natural gas revenues............... $ 597 $ 2,428 $ 5,195 $ 791 $ 1,853 Costs and expenses: Oil and natural gas operating expenses... 518 1,814 2,384 418 557 Depreciation, depletion and amortization.......................... 98 488 1,136 142 382 General and administrative............... 237 425 515 44 198 ------ ------- ------- ------- ------- Total costs and expenses......... 853 2,727 4,035 604 1,137 ------ ------- ------- ------- ------- Operating income (loss).................... (258) (299) 1,160 187 716 Interest expense (net of amounts capitalized)............................. (7) (192) (80) (43) -- Other income............................... 6 24 20 -- -- ------ ------- ------- ------- ------- Net income (loss).......................... $ (259) $ (467) $ 1,100 $ 144 $ 716 ====== ======= ------- ======= ------- Pro forma income taxes(1).................. 396 258 ------- ------- Pro forma net income(1).................... $ 704 $ 458 ======= ======= Pro forma net income per share(1)(2)....... $ 0.09 $ 0.06 ======= ======= Pro forma weighted average shares outstanding(2)........................... 7,722 7,722 STATEMENT OF CASH FLOW DATA: Net cash provided by (used in) operating activities............................... $ (258) $ 406 $ 3,325 $ 486 $ 1,836 Net cash provided by (used in) investing activities............................... (819) (6,785) (8,221) (1,353) (4,354) Net cash provided by financing activities............................... 1,183 6,343 6,319 867 2,525 OTHER OPERATING DATA: EBITDA(3)(5)............................... $ (158) $ 189 $ 2,296 $ 328 $ 1,098 Operating cash flow(4)(5).................. (159) 21 2,236 285 1,098 Capital expenditures....................... 819 6,857 9,480 1,353 4,417
8 10
AS OF MARCH 31, 1997 ---------------------- AS ADJUSTED FOR THE ACTUAL OFFERING(6) ------- ----------- BALANCE SHEET DATA: Working capital............................................. $(1,758) $12,286 Property and equipment, net................................. 19,162 19,162 Total assets................................................ 23,912 38,268 Long-term debt, including current maturities................ 12,254 -- Equity...................................................... 5,407 32,260
- --------------- (1) During each of the periods presented, Carrizo and the other entities being combined in the Combination Transactions 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 the periods presented. See Note 8 to the Company's combined financial statements. (2) Pro forma net income (loss) per share has been computed based on the pro forma net income shown above, assuming the 5,210,000 currently outstanding shares of Common Stock, the estimated 2,290,000 shares of Common Stock that may be issued in connection with the Combination Transactions and the currently outstanding options to purchase 222,120 shares of Common Stock were outstanding since January 1, 1996. (3) EBITDA represents earnings before interest expense, income taxes, depreciation, depletion and amortization. (4) Operating cash flow represents cash flows from operating activities prior to changes in assets and liabilities. (5) 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. (6) Assumes the issuance in the Offering of 2,500,000 shares of Common Stock at $12.00 per share and the application of the net proceeds therefrom. 9 11 SUMMARY RESERVE AND OPERATING DATA
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------- ---------------- 1994 1995 1996 1996 1997 ------- ------- ------- ------ ------- PRODUCTION VOLUMES: Oil (MBbls)................................... 33 78 107 21 21 Natural gas (MMcf)............................ 5 565 1,273 196 592 Natural gas equivalent (MMcfe)................ 203 1,033 1,915 321 721 AVERAGE SALES PRICES: Oil (per Bbl)................................. $ 17.69 $ 19.64 $ 21.54 $19.02 $ 21.50 Natural gas (per Mcf)......................... 0.88 1.60 2.27 1.97 2.35 Natural gas equivalent (per Mcfe)............. 2.94 2.36 2.71 2.44 2.57 AVERAGE COSTS (PER MCFE): Camp Hill operating expenses.................. $ 2.64 $ 2.06 $ 3.15 $ 2.55 $ 2.80 Other operating expenses...................... 1.85 1.63 0.94 0.99 0.60 Total operating expenses............ 2.55 1.76 1.24 1.29 0.77 General and administrative expenses........... 1.17 0.41 0.27 0.14 0.27 Gross profit (loss)........................... (0.19) 0.19 1.19 1.01 1.53 ESTIMATED PROVED RESERVES (AT PERIOD END)(1): Oil (MBbls)................................... 3,785 3,810 3,895 N/A 4,289 Natural gas (MMcf)............................ 272 5,437 12,148 N/A 13,026 Total (MMcfe)................................. 22,982 28,297 35,518 N/A 38,758 PV-10 Value (in thousands)(2)................. $ 9,677 $16,467 $46,342 N/A $30,421 Standardized Measure (in thousands)(3)........ 6,498 11,981 33,021 N/A 22,120 Oil prices used............................... $ 16.31 $ 17.64 $ 20.88 N/A $ 19.71 Natural gas prices used....................... 1.54 1.94 3.69 N/A 1.74 FINDING AND DEVELOPMENT COST (PER MCFE)(4).... $ 0.47 NUMBER OF WELLS DRILLED: Gross......................................... -- -- 20.0 4.0 9.0 Net........................................... -- -- 4.7 1.5 4.2
- --------------- N/A -- Not available. (1) The estimated net proved oil and natural gas reserves and the present value of estimated future net revenues attributable thereto are based upon (i) the reserve report (the "Ryder Scott Report") prepared by Ryder Scott Company, independent petroleum engineers ("Ryder Scott"), and (ii) the reserve report (the "Fairchild Report" and, collectively with the Ryder Scott Report, the "Reserve Reports") prepared by Fairchild, Ancell & Wells, Inc., independent petroleum engineers ("Fairchild"). Summaries of the Reserve Reports as of March 31, 1997 are included as Annex A to this Prospectus. All calculations of estimated net proved reserves have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "Commission") and in accordance with such regulations, the Reserve Reports used oil and natural gas prices in effect at period end (as shown above) to calculate the estimated future net revenues as of such period end. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the Company. See "Risk Factors -- Uncertainty of Reserve Information and Future Net Revenue Estimates." (2) Represents the estimated future net revenues attributable to the Company's reserves giving no effect to federal or state income taxes otherwise attributable to estimated future net revenues from the sale of oil and natural gas and discounted at 10% per annum. (3) Represents the present value of estimated future net revenues after income taxes discounted at 10% per annum. (4) Calculated as total capital expenditures from inception to March 31, 1997 divided by reserve additions for such period. 10 12 RISK FACTORS Prospective purchasers of the Common Stock should carefully consider the risk factors set forth below, as well as the other information contained in this Prospectus. This Prospectus contains certain forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements as a result of any number of factors, including the risk factors set forth below. DEPENDENCE ON EXPLORATORY DRILLING ACTIVITIES The success of the Company will be materially dependent upon the success of its exploratory drilling program, which will be funded in part with the proceeds of the Offering. Exploratory drilling involves numerous risks, including the risk that no commercially productive oil or natural gas reservoirs will be encountered. The cost of drilling, completing and operating wells is often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including unexpected drilling conditions, pressure or irregularities in formations, equipment failures or accidents, adverse weather conditions, compliance with governmental requirements and shortages or delays in the availability of drilling rigs and the delivery of equipment. Although the Company believes that its use of 3-D seismic data and other advanced technologies should increase the probability of success of its exploratory wells and should reduce average finding costs through elimination of prospects that might otherwise be drilled solely on the basis of 2-D seismic data, exploratory drilling remains a speculative activity. Even when fully utilized and properly interpreted, 3-D seismic data and other advanced technologies only assist geoscientists in identifying subsurface structures and do not enable the interpreter to know whether hydrocarbons are in fact present in such structures. In addition, the use of 3-D seismic data and other advanced technologies requires greater predrilling expenditures than traditional drilling strategies and the Company could incur losses as a result of such expenditures. The Company's future drilling activities may not be successful, and if unsuccessful, such failure will have a material adverse effect on the Company's results of operations and financial condition. There can be no assurance that the Company's overall drilling success rate or its drilling success rate for activity within a particular project area will not decline. The Company may choose not to acquire option and lease rights prior to acquiring seismic data and, in many cases, the Company may identify a prospect or drilling location before seeking option or lease rights in the prospect or location. Although the Company has identified or budgeted for numerous drilling prospects, there can be no assurance that such prospects will ever be leased or drilled (or drilled within the scheduled or budgeted time frame) or that oil or natural gas will be produced from any such prospects or any other prospects. In addition, prospects may initially be identified through a number of methods, some of which do not include interpretation of 3-D or other seismic data. Wells that are currently included in the Company's capital budget may be based upon statistical results of drilling activities in other 3-D project areas that the Company believes are geologically similar, rather than on analysis of seismic or other data. Actual drilling and results are likely to vary from such statistical results and such variance may be material. Similarly, the Company's drilling schedule may vary from its capital budget, and there is increased risk of such variance from the 1998 capital budget because of future uncertainties, including those described above. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 11 13 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, 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- 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. If a write-down is required, it would result in a charge 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, 1995 and 1996 was 40,000 MMbtu and 60,000 MMbtu, respectively. Losses realized by the Company under such swap arrangements were $23,466 and $26,887 for the years ended December 31, 1995 and 1996, respectively. The Company did not engage in hedging prior to 1995 and did not engage in hedging during the quarter ended March 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General" and "Business -- Marketing." RESERVE REPLACEMENT RISK In general, the volume of production from oil and natural gas properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Except to the extent the Company conducts successful exploration and development activities or acquires properties containing proved reserves, or both, the proved reserves of the Company will decline as reserves are produced. The Company's future oil and natural gas production is, therefore, highly dependent upon its level of success in finding or acquiring additional reserves. The business of exploring for, developing or acquiring reserves is capital intensive. To the extent cash flow from operations is reduced and external sources of capital become limited or unavailable, the Company's ability to make the necessary capital investment to maintain or expand its asset base of oil and natural gas reserves would be impaired. The failure of an operator of the Company's wells to adequately perform operations, or such operator's breach of the applicable agreements, could adversely impact the Company. In addition, there can be no assurance that the Company's future exploration, development and acquisition activities will result in additional proved reserves or that the Company will be able to drill productive wells at acceptable costs. Furthermore, although the Company's 12 14 revenues could increase if prevailing prices for oil and natural gas increase significantly, the Company's finding and development costs could also increase. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES There are numerous uncertainties inherent in estimating oil and natural gas reserves and their estimated values, including many factors beyond the control of the producer. The reserve data set forth in this Prospectus represent only estimates. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions concerning future oil and natural gas prices, future operating costs, severance and excise taxes, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers but at different times may vary substantially and such reserve estimates may be subject to downward or upward adjustment based upon such factors. Actual production, revenues and expenditures with respect to the Company's reserves will likely vary from estimates, and such variances may be material. In addition, the 10% discount factor, which is required by the Commission to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company or the oil and natural gas industry in general. See "Business -- Oil and Natural Gas Reserves." OPERATING RISKS OF OIL AND NATURAL GAS OPERATIONS The oil and natural gas business involves certain operating hazards such as well blowouts, craterings, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures or spills, pollution, releases of toxic gas and other environmental hazards and risks, any of which could result in substantial losses to the Company. The availability of a ready market for the Company's oil and natural gas production also depends on the proximity of reserves to, and the capacity of, oil and natural gas gathering systems, pipelines and trucking or terminal facilities. The Company delivers natural gas through gas gathering systems and gas pipelines that it does not own. Federal and state regulation of natural gas and oil production and transportation, tax and energy policies, changes in supply and demand and general economic conditions all could adversely affect the Company's ability to produce and market its oil and natural gas. In addition, the Company may be liable for environmental damages caused by previous owners of property purchased and leased by the Company. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce or eliminate the funds available for exploration, development or acquisitions or result in the loss of the Company's properties. In accordance with customary industry practices, the Company maintains insurance against some, but not all, of such risks and losses. The Company does not carry business interruption insurance. The Company may elect to self-insure if management believes that the cost of insurance, although available, is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on the financial condition and results of operations of the Company. As of March 31, 1997, the Company had participated in a substantial percentage of its wells on a non-operated basis, which may limit the Company's ability to control the risks associated with oil and natural gas operations. See "Business -- Operating Hazards and Insurance." 13 15 DEPENDENCE ON KEY PERSONNEL The Company depends to a large extent on the services of certain key management personnel, the loss of any of which could have a material adverse effect on the Company's operations. Prior to completion of the Offering, the Company has entered into employment agreements with each of S.P. Johnson IV (the Company's President and Chief Executive Officer), Frank A. Wojtek (the Company's Chief Financial Officer), George F. Canjar (the Company's Vice President of Exploration Development) and Kendall A. Trahan (the Company's Vice President of Land) substantially as described herein under "Management -- Employment Agreements." The Company does not maintain key-man life insurance with respect to any of its employees. ABILITY TO MANAGE GROWTH AND ACHIEVE BUSINESS STRATEGY The Company has experienced significant growth in the recent past through the expansion of its 3-D seismic data acquisition and drilling program. The Company's rapid 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 May 31, 1997, the Company had 15 full-time employees and two part-time employees. As the Company increases the number of projects it is evaluating or in which it is participating, 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 continue its growth 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 upgrade its technical, operational and administrative resources following the Offering 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 "Risk Factors -- Operating Risks of Oil and Natural Gas Operations." There can be no assurance that the Company will be successful in achieving growth or any other aspect of its business strategy. SIGNIFICANT CAPITAL REQUIREMENTS The Company has experienced and expects to continue to experience substantial working capital needs, particularly as a result of its active 3-D seismic data acquisition and drilling program. In addition to cash generated from operations, additional financing may be required in the future to fund the Company's growth. No assurances can be given as to the availability or terms of any such 14 16 additional financing that may be required or that financing will continue to be available under existing or new credit facilities. In the event such capital resources are not available to the Company, its drilling, development and other activities may be curtailed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." CONTROL BY CERTAIN SHAREHOLDERS Upon completion of the Offering and the Combination Transactions, the Company's officers and directors will beneficially own approximately 59.2% (57.1% if the Underwriters' over-allotment option is exercised in full) of the outstanding shares of Common Stock. As a result, such shareholders will be in a position to significantly influence or control the outcome of certain matters requiring a shareholder vote, including the election of directors, the adoption or amendment of provisions in the Company's Articles of Incorporation or Bylaws and the approval of mergers and other significant corporate transactions. Such ownership of Common Stock may have the effect of delaying, deferring or preventing a change of control of the Company and may adversely affect the voting and other rights of other shareholders. See "Security Ownership of Certain Beneficial Owners and Management." TECHNOLOGICAL CHANGES The oil and gas industry is characterized by rapid and significant technological advancements and introductions of new products and services utilizing new technologies. As others use or develop new technologies, the Company may be placed at a competitive disadvantage, and competitive pressures may force the Company to implement such new technologies at substantial cost. In addition, other oil and gas companies may have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before the Company. There can be no assurance that the Company will be able to respond to such competitive pressures and implement such technologies on a timely basis or at an acceptable cost. One or more of the technologies currently utilized by the Company or implemented in the future may become obsolete. In such case, the Company's business, financial condition and results of operations could be materially adversely affected. If the Company is unable to utilize the most advanced commercially available technology, the Company's business, financial condition and results of operations could be materially and adversely affected. See "Business -- Competition." GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS Oil and natural gas operations are subject to various federal, state and local government regulations which may be changed from time to time in response to economic or political conditions. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity in order to conserve supplies of oil and natural gas. The Company is also subject to changing and extensive tax laws, the effects of which cannot be predicted. Legal requirements are frequently changed and subject to interpretation, and the Company is unable to predict the ultimate cost of compliance with these requirements or their effect on its operations. No assurance can be given that existing laws or regulations, as currently interpreted or reinterpreted in the future, or future laws or regulations will not materially adversely affect the Company's results of operations and financial condition. The development, production, handling, storage, transportation and disposal of oil and natural gas, by-products thereof and other substances and materials produced or used in connection with oil and natural gas operations are subject to regulation under federal, state and local laws and regulations primarily relating to protection of human health and the environment. The discharge of oil, natural gas, or other pollutants into the air, soil or water may give rise to significant liabilities on the part of 15 17 the Company to the government and third parties and may require the Company to incur substantial costs of remediation. See "Business -- Regulation." COMPETITION The Company encounters competition from other oil and natural gas companies in all areas of its operations, including the acquisition of exploratory prospects and proven properties. The Company's competitors include major integrated oil and natural gas companies and numerous independent oil and natural gas companies, individuals and drilling and income programs. Many of its competitors are large, well-established companies with substantially larger operating staffs and greater capital resources than those of the Company and which, in many instances, have been engaged in the oil and natural gas business for a much longer time than the Company. Such companies may be able to pay more for exploratory prospects and productive oil and natural gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than the Company's financial or human resources permit. The Company's ability to explore for oil and natural gas prospects and to acquire additional properties in the future will be dependent upon its ability to conduct its operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment. See "Business -- Competition." LIMITED OPERATING HISTORY AND HISTORICAL OPERATING LOSSES The Company commenced its operations in September 1993 and has only a limited operating history. Potential investors, therefore, have limited historical financial and operating information upon which to base an evaluation of the Company's performance and an investment in shares of Common Stock. For example, the producing wells within exploration projects in which the Company is participating have been on production only for a short period of time. Therefore, estimations with respect to the proved reserves and level of future production attributable to these wells are difficult to determine and there can be no assurance as to the volume of recoverable reserves that will be realized from such wells. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of their development. The Company incurred net losses in 1994 and 1995 of $258,509 and $466,610, respectively. The development of the Company's business and its participation in an increasingly larger number of projects have required and will continue to require substantial expenditures. The Company's future financial results will depend primarily on its ability to economically locate and produce hydrocarbons in commercial quantities and on the market prices for oil and natural gas. There can be no assurance that the Company will achieve or sustain profitability or positive cash flows from operating activities in the future. See "-- Significant Capital Requirements," "Selected Combined Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Oil and Gas Reserves." ACQUISITION RISKS The successful acquisition of producing properties requires an assessment of recoverable reserves, future oil and natural gas prices, operating costs, potential environmental and other liabilities and other factors. Such assessments are necessarily inexact and their accuracy inherently uncertain. In connection with such an assessment, the Company performs a review of the subject properties that it believes to be generally consistent with industry practices, which generally includes on-site inspections and the review of reports filed with various regulatory entities. Such a review, however, will not reveal all existing or potential problems nor will it permit a buyer to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Inspections may not always be performed on every well, and structural and environmental problems are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of such problems. There can be no assurances that any acquisition of property interests by the 16 18 Company will be successful and, if unsuccessful, that such failure will not have an adverse effect on the Company's future results of operations and financial condition. SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of Common Stock in the public market following the Offering could adversely affect the market price for the Common Stock. The 5,210,000 shares outstanding prior to the Offering were not, and the approximately 2,290,000 shares to be issued in the Combination Transactions will not be, registered under the Securities Act of 1933, as amended (the "Securities Act"), and, therefore, are not freely tradeable unless subsequently registered under the Securities Act or exempted from such registration. At the time of the expiration of the lock-up period described below, all of the previously outstanding shares may be sold pursuant to the requirements of Rule 144 promulgated under the Securities Act ("Rule 144"), subject to certain volume limitations, manner of sale and other requirements relating to the sale of securities. Following a period of one year from the closing of this Offering, all of such shares to be issued in the Combination Transactions may be sold pursuant to the requirements of Rule 144, subject to certain volume limitations, manner of sale and other requirements relating to the sale of securities. In addition, options to purchase shares of Common Stock are issuable pursuant to outstanding options and up to 220,000 shares of Common Stock will be issuable pursuant to options to be granted to certain officers and employees of the Company prior to or immediately after the closing of the Offering, and the Company anticipates that shares of Common Stock issuable upon exercise of such options will become available for future sale in the public market pursuant to a subsequently filed registration statement on Form S-8. In addition, the Company will enter into a registration rights agreement with the Company's directors and officers who will own approximately 6,292,809 shares of Common Stock following the Combination Transactions. Pursuant to the registration rights agreement, such persons collectively will receive demand and piggyback registration rights that provide for the registration of the resale of such shares at the Company's expense. The Company, its current shareholders, its executive officers and its directors have agreed not to offer for sale, sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock for a period of 180 days after the date of this Prospectus, without the prior written consent of the representatives of the Underwriters, subject to certain exceptions. Such consent may be given at any time and without public notice. See "Management -- Incentive Plan," "Shares Eligible for Future Sale" and "Underwriting." ABSENCE OF DIVIDENDS ON COMMON STOCK The Company currently intends to retain any earnings for the future operation and development of its business and does not currently anticipate paying any dividends in the foreseeable future. Any future dividends also may be restricted by the Company's then-existing loan agreements. See "Dividend Policy," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 4 to the Company's Financial Statements. CERTAIN ANTI-TAKEOVER EFFECTS The Company's Articles of Incorporation authorize the Board of Directors to set the terms of and issue Preferred Stock without shareholder approval. The Board of Directors could use the Preferred Stock as a means to delay, defer or prevent a takeover attempt that a shareholder might consider to be in the Company's best interest. In addition, certain provisions of the Company's Articles of Incorporation and Bylaws might impede a takeover of the Company. See "Description of Capital Stock." NO PRIOR PUBLIC MARKET Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price will be determined by negotiation between the Company and the Underwriters and 17 19 may not be indicative of the price at which the Common Stock will trade following the completion of the Offering. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The completion of the Offering provides no assurance that an active trading market for the Common Stock will develop or, if developed, that it will be sustained. The market price of the Common Stock could also be subject to significant fluctuation and may be influenced by many factors, including variations in results of operations, variations in oil and natural gas prices, investor perceptions of the Company and the oil and natural gas industry and general economic and other conditions. DILUTION Purchasers of Common Stock in the Offering will experience immediate and substantial dilution in the net tangible book value of their stock of $8.77 per share (assuming an initial public offering price of $12.00 per share). See "Dilution." 18 20 USE OF PROCEEDS The net proceeds to the Company from the Offering at an assumed initial public offering price of $12.00 per share are estimated to be approximately $26.9 million ($31.1 million if the Underwriters' over-allotment option is exercised in full). The Company intends to use a portion of the net proceeds to repay approximately $9.4 million of indebtedness incurred under the Company's revolving credit facilities that currently bear interest at 9.0% and mature in June 1998 and approximately $2.9 million of promissory notes to certain of the Company's directors and officers that currently bear interest at 8.3% and are due in April 1998. The remainder of the net proceeds will be used to accelerate the Company's exploration and development program and for general corporate purposes, including funding additional acreage and 3-D seismic acquisitions. The indebtedness incurred under both the Company's revolving credit facilities and such promissory notes was used primarily for its exploration, development and acquisition activities and to provide working capital. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DIVIDEND POLICY 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. Following the Offering, the Company expects to enter into a Secured Revolving Line of Credit with Compass Bank (the "Company Credit Facility"). Under the proposed terms of the facility, the Company's ability to pay dividends will be restricted. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 19 21 DILUTION As of March 31, 1997, the pro forma net tangible book value of the Company would have been approximately $5.4 million, or approximately $0.72 per share of Common Stock, after giving pro forma effect to the issuance of approximately 2,290,000 shares of Common Stock in connection with the Combination Transactions as if such transactions had been completed at such date. Net tangible book value per share represents the amount of the Company's tangible book value (total book value of tangible assets less total liabilities) divided by the total number of shares of Common Stock outstanding. After further giving effect to the receipt of the estimated net proceeds from the Offering (net of estimated underwriting discounts and offering expenses) at an assumed initial public offering price of $12.00 per share, the adjusted pro forma net tangible book value of the Common Stock outstanding at March 31, 1997 would have been $3.23 per share, representing an immediate increase in net tangible book value of $2.51 per share to existing shareholders and an immediate dilution of $8.77 per share (the difference between the assumed initial public offering price and the net tangible book value per share after the Offering) to persons purchasing Common Stock at the assumed initial public offering price. The following table illustrates such per share dilution:
Assumed initial public offering price per share............. $12.00 Pro forma net tangible book value per share before the Offering............................................... $0.72 Increase in pro forma net tangible book value per share attributable to sale of Common Stock in the Offering... 2.51 ----- Adjusted pro forma net tangible book value per share after giving effect to the Offering............................. 3.23 ------ Dilution in net tangible book value to the purchasers of Common Stock in the Offering.............................. $ 8.77 ======
The following table sets forth, on a pro forma basis to give effect to the Combination Transactions as of March 31, 1997, differences between the number of shares of Common Stock to be acquired or to be acquired from the Company by existing shareholders and by investors purchasing shares in the Offering, the total price paid or to be paid and the average price per share paid or to be paid by existing shareholders and investors purchasing shares in the Offering (based upon an assumed initial public offering price per share of $12.00).
SHARES PURCHASED(1) TOTAL CONSIDERATION(2) --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing shareholders......... 7,500,000 75% $ 5,296,000 15% $ 0.71 New investors................. 2,500,000 25% 30,000,000 85% 12.00 ---------- ---- ----------- ---- Total............... 10,000,000 100% $35,296,000 100% ========== ==== =========== ====
- --------------- (1) Does not include (i) approximately 220,000 shares of Common Stock issuable pursuant to options at an exercise price per share equal to the initial public offering price that will be granted to directors, officers and employees of the Company upon completion of the Offering and (ii) 222,120 shares of Common Stock issuable pursuant to outstanding options at a weighted average exercise price of $3.60 per share (including vested options for 99,954 shares). The exercise of such stock options at a price below the initial public offering price will be dilutive to new investors. See "Management -- Incentive Plan." (2) Total consideration paid by existing shareholders represents the aggregate of (i) in the case of the current shareholders of Carrizo, the amounts paid by such shareholders to the Company for their Common Stock and (ii) in the case of persons receiving Common Stock in the Combination Transactions, the book value at March 31, 1997 of the allocable portion of the net assets and liabilities received by the Company in the Combination Transactions. 20 22 CAPITALIZATION The following table gives effect to the 521-for-one split of the Common Stock effected in June 1997 and sets forth the Company's cash and cash equivalents and capitalization as of March 31, 1997 as follows: (i) on a historical basis, (ii) pro forma after giving effect to the issuance of approximately 2,290,000 shares of Common Stock in connection with the Combination Transactions and (iii) pro forma as adjusted to give effect to the sale of 2,500,000 shares of Common Stock in the Offering at an assumed initial public offering price of $12.00 per share and the application of the estimated net proceeds therefrom. This table should be read in conjunction with the Combined Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
MARCH 31, 1997 ------------------------------------ PRO FORMA AS ADJUSTED PRO FORMA FOR THE AS ADJUSTED COMBINATION FOR THE ACTUAL TRANSACTIONS OFFERING ------- ------------ ----------- (IN THOUSANDS) Cash and cash equivalents................................... $ 1,500 $ 1,500 $15,856 ======= ======= ======= Long-term debt.............................................. $12,254 $12,254 -- Shareholders' equity(1): Preferred stock, $0.01 par value, 10,000,000 shares authorized; none outstanding........................... -- -- -- Common stock, $0.01 par value, 40,000,000 shares authorized; 5,210,000 shares issued and outstanding; 7,500,000 shares issued and outstanding pro forma; 10,000,000 shares issued and outstanding pro forma as adjusted............................................... -- 75 100 Additional paid-in capital................................ 4,356 4,281 31,109 Retained earnings......................................... 1,051 1,051 1,051 ------- ------- ------- Total shareholders' equity........................... 5,407 5,407 32,260 ------- ------- ------- Total capitalization.............................. $17,661 $17,661 $32,260 ======= ======= =======
- --------------- (1) Does not include (i) approximately 220,000 of Common Stock issuable pursuant to options at an exercise price per share equal to the initial public offering price in the Offering that will be granted to directors, officers and employees of the Company upon completion of the Offering and (ii) 222,120 shares of Common Stock issuable pursuant to outstanding options at a weighted average exercise price of $3.60 per share (including vested options for 99,954 shares). 21 23 SELECTED COMBINED FINANCIAL AND OPERATING DATA The financial information of the Company set forth below for the period from inception of operations (September 24, 1993) through December 31, 1993, and for the three years ended December 31, 1996, has been derived from the audited combined financial statements of the Company. The financial information set forth below as of March 31, 1997 and for the three months ended March 31, 1996 and 1997 is derived from the unaudited financial statements of the Company. The results of operations for the interim periods are not necessarily indicative of a full year's operations. The following table also sets forth certain pro forma net income per share information. The information should be read in conjunction with "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited combined financial statements of the Company and the related notes thereto included elsewhere in this Prospectus.
PERIOD FROM INCEPTION OF OPERATIONS (SEPTEMBER 24, THREE MONTHS ENDED 1993) THROUGH YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, --------------------------- ------------------- 1993 1994 1995 1996 1996 1997 -------------- ------- ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA)(UNAUDITED) STATEMENT OF OPERATIONS DATA: Oil and natural gas revenues.................... $ 5 $ 597 $ 2,428 $ 5,195 $ 791 $ 1,853 Costs and expenses: Oil and natural gas operating expenses....... 20 518 1,814 2,384 418 557 Depreciation, depletion and amortization............. 1 98 488 1,136 142 382 General and administrative........... 24 237 425 515 44 198 ----- ------- ------- ------- ------- ------- Total costs and expenses.......... 45 853 2,727 4,035 604 1,137 ----- ------- ------- ------- ------- ------- Operating income (loss)....... (40) (258) (299) 1,160 187 716 Interest expense (net of amounts capitalized)........ -- (7) (192) (80) (43) -- Other income.................. -- 6 24 20 -- -- ----- ------- ------- ------- ------- ------- Net income (loss)............. $ (40) $ (259) $ (467) $ 1,100 $ 144 $ 716 ===== ======= ======= ------- ======= ------- Pro forma income taxes(1)..... 396 258 ------- ------- Pro forma net income(1)....... $ 704 $ 458 ======= ======= Pro forma net income per share(1)(2)................. $ 0.09 $ 0.06 ======= ======= Pro forma weighted average shares outstanding(2)....... 7,722 7,722 STATEMENTS OF CASH FLOW DATA: Net cash provided by (used in) operating activities........ $ 12 $ (258) $ 406 $ 3,325 $ 486 $ 1,836 Net cash provided by (used in) investing activities........ (118) (819) (6,785) (8,221) (1,353) (4,354) Net cash provided by financing activities.................. 106 1,183 6,343 6,319 867 2,525 OTHER OPERATING DATA: EBITDA(3)(5).................. $ (41) $ (158) $ 189 $ 2,296 $ 328 $ 1,098 Operating cash flow(4)(5)..... (41) (159) 21 2,236 285 1,098 Capital expenditures.......... 113 819 6,857 9,480 1,353 4,417
22 24
AS OF MARCH 31, 1997 --------------------- AS AS OF DECEMBER 31, ADJUSTED -------------------------------- FOR THE 1993 1994 1995 1996 ACTUAL OFFERING(6) ---- ------ ------ ------- ------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital..................... $(52) $ 152 $ (265) $(1,005) $(1,758) $12,286 Property and equipment, net......... 113 803 6,960 15,206 19,162 19,162 Total assets........................ 130 1,057 7,645 18,869 23,912 38,268 Long-term debt, including current maturities........................ -- 533 3,480 9,684 12,254 -- Equity.............................. 65 452 3,381 4,596 5,407 32,260
- --------------- (1) During each of the periods presented, Carrizo and the other entities being combined in the Combination Transactions 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 the periods presented. See Note 8 to the Company's combined financial statements. (2) Pro forma net income (loss) per share has been computed based on the pro forma net income shown above, and assuming the 5,210,000 currently outstanding shares of Common Stock, the estimated 2,290,000 shares of Common Stock that may be issued in connection with the Combination Transactions and the currently outstanding options to purchase 222,120 shares of Common Stock were outstanding since January 1, 1996. (3) EBITDA represents earnings before interest expense, income taxes, depreciation, depletion and amortization. (4) Operating cash flow represents cash flows from operating activities prior to changes in assets and liabilities. (5) 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. (6) Assumes the issuance in the Offering of 2,500,000 shares of Common Stock at $12.00 per share and the application of the net proceeds therefrom. 23 25 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 20 wells in 1996 and 19 wells through the five months ended May 31, 1997. The Company expects such increases to continue and has budgeted to drill a total of 67 gross wells (24.6 net) in 1997 and 147 gross wells (67.5 net) in 1998. As a result, 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, over-pressured prospects. 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. The Company has not been required to make any such write-downs. Once incurred, a write-down of oil and gas properties is not reversible at a later date. 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. However, as operations have expanded, the Company has increasingly funded its activities through bank borrowings and cash flow from operations in order to retain a greater portion of the interests it develops. The combined financial statements set forth elsewhere in this Prospectus are prepared on the basis of a combination of Carrizo and the entities that are a party to the Combination Transactions. Carrizo and the entities being 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. Upon the consummation of the Combination Transactions, the Company will be required to record its deferred taxes, if any, in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Giving pro forma effect to the Combination Transactions, for the 12 months ended December 31, 1996 and the three months ended March 31, 1997, pro forma income taxes were $396,000 and $258,000, respectively. RESULTS OF OPERATIONS Three Months Ended March 31, 1997 Compared to the Three Months Ended March 31, 1996 Oil and natural gas revenues for the three months ended March 31, 1997 increased 134% to $1.9 million from $791,000 for the same period in 1996. Production volumes for natural gas during the three months ended March 31, 1997 increased 202% to 592.3 MMcf from 195.9 MMcf for the same period in 1996. Average gas prices increased 19% to $2.35 per Mcf in the first quarter of 1997 24 26 from $1.97 per Mcf in the same period in 1996. Production volumes for oil in the first quarter of 1997 were flat at 21.4 MBbls from 21.3 MBbls for the same period in 1996 as reduced production at the Camp Hill Project (resulting from reduced steam injection levels because of high fuel gas prices) offset increases in production elsewhere. Average oil prices increased 13% to $21.50 per barrel in the first quarter of 1997 from $19.02 per barrel in the same period in 1996. The increase in natural gas production was due primarily to production from new wells drilled and completed in the second half of 1996 and early 1997, as well as the acquisition of the La Rosa properties in 1996, which were fully onstream for the first quarter of 1997. The following table summarizes production volumes, average sales prices and operating revenues for the Company's oil and natural gas operations for the three months ended March 31, 1997 and 1996:
1997 PERIOD COMPARED TO MARCH 31, 1996 PERIOD --------------------- ----------------------- 1996 1997 INCREASE % INCREASE -------- ---------- ---------- ---------- Production volumes Oil and condensate (MBbls)........... 21.3 21.4 0.1 -- Natural gas (MMcf)................... 195.9 592.3 396.4 202% Average sales prices(1) Oil and condensate (per Bbl)......... $ 19.02 $ 21.50 $ 2.48 13% Natural gas (per Mcf)................ 1.97 2.35 0.38 19% Operating revenues Oil and condensate................... $405,189 $ 459,975 $ 54,786 14% Natural gas.......................... 385,324 1,393,195 1,007,871 262% -------- ---------- ---------- Total........................ $790,513 $1,853,170 $1,062,657 134% ======== ========== ==========
- --------------- (1) Including impact of hedging. Oil and natural gas operating expenses for the three months ended March 31, 1997 increased 32% to $557,000 from $418,000 for the same period in 1996. Oil and natural gas operating expenses increased primarily due to increased production as described above, which was offset by a decrease in operating expenses per equivalent unit to $0.77 per Mcfe in the first quarter of 1997 from $1.29 per Mcfe in the same period in 1996. The per unit cost decreased as a result of increased production of natural gas which had lower per unit operating costs. Depreciation, depletion and amortization ("DD&A") expense for the three months ended March 31, 1997 increased 170% to $382,000 from $142,000 for the same period in 1996. This increase was due to increased production and a 20% increase in the 1997 depletion rate to $0.53 per Mcfe from $0.44 per Mcfe in the three months ended March 31, 1996, as a result of increased drilling and related seismic costs. General and administrative expense for the three months ended March 31, 1997 increased 347% to $198,000 from $44,000 for the same period in 1996, as a result of increases in the number of employees and related benefits, plus increased office space. Interest expense for the three months ended March 31, 1997 increased 77% to $188,000 from $107,000 in the same period in 1996. Increases in interest expense were due to increased debt levels in late 1996 and early 1997. Capitalized interest increased to $188,000 in the first quarter of 1997 from $64,000 in the first quarter of 1996 as a result of increased levels of exploration activity and higher levels of unevaluated property. All interest expense during the first quarter of 1997 was capitalized. Net income for the three months ended March 31, 1997 increased to $716,000 from $144,000 for the same period in 1996, as a result of the factors described above. 25 27 Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995 Oil and natural gas revenues for 1996 increased 114% to $5.2 million from $2.4 million in 1995. Production volumes for natural gas in 1996 increased 125% to 1,272.5 MMcf from 565.3 MMcf in 1995. Average natural gas prices increased 42% to $2.27 per Mcf in 1996 from $1.60 per Mcf in 1995. Production volumes for oil in 1996 increased 38% to 107.3 MBbls from 77.6 MBbls in 1995. Average oil prices increased 10% to $21.54 per barrel in 1996 from $19.64 per barrel in 1995. The increase in oil and natural gas production was due primarily to new wells being successfully drilled and completed during 1996, along with recompletions of existing wells. Also contributing to the increase in oil and gas revenues from 1995 to 1996 was the acquisition of the La Rosa properties. 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, 1995 and 1996:
1996 PERIOD COMPARED TO DECEMBER 31, 1995 PERIOD ----------------------- ----------------------- 1995 1996 INCREASE % INCREASE ---------- ---------- ---------- ---------- Production volumes Oil and condensate (MBbls)......... 77.6 107.3 29.7 38% Natural gas (MMcf)................. 565.3 1,272.5 707.2 125% Average sales prices(1) Oil and condensate (per Bbl)....... $ 19.64 $ 21.54 $ 1.90 10% Natural gas (per Mcf).............. 1.60 2.27 0.67 42% Operating revenues Oil and condensate................. $1,524,002 $2,310,798 $ 786,796 52% Natural gas........................ 904,046 2,883,911 1,979,865 219% ---------- ---------- ---------- Total...................... $2,428,048 $5,194,709 $2,766,661 114% ========== ========== ==========
- --------------- (1) Including impact of hedging. Oil and natural gas operating expenses for 1996 increased 31% to $2.4 million from $1.8 million in 1995. Oil and natural gas operating expenses increased due to increased production generated from new oil and gas wells drilled and completed since December 31, 1995, as well as the acquisitions of the La Rosa and Encinitas properties. Operating expenses per equivalent unit in 1996 decreased to $1.24 per Mcfe from $1.76 per Mcfe in 1995. The per unit cost decreased as a result of increased production of natural gas which had lower per unit operating costs. DD&A expense for 1996 increased 133% to $1.1 million from $488,000 in 1995. This increase was due to the increase in oil and gas production as well as a 25% increase in the depletion rate (to $0.59 per Mcfe in 1996 from $0.47 per Mcfe in 1995). The increased depletion rate was primarily caused by increased exploration expenditures attributable to 3-D seismic surveys performed for new wells drilled and completed since December 31, 1995. General and administrative expense for 1996 increased 21% to $515,000 from $425,000 for 1995 due primarily to an increase in salary expense as a result of the addition of new employees. Interest expense for 1996 decreased 59% to $80,000 from $192,000 in 1995. This decrease was primarily due to the increase in interest capitalized consistent with increases in capital expenditures. Net income for 1996 increased to $1.1 million from a loss of $467,000 in 1995 as a result of the factors described above. 26 28 Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994 Oil and natural gas revenues for 1995 increased 307% to $2.4 million from $597,000 in 1994. Production volumes for natural gas for 1995 increased to 565.3 MMcf from 5.4 MMcf in 1994. Average gas prices increased 81% to $1.60 per Mcf in 1995 from $0.88 per Mcf in 1994. Production volumes for oil for 1995 increased 135% to 77.6 MBbls from 33 MBbls in 1994. Average oil prices increased 11% to $19.64 per barrel in 1995 from $17.69 per barrel in 1994. Oil and natural gas revenues were significantly impacted by the acquisition of the Encinitas properties, which added 579 MMcfe of production. 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, 1994 and 1995:
1995 PERIOD COMPARED TO DECEMBER 31, 1994 PERIOD --------------------- ----------------------- 1994 1995 INCREASE % INCREASE -------- ---------- ---------- ---------- Production volumes Oil and condensate (MBbls)......... 33.0 77.6 44.6 135% Natural gas (MMcf)................. 5.4 565.3 559.9 * Average sales prices (1) Oil and condensate (per Bbl)....... $ 17.69 $ 19.64 $ 1.95 11% Natural gas (per Mcf).............. 0.88 1.60 0.72 81% Operating revenues Oil and condensate................. $591,975 $1,524,002 $ 932,027 157% Natural gas........................ 4,758 904,046 899,288 * -------- ---------- ---------- Total...................... $596,733 $2,428,048 $1,831,315 307% ======== ========== ==========
- --------------- * Not meaningful. (1) Including impact of hedging. Oil and gas operating expenses increased 250% to $1.8 million from $518,000 in 1994. The increase was primarily attributable to increased operating expenses of approximately $964,000 on the Encinitas properties. Operating expenses per equivalent unit in 1995 decreased to $1.76 per Mcfe from $2.55 per Mcfe in 1994. The per unit cost decreased as a result of increased production of natural gas which had lower per unit operating costs. DD&A expense increased 397% to $488,000 from $98,000 in 1994 as a result of increased production with a relatively flat depletion rate ($0.47 per Mcfe in 1995 from $0.48 per Mcfe in 1994). General and administrative expense increased 79% to $425,000 from $237,000 in 1994, primarily as a result of the hiring of additional engineering staff and other employees as well as salary increases for existing employees. Interest expense increased to $192,000 from $7,000 in 1994. This increase in 1995 was due to the additional debt incurred to finance the acquisition of the Encinitas properties. The increase in the weighted average outstanding debt balance and effective interest rate was due to the additional debt incurred which bore interest at a bank's prime rate plus 2.75%. The Company incurred a net loss in 1995 of $467,000, compared to a net loss of $259,000 in 1994, as a result of the factors described above. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity have included funds generated by operations, equity capital contributions and borrowings, primarily under Carrizo's Secured Reducing Revolving 27 29 Line of Credit (the "Carrizo Credit Facility") with Compass Bank ("Compass"). A portion of the proceeds from this Offering will be used to repay the amounts outstanding under the Carrizo Credit Facility, the Encinitas Credit Facility (defined below) and the notes from certain of the current shareholders of Carrizo. Following the Offering, the Carrizo Credit Facility, the Encinitas Credit Facility and the shareholder loans will be terminated, and the Company expects to enter into the Company Credit Facility, as described below under "-- Financing Arrangements." Cash flows (used in) provided by operations were $(258,000), $406,000, $3.3 million and $1.8 million in 1994, 1995, 1996 and the three months ended March 31, 1997, respectively. The increase in cash flows provided by operations in 1996 as compared to 1995, and 1995 as compared to 1994, was due primarily to increased revenues from production. The Company has budgeted capital expenditures in 1997 of approximately $22.6 million. Substantially all of the capital expenditures will be used to fund 3-D seismic surveys, land acquisitions and drilling activities in the Company's project areas. The Company expects to drill approximately 67 gross wells (24.6 net) in 1997 and has budgeted for approximately 147 gross wells (67.5 net) in 1998. The actual amounts of capital expenditures and number of wells drilled may differ significantly from such estimates. See "Business -- Significant Project Areas." In addition to its existing leased acreage, the Company has acquired various 3-D seismic options that will allow it to lease up to approximately 252,000 gross undeveloped acres (91,000 net) if determined by 3-D seismic data to be prospective for drilling. 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 $800,000, $6.6 million, $9.1 million and $4.3 million in 1994, 1995, 1996 and the three months ended March 31, 1997, respectively. The Company's drilling efforts resulted in the successful completion of 16 gross wells (3.8 net) in 1996 that increased the Company's net reserves by 4.3 Bcf of gas and 70 MBbls of oil at March 31, 1997. 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 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 had no outstanding hedge positions as of December 31, 1996 or March 31, 1997. The Company has experienced and expects to continue to experience substantial working capital requirements primarily due to the Company's active exploration and development programs and, to a much lesser extent, its technology enhancement programs. While the Company believes that the net proceeds from this Offering, cash flow from operations and borrowings under the 28 30 Company Credit Facility should allow the Company to implement its present business strategy during 1997 and 1998, additional financing may be required in the future to fund the Company's growth, development and exploration program and continued technological enhancement. In the event such capital resources are not available to the Company, its exploration and other activities may be curtailed. FINANCING ARRANGEMENTS Following the closing of this Offering, the Company expects to enter into the Company Credit Facility, which will provide for a maximum loan amount of $25 million, subject to borrowing base limitations. Under the new facility, the principal outstanding will be due and payable upon maturity in June 1999 with interest due monthly. The interest rate for borrowings will be calculated at a floating rate based on the Compass Bank index rate or LIBOR plus 2%. The Company's obligations will be 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 their required semiannual reviews at the Company's cost. The Company will be 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 will also place restrictions on, among other things, (i) incurring additional indebtedness, loans and liens, (ii) changing the nature of business or business structure, (iii) selling assets and (iv) paying dividends. The foregoing description of the Company Credit Facility is based upon a preliminary term sheet negotiated with the lender. There can be no assurance that the Company will enter into any final agreement with the terms described, or at all. In December 1996, Carrizo entered into the Carrizo Credit Facility with Compass, which provides for a maximum loan amount of $25 million, subject to borrowing base limitations. Under the Carrizo Credit Facility, the principal outstanding is due and payable upon maturity in June 1998 with interest due monthly. At March 31, 1997, the borrowing base was $7.2 million and borrowings outstanding were $7.0 million. The interest rate for borrowings is calculated at a floating rate based on a published prime rate plus .75%. Carrizo's obligations under this facility are secured by substantially all of its oil and natural gas properties. Individually and collectively, Paul B. Loyd, Jr., Frank A. Wojtek, Steven A. Webster, Douglas A.P. Hamilton and S.P. Johnson IV are guarantors of Carrizo's obligations under the Carrizo Credit Facility. In addition, certain shares of Common Stock owned by current shareholders are pledged to Compass as security for borrowings under the Carrizo Credit Facility. The Company will use a portion of the proceeds of the Offering to repay all outstanding indebtedness under the Carrizo Credit Facility. Upon such repayment, this facility will be terminated and such guarantees and pledges will be released. In June 1996, Encinitas Partners Ltd. ("Encinitas") entered into the Secured Reducing Revolving Line of Credit (the "Encinitas Credit Facility") with Compass, which provides for a maximum loan amount of $10 million, subject to borrowing base limitations. Under the Encinitas Credit Facility, the principal outstanding is due and payable upon maturity in June 1998 with interest due monthly. At March 31, 1997, the borrowing base under the Encinitas Credit Facility was $2.6 million, of which $2.4 million was outstanding and $224,000 was reserved for outstanding letters of credit. The interest rate for borrowings is calculated at a floating rate based on a published 29 31 prime rate plus .75%. Encinitas' obligations under this facility are secured by substantially all of its oil and natural gas properties. The Company will use a portion of the proceeds of the Offering to repay all outstanding indebtedness under the Encinitas Credit Facility. Upon such repayment, this facility will be terminated. Necessary waivers effective as of December 31, 1996 were received from Compass Bank to decrease the tangible net worth requirement (Encinitas Facility) and to permit Carrizo (under the Carrizo Credit Facility) to advance funds to one of the affiliated entities for exploration expenditures. In January 1995, the Company entered into a loan agreement with Texas Commerce Bank ("TCB") for the acquisition and development of oil and gas properties by Encinitas Partners Ltd. Borrowings under the loan facility, which totaled $2.1 million and bore interest at the prime rate as specified by TCB plus 2.75%, were repaid with borrowings under the Encinitas Credit Facility (defined below), and this loan facility was terminated. As additional consideration, the Company assigned to TCB a 1% royalty interest in the Encinitas/Kelsey properties. In addition to borrowings under the credit facilities described above, the Company had outstanding borrowings from certain shareholders totaling $1.4 million, $2.8 million and $2.9 million at December 31, 1995 and 1996 and March 31, 1997, respectively. See "Certain Transactions." These loans bear interest at TCB's prime rate and are due in 1998. The Company will use a portion of the proceeds of the Offering to prepay all outstanding borrowings from its shareholders and does not expect to continue such arrangements with its shareholders following the Offering. 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. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued SFAS No. 121 regarding accounting for the impairment of long-lived assets. The Company adopted SFAS No. 121 effective January 1, 1996. However, its provisions are not applicable to the Company's oil and gas properties as they are accounted for under the full-cost method of accounting. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, which is a new standard of accounting for stock-based compensation that establishes a fair value method of accounting for awards granted after December 31, 1995 under stock compensation plans. SFAS No. 123 encourages, but does not require, companies to adopt the fair value method of accounting in place of the existing method of accounting for stock-based compensation, whereupon compensation, costs are recognized only in situations where stock compensation plans award intrinsic value to recipients at the date of grant. The Company has elected not to adopt the fair value accounting of SFAS No. 123 and will account for any plans under APB Opinion No. 25, under which no compensation costs have been recognized. The Company has reported the impact of SFAS No. 123 on a pro forma basis as allowed under the pronouncement. See Note 6 of the notes to combined financial statements. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 regarding earnings per share. SFAS No. 128 cannot be adopted until December 15, 1997; however, pro forma disclosures are allowed to minimize the impact of year-end adoption. As a result of the noncomplex nature of the Company's capital structure and treatment of all stock options as outstanding for all periods pursuant to Staff Accounting Bulletin No. 83, SFAS No. 128 would have no current impact on the pro forma calculation of earnings per share. 30 32 BUSINESS OVERVIEW Carrizo is an independent oil and gas company engaged in the exploration, development, exploitation and production of natural gas and crude oil. The Company's operations are currently focused onshore in proven oil and gas producing trends along the Gulf Coast, primarily in Texas and Louisiana in the Frio, Wilcox and Vicksburg trends. The Company believes that the availability of economic onshore 3-D seismic surveys has fundamentally changed the risk profile of oil and gas exploration in these regions. Recognizing this change, the Company has aggressively sought to control significant prospective acreage blocks for targeted, proprietary, 3-D seismic surveys. As of May 31, 1997, the Company had assembled approximately 322,000 gross acres under lease or option. Approximately 75% of the Company's current acreage position is covered by 3-D seismic data that the Company has acquired, or is in the process of acquiring, in its first 15 seismic surveys. The Company expects to acquire additional 3-D seismic data during the remainder of 1997 and 1998 that will cover substantially all of its remaining current acreage position. From the data generated by its first seven proprietary seismic surveys, covering 200 square miles, 94 drillsites have been identified. The Company's capital budgets for 1997 and 1998 of approximately $22.6 million and $54.2 million, respectively, include amounts for the acquisition of additional 3-D seismic data and for the drilling of 67 gross wells (24.6 net) in 1997 with a 37% average working interest and the drilling of 147 gross wells (67.5 net) in 1998 with an anticipated 46% average working interest. In addition, the Company anticipates that as its 3-D seismic data is further evaluated, additional prospects will be generated for drilling beyond 1998. Typically, the Company's primary drilling targets have been shallow (from 4,000 to 7,000 feet), normally pressured reservoirs that generally involve moderate cost (averaging $200,000 to $500,000 per completed well) and risk. Many of these drilling prospects also have secondary, deeper, over-pressured targets which have greater economic potential but generally involve higher cost (averaging $1 million to $2 million per completed well) and risk. The Company often seeks to sell a portion of these deeper prospects to reduce its exploration risk and financial exposure while still allowing the Company to retain significant upside potential. Deeper targets have been identified in seven of the Company's 67 prospects budgeted for drilling in 1997. The Company operates the majority of its projects through the exploratory phase but may relinquish operator status to qualified partners in the production phase to control costs and focus resources on the higher-value exploratory phase. As of May 31, 1997, the Company operated 66 producing oil and gas wells, which accounted for 57% of the wells in which the Company had an interest. The Company seeks to increase its exposure to projects in its core areas through the use of a broad project generation network, including outside regional geologists, joint venture partners and its internal geophysical team. Similarly, the Company uses contract geoscientists with expertise in a particular project area, the prospect generation teams of its industry partners and its internal geophysical staff to identify drillsites. The Company believes that this strategy has enhanced its ability to control general and administrative expenses, which averaged $0.27 per Mcfe of production for the first quarter of 1997. The Company has experienced rapid increases in reserves, production and EBITDA since its inception in 1993 due to the growth of its 3-D based drilling and development activities. From January 1, 1996 to March 31, 1997, the Company participated in the drilling of 29 gross wells (8.9 net) with a commercial well success rate of approximately 79%. This drilling success contributed to the Company's total proved reserves as of March 31, 1997 of approximately 38.7 Bcfe, with a PV-10 Value of $30.4 million. From inception through March 31, 1997, the Company's average finding and development cost was approximately $0.47 per Mcfe. The Company's production has increased 125% from 321 MMcfe for the three months ended March 31, 1996 31 33 to 721 MMcfe for the three months ended March 31, 1997. EBITDA has also increased significantly from $328,000 for the three months ended March 31, 1996 to $1.1 million for the three months ended March 31, 1997. In addition to its core exploratory operations, the Company operates a heavy oil project in Anderson County, Texas which, as of March 31, 1997, contained proved reserves of approximately 3.6 MMBbls of 19 degrees API gravity crude oil. The project produces from a depth of 500 feet and utilizes a tertiary steam drive as an enhanced oil recovery process. During the first quarter of 1997, the Company produced 107 Bbls/d of oil from this project, which averaged a $0.65 per Bbl premium over West Texas Intermediate crude due to the produced oil's suitability as a lube oil feedstock,. The Company's management team has extensive energy industry experience. S.P. Johnson IV, the Company's President and Chief Executive Officer, has 18 years of industry experience, including 15 years with Shell Oil Company where he served in various managerial positions. The Company's technical and operating employees have an average of 15 years of industry experience, in many cases with major and large independent oil companies, including Shell Oil Company, Vastar Resources, Inc., Pennzoil Company and Tenneco Inc. The Company's Board of Directors and major shareholders include its Chairman, Steven A. Webster who is also Chairman and Chief Executive Officer of Falcon Drilling Company Inc., and Paul B. Loyd, Jr., the Chairman and Chief Executive Officer of Reading & Bates Corporation. The Company believes that its future growth will be driven by the drilling and development of existing identified opportunities as well as new 3-D based prospects that are continually being identified from its growing project portfolio. The Company intends to use the proceeds of this Offering to accelerate its drilling and development activities, expand its prospective acreage acquisition program and increase the number and size of, and working interest in, additional 3-D based projects. The address of the Company's principal executive office is 14811 St. Mary's Lane, Suite 148, Houston, Texas 77079 and its telephone number is (281) 496-1352. BUSINESS STRATEGY The Company's business strategy is to profitably expand its reserve base, production levels and EBITDA through the following key elements: Aggressive Acreage and Seismic Acquisition Program. The Company seeks to control significant prospective acreage positions in proven producing trends and then acquire 3-D seismic data to evaluate this acreage. The Company believes that recent technical improvements and cost reductions of onshore 3-D seismic surveys and oil and gas drilling techniques have changed the risk/reward profile of exploration in these regions and allow for the profitable exploration and development of previously undetected or uneconomic drilling prospects. The Company believes that its existing large acreage position and seismic database will generate a significant inventory of drillsites over the next several years. Focused Exploration. The Company intends to maintain its exploration focus primarily in the onshore Gulf Coast region, which it believes offers numerous advantages, including: (i) geologic trends that are prone to the accumulation of significant oil and gas reserves in multiple target zones, (ii) a large number of over-looked or under-exploited drilling prospects, (iii) familiarity of the Company's personnel with the geology of the region, (iv) established relationships with other regional participants and (v) availability of pipeline and operating infrastructure. Based on the results to date of its exploration activities, the Company believes that significant undiscovered reserves remain in this region, and the Company plans to utilize its existing database of 3-D seismic and geologic data and its knowledge of the region's producing fields and trends to further expand its operations within this core region. Leveraged Project and Drillsite Generation Program. The Company maintains a flexible and diversified approach to project identification to increase its exposure to projects in its core areas. 32 34 The Company's project areas have been identified by a broad network that includes contract geoscientists who have expertise in a particular project area, the exploration teams of several industry partners as well as the Company's internal geophysical team. This approach has enabled the Company to increase the number and diversity of projects from which the Company has developed its exploration program while controlling the costs associated with these operations. Similarly, in identifying specific drillsites within a project area, the Company's internal exploration team has worked with outside contract geoscientists and joint venture partners. Prospects with Attractive Risk/Reward Balance. The Company seeks to retain significant working interest positions in exploration prospects that fit its risk/reward criteria. Many of the Company's exploration prospects contain both primary targets with shallower, normally pressured reservoirs that generally involve moderate cost and risk, as well as secondary targets that consist of deeper, over-pressured and often larger reservoirs but involve higher cost and risk. The Company typically retains all or the majority of its interests in the shallow targets and often sells a portion of its interests in the deeper targets to industry partners in order to mitigate its exploration risk and fund the anticipated capital requirements for the retained portion of these targets. The Company believes that this strategy affords it significant upside potential with reduced overall risk. EXPLORATION APPROACH The Company generally seeks to rapidly accumulate large amounts of 3-D seismic data along prolific, producing trends of the onshore Gulf Coast after obtaining options to lease areas covered by the data. The Company then uses this data to identify or evaluate prospects before drilling the prospects that fit its risk/reward criteria. The Company typically seeks to explore in locations within its core areas of expertise that it believes have (i) numerous accumulations of normally pressured reserves at shallow depths and in geologic traps that are difficult to define without the interpretation of 3-D seismic data and (ii) the potential for large accumulations of deeper, over-pressured reserves. As a result of the increased availability of economic onshore 3-D seismic surveys and the improvement and increased affordability of data interpretation technologies, the Company has relied almost exclusively on the interpretation of 3-D seismic data in its exploration strategy. The Company generally does not invest any substantial portion of the costs for an exploration well without first interpreting 3-D seismic data. The principal advantage of 3-D seismic data over traditional 2-D seismic analysis is that it affords the geoscientist the ability to interpret a three dimensional cube of data representing a specific project area as compared to interpreting between widely separated two dimensional vertical profiles. As a consequence, the geoscientist is able to more fully and accurately evaluate prospective areas, improving the probability of drilling commercially successful wells in both exploratory and development drilling. The use of 3-D seismic allows the geoscientist to identify and use areas of irregular sand geometry to augment or replace structural interpretation in the identification of potential hydrocarbon accumulations. Additionally, detailed analysis and correlation of the 3-D seismic response to lithology and contained fluids assist geoscientists in identifying and prioritizing drilling targets. Because 3-D analysis is completed over an entire target area cube, shallow, intermediate and deep objectives can be analyzed. Additionally, the more precise structural definition allowed by 3-D seismic data combined with integration of available well and production data assists in the positioning of new development wells. The Company has sought to obtain large volumes of 3-D seismic data either by participating in large seismic data acquisition programs either alone or pursuant to joint venture arrangements with other energy companies, or through "group shoots" in which the Company shares the costs and results of seismic surveys. By participating in joint ventures and group shoots, the Company is able to share the up-front costs of seismic data acquisition and interpretation, thereby enabling it to participate in a larger number of projects and diversify exploration costs and risks. Substantially all of the Company's operations are conducted through joint operations with industry participants. The Company is currently actively involved in 32 project areas, and following the Offering, intends to 33 35 further increase the number and size of seismic data acquisition projects in which it participates to accelerate its exploration activities. The Company's primary strategy for acreage acquisition is to obtain leasing options covering large geographic areas in connection with 3-D seismic surveys. Prior to conducting proprietary surveys, the Company typically seeks to acquire seismic permits that include options to lease the acreage, thereby ensuring the price and availability of leases on drilling prospects that may result upon completing a successful seismic data acquisition program over a project area. The Company generally attempts to obtain these options covering at least 80% of the project area for these proprietary surveys. The size of these surveys has ranged from 10 to 70 square miles. When the Company participates in 3-D group shoots, it generally seeks prospective leases as quickly as possible following interpretation of the survey. In connection with some group shoots in which the Company believes that competition for acreage may be especially strong, the Company may seek to obtain lease options or leases in prospective areas prior to the receipt or interpretation of 3-D seismic data. The Company maintains a flexible and diversified approach to project identification by focusing on the estimated financial results of a project area rather than limiting its focus to any one method or source for obtaining leads for new project areas. The Company's current project areas resulted from leads developed by its project generation network that includes small, independent "prospect generators," the Company's joint venture partners and the Company's internal staff. The Company believes that it has been able to increase the number of potential projects and reduce its costs through the use of these outside sources of project generation. Similarly, in identifying specific drillsites from within a project area, the Company has relied upon outside contract geoscientists and joint venture partners who have worked with the Company's own geoscientists. Currently, over 20 geoscientists from this network are devoting some or all of their time to identifying project areas or evaluating drillsites in which the Company expects to have an interest. Similarly, the Company also utilizes outside independent landmen with expertise in a particular project area. This outsourcing strategy has enabled the Company to control costs without maintaining a large internal land and exploration department. OPERATING APPROACH The Company's management team has extensive experience in the development and management of projects along the Texas and Louisiana Gulf Coast. The Company believes that the experience of its management in the development of 3-D projects in its core operating areas is a competitive advantage for the Company. The Company's technical and operating employees have an average of 15 years of industry experience, in many cases with major and large independent oil companies, including Shell Oil Company, Vastar Resources, Inc., Pennzoil Company and Tenneco Inc. The Company generally seeks to obtain lease operator status and control over field operations, and in particular seeks to control decisions regarding 3-D survey design parameters and drilling and completion methods. In some cases, the Company may thereafter relinquish its operator status in order to concentrate its resources on exploration activities, especially if the Company has had successful prior experience with an industry partner acting as operator. The Company currently operates 66 producing oil and natural gas wells, which range in depth from 450 feet to greater than 6,500 feet. The Company emphasizes preplanning in project development to lower capital and operational costs and to efficiently integrate potential well locations into the existing and planned infrastructure, including gathering systems and other surface facilities. In constructing surface facilities, the Company seeks to use reliable, high quality, used equipment in place of new equipment to achieve cost savings. The Company also seeks to minimize cycle time from drilling to hook-up of wells, thereby accelerating cash flow and improving ultimate project economics. 34 36 The Company seeks to use advanced production techniques to exploit and expand its reserve base. Following the discovery of proved reserves, the Company typically continues to evaluate its producing properties through the use of 3-D seismic data to locate undrained fault blocks and identify new drilling prospects and performs further reserve analysis and geological field studies using computer aided exploration techniques. The Company seeks to integrate its 3-D seismic data with reservoir characterization and management systems through the use of geophysical workstations which are compatible with industry standard reservoir simulation programs. SIGNIFICANT PROJECT AREAS The Company is currently evaluating 32 exploration project areas. As of May 31, 1997, the Company had an existing 3-D seismic database of 661 square miles and was acquiring an additional 436 square miles of data (totaling 1,097 square miles of 3-D seismic data). To date, all project areas for which seismic data has been interpreted have yielded multiple prospects and drillsites. The Company is continuing to receive and interpret data covering these project areas and believes that each project area has the potential for additional prospects and drillsites. 1997-1998 EXPLORATION PROGRAM
SQ. MILES OF 3-D SEISMIC DATA AT GROSS MAY 31, 1997 ACREAGE ---------------------- TOTAL 1997 LEASED OR BUDGETED 1997 1998 AND 1998 AVERAGE UNDER EXISTING FOR BUDGETED BUDGETED BUDGETED AVERAGE NET OPTION AT OR BEING ACQUISITION GROSS GROSS GROSS WORKING REVENUE PROJECT AREAS MAY 31, 1997 ACQUIRED 1997-1998 WELLS(1) WELLS(2) WELLS INTEREST(3) INTEREST(3) ------------- ------------ -------- ----------- -------- -------- ---------- ----------- ----------- TEXAS Starr/Hidalgo.......... 4,888 340(4) -- 11 15 26 50.0% 37.5% Encinitas/Kelsey....... 9,110 32 -- 14 1 15 27.5% 23.0% Buckeye................ 16,280 22 20 9 11 20 50.0% 39.0% La Rosa................ 8,260 22 -- 2(2) 4 6 31.5% 23.6% Mexican Sweetheart..... 29,421 40 -- -- 8 8 25.0% 18.8% McFaddin Ranch......... 5,300 15 -- 1 4 5 37.5% 28.1% Cologne................ 25,160 40 -- 2(2) 8 10 25.0% 18.8% South Cabeza Creek..... 10,406 20 -- 1(2) 4 5 52.5% 39.4% East McFaddin.......... 6,640 11 -- 3 -- 3 20.0% 16.5% Hiawatha............... 14,985 22 -- 10 4 14 42.0% 31.5% Western 325............ -- 320(4) -- -- 5 5 50.0% 37.5% Lance.................. 16,000 30 -- 3 5 8 25.0% 19.3% Highway 59............. 3,947 -- 20 -- 4 4 20.0% 15.0% Geronimo............... 66,161 107 -- 5 10 15 15.0% 11.3% RPP Welder............. 26,585 60 -- -- 10 10 15.0% 11.3% Midway................. 3,040 -- 15 2(2) 4 6 50.0% 37.5% Lost Bridge............ 1,625 16 -- 1(2) 3 4 50.0% 37.5% Drake 202.............. 12,000 -- 19 -- -- -- 100.0% 82.8% Other (11 Areas)....... 57,605 -- 291 -- 42 42 72.5% 56.9% LOUISIANA North Chalkley......... 640 -- 20 1 2 3 18.0% 14.2% Atchafalaya............ 3,400 -- -- 1 2 3 55.4% 41.5% Live Oak............... 350 -- -- 1 1 2 20.0% 15.0% ------- ----- --- -- --- --- TOTAL........... 321,803 1,097 385 67 147 214 ======= ===== === == === ===
- --------------- (1) Consists of identified drillsites included in the Company's 1997 capital budget that are fully evaluated, leased and have been or are scheduled to be drilled during 1997, except as otherwise indicated. Of these budgeted wells, 19 had been drilled as of May 31, 1997. (2) Consists of wells included in the Company's 1997 and 1998 capital budgets, but as to which 3-D seismic data has either not been obtained or fully evaluated, or for which the Company has not yet acquired leases or option rights. The number of wells indicated is based upon statistical results of drilling activities in 3-D project areas that the Company believes are geologically similar. (3) Anticipated as of May 31, 1997. (4) Represents non-proprietary "group shoots" in which the Company is a participant. 35 37 Set forth below are descriptions of the Company's key project areas where it is actively exploring for potential oil and natural gas prospects and in some cases currently has production. The 3-D surveys the Company is using to analyze its project areas range from regional, non-proprietary "group shoots" to single field proprietary surveys. The Company has, in many cases, participated in these project areas with industry partners to share the up-front costs associated with obtaining option arrangements with landowners, seismic data acquisition and related data interpretation, to mitigate its exploration risk and to increase the number of projects in which it is able to participate. Although the Company is currently pursuing prospects within the project areas described below, and has budgeted to drill the number of wells set forth in the preceding table, there can be no assurance that these prospects will be drilled at all or within the expected time frame. In particular, budgeted wells that are based upon statistical results of drilling activities in other project areas are subject to greater uncertainties than wells for which drillsites have been identified. The final determination with respect to the drilling of any identified drillsites or budgeted wells will be dependent on a number of factors, including (i) the results of exploration efforts and the acquisition, review and analysis of the seismic data, (ii) the availability of sufficient capital resources by the Company and the other participants for the drilling of the prospects, (iii) the approval of the prospects by other participants after additional data has been compiled, (iv) the economic and industry conditions at the time of drilling, including prevailing and anticipated prices for oil and natural gas and the availability of drilling rigs and crews, (v) the financial resources and results of the Company and (vi) the availability of leases on reasonable terms and permitting for the prospect. There can be no assurance that these projects can be successfully developed or that the identified drillsites or budgeted wells discussed will, if drilled, encounter reservoirs of commercially productive oil or natural gas. The reserve data set forth below is based upon the Reserve Reports. There are numerous uncertainties in estimating quantities of proved reserves, including many factors beyond the control of the Company. See "Risk Factors -- Dependence on Exploratory Drilling Activities," "-- Reserve Replacement Risk" and "-- Uncertainty of Reserve Information and Future Net Revenue Estimates." TEXAS Starr/Hidalgo Project Area: Frio and Vicksburg Formations The Starr/Hidalgo Project Area is located in Starr and Hidalgo Counties, Texas in the Frio and Vicksburg formations. The Company and a partner licensed approximately 340 square miles of non-proprietary 3-D seismic data that was delivered during August 1995 and June 1996. Sixty-four prospects have been identified in the shallow Frio trend and the deeper, structurally complex Vicksburg trend, as well as two large prospects in the relatively unexplored Eocene trend. The Company and its partner have leases covering 4,888 acres in this project area and currently control 18 of these prospects (10 Frio, seven Vicksburg and one Eocene). The Company sold a portion of its interest in four of the deeper and riskier Vicksburg prospects to industry partners. During the quarter ended March 31, 1997, the Company's share of production from wells in this project area was approximately 40 Bbls/d of oil and 2.6 MMcf/d of natural gas. As of April 30, 1997, the Company and its partners have drilled a total of 13 wells resulting in 11 producing wells with estimated proved reserves net to the Company of 19.0 MBbls of oil and 2.5 Bcf of natural gas at March 31, 1997. The Company and its partners have identified 11 locations that have been or are scheduled to be drilled during 1997. The Company believes that continuing interpretation and seismic processing of the Starr/Hidalgo Project Area 3-D seismic data will result in additional prospects and drilling locations. Encinitas/Kelsey Project Area: Frio and Vicksburg Formations The Encinitas/Kelsey Project Area is located in Brooks County, Texas in the Frio and Vicksburg formations. The Company acquired an interest in leases covering 9,110 acres in this area in 36 38 December 1994 to re-develop the property. Upon acquisition of its interests in this project area, the Company undertook a comprehensive petrophysical study and acquired a 32 square mile 3-D seismic survey. This effort has resulted in the identification of numerous Frio and Vicksburg prospects. At March 31, 1997, the Company had estimated proved reserves net to the Company of 106.4 MBbls of oil and 2.1 Bcf of natural gas. During the quarter ended March 31, 1997, the Company's share of production from wells in this project area was 138 Bbls/d of oil and 1.8 MMcf/d of natural gas. As of April 30, 1997, the Company and its partners have drilled a total of seven wells resulting in six producing wells. The Company and its partners have identified 14 locations that have been or are scheduled to be drilled in 1997, with the possibility of additional follow-up drilling in 1998. Buckeye Project Area: Wilcox, Hockley, Pettus and Yegua Formations The Buckeye Project Area is located in Live Oak County, Texas. The Company and its partner currently hold 5,440 acres under lease and 31,000 acres under option and have acquired an approximately 22 square mile 3-D seismic survey over the first 12,000 optioned acres. A 3-D seismic survey over the other 9,000 acres under option is planned for the summer of 1997. The exploration objectives for the Buckeye Project Area are the shallow zones of the Hockley, Pettus and Yegua formations and the deep zones of the expanded Upper Wilcox formation. The data for the first phase was received from processing in April 1997 and initial interpretation has generated nine shallow prospects. The first prospect has been successfully drilled, a second is drilling, with the remainder scheduled to be drilled during mid-1997. La Rosa Project Area: Frio Formation The La Rosa Project Area is located in Refugio County, Texas over a producing field leasehold of 3,700 acres. The area covers Frio barrier/strandplain sands productive down to 8,200 feet. Data is currently being processed from a 3-D seismic survey over 22 square miles that was conducted by the Company during the first quarter of 1997. The Company will attempt to use the 3-D seismic data to identify shallow objectives, delineate reservoir compartments for drilling of bypassed reserves and identify flank prospects and deeper prospects in the Vicksburg trend. The Company has budgeted to drill two prospects in this project area during 1997. The Company's leases cover 3,700 acres and its seismic options cover 4,560 acres in this project area. Mexican Sweetheart Project Area: Frio Formation The Mexican Sweetheart Project Area is located in southwestern Jackson County, Texas in the Frio producing trend. A secondary objective for this project area may be the shallow Miocene trend and the Yegua and Wilcox trends. The area is directly south of successful 3-D seismic projects conducted by the Company's partners in this project and covers historical field discoveries. The Company has planned and directed a 40 square mile 3-D seismic survey covering the project area, and field operations were initiated in March 1997. The Company will seek to use the 3-D seismic data to identify shallow objectives, delineate reservoir compartments for drilling of bypassed reserves and identify flank prospects and deeper, higher risk prospects in the Yegua and Upper Wilcox trends, which the Company would seek to explore on a carried basis with an industry partner. The Company's leases cover 676 acres and its seismic options cover 28,745 acres in this project area. McFaddin Ranch Project Area: Miocene and Frio Formations The McFaddin Ranch Project Area is located in Victoria County, Texas in the Miocene and Frio formations. Data is currently being interpreted from a 15 square mile 3-D seismic survey conducted in the first quarter of 1997. The Company will seek to use the 3-D seismic data to delineate a prospect identified through subsurface geological work and interpretation of 2-D seismic data. This project area is immediately northwest of the East McFaddin Field Project Area. The Company has 37 39 budgeted to drill one prospect in this project area during 1997. The Company's seismic options in this project area cover approximately 5,300 acres. Cologne Project Area: Frio Formation The Cologne Project Area is located in Goliad and Victoria Counties, Texas in the Frio formation. A secondary objective for this project area may be the Yegua and Wilcox formations. The area covers several historical field discoveries. A 40 square mile 3-D seismic survey is currently being conducted in the project area. The Company will seek to use the 3-D seismic data to identify shallow opportunities, to delineate any reservoir compartments for drilling of bypassed reserves and seek to identify flank prospects and deeper, higher risk, prospects in the Yegua and Upper Wilcox formations. The Company has budgeted to drill two prospects in this project area during the remainder of 1997. The Company's leases cover 4,160 acres and its seismic options cover 21,000 acres in this project area. South Cabeza Creek Project Area: Frio Formation to Lower Wilcox Sands The South Cabeza Creek Project Area is located in Goliad County, Texas in an area having significant production in the shallow Frio and lower Wilcox trends. The Company is currently in the process of acquiring seismic options and leases for a proposed 20 square mile 3-D seismic shoot in the project area that is currently scheduled to begin in the second or third quarter of 1997. The Company intends to use the 3-D seismic data to identify potential Frio, Vicksburg and Yegua opportunities and to verify and optimize a Wilcox prospect. The Company has budgeted drilling one prospect in this project area beginning in 1997. The Company currently has 906 acres under lease and 9,500 acres under seismic option in this project area. East McFaddin Project Area: Frio Formation The East McFaddin Project Area is located in Victoria County, Texas. In 1995, the Company obtained a 20% working interest in 4,680 acres under lease and 1,760 acres under seismic option by funding an approximately 11 square mile 3-D seismic survey in the project area. During the quarter ended March 31, 1997, the Company's share of production from wells in this project area was 25 Bbls/d of oil and 0.7 MMcf/d of natural gas. As of March 31, 1997, the Company and its partners had drilled a total of five wells resulting in two producing wells with estimated proved reserves net to the Company of 2.3 MBbls of oil and 0.6 Bcf of gas. The Company and its partners have identified three additional locations scheduled to be drilled in 1997, with the possibility of additional follow-up drilling in 1998. Hiawatha Project Area: Pettus and Yegua Formations The Hiawatha Project Area is located in Duval County, Texas and covers existing producing fields originally developed in the 1940s, with the most recent drilling in the 1970s. In August 1996, the Company and its partners acquired an approximately 22 square mile 3-D seismic survey and currently hold leases covering 1,965 acres and seismic options covering 13,000 acres in the project area. During the quarter ended March 31, 1997, the Company's share of production from wells in this project area was 20 Bbls/d of oil and 0.6 MMcf/d of natural gas. As of April 30, 1997, the Company and its partners have drilled a total of eight wells resulting in six producing wells with estimated proved reserves net to the Company of 28.2 MBbls of oil and 0.5 Bcf of natural gas at March 31, 1997. The Company and its partners have identified ten locations that have been or are scheduled to be drilled in 1997, with the possibility of additional follow-up drilling depending on the results of the scheduled drilling. 38 40 Western 325 Project Area: Wilcox and Jackson-Yegua Formations The Western 325 Project Area is located in Webb and Duval Counties, Texas in the Wilcox and Jackson-Yegua formations. The Company and a partner have joined others in underwriting a non-proprietary 3-D seismic data shoot covering approximately 320 square miles in the project area. Multiple prospects have been identified from data covering approximately 100 square miles that was delivered in April 1997. The remainder of the data is currently expected to be delivered in the third quarter of 1997 and the first quarter of 1998. The Company believes that experience gained in the Starr/Hidalgo Project Area may assist in exploration efforts in the Western 325 Project Area. Lance Project Area: Frio Formation The Lance Project Area is located in Bee County, Texas in an area of prolific shallow Frio production. The primary exploration objectives in this project area are the Frio/Vicksburg trends, with secondary objectives in the deeper Vicksburg, Jackson and Yegua formations. The Company is currently interpreting data from a 30 square mile 3-D seismic survey completed in the second half of 1996. The Company will seek to use the 3-D seismic data to delineate reservoir compartments for drilling of bypassed Frio reserves as well as to identify flank and deeper Vicksburg prospects. The Company has scheduled to drill three prospects in this project area during 1997. The Company's seismic options in this project area cover an aggregate of approximately 16,000 acres. Highway 59 Project Area: Frio, Yegua and Wilcox Formations The Highway 59 Project Area is located in Fort Bend and Wharton Counties, Texas in an area of several historical field discoveries and production in the Frio and Yegua formations and in the highly competitive Wharton County Wilcox trend. A survey design has been completed for a 20 square mile 3-D seismic survey in the project area, and field work is expected to begin during the second quarter of 1997. The Company and two large independent industry partners will seek to use the 3-D seismic data to identify shallow opportunities and to delineate Yegua and Wilcox prospects identified through the interpretation of 2-D seismic data. The Company's leases in this project area currently cover 3,947 acres. Geronimo Project Area: Frio Formation The Geronimo Project Area is located in San Patricio County, Texas in an area of predominantly Frio production. Numerous fault systems run through the area, particularly in the basal Frio and Vicksburg formations. A 67 square mile 3-D seismic survey was conducted in 1996, with the initial interpretation of data generating five prospects. The Company has scheduled to drill these prospects during 1997, with possible follow-up development anticipated in 1998. A northeast extension of the initial 3-D seismic survey covering an additional 40 square miles is planned for the second half of 1997. The Company's leases cover 10,278 acres and its seismic options cover 55,883 acres in this project area. RPP Welder Project Area: Frio and Vicksburg Formations The RPP Welder Project Area is located in San Patricio and Refugio Counties, Texas in an area of predominantly upper Frio production and is adjacent to the Geronimo, Midway and LaRosa Project Areas. Numerous fault systems run through the area, particularly at the relatively unexplored basal Frio and Vicksburg levels. The primary producing formations in this area have historically been Miocene and upper Frio oil objectives. Field operations for a 60 square mile 3-D seismic survey commenced during the second quarter of 1997. The Company's leases cover 310 acres and its options cover 26,275 acres in this project area. 39 41 Midway Project Area: Frio Formation The Midway Project Area is located in San Patricio County, Texas in an area of predominantly Frio production. The area is a southwest extension of the Geronimo Project Area and includes the Company's producing properties from the Midway Field along with contiguous leases and seismic option areas. The Company has designed a 15 square mile 3-D seismic survey in this project area, and field operations are planned to commence in the third quarter of 1997. The Company has budgeted to drill two prospects in this project area during the second half of 1997. The Company's leases cover 2,400 acres and its options cover 640 acres in this project area. Lost Bridge Project Area: Frio, Yegua and Wilcox Formations The Lost Bridge Project Area is located in northern Jackson County, Texas in the Frio, Yegua and Wilcox formations. The area covers several historical field discoveries and recent Wilcox production. The Company expects to begin work in the second quarter of 1997 on a 16 square mile 3-D seismic survey. The Company will seek to use the 3-D seismic data to delineate a Yegua prospect identified with 2-D seismic data, identify shallow opportunities and image the deeper Wilcox trend. The Company's strategy is to drill any Yegua prospects and sell a portion of its interest in any Wilcox prospects while retaining a carried interest. The Company is currently acquiring seismic options in the project area and has 850 acres under lease and 775 acres under option to date. The Company anticipates drilling one prospect in this project area during 1997. Drake 202 Project Area: Frio and Vicksburg Formations The Drake 202 Project Area is located in Bee County, Texas adjacent to the Lance Project Area. Primary exploration objectives for this project area are the Frio and Vicksburg formations, as well as deeper, higher risk prospects in the Yegua formation. In this project area, the Company's seismic options cover 12,000 acres. A 19 square mile 3-D seismic survey is budgeted for late 1997. LOUISIANA North Chalkley Project Area: Miogyp Sand The North Chalkley Project Area is located in Calcasieu and Cameron Parishes, Louisiana in an area of production from the Miogyp sand trend. The exploration objective of this project area is a prospect identified through the interpretation of 2-D seismic data in the third Camerina and Miogyp sands. The Company's leases in this project area cover an aggregate of approximately 640 acres. The Company sold a portion of its interest in the project area to two large independent oil and natural gas companies for cash and retained an 18% working interest, which will be carried to casing point on the first well that is scheduled to be drilled during the second and third quarter of 1997. Depending on well results, the Company expects that it and its partners would conduct a 20 square mile 3-D seismic survey of the area. Atchafalaya Project Area: Cib Op-C Sand The Atchafalaya Project Area is located in Atchafalaya Bay in Louisiana. In 1991, a well was drilled in this fault block resulting in a field discovery at approximately 17,500 feet. The Company and its partners control 3,400 acres in this project area under a farm-in agreement and two state leases. The Company's partners have access to 20 square miles of 3-D seismic data covering this project area. As of March 31, 1997, the Company's net estimated proved reserves in the fields were 308 MBbls of oil and 5.8 Bcf of natural gas. The Company plans to drill one well in this project area with a barge rig during the remainder of 1997. The Company plans to sell a portion of its interests in this project area. 40 42 Live Oak Project Area: Chris II Sand The Live Oak Project Area is located in Vermillion Parish, Louisiana. In 1996, the Company and its partners acquired access to a 20 square mile 3-D seismic survey. The Company promoted its interest in the project area to two independents and will pay 11% of the well costs for 20% of the working interest. The Company's leases in this project area cover an aggregate of approximately 350 acres. One well is scheduled to be drilled in the third quarter of 1997. OTHER PROJECT AREAS In addition to the project areas described above, the Company has 11 additional project areas in the early stages of development. These project areas are located in the onshore Texas Gulf Coast region, with the primary exploration objectives being the Frio and Yegua formations, as well as one project area in the Cotton Valley Lime Reef trend. The Company is in the process of acquiring interests with respect to most of these project areas and has acquired leases and seismic options covering approximately 57,605 acres to date. 3-D seismic surveys covering an aggregate of approximately 291 square miles are budgeted for acquisition during 1997 and 1998. Any drilling in these project areas is not expected to be completed any earlier than 1998. SIGNIFICANT DEVELOPMENT PROJECT -- Camp Hill The Company owns interests in and operates six leases totaling 282 acres in the Camp Hill field in Anderson County, Texas. During the quarter ended March 31, 1997, the project produced 107 Bbls/d of 19 degrees API gravity oil. The project produces from a depth of 500 feet and utilizes a tertiary steam drive as an enhanced oil recovery process. Although efficient at maximizing oil recovery, the steam drive process is relatively expensive to operate because natural gas is burned to create the steam injectant. Lifting costs during the first quarter of 1997 averaged $16.80 per barrel ($2.80 per Mcfe). Because profitability increases when natural gas prices drop relative to oil prices, the project is a natural hedge against decreases in natural gas prices relative to oil prices. The crude oil produced, although viscous, commands a higher price (an average premium of $.65 per barrel during the first quarter of 1997) than West Texas intermediate crude due to its suitability as a lube oil feedstock. As of March 31, 1997, the Company had 3.6 MMBbls of oil of proved reserves in this project, with 0.9 MMBbls of oil currently developed. The Company anticipates that it will drill additional wells and increase steam injection to develop the proved undeveloped reserves in this project, with the timing and amount of expenditures depending on the relative prices of oil and natural gas. The Company has an average working interest of 92.5% in its leases in this field and an average net revenue interest of 74.0%. 41 43 OIL AND NATURAL GAS RESERVES The following table sets forth estimated net proved oil and natural gas reserves of the Company and the PV-10 Value of such reserves as of March 31, 1997. The reserve data and the present value as of March 31, 1997 were prepared by Ryder Scott and Fairchild. For further information concerning Ryder Scott's and Fairchild's estimate of the proved reserves of the Company at March 31, 1997, see the Reserve Reports included as Annex A to this Prospectus. The PV-10 Value was prepared using constant prices as of the calculation date, discounted at 10% per annum on a pretax basis, and is not intended to represent the current market value of the estimated oil and natural gas reserves owned by the Company. For further information concerning the present value of future net revenue from these proved reserves, see Note 9 of Notes to Financial Statements. Also see "Risk Factors -- Uncertainty of Reserve Information and Future Net Revenue Estimates."
