-----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, F3WvP7nw1iI948CyYT7KJGTEkh3FZLaL0hMqcyTS7AKheXiydpFDYn35bbTnkVdx 7N1NaL2cAQrWVhqlxbo7Cg== 0000950129-01-502586.txt : 20010815 0000950129-01-502586.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950129-01-502586 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARRIZO OIL & GAS INC CENTRAL INDEX KEY: 0001040593 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760415919 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29187-87 FILM NUMBER: 1710398 BUSINESS ADDRESS: STREET 1: 14701 ST MARYS LANE STREET 2: STE 800 CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 2814961352 MAIL ADDRESS: STREET 1: 14701 ST MARYS LANE STREET 2: SUITE 800 CITY: HOUSTON STATE: TX ZIP: 77079 10-Q 1 h89811e10-q.txt CARRIZO OIL & GAS INC - PERIOD ENDED JUNE 30, 2001 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2001 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission File Number 000-22915. CARRIZO OIL & GAS, INC. (Exact name of registrant as specified in its charter) TEXAS 76-0415919 ----- ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 14701 ST. MARY'S LANE, SUITE 800, HOUSTON, TX 77079 - --------------------------------------------- ----- (Address of principal executive offices) (Zip Code)
(281) 496-1352 ------------------------------- (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X]. No [ ] The number of shares outstanding of the registrant's common stock, par value $0.01 per share, as of August 8, 2001, the latest practicable date, was 14,058,727. 2 CARRIZO OIL & GAS, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Condensed Consolidated Balance Sheets - As of December 31, 2000 and June 30, 2001 2 Condensed Consolidated Statements of Operations - For the three-month and six-month periods ended June 30, 2000 and 2001 3 Condensed Consolidated Statements of Cash Flows - For the six-month periods ended June 30, 2000 and 2001 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION Items 1-6. 18 SIGNATURES 21
3 CARRIZO OIL & GAS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS
December 31, June 30, ASSETS 2000 2001 ---------------- -------------- CURRENT ASSETS: (Unaudited) Cash and cash equivalents $ 8,217,427 $ 6,218,069 Accounts receivable, net of allowance for doubtful accounts of $480,000 at December 31, 2000 and June 30, 2001, respectively 7,392,621 7,855,111 Advances to operators 1,756,396 1,636,773 Risk management assets -- 1,121,769 Deposits 629,460 365,860 Other current assets 401,181 660,546 ----------- ------------ Total current assets 18,397,085 17,858,128 PROPERTY AND EQUIPMENT, net (full-cost method of accounting for oil and gas properties) 72,128,589 92,560,574 INVESTMENT IN MICHAEL PETROLEUM CORPORATION (Note 3) 1,544,180 1,544,180 OTHER ASSETS 930,059 803,515 ----------- ------------ $92,999,913 $112,766,397 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable, trade $ 3,353,570 $ 8,586,078 Accrued liabilities 1,775,830 1,306,112 Advances for joint operations 376,190 549,817 Current maturities of long-term debt 6,458,310 4,759,550 ----------- ------------ Total current liabilities 11,963,900 15,201,557 LONG-TERM DEBT 28,097,490 34,772,691 DEFERRED INCOME TAXES -- 2,956,020 COMMITMENTS AND CONTINGENCIES (Note 6) SHAREHOLDERS' EQUITY: Warrants (3,010,189 outstanding at December 31, 2000 and June 30, 2001, respectively) 765,047 765,047 Common stock, par value $.01 (40,000,000 shares authorized with 14,055,061 and 14,058,727 issued and outstanding at December 31, 2000 and June 30, 2001, respectively) 140,551 140,587 Additional paid in capital 62,708,100 62,720,362 Accumulated deficit (10,675,175) (4,911,636) Other comprehensive income or (loss) -- 1,121,769 ----------- ------------ 52,938,523 59,836,129 ----------- ------------ $92,999,913 $112,766,397 =========== ============
The accompanying notes are an integral part of these consolidated financial statements. -2- 4 CARRIZO OIL & GAS, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three For the Six Months Ended Months Ended June 30, June 30, -------------------------- --------------------------- 2000 2001 2000 2001 ---------- ---------- ---------- ----------- OIL AND NATURAL GAS REVENUES $5,826,737 $7,092,202 $10,106,334 $15,819,683 COSTS AND EXPENSES: Oil and natural gas operating expenses 983,521 1,131,561 1,861,188 2,431,132 Depreciation, depletion and amortization 1,740,600 1,685,582 3,409,406 3,315,326 General and administrative 724,157 872,663 1,455,283 1,743,145 Stock option compensation (benefit) -- (114,026) -- (445,681) ---------- ---------- ----------- ----------- Total costs and expenses 3,448,278 3,575,780 6,725,877 7,043,922 ---------- ---------- ----------- ----------- OPERATING INCOME 2,378,459 3,516,422 3,380,457 8,775,761 OTHER INCOME AND EXPENSES: Interest income 110,929 72,526 274,700 193,027 Interest expense (822,758) (676,080) (1,704,115) (1,425,861) Interest expense, related parties (50,294) (53,066) (109,774) (105,425) Capitalized interest 872,692 729,146 1,801,775 1,531,286 ---------- ---------- ----------- ----------- INCOME BEFORE INCOME TAXES 2,489,028 3,588,948 3,643,043 8,968,788 INCOME TAXES (Note 5) 25,567 1,289,218 51,067 3,205,249 ---------- ---------- ----------- ----------- NET INCOME $2,463,461 $2,299,730 $ 3,591,976 $ 5,763,539 ========== ========== =========== =========== BASIC EARNINGS PER COMMON SHARE (Note 2) $ 0.18 $ 0.16 $ 0.26 $ 0.41 ========== ========== =========== =========== DILUTED EARNINGS PER COMMON SHARE (Note 2) $ 0.15 $ 0.14 $ 0.23 $ 0.35 ========== ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -3- 5 CARRIZO OIL & GAS, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, ---------------------------- 2000 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,591,976 $ 5,763,539 Adjustment to reconcile net income (loss) to net cash provided by operating activities- Depreciation, depletion and amortization 3,409,406 3,315,326 Discount accretion 15,444 42,650 Stock option compensation (benefit) -- (445,681) Deferred income taxes -- 3,139,076 Changes in assets and liabilities- Accounts receivable (192,444) (462,490) Other assets (544,429) (211,277) Accounts payable, trade 139,363 27,405 Other current liabilities (60,841) (24,037) ----------- ----------- Net cash provided by operating activities 6,358,475 11,144,511 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, accrual basis (7,419,966) (23,588,311) Proceeds from sale of Metro Project 5,075,127 -- Adjustment to cash basis (450,279) 13,337,654 Advances to operators (886,666) 119,623 Advances for joint operations (788,569) 173,627 ----------- ----------- Net cash used in investing activities (4,470,353) (9,957,407) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from the sale of common stock -- 12,298 Debt repayments (1,602,713) (3,198,760) ----------- ----------- Net cash used in financing activities (1,602,713) (3,186,462) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 285,409 (1,999,358) CASH AND CASH EQUIVALENTS, beginning of period 11,345,618 8,217,427 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $11,631,027 $ 6,218,069 =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest (net of amounts capitalized) $ 12,114 $ -- =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -4- 6 CARRIZO OIL & GAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ACCOUNTING POLICIES: The condensed consolidated financial statements included herein have been prepared by Carrizo Oil & Gas, Inc. (the Company), and are unaudited, except for the balance sheet at December 31, 2000, which has been prepared from the audited financial statements at that date. The financial statements reflect the accounts of the Company and its subsidiary after elimination of all significant intercompany transactions and balances. The financial statements reflect necessary adjustments, all of which were of a recurring nature, and are in the opinion of management necessary for a fair presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The Company believes that the disclosures presented are adequate to allow the information presented not to be misleading. The condensed financial statements included herein should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 2. EARNINGS PER COMMON SHARE: Supplemental earnings per share information is provided below:
For the Three Months Ended June 30, ---------------------------------------------------------------------------- Income Shares Per-Share Amount ------------------------- ------------------------- --------------------- 2000 2001 2000 2001 2000 2001 ------------ ------------ ------------ ------------ ---------- ---------- Basic Earnings per Share Net income $ 2,463,461 $ 2,299,730 14,011,364 14,058,251 $ 0.18 $ 0.16 ====== ====== Stock Options and Warrants -- -- 2,077,334 2,331,104 ----------- ----------- ---------- ---------- Diluted Earnings per Share Net income available to common shareholders plus assumed conversions $ 2,463,461 $ 2,299,730 16,088,698 16,389,355 $ 0.15 $ 0.14 =========== =========== ========== ========== ====== ======
For the Six Months Ended June 30, ---------------------------------------------------------------------------- Income Shares Per-Share Amount ------------------------- --------------------------- --------------------- 2000 2001 2000 2001 2000 2001 ------------ ------------ -------------- ------------ ---------- ---------- Basic Earnings per Share Net income $ 3,591,976 $ 5,763,539 14,011,364 14,058,090 $ 0.26 $ 0.41 ====== ====== Stock Options and Warrants -- -- 1,663,082 2,609,825 ----------- ----------- ---------- ---------- Diluted Earnings per Share Net income available to common shareholders plus assumed conversions $ 3,591,976 $ 5,763,539 15,674,446 16,667,915 $ 0.23 $ 0.35 =========== =========== ========== ========== ====== ======
Net income per common share has been computed by dividing net income by the weighted average number of shares of common stock outstanding during the periods. The Company had outstanding zero and 161,500 stock options during the three months ended June 30, 2000 and 2001, respectively, which were antidilutive and were not included in the calculation because the exercise price of these instruments exceeded the underlying market value of the options and warrants. The Company also had outstanding zero and 79,500 stock options during the six months ended June 30, 2000 and 2001, respectively, which were antidilutive and were not included in the calculation. 3. INVESTMENT IN MICHAEL PETROLEUM CORPORATION In 2000 the Company received a finder's fee valued at $1,544,180 from affiliates of Donaldson, Lufkin & Jenrette ("DLJ") in connection with their purchase of a significant minority shareholder interest in Michael Petroleum Corporation ("MPC"). MPC is a -5- 7 privately - held exploration and production company which focuses on the prolific gas producing Lobo Trend in South Texas. The minority shareholder interest in MPC was purchased by entities affiliated with DLJ. The Company elected to receive the fee in the form of 18,947 shares of common stock, 1.9 percent of the outstanding common shares of MPC, which is accounted for as a cost basis investment. Steven A. Webster, who is the Chairman of the Board of the Company, is also a Managing Director of Global Energy Partners Ltd., a merchant banking affiliate of DLJ which makes investments in energy companies, and joined the Board of Directors of MPC in connection with the transaction. During the third quarter of 2001, the Company agreed to sell its interest in MPC pursuant to an agreement between MPC and its shareholders for the sale of a majority interest in MPC to Calpine Natural Gas Company. The Company expects to receive total cash proceeds of between $5.5 and $5.7 million, of which approximately $5.5 million is expected to be paid to the Company during the third quarter of 2001, resulting in a book gain of approximately $3.9 million being reflected in the third quarter 2001 financial results. 4. LONG-TERM DEBT: At December 31, 2000 and June 30, 2001, long-term debt consisted of the following:
DECEMBER 31, JUNE 30, 2000 2001 ------------ ------------- Credit facility: Borrowing base facility $ 5,426,000 $ 5,426,000 Term loan facility 5,260,000 2,620,000 Senior subordinated notes 20,462,797 21,012,022 Senior subordinated notes, related parties 2,208,693 2,334,669 Vendor note payable 1,198,310 639,550 Nonrecourse note payable to Rocky Mountain Gas, Inc. -- 7,500,000 ----------- ----------- 34,555,800 39,532,241 Less: current maturities (6,458,310) (4,759,550) ----------- ----------- $28,097,490 $34,772,691 =========== ===========
Carrizo amended its existing credit facility with Compass Bank ("Compass") in September 1998 to provide for a term loan under the facility (the "Term Loan") in addition to the then existing revolving credit facility limited by the Company's borrowing base (the "Borrowing Base Facility") which provided for a maximum loan amount of $25 million subject to Borrowing Base limitations. The Borrowing Base Facility was amended in March, 1999 to provide for a maximum loan amount under such facility of $10 million. Substantially all of Carrizo's oil and natural gas property and equipment is pledged as collateral under this facility. The interest rate for both borrowings is calculated at a floating rate based on the Compass index rate or LIBOR plus 2 percent. The Company's obligations are secured by certain of its oil and gas properties and cash or cash equivalents included in the borrowing base. Certain members of the Board of Directors had provided collateral, primarily in the form of marketable securities, to secure the revolving credit loans. This collateral was released during April 2001. The Borrowing Base Facility and the Term Loan are referred to collectively as the "Company Credit Facility". Proceeds from the Borrowing Base portions of this credit facility have been used to provide funding for exploration and development activity. In April 2001, the maturity date of the Borrowing Base Facility was extended from February 2002 to April 2003. Under the Borrowing Base Facility, Compass, in its sole discretion, will make semiannual borrowing base determinations based upon the proved oil and natural gas properties of the Company. Compass may also redetermine the borrowing base and the monthly borrowing base reduction at any time at its discretion. The latest borrowing base determination was done effective March 1, 2001 and the next review is scheduled for September 1, 2001. The Company may also request borrowing base redeterminations in addition to the required semiannual reviews at the Company's cost. At December 31, 2000 and June 30, 2001, amounts outstanding under the Borrowing Base Facility totaled $5,426,000, with an additional $2,676,884 and $850,000 respectively, available for future borrowings. The Borrowing Base totaled $8,326,884 and $6,500,000 at December 31, 2000 and June 30, 2001, respectively. The Borrowing Base Facility was also available for letters of credit, one of which has been issued for $224,000 at December 31, 2000 and June 30, 2001. The Borrowing Base facility was amended in November 2000 to provide up to $2 million of Guidance Line letters of credit (the "Guidance Line letters of credit") relating exclusively to the Company's outstanding hedge positions. At December 31, 2000 and June 30, 2001, the Company had one and zero Guidance Line letters of credit outstanding amounting to $180,000 and zero, respectively. -6- 8 The Term Loan was initially due and payable upon maturity in September 1999. In March 1999, the maturity date of the Term Loan was amended to provide for twelve monthly installments of $750,000 beginning January 1, 2000. The repayment terms were also amended to provide for $1.74 million of principal due ratably over the last six months of 2000, $2.64 million of principal due ratably over the first six months of 2001, and the balance due in July 2001. During 2001, the repayment schedule was amended to provide for $4.84 million of principal due ratably over the first eleven months of 2001, and the balance due December 2001. Certain members of the Board of Directors have guaranteed the Term Loan. At December 31, 2000 and June 30, 2001, $5,260,000 and $2,620,000 respectively, was outstanding under the Term Loan. The Company is subject to certain covenants under the terms of the Company Credit Facility, including but not limited to (a) maintenance of specified tangible net worth, (b) a ratio of quarterly EBITDA (earnings before interest, taxes, depreciation and amortization) to quarterly debt service of not less than 1.25 to 1.00, and (c) a specified minimum amount of working capital. The Company Credit Facility also places restrictions on, among other things, (a) incurring additional indebtedness, guaranties, loans and liens, (b) changing the nature of business or business structure, (c) selling assets and (d) paying dividends. In March 1999, the Company Credit Facility was amended to decrease the required specified tangible net worth covenant. The Company is currently in compliance with the covenants under the Company Credit Facility. On June 29, 2001, CCBM, Inc., a wholly-owned subsidiary of the Company ("CCBM"), issued a non-recourse promissory note payable in the amount of $7,500,000 to Rocky Mountain Gas, Inc. ("RMG") as consideration for certain interest in oil and gas leases held by RMG in Wyoming and Montana. The RMG note is payable in 41 monthly principal payments of $125,000 plus interest at eight percent per annum commencing July 31, 2001 with the balance due December 31, 2004. The RMG note is secured solely by CCBM's interests in the oil and gas leases in Wyoming and Montana. In November 1999, certain members of the Board of Directors provided a bridge loan in the amount of $2,000,000 to the Company secured by certain oil and natural gas properties. This bridge loan bore interest at 14 percent per annum. Also, in consideration for the bridge loan, the Company assigned to those members of the Board of Directors an Overriding Royalty Interest in certain of the Company's producing properties. The bridge loan was repaid from the proceeds of the sale of Subordinated Notes, Common Stock and Warrants in 1999. In December 1999, the Company consummated the sale of $22 million principal amount of 9 percent Senior Subordinated Notes due 2007 (the "Subordinated Notes") to an investor group led by CB Capital Investors, L.P. (now known as J.P. Morgan Partners, LLC) which included certain members of the Board of Directors. The Company also sold Common Stock and Warrants to this investor group. The Subordinated Notes were sold at a discount of $688,761, which is being amortized over the life of the notes. Quarterly interest payments began on March 31, 2000. The Company may elect, for a period of up to five years to increase the amount of the Subordinated Notes for 60 percent of the interest which would otherwise be payable in cash. As of December 31, 2000 and June 30, 2001, the outstanding balance of the Subordinated Notes had been increased by $1,227,325 and $1,859,876, respectively, for such interest. The Company is subject to certain covenants under the terms under the Subordinated Notes securities purchase agreement, including but not limited to, (a) maintenance of a specified tangible net worth, (b) maintenance of a ratio of EBITDA (earnings before interest, taxes, depreciation and amortization) to quarterly Debt Service (as defined in the agreement) of not less than 1.00 to 1.00, and (c) a limitation of its capital expenditures to a specified amount for the year ended December 31, 2000 and thereafter equal to the Company's EBITDA for the immediately prior fiscal year (unless approved by the Company's Board of Directors and a JP Morgan Partners director). During 1999, Carrizo restructured certain current accounts payable into vendor notes, extending the payment dates through 2001. One note was outstanding in the amount of $1,198,310 and $639,550 at December 31, 2000 and June 30, 2001, respectively, which bears interest at the prime rate. 5. INCOME TAXES: The Company provided deferred income taxes at the rate of 35 percent, which also approximates its statutory rate, that amounted to $1,256,132 and $3,139,076 for the three and six months ended June 30, 2001, respectively. In the first and second quarters of 2000, the Company decreased the valuation allowance associated with $3,644,105 of its net operating loss carryforwards as management had determined that it was more likely than not that such carryforwards would be utilized based upon the Company's estimate of future taxable income at that date. As a result of this determination, the Company realized a deferred tax benefit in the amount of $835,835 and $1,259,998 for the three and six months ended June 30, 2000, respectively. -7- 9 6. COMMITMENTS AND CONTINGENCIES: From time to time, the Company is party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not expect these matters to have a materially adverse effect on the financial position or results of operations of the Company. Settlement of Litigation. The Company, as one of three plaintiffs, filed a lawsuit against BNP Petroleum Corporation ("BNP"), Seiskin Interests, LTD, Pagenergy Company, LLC and Gap Marketing Company, LLC, as defendants, in the 229th Judicial District Court of Duval County, Texas, for fraud and breach of contract in connection with an agreement between plaintiffs and defendants whereby the defendants were obligated to drill a test well in an area known as the Slick Prospect in Duval County, Texas. The allegations of the Company in this litigation were that BNP gave the Company inaccurate and incomplete information on which the Company relied in making its decision not to participate in the test well and the prospect, resulting in the loss of the Company's interest in the lease, the test well and four subsequent wells drilled in the prospect. The Company has sought to enforce its approximate 23.68 percent interest in the prospect and sought damages or rescission, as