PROVED RESERVES(1) -------------------------------------------- DEVELOPED UNDEVELOPED TOTAL --------- ----------- ------- (DOLLARS IN THOUSANDS) Oil and condensate (Mbbls)................... 1,225 3,063 4,289 Natural gas (Mmcf)........................... 6,405 6,621 13,026 Total proved reserves (Mmcfe)................ 13,757 25,001 38,758 PV-10 Value(2)............................... $15,344 $15,076 $30,421
- --------------- (1) The Reserve Reports as of March 31, 1997 do not include reserves for five wells completed as of March 31. In addition, eight wells were completed from March 31, 1997 through May 31, 1997. See "-- Drilling Activity." (2) The PV-10 Value as of March 31, 1997 was determined by using the March 31, 1997 weighted average sales prices of $19.71 per Bbl of oil and $1.74 per Mcf of natural gas. There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the producer. The reserve data set forth herein represents estimates only. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates made by different engineers often vary from one another. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimates, and such revisions may be material. Accordingly, reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered. Furthermore, the estimated future net revenues from proved reserves and the present value thereof are based upon certain assumptions, including future prices, production levels and costs, that may not prove correct. No estimates of proved reserves comparable to those included herein have been included in reports to any federal agency other than the Commission. In accordance with Commission regulations, the Reserve Reports used oil and natural gas prices in effect at March 31, 1997. The prices used in calculating the estimated future net revenue attributable to proved reserves do not necessarily reflect market prices for oil and natural gas production subsequent to March 31, 1997. There can be no assurance that all of the proved reserves will be produced and sold within the periods indicated, that the assumed prices will actually be realized for such production or that existing contracts will be honored or judicially enforced. 42 44 VOLUMES, PRICES AND OIL & GAS OPERATING EXPENSE The following table sets forth certain information regarding the production volumes of, average sales prices received for and average production costs associated with the Company's sales of oil and natural gas for the periods indicated.
YEAR ENDED DECEMBER 31, THREE MONTHS ---------------------------- ENDED 1994 1995 1996 MARCH 31, 1997 ------ ------ ------ -------------- PRODUCTION VOLUMES Oil (MBbls).................................... 33 78 107 21 Natural gas (MMcf)............................. 5 565 1,273 592 Natural gas equivalent (MMcfe)................. 203 1,033 1,915 721 AVERAGE SALES PRICES Oil (per Bbl).................................. $17.69 $19.64 $21.54 $21.50 Natural gas (per Mcf).......................... 0.88 1.60 2.27 2.35 Natural gas equivalent (per Mcfe).............. 2.94 2.36 2.71 2.57 AVERAGE COSTS (PER MCFE) Camp Hill operating expenses................... $ 2.64 $ 2.06 $ 3.15 $ 2.80 Other operating expenses....................... 1.85 1.63 0.94 0.60 Total operating expenses(1).......... 2.55 1.76 1.24 0.77
- --------------- (1) Includes direct lifting costs (labor, repairs and maintenance, materials and supplies), workover costs and the administrative costs of production offices, insurance and property and severance taxes. FINDING AND DEVELOPMENT COSTS Since inception, the Company has incurred total gross development, exploration and acquisition costs of approximately $20.0 million. Total exploration, development and acquisition activities since inception have resulted in the addition of approximately 42.4 Bcfe, net to the Company's interest, of proved reserves at an average finding and development cost of $0.47 per Mcfe. The Company's finding and development costs have historically fluctuated on a year-to-year basis. Finding and development costs, as measured annually, may not be indicative of the Company's ability to economically replace oil and natural gas reserves because the recognition of costs may not necessarily coincide with the addition of proved reserves. DEVELOPMENT, EXPLORATION AND ACQUISITION CAPITAL EXPENDITURES The following table sets forth certain information regarding the gross costs incurred in the purchase of proved and unproved properties and in development and exploration activities.
YEAR ENDED DECEMBER 31, THREE MONTHS ------------------------ ENDED 1994 1995 1996 MARCH 31, 1997 ---- ------ ------ -------------- (IN THOUSANDS) Acquisition costs Unproved prospects............................. -- $ 317 $ 51 $ 11 Proved properties.............................. 329 3,588 1,908 -- Exploration...................................... 280 2,364 4,724 3,550 Development...................................... 177 208 1,956 549 ---- ------ ------ ------ Total costs incurred................... $786 $6,478 $8,639 $4,110
43 45 DRILLING ACTIVITY The following table sets forth the drilling activity of the Company for the years ended December 31, 1994, 1995 and 1996 and the three months ended March 31,1997. In the table, "gross" refers to the total wells in which the Company has a working interest and "net" refers to gross wells multiplied by the Company's working interest therein. As shown below, the Company's drilling activity from January 1, 1994 to March 31, 1997 has resulted in a commercial success rate of approximately 79%.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED ---------------------------------------------- MARCH 31, 1994 1995 1996 1997 ------------- ------------- ------------ ------------ GROSS NET GROSS NET GROSS NET GROSS NET ----- ---- ----- ---- ----- --- ----- --- Exploratory Wells Productive.................. -- -- -- -- 16 3.8 7 3.3 Nonproductive............... -- -- -- -- 4 0.9 2 0.9 ---- ---- ---- ---- -- --- -- --- Total............... -- -- -- -- 20 4.7 9 4.2 ==== ==== ==== ==== == === == === Development Wells Productive.................. -- -- -- -- -- -- -- -- Nonproductive............... -- -- -- -- -- -- -- -- ---- ---- ---- ---- -- --- -- --- Total............... -- -- -- -- -- -- -- -- ==== ==== ==== ==== == === == ===
From March 31, 1997 to May 31, 1997, the Company drilled nine gross productive exploratory wells (2.1 net), of which seven were successfully completed, and one gross productive development well (0.27 net) that was successfully completed. As of May 31, 1997, the Company was drilling or evaluating four gross exploratory wells (1.5 net) and no gross development wells. PRODUCTIVE WELLS The following table sets forth the number of productive oil and natural gas wells in which the Company owned an interest as of March 31, 1997.
COMPANY- OPERATED OTHER TOTAL ------------ ------------ ------------ GROSS NET GROSS NET GROSS NET ----- ---- ----- ---- ----- ---- Oil............................................... 56 56.0 23 5.0 79 61.0 Natural gas....................................... 10 6.9 26 7.3 36 14.2 -- ---- -- ---- --- ---- Total................................... 66 62.9 49 12.3 115 75.2 == ==== == ==== === ====
ACREAGE DATA The following table sets forth certain information regarding the Company's developed and undeveloped lease acreage as of March 31, 1997. Developed acres refers to acreage within producing units and undeveloped acres refers to acreage that has not been placed in producing units.
DEVELOPED UNDEVELOPED ACREAGE ACREAGE TOTAL -------------- --------------- --------------- GROSS NET GROSS NET GROSS NET ------ ----- ------ ------ ------ ------ Louisiana............................... 0 0 4,390 3,217 4,390 3,217 Texas................................... 29,643 9,979 32,972 9,945 62,615 19,924 ------ ----- ------ ------ ------ ------ Total......................... 29,643 9,979 41,309 13,951 67,005 23,141 ====== ===== ====== ====== ====== ======
The table does not include 252,000 gross acres (91,000 net) that the Company has a right to acquire pursuant to various seismic option agreements at May 31, 1997. Under the terms of its option agreements, the Company typically has the right for a period of one year, subject to 44 46 extensions, to exercise its option to lease the acreage at predetermined terms. The Company's lease agreements generally terminate if wells have not been drilled on the acreage within a period of three years. MARKETING The Company's production is marketed to third parties consistent with industry practices. Typically, oil is sold at the wellhead at field-posted prices plus a bonus and natural gas is sold under contract at a negotiated price based upon factors normally considered in the industry, such as distance from the well to the pipeline, well pressure, estimated reserves, quality of natural gas and prevailing supply/demand conditions. The Company's marketing objective is to receive the highest possible wellhead price for its product. The Company is aided by the presence of multiple outlets near its production in the Texas and Louisiana Gulf Coast. The Company takes an active role in determining the available pipeline alternatives for each property based upon historical pricing, capacity, pressure, market relationships, seasonal variances and long-term viability. There are a variety of factors which affect the market for oil and natural gas, including the extent of domestic production and imports of oil and natural gas, the proximity and capacity of natural gas pipelines and other transportation facilities, demand for oil and natural gas, the marketing of competitive fuels and the effects of state and federal regulations on oil and natural gas production and sales. The Company has not experienced any difficulties in marketing its oil and natural gas. The oil and natural gas industry also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual customers. The Company from time to time markets its own production where feasible with a combination of market-sensitive pricing and forward-fixed pricing. Forward pricing is utilized to take advantage of anomalies in the futures market and to hedge a portion of the Company's production deliverability at prices exceeding forecast. All of such hedging transactions provide for financial rather than physical settlement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General Overview." Despite the measures taken by the Company to attempt to control price risk, the Company remains subject to price fluctuations for natural gas sold in the spot market due primarily to seasonality of demand and other factors beyond the Company's control. Domestic oil prices generally follow worldwide oil prices, which are subject to price fluctuations resulting from changes in world supply and demand. The Company continues to evaluate the potential for reducing these risks by entering into, and expects to enter into, additional hedge transactions in future years. In addition, the Company may also close out any portion of hedges that may exist from time to time as determined to be appropriate by management. As of March 31, 1997, there were no existing hedge positions. Total natural gas purchased and sold under swap arrangements during the years ended December 31, 1995 and 1996 were 40,000 MMbtu and 60,000 MMbtu, respectively. Gains and losses realized by the Company under such swap arrangements were $23,466 and $26,887 for the years ended December 31, 1995 and 1996, respectively. The Company did not engage in hedging prior to 1995 and did not engage in hedging during the quarter ended March 31, 1997. COMPETITION The Company encounters competition from other oil and natural gas companies in all areas of its operations, including the acquisition of exploratory prospects and proven properties. The Company's competitors include major integrated oil and natural gas companies and numerous independent oil and natural gas companies, individuals and drilling and income programs. Many of its competitors are large, well-established companies with substantially larger operating staffs and greater capital resources than those of the Company and which, in many instances, have been engaged in the oil and natural gas business for a much longer time than the Company. Such 45 47 companies may be able to pay more for exploratory prospects and productive oil and natural gas properties and may be able to identify, evaluate, bid for and purchase a greater number of properties and prospects than the Company's financial or human resources permit. In addition, such companies may be able to expend greater resources on the existing and changing technologies that the Company believes are and will be increasingly important to the current and future success of oil and natural gas companies. The Company's ability to explore for oil and natural gas prospects and to acquire additional properties in the future will be dependent upon its ability to conduct its operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment. The Company believes that its exploration, drilling and production capabilities and the experience of its management generally enable it to compete effectively. Many of the Company's competitors, however, have financial resources and exploration and development budgets that are substantially greater than those of the Company, which may adversely affect the Company's ability to compete with these companies. REGULATION The availability of a ready market for oil and gas production depends upon numerous factors beyond the Company's control. These factors include regulation of oil and natural gas production, federal and state regulations governing environmental quality and pollution control, state limits on allowable rates of production by well or proration unit, the amount of oil and natural gas available for sale, the availability of adequate pipeline and other transportation and processing facilities and the marketing of competitive fuels. For example, a productive natural gas well may be "shut-in" because of an oversupply of natural gas or lack of an available natural gas pipeline in the areas in which the Company may conduct operations. State and federal regulations generally are intended to prevent waste of oil and natural gas, protect rights to produce oil and natural gas between owners in a common reservoir, control the amount of oil and natural gas produced by assigning allowable rates of production and control contamination of the environment. Pipelines are subject to the jurisdiction of various federal, state and local agencies. The following discussion summarizes the regulation of the United States oil and gas industry. The Company believes that it is in substantial compliance with such statutes, rules, regulations and governmental orders, although there can be no assurance that this is or will remain the case. The following discussion is not intended to constitute a complete discussion of the various statutes, rules, regulations and governmental orders to which the Company's operations may be subject. Regulation of Oil and Natural Gas Exploration and Production. The Company's operations are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits for the drilling of wells, maintaining bonding requirements in order to drill or operate wells and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled in, the plugging and abandoning of wells and the disposal of fluids used in connection with operations. The Company's operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration units and the density of wells which may be drilled in and the unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely primarily or exclusively on voluntary pooling of lands and leases. In areas where pooling is voluntary, it may be more difficult to form units, and therefore, more difficult to develop a project if the operator owns less than 100% of the leasehold. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose certain requirements regarding the ratability of production. The effect of these regulations may limit the amount of oil and natural gas the Company can produce from its wells and may limit the number of wells or the locations at which the Company can drill. The regulatory burden on the oil and gas industry increases the Company's costs of doing business and, consequently, affects its profitability. Inasmuch as such laws and regulations are frequently 46 48 expanded, amended and reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations. Regulation of Sales and Transportation of Natural Gas Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938 (the "NGA"), the Natural Gas Policy Act of 1978 (the "NGPA") and the regulations promulgated thereunder by the Federal Energy Regulatory Commission (the "FERC"). Maximum selling prices of certain categories of natural gas sold in "first sales," whether sold in interstate or intrastate commerce, were regulated pursuant to the NGPA. The Natural Gas Wellhead Decontrol Act (the "Decontrol Act") removed, as of not later than January 1, 1993, all remaining federal price controls from natural gas sold in "first sales." The FERC's jurisdiction over natural gas transportation was unaffected by the Decontrol Act. While sales by producers of natural gas and all sales of crude oil, condensate and natural gas liquids can currently be made at market prices, Congress could reenact price controls in the future. The Company's sales of natural gas are affected by the availability, terms and cost of transportation. The price and terms for access to pipeline transportation are subject to extensive regulation. In recent years, the FERC has undertaken various initiatives to increase competition within the natural gas industry. As a result of initiatives like FERC Order 636, issued in April 1992, the interstate natural gas transportation and marketing system has been substantially restructured to remove various barriers and practices that historically limited non-pipeline natural gas sellers, including producers, from effectively competing with interstate pipelines for sales to local distribution companies and large industrial and commercial customers. The most significant provisions of Order No. 636 require that interstate pipelines provide transportation separate or "unbundled" from their sales service, and require that pipelines provide firm and interruptible transportation service on an open access basis that is equal for all natural gas supplies. In many instances, the result of Order No. 636 and related initiatives have been to substantially reduce or eliminate the interstate pipelines' traditional role as wholesalers of natural gas in favor of providing only storage and transportation services. The FERC has announced several important transportation-related policy statements and proposed rule changes, including a statement of policy and a request for comments concerning alternatives to its traditional cost-of-service ratemaking methodology to establish the rates interstate pipelines may charge for their services. A number of pipelines have obtained FERC authorization to charge negotiated rates as one such alternative. In February 1997, the FERC announced a broad inquiry into issues facing the natural gas industry to assist the FERC in establishing regulatory goals and priorities in the post-Order No. 636 environment. Similarly, the Texas Railroad Commission has been reviewing changes to its regulations governing transportation and gathering services provided by intrastate pipelines and gatherers. While the changes being considered by these federal and state regulators would affect the Company only indirectly, they are intended to further enhance competition in natural gas markets. The Company owns certain natural gas pipelines that it believes meet the standards the FERC has used to establish a pipeline's status as a gatherer not subject to FERC jurisdiction under the NGA. State regulation of gathering facilities generally includes various safety, environmental, and in some circumstances, nondiscriminatory take requirements, but does not generally entail rate regulation. Natural gas gathering may receive greater regulatory scrutiny at both state and federal levels in the post-Order No. 636 environment. The Company cannot predict what further action the FERC or state regulators will take on these matters; however, the Company does not believe that it will be affected by any action taken materially differently than other natural gas producers with which it competes. Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the FERC, state commissions and the courts. The natural gas industry historically 47 49 has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue. Oil Price Controls and Transportation Rates. Sales of crude oil, condensate and gas liquids by the Company are not currently regulated and are made at market prices. The price the Company receives from the sale of these products may be affected by the cost of transporting the products to market. Effective January 1995, the FERC implemented regulations establishing an indexing system under which oil pipelines will be able to change their transportation rates, subject to prescribed ceiling limits. The indexing system generally indexes such rates to inflation, subject to certain conditions and limitations. The Company is not able at this time to predict the effects of these regulations, if any, on the transportation costs associated with oil production from the Company's oil producing operations. Environmental Regulations. The Company's operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stricter environmental legislation and regulations could continue. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes environmental protection requirements that result in increased costs to the oil and gas industry in general, the business and prospects of the Company could be adversely affected. The Company generates wastes, including hazardous wastes, that are subject to the federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The EPA and various state agencies have limited the approved methods of disposal for certain hazardous and nonhazardous wastes. Furthermore, certain wastes generated by the Company's oil and natural gas operations that are currently exempt from treatment as "hazardous wastes" may in the future be designated as "hazardous wastes," and therefore be subject to more rigorous and costly operating and disposal requirements. The Company currently owns or leases numerous properties that for many years have been used for the exploration and production of oil and gas. Although the Company believes that it has utilized good operating and waste disposal practices, prior owners and operators of these properties may not have utilized similar practices, and hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by the Company or on or under locations where such wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not under the Company's control. These properties and the wastes disposed thereon may be subject to CERCLA, RCRA and analogous state laws. Under such laws, the Company could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination) or to perform remedial plugging operations to prevent future contamination. The Company's operations may be subject to the Clean Air Act ("CAA") and comparable state and local requirements. Amendments to the CAA were adopted in 1990 and contain provisions that may result in the gradual imposition of certain pollution control requirements with respect to air emissions from the operations of the Company. The EPA and states have been developing regulations to implement these requirements. The Company may be required to incur certain capital expenditures in the next several years for air pollution control equipment in connection with maintaining or obtaining operating permits and approvals addressing other air emission-related issues. However, the Company does not believe its operations will be materially adversely affected by any such requirements. Federal regulations require certain owners or operators of facilities that store or otherwise handle oil, such as the Company, to prepare and implement spill prevention, control, countermea- 48 50 sure and response plans relating to the possible discharge of oil into surface waters. The Oil Pollution Act of 1990, as amended ("OPA"), contains numerous requirements relating to the prevention of and response to oil spills into waters of the United States. The OPA subjects owners of facilities to strict joint and several liability for all containment and cleanup costs and certain other damages arising from a spill, including, but not limited to, the costs of responding to a release of oil to surface waters. The OPA also requires owners and operators of offshore facilities that could be the source of an oil spill into waters of the United States, including wetlands, to post a bond, letter of credit or other form of financial assurance in the amount of $35 million, subject to later increase to as much as $150 million if a formal risk assessment indicates that the increase is warranted, to cover costs that could be incurred by governmental authorities in responding to an oil spill. In addition to OPA, other federal and state laws for the control of water pollution also provide varying civil and criminal penalties and liabilities in the case of releases of petroleum or its derivatives into surface waters or into the ground. Regulations are currently being developed under OPA and state laws concerning oil pollution prevention and other matters that may impose additional regulatory burdens on the Company. In addition, the CWA and analogous state laws require permits to be obtained to authorize discharge into surface waters or to construct facilities in wetland areas. With respect to certain of its operations, the Company is required to maintain such permits or meet general permit requirements. The EPA recently adopted regulations concerning discharges of storm water runoff. This program requires covered facilities to obtain individual permits, participate in a group permit or seek coverage under an EPA general permit. The Company believes that it will be able to obtain, or be included under, such permits, where necessary, and minor modifications to existing facilities and operations that would not have a material effect on the Company. The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, and similar state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. The Company also is subject to a variety of federal, state and local permitting and registration requirements relating to protection of the environment. Management believes that the Company is in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse effect on the Company. OPERATING HAZARDS AND INSURANCE The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosion, blow-out, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases, the occurrence of any of which could result in substantial losses to the Company due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. In accordance with customary industry practice, the Company maintains insurance against some, but not all, of the risks described above. The Company's insurance does not cover business interruption or protect against loss of revenues. There can be no assurance that any insurance obtained by the Company will be adequate to cover any losses or liabilities. The Company cannot predict the continued availability of insurance or the availability of insurance at premium levels that 49 51 justify its purchase. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect the Company's financial condition and operations. TITLE TO PROPERTIES The Company believes it has satisfactory title to all of its producing properties in accordance with standards generally accepted in the oil and natural gas industry. The Company's properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes and other burdens which the Company believes do not materially interfere with the use of or affect the value of such properties. As is customary in the industry in the case of undeveloped properties, little investigation of record title is made at the time of acquisition (other than a preliminary review of local records). Investigations, including a title opinion of local counsel, are generally made before commencement of drilling operations. The Company's revolving credit facilities are secured by substantially all of its oil and natural gas properties. EMPLOYEES At May 31, 1997, the Company had 15 full-time employees, including two geoscientists and three engineers, and two part-time employees. As drilling and production activities increase, the Company intends to hire additional technical, operational and administrative personnel as appropriate. The Company believes that its relationships with its employees are good. In order to optimize prospect generation and development, the Company utilizes the services of independent consultants and contractors to perform various professional services, particularly in the areas of 3-D seismic data mapping, acquisition of leases and lease options, construction, design, well site surveillance, permitting and environmental assessment. Field and on-site production operation services, such as pumping, maintenance, dispatching, inspection and testing, are generally provided by independent contractors. The Company believes that this use of third party service providers has enhanced its ability to contain general and administrative expenses, which averaged $0.27 per Mcfe for the first quarter of 1997. 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. 50 52 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information with respect to executive officers and directors of the Company:
NAME AGE POSITION ---- --- -------- S.P. Johnson IV................ 41 President, Chief Executive Officer and Director Frank A. Wojtek................ 41 Chief Financial Officer, Vice President, Secretary, Treasurer and Director George F. Canjar............... 39 Vice President of Exploration Development Kendall A. Trahan.............. 46 Vice President of Land Steven A. Webster.............. 45 Chairman of the Board Douglas A.P. Hamilton.......... 50 Director Paul B. Loyd, Jr. ............. 50 Director
Set forth below is a description of the backgrounds of each of the executive officers and directors 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, since 1992 Mr. Wojtek has been 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 has 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 1991 to February 1997, he served as a Director of Joint Ventures Onshore Gulf Coast for Vastar Resources, Inc. From 1982 to 1991, 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. Steven A. Webster has been the Chairman of the Board of the Company since June 1997 and has been a director of the Company since 1993. Mr. Webster has been Chairman and Chief 51 53 Executive Officer of Falcon Drilling Company Inc., an offshore drilling company, and its predecessor companies since 1988. Mr. Webster is also a director of DI Industries, Inc. (an onshore drilling company) and Crown Resources Corporation (a precious metals mining company). He is a trust manager of Camden Property Trust (a real estate investment trust). Mr. Webster holds an M.B.A. degree from Harvard Business School. Douglas A.P. Hamilton has been a director of the Company since 1993 and of Falcon Drilling Company, Inc. since 1992. Mr. Hamilton has since 1979 been the President of Anatar Investments, Inc., a diversified investment capital firm with active investments in oil and gas and offshore contract drilling. Mr. Hamilton has a degree from the University of North Carolina and completed the PMD program at Harvard Business School. Paul B. Loyd, Jr. has been a Director of the Company since 1993. Mr. Loyd has been Chairman of the Board and Chief Executive Officer of Reading & Bates since 1991 and President of Reading & Bates since 1993. Mr. Loyd has been President of Loyd & Associates, Inc., a financial consulting firm, since 1989. Mr. Loyd was Chief Executive Officer and a director of Chiles-Alexander International, Inc. from 1987 to 1989, President and a director of Griffin-Alexander Drilling Company, from 1984 to 1987, and prior to that, a director and Chief Financial Officer of Houston Offshore International, all of which are companies in the offshore drilling industry. Mr. Loyd is also a director of Wainoco Oil Corporation. Mr. Loyd served as President of the Company from its inception in September 1993 until December 1993. Mr. Loyd holds an M.B.A. degree from Harvard Business School. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. The Company's Board of Directors is currently composed of five directors, two of whom are employees of the Company. All of the current directors serve until the next annual shareholders' meeting or until their successors have been duly elected and qualified. The Board of Directors will have two standing committees: the Audit Committee (which will consist of Messrs. Wojtek, Hamilton and Loyd) and the Compensation Committee (which will consist of Messrs. Webster, Hamilton and Loyd). DIRECTOR COMPENSATION Directors who are employees of the Company are not entitled to receive additional compensation for serving as directors. Following the Offering, each director who is not an employee of the Company or a subsidiary (a "Non-employee Director") will receive an annual retainer of $7,500. All directors will be reimbursed for out-of-pocket expenses incurred in attending meetings of the Board or Board committees and for other expenses incurred in their capacity as directors. In addition, Nonemployee Directors will receive options for the purchase of Common Stock pursuant to the Incentive Plan of the Company (the "Incentive Plan"). See "-- Incentive Plan." OFFICER AND DIRECTOR INDEMNIFICATION The Company's Bylaws provide for the indemnification of its officers and directors, and the advancement to them of expenses in connection with proceedings and claims, to the fullest extent permitted by the Texas Business Corporation Act. The Company has also entered into indemnification agreements with each of its directors and certain of its officers that contractually provide for indemnification and expense advancement and include related provisions meant to facilitate the indemnitee's receipt of such benefits. In addition, the Company expects to purchase directors' and officers' liability insurance policies for its directors and officers in the future. The Bylaws and such agreements with directors and officers provide for indemnification for amounts (i) in respect of the deductibles for such insurance policies, (ii) that exceed the liability limits of such insurance policies and (iii) that are available, were available or which become available to the Company or which are generally available to companies comparable to the Company but which the officers or directors of the Company determine is inadvisable for the Company to purchase, given the cost involved of the 52 54 Company. Such indemnification may be made even though directors and officers would not otherwise be entitled to indemnification under other provisions of the Bylaws or such agreements. EXECUTIVE COMPENSATION The following table sets forth certain summary information concerning the compensation provided by the Company to its President and Chief Executive Officer during the year ended December 31, 1996 (the "Named Executive Officer"). No other executive officer of the Company received combined salary and bonus from the Company that exceeded $100,000 during such year. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1) -------------------- NAME AND PRINCIPAL POSITION SALARY BONUS --------------------------- -------- -------- S. P. Johnson IV............................................ $180,000 -- President and Chief Executive Officer
- --------------- (1) The Named Executive Officer did not receive any annual compensation not properly categorized as salary or bonus, except for certain perquisites and other personal benefits which are not shown because the aggregate amount of such compensation, if any, for the named executive officer during the fiscal year did not exceed the lesser of $50,000 or 10% of total salary and bonus reported for such executive officer. No options were granted to the Named Executive Officer in 1996, and the Named Executive Officer did not exercise any stock options during 1996. The Company has no outstanding stock appreciation rights, shares of restricted stock or long-term incentive plans. See "-- Incentive Plan" below for information regarding the Incentive Plan, which the Company expects to adopt prior to completion of the Offering. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with each of Mr. S. P. Johnson IV and Mr. Frank A. Wojtek which provides for an annual base salary in an amount not less than $180,000 in the case of Mr. Johnson and $150,000 in the case of Mr. Wojtek (but Mr. Wojtek's salary will not begin until he commences full time employment with the Company). Upon completion of this Offering, Mr. Johnson and Mr. Wojtek will also each receive option grants, pursuant to the Incentive Plan, to purchase 100,000 and 40,000 shares of Common Stock, respectively, at the price to the public set forth on the cover page of this Prospectus. See "-- Incentive Plan." The Company and Mr. Kendall Trahan were parties to a two-year employment agreement, pursuant to which Mr. Trahan served as the Company's Vice President of Land at an annual salary of $135,000. The Company recently has entered into a new employment agreement which provides for an annual base salary in an amount not less than $135,000. The new agreement continues and revises a previously granted stock option, such that he has the option to purchase up to 83,295 shares of the Company's Common Stock at an aggregate exercise price of $300,000. These options vest according to a two-year vesting schedule. The Company had previously entered into a three-year employment agreement with Mr. George Canjar, pursuant to which Mr. Canjar served as the Company's Manager of Exploration Development at an annual salary of $126,000. The Company recently has entered into a new employment agreement with Mr. Canjar which provides for an annual base salary in an amount not less than $126,000. The agreement includes a provision that entitles Mr. Canjar to an undivided 0.5% overriding royalty interest, proportionately reduced to the Company's working interest, in all oil, gas and other minerals that may be produced and saved from prospects generated by Mr. Canjar. The 53 55 new agreement continues and revises a previously granted stock option, such that he has the option to purchase up to 138,825 shares of the Company's Common Stock at an aggregate exercise price of $500,000. These options vest according to a two-year vesting schedule. Each of the employment agreements of Mr. Johnson, Mr. Wojtek, Mr. Trahan and Mr. Canjar has an initial three-year term provided that at the end of the second year of such initial term and on every day thereafter, the term of each such employment agreement will automatically be extended for one day, such that the remaining term of the agreement shall never be less than one year. Under each agreement both the Company and the employee may terminate the employee's employment at any time. Upon termination of employment on account of disability or if employment is terminated by the Company for any reason (except under certain limited circumstances defined as "for cause" in the agreement), or if employment is terminated either (x) by the employee subsequent to a change of control (as defined and including certain terminations prior to a change of control if caused by a person involved in precipitating a change of control) or (y) by reason of death during a sixty day period following the elapse of one year after such a change of control ("window period") or with good reason (as defined), under the agreement the employee will generally be entitled to (i) an immediate lump sum cash payment equal to 150% (375% if termination occurs after a change of control) of his annual base salary that would have been payable for the remainder of the term of the applicable agreement discounted at 6%, (ii) continued participation in all the Company's welfare benefit plans and continued life insurance and medical benefits coverage and (iii) the immediate vesting of any stock options or restricted stock previously granted to such employee and outstanding as of the time immediately prior to the date of his termination, or a cash payment in lieu thereof. If employment terminates due to death of the employee and other than in a window period, the Company will pay a sum equal to the amount of the employee's annual base salary for the remaining term of the agreement, reduced by the amount payable under any life insurance policies to the extent that such amounts are attributable to premiums paid by the Company. The salaries in each of these agreements are subject to periodic review and provide for increases consistent with increases in base salary generally awarded to other executives of the Company. Each agreement entitles the employee to participate in all of the Company's incentive, savings, retirement and welfare benefit plans in which other executive officers of the Company participate. The agreements each provide for an annual bonus in an amount comparable to the annual bonus of other Company executives, taking into account the individual's position and responsibilities. 54 56 INCENTIVE PLAN Prior to the completion of the Offering, the Company expects to adopt the Incentive Plan. The objectives of the Incentive Plan are to (i) attract and retain the services of key employees, qualified independent directors and qualified consultants and other independent contractors and (ii) encourage the sense of proprietorship in and stimulate the active interest of those persons in the development and financial success of the Company by making awards ("Awards") designed to provide participants in the Incentive Plan with proprietary interest in the growth and performance of the Company. The Company plans to reserve 1,000,000 shares of Common Stock for use in connection with the Incentive Plan. Persons eligible for Awards are (i) employees holding positions of responsibility with the Company or any of its subsidiaries and whose performance can have a significant effect on the success of the Company, (ii) Nonemployee Directors and (iii) certain nonemployed consultants and other independent contractors providing, or who will provide, services to the Company or any of its subsidiaries. The Compensation Committee of the Company's Board of Directors (the "Committee") will administer the Incentive Plan. With respect to Awards to employees and independent contractors, the Committee has the exclusive power to administer the Incentive Plan, to take all actions specifically contemplated thereby or necessary or appropriate in connection with the administration thereof, to interpret the Incentive Plan and to adopt such rules, regulations and guidelines for carrying out its purposes as the Committee may deem necessary or proper in keeping with the objectives of such plan. With respect to Awards to employees and independent contractors, the Committee may, in its discretion, among other things, extend or accelerate the exercisability of, accelerate the vesting of or eliminate or make less restrictive any restrictions contained in any Award, waive any restriction or other provision of the Incentive Plan or in any Award or otherwise amend or modify any Award in any manner that is either (i) not adverse to that participant holding the Award or (ii) consented to by that participant. The Committee also may delegate to the chief executive officer and other senior officers of the Company its duties under the Incentive Plan. The Board of Directors may amend, modify, suspend or terminate the Incentive Plan for the purpose of addressing any changes in legal requirements or for any other lawful purpose, except that (i) no amendment or alteration that would adversely affect the rights of any participant under any Award previously granted to such participant shall be made without the consent of such participant and (ii) no amendment or alteration shall be effective prior to its approval by the shareholders of the Company to the extent such approval is then required pursuant to Rule 16b-3 in order to preserve the applicability of any exemption provided by such rule to any Award then outstanding (unless the holder of such Award consents) or to the extent shareholder approval is otherwise required by applicable legal requirements. The Board of Directors may make certain adjustments in the event of any subdivision, split or consolidation of outstanding shares of Common Stock, any declaration of a stock dividend payable in shares of Common Stock, any recapitalization or capital reorganization of the Company, any consolidation or merger of the Company with another corporation or entity, any adoption by the Company of any plan of exchange affecting the Common Stock or any distribution to holders of Common Stock of securities or property (other than normal cash dividends). Awards to employees and independent contractors may be in the form of (i) rights to purchase a specified number of shares of Common Stock at a specified price ("Options"), (ii) rights to receive a payment, in cash or Common Stock, equal to the fair market value or other specified value of a number of shares of Common Stock on the rights exercise date over a specified strike price, (iii) grants of restricted or unrestricted Common Stock or units denominated in Common Stock, (iv) grants denominated in cash and (v) grants denominated in cash, Common Stock, units denominated in Common Stock or any other property which are made subject to the attainment of one or more performance goals ("Performance Awards"). An Option may be either an incentive 55 57 stock option ("ISO") that qualifies, or a nonqualified stock option ("NSO") that does not qualify, with the requirements of Section 422 of the Code; provided, that independent contractors cannot be awarded ISOs. The Committee will determine the employees and independent contractors to receive Awards and the terms, conditions and limitations applicable to each such Award, which conditions may, but need not, include continuous service with the Company, achievement of specific business objectives, attainment of specified growth rates, increases in specified indices or other comparable measures of performance. Performance Awards may include more than one performance goal, and a performance goal may be based on one or more business criteria applicable to the grantee, the Company as a whole or one or more of the Company's business units and may include any of the following: increased revenue, net income, stock price, market share, earnings per share, return on equity or assets or decrease in costs. On the date the Offering closes, Options under the Incentive Plan will be granted to approximately 10 employees of the Company to purchase a total of approximately 220,000 shares of Common Stock at an exercise price per share equal to the initial public offering price per share set forth on the cover page of this Prospectus. These awards include options to be granted to Messrs. Johnson and Wojtek to purchase 100,000 and 40,000 shares of Common Stock, respectively. All such options will have a term of ten years and become exercisable in cumulative annual increments of one-third of the total number of shares of Common Stock subject thereto, beginning on the first anniversary of the date of grant. On the date the Offering closes, each of the current Nonemployee Directors, Messrs. Webster, Hamilton and Loyd, automatically will be granted NSOs to purchase 10,000 shares of Common Stock. In addition, on the first business day following the date on which each annual meeting of the Company's shareholders is held, each Nonemployee Director then serving will automatically be granted NSOs to purchase 2,500 shares of Common Stock. Any person who first becomes a Nonemployee Director on or after the date the Offering closes automatically will be granted, on the date of his or her election, NSOs to purchase 10,000 shares of Common Stock. Each NSO granted to Nonemployee Directors will (i) have a ten-year term, (ii) have an exercise price per share equal to the fair market value of a Common Stock share on the date of grant (the initial public offering price in the case of NSOs granted on the closing of the Offering) and (iii) become exercisable in cumulative annual increments of one-third of the total number of shares of Common Stock subject thereto, beginning on the first anniversary of the date of grant. If a Nonemployee Director resigns from the Board without the consent of a majority of the other directors, such director's NSOs may be exercised only to the extent they were exercisable on the resignation date. The foregoing description summarizes the principal terms and conditions of the Incentive Plan, does not purport to be complete and is qualified in its entirety by reference to the Incentive Plan, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION In June 1997, the Company established a Compensation Committee. In the past, matters with respect to the compensation of executive officers of the Company were determined by the nonemployee members of the Board of Directors, as a whole. 56 58 CERTAIN TRANSACTIONS THE COMBINATION TRANSACTIONS The Company currently conducts its operations through a number of affiliated entities that will be combined in the Combination Transactions. Carrizo conducts oil and natural gas operations directly with industry partners and through certain affiliated partnerships as described below. Prior to completion of the Offering, the shareholders of the Company are Steven A. Webster, S.P. Johnson IV, Frank A. Wojtek, Douglas A.P. Hamilton and Paul B. Loyd, Jr. (the "Founders"), each of whom is an officer and/or a director of the Company, and DAPHAM Partnership L.P., the limited partner of which is a charitable remainder trust of which the beneficiaries include Mr. Hamilton and his wife and children. Carrizo Production, Inc. is a corporation that is owned by the Founders. The officers and directors of Carrizo Production, Inc. also serve in the same capacity for Carrizo. Carrizo Production, Inc. is the general partner of and holds a 1.42% before payout/28.82% after payout interest in Encinitas Partners Ltd. The remaining partnership interests in Encinitas Partners Ltd. are held by limited partners, including the Founders. Carrizo holds a 50% general partner interest in La Rosa Partners Ltd. The remaining 50% interest in La Rosa Partners Ltd. is held by the Founders (other than Mr. Wojtek) as limited partners. Carrizo is the general partner and holds a 13.33% before payout/31.67% after payout interest in Carrizo Partners Ltd.; the remaining partnership interests in Carrizo Partners Ltd. are held by limited partner investors that include S.P. Johnson IV who as a special limited partner is entitled to a 0.001% prepayout and 25% after payout interest. Carrizo owns a 50% general partner interest in Placedo Partners Ltd., and Carrizo Partners Ltd. holds the remaining 50% limited partner interest in Placedo Partners Ltd. The Combination Transactions will include the following: (i) Carrizo Production, Inc. will be merged into Carrizo (the "Carrizo Production Merger"), and the outstanding shares of capital stock of Carrizo Production, Inc. will be converted into an aggregate of 343,000 shares of Common Stock; (ii) Carrizo will acquire Encinitas Partners Ltd. in two steps: (a) Carrizo will acquire the Founder's limited partner interests in Encinitas Partners Ltd. for an aggregate consideration of 468,533 shares of Common Stock (the "Founder's Purchase Transaction") and (b) Encinitas Partners Ltd. will be merged into Carrizo (the "Encinitas Merger"), and the outstanding partnership interests in Encinitas Partners Ltd. will be converted into an aggregate of 860,699 shares of Common Stock; (iii) La Rosa Partners Ltd. will be merged into Carrizo (the "La Rosa Merger"), and the outstanding partnership interests in La Rosa Partners Ltd. will be converted into an aggregate of 48,750 shares of Common Stock; and (iv) Carrizo Partners Ltd. will be merged into Carrizo (the "Carrizo Partners Merger"), and the outstanding partnership interests in Carrizo Partners Ltd. will be converted into an aggregate of 569,068 shares of Common Stock. As a result of the Carrizo Partners Merger, Carrizo will own all of the partnership interests in Placedo Partners Ltd. Each of the Combination Transactions will close concurrently with the closing of the Offering. An aggregate of 2,290,000 shares of Common Stock will be issued in connection with the Combination Transactions. Mr. Webster will receive 77,175 shares of Common Stock in the Carrizo Production Merger, 132,721 shares of Common Stock in the Founder's Purchase Transaction and 14,610 shares of Common Stock in the La Rosa Merger, and Cerrito Partners, of which Mr. Webster is a general partner, will receive 31,126 shares of Common Stock in the Encinitas Merger. Mr. Johnson will receive 34,300 shares of Common Stock in the Carrizo Production Merger, 46,075 shares of Common Stock in the Founder's Purchase Transaction, 4,870 shares of Common Stock in the La Rosa Merger and 176,841 shares of Common Stock in the Carrizo Partners Merger. Mr. Wojtek will receive 77,175 shares of Common Stock in the Carrizo Production Merger and 24,296 shares of Common Stock in the Founder's Purchase Transaction. Mr. Hamilton will receive 77,175 shares of Common Stock in the Carrizo Production Merger, 132,721 shares of Common Stock in the Founder's Purchase Transaction and 14,610 shares of Common Stock in the La Rosa Merger. Mr. Loyd will receive 77,175 shares of Common Stock in the Carrizo Production Merger, 57 59 132,721 shares of Common Stock in the Founder's Purchase Transaction and 14,610 shares of Common Stock in the La Rosa Merger. MASTER TECHNICAL SERVICES AGREEMENT In August 1996, the Company entered into the Master Technical Services Agreement (the "MTS Agreement") with Reading & Bates Development Co. ("R&B Development"), which is a subsidiary of Reading & Bates. Paul B. Loyd, Jr., a director of the Company, is the Chairman of the Board, Chief Executive Officer and President and a director of Reading & Bates. Under the MTS Agreement, the Company provides certain engineering and technical services to R&B Development in connection with R&B Development's technical service, procurement and construction projects in offshore drilling and floating production, and the Company is paid an amount generally equal to the salaries of its personnel that provide such services, pro rata based on the amount of time that is spent providing such services. The Company was paid $117,726 for services provided during 1996 under the MTS Agreement, has continued to perform services under the contract in 1997 and expects to continue to perform services under the contract following the Offering. The MTS Agreement may generally be terminated by either party upon five days prior written notice to the other party. AMOUNTS OWED BY THE COMPANY TO CERTAIN OFFICERS AND DIRECTORS Between December 1993 and December 1996, Carrizo issued promissory notes to certain officers and directors of the Company, in consideration of funds advanced to Carrizo by such officers and directors to assist Carrizo in its operations. Each of such promissory notes is payable on demand and bears interest equal to the Texas Commerce Bank, N.A. prime rate. The outstanding aggregate balance, including accrued interest, of the notes payable to Paul B. Loyd, Jr. was, as of December 31, 1994, 1995 and 1996, respectively, $66,525, $370,601 and $775,553. The outstanding aggregate balance, including accrued interest, of the notes payable to Steven A. Webster was, as of December 31, 1994, 1995 and 1996, respectively, $63,125, $370,195 and $772,475. The outstanding aggregate balance, including accrued interest, of the notes payable to Frank A. Wojtek was, as of December 31, 1994, 1995 and 1996, respectively, $66,524, $345,379 and $711,403. The outstanding aggregate balance, including accrued interest, of the notes payable to Douglas A.P. Hamilton was, as of December 31, 1994, 1995 and 1996, respectively, $72,658, $370,608 and $774,701. The outstanding aggregate balance, including accrued interest, of the notes payable to S.P. Johnson IV was, as of December 31, 1994 and 1995, respectively, $26,555 and $14,783. The Company borrowed $1.8 million from Douglas A. P. Hamilton on May 31, 1997. The Company used the proceeds of this loan to repay a portion of the indebtedness owed to Messrs. Loyd, Webster and Wojtek. The Company made a payment of $600,000 to each of Messrs. Loyd and Wojtek on May 31, 1997, and a payment of $600,000 to Mr. Webster on June 3, 1997. As of May 31, 1997, the total principal owed on such promissory notes was $115,916 to Paul B. Loyd, Jr.; $715,916 to Steven A. Webster ($115,916 after the June 3, 1997 payment); $59,250 to Frank A. Wojtek and $2,515,916 to Douglas A.P. Hamilton. As of May 31, 1997, the remaining amounts due on such promissory notes, including accrued interest, are as follows: $200,037 to Paul B. Loyd, Jr.; $797,237 to Steven A. Webster ($197,237 after the June 3, 1997 payment); $133,927 to Frank A. Wojtek and $2,600,302 to Douglas A.P. Hamilton. In addition, between February 1997 and March 1997, La Rosa Partners, Ltd. issued promissory notes in favor of certain officers and directors of the Company, in consideration of funds advanced to La Rosa Partners, Ltd. by such officers and directors to assist La Rosa Partners, Ltd. in its operations. Each of such promissory notes is payable on demand and bears interest equal to the Texas Commerce Bank, N.A. prime rate. As of May 31, 1997, the total principal owed on such promissory notes is $30,000 to Paul B. Loyd, Jr.; $30,000 to Steven A. Webster; $15,000 to Frank A. Wojtek and $30,000 to Douglas A. P. Hamilton. As of May 31, 1997, the remaining amounts due on 58 60 such promissory notes, including accrued interest, are as follows: $30,624 to Paul B. Loyd, Jr.; $30,692 to Steven A. Webster; $15,309 to Frank A. Wojtek and $30,671 to Douglas A.P. Hamilton. The Company intends to repay Carrizo's and La Rosa Partners Ltd.'s indebtedness to such officers and directors of the Company evidenced by the above-referenced promissory notes from the proceeds of the Offering. The Company does not intend to incur any further indebtedness to, or make any loans to, any of its executive officers, directors or other affiliates following the completion of the Offering. FINANCIAL/ACCOUNTING SERVICES AGREEMENT In March 1994, the Company entered into the Financial/Accounting Services Agreement (the "Services Agreement"), effective as of December 1, 1993, with Loyd & Associates, Inc. ("Loyd & Associates"), a private financial consulting and investment banking firm. Paul B. Loyd, Jr. serves as President and owns 92.5% of the stock of Loyd & Associates, and Frank A. Wojtek serves as Vice President and Secretary/Treasurer and owns 7.5% of the stock of Loyd & Associates. Under the Services Agreement, Loyd & Associates provides, on an as-needed basis and at market rates, financial consulting, accounting and administrative services to the Company, Carrizo Partners Ltd. and Placedo Partners Ltd. The Services Agreement also provides for reimbursement to Loyd & Associates of certain expenses. Total payments for services rendered were $43,500 in 1994, $60,000 in 1995 and $60,000 in 1996. The Services Agreement will terminate at the closing of the Offering. In addition to serving as Vice President and Secretary/Treasurer of Loyd & Associates, Mr. Wojtek serves as Assistant to the Chairman of the Board of Reading & Bates. Following the Offering, Mr. Wojtek will serve full time as the Company's Chief Financial Officer, Vice President and Secretary. AGREEMENTS WITH THE COMPANY'S CURRENT SHAREHOLDERS From the date of its formation until shortly prior to the closing of the Offering, Carrizo Production, Inc. will be, and from the date of its formation until May 16, 1997 Carrizo was, an S corporation for federal income tax purposes. The Company has entered into tax indemnification agreements with the Founders that provide for, among other things, the indemnification of the Founders for any losses or liabilities with respect to any additional taxes (including interest, penalties and legal fees) resulting from Carrizo's and Carrizo Production, Inc.'s operations during the period in which each was an S Corporation. The Company also has entered into a registration rights agreement with the current shareholders of the Company as described under "Shares Eligible for Future Sale." 59 61 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information with respect to beneficial ownership of the Common Stock both after giving effect to the Combination Transactions but before giving effect to the Offering and after giving effect to the Combination Transactions and the Offering by: (i) all persons who will be the beneficial owner of 5% or more of the outstanding Common Stock; (ii) each director; (iii) each executive officer of the Company; and (iv) all officers and directors of the Company as a group, assuming in each case, the issuance of an aggregate of 2,290,000 shares of Common Stock to all parties to the Combination Transactions.
COMMON STOCK BENEFICIALLY PERCENT OF COMMON OWNED STOCK BENEFICIALLY FOLLOWING THE OWNED FOLLOWING THE COMBINATION COMBINATION TRANSACTIONS TRANSACTIONS ------------- --------------------- PRIOR TO NUMBER OF THE AFTER THE NAME(1) SHARES OFFERING OFFERING ------- ------------- -------- --------- S.P. Johnson IV(2)......................................... 783,085 10.4% 7.8% Frank A. Wojtek(3)......................................... 1,273,721 17.0% 12.7% George Canjar(4)........................................... 83,295 1.0% * Ken Trahan(5).............................................. 16,659 * * Steven A. Webster(6)....................................... 1,427,882 19.0% 14.3% Douglas A.P. Hamilton(7)................................... 1,000,796 13.3% 10.0% Paul B. Loyd, Jr.(8)....................................... 1,396,756 18.6% 14.0% All directors and executive officers as a group (7 persons)(9).............................................. 5,982,194 78.7% 59.2% Kenneth Huff(10)........................................... 441,695 5.9% 4.4%
- --------------- * Less than one percent. (1) Except as otherwise noted and pursuant to applicable community property laws, each shareholder has sole voting and investment power with respect to the shares beneficially owned. The business address of each director and executive officer is c/o Carrizo Oil & Gas, Inc., 14811 St. Mary's Lane, Suite 148, Houston, Texas 77079. (2) Shares shown represent (i) 521,000 shares of Common Stock currently owned, (ii) 34,300 shares of Common Stock to be acquired through the Carrizo Production Merger, (iii) 46,075 shares of Common Stock to be acquired through the Founder's Purchase Transaction, (iv) 4,870 shares of Common Stock to be acquired through the La Rosa Merger and (v) 176,840 shares of Common Stock to be acquired through the Carrizo Partners Merger. (3) Shares shown represent (i) 1,172,250 shares of Common Stock currently owned, (ii) 77,175 shares of Common Stock to be acquired through the Carrizo Production Merger and (iii) 24,296 shares of Common Stock to be acquired through the Founder's Purchase Transaction. (4) Shares shown represent 83,295 shares of Common Stock to be acquired pursuant to stock options that are immediately exercisable or exercisable within 60 days of this Prospectus. (5) Shares shown represent 16,659 shares of Common Stock to be acquired pursuant to stock options that are immediately exercisable. (6) Shares shown represent (i) 1,172,250 shares of Common Stock currently owned, (ii) 77,175 shares of Common Stock to be acquired through the Carrizo Production Merger, (iii) 132,721 shares of Common Stock to be acquired through the Founder's Purchase Transaction by Mr. Webster and 31,126 shares of Common Stock to be acquired through the Encinitas Merger by Cerrito Partners, of which Mr. Webster is a general partner and shares voting and dispositive power with the other general partners, and (iv) 14,610 shares of Common Stock 60 62 to be acquired through the La Rosa Merger. Mr. Webster may be deemed a beneficial owner of the shares of Common Stock to be acquired through the Encinitas Merger by Cerrito Partners. Mr. Webster disclaims such beneficial ownership. (7) Shares shown represent (i) 776,290 shares of Common Stock currently owned by Mr. Hamilton, (ii) 77,175 shares of Common Stock to be acquired through the Carrizo Production Merger, (iii) 132,721 shares of Common Stock to be acquired through the Founder's Purchase Transaction and (iv) 14,610 shares of Common Stock to be acquired through the La Rosa Merger. (8) Shares shown represent (i) 1,172,250 shares of Common Stock currently owned, (ii) 77,175 shares of Common Stock to be acquired through the Carrizo Production Merger, (iii) 132,721 shares of Common Stock to be acquired through the Founder's Purchase Transaction and (iv) 14,610 shares of Common Stock to be acquired through the La Rosa Merger. (9) Shares shown include 99,954 shares of Common Stock to be acquired pursuant to stock options that are immediately exercisable or exercisable within 60 days of this Prospectus. (10) Shares shown represent (i) 395,960 shares of Common Stock currently owned by DAPHAM Partnership L.P., of which Mr. Huff is the general partner and a charitable remainder trust, of which Mr. Hamilton and his wife and children are among the beneficiaries, is the limited partner, (ii) 15,564 shares of Common Stock to be acquired through the Encinitas Merger and (iii) 30,171 shares of Common Stock to be acquired through the Carrizo Partners Merger. The business address of Mr. Huff is 9256 N. Pelham Parkway, Milwaukee, Wisconsin 53217. 61 63 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 40,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. Following consummation of the Offering and the Combination Transactions, there will be approximately 10,000,000 shares of Common Stock outstanding (assuming the over-allotment option is not exercised and the issuance of approximately 2,290,000 shares of Common Stock in the Combination Transactions), and no shares of Preferred Stock will be outstanding. The following description of certain provisions of the Company's Amended and Restated Articles of Incorporation (the "Articles of Incorporation") and the Company's Amended and Restated Bylaws (the "Bylaws") are necessarily general and do not purport to be complete and are qualified in their entirety by reference to the Articles of Incorporation and Bylaws, which are included as exhibits to the Registration Statement of which this Prospectus is a part. The Company was organized in September 1993 and is a Texas corporation. COMMON STOCK Holders of Common Stock are entitled to one vote per share with respect to all matters required by law to be submitted to shareholders of the Company. Holders of Common Stock have no preemptive rights to purchase or subscribe for securities of the Company, and the Common Stock is not convertible or subject to redemption by the Company. Subject to the rights of the holders of any class of capital stock of the Company having any preference or priority over the Common Stock, none of which will be outstanding upon completion of the Offering, the holders of the Common Stock are entitled to dividends in such amounts as may be declared by the Board of Directors of the Company from time to time out of funds legally available for such payments and, in the event of liquidation, dissolution or winding up of the Company, to share ratably in any assets of the Company remaining after payment in full of all creditors and provisions for any liquidation preferences on any outstanding stock ranking prior to the Common Stock. American Securities Transfer & Trust, Inc. is the registrar and transfer agent for the Common Stock. PREFERRED STOCK The Board of Directors, without further action by the shareholders, is authorized to issue up to 10 million shares of Preferred Stock in one or more series and to fix and determine as to any series all the relative rights and preferences of shares in such series, including, without limitation, preferences, limitations or relative rights with respect to such series. The Company has no present intention to issue any Preferred Stock, but may determine to do so in the future. The issuance of shares of Preferred Stock, or the issuance of rights to purchase such shares, could adversely affect the voting power of the Common Stock, discourage an unsolicited acquisition proposal or make it more difficult for a third party to gain control of the Company. For instance, the issuance of a series of Preferred Stock might impede a business combination by including class voting rights that would enable the holder to block such a transaction, or facilitate a business combination by including voting rights that would provide a required percentage vote of the shareholders. In addition, under certain circumstances, the issuance of Preferred Stock could adversely affect the voting power of the holders of the Common Stock. Although the Board of Directors is required to make any determination to issue such stock based on its judgment as to the best interests of the shareholders of the Company, the Board of Directors could act in a manner that would discourage an acquisition attempt or other transaction that some, or a majority, of the shareholders might believe to be in their best interests or in which shareholders might receive a premium for their stock over the then market price of such stock. The Board of Directors does not at 62 64 present intend to seek shareholder approval prior to any issuance of currently authorized stock, unless otherwise required by law or the rules of the Nasdaq National Market. SPECIAL MEETINGS Special Meetings of the shareholders of the Company may be called by the chairman of the board, the president, the Board of Directors or by shareholders holding not less than 50% of the outstanding voting stock of the Company. VOTING Holders of Common Stock are entitled to cast one vote per share on matters submitted to a vote of shareholders and do not have cumulative voting rights. Each director will be elected annually. Because the Common Stock does not have cumulative voting rights, the holders of more than 50% of the shares may, if they choose to do so, elect all of the directors and, in that event, the holders of the remaining shares will not be able to elect any directors. See "Risk Factors -- Control by Principal Shareholders." Subject to any additional voting rights that may be granted to holders of future classes or series of stock, the Company's Articles of Incorporation and/or Texas law requires the affirmative vote of holders of 66 2/3% of the outstanding shares entitled to vote thereon to approve any merger, consolidation or share exchange, any disposition of the assets of the Company or any dissolution of the Company and requires the affirmative vote of holders of a majority of the outstanding shares entitled to vote thereon to approve any amendment to the Articles of Incorporation or any other matter for which a shareholder vote is required by the Texas Business Corporation Act. If any class or series of shares is entitled to vote as a class with regard to the above-described events, the vote required will be the affirmative vote of the holders of a majority of the outstanding shares within each class or series of shares entitled to vote thereon as a class and at least a majority of the outstanding shares of capital stock otherwise entitled to vote thereon. Approval of any other matter not described above that is submitted to the shareholders requires the affirmative vote of the holders of a majority of the shares of Common Stock represented at a meeting at which a quorum is present or represented. The holders of a majority of the shares entitled to vote will constitute a quorum at meetings of shareholders. The Company's Bylaws provide that shareholders who wish to nominate directors or to bring business before a shareholders' meeting must notify the Company and provide certain pertinent information at least 80 days before the meeting date (or within ten days after public announcement pursuant to the Bylaws of the meeting date, if the meeting date has not been publicly announced at least 90 days in advance). The Company's Articles of Incorporation and Bylaws provide that following the Offering no director may be removed from office, except for cause and upon the affirmative vote of the holders of a majority of the outstanding shares of all capital stock of the Company entitled to vote generally in the election of the Company's directors. The following constitute "cause": (i) such director has been convicted, or is granted immunity to testify where another has been convicted, of a felony; (ii) such director has been found to be grossly negligent or guilty of willful misconduct in the performance of duties to the Company by a court or by the affirmative vote of a majority of all other directors; (iii) such director is adjudicated mentally incompetent; or (iv) such director has been found by a court or by the affirmative vote of a majority of all other directors to have breached his duty of loyalty to the Company or its shareholders or to have engaged in a transaction with the Company from which such director derived an improper personal benefit. 63 65 LIMITATION OF DIRECTOR LIABILITY AND INDEMNIFICATION ARRANGEMENTS The Articles of Incorporation of the Company contain a provision that limits the liability of the Company's directors as permitted by the Texas Business Corporation Act. The provision eliminates the personal liability of a director to the Company and its shareholders for monetary damages for an act or omission in the director's capacity as a director. The provision does not change the liability of a director for breach of his duty of loyalty to the Company or to shareholders, acts or omissions not in good faith that involve intentional misconduct or a knowing violation of law, an act or omission for which the liability of a director is expressly provided for by an applicable statute, or in respect of any transaction from which a director received an improper personal benefit. Pursuant to the Articles of Incorporation, the liability of directors will be further limited or eliminated without action by shareholders if Texas law is amended to further limit or eliminate the personal liability of directors. The Company's Bylaws provide for the indemnification of its officers and directors, and the advancement to them of expenses in connection with proceedings and claims, to the fullest extent permitted by the Texas Business Corporation Act. The Company has also entered into indemnification agreements with each of its directors and certain of its officers that contractually provide for indemnification and expense advancement and include related provisions meant to facilitate the indemnitee's receipt of such benefits. In addition, the Company may purchase directors' and officers' liability insurance policies for its directors and officers in the future. The Bylaws and such agreements with directors and officers provide for indemnification for amounts (i) in respect of the deductibles for such insurance policies, (ii) that exceed the liability limits of such insurance policies and (iii) that are available, were available or become available to the Company or are generally available to companies comparable to the Company but which the officers or directors of the Company determine is inadvisable for the Company to purchase, given the cost involved of the Company. Such indemnification may be made even though directors and officers would not otherwise be entitled to indemnification under other provisions of the Bylaws or such agreements. SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of the Combination Transactions and the Offering, approximately 10,000,000 shares of Common Stock will be outstanding. The shares of Common Stock sold in the Offering will be registered under the Securities Act and will be freely tradeable without restriction or further registration under the Securities Act, except for certain manner of sale, volume limitations and other restrictions with respect to any shares purchased in the Offering by an affiliate of the Company (a "Company Affiliate"), which will be subject to the resale limitations of Rule 144 (not including the holding period requirement) under the Securities Act. Under Rule 144 under the Securities Act, a person is an affiliate of an entity if such person directly or indirectly controls or is controlled by or is under common control with such entity and may include certain officers and directors, principal shareholders and certain other shareholders with special relationships. All of the remaining 7,500,000 shares that will be outstanding following the Offering will be owned by officers and directors of the Company and other participants in the Combination Transactions and will constitute "restricted securities" within the meaning of Rule 144. Such shares may not be resold in a public distribution except pursuant to an effective registration statement under the Securities Act or an applicable exemption from registration, including pursuant to Rule 144. This Prospectus may not be used in connection with any resale of shares of Common Stock acquired in the Offering by Company Affiliates or in the Combination Transactions. In general, under Rule 144 as currently in effect, if a minimum of one year has elapsed since the later of the date of acquisition of the restricted securities from the issuer or from an affiliate of the issuer, a person (or persons whose shares of Common Stock are aggregated), including persons who may be deemed "affiliates" of the Company, would be entitled to sell within any three-month period a number of shares of Common Stock that does not exceed the greater of (i) 1% of the then-outstanding shares of Common Stock (i.e., approximately 100,000 shares immediately after 64 66 consummation of the Offering) and (ii) the average weekly trading volume during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain provisions as to the manner of sale (which provision is proposed to be eliminated), notice requirements and the availability of current public information about the Company. In addition, under Rule 144(k), if a period of at least two years has elapsed since the later of the date restricted securities were acquired from the Company or the date they were acquired from an affiliate of the Company, a shareholder who is not an affiliate of the Company at the time of sale and who has not been an affiliate for at least three months prior to the sale would be entitled to sell shares of Common Stock in the public market immediately without compliance with the foregoing requirements under Rule 144. Rule 144 does not require the same person to have held the securities for the applicable periods. The foregoing summary of Rule 144 is not intended to be a complete description thereof. The Company currently has outstanding options to purchase 222,120 shares of Common Stock (99,954 of which are vested) and will grant options to purchase 220,000 shares (none of which will be vested) as of the closing of the Offering under the Incentive Plan. Such shares for which the vested portion of outstanding options may be exercised may generally be sold in reliance on the resale provisions of Rule 701. In general, any employee or consultant to the Company who purchased shares pursuant to a written compensatory plan or contract entered into prior to the Company's initial public offering is entitled to rely on the resale provisions of Rule 701, which permit non-affiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144, and permit affiliates to sell their Rule 701 shares without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the date of this Prospectus. The holders of vested outstanding options to purchase 99,954 shares could exercise these options and could then sell such shares in compliance with Rule 701. Holders of all options granted prior to the Offering have agreed not to sell the shares of Common Stock for a period of 180 days following the date of the final prospectus for the Offering. The Company intends to file a registration statement on Form S-8 under the Securities Act to register the shares of Common Stock reserved or to be available for issuance pursuant to the Long-Term Incentive Plan. Shares of Common Stock issued pursuant to such plan generally will be available for sale in the open market by holders who are not Company Affiliates and, subject to the volume and other limitations of Rule 144, by holders who are Company Affiliates. The Company, its executive officers, its directors and its current shareholders have agreed not to offer for sale, sell, or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock for a period of 180 days after the date of this Prospectus, without the prior written consent of the representatives of the Underwriters, subject to certain exceptions. See "Underwriting." Prior to the Offering, there has been no public market for the Common Stock, and no prediction can be made of the effect, if any, that sales of Common Stock or the availability of shares for sale will have on the market price prevailing from time to time. Following the Offering, sales of substantial amounts of Common Stock in the public market or otherwise, or the perception that such sales could occur, could adversely affect the prevailing market price for the Common Stock. REGISTRATION RIGHTS OF CURRENT SHAREHOLDERS The Registration Rights Agreement dated as of June 6, 1997 among the Company and its current shareholders provides registration rights with respect to the Common Stock currently outstanding as well as shares issued in the Combination Transactions or otherwise purchased from the Company (the "Registrable Securities"). Shareholders owning not less than 51% of the then- outstanding shares of Registrable Securities may demand that the Company effect a registration under the Securities Act for the sale of not less than 5% of the shares of Registrable Securities then 65 67 outstanding. The Company's current shareholders also have limited rights to require the Company to include their shares of Common Stock in connection with registered offerings by the Company. All of the Founders have agreed to waive these registration rights in connection with the Offering. The Company may generally be required to effect three demand registrations (provided that no such registration may occur six months after the closing of the Offering) and three additional demand registrations for certain offerings registered on SEC Form S-3, subject to certain conditions and limitations. The registration rights will terminate as to any holder of Registrable Securities at the later of (i) one year after the closing of the Offering or (ii) at such time as such holder may sell under Rule 144 in a three-month period all Registrable Securities then held by such holder. The Company's current shareholders may not exercise their registration rights with respect to any shares received in the Combination Transaction for a period of at least one year following the effective date of the registration statement of which this Prospectus is a part. Registration of shares under the Securities Act would result in such shares becoming freely tradeable without restriction under the Securities Act (except for shares purchased by affiliates of the Company) immediately upon the effectiveness of such registration. 66 68 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement, the Underwriters named below, for whom Schroder Wertheim & Co. Incorporated and Jefferies & Company, Inc. are acting as Representatives (the "Representatives"), have severally agreed to purchase from the Company an aggregate of 2,500,000 shares of Common Stock. The number of shares of Common Stock that each Underwriter has agreed to purchase is set forth opposite its name below:
NUMBER OF UNDERWRITERS SHARES ------------ --------- Schroder Wertheim & Co. Incorporated........................ Jefferies & Company, Inc.................................... --------- Total............................................. 2,500,000 =========
The Underwriting Agreement provides that the Underwriters' obligation to pay for and accept delivery of the shares of Common Stock offered hereby is subject to certain conditions precedent and that the Underwriters will be obligated to purchase all such shares, excluding shares covered by the over-allotment option, if any are purchased. The Underwriters have informed the Company that no sales of Common Stock will be confirmed to discretionary accounts. The Company has been advised by the Underwriters that they propose initially to offer the Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price, less a concession not in excess of $ per share. The Underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other brokers and dealers. After the Offering, the public offering price, the concession and reallowances to dealers and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 375,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share to be paid by the Underwriters for the other shares of Common Stock offered hereby. If the Underwriters purchase any such additional shares pursuant to the over-allotment option, each Underwriter will be committed, subject to certain conditions, to purchase a number of the additional shares of Common Stock proportionate to such Underwriter's initial commitment. The Company, its directors and executive officers, and each of its current shareholders have agreed with the Representatives, for a period of 180 days after the date of this Prospectus, not to issue, sell, offer to sell, grant any options for the sale of, or otherwise dispose of any shares of Common Stock or any rights to purchase shares of Common Stock (other than stock issued or options granted pursuant to the Company's stock incentive plans), without the prior written consent of Schroder Wertheim & Co. Incorporated. See "Shares Eligible for Future Sale." The Company has agreed to indemnify the Underwriters against certain liabilities that they may incur in connection with the sale of the Common Stock, including liabilities arising under the Securities Act, and to contribute to payments that the Underwriters may be required to make with respect thereto. Prior to this Offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock will be determined by negotiation between the Company and 67 69 the Representatives. Among other factors considered in determining the public offering price will be prevailing market and economic conditions, revenues and earnings of the Company, the state of the Company's business operations, an assessment of the Company's management and consideration of the above factors in relation to market valuation of companies in related businesses and other factors deemed relevant. There can be no assurance, however, that the prices at which the Common Stock will sell in the public market after the Offering will not be lower than the public offering price. In order to facilitate the Offering of the Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may overallot in connection with the Offering, creating a short position in the Common Stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the Common Stock in the Offering, if the syndicate repurchases previously distributed Common Stock in transactions to cover syndicate short positions, in stabilization or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Company intends to file an application for quotation of its Common Stock on the Nasdaq National Market under the symbol "CZOG." LEGAL MATTERS Certain legal matters in connection with the shares of Common Stock offered hereby are being passed upon for the Company by Baker & Botts, L.L.P., Houston, Texas, and for the Underwriters by Vinson & Elkins L.L.P., Houston, Texas. EXPERTS The audited combined financial statements included in this Prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated by their report with respect thereto, and is included herein in reliance upon the authority of said firm as experts in giving said report. The letter reports of Ryder Scott and Fairchild included as Annex A to this Prospectus and certain information with respect to the Company's oil and natural gas reserves derived therefrom have been included herein in reliance upon such firms as experts with respect to such matters. 68 70 ADDITIONAL INFORMATION The Company has not previously been subject to the reporting requirements of the Exchange Act. The Company has filed a Registration Statement under the Securities Act with the Commission with respect to the Offering. This Prospectus, filed as a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement or the exhibits and schedules thereto in accordance with the rules and regulations of the Commission, and reference is hereby made to such omitted information. Statements made in this Prospectus concerning any document filed as an exhibit to the Registration Statement are not necessarily complete, and in each instance reference is made to such exhibit for a complete statement of its provisions. The Registration Statement and the exhibits and schedules thereto may be inspected, without charge, at the public reference facilities of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and its regional offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and at 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of all or any portion of the Registration Statement can be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Commission maintains an Internet web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission (http://www.sec.gov). 69 71 GLOSSARY OF CERTAIN INDUSTRY TERMS The definitions set forth below shall apply to the indicated terms as used in this Prospectus. All volumes of natural gas referred to herein are stated at the legal pressure base of the state or area where the reserves exist and at 60 degrees Fahrenheit and in most instances are rounded to the nearest major multiple. After payout. With respect to an oil or gas interest in a property, refers to the time period after which the costs to drill and equip a well have been recovered. Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons. Bbls/d. Stock tank barrels per day. Bcf. Billion cubic feet. Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. Before payout. With respect to an oil or gas interest in a property, refers to the time period before which the costs to drill and equip a well have been recovered. Btu or British Thermal Unit. The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit. Completion. The installation of permanent equipment for the production of oil or gas or, in the case of a dry hole, the reporting of abandonment to the appropriate agency. Developed acreage. The number of acres which are allocated or assignable to producing wells or wells capable of production. Development well. A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive. Dry hole or well. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. Exploratory well. A well drilled to find and produce oil or gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir or to extend a known reservoir. Farm-in or farm-out. An agreement whereunder the owner of a working interest in an oil and natural gas lease assigns the working interest or a portion thereof to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a "farm-in" while the interest transferred by the assignor is a "farm-out." Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. Finding costs. Costs associated with acquiring and developing proved oil and natural gas reserves which are capitalized by the Company pursuant to generally accepted accounting principles, including all costs involved in acquiring acreage, geological and geophysical work and the cost of drilling and completing wells. Gross acres or gross wells. The total acres or wells, as the case may be, in which a working interest is owned. MBbls. One thousand barrels of crude oil or other liquid hydrocarbons. 70 72 MBbls/d. One thousand barrels of crude oil or other liquid hydrocarbons per day. Mcf. One thousand cubic feet. Mcf/d. One thousand cubic feet per day. Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. MMBbls. One million barrels of crude oil or other liquid hydrocarbons. MMBtu. One million British Thermal Units. MMcf. One million cubic feet. MMcf/d. One million cubic feet per day. MMcfe. One million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids, which approximates the relative energy content of crude oil, condensate and natural gas liquids as compared to natural gas. Prices have historically been higher or substantially higher for crude oil than natural gas on an energy equivalent basis. Net acres or net wells. The sum of the fractional working interests owned in gross acres or gross wells. Normally pressured reservoirs. Reservoirs with a formation-fluid pressure equivalent to 0.465 psi per foot of depth from the surface. For example, if the formation pressure is 4,650 psi at 10,000 feet, then the pressure is considered to be normal. Over-pressured reservoirs. Reservoirs subject to abnormally high pressure as a result of certain types of subsurface formations. Petrophysical study. Study of rock and fluid properties based on well log and core analysis. Present value. When used with respect to oil and natural gas reserves, the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs in effect as of the date indicated, without giving effect to nonproperty-related expenses such as general and administrative expenses, debt service and future income tax expense or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%. Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. Proved developed nonproducing reserves. Proved developed reserves expected to be recovered from zones behind casing in existing wells. Proved developed producing reserves. Proved developed reserves that are expected to be recovered from completion intervals currently open in existing wells and able to produce to market. Proved developed reserves. Proved reserves that can be expected to be recovered from existing wells with existing equipment and operating methods. Proved reserves. The estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved undeveloped location. A site on which a development well can be drilled consistent with spacing rules for purposes of recovering proved undeveloped reserves. 71 73 Proved undeveloped reserves. Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. PV-10 Value. The present value of estimated future revenues to be generated from the production of proved reserves calculated in accordance with Commission guidelines, net of estimated production and future development costs, using prices and costs as of the date of estimation without future escalation, without giving effect to non-property related expenses such as general and administrative expenses, debt service, future income tax expense and depreciation, depletion and amortization, and discounted using an annual discount rate of 10%. Recompletion. The completion for production of an existing well bore in another formation from that in which the well has been previously completed. Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs. Royalty interest. An interest in an oil and natural gas property entitling the owner to a share of oil or gas production free of costs of production. 3-D seismic data. Three-dimensional pictures of the subsurface created by collecting and measuring the intensity and timing of sound waves transmitted into the earth as they reflect back to the surface. Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves. Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production. Workover. Operations on a producing well to restore or increase production. 72 74 CARRIZO OIL & GAS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Carrizo Oil & Gas, Inc., and Affiliated Entities -- Report of Independent Public Accountants.................. F-2 Combined Balance Sheets, December 31, 1995 and 1996, and March 31, 1997......................................... F-3 Combined Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996, and the Three Months Ended March 31, 1996 and 1997.......................... F-4 Combined Statements of Equity for the Years Ended December 31, 1994, 1995 and 1996, and the Three Months Ended March 31, 1997......................................... F-5 Combined Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996, and the Three Months Ended March 31, 1996 and 1997.......................... F-6 Notes to Combined Financial Statements.................... F-7
F-1 75 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Carrizo Oil & Gas, Inc.: We have audited the accompanying combined balance sheets of Carrizo Oil & Gas, Inc. (a Texas corporation), and affiliated entities identified in Note 1 (collectively, the Company) as of December 31, 1995 and 1996, and the related combined statements of operations, equity and cash flows for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing standards. 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 combined financial position of the Company as of December 31, 1995 and 1996, and the combined results of their operations and cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas June 5, 1997 F-2 76 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES COMBINED BALANCE SHEETS ASSETS
AS OF DECEMBER 31, AS OF ------------------------- MARCH 31, 1995 1996 1997 ---------- ----------- ----------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents............. $ 69,536 $ 1,492,603 $ 1,500,493 Accounts receivable, trade............ 357,956 1,654,032 2,283,104 Accounts receivable, joint interest owners............................. -- 82,296 295,394 Accounts receivable from related parties............................ -- 79,578 55,598 Other current assets.................. 15,794 15,472 57,924 ---------- ----------- ----------- Total current assets.......... 443,286 3,323,981 4,192,513 PROPERTY AND EQUIPMENT, net (full-cost method of accounting for oil and gas properties)........................... 6,959,513 15,205,587 19,162,276 OTHER ASSETS............................ 242,099 339,789 557,506 ---------- ----------- ----------- $7,644,898 $18,869,357 $23,912,295 ========== =========== =========== LIABILITIES AND EQUITY CURRENT LIABILITIES: Accounts payable, trade............... $ 646,238 $ 4,326,299 $ 5,928,520 Other current liabilities............. 62,315 22,976 22,125 ---------- ----------- ----------- Total current liabilities..... 708,553 4,349,275 5,950,645 NOTES PAYABLE TO RELATED PARTIES........ 1,396,196 2,773,935 2,878,935 LONG-TERM DEBT.......................... 2,083,684 6,910,000 9,375,000 OTHER LONG-TERM LIABILITIES............. 75,366 240,197 301,213 COMMITMENTS AND CONTINGENCIES (Note 5) EQUITY: Capital............................... 4,146,000 4,261,000 4,915,678 Retained earnings (deficit)........... (764,901) 334,950 1,050,566 Deferred compensation................. -- -- (559,742) ---------- ----------- ----------- 3,381,099 4,595,950 5,406,502 ---------- ----------- ----------- $7,644,898 $18,869,357 $23,912,295 ========== =========== ===========
The accompanying notes are an integral part of these combined financial statements. F-3 77 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------- --------------------- 1994 1995 1996 1996 1997 --------- ---------- ---------- -------- ---------- (UNAUDITED) OIL AND NATURAL GAS REVENUES............ $ 596,733 $2,428,048 $5,194,709 $790,513 $1,853,170 COSTS AND EXPENSES: Oil and natural gas operating expenses........................... 518,022 1,813,406 2,384,145 417,728 557,464 Depreciation, depletion and amortization....................... 98,262 487,949 1,135,797 141,674 382,475 General and administrative............ 237,460 425,198 514,644 44,194 197,615 --------- ---------- ---------- -------- ---------- Total costs and expenses...... 853,744 2,726,553 4,034,586 603,596 1,137,554 --------- ---------- ---------- -------- ---------- OPERATING INCOME (LOSS)................. (257,011) (298,505) 1,160,123 186,917 715,616 OTHER INCOME AND EXPENSES: Interest expense...................... -- (274,585) (312,409) (76,480) (146,447) Interest expense, related parties..... (7,263) (35,059) (189,881) (30,306) (42,051) Capitalized interest.................. -- 117,288 422,493 64,216 188,498 Other income.......................... 5,765 24,251 19,525 -- -- --------- ---------- ---------- -------- ---------- NET INCOME (LOSS)....................... $(258,509) $ (466,610) $1,099,851 $144,347 $ 715,616 ========= ========== ======== (UNAUDITED): PRO FORMA INCOME TAXES.................. 395,946 257,622 ---------- ---------- NET INCOME (after pro forma income taxes)................................ $ 703,905 $ 457,994 ========== ========== PRO FORMA PRIMARY AND FULLY DILUTED EARNINGS PER SHARE (Note 2)........... $ 0.09 $ 0.06 ========== ========== PRO FORMA WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (Note 2).... 7,722,120 7,722,120 ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-4 78 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES COMBINED STATEMENTS OF EQUITY
RETAINED EARNINGS DEFERRED TOTAL CAPITAL (DEFICIT) COMPENSATION EQUITY ---------- ---------- ------------ ---------- BALANCE, December 31, 1993.............. $ 100,000 $ (39,782) $ -- $ 60,218 Net loss.............................. -- (258,509) -- (258,509) Capital contributions................. 650,000 -- -- 650,000 ---------- ---------- --------- ---------- BALANCE, December 31, 1994.............. 750,000 (298,291) -- 451,709 Net loss.............................. -- (466,610) -- (466,610) Capital contributions................. 3,500,000 -- -- 3,500,000 Distributions......................... (104,000) -- -- (104,000) ---------- ---------- --------- ---------- BALANCE, December 31, 1995.............. 4,146,000 (764,901) -- 3,381,099 Net income............................ -- 1,099,851 -- 1,099,851 Capital contributions................. 450,000 -- -- 450,000 Distributions......................... (335,000) -- -- (335,000) ---------- ---------- --------- ---------- BALANCE, December 31, 1996.............. 4,261,000 334,950 -- 4,595,950 UNAUDITED: Net income............................ -- 715,616 -- 715,616 Distributions......................... (45,000) -- -- (45,000) Deferred compensation related to certain stock options.............. 699,678 -- (699,678) -- Compensation related to certain stock options............................ -- -- 139,936 139,936 ---------- ---------- --------- ---------- BALANCE, March 31, 1997................. $4,915,678 $1,050,566 $(559,742) $5,406,502 ========== ========== ========= ==========
The accompanying notes are an integral part of these combined financial statements. F-5 79 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ------------------------------------- ----------------------------- 1994 1995 1996 1996 1997 ---------- ---------- ----------- ------------- ------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).................... $ (258,509) $ (466,610) $ 1,099,851 $ 144,347 $ 715,616 Adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities -- Depreciation, depletion and amortization................. 98,262 487,949 1,135,797 141,674 382,475 Changes in assets and liabilities -- Accounts receivable............... (100,090) (245,365) (1,457,950) (158,401) (818,190) Other current assets.............. 9,296 (9,433) 322 2,334 (42,452) Accounts payable, trade........... 38,215 518,166 2,422,257 341,309 1,538,883 Interest payable to related parties......................... (38,936) 88,174 105,278 14,545 60,051 Other current liabilities......... (6,067) 32,772 19,886 -- 114 ---------- ---------- ----------- ----------- ----------- Net cash provided by (used in) operating activities... (257,829) 405,653 3,325,441 485,808 1,836,497 ---------- ---------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures -- accrual basis............................. (818,775) (6,857,057) (9,479,561) (1,353,233) (4,416,945) Adjustment to cash basis............. -- 71,664 1,258,132 -- 63,338 ---------- ---------- ----------- ----------- ----------- Net cash used in investing activities................. (818,775) (6,785,393) (8,221,429) (1,353,233) (4,353,607) ---------- ---------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt......... -- 2,083,684 6,910,000 194,733 2,965,000 Debt repayments...................... -- -- (2,083,684) -- (500,000) Proceeds from related party notes payable........................... 532,500 863,696 1,377,739 222,643 105,000 Contributions........................ 650,000 3,500,000 450,000 450,000 -- Distributions........................ -- (104,000) (335,000) -- (45,000) ---------- ---------- ----------- ----------- ----------- Net cash provided by financing activities....... 1,182,500 6,343,380 6,319,055 867,376 2,525,000 ---------- ---------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... 105,896 (36,360) 1,423,067 (49) 7,890 CASH AND CASH EQUIVALENTS, beginning of year................................. -- 105,896 69,536 69,536 1,492,603 ---------- ---------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year................................. $ 105,896 $ 69,536 $ 1,492,603 $ 69,487 $ 1,500,493 ========== ========== =========== =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest (net of amounts capitalized).............. $ -- $ 122,471 $ -- $ -- $ --
The accompanying notes are an integral part of these combined financial statements. F-6 80 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION, COMBINATION AND NATURE OF OPERATIONS: The Combination Carrizo Oil & Gas, Inc. (Carrizo, a Texas corporation) was formed in 1993 and will be the surviving entity upon the completion of a series of combination transactions (the Combination). The Combination will include the following transactions: (a) Carrizo Production, Inc. (a Texas corporation and an affiliated entity with ownership identical to Carrizo) will be merged into Carrizo and the outstanding shares of capital stock of Carrizo Production, Inc. will be exchanged for an aggregate of 343,000 shares of common stock of Carrizo (the Common Stock); (b) Carrizo will acquire Encinitas Partners Ltd. (a Texas limited partnership of which Carrizo Production, Inc. serves as the general partner) as follows: Carrizo will acquire from the current 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. will be merged into Carrizo and the outstanding limited partner interests in Encinitas Partners Ltd. will be exchanged for an aggregate of 860,699 shares of Common Stock; (c) La Rosa Partners Ltd. (a Texas limited partnership of which Carrizo serves as the general partner) will be merged into Carrizo and the outstanding limited partner interests in La Rosa Partners Ltd. will be exchanged for an aggregate of 48,700 shares of Common Stock; and (d) Carrizo Partners Ltd. (a Texas limited partnership of which Carrizo serves as the general partner) will be merged into Carrizo and the outstanding limited partner interests in Carrizo Partners Ltd. will be exchanged for an aggregate of 569,068 shares of Common Stock. Carrizo plans to complete each of the above transactions concurrently with the consummation of an initial public offering of its Common Stock (see Note 8). Principles of Combination The accompanying combined financial statements include the accounts of Carrizo, Carrizo Production, Inc., and the combined interests of the aforementioned limited partnerships, all of which share common ownership and management (collectively, the Company). Upon completion of the transactions described above, the combination will be 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 combined accounts 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. Nature of Operations The Company is an independent energy company engaged in the exploration, development, exploitation and production of oil and natural gas. The Company's 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 1,097 square miles of 3-D seismic data. Additionally, the Company has assembled approximately 322,000 gross acres under lease or option. Consistent with other companies in the energy industry, the Company is subject to certain risks, including volatility of oil and natural gas prices, uncertainty of reserve information, operating risks of oil and natural gas operations, and significant requirements for capital. F-7 81 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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. No general and administrative costs have been capitalized at December 31, 1994, 1995 or 1996. During the three-months ended March 31, 1997, the Company capitalized $139,936 of deferred compensation related to stock options granted to personnel directly associated with exploration activities.(See Note 6.) 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 were evaluated for impairment on a property-by-property basis annually through 1995 and quarterly beginning in 1996. 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 1994, 1995, 1996 and the three months ended March 31, 1997, was $0.48, $0.47, $0.59 and $0.53, 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. Through March 31, 1997, there have been no dispositions of oil and gas properties. 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. For the accompanying reporting periods, no write-down of the Company's oil and natural gas assets was necessary. 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 Offering costs of $211,575 through March 31, 1997 have been deferred and are anticipated to be applied against stock offering proceeds (see Note 8). Long-term debt financing costs of $47,194 are capitalized as deferred assets and are being amortized over the term of the loans. 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 F-8 82 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) short-term nature of these items. The carrying amount of long-term debt 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 when the hedged transaction occurs. Historically, gains and losses from hedging activities have not been material. Total oil and natural gas hedged in 1995 and 1996 was 9,000 Bbls and 3,000 Bbls, respectively, and 40,000 MMBtu and 60,000 MMBtu, respectively. There was no hedging activity during 1994. The Company had no outstanding hedged positions as of December 31, 1996, or March 31, 1997. Income Taxes Carrizo and the combined affiliated entities either have elected to be treated as S Corporations under the Internal Revenue Code or are otherwise not taxed as entities for federal income tax purposes. The taxable income or loss is therefore allocated to the equity owners of Carrizo and the combined affiliated entities. Accordingly, no provision was made for income taxes in the accompanying combined historical financial statements. (See Note 8.) 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. Recently Issued Accounting Pronouncements In March 1995, the Financial Accounting Standards Board issued SFAS No. 121 regarding accounting for the impairment of long-lived assets. The Company adopted SFAS No. 121 effective January 1, 1996. However, its provisions are not applicable to the Company's oil and gas properties as they are accounted for under the full-cost method of accounting. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 regarding earnings per share. SFAS No. 128 cannot be adopted until December 15, 1997; however, pro forma disclosures are allowed to minimize the impact of year-end adoption. As a result of the noncomplex F-9 83 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) nature of the Company's capital structure and treatment of all stock options as outstanding for all periods pursuant to Staff Accounting Bulletin No. 83, SFAS No. 128 would have no current impact on the pro forma calculation of earnings per share. Interim Financial Data (Unaudited) The unaudited financial statements as of March 31, 1997, and for the three-month periods ended March 31, 1996 and 1997, and all related footnote information for these periods have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and results of operations and cash flows in accordance with generally accepted accounting principles. Earnings Per Share Historical earnings per share have been omitted from the combined statements of operations since such information is not meaningful and the historically combined company is not a separate legal entity with a singular capital structure. Pro forma earnings per share is presented using the weighted average number of common shares outstanding after giving effect to the Combination (7,500,000 shares). All common stock options have been treated as outstanding for all periods presented (222,120 shares), as required by SEC Staff Accounting Bulletin No. 83. 3. PROPERTY AND EQUIPMENT: At December 31, 1995 and 1996, and March 31, 1997, property and equipment consisted of the following:
DECEMBER 31, ------------------------ MARCH 31, 1995 1996 1997 ---------- ----------- ----------- (UNAUDITED) Proved oil and natural gas properties........ $4,813,440 $ 9,217,027 $10,550,738 Unproved oil and natural gas properties...... 2,680,876 7,455,698 10,416,676 Other equipment.............................. -- 62,073 106,548 ---------- ----------- ----------- Total property and equipment....... 7,494,316 16,734,798 21,073,962 Accumulated depreciation, depletion and amortization............................... (534,803) (1,529,211) (1,911,686) ---------- ----------- ----------- Property and equipment, net.................. $6,959,513 $15,205,587 $19,162,276 ========== =========== ===========
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 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 $7,455,698 of unproved property costs at December 31, 1996 being excluded from the amortizable base, $2,680,876 and $4,774,822 were incurred in 1995 and 1996, respectively. The Company expects it will complete its evaluation of the properties representing the majority of these costs within the next three years. F-10 84 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. LONG-TERM DEBT: In January 1995, the Company entered into a loan agreement with Texas Commerce Bank (TCB) in the amount of $1,800,000 for the acquisition of the Encinitas oil and gas properties. This loan was amended on February 18, 1995, to provide funds for the development of those properties. Borrowings under this agreement, which totaled $2,083,684 at December 31, 1995, and bore interest at the prime rate as specified by TCB plus 2.75 percent, were repaid with borrowings under the Encinitas Facility (defined below), and this loan facility was terminated in 1996. As additional consideration, the Company assigned a 1 percent royalty interest in the Encinitas/Kelsey properties to TCB. In June 1996, the Company entered into a $10 million revolving credit facility with Compass Bank (the Encinitas Facility). Proceeds from this facility were used to pay off the existing loan from TCB as well as fund exploration and development activities. The facility is subject to a borrowing base calculation and had a commitment of $3,350,000 at December 31, 1996, and $2,634,000 at March 31, 1997. The facility is also available for letters of credit, one of which has been issued for $224,000. The Encinitas Facility is secured by the interests in oil and natural gas properties owned by Encinitas Partners, Ltd., and bears interest at the prime rate as defined by Compass Bank plus .75 percent, and the borrowings must be repaid by June 1, 1998. At December 31, 1996, and March 31, 1997, borrowings under the Encinitas Facility totaled $2,910,000 and $2,410,000, respectively. At December 31, 1996, $216,000 was available to the Company for future borrowings. No additional amounts were available for borrowing at March 31, 1997. The weighted average interest rate under the Encinitas Facility for 1996 was 9 percent. In December 1996, Carrizo entered into a separate $25 million revolving credit facility with Compass Bank (the Carrizo Facility), which is subject to a borrowing base determination, and total commitment was $6 million and approximately $7.2 million at December 31, 1996, and March 31, 1997, respectively. Interest on this facility is the prime rate as defined by Compass Bank plus .75 percent, and the borrowings must be repaid by June 1, 1998. Proceeds from this facility have been used to provide working capital 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 December 31, 1996, and March 31, 1997, borrowings under this facility totaled $4 million and $6,965,000, respectively, with an additional $2 million and approximately $250,000, respectively, available for future borrowings. The weighted average interest rate for 1996 on the Carrizo Facility was 9 percent. Encinitas Partners, Ltd., and Carrizo are each subject to certain covenants under the terms of the Encinitas Facility and the Carrizo Facility, respectively, 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 expenses, less noncash net income) to quarterly debt service (payments made for principal in connection with each 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 credit facilities also place restrictions on, among other things, (a) incurring additional indebtedness, guaranties, loans and liens, (b) changing the nature of business or business structure and (c) selling assets. Necessary waivers effective as of December 31, 1996, were received from Compass Bank to decrease the Encinitas Facility tangible net worth requirement and to permit Carrizo (under the Carrizo Facility) to advance funds to one of the affiliated entities for exploration expenditures. The Company also had outstanding borrowings from certain shareholders totaling $1,396,196, $2,773,935 and $2,878,935 at December 31, 1995 and 1996, and March 31, 1997, respectively. F-11 85 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) These loans bore interest at the TCB prime rate, and repayment of the funds and interest is due in April 1998. Accrued interest on shareholder borrowings is included in other long-term liabilities. At December 31, 1995 and 1996, and at March 31, 1997, notes payable and long-term debt consisted of the following:
DECEMBER 31, MARCH 31, ------------------------ ----------- 1995 1996 1997 ---------- ---------- ----------- (UNAUDITED) Notes payable to shareholders (due April, 1998)................................... $1,396,196 $2,773,935 $ 2,878,935 Notes payable to TCB...................... 2,083,684 -- -- $10 million revolving credit facility (due June 1, 1998)........................... -- 2,910,000 2,410,000 $25 million revolving credit facility (due June 1, 1998)........................... -- 4,000,000 6,965,000 ---------- ---------- ----------- $3,479,880 $9,683,935 $12,253,935 ========== ========== ===========
5. COMMITMENTS AND CONTINGENCIES: The Company is, from time to time, 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, 1996, Carrizo was obligated under a noncancelable operating lease for office space. Rent expense for the years ended December 31, 1994, 1995 and 1996, was $5,400, $7,600 and $14,900, respectively. Following is a schedule of the remaining future minimum lease payments under this lease: 1997.................................................... $ 68,680 1998.................................................... 75,390 1999.................................................... 75,390 2000.................................................... 12,562
6. EQUITY: On July 19, 1996, and March 1, 1997, the Company entered into separate stock option agreements 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 vest 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. In connection with a planned initial public offering (see Note 8), the Company has recorded deferred compensation related to the March 1997 stock option agreement, as additional paid-in capital and an offsetting contra-equity account. Such compensation accrual is based on the difference between the option price ($3.60) and the fair value of Carrizo's common stock when such options were granted (using the $12.00 per share estimate of the initial public offering common stock price as an estimate of fair value). Such deferred compensation is F-12 86 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) recognized in the period in which the options vest, which resulted in $139,936 being recorded in the three-month period ended March 31, 1997. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123. SFAS No. 123 is a new standard of accounting for stock-based compensation and establishes a fair value method of accounting for awards granted under stock compensation plans. SFAS No. 123 encourages, but does not require, companies to adopt the fair value method of accounting in place of the existing method of accounting for stock-based compensation whereupon compensation costs are recognized only in situations where stock compensation plans award intrinsic value to recipients at the date of grant. Companies that do not adopt the fair value method of accounting prescribed in SFAS No. 123 must, nonetheless, make annual pro forma disclosures of the estimated effects on net income and earnings per share in their year-end 1996 financial statements as if the fair value method had been used for grants after December 31, 1994. Had compensation cost for the options granted in July, 1996 been determined consistent with SFAS 123, the Company's reported 1996 net income and pro forma earnings per share would have been adjusted to the following pro forma amounts: Net Income..................... As reported $1,099,851 Pro forma $1,038,490 EPS............................ As reported (pro forma) $ 0.14 Pro forma $ 0.13
The fair value of these options is estimated on the date of grant using the Black-Scholes option pricing model, with the following assumptions: risk-free interest rate of 6.82%, expected dividend yield of 0%, expected life of 10 years, and expected volatility of 30%. 7. 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 Reading & Bates Corporation. Paul Loyd, a member of the board of the Company, is 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 $117,726 in services under this agreement in 1996. The Company has 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 are made monthly and total payments to Loyd & Associates Inc. for services rendered were $43,500, $60,000 and $60,000 in 1994, 1995 and 1996, respectively. These expenditures were included in general and administrative expenses for each year. 8. SUBSEQUENT EVENTS (UNAUDITED): Carrizo and its affiliated entities are anticipated to be combined in a series of transactions concurrent with the consummation of an initial public offering of common stock. As a result of the Combination, Carrizo will issue approximately 2,290,000 shares of common stock for the equity interests that it does not already own in these entities. F-13 87 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Carrizo anticipates filing a registration statement on Form S-1 in June 1996 for the sale of 2,500,000 shares of common stock. The net proceeds from this sale at an assumed initial public offering price of $12.00 per share are estimated to be approximately $26.9 million. Carrizo intends to use a portion of the net proceeds to repay approximately $9.4 million of indebtedness incurred under the revolving credit facilities and approximately $2.9 million of promissory notes to certain of the Company's directors and officers. The remainder of the net proceeds will be used to accelerate the Company's exploration and development program and for general corporate purposes. Following the completion of the initial public offering, the Company expects to enter into a new credit facility and the Encinitas Facility and Carrizo Facility will be terminated. On June 4, 1997, the board of directors authorized a 521-for-1 split of the Company's stock and increased the number of authorized shares to 40 million shares of common stock and 10 million shares of preferred stock. All share amounts presented in these combined financial statements are presented on a retroactive, post-split basis. 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 will be required to establish a deferred tax liability in the second quarter of 1997 and is currently in process of determining such amount. Additionally, the Company has entered into tax indemnification agreements with the founders of the Company pertaining to periods in which the Company was an S Corporation. 9. 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:
YEAR ENDED DECEMBER 31 ------------------------------------ 1994 1995 1996 -------- ---------- ---------- Property acquisition costs -- Unproved................................... $ -- $ 316,820 $ 50,720 Proved..................................... 329,146 3,588,173 1,907,890 Exploration cost............................. 280,001 2,364,056 4,724,102 Development costs............................ 177,285 208,696 1,955,917 -------- ---------- ---------- Total costs incurred(1)............ $786,432 $6,477,745 $8,638,629 ======== ========== ==========
- --------------- (1) Excludes capitalized interest on unproved properties of $117,288 and $422,493 for the years ended December 31, 1995 and 1996, 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 F-14 88 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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, 1996, 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. Amounts at December 31, 1994 and 1995, and for the periods then ended were rolled back from December 31, 1996, balances, ignoring the impact of revisions of estimates during those periods, if any. 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:
BARRELS OF OIL, CONDENSATE AND NATURAL GAS LIQUIDS ----------------------------------- AT DECEMBER 31, ----------------------------------- 1994 1995 1996 --------- --------- --------- Proved developed and undeveloped reserves -- Beginning of year............................ 3,750,000 3,785,000 3,810,000 Purchases of oil and gas properties.......... 68,000 103,000 12,000 Extensions and discoveries................... -- -- 180,000 Production................................... (33,000) (78,000) (107,000) --------- --------- --------- End of year.................................... 3,785,000 3,810,000 3,895,000 ========= ========= ========= Proved developed reserves at end of year....... 1,085,000 1,100,000 1,048,000 ========= ========= =========
THOUSANDS OF CUBIC FEET OF NATURAL GAS ---------------------------------- AT DECEMBER 31, ---------------------------------- 1994 1995 1996 ------- --------- ---------- Proved developed and undeveloped reserves -- Beginning of year............................ 277,000 272,000 5,437,000 Purchases of oil and gas properties.......... -- 5,730,000 338,000 Extensions and discoveries................... -- -- 7,646,000 Production................................... (5,000) (565,000) (1,273,000) ------- --------- ---------- End of year.................................... 272,000 5,437,000 12,148,000 ======= ========= ========== Proved developed reserves at end of year....... -- 3,810,000 8,110,000 ======= ========= ==========
F-15 89 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1994 1995 1996 ----------- ----------- ------------ Future cash inflows...................... $61,727,000 $77,739,000 $126,155,000 Future oil and natural gas operating expenses.............................. 40,576,000 43,529,000 47,675,000 Future development costs................. 7,711,000 7,918,000 9,375,000 Future income tax expenses............... 4,415,000 7,163,000 19,864,000 ----------- ----------- ------------ Future net cash flows.................... 9,025,000 19,129,000 49,241,000 10% annual discount for estimating timing of cash flows......................... 2,527,000 7,148,000 16,220,000 ----------- ----------- ------------ Standardized measure of discounted future net cash flows........................ $ 6,498,000 $11,981,000 $ 33,021,000 =========== =========== ============
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. Prices used in computing year end 1996 future cash flows were $20.88 and $3.69 for oil and natural gas, respectively. Such prices declined significantly in the first quarter of 1997. 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 the 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. F-16 90 CARRIZO OIL & GAS, INC. AND AFFILIATED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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:
YEAR ENDED DECEMBER 31, --------------------------------------- 1994 1995 1996 ----------- ----------- ----------- Changes due to current-year operations -- Sales of oil and natural gas, net of oil and natural gas operating expenses..... $ (79,000) $ (614,000) $(2,811,000) Extensions and discoveries................ - - 19,641,000 Purchases of oil and gas properties....... 104,000 2,770,000 2,079,000 Changes due to revisions in standardized variables- Prices and operating expenses............. 6,761,000 6,343,000 9,781,000 Income taxes.............................. (2,785,000) (1,307,000) (8,834,000) Estimated future development costs........ - - (670,000) Accretion of discount..................... 131,000 968,000 1,647,000 Production rates (timing) and other....... 1,449,000 (2,677,000) 207,000 ----------- ----------- ----------- Net change.................................. 5,581,000 5,483,000 21,040,000 Beginning of year........................... 917,000 6,498,000 11,981,000 ----------- ----------- ----------- End of year................................. $ 6,498,000 $11,981,000 $33,021,000 =========== =========== ===========
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. F-17 91 ANNEX A [RYDER SCOTT COMPANY LETTERHEAD] June 9, 1997 Carrizo Oil & Gas, Inc. 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Gentlemen: At your request, we have prepared an estimate of the reserves, future production, and income attributable to certain leasehold interests of Carrizo Oil & Gas, Inc. (Carrizo) as of March 31, 1997. The subject properties are located in the states of Louisiana and Texas. The income data were estimated using the Securities and Exchange Commission (SEC) guidelines for future price and cost parameters. The estimated reserves and future income amounts presented in this report are related to hydrocarbon prices. March 1997 hydrocarbon prices were used in the preparation of this report as required by SEC guidelines; however, actual future prices may vary significantly from these prices. Therefore, volumes of reserves actually recovered and amounts of income actually received may differ significantly from the estimated quantities presented in this report. The results of this study are summarized below. SEC PARAMETERS Estimated Net Reserves and Income Data Certain Leasehold Interests of CARRIZO OIL & GAS, INC. As of March 31, 1997 -------------------------------------------------
Proved -------------------------------------------------------------------------------------- Developed Total ------------------------------------------ Producing Non-Producing Undeveloped Proved ------------------ -------------------- ------------------- ---------------- NET REMAINING RESERVES Oil/Condensate - Barrels 126,049 15,876 322,180 464,105 Plant Products - Barrels 78,040 76,981 40,875 195,896 Gas - MMCF 4,394 2,011 6,621 13,026 INCOME DATA Future Gross Revenue $10,022,455 $4,204,793 $18,145,781 $32,373,029 Deductions 1,909,546 1,106,379 5,738,842 8,754,767 ----------- ---------- ----------- ----------- Future Net Income (FNI) $ 8,112,909 $3,098,414 $12,406,939 $23,618,262 Discounted FNI @ 10% $ 6,852,037 $1,933,074 $ 7,593,621 $16,378,732
Liquid hydrocarbons are expressed in standard 42 gallon barrels. All gas volumes are sales gas expressed in millions of cubic feet (MMCF) at the official temperature and pressure bases of the areas in which the gas reserves are located. 92 Carrizo Oil & Gas, Inc. June 9, 1997 Page 2 The future gross revenue is after the deduction of production taxes. The deductions are comprised of the normal direct costs of operating the wells, ad valorem taxes, recompletion costs, and development costs. The future net income is before the deduction of state and federal income taxes and general administrative overhead, and has not been adjusted for outstanding loans that may exist nor does it include any adjustment for cash on hand or undistributed income. No attempt was made to quantify or otherwise account for any accumulated gas production imbalances that may exist. Gas reserves account for approximately 66 percent and liquid hydrocarbon reserves account for the remaining 34 percent of total future gross revenue from proved reserves. RESERVES INCLUDED IN THIS REPORT The proved reserves included herein conform to the definition as set forth in the Securities and Exchange Commission's Regulation S-X Part 210.4-10 (a) as clarified by subsequent Commission Staff Accounting Bulletins. The definition of proved reserves is included in the section entitled "Definitions of Reserves" which is attached with this report. The proved developed non-producing reserves included herein are comprised of the behind pipe category. The various reserve status categories are defined in the section entitled "Reserve Status Categories" which is attached with this report. ESTIMATES OF RESERVES In general, the reserves included herein were predominantly estimated by the volumetric method due to the limited production history of the wells considered in this study. However, performance methods were used in certain cases where characteristics of the data indicated this method was more appropriate in our opinion. The reserves estimated by the performance method utilized extrapolations of various historical data in those cases where such data were definitive. Reserves were estimated by the volumetric method in those cases where there were inadequate historical performance data to establish a definitive trend or where the use of production performance data as a basis for the reserve estimates was considered to be inappropriate. The reserves included in this report are estimates only and should not be construed as being exact quantities. They may or may not be actually recovered, and if recovered, the revenues therefrom and the actual costs related thereto could be more or less than the estimated amounts. Moreover, estimates of reserves may increase or decrease as a result of future operations. FUTURE PRODUCTION RATES Initial production rates are based on the current producing rates for those wells now on production. Test data and other related information were used to estimate the anticipated initial production rates for those wells or locations which are not currently producing. If no production decline trend has been established, future production rates were held constant, or adjusted for the effects of curtailment where appropriate, until a decline in ability to produce was anticipated. An estimated rate of decline was then applied to depletion of the reserves. If a decline trend has been established, this trend was used as the basis for estimating future production rates. For reserves not yet on production, sales were estimated to commence at an anticipated date furnished by Carrizo. In general, we estimate that future gas production rates limited by allowables or marketing conditions will continue to be the same as the average rate for the latest available 12 months of actual production until such time that the well or wells are incapable of producing at this 93 Carrizo Oil & Gas, Inc. June 9, 1997 Page 3 rate. The well or wells were then projected to decline at their decreasing delivery capacity rate. Our general policy on estimates of future gas production rates is adjusted when necessary to reflect actual gas market conditions in specific cases. The future production rates from wells now on production may be more or less than estimated because of changes in market demand or allowables set by regulatory bodies. Wells or locations which are not currently producing may start producing earlier or later than anticipated in our estimates of their future production rates. HYDROCARBON PRICES Carrizo furnished us with prices in effect at March 31, 1997 and these prices were held constant except for known and determinable escalations. Product prices which were actually used for each property reflect adjustment for gravity, quality, local conditions, and/or distance from market. In accordance with Securities and Exchange Commission guidelines, changes in liquid and gas prices subsequent to March 31, 1997 were not taken into account in this report. Future prices used in this report are discussed in more detail in the section entitled "Hydrocarbon Pricing Parameters" which is attached with this report. COSTS Operating costs for the leases and wells in this report are based on the operating expense reports of Carrizo and include only those costs directly applicable to the leases or wells. When applicable, the operating costs include a portion of general and administrative costs allocated directly to the leases and wells under terms of operating agreements. No deduction was made for indirect costs such as general administration and overhead expenses, loan repayments, interest expenses, and exploration and development prepayments that are not charged directly to the leases or wells. Development costs were furnished to us by Carrizo and are based on authorizations for expenditure for the proposed work or actual costs for similar projects. At the request of Carrizo, their estimate of zero abandonment costs after salvage value was used in this report. Ryder Scott has not performed a detailed study of the abandonment costs nor the salvage value and makes no warranty for Carrizo's estimate. Current costs were held constant throughout the life of the properties. GENERAL While it may reasonably be anticipated that the future prices received for the sale of production and the operating costs and other costs relating to such production may also increase or decrease from existing levels, such changes were, in accordance with rules adopted by the SEC, omitted from consideration in making this evaluation. The estimates of reserves presented herein were based upon a detailed study of the properties in which Carrizo owns an interest; however, we have not made any field examination of the properties. No consideration was given in this report to potential environmental liabilities which may exist nor were any costs included for potential liability to restore and clean up damages, if any, caused by past operating practices. Carrizo has informed us that they have furnished us all of the accounts, records, geological and engineering data, and reports and other data required for this investigation. 94 Carrizo Oil & Gas, Inc. June 9, 1997 Page 4 The ownership interests, prices, and other factual data furnished by Carrizo were accepted without independent verification. The estimates presented in this report are based on data available through March 1997. Neither we nor any of our employees have any interest in the subject properties and neither the employment to make this study nor the compensation is contingent on our estimates of reserves and future income for the subject properties. This report was prepared for the exclusive use and sole benefit of Carrizo Oil & Gas, Inc. The data, work papers, and maps used in this report are available for examination by authorized parties in our offices. Please contact us if we can be of further service. Very truly yours, RYDER SCOTT COMPANY PETROLEUM ENGINEERS /s/ MICHAEL F. STELL Michael F. Stell, P.E. Petroleum Engineer MFS/sw Approved: /s/ DON P. ROESLE - ------------------------------------- Don P. Roesle, P.E. Senior Vice President 95 DEFINITIONS OF RESERVES PROVED RESERVES (SEC DEFINITION) Proved reserves of crude oil, condensate, natural gas, and natural gas liquids are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable in the future from known reservoirs under existing operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalation based on future conditions. Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. In certain instances, proved reserves are assigned on the basis of a combination of core analysis and electrical and other type logs which indicate the reservoirs are analogous to reservoirs in the same field which are producing or have demonstrated the ability to produce on a formation test. The area of a reservoir considered proved includes (1) that portion delineated by drilling and defined by fluid contacts, if any, and (2) the adjoining portions not yet drilled that can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of data on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. Reserves that can be produced economically through the application of improved recovery techniques are included in the proved classification when these qualifications are met: (1) successful testing by a pilot project or the operation of an installed program in the reservoir provides support for the engineering analysis on which the project or program was based, and (2) it is reasonably certain the project will proceed. Improved recovery includes all methods for supplementing natural reservoir forces and energy, or otherwise increasing ultimate recovery from a reservoir, including (1) pressure maintenance, (2) cycling, and (3) secondary recovery in its original sense. Improved recovery also includes the enhanced recovery methods of thermal, chemical flooding, and the use of miscible and immiscible displacement fluids. Proved natural gas reserves are comprised of non-associated, associated and dissolved gas. An appropriate reduction in gas reserves has been made for the expected removal of natural gas liquids, for lease and plant fuel, and for the exclusion of non-hydrocarbon gases if they occur in significant quantities and are removed prior to sale. Estimates of proved reserves do not include crude oil, natural gas, or natural gas liquids being held in underground or surface storage. Proved reserves are estimates of hydrocarbons to be recovered from a given date forward. They may be revised as hydrocarbons are produced and additional data become available. 96 RESERVE STATUS CATEGORIES Reserve status categories define the development and producing status of wells and/or reservoirs. PROVED DEVELOPED (SEC DEFINITION) Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. Developed reserves may be subcategorized as producing or non-producing using the SPE/SPEE Definitions: Producing Producing reserves are expected to be recovered from completion intervals open at the time of the estimate and producing. Improved recovery reserves are considered to be producing only after an improved recovery project is in operation. Non-Producing Non-producing reserves include shut-in and behind pipe reserves. Shut-in reserves are expected to be recovered from completion intervals open at the time of the estimate, but which had not started producing, or were shut-in for market conditions or pipeline connection, or were not capable of production for mechanical reasons, and the time when sales will start is uncertain. Behind pipe reserves are expected to be recovered from zones behind casing in existing wells, which will require additional completion work or a future recompletion prior to the start of production. PROVED UNDEVELOPED (SEC DEFINITION) Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with reasonable certainty that there is continuity of production from the existing productive formation. Estimates for proved undeveloped reserves are attributable to any acreage for which an application of fluid injection or other improved technique is contemplated, only when such techniques have been proved effective by actual tests in the area and in the same reservoir. 97 HYDROCARBON PRICING PARAMETERS SECURITIES AND EXCHANGE COMMISSION PARAMETERS OIL AND CONDENSATE Carrizo furnished us with oil and condensate prices in effect at March 31, 1997 and these prices were held constant to depletion of the properties. In accordance with Securities and Exchange Commission guidelines, changes in liquid prices subsequent to March 31, 1997 were not considered in this report. PLANT PRODUCTS Carrizo furnished us with plant product prices in effect at March 31, 1997 and these prices were held constant to depletion of the properties. GAS Carrizo furnished us with gas prices in effect at March 31, 1997 and with its forecasts of future gas prices which take into account SEC guidelines, current spot market prices, contract prices, and fixed and determinable price escalations where applicable. In accordance with SEC guidelines, the future gas prices used in this report make no allowances for future gas price increases which may occur as a result of inflation nor do they make any allowance for seasonal variations in gas prices which may cause future yearly average gas prices to be somewhat lower than March 31, 1997 gas prices. For gas sold under contract, the contract gas price including fixed and determinable escalations, exclusive of inflation adjustments, was used until the contract expires and then was adjusted to the current market price for the area and held at this adjusted price to depletion of the reserves. 98 [FAIRCHILD, ANCELL & WELLS, INC. LETTERHEAD] June 4, 1997 Carrizo Oil & Gas, Inc. 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Re: Reserves Evaluation to the Interests of Carrizo Oil & Gas, Inc. Heavy Oil Properties, Anderson County, Texas Gentlemen: Fairchild, Ancell & Wells, Inc. (FAW) has performed an engineering evaluation to estimate proved reserves and future cash flows from heavy oil (steamflood) properties to the interests of Carrizo Oil & Gas, Inc. in Anderson County, Texas. This evaluation was authorized by Mr. S.P. Johnson IV, President of Carrizo Oil & Gas, Inc. (Carrizo). Projections of the anticipated future annual oil production and future cash flows have also been prepared utilizing property development schedules provided by Carrizo. The reserves and future cash flows to the evaluated interests were based on economic parameters and operating conditions considered applicable and are pursuant to the financial reporting requirements of the Securities and Exchange Commission (SEC). The results of the study are summarized below. ESTIMATED PROVED RESERVES AND FUTURE CASH FLOWS CAMP HILL FIELD ANDERSON COUNTY, TEXAS TO THE INTERESTS OF CARRIZO OIL & GAS, INC. EFFECTIVE 3/31/97
Future Cash Flows (M$) Net -------------------------------------- Reserves Mbbls Undiscounted Discounted at 10% -------------- ------------ ----------------- Proved Producing 928.4 8,270.8 6,559.3 Proved Undeveloped 2,700.2 13,242.6 7,482.7 Total Proved 3,628.6 21,513.4 14,042.0
99 Carrizo Oil & Gas, Inc. Page 2 June 4, 1997 FUTURE CASH FLOW - TOTAL PROJECT BY YEAR
Future Cash Flows (M$) ----------------------------------- Discounted Year Undiscounted at 10% --- ------------ ---------- 1997 262.8 250.6 1998 2,541.9 2,203.3 1999 4,067.4 3,205.0 2000 2,809.9 2,012.9 2001 2,906.3 1,892.6 2002 3,044.9 1,802.6 2003 2,255.9 1,214.1 2004 2,426.3 1,187.1 2005 979.2 435.5 2006 218.9 88.5 TOTAL 21,513.4 14,042.0
The estimated reserves and future cash flows shown in this report are for proved developed producing and proved undeveloped reserves. Our estimates do not include any value which might be attributed to interests in undeveloped acreage beyond those tracts for which reserves have been assigned. In performance of this evaluation, we have relied upon information furnished by Carrizo with respect to property interests owned, production from such properties, current costs of operation and development, current prices for production, agreements relating to current and future operations and sale of production. With respect to the technical files supplied by Carrizo, we have accepted the authenticity and sufficiency of the data contained therein. Future cash flow is presented after deducting production taxes and after deducting future capital costs and operating expenses, but before consideration of Federal income taxes. The future cash flow has been discounted at an annual rate of 10 percent to determine its "present worth." The present worth is shown to indicate the effect of time on the value of money and should not be construed as being the fair market value of the properties Our estimates of future revenue do not include any salvage value for the lease and well equipment nor the costs of abandoning the properties. Fairchild, Ancell & Wells, Inc. expresses no opinion as to the fair market value of the evaluated properties. 100 Carrizo Oil & Gas, Inc. Page 3 June 4, 1997 The reserves included in this report are estimates only and should not be construed as being exact quantities. They may or may not be actually recovered, and if recovered, the revenues therefrom and the actual costs related thereto could be more or less than the estimated amounts. Because of governmental policies and uncertainties of supply and demand, the actual sales rates and the prices actually received for the reserves along with the costs incurred in recovering such reserves may vary from those assumptions included in this report. Also, estimates of reserves may increase or decrease as a result of future operations. In evaluating the information at our disposal concerning this report, we have excluded from our consideration all matters as to which legal or accounting, rather than engineering, interpretation may be controlling. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering data and, therefore, our conclusions necessarily represent only informed professional judgments. The titles to the properties have not been examined by Fairchild, Ancell & Wells, Inc. nor has the actual degree or type of interest owned been independently confirmed. We are independent petroleum engineers and geologists; we do not own an interest in these properties and are not employed on a contingent basis. Basic geologic and field performance data together with our engineering work sheets are maintained on file in our office and are available for review. It has been a pleasure to serve you by preparing this engineering evaluation. Yours very truly, /s/ FAIRCHILD, ANCELL & WELLS, INC. Fairchild, Ancell & Wells, Inc. 101 ====================================================== NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. --------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary................... 3 Risk Factors......................... 11 Use of Proceeds...................... 19 Dividend Policy...................... 19 Dilution............................. 20 Capitalization....................... 21 Selected Combined Financial and Operating Data..................... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 24 Business............................. 31 Management........................... 51 Certain Transactions................. 57 Security Ownership of Certain Beneficial Owners and Management.. 60 Description of Capital Stock......... 62 Shares Eligible for Future Sale...... 64 Underwriting......................... 67 Legal Matters........................ 68 Experts.............................. 68 Additional Information............... 69 Glossary of Certain Industry Terms... 70 Index to Financial Statements........ F-1 Letters of Petroleum Engineers....... A-1
--------------------- UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== 2,500,000 SHARES [LOGO] CARRIZO OIL & GAS, INC. COMMON STOCK ($0.01 PAR VALUE) SCHRODER WERTHEIM & CO. JEFFERIES & COMPANY, INC. , 1997 ====================================================== 102 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following are the estimated expenses (other than underwriting discounts and commission) of the issuance and distribution of the securities being registered, all of which shall be paid by the Company: Securities and Exchange Commission Registration Fee......... $11,326 NASD Filing Fee............................................. 4,238 Nasdaq National Market Fees................................. 42,500 Printing Expenses........................................... * Legal Fees and Expenses..................................... * Accountants' Fees and Expenses.............................. * Blue Sky Fees and Expenses.................................. * Transfer Agent and Registrar Fees........................... * Miscellaneous Expenses...................................... * ------- Total............................................. $ * =======
- --------------- * To be provided by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article 2.02-1 of the Texas Business Corporation Act provides that a corporation may indemnify any director or officer who was, is or is threatened to be made a named defendant or respondent in a proceeding because he is or was a director or officer, provided that the director or officer (i) conducted himself in good faith, (ii) reasonably believed (a) in the case of conduct in his official capacity, that his conduct was in the corporation's best interests or (b) in all other cases, that his conduct was at least not opposed to the corporation's best interests and (iii) in the case of any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Subject to certain exceptions, a director or officer may not be indemnified if the person is found liable to the corporation or if the person is found liable on the basis that he improperly received a personal benefit. Under Texas law, reasonable expenses incurred by a director or officer may be paid or reimbursed by the corporation in advance of a final disposition of the proceeding after the corporation receives a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification and a written undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined that the director or officer is not entitled to indemnification by the corporation. Texas law requires a corporation to indemnify an officer or director against reasonable expenses incurred in connection with the proceeding in which he is named defendant or respondent because he is or was a director or officer if he is wholly successful in defense of the proceeding. Texas law also permits a corporation to purchase and maintain insurance or another arrangement on behalf of any person who is or was a director or officer against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the corporation would have the power to indemnify him against that liability under Article 2.02-1. The Company's Bylaws provide for the indemnification of its officers and directors, and the advancement to them of expenses in connection with proceedings and claims, to the fullest extent permitted by the Texas Business corporation Act, the Company has also entered into indemnification agreements with each of its directors and certain of its officers that contractually provide for indemnification and expense advancement and include related provisions meant to facilitate the indemnitee' receipt of such benefits. These provisions cover, among other things: (i) specification II-1 103 of the method of determining entitlement to indemnification and the selection of independent counsel that will in some cases make such determination, (ii) specification of certain time periods by which certain payments or determinations must be made and actions must be taken and (iii) the establishment of certain presumptions in favor of an indemnitee. The benefits of certain of these provisions are available to an indemnitee only if there has been a change in control (as defined). In addition, the Company may purchase directors' and officers' liability insurance policies for its directors and officers in the future. The Bylaws and such agreements with directors and officers provide for indemnification for amounts (1) in respect of the deductibles for such insurance policies, (2) that exceed the liability limits of such insurance policies and (3) that are available, were available or which become available to the Company but which the officers or directors of the Company determine is inadvisable for the Company to purchase, given the cost involved of the Company. Such indemnification may be made even though directors and officers would not otherwise be entitled to indemnification under other provisions of the Bylaws or such agreements. The above discussion of Article 2.02-1 of the Texas Business Corporation Act and of the Company's Bylaws is not intended to be exhaustive and is respectively qualified in its entirety by such statute and the Bylaws. Reference is made to the form of the Underwriting Agreement, filed as Exhibit 1.1 hereto, which contains provisions for indemnification of the Company, its directors, officers and any controlling persons by the Underwriters against certain liabilities for information furnished by the Underwriters. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Carrizo Oil & Gas, Inc. has not sold any securities, registered or otherwise, within the past three years, except as set forth below. Carrizo Oil & Gas, Inc. has granted to employees options to purchase 222,120 shares of Common Stock. Such transaction was exempt from the registration requirements of the Securities Act by virtue of Rule 701 thereunder. Carrizo Oil & Gas, Inc. expects to sell approximately 2,290,000 shares of Common Stock in the Combination Transactions. Such transaction is exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof as a transaction not involving any public offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION ------- ----------- *1.1 -- Form of Underwriting Agreement. 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. 3.1 -- Amended and Restated Articles of Incorporation of the Company. 3.2 -- Amended and Restated Bylaws of the Company. *4.1 -- Form of certificate representing Common Stock. 4.2 -- Secured Reducing Revolving Line of Credit by and between Encinitas Partners Ltd. And Compass Bank dated June 26, 1996. 4.3 -- First Amendment to Loan Agreement by and between Encinitas Partners Ltd. and Compass Bank dated December 6, 1996. 4.4 -- Secured Reducing Revolving Line of Credit by and between the Company and Compass Bank dated December 6, 1996.
II-2 104
EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.5 -- First Amendment to Loan Agreement by and between the Company and Compass Bank dated April 4, 1997. 4.6 -- Second Amendment to Loan Agreement by and between the Company and Compass Bank dated May 15, 1997. *4.7 -- Third Amendment to Loan Agreement by and between the Company and Compass Bank. -- 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. *5.1 -- Opinion of Baker & Botts, L.L.P. *10.1 -- Incentive Plan of the Company. *10.2 -- Employment Agreement between the Company and S. P. Johnson IV. *10.3 -- Employment Agreement between the Company and Frank A. Wojtek. *10.4 -- Employment Agreement between the Company and Kendall A. Trahan. *10.5 -- Employment Agreement between the Company and George Canjar. 10.6 -- Form of Indemnification Agreement between the Company and each of its directors and executive officers. 10.7 -- Registration Rights Agreement by and among the Company, 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. *10.8 -- S Corporation Tax Allocation, Payment and Indemnification Agreement among the Company and Messrs. Loyd, Webster, Johnson, Hamilton and Wojtek. *10.9 -- S Corporation Tax Allocation, Payment and Indemnification Agreement among Carrizo Production, Inc. and Messrs. Loyd, Webster, Johnson, Hamilton and Wojtek. *11.1 -- Computation of Net Income Per Common and Common Equivalent Share. 21.1 -- Subsidiaries of the Company. 23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of Ryder Scott Company. 23.3 -- Consent of Fairchild, Ancell & Wells, Inc. *23.4 -- Consent of Baker & Botts, L.L.P. (included in Exhibit 5.1). 24.1 -- Power of Attorney (included on the signature page of this Registration Statement). *27.1 -- Financial Data Schedule.
- --------------- * To be filed by amendment. (b) Financial Statement Schedules. Schedule I -- Condensed Financial Information of Registrant All other schedules are omitted because they are not applicable or because the required information is contained in the financial statements or notes thereto included in this Registration Statement. II-3 105 ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the Underwriters, at the closing specified in the Underwriting Agreement, certificates representing the shares of Common Stock offered hereby in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For the purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as a part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 106 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS, ON THE 13TH DAY OF JUNE, 1997. CARRIZO OIL & GAS, INC. By: /s/ S. P. JOHNSON IV ---------------------------------- S. P. Johnson IV President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby appoints S. P. Johnson IV and Frank A. Wojtek and both of them, either of whom may act without the joinder of the other, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments (including post- effective amendments) to this Registration Statement and any registration statement for the same offering filed pursuant to Rule 462 under the Securities Act of 1933, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing appropriate or necessary to be done, as fully and for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on June 13, 1997.
SIGNATURE TITLE --------- ----- /s/ S. P. JOHNSON IV President, Chief Executive Officer and - ----------------------------------------------------- Director (Principal Executive Officer) S. P. Johnson IV /s/ FRANK A. WOJTEK Chief Financial Officer, Vice President, - ----------------------------------------------------- Secretary, Treasurer and Director (Principal Frank A. Wojtek Financial Officer and Principal Accounting Officer) /s/ STEVEN A. WEBSTER Chairman of the Board - ----------------------------------------------------- Steven A. Webster /s/ DOUGLAS A. P. HAMILTON Director - ----------------------------------------------------- Douglas A. P. Hamilton /s/ PAUL B. LOYD, JR. Director - ----------------------------------------------------- Paul B. Loyd, Jr.
II-5 107 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- *1.1 -- Form of Underwriting Agreement. 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. 3.1 -- Amended and Restated Articles of Incorporation of the Company. 3.2 -- Amended and Restated Bylaws of the Company. *4.1 -- Form of certificate representing Common Stock. 4.2 -- Secured Reducing Revolving Line of Credit by and between Encinitas Partners Ltd. And Compass Bank dated June 26, 1996. 4.3 -- First Amendment to Loan Agreement by and between Encinitas Partners Ltd. and Compass Bank dated December 6, 1996. 4.4 -- Secured Reducing Revolving Line of Credit by and between the Company and Compass Bank dated December 6, 1996. 4.5 -- First Amendment to Loan Agreement by and between the Company and Compass Bank dated April 4, 1997. 4.6 -- Second Amendment to Loan Agreement by and between the Company and Compass Bank dated May 15, 1997. *4.7 -- Third Amendment to Loan Agreement by and between the Company and Compass Bank. -- 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. *5.1 -- Opinion of Baker & Botts, L.L.P. *10.1 -- Incentive Plan of the Company. *10.2 -- Employment Agreement between the Company and S. P. Johnson IV. *10.3 -- Employment Agreement between the Company and Frank A. Wojtek. *10.4 -- Employment Agreement between the Company and Kendall A. Trahan. *10.5 -- Employment Agreement between the Company and George Canjar. 10.6 -- Form of Indemnification Agreement between the Company and each of its directors and executive officers. 10.7 -- Registration Rights Agreement by and among the Company, 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. *10.8 -- S Corporation Tax Allocation, Payment and Indemnification Agreement among the Company and Messrs. Loyd, Webster, Johnson, Hamilton and Wojtek. *10.9 -- S Corporation Tax Allocation, Payment and Indemnification Agreement among Carrizo Production, Inc. and Messrs. Loyd, Webster, Johnson, Hamilton and Wojtek. *11.1 -- Computation of Net Income Per Common and Common Equivalent Share. 21.1 -- Subsidiaries of the Company. 23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of Ryder Scott Company. 23.3 -- Consent of Fairchild, Ancell & Wells, Inc.
108
EXHIBIT NUMBER DESCRIPTION ------- ----------- *23.4 -- Consent of Baker & Botts, L.L.P. (included in Exhibit 5.1). 24.1 -- Power of Attorney (included on the signature page of this Registration Statement). *27.1 -- Financial Data Schedule.
- --------------- * To be filed by amendment. EX-2.1 2 COMBINATION AGREEMENT 1 EXHIBIT 2.1 COMBINATION AGREEMENT DATED JUNE 6, 1997 2 TABLE OF CONTENTS ARTICLE I. DEFINITIONS; ORDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.2 Combination Transactions Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE II. THE ENCINITAS PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.1 The Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.3 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.4 Deliveries at Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.5 Consent to Limited Partner Interest Transfer . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE III. THE PRODUCTION MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.1 The Production Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.3 Production Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 3.4 Conversion of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 3.5 Surrender and Exchange of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE IV. THE ENCINITAS MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 4.1 The Encinitas Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 4.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 4.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 4.4 Conversion of Partnership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 4.5 Surrender and Exchange of Partnership Interests . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE V. THE LA ROSA MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 5.1 The La Rosa Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 5.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 5.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 5.4 Conversion of Partnership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 5.5 Surrender and Exchange of Partnership Interests . . . . . . . . . . . . . . . . . . . . . . 14 Section 5.6 No Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE VI. THE CARRIZO PARTNERS MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.1 The Carrizo Partners Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.4 Conversion of Partnership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.5 Surrender and Exchange of Partnership Interests . . . . . . . . . . . . . . . . . . . . . . 16
ii 3 Section 6.6 No Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE VII. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . 17 Section 7.1 Organization; Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 7.2 Capitalization of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 7.3 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 7.4 Authority and Authorization; Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 7.5 Litigation, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 7.6 Financial Statements of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 7.7 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE VIII. REPRESENTATIONS AND WARRANTIES OF THE FOUNDERS . . . . . . . . . . . . . . . . . . . . . . 19 Section 8.1 Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 8.2 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 8.3 Authority and Authorization; Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 8.4 Experience; Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 8.5 Access to Company Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 8.6 Investment Purposes; Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 8.7 Additional Restriction on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE IX. REPRESENTATIONS AND WARRANTIES OF PRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 22 Section 9.1 Organization; Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 9.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 9.3 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 9.4 Authority and Authorization; Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 9.5 Litigation, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 9.6 Financial Statements of Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 9.7 Ownership of Encinitas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 9.8 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 9.9 Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE X. REPRESENTATIONS AND WARRANTIES OF ENCINITAS . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 10.1 Formation; Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 10.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 10.3 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 10.4 Authority and Authorization; Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 10.5 Litigation, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 10.6 Financial Statements of Encinitas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 10.7 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 10.8 Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ARTICLE XI. REPRESENTATIONS AND WARRANTIES OF LA ROSA . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 11.1 Formation; Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
iii 4 Section 11.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 11.3 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 11.4 Authority and Authorization; Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 11.5 Litigation, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 11.6 Financial Statements of La Rosa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 11.7 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 11.8 Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE XII. REPRESENTATIONS AND WARRANTIES OF CARRIZO PARTNERS . . . . . . . . . . . . . . . . . . . . 28 Section 12.1 Formation; Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 12.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 12.3 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 12.4 Authority and Authorization; Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 12.5 Litigation, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 12.6 Financial Statements of Carrizo Partners . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 12.7 Ownership of Placedo Partners Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 12.8 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 12.9 Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE XIII. COVENANTS AND AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 13.1 Equityholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 13.2 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 13.3 Third Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE XIV. CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 14.1 Conditions to the Obligations of All Parties to Effect the Combination Transactions . . . . 32 Section 14.2 Conditions to the Obligations of the Company and each of the Founders to Effect the Encinitas Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 14.3 Conditions to the Obligations of the Company and Production to Effect the Production Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 14.4 Conditions to the Obligations of the Company and Encinitas to Effect the Encinitas Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 14.5 Conditions to the Obligations of the Company and La Rosa to Effect the La Rosa Merger . . . 33 Section 14.6 Conditions to the Obligations of the Company and Carrizo Partners to Effect the Carrizo Partners Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 14.7 Conditions to the Obligations of the Company to Effect Any of the Combination Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 14.8 Other Combination Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
iv 5 ARTICLE XV. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 15.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 15.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE XVI. MISCELLANEOUS AND GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 16.1 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 16.2 Modification or Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 16.3 Restrictions on Transfer; Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 16.4 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 16.5 Stock Splits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 16.6 No Rights as Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 16.7 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 16.8 Entire Agreement, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 16.9 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 16.10 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 16.11 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 16.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 16.13 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Exhibits Exhibit A Production Plan of Merger Exhibit B Transferor Representations and Warranties Exhibit C Encinitas Plan of Merger Exhibit D La Rosa Plan of Merger Exhibit E Carrizo Partners Plan of Merger Exhibit F Founders Disclosure Schedule Exhibit G Production Disclosure Schedule Exhibit H Encinitas Disclosure Schedule Exhibit I La Rosa Disclosure Schedule Exhibit J Carrizo Partners Disclosure Schedule Schedules Schedule 1.1(A) Carrizo Partners Limited Partners' Percentages Schedule 1.1(B) Encinitas Limited Partners' Percentages Schedule 1.1(C) La Rosa Limited Partners' Percentages v 6 COMBINATION AGREEMENT THIS COMBINATION AGREEMENT (this "Agreement"), dated as of June 6, 1997, is by and among (i) Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), (ii) Carrizo Production, Inc., a Texas corporation ("Production"), (iii) Encinitas Partners Ltd., a Texas limited partnership ("Encinitas"), (iv) La Rosa Partners Ltd., a Texas limited partnership ("La Rosa"), (v) Carrizo Partners Ltd., a Texas limited partnership ("Carrizo Partners"), and (vi) Paul B. Loyd, Jr., Steven A. Webster, Sylvester P. Johnson, IV, Douglas A. P. Hamilton and Frank A. Wojtek (each, a "Founder" and together, the "Founders"). RECITALS WHEREAS, the Company, Production, Encinitas, La Rosa, Carrizo Partners and the Founders desire to combine certain of the oil and gas properties and exploration and development operations owned and conducted by the Company, Production, Encinitas, La Rosa and Carrizo Partners (the "Combination") through the purchase by the Company of certain limited partner interests in Encinitas and the merger of Production, Encinitas, La Rosa and Carrizo Partners with and into the Company at or about the time of the closing of the initial public offering (the "Offering") of shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), pursuant to the Securities Exchange Act of 1933, as amended (the "Securities Act"), as will be described in the Company's registration statement on Form S-1, to be filed with the Securities and Exchange Commission (the "SEC") with respect to the Offering; and WHEREAS, to effect the Combination, the Company plans (i) a purchase of limited partner interests in Encinitas from the Founders (the "Encinitas Purchase") for Common Stock, (ii) a merger (the "Production Merger") of Production with and into the Company in which the stockholders of Production (the "Production Stockholders") will receive Common Stock, (iii) a merger (the "Encinitas Merger") of Encinitas with and into the Company in which the limited partners of Encinitas (the "Encinitas Limited Partners") will receive Common Stock, (iv) a merger (the "La Rosa Merger") of La Rosa with and into the Company in which the limited partners of La Rosa (the "La Rosa Limited Partners") will receive Common Stock and (v) a merger (the "Carrizo Partners Merger") of Carrizo Partners with and into the Company in which the limited partners of Carrizo Partners (the "Carrizo Partners Limited Partners") will receive Common Stock (the Encinitas Purchase, the Production Merger, the Encinitas Merger, the La Rosa Merger and the Carrizo Partners Merger collectively may be referred to herein as the "Combination Transactions," and each may be referred to herein as a "Combination Transaction"); and WHEREAS, the Board of Directors of the Company has deemed each of the Combination Transactions to be in the best interest of the Company and the stockholders of the Company, and has approved, and recommended that the stockholders of the Company approve, this Agreement and each of the Combination Transactions; and 1 7 WHEREAS, the Board of Directors of Production has deemed the Production Merger and the other Combination Transactions to be in the best interest of Production and the stockholders of Production, and has approved, and recommended that the stockholders of Production approve, this Agreement and the Production Merger; and WHEREAS, the Board of Directors of Production, as the general partner of Encinitas, has deemed the Encinitas Merger and the other Combination Transactions to be in the best interest of Encinitas and the Encinitas Limited Partners, and has approved, and recommended that the Encinitas Limited Partners approve, this Agreement, an amendment to the Encinitas Partnership Agreement (as defined in Section 1.1) to permit the Encinitas Merger and the Encinitas Merger; and WHEREAS, the Board of Directors of the Company, as the general partner of La Rosa, has deemed the La Rosa Merger and the other Combination Transactions to be in the best interest of La Rosa and the La Rosa Limited Partners, and has approved, and recommended that the La Rosa Limited Partners approve, this Agreement, an amendment to the La Rosa Partnership Agreement (as defined in Section 1.1) to permit the La Rosa Merger and the La Rosa Merger; and WHEREAS, the Board of Directors of the Company, as the general partner of Carrizo Partners, has deemed the Carrizo Partners Merger and the other Combination Transactions to be in the best interest of Carrizo Partners and the Carrizo Partners Limited Partners, and has approved, and recommended that the Carrizo Partners Limited Partners approve, this Agreement, an amendment to the Carrizo Partners Partnership Agreement (as defined in Section 1.1) to permit the Carrizo Partners Merger and the Carrizo Partners Merger; and WHEREAS, the parties hereto desire to set forth the terms and conditions of the Combination and to provide for certain relationships and obligations among the parties hereto following the Closing Date (as defined in Section 1.1): NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the aforesaid parties hereto hereby agree as follows: ARTICLE I. DEFINITIONS; ORDER SECTION 1.1 DEFINED TERMS. As used in this Agreement, the following terms have the meanings specified in this Section 1.1. Other capitalized terms have the meanings assigned to them elsewhere in this Agreement. Accredited Investor means an "Accredited Investor" as defined in Rule 501(a) promulgated under the Securities Act. 2 8 Carrizo Partners After Payout Consideration means, with respect to each Carrizo Partners Limited Partner Interest, the product of (i) 707,358 shares of Common Stock (which is equal to the difference between (a) the Carrizo Partners Aggregate Valuation Shares and (b) the quotient of (1) the aggregate Carrizo Partners Before Payout Consideration with respect to all Carrizo Partners Limited Partner Interests, divided by (2) 86.667% (the aggregate Before Payout Percentages with respect to all Carrizo Partners Limited Partner Interests as set forth on Schedule 1.1(A) hereto)), multiplied by (ii) the percentage set forth on Schedule 1.1(A) hereto as the After Payout Percentage with respect to such Carrizo Partners Limited Partner Interest. For purposes of clarity, it is agreed that the Carrizo Partners After Payout Consideration with respect to each of the units representing a Carrizo Partners Limited Partner Interest attributable to an original capital contribution of $50,000 by an Investor Limited Partner (as defined in the Carrizo Partners Partnership Agreement) is 23,578 shares of Common Stock, and the aggregate Carrizo Partners After Payout Consideration with respect to all Carrizo Partners Limited Partner Interests is 483,361 shares of Common Stock. Carrizo Partners Aggregate Valuation Sharesmeans 806,250 shares of Common Stock, which is equal to the number of shares of Common Stock that would be issued to the partners of Carrizo Partners if shares were being issued in respect of all partner interests in Carrizo Partners in the Carrizo Partners Merger (it being understood, however, that because no shares are being issued in respect of the general partner interest in Carrizo Partners in the Carrizo Partners Merger, the number of shares issuable in the Carrizo Partners Merger will be less than the Carrizo Partners Aggregate Valuation Shares). Carrizo Partners Approvalsmeans the approval of the Carrizo Partners Partnership Agreement Amendment by the general partner of Carrizo Partners and a majority in interest of the Carrizo Partners Limited Partners Interests, in accordance with the Carrizo Partners Partnership Agreement, and the approval of the Carrizo Partners Merger by the partners of Carrizo Partners in accordance with the Carrizo Partners Partnership Agreement, as amended by the Carrizo Partners Partnership Agreement Amendment. Carrizo Partners Before Payout Consideration means, with respect to each Carrizo Partners Limited Partner Interest, the product of (i) 98,892 shares of Common Stock (which is equal to the quotient of (a) $1,040,344 (which is the amount of cash that if distributed with respect to all partner interests in Carrizo Partners at August 1, 1997 (the assumed Carrizo Partners Effective Time (as defined in Section 6.3)) would result in distributions to the Investor Limited Partners in an amount sufficient to cause a Conversion Date to occur (i.e., an amount that would be sufficient to repay a loan or loans in the amounts, and made at the times, of the Capital Contributions of the Investor Limited Partners, bearing interest at 20% per annum compounded annually) minus the aggregate amount of distributions made by Carrizo Partners with respect to all partner interests in Carrizo Partners prior to the Carrizo Partners Effective Time, divided by (b) the Share Valuation Price), multiplied by (ii) the percentage set forth on Schedule 1.1(A) hereto as the Before Payout Percentage with respect to such Carrizo Partners Limited Partner Interest. For purposes of clarity, it is agreed that the Carrizo Partners Before Payout Consideration with respect to each of the units representing a Carrizo Partners Limited Partner Interest attributable to an original capital contribution of $50,000 3 9 by an Investor Limited Partner is 6,593 shares of Common Stock, and the aggregate Carrizo Partners Before Payout Consideration with respect to all Carrizo Partners Limited Partner Interests is 85,707 shares of Common Stock. Capitalized terms used in this definition and not otherwise defined in this Agreement shall have the meanings given to them in the Carrizo Partners Partnership Agreement. Carrizo Partners Limited Partner Interests means the limited partner interests in Carrizo Partners of the limited partners of Carrizo Partners. Carrizo Partners Merger Consideration means, with respect to each Carrizo Partners Limited Partner Interest, the sum of the Carrizo Partners Before Payout Consideration and the Carrizo Partners After Payout Consideration with respect to such Carrizo Partners Limited Partner Interest. For purposes of clarity, it is agreed that the Carrizo Partners Merger Consideration with respect to each of the units representing a Carrizo Partners Limited Partner Interest attributable to an original capital contribution of $50,000 by an Investor Limited Partner (as defined in the Carrizo Partners Partnership Agreement) is 30,171 shares of Common Stock, and the aggregate Carrizo Partners Merger Consideration with respect to all Carrizo Partners Limited Partner Interests is 569,068 shares of Common Stock. Carrizo Partners Partnership Agreement means the Agreement of Limited Partnership of Carrizo Partners Ltd. dated January 7, 1994 as it has or may be amended from time to time. Carrizo Partners Partnership Agreement Amendmentmeans the proposed amendment to the Carrizo Partners Partnership Agreement to permit the Carrizo Partners Merger upon the approval of a majority in interest of the Carrizo Partners Limited Partner Interests. Closing means the closing of each of the Offering, the Encinitas Purchase Closing (if consummated), the Production Merger (if consummated), the Encinitas Merger (if consummated), the La Rosa Merger (if consummated) and the Carrizo Partners Merger (if consummated). Closing Date means the date of the closing of the Offering, the Encinitas Purchase Closing (if consummated), the Production Merger (if consummated), the Encinitas Merger (if consummated), the La Rosa Merger (if consummated) and the Carrizo Partners Merger (if consummated). Encinitas After Payout Consideration means, with respect to each Encinitas Limited Partner Interest, the product of (i) 1,166,111 shares of Common Stock (which is equal to the difference between (a) the Encinitas Aggregate Valuation Shares and (b) the quotient of (1) the aggregate Encinitas Before Payout Consideration with respect to all Encinitas Limited Partner Interests, divided by (2) 98.58% (the aggregate Before Payout Percentages with respect to all Encinitas Limited Partner Interests as set forth on Schedule 1.1(B) hereto)), multiplied by (ii) the percentage set forth on Schedule 1.1(B) hereto as the After Payout Percentage with respect to such Encinitas Limited Partner Interest. For purposes of clarity, it is agreed that the Encinitas After Payout Consideration with respect to each of the units representing an Encinitas Limited Partner Interest attributable to an original capital contribution of $50,000 by an Additional Limited Partner (as 4 10 defined in the Encinitas Partnership Agreement) is 8,329 shares of Common Stock, and the aggregate Encinitas After Payout Consideration with respect to all Encinitas Limited Partner Interests is 829,932 shares of Common Stock. Encinitas Aggregate Valuation Sharesmeans 1,672,500 shares of Common Stock, which is equal to the number of shares of Common Stock that would be issued to the partners of Encinitas if shares were being issued in respect of all partner interests in Encinitas in the Encinitas Merger (it being understood, however, that because no shares are being issued in respect of the general partner interest in Encinitas in the Encinitas Merger, the number of shares issuable in the Encinitas Merger will be less than the Encinitas Aggregate Valuation Shares). Encinitas Approvals means the approval of the Encinitas Partnership Agreement Amendment by the general partner of Encinitas and a majority in interest of the Encinitas Limited Partners Interests, in accordance with the Encinitas Partnership Agreement, and the approval of the Encinitas Merger by the partners of Encinitas in accordance with the Encinitas Partnership Agreement, as amended by the Encinitas Partnership Agreement Amendment. Encinitas Before Payout Consideration means, with respect to each Encinitas Limited Partner Interest, the product of (i) 506,389 shares of Common Stock (which is equal to the quotient of (a) $5,327,211 (which is the amount of cash that if distributed with respect to all partner interests in Encinitas at August 1, 1997 (the assumed Encinitas Effective Time (as defined in Section 4.3)) would result in distributions to the Additional Limited Partners in an amount sufficient to cause a Conversion Date to occur (i.e., an amount that would result in the aggregate amount of distributions to the Additional Limited Partners being equal to the sum of the aggregate Capital Contributions of the Additional Limited Partners, plus 20% per annum thereon from the Amendment Date, compounded annually) minus the aggregate amount of distributions made by Encinitas with respect to all partner interests in Encinitas prior to the Encinitas Effective Time, divided by (b) the Share Valuation Price), multiplied by (ii) the percentage set forth on Schedule 1.1(B) hereto as the Before Payout Percentage with respect to such Encinitas Limited Partner Interest. For purposes of clarity, it is agreed that the Encinitas Before Payout Consideration with respect to each of the units representing an Encinitas Limited Partner Interest attributable to an original capital contribution of $50,000 by an Additional Limited Partner is 7,234 shares of Common Stock, and the aggregate Encinitas Before Payout Consideration with respect to all Encinitas Limited Partner Interests is 499,300 shares of Common Stock. Capitalized terms used in this definition and not otherwise defined in this Agreement shall have the meanings given to them in the Encinitas Partnership Agreement. Encinitas Limited Partner Interests means the limited partner interests in Encinitas of the limited partners of Encinitas. Encinitas Merger Consideration means, with respect to each Encinitas Limited Partner Interest, the sum of the Encinitas Before Payout Consideration and the Encinitas After Payout Consideration with respect to such Encinitas Limited Partner Interest. For purposes of clarity, it is 5 11 agreed that the Encinitas Merger Consideration with respect to each of the units representing an Encinitas Limited Partner Interest attributable to an original capital contribution of $50,000 by an Additional Limited Partner (as defined in the Encinitas Partnership Agreement) is 15,563 shares of Common Stock, and the aggregate Encinitas Merger Consideration with respect to all Encinitas Limited Partner Interests is 1,329,232 shares of Common Stock. Encinitas Partnership Agreement means the Amended and Restated Agreement of Limited Partnership of Encinitas Partners Ltd. as it has or may be amended from time to time. Encinitas Partnership Agreement Amendment means the proposed amendment to the Encinitas Partnership Agreement to permit the Encinitas Merger upon the approval of a majority in interest of the Encinitas Limited Partner Interests. Encinitas Purchase Consideration means, with respect to each Founder, the sum of the Encinitas Before Payout Consideration and the Encinitas After Payout Consideration with respect to the Encinitas Limited Partner Interests owned by such Founder. La Rosa Aggregate Valuation Shares means 48,700 shares of Common Stock, which is equal to the number of shares of Common Stock that would be issued to the partners of La Rosa if shares were being issued in respect of all partner interests in La Rosa in the La Rosa Merger (it being understood, however, that because no shares are being issued in respect of the general partner interest in La Rosa in the La Rosa Merger, the number of shares issuable in the La Rosa Merger will be less than the La Rosa Aggregate Valuation Shares). La Rosa Approvals means the approval of the La Rosa Partnership Agreement Amendment by the general partner of La Rosa and a majority in interest of the La Rosa Limited Partners Interests, in accordance with the La Rosa Partnership Agreement, and the approval of the La Rosa Merger by the partners of La Rosa in accordance with the La Rosa Partnership Agreement, as amended by the La Rosa Partnership Agreement Amendment. La Rosa Limited Partner Interests means the limited partner interests in La Rosa of the limited partners of La Rosa. La Rosa Merger Consideration means, with respect to each La Rosa Limited Partner Interest, the sum of the product of (i) the La Rosa Aggregate Valuation Shares multiplied by (ii) the percentage set forth on Schedule 1.1(C) hereto with respect to such La Rosa Limited Partner Interest. La Rosa Partnership Agreement means the Agreement of Limited Partnership of La Rosa Partners Ltd. dated March 26, 1996 as it may be amended from time to time. La Rosa Partnership Agreement Amendment means the proposed amendment to the La Rosa Partnership Agreement to permit the La Rosa Merger upon the approval of a majority in interest of the La Rosa Limited Partner Interests. 6 12 Mergers means the Production Merger, the Encinitas Merger, the La Rosa Merger and the Carrizo Partners Merger. Offering Memorandum means the Offering Memorandum of the Company dated June 6, 1997. Production Merger Consideration means 70 shares of Common Stock (which is equal to the whole number nearest to the quotient of (i) the difference between (a) the Encinitas Aggregate Valuation Shares and (b) the sum of (1) the aggregate Encinitas Merger Consideration in the Encinitas Merger with respect to all Encinitas Limited Partner Interests and (2) the aggregate Encinitas Purchase Consideration of all Founders, divided by (ii) 4,900 (the total number of shares of Production's common stock currently outstanding and to be outstanding at the Production Effective Time (as defined in Section 3.3))). Shares means shares of Common Stock acquired pursuant to the Combination Transactions. Share Valuation Pricemeans $10.52 (which is the price per share of Common Stock that was established by the Company for use in determining the Carrizo Partners Merger Consideration and the Encinitas Merger Consideration (it being understood that such price likely will differ, and may differ significantly, from the sale price per share to the public of the Common Stock in the Offering)). Surviving Corporation means the Company, which shall be the surviving corporation of each of the Mergers. SECTION 1.2 COMBINATION TRANSACTIONS ORDER. The Combination Transactions shall occur on the Closing Date in the following order: (a) the Encinitas Purchase Closing, if consummated, immediately followed by (b) the Production Merger, if consummated, immediately followed by (c) the Encinitas Merger, the La Rosa Merger and the Carrizo Partners Merger, which, if consummated, shall occur simultaneously. ARTICLE II. THE ENCINITAS PURCHASE SECTION 2.1 THE PURCHASE. Subject to the terms and conditions of this Agreement, on the Closing Date, the Company will purchase and acquire from each of the Founders, and each of the Founders will sell, assign and transfer to the Company, all of his Encinitas Limited Partner Interests free and clear of any liens, encumbrances or defects ("Liens"). SECTION 2.2 PURCHASE PRICE. In exchange for each Founder's Encinitas Limited Partner Interests, the Company shall pay each such Founder his Encinitas Purchase Consideration. 7 13 SECTION 2.3 CLOSING. The closing of the Encinitas Purchase (the "Encinitas Purchase Closing"), if consummated, shall take place at the offices of Baker & Botts, L.L.P., 910 Louisiana, Houston, Texas 77002 (or at such other place as the parties hereto shall mutually agree), on the Closing Date, provided that the conditions set forth in Sections 14.1, 14.2 and 14.7 shall have been fulfilled or waived in accordance with this Agreement. SECTION 2.4 DELIVERIES AT CLOSING. At the Encinitas Purchase Closing, each Founder shall deliver a duly executed assignment in form and substance reasonably acceptable to the Company transferring his Encinitas Limited Partner Interests to the Company and directions to the general partner of Encinitas to transfer on the books of Encinitas such Founder's Encinitas Limited Partner Interests to the Company. At or promptly following the Encinitas Purchase Closing, the Company shall deliver to each Founder, in exchange for such Founder's Encinitas Limited Partner Interests, a stock certificate from the Company in the name of such Founder representing the number of shares of Common Stock equal to such Founder's Encinitas Purchase Consideration, as set forth in Section 2.2. SECTION 2.5 CONSENT TO LIMITED PARTNER INTEREST TRANSFER. By its execution of this Agreement, Production, as general partner of Encinitas, consents to the transfer of any Encinitas Limited Partner Interests to the Company or its permitted assigns pursuant to the Encinitas Purchase, and to the admittance of the Company as an Encinitas Limited Partner in respect of such transferred Encinitas Limited Partner Interests. ARTICLE III. THE PRODUCTION MERGER SECTION 3.1 THE PRODUCTION MERGER. Subject to the terms and conditions of this Agreement, at the Production Effective Time (as defined in Section 3.3), Production shall be merged with and into the Company in accordance with the Plan or Merger attached hereto as Exhibit A (the "Production Plan of Merger"), which is hereby made a part hereof and incorporated herein by reference, and the separate existence of Production shall thereupon cease. The Company shall be the surviving corporation in the Production Merger and shall continue to be governed by the laws of the State of Texas, and the separate existence of the Company with all its rights, privileges, immunities, and franchises shall continue unaffected by the Production Merger. The Production Merger shall have the effect specified in the Texas Business Corporation Act (the "TBCA") with respect to Production and with respect to the Surviving Corporation. SECTION 3.2 CLOSING. The closing of the Production Merger (the "Production Merger Closing"), if consummated, shall take place at the offices of Baker & Botts, L.L.P., 910 Louisiana, Houston, Texas 77002 (or at such other place as the parties hereto shall mutually agree), on the Closing Date, provided that the conditions set forth in Sections 14.1, 14.3 and 14.7 shall have been fulfilled or waived in accordance with this Agreement. 8 14 SECTION 3.3 PRODUCTION EFFECTIVE TIME. At the Production Closing, Production and the Company will cause the Articles of Merger, including the Production Plan of Merger incorporated by reference therein, to be filed with the Secretary of State of the State of Texas as required by, and executed in accordance with, the TBCA. The Production Merger shall become effective at the time (the "Production Effective Time") specified in the Production Plan of Merger. SECTION 3.4 CONVERSION OF SHARES. As provided in the Production Plan of Merger: (a) at the Production Effective Time, by virtue of the Production Merger and without any action on the part of the holder of any share of Common Stock or capital stock of Production: (i) subject to Section 3.4(b) and Article VII of the Production Plan of Merger, each share of common stock of Production ("Production Common Stock") outstanding immediately prior to the Production Effective Time, other than Production Common Stock that is to be canceled pursuant to Section 3.4(a)(ii), shall be converted into and represent the right to receive the Production Merger Consideration, payable as provided in Section 3.5; (ii) each share of Production Common Stock that is held by Production or any subsidiary thereof as treasury stock immediately prior to the Production Effective Time shall be canceled, and no payment shall be made with respect thereto; and (iii) each share of Common Stock outstanding immediately prior to the Production Effective Time shall remain outstanding and continue unchanged as one share of Common Stock; and (b) no fractional shares of Common Stock shall be issued in the Production Merger, and each holder of shares of Production Common Stock will be issued a whole share of Common Stock in lieu of any fractional share interest to which such holder would otherwise be entitled. SECTION 3.5 SURRENDER AND EXCHANGE OF SHARES. (a) Promptly after the Production Effective Time, the Surviving Corporation will send to each recordholder of shares of Production Common Stock immediately prior to the Production Effective Time (i) a letter of transmittal for use in exchanging certificates representing shares of Production Common Stock for the Production Merger Consideration and (ii) instructions for use in effecting the surrender of the certificates representing shares of Production Common Stock in exchange for certificates representing shares of Common Stock. Upon surrender of certificates for Production Common Stock for cancellation to the Surviving Corporation, together with a duly executed letter of transmittal and such other documents as the Surviving Corporation shall reasonably require, the holder of such certificates shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of Common Stock into which the shares of Production Common Stock theretofore represented by the certificates for Production Common Stock so surrendered shall have been converted pursuant to the provisions of Section 3.4, and the certificates for Production Common Stock so surrendered shall be canceled. The letter of transmittal shall (x) specify, among other things, that delivery shall be 9 15 effected, and risk of loss and title to the Production Common Stock shall pass, only upon actual delivery of the certificates for shares of Production Common Stock to the Surviving Corporation, (y) include provisions ensuring the rights of each party hereunder including customary provisions and a statement that satisfies the requirements of Treas. Reg. Section 1.1445-2(b)(2) certifying that the holder submitting such letter of transmittal is not a "foreign person" and provide that if such statement is not made, appropriate tax withholding will be made from the Production Merger Consideration and (z) include the representations and warranties set forth on Exhibit B hereto and other provisions to ensure that the receipt by such holder of shares of Common Stock otherwise complies with Regulation D promulgated under the Securities Act and other applicable laws. (b) Until surrendered in accordance with the terms hereof, each certificate for shares of Production Common Stock shall after the Production Effective Time represent for all purposes only the right to receive the Production Merger Consideration. Unless and until so surrendered, no dividends or other distributions payable to the holders of Common Stock, as to any time on or after the Production Effective Time, will be paid to the holder of such outstanding certificates. (c) From and after the Production Effective Time, there shall be no further registration of transfers on the books of Production of shares of Production Common Stock that were outstanding immediately prior to the Production Effective Time. (d) Notwithstanding the foregoing, the Surviving Corporation shall not be liable to any holder of shares of Production Common Stock for any amount paid to a public official pursuant to applicable abandoned property laws. Any amounts remaining unclaimed by holders of shares of Production Common Stock three years after the Production Effective Time (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental entity) shall, to the extent permitted by applicable law, become the property of the Surviving Corporation free and clear of any claims or interests of any person previously entitled thereto. ARTICLE IV. THE ENCINITAS MERGER SECTION 4.1 THE ENCINITAS MERGER. Subject to the terms and conditions of this Agreement, at the Encinitas Effective Time (as defined in Section 4.3), Encinitas shall be merged with and into the Company in accordance with the Plan of Merger attached hereto as Exhibit C (the "Encinitas Plan of Merger"), which is hereby made a part hereof and incorporated herein by reference and the separate existence of Encinitas shall thereupon cease. The Company shall be the surviving corporation in the Encinitas Merger and shall continue to be governed by the laws of the State of Texas, and the separate existence of the Company with all its rights, privileges, immunities, and franchises shall continue unaffected by the Encinitas Merger. The Encinitas Merger shall have the effect specified in the Texas Revised Limited Partnership Act (the "TRLPA") and the TBCA, respectively, with respect to Encinitas and with respect to the Surviving Corporation. 10 16 SECTION 4.2 CLOSING. The closing of the Encinitas Merger (the "Encinitas Merger Closing"), if consummated, shall take place at the offices of Baker & Botts, L.L.P., 910 Louisiana, Houston, Texas 77002 (or at such other place as the parties hereto shall mutually agree), on the Closing Date, provided that the conditions set forth in Sections 14.1, 14.4 and 14.7 shall have been fulfilled or waived in accordance with this Agreement. SECTION 4.3 EFFECTIVE TIME. At the Encinitas Closing, Encinitas and the Company will cause the Articles of Merger, including the Encinitas Plan of Merger incorporated by reference therein, to be filed with the Secretary of State of the State of Texas as required by, and executed in accordance with, the TRLPA and the TBCA. The Encinitas Merger shall become effective at the time (the "Encinitas Effective Time") specified in the Encinitas Plan of Merger. SECTION 4.4 CONVERSION OF PARTNERSHIP INTERESTS. As provided in the Encinitas Plan of Merger: (a) at the Encinitas Effective Time, by virtue of the Encinitas Merger and without any action on the part of the holder of any share of Common Stock or partnership interest of Encinitas: (i) subject to Section 4.4(b), all of the Encinitas Limited Partner Interests outstanding immediately prior to the Encinitas Effective Time, other than Encinitas Limited Partner Interests that are to be canceled pursuant to Section 4.4(a)(ii), shall be converted into and represent the right to receive the Encinitas Merger Consideration, payable to the holder of such Encinitas Limited Partner Interests as provided in Section 4.5; (ii) any Encinitas Limited Partner Interests outstanding immediately prior to the Encinitas Effective Time that are held by Encinitas or any subsidiary thereof or by the Company (pursuant to the Encinitas Purchase or otherwise) shall be canceled, and no payment shall be made with respect thereto; (iii) all general partner interests in Encinitas outstanding immediately prior to the Encinitas Effective Time shall be canceled, and no payment shall be made with respect thereto; and (iv) each share of Common Stock outstanding immediately prior to the Encinitas Effective Time shall remain outstanding and continue unchanged as one share of Common Stock; and (b) no fractional shares of Common Stock shall be issued in the Encinitas Merger, and each holder of Encinitas Limited Partner Interests will be issued the whole number of shares of Common Stock nearest to the number of shares to which such holder would otherwise be entitled. SECTION 4.5 SURRENDER AND EXCHANGE OF PARTNERSHIP INTERESTS. (a) Promptly after the Encinitas Effective Time, the Surviving Corporation will send to each recordholder of Encinitas 11 17 Limited Partner Interests immediately prior to the Encinitas Effective Time a letter of transfer for use in delivery to such holder of the Encinitas Merger Consideration. Upon delivery of a duly executed letter of transfer and such other documents as the Surviving Corporation shall reasonably require, the holder of such Encinitas Limited Partner Interests shall be entitled to receive a certificate representing that number of whole shares of Common Stock into which the Encinitas Limited Partner Interests shall have been converted pursuant to the provisions of Section 4.4. The letter of transfer shall (x) specify, among other things, that delivery shall be effected only upon actual delivery of the letter of transfer to the Surviving Corporation, (y) include provisions ensuring the rights of each party hereunder including customary provisions and a statement that satisfies the requirements of Treas. Reg. Section 1.1445-2(b)(2) certifying that the holder submitting such letter of transfer is not a "foreign person" and provide that if such statement is not made, appropriate tax withholding will be made from the Encinitas Merger Consideration and (z) include the representations and warranties set forth on Exhibit B hereto and other provisions to ensure that the receipt by such holder of shares of Common Stock otherwise complies with Regulation D promulgated under the Securities Act and other applicable laws. (b) Until a letter of transfer with respect to each Encinitas Limited Partner Interest is accepted by the Company in accordance with the terms hereof, Encinitas Limited Partner Interests shall after the Encinitas Effective Time represent for all purposes only the right to receive the Encinitas Merger Consideration. Unless and until so surrendered, no dividends or other distributions payable to the holders of Common Stock, as to any time on or after the Encinitas Effective Time, will be paid to the holder of such Encinitas Limited Partner Interests. (c) From and after the Encinitas Effective Time, there shall be no further registration of transfers on the books of Encinitas of Encinitas Limited Partner Interests that were outstanding immediately prior to the Encinitas Effective Time. (d) Notwithstanding the foregoing, the Surviving Corporation shall not be liable to any holder of Encinitas Limited Partner Interests for any amount paid to a public official pursuant to applicable abandoned property laws. Any amounts remaining unclaimed by holders of Encinitas Limited Partner Interests three years after the Encinitas Effective Time (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental entity) shall, to the extent permitted by applicable law, become the property of the Surviving Corporation free and clear of any claims or interests of any person previously entitled thereto. SECTION 4.6 NO DISSENTERS' RIGHTS. Encinitas Limited Partners shall have no appraisal, dissenters' or similar rights in connection with the Encinitas Merger. 