well as costs and attorneys' fees. The case was originally filed in Duval County, Texas on February 25, 2000. In mid March, 2000, the defendants filed an original answer and certain counterclaims against plaintiffs, seeking unspecified damages for slander of title, tortious interference with business relations, and exemplary damages. The case proceeded to trial before the Court (without a jury) on June 19, 2000 after the plaintiffs' were found by the court to have failed to comply with procedural requirements regarding the request for a jury. After several days of trial the case was recessed and later resumed on September 5, 2000. The court at that time denied the plaintiffs' motion for mistrial based on the court's denial of a jury trial. The court also ordered that the defendants' counterclaims would be the subject of a separate trial that would commence on December 11, 2000. The parties proceeded to try issues related to the plaintiffs' claims on September 5, 2000. All parties rested on the plaintiffs' claims on September 13, 2000. The court took the matter under advisement and has not yet announced a ruling. Defendants filed a second amended answer and counterclaim and certain supplemental responses to request for disclosure in which they stated that they were seeking damages in the amount of $33.5 million by virtue of an alleged lost sale of the subject properties, $17 million in alleged lost profits from other prospective contracts, and unspecified incidental and consequential damages from the alleged wrongful suspension of funds under their gas sales contract with the gas purchaser on the properties, alleged damage to relationships with trade creditors and financial institutions, including the inability to leverage the Slick Prospect, and attorneys' fees at prevailing hourly rates in Duval County, Texas incurred in defending against plaintiffs' claims and for 40 percent of any aggregate recovery in prosecuting their counterclaims. In subsequent testimony, the defendants verbally alleged $26 million of damages by virtue of the alleged lost sale of the properties (as opposed to the $33.5 million previously sought), $7.5 million of damages by virtue of loss of a lease development opportunity and $100 million of damages by virtue of the loss of a business opportunity related to BNP's alleged inability to participate in a 3-D seismic project. The Company had also alleged that BNP Petroleum Corporation, Seiskin Interests, LTD and Pagenergy Company, LLC breached a contract with the plaintiffs by obtaining oil and gas leases within an area restricted by that contract. This breach of contract allegation is the subject of an additional lawsuit by plaintiffs in the 165th District Court in Harris County, Texas. The defendants took the position that the claim must be tried in the Duval County case. The Duval County court, without issuing a formal ruling, took the position that this claim should be considered in the Duval County case. The Company was seeking damages as a result of defendants' actions as well as costs and attorneys' fees. On December 8, 2000 the Company entered into a Compromise and Settlement Agreement ("Settlement Agreement") with the defendants with regard to the above described litigation. Under the terms of the Settlement Agreement, the Company and the defendants agreed to enter into an Agreed Order of Dismissal with Prejudice of the litigation and, among other things, agreed as follows: 1. Should a co-plaintiff to the Duval County litigation secure a final judgment (without regard to appeals, new trials or other such actions) in the trial court in Duval County that results in such plaintiff being entitled to recover a five percent or greater undivided interest in the Slick Prospect, BNP will pay to Carrizo, at BNP's option, either $500,000 or an amount equal to the judgment rendered in favor of such plaintiff. 2. Should the defendants secure a final judgment (without regard to appeals, new trials or other such actions) in the trial court in Duval County against a co-plaintiff, the Company will be obligated to pay BNP an amount equal to five percent of any percentage of the total judgment apportioned to the Company in the case, such payment being limited however to no more than five percent of 47.2 percent of the total judgment entered in the case. -8- 10 3. In the event the defendants and such co-plaintiff reach a full and final settlement prior to the entry of a written final judgment in the trial court in Duval County (including but not limited to any type of agreed judgment or any agreement that such co-plaintiff will not be ultimately liable to BNP for the full amount of any judgment rendered in favor of the defendants), the obligations described in (1) and (2) above will be null and void. Also, in the event BNP and such co-plaintiff both only obtain take nothing judgments in the case, such obligations will be null and void. 4. Both the Company and the defendants released each other from any and all claims, demands, actions or causes of action relating to or arising out of the litigation. The case proceeded to trial on the counterclaims on December 11, 2000 in the Duval County court. BNP presented evidence that its damages were in the amounts of $19.6 million for the alleged lost sale of the properties, $35 million for loss of the lease development opportunity, and $308 million for loss of the opportunity related to participation in the 3-D seismic project. During the course of the trial, the co-plaintiff presented its motion for summary judgment on the counterclaims based on the doctrine of absolute judicial proceeding privilege. The court partially granted the co-plaintiff's motion for summary judgment as it related to the filing of a lis pendens, but denied it with regard to the other allegations of BNP. The court also granted the co-plaintiff's plea in abatement relating to the breach of contract allegation, ruling that the District Court in Harris County has dominant jurisdiction of that issue. Upon completion of the trial, the court announced that it would take the case under advisement. As of August 10, 2001, the Court has not yet announced a ruling. While the outcome of these events cannot be predicted with certainty, management does not expect these matters to have a materially adverse effect in the financial position or results of operations of the Company. In July 2001, the Company was notified of a potential title problem related to our lease on certain properties in Starr County, Texas known as the North La Copita prospect. The prospect includes four Neblett wells, three of which have been completed and one of which is waiting on completion. At this time, the ultimate outcome of the potential title problem and the impact of such outcome on the Company is uncertain. A complete loss of the lease in question would result in the loss to the Company of approximately .6 Bcfe of reported proved reserves as of December 31, 2000 or .9 Bcfe of estimated proved reserves as of June 31, 2001. On August 10, 2001, the North La Copita wells were shut in, pending further resolution of this matter. At the time of the shut in, the Neblett #1 well was producing at the rate of approximately 45 Mcfe per day, the Neblett #2 well was producing at the rate of approximately 90 Mcfe per day, and the Neblett #3 well was producing at the rate of approximately 895 Mcfe per day, all net to the Company's interest. The Company believes that an unfavorable outcome in this matter would not have a material impact on our financial condition. COMMITMENTS During November 2000, the Company entered into a one-year contract with Grey Wolf, Inc. for utilization of a 1,500 horsepower drilling rig capable of drilling wells to a depth of approximately 18,000 feet. The contract, which commenced in February 2001, provides for a dayrate of $12,000 per day. The rig is being utilized primarily to drill wells in the Company's focus areas, including the Matagorda Project Area and the Cabeza Creek Project Area. The contract contains a provision which would allow the Company to terminate the contract early by tendering payment equal to one-half the dayrate for the number of days remaining under the term of the contract as of the date of termination. Steven A. Webster, who is the Chairman of the Board of Directors of the Company, is a member of the Board of Directors of Grey Wolf, Inc. The Company, through CCBM (a wholly-owned subsidiary) acquired interests in certain oil and gas leases in Wyoming and Montana in areas prospective for coalbed methane. CCBM plans to spend up to $5 million for drilling costs on these leases over the next 18 months, 50 percent of which would be spent pursuant to an obligation to fund $2.5 million of drilling costs on behalf of RMG, from whom the interests in the leases were acquired. 7. CHANGE IN ACCOUNTING PRINCIPLE: In June 1998, The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities". This statement, as amended by SFAS No. 137 and SFAS No. 138, established standards of accounting for and disclosures of derivative instruments and hedging activities. This statement required all derivative instruments to be carried on the balance sheet at fair value and was effective for the Company beginning January 1, 2001. The Company adopted SFAS No. 133 on January 1, 2001. In accordance with the current transition provisions of SFAS No. 133, the Company recorded a net-of-tax cumulative-effect transition adjustment of $2.0 million (net of related tax expense of $1.1 million) in accumulated other comprehensive income to recognize the fair value of its derivatives designated as cash-flow hedging instruments at the date of adoption. All of the Company's derivative instruments will be recognized on the balance sheet at their fair value. The Company typically uses fixed rate swaps and no cost collars to hedge its exposure to material changes in the price of natural gas and crude oil. Upon entering into a derivative contract, the Company designates its derivative as a hedge of the variability of a cash flow to be received (cash flow hedge). Changes in the fair value of a cash flow hedge are recorded in other comprehensive income to the extent that the derivative is effective in offsetting changes in the fair value of the hedged item. Any ineffectiveness in the relationship between the cash flow hedge and the hedged item is recognized currently in income. Gains and losses accumulated in -9- 11 other comprehensive income associated with the cash flow hedge are recognized in earnings when the forecasted transaction occurs. All of the Company's derivative instruments at January 1, 2001 were designated as cash-flow hedges. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated cash flow hedges to forecasted transactions. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged transactions. When hedged accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continued to be carried on the balance sheet at its fair value and gains and losses that were accumulated in other comprehensive income will be recognized in earnings immediately. In all other situations in which hedge accounting is discontinued, the derivative will be carried at fair value on the balance sheet with future changes in its fair value recognized in then current earnings. At June 30, 2001, the Company had recorded $1.1 million of hedging gains in other comprehensive income, all of which is expected to be reclassified to earnings within the next twelve months. The amount ultimately reclassified to earnings will vary due to changes in the fair values of the derivatives designated as cash flow hedges prior to their settlement. Total oil and natural gas purchased and sold under hedging arrangements during the three months ended June 30, 2000 and 2001 were 12,200 Bbls and zero Bbls, respectively, and 390,000 MMBtu and 726,000 MMBtu, respectively. Income and (losses) realized by the Company under such hedging arrangements were $(97,000) and $331,000 for the three months ended June 30, 2000 and 2001, respectively. Total oil and natural gas purchased and sold under hedging arrangements during the six months ended June 30, 2000 and 2001 were 51,500 Bbls and 18,000 Bbls, respectively, and 630,000 MMBtu and 1,719,000 MMBtu, respectively. Income and (losses) realized by the Company under such hedging arrangements were $341,000 and ($681,000) for the six months ended June 30, 2000 and 2001, respectively. At June 30, 2000, the Company had 600,000 MMBtu and 18,000 Bbls of outstanding hedge positions (at an average price of $3.61 per MMBtu and $26.45 per Bbl) for July through December 2000 production. At June 30, 2001, the Company had outstanding hedge positions covering 1,731,000 MMBtu of natural gas and zero Bbls of oil. The 1,731,000 MMBtu of natural gas hedges had an average floor of $4.60 per MMBtu and an average ceiling of $5.56 per MMBtu for July 2001 through March 2002 production. -10- 12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors that have affected certain aspects of the Company's financial position and results of operations during the periods included in the accompanying unaudited condensed financial statements. This discussion should be read in conjunction with the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the annual financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and the unaudited condensed financial statements included elsewhere herein. Unless otherwise indicated by the context, references herein to "Carrizo" or "Company" mean Carrizo Oil & Gas, Inc., a Texas corporation that is the registrant. GENERAL OVERVIEW The Company began operations in September 1993 and initially focused on the acquisition of producing properties. As a result of the increasing availability of economic onshore 3-D seismic surveys, the Company began to obtain 3-D seismic data and options to lease substantial acreage in 1995 and began to drill its 3-D based prospects in 1996. The Company drilled 39 gross wells in 2000 and eight gross wells through the six months ended June 30, 2001. The Company has budgeted to drill 40 gross wells (15.6 net) in 2001; however, the actual number of wells drilled will vary depending upon various factors, including the availability and cost of drilling rigs, land and industry partner issues, Company cash flow, success of drilling programs, weather delays and other factors. If the Company drills the number of wells it has budgeted for 2001, depreciation, depletion and amortization, oil and gas operating expenses and production are expected to increase. The Company has typically retained the majority of its interests in shallow, normally pressured prospects and sold a portion of its interests in deeper, overpressured prospects. The Company has primarily grown through the internal development of properties within its exploration project areas, although the Company acquired properties with existing production in the Camp Hill Project in late 1993, the Encinitas Project in early 1995 and the La Rosa Project in 1996. The Company made these acquisitions through the use of limited partnerships with Carrizo or Carrizo Production, Inc. as the general partner. In addition, in November 1998, the Company acquired assets in Wharton County, Texas in the Jones Branch project area for $3,000,000. During the second quarter of 2001, the Company formed CCBM as a wholly-owned subsidiary. CCBM was formed to acquire interests in certain oil and gas leases in Wyoming and Montana in areas prospective for coalbed methane and develop such interests. CCBM plans to spend up to $5 million for drilling costs on these leases over the next 18 months, 50 percent of which would be spent pursuant to an obligation to fund $2.5 million of drilling costs on behalf of RMG, from whom the interests in the leases were acquired. In order to reduce its exposure to short-term fluctuations in the price of oil and natural gas, and not for speculation purposes, 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. At June 30, 2001, the Company had recorded $1.1 million of hedging gains in other comprehensive income, which all of which is expected to be reclassified to earnings within the next twelve months. The amount ultimately reclassified to earnings will vary due to changes in the fair values of the derivatives designated as cash flow hedges prior to their settlement. Total oil and natural gas purchased and sold under hedge arrangements during the three months ended June 30, 2000 and 2001 were 12,200 Bbls and zero Bbls, respectively, and 390,000 MMBtu and 726,000 MMBtu, respectively. Income and (losses) realized by the Company under such hedge arrangements were $(97,000) and $331,000 for the three months ended June 30, 2000 and 2001, respectively. Total oil and natural gas purchased and sold under hedge arrangements during the six months ended June 30, 2000 and 2001 were 51,500 Bbls and 18,000 Bbls, respectively, and 630,000 MMBtu and 1,719,000 MMBtu, respectively. Income and (losses) realized by the Company under such hedge arrangements were $341,000 and ($681,000) for the six months ended June 30, 2000 and 2001, respectively. At June 30, 2000, the Company had 600,000 MMBtu and 18,000 Bbls of outstanding hedge positions (at an average price of $3.61 per MMBtu and $26.45 per Bbl) for July through December 2000 production. At June 30, 2001, the Company had outstanding hedge positions covering 1,731,000 MMBtu of natural gas and zero Bbls of oil. The 1,731,000 MMBtu of natural gas hedges had an average floor of $4.60 per MMBtu and an average ceiling of $5.56 per MMBtu for July 2001 through March 2002 production. The Company's hedge prices are based on Houston Ship Channel prices. The Company's Board of Directors sets all of the Company's hedging policy, including volumes, -11- 13 types of instruments and counterparties, on a quarterly basis. These policies are implemented by management through the execution of trades by either the President or Chief Financial Officer after consultation and concurrence by the President, Chief Financial Officer and Chairman of the Board. The master contracts with the authorized counterparties identify the President and Chief Financial Officer as the only Company representatives authorized to execute trades. The Board of Directors also reviews the status and results of hedging activities quarterly. On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133. See Note 7 to the Financial Statements. The Company uses the full-cost method of accounting for its oil and gas properties. Under this method, all acquisition, exploration and development costs, including any general and administrative costs that are directly attributable to the Company's acquisition, exploration and development activities, are capitalized in a "full-cost pool" as incurred. The Company records depletion of its full-cost pool using the unit-of-production method. To the extent that such capitalized costs in the full-cost pool (net of depreciation, depletion and amortization and related deferred taxes) exceed the present value (using a 10 percent discount rate) of estimated future net after-tax cash flows from proved oil and gas reserves, such excess costs are charged to operations. Primarily as a result of depressed oil and natural gas prices, and the resulting downward reserve quantities revisions, the Company recorded a ceiling test write-down of $20.3 million in 1998. A ceiling test write-down was not required for the six months ended June 30, 2001 and 2000. Once incurred, a write-down of oil and gas properties is not reversible at a later date. RESULTS OF OPERATIONS Three Months Ended June 30, 2001, Compared to the Three Months Ended June 30, 2000 Oil and natural gas revenues for the three months ended June 30, 2001 increased 22 percent to $7,092,000 from $5,827,000 for the same period in 2000. Production volumes for natural gas during the three months ended June 30, 2001 decreased 18 percent to 1,151,221 Mcf from 1,396,688 Mcf for the same period in 2000. Average natural gas prices increased 59 percent to $5.02 per Mcf in the second quarter of 2001 from $3.15 per Mcf in the same period in 2000. Production volumes for oil in the second quarter of 2001 decreased two percent to 50,514 Bbls from 51,430 Bbls for the same period in 2000. Average oil prices decreased six percent to $25.97 per barrel in the second quarter of 2001 from $27.72 per barrel in the same period in 2000. The decrease in oil production was due to the natural decline in production primarily at the Jones Branch wells and the initial Matagorda Project wells offset by the commencement of production at the Pitchfork Ranch well. The decrease in natural gas production was due primarily to the sale of the Metro Project during 2000 and the natural decline in production primarily at the initial Matagorda Project wells offset by the commencement of production at the additional Cedar Point Project wells, the additional N. La Copita Project wells, the West Bay Project well and the Pitchfork Ranch well. Oil and natural gas revenues include the impact of hedging activities as discussed above under "General Overview." The following table summarizes production volumes, average sales prices and operating revenues for the Company's oil and natural gas operations for the three months ended June 30, 2000 and 2001:
2001 Period Compared to 2000 Period June 30, ----------------------------- -------------------------------- Increase % Increase 2000 2001 (Decrease) (Decrease) ------------ ------------ -------------- -------------- Production volumes - Oil and condensate (Bbls) 51,430 50,514 (916) (2%) Natural gas (Mcf) 1,396,688 1,151,221 (245,467) (18%) Average sales prices - (1) Oil and condensate (per Bbls) $ 27.72 $ 25.97 $ (1.75) (6%) Natural gas (per Mcf) 3.15 5.02 1.87 59% Operating revenues - Oil and condensate $1,425,850 $1,312,062 $ (113,788) (8%) Natural gas 4,400,887 5,780,140 1,379,253 31% ---------- ---------- ---------- Total $5,826,737 $7,092,202 $1,265,465 22% ========== ========== ==========