12 18 ARTICLE V. THE LA ROSA MERGER SECTION 5.1 THE LA ROSA MERGER. Subject to the terms and conditions of this Agreement, at the La Rosa Effective Time (as defined in Section 5.3), La Rosa shall be merged with and into the Company in accordance with the Plan of Merger attached hereto as Exhibit D (the "La Rosa Plan of Merger"), which is hereby made a part hereof and incorporated herein by reference, and the separate existence of La Rosa shall thereupon cease. The Company shall be the surviving corporation in the La Rosa Merger and shall continue to be governed by the laws of the State of Texas, and the separate existence of the Company with all its rights, privileges, immunities, and franchises shall continue unaffected by the La Rosa Merger. The La Rosa Merger shall have the effect specified in the TRLPA and the TBCA, respectively, with respect to La Rosa and with respect to the Surviving Corporation. SECTION 5.2 CLOSING. The closing of the La Rosa Merger (the "La Rosa Merger Closing"), if consummated, shall take place at the offices of Baker & Botts, L.L.P., 910 Louisiana, Houston, Texas 77002 (or at such other place as the parties hereto shall mutually agree), on the Closing Date, provided that the conditions set forth in Sections 14.1, 14.5 and 14.7 shall have been fulfilled or waived in accordance with this Agreement. SECTION 5.3 EFFECTIVE TIME. At the La Rosa Closing, La Rosa and the Company will cause the Articles of Merger, including the La Rosa Plan of Merger incorporated by reference therein, to be filed with the Secretary of State of the State of Texas as required by, and executed in accordance with, the TRLPA and the TBCA. The La Rosa Merger shall become effective at the time (the "La Rosa Effective Time") specified in the La Rosa Plan of Merger. SECTION 5.4 CONVERSION OF PARTNERSHIP INTERESTS. As provided in the La Rosa Plan of Merger: (a) at the La Rosa Effective Time, by virtue of the La Rosa Merger and without any action on the part of the holder of any share of Common Stock or partnership interest of La Rosa: (i) subject to Section 5.4(b), all of the La Rosa Limited Partner Interests outstanding immediately prior to the La Rosa Effective Time, other than La Rosa Limited Partner Interests that are to be canceled pursuant to Section 5.4(a)(ii), shall be converted into and represent the right to receive the La Rosa Merger Consideration, payable to the holder of such La Rosa Limited Partner Interests as provided in Section 5.5; (ii) any La Rosa Limited Partner Interests outstanding immediately prior to the La Rosa Effective Time that are held by La Rosa or any subsidiary thereof or by the Company shall be canceled, and no payment shall be made with respect thereto; 13 19 (iii) all general partner interests in La Rosa outstanding immediately prior to the La Rosa Effective Time shall be canceled, and no payment shall be made with respect thereto; and (iv) each share of Common Stock outstanding immediately prior to the La Rosa Effective Time shall remain outstanding and continue unchanged as one share of Common Stock; and (b) no fractional shares of Common Stock shall be issued in the La Rosa Merger, and each holder of La Rosa Limited Partner Interests will be issued the whole number of shares of Common Stock nearest to the number of shares to which such holder would otherwise be entitled. SECTION 5.5 SURRENDER AND EXCHANGE OF PARTNERSHIP INTERESTS. (a) Promptly after the La Rosa Effective Time, the Surviving Corporation will send to each recordholder of La Rosa Limited Partner Interests immediately prior to the La Rosa Effective Time a letter of transfer for use in delivery to such holder of the La Rosa Merger Consideration. Upon delivery of a duly executed letter of transfer and such other documents as the Surviving Corporation shall reasonably require, the holder of such La Rosa Limited Partner Interests shall be entitled to receive a certificate representing that number of whole shares of Common Stock into which the La Rosa Limited Partner Interests shall have been converted pursuant to the provisions of Section 5.4. The letter of transfer shall (x) specify, among other things, that delivery shall be effected only upon actual delivery of the letter of transfer to the Surviving Corporation, (y) include provisions ensuring the rights of each party hereunder including customary provisions and a statement that satisfies the requirements of Treas. Reg. Section 1.1445-2(b)(2) certifying that the holder submitting such letter of transfer is not a "foreign person" and provide that if such statement is not made, appropriate tax withholding will be made from the La Rosa Merger Consideration and (z) include the representations and warranties set forth on Exhibit B hereto and other provisions to ensure that the receipt by such holder of shares of Common Stock otherwise complies with Regulation D promulgated under the Securities Act and other applicable laws. (b) Until a letter of transfer with respect to each La Rosa Limited Partner Interest is accepted by the Company in accordance with the terms hereof, La Rosa Limited Partner Interests shall after the La Rosa Effective Time represent for all purposes only the right to receive the La Rosa Merger Consideration. Unless and until so surrendered, no dividends or other distributions payable to the holders of Common Stock, as to any time on or after the La Rosa Effective Time, will be paid to the holder of such La Rosa Limited Partner Interests. (c) From and after the La Rosa Effective Time, there shall be no further registration of transfers on the books of La Rosa of La Rosa Limited Partner Interests that were outstanding immediately prior to the La Rosa Effective Time. (d) Notwithstanding the foregoing, the Surviving Corporation shall not be liable to any holder of La Rosa Limited Partner Interests for any amount paid to a public official pursuant to 14 20 applicable abandoned property laws. Any amounts remaining unclaimed by holders of La Rosa Limited Partner Interests three years after the La Rosa Effective Time (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental entity) shall, to the extent permitted by applicable law, become the property of the Surviving Corporation free and clear of any claims or interests of any person previously entitled thereto. SECTION 5.6 NO DISSENTERS' RIGHTS. La Rosa Limited Partners shall have no appraisal, dissenters' or similar rights in connection with the La Rosa Merger. ARTICLE VI. THE CARRIZO PARTNERS MERGER SECTION 6.1 THE CARRIZO PARTNERS MERGER. Subject to the terms and conditions of this Agreement, at the Carrizo Partners Effective Time (as defined in Section 6.3), Carrizo Partners shall be merged with and into the Company in accordance with the Plan of Merger attached hereto as Exhibit E (the "Carrizo Partners Plan of Merger"), which is hereby incorporated herein by reference, and the separate existence of Carrizo Partners shall thereupon cease. The Company shall be the surviving corporation in the Carrizo Partners Merger and shall continue to be governed by the laws of the State of Texas, and the separate existence of the Company with all its rights, privileges, immunities, and franchises shall continue unaffected by the Carrizo Partners Merger. The Carrizo Partners Merger shall have the effect specified in the TRLPA and the TBCA, respectively, with respect to Carrizo Partners and with respect to the Surviving Corporation. SECTION 6.2 CLOSING. The closing of the Carrizo Partners Merger (the "Carrizo Partners Merger Closing"), if consummated, shall take place at the offices of Baker & Botts, L.L.P., 910 Louisiana, Houston, Texas 77002 (or at such other place as the parties hereto shall mutually agree), on the Closing Date, provided that the conditions set forth in Sections 14.1, 14.6 and 14.7 shall have been fulfilled or waived in accordance with this Agreement. SECTION 6.3 EFFECTIVE TIME. At the Carrizo Partners Closing, Carrizo Partners and the Company will cause the Articles of Merger, including the Carrizo Partners Plan of Merger incorporated by reference therein, to be filed with the Secretary of State of the State of Texas as required by, and executed in accordance with, the TRLPA and the TBCA. The Carrizo Partners Merger shall become effective at the time (the "Carrizo Partners Effective Time") specified in the Carrizo Partners Plan of Merger. 15 21 SECTION 6.4 CONVERSION OF PARTNERSHIP INTERESTS. As provided in the Carrizo Partners Plan of Merger: (a) at the Carrizo Partners Effective Time, by virtue of the Carrizo Partners Merger and without any action on the part of the holder of any share of Common Stock or partnership interest of Carrizo Partners: (i) subject to Section 6.4(b), all of the Carrizo Partners Limited Partner Interests outstanding immediately prior to the Carrizo Partners Effective Time, other than Carrizo Partners Limited Partner Interests that are to be canceled pursuant to Section 6.4(a)(ii), shall be converted into and represent the right to receive the Carrizo Partners Merger Consideration, payable to the holder of such Carrizo Partners Limited Partner Interests as provided in Section 6.5; (ii) any Carrizo Partners Limited Partner Interests outstanding immediately prior to the Carrizo Partners Effective Time that are held by Carrizo Partners or any subsidiary thereof or by the Company shall be canceled, and no payment shall be made with respect thereto; (iii) all general partner interests in Carrizo Partners outstanding immediately prior to the Carrizo Partners Effective Time shall be canceled, and no payment shall be made with respect thereto; and (iv) each share of Common Stock outstanding immediately prior to the Carrizo Partners Effective Time shall remain outstanding and continue unchanged as one share of Common Stock; and (b) no fractional shares of Common Stock shall be issued in the Carrizo Partners Merger, and each holder of Carrizo Partners Limited Partner Interests will be issued the whole number of shares of Common Stock nearest to the number of shares to which such holder would otherwise be entitled. SECTION 6.5 SURRENDER AND EXCHANGE OF PARTNERSHIP INTERESTS. (a) Promptly after the Carrizo Partners Effective Time, the Surviving Corporation will send to each recordholder of Carrizo Partners Limited Partner Interests immediately prior to the Carrizo Partners Effective Time a letter of transfer for use in delivery to such holder of the Carrizo Partners Merger Consideration. Upon delivery of a duly executed letter of transfer and such other documents as the Surviving Corporation shall reasonably require, the holder of such Carrizo Partners Limited Partner Interests shall be entitled to receive a certificate representing that number of whole shares of Common Stock into which the Carrizo Partners Limited Partner Interests shall have been converted pursuant to the provisions of Section 4.7. The letter of transfer shall (x) specify, among other things, that delivery shall be effected only upon actual delivery of the letter of transfer to the Surviving Corporation, (y) include provisions ensuring the rights of each party hereunder including customary provisions and 16 22 a statement that satisfies the requirements of Treas. Reg. Section 1.1445-2(b)(2) certifying that the holder submitting such letter of transfer is not a "foreign person" and provide that if such statement is not made, appropriate tax withholding will be made from the Carrizo Partners Merger Consideration and (z) include the representations and warranties set forth on Exhibit B hereto and a statement that the holder submitting such letter of transfer is an Accredited Investor and other provisions to ensure that the receipt by such holder of shares of Common Stock otherwise complies with Regulation D promulgated under the Securities Act and other applicable laws. (b) Until a letter of transfer with respect to each Carrizo Partners Limited Partner Interest is accepted by the Company in accordance with the terms hereof, Carrizo Partners Limited Partner Interests shall after the Carrizo Partners Effective Time represent for all purposes only the right to receive the Carrizo Partners Merger Consideration. Unless and until so surrendered, no dividends or other distributions payable to the holders of Common Stock, as to any time on or after the Carrizo Partners Effective Time, will be paid to the holder of such Carrizo Partners Limited Partner Interests. (c) From and after the Carrizo Partners Effective Time, there shall be no further registration of transfers on the books of Carrizo Partners of Carrizo Partners Limited Partner Interests that were outstanding immediately prior to the Carrizo Partners Effective Time. (d) Notwithstanding the foregoing, the Surviving Corporation shall not be liable to any holder of Carrizo Partners Limited Partner Interests for any amount paid to a public official pursuant to applicable abandoned property laws. Any amounts remaining unclaimed by holders of Carrizo Partners Limited Partner Interests three years after the Carrizo Partners Effective Time (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental entity) shall, to the extent permitted by applicable law, become the property of the Surviving Corporation free and clear of any claims or interests of any person previously entitled thereto. SECTION 6.6 NO DISSENTERS' RIGHTS. Carrizo Partners Limited Partners shall have no appraisal, dissenters' or similar rights in connection with the Carrizo Partners Merger. ARTICLE VII. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants the following to each of the other parties hereto. Except as set forth in the Offering Memorandum: SECTION 7.1 ORGANIZATION; QUALIFICATION. The Company is a corporation duly organized under the TBCA and is validly existing and in good standing under the laws of the State of Texas. The Company has all requisite corporate power and authority to own, operate or lease its properties and to carry on its business as now being conducted. 17 23 SECTION 7.2 CAPITALIZATION OF THE COMPANY. The authorized capital stock of the Company consists solely of 40,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, par value $0.01 per share. As of the date hereof (taking into account the 521-for-one stock split that has been approved by the Board of Directors of the Company) 5,210,000 shares of Common Stock and no shares of preferred stock are outstanding, as well as outstanding options to purchase 208,400 shares of Common Stock. All outstanding shares of capital stock of the Company are, and the shares of Common Stock to be issued pursuant to this Agreement, when issued in accordance with the terms hereof and thereof, will be, duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. SECTION 7.3 NO CONFLICTS. Subject to the Company Shareholder Approval (as defined in Section 13.1), consummation of the transactions contemplated hereby and compliance with the terms and provisions of this Agreement will not conflict with, result in a breach of, require notice under or constitute a default under either the Company's Articles of Incorporation or Bylaws or any judgment, order, injunction, decree or ruling of any court or governmental authority or under any material agreement, indenture or instrument to which the Company is a party. No consent, approval, order or authorization of, or registration, declaration or filing with, any court or governmental authority or other third party is required on the part of the Company in connection with the execution and delivery of this Agreement or for the consummation by the Company of the transactions contemplated by this Agreement, other than the Company Shareholder Approval and filings with the Secretary of State of the State of Texas in connection with the Mergers or filings pursuant to federal or state securities laws. SECTION 7.4 AUTHORITY AND AUTHORIZATION; BINDING EFFECT. The Company has all requisite corporate power and authority to execute and deliver this Agreement and, subject to the Company Shareholder Approval, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and, subject to the Company Shareholder Approval, the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery hereof by the other parties hereto, constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. SECTION 7.5 LITIGATION, ETC. (a) There is no action, claim or proceeding pending or, to the knowledge of the Company, threatened to which the Company is or would be party before any court or governmental authority acting in an adjudicative capacity or any arbitration or arbitration tribunal with respect to which there is a reasonable likelihood of a determination having, or which, insofar as reasonably can be foreseen, in the future would have a material adverse effect on the Company, (b) the Company is not subject to any outstanding order, writ, injunction or decree having, or which, insofar as reasonably can be foreseen, in the future would have a material adverse effect on the Company, and (c) since its formation, there have been no claims made or actions or proceedings 18 24 brought against any officer or director of the Company arising out of or pertaining to any action or omission within the scope of his employment or position with the Company, which claim, action or proceeding is material to the Company. SECTION 7.6 FINANCIAL STATEMENTS OF THE COMPANY. Each of the balance sheets of the Company included in the Offering Memorandum (including the related notes and schedules) fairly presents, in all material respects, the financial position of the Company as of its date, and each of the statements of income and changes in financial position included in the Offering Memorandum (including any related notes and schedules) fairly presents the results of operations, shareholders' equity, retained earning and changes in financial position, as the case may be, of the Company for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments not material in amount of effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein. Since December 31, 1996, no dividends, distributions, repurchases of interests or any other payment has been made to any equityholder of the Company as such. The Company did not have on December 31, 1996 or the date of any subsequent balance sheet of the Company, any material contingent liabilities, liabilities for taxes, obligations, guarantees or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in the balance sheet, including the notes thereto, of the Company as of said date. Since December 31, 1996, there has been no material adverse change in the financial condition, assets or operation of the business of the Company. SECTION 7.7 COMPLIANCE WITH LAWS. The operations of the Company do not violate any federal, state, local or other laws or regulations or any order or requirement of any court or governmental agency or authority in any material respect, including without limitation those laws, regulations, orders or requirements relating to environment or health. Such operations are not subject to any existing, pending or, to the knowledge of the Company, threatened action, suit, investigation, inquiry or proceeding by or before any court or governmental agency or authority under any federal, state or local environmental law, rule or regulation, except in each case for any matter that would not have a material adverse effect on the Company. ARTICLE VIII. REPRESENTATIONS AND WARRANTIES OF THE FOUNDERS Each of the Founders hereby represents and warrants the following to the Company (with each Founder making representations and warranties solely with respect to that Founder). Except as set forth on the Founders Disclosure Schedule, attached hereto as Exhibit F: SECTION 8.1 OWNERSHIP. The Founders Disclosure Schedule sets forth the true and correct Encinitas Limited Partner Interests owned by such Founder. The Founder owns its Encinitas Limited Partner Interest free and clear of all Liens. 19 25 SECTION 8.2 NO CONFLICTS. Consummation of the transactions contemplated hereby and compliance with the terms and provisions of this Agreement will not conflict with, result in a breach of, require notice or consent under or constitute a default under any judgment, order, injunction, decree or ruling of any court or governmental authority or under any material agreement, indenture or instrument to which the Founder is a party. No consent, approval, order or authorization of, or registration, declaration or filing with, any court or governmental authority or other third party is required on the part of the Founder in connection with the execution and delivery of this Agreement or for the consummation of the transactions contemplated by this Agreement. SECTION 8.3 AUTHORITY AND AUTHORIZATION; BINDING EFFECT. The Founder has all requisite authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Founder and, assuming the due authorization, execution and delivery hereof by the other parties hereto, constitutes a valid and binding obligation of the Founder enforceable against the Founder in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. SECTION 8.4 EXPERIENCE; STATUS. (a) The Founder has experience in analyzing and investing in companies like the Company and is capable of evaluating the merits and risks of his investment in the Company and has the capacity to protect his own interests. To the extent necessary, the Founder has retained, at his own expense, and relied upon, appropriate professional advice regarding the investment, tax and legal merits and consequences of the Combination Transactions, or any part thereof, and owning Shares, it being understood that the Company has not retained legal or financial advisors on behalf of the Founder. (b) The Founder is an Accredited Investor, is able to bear the economic risk of his investment in the Shares and has sufficient net worth to sustain a loss of his entire investment in the Company without economic hardship if such loss should occur. SECTION 8.5 ACCESS TO COMPANY INFORMATION. (a) The Founder has had an opportunity to discuss the Company's business, management and financial affairs with the members of the Company's management and has had the opportunity to review the Company's facilities. The Founder has also had an opportunity to ask questions of the officers of the Company, which questions were answered to his satisfaction. The Founder acknowledges that he is familiar with all aspects of the Company's business. (b) The Founder has received and carefully reviewed a copy of the Offering Memorandum. The Founder understands that information in such Offering Memorandum is preliminary and subject to change. The Founder acknowledges that he has reviewed the information in such Offering Memorandum solely for general background purposes and that, in particular, information with respect to the Offering and the Combination Transactions is expected to change prior to the Closing. The Founder recognizes that he will receive no supplement or amendment to such Offering Memorandum. The Founder acknowledges that his investment decision is based 20 26 primarily on his familiarity with the assets the Company currently owns and is expected to acquire and the Company's management. (c) The Founder has received no representations or warranties from the Company, or its employees, affiliates, attorneys, accountants or agents, except as set forth in this Agreement. (d) The Founder understands that the purchase of the Shares involves numerous risks, including those outlined in the Offering Memorandum. SECTION 8.6 INVESTMENT PURPOSES; RULE 144. (a) The Founder is acquiring Shares solely for investment for his own account, not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof. The Founder understands that the Shares have not been registered under the Securities Act or applicable state and other securities laws by reason of a specific exemption from the registration provisions of the Securities Act and applicable state and other securities laws, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Founders' representations as expressed herein. The Founder understands that the Company is relying, in part, upon the representations and warranties contained in this Agreement for the purpose of determining whether the Combination Transactions meet the requirements for such exemptions. (b) The Founder acknowledges and understands that he must bear the economic risk of his investment in the Shares for an indefinite period of time because the Shares must be held indefinitely unless subsequently registered under the Securities Act and applicable state and other securities laws or unless an exemption from such registration is available. The Founder understands that, except as described in the Offering Memorandum, the Company has not agreed to and does not plan to file a registration statement to register the resale of the Shares under the Securities Act. (c) The Founder is aware of the current provisions of Rule 144 promulgated under the Securities Act ("Rule 144") which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including among other things, the existence of a public market for the securities, the availability of certain current public information about the issuer of the securities, the resale occurring not less than one year after a party has purchased from an issuer or its affiliate and paid the full purchase price for the securities to be sold, the sale being effected through a "broker's transaction" or in transactions directly with a "market maker" and the number of securities being sold during any three-month period not exceeding specified limitations. The Founder understands that any transfer agent of the Company will be issued stop-transfer instructions with respect to such Shares unless such transfer is subsequently registered under the Securities Act and applicable state and other securities laws or unless an exemption from such registration is available. The Founder understands that for purposes of Rule 144, he will be deemed an affiliate of the Company. 21 27 (d) The Founder acknowledges and agrees that the foregoing representations are true as of the date hereof, the time of receipt of Shares and the time of the vote on and effective time of any merger or other transaction that resulted in the issuance of Shares. SECTION 8.7 ADDITIONAL RESTRICTION ON TRANSFER. The Founder has received a copy of the Amended and Restated Bylaws of the Company and understands that the Shares will be subject to the restrictions on transfer contained in Article I of such Bylaws. The Founder also acknowledges the restrictions on transfer of the Shares in Section 16.3 of this Agreement. ARTICLE IX. REPRESENTATIONS AND WARRANTIES OF PRODUCTION Production hereby represents and warrants the following to the Company. Except as set forth on the Production Disclosure Schedule, attached hereto as Exhibit G: SECTION 9.1 ORGANIZATION; QUALIFICATION. Production is a corporation duly organized under the TBCA and is validly existing and in good standing under the laws of the State of Texas. Production has all requisite corporate power and authority to own, operate or lease its properties and to carry on its business as now being conducted. SECTION 9.2 CAPITALIZATION. The authorized capital stock of Production consists solely of 100,000 shares of common stock, par value $0.01 per share, of which 4,900 shares are outstanding as of the date hereof and will be outstanding as of the Production Effective Time. Production does not, and will not as of the Closing Date, have any outstanding subscriptions, options or other arrangements or commitments obligating it to issue any additional shares of capital stock. All outstanding shares of capital stock of Production are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. SECTION 9.3 NO CONFLICTS. Subject to the Production Shareholder Approval (as defined in Section 13.1), consummation of the transactions contemplated hereby and compliance with the terms and provisions of this Agreement will not conflict with, result in a breach of, require notice or consent under or constitute a default under Production's Articles of Incorporation or Bylaws or any judgment, order, injunction, decree or ruling of any court or governmental authority or under any material agreement, indenture or instrument to which Production is a party. No consent, approval, order or authorization of, or registration, declaration or filing with, any court or governmental authority or other third party is required on the part of Production in connection with the execution and delivery of this Agreement or for the consummation by Production of the transactions contemplated by this Agreement other than the Production Shareholder Approval and filings with the Secretary of State of the State of Texas in connection with the Production Merger. SECTION 9.4 AUTHORITY AND AUTHORIZATION; BINDING EFFECT. Production has all requisite corporate power and authority to execute and deliver this Agreement and, subject to the Production 22 28 Shareholder Approval, to consummate the transactions involving Production contemplated hereby. The execution and delivery of this Agreement and, subject to the Production Shareholder Approval, the consummation of the transactions by Production contemplated hereby have been duly authorized by all necessary corporate action on the part of Production. This Agreement has been duly executed and delivered by Production and, assuming the due authorization, execution and delivery hereof by the other parties hereto, constitutes a valid and binding obligation of Production enforceable against Production in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. SECTION 9.5 LITIGATION, ETC. (a) There is no action, claim, or proceeding pending or, to the knowledge of Production, threatened, to which Production is or would be a party before any court or governmental authority acting in an adjudicative capacity or any arbitrator or arbitration tribunal with respect to which there is a reasonable likelihood of a determination having, or which, insofar as reasonably can be foreseen, in the future would have a material adverse effect on Production, (b) Production is not subject to any outstanding order, writ, injunction or decree having, or which, insofar as reasonably can be foreseen, in the future would have a material adverse effect on Production, and (c) there have been no claims made or actions or proceedings brought against any officer or director of Production arising out of or pertaining to any action or omission within the scope of his employment or position with Production, which claim, action or proceeding is material to Production. SECTION 9.6 FINANCIAL STATEMENTS OF PRODUCTION. Each of the balance sheets of Production included in the Offering Memorandum (including the related notes and schedules) fairly presents, in all material respects, the financial position of Production as of its date, and each of the statements of income and changes in financial position included in the Offering Memorandum (including any related notes and schedules) fairly presents the results of operations, stockholders' equity, retained earning and changes in financial position, as the case may be, of Production for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments not material in amount of effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein. Since December 31, 1996, no dividends, distributions, repurchases of interests or any other payment has been made to any equityholder of Production as such. Production did not have on December 31, 1996 or the date of any subsequent balance sheet of Production, any material contingent liabilities, liabilities for taxes, obligations, guarantees or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in the balance sheet, including the notes thereto, of Production as of said date. Since December 31, 1996, there has been no material adverse change in the financial condition, assets or operation of the business of Production. SECTION 9.7 OWNERSHIP OF ENCINITAS. Production owns its general partner interest in Encinitas free and clear of all Liens. 23 29 SECTION 9.8 COMPLIANCE WITH LAWS. The operations of Production do not violate any federal, state, local or other laws or regulations or any order or requirement of any court or governmental agency or authority in any material respect, including without limitation those laws, regulations, orders or requirements relating to environment or health. Such operations are not subject to any existing, pending or, to the knowledge of Production, threatened action, suit, investigation, inquiry or proceeding by or before any court or governmental agency or authority under any federal, state or local environmental law, rule or regulation, except in each case for any matter that would not have a material adverse effect on Production. SECTION 9.9 LIMITED PARTNERS. To the knowledge of Production, as the general partner of Encinitas, all of the Encinitas Limited Partners are Accredited Investors. ARTICLE X. REPRESENTATIONS AND WARRANTIES OF ENCINITAS Encinitas hereby represents and warrants the following to the Company. Except as set forth on the Encinitas Disclosure Schedule, attached hereto as Exhibit H: SECTION 10.1 FORMATION; QUALIFICATION. Encinitas is a limited partnership duly formed under Texas law and is validly existing and in good standing under the laws of the State of Texas. Encinitas has all requisite partnership power and authority to own, operate or lease its properties and to carry on its business as now being conducted. SECTION 10.2 CAPITALIZATION. Production is the sole general partner of Encinitas and owns all the general partner interests in Encinitas free and clear of all Liens. All the outstanding limited and general partner interests of Encinitas are duly authorized, validly issued, fully paid to the extent required under the Encinitas Partnership Agreement and nonassessable (except as provided by Texas partnership law) and were issued free of preemptive rights. Encinitas does not, and will not as of the Closing Date, have any outstanding subscriptions, options or other arrangements or commitments obligating Encinitas to issue any additional limited or general partner interests. Immediately prior to the Encinitas Effective Time, there will be no outstanding interests in Encinitas other than those set forth in the Encinitas Partnership Agreement, a true and correct copy of which has heretofore been delivered to the Company. SECTION 10.3 NO CONFLICTS. Assuming the Encinitas Approvals, consummation of the transactions contemplated hereby and compliance with the terms and provisions of this Agreement will not materially conflict with, result in a material breach of, require notice or consent under or constitute a material breach under the Encinitas Partnership Agreement or the certificate of limited partnership of Encinitas or any judgment, order, injunction, decree or ruling of any court or governmental authority or under any material agreement, indenture or instrument to which Encinitas or the general partner of Encinitas is a party. No consent, approval, order or authorization of, or registration, declaration or filing with, any court or governmental authority or other third party is 24 30 required on the part of Encinitas or the general partner of Encinitas in connection with the execution and delivery of this Agreement or for the consummation by Encinitas of the transactions contemplated by this Agreement, other than the Encinitas Approvals. There are no agreements or arrangements regarding the management or internal governance of Encinitas or relating to the allocation of its assets, revenues or costs other than the Encinitas Partnership Agreement. SECTION 10.4 AUTHORITY AND AUTHORIZATION; BINDING EFFECT. Encinitas has all requisite partnership power and authority to enter into and, subject to the Encinitas Approvals, perform the provisions of this Agreement involving Encinitas. The execution and delivery of this Agreement and the consummation by Encinitas of the transactions contemplated hereby have been duly authorized by all necessary partnership action on the part of Encinitas, subject to the Encinitas Approvals. Subject to such approvals, this Agreement has been duly executed and delivered by Encinitas and, assuming the due authorization, execution and delivery hereof by the other parties hereto, constitutes a valid and binding obligation of Encinitas enforceable against Encinitas in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. SECTION 10.5 LITIGATION, ETC. (a) There is no action, claim or proceeding pending or, to the knowledge of Encinitas, threatened, to which Encinitas is or would be a party before any court or governmental authority acting in an adjudicative capacity or any arbitrator or arbitration tribunal with respect to which there is a reasonable likelihood of a determination having, or which, insofar as reasonably can be foreseen, in the future would have a material adverse effect on Encinitas, (b) Encinitas is not subject to any outstanding order, writ, injunction or decree having, or which, insofar as reasonably can be foreseen, in the future would have a material adverse effect on Encinitas, and (c) there have been no claims made or actions or proceedings brought against any officer or director of the general partner of Encinitas arising out of or pertaining to any action or omission within the scope of his employment or position as an officer or director of the general partner of Encinitas, which claim, action or proceeding is material to Encinitas. SECTION 10.6 FINANCIAL STATEMENTS OF ENCINITAS. Each of the balance sheets of Encinitas included in the Offering Memorandum (including the related notes and schedules) fairly presents, in all material respects, the financial position of Encinitas as of its date, and each of the statements of income and changes in financial position included in the Offering Memorandum (including any related notes and schedules) fairly presents the results of operations, partners' equity, retained earnings and changes in financial position, as the case may be, of Encinitas for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments not material in amount or effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein. Since December 31, 1996, no distributions, repurchases of interests or any other payment has been made to any equityholder of Encinitas as such. Encinitas did not have on December 31, 1996 or the date of any subsequent balance sheet of Encinitas, any material contingent liabilities, liabilities for taxes, obligations, guarantees or unrealized or anticipated losses from any unfavorable commitments, 25 31 except as referred to or reflected or provided for in the balance sheet, including the notes thereto, of Encinitas as of said date. Since December 31, 1996, there has been no material adverse change in the financial condition, assets or operation of the business of Encinitas. SECTION 10.7 COMPLIANCE WITH LAWS. The operations of Encinitas do not violate any federal, state, local or other laws or regulations or any order or requirement of any court or governmental agency or authority in any material respect, including without limitation those laws, regulations, orders or requirements relating to environment or health. Such operations are not subject to any existing, pending or, to the knowledge of Encinitas, threatened action, suit, investigation, inquiry or proceeding by or before any court or governmental agency or authority under any federal, state or local environmental law, rule or regulation, except in each case for any matter that would not have a material adverse effect on Encinitas. SECTION 10.8 LIMITED PARTNERS. The general partner of Encinitas believes, based upon its prior substantive relationship with each of the Encinitas Limited Partners, that each of the Encinitas Limited Partners are Accredited Investors and that each of the other representations and warranties set forth on Exhibit B hereto are true and correct with respect to each of the Encinitas Limited Partners to the same extent as if such limited partners had signed such Exhibit B. ARTICLE XI. REPRESENTATIONS AND WARRANTIES OF LA ROSA La Rosa hereby represents and warrants the following to the Company. Except as set forth on the La Rosa Disclosure Schedule, attached hereto as Exhibit I: SECTION 11.1 FORMATION; QUALIFICATION. La Rosa is a limited partnership duly formed under Texas law and is validly existing and in good standing under the laws of the State of Texas. La Rosa has all requisite partnership power and authority to own, operate or lease its properties and to carry on its business as now being conducted. SECTION 11.2 CAPITALIZATION. The Company is the sole general partner of La Rosa and owns all the general partner interests in La Rosa free and clear of all Liens. All the outstanding limited and general partner interests of La Rosa are duly authorized, validly issued, fully paid to the extent required under the La Rosa Partnership Agreement and nonassessable (except as provided by Texas partnership law) and were issued free of preemptive rights. La Rosa does not, and will not as of the Closing Date, have any outstanding subscriptions, options or other arrangements or commitments obligating La Rosa to issue any additional limited or general partner interests. Immediately prior to the La Rosa Effective Time, there will be no outstanding interests in La Rosa other than those set forth in the La Rosa Partnership Agreement, a true and correct copy of which has heretofore been delivered to the Company. 26 32 SECTION 11.3 NO CONFLICTS. Assuming the La Rosa Approvals, consummation of the transactions contemplated hereby and compliance with the terms and provisions of this Agreement will not materially conflict with, result in a material breach of, require notice or consent under or constitute a material breach under the La Rosa Partnership Agreement or the certificate of limited partnership of La Rosa or any judgment, order, injunction, decree or ruling of any court or governmental authority or under any material agreement, indenture or instrument to which La Rosa or the general partner of La Rosa is a party. No consent, approval, order or authorization of, or registration, declaration or filing with, any court or governmental authority or other third party is required on the part of La Rosa or the general partner of La Rosa in connection with the execution and delivery of this Agreement or for the consummation by La Rosa of the transactions contemplated by this Agreement, other than the La Rosa Approvals. There are no agreements or arrangements regarding the management or internal governance of La Rosa or relating to the allocation of its assets, revenues or costs other than the La Rosa Partnership Agreement. SECTION 11.4 AUTHORITY AND AUTHORIZATION; BINDING EFFECT. La Rosa has all requisite partnership power and authority to enter into and, subject to the La Rosa Approvals, perform the provisions of this Agreement involving La Rosa. The execution and delivery of this Agreement and the consummation by La Rosa of the transactions contemplated hereby have been duly authorized by all necessary partnership action on the part of La Rosa, subject to the La Rosa Approvals. Subject to such approvals, this Agreement has been duly executed and delivered by La Rosa and, assuming the due authorization, execution and delivery hereof by the other parties hereto, constitutes a valid and binding obligation of La Rosa enforceable against La Rosa in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. SECTION 11.5 LITIGATION, ETC. (a) There is no action, claim or proceeding pending or, to the knowledge of La Rosa, threatened, to which La Rosa is or would be a party before any court or governmental authority acting in an adjudicative capacity or any arbitrator or arbitration tribunal with respect to which there is a reasonable likelihood of a determination having, or which, insofar as reasonably can be foreseen, in the future would have a material adverse effect on La Rosa, (b) La Rosa is not subject to any outstanding order, writ, injunction or decree having, or which, insofar as reasonably can be foreseen, in the future would have a material adverse effect on La Rosa, and (c) there have been no claims made or actions or proceedings brought against any officer or director of the general partner of La Rosa arising out of or pertaining to any action or omission within the scope of his employment or position as an officer or director of the general partner of La Rosa, which claim, action or proceeding is material to La Rosa. SECTION 11.6 FINANCIAL STATEMENTS OF LA ROSA. Each of the balance sheets of La Rosa included in the Offering Memorandum (including the related notes and schedules) fairly presents, in all material respects, the financial position of La Rosa as of its date, and each of the statements of income and changes in financial position included in the Offering Memorandum (including any related notes and schedules) fairly presents the results of operations, partners' equity, retained earnings and changes in financial position, as the case may be, of La Rosa for the periods set forth 27 33 therein (subject, in the case of unaudited statements, to normal year-end audit adjustments not material in amount or effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein. Since December 31, 1996, no distributions, repurchases of interests or any other payment has been made to any equityholder of La Rosa as such. La Rosa did not have on December 31, 1996 or the date of any subsequent balance sheet of La Rosa, any material contingent liabilities, liabilities for taxes, obligations, guarantees or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in the balance sheet, including the notes thereto, of La Rosa as of said date. Since December 31, 1996, there has been no material adverse change in the financial condition, assets or operation of the business of La Rosa. SECTION 11.7 COMPLIANCE WITH LAWS. The operations of La Rosa do not violate any federal, state, local or other laws or regulations or any order or requirement of any court or governmental agency or authority in any material respect, including without limitation those laws, regulations, orders or requirements relating to environment or health. Such operations are not subject to any existing, pending or, to the knowledge of La Rosa, threatened action, suit, investigation, inquiry or proceeding by or before any court or governmental agency or authority under any federal, state or local environmental law, rule or regulation, except in each case for any matter that would not have a material adverse effect on La Rosa. SECTION 11.8 LIMITED PARTNERS. The general partner of La Rosa believes, based upon its prior substantive relationship with each of the La Rosa Limited Partners, that each of the La Rosa Limited Partners are Accredited Investors and that each of the other representations and warranties set forth on Exhibit B hereto are true and correct with respect to each of the La Rosa Limited Partners to the same extent as if such limited partners had signed such Exhibit B. ARTICLE XII. REPRESENTATIONS AND WARRANTIES OF CARRIZO PARTNERS Carrizo Partners hereby represents and warrants the following to the Company. Except as set forth on the Carrizo Partners Disclosure Schedule, attached hereto as Exhibit J: SECTION 12.1 FORMATION; QUALIFICATION. Carrizo Partners is a limited partnership duly formed under Texas law and is validly existing and in good standing under the laws of the State of Texas. Carrizo Partners has all requisite partnership power and authority to own, operate or lease its properties and to carry on its business as now being conducted. SECTION 12.2 CAPITALIZATION. The Company is the sole general partner of Carrizo Partners and owns all the general partner interests in Carrizo Partners free and clear of all Liens. All the outstanding limited and general partner interests of Carrizo Partners are duly authorized, validly issued, fully paid to the extent required under the Carrizo Partners Partnership Agreement and nonassessable (except as provided by Texas partnership law) and were issued free of preemptive rights. Carrizo Partners does not, and will not as of the Closing Date, have any outstanding 28 34 subscriptions, options or other arrangements or commitments obligating Carrizo Partners to issue any additional limited or general partner interests. Immediately prior to the Carrizo Partners Effective Time, there will be no outstanding interests in Carrizo Partners other than those set forth in the Carrizo Partners Partnership Agreement, a true and correct copy of which has heretofore been delivered to the Company. SECTION 12.3 NO CONFLICTS. Assuming the Carrizo Partners Approvals, consummation of the transactions contemplated hereby and compliance with the terms and provisions of this Agreement will not materially conflict with, result in a material breach of, require notice or consent under or constitute a material breach under the Carrizo Partners Partnership Agreement or the certificate of limited partnership of Carrizo Partners or any judgment, order, injunction, decree or ruling of any court or governmental authority or under any material agreement, indenture or instrument to which Carrizo Partners or the general partner of Carrizo Partners is a party. No consent, approval, order or authorization of, or registration, declaration or filing with, any court or governmental authority or other third party is required on the part of Carrizo Partners or the general partner of Carrizo Partners in connection with the execution and delivery of this Agreement or for the consummation by Carrizo Partners of the transactions contemplated by this Agreement, other than the Carrizo Partners Approvals. There are no agreements or arrangements regarding the management or internal governance of Carrizo Partners or relating to the allocation of its assets, revenues or costs other than the Carrizo Partners Partnership Agreement. SECTION 12.4 AUTHORITY AND AUTHORIZATION; BINDING EFFECT. Carrizo Partners has all requisite partnership power and authority to enter into and, subject to the Carrizo Partners Approvals, perform the provisions of this Agreement involving Carrizo Partners. The execution and delivery of this Agreement and the consummation by Carrizo Partners of the transactions contemplated hereby have been duly authorized by all necessary partnership action on the part of Carrizo Partners, subject to the Carrizo Partners Approvals. Subject to such approvals, this Agreement has been duly executed and delivered by Carrizo Partners and, assuming the due authorization, execution and delivery hereof by the other parties hereto, constitutes a valid and binding obligation of Carrizo Partners enforceable against Carrizo Partners in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. SECTION 12.5 LITIGATION, ETC. (a) There is no action, claim or proceeding pending or, to the knowledge of Carrizo Partners, threatened, to which Carrizo Partners is or would be a party before any court or governmental authority acting in an adjudicative capacity or any arbitrator or arbitration tribunal with respect to which there is a reasonable likelihood of a determination having, or which, insofar as reasonably can be foreseen, in the future would have a material adverse effect on Carrizo Partners, (b) Carrizo Partners is not subject to any outstanding order, writ, injunction or decree having, or which, insofar as reasonably can be foreseen, in the future would have a material adverse effect on Carrizo Partners, and (c) there have been no claims made or actions or proceedings brought against any officer or director of the general partner of Carrizo Partners arising out of or pertaining 29 35 to any action or omission within the scope of his employment or position as an officer or director of the general partner of Carrizo Partners, which claim, action or proceeding is material to Carrizo Partners. SECTION 12.6 FINANCIAL STATEMENTS OF CARRIZO PARTNERS. Each of the balance sheets of Carrizo Partners included in the Offering Memorandum (including the related notes and schedules) fairly presents, in all material respects, the financial position of Carrizo Partners as of its date, and each of the statements of income and changes in financial position included in the Offering Memorandum (including any related notes and schedules) fairly presents the results of operations, partners' equity, retained earnings and changes in financial position, as the case may be, of Carrizo Partners for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments not material in amount or effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein. Since December 31, 1996, no distributions, repurchases of interests or any other payment has been made to any equityholder of Carrizo Partners as such. Carrizo Partners did not have on December 31, 1996 or the date of any subsequent balance sheet of Carrizo Partners, any material contingent liabilities, liabilities for taxes, obligations, guarantees or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in the balance sheet, including the notes thereto, of Carrizo Partners as of said date. Since December 31, 1996, there has been no material adverse change in the financial condition, assets or operation of the business of Carrizo Partners. SECTION 12.7 OWNERSHIP OF PLACEDO PARTNERS LTD. Carrizo Partners owns its fifty percent (50%) limited partner interest in Placedo Partners Ltd. free and clear of all Liens. SECTION 12.8 COMPLIANCE WITH LAWS. The operations of Carrizo Partners do not violate any federal, state, local or other laws or regulations or any order or requirement of any court or governmental agency or authority in any material respect, including without limitation those laws, regulations, orders or requirements relating to environment or health. Such operations are not subject to any existing, pending or, to the knowledge of Carrizo Partners, threatened action, suit, investigation, inquiry or proceeding by or before any court or governmental agency or authority under any federal, state or local environmental law, rule or regulation, except in each case for any matter that would not have a material adverse effect on Carrizo Partners. SECTION 12.9 LIMITED PARTNERS. The general partner of Carrizo Partners believes, based upon its prior substantive relationship with each of the Carrizo Partners Limited Partners, that each of the Carrizo Partners Limited Partners are Accredited Investors and that each of the other representations and warranties set forth on Exhibit B hereto are true and correct with respect to each of the Carrizo Partners Limited Partners to the same extent as if such limited partners had signed such Exhibit B. 30 36 ARTICLE XIII. COVENANTS AND AGREEMENTS SECTION 13.1 EQUITYHOLDER APPROVAL. (a) The Company shall, as promptly as practicable, submit this Agreement and the transactions contemplated hereby for the approval of its shareholders (the "Company Shareholder Approval") and, subject to the fiduciary duties of the Board of Directors of the Company under applicable law, shall use its reasonable best efforts to obtain shareholder approval and adoption of this Agreement and the transactions contemplated hereby. (b) Production shall, as promptly as practicable, submit this Agreement and the Production Merger for the approval of its shareholders (the "Production Shareholder Approval") and, subject to the fiduciary duties of the Board of Directors of the Company under applicable law, shall use its reasonable best efforts to obtain shareholder approval and adoption of this Agreement and the transactions contemplated hereby. (c) Subject to its fiduciary duties as a general partner under applicable law, Production, as general partner of Encinitas, shall, as promptly as practicable, recommend the Encinitas Approvals to the limited partners of Encinitas, and shall use its reasonable best efforts to obtain such approvals. (d) Subject to its fiduciary duties as a general partner under applicable law, the Company, as general partner of La Rosa, shall, as promptly as practicable, recommend the La Rosa Approvals to the limited partners of La Rosa, and shall use its reasonable best efforts to obtain such approvals. (e) Subject to its fiduciary duties as a general partners under applicable law, the Company, as general partner of Carrizo Partners, shall, as promptly as practicable, recommend the Carrizo Partners Approvals to the limited partners of Carrizo Partners, and shall use its reasonable best efforts to obtain such approvals. SECTION 13.2 CONDUCT OF BUSINESS. Production, Encinitas, La Rosa and Carrizo Partners agree that prior to the Closing, and except as otherwise contemplated herein or consented to in writing by the Company or as relates to the Offering, each shall (a) conduct its business in the ordinary course and shall use reasonable efforts to preserve intact its present business organization, maintain the services of its present officers and employees and preserve the relations with its customers, suppliers and others having business relations with it; (b) except as set forth on a Disclosure Schedule attached hereto, not pay or declare dividends or other distributions, split, combine or otherwise reclassify its capital stock or partnership interests or directly or indirectly repurchase or otherwise acquire shares of its capital stock or partnership interests; (c) not issue any capital stock, partnership interests or debt securities having voting rights for directors or any rights, options, securities convertible or exchangeable therefor, except under existing employee stock option plans or presently outstanding convertible or exchangeable securities; and (d) not amend or modify its certificates or articles of incorporation, by-laws, partnership agreements or other governing 31 37 documents, except for the Encinitas Partnership Agreement Amendment, the La Rosa Partnership Agreement Amendment and the Carrizo Partners Partnership Agreement Amendment. SECTION 13.3 THIRD PARTY CONSENTS. Each of the parties hereto will use its best efforts to obtain such consents of third parties to agreements which would otherwise be violated by any provisions hereof, to take all actions necessary to effect the transactions contemplated hereby, and to make such filings with governmental authorities necessary to consummate the transactions contemplated by this Agreement including, without limitation, the execution and delivery of any additional instruments reasonably necessary to consummate the transactions contemplated by this Agreement. ARTICLE XIV. CONDITIONS SECTION 14.1 CONDITIONS TO THE OBLIGATIONS OF ALL PARTIES TO EFFECT THE COMBINATION TRANSACTIONS. The respective obligations of each of the parties to effect the Combination Transactions shall be subject to the fulfillment (or waiver) at or prior to the Closing of the following conditions: (a) Initial Public Offering. The Offering shall occur prior to or simultaneously with the Closing. (b) Company Shareholder Approval. The approval of the shareholders of the Company to this Agreement and the transactions contemplated hereby shall have been obtained. SECTION 14.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND EACH OF THE FOUNDERS TO EFFECT THE ENCINITAS PURCHASE. The respective obligations of the Company and each of the Founders to effect the Encinitas Purchase shall be subject to the fulfillment (or waiver) at or prior to the Closing of the following additional conditions: (a) No Orders. There shall not be issued and in effect any order restraining, prohibiting or delaying consummation of the Encinitas Purchase. SECTION 14.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND PRODUCTION TO EFFECT THE PRODUCTION MERGER. The respective obligations of the Company and Production to effect the Production Merger shall be subject to the fulfillment (or waiver) at or prior to the Production Effective Time of the following additional conditions: (a) No Orders. There shall not be issued and in effect any order restraining, prohibiting or delaying consummation of the Production Merger. 32 38 (b) Production Shareholder Approval. The approval of the shareholders of Production to this Agreement and the Production Merger shall have been obtained. SECTION 14.4 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND ENCINITAS TO EFFECT THE ENCINITAS MERGER. The respective obligations of the Company and Encinitas to effect the Encinitas Merger shall be subject to the fulfillment (or waiver) at or prior to the Encinitas Effective Time of the following additional conditions: (a) No Orders. There shall not be issued and in effect any order restraining, prohibiting or delaying consummation of the Encinitas Merger. (b) Encinitas Approvals. The Encinitas Approvals shall have been obtained. SECTION 14.5 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND LA ROSA TO EFFECT THE LA ROSA MERGER. The respective obligations of the Company and La Rosa to effect the La Rosa Merger shall be subject to the fulfillment (or waiver) at or prior to the La Rosa Effective Time of the following additional conditions: (a) No Orders. There shall not be issued and in effect any order restraining, prohibiting or delaying consummation of the La Rosa Merger. (b) La Rosa Approvals. The La Rosa Approvals shall have been obtained. SECTION 14.6 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND CARRIZO PARTNERS TO EFFECT THE CARRIZO PARTNERS MERGER. The respective obligations of the Company and Carrizo Partners to effect the Carrizo Partners Merger shall be subject to the fulfillment (or waiver) at or prior to the Carrizo Partners Effective Time of the following additional conditions: (a) No Orders. There shall not be issued and in effect any order restraining, prohibiting or delaying consummation of the Carrizo Partners Merger. (b) Carrizo Partners Approvals. The Carrizo Partners Approvals shall have been obtained. SECTION 14.7 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY TO EFFECT ANY OF THE COMBINATION TRANSACTIONS. The obligations of the Company to effect any of the Combination Transactions shall be subject to the fulfillment (or waiver) at or prior to the Closing of the following additional conditions: (a) Accuracy of Representations and Warranties. The representations and warranties of each of the Founders, Production, Encinitas, La Rosa and Carrizo Partners contained in Articles VIII, IX, X, XI and XII, respectively, shall be true and correct in all material respects on and as of the Closing as if made on and as of such time (except for representation and warranties made of as a 33 39 specified date or time, which shall be true and correct in all material respects as of such specified date or time); at the Closing each of the Founders, Production, Encinitas, La Rosa and Carrizo Partners shall deliver a certificate signed by such party, or an officer or general partner thereof (as applicable), certifying the foregoing. (b) Performance of Covenants. The Founders, Production, Encinitas, La Rosa and Carrizo Partners shall have performed and complied in all material respect with the covenants and agreements contained in this Agreement that are required to be performed or complied with by it on or prior to the Closing. (c) Combination Transactions Closings. Each of the Combination Transactions shall close. SECTION 14.8 OTHER COMBINATION TRANSACTIONS. For further clarity, the parties hereby acknowledge that it is not a condition to the obligation of any party (other than the Company) to consummate any Combination Transactions that any other Combination Transactions is consummated. ARTICLE XV. TERMINATION SECTION 15.1 TERMINATION. This Agreement may be terminated and the Combination contemplated hereby may be abandoned at any time prior to the Effective Time, whether before or after approval of any other matter by any equityholder of the parties: SECTION (a) By mutual consent of the Company, Production, Encinitas, La Rosa and Carrizo Partners, including, without limitation, for the purpose of engaging in another transaction involving the merger or sale or other business combination of one or more of such entities into any other entity or another similar transaction; SECTION (b) By the Company, if a court of competent jurisdiction or governmental, regulatory or administrative agency or commission shall have issued an order, decree or ruling or taken any other action, in each case permanently restraining, enjoining or otherwise prohibiting the Combination Transactions contemplated by this Agreement; or (c) By the Company, if the Company determines that there is a reasonable probability that the Offering or the Combination Transactions will not be consummated on or prior to December 31, 1997. SECTION 15.2 EFFECT OF TERMINATION. In the event of termination of this Agreement by a party as provided in Section 15.1, written notice thereof shall promptly be given to the other parties, 34 40 and this Agreement shall forthwith terminate without further action of the parties hereto. If this Agreement is terminated as provided, however, there shall be no liabilities or obligations hereunder on the part of the parties, except that nothing herein shall relieve any party hereto from liability for any breach of this Agreement that resulted in the termination. ARTICLE XVI. MISCELLANEOUS AND GENERAL SECTION 16.1 SURVIVAL. The representations and warranties in Articles VII, IX, X, XI and XII and any statement made in any certificate required under Section 14.7 shall expire at the Effective Time, and the representations and warranties in Article VIII shall survive the Effective Time. SECTION 16.2 MODIFICATION OR AMENDMENT. At any time before or after approval of any matter by any equityholder of the parties, the parties hereto may modify, waive or amend this Agreement by written agreement executed and delivered by duly authorized representatives of the respective parties. SECTION 16.3 RESTRICTIONS ON TRANSFER; LEGENDS. Prior to any proposed transfer (whether by sale, assignment, pledge or otherwise) of Shares, the proposed transferor (the "Transferor") will give written notice to the Company of his intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall be accompanied by a written opinion of legal counsel who shall be reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transfer of the securities in question may be effected without registration under the Securities Act, and that such proposed transfer does call into question the exemption from registration under which such Shares were initially issued by the Company. Any such legal opinion must be reasonably satisfactory to the Company and must state that it may also be relied upon by any transfer agent, stock exchange or counsel to the Company. The Company may also require a certificate of the Transferor that certifies as to matters that assist the Company in establishing compliance with securities laws at the time of the original issuance of the Shares as well as at the time of the proposed transfer (including without limitation, the representations set forth on Exhibit B attached hereto). Upon compliance with the terms hereof to the satisfaction of the Company, the Transferor shall be entitled to transfer such securities in accordance with the terms of the notice delivered by the Transferor to the Company. Each certificate evidencing the Shares so transferred shall bear an appropriate restrictive legend reasonably deemed appropriate by the Company, including any appropriate legend relating to the restrictions and obligations under this Agreement. The Transferor will, prior to any transfer (unless such transfer is made pursuant to Rule 144 or an effective registration statement under the Securities Act), cause any transferee of the Shares, to enter into an agreement with the Company that the transferee will take and hold such securities subject to the provisions and upon the conditions specified herein. Without limiting the generality of any other provision hereof, the provisions of this Section 16.3 shall be binding on successive transferees. The Company shall have no obligation to 35 41 effect any transfer on its books and records (and no such attempted transfer shall be effective) unless such transfer is made in accordance with the terms hereof. The Company may issue stop transfer instructions to any transfer agent for the Common Stock in order to implement any restriction on transfer contemplated by this Agreement. The Shares shall contain the following legend: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AS TO THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT ANY PROSPECTUS DELIVERY REQUIREMENTS ARE NOT APPLICABLE. THE SHARES WERE (1) ISSUED PURSUANT TO AN AGREEMENT AND (2) ARE SUBJECT TO PROVISIONS OF THE BYLAWS OF THE COMPANY, BOTH OF WHICH INCLUDE ADDITIONAL RESTRICTIONS ON THEIR TRANSFER AND COPIES OF SUCH AGREEMENT AND AMENDED AND RESTATED BYLAWS MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY. SECTION 16.4 INDEMNIFICATION. (a) Whether or not any of the Combination Transactions are consummated, the Company hereby agrees to indemnify the directors and officers of the Company and Production, acting in their capacity as an officer or director, as the case may be, of the Company or Production, respectively, in its own capacity or in its capacity as the general partner of Encinitas, La Rosa or Carrizo Partners (each an "Indemnitee"), and hold the Indemnitees harmless from and against, and shall reimburse them on demand for, any and all losses, damages, liabilities, claims, demands, deficiencies, judgements, settlements, whether or not arising out of third-party claims, including without limitation the reasonable fees and expenses of counsel and other related costs and expenses ("Losses") resulting from or arising out of the Combination Transactions, including but not limited to (i) all liabilities of the Company, Production, Encinitas, La Rosa and Carrizo Partners in connection with the Combination Transactions and (ii) any liabilities to the limited partners of Encinitas, La Rosa or Carrizo Partners in connection with the Combination Transactions; provided that the Company shall not be required by this Agreement to indemnify (1) the officers and directors of the Company or Production to the extent that the Company or Production breaches this Agreement or the officers and directors of the Company or Production in such entities' capacity as general partners of Encinitas, La Rosa or Carrizo Partners to the extent that Encinitas, La Rosa or Carrizo Partners, as the case may be, breaches this agreement for Losses resulting from the termination or breach of this Agreement ("Termination Related Losses") in the event that this Agreement shall be terminated pursuant to Section 15.1(c) as a result of such breach of this Agreement by the Company, Production, Encinitas, La Rosa or Production, as applicable or (2) (without limiting the generality of any other clause hereof) any Indemnitee for any Losses to such 36 42 Indemnitee resulting from, arising out of or in such Indemnitee's capacity as an equityholder of any of the parties hereto ("Equityholder Losses"). (b) If a claim by a third party is made against a party indemnified pursuant to this Section 16.4, and if such indemnified party intends to seek indemnity with respect thereto under this Section 16.4, the indemnified party shall promptly notify the indemnifying party of such claim; provided that the failure of the indemnified party to notify the indemnifying party of any such claim shall not relieve the indemnifying party of its obligations under this Section 16.4, except to the extent the indemnifying party is actually prejudiced by such failure. In case any action or proceeding including any such claim is brought against the indemnified party, the indemnifying party shall be entitled to participate therein and to assume the defense thereof with counsel reasonably satisfactory to the indemnified party to the extent it may wish; provided, that, in the event the indemnifying party so assumes the defense, the indemnified party shall still have the right to employ separate counsel at its own expense in any such action and to participate in the defense thereof. Without the prior written consent of the indemnified party, which consent shall not unreasonably be withheld, the indemnifying party will not consent to the entry of any judgment or enter into any settlement of any such claim which does not include as an unconditional term thereof the giving by the claimant or plaintiff thereof to such indemnified party of a release from any and all liability in respect of such claim or litigation. The indemnified party will not enter into any settlement or pay (except pursuant to a final court order or judgment) any such claim without the prior written consent of the indemnifying party, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, the indemnified party shall have the right to pay or settle any such claim, provided that in such event it shall waive any right to indemnity therefor by the indemnifying party or parties. (c) Without limiting the generality of any other provision hereunder, it is the express intent of this Agreement that the Indemnitees be indemnified regardless of such Indemnitee's acts of negligence or gross negligence, to the extent that such indemnification is allowed pursuant to the terms of this Agreement; provided, that, notwithstanding the foregoing or any other provision hereof, the Company shall not indemnify any Indemnitee under this Section 16.4 for any action taken or any failure to act by such Indemnitee after the date of this Agreement if such action or failure to act is in material breach of any provision hereof or if such action or inaction constituted intentional misconduct or a willful violation of law. SECTION 16.5 STOCK SPLITS. The consideration to be received in the Combination Transaction is based upon the number of shares of Common Stock that will be outstanding following the 521-for-one stock split described in Section 7.2. The Company may change such consideration to make an appropriate adjustment to reflect any other subsequent stock split, stock dividend, reverse stock split or reclassification of shares, but need not make any other adjustment in respect of any other distribution or transaction. The provisions of this Section shall apply notwithstanding any other provision of this Agreement to the contrary contained herein or in any attachment or Exhibit thereto. SECTION 16.6 NO RIGHTS AS SHAREHOLDER. Prior to the time that Common Stock is issued in accordance with the terms hereof, nothing contained in this Agreement shall be construed as 37 43 conferring upon any person any rights as a shareholder of the Company, including without limitation the right to vote, receive distributions, call meetings, consent or receive notices as a shareholder in respect of any meeting of shareholders or imposing any fiduciary or other duty on the Company, its officers, directors or shareholders, in favor of such person, all of which rights and duties are expressly disclaimed and waived with respect to such person. SECTION 16.7 FURTHER ASSURANCES. The parties hereto without additional consideration shall execute and deliver or shall cause to be executed and delivered such further documents and certificates and to take such further actions as may be reasonably required or desirable to carry out the provisions of this Agreement and consummate the transactions contemplated hereby, and if an entity, such party shall its reasonable best efforts to cause its equity holders to do the same. In particular, without limiting the generality of the foregoing sentence, at any time after the Closing, any party hereto will execute and deliver or shall cause to be executed and delivered any deeds, bills of sale, assignments, assurances, or any other actions or things as are necessary or desirable to vest, perfect, or confirm of record or otherwise in the Company its rights, title, or interest in, to, or under any of the rights, properties, or assets acquired or to be acquired by the Company as a result of or in connection with the Combination Transactions or otherwise to carry out this Agreement, and will give any additional information and execute any reasonably requested certificate or document in order to ensure compliance with applicable securities laws with respect to the transactions contemplated hereby. SECTION 16.8 ENTIRE AGREEMENT, ETC. This Agreement (a) constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties, with respect to the subject matter hereof, and (b) shall not be assignable by any party and (c) is not intended to create any obligations to, or rights in respect of, any persons other than the parties hereto and the Indemnitees as described in Section 16.4. SECTION 16.9 CONSTRUCTION. As used herein the phrase "the transactions contemplated hereby" and similar phrases shall refer to the transactions to be effected pursuant to this Agreement, but specifically shall not include the Offering. SECTION 16.10 NOTICES. Any notice or other communication required or permitted under this Agreement shall be by facsimile actually received or in writing and mailed by certified or registered mail, return receipt requested, postage prepaid. Any such notice shall be deemed given upon its receipt at the following address: 38 44 (a) If the Company: (b) If to Production: Carrizo Oil & Gas, Inc. Production, Inc. 14811 St. Mary's Lane, Suite 148 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Houston, Texas 77079 Attn: President Attn: President Tel: (281) 496-1352 Tel: (281) 496-1352 Fax: (281) 496-0884 Fax: (281) 496-0884 with a copy to: with a copy to: Gene J. Oshman Gene J. Oshman Baker & Botts, L.L.P. Baker & Botts, L.L.P. 3000 One Shell Plaza 3000 One Shell Plaza 910 Louisiana 910 Louisiana Houston, Texas 77002 Houston, Texas 77002 Tel: (713) 229-1178 Tel: (713) 229-1178 Fax: (713) 229-1522 Fax: (713) 229-1522 (c) If to Encinitas: (d) If to La Rosa: Encinitas Partners Ltd. La Rosa Partners Ltd. 14811 St. Mary's Lane, Suite 148 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Houston, Texas 77079 Attn: President Attn: President Tel: (281) 496-1352 Tel: (281) 496-1352 Fax: (281) 496-0884 Fax: (281) 496-0884 (e) If to Carrizo Partners Ltd.: (f) If to a Founder: Carrizo Partners Ltd. [Founder] 14811 St. Mary's Lane, Suite 148 c/o Carrizo Oil & Gas, Inc. Houston, Texas 77079 14811 St. Mary's Lane, Suite 148 Attn: President Houston, Texas 77079 Tel: (281) 496-1352 Attn: President Fax: (281) 496-0884 Tel: (281) 496-1352 Fax: (281) 496-0884
Any party may, by notice given in accordance with this section to the other parties, designate another address or person for receipt of notices hereunder. 39 45 SECTION 16.11 CAPTIONS. The article, section and paragraph captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. SECTION 16.12 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original, and all such counterparts taken together shall constitute the same agreement. SECTION 16.13 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. 40 46 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the parties hereto on the date first hereinabove written. CARRIZO OIL & GAS, INC, CARRIZO PRODUCTION, INC., a Texas corporation a Texas corporation By: /s/ S.P. JOHNSON IV By: /s/ S.P. JOHNSON IV --------------------------------- --------------------------------- Name: Name: Title: Title: ENCINITAS PARTNERS LTD. LA ROSA PARTNERS LTD. By: Carrizo Production, Inc., By: Carrizo Oil & Gas, Inc., a Texas corporation a Texas corporation Title: General Partner Title: General Partner By: /s/ S.P. JOHNSON IV By: /s/ S.P. JOHNSON IV ------------------------ ------------------------- Name: Name: Title: Title: CARRIZO PARTNERS LTD. By: Carrizo Oil & Gas, Inc., a Texas corporation Title: General Partner By: /s/ S.P. JOHNSON IV ------------------------ Name: Title: [Signature Page to Combination Agreement among Carrizo Oil & Gas, Inc., a Texas corporation, Carrizo Production, Inc., a Texas corporation, Encinitas Partners Ltd., a Texas limited partnership, La Rosa Partners Ltd., a Texas limited partnership, Carrizo Partners Ltd., a Texas limited partnership, and Paul B. Loyd, Jr., Steven A. Webster, Sylvester P. Johnson, IV, Douglas A. P. Hamilton and Frank A. Wojtek] 41 47 FOUNDERS /s/ PAUL B. LOYD, JR. - --------------------------------- Paul B. Loyd, Jr. /s/ STEVEN A. WEBSTER - --------------------------------- Steven A. Webster /s/ SYLVESTER P. JOHNSON, IV - --------------------------------- Sylvester P. Johnson, IV /s/ DOUGLAS A.P. HAMILTON - --------------------------------- Douglas A.P. Hamilton /s/ FRANK A. WOJTEK - --------------------------------- Frank A. Wojtek [Signature Page to Combination Agreement among Carrizo Oil & Gas, Inc., a Texas corporation, Carrizo Production, Inc., a Texas corporation, Encinitas Partners Ltd., a Texas limited partnership, La Rosa Partners Ltd., a Texas limited partnership, Carrizo Partners Ltd., a Texas limited partnership, and Paul B. Loyd, Jr., Steven A. Webster, Sylvester P. Johnson, IV, Douglas A. P. Hamilton and Frank A. Wojtek] 42 48 SCHEDULES The schedules have been intentionally omitted herefrom. The Company will furnish supplementally a copy of any or all of such omitted schedules to the Commission upon request. 49 EXHIBIT A PLAN OF MERGER MERGING CARRIZO PRODUCTION, INC. (A TEXAS CORPORATION) WITH AND INTO CARRIZO OIL & GAS, INC. (A TEXAS CORPORATION) This Plan of Merger (this "Plan") is between Carrizo Production, Inc., a Texas corporation ("Production"), and Carrizo Oil & Gas, Inc., a Texas corporation ("Carrizo Oil & Gas") (Production and Carrizo Oil & Gas being hereinafter collectively referred to as the "Constituent Corporations"). W I T N E S S E T H: WHEREAS, Production is a corporation duly organized and existing under the laws of the State of Texas with an authorized capital of 100,000 shares of common stock, par value $.01 per share ("Production Common Stock"), of which 4,900 shares are issued and outstanding; and WHEREAS, Carrizo Oil & Gas is a corporation duly organized and existing under the laws of the State of Texas with an authorized capital of (a) 40,000,000 shares of common stock, par value $.01 per share ("Common Stock"), of which 5,210,000 shares are issued and outstanding and (b) 10,000,000 shares of Preferred Stock, par value $.01 per share, of which no shares are issued and outstanding; and WHEREAS, Production and Carrizo Oil & Gas are parties to a certain Combination Agreement dated as of June 6, 1997 (the "Combination Agreement"); and WHEREAS, each of the boards of directors of the Constituent Corporations deems it advisable and in the best interest of each of such corporations and their respective shareholders that Production be merged with and into Carrizo Oil & Gas under and pursuant to the Texas Business Corporation Act (the "TBCA") as contemplated herein (the "Merger") and accordingly has approved this Plan and recommended that the shareholders of such corporation approve this Plan; and WHEREAS, no shareholder of Production will become personally liable for the liabilities or obligations of any other person or entity as a result of the Merger; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereto have agreed and do hereby agree, subject to the conditions hereinafter set forth, as follows: 50 ARTICLE I MERGER AND NAME OF SURVIVING CORPORATION At the Effective Time, as hereinafter defined, Production shall be merged with and into Carrizo Oil & Gas, and Carrizo Oil & Gas is hereby also designated as the "Surviving Corporation" and shall not be a new corporation and shall continue its corporate existence as a Texas corporation governed by the laws of the State of Texas. ARTICLE XVIII TERMS AND CONDITIONS OF MERGER At the Effective Time, the Merger shall have the effect specified in the TBCA with respect to Production and with respect to the Surviving Corporation. ARTICLE XVIIII MANNER AND BASIS OF CONVERTING SHARES (a) Subject to paragraph (a) of Article VII hereof and paragraph (d) of this Article III, at the Effective Time, each share of Production Common Stock issued and outstanding immediately prior to the Effective Time, other than Production Common Stock that is to be canceled pursuant to paragraph (b) of this Article III, shall be converted into and represent the right to receive 70 shares of Common Stock (the "Production Merger Consideration"). (b) At the Effective Time, each share of Production Common Stock that is held by Production or any subsidiary thereof as treasury stock immediately prior to the Effective Time shall be canceled, and no payment shall be made with respect thereto. (c) At the Effective Time, each share of Common Stock outstanding immediately prior to the Effective Time shall remain outstanding and continue unchanged as one share of Common Stock. (d) No fractional shares of Common Stock shall be issued in the Merger. Each holder of shares of Production Common Stock will be issued a whole share of Common Stock in lieu of any fractional share interest to which such holder would otherwise be entitled. ARTICLE IV ARTICLES OF INCORPORATION, BYLAWS AND OFFICERS AND DIRECTORS (a) The Articles of Incorporation of Carrizo Oil & Gas in effect immediately prior to the Effective Time shall be and constitute the Articles of Incorporation of the Surviving Corporation, until duly amended in accordance with the terms thereof and the TBCA. -45- 51 (b) The Bylaws of Carrizo Oil & Gas in effect immediately prior to the Effective Time shall be and constitute the Bylaws of the Surviving Corporation, until duly amended in accordance with the terms thereof and the TBCA. (c) The directors of Carrizo Oil & Gas immediately prior to the Effective Time shall thereafter continue to be the directors of the Surviving Corporation. The officers of Carrizo Oil & Gas in office immediately prior to the Effective Time shall thereafter continue to be the officers of the Surviving Corporation. Each such director and officer will hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation. ARTICLE V APPROVAL AND EFFECTIVE TIME OF THE MERGER The Merger shall be effected when all the following actions in paragraphs (a) through (c) have been taken: (a) This Plan shall have been approved by the shareholders of the Constituent Corporations in accordance with the TBCA; (b) Articles of Merger pursuant to the TBCA shall have been filed with the Secretary of State of the State of Texas; and (c) Each of the conditions of the Constituent Corporations set forth in Sections 14.1, 14.3 and 14.7 of the Combination Agreement shall have been satisfied or waived. The Surviving Corporation shall file a statement complying with Article 10.03 of the TBCA with the Secretary of State of the State of Texas, within 90 days of the date of the filing of the Articles of Merger, setting forth the time and date upon which all the conditions set forth in paragraphs (a), (b) and (c) of this Article V have been satisfied (such time and date being referred to as the "Effective Time"). ARTICLE VI ABANDONMENT OF PLAN This Plan may be abandoned at any time prior to the Effective Time by the filing with the Secretary of State of the State of Texas of a statement complying with Section 5.03(I) of the TBCA stating that this Plan has been abandoned. In the event of the abandonment of this Plan pursuant to this Article VI, this Plan and the transactions contemplated hereby shall become void and have no effect, without any liability on the part of either Constituent Corporation or their respective directors, officers or stockholders, as the case may be, in respect of this Plan. -46- 52 ARTICLE VII MISCELLANEOUS (a) Notwithstanding paragraph (a) of Article III hereof, shares of Production Common Stock outstanding immediately prior to the Effective Time and held by a holder who makes a written demand for the payment of the fair value of such holder's shares in the manner provided under the TBCA (a "Dissenting Shareholder") shall not be converted into the right to receive the Production Merger Consideration, unless such holder shall have failed to perfect or shall have effectively withdrawn or lost his right to payment of the fair value of his shares of Production Common Stock under the TBCA. If after the Effective Time such holder shall have failed to perfect or shall have effectively withdrawn or lost his right to payment of the fair value of his shares of Production Common Stock under the TBCA, such shares of Production Common Stock shall be treated as if they had been converted as of the Effective Time into the right to receive the Production Merger Consideration. Production shall give the Carrizo Oil & Gas prompt notice of any objections or demands received by Production from any shareholder exercising his right to dissent, and, prior to the Effective Time, Carrizo Oil & Gas shall have the right to participate in all negotiations and proceedings with respect thereto. Prior to the Effective Time, Production shall not, except with the prior written consent of Carrizo Oil & Gas, make any payment with respect to, or settle or offer or agree to settle, any such demands. (b) This Plan shall be governed by and construed in accordance with the laws of the State of Texas. (c) If at any time the Surviving Corporation shall consider or be advised that any further assignment, assurance or other action is necessary or desirable to vest in the Surviving Corporation the title to any property or right of either of the Constituent Corporations or otherwise to carry out the purposes of this Agreement, the proper officers, directors or representatives of the relevant Constituent Corporation shall execute and make all such proper assignments or assurances and take such other actions. The proper officers, directors or representatives of the Surviving Corporation are hereby authorized in the name of each of the Constituent Corporations, or otherwise, to take any and all such action. -47- 53 IN WITNESS WHEREOF, the undersigned have caused this Plan of Merger to be executed this 6th day of June, 1997. CARRIZO PRODUCTION, INC. By: --------------------------- Name: Title: CARRIZO OIL & GAS, INC. By: --------------------------- Name: Title: -48- 54 EXHIBIT B TRANSFEROR REPRESENTATIONS AND WARRANTIES The undersigned hereby represents and warrants to Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), the following (capitalized terms used herein shall have the meanings given to them in the Combination Agreement dated as of June 6, 1997 among the Company and the other parties thereto (the "Combination Agreement"): (a) EXPERIENCE; STATUS. (i) The undersigned has experience in analyzing and investing in companies like the Company and is capable of evaluating the merits and risks of his investment in the Company and has the capacity to protect his own interests. To the extent necessary, the undersigned has retained, at his own expense, and relied upon, appropriate professional advice regarding the investment, tax and legal merits and consequences of the Combination Transactions, or any part thereof, and owning the shares of Common Stock the undersigned will receive pursuant to the Combination Transactions (the "Shares"), it being understood that the Company has not retained legal or financial advisors on behalf of the undersigned. (ii) The undersigned is an Accredited Investor, is able to bear the economic risk of his investment in the Shares and has sufficient net worth to sustain a loss of his entire investment in the Company without economic hardship if such loss should occur. (b) ACCESS TO COMPANY INFORMATION. (i) The undersigned has had an opportunity to discuss the Company's business, management and financial affairs with the members of the Company's management and has had the opportunity to review the Company's facilities. The undersigned has also had an opportunity to ask questions of the officers of the Company, which questions were answered to his satisfaction. The undersigned acknowledges that he is familiar with all aspects of the Company's business. (ii) The undersigned has received and carefully reviewed a copy of the Offering Memorandum. The undersigned understands that information in such Offering Memorandum is preliminary and subject to change. The undersigned acknowledges that he has reviewed the information in such Offering Memorandum solely for general background purposes and that, in particular, information with respect to the Company, the Offering and the Combination Transactions, is expected to change prior to the closing of the Combination Transactions. The undersigned recognizes that he will receive no supplement or amendment to such Offering Memorandum. The undersigned acknowledges that his investment decision is based primarily on his familiarity with the assets the Company currently owns and may acquire and the Company's management. -49- 55 (iii) The undersigned has received no representations or warranties from the Company, or its employees, affiliates, attorneys, accountants or agents, except as set forth in the Combination Agreement. (iv) The undersigned understands that the purchase of the Shares involves numerous risks, including those outlined in the Offering Memorandum. (c) INVESTMENT PURPOSES; RULE 144. (i) The undersigned is acquiring Shares solely for investment for his own account, not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof. The undersigned understands that the Shares have not been registered under the Securities Act or applicable state and other securities laws by reason of a specific exemption from the registration provisions of the Securities Act and applicable state and other securities laws, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the undersigned's representations as expressed herein. The undersigned understands that the Company is relying, in part, upon the representations and warranties contained in this consent for the purpose of determining whether the Combination Transactions meet the requirements for such exemptions. (ii) The undersigned acknowledges and understands that he must bear the economic risk of his investment in the Shares for an indefinite period of time because the Shares must be held indefinitely unless subsequently registered under the Securities Act and applicable state and other securities laws or unless an exemption from such registration is available. The undersigned understands that, except as described in the Offering Memorandum, the Company has not agreed to and does not plan to file a registration statement to register the resale of the Shares under the Securities Act. (iii) The undersigned is aware of the current provisions of Rule 144 promulgated under the Securities Act which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the securities, the availability of certain current public information about the issuer of the securities, the resale occurring not less than two years (soon to be amended to one year) after a party has purchased from an issuer or its affiliate and paid the full purchase price for the securities to be sold, the sale being effected through a "broker's transaction" or in transactions directly with a "market maker" and the number of securities being sold during any three- month period not exceeding specified limitations. The undersigned understands that any transfer agent of the Company will be issued stop- transfer instructions with respect to such Shares unless such transfer is subsequently registered under the Securities Act and applicable state and other securities laws or unless an exemption from such registration is available. (d) OTHER. The undersigned acknowledges and agrees that the foregoing representations are true as of the date hereof, the time of receipt of Shares and the time of the vote on and effective time of any merger or other transaction that resulted in the issuance of Shares. -50- 56 (e) ADDITIONAL RESTRICTION ON TRANSFER. The undersigned has received a copy of the Amended and Restated Bylaws of the Company and understands that the Shares will be subject to the restrictions on transfer contained in Article I of such Bylaws. The undersigned also acknowledges and agrees to be bound by the restrictions on transfer of the Shares in Section 16.3 of the Combination Agreement. ------------------------------ [signature] -51- 57 EXHIBIT C PLAN OF MERGER MERGING ENCINITAS PARTNERS LTD. (A TEXAS LIMITED PARTNERSHIP) WITH AND INTO CARRIZO OIL & GAS INC. (A TEXAS CORPORATION) This Plan of Merger (this "Plan") is between Encinitas Partners Ltd., a Texas limited partnership ("Encinitas"), and Carrizo Oil & Gas, Inc., a Texas corporation ("Carrizo Oil & Gas") (Encinitas and Carrizo Oil & Gas being hereinafter collectively referred to as the "Constituent Entities"). W I T N E S S E T H: WHEREAS, Encinitas is a limited partnership duly organized and existing under the laws of the State of Texas; and WHEREAS, Carrizo Oil & Gas is a corporation duly organized and existing under the laws of the State of Texas with an authorized capital of (a) 40,000,000 shares of common stock, par value $.01 per share ("Common Stock"), of which 5,210,000 shares are issued and outstanding and (b) 10,000,000 shares of Preferred Stock, par value $.01 per share, of which no shares are issued and outstanding; and WHEREAS, Encinitas and Carrizo Oil & Gas are parties to a certain Combination Agreement dated as of June 6, 1997 (the "Combination Agreement"); and WHEREAS, the board of directors of Carrizo Production, Inc., a Texas corporation and the general partner of Encinitas, has deemed the merger of Encinitas with and into Carrizo Oil & Gas under and pursuant to the Texas Revised Limited Partnership Act (the "TRLPA") and the Texas Business Corporation Act (the "TBCA") as contemplated herein (the "Merger") advisable and in the best interest of Encinitas and the partners of Encinitas, and has approved, and recommended the limited partners of Encinitas approve, (a) the amendment (the "Partnership Agreement Amendment") to the Amended and Restated Agreement of Limited Partnership of Encinitas Partners Ltd. (the "Encinitas Partnership Agreement") to permit the Merger upon the vote of a majority in interest of the limited partners of Encinitas and (b) this Plan and the Merger; and WHEREAS, the board of directors of Carrizo Oil & Gas has deemed the Merger advisable and in the best interest of Carrizo Oil & Gas and its shareholders and accordingly has approved, and recommended that the shareholders of Carrizo Oil & Gas approve, this Plan and the Merger; and -52- 58 WHEREAS, no partner of Encinitas will become personally liable for the liabilities or obligations of any other person or entity as a result of the Merger; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereto have agreed and do hereby agree, subject to the conditions hereinafter set forth, as follows: ARTICLE I MERGER AND NAME OF SURVIVING CORPORATION At the Effective Time, as hereinafter defined, Encinitas shall be merged with and into Carrizo Oil & Gas, and Carrizo Oil & Gas is hereby also designated as the "Surviving Corporation" and shall not be a new corporation and shall continue its corporate existence as a Texas corporation governed by the laws of the State of Texas. ARTICLE XIXI TERMS AND CONDITIONS OF MERGER At the Effective Time, the Merger shall have the effect specified in the TRLPA and the TBCA, respectively, with respect to Encinitas and with respect to the Surviving Corporation. ARTICLE XXI MANNER AND BASIS OF CONVERTING SHARES (a) Subject to paragraph (e) of this Article III, at the Effective Time, all of the limited partner interests in Encinitas (the "Encinitas Limited Partner Interests") outstanding immediately prior to the Effective Time, other than Encinitas Limited Partner Interests that are to be canceled pursuant to paragraph (b) of this Article III, shall be converted into and represent the right to receive the Encinitas Merger Consideration (defined below) payable to the holder of such Encinitas Limited Partner Interest. As used herein, the following terms have the meanings specified below: Encinitas After Payout Consideration means, with respect to each Encinitas Limited Partner Interest, the product of (i) 1,166,111 shares of Common Stock multiplied by (ii) the percentage set forth on Schedule A hereto as the After Payout Percentage with respect to such Encinitas Limited Partner Interest. Encinitas Before Payout Consideration means, with respect to each Encinitas Limited Partner Interest, the product of (i) 506,389 shares of Common Stock multiplied by (ii) the percentage set forth on Schedule A hereto as the Before Payout Percentage with respect to such Encinitas Limited Partner Interest. -53- 59 Encinitas Merger Consideration means, with respect to each Encinitas Limited Partner Interest, the sum of the Encinitas Before Payout Consideration and the Encinitas After Payout Consideration with respect to such Encinitas Limited Partner Interest. (b) At the Effective Time, any Encinitas Limited Partner Interests outstanding immediately prior to the Effective Time that are held by Encinitas or any subsidiary thereof or by Carrizo Oil & Gas shall be canceled, and no payment shall be made with respect thereto. (c) At the Effective Time, all general partner interests in Encinitas outstanding immediately prior to the Effective Time shall be canceled, and no payment shall be made with respect thereto. (d) At the Effective Time, each share of Common Stock outstanding immediately prior to the Effective Time shall remain outstanding and continue unchanged as one share of Common Stock. (e) No fractional shares of Common Stock shall be issued in the Merger. Each holder of Encinitas Limited Partner Interests will be issued a whole share of Common Stock in lieu of any fractional share interest to which such holder would otherwise be entitled. ARTICLE IV ARTICLES OF INCORPORATION, BYLAWS AND OFFICERS AND DIRECTORS (a) The Articles of Incorporation of Carrizo Oil & Gas in effect immediately prior to the Effective Time shall be and constitute the Articles of Incorporation of the Surviving Corporation, until duly amended in accordance with the terms thereof and the TBCA. (b) The Bylaws of Carrizo Oil & Gas in effect immediately prior to the Effective Time shall be and constitute the Bylaws of the Surviving Corporation, until duly amended in accordance with the terms thereof and the TBCA. (c) The directors of Carrizo Oil & Gas immediately prior to the Effective Time shall thereafter continue to be the directors of the Surviving Corporation. The officers of Carrizo Oil & Gas in office immediately prior to the Effective Time shall thereafter continue to be the officers of the Surviving Corporation. Each such director and officer will hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation. ARTICLE V APPROVAL AND EFFECTIVE TIME OF THE MERGER The Merger shall be effected when all the following actions in paragraphs (a) through (d) have been taken: -54- 60 (a) The Partnership Agreement Amendment and this Plan shall have been approved by the partners of Encinitas in accordance with the TRLPA and the Encinitas Partnership Agreement; (b) This Plan shall have been approved by the shareholders of Carrizo Oil & Gas in accordance with the TBCA; (c) Articles of Merger pursuant to the TBCA shall have been filed with the Secretary of State of the State of Texas; and (d) Each of the conditions of the Constituent Entities set forth in Sections 14.1, 14.4 and 14.7 of the Combination Agreement shall have been satisfied or waived. The Surviving Corporation shall file a statement complying with Section 2.12 of the TRLPA and Article 10.03 of the TBCA with the Secretary of State of the State of Texas, within 90 days of the date of the filing of the Articles of Merger, setting forth the time and date upon which the conditions set forth in paragraphs (a), (b), (c) and (d) of this Article V have been satisfied (such time and date being referred to as the "Effective Time"). ARTICLE VI ABANDONMENT OF PLAN This Plan may be abandoned at any time prior to the Effective Time by the filing with the Secretary of State of the State of Texas of a statement complying with Section 2.12 of the TRLPA and Section 5.03(I) of the TBCA stating that this Plan has been abandoned. In the event of the abandonment of this Plan pursuant to this Article VI, this Plan and the transactions contemplated hereby shall become void and have no effect, without any liability on the part of either Constituent Entity or their respective directors, officers, partners or shareholders, as the case may be, in respect of this Plan. ARTICLE VII MISCELLANEOUS (a) This Plan shall be governed by and construed in accordance with the laws of the State of Texas. (b) If at any time the Surviving Corporation shall consider or be advised that any further assignment, assurance or other action is necessary or desirable to vest in the Surviving Corporation the title to any property or right of either of the Constituent Entities or otherwise to carry out the purposes of this Agreement, the proper officers, directors or representatives of the relevant Constituent Entity shall execute and make all such proper assignments or assurances and take such other actions. The proper officers, directors or representatives of the Surviving Corporation are hereby authorized in the name of each of the Constituent Entity, or otherwise, to take any and all such action. -55- 61 IN WITNESS WHEREOF, the undersigned have caused this Plan of Merger to be executed this 6th day of June, 1997. ENCINITAS PARTNERS LTD. By: Carrizo Production, Inc., as general partner By: ----------------------- Name: Title: CARRIZO OIL & GAS, INC. By: ------------------------------ Name: Title: -56- 62 SCHEDULE A ENCINITAS LIMITED PARTNER INTEREST PERCENTAGES