- ------------------ (1) Includes impact of hedging activities. -12- 14 Oil and natural gas operating expenses for the three months ended June 30, 2001 increased 15 percent to $1,132,000 from $984,000 for the same period in 2000 primarily due to higher severance and ad valorem taxes and the addition of new production offset by a reduction in costs on older producing fields. Operating expenses per equivalent unit increased 35 percent to $.78 per Mcfe in the second quarter of 2001 from $.58 per Mcfe in the same period in 2000 primarily as a result of higher severance and ad valorem taxes and decreased production of natural gas as wells naturally decline. Depreciation, depletion and amortization (DD&A) expense for the three months ended June 30, 2001 decreased three percent to $1,686,000 from $1,740,000 for the same period in 2000. This decrease was due to decreased production offset by increased amortization of deferred loan costs and additional seismic and drilling costs. General and administrative expense for the three months ended June 30, 2001 increased 21 percent to $873,000 from $724,000 for the same period in 2000 primarily as a result of the addition of staff to handle increased drilling and production activities. Income taxes increased to $1,289,000 for the three months ended June 30, 2001 from $26,000 for the same period in 2000. The Company provided deferred income taxes at 35 percent during the second quarter of 2001 compared to none in the second quarter of 2000 as a result of an adjustment to its valuation reserve on net operating loss carryforwards in 2000. Interest income for the three months ended June 30, 2001 decreased to $73,000 from $111,000 in the second quarter of 2000 primarily as a result of lower cash balances during the second quarter of 2001. Capitalized interest decreased to $729,000 in the second quarter of 2001 from $873,000 in the second quarter of 2000 primarily due to lower interest costs as a result of the term loan repayments during the second quarter of 2001. Income before income taxes for the three months ended June 30, 2001 increased to $3,589,000 from $2,489,000 in the same period in 2000. Net income for the three months ended June 30, 2001 decreased to $2,300,000 from $2,463,000 for the same period in 2000 primarily as a result of the factors described above. Six Months Ended June 30, 2001, Compared to the Six Months Ended June 30, 2000 Oil and natural gas revenues for the six months ended June 30, 2001 increased 57 percent to $15,820,000 from $10,107,000 for the same period in 2000. Production volumes for natural gas during the six months ended June 30, 2001 decreased 10 percent to 2,312,271 Mcf from 2,577,304 Mcf for the same period in 2000. Average natural gas prices increased 83 percent to $5.84 per Mcf in the first six months of 2001 from $2.87 per Mcf in the same period in 2000. Production volumes for oil in the first six months of 2001 decreased 16 percent to 87,974 Bbls from 104,241 Bbls for the same period in 2000. Average oil prices increased one percent to $26.28 per barrel in the first six months of 2001 from $26.11 per barrel in the same period in 2000. The decrease in oil production was due to the natural decline in production primarily at the Jones Branch wells, the initial Matagorda Project wells offset the commencement of production of the Pitchfork Ranch well. The decrease in natural gas production was due primarily to the sale of the Metro Project during 2000 and the natural decline in production primarily at the initial Matagorda Project wells offset by the commencement of production at the additional Cedar Point Project wells, the additional N. La Copita Project wells, the West Bay Project well and the Pitchfork Ranch well. Oil and natural gas revenues include the impact of hedging activities as discussed above under "General Overview." The following table summarizes production volumes, average sales prices and operating revenues for the Company's oil and natural gas operations for the six months ended June 30, 2000 and 2001: -13- 15
2001 Period Compared to 2000 Period March 31, ------------------------------- --------------------------- Increase % Increase 2000 2001 (Decrease) (Decrease) ------------ ------------ ------------ ------------- Production volumes - Oil and condensate (Bbls) 104,241 87,974 (16,267) (16%) Natural gas (Mcf) 2,577,304 2,312,271 (265,033) (10%) Average sales prices - (1) Oil and condensate (per Bbls) $ 26.11 $ 26.28 $ 0.17 1% Natural gas (per Mcf) 2.87 5.84 2.97 83% Operating revenues - Oil and condensate $ 2,722,410 $ 2,311,893 $ (410,517) (15%) Natural gas 7,384,924 13,507,790 6,122,866 83% ----------- ----------- ---------- Total $10,107,334 $15,819,683 $5,712,349 57% =========== =========== ==========
- ------------------ (2) Includes impact of hedging activities. Oil and natural gas operating expenses for the six months ended June 30, 2001 increased 31 percent to $2,431,000 from $1,861,000 for the same period in 2000 primarily due to higher severance and ad valorem taxes and the addition of new production offset by a reduction in costs on older producing fields. Operating expenses per equivalent unit increased 47 percent to $.86 per Mcfe in the first six months of 2001 from $.58 per Mcfe in the same period in 2000 primarily as a result of higher severance and ad valorem taxes and decreased production of natural gas as wells naturally decline. Depreciation, depletion and amortization (DD&A) expense for the six months ended June 30, 2001 decreased three percent to $3,315,000 from $3,409,000 for the same period in 2000. This decrease was due to decreased production offset by increased amortization of deferred loan costs and additional seismic and drilling costs. General and administrative expense for the six months ended June 30, 2001 increased 20 percent to $1,743,000 from $1,455,000 for the same period in 2000 primarily as a result of the addition of staff to handle increased drilling and production activities. Income taxes increased to $3,205,000 for the six months ended June 30, 2001 from $51,000 for the same period in 2000. The Company provided deferred income taxes at 35 percent during the first six months of 2001 compared to none in the first six months of 2000 as a result of an adjustment to its valuation reserve on net operating loss carryforwards. Interest income for the six months ended June 30, 2001 decreased to $193,000 from $275,000 in the first six months of 2000 primarily as a result of lower cash balances during the first six months of 2001. Capitalized interest decreased to $1,531,000 in the first six months of 2001 from $1,802,000 in the first six months of 2000 primarily due to lower interest costs as a result of the term loan repayments during the first six months of 2001. Income before income taxes for the six months ended June 30, 2001 increased to $8,969,000 from $3,643,000 in the same period in 2000. Net income for the six months ended June 30, 2001 increased to $5,764,000 from $3,592,000 for the same period in 2000 primarily as a result of the factors described above. LIQUIDITY AND CAPITAL RESOURCES The Company has made and is expected to make oil and gas capital expenditures in excess of its net cash flow from operations in order to complete the exploration and development of its existing properties. The Company will require additional sources of financing to fund drilling expenditures on properties currently owned by the Company and to fund leasehold costs and geological and geophysical costs on its active exploration projects. While the Company believes that the current cash balances and anticipated 2001 operating cash flow will provide sufficient capital to carry out the Company's 2001 exploration plan, management of the Company continues to seek financing for its capital program from a variety of sources. No assurance can be given that the Company will be able to obtain additional financing on terms that would be acceptable to the Company. The Company's inability to obtain additional financing could have a material adverse effect on the Company. Without raising additional capital, the Company anticipates that it may be required to limit or defer its planned oil and gas -14- 16 exploration and development program, which could adversely affect the recoverability and ultimate value of the Company's oil and gas properties. The Company's primary sources of liquidity have included proceeds from the 1997 initial public offering, from the December 1999 sale of Subordinated Notes, Common Stock and Warrants, the 1998 sale of shares of Preferred Stock and Warrants, funds generated by operations, equity capital contributions, borrowings (primarily under revolving credit facilities) and the Palace Agreement that provided a portion of the funding for the Company's 1999, 2000 and 2001 drilling program in return for participation in certain wells. Cash flows provided by operations (after changes in working capital) were $6,358,000 and $11,145,000 for the six months ended June 30, 2000 and 2001, respectively. The increase in cash flows provided by operations in 2001 as compared to 2000 was due primarily to additional revenue as a result of higher oil and natural gas prices during the first six months of 2001. The Company has budgeted capital expenditures for the year ended December 31, 2001 of approximately $29.5 million of which $11.9 million is expected to be used to fund 3-D seismic surveys and land acquisitions and $17.6 million of which is expected to be used for drilling activities in the Company's project areas. The Company has budgeted to drill up to approximately 40 gross wells (15.6 net) in 2001. The actual number of wells drilled and capital expended is dependent upon available financing, cash flow, availability and cost of drilling rigs, land and partner issues and other factors. The Company has continued to reinvest a substantial portion of its cash flows into increasing its 3-D supported drilling prospect portfolio, improving its 3-D seismic interpretation technology and funding its drilling program. Oil and gas capital expenditures were $23.6 million for the six months ended June 30, 2001 which included $7.5 million of oil and gas interests acquired from RMG and $2.1 million of capitalized interest and general and administrative costs. The Company's drilling efforts resulted in the successful completion of 24 gross wells (6.6 net) during the year ended December 31, 2000 and 8 gross wells (2.0 net) during the six months ended June 30, 2001. FINANCING ARRANGEMENTS In connection with Carrizo's initial public offering in 1997, Carrizo entered into an amended revolving credit facility with Compass Bank (the "Company Credit Facility"), to provide for a maximum loan amount of $25 million, subject to borrowing base limitations. The principal outstanding is due and payable in April 2003, with interest due monthly. The Company Credit Facility was amended in March 1999 to provide for a maximum loan amount under such facility of $10 million. The interest rate on all revolving credit loans is calculated, at the Company's option, at a floating rate based on the Compass index rate or LIBOR plus 2 percent. The Company's obligations are secured by substantially all of its oil and gas properties and cash or cash equivalents included in the borrowing base. Certain members of the Board of Directors had provided collateral, primarily in the form of marketable securities, to secure the revolving credit loans. This collateral was released during April 2001. Under the Company Credit Facility, Compass, in its sole discretion, will make semiannual borrowing base determinations based upon the proved oil and natural gas properties of the Company. Compass may also redetermine the borrowing base and the monthly borrowing base reduction at any time at its discretion. The latest borrowing base determination was done effective March 1, 2001 and the next review is scheduled for September 1 2001. The Company may also request borrowing base redeterminations in addition to the required semiannual reviews at the Company's cost. In September 1998, the Company Credit Facility was further amended to provide for an additional $7 million term loan bearing interest at the Index Rate, of which $7 million was borrowed in the fourth quarter of 1998. In March 1999, the Company Credit Facility was further amended to increase the $7 million term loan by $2 million. In December 1999, $2 million principal amount of the term loan was repaid with proceeds from the sale from the Subordinated Notes, Common Stock and Warrants. Certain members of the Board of Directors have guaranteed the term loan. As currently amended pursuant to an amendment dated December 1999, interest on the term loan is payable monthly, bearing interest at the Index Rate. Unless preceded by the Term Loan Maturity Date (as defined below), principal payments on the term loan were not due until June 1, 2000, whereupon the term loan was repayable in consecutive monthly installments in the amount $290,000 each, beginning July 1, 2000 through December 1, 2000, and thereafter in the amount of $440,000, beginning January 1, 2001 until the Term Loan Maturity Date, when the entire principal balance, plus interest, is payable. Term Loan Maturity Date means the earlier of: (1) the date of closing of the issuance of additional equity of the Company, if the net proceeds of such issuance are sufficient to repay in full the term loan; (2) the date of closing of the issuance of convertible subordinated debt of the Company, if the proceeds of such issuance are sufficient to repay in full the term loan; (3) the date of repayment of the revolving credit loans and the termination of the revolving commitment; and (4) December 1, 2001. As of June 30, 2001 and December 31, 2000, the outstanding principal balance under the Term Loan was $2,620,000 and $5,260,000, respectively. -15- 17 The Company is subject to certain covenants under the terms of the Company Credit Facility, including but not limited to (a) maintenance of specified tangible net worth, (b) a ratio of quarterly EBITDA (earnings before interest, taxes, depreciation and amortization) to quarterly debt service of not less than 1.25 to 1.00, and (c) a specified minimum amount of working capital. The Company Credit Facility also places restrictions on, among other things, (a) incurring additional indebtedness, guaranties, loans and liens, (b) changing the nature of business or business structure, (c) selling assets and (d) paying dividends. Proceeds of the revolving credit loans have been used to provide funding for exploration and development activity. At December 31, 2000 and June 30, 2001, outstanding revolving credit loans totaled $5,426,000, with an additional $2,676,884 and $5,547,967, respectively, available for future borrowings. The Company Credit Facility also provides for the issuance of letters of credit, one of which has been issued for $224,000 at December 31, 2000 and June 30, 2001. The Borrowing Base facility was amended in November 2000 to provide up to $2 million of Guidance Line letters of credit (the "Guidance Line letters of credit") relating exclusively to the Company's outstanding hedge positions. At December 31, 2000 and June 30, 2001, the Company had one and none Guidance Line letter of credit outstanding amounting to $180,000 and zero, respectively. On June 29, 2001, CCBM, a wholly-owned subsidiary of the Company, issued a non-recourse promissory note payable in the amount of $7,500,000 to Rocky Mountain Gas, Inc. ("RMG") as consideration for certain interest in oil and gas leases held by RMG in Wyoming and Montana. The RMG note is payable in 41-monthly principal payments of $125,000 plus interest at eight percent per annum commencing July 31, 2001 with the balance due December 31, 2004. The RMG note is secured solely by CCBM's interests in the oil and gas leases in Wyoming and Montana. In November 1999, certain members of the Board of Directors provided a bridge loan in the amount of $2,000,000, to the Company, secured by certain oil and natural gas properties. This bridge loan bore interest at 14 percent per annum. Also in consideration for the bridge loan, the Company assigned to Messrs. Hamilton, Webster, and Loyd an aggregate 1.0 percent overriding royalty interest ("ORRI") in the Huebner #1 and Fondren Letulle #1 wells (combined with the prior assignment, a 2 percent overriding royalty interest), a .8794 percent ORRI in Neblett #1 (N. La. Copita), a 1.0466 percent ORRI in STS 104-5 #1, a 1.544 percent ORRI in USX Hematite #1, a 2.0 percent ORRI in Huebner #2 and a 2.0 percent ORRI in Burkhart #1. On December 15, 1999 the bridge loan was repaid in its entirety with proceeds from the sale of Common Stock, Subordinated Notes and Warrants. Such overriding royalty interests are limited to the well bore and proportionately reduced to the Company's working interest in the well. In December 1999, the Company consummated the sale of $22 million principal amount of 9 percent Senior Subordinated Notes due 2007 (the "Subordinated Notes") to an investor group led by CB Capital Investors, L.P. which included certain members of the Board of Directors. The Subordinated Notes were sold at a discount of $688,761 which is being amortized over the life of the notes. Interest is payable quarterly beginning March 31, 2000. The Company may elect, for a period of five years, to increase the amount of the Subordinated Notes for up to 60 percent of the interest which would otherwise be payable in cash. The Subordinated Notes were increased by $1,227,325 and $1,859,876 for such interest as of December 31, 2000 and June 30, 2001, respectively. Concurrent with the sale of the notes, the Company consummated the sale of 3,636,364 shares of Common Stock at a price of $2.20 per share and Warrants to purchase up to 2,760,189 shares of the Company's Common Stock at an exercise price of $2.20 per share. For accounting purposes, the Warrants are valued at $0.25 per Warrant. The sale was made to an investor group led by CB Capital Investors, L.P. which included certain members of the Board of Directors. The Warrants have an exercise price of $2.20 per share and expire in December 2007. The Company is subject to certain covenants under the terms under the related Securities Purchase Agreement, including but not limited to, (a) maintenance of a specified Tangible Net Worth, (b) maintenance of a ratio of EBITDA (earnings before interest, taxes depreciation and amortization) to quarterly Debt Service (as defined in the agreement) of not less than 1.00 to 1.00, and (c) limit its capital expenditures to a specified amount for the year ended December 31, 2000, and thereafter to an amount equal to the Company's EBITDA for the immediately prior fiscal year (unless approved by the Company's Board of Directors and a JP Morgan Partners director), as well as limits on the Company's ability to (i) incur indebtedness, (ii) incur or allow liens, (iii) engage in mergers, consolidation, sales of assets and acquisitions, (iv) declare dividends and effect certain distributions (including restrictions on distributions upon the Common Stock), (v) engage in transactions with affiliates (vi) make certain repayments and prepayments, including any prepayment of the Company's Term Loan, any subordinated debt, indebtedness that is guaranteed or credit-enhanced by any affiliate of the Company, and prepayments that effect certain permanent reductions in revolving credit facilities. Of the approximately $29,000,000 net proceeds of this financing, $12,060,000 was used to fund the Enron Repurchase described below and related expenses, $2,025,000 was used to repay the bridge loan extended to the Company by its outside directors, $2 million was used to repay a portion of the Compass Term Loan, $1 million was used to repay a portion of the Compass Borrowing Base Facility, and the remaining proceeds were used to fund the Company's ongoing exploration and development program and general corporate purposes. -16- 18 In December 1999, the Company consummated the repurchase from certain Enron Corporation affiliates of all the outstanding shares of Preferred Stock and 750,000 Warrants for $12 million. At the same time, the Company reduced the exercise price of the remaining 250,000 Warrants from $11.50 per share to $4.00 per share. EFFECTS OF INFLATION AND CHANGES IN PRICE The Company's results of operations and cash flows are affected by changing oil and gas prices. If the price of oil and gas increases (decreases), there could be a corresponding increase (decrease) in the operating cost that the Company is required to bear for operations, as well as an increase (decrease) in revenues. Inflation has had a minimal effect on the Company. -17- 19 PART II. OTHER INFORMATION Item 1 - Legal Proceedings From time to time, the Company is party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not expect these matters to have a materially adverse effect on the financial position or results of operations of the Company. Settlement of Litigation. The Company, as one of three plaintiffs, filed a lawsuit against BNP Petroleum Corporation ("BNP"), Seiskin Interests, LTD, Pagenergy Company, LLC and Gap Marketing Company, LLC, as defendants, in the 229th Judicial District Court of Duval County, Texas, for fraud and breach of contract in connection with an agreement between plaintiffs and defendants whereby the defendants were obligated to drill a test well in an area known as the Slick Prospect in Duval County, Texas. The allegations of the Company in this litigation were that BNP gave the Company inaccurate and incomplete information on which the Company relied in making its decision not to participate in the test well and the prospect, resulting in the loss of the Company's interest in the lease, the test well and four subsequent wells drilled in the prospect. The Company has sought to enforce its approximate 23.68% interest in the prospect and sought damages or rescission, as well as costs and attorneys' fees. The case was originally filed in Duval County, Texas on February 25, 2000. In mid March, 2000, the