CAPITAL BEFORE PAYOUT AFTER PAYOUT PARTNER CONTRIBUTION PERCENTAGE PERCENTAGE ------- ------------ ---------- ---------- Initial Limited Partners: Partner $201,891.67 5.76833% 8.87654% Partner 201,891.67 5.76833 8.87654 Partner 201,891.66 5.76833 8.87654 Partner 50,225 1.43500 1.46035 Partner 70,100 2.00286 3.08143 Partner 75,000 2.14286 2.14286 ------------ ---------- ---------- Total Initial Limited Partners $ 801,000 22.88571% 33.31426% Additional Limited Partners: Partner $ 250,000 7.14286% 3.57143% Partner 275,000 7.85714 3.92857 Partner 50,000 1.42857 0.71429 Partner 50,000 1.42857 0.71429 Partner 50,000 1.42857 0.71429 Partner 50,000 1.42857 0.71429 Partner 300,000 8.57143 4.28571 Partner 200,000 5.71429 2.85714 Partner 25,000 0.71429 0.35714 Partner 100,000 2.85714 1.42857 Partner 150,000 4.28571 2.14286 Partner 150,000 4.28571 2.14286 Partner 100,000 2.85714 1.42857 Partner 75,000 2.14286 1.07143
63
CAPITAL BEFORE PAYOUT AFTER PAYOUT PARTNER CONTRIBUTION PERCENTAGE PERCENTAGE ------- ------------ ---------- ---------- Additional Limited Partners (continued): Partner 100,000 2.85714 1.42857 Partner 100,000 2.85714 1.42857 Partner 100,000 2.85714 1.42857 Partner 100,000 2.85714 1.42857 Partner 50,000 1.42857 0.71429 Partner 50,000 1.42857 0.71429 Partner 100,000 2.85714 1.42857 Partner 100,000 2.85714 1.42857 Partner 50,000 1.42857 0.71429 Partner 50,000 1.42857 0.71429 Partner 25,000 0.71429 0.35714 ----------- --------- --------- Total Additional Limited Partners $ 2,650,000 75.71429% 37.85714% ----------- --------- --------- Total Limited Partners $ 3,451,000 98.60000% 71.17140% General Partner: Partner $ 49,000 1.40000% 28.82860% ----------- --------- --------- Total General and Limited Partners $ 3,500,000 100.00000% 100.00000% =========== ========== ==========
64 EXHIBIT D PLAN OF MERGER MERGING LA ROSA PARTNERS LTD. (A TEXAS LIMITED PARTNERSHIP) WITH AND INTO CARRIZO OIL & GAS INC. (A TEXAS CORPORATION) This Plan of Merger (this "Plan") is between La Rosa Partners Ltd., a Texas limited partnership ("La Rosa"), and Carrizo Oil & Gas, Inc., a Texas corporation ("Carrizo Oil & Gas") (La Rosa and Carrizo Oil & Gas being hereinafter collectively referred to as the "Constituent Entities"). W I T N E S S E T H: WHEREAS, La Rosa is a limited partnership duly organized and existing under the laws of the State of Texas; and WHEREAS, Carrizo Oil & Gas is a corporation duly organized and existing under the laws of the State of Texas with an authorized capital of (a) 40,000,000 shares of common stock, par value $.01 per share ("Common Stock"), of which 5,210,000 shares are issued and outstanding and (b) 10,000,000 shares of Preferred Stock, par value $.01 per share, of which no shares are issued and outstanding; and WHEREAS, La Rosa and Carrizo Oil & Gas are parties to a certain Combination Agreement dated as of June 6, 1997 (the "Combination Agreement"); and WHEREAS, the board of directors of Carrizo Oil & Gas, as the general partner of La Rosa, has deemed the merger of La Rosa with and into Carrizo Oil & Gas under and pursuant to the Texas Revised Limited Partnership Act (the "TRLPA") and the Texas Business Corporation Act (the "TBCA") as contemplated herein (the "Merger") advisable and in the best interest of La Rosa and the partners of La Rosa, and has approved, and recommended the limited partners of La Rosa approve, (a) the amendment (the "Partnership Agreement Amendment") to the Amended and Restated Agreement of Limited Partnership of La Rosa Partners Ltd. (the "La Rosa Partnership Agreement") to permit the Merger upon the vote of a majority in interest of the limited partners of La Rosa and (b) this Plan and the Merger; and WHEREAS, the board of directors of Carrizo Oil & Gas has deemed the Merger advisable and in the best interest of Carrizo Oil & Gas and its shareholders and accordingly has approved, and recommended that the shareholders of Carrizo Oil & Gas approve, this Plan and the Merger; and 65 WHEREAS, no partner of La Rosa will become personally liable for the liabilities or obligations of any other person or entity as a result of the Merger; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereto have agreed and do hereby agree, subject to the conditions hereinafter set forth, as follows: ARTICLE I MERGER AND NAME OF SURVIVING CORPORATION At the Effective Time, as hereinafter defined, La Rosa shall be merged with and into Carrizo Oil & Gas, and Carrizo Oil & Gas is hereby also designated as the "Surviving Corporation" and shall not be a new corporation and shall continue its corporate existence as a Texas corporation governed by the laws of the State of Texas. ARTICLE XXII TERMS AND CONDITIONS OF MERGER At the Effective Time, the Merger shall have the effect specified in the TRLPA and the TBCA, respectively, with respect to La Rosa and with respect to the Surviving Corporation. ARTICLE XXIII MANNER AND BASIS OF CONVERTING SHARES (a) Subject to paragraph (e) of this Article III, at the Effective Time, all of the limited partner interests in La Rosa (the "La Rosa Limited Partner Interests") outstanding immediately prior to the Effective Time, other than La Rosa Limited Partner Interests that are to be canceled pursuant to paragraph (b) of this Article III, shall be converted into and represent the right to receive the La Rosa Merger Consideration (defined below) payable to the holder of such La Rosa Limited Partner Interest. As used herein, the following terms have the meanings specified below: La Rosa Merger Consideration means, with respect to each La Rosa Limited Partner Interest, the sum of the product of (i) 48,700 multiplied by (ii) the percentage set forth on Schedule A hereto with respect to such La Rosa Limited Partner Interest. (b) At the Effective Time, any La Rosa Limited Partner Interests outstanding immediately prior to the Effective Time that are held by La Rosa or any subsidiary thereof or by Carrizo Oil & Gas shall be canceled, and no payment shall be made with respect thereto. (c) At the Effective Time, all general partner interests in La Rosa outstanding immediately prior to the Effective Time shall be canceled, and no payment shall be made with respect thereto. -60- 66 (d) At the Effective Time, each share of Common Stock outstanding immediately prior to the Effective Time shall remain outstanding and continue unchanged as one share of Common Stock. (e) No fractional shares of Common Stock shall be issued in the Merger. Each holder of La Rosa Limited Partner Interests will be issued a whole share of Common Stock in lieu of any fractional share interest to which such holder would otherwise be entitled. ARTICLE IV ARTICLES OF INCORPORATION, BYLAWS AND OFFICERS AND DIRECTORS (a) The Articles of Incorporation of Carrizo Oil & Gas in effect immediately prior to the Effective Time shall be and constitute the Articles of Incorporation of the Surviving Corporation, until duly amended in accordance with the terms thereof and the TBCA. (b) The Bylaws of Carrizo Oil & Gas in effect immediately prior to the Effective Time shall be and constitute the Bylaws of the Surviving Corporation, until duly amended in accordance with the terms thereof and the TBCA. (c) The directors of Carrizo Oil & Gas immediately prior to the Effective Time shall thereafter continue to be the directors of the Surviving Corporation. The officers of Carrizo Oil & Gas in office immediately prior to the Effective Time shall thereafter continue to be the officers of the Surviving Corporation. Each such director and officer will hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation. ARTICLE V APPROVAL AND EFFECTIVE TIME OF THE MERGER The Merger shall be effected when all the following actions in paragraphs (a) through (d) have been taken: (a) The Partnership Agreement Amendment and this Plan shall have been approved by the partners of La Rosa in accordance with the TRLPA and the La Rosa Partnership Agreement; (b) This Plan shall have been approved by the shareholders of Carrizo Oil & Gas in accordance with the TBCA; (c) Articles of Merger pursuant to the TBCA shall have been filed with the Secretary of State of the State of Texas; and (d) Each of the conditions of the Constituent Entities set forth in Sections 14.1, 14.5 and 14.7 of the Combination Agreement shall have been satisfied or waived. -61- 67 The Surviving Corporation shall file a statement complying with Section 2.12 of the TRLPA and Article 10.03 of the TBCA with the Secretary of State of the State of Texas, within 90 days of the date of the filing of the Articles of Merger, setting forth the time and date upon which the conditions set forth in paragraphs (a), (b), (c) and (d) of this Article V have been satisfied (such time and date being referred to as the "Effective Time"). ARTICLE VI ABANDONMENT OF PLAN This Plan may be abandoned at any time prior to the Effective Time by the filing with the Secretary of State of the State of Texas of a statement complying with Section 2.12 of the TRLPA and Section 5.03(I) of the TBCA stating that this Plan has been abandoned. In the event of the abandonment of this Plan pursuant to this Article VI, this Plan and the transactions contemplated hereby shall become void and have no effect, without any liability on the part of either Constituent Entity or their respective directors, officers, partners or shareholders, as the case may be, in respect of this Plan. ARTICLE VII MISCELLANEOUS (a) This Plan shall be governed by and construed in accordance with the laws of the State of Texas. (b) If at any time the Surviving Corporation shall consider or be advised that any further assignment, assurance or other action is necessary or desirable to vest in the Surviving Corporation the title to any property or right of either of the Constituent Entities or otherwise to carry out the purposes of this Agreement, the proper officers, directors or representatives of the relevant Constituent Entity shall execute and make all such proper assignments or assurances and take such other actions. The proper officers, directors or representatives of the Surviving Corporation are hereby authorized in the name of each of the Constituent Entity, or otherwise, to take any and all such action. -62- 68 IN WITNESS WHEREOF, the undersigned have caused this Plan of Merger to be executed this 6th day of June, 1997. LA ROSA PARTNERS LTD. By: Carrizo Oil & Gas, Inc., as general partner By: ----------------------- Name: Title: CARRIZO OIL & GAS, INC. By: ------------------------------ Name: Title: -63- 69 SCHEDULE A LA ROSA LIMITED PARTNER INTEREST PERCENTAGES
CAPITAL PARTNER CONTRIBUTION PERCENTAGE ------- ------------ ---------- Limited Partners: Partner $67,500 15% Partner 67,500 15 Partner 67,500 15 Partner 22,500 5 -------- --- Total Limited Partners $225,000 50% General Partner: Partner $225,000 50% -------- --- Total General and Limited Partners $450,000 100% ======== ===
70 EXHIBIT E PLAN OF MERGER MERGING CARRIZO PARTNERS LTD. (A TEXAS LIMITED PARTNERSHIP) WITH AND INTO CARRIZO OIL & GAS INC. (A TEXAS CORPORATION) This Plan of Merger (this "Plan") is between Carrizo Partners Ltd., a Texas limited partnership ("Carrizo Partners"), and Carrizo Oil & Gas, Inc., a Texas corporation ("Carrizo Oil & Gas") (Carrizo Partners and Carrizo Oil & Gas being hereinafter collectively referred to as the "Constituent Entities"). W I T N E S S E T H: WHEREAS, Carrizo Partners is a limited partnership duly organized and existing under the laws of the State of Texas; and WHEREAS, Carrizo Oil & Gas is a corporation duly organized and existing under the laws of the State of Texas with an authorized capital of (a) 40,000,000 shares of common stock, par value $.01 per share ("Common Stock"), of which 5,210,000 shares are issued and outstanding and (b) 10,000,000 shares of Preferred Stock, par value $.01 per share, of which no shares are issued and outstanding; and WHEREAS, Carrizo Partners and Carrizo Oil & Gas are parties to a certain Combination Agreement dated as of June 6, 1997 (the "Combination Agreement"); and WHEREAS, the board of directors of Carrizo Oil & Gas, as the general partner of Carrizo Partners, has deemed the merger of Carrizo Partners with and into Carrizo Oil & Gas under and pursuant to the Texas Revised Limited Partnership Act (the "TRLPA") and the Texas Business Corporation Act (the "TBCA") as contemplated herein (the "Merger") advisable and in the best interest of Carrizo Partners and the partners of Carrizo Partners, and has approved, and recommended the limited partners of Carrizo Partners approve, (a) the amendment (the "Partnership Agreement Amendment") to the Amended and Restated Agreement of Limited Partnership of Carrizo Partners Ltd. (the "Carrizo Partners Partnership Agreement") to permit the Merger upon the vote of a majority in interest of the limited partners of Carrizo Partners and (b) this Plan and the Merger; and WHEREAS, the board of directors of Carrizo Oil & Gas has deemed the Merger advisable and in the best interest of Carrizo Oil & Gas and its shareholders and accordingly has 71 approved, and recommended that the shareholders of Carrizo Oil & Gas approve, this Plan and the Merger; and WHEREAS, no partner of Carrizo Partners will become personally liable for the liabilities or obligations of any other person or entity as a result of the Merger; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereto have agreed and do hereby agree, subject to the conditions hereinafter set forth, as follows: ARTICLE I MERGER AND NAME OF SURVIVING CORPORATION At the Effective Time, as hereinafter defined, Carrizo Partners shall be merged with and into Carrizo Oil & Gas, and Carrizo Oil & Gas is hereby also designated as the "Surviving Corporation" and shall not be a new corporation and shall continue its corporate existence as a Texas corporation governed by the laws of the State of Texas. ARTICLE XXIIII TERMS AND CONDITIONS OF MERGER At the Effective Time, the Merger shall have the effect specified in the TRLPA and the TBCA, respectively, with respect to Carrizo Partners and with respect to the Surviving Corporation. ARTICLE XXIVI MANNER AND BASIS OF CONVERTING SHARES (a) Subject to paragraph (e) of this Article III, at the Effective Time, all of the limited partner interests in Carrizo Partners (the "Carrizo Partners Limited Partner Interests") outstanding immediately prior to the Effective Time, other than Carrizo Partners Limited Partner Interests that are to be canceled pursuant to paragraph (b) of this Article III, shall be converted into and represent the right to receive the Carrizo Partners Merger Consideration (defined below) payable to the holder of such Carrizo Partners Limited Partner Interest. As used herein, the following terms have the meanings specified below: Carrizo Partners After Payout Consideration means, with respect to each Carrizo Partners Limited Partner Interest, the product of (i) 707,358 shares of Common Stock multiplied by (ii) the percentage set forth on Schedule A hereto as the After Payout Percentage with respect to such Carrizo Partners Limited Partner Interest. Carrizo Partners Before Payout Consideration means, with respect to each Carrizo Partners Limited Partner Interest, the product of (i) 98,892 shares of Common Stock multiplied by (ii) the percentage set forth on Schedule A hereto as the Before Payout Percentage with respect to such Carrizo Partners Limited Partner Interest. -66- 72 Carrizo Partners Merger Consideration means, with respect to each Carrizo Partners Limited Partner Interest, the sum of the Carrizo Partners Before Payout Consideration and the Carrizo Partners After Payout Consideration with respect to such Carrizo Partners Limited Partner Interest. (b) At the Effective Time, any Carrizo Partners Limited Partner Interests outstanding immediately prior to the Effective Time that are held by Carrizo Partners or any subsidiary thereof or by Carrizo Oil & Gas shall be canceled, and no payment shall be made with respect thereto. (c) At the Effective Time, all general partner interests in Carrizo Partners outstanding immediately prior to the Effective Time shall be canceled, and no payment shall be made with respect thereto. (d) At the Effective Time, each share of Common Stock outstanding immediately prior to the Effective Time shall remain outstanding and continue unchanged as one share of Common Stock. (e) No fractional shares of Common Stock shall be issued in the Merger. Each holder of Carrizo Partners Limited Partner Interests will be issued a whole share of Common Stock in lieu of any fractional share interest to which such holder would otherwise be entitled. ARTICLE IV ARTICLES OF INCORPORATION, BYLAWS AND OFFICERS AND DIRECTORS (a) The Articles of Incorporation of Carrizo Oil & Gas in effect immediately prior to the Effective Time shall be and constitute the Articles of Incorporation of the Surviving Corporation, until duly amended in accordance with the terms thereof and the TBCA. (b) The Bylaws of Carrizo Oil & Gas in effect immediately prior to the Effective Time shall be and constitute the Bylaws of the Surviving Corporation, until duly amended in accordance with the terms thereof and the TBCA. (c) The directors of Carrizo Oil & Gas immediately prior to the Effective Time shall thereafter continue to be the directors of the Surviving Corporation. The officers of Carrizo Oil & Gas in office immediately prior to the Effective Time shall thereafter continue to be the officers of the Surviving Corporation. Each such director and officer will hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation. ARTICLE V APPROVAL AND EFFECTIVE TIME OF THE MERGER The Merger shall be effected when all the following actions in paragraphs (a) through (d) have been taken: -67- 73 (a) The Partnership Agreement Amendment and this Plan shall have been approved by the partners of Carrizo Partners in accordance with the TRLPA and the Carrizo Partners Partnership Agreement; (b) This Plan shall have been approved by the shareholders of Carrizo Oil & Gas in accordance with the TBCA; (c) Articles of Merger pursuant to the TBCA shall have been filed with the Secretary of State of the State of Texas; and (d) Each of the conditions of the Constituent Entities set forth in Sections 14.1, 14.6 and 14.7 of the Combination Agreement shall have been satisfied or waived. The Surviving Corporation shall file a statement complying with Section 2.12 of the TRLPA and Article 10.03 of the TBCA with the Secretary of State of the State of Texas, within 90 days of the date of the filing of the Articles of Merger, setting forth the time and date upon which the conditions set forth in paragraphs (a), (b), (c) and (d) of this Article V have been satisfied (such time and date being referred to as the "Effective Time"). ARTICLE VI ABANDONMENT OF PLAN This Plan may be abandoned at any time prior to the Effective Time by the filing with the Secretary of State of the State of Texas of a statement complying with Section 2.12 of the TRLPA and Section 5.03(I) of the TBCA stating that this Plan has been abandoned. In the event of the abandonment of this Plan pursuant to this Article VI, this Plan and the transactions contemplated hereby shall become void and have no effect, without any liability on the part of either Constituent Entity or their respective directors, officers, partners or shareholders, as the case may be, in respect of this Plan. ARTICLE VII MISCELLANEOUS (a) This Plan shall be governed by and construed in accordance with the laws of the State of Texas. (b) If at any time the Surviving Corporation shall consider or be advised that any further assignment, assurance or other action is necessary or desirable to vest in the Surviving Corporation the title to any property or right of either of the Constituent Entities or otherwise to carry out the purposes of this Agreement, the proper officers, directors or representatives of the relevant Constituent Entity shall execute and make all such proper assignments or assurances and take such other actions. The proper officers, directors or representatives of the Surviving Corporation are hereby authorized in the name of each of the Constituent Entity, or otherwise, to take any and all such action. IN WITNESS WHEREOF, the undersigned have caused this Plan of Merger to be executed this 6th day of June, 1997. -68- 74 CARRIZO PARTNERS LTD. By: Carrizo Oil & Gas, Inc., as general partner By: -------------------------- Name: Title: CARRIZO OIL & GAS, INC. By: --------------------------------- Name: Title: -69- 75 SCHEDULE A CARRIZO PARTNERS LIMITED PARTNER INTEREST PERCENTAGES
CAPITAL BEFORE PAYOUT AFTER PAYOUT PARTNERS CONTRIBUTION PERCENTAGE PERCENTAGE -------- ------------ ---------- ---------- Special Limited Partner: Partner $ 0 0.001% 25.00000% --------- -------- -------- Investor Limited Partners: Partner $ 175,000 23.333% 11.66667% Partner 50,000 6.667 3.33333 Partner 50,000 6.667 3.33333 Partner 100,000 13.333 6.66667 Partner 50,000 6.667 3.33333 Partner 50,000 6.667 3.33333 Partner 50,000 6.667 3.33333 Partner 50,000 6.667 3.33333 Partner 75,000 10.000 5.00000 --------- ------- ----------- Total Investor Limited Partners $ 650,000 86.666% 43.33333% --------- ------- ---------- Total Limited Partners $ 650,000 86.667% 68.33333% General Partner: Partner $ 100,000 13.333% 31.66667% --------- ------- --------- Total General and Limited Partners $ 750,000 100.000% 100.00000% ========= ======= =========
76 EXHIBIT F FOUNDERS DISCLOSURE SCHEDULE None. 77 EXHIBIT G PRODUCTION DISCLOSURE SCHEDULE None. 78 EXHIBIT H ENCINITAS DISCLOSURE SCHEDULE None. 79 EXHIBIT I LA ROSA DISCLOSURE SCHEDULE None. 80 EXHIBIT J CARRIZO PARTNERS DISCLOSURE SCHEDULE None. EX-3.1 3 RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF CARRIZO OIL & GAS, INC. ARTICLE ONE Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act, hereby adopts these Amended and Restated Articles of Incorporation, which accurately copy the Articles of Incorporation of the Company in effect on the date hereof, as further amended by these Amended and Restated Articles of Incorporation as hereinafter set forth, and contain no other change in any provisions thereof. ARTICLE TWO The Articles of Incorporation of the Company are amended by these Amended and Restated Articles of Incorporation as follows: The amendments made by these Amended and Restated Articles of Incorporation (the "Amendments") alter or change Articles One through Eleven and delete Article Twelve of the Articles of Incorporation. The full text of each provision altered or added is as set forth in Article Five hereof. The Amendments effect a 521 for 1 stock split of the outstanding shares of the common stock, par value $0.01 per share, of the Company (the "Common Stock") and increase the number of authorized shares of capital stock of all classes from 100,000 to 50,000,000. Simultaneously with the effective date of the Amendments (the "Effective Date"), each issued and outstanding share of previously authorized Common Stock ("Old Common Stock"), shall thereby and thereupon be reclassified, changed and split up into 5,210,000 validly issued, fully paid and nonassessable shares of Common Stock, par value $0.01 per share, of the Company ("New Common Stock"). Each holder of a certificate or certificates that immediately prior to the Effective Date represented outstanding shares of Old Common Stock (the "Old Certificates," whether one or more) shall be entitled to receive upon surrender of such Old Certificates to the Company for cancellation, a certificate or certificates (the "New Certificates," whether one or more) representing the number of whole shares of the New Common Stock into which and for which the shares of the Old Common Stock formerly represented by such Old Certificates so surrendered, are reclassified, changed and 1 2 split up under the terms hereof. From and after the Effective Date, Old Certificates shall represent only the right to receive New Certificates pursuant to the provisions hereof. No certificates or scrip representing fractional share interests in the New Common Stock will be issued, and no such fractional share interest will entitle the holder thereof to vote, or to any rights of a shareholder of the Company. Any fractional shares otherwise issuable will be rounded up to the nearest whole share. ARTICLE THREE The Amendments have been effected in conformity with the provisions of the Texas Business Corporation Act, and the Amended and Restated Articles of Incorporation were duly adopted by all of the shareholders of the Company pursuant to a written consent dated June 4, 1997. ARTICLE FOUR On that date there were 10,000 shares of Common Stock outstanding, all of which were entitled to vote on the Amendments. All 10,000 shares of Common Stock were voted in favor of the Amendments. ARTICLE FIVE The Articles of Incorporation of the Company filed with the Secretary of State of the State of Texas on September 24, 1993 are hereby superseded by the following Amended and Restated Articles of Incorporation, which accurately copy the entire text thereof as amended hereby: AMENDED AND RESTATED ARTICLES OF INCORPORATION OF CARRIZO OIL & GAS, INC. ARTICLE ONE The name of the corporation is Carrizo Oil & Gas, Inc. 2 3 ARTICLE TWO The period of its duration is perpetual. ARTICLE THREE The purpose or purposes for which the corporation is organized is the transaction of all lawful business for which a corporation may be incorporated under the corporation laws of the State of Texas. ARTICLE FOUR The aggregate number of shares that the corporation shall have the authority to issue, is 50,000,000 shares, consisting of 40,000,000 shares of Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred Stock, par value $0.01 per share. The descriptions of the different classes of capital stock of the corporation and the preferences, designations, relative rights, privileges and powers, and the restrictions, limitations and qualifications thereof, of said classes of stock are as follows: Division A The shares of Preferred Stock may be divided into and issued in one or more series, the relative rights and preferences of which series may vary in any and all respects. The board of directors of the corporation is hereby vested with the authority to establish series of Preferred Stock by fixing and determining all the preferences, limitations and relative rights of the shares of any series so established, to the extent not provided for in these Articles of Incorporation or any amendment hereto, and with the authority to increase or decrease the number of shares within each such series; provided, however, that the board of directors may not decrease the number of shares within a series below the number of shares within such series that is then issued. The authority of the board of directors with respect to each such series shall include, but not be limited to, determination of the following: (1) the distinctive designation and number of shares of that series; (2) the rate of dividend (or the method of calculation thereof) payable with respect to shares of that series, the dates, terms and other conditions upon which such dividends shall be payable, and the relative rights of priority of such dividends to dividends payable on any other class or series of capital stock of the corporation; 3 4 (3) the nature of the dividend payable with respect to shares of that series as cumulative, noncumulative or partially cumulative, and if cumulative or partially cumulative, from which date or dates and under what circumstances. (4) whether shares of that series shall be subject to redemption, and, if made subject to redemption, the times, prices, rates, adjustments and other terms and conditions of such redemption (including the manner of selecting shares of that series for redemption if fewer than all shares of such series are to be redeemed); (5) the rights of the holders of shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation (which rights may be different if such action is voluntary than if it is involuntary), including the relative rights of priority in such event as to the rights of the holders of any other class or series of capital stock of the corporation; (6) the terms, amounts and other conditions of any sinking or similar purchase or other fund provided for the purchase or redemption of shares of that series; (7) whether shares of that series shall be convertible into or exchangeable for shares of capital stock or other securities of the corporation or of any other corporation or entity, and, if provision be made for conversion or exchange, the times, prices, rates, adjustments and other terms and conditions of such conversion or exchange; (8) the extent, if any, to which the holders of shares of that series shall be entitled (in addition to any voting rights provided by law) to vote as a class or otherwise with respect to the election of directors or otherwise; (9) the restrictions and conditions, if any, upon the issue or reissue of any additional Preferred Stock ranking on a parity with or prior to shares of that series as to dividends or upon liquidation, dissolution or winding up; (10) any other repurchase obligations of the corporation, subject to any limitations of applicable law; and (11) notwithstanding their failure to be included in (1) through (10) above, any other designations, preferences, limitations or relative rights of shares of that series. Any of the designations, preferences, limitations or relative rights (including the voting rights) of any series of Preferred Stock may be dependent on facts ascertainable outside these Articles of Incorporation. 4 5 Shares of any series of Preferred Stock shall have no voting rights except as required by law or as provided in the preferences, limitations and relative rights of such series. Division B 1. Dividends. Dividends may be paid on the Common Stock out of any assets of the corporation available for such dividends subject to the rights of all outstanding shares of capital stock ranking senior to the Common Stock in respect of dividends. 2. Distribution of Assets. In the event of any liquidation, dissolution or winding up of the corporation, after there shall have been paid to or set aside for the holders of capital stock ranking senior to the Common Stock in respect of rights upon liquidation, dissolution or winding up the full preferential amounts to which they are respectively entitled, the holders of the Common Stock shall be entitled to receive, pro rata, all of the remaining assets of the corporation available for distribution to its shareholders. 3. Voting Rights. The holders of the Common Stock shall be entitled to one vote per share for all purposes upon which such holders are entitled to vote. Division C 1. No Preemptive Rights. No shareholder of the corporation shall by reason of his holding shares of any class have any preemptive or preferential right to acquire or subscribe for any additional, unissued or treasury shares of any class of the corporation now or hereafter to be authorized, or any notes, debentures, bonds or other securities convertible into or carrying any right, option or warrant to subscribe to or acquire shares of any class now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividends or voting or other rights of such shareholder, and the board of directors may issue or authorize the issuance of shares of any class, or any notes, debentures, bonds or other securities convertible into or carrying rights, options or warrants to subscribe to or acquire shares of any class, without offering any such shares of any class, either in whole or in part, to the existing shareholders of any class. 2. Share Dividends. Subject to any restrictions in favor of any series of Preferred Stock provided in the relative rights and preferences of such series, the corporation may pay a share dividend in shares of any class or series of capital stock of the corporation to the holders of shares of any class or series of capital stock of the corporation. 3. No Cumulative Voting. Cumulative voting for the election of directors is expressly prohibited as to all shares of any class or series. 5 6 ARTICLE FIVE The corporation will not commence business until it has received for the issuance of its shares consideration of the value of One Thousand Dollars ($1,000.00), consisting of any tangible or intangible benefit to the corporation, including cash, promissory notes, services performed, contracts for services to be performed or other securities of the corporation. ARTICLE SIX The street address of the corporation's registered office is 14811 St. Mary's Lane, Suite 148, Houston, Texas 77079, and the name of its registered agent at such address is Frank A. Wojtek. ARTICLE SEVEN 1. Number and Term of Directors. The number of directors shall be fixed by, or in the manner provided by, the bylaws of the corporation. The number of directors constituting the current board of directors is five, and the names and addresses of such persons constituting the board of directors, who are to serve until their successors are elected and qualified are as follows: Name Address ---- ------- Steven A. Webster 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 S. P. Johnson, IV 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Frank A. Wojtek 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Douglas A. P. Hamilton 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Paul B. Loyd, Jr. 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 2. Removal of Directors. No director of the Corporation shall be removed from such office by vote or other action of the shareholders of the Corporation or otherwise, except by the affirmative vote of holders of at least a majority of the then outstanding Voting Stock (as defined below), voting together as a single class. The term "Voting Stock" shall mean all outstanding shares 6 7 of all classes and series of capital stock of the Corporation entitled to vote generally in the election of directors of the Corporation, considered as one class; and, if the Corporation shall have shares of Voting Stock entitled to more or less than one vote for any such share, each reference in these Articles of Incorporation to a proportion or percentage of Voting Stock shall be calculated by reference to the portion or percentage of votes entitled to be cast by holders of such shares generally in the election of directors of the Corporation. Prior to the date (the "Public Status Date") of the closing of the Corporation's first offering of the Common Stock to the general public registered under a registration statement filed by the Corporation with the Securities and Exchange Commission, any such removal of a director of the Corporation may be with or without cause. On and after the Public Status Date, no director of the Corporation shall be removed from such office, except for cause, which shall be deemed to exist only if: (i) such director has been convicted, or such director is granted immunity to testify where another has been convicted, of a felony by a court of competent jurisdiction (and such conviction is no longer subject to direct appeal); (ii) such director has been found by a court of competent jurisdiction (and such finding is no longer subject to direct appeal) or by the affirmative vote of at least a majority of the Whole Board (as defined below) at any regular or special meeting of the board of directors called for such purpose to have been grossly negligent or guilty of willful misconduct in the performance of his duties to the Corporation in a matter of substantial importance to the Corporation; (iii) such director has been adjudicated by a court of competent jurisdiction to be mentally incompetent, which mental incompetency directly affects his ability to perform as a director of the Corporation; or (iv) such director has been found by a court of competent jurisdiction (and such finding is no longer subject to direct appeal) or by the affirmative vote of at least a majority of the Whole Board at any regular or special meeting of the board of directors called for such purpose to have breached such director's duty of loyalty to the Corporation or its shareholders or to have engaged in any transaction with the Corporation from which such director derived an improper personal benefit. No director of the Corporation so removed may be nominated, re-elected or reinstated as a director of the Corporation so long as the cause for removal continues to exist. The term "Whole Board" shall mean the total number of authorized directors of the Corporation whether or not there exist any vacancies in previously authorized directorships. This paragraph shall be subject to the rights, if any, of holders of any class or series of stock to elect directors and remove directors elected by them. ARTICLE EIGHT A director of the corporation shall not be liable to the corporation or its shareholders for monetary damages for an act or omission in the director's capacity as a director, except that this article does not eliminate or limit the liability of a director for: (1) a breach of a director's duty of loyalty to the corporation or its shareholders; (2) an act or omission not in good faith that constitutes a breach of duty of that director to the corporation or an act or omission that involves intentional misconduct or a knowing violation of the law; (3) a transaction from which a director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the 7 8 director's office; or (4) an act or omission for which the liability of a director is expressly provided for by an applicable statute. If the Texas Miscellaneous Corporation Laws Act or the Texas Business Corporation Act (the "TBCA") is amended to authorize action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by such statutes, as so amended. Any repeal or modification of this article shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. ARTICLE NINE Prior to the Public Status Date, any action required or permitted to be taken at any annual or special meeting of shareholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent or counterpart consents in writing, setting forth the action so taken, shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those shareholders who did not consent in writing to the action. ARTICLE TEN The vote of shareholders required for approval of any amendment of the articles of incorporation of the corporation for which the TBCA requires a shareholder vote, shall be (in lieu of any greater vote required by the TBCA) the affirmative vote of the holders of a majority of the outstanding Voting Stock entitled to vote thereon, unless any class or series of shares is entitled to vote as a class thereon, in which event the vote required shall be the affirmative vote of the holders of a majority of the outstanding shares within each class or series of shares entitled to vote thereon as a class and at least a majority of the outstanding Voting Stock otherwise entitled to vote thereon. ARTICLE ELEVEN Special meetings of shareholders may be called by the corporation's chairman of the board, the president or the board of directors. Subject to the provisions of the corporation's bylaws governing special meetings, holders of not less than 50% of the outstanding shares of stock entitled to vote at the proposed special meeting may also call a special meeting of shareholders by furnishing the corporation a written request which states the purpose or purposes of the proposed meeting in the manner set forth in the bylaws. 8 9 EXECUTED AND EFFECTIVE this 5th day of June, 1997. CARRIZO OIL & GAS, INC. By: /s/ S. P. JOHNSON, IV ------------------------------- S. P. Johnson, IV President 9 EX-3.2 4 RESTATED BYLAWS 1 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF CARRIZO OIL & GAS, INC. The following Amended and Restated Bylaws, adopted by the Board of Directors of Carrizo Oil & Gas, Inc. (the "Corporation") as of June 4, 1997, shall govern the business of the Corporation, except as the same may be afterwards amended: ARTICLE I CAPITAL STOCK Section 1. Certificates Representing Shares. The Corporation shall deliver certificates representing all shares to which shareholders are entitled. Such certificates shall be signed by the President or a Vice President and either the Secretary or any Assistant Secretary or such other officer or officers as the Board of Directors shall designate, and shall bear the seal of the Corporation or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its issuance. Section 2. Shareholders of Record. The Board of Directors of the Corporation may appoint one or more transfer agents or registrars of any class of stock of the Corporation. Unless and until such appointment is made, the Secretary of the Corporation shall maintain among other records a stock transfer book, the stubs in which shall set forth the names and addresses of the holders of all issued shares of the Corporation, the number of shares held by each, the certificate numbers representing such shares, the date of issue of the certificates representing such shares, and whether or not such shares originate from original issues or from transfer. The names and addresses of shareholders as they appear on the stock transfer book shall be the official list of shareholders of record of the Corporation for all purposes. The Corporation shall be entitled to treat the holder of record of any shares of the Corporation as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such shares or any rights deriving from such shares, on the part of any other person, including (but without limitation) a purchaser, assignee or transferee, unless and until such other person becomes the -1- 2 holder of record of such shares, whether or not the Corporation shall have either actual or constructive notice of the interest of such other person. Section 3. Transfer of Shares. The shares of the Corporation shall be transferable on the stock transfer books of the Corporation by the holder of record thereof, or his duly authorized attorney or legal representative, upon endorsement and surrender for cancellation of the certificates for such shares. All certificates surrendered for transfer shall be canceled, and no new certificate shall be issued until a former certificate or certificates for a like number of shares shall have been surrendered and canceled, except that in the case of a lost, destroyed or mutilated certificate, a new certificate may be issued therefor upon such conditions for the protection of the Corporation and any transfer agent or registrar as the Board of Directors or the Secretary or any other officer may prescribe. Section 4. Restrictions on Transfer of Combination Common Stock. (a) Reference is made to (i) the Combination Agreement (the "Combination Agreement") dated as of June 6, 1997 among Carrizo Oil & Gas, Inc., Carrizo Production, Inc., Carrizo Partners Ltd., Encinitas Partners Ltd., La Rosa Partners Ltd. and each of Paul B. Loyd, Jr., Steven A. Webster, Sylvester P. Johnson, IV, Douglas A. P. Hamilton and Frank A. Wojtek. A shareholder that receives shares of the Corporation's common stock pursuant to the Combination Agreement and the Combination Transactions (as defined in the Combination Agreement) is referred to herein as a "Combination Shareholder" and such shares of common stock are referred to herein as "Combination Common Stock." Prior to any proposed transfer (whether by sale, assignment, pledge or otherwise) of Combination Common Stock, the proposed transferor (the "Transferor") will give written notice to the Corporation of his intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall be accompanied by a written opinion of legal counsel who shall be reasonably satisfactory to the Corporation, addressed to the Corporation, to the effect that the proposed transfer of the securities in question may be effected without registration under the Securities Act of 1933, as amended (the "Securities Act"), and that such proposed transfer does not call into question the exemption from registration under which such Combination Common Stock were initially issued by the Corporation. Any such legal opinion must be reasonably satisfactory to the Corporation and must state that it may also be relied upon by any transfer agent, stock exchange or counsel to the Corporation. As a condition to the transfer, the Corporation may also require a certificate of the Transferor that certifies as to matters that assist the Corporation in establishing compliance with securities laws at the time of the original issuance of the Combination Common Stock as well as at the time of the proposed transfer (including without limitation a certificate containing the representations set forth in Exhibit B to the Combination Agreement). Upon compliance with the terms of these Bylaws to the satisfaction of the Corporation, the Transferor shall be entitled to transfer such securities in accordance with the terms of the notice delivered by the Transferor to the Corporation. Each certificate evidencing the Combination Common Stock so transferred shall bear an appropriate restrictive legend reasonably deemed appropriate by the Corporation, including any appropriate legend relating to the restrictions and obligations under this Bylaw. The Transferor must, prior to any transfer (unless such transfer is made pursuant to -2- 3 Rule 144 or an effective registration statement under the Securities Act), cause any transferee of the Shares, to enter into an agreement with the Corporation that the transferee will take and hold such securities subject to the provisions and upon the conditions specified herein. Without limiting the generality of any other provision hereof, the provisions of this Section 4(a) shall be binding on successive transferees. (b) Any sale or transfer, or purported sale or transfer, of Combination Common Stock shall be null and void, and the Corporation shall have no obligation to effect any transfer unless the terms, conditions and provisions of this Section 4 are strictly observed and followed or are waived by the Corporation. The Corporation may issue stop transfer instructions to any transfer agent for the Corporation's common stock in order to implement any restriction on transfer contemplated by this Bylaw. (c) In addition to any other legend, the certificates representing Combination Common Stock shall bear the following legend: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION AS TO THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION, THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT ANY PROSPECTUS DELIVERY REQUIREMENTS ARE NOT APPLICABLE. THE SHARES WERE (1) ISSUED PURSUANT TO AN AGREEMENT AND (2) ARE SUBJECT TO PROVISIONS OF THE BYLAWS OF THE CORPORATION, BOTH OF WHICH INCLUDE ADDITIONAL RESTRICTIONS ON THEIR TRANSFER AND COPIES OF SUCH AGREEMENT AND BYLAWS MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION. (d) If any provision or provisions of this Section 4 of the Amended and Restated Bylaws shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby; and, to the fullest extent possible, the provisions of this Section 4 of the Amended and Restated Bylaws shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. -3- 4 ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. Place of Meetings. All meetings of shareholders shall be held at the registered office of the Corporation, or at such other place within or without the State of Texas as may be designated by the Board of Directors or officer calling the meeting. Section 2. Annual Meeting. Annual meetings of the shareholders shall be held during each calendar year on a date and at a time designated by the Board of Directors or as may otherwise be set forth in the notice of the meeting, and on any subsequent day or days to which such meeting may be adjourned, for the purposes of electing directors and of transacting such other business as may properly come before the meeting. Failure to designate a time for the annual meeting or to hold the annual meeting at the designated time shall not work a dissolution of the Corporation. Section 3. Special Meetings. Special meetings of the shareholders may be called by the Chairman of the Board, the President or the Board of Directors. Special meetings of shareholders shall be called by the Secretary upon the written request of the holders of shares entitled to cast not less than the following specified percentages of all the votes entitled to be cast at such meeting: (a) prior to the date (the "Public Status Date") of the closing of the Corporation's first offering of the Common Stock to the general public registered under a registration statement filed by the Corporation with the Securities and Exchange Commission, 10% and (b) on and after the Public Status Date, 50%. Such request shall state the purpose or purposes of such meeting and the matters proposed to be acted on thereat. Upon receipt of such request and any notice required by Sections 8 and/or 9 of Article II, the Board of Directors shall set a date for the special meeting, set a record date in accordance with Article II, Section 5, and shall cause an appropriate officer of the Corporation to give the notice required under Article II, Section 4. Section 4. Notice of Meeting. Written notice of all meetings stating the place, day and hour of the meeting and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 60 days before the meeting to the shareholders of record entitled to vote at such meeting unless the Board of Directors is seeking shareholder approval of a plan of merger or exchange, in which case notice shall be delivered not less than 20 nor more than 60 days before the meeting to all shareholders whether or not entitled to vote. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. Any notice required to be given to any shareholder under any provision of the Texas Business Corporation Act or any successor statutory provision, as from time to time amended (the "TBCA"), the Amended and Restated Articles of Incorporation or these Amended and Restated Bylaws need not be given to the shareholder if (1) notice of two consecutive annual meetings and all notices of meetings held during the period between those annual meetings, if any, or (2) all (but in no event less than two) payments (if sent by first class mail) of distributions or interest on securities during a 12-month period have been -4- 5 mailed to that person, addressed at his address as shown on the records of the Corporation, and have been returned undeliverable. Any action or meeting taken or held without notice to such a person shall have the same force and effect as if the notice had been duly given. If such a person delivers to the Corporation a written notice setting forth his then current address, the requirement that notice be given to that person shall be reinstated. Section 5. Fixing of Record Date. The Board of Directors shall fix and shall have the exclusive authority to fix, in advance, a date as the record date for the purpose of determining shareholders entitled to notice of or to vote at any annual or special meeting of shareholders or any adjournment thereof, or shareholders entitled to receive a distribution by the Corporation (other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or a share dividend, or in order to make a determination of shareholders for any other proper purpose. Such date, in any case, shall be not more than 60 days, and in the case of a meeting of shareholders not less than 10 days (20 days if voting on a plan of merger or exchange), prior to the date on which the particular action requiring such determination of shareholders is to be taken. Section 6. Voting List. The officer or agent having charge of the stock transfer books of the Corporation shall make, at least 10 days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of 10 days prior to such meeting, shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Failure to comply with any requirements of this Section 6 shall not affect the validity of any action taken at such meeting. Section 7. Voting. Except to the extent otherwise provided in the Amended and Restated Articles of Incorporation, each holder of shares of the Corporation entitled to vote shall be entitled to one vote for each such share, either in person or by proxy executed in writing by him or by his duly authorized attorney-in-fact. No proxy shall be valid after 11 months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless the proxy form conspicuously states that the proxy is irrevocable and the proxy is coupled with an interest. Section 8. Nomination of Directors. (a) The provisions of subsection (b) hereof shall become effective upon (and, notwithstanding any other provision of these Amended and Restated Bylaws, shall not be effective with respect to any action specified in subsection (b) hereof to be taken on any date prior to) the Public Status Date. -5- 6 (b) Subject to the rights of holders of any class or series of stock having a preference over Common Stock of the Corporation as to dividends or upon liquidation to elect directors under specified circumstances, nominations of persons for election to the Board of Directors may be made only (a) by the Board of Directors or a committee appointed by the Board of Directors or (b) by any shareholder who is a shareholder of record at the time of giving of the shareholder's notice provided for in this Section 8, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 8. A shareholder wishing to nominate one or more individuals to stand for election in the election of members of the Board of Directors at an annual or special meeting must provide written notice thereof to the Board of Directors not less than 80 days in advance of such meeting; provided, however, that in the event that the date of the meeting was not publicly announced by the Corporation by a mailing to shareholders, a press release or a filing with the Securities and Exchange Commission pursuant to Section 13(a) or 14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), more than 90 days prior to the meeting, such notice, to be timely, must be delivered to the Board of Directors not later than the close of business on the tenth day following the day on which the date of the meeting was publicly announced. A shareholder's notice shall set forth (i) the name and address, as they appear on the Corporation's books, of the shareholder making the nomination or nominations; (ii) such information regarding the nominee(s) proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee(s) been nominated or intended to be nominated by the Board of Directors; (iii) a representation of the shareholder as to the class and number of shares of capital stock of the Corporation that are beneficially owned by such shareholder, and the shareholder's intent to appear in person or by proxy at the meeting to propose such nomination; and (iv) the written consent of the nominee(s) to serve as a member of the Board of Directors if so elected. No shareholder nomination shall be effective unless made in accordance with the procedures set forth in this Section 8. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a shareholder nomination was not made in accordance with the provisions of these Amended and Restated Bylaws, and if the chairman should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 9. Proposals of Shareholders. (a) The provisions of subsection (b) hereof shall become effective upon (and, notwithstanding any other provision of these Amended and Restated Bylaws, shall not be effective with respect to any action specified in subsection (b) hereof to be taken on any date prior to) the Public Status Date. (b) At any meeting of shareholders, there shall be conducted only such business as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any shareholder of the Corporation who is a shareholder of record at the time of giving of the shareholder's notice provided for in this Section 9, who shall be entitled to vote at such meeting and who complies with the notice procedure set forth in this Section 9. For business to be properly brought before a meeting of shareholders by a shareholder, the shareholder shall have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices -6- 7 of the Corporation not less than 80 days in advance of such meeting; provided, however, that in the event that the date of the meeting was not publicly announced by the Corporation by a mailing to shareholders, a press release or a filing with the Securities and Exchange Commission pursuant to Section 13(a) or 14(a) of the Exchange Act, more than 90 days prior to the meeting, such notice, to be timely, must be delivered to the Board of Directors not later than the close of business on the tenth day following the day on which the date of the meeting was first so publicly announced. A shareholder's notice shall set forth as to each matter proposed to be brought before the meeting: (1) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and, in the event that such business includes a proposal regarding the amendment of either the Amended and Restated Articles of Incorporation or these Amended and Restated Bylaws of the Corporation, the language of the proposed amendment; (2) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business; (3) a representation of the shareholder as to the class and number of shares of capital stock of the Corporation that are beneficially owned by such shareholder, and the shareholder's intent to appear in person or by proxy at the meeting to propose such business; and (4) any material interest of such shareholder in such proposal or business. Notwithstanding anything in these Amended and Restated Bylaws to the contrary, no business shall be conducted at a shareholders meeting unless brought before the meeting in accordance with the procedure set forth in this Section 9. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of these Amended and Restated Bylaws, and if the chairman should so determine, the chairman shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 10. Quorum and Voting of Shareholders. The holders of a majority of shares entitled to vote on a matter, represented in person or by proxy, shall constitute a quorum as to that matter at a meeting of shareholders, but, if a quorum is not present or represented, a majority in interest of those present or represented may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. With respect to any matter, other than a matter for which the affirmative vote of the holders of a specified portion of the shares entitled to vote is required by law, the Amended and Restated Articles of Incorporation, or these Amended and Restated Bylaws, the vote of the holders of a majority of the shares entitled to vote on that matter and represented in person or by proxy at a meeting at which a quorum is present or represented shall be the act of the shareholders' meeting. Section 11. Officers. The President, shall, if present, preside at and be the chairman of, and the Secretary shall keep the records of, each meeting of shareholders. In the absence, or failure or refusal to perform, of such person, his duties shall be performed by an officer or Director of the Corporation appointed by the Board of Directors or appointed at the meeting. -7- 8 Section 12. Conduct of Meetings. The chairman of a meeting of shareholders shall have the power to appoint inspectors of election and to establish and interpret rules for the conduct of the meeting. Section 13. Consent of Shareholders in Lieu of Meeting. Prior to the Public Status Date, any action required or permitted to be taken at any annual or special meeting of shareholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent or counterpart consents in writing, setting forth the action so taken, shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those shareholders who did not consent in writing to the action. ARTICLE III DIRECTORS Section 1. Number and Tenure. The business and affairs of the Corporation shall be managed by a Board of Directors initially consisting of five directors as of the date of the adoption of these Amended and Restated Bylaws. Subject to any limitations contained in the Amended and Restated Articles of Incorporation, the number of directors may be increased or decreased from time to time by resolution of the Board of Directors or by due election of that number of directors by the shareholders, but no decrease by the Board of Directors shall have the effect of shortening the term of any incumbent director. Unless sooner removed in accordance with these Amended and Restated Bylaws, members of the Board of Directors shall hold office until the next annual meeting of shareholders and until their successors shall have been elected and qualified. The Board of Directors, in its discretion, may elect from the directors a Chairman of the Board who, if present, shall preside at meetings of the Board of Directors. Section 2. Qualifications. Directors need not be shareholders of the Corporation. Section 3. Vacancies. Any vacancy occurring in the Board of Directors or any directorship to be filled by reason of an increase in the number of directors may be filled by election at an annual or special meeting of shareholders called for that purpose or by the affirmative vote of a majority of the remaining directors, though less than a quorum of the entire Board; provided, however, that any directorship to be filled by the Board of Directors by reason of an increase in the number of directors may be filled for a term of office continuing only until the next election of one or more directors by the shareholders; and provided, further, that the Board of Directors may not fill more than two directorships to be filled by reason of an increase in the number of directors during the period between any two successive annual meetings of shareholders. Subject to the foregoing, a director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. -8- 9 Section 4. Place of Meeting. Meetings of the Board of Directors may be held either within or without the State of Texas, at whatever place is specified by the officer calling the meeting. In the absence of specific designation, the meetings shall be held at the principal office of the Corporation. Section 5. Regular Meetings. The Board of Directors shall meet each year immediately following the annual meeting of the shareholders, at the place of such meeting, for the transaction of such business as may properly be brought before it. No notice of annual meetings need be given to either existing or newly elected members of the Board of Directors. Regular meetings may be held at such other times as shall be designated by the Board of Directors. Section 6. Special Meetings. Special meetings of the Board of Directors may be held at any time upon the call of the Chairman of the Board, the President or any two directors of the Corporation. Notice of special meetings shall be given to each director, and may be given by any of the following methods: (a) by mail or telegram sent to the last known business or residence address of such director at least four days before the meeting, (b) by facsimile to the last known business or residence facsimile number of such director transmitted at least two days before the meeting or (c) orally at least one day before the meeting. For purposes of the foregoing sentence, notice shall be deemed given (i) by mail, when deposited in the U.S. mail, postage prepaid, or by telegram, when the telegram is delivered to the telegraph company for transmittal, (ii) by facsimile, when transmittal is confirmed by the sending facsimile machine and (iii) orally, when communicated in person or by telephone to the director or to a person at the business or residence of the director who may reasonably be expected to communicate it to the director. In calculating the number of days' notice received by a director, the date the notice is given by any of the foregoing methods shall be counted, but the date of the meeting to which the notice relates shall not be counted. Notice of the time, place and purpose of a special meeting may be waived in writing before or after such meeting, and shall be equivalent to the giving of notice. Attendance of a director at such meeting shall also constitute a waiver of notice thereof, except where the director attends for the announced purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Except as otherwise herein provided, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 7. Quorum. One-half of the number of directors fixed in the manner provided in these Amended and Restated Bylaws as from time to time amended shall constitute a quorum for the transaction of business, but a smaller number may adjourn from time to time until they can secure the attendance of a quorum. The act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. Any regular or special directors' meeting may be adjourned from time to time by those present, whether a quorum is present or not. -9- 10 Section 8. Committees. The Board of Directors, by resolution or resolutions passed by a majority of the whole Board of Directors, may designate one or more members of the Board of Directors to constitute an Executive Committee and one or more other committees, which shall in each case consist of such number of directors as the Board of Directors may determine. The Executive Committee shall have and may exercise, subject to such restrictions as may be contained in the Amended and Restated Articles of Incorporation or that may be imposed by law, all of the authority of the Board of Directors, including without limitation the power and authority to declare a dividend and to authorize the issuance of shares of the Corporation. Each other committee shall have and may exercise such powers of the Board in the management of the business and affairs of the Corporation, including without limitation the power and authority to declare a dividend and to authorize the issuance of shares of the Corporation, as the Board of Directors may determine by resolution and specify in the respective resolutions appointing them, subject to such restrictions as may be contained in the Amended and Restated Articles of Incorporation or that may be imposed by law. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. A majority of all the members of any such committee may fix its rules of procedure, determine its action and fix the time and place, whether within or without the State of Texas, of its meetings and specify what notice thereof, if any, shall be given, unless the Board of Directors shall provide otherwise by resolution. The Board of Directors shall have power to change the membership of any such committee at any time, to fill vacancies therein and to disband any such committee, either with or without cause, at any time. Each committee shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. Section 9. Compensation. Directors may be paid their expenses, if any, of attendance at each regular or special meeting of the Board of the Directors or any committee thereof, and a salary as director as may be fixed by the Board of Directors from time to time; provided, that nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 10. Removal. No director of the Corporation shall be removed from such office by vote or other action of the shareholders of the Corporation or otherwise, except by the affirmative vote of holders of at least a majority of the then outstanding Voting Stock (as defined below), voting together as a single class. The term "Voting Stock" shall mean all outstanding shares of all classes and series of capital stock of the Corporation entitled to vote generally in the election of directors of the Corporation, considered as one class; and, if the Corporation shall have shares of Voting Stock entitled to more or less than one vote for any such share, each reference in these Bylaws to a proportion or percentage in voting power of Voting Stock shall be calculated by reference to the portion or percentage of votes entitled to be cast by holders of such shares generally in the election of directors of the Corporation. Prior to the Public Status Date, any such removal of a director of the Corporation may be with or without cause. On and after the Public Status Date, no director of the Corporation shall be removed from such office, except for cause, which shall be deemed to exist only if: (i) such director has been convicted, or such director is granted immunity to testify where another has been convicted, of a felony by a court of competent jurisdiction (and such conviction is no longer subject to direct appeal); (ii) such director has been found by a court -10- 11 of competent jurisdiction (and such finding is no longer subject to direct appeal) or by the affirmative vote of at least a majority of the Whole Board (as defined below) at any regular or special meeting of the board of directors called for such purpose to have been grossly negligent or guilty of willful misconduct in the performance of his duties to the Corporation in a matter of substantial importance to the Corporation; (iii) such director has been adjudicated by a court of competent jurisdiction to be mentally incompetent, which mental incompetency directly affects his ability to perform as a director of the Corporation; or (iv) such director has been found by a court of competent jurisdiction (and such finding is no longer subject to direct appeal) or by the affirmative vote of at least a majority of the Whole Board at any regular or special meeting of the board of directors called for such purpose to have breached such director's duty of loyalty to the Corporation or its shareholders or to have engaged in any transaction with the Corporation from which such director derived an improper personal benefit. No director of the Corporation so removed may be nominated, re-elected or reinstated as a director of the Corporation so long as the cause for removal continues to exist. The term "Whole Board" shall mean the total number of authorized directors of the Corporation whether or not there exist any vacancies in previously authorized directorships. This paragraph shall be subject to the rights, if any, of holders of any class or series of stock to elect directors and remove directors elected by them. Section 11. Action Without a Meeting. Any action required or permitted to be taken at a meeting of directors or any committee may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors or members of the committee, as the case may be, and such consent shall have the same force and effect as a unanimous vote at a meeting. ARTICLE IV OFFICERS Section 1. Officers. The officers of the Corporation shall be elected by the Board of Directors, and shall consist of a President and a Secretary. The Board of Directors, in its discretion, may also elect a Chief Executive Officer, a Chief Financial Officer, a Chief Operating Officer, one or more Vice Presidents, a Treasurer and such other officers as the Board of Directors may from time to time designate, all of whom shall hold office until their successors are elected and qualified. Any two or more offices may be held by the same person. The Board of Directors may designate which of such officers are to be treated as executive officers for purposes of these Amended and Restated Bylaws or for any other purpose. The salaries of the officers shall be determined by the Board of Directors, and may be altered by the Board of Directors from time to time except as otherwise provided by contract. All officers shall be entitled to be paid or reimbursed for all costs and expenditures incurred in the Corporation's business. -11- 12 Section 2. Vacancies. Whenever any vacancies shall occur in any office by death, resignation, increase in the number of officers of the Corporation, or otherwise, the same shall be filled by the Board of Directors, and the officer so elected shall hold office until his successor is chosen and qualified. Section 3. Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Section 4. Chief Executive Officer. The Chief Executive Officer, if there is one, shall be subject to the control of the Board of Directors, and shall in general supervise and control all business and affairs of the Corporation. The Chief Executive Officer may sign, with the Secretary or any other proper officer of the Corporation thereunto authorized by the Board of Directors, certificates for shares of the Corporation, any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Amended and Restated Bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise signed and executed; and in general shall perform all duties incident to the office of Chief Executive Officer and such other duties as may be prescribed by the Board of Directors from time to time. In the absence of the Chairman, or if the directors neglect or fail to elect a Chairman, then the Chief Executive Officer of the Corporation, if he is a member of the Board of Directors, shall automatically serve as Chairman of the Board of Directors. Section 5. President. In the absence of the Chief Executive Officer, or in the event of his death or inability to act or refusal to act, the President shall perform the duties of the Chief Executive Officer and when so acting shall have all of the powers of and be subject to all of the restrictions upon the Chief Executive Officer. In general, he shall perform all duties incident to the office of President and such other duties as may be prescribed by the Chief Executive Officer or the Board of Directors from time to time. Section 6. Chief Operating Officer. The Chief Operating Officer shall, subject to the control of the Board of Directors, the Chief Executive Officer, the President and the Chairman of the Board, if there is one, in general assist the chief executive officer, and shall perform all duties relating to the general management and operation of the Corporation incident to the office of Chief Operating Officer and such other duties as may be prescribed by the Board of Directors from time to time. Section 7. Chief Financial Officer. The Chief Financial Officer shall, subject to the control of the Board of Directors, the President, the Chief Executive Officer and the Chairman of the Board, if there is one, in general assist the chief executive officer, and shall perform all duties relating to the general management and operation (with specific attention to financial -12- 13 matters) of the Corporation incident to the office of Chief Financial Officer and such other duties as may be prescribed by the Board of Directors from time to time. Section 8. Vice President. Any Vice President may perform the usual and customary duties that pertain to such office (but no unusual or extraordinary duties or powers conferred by the Board of Directors upon the President) and, under the direction and subject to the control of the Board of Directors, such other duties as may be assigned to a Vice President. Section 9. Secretary. It shall be the duty of the Secretary to attend all meetings of the shareholders and Board of Directors and record correctly the proceedings had at such meetings in a book suitable for that purpose. It shall also be the duty of the Secretary to attest with his signature and the seal of the Corporation all stock certificates issued by the Corporation and to keep a stock ledger in which shall be correctly recorded all transactions pertaining to the capital stock of the Corporation. The Secretary shall also attest with his signature and the seal of the Corporation all deeds, conveyances or other instruments requiring the seal of the Corporation. The person holding the office of Secretary shall also perform, under the direction and subject to the control of the Board of Directors, such other duties as may be assigned to the Secretary. The duties of the Secretary may also be performed by any Assistant Secretary. Section 10. Treasurer. The Treasurer shall keep such moneys of the Corporation as may be entrusted to his keeping and account for the same. The Treasurer shall be prepared at all times to give information as to the condition of the Corporation and shall make a detailed annual report of the entire business and financial condition of the Corporation. The person holding the office of Treasurer shall also perform, under the direction and subject to the control of the Board of Directors, such other duties as may be assigned to the Treasurer. The duties of the Treasurer may also be performed by any Assistant Treasurer. Section 11. Other Officers. Assistant Secretaries, if any, and Assistant Treasurers, if any, shall have the duties set forth in Sections 9 and 10, respectively, of this Article IV. Any officer whose duties are not set forth in Sections 4 through 10 of this Article IV shall have such duties as the Board of Directors, the Chief Executive Officer or the President may prescribe. Section 12. Delegation of Authority. In the case of any absence of any officer of the Corporation or for any other reason that the Board may deem sufficient, the Board of Directors may delegate some or all of the powers or duties of such officer to any other officer or to any director, employee, shareholder or agent for whatever period of time seems desirable. -13- 14 ARTICLE V INDEMNITY Section 1. Indemnification of Directors and Executive Officers. Each person who at any time shall serve, or shall have served, as a director or executive officer of the Corporation, or any person who, while a director or executive officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise (each such person referred to herein as an "Indemnitee"), shall be entitled to indemnification as and to the fullest extent permitted by Article 2.02-1 of the TBCA. The foregoing right of indemnification shall not be deemed exclusive of any other rights to which those to be indemnified may be entitled as a matter of law or under any agreement, other provision of these Amended and Restated Bylaws, vote of shareholders or directors, or other arrangement. The Corporation may enter into indemnification agreements with its officers and directors that contractually provide to them the benefits of the provisions of this Article V and include related provisions meant to facilitate the Indemnitees' receipt of such benefits and such other indemnification protections as may be deemed appropriate. Section 2. Advancement or Reimbursement of Expenses. The rights of Indemnitee provided under the preceding section shall include, but not be limited to, the right to be indemnified and to have expenses advanced in all proceedings to the fullest extent permitted by Article 2.02-1 of the TBCA. In the event that an Indemnitee is not wholly successful, on the merits or otherwise, in a proceeding but is successful, on the merits or otherwise, as to any claim in such proceeding, the Corporation shall indemnify Indemnitee against all expenses actually and reasonably incurred by him or on his behalf relating to each claim. The termination of a claim in a proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim. In addition, to the extent an Indemnitee is, by reason of his corporate status, a witness or otherwise participates in any proceeding at a time when he is not named a defendant or respondent in the proceeding, he shall be indemnified against all expenses actually and reasonably incurred by him or on his behalf in connection therewith. The Corporation shall pay all reasonable expenses incurred by or on behalf of Indemnitee in connection with any proceeding or claim, whether brought by the Corporation or otherwise, in advance of any determination respecting entitlement to indemnification pursuant to this Article V within 10 days after the receipt by the Corporation of a written request from Indemnitee reasonably evidencing such expenses and requesting such payment or payments from time to time, whether prior to or after final disposition of such proceeding or claim; provided that the Indemnitee undertakes and agrees in writing that he will reimburse and repay the Corporation for any expenses so advanced to the extent that it shall ultimately be determined by a court, in a final adjudication from which there is no further right of appeal, that Indemnitee is not entitled to be indemnified against such expenses. Section 3. Determination of Request. Upon written request to the Corporation by an Indemnitee for indemnification pursuant to these Amended and Restated Bylaws, a -14- 15 determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in accordance with Article 2.02-1 of the TBCA provided, however, that notwithstanding the foregoing, if a Change in Control shall have occurred, such determination shall be made by Independent Counsel selected by the Indemnitee, unless the Indemnitee shall request that such determination be made in accordance with Article 2.02-1F (1) or (2). The Corporation shall pay any and all reasonable fees and expenses of Independent Counsel incurred in connection with any such determination. If a Change in Control shall have occurred, the Indemnitee shall be presumed (except as otherwise expressly provided in this Article) to be entitled to indemnification under this Article upon submission of a request to the Corporation for indemnification, and thereafter the Corporation shall have the burden of proof in overcoming that presumption in reaching a determination contrary to that presumption. The presumption shall be used by Independent Counsel, or such other person or persons determining entitlement to indemnification, as a basis for a determination of entitlement to indemnification unless the Corporation provides information sufficient to overcome such presumption by clear and convincing evidence or the investigation, review and analysis of Independent Counsel or such other person or persons convinces him or them by clear and convincing evidence that the presumption should not apply. Section 4. Effect of Certain Proceedings. The termination of any proceeding or of any claim in a proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Article) by itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did conduct himself in good faith and in a manner that he reasonably believed in the case of conduct in his official capacity, that was in the best interests of the Corporation or, in all other cases, that was not opposed to the best interests of the Corporation or, with respect to any criminal proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful and Indemnitee shall be deemed to have been found liable in respect of any claim only after he shall have been so adjudged by a court of competent jurisdiction after exhaustion of all appeals therefrom. Section 5. Expenses of Enforcement of Article. In the event that Indemnitee, pursuant to this Article V, seeks a judicial adjudication to enforce his rights under, or to recover damages for breach of, rights created under or pursuant to this Article, Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any and all expenses actually and reasonably incurred by him in such judicial adjudication but only if he prevails therein. If it shall be determined in said judicial adjudication that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication shall be reasonably prorated in good faith by counsel for Indemnitee. Notwithstanding the foregoing, if a Change in Control shall have occurred, Indemnitee shall be entitled to indemnification under this Section 5 regardless of whether Indemnitee ultimately prevails in such judicial adjudication. Section 6. Indemnification of other Officers, Employees and Agents. The Corporation, by adoption of a resolution of the Board of Directors, may indemnify and advance expenses to an officer who is not an executive officer, an employee or agent of the Corporation -15- 16 to the same extent and subject to the same conditions (or to such lesser extent and/or with such other conditions as the Board of Directors may determine) under which it may indemnify and advance expenses to an Indemnitee under this Article V; and the Corporation may indemnify and advance expenses to persons who are not or were not directors, officers, employees or agents of the Corporation, but who are or were serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person to the same extent and subject to the same conditions (or to such lesser extent and/or with such other conditions as the Board of Directors may determine) that it may indemnify and advance expenses to Indemnitees under this Article V. Section 7. Insurance and Self-Insurance Arrangements. The Corporation may, but is not required to, procure or maintain insurance or other similar arrangements, at its expense, to protect itself and any person, including any Indemnitee, who is or was a director, officer, employee, agent or fiduciary of the corporation or who is or was serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any expense, liability or loss asserted against or incurred by such person, in such a capacity or arising out of his status as such a person, whether or not the Corporation would have the power to indemnify such person against such expense or liability. In considering the cost and availability of such insurance, the Corporation, (through the exercise of the business judgment of its directors and officers), may from time to time, purchase insurance which provides for any and all of (i) deductibles, (ii) limits on payments required to be made by the insurer, or (iii) coverage exclusions and/or coverage which may not be as comprehensive as that which might otherwise be available to the Corporation but which otherwise available insurance the officers or directors of the Corporation determine is inadvisable for the Corporation to purchase given the cost involved. The purchase of insurance with deductibles, limits on payments and coverage exclusions and/or noncomprehensive insurance will be deemed to be in the best interest of the Corporation but may not be in the best interest of the Indemnitees. As to the Corporation, purchasing insurance with deductibles, limits on payments and coverage exclusions and/or noncomprehensive insurance is similar to the Corporation's practice of self-insurance in other areas. In order to protect Indemnitees who would otherwise be more fully or entirely covered under such policies, the Corporation shall indemnify and hold Indemnitees harmless to the extent (i) of such deductibles, (ii) of amounts exceeding payments required to be made by an insurer or (iii) of coverage under policies of officer's and director's liability insurance that are available, were available or which became available to the Corporation or which are generally available to companies comparable to the Corporation but which the officers or directors of the Corporation determine is inadvisable for the Corporation to purchase, given the cost involved. The obligation of the Corporation in the preceding sentence shall be without regard to whether the Corporation would otherwise be entitled to indemnify such officer or director under the other provisions of these Amended and Restated Bylaws, or under any law, agreement, vote of shareholders or directors or other arrangement. Notwithstanding the foregoing provision of -16- 17 this Section 7, an Indemnitee shall not be entitled to indemnification for the results of his conduct that is intentionally adverse to the interests of the Corporation. This Section 7 is authorized by Section 2.02-1(R) of the TBCA as in effect on the date of adoption of these Amended and Restated Bylaws, and further, is intended to establish an arrangement of self-insurance pursuant to that section. Section 8. Severability. If any provision or provisions of this Article shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby; and, to the fullest extent possible, the provisions of this Article shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. Section 9. Definitions. The following terms are used herein as follows: "Change in Control" means a change in control of the Corporation occurring after the date of adoption of these Amended and Restated Bylaws of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Exchange Act, whether or not the Corporation is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if at any time after the date of adoption of these Amended and Restated Bylaws (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 40% or more of the combined voting power of the Corporation's then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) the Corporation is a party to a merger, consolidation, share exchange, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter or (iii) during any 15-month period, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. "Corporate status" means the status of a person who is or was a director, officer, partner, employee, agent or fiduciary of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Corporation. -17- 18 "Disinterested Director" means a director of the Corporation who is not a named defendant or respondent to the proceeding or subject to a claim in respect of which indemnification is sought by Indemnitee. "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither contemporaneously is, nor in the five years theretofore has been, retained to represent: (a) the Corporation or Indemnitee in any matter material to either such party, (b) any other party to the proceeding giving rise to a claim for indemnification hereunder or (c) the beneficial owner, directly or indirectly, of securities of the Corporation representing 40% or more of the combined voting power of the Corporation's then outstanding voting securities. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or Indemnitee in an action to determine Indemnitee's rights to indemnification under these Amended and Restated Bylaws. ARTICLE VI MISCELLANEOUS PROVISIONS Section 1. Amendments. These Amended and Restated Bylaws may be amended or repealed, or new bylaws adopted, (a) by the Board of Directors, unless the shareholders in amending, repealing or adopting a particular bylaw expressly provide that the Board of Directors may not amend or repeal that bylaw or unless the Amended and Restated Articles of Incorporation or the TBCA reserves the power to take such action to the shareholders in whole or part or (b) by the shareholders, unless the Amended and Restated Articles of Incorporation or a bylaw adopted by the shareholders provides otherwise as to all or some portion of these Amended and Restated Bylaws; provided that any amendment or repeal of these Amended and Restated Bylaws by the shareholders may only be effected at a shareholders meeting for which notice has been given pursuant to Article II, Section 9 of these Amended and Restated Bylaws. Section 2. Waiver. Whenever any notice is required to be given to any shareholder, director or committee member under the provisions of any law, the Amended and Restated Articles of Incorporation or these Amended and Restated Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Section 3. Conference Telephone Meetings. Meetings of shareholders, directors, or any committee thereof, may be held by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this Section 3 shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose -18- 19 of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 4. Offices. The principal office of the Corporation shall be located in Houston, Texas, unless and until changed by resolution of the Board of Directors. The Corporation may also have offices at such other places as the Board of Directors may from time to time designate, or as the business of the Corporation may require. Section 5. Resignations. Any director or officer may resign at any time. Such resignations shall be made in writing and shall take effect at the time specified therein, or, if no time be specified, at the time of its receipt by the Chief Executive Officer, President or Secretary. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. Section 6. Seal. The seal of the Corporation shall be circular in form with a five pointed star in the center and the name of the Corporation around the margin thereof, or in such other form as may be fixed by resolution of the Board of Directors. Section 7. Fiscal Year. The fiscal year of the Corporation shall be the calendar year, or such other fiscal year as shall be fixed by the resolution of the Board of Directors. -19- EX-4.2 5 SECURED REDUCING REVOLVING LINE OF CREDIT-6/26/96 1 EXHIBIT 4.2 LOAN AGREEMENT $10,000,000.00 SECURED REDUCING REVOLVING LINE OF CREDIT FROM COMPASS BANK TO ENCINITAS PARTNERS LTD June 26, 1996 2 TABLE OF CONTENTS
PAGE ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II. THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.01 The Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.02 Advances and Payments of Principal Under the Note . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.03 Payments of Interest under the Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.04 Provisions Relating to Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.05 Advances to Satisfy Obligations of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.06 Mandatory Prepayment of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.07 Borrowing Base Determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.08 Assignment of Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.09 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.10 Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.11 Addition of Borrowing Base Oil & Gas Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE III. CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.01 Receipt of Note, Agreement and Certificate of Compliance . . . . . . . . . . . . . . . . . . . . . . 14 3.02 Receipt of Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.03 Receipt of Organizational Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.04 Receipt of Certified Copy of Partnership/Corporate Proceedings and Certificates of Incumbency . . . 14 3.05 Receipt of Certificates of Authority and Certificates of Good Standing . . . . . . . . . . . . . . . 15 3.06 UCC Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.07 Bank Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.08 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.09 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.10 Request for Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.11 Accuracy of Representations and Warranties and No Event of Default . . . . . . . . . . . . . . . . . 15 3.12 Legal Matters Satisfactory to Counsel to Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.13 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.14 Status of Record Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.15 Collateral Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.16 Legal Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.17 Documents Required for Subsequent Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.18 McGill Bros. NCT-1 No. 74 Well and Womack #1 Well . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE IV. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.01 Existence and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.02 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
i 3
PAGE ---- 4.03 Valid and Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.04 Title to Borrowing Base Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.05 Oil and Gas Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.06 Interest in the Borrowing Base Oil and Gas Properties . . . . . . . . . . . . . . . . . . . . . . . 18 4.07 Oil and Gas Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.08 Producing Wells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.10 Scope and Accuracy of Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.11 Liabilities, Litigation and Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.12 Margin Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.13 Authorizations and Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.14 Compliance with Laws, Rules, Regulations and Orders . . . . . . . . . . . . . . . . . . . . . . . . 20 4.15 Proper Filing of Tax Returns and Payment of Taxes Due . . . . . . . . . . . . . . . . . . . . . . . 21 4.16 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.17 Investment Company Act Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.18 Public Utility Holding Company Act Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.19 Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE V. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.01 Use of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.02 Maintenance and Access to Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.03 Quarterly Unaudited Financial Statements of Borrower . . . . . . . . . . . . . . . . . . . . . . . . 23 5.04 Annual Unaudited Financial Statements of Guarantor . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.05 Annual Audited Financial Statements of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.06 Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.07 Statement of Material Adverse Change in Condition . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.08 Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.09 Compliance with Laws and Payment of Assessments and Charges . . . . . . . . . . . . . . . . . . . . 24 5.10 Maintenance of Existence and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.12 Initial Expenses of Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.13 Subsequent Expenses of Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.14 Maintenance of Tangible Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.15 Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.16 Inspection of Tangible Assets/Right of Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.17 Payment of Note and Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.18 ERISA Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.19 Tangible Net Worth Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ii 4
PAGE ---- 5.20 Cash Flow to Debt Service Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.21 Compliance with Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.22 Hazardous Substances Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 5.23 Changes in Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.24 Operating Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE VI. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 6.01 Other Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 6.02 Guaranty of Payment or Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 6.03 Loans or Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 6.04 Mortgages or Pledges of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 6.05 Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 6.06 Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 6.07 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 6.08 Payment of Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 6.09 Cancellation of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 6.10 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 6.11 Changes in Business Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 6.12 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE VII. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.01 Enumeration of Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.02 Rights Upon Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE VIII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 8.01 Security Interests in Deposits and Right of Offset or Banker's Lien . . . . . . . . . . . . . . . . 32 8.02 Survival of Representations, Warranties and Covenants . . . . . . . . . . . . . . . . . . . . . . . 32 8.03 Notices and Other Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 8.04 Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.05 Renewals and Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.06 No Waiver by Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.07 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.08 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.09 Incorporation of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.10 Survival Upon Unenforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.11 Rights of Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.12 Amendments or Modifications of this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.13 Agreement Construed as an Entirety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.14 Number and Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.15 AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.16 Controlling Provision Upon Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