defendants filed an original answer and certain counterclaims against plaintiffs, seeking unspecified damages for slander of title, tortious interference with business relations, and exemplary damages. The case proceeded to trial before the Court (without a jury) on June 19, 2000 after the plaintiffs' were found by the court to have failed to comply with procedural requirements regarding the request for a jury. After several days of trial the case was recessed and later resumed on September 5, 2000. The court at that time denied the plaintiffs' motion for mistrial based on the court's denial of a jury trial. The court also ordered that the defendants' counterclaims would be the subject of a separate trial that would commence on December 11, 2000. The parties proceeded to try issues related to the plaintiffs' claims on September 5, 2000. All parties rested on the plaintiffs' claims on September 13, 2000. The court took the matter under advisement and has not yet announced a ruling. Defendants filed a second amended answer and counterclaim and certain supplemental responses to request for disclosure in which they stated that they were seeking damages in the amount of $33.5 million by virtue of an alleged lost sale of the subject properties, $17 million in alleged lost profits from other prospective contracts, and unspecified incidental and consequential damages from the alleged wrongful suspension of funds under their gas sales contract with the gas purchaser on the properties, alleged damage to relationships with trade creditors and financial institutions, including the inability to leverage the Slick Prospect, and attorneys' fees at prevailing hourly rates in Duval County, Texas incurred in defending against plaintiffs' claims and for 40% of any aggregate recovery in prosecuting their counterclaims. In subsequent testimony, the defendants verbally alleged $26 million of damages by virtue of the alleged lost sale of the properties (as opposed to the $33.5 million previously sought), $7.5 million of damages by virtue of loss of a lease development opportunity and $100 million of damages by virtue of the loss of a business opportunity related to BNP's alleged inability to participate in a 3-D seismic project. The Company had also alleged that BNP Petroleum Corporation, Seiskin Interests, LTD and Pagenergy Company, LLC breached a contract with the plaintiffs by obtaining oil and gas leases within an area restricted by that contract. This breach of contract allegation is the subject of an additional lawsuit by plaintiffs in the 165th District Court in Harris County, Texas. The defendants took the position that the claim must be tried in the Duval County case. The Duval County court, without issuing a formal ruling, took the position that this claim should be included in the Duval County case. The Company was seeking damages as a result of defendants' actions as well as costs and attorneys' fees. On December 8, 2000 the Company entered into a Compromise and Settlement Agreement ("Settlement Agreement") with the defendants with regard to the above described litigation. Under the terms of the Settlement Agreement, the Company and the defendants agreed to enter into an Agreed Order of Dismissal with Prejudice of the litigation and, among other things, agreed as follows: 1. Should a co-plaintiff to the Duval County litigation secure a final judgment (without regard to appeals, new trials or other such actions) in the trial court in Duval County that results in such plaintiff being entitled to recover a five percent or greater undivided interest in the Slick Prospect, BNP will pay to Carrizo, at BNP's option, either $500,000 or an amount equal to the judgment rendered in favor of such plaintiff. -18- 20 2. Should the defendants secure a final judgment (without regard to appeals, new trials or other such actions) in the trial court in Duval County against a co-plaintiff, the Company will be obligated to pay BNP an amount equal to five percent of any percentage of the total judgment apportioned to the Company in the case, such payment being limited however to no more than five percent of 47.2 percent of the total judgment entered in the case. 3. In the event the defendants and such co-plaintiff reach a full and final settlement prior to the entry of a written final judgment in the trial court in Duval County (including but not limited to any type of agreed judgment or any agreement that such co-plaintiff will not be ultimately liable to BNP for the full amount of any judgment rendered in favor of the defendants), the obligations described in (1) and (2) above will be null and void. Also, in the event BNP and such co-plaintiff both only obtain take nothing judgments in the case, such obligations will be null and void. 4. Both the Company and the defendants released each other from any and all claims, demands, actions or causes of action relating to or arising out of the litigation. The case proceeded to trial on the counterclaims on December 11, 2000. BNP presented evidence that its damages were in the amounts of $19.6 million for the alleged lost sale of the properties, $35 million for loss of the lease development opportunity, and $308 million for loss of the opportunity related to participation in the 3-D seismic project. During the course of the trial, the co-plaintiff presented its motion for summary judgment on the counterclaims based on the doctrine of absolute judicial proceeding privilege. The court partially granted the co-plaintiff's motion for summary judgment as it related to the filing of a lis pendens, but denied it with regard to the other allegations of BNP. The court also granted to co-plaintiff's plea in abatement relating to the breach of contract allegation, ruling that the District Court in Harris County has dominant jurisdiction of that issue. Upon completion of the trial, the court announced that it would take the case under advisement. As of August 10, 2001, the Court has not yet announced a ruling. Item 2 - Changes in Securities and Use of Proceeds Effective May 1, 2001, the Company granted to participants in a 2001 exploration program an exchange option whereby each program participant may elect, prior to the earlier of May 1, 2003 or the date on which such participant's interest in the program totals zero, to exchange its entire interest in the program (a maximum of $3.5 million for all participants) for common stock of the Company. The number of shares exchangeable for a participant's interest is equal to the amount of such participant's interest in the program, dividend by $9.00. Item 3 - Defaults Upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders At the Annual Meeting of Carrizo & Gas, Inc. held on May 18, 2001, there were represented by person or by proxy 11,691,212 shares out of 14,058,061 entitled to vote as of the record date, constituting a quorum. The matters submitted to a vote of shareholders were (i) the reelection of Steven A. Webster, Christopher C. Behrens, Arnold L. Chavkin, Douglas A.P. Hamilton, F. Gardner Parker, S.P. Johnson IV and Frank A. Wojtek as directors and (ii) the approval of the appointment of Arthur Andersen LLP as Independent Public Accountant for the fiscal year ended December 31, 2001. With respect to the election of directors, the following number of votes were cast for the nominees: 11,685,802 for Mr. Webster and 5,410 withheld; 11,686,802 for Mr. Behrens and 4,410 withheld; 11,686,802 for Mr. Chavkin and 4,410 withheld: 11,686,802 for Mr. Hamilton and 4,410 withheld; 11,466,312 for Mr. Johnson and 224,900 withheld; and 11,466,312 for Mr. Wojtek and 224,900 withheld. There were no abstentions in the election of directors. With respect to the appointment of Arthur Andersen LLP as Independent Public Accountants, 11,603,967 votes were cast for the appointments, 79,384 votes were withheld, and 7,861 votes abstained. Item 5 - Other Information FORWARD LOOKING STATEMENTS The statements contained in all parts of this document, including, but not limited to, those relating to the Company's schedule, targets, estimates or results of future drilling, budgeted wells, increases in wells, budgeted and other future capital expenditures, CCBM's planned expenditures for drilling costs on leases in Wyoming and Montana, use of offering proceeds, effects of litigation, expected production or reserves, increases in reserves, acreage working capital requirements, hedging activities, the ability of expected sources of liquidity to implement its business strategy, effect and timing of the sale of shares in MPC, outcome, effects and timing of title problems, and any other statements regarding future operations, financial results, business plans and cash needs and other statements that are not historical facts are forward looking statements. When used in this document, the words "anticipate," "estimate," "expect," "may," "project," "believe" and similar expression are intended to be among the statements that identify forward looking statements. Such statements involve risks and uncertainties, including, but not limited to, those relating to the Company's dependence on its exploratory drilling activities, the volatility of oil and natural gas prices, the need to replace reserves depleted by production, operating risks of oil and natural gas operations, outcome of title issues, the Company's dependence on its key personnel, factors that affect the Company's ability to manage its growth and achieve its business strategy, risks relating to, limited operating history, technological changes, significant capital requirements of the Company, the potential impact of government regulations, litigation, competition, the uncertainty of reserve information and future net revenue estimates, property acquisition risks, availability of equipment, weather and other factors detailed in the Company's Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. Should one or more of these risks or -19- 21 uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. Item 6 - Exhibits and Reports on Form 8-K Exhibits
Exhibit Number Description ------ ----------- +2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of September 6, 1997 (incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +3.1 -- Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). +3.2 -- Amended and Restated Bylaws of the Company, as amended by Amendment No. 1 (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form 8-A (Registration No. 000-22915) and Amendment No. 2 (incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K dated December 15, 1999). 4.1 -- Letter Agreement regarding participation in Carrizo's 2001 Seismic and Acreage Program dated May 1, 2001. 4.2 -- Amendment No. 1 to the Letter Agreement regarding participation in Carizzo's 2001 Seismic and Acreage Program, dated June 1, 2001. 4.3 -- Promissory Note payable to Rocky Mountain Gas, Inc. by CCBM, Inc. dated June 29, 2001. 10.1 -- Purchase and sale agreement by and between Rocky Mountain Gas, Inc. and CCBM, Inc. dated June 29, 2001.