iii 5
PAGE ---- 8.17 Time, Place and Method of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 8.18 Counterpart Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
EXHIBITS EXHIBIT A Borrowing Base Properties EXHIBIT B Compliance Certificate EXHIBIT C Note EXHIBIT D Security Instruments EXHIBIT E Form of Request for Advance SCHEDULES 3.09 Matters to be Covered by Opinion of Counsel for Borrower and Guarantor 4.09 Purchasers of Production 4.11 Litigation iv 6 LOAN AGREEMENT THIS LOAN AGREEMENT, is entered into as of the 26th day of June 1996, by and among ENCINITAS PARTNERS LTD., a Texas limited partnership (the "Borrower"), CARRIZO PRODUCTION, INC., a Texas corporation (the "Guarantor"), and COMPASS BANK, a Texas chartered bank (the "Bank"). W I T N E S S E T H WHEREAS, Borrower desires to obtain a loan from Bank in order to refinance existing debt, acquire additional oil and gas reserves, conduct developmental drilling, and use as working capital for other ordinary business of the partnership; and WHEREAS, Guarantor is the sole general partner of Borrower and owns a partnership interest in Borrower, and accordingly, Guarantor will benefit from the loans to Borrower pursuant to this Agreement; and WHEREAS, Bank is willing to loan such funds to Borrower in accordance with the terms of this Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, Bank, Borrower and Guarantor agree as follows: ARTICLE I. DEFINITIONS As used in this Agreement, the following terms shall have the meanings indicated: "Affiliate" means, as applied to any Person, any other Person, directly or indirectly, controlling, controlled by, or under common control with, that Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by", and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities, by contract, or otherwise. 1 7 "Agreement" means this Loan Agreement, as the same may be amended or supplemented from time to time. "Bank" has the meaning set forth in the preamble hereof. "Borrower" has the meaning set forth in the preamble hereof. "Borrowing Base" means the maximum loan amount supported by the Borrowing Base Properties, as determined by Bank from time to time in accordance with Section 2.07 of this Agreement, and which is $3,000,000.00 as of the date of this Agreement. "Borrowing Base Properties" means those properties of Borrower that are to be made subject to the liens created by the Security Instruments to secure the Obligations, which initial Borrowing Base Properties are described in Exhibit "A" attached hereto and made a part hereof, together with such additional Oil and Gas Properties as are subsequently added to the Borrowing Base Properties pursuant to Section 2.11. "Business Day" means a day other than a Saturday, Sunday or legal holiday for commercial banks under the laws of the State of Texas. "Compliance Certificate" means the certificate of the president or vice president of the sole general partner of Borrower required to be submitted to Bank from time to time pursuant to this Agreement, which certificate shall be in the form attached hereto as Exhibit "B." "Environmental Laws" means (a) the following federal laws as they may be cited, referenced and amended from time to time: the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Endangered Species Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the Hazardous Materials Transportation Act, the Superfund Amendments and Reauthorization Act, and the Toxic Substances Control Act; (b) any and all environmental statutes of any state in which property of Borrower is situated, as they may be cited, referenced and amended from time to time; (c) any rules or regulations promulgated under or adopted pursuant to the above federal and state laws; and (d) any other federal, state or local 2 8 statute or any requirement, rule, regulation, code, ordinance or order adopted pursuant thereto, including, without limitation, those relating to the generation, transportation, treatment, storage, recycling, disposal, handling or release of Hazardous Substances. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereof. "ERISA Affiliate" means any trade or business (whether or not incorporated) which together with Borrower would be treated as a single employer under Section 4001 of ERISA. "Event of Default" means any of the events specified in Section 7.01 of this Agreement. "Financial Statements" means the statements of the financial condition of the indicated Person, as at the point in time and for the period indicated and consisting of at least a consolidated balance sheet, income statement and statement of cash flows, and, when the foregoing are audited, accompanied by the certification of such Person's independent certified public accountants and footnotes to any of the foregoing, all of which shall be prepared in accordance with GAAP applied on a basis consistent with that of the preceding year. "Floating Rate" means the Index Rate in effect from time to time plus three-quarters of one percent (.75%). "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a "consistent basis" when the accounting principles observed in a current period are comparable in all material respects to those accounting principles applied in a preceding period. "Guarantor" has the meaning set forth in the preamble hereof. 3 9 "Guaranty" means the guaranty of all of Borrower's Obligations to Bank arising under this Agreement, in form and substance satisfactory to Bank, duly executed by Guarantor. "Hazardous Substances" means flammables, explosives, radioactive materials, hazardous wastes, asbestos or any material containing asbestos, polychlorinated biphenyls (PCBs), toxic substances or related materials, petroleum and petroleum products and associated oil or natural gas exploration, production and development wastes or any substances defined as "hazardous substances", "hazardous materials", "hazardous wastes" or "toxic substances" under the Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Superfund Amendments and Reauthorization Act, as amended, the Hazardous Materials Transportation Act, as amended, the Resource Conservation and Recovery Act, as amended, the Toxic Substances Control Act, as amended, or any other Environmental Laws now or hereafter enacted or promulgated by any regulatory authority or governmental body. "Indebtedness" means, as to any Person, (a) all items of indebtedness or liability (other than capital, surplus, deferred credits and reserves, as such) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet as at the date as of which Indebtedness is to be determined, (b) indebtedness secured by any mortgage, pledge or lien existing on or encumbering property owned by the Person whose Indebtedness is being determined, whether or not the indebtedness secured thereby shall have been assumed, and (c) all indebtedness of others which such Person has directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business), discounted with recourse, agreed (contingently or otherwise) to purchase or repurchase or otherwise acquire, or in respect of which such Person has agreed to supply or advance funds (whether by way of loan, purchase of securities or capital contribution, through a commitment to pay for property or services regardless of the nondelivery of such property or the nonfurnishing of such services or otherwise), or in respect of which such Person has otherwise become directly or indirectly liable, contingently or otherwise, whether now existing or hereafter arising. "Index Rate" means, at any time, the prime rate established in The Wall Street Journal's "Money Rates" or similar table. If multiple prime rates are quoted in the table, then the 4 10 highest prime rate will be the Index Rate. In the event that the prime rate is no longer published by The Wall Street Journal in the "Money Rates" or similar table, then Bank may select an alternative published index based upon comparable information as a substitute Index Rate. Upon the selection of a substitute Index Rate, the applicable interest rate shall thereafter vary in relation to the substitute index. Such substitute index shall be the same index that is generally used as a substitute by Bank on all Index Rate loans. The Index Rate is eight and one-quarter percent (8.25%) as of the date of this Agreement. "Investment" in any Person means any stock, bond, note or other evidence of Indebtedness or any other security (other than current trade and customer accounts) of, or loan to, such Person. "Leases" means oil and gas leases and all oil, gas and mineral leases constituting any part of the Borrowing Base Properties. "Limitation Period" means any period while any amount remains owing on the Note and interest on such amount calculated at the Floating Rate, plus any fees payable hereunder and deemed to be interest under applicable law, would exceed the Maximum Rate. "Loan" means, singly, any advance by Bank to Borrower pursuant to this Agreement and "Loans" means, cumulatively, the aggregate sum of all money advanced by Bank to Borrower pursuant to this Agreement. "Loan Documents" means this Agreement and all promissory notes, security agreements, guaranties, and other instruments, documents, and agreements executed and delivered pursuant to or in connection with this Agreement, as such instruments, documents, and agreements may be amended, modified, renewed, extended, or supplemented from time to time. "Loan Excess" means, at any point in time, the amount, if any, by which the outstanding balance on the Loans evidenced by the Note exceeds the Revolving Commitment then in effect. "Marketable Title" means good and indefeasible title free and clear of all mortgages, liens and encumbrances, except for Permitted Encumbrances. 5 11 "Maturity Date" means June 1, 1998. "Maximum Rate" means the maximum non-usurious interest rate permissible under applicable laws of the State of Texas or those of the United States of America applicable to Bank. "Monthly Borrowing Base Reduction" means the amount of the automatic monthly reduction to the Borrowing Base, as determined by Bank from time to time in accordance with Section 2.07 of this Agreement. "Multi-employer Plan" means a plan described in Section 4001(a)(3) of ERISA which covers employees of Borrower or any ERISA Affiliate. "Note" means that certain promissory note in the original face amount of $10,000,000.00, dated of even date herewith, made by Borrower payable to the order of Bank, in the form attached hereto as Exhibit "C," together with all deferrals, renewals, extensions, amendments, modifications or rearrangements thereof, which promissory note shall evidence the advances to Borrower by Bank pursuant to Section 2.01 hereof. "Obligations" means all obligations, indebtedness, and liabilities of Borrower to Bank, now existing or hereafter arising, including, but not limited to, the indebtedness evidenced by the Note, whether direct, indirect, related, unrelated, fixed, contingent, specified, unspecified, joint, several, or joint and several, and all interest and fees accruing thereon and all attorneys' fees and other expenses incurred in the enforcement or collection thereof. "Oil and Gas Properties" means fee, leasehold or other interests in or under mineral estates or oil, gas and other liquid or gaseous hydrocarbon leases with respect to properties situated in the United States, including, without limitation, overriding royalty and royalty interests, leasehold estate interests, net profits interests, production payment interests and mineral fee interests, together with all contracts executed in connection therewith, all oil, gas and other minerals produced and to be produced therefrom, all proceeds thereof, and all tenements, hereditaments, appurtenances and properties, real or personal, appertaining, belonging, affixed or incidental thereto. 6 12 "Permitted Encumbrances" means: (A) Liens for taxes, assessments, or similar charges, incurred in the ordinary course of business that are not yet due and payable; (B) Liens of mechanics, materialmen, warehousemen, carriers, or other similar liens, securing obligations incurred in the ordinary course of business that are not yet due and payable; (C) Encumbrances consisting of zoning restrictions, easements, or other restrictions on the use of real property, none of which materially impairs the use of such property by Borrower in the operation of its business, and none of which is violated in any material respect by existing or proposed operations; (D) Liens in favor of Bank; (E) The following, if the validity or amount thereof is being contested in good faith by appropriate and lawful proceedings, so long as levy and execution thereon have been stayed and continue to be stayed, and in Bank's sole judgment they do not, in the aggregate, materially detract from the value of the property of Borrower or any Subsidiary, or materially impair the use thereof in the operation of its business: (1) Claims or liens for taxes, assessments, or similar charges; and (2) Claims or liens of mechanics, materialmen, warehousemen, carriers, or other similar liens. "Person" means an individual, company, corporation, partnership, limited partnership, joint venture, trust, association, unincorporated organization or a government or any agency or political subdivision thereof. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. 7 13 "Prohibited Transaction" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1954, as amended from time to time. "Proved Reserves" means the estimated quantities of crude oil, condensate, natural gas liquids and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable by primary producing mechanisms in future years from known reservoirs underlying lands or interests therein constituting Oil and Gas Properties, under existing economic and operating conditions. Reserves which can be produced economically through application of improved recovery techniques (e.g., fluid injection) will be included in Proved Reserves when successful testing by a pilot project or the operation of an installed program in the reservoir provides support for the engineering analysis on which the pilot project or installed program was based. In general, the economic productivity of the estimated proved reserves is supported by actual production or a conclusive formation test; however, in certain instances proved reserves are assigned to reservoirs on the basis of a combination of electrical and other type logs and core analyses which indicate these reservoirs are analogous to similar reservoirs in the same field which are producing or have demonstrated the ability to produce on a formation test. "Reportable Event" means any of the events set forth in Section 4043 of ERISA. "Request for Advance" means the written request by Borrower for an advance by Bank pursuant to this Agreement, which Request for Advance shall be in a form, and shall include the information and accompanying supporting documentation, as prescribed in Exhibit "E" attached hereto. "Revolving Commitment" means the obligation of Bank, subject to the provisions of this Agreement and existing only through the last Business Day prior to the Maturity Date, to advance to Borrower funds, not to exceed at any one time outstanding an amount equal to the Borrowing Base then in effect. "Security Instruments" means the security instruments described on Exhibit "D," in form and substance satisfactory to Bank, to be executed by Borrower pursuant to Section 3.15, and any 8 14 and all other instruments or documents hereafter executed in connection with or as security for the payment of the Note. "Subsidiary" means, with respect to Borrower and Guarantor, respectively, (a) any corporation in which Borrower or Guarantor, directly or indirectly through its Subsidiaries, owns more than fifty percent (50%) of the stock of any class or classes having by the terms thereof the ordinary voting power to elect a majority of the directors of such corporation; and (b) any partnership, association, joint venture, or other entity in which Borrower or Guarantor, respectively, directly or indirectly through its Subsidiaries, has more than a fifty percent (50%) equity interest at the time. "Tangible Net Worth" means the total assets of Borrower exclusive of (a) those assets classified as intangible, including, without limitation, goodwill, patents, trademarks, trade names, copyrights, franchises and deferred charges, (b) treasury stock and minority interests in any Person, (c) cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of capital stock, (d) to the extent not already deducted from total assets, allowances for depreciation, depletion, obsolescence and/or amortization of properties, uncollectible accounts, and contingent but probable liabilities as to which an amount can be established, (e) deferred taxes and (f) all assets arising from advances to officers, former officers or sales representatives of Borrower made outside of the ordinary course of business; less total liabilities of Borrower; all of the above being determined in accordance with GAAP. "Unmatured Event of Default" means any event or occurrence which solely with the lapse of time or the giving of notice or both will ripen into an Event of Default. Undefined financial accounting terms used in this Agreement shall be defined in accordance with GAAP. ARTICLE II. THE LOAN 2.01 The Loan. Upon the terms and conditions (including, without limitation, the right of Bank to terminate the Revolving Commitment hereunder upon an Event of Default or an Unmatured Event of Default) and relying on the representations and warranties contained in this Agreement, Bank agrees, for a period 9 15 from and after the date hereof through the last Business Day prior to the Maturity Date, to make advances for the account of Borrower from time to time following receipt of a Request for Advance; provided, however, that the aggregate principal amount of all Loans at any one time outstanding shall not exceed the Revolving Commitment. Through the last Business Day prior to the Maturity Date, Borrower may use this revolving credit by borrowing, prepaying and reborrowing, all in accordance with the terms and conditions of this Agreement. The borrowings made by Borrower pursuant to the Revolving Commitment shall be made at the principal office of Bank and shall be evidenced by the Note. The entire principal amount of the Note is due on the Maturity Date. 2.02 Advances and Payments of Principal Under the Note. Each time an advance is made against or payment is made on the Note, Bank is hereby irrevocably authorized by Borrower to make appropriate entries of such in its records in accordance with the usual and customary practices of accounting for advances and payments on notes; provided, however, the failure of Bank to do so shall not relieve Borrower of its correct liability hereunder or under the Note. The aggregate unpaid amount of advances reflected by the notations by Bank on its records or the ledger sheets affixed to the Note shall be deemed rebuttably presumptive evidence of the principal amount owing on the Note. The liability for payment of principal and interest evidenced by the Note shall be limited to principal amounts actually advanced to Borrower and outstanding under this Agreement and interest on such amounts calculated in accordance with this Agreement. Interest provided for in the Note and herein shall be calculated on unpaid sums actually advanced and outstanding under the Note pursuant to the terms of this Agreement and only for the period from the date or dates of such advances until repayment. 2.03 Payments of Interest under the Note. Subject to the terms and provisions of this Agreement, interest on the Loan, calculated at the Floating Rate, shall be due and payable monthly as it accrues beginning August 1, 1996, and continuing thereafter on the first day of each succeeding calendar month while any amount remains owing on the Note and at the Maturity Date, the interest payment in each instance to be that which has been earned and 10 16 remains unpaid. The rate of interest charged on the Loan shall be adjusted, effective on the effective date of each change in the Index Rate. 2.04 Provisions Relating to Interest. All Loans hereunder and outstanding from time to time shall bear interest at a daily rate equal to the Floating Rate per annum, each such change in the rate of interest charged on the Loans to become effective without notice to Borrower, on the effective date of each change in the Index Rate, calculated on the basis of a year of three hundred sixty-five or three hundred sixty-six (365 or 366) days, as applicable, from the date of advance through the date of repayment. It is the intention of the parties hereto to comply strictly with the usury laws of the State of Texas and the United States of America and, in this connection, there shall never be collected, charged or received on any sums advanced hereunder interest in excess of the Maximum Rate. For purposes of Article 5069-1.04, Vernon's Texas Civil Statutes, as amended, Borrower agrees that the maximum rate to be charged shall be the "indicated (weekly) rate ceiling" as defined in said Article, provided that Bank may also rely to the extent permitted by applicable laws of the State of Texas or the United States of America, on alternative maximum rates of interest under other applicable laws of the State of Texas or the United States of America applicable to Bank, if greater. Interest on past due interest and principal shall be at a daily rate equal to the lesser of (a) the Maximum Rate per annum or (b) the Floating Rate plus three percent (3%) per annum, calculated on the basis of a year of three hundred sixty-five or three hundred sixty-six (365 or 366) days, as applicable, for the number of days elapsed; and if no Maximum Rate exists, all past due interest and principal shall bear interest at a daily rate equal to the Floating Rate plus three percent (3%) per annum, calculated on a year of three hundred sixty-five or three hundred sixty-six (365 or 366), as applicable, days for the number of days elapsed. Notwithstanding anything herein or in the Note to the contrary, during any Limitation Period, the interest rate to be charged on amounts evidenced by the Note shall be the Maximum Rate and the obligation of Borrower for any fees payable hereunder and deemed to be interest under applicable law shall be suspended. During any period or periods of time following a Limitation Period, to the extent permitted by applicable laws of the State of Texas or the United States of America, the interest rate to be charged hereunder shall remain at the Maximum Rate until such time as there has been 11 17 paid to Bank (a) the amount of interest in excess of the Maximum Rate that Bank would have received during the Limitation Period had the interest rate remained at the relevant Floating Rate and (b) all interest and fees otherwise due to Bank but for the effect of such Limitation Period. If under any circumstances the aggregate amounts paid on the Note or under this Agreement include amounts which by law are deemed interest and which would exceed the amount permitted if the Maximum Rate were in effect, Borrower stipulates that such payment and collection will have been and will be deemed to have been, to the extent permitted by applicable laws of the State of Texas or the United States of America, the result of mathematical error on the part of both Borrower and Bank, and Bank shall promptly refund the amount of such excess (to the extent only of such interest payments above the Maximum Rate which could lawfully have been collected and retained) upon discovery of such error by Bank or notice thereof from Borrower. 2.05 Advances to Satisfy Obligations of Borrower. Bank may, but shall not be obligated to, make advances hereunder and apply same to the satisfaction of any condition, warranty, representation or covenant of Borrower contained in this Agreement, and the funds so advanced and applied shall be part of the Loan proceeds advanced under this Agreement and evidenced by the Note. 2.06 Mandatory Prepayment of the Notes. In the event that Bank or Borrower determine that a Loan Excess exists, Borrower shall immediately, but in no event later than thirty (30) days following notice from Bank of any such determination, (i) prepay the principal of the Note in an aggregate amount at least equal to such Loan Excess or (ii) add to the Borrowing Base Properties additional Oil and Gas Properties of Borrower sufficient in value, as determined by Bank in its sole discretion pursuant to Section 2.07, to increase the Borrowing Base to equal the unpaid principal amount of the Note. 2.07 Borrowing Base Determination. The initial Borrowing Base is hereby established at $3,000,000.00, effective as of the date hereof. Subject to the other provisions of this Agreement, the Borrowing Base shall be automatically reduced commencing on August 1, 1996, by the Monthly Borrowing Base Reduction, which is initially established at $90,000.00. 12 18 If and when both of the McGill Brothers NCT-1 #77 and #78 wells (as more fully described on Exhibit "A" attached hereto) are completed as wells capable of producing oil or gas in paying quantities on or before the first Borrowing Base review occurring after the date of this Agreement, have been producing oil or gas for at least ten consecutive days, and have commenced sales of such production, Borrower shall notify Bank thereof and provide Bank with the completion reports for such wells, documentary evidence that the production and sale of oil and gas therefrom have commenced, and such other information relative to the wells as Bank may request. Following the Bank's evaluation of such information, if the Bank determines in its sole discretion that its preliminary evaluation of such wells has been reconfirmed, the Borrowing Base then in effect will increase by $800,000.00, effective upon Bank's written notification to Borrower of such increase. On or before October 1, 1996, Borrower shall furnish to Bank information sufficient to update to an effective date of July 1, 1996, the most recent petroleum engineering reports and geological data provided to Bank prior to Closing relative to the Proved Reserves that are attributable to the Oil and Gas Properties that constitute part of the Borrowing Base Properties, as well as such other information as Bank may request regarding volumes of production produced and sold, contracts, pricing, gross revenues, expenses, and other information and engineering and geological data as may relate to the Borrowing Base Properties (collectively the "Borrowing Base Property Data"). Upon receipt of such Borrowing Base Property Data, Bank shall, in the normal course of business, endeavor to make a determination by December 1, 1996, of the Borrowing Base and the Monthly Borrowing Base Reduction which shall become effective upon written notification from Bank to Borrower, and which, subject to the other provisions of this Agreement, shall be the basis on which the Borrowing Base shall thereafter be calculated until the effective date of the next redetermination of the Borrowing Base and the Monthly Borrowing Base Reduction as set forth in this Section. Thereafter, on or before each succeeding April 1 and October 1 until the Maturity Date, Borrower shall furnish to Bank a report, in form and substance satisfactory to Bank, which report shall set forth, as of each preceding January 1 or July 1, as applicable, such Borrowing Base Property Data as Bank may request attributable to the Borrowing Base Properties. Each report to be provided on or before each April 1 shall be a complete report relating to the Borrowing Base Property Data, prepared by an independent petroleum engineer or firm of engineers satisfactory to 13 19 Bank. Each report to be provided on or before each October 1 shall simply update the previous complete report, and may be prepared by Borrower's own engineers and shall be certified by the President of the general partner of Borrower. Upon receipt of each such report, Bank shall, in the normal course of business, make a determination of the Borrowing Base and the Monthly Borrowing Base Reduction which shall become effective upon written notification from Bank to Borrower, and which, subject to the other provisions of this Agreement, shall be the basis on which the Borrowing Base shall thereafter be calculated until the effective date of the next redetermination of the Borrowing Base and the Monthly Borrowing Base Reduction as set forth in this Section. Bank may redetermine the Borrowing Base and the Monthly Borrowing Base Reduction at any time, and from time to time, which redetermination shall become effective upon written notification from Bank to Borrower and which, subject to the other provisions of this Agreement, shall be the basis on which the Borrowing Base shall thereafter be calculated until the effective date of the next redetermination of the Borrowing Base and the Monthly Borrowing Base Reduction, as set forth in this Section. Beginning with the delivery of the Borrowing Base Property Data due by October 1, 1996, and continuing as and when Borrower is required to provide to Bank each semi-annual report, as required by the provisions of this Section, Borrower shall contemporaneously pay an engineering fee of $5,000.00 to Bank for Bank's analysis of such report and redetermination of the Borrowing Base and the Monthly Borrowing Base Reduction. At any time engineering reviews are requested by Borrower in connection with a Borrowing Base redetermination, other than the semi-annual reviews required by Bank, an additional fee of $5,000.00 shall be paid to Bank for Bank's analysis of such report and redetermination of the Borrowing Base. The Borrowing Base shall represent Bank's determination, in accordance with its customary lending practices in effect from time to time, of the maximum loan amount that may be supported by the Borrowing Base Properties. Borrower and Bank acknowledge that (a) due to the uncertainties of the oil and gas extraction process, the Borrowing Base Properties are not subject to evaluation with a high degree of accuracy and are subject to potential rapid deterioration in value, and (b) for this reason and the difficulties and expenses involved in liquidating and collecting against the Borrowing Base Properties, Bank's determination of the 14 20 maximum loan amount with respect to the Borrowing Base Properties contains an equity cushion, which equity cushion is acknowledged by Borrower as essential for the adequate protection of Bank. 2.08 Assignment of Production. Certain of the Security Instruments covering the Borrowing Base Properties contain an assignment unto and in favor of Bank of all oil, gas and other minerals produced and to be produced from or attributable to the Oil and Gas Properties that constitute part of the Borrowing Base Properties, together with all of the revenues and proceeds attributable to such production, and such Security Instruments further provide that all such revenues and proceeds which may be so collected by Bank pursuant to the assignment shall be applied to the payment of the Note and the satisfaction of all other Indebtedness to be secured by such Security Instruments. Borrower hereby appoints Bank as its agent and attorney-in-fact for all purposes deemed by Bank to be necessary or desirable in connection with such assignment of production, including, but not limited to, completing the letter transfer orders delivered to Bank pursuant to Sections 3.15 and/or 3.17 hereof, which power is coupled with an interest and is not revocable. 2.09 Commitment Fee. As consideration for the commitment of Bank to make Loans to Borrower through the Maturity Date pursuant to this Agreement, Borrower agrees to pay to Bank within three (3) Business Days of receipt of Bank's statement as to quarterly periods ending March 31, June 30, September 30 and December 31 of each year (except the first period shall be for a period of time from the Closing to September 30, 1996) during the period commencing on the date of this Agreement to and including the Maturity Date and at the Maturity Date, a fee equal to 1/2 of 1% per annum (computed on the basis of 365 or 366 days, as the case may be) multiplied by an amount equal to the daily average excess, if any, of the Revolving Commitment over the aggregate principal amount outstanding on the Note during the period from the date of this Agreement or previous calculation date provided above, whichever is later, to the relevant calculation date or the Maturity Date, as the case may be. 2.10 Facility Fee. As consideration for the commitment of Bank to make Loans to Borrower pursuant to this Agreement, Borrower shall pay to Bank a fee ("Facility Fee") of $38,000.00, one-half of which has heretofore been paid, and the remaining $19,000.00 of which shall be paid simultaneously with the Closing. 15 21 If the Revolving Commitment is ever increased to an amount exceeding $3,800,000.00, then at the time such increase becomes effective, Borrower shall pay Bank an additional Facility Fee equal to one percent (1.0%) of the amount by which such increased Revolving Commitment exceeds either: (a) $3,800,000.00, or (b) the highest Revolving Commitment amount previously in effect, if greater than $3,800,000.00. 2.11 Addition of Borrowing Base Oil & Gas Properties. Borrower may, from time to time upon thirty (30) days prior written notice to Bank, propose to add Oil and Gas Properties of Borrower to the Borrowing Base Properties. Any such proposal to add Oil and Gas Properties of Borrower to the Borrowing Base Properties shall be accompanied by an engineering report applicable to such Oil and Gas Properties that conforms to the requirements of Section 2.07, evidence sufficient to establish that Borrower has Marketable Title to such Oil and Gas Properties, and such other data as Bank may reasonably request. Any such addition shall become effective at such time as: (a) Bank has made its determination in the ordinary course of business of the amount by which the Borrowing Base would be increased as the result of such addition and (b) the conditions set forth in Article III hereof, to the extent they are applicable to such additional Oil and Gas Properties of Borrower, have been satisfied. ARTICLE III. CONDITIONS The obligation of Bank to make the Loan referred to in Article II of this Agreement is subject to satisfaction of the following conditions precedent stated in this Article III. The obligation of Bank to make subsequent advances pursuant to this Agreement is subject to the prior or contemporaneous satisfaction of the conditions precedent stated in Sections 3.10 through 3.17. 3.01 Receipt of Note, Agreement and Certificate of Compliance. Bank shall have received the Note, multiple counterparts of this Agreement, as requested by Bank, and the Certificate of Compliance duly executed by an authorized officer for Borrower and, as to the Agreement, by Guarantor. 3.02 Receipt of Guaranty. Bank shall have received from Guarantor the Guaranty, duly executed by Guarantor. 3.03 Receipt of Organizational Documents. 16 22 a. Bank shall have received from Borrower its Certificate of Limited Partnership certified by the Secretary of State of the state of its formation and its Partnership Agreement certified by the secretary or an assistant secretary of the general partner of Borrower. b. Bank shall have received from Guarantor its Articles of Incorporation certified by the Secretary of State of the state of its incorporation and its bylaws certified by the secretary or an assistant secretary of Guarantor. 3.04 Receipt of Certified Copy of Partnership/Corporate Proceedings and Certificates of Incumbency. Bank shall have received from Guarantor, in its capacity as Guarantor and in its capacity as general partner of Borrower, copies of all resolutions of its board of directors with respect to the transactions set forth in this Agreement and the execution of this Agreement, the Note (as to Borrower only) and those of the Security Instruments to which it is a party, such copy or copies to be certified by the secretary or an assistant secretary as being true and correct and in full force and effect as of the date hereof. In addition, Bank shall have received from Guarantor, in its capacity as Guarantor and in its capacity as general partner of Borrower, a certificate of incumbency signed by the secretary or an assistant secretary of Guarantor setting forth (a) the names of the officers executing this Agreement, the Note (as to Borrower only) and those of the Security Instruments to which it is a party, (b) the office(s) to which such Persons have been elected and in which they presently serve and (c) an original specimen signature of each such person. 3.05 Receipt of Certificates of Authority and Certificates of Good Standing. Bank shall have received certificates, as of the most recent dates practicable, of the Secretary of State of each state in which Borrower is qualified as a foreign limited partnership, and the department of revenue or taxation of each of the foregoing states, as to the good standing of Borrower; 3.06 UCC Search. The results of a Uniform Commercial Code search showing all financing statements and other documents or instruments on file against Borrower and Guarantor, in the Offices of the Secretaries of State of the State of Texas and in the counties in which Borrowing Base Properties are located, such 17 23 search to be as of a date no more than ten (10) days prior to the date of the advance of the Loan. 3.07 Bank Fees. Bank shall have contemporaneously received the facility fee required by Section 2.10. 3.08 Financial Statements. Bank shall have received consolidated Financial Statements of Borrower and Guarantor, respectively, as of March 31, 1996, with respect to Borrower and as of December 31, 1995, with respect to Guarantor, showing financial information consistent with that previously provided to Bank. 3.09 Opinion of Counsel. Bank shall received a satisfactory legal opinion from the firm of Gardere Wynne Sewell & Riggs, L.L.P., counsel for Borrower and Guarantor, in form and substance acceptable to Bank, covering the matters prescribed on Schedule 3.09 hereof. 3.10 Request for Advance. Bank shall have received from Borrower a Request for Advance. 3.11 Accuracy of Representations and Warranties and No Event of Default. The representations and warranties contained in Article IV of this Agreement shall be true and correct in all material respects on the date of the making of such Loans or advances with the same effect as though such representations and warranties had been made on such date; and no Event of Default shall have occurred and be continuing or will have occurred at the completion of the making of such Loans or advances, and Bank shall have received a Compliance Certificate signed by the president or controller of the general partner of Borrower. 3.12 Legal Matters Satisfactory to Counsel to Bank. All legal matters incident to the consummation of the transactions hereby contemplated shall be satisfactory to counsel for Bank. 3.13 No Material Adverse Change. No material adverse change shall have occurred since the date of this Agreement in the condition, financial or otherwise, of Borrower or Guarantor. 3.14 Status of Record Title. Bank shall have been satisfied that Borrower has Marketable Title to its Borrowing Base Properties, and that Borrower owns record title to an undivided net revenue interest in the production from each Oil and Gas Property 18 24 that is Borrowing Base Property that is not less than the net revenue interest therein attributed to Borrower in the Loan Documents, as amended from time to time, as well as an undivided working interest in each such Oil and Gas Property that is not greater than the working interest therein attributed to Borrower in the Loan Documents, as amended from time to time (unless there is a corresponding increase in the net revenue interest attributed to such party therein). 3.15 Collateral Documents. As security for the payment of the Note and the performance of the obligations of Borrower under this Agreement, Bank shall have received the duly executed Security Instruments. 3.16 Legal Fees. All legal fees and disbursements owed to Bank's special counsel who provided representation to this Bank in connection with this Agreement or any amendment hereto and in connection with the review of title to the Borrowing Base Properties shall have been paid. 3.17 Documents Required for Subsequent Disbursements. As of the time of funding any additional advances to Borrower that have been approved by Bank pursuant to Section 2.01 and are made in conjunction with the addition of Oil and Gas Properties owned by Borrower to the Borrowing Base Properties, Borrower shall have duly delivered to Bank: (i) the Security Instruments that are necessary or appropriate, in the opinion of Bank, relating to such additional Oil and Gas Properties, and (ii) Transfer Order Letters applicable to the production of oil and gas from any additional Oil and Gas Properties added to the Borrowing Base Properties. 3.18 McGill Bros. NCT-1 No. 74 Well and Womack #1 and #3 Wells. Bank shall have received evidence satisfactory to it, in its sole discretion, confirming that the production of oil or gas in paying quantities has commenced from the McGill Bros. NCT-1 No. 74 Well and the Womack #1 and #3 Wells. ARTICLE IV. REPRESENTATIONS AND WARRANTIES To induce Bank to enter into this Agreement and to make the Loan hereunder, Borrower and, except as otherwise provided, Guarantor represent and warrant to Bank (which representations and warranties will survive the delivery of the Note) that: 19 25 4.01 Existence and Good Standing. a. Borrower is a limited partnership, duly organized, legally existing and in good standing under the laws of its jurisdiction of formation and is duly qualified and in good standing as a foreign limited partnership in all jurisdictions wherein the property owned or the business transacted by it makes such qualification necessary, other than those jurisdictions wherein the failure to so qualify does not have a material adverse effect on Borrower, and Guarantor is the duly appointed and acting sole general partner of Borrower. b. Guarantor is a corporation, duly organized, legally existing and in good standing under the laws of its jurisdiction of incorporation and is duly qualified and in good standing as a foreign corporation in all jurisdictions wherein the property owned or the business transacted by it makes such qualification necessary, other than those jurisdictions wherein the failure to so qualify does not have a material adverse effect on Guarantor. 4.02 Due Authorization. As to Borrower, the execution and delivery by Borrower of this Agreement and the borrowings hereunder; the execution and delivery by Borrower of the Note and the Security Instruments; and the repayment by Borrower of Indebtedness evidenced by the Note and interest and fees provided in the Note and this Agreement are (a) within the partnership power of Borrower; (b) have been duly authorized by all necessary partnership action; and (c) do not and will not (i) require the consent of any regulatory authority or governmental body, (ii) violate any provision of law or of the certificate of limited partnership or limited partnership agreement of Borrower, (iii) cause a default to occur under the terms and provisions of any indenture, instrument or other agreement to which Borrower is a party or by which its property may be presently bound or encumbered, or (iv) result in or require the creation or imposition of any mortgage, lien, pledge, security interest, charge or other encumbrance in, upon or of any of the properties or assets of Borrower under any such indenture, instrument or other agreement, other than under any of the Security Instruments. As to Guarantor, the execution and delivery of this Agreement and the Guaranty are (a) within the corporate power of Guarantor; (b) have been duly authorized by all necessary corporate action, and (c) do not and will not (i) require the consent of any regulatory authority or 20 26 governmental body, (ii) violate any provision of law or of the charter or bylaws of Guarantor, (iii) cause a default to occur under the terms and provisions of any indenture, instrument or other agreement to which Guarantor is a party or by which Guarantor may be presently bound or encumbered, or (iv) result in or require the creation or imposition of any mortgage, lien, pledge, security interest, charge or any other encumbrance in, upon or of any of the properties or assets of Guarantor under such indenture, instrument or other agreement, other than under this Agreement or the Guaranty. 4.03 Valid and Binding Obligations. This Agreement, the Note, the Security Instruments and the Guaranty, when duly executed and delivered, will be, as to each such instrument executed by Borrower and Guarantor, respectively, the legal, valid and binding obligations of and enforceable against Borrower and Guarantor, as applicable, in accordance with their respective terms (subject to any applicable bankruptcy, insolvency or other laws of general application affecting creditors' rights and judicial decisions interpreting any of the foregoing). 4.04 Title to Borrowing Base Properties. Borrower has Marketable Title to all its Borrowing Base Properties, free and clear of all mortgages, liens and encumbrances, except for Permitted Encumbrances. 4.05 Oil and Gas Leases. The Leases which constitute any part of the Borrowing Base Properties are in full force and effect, are valid, subsisting leases covering the entire estates to which they pertain and all rentals, royalties and other amounts due and payable in accordance with the terms of the Leases, overriding royalties, net profits or other production burdens have been duly paid or provided for; the obligations to be performed under the Leases have been duly performed; and neither Borrower nor Guarantor is aware of any default by any third party under any of the Leases with respect to such third party's obligations. 4.06 Interest in the Borrowing Base Oil and Gas Properties. With respect to each of the Borrowing Base Properties, the ownership of Borrower in such property will, with respect to the wells, units and/or tracts of land described in Exhibit "A" hereto in connection with such property, (i) entitle Borrower to receive (subject to the terms and provisions of this Agreement) a decimal share of the oil and gas produced from, or allocated to, 21 27 such wells, units and/or tracts equal to not less than the decimal share set forth in Exhibit "A" in connection with such wells, units and/or tracts, and (ii) cause Borrower to be obligated to bear a decimal share of the cost of exploration, development and operation of such wells, units and/or tracts of land not greater than the decimal share set forth in Exhibit "A" in connection with such wells, units and/or tracts, unless any increase in Borrower's share of costs is accompanied by a pro-rata increase in Borrower's share of revenue. Except as set forth in the instrument and agreements, if any, more particularly described in Exhibit "A", all such shares of production which Borrower is entitled to receive, and shares of expenses which Borrower is obligated to bear, are not subject to change, except for changes attributable to future elections by Borrower not to participate in operations proposed pursuant to customary forms of applicable joint operating agreements, and except for changes attributable to changes in participating areas under any federal units wherein participating areas may be formed, enlarged or contracted in accordance with the rules and regulations of the applicable governmental authority. 4.07 Oil and Gas Contracts. Borrower is not obligated, by virtue of any prepayment under any contract providing for the sale by Borrower of hydrocarbons which contains a "take-or-pay" clause or under any similar prepayment agreement or arrangement, including, without limitation, "gas balancing agreements", to deliver a material amount of hydrocarbons produced from the Borrowing Base Properties at some future time without then or thereafter receiving full payment therefor (i.e., in the case of oil, not in excess of sixty (60) days, and in the case of gas, not in excess of ninety (90) days). The Borrowing Base Properties are not subject to any contractual, or other arrangement for the sale of crude oil which cannot be cancelled on ninety (90) days' (or less) notice, unless the price provided for therein is equal to or greater than the prevailing market price in the vicinity. The Borrowing Base Properties are not subject to any gas sales contract that contains any material terms which are not customary in the industry within the region in which the Borrowing Base Properties affected thereby are located. The Borrowing Base Properties are not subject to any regulatory refund obligation and no facts exist which might cause the same to be imposed. 4.08 Producing Wells. All producing wells located on the Borrowing Base Properties have been, during all times that such were under the direction or control of Borrower and, to the 22 28 knowledge of Borrower, at all other times, drilled, operated and produced in conformity with all applicable Laws, rules, regulations and orders of all regulatory authorities having jurisdiction, are subject to no penalties on account of past production, and are bottomed under and are producing from, and the well bores are wholly within, the Borrowing Base Properties or on Oil and Gas Properties which have been pooled, unitized or communitized with the Borrowing Base Properties. 4.09 Purchasers of Production. The persons who are purchasing Borrower's interests in oil and gas produced from the Borrowing Base Properties as of the calendar month during which the Loans are made hereunder are identified on Schedule 4.09 attached hereto. 4.10 Scope and Accuracy of Financial Statements. All Financial Statements submitted and to be submitted to Bank hereunder, including, without limitation, the Financial Statements of Borrower and Guarantor, are and will be complete and correct in all material respects; are and will be prepared in accordance with GAAP and practices consistently applied; and do and will fairly reflect the financial condition and the results of the operations of Borrower and Guarantor in all material respects as of the dates and for the period stated therein (subject only to normal year-end audit adjustments with respect to such unaudited interim statements of Borrower and Guarantor); and no material adverse change has since occurred in the condition, financial or otherwise, of Borrower or Guarantor, or their respective Subsidiaries (taken as a whole). 4.11 Liabilities, Litigation and Restrictions. Except as disclosed in the Financial Statements, neither Borrower nor Guarantor has any liabilities, direct or contingent, which may materially and adversely affect the business or assets of such party. Except as described on Schedule 4.11, there is no litigation or other action of any nature pending before any court, governmental instrumentality, regulatory authority or arbitral body or, to the knowledge of Borrower or Guarantor, threatened against or affecting Borrower or Guarantor, or any of their Subsidiaries, which might reasonably be expected to result in any material, adverse change in the business or assets of Borrower or Guarantor, or their respective Subsidiaries (taken as a whole). No unusual or unduly burdensome restriction, restraint or hazard exists by contract, law, governmental regulation or otherwise relative to the 23 29 business or material properties of Borrower or Guarantor other than such as relate generally to Persons engaged in the business activities conducted by Borrower or Guarantor, as the case may be. 4.12 Margin Stock. None of the proceeds of the Loans will be used for the purpose of buying or carrying margin stock. 4.13 Authorizations and Consents. No authorization, consent, approval, exemption, franchise, permit or license of, or filing with, any governmental or public authority or any third party is required to authorize, or is otherwise required in connection with the valid execution and delivery by Borrower or Guarantor, as applicable, of this Agreement, the Note, and those of the Security Instruments to which it is a party or any instrument contemplated hereby, the repayment by Borrower of advances against the Note and interest and fees provided in the Note and this Agreement, or the performance by Borrower or Guarantor of its obligations under any of the foregoing. 4.14 Compliance with Laws, Rules, Regulations and Orders. To the best of the knowledge and belief of Borrower and Guarantor, neither the business nor any of the activities of Borrower or Guarantor, as presently conducted, violates any law or any rule, regulation or directive of any applicable judicial, administrative or other governmental instrumentality (including, but not by way of limitation, any law or any rule, regulation or directive of any judicial, administrative or other governmental instrumentality relating to zoning, to any Environmental Law, to the stabilization of wages or prices or to the development, production, transportation or purchase or sale of oil, gas or other hydrocarbons) the result of which violation would have a material adverse effect on Borrower or Guarantor, or their respective Subsidiaries (taken as a whole), and Borrower and Guarantor each possess all licenses, approvals, registrations, permits and other authorizations necessary to enable it to carry on its business in all material respects as now conducted, and all such licenses, approvals, registrations, permits and other authorizations are in full force and effect; and neither Borrower nor Guarantor has reason to believe that Borrower or Guarantor will be unable to obtain the renewal of any such licenses, approvals, registrations, permits and other authorizations. 4.15 Proper Filing of Tax Returns and Payment of Taxes Due. Borrower and Guarantor have each duly and properly filed all 24 30 United States Income Tax returns and all other tax returns which are required to be filed, and have paid all taxes due pursuant to said returns or pursuant to any assessment received, except such taxes, if any, as are being contested in good faith and as to which adequate provisions and disclosures have been made; and the respective charges and reserves on the books of Borrower and Guarantor with respect to any taxes or other governmental charges are adequate. 4.16 ERISA. Borrower and Guarantor are each in compliance in all material respects with all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has occurred and is continuing with respect to any plan; no notice of intent to terminate a plan has been filed, nor has any plan been terminated; no circumstances exist which constitute grounds under Section 4042 of ERISA entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administrate a plan, nor has the PBGC instituted any such proceedings; neither Borrower nor Guarantor, nor any ERISA Affiliate has completely or partially withdrawn under Sections 4201 or 4204 of ERISA from a Multi-employer plan; Borrower and Guarantor, and each ERISA Affiliate have met their minimum funding requirements under ERISA with respect to all of their plans and the present value of all vested benefits under each plan exceeds the fair market value of all plan assets allocable to such benefits, as determined on the most recent valuation date of the plan and in accordance with the provisions of ERISA and the regulations thereunder for calculating the potential liability of Borrower or Guarantor, or any ERISA Affiliate to the PBGC or the plan under Title IV of ERISA; and neither Borrower nor Guarantor, nor any ERISA Affiliate has incurred any liability to the PBGC under ERISA. 4.17 Investment Company Act Compliance. Neither Borrower nor Guarantor is, nor is it directly or indirectly controlled by or acting on behalf of any person or entity which is, an investment company or an "affiliated person" of an investment company within the meaning of the Investment Borrower Act of 1940. 4.18 Public Utility Holding Company Act Compliance. Neither Borrower nor Guarantor is a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 25 31 4.19 Environmental Laws. To the best of the knowledge and belief of Borrower and Guarantor: (a) no property of Borrower or Guarantor is currently on, or has ever been on, any federal or state list of superfund sites as listed on the Environmental Protection Agency National Priority List or any comparable state registries or list in any state of the United States (collectively "Superfund Sites"); (b) no Hazardous Substances have in the past been generated, transported, and or disposed of, by Borrower or Guarantor at any Superfund Site; (c) except in accordance with a valid permit, license, certificate or approval of the relevant regulatory authority or governmental body, there has been no emission, spill, release, disposal or discharge of any Hazardous Substance into or upon (i) the air, (ii) soils or any improvements located thereon, (iii) surface water or groundwater, or (iv) the sewer, septic system or waste treatment, storage or disposal system servicing any property of Borrower or Guarantor; and (d) no complaint, order, directive, claim, citation, notice of environmental report, notice of investigation or other notice by any regulatory authority or governmental body or any other Person with respect to (i) air emissions, (ii) spills, releases or discharges to soils or any improvements located thereon, surface water, groundwater or the sewer, septic system or waste treatment, storage or disposal systems servicing any property of Borrower or Guarantor, (iii) solid or liquid waste disposal, (iv) the use, generation, storage, transportation or disposal of any Hazardous Substance, or (v) other environmental, health or safety matters affecting any property of Borrower or Guarantor, any improvements located thereon, or the business thereon conducted, has been received by Borrower or Guarantor, nor has Borrower or Guarantor been given oral or written notice thereof; provided, however, that the representations and warranties set forth in subparagraphs (c) and (d) above shall apply only to events and conditions which either resulted in (i) a continuing lien or encumbrance on the property of Borrower or Guarantor or (ii) 26 32 otherwise materially affect Borrower's or Guarantor's use or operation of its property or Borrower's ability to repay the Indebtedness evidenced by the Note, or Guarantor's ability to perform its Guaranty. 27 33 ARTICLE V. AFFIRMATIVE COVENANTS Borrower and Guarantor, as applicable, covenant, so long as any Indebtedness of Borrower to Bank remains unpaid under this Agreement or Bank remains obligated to make advances hereunder, to: 5.01 Use of Funds. Use the proceeds advanced under the Loan to refinance the existing Debt described on Schedule 5.01, acquire Oil and Gas Properties, conduct developmental drilling, and use as working capital for other ordinary business activities of Borrower, and furnish Bank such evidence as it may reasonably require with respect to such use. 5.02 Maintenance and Access to Records. Keep adequate records in accordance with good accounting practices, of all of its transactions so that at any time, and from time to time, its true and complete financial condition may be readily determined and, at Bank's reasonable request, make all financial records and records relating to the Borrowing Base Properties available for Bank's inspection and permit Bank to make and take away copies thereof for Bank's internal use only and subject to such confidentiality agreements as Borrower may reasonably require. 5.03 Quarterly Unaudited Financial Statements of Borrower. Deliver to Bank, on or before the forty-fifth (45th) day after the end of each calendar quarter, unaudited Financial Statements of Borrower as at the end of such period and from the beginning of such fiscal year to the end of the respective period, as applicable, which Financial Statements shall be certified by the president or chief financial officer of the general partner of Borrower as being true and correct, subject to changes resulting from year-end audit adjustments. 5.04 Annual Unaudited Financial Statements of Guarantor. Deliver to Bank, on or before the one hundred twentieth (120th) day after the close of each fiscal year of Guarantor, unaudited Financial Statements of Guarantor as at the end of such fiscal year, which Financial Statements shall be certified by the president or chief financial officer of Guarantor as being true and correct. 5.05 Annual Audited Financial Statements of Borrower. Deliver to Bank, on or before the one hundred and twentieth (120th) 28 34 day after the close of each fiscal year of Borrower, a copy of the annual audited Financial Statements of Borrower. 5.06 Compliance Certificate. Deliver to Bank a Compliance Certificate: (a) at the time of Borrower's execution of this Agreement, (b) at the time of delivery of the Financial Statements pursuant to Section 5.03 above, and (c) at the time of delivery of the Financial Statements pursuant to Section 5.05 above. 5.07 Statement of Material Adverse Change in Condition. Deliver to Bank, promptly upon any officer of the general partner of Borrower, or any officer of Guarantor, having knowledge of any material adverse change in the condition, financial or otherwise, of Borrower or its Subsidiaries (or any event or circumstance that would result in any such material adverse change in condition including, but not limited to, litigation and changes in business), a statement of the president or vice president of the general partner of Borrower, setting forth the change in condition or event or circumstance likely to result in any such change and the steps being taken by Borrower or the applicable Subsidiary with respect to such change in condition or event or circumstance. 5.08 Additional Information. Furnish to Bank, promptly upon Bank's reasonable request, such additional financial or other information concerning the assets, liabilities, operations, and transactions of Borrower and of Guarantor, respectively, in such party's possession or to which it has access, including, without limitation, information concerning the Borrowing Base Properties. 5.09 Compliance with Laws and Payment of Assessments and Charges. Comply with all applicable statutes and government regulations, including, without limitation, ERISA, and pay all taxes, assessments, governmental charges, claims for labor, supplies, rent, its share of all costs and expenses incurred under any joint operating agreement, and other obligations which, if unpaid, might become a lien against its property, except any of the foregoing being contested in good faith and as to which satisfactory accruals have been provided and unless failure to comply or pay would not have a material adverse effect on the assets of Borrower and its Subsidiaries (taken as a whole). 5.10 Maintenance of Existence and Good Standing. Maintain Borrower's limited partnership existence and good standing 29 35 and Guarantor's corporate existence and good standing in the jurisdiction of its respective formation or incorporation, as applicable, and in all jurisdictions wherein the property now owned or hereafter acquired or business now or hereafter conducted necessitates same, other than those jurisdictions wherein the failure to so qualify will not have a material adverse effect on Borrower or on Guarantor, as applicable. 5.11 Further Assurances. Promptly cure any defects in the execution and delivery of this Agreement, the Note, the Security Instruments, the Guaranty or any other instrument referred to herein or executed in connection with the Note, and upon notice, immediately execute and deliver to Bank, all such other and further instruments as may be reasonably required or desired by Bank from time to time in compliance with the covenants and agreements made in this Agreement. 5.12 Initial Expenses of Bank. Pay all fees and expenses of special legal counsel for Bank, incurred in connection with the negotiation and preparation of this Agreement, the Note, the Security Instruments, the Guaranty or any other instrument referred to herein or executed in connection with the Note, the satisfaction of the conditions precedent set forth in Article III of this Agreement and the consummation of the transactions contemplated in this Agreement. 5.13 Subsequent Expenses of Bank. Upon request, promptly reimburse Bank for all reasonable amounts expended, advanced or incurred by Bank to collect the Note or to enforce the rights of Bank under this Agreement, the Note, the Security Instruments, the Guaranty, or any other instrument referred to herein or executed in connection with the Note, which amounts shall be deemed compensatory in nature and liquidated as to amount upon notice to Borrower by Bank and which amounts will include, but not be limited to, (a) all court costs, (b) attorneys' fees, (c) fees of auditors and accountants, (d) investigation expenses, (e) internal fees of Bank's in-house legal counsel, (f) fees and expenses incurred in connection with Bank's participation as a member of the creditors' committee in a case commenced under Title 11 of the United States Code or other similar law of the United States, the State of Texas or any other jurisdiction, (g) fees and expenses incurred in connection with lifting the automatic stay prescribed in Sections 362 Title 11 of the United States Code, and (h) fees and expenses incurred in connection with any action pursuant 30 36 to Sections 1129 Title 11 of the United States Code, incurred by Bank in connection with the collection of any sums due under this Agreement, together with interest at the Floating Rate per annum, calculated on a basis of a year of three hundred sixty-five (365) or three hundred sixty-six (366) days, on each such amount from the date of notification to Borrower that the same was expended, advanced or incurred by Bank until the date it is repaid to Bank, with the obligations under this Section 5.13, surviving the non-assumption of this Agreement in a case commenced under Title 11 of the United States Code or other similar law of the United States, the State of Texas or any other jurisdiction and being binding upon Borrower or a trustee, receiver or liquidator of any such party appointed in any such case. 5.14 Maintenance of Tangible Property. Maintain all of its tangible property in good repair and condition and make all necessary replacements thereof and operate such property in a good and workmanlike manner in accordance with standard industry practices, unless the failure to do so would not have a material adverse effect on Borrower and its Subsidiaries (taken as a whole) or the value of the Borrowing Base Properties. 5.15 Maintenance of Insurance. Continue to maintain, or cause to be maintained, insurance with respect to the properties and business of Borrower and Guarantor against such liabilities, casualties, risks and contingencies and in such amounts as is customary in the industry, in an amount and form, and underwritten by an insurer or insurers, as are acceptable to Bank in its sole discretion, and furnish to Bank, at the execution of this Agreement and annually thereafter, certificates evidencing such insurance. 5.16 Inspection of Tangible Assets/Right of Audit. Permit any authorized representative of Bank, to visit and inspect (at the risk of Bank and/or such representative) any tangible asset of Borrower and Guarantor, and/or to audit the books and records of Borrower and Guarantor during normal business hours. 5.17 Payment of Note and Performance of Obligations. As to Borrower, pay the Note according to the reading, tenor and effect thereof, as modified hereby, and do and perform every act and discharge all of the obligations provided to be performed and discharged hereunder. 31 37 5.18 ERISA Reports. Promptly after the filing or receiving thereof, copies of all reports, including annual reports, and notices which Borrower or Guarantor files with or receives from the PBGC or the U.S. Department of Labor under ERISA; and promptly after Borrower or Guarantor knows or has reason to know that any Reportable Event or Prohibited Transaction has occurred with respect to any plan or that the PBGC or Borrower or Guarantor has instituted or will institute proceedings under Title IV of ERISA to terminate any plan, Borrower will deliver to Bank a certificate of the controller of Borrower setting forth details as to such Reportable Event or Prohibited Transaction or plan termination and the action Borrower or Guarantor, as applicable, proposes to take with respect thereto. 5.19 Tangible Net Worth Requirement. Borrower shall maintain a total Tangible Net Worth of not less than $2,750,000.00, plus: (a) fifty percent (50%) of net income (excluding losses) of Borrower subsequent to March 31, 1996, and (b) one hundred percent (100%) of any increases in partners' capital resulting from additional capital contributions to Borrower or the sale or issuance of any partnership interest in Borrower subsequent to March 31, 1996. 5.20 Cash Flow to Debt Service Ratio. Borrower will maintain (calculated in accordance with GAAP) a ratio of quarterly Cash Flow to quarterly Debt Service of not less than 1.25 to 1.0. Compliance with this covenant shall begin with the quarter ending September 30, 1996. For the purposes of calculating this ratio: (a) "Cash Flow" shall be defined as the sum of net income plus depreciation and other non-cash charges less non-cash income of Borrower, and (b) "Debt Service" shall be defined as the sum of (i) actual principal amounts paid by Borrower during such quarter on Indebtedness other than in connection with this Loan; and (ii) principal amounts required to be paid by Borrower during such quarter in connection with this Loan. 5.21 Compliance with Environmental Laws. Comply in all material respects with any and all requirements of law, including, without limitation, Environmental Laws, (a) related to any natural or environmental resource or media located on, above, within, in the vicinity of, related to or affected by any Borrowing Base 32 38 Properties or any other property of Borrower or Guarantor, or (b) required for the performance or conduct of its operations, including, without limitation, all permits, licenses, registrations, approvals and authorizations, and, in this regard, comply fully and in a timely manner with, and cause all employees, crew members, agents, contractors, subcontractors and future lessees (pursuant to appropriate lease provisions) of Borrower and Guarantor while such Persons are acting within the scope of their relationship with Borrower or any Guarantor, to so comply with, all requirements of law, including, without limitation, Environmental Laws, and other requirements with respect to the property of Borrower or Guarantor and the operation thereof necessary or appropriate to enable Borrower and Guarantor to fulfill their respective obligations under all requirements of law, including, without limitation, Environmental Laws, applicable to the use, generation, handling, storage, treatment, transport and disposal of any Hazardous Substances now or hereafter located or present on or under any such property. 5.22 Hazardous Substances Indemnification. Indemnify and hold Bank harmless from and against any and all claims, losses, damages, liabilities, fines, penalties, charges, administrative and judicial proceedings and orders, judgments, remedial actions, requirements and enforcement actions of any kind, and all costs and expenses incurred in connection therewith (including, without limitation, attorneys' fees and expenses), arising directly or indirectly, in whole or in part, out of (a) the presence of any Hazardous Substances on, under or from its property, whether prior to or during the term hereof, or (b) any activity carried on or undertaken on or off its property, whether prior to or during the term hereof, and whether by Borrower or Guarantor, or any predecessor in title or any employees, agents, contractors or subcontractors of Borrower or Guarantor, or any predecessor in title, or any third Persons at any time occupying or present on such property, in connection with the handling, treatment, removal, storage, decontamination, cleanup, transportation or disposal of any Hazardous Substances at any time located or present on or under such property; with the foregoing indemnity further applying to any residual contamination on or under the property of Borrower or Guarantor, or any property of any other Person, or affecting any natural resources, and to any contamination of any property or natural resources arising in connection with the generation, use, handling, storage, transportation or disposal of any Hazardous Substances, irrespective of whether any of such activities were or 33 39 will be undertaken in accordance with applicable requirements of law, including, without limitation, Environmental Laws, and surviving satisfaction of all Indebtedness of Borrower to Bank and the termination of this Agreement, provided, further, that the claims and other actions of any kind against Bank which give rise to such indemnity are not barred by the applicable statute of limitations at the time such claims or actions are instituted and such indemnity shall not extend to any act or omission by Bank or any Affiliate of Bank or any of Bank's employees or agents with respect to the relevant property subsequent to Bank becoming the owner of, taking possession of to the exclusion of Borrower or Guarantor or assuming operations of any property previously owned by Borrower or Guarantor and with respect to which property such claim, loss, damage, liability, fine, penalty, charge, proceeding, order, judgment, action or requirement arises subsequent to the acquisition of title thereto, taking possession thereof or assumption of operations thereon by Bank or any Affiliate of Bank or any of Bank's employees or agents. Notwithstanding anything herein to the contrary, the provisions of this Section 5.22 shall survive any termination of this Agreement and shall survive the payment and performance in full of all Obligations owed by Borrower and Guarantor to Bank. 5.23 Changes in Management. Notify Bank of any change in the general partner or other senior management of Borrower or in the senior management of Guarantor existing as of the date hereof. 5.24 Operating Accounts. Maintain all principal operating accounts of Borrower with Bank. ARTICLE VI. NEGATIVE COVENANTS Without the prior written consent of Bank and so long as any part of the principal or interest on the Note shall remain unpaid or Bank remains obligated to make advances hereunder, Borrower and, where provided, Guarantor, including their respective Subsidiaries, will not: 6.01 Other Indebtedness. Incur, create, assume or suffer to exist any Indebtedness, whether by way of loan or the issuance or sale of securities except (a) Loans hereunder, (b) loans by Bank under other credit arrangements, (c) Indebtedness owed to Bank by any Affiliates of Borrower, and (d) unsecured accounts payable incurred in the ordinary course of business which 34 40 are not overdue or if overdue, are acceptable to Bank and are being contested in good faith by appropriate proceedings. 6.02 Guaranty of Payment or Performance. Guaranty any contract or obligation of any Person, except for any Indebtedness owed to Bank by any Affiliates of Borrower, and except that the foregoing restriction shall not apply to endorsements of instruments for collection in the ordinary course of business. 6.03 Loans or Advances. As to Borrower, only, make or agree to make or allow to remain outstanding any loans or advances to any Person, including Affiliates of Borrower, in amounts which exceed $25,000 in the aggregate, except advances or extensions of credit in the form of accounts receivable incurred in the ordinary course of business. 6.04 Mortgages or Pledges of Assets. Create, incur, assume or permit to exist, any mortgage, pledge, security interest, lien or encumbrance on any of its properties or assets (now owned or hereafter acquired), except that the foregoing restrictions shall not apply to any matters that would constitute or result in Permitted Encumbrances. 6.05 Nature of Business. Permit any material change to be made in the character of its business as conducted as of the date hereof, or permit any Subsidiary to permit any material change to be made in the character of such Subsidiary's business as conducted as of the date hereof. 6.06 Sales of Assets. Sell, lease, assign, transfer or otherwise dispose of, in one or any series of related transactions, all or any part of its assets, if such transfer is material to Borrower's operations, nor enter into any arrangement, directly or indirectly, with any Person to sell and rent or lease back such assets or any part thereof which are intended to be used for substantially the same purpose or purposes as the assets sold or transferred. 6.07 Dividends and Distributions. Declare or pay any dividend from Borrower or make any distribution on, or purchase, redeem or otherwise acquire for value, any interest in Borrower or its Subsidiaries. 6.08 Payment of Accounts Payable. Allow any account payable to remain unpaid after its due date, except such as are 35 41 overdue that are acceptable to Bank, are being contested in good faith, and as to which adequate provision or accrual has been made. 6.09 Cancellation of Insurance. Allow any insurance policy required to be carried hereunder to be terminated or lapse or expire without provision for adequate renewal thereof. 6.10 Investments. Make Investments in or purchase or otherwise acquire all or substantially all of the assets of any Person other than Borrower and its Subsidiaries, or any shares of stock of, or similar interest in, any Person. 6.11 Changes in Business Structure. Consolidate or merge with or purchase (for cash or securities) all or any part of the assets or capital stock of any corporation, firm, association or enterprise, or allow any such entity to be merged into Borrower, nor shall Borrower dissolve or liquidate, nor shall Borrower or Guarantor, respectively, cause or permit any change to occur in the ownership of the capital stock of Guarantor or in Guarantor's ownership interest in Borrower (other than conversions of ownership interest in Borrower, as prescribed in Borrower's current Agreement of Limited Partnership). 6.12 Transactions with Affiliates. Enter into any transaction between or among Borrower and/or any Subsidiaries with any Affiliate on terms that are less favorable than could be obtained in an arms-length transaction with a Person that is not an Affiliate. ARTICLE VII. EVENTS OF DEFAULT 7.01 Enumeration of Events of Default. Any of the following events shall be considered an Event of Default as that term is used herein: (a) Default shall be made by Borrower in the payment of any installment of principal on the Note, (b) Default shall be made by Borrower in the payment of any installment of interest on the Note, or any fees or other monetary obligation payable hereunder, and such default shall remain unremedied in excess of three (3) days after notice being given by Bank, 36 42 (c) Default shall be made by Borrower or Guarantor in the due observance or performance of any affirmative covenant required in this Agreement, the Note, the Security Instruments, or the Guaranty, and such default shall remain unremedied for in excess of thirty (30) days after the earlier of: (i) such default becoming known to Borrower or Guarantor, or (ii) notice being given by Bank. (d) Default shall be made by Borrower or Guarantor in the due observance or performance of any negative covenant required in this Agreement, the Note, the Security Instruments, or the Guaranty. (e) Any representation or warranty herein made by Borrower or Guarantor proves to have been untrue in any respect material to Borrower or Guarantor, or any representation, statement (including Financial Statements), certificate or data furnished or made by Borrower or Guarantor to Bank in connection herewith proves to have been untrue in any respect material to Borrower or Guarantor as of the date the facts therein set forth were stated or certified; (f) Default shall be made by Borrower or Guarantor (as principal or guarantor or other surety) in payment or performance of any bond, debenture, note or other evidence of Indebtedness for borrowed money, or any other credit agreement, loan agreement, indenture, promissory note or similar agreement or instrument executed in connection with any of the foregoing in excess of $25,000 in the aggregate; and such default shall remain unremedied for in excess of the period of grace, if any, with respect thereto, with the effect of accelerating the maturity of any such Indebtedness; (g) Borrower or Guarantor applies for or consents to the appointment of a receiver, trustee or liquidator of it or all or a substantial part of its assets, or (ii) files a voluntary petition commencing a case under Title 11 of the United States Code, seeking liquidation, reorganization or rearrangement or taking advantage of any bankruptcy, insolvency, debtor's relief or other similar law of the United States, the State of Texas or any other jurisdiction, or (iii) makes a general assignment for the benefit of creditors, or (iv) is unable, or admits in writing its inability to pay its debts generally as they become due, or (v) files an answer admitting the material allegations of a petition filed against 37 43 it in any case commenced under Title 11 of the United States Code or any reorganization, insolvency, conservatorship or similar proceeding under any bankruptcy, insolvency, debtor's relief or other similar law of the United States, the State of Texas or any other jurisdiction; (h) An order, judgment or decree shall be entered against Borrower or Guarantor by any court of competent jurisdiction or by any other duly authorized authority, on the petition of a creditor or otherwise, granting relief under Title 11 of the United States Code or under any bankruptcy, insolvency, debtor's relief or other similar law of the United States, the State of Texas or any other jurisdiction, approving a petition seeking reorganization or an arrangement of its debts or appointing a receiver, trustee, conservator, custodian or liquidator of it or all or any substantial part of its assets, and the failure to have such order, judgment or decree dismissed within ten (10) days of its entry; (i) Borrower or Guarantor has concealed, removed, or permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them; or has made or suffered a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or has made any transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid; or has suffered or permitted, while insolvent, any creditor to obtain a lien upon any of its property through legal proceedings or distraint which is not vacated within thirty (30) days from the date thereof. 7.02 Rights Upon Default. Upon the happening of an Event of Default specified in Subsections 7.01 (g) or (h), the entire aggregate principal amount of all Indebtedness then outstanding hereunder and the interest accrued thereon shall automatically become immediately due and payable, and upon the happening and continuation of any other Event of Default, Bank may declare the entire aggregate principal amount of all Indebtedness then outstanding hereunder and the interest accrued thereon immediately due and payable. In either case, the entire principal and interest shall thereupon become immediately due and payable, without notice (including, without limitation, notice of intent to accelerate maturity or notice of acceleration of maturity) and without presentment, demand, protest, notice of protest or other 38 44 notice of default or dishonor of any kind, except as provided to the contrary elsewhere herein, all of which are hereby expressly waived by Borrower and Guarantor. Upon the happening and continuation of any Event of Default, all obligations (if any) of Bank hereunder shall immediately cease and terminate unless and until Bank shall reinstate the same in writing. ARTICLE VIII. MISCELLANEOUS 8.01 Security Interests in Deposits and Right of Offset or Banker's Lien. Borrower hereby transfers, assigns and pledges to Bank and/or grants to Bank a security interest (as security for the payment and/or performance of the obligations of Borrower under this Agreement and the Note, with such interest of Bank to be retransferred, reassigned and/or released by Bank at the expense of Borrower upon payment in full and/or complete performance by Borrower of all such obligations) and the right, exercisable at such time as any obligation hereunder shall mature, whether by acceleration of maturity or otherwise of offset or banker's lien against all funds or other property of Borrower now or hereafter or from time to time on deposit with or in the possession of Bank, including, without limitation, all certificates of deposit and other depository accounts. 8.02 Survival of Representations, Warranties and Covenants. All representations and warranties of Borrower and Guarantor and all covenants and agreements herein made shall survive the execution and delivery of the Note and this Agreement and shall remain in force and effect so long as any debt is outstanding under the Note, or any renewal or extension of this Agreement or the Note, or Bank remains obligated to make advances hereunder. 8.03 Notices and Other Communications. Notices, requests and communications hereunder shall be in writing and shall be sufficient in all respects if delivered to the relevant address indicated below (including delivery by registered or certified United States mail, telex, telegram or hand): (a) If to Bank: COMPASS BANK 24 Greenway Plaza, Suite 1401 39 45 Houston, Texas 77046 Attention: Energy Lending Fax: (713) 968-8222 (b) If to Borrower: Encinitas Partners Ltd. 14825 St. Mary's Lane, Suite 110 Houston, Texas 77079 Attention: Mr. Frank A. Wojtek Fax: (713) 496-1749 (c) If to Guarantor: Carrizo Production, Inc. 14825 St. Mary's Lane, Suite 110 Houston, Texas 77079 Attention: Mr. Frank A. Wojtek Fax: (713) 496-1749 Any party may, by proper written notice hereunder to the other, change the individuals or addresses to which such notices to it shall thereafter be sent. 8.04 Parties in Interest. All covenants and agreements herein contained by or on behalf of Borrower and Guarantor shall be binding upon Borrower and Guarantor and their respective successors and assigns and inure to the benefit of Bank and its successors and assigns. 8.05 Renewals and Extensions. All provisions of this Agreement relating to the Note shall apply with equal force and effect to each and all promissory notes hereafter executed which in whole or in part represent a renewal, extension, amendment, modification or rearrangement of any part of the Indebtedness originally represented by the Note. 8.06 No Waiver by Bank. No course of dealing on the part of Bank, its officers or employees, nor any failure or delay by Bank with respect to exercising any of its rights, powers or privileges under this Agreement, the Note, the Security Instruments or any other instrument referred to herein or executed in connection with the Note shall operate as a waiver thereof. The rights and remedies of Bank under this Agreement, the Note, the Security Instruments or any other instrument referred to herein or 40 46 executed in connection with the Note shall be cumulative and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy. In the event that Borrower or Guarantor is unable to satisfy any covenant, warranty or condition herein, no advance of loan proceeds by Bank shall have the effect of precluding Bank from thereafter declaring any such continuing inability to be an Event of Default as hereinabove provided. 8.07 INDEMNIFICATION. BORROWER AND GUARANTOR HEREBY RELEASE AND AGREE TO INDEMNIFY AND HOLD BANK AND ITS OFFICERS, EMPLOYEES, DIRECTORS, AGENTS AND ATTORNEYS (COLLECTIVELY THE "BANK PARTIES") HARMLESS, FROM AND AGAINST ALL CLAIMS, DAMAGES, LIABILITIES AND EXPENSES, KNOWN OR UNKNOWN, ACCRUED AND UNACCRUED, INCLUDING ANY OF THE FOREGOING ALLEGED TO HAVE RESULTED FROM NEGLIGENCE OF ANY OF THE BANK PARTIES, UNLESS ATTRIBUTABLE TO BANK PARTIES' OWN GROSS NEGLIGENCE OR WILFUL MISCONDUCT, THAT MAY NOW OR HEREAFTER BE ASSERTED AGAINST ANY OF BANK PARTIES IN CONNECTION WITH OR ARISING OUT OF ANY INVESTIGATION, LITIGATION OR PROCEEDING DIRECTLY OR INDIRECTLY RELATING TO OR ARISING OUT OF ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. 8.08 GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 8.09 Incorporation of Exhibits. The Exhibits attached to this Agreement are incorporated herein for all purposes and shall be considered a part of this Agreement. 8.10 Survival Upon Unenforceability. In the event any one or more of the provisions contained in this Agreement, the Note, the Security Instruments or in any other instrument referred to herein or executed in connection with the Note shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof or of any other instrument referred to herein or executed in connection herewith. 8.11 Rights of Third Parties. All provisions herein are imposed solely and exclusively for the benefit of Bank, Borrower and Guarantor and no other Person shall have standing to require satisfaction of such provisions in accordance with their terms or be entitled to assume that Bank will refuse to make advances in the absence of strict compliance with any or all thereof and any or all 41 47 of such provisions may be freely waived in whole or in part by Bank at any time if in its sole discretion it deems it advisable to do so. 8.12 Amendments or Modifications of this Agreement. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 8.13 Agreement Construed as an Entirety. This Agreement, for convenience only, has been divided into Articles and Sections and it is understood that the rights, powers, privileges, duties and other legal relations of the parties hereto shall be determined from this Agreement as an entirety and without regard to the aforesaid division into Articles and Sections and without regard to headings prefixed to said Articles or Sections. 8.14 Number and Gender. Whenever the context requires, reference herein made to the single number shall be understood to include the plural and likewise the plural shall be understood to include the singular. Words denoting sex shall be construed to include the masculine, feminine, and neuter, when such construction is appropriate, and specific enumeration shall not exclude the general, but shall be construed as cumulative. 8.15 AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS. THIS AGREEMENT, TOGETHER WITH THE NOTE AND THE Security Instruments, CONSTRUED TOGETHER WITH THE REVOLVING CREDIT AGREEMENT AND ALL INSTRUMENTS EXECUTED PURSUANT THERETO, REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 8.16 Controlling Provision Upon Conflict. In the event of a conflict between the provisions of this Agreement and those of the Note, the Security Instruments or any other instrument referred to herein or executed in connection with the Note, the provisions of this Agreement shall control. 42 48 8.17 Time, Place and Method of Payments. All payments required pursuant to this Agreement or the Note shall be made in immediately available funds; shall be deemed received by Bank on the next Business Day following receipt if such receipt is after 3:00 p.m., on any Business Day, and shall be made at the principal banking quarters of Bank. 8.18 Counterpart Execution. This Agreement may be executed as one instrument signed by all parties or in separate counterparts hereof, each of which counterparts shall be considered an original and all of which shall be deemed to be one instrument, and any signed counterpart shall be deemed delivered by the party signing it if sent to any other party hereto by electronic facsimile transmission. IN WITNESS WHEREOF, this Agreement is executed as of the date first above written. BORROWER: ENCINITAS PARTNERS LTD. By: CARRIZO PRODUCTION, INC., its sole general partner By: /s/ Frank A. Wojtek ------------------------- Frank A. Wojtek Vice President BANK: COMPASS BANK By: /s/ Kathleen J. Bowen ------------------------------ Kathleen J. Bowen Vice President 43 49 GUARANTOR: CARRIZO PRODUCTION, INC. By: /s/ FRANK A. WOJTEK -------------------------- Frank A. Wojtek Vice President 44 50 SCHEDULES AND EXHIBITS The schedules and exhibits have been intentionally omitted herefrom. The Company will furnish supplementally a copy of any or all of such omitted schedules and exhibits to the Commission upon request. 45 EX-4.3 6 SECURED REDUCING REVOLVING LINE OF CREDIT-12/6/96 1 EXHIBIT 4.3 AMENDMENT NO. 1 TO LOAN AGREEMENT DATED JUNE 26, 1996 BY AND ENCINITAS PARTNERS LTD. AND COMPASS BANK This Amendment No. 1 to Loan Agreement dated June 26, 1996 (this "First Amendment") by and between ENCINITAS PARTNERS LTD., a Texas limited partnership (the "Borrower") and COMPASS BANK, a Texas chartered bank (the "Bank"), is entered into this 6th day of December, 1996. W I T N E S S E T H: Borrower and Bank entered into a Loan Agreement dated June 26, 1996 (as such may be further amended, modified, supplemented or restated, the "Loan Agreement"). Borrower has requested that the Loan Agreement be amended to provide a $1,000,000 sublimit for the Bank's issuance of Letters of Credit, and Bank has agreed to such request, subject to the terms and conditions of the Loan Agreement, as amended by this First Amendment. NOW, THEREFORE, in consideration of the promises herein contained, and each intending to be legally bound hereby, the parties agree as follows: I. Amendments to Loan Agreement. Article I, DEFINITIONS, is amended by adding the following definitions: "First Amendment" means Amendment No. 1 to this Agreement, executed by Borrower and Bank on December 6, 1996. "Letters of Credit" means letters of credit to be issued by the Bank for the account of the Borrower pursuant to Section 2.12, in the form acceptable to the Bank, and all extensions, renewals and modifications thereof. Article II, THE LOAN, is amended by adding the following sections: -1- 2 2.12 Letters of Credit. Subject to the terms and conditions of this Agreement, the Bank agrees to issue standby Letters of Credit for the account of the Borrower from time to time following receipt of a Request for Advance three (3) Business Days prior to the requested date of issuance in such amount as the Borrower may request in an aggregate amount of up to (i) One Million Dollars ($1,000,000.00), but (ii) not to exceed at any time the unborrowed portion of the Revolving Commitment. The amount of any such Letters of Credit issued under the Revolving Commitment shall be deemed to be a Loan and to reduce the amount available under the Revolving Commitment and shall be governed by the terms of this Agreement. The Bank may require in connection with the issuance of any Letter of Credit that Borrower execute the Bank's then-current form of application for a Letter of Credit, but if there is any conflict between the terms of any such application and the terms of this Agreement, the terms of this Agreement shall control. No Letter of Credit shall have an expiration date that is later than the Maturity Date. 2.13 Repayment of Letters of Credit. If drawn upon by the beneficiary of a Letter of Credit, all amounts so drawn shall be due and payable by the Borrower immediately upon receipt of Bank's statement. 2.14 Letter of Credit Fee. As consideration for the issuance by the Bank of Letters of Credit for the account of the Borrower, the Borrower agrees to pay to the Bank a fee of one percent (1.0%), per annum, of the amount of each such Letter of Credit (subject to a $300.00 minimum fee per year on each Letter of Credit), the first such per annum fee for each Letter of Credit to be payable in advance of the issuance of such Letter of Credit, with successive per annum fees to be paid in advance of the anniversary date of the issuance of such Letter of Credit if it is to remain in effect beyond such anniversary date. II. Reaffirmation of Representations and Warranties. To induce the Bank to enter into this First Amendment, the Borrower hereby reaffirms, as of the date hereof, its representations and warranties contained in Article IV of the Loan Agreement and in all other documents executed pursuant thereto, and additionally represents and warrants as follows: -2- 3 A. The execution and delivery of this First Amendment and the performance by the Borrower of its obligations under this First Amendment are within the Borrower's power, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of any agreement binding upon the Borrower. B. The Loan Agreement as amended by this First Amendment represents the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms subject as to enforcement only to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally. C. No Event of Default or Unmatured Event of Default has occurred and is continuing as of the date hereof. III. Defined Terms. Except as amended hereby, terms used herein that are defined in the Loan Agreement shall have the same meanings herein. IV. Reaffirmation of Loan Agreement. This First Amendment shall be deemed to be an amendment to the Loan Agreement, and the Loan Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Loan Agreement herein and in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Loan Agreement as amended hereby. V. Entire Agreement. The Loan Agreement, as hereby amended, embodies the entire agreement between the Borrower and the Bank and supersedes all prior proposals, agreements and understandings relating to the subject matter hereof. The Borrower certifies that it is relying on no representation, warranty, covenant or agreement except for those set forth in the Loan Agreement as hereby amended and the other documents previously executed or executed of even date herewith. VI. Governing Law. THIS First AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. This First Amendment has been entered into in Harris County, Texas, and it shall be performable for all purposes in Harris County, Texas. -3- 4 Courts within the State of Texas shall have jurisdiction over any and all disputes between the Borrower and the Bank, whether in law or equity, including, but not limited to, any and all disputes arising out of or relating to this First Amendment or any other Loan Document; and venue in any such dispute whether in federal or state court shall be laid in Harris County, Texas. VII. Severability. Whenever possible each provision of this First Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this First Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this First Amendment. VIII. Execution in Counterparts. This First Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same agreement. IX. Section Captions. Section captions used in this First Amendment are for convenience of reference only, and shall not affect the construction of this First Amendment. X. Successors and Assigns. This First Amendment shall be binding upon the Borrower and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Bank, and the respective successors and assigns of the Bank. XI. Non-Application of Chapter 15 of Texas Credit Codes. The provisions of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil Statutes, Article 5069-15) are specifically declared by the parties hereto not to be applicable to the Loan Agreement as hereby amended or any of the other Loan Documents or to the transactions contemplated hereby. XII. Notice. THIS First AMENDMENT TOGETHER WITH THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. -4- 5 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the day and year first above written. BORROWER: ENCINITAS PARTNERS LTD. By: Carrizo Production, Inc., its sole general partner By: /s/ FRANK A. WOJTEK ---------------------------- Frank A. Wojtek, Vice President BANK: COMPASS BANK By: /s/ KATHLEEN J. BOWEN -------------------------------- Kathleen J. Bowen, Vice President Agreed To and Accepted: by GUARANTOR CARRIZO PRODUCTION, INC. By: /s/ FRANK A. WOJTEK ------------------------- Frank A. Wojtek, Vice President -5- EX-4.4 7 SECURED REDUCING REVOLVING LINE OF CREDIT 1 EXHIBIT 4.4 LOAN AGREEMENT $25,000,000.00 SECURED REDUCING REVOLVING LINE OF CREDIT FROM COMPASS BANK TO CARRIZO OIL & GAS, INC. December 6, 1996 2 TABLE OF CONTENTS
PAGE ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II. THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.01 The Loan . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.02 Advances and Payments of Principal Under the Note . . . . . 9 2.03 Payments of Interest under the Note . . . . . . . . . . . . 9 2.04 Provisions Relating to Interest . . . . . . . . . . . . . . 10 2.05 Advances to Satisfy Obligations of Borrower . . . . . . . . 11 2.06 Mandatory Prepayment of the Notes . . . . . . . . . . . . . 11 2.07 Borrowing Base Determination . . . . . . . . . . . . . . . . 11 2.08 Assignment of Production . . . . . . . . . . . . . . . . . . 14 2.09 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . 14 2.10 Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . 15 2.11 Addition of Borrowing Properties . . . . . . . . . . . . . . 15 2.12 Letters of Credit . . . . . . . . . . . . . . . . . . . . . 15 2.13 Repayment of Letters of Credit . . . . . . . . . . . . . . . 16 2.14 Letter of Credit Fee . . . . . . . . . . . . . . . . . . . . 16 ARTICLE III. CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.01 Receipt of Note, Agreement and Certificate of Compliance . . 16 3.02 Receipt of Guaranty . . . . . . . . . . . . . . . . . . . . 16 3.03 Receipt of Organizational Documents . . . . . . . . . . . . 16 3.04 Receipt of Certified Copy of Corporate Proceedings and Certificates of Incumbency . . . . . . . . . . . . . . . . . 16 3.05 Receipt of Certificates of Authority and Certificates of Good Standing . . . . . . . . . . . . . . . . . . . . . . . 17 3.06 UCC Search . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.07 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.08 Financial Statements . . . . . . . . . . . . . . . . . . . . 17 3.09 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . 17 3.10 Payment of Other Indebtedness and Release of Liens . . . . . 17 3.11 Subordination Agreement . . . . . . . . . . . . . . . . . . 17 3.12 Request for Advance . . . . . . . . . . . . . . . . . . . . 18 3.13 Accuracy of Representations and Warranties and No Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.14 Legal Matters Satisfactory to Counsel to Bank . . . . . . . 18 3.15 No Material Adverse Change . . . . . . . . . . . . . . . . . 18 3.16 Status of Title . . . . . . . . . . . . . . . . . . . . . . 18 3.17 Security Instruments . . . . . . . . . . . . . . . . . . . . 18 3.18 Legal Fees . . . . . . . . . . . . . . . . . . . . . . . . . 18
i 3
PAGE ---- 3.19 Documents Required for Subsequent Disbursements . . . . . . 19 ARTICLE IV. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . 19 4.01 Existence and Good Standing . . . . . . . . . . . . . . . . 19 4.02 Due Authorization . . . . . . . . . . . . . . . . . . . . . 19 4.03 Valid and Binding Obligations . . . . . . . . . . . . . . . 19 4.04 Title to Borrowing Base Properties . . . . . . . . . . . . . 20 4.05 Oil and Gas Leases . . . . . . . . . . . . . . . . . . . . . 20 4.06 Interest in the Borrowing Base Oil and Gas Properties . . . 20 4.07 Oil and Gas Contracts . . . . . . . . . . . . . . . . . . . 20 4.08 Producing Wells . . . . . . . . . . . . . . . . . . . . . . 21 4.09 Purchasers of Production . . . . . . . . . . . . . . . . . . 21 4.10 Scope and Accuracy of Financial Statements . . . . . . . . . 21 4.11 Liabilities, Litigation and Restrictions . . . . . . . . . . 22 4.12 Margin Stock . . . . . . . . . . . . . . . . . . . . . . . . 22 4.13 Authorizations and Consents . . . . . . . . . . . . . . . . 22 4.14 Compliance with Laws, Rules, Regulations and Orders . . . . 22 4.15 Proper Filing of Tax Returns and Payment of Taxes Due . . . 23 4.16 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.17 Investment Company Act Compliance . . . . . . . . . . . . . 23 4.18 Public Utility Holding Company Act Compliance . . . . . . . 23 4.19 Environmental Laws . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE V. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . 24 5.01 Use of Funds . . . . . . . . . . . . . . . . . . . . . . . . 25 5.02 Maintenance and Access to Records . . . . . . . . . . . . . 25 5.03 Quarterly Unaudited Financial Statements of Borrower . . . . 25 5.04 Annual Audited Financial Statements of Borrower . . . . . . 25 5.05 Annual Unaudited Financial Statements of Guarantor . . . . . 25 5.06 Guarantor's Tax Returns. . . . . . . . . . . . . . . . . . . 25 5.07 Compliance Certificate . . . . . . . . . . . . . . . . . . . 25 5.08 Monthly Borrowing Base Certificate . . . . . . . . . . . . . 26 5.09 Statement of Material Adverse Change in Condition . . . . . 26 5.10 Additional Information . . . . . . . . . . . . . . . . . . . 26 5.11 Compliance with Laws and Payment of Assessments and Charges 26 5.12 Maintenance of Existence and Good Standing . . . . . . . . . 26 5.13 Further Assurances . . . . . . . . . . . . . . . . . . . . . 26
ii 4
PAGE ---- 5.14 Initial Expenses of Bank . . . . . . . . . . . . . . . . . . 27 5.15 Subsequent Expenses of Bank . . . . . . . . . . . . . . . . 27 5.16 Maintenance of Tangible Property . . . . . . . . . . . . . . 27 5.17 Maintenance of Insurance . . . . . . . . . . . . . . . . . . 28 5.18 Inspection of Tangible Assets/Right of Audit . . . . . . . . 28 5.19 Payment of Note and Performance of Obligations . . . . . . . 28 5.20 ERISA Reports . . . . . . . . . . . . . . . . . . . . . . . 28 5.21 Tangible Net Worth Requirement . . . . . . . . . . . . . . . 28 5.22 Cash Flow to Debt Service Ratio . . . . . . . . . . . . . . 28 5.23 Compliance with Environmental Laws . . . . . . . . . . . . . 29 5.24 Hazardous Substances Indemnification . . . . . . . . . . . . 29 5.25 Changes in Management . . . . . . . . . . . . . . . . . . . 30 5.26 Operating Accounts . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE VI. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . 30 6.01 Other Indebtedness . . . . . . . . . . . . . . . . . . . . . 30 6.02 Guaranty of Payment or Performance . . . . . . . . . . . . . 31 6.03 Loans or Advances . . . . . . . . . . . . . . . . . . . . . 31 6.04 Mortgages or Pledges of Assets . . . . . . . . . . . . . . . 31 6.05 Nature of Business . . . . . . . . . . . . . . . . . . . . . 31 6.06 Sales of Assets . . . . . . . . . . . . . . . . . . . . . . 31 6.07 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.08 Payment of Accounts Payable . . . . . . . . . . . . . . . . 31 6.09 Cancellation of Insurance . . . . . . . . . . . . . . . . . 31 6.10 Investments . . . . . . . . . . . . . . . . . . . . . . . . 31 6.11 Changes in Business Structure . . . . . . . . . . . . . . . 32 6.12 Shareholder Control . . . . . . . . . . . . . . . . . . . . 32 6.13 Transactions with Affiliates . . . . . . . . . . . . . . . . 32 ARTICLE VII. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . 32 7.01 Enumeration of Events of Default . . . . . . . . . . . . . . 32 7.02 Rights Upon Default . . . . . . . . . . . . . . . . . . . . 34 ARTICLE VIII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 34 8.01 Security Interests in Deposits and Right of Offset or Banker's Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.02 Survival of Representations, Warranties and Covenants . . . 34 8.03 Notices and Other Communications . . . . . . . . . . . . . . 34 8.04 Parties in Interest . . . . . . . . . . . . . . . . . . . . 35 8.05 Renewals and Extensions . . . . . . . . . . . . . . . . . . 35 8.06 No Waiver by Bank . . . . . . . . . . . . . . . . . . . . . 35 8.07 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . 35
iii 5
PAGE ---- 8.08 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . 36 8.09 Incorporation of Exhibits . . . . . . . . . . . . . . . . . 36 8.10 Survival Upon Unenforceability . . . . . . . . . . . . . . . 36 8.11 Rights of Third Parties . . . . . . . . . . . . . . . . . . 36 8.12 Amendments or Modifications of this Agreement . . . . . . . 36 8.13 Agreement Construed as an Entirety . . . . . . . . . . . . . 36 8.14 Number and Gender . . . . . . . . . . . . . . . . . . . . . 36 8.15 AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS . . . . . . . . . 37 8.16 Controlling Provision Upon Conflict . . . . . . . . . . . . 37 8.17 Time, Place and Method of Payments . . . . . . . . . . . . . 37 8.18 Counterpart Execution . . . . . . . . . . . . . . . . . . . 37
EXHIBITS EXHIBIT A Compliance Certificate EXHIBIT B Note EXHIBIT C Security Instruments EXHIBIT D Form of Request for Advance EXHIBIT E Form of Monthly Borrowing Base Certificate SCHEDULES 1.01(a) Borrowing Base Oil and Gas Properties 1.01(b) Borrowing Base Cash 2.07 Borrowing Base Adjustment for Successfully Completed Wells 3.09 Form of Opinion of Counsel for Borrower 3.10 Indebtedness to be Discharged 3.11 Indebtedness to be Subordinated 4.09 Purchasers of Production 4.11 Litigation iv 6 LOAN AGREEMENT THIS LOAN AGREEMENT, is entered into as of the 6th day of December 1996, by and among CARRIZO OIL & GAS, INC., a Texas corporation (the "Borrower") and COMPASS BANK, a Texas chartered bank (the "Bank"). W I T N E S S E T H WHEREAS, Borrower desires to obtain a loan from Bank in order to refinance existing debt, acquire additional oil and gas reserves, conduct developmental drilling, obtain letters of credit, and use as working capital for other ordinary business of Borrower; and WHEREAS, each Guarantor is a stockholder in Borrower, and together constitute all of the stockholders of Borrower, and accordingly, Guarantor will benefit from the loans to Borrower pursuant to this Agreement; and WHEREAS, Bank is willing to loan such funds to Borrower in accordance with the terms of this Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, Bank and Borrower agree as follows: ARTICLE I. DEFINITIONS As used in this Agreement, the following terms shall have the meanings indicated: "Affiliate" means, as applied to any Person, any other Person, directly or indirectly, controlling, controlled by, or under common control with, that Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by", and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities, by contract, or otherwise. 1 7 "Agreement" means this Loan Agreement, as the same may be amended or supplemented from time to time. "Bank" has the meaning set forth in the preamble hereof. "Borrower" has the meaning set forth in the preamble hereof. "Borrowing Base" means the aggregate sum of: (a) Three Million Dollars ($3,000,000.00), plus (b) the maximum loan amount supported by the Borrowing Base Properties, as determined by Bank from time to time in accordance with Section 2.07 of this Agreement. "Borrowing Base Properties" means the Borrowing Base Oil and Gas Properties, the Borrowing Base Cash, and the Borrowing Base Securities. "Borrowing Base Oil and Gas Properties" means those Oil and Gas Properties of Borrower that are to be made subject to the liens created by certain of the Security Instruments to secure the Obligations, which initial Borrowing Base Oil and Gas Properties are described in Schedule 1.01(a) attached hereto and made a part hereof, together with such additional Oil and Gas Properties as are subsequently added to the Borrowing Base Properties pursuant to Section 2.11. "Borrowing Base Cash" means the Cash and Cash Equivalent of Borrower that is to be made subject to the liens created by certain of the Security Instruments to secure the Obligations, which initial Borrowing Base Cash is described in Schedule 1.01(b) attached hereto and made a part hereof, together with such additional Cash and Cash Equivalent as is subsequently added to the Borrowing Base Properties pursuant to Section 2.11. "Borrowing Base Securities" means Eligible Marketable Securities of Borrower that are added to the Borrowing Base Properties pursuant to Section 2.11. "Business Day" means a day other than a Saturday, Sunday or legal holiday for commercial banks under the laws of the State of Texas. 2 8 "Cash" means legal tender of the United States of America. "Cash Equivalent" means certificates of deposit issued by the Bank and/or other certificates of deposit approved by the Bank in its sole discretion. "Compliance Certificate" means the certificate of the president or vice president of Borrower required to be submitted to Bank from time to time pursuant to this Agreement, which certificate shall be in the form attached hereto as Exhibit "A." "Eligible Marketable Securities" means the unrestricted shares of stock in Falcon Drilling Company, Inc. and Reading & Bates Corporation, and any other unrestricted shares of stock that are approved by the Bank in its sole discretion. "Environmental Laws" means (a) the following federal laws as they may be cited, referenced and amended from time to time: the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Endangered Species Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the Hazardous Materials Transportation Act, the Superfund Amendments and Reauthorization Act, and the Toxic Substances Control Act; (b) any and all environmental statutes of any state in which property of Borrower is situated, as they may be cited, referenced and amended from time to time; (c) any rules or regulations promulgated under or adopted pursuant to the above federal and state laws; and (d) any other federal, state or local statute or any requirement, rule, regulation, code, ordinance or order adopted pursuant thereto, including, without limitation, those relating to the generation, transportation, treatment, storage, recycling, disposal, handling or release of Hazardous Substances. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereof. "ERISA Affiliate" means any trade or business (whether or not incorporated) which together with Borrower would be treated as a single employer under Section 4001 of ERISA. 3 9 "Event of Default" means any of the events specified in Section 7.01 of this Agreement. "Financial Statements" means the statements of the financial condition of the indicated Person, as at the point in time and for the period indicated and consisting of at least a consolidated balance sheet, income statement and statement of cash flows, and, when the foregoing are audited, accompanied by the certification of such Person's independent certified public accountants and footnotes to any of the foregoing, all of which shall be prepared in accordance with GAAP applied on a basis consistent with that of the preceding year. "Floating Rate" means the Index Rate in effect from time to time plus three-quarters of one percent (.75%). "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a "consistent basis" when the accounting principles observed in a current period are comparable in all material respects to those accounting principles applied in a preceding period. "Guarantor" means, individually and collectively, Paul B. Loyd, Jr., Frank A. Wojtek, Steven A. Webster, Douglas A.P. Hamilton and S. P. Johnson. "Guaranty" means the guaranty of all of Borrower's Obligations to Bank arising under this Agreement, in form and substance satisfactory to Bank, duly executed by each Guarantor. "Hazardous Substances" means flammables, explosives, radioactive materials, hazardous wastes, asbestos or any material containing asbestos, polychlorinated biphenyls (PCBs), toxic substances or related materials, petroleum and petroleum products and associated oil or natural gas exploration, production and development wastes or any substances defined as "hazardous substances", "hazardous materials", "hazardous wastes" or "toxic substances" under the Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Superfund 4 10 Amendments and Reauthorization Act, as amended, the Hazardous Materials Transportation Act, as amended, the Resource Conservation and Recovery Act, as amended, the Toxic Substances Control Act, as amended, or any other Environmental Laws now or hereafter enacted or promulgated by any regulatory authority or governmental body. "Indebtedness" means, as to any Person, (a) all items of indebtedness or liability (other than capital, surplus, deferred credits and reserves, as such) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet as at the date as of which Indebtedness is to be determined, (b) indebtedness secured by any mortgage, pledge or lien existing on or encumbering property owned by the Person whose Indebtedness is being determined, whether or not the indebtedness secured thereby shall have been assumed, and (c) all indebtedness of others which such Person has directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business), discounted with recourse, agreed (contingently or otherwise) to purchase or repurchase or otherwise acquire, or in respect of which such Person has agreed to supply or advance funds (whether by way of loan, purchase of securities or capital contribution, through a commitment to pay for property or services regardless of the nondelivery of such property or the nonfurnishing of such services or otherwise), or in respect of which such Person has otherwise become directly or indirectly liable, contingently or otherwise, whether now existing or hereafter arising. "Index Rate" means, at any time, the prime rate established in The Wall Street Journal's "Money Rates" or similar table. If multiple prime rates are quoted in the table, then the highest prime rate will be the Index Rate. In the event that the prime rate is no longer published by The Wall Street Journal in the "Money Rates" or similar table, then Bank may select an alternative published index based upon comparable information as a substitute Index Rate. Upon the selection of a substitute Index Rate, the applicable interest rate shall thereafter vary in relation to the substitute index. Such substitute index shall be the same index that is generally used as a substitute by Bank on all Index Rate loans. The Index Rate is eight and one-quarter percent (8.25%) as of the date of this Agreement. 5 11 "Investment" in any Person means any stock, bond, note or other evidence of Indebtedness or any other security (other than current trade and customer accounts) of, or loan to, such Person. "Leases" means oil and gas leases and all oil, gas and mineral leases constituting any part of the Borrowing Base Oil and Gas Properties. "Letters of Credit" means letters of credit to be issued by the Bank for the account of the Borrower pursuant to Section 2.12, in the form acceptable to the Bank, and all extensions, renewals and modifications thereof. "Limitation Period" means any period while any amount remains owing on the Note and interest on such amount calculated at the Floating Rate, plus any fees payable hereunder and deemed to be interest under applicable law, would exceed the Maximum Rate. "Loan" means, singly, any advance by Bank to Borrower pursuant to this Agreement and "Loans" means, cumulatively, the aggregate sum of all money advanced by Bank to Borrower pursuant to this Agreement. "Loan Documents" means this Agreement and all promissory notes, security agreements, guaranties, and other instruments, documents, and agreements executed and delivered pursuant to or in connection with this Agreement, as such instruments, documents, and agreements may be amended, modified, renewed, extended, or supplemented from time to time. "Loan Excess" means, at any point in time, the amount, if any, by which the outstanding balance on the Loans evidenced by the Note exceeds the Revolving Commitment then in effect. "Marketable Title" means good and indefeasible title and ownership, free and clear of all mortgages, liens and encumbrances, except for Permitted Encumbrances. "Maturity Date" means June 1, 1998. "Maximum Rate" means the maximum non-usurious interest rate permissible under applicable laws of the State of Texas or those of the United States of America applicable to Bank. 6 12 "Monthly Borrowing Base Certificate" means a certificate of the President or Chief Financial Officer of Borrower attesting to Borrower's calculation of the Borrowing Base as of the last day of the month preceding the month in which such certificate is executed and delivered to the Bank, pursuant to Section 5.08, in the form attached hereto as Exhibit "E." "Monthly Borrowing Base Reduction" means the amount of the automatic monthly reduction to the Borrowing Base, as determined by Bank from time to time in accordance with Section 2.07 of this Agreement. "Multi-employer Plan" means a plan described in Section 4001(a)(3) of ERISA which covers employees of Borrower or any ERISA Affiliate. "Note" means that certain promissory note in the original face amount of $25,000,000.00, dated of even date herewith, made by Borrower payable to the order of Bank, in the form attached hereto as Exhibit "B," together with all deferrals, renewals, extensions, amendments, modifications or rearrangements thereof, which promissory note shall evidence the advances to Borrower by Bank pursuant to Section 2.01 hereof. "Obligations" means all obligations, indebtedness, and liabilities of Borrower to Bank, now existing or hereafter arising, including, but not limited to, the indebtedness evidenced by the Note, whether direct, indirect, related, unrelated, fixed, contingent, specified, unspecified, joint, several, or joint and several, and all interest and fees accruing thereon and all attorneys' fees and other expenses incurred in the enforcement or collection thereof. "Oil and Gas Properties" means fee, leasehold or other interests in or under mineral estates or oil, gas and other liquid or gaseous hydrocarbon leases with respect to properties situated in the United States, including, without limitation, overriding royalty and royalty interests, leasehold estate interests, net profits interests, production payment interests and mineral fee interests, together with all contracts executed in connection therewith, all oil, gas and other minerals produced and to be produced therefrom, all proceeds thereof, and all tenements, hereditaments, appurtenances and properties, real or personal, appertaining, belonging, affixed or incidental thereto. 7 13 "Permitted Encumbrances" means: (A) Liens for taxes, assessments, or similar charges, incurred in the ordinary course of business that are not yet due and payable; (B) Liens of mechanics, materialmen, warehousemen, carriers, or other similar liens, securing obligations incurred in the ordinary course of business that are not yet due and payable; (C) Encumbrances consisting of zoning restrictions, easements, or other restrictions on the use of real property, none of which materially impairs the use of such property by Borrower in the operation of its business, and none of which is violated in any material respect by existing or proposed operations; (D) Liens in favor of Bank; (E) The following, if the validity or amount thereof is being contested in good faith by appropriate and lawful proceedings, so long as levy and execution thereon have been stayed and continue to be stayed, and in Bank's sole judgment they do not, in the aggregate, materially detract from the value of the property of Borrower or any Subsidiary, or materially impair the use thereof in the operation of its business: (1) Claims or liens for taxes, assessments, or similar charges; and (2) Claims or liens of mechanics, materialmen, warehousemen, carriers, or other similar liens. "Person" means an individual, company, corporation, partnership, limited partnership, joint venture, trust, association, unincorporated organization or a government or any agency or political subdivision thereof. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. 8 14 "Prohibited Transaction" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1954, as amended from time to time. "Proved Reserves" means the estimated quantities of crude oil, condensate, natural gas liquids and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable by primary producing mechanisms in future years from known reservoirs underlying lands or interests therein constituting Oil and Gas Properties, under existing economic and operating conditions. Reserves which can be produced economically through application of improved recovery techniques (e.g., fluid injection) will be included in Proved Reserves when successful testing by a pilot project or the operation of an installed program in the reservoir provides support for the engineering analysis on which the pilot project or installed program was based. In general, the economic productivity of the estimated proved reserves is supported by actual production or a conclusive formation test; however, in certain instances proved reserves are assigned to reservoirs on the basis of a combination of electrical and other type logs and core analyses which indicate these reservoirs are analogous to similar reservoirs in the same field which are producing or have demonstrated the ability to produce on a formation test. "Reportable Event" means any of the events set forth in Section 4043 of ERISA. "Request for Advance" means the written request by Borrower for an advance by Bank pursuant to this Agreement, which Request for Advance shall be in a form, and shall include the information and accompanying supporting documentation, as prescribed in Exhibit "D" attached hereto. "Revolving Commitment" means the obligation of Bank, subject to the provisions of this Agreement and existing only through the last Business Day prior to the Maturity Date, to advance to Borrower funds, not to exceed at any one time outstanding an amount equal to the lesser of: (a) Six Million Dollars ($6,000,000.00), or (b) the Borrowing Base then in effect. "Security Instruments" means the security instruments described on Exhibit "C," in form and substance satisfactory to Bank, to be executed by Borrower pursuant to Section 3.17, and any 9 15 and all other instruments or documents hereafter executed in connection with or as security for the payment of the Note. "Subsidiary" means, with respect to Borrower and Guarantor, respectively, (a) any corporation in which Borrower or Guarantor, directly or indirectly through its Subsidiaries, owns more than fifty percent (50%) of the stock of any class or classes having by the terms thereof the ordinary voting power to elect a majority of the directors of such corporation; and (b) any partnership, association, joint venture, or other entity in which Borrower or Guarantor, respectively, directly or indirectly through its Subsidiaries, has more than a fifty percent (50%) equity interest at the time. "Tangible Net Worth" means the total assets of Borrower exclusive of (a) those assets classified as intangible, including, without limitation, goodwill, patents, trademarks, trade names, copyrights, franchises and deferred charges, (b) treasury stock and minority interests in any Person, (c) cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of capital stock, (d) to the extent not already deducted from total assets, allowances for depreciation, depletion, obsolescence and/or amortization of properties, uncollectible accounts, and contingent but probable liabilities as to which an amount can be established, (e) deferred taxes and (f) all assets arising from advances to officers, former officers or sales representatives of Borrower made outside of the ordinary course of business; less total liabilities of Borrower; all of the above being determined in accordance with GAAP. "Unmatured Event of Default" means any event or occurrence which solely with the lapse of time or the giving of notice or both will ripen into an Event of Default. Undefined financial accounting terms used in this Agreement shall be defined in accordance with GAAP. ARTICLE II. THE LOAN 2.01 The Loan. Upon the terms and conditions (including, without limitation, the right of Bank to terminate the Revolving Commitment hereunder upon an Event of Default or an Unmatured Event of Default) and relying on the representations and warranties contained in this Agreement, Bank agrees, for a period 10 16 from and after the date hereof through the last Business Day prior to the Maturity Date, to make advances for the account of Borrower from time to time following receipt of a Request for Advance; provided, however, that the aggregate principal amount of all Loans at any one time outstanding shall not exceed the Revolving Commitment. Through the last Business Day prior to the Maturity Date, Borrower may use this revolving credit by borrowing, prepaying and reborrowing, all in accordance with the terms and conditions of this Agreement. The borrowings made by Borrower pursuant to the Revolving Commitment shall be made at the principal office of Bank and shall be evidenced by the Note. The entire principal amount of the Note is due on the Maturity Date. 2.02 Advances and Payments of Principal Under the Note. Each time an advance is made against or payment is made on the Note, Bank is hereby irrevocably authorized by Borrower to make appropriate entries of such in its records in accordance with the usual and customary practices of accounting for advances and payments on notes; provided, however, the failure of Bank to do so shall not relieve Borrower of its correct liability hereunder or under the Note. The aggregate unpaid amount of advances reflected by the notations by Bank on its records or the ledger sheets affixed to the Note shall be deemed rebuttably presumptive evidence of the principal amount owing on the Note. The liability for payment of principal and interest evidenced by the Note shall be limited to principal amounts actually advanced to Borrower and outstanding under this Agreement and interest on such amounts calculated in accordance with this Agreement. Interest provided for in the Note and herein shall be calculated on unpaid sums actually advanced and outstanding under the Note pursuant to the terms of this Agreement and only for the period from the date or dates of such advances until repayment. 2.03 Payments of Interest under the Note. Subject to the terms and provisions of this Agreement, interest on the Loan, calculated at the Floating Rate, shall be due and payable monthly as it accrues beginning January 1, 1997, and continuing thereafter on the first day of each succeeding calendar month while any amount remains owing on the Note and at the Maturity Date, the interest payment in each instance to be that which has been earned and 11 17 remains unpaid. The rate of interest charged on the Loan shall be adjusted, effective on the effective date of each change in the Index Rate. 2.04 Provisions Relating to Interest. All Loans hereunder and outstanding from time to time shall bear interest at a daily rate equal to the Floating Rate per annum, each such change in the rate of interest charged on the Loans to become effective without notice to Borrower, on the effective date of each change in the Index Rate, calculated on the basis of a year of three hundred sixty-five or three hundred sixty-six (365 or 366) days, as applicable, from the date of advance through the date of repayment. It is the intention of the parties hereto to comply strictly with the usury laws of the State of Texas and the United States of America and, in this connection, there shall never be collected, charged or received on any sums advanced hereunder interest in excess of the Maximum Rate. For purposes of Article 5069-1.04, Vernon's Texas Civil Statutes, as amended, Borrower agrees that the maximum rate to be charged shall be the "indicated (weekly) rate ceiling" as defined in said Article, provided that Bank may also rely to the extent permitted by applicable laws of the State of Texas or the United States of America, on alternative maximum rates of interest under other applicable laws of the State of Texas or the United States of America applicable to Bank, if greater. Interest on past due interest and principal shall be at a daily rate equal to the lesser of (a) the Maximum Rate per annum or (b) the Floating Rate plus three percent (3%) per annum, calculated on the basis of a year of three hundred sixty-five or three hundred sixty-six (365 or 366) days, as applicable, for the number of days elapsed; and if no Maximum Rate exists, all past due interest and principal shall bear interest at a daily rate equal to the Floating Rate plus three percent (3%) per annum, calculated on a year of three hundred sixty-five or three hundred sixty-six (365 or 366), as applicable, days for the number of days elapsed. Notwithstanding anything herein or in the Note to the contrary, during any Limitation Period, the interest rate to be charged on amounts evidenced by the Note shall be the Maximum Rate and the obligation of Borrower for any fees payable hereunder and deemed to be interest under applicable law shall be suspended. During any period or periods of time following a Limitation Period, to the extent permitted by applicable laws of the State of Texas or the United States of America, the interest rate to be charged hereunder shall remain at the Maximum Rate until such time as there has been 12 18 paid to Bank (a) the amount of interest in excess of the Maximum Rate that Bank would have received during the Limitation Period had the interest rate remained at the relevant Floating Rate and (b) all interest and fees otherwise due to Bank but for the effect of such Limitation Period. If under any circumstances the aggregate amounts paid on the Note or under this Agreement include amounts which by law are deemed interest and which would exceed the amount permitted if the Maximum Rate were in effect, Borrower stipulates that such payment and collection will have been and will be deemed to have been, to the extent permitted by applicable laws of the State of Texas or the United States of America, the result of mathematical error on the part of both Borrower and Bank, and Bank shall promptly refund the amount of such excess (to the extent only of such interest payments above the Maximum Rate which could lawfully have been collected and retained) upon discovery of such error by Bank or notice thereof from Borrower. 2.05 Advances to Satisfy Obligations of Borrower. Bank may, but shall not be obligated to, make advances hereunder and apply same to the satisfaction of any condition, warranty, representation or covenant of Borrower contained in this Agreement, and the funds so advanced and applied shall be part of the Loan proceeds advanced under this Agreement and evidenced by the Note. 2.06 Mandatory Prepayment of the Notes. In the event that Bank or Borrower determine that a Loan Excess exists, Borrower shall immediately, but in no event later than fifteen (15) days following the earlier of either: (a) Borrower becoming aware that a Loan Excess exists, or (b) notice from Bank of any such determination, (i) prepay the principal of the Note in an aggregate amount at least equal to such Loan Excess or (ii) add to the Borrowing Base Properties additional Oil and Gas Properties, Cash, Cash Equivalent, and/or Eligible Marketable Securities of Borrower sufficient in value, as determined by Bank in its sole discretion pursuant to Section 2.07, to increase the Borrowing Base to equal the unpaid principal amount of the Note plus all accrued, unpaid interest. 2.07 Borrowing Base Determination. The initial Borrowing Base is hereby established at $4,000,000.00 effective as of the date hereof. Subject to the other provisions of this Agreement, the Borrowing Base shall be automatically reduced 13 19 commencing on January 1, 1997, by the Monthly Borrowing Base Reduction, which is initially established at $15,000.00. a. Borrowing Base Oil and Gas Properties. If and when the La Brisa Ranch #1-A (Ranier), La Brisa Land & Cattle #1 (McKinley) and La Brisa Ranch #1 (Wheeler) wells (as more fully described on Schedule 1.01(a) attached hereto): (i) are completed as wells capable of producing oil or gas in paying quantities on or before the first scheduled Borrowing Base review occurring after the date of this Agreement, (ii) have been producing oil or gas for at least ten consecutive days, and (iii) have commenced sales of such production, Borrower shall notify Bank thereof and provide Bank with the completion reports for such wells, documentary evidence that the production and sale of oil and gas therefrom have commenced, and such other information relative to the wells as Bank may request. Following the Bank's evaluation of such information, if the Bank determines in its sole discretion that its preliminary evaluation of such wells has been reconfirmed, the Borrowing Base and Monthly Borrowing Base Reduction then in effect with respect to the Borrowing Base Oil and Gas Properties will be redetermined to the respective amounts reflected on Schedule 2.07 attached hereto, effective upon Bank's written notification to Borrower of such increase. On or before April 1, 1997, Borrower shall furnish to Bank information sufficient to update to an effective date of January 1, 1997, the most recent petroleum engineering reports and geological data provided to Bank prior to Closing relative to the Proved Reserves that are attributable to the Oil and Gas Properties that constitute part of the Borrowing Base Oil and Gas Properties, as well as such other information as Bank may request regarding volumes of production produced and sold, contracts, pricing, gross revenues, expenses, and other information and engineering and geological data as may relate to the Borrowing Base Oil and Gas Properties (collectively the "Borrowing Base Property Data"). Upon receipt of such Borrowing Base Property Data, Bank shall, in the normal course of business, redetermine the Borrowing Base and the Monthly Borrowing Base Reduction attributed to the Borrowing Base Oil and Gas Properties, which redetermination shall become effective upon written notification from Bank to Borrower, and which, subject to the other provisions of this Agreement, shall be the basis on which the Borrowing Base shall thereafter be calculated until the effective date of the next redetermination of the Borrowing Base and the Monthly Borrowing Base Reduction as set 14 20 forth in this Section. Thereafter, on or before each succeeding October 1 and April 1 until the Maturity Date, Borrower shall furnish to Bank a report, in form and substance satisfactory to Bank, which report shall set forth, as of each preceding July 1 or January 1, as applicable, such Borrowing Base Property Data as Bank may request attributable to the Borrowing Base Oil and Gas Properties. Each report to be provided on or before each April 1 (except for April 1, 1997) shall be a complete report relating to the Borrowing Base Property Data, prepared by an independent petroleum engineer or firm of engineers satisfactory to Bank. Each report to be provided on or before each October 1 (and the one to be provided on or before April 1, 1997) shall simply update the previous complete report, and may be prepared by Borrower's own engineers and shall be certified by the President of the general partner of Borrower. Upon receipt of each such report, Bank shall, in the normal course of business, make a determination of the Borrowing Base and the Monthly Borrowing Base Reduction which shall become effective upon written notification from Bank to Borrower, and which, subject to the other provisions of this Agreement, shall be the basis on which the Borrowing Base attributable to the Borrowing Base Oil and Gas Properties shall thereafter be calculated until the effective date of the next redetermination of the Borrowing Base and the Monthly Borrowing Base Reduction as set forth in this Section. Beginning with the delivery of the Borrowing Base Property Data due by April 1, 1997, and continuing as and when Borrower is required to provide to Bank each semi-annual report, as required by the provisions of this Section, Borrower shall contemporaneously pay an engineering fee of $5,000.00 to Bank for Bank's analysis of such report and redetermination of the Borrowing Base and the Monthly Borrowing Base Reduction. At any time engineering reviews are requested by Borrower in connection with a Borrowing Base redetermination, other than the semi-annual reviews required by Bank, an additional fee of $5,000.00 shall be paid to Bank for Bank's analysis of such report and redetermination of the Borrowing Base. b. Borrowing Base Cash. At each time that the Bank redetermines the Borrowing Base attributable to the Borrowing Base Oil and Gas Properties, as set forth in subsection 2.07(a), it shall also include in the Borrowing Base calculation the face value of all Borrowing Base Cash that is in the Bank's possession and is subject to one or more of the applicable Security Agreements. 15 21 c. Borrowing Base Securities. At each time that the Bank redetermines the Borrowing Base attributable to the Borrowing Base Oil and Gas Properties, as set forth in Section 2.07(a), it shall also include in the Borrowing Base calculation seventy-five percent (75%) of the market value of the Borrowing Base Securities that are in the Bank's possession and are subject to one or more of the applicable Security Agreements, with the market value thereof to be determined based on the announced value at which such securities were trading as of the close of trading on the last trading day of the month preceding the month in which the Bank notifies Borrower of the redetermination of the Borrowing Base. d. Equity Cushion. The Borrowing Base shall represent Bank's determination, in accordance with its customary lending practices in effect from time to time, of the maximum loan amount that may be supported by the Borrowing Base Properties. Borrower and Bank acknowledge that (a) due to the uncertainties of the oil and gas extraction process, the Borrowing Base Oil and Gas Properties are not subject to evaluation with a high degree of accuracy and are subject to potential rapid deterioration in value, and (b) for this reason and the difficulties and expenses involved in liquidating and collecting against the Borrowing Base Oil and Gas Properties, Bank's determination of the maximum loan amount with respect to the Borrowing Base Oil and Gas Properties contains an equity cushion, which equity cushion is acknowledged by Borrower as essential for the adequate protection of Bank. e. Unscheduled Borrowing Base Redeterminations. In addition to scheduled redeterminations of the Borrowing Base, the Bank may redetermine the Borrowing Base and the Monthly Borrowing Base Reduction at any time, and from time to time, which redetermination shall become effective upon written notification from Bank to Borrower and which, subject to the other provisions of this Agreement, shall be the basis on which the Borrowing Base shall thereafter be calculated until the effective date of the next redetermination of the Borrowing Base and the Monthly Borrowing Base Reduction, as set forth in this Section. 2.08 Assignment of Production. Certain of the Security Instruments covering the Borrowing Base Oil and Gas Properties contain an assignment unto and in favor of Bank of all oil, gas and other minerals produced and to be produced from or attributable to the Oil and Gas Properties that constitute part of the Borrowing 16 22 Base Oil and Gas Properties, together with all of the revenues and proceeds attributable to such production, and such Security Instruments further provide that all such revenues and proceeds which may be so collected by Bank pursuant to the assignment shall be applied to the payment of the Note and the satisfaction of all other Indebtedness to be secured by such Security Instruments. Such Security Instruments further provide that the Bank grants to Borrower a license to receive and collect the revenues and proceeds attributable to such production unless and until an Event of Default shall occur, and upon the occurrence of an Event of Default, the Bank, acting in its sole discretion, shall have the right to terminate Borrower's license to collect such revenues and proceeds. Borrower hereby appoints Bank as its agent and attorney-in-fact for all purposes deemed by Bank to be necessary or desirable in connection with such assignment of production, including, but not limited to, completing the letter transfer orders delivered to Bank pursuant to Sections 3.17 and/or 3.19 hereof, which power is coupled with an interest and is not revocable. 2.09 Commitment Fee. As consideration for the commitment of Bank to make Loans to Borrower through the Maturity Date pursuant to this Agreement, Borrower agrees to pay to Bank within three (3) Business Days of receipt of Bank's statement as to quarterly periods ending March 31, June 30, September 30 and December 31 of each year (except the first period shall be for a period of time from the Closing to December 31, 1996) during the period commencing on the date of this Agreement to and including the Maturity Date and at the Maturity Date, a fee equal to 1/2 of 1% per annum (computed on the basis of 365 or 366 days, as the case may be) multiplied by an amount equal to the daily average excess, if any, of the greater of either: (a) $6,000,000.00, or (b) the Revolving Commitment, over the sum of: (x) the aggregate principal amount outstanding on the Note, plus (y) the aggregate face amount of all outstanding Letters of Credit, throughout the period from the date of this Agreement or previous calculation date provided above, whichever is later, to the relevant calculation date or the Maturity Date, as the case may be. 2.10 Facility Fee. As consideration for the commitment of Bank to make Loans to Borrower pursuant to this Agreement, Borrower shall pay to Bank a fee ("Facility Fee") of $60,000.00, one-half of which has heretofore been paid, and the remaining $30,000.00 of which shall be paid simultaneously with the Closing. 17 23 If the Revolving Commitment is ever increased to an amount exceeding $6,000,000.00, then at the time such increase becomes effective, Borrower shall pay Bank an additional Facility Fee equal to one percent (1.0%) of the amount by which such increased Revolving Commitment exceeds either: (a) $6,000,000.00, or (b) the highest Revolving Commitment amount previously in effect, if greater than $6,000,000.00. 2.11 Addition of Borrowing Properties. Borrower may, from time to time upon thirty (30) days prior written notice to Bank, propose to add Oil and Gas Properties, Cash, Cash Equivalent, and/or Eligible Marketable Securities of Borrower to the Borrowing Base Properties. Any such proposal to add Oil and Gas Properties of Borrower to the Borrowing Base Properties shall be accompanied by an engineering report applicable to such Oil and Gas Properties that conforms to the requirements of Section 2.07, evidence sufficient to establish that Borrower has Marketable Title to such Oil and Gas Properties, and such other data as Bank may reasonably request. Any such proposal to add Eligible Marketable Securities of Borrower to the Borrowing Base properties shall be accompanied by evidence sufficient to establish that Borrower has Marketable Title to such Eligible Marketable Securities, and such other data as Bank may reasonably request. Any such additions shall become effective at such time as: (a) Bank has made its determination in the ordinary course of business of the amount by which the Borrowing Base would be increased as the result of such addition and (b) the conditions set forth in Article III hereof, to the extent they are applicable to such additional Borrowing Base Properties of Borrower, have been satisfied. 2.12 Letters of Credit. Subject to the terms and conditions of this Agreement, the Bank agrees to issue standby Letters of Credit for the account of the Borrower from time to time following receipt of a Request for Advance three (3) Business Days prior to the requested date of issuance in such amount as the Borrower may request in an aggregate amount of up to (i) One Million Dollars ($1,000,000.00), but (ii) not to exceed at any time the unborrowed portion of the Revolving Commitment. The amount of any such Letters of Credit issued under the Revolving Commitment shall be deemed to be a Loan and to reduce the amount available under the Revolving Commitment and shall be governed by the terms of this Agreement. The Bank may require in connection with the issuance of any Letter of Credit that Borrower execute the Bank's then-current form of application for a Letter of Credit, but if 18 24 there is any conflict between the terms of any such application and the terms of this Agreement, the terms of this Agreement shall control. No Letter of Credit shall have an expiration date that is later than one year from the date of its issuance, or, if sooner, beyond the Maturity Date. 2.13 Repayment of Letters of Credit. If drawn upon by the beneficiary of a Letter of Credit, all amounts so drawn shall be due and payable by the Borrower immediately upon receipt of Bank's statement therefor. 2.14 Letter of Credit Fee. As consideration for the issuance by the Bank of Letters of Credit for the account of the Borrower, the Borrower agrees to pay to the Bank a fee of one percent (1.0%), per annum, of the amount of each such Letter of Credit (subject to a $300.00 minimum fee per year on each Letter of Credit), the first such per annum fee for each Letter of Credit to be payable in advance of the issuance of such Letter of Credit, with successive per annum fees to be paid in advance of the anniversary date of the issuance of such Letter of Credit if it is to remain in effect beyond such anniversary date. ARTICLE III. CONDITIONS The obligation of Bank to make the Loan referred to in Article II of this Agreement is subject to satisfaction of the following conditions precedent stated in this Article III. The obligation of Bank to make subsequent advances pursuant to this Agreement is subject to the prior or contemporaneous satisfaction of the conditions precedent stated in Sections 3.12 through 3.19. 3.01 Receipt of Note, Agreement and Certificate of Compliance. Bank shall have received the Note, multiple counterparts of this Agreement, as requested by Bank, and the Certificate of Compliance duly executed by an authorized officer for Borrower. 3.02 Receipt of Guaranty. Bank shall have received from each Guarantor the Guaranty, duly executed by Guarantor. 3.03 Receipt of Organizational Documents. Bank shall have received from Borrower its Articles of Incorporation and its bylaws certified by the secretary or an assistant secretary of Borrower. 19 25 3.04 Receipt of Certified Copy of Corporate Proceedings and Certificates of Incumbency. Bank shall have received from Borrower copies of all resolutions of its board of directors authorizing the transactions set forth in this Agreement, and the execution of this Agreement, the Note, and those of the Security Instruments to which it is a party, such copy or copies to be certified by the secretary or an assistant secretary as being true and correct and in full force and effect as of the date hereof. In addition, Bank shall have received from Borrower a certificate of incumbency signed by the secretary or an assistant secretary of Borrower setting forth (a) the names of the officers executing this Agreement, the Note, and those of the Security Instruments to which it is a party, (b) the office(s) to which such Persons have been elected and in which they presently serve and (c) an original specimen signature of each such person. 3.05 Receipt of Certificates of Authority and Certificates of Good Standing. Bank shall have received certificates, as of the most recent dates practicable, of the Secretary of State of the state in which Borrower is incorporated attesting to Borrower's existence, and of each state in which Borrower is qualified to do business as a foreign corporation attesting to such qualification, and from the department of revenue or taxation of each of the foregoing states, as to the good standing of Borrower; 3.06 UCC Search. The results of a Uniform Commercial Code search showing all financing statements and other documents or instruments on file against Borrower and Guarantor, in the Offices of the Secretaries of State of the State of Texas and in the counties in which Borrowing Base Oil and Gas Properties are located, such search to be as of a date no more than ten (10) days prior to the date of the advance of the Loan. 3.07 Fees. Bank shall have contemporaneously received the fees required by Section 2.10. 3.08 Financial Statements. Bank shall have received the Financial Statements of Borrower as of August 31, 1996, showing financial information consistent with that previously provided to Bank. 20 26 3.09 Opinion of Counsel. Bank shall received a satisfactory legal opinion from the firm of Gardere Wynne Sewell & Riggs, L.L.P., counsel for Borrower, in form and substance acceptable to Bank, covering the matters prescribed on Schedule 3.09 hereof. 3.10 Payment of Other Indebtedness and Release of Liens. Bank shall have received evidence satisfactory to it, in its sole discretion, that the other Indebtedness of Borrower described on Schedule 3.10 hereof has been fully paid and discharged, and that the holder(s) of such indebtedness have executed and delivered to Borrower recordable releases, in form satisfactory to the Bank, in its sole discretion, releasing all liens and security interests owned or claimed by such holder(s) to secure such Indebtedness. 3.11 Subordination Agreement. With respect to all of the other Indebtedness described on Schedule 3.11 attached hereto, the Bank, the Borrower, and each holder of such Indebtedness shall have entered into a subordination agreement in form and substance acceptable to the Bank, in its sole discretion, providing that no payments of principal or interest on the Indebtedness covered by such subordination agreement may be paid by Borrower or accepted by the holder of such indebtedness without the prior written consent of the Bank. 3.12 Request for Advance. Bank shall have received from Borrower a Request for Advance. 3.13 Accuracy of Representations and Warranties and No Event of Default. The representations and warranties contained in Article IV of this Agreement shall be true and correct in all material respects on the date of the making of such Loans or advances with the same effect as though such representations and warranties had been made on such date; and no Event of Default shall have occurred and be continuing or will have occurred at the completion of the making of such Loans or advances. 3.14 Legal Matters Satisfactory to Counsel to Bank. All legal matters incident to the consummation of the transactions hereby contemplated shall be satisfactory to counsel for Bank. 3.15 No Material Adverse Change. No material adverse change shall have occurred since the date of this Agreement in the condition, financial or otherwise, of Borrower or Guarantor. 21 27 3.16 Status of Title. Bank shall have been satisfied that Borrower has Marketable Title to its Borrowing Base Properties, and that Borrower owns record title to an undivided net revenue interest in the production from each Oil and Gas Property that is a Borrowing Base Property that is not less than the net revenue interest therein attributed to Borrower in the Loan Documents, as amended from time to time, as well as an undivided working interest in each such Oil and Gas Property that is not greater than the working interest therein attributed to Borrower in the Loan Documents, as amended from time to time (unless there is a corresponding increase in the net revenue interest attributed to such party therein). 3.17 Security Instruments. As security for the payment of the Note and the performance of the Obligations of Borrower under this Agreement, Bank shall have received the Security Instruments, duly executed by Borrower with respect to Borrowing Base properties owned by Borrower and duly executed by the applicable Guarantor with respect to Borrowing Base Properties owned by such Guarantor. 3.18 Legal Fees. All legal fees and disbursements owed to Bank's special counsel who provided representation to the Bank in connection with this Agreement or any amendment hereto and in connection with the review of title to the Borrowing Base Oil and Gas Property shall have been paid. 3.19 Documents Required for Subsequent Disbursements. As of the time of funding any additional advances to Borrower that are made in conjunction with the addition to the Borrowing Base Properties of Oil and Gas Properties, Cash, Cash Equivalent, and/or Eligible Marketable Securities owned by Borrower or any Guarantor, Borrower or such Guarantor shall have duly delivered to Bank: (i) the Security Instruments that are necessary or appropriate, in the opinion of Bank, relating to such additional Borrowing Base Properties, (ii) Transfer Order Letters applicable to the production of oil and gas from any additional Oil and Gas Properties added to the Borrowing Base Properties, and (iii) possession of any such additional Borrowing Base Cash and Borrowing Base Securities. 22 28 ARTICLE IV. REPRESENTATIONS AND WARRANTIES To induce Bank to enter into this Agreement and to make the Loan hereunder, Borrower represents and warrants to Bank (which representations and warranties will survive the delivery of the Note) that: 4.01 Existence and Good Standing. Borrower is a corporation, duly organized, legally existing and in good standing under the laws of its jurisdiction of incorporation and is duly qualified and in good standing as a foreign corporation in all jurisdictions wherein the property owned or the business transacted by it makes such qualification necessary, other than those jurisdictions wherein the failure to so qualify does not have a material adverse effect on Borrower. 4.02 Due Authorization. As to Borrower, the execution and delivery by Borrower of this Agreement and the borrowings hereunder; the execution and delivery by Borrower of the Note and the Security Instruments; and the repayment by Borrower of Indebtedness evidenced by the Note and interest and fees provided in the Note and this Agreement are (a) within the corporate power of Borrower; (b) have been duly authorized by all necessary corporate action; and (c) do not and will not (i) require the consent of any regulatory authority, governmental body, or any other Person, (ii) violate any provision of law, the certificate of incorporation, the articles of incorporation, or the bylaws of Borrower, (iii) cause a default to occur under the terms and provisions of any indenture, instrument or other agreement to which Borrower is a party or by which its property may be presently bound or encumbered, or (iv) result in or require the creation or imposition of any mortgage, lien, pledge, security interest, charge or other encumbrance in, upon or of any of the properties or assets of Borrower under any such indenture, instrument or other agreement, other than under any of the Security Instruments. 4.03 Valid and Binding Obligations. This Agreement, the Note, the Security Instruments and the Guaranty, when duly executed and delivered, will be, as to each such instrument executed by Borrower and Guarantor, respectively, the legal, valid and binding obligations of and enforceable against Borrower and Guarantor, as applicable, in accordance with their respective terms (subject to any applicable bankruptcy, insolvency or other laws of general application affecting creditors' rights and judicial decisions interpreting any of the foregoing). 23 29 4.04 Title to Borrowing Base Properties. Borrower has Marketable Title to all of its Borrowing Base Properties, and each Guarantor has marketable title to all of its Borrowing Base Properties. 4.05 Oil and Gas Leases. The Leases which constitute any part of the Borrowing Base Properties are in full force and effect, are valid, subsisting leases covering the entire estates to which they pertain and all rentals, royalties and other amounts due and payable in accordance with the terms of the Leases, overriding royalties, net profits or other production burdens have been duly paid or provided for; the obligations to be performed under the Leases have been duly performed; and Borrower is not aware of any default by any third party under any of the Leases with respect to such third party's obligations. 4.06 Interest in the Borrowing Base Oil and Gas Properties. With respect to each of the Borrowing Base Oil and Gas Properties, the ownership of Borrower in such property will, with respect to the wells, units and/or tracts of land described in Schedule 1.01(a) hereto in connection with such property, (i) entitle Borrower to receive (subject to the terms and provisions of this Agreement) a decimal share of the oil and gas produced from, or allocated to, such wells, units and/or tracts equal to not less than the decimal share set forth in Schedule 1.01(a) in connection with such wells, units and/or tracts, and (ii) cause Borrower to be obligated to bear a decimal share of the cost of exploration, development and operation of such wells, units and/or tracts of land not greater than the decimal share set forth in Schedule 1.01(a) in connection with such wells, units and/or tracts, unless any increase in Borrower's share of costs is accompanied by a pro-rata increase in Borrower's share of revenue. Except as set forth in the instrument and agreements, if any, more particularly described in Schedule 1.01(a), all such shares of production which Borrower is entitled to receive, and shares of expenses which Borrower is obligated to bear, are not subject to change, except for changes attributable to future elections by Borrower not to participate in operations proposed pursuant to customary forms of applicable joint operating agreements, and except for changes attributable to changes in participating areas under any federal units wherein participating areas may be formed, enlarged or contracted in accordance with the rules and regulations of the applicable governmental authority. 24 30 4.07 Oil and Gas Contracts. Borrower is not obligated, by virtue of any prepayment under any contract providing for the sale by Borrower of hydrocarbons which contains a "take-or-pay" clause or under any similar prepayment agreement or arrangement, including, without limitation, "gas balancing agreements", to deliver a material amount of hydrocarbons produced from the Borrowing Base Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor (i.e., in the case of oil, not in excess of sixty (60) days, and in the case of gas, not in excess of ninety (90) days). The Borrowing Base Oil and Gas Properties are not subject to any contractual, or other arrangement for the sale of crude oil which cannot be cancelled on ninety (90) days' (or less) notice, unless the price provided for therein is equal to or greater than the prevailing market price in the vicinity. The Borrowing Base Oil and Gas Properties are not subject to any gas sales contract that contains any material terms which are not customary in the industry within the region in which the Borrowing Base Oil and Gas Properties affected thereby are located. The Borrowing Base Oil and Gas Properties are not subject to any regulatory refund obligation and no facts exist which might cause the same to be imposed. 4.08 Producing Wells. All producing wells located on the Borrowing Base Oil and Gas Properties have been, during all times that such were under the direction or control of Borrower and, to the knowledge of Borrower, at all other times, drilled, operated and produced in conformity with all applicable Laws, rules, regulations and orders of all regulatory authorities having jurisdiction, are subject to no penalties on account of past production, and are bottomed under and are producing from, and the well bores are wholly within, the Borrowing Base Oil and Gas Properties or on Oil and Gas Properties which have been pooled, unitized or communitized with the Borrowing Base Oil and Gas Properties. 4.09 Purchasers of Production. The persons who are purchasing Borrower's interests in oil and gas produced from the Borrowing Base Oil and Gas Properties as of the calendar month during which the Loans are made hereunder are identified on Schedule 4.09 attached hereto. 4.10 Scope and Accuracy of Financial Statements. All Financial Statements submitted and to be submitted to Bank hereunder, including, without limitation, the Financial Statements 25 31 of Borrower and Guarantor, are and will be complete and correct in all material respects; with RESPECT to Borrower, are and will be prepared in accordance with GAAP and practices consistently applied; with respect to Guarantor, are and will be prepared on a cash accounting basis and tax accounting practices consistently applied; and do and will fairly reflect the financial condition and the results of the operations of Borrower and Guarantor in all material respects as of the dates and for the period stated therein (subject only to normal year-end audit adjustments with respect to such unaudited interim statements of Borrower and Guarantor); and no material adverse change has since occurred in the condition, financial or otherwise, of Borrower or Guarantor, or their respective Subsidiaries (taken as a whole). 4.11 Liabilities, Litigation and Restrictions. Except as disclosed in the Financial Statements, neither Borrower nor Guarantor has any liabilities, direct or contingent, which may materially and adversely affect the business or assets of such party. Except as described on Schedule 4.11, there is no litigation or other action of any nature pending before any court, governmental instrumentality, regulatory authority or arbitral body or, to the knowledge of Borrower, threatened against or affecting Borrower or Guarantor, or any of their Subsidiaries, which might reasonably be expected to result in any material, adverse change in the business or assets of Borrower or Guarantor, or their respective Subsidiaries (taken as a whole). No unusual or unduly burdensome restriction, restraint or hazard exists by contract, law, governmental regulation or otherwise relative to the business or material properties of Borrower or Guarantor other than such as relate generally to Persons engaged in the business activities conducted by Borrower or Guarantor, as the case may be. 4.12 Margin Stock. None of the proceeds of the Loans will be used for the purpose of buying or carrying margin stock. 4.13 Authorizations and Consents. No authorization, consent, approval, exemption, franchise, permit or license of, or filing with, any governmental or public authority or any third party is required to authorize, or is otherwise required in connection with the valid execution and delivery by Borrower or Guarantor, as applicable, of this Agreement, the Note, and those of the Security Instruments to which it is a party or any instrument contemplated hereby, the repayment by Borrower of advances against the Note and interest and fees provided in the Note and this 26 32 Agreement, or the performance by Borrower or Guarantor of its obligations under any of the foregoing. 4.14 Compliance with Laws, Rules, Regulations and Orders. To the best of the knowledge and belief of Borrower, neither the business nor any of the activities of Borrower or Guarantor, as presently conducted, violates any law or any rule, regulation or directive of any applicable judicial, administrative or other governmental instrumentality (including, but not by way of limitation, any law or any rule, regulation or directive of any judicial, administrative or other governmental instrumentality relating to zoning, to any Environmental Law, to the stabilization of wages or prices or to the development, production, transportation or purchase or sale of oil, gas or other hydrocarbons) the result of which violation would have a material adverse effect on Borrower or Guarantor, or their respective Subsidiaries (taken as a whole), and Borrower and Guarantor each possess all licenses, approvals, registrations, permits and other authorizations necessary to enable it to carry on its business in all material respects as now conducted, and all such licenses, approvals, registrations, permits and other authorizations are in full force and effect; and Borrower has no reason to believe that either Borrower or Guarantor will be unable to obtain the renewal of any such licenses, approvals, registrations, permits and other authorizations. 4.15 Proper Filing of Tax Returns and Payment of Taxes Due. Borrower and Guarantor have each duly and properly filed all United States Income Tax returns and all other tax returns which are required to be filed, and have paid all taxes due pursuant to said returns or pursuant to any assessment received, except such taxes, if any, as are being contested in good faith and as to which adequate provisions and disclosures have been made; and the respective charges and reserves on the books of Borrower and Guarantor with respect to any taxes or other governmental charges are adequate. 4.16 ERISA. Borrower is in compliance in all material respects with all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has occurred and is continuing with respect to any plan; no notice of intent to terminate a plan has been filed, nor has any plan been terminated; no circumstances exist which constitute grounds under Section 4042 of ERISA entitling the PBGC to institute proceedings to terminate, 27 33 or appoint a trustee to administrate a plan, nor has the PBGC instituted any such proceedings; neither Borrower nor any ERISA Affiliate has completely or partially withdrawn under Sections 4201 or 4204 of ERISA from a Multi-employer plan; Borrower and each ERISA Affiliate have met their minimum funding requirements under ERISA with respect to all of their plans and the present value of all vested benefits under each plan exceeds the fair market value of all plan assets allocable to such benefits, as determined on the most recent valuation date of the plan and in accordance with the provisions of ERISA and the regulations thereunder for calculating the potential liability of Borrower or any ERISA Affiliate to the PBGC or the plan under Title IV of ERISA; and neither Borrower nor any ERISA Affiliate has incurred any liability to the PBGC under ERISA. 4.17 Investment Company Act Compliance. Neither Borrower nor Guarantor is, nor is it directly or indirectly controlled by or acting on behalf of any person or entity which is, an investment company or an "affiliated person" of an investment company within the meaning of the Investment Borrower Act of 1940. 4.18 Public Utility Holding Company Act Compliance. Borrower is not a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 4.19 Environmental Laws. To the best of the knowledge and belief of Borrower: (a) no property of Borrower or Guarantor is currently on, or has ever been on, any federal or state list of superfund sites as listed on the Environmental Protection Agency National Priority List or any comparable state registries or list in any state of the United States (collectively "Superfund Sites"); (b) no Hazardous Substances have in the past been generated, transported, and or disposed of, by Borrower or Guarantor at any Superfund Site; (c) except in accordance with a valid permit, license, certificate or approval of the relevant regulatory authority or governmental body, there has been no emission, spill, 28 34 release, disposal or discharge of any Hazardous Substance into or upon (i) the air, (ii) soils or any improvements located thereon, (iii) surface water or groundwater, or (iv) the sewer, septic system or waste treatment, storage or disposal system servicing any property of Borrower or Guarantor; and (d) no complaint, order, directive, claim, citation, notice of environmental report, notice of investigation or other notice by any regulatory authority or governmental body or any other Person with respect to (i) air emissions, (ii) spills, releases or discharges to soils or any improvements located thereon, surface water, groundwater or the sewer, septic system or waste treatment, storage or disposal systems servicing any property of Borrower or Guarantor, (iii) solid or liquid waste disposal, (iv) the use, generation, storage, transportation or disposal of any Hazardous Substance, or (v) other environmental, health or safety matters affecting any property of Borrower or Guarantor, any improvements located thereon, or the business thereon conducted, has been received by Borrower or Guarantor, nor has Borrower or Guarantor been given oral or written notice thereof; provided, however, that the representations and warranties set forth in subparagraphs (c) and (d) above shall apply only to events and conditions which either resulted in (i) a continuing lien or encumbrance on the property of Borrower or Guarantor or (ii) otherwise materially affect Borrower's or Guarantor's use or operation of its property or Borrower's ability to repay the Indebtedness evidenced by the Note, or Guarantor's ability to perform its Guaranty. ARTICLE V. AFFIRMATIVE COVENANTS Borrower covenants, so long as any Indebtedness of Borrower to Bank remains unpaid under this Agreement or Bank remains obligated to make advances hereunder, to: 5.01 Use of Funds. Use the proceeds advanced under the Loan to refinance the existing Indebtedness described on Schedule 3.10, acquire Oil and Gas Properties, conduct developmental drilling, and use as working capital for other ordinary business activities of Borrower, and furnish Bank such evidence as it may reasonably require with respect to such use. 29 35 5.02 Maintenance and Access to Records. Keep adequate records in accordance with good accounting practices, of all of Borrower's transactions so that at any time, and from time to time, its true and complete financial condition may be readily determined and, at Bank's reasonable request, make all financial records and records relating to the Borrowing Base Properties available for Bank's inspection and permit Bank to make and take away copies thereof for Bank's internal use only and subject to such confidentiality agreements as Borrower may reasonably require. 5.03 Quarterly Unaudited Financial Statements of Borrower. Deliver to Bank, on or before the forty-fifth (45th) day after the end of each of the first three calendar quarters of each fiscal year, unaudited Financial Statements of Borrower as at the end of such period and from the beginning of such fiscal year to the end of the respective period, as applicable, which Financial Statements shall be certified by the president or chief financial officer of Borrower as being true and correct, subject to changes resulting from year-end audit adjustments. 5.04 Annual Audited Financial Statements of Borrower. Deliver to Bank, on or before the one hundred and twentieth (120th) day after the close of each fiscal year of Borrower, a copy of the annual audited Financial Statements of Borrower. 5.05 Annual Unaudited Financial Statements of Guarantor. Deliver or cause to be delivered to Bank, on or before the ninetieth (90th) day after the close of each calendar year, unaudited personal Financial Statements of Guarantor as at the end of such year, which Financial Statements shall include cash flow and contingent liability information, and shall be certified by the Guarantor as being true and correct. 5.06 Guarantor's Tax Returns. Deliver or cause to be delivered to Bank, on or before the forty-fifth (45th) day after each Guarantor's annual personal tax return for the preceding tax year is filed with the Internal Revenue Service, copies of the first two pages of such annual personal tax return of such Guarantor for the such tax year, certified by such Guarantor as being true and correct. 5.07 Compliance Certificate. Deliver to Bank a Compliance Certificate: (a) at the time of Borrower's execution 30 36 of this Agreement, and (b) at the time of delivery of each of the Financial Statements pursuant to Sections 5.03 and 5.04 above. 5.08 Monthly Borrowing Base Certificate. Deliver to Bank on or before the 15th day of each month a Monthly Borrowing Base Certificate evidencing Borrower's calculation of the Borrowing Base according to the parameters described in Section 2.07, effective as of the first day of such month. 5.09 Statement of Material Adverse Change in Condition. Deliver to Bank, promptly upon any officer of the Borrower having knowledge of any material adverse change in the condition, financial or otherwise, of Borrower or its Subsidiaries (or any event or circumstance that would result in any such material adverse change in condition including, but not limited to, litigation and changes in business), a statement of the president or vice president of Borrower, setting forth the change in condition or event or circumstance likely to result in any such change and the steps being taken by Borrower or the applicable Subsidiary with respect to such change in condition or event or circumstance. 5.10 Additional Information. Furnish to Bank, promptly upon Bank's reasonable request, such additional financial or other information concerning the assets, liabilities, operations, and transactions of Borrower and of each Guarantor, respectively, in such party's possession or to which it has access, including, without limitation, information concerning the Borrowing Base Properties. 5.11 Compliance with Laws and Payment of Assessments and Charges. Comply with all applicable statutes and government regulations, including, without limitation, ERISA, and pay all taxes, assessments, governmental charges, claims for labor, supplies, rent, its share of all costs and expenses incurred under any joint operating agreement, and other obligations which, if unpaid, might become a lien against its property, except any of the foregoing being contested in good faith and as to which satisfactory accruals have been provided and unless failure to comply or pay would not have a material adverse effect on the assets of Borrower and its Subsidiaries (taken as a whole). 5.12 Maintenance of Existence and Good Standing. Maintain Borrower's corporate existence and good standing in the 31 37 jurisdiction of its incorporation, and in all jurisdictions wherein the property now owned or hereafter acquired or business now or hereafter conducted necessitates same, other than those jurisdictions wherein the failure to so qualify will not have a material adverse effect on Borrower. 5.13 Further Assurances. Promptly cure any defects in the execution and delivery of this Agreement, the Note, the Security Instruments, the Guaranty or any other instrument referred to herein or executed in connection with the Note, and upon notice, immediately execute and deliver to Bank, all such other and further instruments as may be reasonably required or desired by Bank from time to time in compliance with the covenants and agreements made in this Agreement. 5.14 Initial Expenses of Bank. Pay all fees and expenses of special legal counsel for Bank, incurred in connection with the negotiation and preparation of this Agreement, the Note, the Security Instruments, the Guaranty or any other instrument referred to herein or executed in connection with the Note, the satisfaction of the conditions precedent set forth in Article III of this Agreement and the consummation of the transactions contemplated in this Agreement. 5.15 Subsequent Expenses of Bank. Upon request, promptly reimburse Bank for all reasonable amounts expended, advanced or incurred by Bank to collect the Note or to enforce the rights of Bank under this Agreement, the Note, the Security Instruments, the Guaranty, or any other instrument referred to herein or executed in connection with the Note, which amounts shall be deemed compensatory in nature and liquidated as to amount upon notice to Borrower by Bank and which amounts will include, but not be limited to, (a) all court costs, (b) attorneys' fees, (c) fees of auditors and accountants, (d) investigation expenses, (e) internal fees of Bank's in-house legal counsel, (f) fees and expenses incurred in connection with Bank's participation as a member of the creditors' committee in a case commenced under Title 11 of the United States Code or other similar law of the United States, the State of Texas or any other jurisdiction, (g) fees and expenses incurred in connection with lifting the automatic stay prescribed in Sections 362 Title 11 of the United States Code, and (h) fees and expenses incurred in connection with any action pursuant to Sections 1129 Title 11 of the United States Code, incurred by Bank in connection with the collection of any sums due under this 32 38 Agreement, together with interest at the Floating Rate per annum, calculated on a basis of a year of three hundred sixty-five (365) or three hundred sixty-six (366) days, on each such amount from the date of notification to Borrower that the same was expended, advanced or incurred by Bank until the date it is repaid to Bank, with the obligations under this Section 5.15, surviving the non-assumption of this Agreement in a case commenced under Title 11 of the United States Code or other similar law of the United States, the State of Texas or any other jurisdiction and being binding upon Borrower or a trustee, receiver or liquidator of any such party appointed in any such case. 5.16 Maintenance of Tangible Property. Maintain all of Borrower's tangible property in good repair and condition and make all necessary replacements thereof and operate such property in a good and workmanlike manner in accordance with standard industry practices, unless the failure to do so would not have a material adverse effect on Borrower and its Subsidiaries (taken as a whole) or the value of the Borrowing Base Oil and Gas Properties. 5.17 Maintenance of Insurance. Continue to maintain, or cause to be maintained, insurance with respect to the properties and business of Borrower against such liabilities, casualties, risks and contingencies and in such amounts as is customary in the industry, in an amount and form, and underwritten by an insurer or insurers, as are acceptable to Bank in its sole discretion, and furnish to Bank, at the execution of this Agreement and annually thereafter, certificates evidencing such insurance. 5.18 Inspection of Tangible Assets/Right of Audit. Permit (or cause to be permitted) any authorized representative of Bank, to visit and inspect (at the risk of Bank and/or such representative) any tangible asset of Borrower and Guarantor, and/or to audit the books and records of Borrower and Guarantor during normal business hours. 5.19 Payment of Note and Performance of Obligations. As to Borrower, pay the Note according to the reading, tenor and effect thereof, as modified hereby, and do and perform every act and discharge all of the obligations provided to be performed and discharged hereunder. 5.20 ERISA Reports. Promptly after the filing or receiving thereof, copies of all reports, including annual reports, 33 39 and notices which Borrower files with or receives from the PBGC or the U.S. Department of Labor under ERISA; and promptly after Borrower knows or has reason to know that any Reportable Event or Prohibited Transaction has occurred with respect to any plan or that the PBGC or Borrower has instituted or will institute proceedings under Title IV of ERISA to terminate any plan, Borrower will deliver to Bank a certificate of the controller of Borrower setting forth details as to such Reportable Event or Prohibited Transaction or plan termination and the action Borrower proposes to take with respect thereto. 5.21 Tangible Net Worth Requirement. Borrower shall maintain a total Tangible Net Worth of not less than $1,000,000.00, plus: (a) fifty percent (50%) of net income (excluding losses) of Borrower subsequent to December 31, 1996, and (b) one hundred percent (100%) of any increases in shareholders' equity resulting from the sale or issuance of stock in Borrower subsequent to December 31, 1996. For purposes of this section 5.21, Tangible Net Worth shall include notes payable by the Borrower to its shareholders, together with accrued interest thereon, provided that such Indebtedness is expressly subordinated to the Obligations of Borrower to the Bank pursuant to a subordination agreement executed in accordance with Section 3.11 hereof. 5.22 Cash Flow to Debt Service Ratio. Borrower will maintain (calculated in accordance with GAAP) a ratio of quarterly Cash Flow to quarterly Debt Service of not less than 1.25 to 1.0. Compliance with this covenant shall begin with the quarter ending March 31, 1997. For the purposes of calculating this ratio: (a) "Cash Flow" shall be defined as the sum of net income plus depreciation and other non-cash charges less non-cash income of Borrower, and (b) "Debt Service" shall be defined as the sum of (i) actual principal amounts paid by Borrower during such quarter on Indebtedness other than in connection with this Loan; and (ii) principal amounts required to be paid by Borrower during such quarter in connection with this Loan. 5.23 Compliance with Environmental Laws. Comply in all material respects with any and all requirements of law, including, without limitation, Environmental Laws, (a) related to any natural or environmental resource or media located on, above, within, in 34 40 the vicinity of, related to or affected by any Borrowing Base Oil and Gas Properties or any other property of Borrower, or (b) required for the performance or conduct of its operations, including, without limitation, all permits, licenses, registrations, approvals and authorizations, and, in this regard, comply fully and in a timely manner with, and cause all employees, crew members, agents, contractors, subcontractors and future lessees (pursuant to appropriate lease provisions) of Borrower while such Persons are acting within the scope of their relationship with Borrower, to so comply with, all requirements of law, including, without limitation, Environmental Laws, and other requirements with respect to the property of Borrower and the operation thereof necessary or appropriate to enable Borrower to fulfill its obligations under all requirements of law, including, without limitation, Environmental Laws, applicable to the use, generation, handling, storage, treatment, transport and disposal of any Hazardous Substances now or hereafter located or present on or under any such property. 5.24 Hazardous Substances Indemnification. Indemnify and hold Bank harmless from and against any and all claims, losses, damages, liabilities, fines, penalties, charges, administrative and judicial proceedings and orders, judgments, remedial actions, requirements and enforcement actions of any kind, and all costs and expenses incurred in connection therewith (including, without limitation, attorneys' fees and expenses), arising directly or indirectly, in whole or in part, out of (a) the presence of any Hazardous Substances on, under or from its property, whether prior to or during the term hereof, or (b) any activity carried on or undertaken on or off its property, whether prior to or during the term hereof, and whether by Borrower or any predecessor in title or any employees, agents, contractors or subcontractors of Borrower or any predecessor in title, or any third Persons at any time occupying or present on such property, in connection with the handling, treatment, removal, storage, decontamination, cleanup, transportation or disposal of any Hazardous Substances at any time located or present on or under such property; with the foregoing indemnity further applying to any residual contamination on or under the property of Borrower, or any property of any other Person, or affecting any natural resources, and to any contamination of any property or natural resources arising in connection with the generation, use, handling, storage, transportation or disposal of any Hazardous Substances, irrespective of whether any of such activities were or will be 35 41 undertaken in accordance with applicable requirements of law, including, without limitation, Environmental Laws, and surviving satisfaction of all Indebtedness of Borrower to Bank and the termination of this Agreement, provided, further, that the claims and other actions of any kind against Bank which give rise to such indemnity are not barred by the applicable statute of limitations at the time such claims or actions are instituted and such indemnity shall not extend to any act or omission by Bank or any Affiliate of Bank or any of Bank's employees or agents with respect to the relevant property subsequent to Bank becoming the owner of, taking possession of to the exclusion of Borrower or assuming operations of any property previously owned by Borrower and with respect to which property such claim, loss, damage, liability, fine, penalty, charge, proceeding, order, judgment, action or requirement arises subsequent to the acquisition of title thereto, taking possession thereof or assumption of operations thereon by Bank or any Affiliate of Bank or any of Bank's employees or agents. Notwithstanding anything herein to the contrary, the provisions of this Section 5.24 shall survive any termination of this Agreement and shall survive the payment and performance in full of all Obligations owed by Borrower to Bank. 5.25 Changes in Management. Notify Bank of any change in the senior management of Borrower existing as of the date hereof. 5.26 Operating Accounts. Maintain all principal operating accounts of Borrower with Bank. ARTICLE VI. NEGATIVE COVENANTS Without the prior written consent of Bank and so long as any part of the principal or interest on the Note shall remain unpaid or Bank remains obligated to make advances hereunder, Borrower and its Subsidiaries will not: 6.01 Other Indebtedness. Incur, create, assume or suffer to exist any Indebtedness, whether by way of loan or the issuance or sale of securities except (a) Loans hereunder, (b) loans by Bank under other credit arrangements, (c) Indebtedness owed to Bank by any Affiliates of Borrower, and (d) unsecured accounts payable incurred in the ordinary course of business which are not overdue or if overdue, are acceptable to Bank and are being contested in good faith by appropriate proceedings; provided that Borrower shall be permitted to increase the amount of Indebtedness 36 42 owed the holders thereof identified on Schedule 3.11 hereof, provided that any increased amount of such Indebtedness shall contemporaneously be subordinated to all of Borrower's Obligations to the Bank on terms that are satisfactory to the Bank, in its sole discretion. 6.02 Guaranty of Payment or Performance. Guaranty any contract or obligation of any Person, except for any Indebtedness owed to Bank by any Affiliates of Borrower, and except that the foregoing restriction shall not apply to endorsements of instruments for collection in the ordinary course of business. 6.03 Loans or Advances. As to Borrower, only, make or agree to make or allow to remain outstanding any loans or advances to any Person, including Affiliates of Borrower, in amounts which exceed $25,000 in the aggregate, except advances or extensions of credit in the form of accounts receivable incurred in the ordinary course of business. 6.04 Mortgages or Pledges of Assets. Create, incur, assume or permit to exist, any mortgage, pledge, security interest, lien or encumbrance on any of its properties or assets (now owned or hereafter acquired), except that the foregoing restrictions shall not apply to any matters that would constitute or result in Permitted Encumbrances. 6.05 Nature of Business. Permit any material change to be made in the character of its business as conducted as of the date hereof, or permit any Subsidiary to permit any material change to be made in the character of such Subsidiary's business as conducted as of the date hereof. 6.06 Sales of Assets. Sell, lease, assign, transfer or otherwise dispose of, in one or any series of related transactions, all or any part of its assets, if such transfer is material to Borrower's operations, nor enter into any arrangement, directly or indirectly, with any Person to sell and rent or lease back such assets or any part thereof which are intended to be used for substantially the same purpose or purposes as the assets sold or transferred. 6.07 Dividends and Distributions. Declare or pay any dividend from Borrower or make any distribution on, or purchase, redeem or otherwise acquire for value, any interest in Borrower or its Subsidiaries. 37 43 6.08 Payment of Accounts Payable. Allow any account payable to remain unpaid after its due date, except such as are overdue that are acceptable to Bank, are being contested in good faith, and as to which adequate provision or accrual has been made. 6.09 Cancellation of Insurance. Allow any insurance policy required to be carried hereunder to be terminated or lapse or expire without provision for adequate renewal thereof. 6.10 Investments. Make Investments in or purchase or otherwise acquire all or substantially all of the assets of any Person other than Borrower and its Subsidiaries, or any shares of stock of, or similar interest in, any Person. 6.11 Changes in Business Structure. Consolidate or merge with, or purchase (for cash or securities) all or substantially all of the assets or all or any part of the capital stock of any corporation, firm, association or enterprise, or allow any such entity to be merged into Borrower, nor shall Borrower dissolve or liquidate; provided that Borrower shall be permitted to merge with Carrizo Production, Inc. ("CPI"), if, at the time of such merger, CPI owes no Indebtedness and contemporaneous with the consummation of such merger the Tangible Net Worth that Borrower is required to maintain pursuant to Section 5.21 shall be increased by the amount of the Tangible Net Worth of CPI. 6.12 Shareholder Control. Cause or permit any change to occur in Guarantor's ownership interests in Borrower that would reduce Guarantor's aggregate ownership of the voting common stock of Borrower to less than fifty- one percent (51%). 6.13 Transactions with Affiliates. Enter into any transaction between or among Borrower and/or any Subsidiaries with any Affiliate on terms that are less favorable than could be obtained in an arms-length transaction with a Person that is not an Affiliate. ARTICLE VII. EVENTS OF DEFAULT 7.01 Enumeration of Events of Default. Any of the following events shall be considered an Event of Default as that term is used herein: (a) Default shall be made by Borrower in the payment of any installment of principal on the Note, 38 44 (b) Default shall be made by Borrower in the payment of any installment of interest on the Note, or any fees or other monetary obligation payable hereunder, and such default shall remain unremedied in excess of three (3) days after notice being given by Bank, (c) Default shall be made by Borrower or Guarantor in the due observance or performance of any affirmative covenant required in this Agreement, the Note, the Security Instruments, or the Guaranty, and such default shall remain unremedied for in excess of thirty (30) days after the earlier of: (i) such default becoming known to Borrower, or (ii) notice being given by Bank. (d) Default shall be made by Borrower or Guarantor in the due observance or performance of any negative covenant required in this Agreement, the Note, the Security Instruments, or the Guaranty. (e) Any representation or warranty herein made by Borrower proves to have been untrue in any respect material to Borrower or Guarantor, or any representation, statement (including Financial Statements), certificate or data furnished or made by Borrower or Guarantor to Bank in connection herewith proves to have been untrue in any respect material to Borrower or Guarantor as of the date the facts therein set forth were stated or certified; (f) Default shall be made by Borrower or Guarantor (as principal or guarantor or other surety) in payment or performance of any bond, debenture, note or other evidence of Indebtedness for borrowed money, or any other credit agreement, loan agreement, indenture, promissory note or similar agreement or instrument executed in connection with any of the foregoing in excess of $25,000 in the aggregate; and such default shall remain unremedied for in excess of the period of grace, if any, with respect thereto, with the effect of accelerating the maturity of any such Indebtedness; (g) Borrower or Guarantor applies for or consents to the appointment of a receiver, trustee or liquidator of it or all or a substantial part of its assets, or (ii) files a voluntary petition commencing a case under Title 11 of the United States Code, seeking liquidation, reorganization or rearrangement or taking advantage of any bankruptcy, 39 45 insolvency, debtor's relief or other similar law of the United States, the State of Texas or any other jurisdiction, or (iii) makes a general assignment for the benefit of creditors, or (iv) is unable, or admits in writing its inability to pay its debts generally as they become due, or (v) files an answer admitting the material allegations of a petition filed against it in any case commenced under Title 11 of the United States Code or any reorganization, insolvency, conservatorship or similar proceeding under any bankruptcy, insolvency, debtor's relief or other similar law of the United States, the State of Texas or any other jurisdiction; (h) An order, judgment or decree shall be entered against Borrower or Guarantor by any court of competent jurisdiction or by any other duly authorized authority, on the petition of a creditor or otherwise, granting relief under Title 11 of the United States Code or under any bankruptcy, insolvency, debtor's relief or other similar law of the United States, the State of Texas or any other jurisdiction, approving a petition seeking reorganization or an arrangement of its debts or appointing a receiver, trustee, conservator, custodian or liquidator of it or all or any substantial part of its assets, and the failure to have such order, judgment or decree dismissed within ten (10) days of its entry; (i) Borrower or Guarantor has concealed, removed, or permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them; or has made or suffered a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or has made any transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid; or has suffered or permitted, while insolvent, any creditor to obtain a lien upon any of its property through legal proceedings or distraint which is not vacated within thirty (30) days from the date thereof. 7.02 Rights Upon Default. Upon the happening of an Event of Default specified in Subsections 7.01 (g) or (h), the entire aggregate principal amount of all Indebtedness then outstanding hereunder and the interest accrued thereon shall automatically become immediately due and payable, and upon the happening and continuation of any other Event of Default, Bank may declare the entire aggregate principal amount of all Indebtedness 40 46 then outstanding hereunder and the interest accrued thereon immediately due and payable. In either case, the entire principal and interest shall thereupon become immediately due and payable, without notice (including, without limitation, notice of intent to accelerate maturity or notice of acceleration of maturity) and without presentment, demand, protest, notice of protest or other notice of default or dishonor of any kind, except as provided to the contrary elsewhere herein, all of which are hereby expressly waived by Borrower. Upon the happening and continuation of any Event of Default, all obligations (if any) of Bank hereunder shall immediately cease and terminate unless and until Bank shall reinstate the same in writing. ARTICLE VIII. MISCELLANEOUS 8.01 Security Interests in Deposits and Right of Offset or Banker's Lien. Borrower hereby transfers, assigns and pledges to Bank and/or grants to Bank a security interest (as security for the payment and/or performance of the obligations of Borrower under this Agreement and the Note, with such interest of Bank to be retransferred, reassigned and/or released by Bank at the expense of Borrower upon payment in full and/or complete performance by Borrower of all such obligations) and the right, exercisable at such time as any obligation hereunder shall mature, whether by acceleration of maturity or otherwise of offset or banker's lien against all funds or other property of Borrower now or hereafter or from time to time on deposit with or in the possession of Bank, including, without limitation, all certificates of deposit and other depository accounts. 8.02 Survival of Representations, Warranties and Covenants. All representations and warranties of Borrower and all covenants and agreements herein made shall survive the execution and delivery of the Note and this Agreement and shall remain in force and effect so long as any debt is outstanding under the Note, or any renewal or extension of this Agreement or the Note, or Bank remains obligated to make advances hereunder. 8.03 Notices and Other Communications. Notices, requests and communications hereunder shall be in writing and shall be sufficient in all respects if delivered to the relevant address indicated below (including delivery by registered or certified United States mail, telex, telegram or hand): 41 47 (a) If to Bank: COMPASS BANK 24 Greenway Plaza, Suite 1401 Houston, Texas 77046 Attention: Energy Lending Fax: (713) 968-8222 (b) If to Borrower: CARRIZO OIL & GAS, INC. 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Attention: Frank A. Wojtek Fax: (713) 496-0884 Any party may, by proper written notice hereunder to the other, change the individuals or addresses to which such notices to it shall thereafter be sent. 8.04 Parties in Interest. All covenants and agreements herein contained by or on behalf of Borrower shall be binding upon Borrower and its successors and assigns and inure to the benefit of Bank and its successors and assigns. 8.05 Renewals and Extensions. All provisions of this Agreement relating to the Note shall apply with equal force and effect to each and all promissory notes hereafter executed which in whole or in part represent a renewal, extension, amendment, modification or rearrangement of any part of the Indebtedness originally represented by the Note. 8.06 No Waiver by Bank. No course of dealing on the part of Bank, its officers or employees, nor any failure or delay by Bank with respect to exercising any of its rights, powers or privileges under this Agreement, the Note, the Security Instruments or any other instrument referred to herein or executed in connection with the Note shall operate as a waiver thereof. The rights and remedies of Bank under this Agreement, the Note, the Security Instruments or any other instrument referred to herein or executed in connection with the Note shall be cumulative and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy. In the event that Borrower is unable to satisfy any covenant, warranty or condition herein, no advance of loan proceeds by Bank shall have 42 48 the effect of precluding Bank from thereafter declaring any such continuing inability to be an Event of Default as hereinabove provided. 8.07 INDEMNIFICATION. BORROWER HEREBY RELEASES AND AGREES TO INDEMNIFY AND HOLD BANK AND ITS OFFICERS, EMPLOYEES, DIRECTORS, AGENTS AND ATTORNEYS (COLLECTIVELY THE "BANK PARTIES") HARMLESS, FROM AND AGAINST ALL CLAIMS, DAMAGES, LIABILITIES AND EXPENSES, KNOWN OR UNKNOWN, ACCRUED AND UNACCRUED, INCLUDING ANY OF THE FOREGOING ALLEGED TO HAVE RESULTED FROM NEGLIGENCE OF ANY OF THE BANK PARTIES, UNLESS ATTRIBUTABLE TO BANK PARTIES' OWN GROSS NEGLIGENCE OR WILFUL MISCONDUCT, THAT MAY NOW OR HEREAFTER BE ASSERTED AGAINST ANY OF BANK PARTIES IN CONNECTION WITH OR ARISING OUT OF ANY INVESTIGATION, LITIGATION OR PROCEEDING DIRECTLY OR INDIRECTLY RELATING TO OR ARISING OUT OF ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. 8.08 GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 8.09 Incorporation of Exhibits. The Exhibits attached to this Agreement are incorporated herein for all purposes and shall be considered a part of this Agreement. 8.10 Survival Upon Unenforceability. In the event any one or more of the provisions contained in this Agreement, the Note, the Security Instruments or in any other instrument referred to herein or executed in connection with the Note shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof or of any other instrument referred to herein or executed in connection herewith. 8.11 Rights of Third Parties. All provisions herein are imposed solely and exclusively for the benefit of Bank and Borrower and no other Person shall have standing to require satisfaction of such provisions in accordance with their terms or be entitled to assume that Bank will refuse to make advances in the absence of strict compliance with any or all thereof and any or all of such provisions may be freely waived in whole or in part by Bank at any time if in its sole discretion it deems it advisable to do so. 8.12 Amendments or Modifications of this Agreement. Neither this Agreement nor any provision hereof may be changed, 43 49 waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 8.13 Agreement Construed as an Entirety. This Agreement, for convenience only, has been divided into Articles and Sections and it is understood that the rights, powers, privileges, duties and other legal relations of the parties hereto shall be determined from this Agreement as an entirety and without regard to the aforesaid division into Articles and Sections and without regard to headings prefixed to said Articles or Sections. 8.14 Number and Gender. Whenever the context requires, reference herein made to the single number shall be understood to include the plural and likewise the plural shall be understood to include the singular. Words denoting sex shall be construed to include the masculine, feminine, and neuter, when such construction is appropriate, and specific enumeration shall not exclude the general, but shall be construed as cumulative. 8.15 AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS. THIS AGREEMENT, TOGETHER WITH THE NOTE AND THE SECURITY INSTRUMENTS, CONSTRUED TOGETHER WITH THE REVOLVING CREDIT AGREEMENT AND ALL INSTRUMENTS EXECUTED PURSUANT THERETO, REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 8.16 Controlling Provision Upon Conflict. In the event of a conflict between the provisions of this Agreement and those of the Note, the Security Instruments or any other instrument referred to herein or executed in connection with the Note, the provisions of this Agreement shall control. 8.17 Time, Place and Method of Payments. All payments required pursuant to this Agreement or the Note shall be made in immediately available funds; shall be deemed received by Bank on the next Business Day following receipt if such receipt is after 3:00 p.m., on any Business Day, and shall be made at the principal banking quarters of Bank. 44 50 8.18 Counterpart Execution. This Agreement may be executed as one instrument signed by all parties or in separate counterparts hereof, each of which counterparts shall be considered an original and all of which shall be deemed to be one instrument, and any signed counterpart shall be deemed delivered by the party signing it if sent to any other party hereto by electronic facsimile transmission. 45 51 IN WITNESS WHEREOF, this Agreement is executed as of the date first above written. BORROWER: CARRIZO OIL & GAS, INC. By: /s/ FRANK A. WOJTEK ------------------------------ Frank A. Wojtek Vice President and Chief Financial Officer BANK: COMPASS BANK By: /s/ KATHLEEN J. BROWN ------------------------------ Kathleen J. Bowen Vice President 46 52 SCHEDULES AND EXHIBITS The schedules and exhibits have been intentionally omitted herefrom. The Company will furnish supplementally a copy of any or all of such omitted schedules and exhibits to the Commission upon request. 47 EX-4.5 8 AMEND.#1 TO LOAN AGREEMENT DATED - 4/4/97 1 EXHIBIT 4.5 FIRST AMENDMENT TO LOAN AGREEMENT BY AND BETWEEN CARRIZO OIL & GAS, INC. AND COMPASS BANK This First Amendment to the Loan Agreement (this "First Amendment") by and between CARRIZO OIL & GAS, INC., a Texas corporation (the "Borrower"), and COMPASS BANK, a Texas chartered bank (the "Bank"), is entered into on this 4th day of April 1997 and shall be effective as of that date for all purposes. W I T N E S S E T H: Borrower and Bank entered into a Loan Agreement dated December 6, 1996 (the "Loan Agreement"). Capitalized terms used, but not defined, herein shall have the meanings prescribed therefor in the Loan Agreement. Borrower has requested that Bank advance to Borrower, in addition to the revolving loan originally provided for in the Loan Agreement, a term loan in the amount of $3,000,000.00, and Bank has agreed to provide the requested term loan according to the terms set forth herein, which shall be incorporated into the Loan Agreement. NOW, THEREFORE, in consideration of the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by Borrower and Bank, and each intending to be legally bound hereby, the parties agree as follows: I. Specific Amendments to Loan Agreement. Article I is hereby amended by adding, replacing or amending the following definitions therein: "Borrower's IPO Closing" means the date on which an initial public offering of stock in Borrower is consummated and funded. 1 2 "First Amendment" means the First Amendment to this Agreement executed by Borrower and Bank on April 4, 1997. "Floating Rate" means: (a) with respect to the Revolving Loan evidenced by the Note, the Index Rate in effect from time to time plus three-quarters of one percent (.75%), and (b) with respect to the Term Loan evidenced by the Term Note, the Index Rate in effect from time to time plus two percent (2.00%). "Notes" means, collectively, the Note and the Term Note, and any extension, renewal, rearrangement of, or substitute for either of such Notes. All references to the defined term, "Note," throughout this Agreement, as it existed prior to the First Amendment, shall be construed to refer to both of the Notes, with the exception of the references to the term, "Note," in the definitions of Floating Rate, Loan Excess, and Note, and in Sections 2.01 through 2.03, 2.06, 2.09, 3.01, 3.04 and Exhibit "B," all of which shall remain singular and shall be construed to refer to the Note evidencing the Revolving Loan. "Revolving Loan(s)" means the Loan(s) made pursuant to Section 2.01 hereof. "Subordination Agreement" means each of the subordination agreements executed by each respective Guarantor on or about December 6, 1996, pursuant to Section 3.11 of the Agreement. "Term Loan" means that certain $3,000,000.00 term loan made or to be made by Bank to Borrower pursuant to Section 2.15 hereof. "Term Loan Maturity Date" means the earlier of January 5, 1998, or the date of Borrower's IPO Closing. "Term Note" means the promissory note in the original face amount of $3,000,000.00 dated April 4, 1997, made by Borrower payable to the order of Bank, in substantially the form attached to the First Amendment as Exhibit "A," together with all deferrals, renewals, extensions, amendments, modifications or rearrangements thereof, which promissory note shall evidence the advances to Borrower by Bank pursuant to Section 2.15 hereof. 2 3 Article II is hereby amended to add the following sections: 2.15 Term Loan. Subject to the terms and conditions and relying on the representations and warranties contained in this Agreement, Bank agrees to make the Term Loan to Borrower in a single advance on or after April 4, 1997. 2.16 The Term Note. The obligation of Borrower to repay the Term Loan shall be evidenced by the Term Note. 2.17 Repayment of Term Loan. Interest on the Term Note, calculated as aforesaid in Section 2.04, shall be repaid by Borrower in monthly installments on the first day of each month following the advance from Bank to Borrower pursuant to Section 2.15, through and including the Term Loan Maturity Date, when the entire unpaid balance of the Term Note, inclusive of principal and interest, shall be paid in full. 2.18 Voluntary Prepayment of the Term Note. Borrower shall have the right and option to prepay, at any time subject to the contemporaneous payment of the prepayment fee prescribed below, the entire balance outstanding on the Term Note, together with all accrued, unpaid interest. No partial prepayments shall be permitted. If Borrower prepays the indebtedness evidenced by the Term Note prior to the Term Loan Maturity Date, then as consideration for and as a condition to such prepayment privilege, Borrower shall simultaneously pay Bank a fee in the amount of $30,000.00. Article III is hereby amended to add the following Section 3.20. 3.20 Conditions Precedent in Connection With the First Amendment. The obligation of Bank to make the Term Loan referred to in Section 2.15 of this Agreement is subject to satisfaction of the following conditions precedent: (a) Receipt of Term Note, First Amendment and Certificate of Compliance. Bank shall have received the Term Note, multiple counterparts of the First Amendment, as requested by Bank, and the Certificate of Compliance duly executed by an authorized officer for Borrower. 3 4 (b) Receipt of Certified Copy of Corporate Proceedings and Certificate of Incumbency. Bank shall have received from Borrower copies of the resolutions of its board of directors authorizing the transactions set forth in the First Amendment and the execution of the First Amendment and the Term Note, such copy or copies to be certified by the secretary or an assistant secretary as being true and correct and in full force and effect as of the date of such certificate. In addition, Bank shall have received from Borrower a certificate of incumbency signed by the secretary or an assistant secretary setting forth (a) the names of the officers executing the First Amendment and the Term Note (b) the office(s) to which such Persons have been elected and in which they presently serve and (c) an original specimen signature of each such person. (c) Accuracy of Representations and Warranties and No Event of Default. The representations and warranties contained in Article IV of this Agreement shall be true and correct in all material respects on the date of the making of such Term Loan with the same effect as though such representations and warranties had been made on such date; and no Event of Default shall have occurred and be continuing or will have occurred at the completion of the making of such Loan. (d) Legal Matters Satisfactory to Special Counsel to Bank. All legal matters incident to the consummation of the transactions contemplated by the First Amendment shall be satisfactory to the firm of Hutcheson & Grundy, L.L.P., special counsel for Bank. (e) No Material Adverse Change. No material adverse change shall have occurred since the date of this Agreement in the condition, financial or otherwise, of Borrower or the Guarantors. (h) Collateral Documents. As security for the payment of the Term Note and the performance of the obligations of Borrower and the Guarantors under this Agreement and the respective Guaranties, Bank shall have received the duly executed: 4 5 (i) Amendment and ratification by each Guarantor of its respective Guaranty and Subordination Agreement, in form and substance satisfactory to Bank; and (ii) a Stock Pledge Agreement from each Guarantor for the benefit of Bank covering the stock of Borrower owned by such Guarantor, along with a stock power, both in form and substance satisfactory to Bank. (i) Facility Fee. Bank shall have received the Facility Fee in the amount of $30,000.00 as provided in that certain commitment letter between Bank and Borrower dated March 31, 1997. Section 5.01 is hereby amended in its entirety as follows: 5.01 Use of Funds. Use the proceeds advanced under the Revolving Loan to refinance the existing Indebtedness described on Schedule 3.10, acquire Oil and Gas Properties, conduct developmental drilling, and use as working capital for other ordinary business activities of Borrower, and use the proceeds advanced under the Term Loan to fund the cost of three dimensional seismic data programs, acquire Oil and Gas Properties, and conduct developmental drilling, and furnish Bank such evidence as it may reasonably require with respect to such uses. II. Reaffirmation of Representations and Warranties. To induce Bank to enter into this First Amendment, Borrower and each Guarantor hereby reaffirms, as of the date hereof, its representations and warranties contained in Article IV of the Loan Agreement and in all other documents executed pursuant thereto, and additionally represents and warrants as follows: A. The execution and delivery of this First Amendment and the performance by Borrower and each Guarantor of its obligations under this First Amendment are within Borrower's and each Guarantor's power, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of Borrower or any Guarantor or of any agreement binding upon Borrower or any Guarantor. 5 6 B. The Loan Agreement as amended by this First Amendment represents the legal, valid and binding obligations of Borrower and each Guarantor, enforceable against each in accordance with their respective terms subject as to enforcement only to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally. C. No Event of Default or Unmatured Event of Default has occurred and is continuing as of the date hereof. III. Defined Terms. Except as amended hereby, terms used herein that are defined in the Loan Agreement shall have the same meanings herein. IV. Reaffirmation of Loan Agreement. This First Amendment shall be deemed to be an amendment to the Loan Agreement, and the Loan Agreement, as further amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Loan Agreement herein and in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Loan Agreement as amended hereby. V. Entire Agreement. The Loan Agreement, as hereby further amended, embodies the entire agreement between Borrower, the Guarantors and Bank and supersedes all prior proposals, agreements and understandings relating to the subject matter hereof. Borrower and each Guarantor certifies that it is relying on no representation, warranty, covenant or agreement except for those set forth in the Loan Agreement as hereby further amended and the other documents previously executed or executed of even date herewith. VI. Governing Law. THIS FIRST AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. This First Amendment has been entered into in Harris County, Texas, and it shall be performable for all purposes in Harris County, Texas. Courts within the State of Texas shall have jurisdiction over any and all disputes between Borrower and Bank, whether in law or equity, including, but not limited to, any and all disputes arising out of or relating to this First Amendment or any other Loan Document; and venue in any such dispute whether in federal or state court shall be laid in Harris County, Texas. 6 7 VII. Severability. Whenever possible each provision of this First Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this First Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this First Amendment. VIII. Execution in Counterparts. This First Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument, and any signed counterpart shall be deemed delivered by the party executing such counterpart if sent to any other party hereto by electronic facsimile transmission. IX. Section Captions. Section captions used in this First Amendment are for convenience of reference only, and shall not affect the construction of this First Amendment. X. Successors and Assigns. This First Amendment shall be binding upon Borrower, each Guarantor and Bank and their respective successors and assigns, and shall inure to the benefit of Borrower, each Guarantor and Bank, and the respective successors and assigns of Bank. XI. Non-Application of Chapter 15 of Texas Credit Codes. The provisions of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil Statutes, Article 5069-15) are specifically declared by the parties hereto not to be applicable to the Loan Agreement as hereby further amended or any of the other Loan Documents or to the transactions contemplated hereby. XII. Notice. THIS FIRST AMENDMENT TOGETHER WITH THE LOAN AGREEMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 7 8 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the day and year first above written. BORROWER CARRIZO OIL & GAS, INC. By: /s/ Frank A. Wojtek ----------------------------- Frank A. Wojtek Vice President BANK COMPASS BANK By: /s/ Kathleen J. Bowen ----------------------------- Kathleen J. Bowen Vice President 8 9 SCHEDULES AND EXHIBITS The schedules and exhibits have been intentionally omitted herefrom. The Company will furnish supplementally a copy of any or all of such omitted schedules and exhibits to the Commission upon request. 9 EX-4.6 9 AMEND.#2 TO LOAN AGREEMENT DATED - 5/15/97 1 EXHIBIT 4.6 SECOND AMENDMENT TO LOAN AGREEMENT BY AND BETWEEN CARRIZO OIL & GAS, INC. AND COMPASS BANK This Second Amendment to the Loan Agreement (this "Second Amendment") by and between CARRIZO OIL & GAS, INC., a Texas corporation (the "Borrower"), and COMPASS BANK, a Texas chartered bank (the "Bank"), is entered into on this 15th day of May 1997 and shall be effective as of that date for all purposes. W I T N E S S E T H: Borrower and Bank entered into a Loan Agreement dated December 6, 1996, as amended by First Amendment thereto dated April 4, 1997 (collectively, the "Loan Agreement"). Capitalized terms used, but not defined, herein shall have the meanings prescribed therefor in the Loan Agreement. Borrower has requested that Bank increase the principal amount of the Term Loan to $6,000,000.00, and Bank has agreed to do so according to the terms set forth herein, which shall be incorporated into the Loan Agreement. NOW, THEREFORE, in consideration of the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by Borrower and Bank, and each intending to be legally bound hereby, the parties agree as follows: I. Specific Amendments to Loan Agreement. Article I is hereby amended by adding, replacing or amending the following definitions therein: "Certificate of Liquidity" shall have the meaning set forth in Section 5.27. "Liquid Assets" means Cash on hand and balances in checking accounts available for immediate withdrawal, the value, from time to time, of short-term, highly liquid 1 2 investments that are readily convertible to Cash, such as treasury bills, commercial paper and money market funds, and the value, from time to time, of unrestricted shares of stock that are publicly traded on the New York Stock Exchange, the American Stock Exchange, or NASDAQ, but only to the extent the foregoing are free from all liens, claims and encumbrances, including liens or security interests in favor of the Bank. "Revolving Commitment" means the obligation of Bank, subject to the provisions of this Agreement and existing only through the last Business Day prior to the Maturity Date, to advance to Borrower funds, not to exceed at any one time outstanding an amount equal to the lesser of: (a) Seven Million Two Hundred Thousand Dollars ($7,200,000.00), or (b) the Borrowing Base then in effect. "Second Amendment" means the Second Amendment to this Agreement executed by Borrower and Bank on May 15, 1997. "Term Loan" means that certain $6,000,000.00 term loan made or to be made by Bank to Borrower pursuant to Section 2.15 hereof. "Term Note" means the amended and restated term note in the original face amount of $6,000,000.00 dated May 15, 1997, made by Borrower payable to the order of Bank, in substantially the form attached to the Second Amendment as Exhibit "A," together with all deferrals, renewals, extensions, amendments, modifications or rearrangements thereof, which promissory note shall evidence the advances to Borrower by Bank pursuant to Section 2.15 hereof. Section 2.15 is hereby amended by adding the following text at the end of such section: Within one (1) business day after Borrower has satisfied the conditions set forth in Section 3.21, and provided Borrower is not then in default of any of the other terms, conditions, representations or warranties contained in this Agreement, Bank shall make a single advance to Borrower in the amount of $3,000,000.00, such that the resulting outstanding principal balance of the Term Loan shall then be $6,000,000.00. 2 3 Section 2.18 is hereby amended by replacing the sum, "$30,000.00" that appears in the last line thereof with the sum, "$60,000.00." Article III is hereby amended to add the following Section 3.21. 3.21 Conditions Precedent in Connection With the Second Amendment. The obligation of Bank to make the additional advance pursuant to Section 2.15 that increases the principal balance of the Term Loan from $3,000,000.00 to $6,000,000,00 is subject to satisfaction of the following conditions precedent: (a) Receipt of Term Note, Second Amendment and Certificate of Compliance. Bank shall have received the Term Note, multiple counterparts of the Second Amendment, as requested by Bank, and the Certificate of Compliance duly executed by an authorized officer for Borrower. (b) Accuracy of Representations and Warranties and No Event of Default. The representations and warranties contained in Article IV of this Agreement shall be true and correct in all material respects on the date of the making of such Term Loan with the same effect as though such representations and warranties had been made on such date; and no Event of Default shall have occurred and be continuing or will have occurred at the completion of the making of such Loan. (c) Legal Matters Satisfactory to Special Counsel to Bank. All legal matters incident to the consummation of the transactions contemplated by the Second Amendment shall be satisfactory to the firm of Hutcheson & Grundy, L.L.P., special counsel for Bank. (d) No Material Adverse Change. No material adverse change shall have occurred since the date of this Agreement in the condition, financial or otherwise, of Borrower or the Guarantors. (e) Facility Fee. Bank shall have received an additional facility fee in the amount of $30,000.00. 3 4 Article V is hereby amended by adding thereto the following new Section 5.27: 5.27 Liquidity of Certain Guarantors. Borrower shall cause each of the Guarantors Hamilton, Loyd, and Webster to deliver to Bank on or before October 15, 1997, a Certificate of Liquidity in the form attached as Exhibit "B" to the Second Amendment, certifying the value of such Guarantor's Liquid Assets effective as of September 30, 1997. Section 7.01 is hereby amended by adding thereto the following new clause (j): (j) Borrower shall fail to cause each of the Guarantors identified in Section 5.27 to deliver a Certificate of Liquidity of such Guarantor by the date specified in such section, or any such Certificate of Liquidity shall be false or misleading in any material respect or shall disclose that such Guarantor owns Liquid Assets valued at less than $2,500,000.00. II. Reaffirmation of Representations and Warranties. To induce Bank to enter into this Second Amendment, Borrower and each Guarantor hereby reaffirms, as of the date hereof, its representations and warranties contained in Article IV of the Loan Agreement and in all other documents executed pursuant thereto, and additionally represents and warrants as follows: A. The execution and delivery of this Second Amendment and the performance by Borrower and each Guarantor of its obligations under this Second Amendment are within Borrower's and each Guarantor's power, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of Borrower or any Guarantor or of any agreement binding upon Borrower or any Guarantor. B. The Loan Agreement as amended by this Second Amendment represents the legal, valid and binding obligations of Borrower and each Guarantor, enforceable against each in accordance with their respective terms subject as to enforcement only to bankruptcy, insolvency, reorganization, 4 5 moratorium or other similar laws affecting the enforcement of creditors' rights generally. C. No Event of Default or Unmatured Event of Default has occurred and is continuing as of the date hereof. III. Defined Terms. Except as amended hereby, terms used herein that are defined in the Loan Agreement shall have the same meanings herein. IV. Reaffirmation of Loan Agreement. This Second Amendment shall be deemed to be an amendment to the Loan Agreement, and the Loan Agreement, as further amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Loan Agreement herein and in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Loan Agreement as amended hereby. V. Entire Agreement. The Loan Agreement, as hereby further amended, embodies the entire agreement between Borrower, the Guarantors and Bank and supersedes all prior proposals, agreements and understandings relating to the subject matter hereof. Borrower and each Guarantor certifies that it is relying on no representation, warranty, covenant or agreement except for those set forth in the Loan Agreement as hereby further amended and the other documents previously executed or executed of even date herewith. VI. Governing Law. THIS SECOND AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. This Second Amendment has been entered into in Harris County, Texas, and it shall be performable for all purposes in Harris County, Texas. Courts within the State of Texas shall have jurisdiction over any and all disputes between Borrower and Bank, whether in law or equity, including, but not limited to, any and all disputes arising out of or relating to this Second Amendment or any other Loan Document; and venue in any such dispute whether in federal or state court shall be laid in Harris County, Texas. VII. Severability. Whenever possible each provision of this Second Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Second Amendment shall be prohibited by or invalid under 5 6 applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Second Amendment. VIII. Execution in Counterparts. This Second Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument, and any signed counterpart shall be deemed delivered by the party executing such counterpart if sent to any other party hereto by electronic facsimile transmission. IX. Section Captions. Section captions used in this Second Amendment are for convenience of reference only, and shall not affect the construction of this Second Amendment. X. Successors and Assigns. This Second Amendment shall be binding upon Borrower, each Guarantor and Bank and their respective successors and assigns, and shall inure to the benefit of Borrower, each Guarantor and Bank, and the respective successors and assigns of Bank. XI. Non-Application of Chapter 15 of Texas Credit Codes. The provisions of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil Statutes, Article 5069-15) are specifically declared by the parties hereto not to be applicable to the Loan Agreement as hereby further amended or any of the other Loan Documents or to the transactions contemplated hereby. XII. Notice. THIS SECOND AMENDMENT TOGETHER WITH THE LOAN AGREEMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 6 7 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed as of the day and year first above written. BANK BORROWER COMPASS BANK CARRIZO OIL & GAS, INC. By: /s/ Kathleen J. Bowen By: /s/ Frank A. Wojtek ---------------------------- ------------------------- Kathleen J. Bowen Frank A. Wojtek Vice President Vice President 7 8 SCHEDULES AND EXHIBITS The schedules and exhibits have been intentionally omitted herefrom. The Company will furnish supplementally a copy of any or all of such omitted schedules and exhibits to the Commission upon request. 8 EX-10.6 10 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.6 CARRIZO OIL & GAS, INC. INDEMNIFICATION AGREEMENT This Agreement ("Agreement") is made and entered into as of the ____ day of ___________, 1997, by and between Carrizo Oil & Gas, Inc., a Texas corporation (the "Corporation"), and ___________________ ("Indemnitee"). RECITALS A. Highly competent persons are becoming more reluctant to serve corporations as directors, executive officers or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation. B. The Board of Directors of the Corporation (the "Board") has determined that the inability to attract and retain such persons would be detrimental to the best interests of the Corporation and its shareholders and that the Corporation should act to assure such persons that there will be increased certainty of such protection in the future. C. The Board has also determined that it is reasonable, prudent and necessary for the Corporation, in addition to purchasing and maintaining directors' and officers' liability insurance, contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law and to provide an arrangement of self-insurance so that they will serve or continue to serve the Corporation free from undue concern that they will not be so indemnified. D. Indemnitee is willing to serve, continue to serve and on behalf of the Corporation on the condition that he be so indemnified. E. In ____________, 1997, the Amended and Restated Bylaws of the Corporation were approved by the Board and by the Corporation's shareholders which Bylaws provided for indemnification, advancement of expenses, arrangements of insurance and self-insurance and specifically authorized the Corporation to enter into indemnification agreements that contractually provide to indemnitees the benefits of the provisions of Article V of such Bylaws and that include related provisions and which agreements facilitate indemnitees' receipt of such benefits and such other indemnification protections as may be deemed appropriate. In consideration of the mutual covenants herein contained, the parties agree as follows: -1- 2 ARTICLE I CERTAIN DEFINITIONS As used herein, the following words and terms shall have the following respective meanings (whether singular or plural): "Change in Control" means a change in control of the Corporation occurring after the date of this Agreement of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Corporation is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if at any time after the date of this Agreement (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 40% or more of the combined voting power of the Corporation's then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) the Corporation is a party to a merger, consolidation, share exchange, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter or (iii) during any 15-month period, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. "Claim" means an actual or threatened claim or request for relief. "Corporate Status" means the status of a person who is or was a director, officer, partner, employee, agent or fiduciary of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Corporation. "Disinterested Director" means a director of the Corporation who is not a named defendant or respondent to the Proceeding or subject to a Claim in respect of which indemnification is sought by Indemnitee. "Expenses" means all attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types - 2 - 3 customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating or being or preparing to be a witness in a Proceeding. "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither contemporaneously is, nor in the five years theretofore has been, retained to represent: (a) the Corporation or Indemnitee in any matter material to either such party, (b) any other party to the Proceeding giving rise to a claim for indemnification hereunder or (c) the beneficial owner, directly or indirectly, of securities of the Corporation representing 40% or more of the combined voting power of the Corporation's then outstanding voting securities. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or Indemnitee in an action to determine Indemnitee's rights under this Agreement. "person" shall have the meaning ascribed to such term in Sections 13(d) and 14(d) of the Exchange Act. "Proceeding" means any threatened, pending or completed action, suit, arbitration, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative or investigative (except one initiated by Indemnitee pursuant to Article VI of this Agreement to enforce his rights under this Agreement), and any appeal in or related to any such action, suit, arbitration, investigation, hearing or proceeding and any inquiry or investigation that could lead to such an action, suit, proceeding or arbitration. "TBCA" means the Texas Business Corporation Act and any successor statute thereto as either of them may from time to time be amended. ARTICLE II SERVICES BY INDEMNITEE Indemnitee agrees to serve as a director of the Corporation. Indemnitee may from time to time also agree to serve, as the Corporation may request from time to time, as a director, officer, partner, employee, agent or fiduciary of either the Corporation or any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in which the Corporation has an interest. Indemnitee and the Corporation each acknowledge that they have entered into this Agreement as a means of inducing Indemnitee to serve the Corporation in such capacities. Indemnitee may at any time and for any reason resign from such position or positions (subject to any other contractual obligation or any obligation imposed by operation of law). The Corporation shall have no obligation under this Agreement to continue Indemnitee in any such position or positions. - 3 - 4 ARTICLE III INDEMNIFICATION Section 3.1. General. The Corporation shall indemnify, and advance Expenses, to Indemnitee to the fullest extent permitted by applicable law in effect on the date hereof and to such greater extent as applicable law may thereafter from time to time permit. The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the right to be indemnified and to have Expenses advanced in all Proceedings to the fullest extent permitted by Article 2.02-1 of the TBCA. The provisions set forth in this Agreement are provided in addition to and as a means of furtherance and implementation of, and not in limitation of, the obligations expressed in this Article III. No requirement, condition to or limitation of any right to indemnification under this Article III, or to advancement of Expenses under Articles III and IV shall in any way limit the rights of Indemnitee under Section 7.3. Section 3.2. Additional Indemnity of the Corporation. Indemnitee shall be entitled to indemnification pursuant to this Section 3.2 if, by reason of his Corporate Status, he is, or is threatened to be made, a party to any Proceeding (except to the extent limited by Section 3.3). Pursuant to this Section 3.2, Indemnitee shall be indemnified against Expenses, judgments, penalties (including excise or similar taxes), fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any Claim therein, if (1) he conducted himself in good faith; (2) he reasonably believed: (a) in the case of conduct in his official capacity, that his conduct was in the Corporation's best interest; and (b) in all other cases, that his conduct was at least not opposed to the Corporation's best interests and, (3) in the case of any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. Nothing in this Section 3.2 shall limit the benefits of Section 3.1 or any other Section hereunder. Section 3.3. Limitation on Indemnity. The Indemnification otherwise available to an Indemnitee under Section 3.2 shall be limited to the extent set forth in this Section 3.3. In the event that an Indemnitee is found liable to the Corporation or is found liable on the basis that personal benefit was improperly received by the Indemnitee whether or not the benefit resulted from an action taken in Indemnitee's official capacity the Indemnitee shall, with respect to the Claim in the Proceeding in which such finding is made, be indemnified only against reasonable Expenses actually incurred by him in connection with that Claim. Notwithstanding the foregoing, no indemnification against such Expenses shall be made in respect of any Claim in such Proceeding as to which Indemnitee shall have been adjudged to be liable for willful or intentional misconduct in the performance of his duty to the Corporation; provided, however, that, if applicable law so permits, indemnification against such Expenses shall nevertheless be made by the Corporation in such event if and only to the extent that the court in which such Proceeding shall have been brought or is pending, shall determine. - 4 - 5 ARTICLE IV EXPENSES Section 4.1. Expenses of a Party Who Is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him in connection with any Proceeding to which Indemnitee is a party by reason of his Corporate Status and in which Indemnitee is successful, on the merits or otherwise. In the event that Indemnitee is not wholly successful, on the merits or otherwise, in a Proceeding but is successful, on the merits or otherwise, as to any Claim in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf relating to each Claim. For purposes of this Section 4.1 and without limitation, the termination of a Claim in a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such Claim. Section 4.2. Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness or otherwise participates in any Proceeding at a time when he is not named a defendant or respondent in the Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. Section 4.3. Advancement of Expenses. The Corporation shall pay all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding or Claim, whether brought by the Corporation or otherwise, in advance of any determination respecting entitlement to indemnification pursuant to Article V hereof within 10 days after the receipt by the Corporation of a written request from Indemnitee requesting such payment or payments from time to time, whether prior to or after final disposition of such Proceeding or Claim. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee. Indemnitee hereby undertakes and agrees that he will reimburse and repay the Corporation for any Expenses so advanced to the extent that it shall ultimately be determined by a court in a final adjudication from which there is no further right of appeal, that Indemnitee is not entitled to be indemnified against such Expenses. ARTICLE V PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION Section 5.1. Request by Indemnitee. To obtain indemnification under this Agreement, Indemnitee shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary or an Assistant Secretary of the Corporation shall, promptly upon - 5 - 6 receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. Section 5.2. Determination of Request. Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 5.1 hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (a) if a Change in Control shall have occurred, by Independent Counsel (selected in accordance with Section 5.3) in a written opinion to the Board, a copy of which shall be delivered to Indemnitee, unless Indemnitee shall request that such determination be made in accordance with Article 2.02-1F (1) or (2) of the TBCA; (b) if a Change in Control shall not have occurred, in accordance with Article 2.02-1 of the TBCA. If it is so determined that Indemnitee is entitled to indemnification hereunder, payment to Indemnitee shall be made within 10 days after such determination. Indemnitee shall cooperate with the person making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person upon reasonable advance request any documentation or information that is not privileged or otherwise protected from disclosure and that is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person making such determination shall be borne by the Corporation (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Corporation hereby agrees to indemnify and hold harmless Indemnitee therefrom. Section 5.3. Independent Counsel. If a Change in Control shall have occurred and Indemnitee elects that the determination as to indemnification is to be made by Independent Counsel, the Independent Counsel shall be selected by Indemnitee, and Indemnitee shall give written notice to the Corporation within 10 days advising it of the identity of the Independent Counsel so selected (unless Indemnitee shall request that such selection be made by the Board, in which event the Corporation shall give written notice to Indemnitee within 10 days after receipt of Indemnitee's request for indemnification advising him of the identity of the Independent Counsel so selected). In either event, Indemnitee or the Corporation, as the case may be, may, within seven days after such written notice of selection shall have been given, deliver to the Corporation or to Indemnitee, as the case may be, a written objection to such selection. Any objection to selection of Independent Counsel pursuant to this Section 5.3 may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of the definition of "Independent Counsel" in Article I hereof, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is timely made, the Independent Counsel so selected may not serve as Independent Counsel unless and until a court has determined that such objection is without merit. In the event of a timely written objection to a choice of Independent Counsel, the party originally selecting the Independent Counsel shall have seven days to make an alternate selection of Independent Counsel and to give written notice of such selection to the other party, after which time such other party shall have five days to make a written objection to such alternate selection. If, within 30 days after submission by Indemnitee of a written request for indemnification pursuant to Section 5.1 hereof, no Independent Counsel shall have been selected and not objected to, either the Corporation or Indemnitee may petition a court of competent jurisdiction (the "Court") for resolution - 6 - 7 of any objection that shall have been made by the Corporation or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court or by such other person as the Court shall designate, and the person with respect to whom an objection is so resolved or the person so appointed shall act as Independent Counsel under Section 5.2 hereof. The Corporation shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 5.2, and the Corporation shall pay all reasonable fees and expenses incident to the procedures of this Section 5.3, regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 6.1(c) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). Section 5.4. Presumptions and Effect of Certain Proceedings. (a) If a Change in Control shall have occurred, the Indemnitee shall be presumed (except as otherwise expressly provided in this Agreement) to be entitled to indemnification under this Agreement upon submission of a request for indemnification under Section 5.1, and thereafter the Corporation shall have the burden of proof in overcoming that presumption in reaching a determination contrary to that presumption. The presumption shall be used by Independent Counsel (or other person or persons determining entitlement to indemnification) as a basis for a determination of entitlement to indemnification unless the Corporation provides information sufficient to overcome such presumption by clear and convincing evidence or the investigation, review and analysis of Independent Counsel (or such other person or persons) convinces him by clear and convincing evidence that the presumption should not apply. (b) If the person or persons empowered or selected under Article V of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within 60 days after receipt by the Corporation of the request by Indemnitee therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a knowing misstatement by Indemnitee of a material fact, or knowing omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 60-day period may be extended for a reasonable time, not to exceed an additional 30 days, if the person making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating to such determination; and provided, further, that the 60-day limitation set forth in this Section 5.4(b) shall not apply and such period shall be extended as necessary (i) if within 30 days after receipt by the Corporation of the request for indemnification under Section 5.1 the Board has resolved to submit such determination to the shareholders pursuant to Section 5.2(b) of this Agreement for their consideration at an annual meeting thereof to be held within 90 days after such receipt and such determination is made thereat, or a special meeting of shareholders is called within 30 days after such receipt for the purpose of making such determination, such meeting is held for such purpose - 7 - 8 within 60 days after having been so called and such determination is made thereat, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 5.2(a) of this Agreement, in which case the applicable period shall be as set forth in Section 6.1(c). (c) The termination of any Proceeding or of any Claim by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) by itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did conduct himself in good faith and in a manner that he reasonably believed in the case of conduct in his official capacity, that was in the best interests of the Corporation or, in all other cases, that was not opposed to the best interests of the Corporation or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. Indemnitee shall be deemed to have been found liable in respect of any Claim only after he shall have been so adjudged by a court in competent jurisdiction after exhaustion of all appeals therefrom. ARTICLE VI CERTAIN REMEDIES OF INDEMNITEE Section 6.1. Indemnitee Entitled to Adjudication in an Appropriate Court. In the event (a) a determination is made pursuant to Article V that Indemnitee is not entitled to indemnification under this Agreement; (b) there has been any failure by the Corporation to make timely payment or advancement of any amounts due hereunder; or (c) the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 5.2 and such determination shall not have been made and delivered in a written opinion within 90 days after (i) such Independent Counsel's being appointed, (ii) the overruling by the Court of objections to such counsel's selection or (iii) expiration of all periods for the Corporation or Indemnitee to object to such counsel's selection, Indemnitee shall be entitled to commence an action seeking an adjudication in an appropriate court of the State of Texas, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association. Indemnitee shall commence such action seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such action pursuant to this Section 6.1, or such right shall expire. The Corporation agrees not to oppose Indemnitee's right to seek any such adjudication or award in arbitration. Section 6.2. Adverse Determination Not to Affect any Judicial Proceeding. In the event that a determination shall have been made pursuant to Article V that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Article VI shall be conducted in all respects as a de novo trial or arbitration on the merits, and Indemnitee shall not be prejudiced by reason of such initial adverse determination. In any judicial proceeding or - 8 - 9 arbitration commenced pursuant to this Article VI, the Corporation shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. Section 6.3. Company Bound by Determination Favorable to Indemnitee in any Judicial Proceeding or Arbitration. If a determination shall have been made or deemed to have been made pursuant to Article V that Indemnitee is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Article VI, absent a knowing misstatement by Indemnitee of a material fact, or a knowing omission of a material fact necessary to make a statement by Indemnitee not materially misleading, in connection with the request for indemnification. Section 6.4. Corporation Bound by the Agreement. The Corporation shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Article VI that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Corporation is bound by all the provisions of this Agreement. Section 6.5. Indemnitee Entitled to Expenses of Judicial Proceeding. In the event that Indemnitee seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any and all expenses (of the types described in the definition of Expenses in Article I) actually and reasonably incurred by him in such judicial adjudication or arbitration but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses or other benefit sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be reasonably prorated in good faith by counsel for Indemnitee. Notwithstanding the foregoing, if a Change in Control shall have occurred, Indemnitee shall be entitled to indemnification under this Section 6.5 regardless of whether Indemnitee ultimately prevails in such judicial adjudication or arbitration. ARTICLE VII MISCELLANEOUS Section 7.1. Non-Exclusivity. The rights of Indemnitee to receive indemnification and advancement of Expenses under this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Articles of Incorporation or Bylaws of the Corporation, any other agreement, vote of shareholders or a resolution of directors, or otherwise. No amendment or alteration of the Articles of Incorporation or Bylaws of the Corporation or any provision thereof shall adversely affect Indemnitee's rights hereunder and such rights shall be in addition to any rights Indemnitee may have under the Corporation's Articles of Incorporation, Bylaws and the TBCA or otherwise. To the extent that there is a change in the TBCA (whether by statute or judicial decision) which allows greater - 9 - 10 indemnification by agreement than would be afforded currently under the Corporation's Articles of Incorporation or Bylaws and this Agreement, it is the intent of the parties hereto that the Indemnitee shall enjoy by virtue of this Agreement the greater benefit so afforded by such change. Section 7.2. Insurance and Subrogation. (a) To the extent that the Corporation maintains an insurance policy or policies providing liability insurance for directors, officers, employees, agents or fiduciaries of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that such person serves at the request of the Corporation, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee, agent or fiduciary under such policy or policies. (b) In the event of any payment by the Corporation under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights. (c) The Corporation shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any Bylaw, insurance policy, contract, agreement or otherwise. Section 7.3. Self Insurance of the Corporation. The parties hereto recognize that the Corporation may, but is not required to, procure or maintain insurance or other similar arrangements, at its expense, to protect itself and any person, including the Indemnitee, who is or was a director, officer, employee, agent or fiduciary of the Corporation or who is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any expense, liability or loss asserted against or incurred by such person, in such a capacity or arising out of his status as such a person, whether or not the Corporation would have the power to indemnify such person against such expense or liability. In considering the cost and availability of such insurance, the Corporation, (through the exercise of the business judgment of its directors and officers), may from time to time, purchase insurance which provides for any and all of (i) deductibles, (ii) limits on payments required to be made by the insurer, or (iii) coverage exclusions and/or coverage which may not be as comprehensive as that which might otherwise be available to the Corporation but which otherwise available insurance the officers or directors of the Corporation determine is inadvisable for the Corporation to purchase given the cost involved. The purchase of insurance with deductibles, limits on payments and coverage exclusions will be deemed to be in the best interest of the Corporation - 10 - 11 but may not be in the best interest of the Indemnitee. As to the Corporation, purchasing insurance with deductibles, limits on payments and coverage exclusions is similar to the Corporation's practice of self-insurance in other areas. In order to protect Indemnitee who would otherwise be more fully or entirely covered under such policies, the Corporation shall indemnify and hold Indemnitee harmless to the extent (i) of such deductibles, (ii) of amounts exceeding payments required to be made by an insurer or (iii) of coverage under policies of officer's and director's liability insurance that are available, were available or which became available to the Corporation or which are generally available to companies comparable to the Corporation but which the officers or directors of the Corporation determine is inadvisable for the Corporation to purchase, given the cost involved. The obligation of the Corporation in the preceding sentence shall be without regard to whether the Corporation would otherwise be entitled to indemnify such officer or director under the other provisions of this Agreement, or under any law, agreement, vote of shareholders or directors or other arrangement. Notwithstanding the foregoing provisions of this Section 7.3, the Indemnitee shall not be entitled to indemnification for the results of his conduct that is intentionally adverse to the interests of the Corporation. Without limiting the generality of any provision of this Agreement, the procedures in Article V hereof shall, to the extent applicable, be used for determining entitlement to indemnification under this Section 7.3. This Agreement is authorized by Section 2.02-1(R) of the TBCA as in effect on _____________, 1997, and further is intended to establish an arrangement of self-insurance pursuant to that section. Section 7.4. Certain Settlement Provisions. The Corporation shall have no obligation to indemnify Indemnitee under this Agreement for amounts paid in settlement of a Proceeding or Claim without the Corporation's prior written consent. The Corporation shall not settle any Proceeding or Claim in any manner that would impose any fine or other obligation on Indemnitee without Indemnitee's consent. Neither the Corporation nor Indemnitee shall unreasonably withhold their consent to any proposed settlement. Section 7.5. Exculpation of Directors. If Indemnitee is or was a director of the Corporation, he shall not in that capacity be liable to the Corporation or its shareholders for monetary damages for an act or omission in Indemnitee's capacity as a director, except that Indemnitee's liability shall not be eliminated or limited for: (a) a breach of Indemnitee's duty of loyalty to the Corporation or its shareholders; (b) an act or omission not in good faith that constitutes a breach of duty of the director to the Corporation or an act or omission that involves intentional misconduct or a knowing violation of the law; (c) a transaction from which Indemnitee received an improper benefit, whether or not the benefit resulted from an action taken within the scope of Indemnitee's office; or (d) an act or omission for which the liability of Indemnitee is expressly provided for by statute. Section 7.6. Duration of Agreement. This Agreement shall continue for so long as Indemnitee serves as a director of the Corporation or as a director, officer, partner, employee, agent or fiduciary of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in which the Corporation has an interest, and thereafter shall survive until and terminate upon the later to occur of: (a) 20 years after the date that Indemnitee shall have ceased to - 11 - 12 serve as a director of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee served at the request of the Corporation; (b) the final termination of all pending Proceedings in respect of which Indemnitee is granted rights of indemnification or advancement of expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Article VI relating thereto; or (c) the expiration of all statutes of limitation applicable to possible Claims arising out of Indemnitee's Corporate Status. This Agreement shall be binding upon the Corporation and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors, legal representatives and administrators. Section 7.7. Notice by Each Party. Indemnitee agrees to promptly notify the Corporation in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document or communication relating to any Proceeding or Claim for which Indemnitee may be entitled to indemnification or advancement of Expenses hereunder. The Corporation agrees to promptly notify Indemnitee in writing, as to the pendency of any Proceeding or Claim which may involve a claim against the Indemnitee for which Indemnitee may be entitled to indemnification or advancement of Expenses hereunder. Section 7.8. Amendment. This Agreement may not be modified or amended except by a written instrument executed by or on behalf of each of the parties hereto. Section 7.9. Waivers. The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) by the party entitled to enforce such term only by a writing signed by the party against which such waiver is to be asserted. Unless otherwise expressly provided herein, no delay on the part of any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party hereto of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. Section 7.10. Entire Agreement. This Agreement and the documents expressly referred to herein constitute the entire agreement between the parties hereto with respect to the matters covered hereby, and any other prior or contemporaneous oral or written understandings or agreements with respect to the matters covered hereby are expressly superseded by this Agreement. Section 7.11. Severability. If any provision of this Agreement (including any provision within a single section, paragraph or sentence) or the application of such provision to any person or circumstance, shall be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Agreement or affect the application of such provision to other persons or circumstances, and the parties hereto agree that the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom and the remainder of this Agreement will have the same force and effectiveness as if such part or parts had never been included herein; provided, however, that the - 12 - 13 parties shall negotiate in good faith with respect to an equitable modification of the provision or application thereof declared to be invalid, unenforceable or void. Any such finding of invalidity or unenforceability shall not prevent the enforcement of such provision in any other jurisdiction to the maximum extent permitted by applicable law. Section 7.12. Notices. Unless otherwise expressly provided herein, all notices, requests, demands, consents, waivers, instructions, approvals and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered to or mailed, certified mail return receipt requested, first-class postage paid, addressed as follows: If to the Corporation, to it at: Carrizo Oil & Gas, Inc. 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Attn: Chief Financial Officer If to Indemnitee, to him at: -------------------------- or to such other address or to such other individuals as any party shall have last designated by notice to the other parties. All notices and other communications given to any party in accordance with the provisions of this Agreement shall be deemed to have been given when delivered or sent to the intended recipient thereof in accordance with the provisions of this Section 7.12. Section 7.13. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas without regard to the principles of conflict of laws. Section 7.14. Headings. The Article and Section headings in this Agreement are for convenience of reference only, and shall not be deemed to alter or affect the meaning or interpretation of any provisions hereof. Section 7.15. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. Section 7.16. Certain Persons Not Entitled to Indemnification. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of expenses hereunder with respect to any Proceeding or any Claim therein, brought - 13 - 14 or made by such person against the Corporation, except as specifically provided in Article V or Article VI hereof. Section 7.17. Indemnification for Negligence, Gross Negligence, etc. Without limiting the generality of any other provision hereunder, it is the express intent of this Agreement that Indemnitee be indemnified and expenses be advanced regardless of Indemnitee's acts of negligence, gross negligence, intentional or willful misconduct to the extent that indemnification and advancement of expenses is allowed pursuant to the terms of this Agreement. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered to be effective as of the date first above written. CARRIZO OIL & GAS, INC. By: ----------------------------------- Name: Title: INDEMNITEE ------------------------------------------- Name: - 14 - EX-10.7 11 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.7 CARRIZO OIL & GAS, INC., a Texas corporation - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT June 6, 1997 - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page ---- 1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Restrictions on Transferability . . . . . . . . . . . . . . . . . . 3 3. Restrictive Legend . . . . . . . . . . . . . . . . . . . . . . . . . 3 4. Notice of Proposed Transfers . . . . . . . . . . . . . . . . . . . . 4 5. Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . 4 5.1 Requested Registration . . . . . . . . . . . . . . . . . . . 4 5.2 Company Registration . . . . . . . . . . . . . . . . . . . . 7 5.3 Registration on Form S-3 . . . . . . . . . . . . . . . . . . 8 5.4 Limitations on Subsequent Registration Rights . . . . . . . 10 5.5 Expenses of Registration . . . . . . . . . . . . . . . . . . 10 5.6 Registration Procedures . . . . . . . . . . . . . . . . . . 11 5.7 Indemnification . . . . . . . . . . . . . . . . . . . . . . 12 5.8 Certain Agreements of Holders . . . . . . . . . . . . . . . 15 5.9 Rule 144 Reporting . . . . . . . . . . . . . . . . . . . . . 16 5.10 Transfer of Registration Rights . . . . . . . . . . . . . . 17 5.11 Lockup Agreement . . . . . . . . . . . . . . . . . . . . . . 17 5.12 Termination of Registration Rights . . . . . . . . . . . . . 17 5.13 IPO Registration Waiver. . . . . . . . . . . . . . . . . . 18 6. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . 18 6.3 Effectiveness . . . . . . . . . . . . . . . . . . . . . . . 18 6.5 Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . 18 6.6 Delays or Omissions . . . . . . . . . . . . . . . . . . . . 19 6.7 Understanding of Agreement . . . . . . . . . . . . . . . . . 19 6.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . 19 6.9 Titles and Subtitles . . . . . . . . . . . . . . . . . . . . 19 6.10 Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.11 Stock Split . . . . . . . . . . . . . . . . . . . . . . . . 19 6.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . 20
-i- 3 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT is entered into as of the ___ day of June, 1997 by and among Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), and the shareholders of the company, each of whom has previously purchased securities of the Company and whose names are set forth on Annex A attached hereto (the "Purchasers"). Recitals The Purchasers previously purchased all of the currently outstanding shares of Common Stock, as authorized by resolutions of the Board of Directors of the Company dated September 24, 1993 and November 5, 1993 (the "Purchase Authorizations"). The Company has determined that it is in the best interest of the Company to consummate an IPO (as defined herein). In order to induce the Purchasers to amend the Company's certificate of incorporation to increase the authorized number of shares of Common Stock and to take certain steps that will promote the ability of the Company to consummate an IPO, the Company wishes to grant registration rights to the Purchasers and the Purchasers wish to enter into certain agreements with the Company and among themselves as more fully set forth herein. NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: "Combination Transactions" shall have the meaning given to such term in the Combination Agreement dated as of June 6, 1997 among Carrizo Oil & Gas, Inc., Carrizo Production, Inc., Carrizo Partners Ltd., Encinitas Partners Ltd., La Rosa Partners Ltd. and each of the Purchasers. "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Common Stock" shall mean the common stock of the Company, par value $.01 per share, and any other securities issued in respect of Common Stock upon any stock split, stock dividend, recapitalization, merger, consolidation, share exchange or similar event. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. 4 "Holder" shall mean any Purchaser holding Registrable Securities and any person holding Registrable Securities to whom the rights under this Agreement have been transferred in accordance with Section 5.10 hereof. "Initiating Holders" shall mean any Holder(s) who in the aggregate are Holders of not less than 51% of the then outstanding Registrable Securities. "IPO" shall mean the first offering of the Company's securities to the general public registered under a registration statement filed by the Company with the Commission. "Outstanding Registrable Securities" means those Registrable Securities that are then outstanding as well as those Registrable Securities, if any, which are issuable upon exercise or conversion (in one or more steps) of securities which are then outstanding. "Purchased Shares" shall mean the Common Stock purchased by the Purchasers pursuant to the Purchase Authorizations. "Person" means any individual, any foreign or domestic corporation, general partnership, limited partnership, limited liability company, firm, joint venture, association, individual retirement account, joint stock company, trust, estate, unincorporated organization, governmental or regulatory body or other entity. "Registrable Securities" shall mean the shares of Common Stock of the Company held by the Purchasers on the date hereof Shares or securities of the Company hereafter acquired by a Holder from the Company (including without limitation, any Common Stock issued to such Purchaser in the Combinations Transactions) or another Holder; provided, however, that securities shall be treated as Registrable Securities only if and only for so long as they are held by a Holder or a permitted transferee pursuant to the terms hereof, and (i) they have not been disposed of pursuant to a registration statement declared effective by the Commission, so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale, or (ii) they have not been sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act, so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale, or (iii) the registration rights as to the Holder of such Registrable Securities have not expired pursuant to Section 5.12. The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses, other than Selling Expenses (as defined below), incurred by the Company in complying with Section 5.1, 5.2 or 5.3 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, the expense of any -2- 5 special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company) and the reasonable fees and disbursements of one counsel for all Holders. "Restricted Securities" shall mean the securities of the Company required to bear the legend set forth in Section 3 hereof. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders and, except as set forth above, all fees and disbursements of counsel for any Holder. 2. Restrictions on Transferability. The Purchased Shares or any other securities issued in respect of the Purchased Shares upon any stock split, stock dividend, recapitalization, merger, consolidation share exchange or similar event shall not be sold, assigned, transferred or pledged except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. Each Purchaser will cause any proposed purchaser, assignee, transferee or pledgee of the Purchased Shares or any other securities issued in respect of the Purchased Shares upon any stock split, stock dividend, recapitalization, merger, consolidation share exchange or similar event held by a Purchaser to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement. 3. Restrictive Legend. Each certificate representing the Purchased Shares or any other securities issued in respect of the Purchased Shares upon any stock split, stock dividend, recapitalization, merger, consolidation, share exchange or similar event, shall (unless otherwise permitted by the provisions of Section 4 below) be stamped or otherwise imprinted with a legend noted conspicuously on the certificate substantially in the following form (in addition to any legend required under applicable state securities laws or otherwise): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO -3- 6 REQUIRED APPROVALS FOR TRANSFER AND CERTAIN OTHER RESTRICTIONS ON TRANSFER, ALL OF WHICH RIGHTS, OPTION AND RESTRICTIONS ARE BINDING ON TRANSFEREES. COPIES OF THE AGREEMENT COVERING THE FOREGOING MATTERS AND RESTRICTING THE TRANSFER OF SUCH SHARES MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY. Each Purchaser consents to the Company making a notation on its records and giving instructions to any transfer agent of the Purchased Shares in order to implement the restrictions on transfer established in this Agreement. The Company agrees to keep a copy of this Agreement (as it may from time to time be amended) at its place of business and to make such Agreement subject to the same right of examination by shareholder of the Company, in person or by agent, attorney or accountant, as are the books and records of the Company. 4. Notice of Proposed Transfers. The holder of each certificate representing Restricted Securities, by acceptance thereof, agrees to comply in all respects with the provisions of this Section 4. Prior to any proposed sale, assignment, transfer or pledge of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and shall be accompanied, at such holder's expense by either (i) a written opinion of legal counsel who shall be reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act or any state or foreign securities law, or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. Each certificate evidencing the Restricted Securities transferred as above provided shall bear the appropriate restrictive legend set forth in Section 3 above, except that the first two sentences shall not be required if such transfer is either (i) made pursuant to Rule 144, or (ii) if in the opinion of counsel for such holder and of counsel for the Company such legend is not required in order to establish compliance with any provision of the Securities Act. -4- 7 5. Registration Rights. 5.1 Requested Registration. (a) Request for Registration. In case the Company shall receive from Initiating Holders a written request that the Company effect any registration, qualification or compliance with respect to not less than 5% of the shares of Registrable Securities then outstanding, the Company will: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its reasonable best lawful efforts to effect such registration, qualification or compliance (including, without limitation, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holders joining in such request as are specified in a written request received by the Company within 20 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5.1: (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (B) Prior to six months after the closing date of the IPO; (C) During the period starting with the date sixty (60) days prior to the Company's estimated date of filing of, and ending on the date three (3) months immediately following the effective date of, a Company- initiated registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective (and provided, further, that the Company cannot pursuant to this Section 5.1(a)(ii)(C) or pursuant to Section 5.3(a)(ii)(B) delay implementation of a demand for registration more than once in any 24-month period); (D) After the Company has effected three such registrations pursuant to this Section 5.1(a), and such registrations have been declared or ordered effective; or -5- 8 (E) If the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for a registration statement to be filed in the near future, then the Company's obligation to use its reasonable best lawful efforts to register, qualify or comply under this Section 5.1 shall be deferred once (with respect to any demand for registration hereunder) for a period not to exceed ninety (90) days from the date of receipt of written request from the Initiating Holders, provided that the Company cannot pursuant to this Section 5.1(a)(ii)(E) or pursuant to Section 5.3(a)(ii)(D) delay implementation of a demand for registration more than once in any 12-month period. Subject to the foregoing clauses (A) through (E), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, after receipt of the request or requests of the Initiating Holders. (b) Underwriting. In the event that a registration pursuant to Section 5.1 is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the notice given pursuant to Section 5.1(a)(i). In such event, the right of any Holder to registration pursuant to Section 5.1 shall be conditioned upon such Holder's participation in the underwriting arrangements required by this Section 5.1, and the inclusion of such Holder's Registrable Securities, as the case may be, in the underwriting to the extent requested shall be limited to the extent provided herein. The Company shall (together with all Holders and other holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by a majority in interest of the Initiating Holders, but subject to the Company's reasonable approval. Notwithstanding any other provision of this Section 5.1, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may limit the Registrable Securities to be included in such registration and underwriting (provided that securities of other securityholders are not included therein). In the event of a limitation on the number of Registrable Securities to be included in a registration, then the Company shall so advise all Holders and the number of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. To facilitate the allocation of Registrable Securities in accordance with the above provisions, the Company or the underwriters may round the number of Registrable Securities allocated to any Holder to the nearest 100 shares. If any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Initiating Holders. The Registrable Securities so withdrawn shall also be withdrawn from registration, and such Registrable Securities shall not be transferred in a public distribution prior to -6- 9 180 days after the effective date of such registration, or such other shorter period of time as the underwriters may require. (c) The Company shall not register securities for sale for its own account in any registration requested pursuant to this Section 5.1 unless permitted to do so by the written consent of Holders who hold at least 2/3 of the Registrable Securities as to which registration has been requested or unless the underwriter shall indicate in writing to the Initiating Holders that the inclusion of the shares to be sold for the account of the Company will not adversely affect the registration, the price of the shares to be sold and the number of shares to be sold for the account of the Holders. The Company may not cause any other registration of securities for sale for its own account (other than a registration effected solely to implement an employee benefit plan or stock option plan or a transaction contemplated by Rule 145 of the Commission) to be initiated after a registration requested pursuant to Section 5.1 and to become effective less than 90 days after the effective date of any registration requested pursuant to Section 5.1. 5.2 Company Registration. (a) Notice of Registration. If at any time or from time to time the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders, other than (x) a registration relating solely to employee benefit plans, or (y) a registration relating solely to a Commission Rule 145 transaction, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 20 days after receipt of such written notice from the Company, by any Holder. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 5.2(a)(i) . In such event the right of any Holder to registration pursuant to Section 5.2 shall be conditioned upon such Holder's participation in such underwriting, and the inclusion of Registrable Securities in the underwriting shall be limited to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 5.2, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriters may exclude some or all Registrable Securities from such registration and underwriting (provided that securities of other securityholders are similarly excluded. In the event of a limitation (or elimination) on the number of Registrable Securities and other securities to be included in a registration, the Company shall so -7- 10 advise all Holders and any other holders requesting to distribute their securities through such underwriting pursuant to piggy-back registration rights and the number of Registrable Securities and other such securities that may be included in the registration and underwriting shall be allocated among all Holders thereof and such other holders in proportion, as nearly as practicable, to the respective amounts of securities requested to be included in such registration. To facilitate the allocation of Registrable Securities in accordance with the above provisions, the Company may round the number of Registrable Securities and other securities allocated to any Holder or other holder to the nearest 100 shares. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to 180 days after the effective date of the registration statement relating thereto, or such other shorter period of time as the underwriters may require. (c) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 5.2 prior to or after the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. 5.3 Registration on Form S-3. (a) In addition to the registration rights provided in Sections 5.1 and 5.2, if the Company shall receive from Initiating Holders a written request that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of the Registrable Securities and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering by selling Holders the Company will: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its best lawful efforts to effect such registration, qualification or compliance (including, without limitation, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities and of any Holders joining in such request as are specified in a written request received by the Company within 20 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5.3: (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, -8- 11 qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (B) During the period starting with the date sixty (60) days prior to the Company's estimated date of filing of, and ending on the date three (3) months immediately following the effective date of, any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective (and provided, further, that the Company cannot pursuant to this Section 5.3(a)(ii)(B) or pursuant to Section 5.1(a)(ii)(C) delay implementation of a demand for registration more than once in any 24-month period); (C) After the Company has effected three such registrations pursuant to this Section 5.3(a), and such registrations have been declared or ordered effective; or (D) If the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for a registration statement to be filed in the near future, then the Company's obligation to use its reasonable best lawful efforts to register, qualify or comply under this Section 5.3 shall be deferred once (with respect to any demand for registration hereunder) for a period not to exceed ninety (90) days from the date of receipt of written request for registration; provided, however, that the Company cannot pursuant to this Section 5.3(a)(ii)(D) or pursuant to Section 5.1(a)(ii)(E) delay implementation of a demand for registration more than once in any 12-month period. Subject to the foregoing clauses (A) through (D), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as reasonably practicable, after receipt of the request or requests for registration. (b) Underwriting. In the event that a registration pursuant to Section 5.3 is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the notice given pursuant to Section 5.3(a)(i). In such event, the right of any Holder to registration pursuant to Section 5.3 shall be conditioned upon such Holder's participation in the underwriting arrangements required by this Section 5.3, and the inclusion of such Holder's Registrable Securities, as the case may be, in the underwriting to the extent requested shall be limited to the extent provided herein. The Company shall (together with all Holders and other holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by a majority in interest of the Initiating Holders, but subject to the Company's reasonable approval. Notwithstanding any other provision of this Section 5.3, if the managing underwriter determines that marketing factors require a limitation of the number of Registrable Securities to be underwritten, the underwriters may limit the -9- 12 Registrable Securities to be included in such registration and underwriting (provided that securities of other securityholders are not included therein). In the event of a limitation on the number of Registrable Securities to be included in a registration, the Company shall so advise all Holders, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. To facilitate the allocation of Registrable Securities in accordance with the above provisions, the Company or the underwriters may round the number of Registrable Securities allocated to any Holder to the nearest 100 shares. If any Holder disapproves of the terms of the underwriting, such Person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Initiating Holders. The Registrable Securities so withdrawn shall also be withdrawn from registration, and such securities shall not be transferred in a public distribution prior to 180 days after the effective date of such registration, or such other shorter period of time as the underwriters may require. (c) The Company shall not register securities for sale for its own account in any registration requested pursuant to this Section 5.3 unless permitted to do so by the written consent of Holders who hold at least 2/3 of the Registrable Securities as to which registration has been requested or unless the underwriter shall indicate in writing to the Initiating Holders that the inclusion of the shares to be sold for the account of the Company will not adversely affect the registration, the price of the shares to be sold and the number of shares to be sold for the account of the Holders. The Company may not cause any other registration of securities for sale for its own account (other than a registration effected solely to implement an employee benefit plan or stock option plan or a transaction contemplated by Rule 145 of the Commission) to be initiated after a registration requested pursuant to Section 5.3 and to become effective less than 90 days after the effective date of any registration requested pursuant to Section 5.3 5.4 Limitations on Subsequent Registration Rights. (a) Within the limitations prescribed by this Section 5.4(a), but not otherwise, the Company may grant to subsequent investors in the Company registration rights such as those provided in Section 5.2. Such rights may only pertain to shares of Common Stock, including shares of Common Stock into which any other securities may be converted. Such rights may be granted with respect to (i) registrations requested pursuant to Section 5.1 or 5.3, but only in respect of that portion of any such registration as remains after inclusion of all Registrable Securities requested by Holders to be included in such registration and (ii) registrations initiated by the Company, provided that such rights shall be limited in all cases to sharing pro rata in the available portion of the registration in question with Holders, such sharing to be based on the number of shares of Common Stock held by the respective Holders and held by such other investors, plus the number of shares of Common Stock into which other securities held by the Holders and such other investors are convertible, which are entitled to registration rights. -10- 13 (b) The Company may not grant to subsequent investors in the Company rights of registration upon request (such as those provided in Section 5.1) unless (i) such rights are limited to shares of Common Stock and (ii) all Holders are given the right to participate in registrations requested by such subsequent investors (but subject to the right of priority of registration for such subsequent investors), such participation to be on the pro rata basis described in Section 5.4(a), provided that no demand registration is permitted which could result in such registration statement being declared effective prior to either of the two demand registrations granted in Section 5.1 hereof. 5.5 Expenses of Registration. All Registration Expenses incurred in connection with the registrations pursuant to Section 5.1, Section 5.2 and Section 5.3 shall be borne by the Company. Unless otherwise stated, all Selling Expenses relating to securities registered on behalf of the Holders or other holders registering securities shall be borne by the Holders or holders of such securities pro rata on the basis of the number of shares so registered. 5.6 Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Agreement, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) Prepare and file with the Commission a registration statement with respect to such securities and use its best lawful efforts to cause such registration statement to become and remain effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; provided, however, that (i) such 120-day period shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company; and (ii) in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such 120-day period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, provided that Rule 415, or any successor rule under the Securities Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Securities Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment that (I) includes any prospectus required by Section 10(a)(3) of the Securities Act or (II) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (I) and (II) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration statement; (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; -11- 14 (c) Furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; (d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing; (e) Cause all such Registrable Securities registered pursuant hereto to be listed on each securities exchange or quoted on a quotation system on which similar securities issued by the Company are then listed or quoted; (f) Provide a transfer agent and registrar for all Registrable Securities registered pursuant to such registration statement and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; (g) Otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its securities holders, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months, but not more than 18 months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; and (h) If requested by Holders of 50% of all of the Registrable Securities that are being registered in such registration, furnish to each prospective seller a signed counterpart, a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in the registration statement, covering substantially the same matters with respect to the registration statement (and the prospectus included therein) and with respect to events subsequent to the date of the financial statements, as are customarily covered (at the time of such registration and closing) in "comfort" letters delivered to the underwriters in underwritten public offerings of securities. 5.7 Indemnification. (a) To the extent permitted by law, the Company will indemnify each Holder, each of its officers and directors, partners and legal counsel and each Person controlling such -12- 15 Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each Person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions or proceedings in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, not misleading, or any violation by the Company of the Securities Act or any rule or regulation promulgated under the Securities Act applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers and directors, partners and legal counsel and each Person controlling such Holder, each such underwriter and each Person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing, settling or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by such Holder, controlling Person or underwriter and stated to be specifically for use therein. Notwithstanding the foregoing, insofar as the foregoing indemnity relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement becomes effective or in the final prospectus filed with the Commission pursuant to Rule 424(b) of the Commission, the indemnity agreement herein shall not inure to the benefit of any underwriter if a copy of the final prospectus filed pursuant to Rule 424(b) was not furnished to the Person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Securities Act. (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors, officers and legal counsel, each underwriter, if any, of the Company's securities covered by such a registration statement, each Person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each Person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, legal counsel, Persons, underwriters or control persons for any legal or any other -13- 16 expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use therein. Notwithstanding the foregoing, the liability of each Holder under this subsection (b) shall be limited in an amount equal to the net proceeds from the sale of the sold by such Holder. In addition, insofar as the foregoing indemnity relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement becomes effective or in the final prospectus filed pursuant to Rule 424(b) of the Commission, the indemnity agreement herein shall not inure to the benefit of the Company, any underwriter or (if there is no underwriter) any Holder if a copy of the final prospectus filed pursuant to Rule 424(b) was not furnished to the Person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Securities Act. (c) Each party entitled to indemnification under this Section 5.7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which there is a conflict of interest or separate and different defenses. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. No Indemnified Party shall consent to entry of any judgment or enter into any settlement without the consent of each Indemnifying Party (which consent shall not be unreasonably withheld). Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. (d) If the indemnification provided for in this Section 5.7 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any losses, claims, damages, expenses or liabilities referred to therein, then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, expenses or liabilities in such -14- 17 proportion as is appropriate to reflect the relative fault of the Company on the one hand and all shareholders offering securities in the offering (the "Selling Shareholders") on the other in connection with the statements or omissions which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and the Selling Shareholders on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Selling Shareholders and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Selling Shareholders agree that it would not be just and equitable if contribution pursuant to this Section 5.7(d) were based solely upon the number of entities from whom contribution was requested or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 5.7(d). The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages, expenses and liabilities referred to above in this Section 5.7(d) shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim, subject to the provisions of Section 5.7(c) hereof. Notwithstanding the provisions of this Section 5.7(d), no Selling Shareholder shall be required to contribute any amount or make any other payments under this Agreement which in the aggregate exceed the proceeds received by such Selling Shareholder. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with an underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. 5.8 Certain Agreements of Holders. (a) The Holder(s) included in any registration shall furnish to the Company such information regarding such Holder(s), the Registrable Securities and the distribution proposed by such Holder(s), as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in Section 5. (b) The failure of any Holder(s) to be included in a registration to furnish the information requested pursuant to Section 5.8(a) shall not affect the obligation of the Company under Section 5 to the remaining Holder(s) who furnish such information unless, in the reasonable opinion of counsel to the Company or the underwriters, such failure impairs or may impair the legality of the registration statement or the underlying offering. -15- 18 (c) Each Holder agrees that, upon receipt of any notice from the Company of the happening of any event requiring the preparation of a supplement or amendment to a prospectus relating to Registrable Securities so that, as thereafter delivered to such Holder, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, each Holder will forthwith discontinue disposition of Registrable Securities pursuant to the registration statements contemplated by this Agreement until its receipt of copies of the supplemented or amended prospectus from the Company and, if so directed by the Company, each Holder shall deliver to the Company all copies, other than permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Securities that is current at the time of receipt of such notice. (d) Each Holder agrees to notify the Company, at any time when a prospectus relating to the registration statement contemplated by this Agreement is required to be delivered by it under the Act, of the occurrence of any event relating to such Holder which requires the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading relating to such Holder, and such Holder shall promptly make available to the Company information necessary to enable the Company to prepare any such supplement or amendment. Each Holder agrees not to take any action with respect to any distribution deemed to be made pursuant to such registration statement that constitutes a violation of Rule 10(b)6 under the Exchange Act or any other applicable rule, regulation or law. (c) Each Holder acknowledges and agrees that in the event of sales under a shelf registration statement pursuant to this Agreement, (1) the Registrable Securities sold pursuant to such registration statement are not transferable on the books of the Company unless the share certificate submitted to the transfer agent evidencing such Registrable Securities is accompanied by a certificate reasonably satisfactory to the Company to the effect that (A) the Registrable Securities have been sold in accordance with such registration statement and (B) the requirement of delivering a current prospectus has been satisfied and (2) such Holder will not effect any public sale or distribution of Registrable Securities pursuant to such shelf registration statement pursuant to this Agreement at any time that the Company shall have advised the Holders in writing that the sale by such Holders pursuant to such shelf registration could reasonably be expected to adversely affect, or require the premature disclosure of any proposed acquisition, disposition or other transaction involving the Company; provided, however, the Company may not restrict any such sales unless at least five (5) days' prior written notice is provided to each Holder and provided further the Company may not restrict sales by Holders for a total of more than 60 (sixty) days during any one year period. 5.9 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to use its best lawful efforts to: -16- 19 (a) Make and keep public information regarding the Company available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after 90 days following the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public. (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); (c) So long as a Holder owns any Restricted Securities, furnish to such Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time from and after 90 days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing such Holder to sell any such securities without registration. 5.10 Transfer of Registration Rights. The rights granted to a Holder under Section 5 may be assigned to a transferee or assignee in connection with any transfer or assignment of Registrable Securities by a Holder provided that: (i) such transfer may otherwise be effected in accordance with applicable securities laws, (ii) such assignee or transferee acquires at least the lesser of (a) one-half of the number of Registrable Securities originally held by the Holder that owned such Registrable Securities on the date hereof and (b) Registrable Securities consisting of 100,000 (subject to appropriate adjustment for any other stock splits, dividends, subdivisions, combinations, recapitalizations and the like) and (iii) the Holder notifies the Company in writing of the transfer or assignment, stating the name and the address of the transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned and the assignee or transferee agrees in writing to be bound by the provisions of this Agreement. 5.11 Lockup Agreement. In consideration for the Company's agreeing to its obligations under this Agreement, each Holder hereby agrees in connection with any registration of the Company's securities other than (x) a registration relating solely to employee benefit plans, or (y) a registration relating solely to a transaction contemplated by Rule 145 of the Commission (whether or not the Holder's Registrable Securities are included in a registration statement pursuant thereto, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) other than intra-family transfers and transfer to trusts for estate planning purposes without the prior written consent of the Company or underwriters managing the offering, as the case may be, in the case of (i) an IPO, during such period of time from the effective date of such registration as the underwriters may specify (not to exceed one year) and, (ii), all other registrations above, during the 90-day period -17- 20 beginning on the effective date of a registration statement filed pursuant hereto; provided, however, that such Holder shall be relieved of its obligations under this Section 5.11 unless all executive officers and directors of the Company enter into similar agreements. Each Holder hereby agrees that, upon the request of the Company or the underwriters, it will confirm in writing the provisions of this Section 5.11. The Company may impose stock-transfer instructions with respect to securities subject to the foregoing restriction until the end of said restriction. 5.12 Termination of Registration Rights. The registration rights granted pursuant to this Agreement shall terminate as to any Holder at the later of (i) one year after the closing of the IPO or (ii) at such time as such Holder may sell under Rule 144 (which shall include sales pursuant to Rule 701(c)(3)) in a three-month period all Registrable Securities then held by such Holder. 5.13 IPO Registration Waiver. Notwithstanding anything to the contrary contained in this Agreement, each Holder agrees that, as to any of such Holder's Registrable Securities, it waives any right to notice of or inclusion in, any registration that is made for an IPO. Although the preceding sentence may be waived by the Company, any such waiver must be made pro rata as to all Holders based on the number of Registrable Securities held by each Holder. 6. Miscellaneous. 6.1 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS BY THE INTERNAL LAWS OF THE STATE OF TEXAS. 6.2 Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 6.3 Effectiveness. This Agreement shall become effective upon its execution by each Purchaser. 6.4 Entire Agreement; Amendment. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject hereof. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; provided further, however, that any provisions hereof may be amended, waived, discharged or terminated upon the written consent of the Company and the holders of a majority in interest of the aggregate of the then outstanding Registrable Securities. 6.5 Notices, Etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, including Federal Express or similar courier service, or by facsimile transmission addressed (a) if to a Purchaser, at such Purchaser's address and/or -18- 21 telefax number set forth in Annex A attached hereto, or at such other address as such Purchaser shall have furnished to the Company in writing, or (b) if to the Company, to Carrizo Oil & Gas, Inc., 14811 St. Mary's Lane, Suite 148, Houston, Texas 77079, Attn: President; telefax number (281) 496-0884, or at such other address as the Company shall have furnished to the Holders. Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or five days after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or, if sent by courier, on the next business day following the day of dispatch or sent by facsimile transmission, on the date of such transmission if confirmation of such transmission is received. 6.6 Delays or Omissions. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any party upon any breach or default of another party the Company under this Agreement shall impair any such right, power or remedy of such party that is not in breach or default nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative. 6.7 Understanding of Agreement. Each Person signing this Agreement acknowledges: (a) that he was urged by the other parties to secure legal counsel in connection with this Agreement; (b) has carefully read and understood the provisions of this Agreement; (c) he has given informed consent to this Agreement and was not subjected to fraud, duress, or overreaching. 6.8 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 6.9 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. -19- 22 6.10 Gender. As used herein, masculine pronouns shall include the feminine and neuter, neuter pronouns shall include the masculine and the feminine. 6.11 Stock Split. This Agreement takes into account the Encinitas 521 for 1 stock split expected to be effected by the Company in June 1997. In the event the Company shall declare any other stock split, stock dividend or other distribution of securities in respect of, or issue in replacement of or exchange for, other , (a) such new that are received by the holder of such original securities shall be subject to this agreement, and the provisions of this agreement providing for calculations based on the number of securities shall include the new securities issued in respect of the original securities, and (b) the number of securities shall be equitably adjusted as appropriate to give effect to such event. 6.12 Shares from Combination Transactions. Notwithstanding anything to the contrary contained herein, in any registration effected hereunder, no Holder shall be entitled to include any Registrable Securities that were received pursuant to any of the Combination Transactions until the expiration of a period ending on the one year anniversary of the closing of the Combination Transactions. 6.13 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -20- 23 IN WITNESS WHEREOF, the undersigned or each of their respective duly authorized officers or representatives have executed this agreement effective upon the date first set forth above. "COMPANY" CARRIZO OIL & GAS, INC. By: ---------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- "PURCHASERS" -------------------------------------------------- Douglas A.P. Hamilton -------------------------------------------------- Paul B. Loyd, Jr. -------------------------------------------------- Steven A. Webster -------------------------------------------------- Frank A. Wojtek -------------------------------------------------- Sylvester P. Johnson IV DAPHAM PARTNERSHIP L.P. By: ---------------------------------------------- Kenneth Huff General Partner -21- 24 ANNEX A PURCHASERS Douglas A.P. Hamilton 14811 St. Mary's Lane Suite 148 Houston, Texas 77079 Paul B. Loyd, Jr. 14811 St. Mary's Lane Suite 148 Houston, Texas 77079 Steven A. Webster 14811 St. Mary's Lane Suite 148 Houston, Texas 77079 Frank A. Wojtek 14811 St. Mary's Lane Suite 148 Houston, Texas 77079 Sylvester P. Johnson IV 14811 St. Mary's Lane Suite 148 Houston, Texas 77079 DAPHAM Partnership L.P. 14811 St. Mary's Lane Suite 148 Houston, Texas 77079 -22- EX-21.1 12 SUBSIDIARIES OF THE COMPANY 1 Exhibit 21.1 SUBSIDIARIES OF THE COMPANY* The Company has no subsidiaries. - ----------------------- *Assumes the consummation of each of the Combination Transactions as described in the Company's Registration Statement on Form S-1, which will occur simultaneously with the closing of the Offering described in the Company's Registration Statement on Form S-1. EX-23.1 13 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Houston, Texas June 13, 1997 EX-23.2 14 CONSENT OF RYDER SCOTT COMPANY 1 EXHIBIT 23.2 [RYDER SCOTT COMPANY LETTERHEAD] CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We hereby consent to (i) the use in the Prospectus (the "Prospectus") constituting a part of the Registration Statement on Form S-1 filed by Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), under the Securities Act of 1933, of information contained in our reserve report that the Prospectus in Annex A), relating to the oil and gas reserves and revenue, as of March 31, 1997 of certain interests of the Company and the information derived from such letters, (ii) all references to such report letters and/or to this firm in such Prospectus, and further consent to our being named as an expert therein, and (iii) the incorporation of this consent in any Registration Statement filed for the same offering pursuant to Rule 462(b) under the Act. /s/ RYDER SCOTT COMPANY PETROLEUM ENGINEERS RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas June 10, 1997 EX-23.3 15 CONSENT OF FAIRCHILD, ANCELL & WELLS, INC. 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We hereby consent to (i) the use in the Prospectus (the Prospectus) constituting a part of the Registration Statement on Form S-1 filed by Carrizo Oil & Gas, Inc., a Texas corporation (the Company), under the Securities Act of 1933, of information contained in our reserve report that the Prospectus in Annex A), relating to the oil and gas reserves and revenue, as of March 31, 1997 of certain interests of the Company and the information derived from such letters, (ii) all references to such report letters and/or to this firm in such Prospectus, and further consent to our being named as an expert therein, and (iii) the incorporation of this consent in any Registration Statement filed for the same offering pursuant to Rule 462(b) under the Act. /s/ FAIRCHILD, ANCELL & WELLS, INC. FAIRCHILD, ANCELL & WELLS, INC. Houston, Texas June 4, 1997 -----END PRIVACY-ENHANCED MESSAGE-----