+ Incorporated herein by reference as indicated. Reports on Form 8-K None -20- 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Carrizo Oil & Gas, Inc. (Registrant) Date: August 14, 2001 By: /s/S. P. Johnson, IV -------------------------------------------- President and Chief Executive Officer (Principal Executive Officer) Date: August 14, 2001 By: /s/Frank A. Wojtek -------------------------------------------- Chief Financial Officer (Principal Financial and Accounting Officer) -21- 23 EXHIBIT INDEX
Exhibit Number Description ------ ----------- +2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of September 6, 1997 (incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +3.1 -- Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). +3.2 -- Amended and Restated Bylaws of the Company, as amended by Amendment No. 1 (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form 8-A (Registration No. 000-22915) and Amendment No. 2 (incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K dated December 15, 1999). 4.1 -- Letter Agreement regarding participation in Carrizo's 2001 Seismic and Acreage Program dated May 1, 2001. 4.2 -- Amendment No. 1 to the Letter Agreement regarding participation in Carizzo's 2001 Seismic and Acreage Program, dated June 1, 2001. 4.3 -- Promissory Note payable to Rocky Mountain Gas, Inc. by CCBM, Inc. dated June 29, 2001. 10.1 -- Purchase and sale agreement by and between Rocky Mountain Gas, Inc. and CCBM, Inc. dated June 29, 2001.
+ Incorporated herein by reference as indicated. Reports on Form 8-K None EX-4.1 3 h89811ex4-1.txt LETTER AGREEMENT RE PARTICIPATION IN 2001 PROGRAM 1 EXHIBIT 4.1 As of May 1, 2001 To: Participants Listed on Exhibit "A" Re: Letter Agreement Regarding Participation in Carrizo 2001 Program Gentlemen: This binding letter agreement (this "Agreement") is by and between each of the undersigned participants ("Participant"), including Berea Oil & Gas Corp., as manager of the Participants (the "Managing Participant"), and Carrizo Oil & Gas, Inc. ("Carrizo"), and sets forth the entire agreement among each Participant and Carrizo concerning the participation by the Participant in Carrizo's 2001 Seismic and Acreage Program described herein (the "Program"). Each Participant and Carrizo may be referred to in this Agreement individually as a "Party" and collectively as the "Parties." The Parties hereby agree to the following: 1. OVERVIEW. Carrizo generates oil and gas prospects for exploration and development using seismic, well control and other geological and geophysical information. Carrizo generally attempts to assign a portion or all of the working interests in a generated prospect with other industry participants and investors on a promoted basis, which may include receiving a cash payment, an overriding royalty interest, a carried interest, a back-in interest or other similar arrangement. Certain accredited and knowledgeable investors have expressed a desire to fund a portion of Carrizo's costs of generating new prospects in exchange for receiving a proportionate share of the working interests and, in addition, certain of the promotional benefits and interests. 2. THE PROGRAM. (a) PURPOSE AND MANAGEMENT. The Program's operations and the Program Funds (as defined below) will be dedicated to purchasing, developing, evaluating or otherwise acquiring geological and geophysical information/data ("Geological Data") for the purpose of generating prospects; optioning, leasing or otherwise acquiring the mineral interests in acreage ("Acreage") covering such prospects; and assigning a portion the mineral interests in such prospects on a promoted basis to third parties. The Program will emphasize its exploration efforts in South Texas, and the Program and all aspects of this Agreement shall be exclusively limited to the project areas and areas of mutual interest as mutually agreed as specified on Exhibit "C" attached hereto ("AMI's"), and such additional project areas as are mutually agreed in writing and subsequently added to the program ("the Project Areas"). Carrizo, or Program Manager, will administer and manage all of the operations with respect to the acquisition of Geological Data, generation and acquisition of prospects, the commitment of Program Funds (herein defined) to any prospect and the general administration of the Program's activities. 2 (b) PROGRAM COMMITMENT AND FUTURE MANDATORY AND ELECTIVE CASH CALL CONTRIBUTIONS. Contemporaneously with the execution of this Agreement by all of the Parties, each Participant will pay or wire transfer in cash to Carrizo thirty-five percent (35%) of the amount next to such Participant's name on Exhibit "A" hereto. The remaining sixty-five percent (65%) will be paid from time to time via mandatory cash calls from Carrizo to the Participants ("Mandatory Cash Call"). Mandatory Cash Calls will be made to the Participants, in the sole business judgment of Carrizo, based on expected upcoming Program cash needs. Each Participant is severally responsible for and will pay its proportionate share ("Allocable Share") of Mandatory Cash Calls as denoted on Exhibit "A" within ten (10) days of receipt of written notice of each Mandatory Cash Call. Mandatory Cash Call amounts will not exceed that amount that would in conjunction with existing Program Funds result in an amount greater than $250,000 remaining in the Program Account after payment of costs specifically identified by Carrizo in writing concurrently with such Mandatory Cash Call. The total amount reflected on Exhibit "A" of $3,500,000.00 is hereby defined as the "Commitment Amount". Carrizo will promptly deposit into and maintain all cash amounts in an interest-bearing Program account ("Program Account") including all Commitment Amount funds reflected on Exhibit "A" which have been delivered to Carrizo, any profits earned and interest accrued, and less any amounts paid out of the funds in accordance with this Agreement (collectively, the "Program Funds"). There is no obligation on the part of Carrizo to obtain the highest interest rate available for Program Funds. Completion of In Progress Prospects Beyond Program Commitment Amount. If at any time during the Program Term Carrizo determines that Program Funds plus the remaining Commitment Amount that has not been mandatorily cash-called by Carrizo is insufficient to pay for Program expenses as delineated in Section 2(c) below, Carrizo may, with the consent of the Managing Participant, make an "Elective Cash Call" to the Participants in an amount not to exceed each Participant's Allocable Share of cash reasonably required to complete any prospects currently in acquisition progress but not yet fully assembled and sold ("In Progress Prospects"). In determining the total amount of cash requested from each Participant, Carrizo shall provide an analysis of expected cash flows by prospect to and from the Program Account until all such remaining In Progress Prospects have been completed or abandoned. In the event that any Participant(s) elects not to pay for its Allocable Share of an Elective Cash Call ("Non-Electing Participant"), then the remaining electing Participants may elect to take, on a basis proportionate to the Allocable Shares of such electing Participants, or on any other basis upon which they may mutually agree, such non-electing interest in the remaining In Progress Prospects and will pay to the Program Account their share of the Elective Cash Call relative to the non-electing interest. As among the Participants, the interests of the Non-Electing Participant(s) in such In Progress Prospects shall be diluted on a dollar-for-dollar basis by funds contributed by electing Participants in such Elective Cash Call and the Allocable Shares shall be proportionately adjusted. If electing Participants do not subscribe for all of any such Elective Cash Call, then Carrizo shall not further develop or market such In Progress Prospect without the consent of the Managing Participant, which consent shall not be unreasonably withheld. Elective Prospect. During the Program Term, should Carrizo encounter prospect opportunities for which the remaining Program Funds plus the remaining Commitment Amount that has not been mandatorily cash-called by Carrizo is insufficient to fund the assembly of such 2 3 prospect(s) ("Elective Prospect") Carrizo may, with the consent of the Managing Participant, deliver a "Prospect Election Notice" to the Participants along with reasonable supporting information as to geology, location/acreage to be acquired, and estimated Ground Floor Costs to be incurred. Within seven (7) days of such delivery Participants will sign the Elective Prospect Election Notice either agreeing to proceed with the Elective Prospect or electing to decline participation. A cash call will be made to those Participants electing to proceed to fund the Elective Prospect based upon the estimated budget prepared, and each Participant will pay their Allocable Share within ten (10) days after delivery of such cash call. If a portion of the Participants chooses to decline the Elective Prospect, then the electing Participants may choose to take all of the proportionate share of the non-elected portion of the Elective Prospect, whereupon such Elective Prospect shall then be deemed to be a Program prospect and subject to the terms of this Agreement. If electing Participants do not subscribe for all costs to assemble of any such Elective Prospect, then Carrizo shall, after 30 days written notice to the Managing Participant advising Participants of its intent to develop the prospect, be entitled to proceed with development of such Elective Prospect for Carrizo's own account (including assigning its interest to third parties on a promoted basis not subject to this Agreement). (c) PROSPECT GENERATION AND PLACEMENT. In accordance with the authority granted to Carrizo under this Agreement, Carrizo will use the Program Funds to purchase, develop or otherwise acquire Geological Data to generate prospects; acquire Acreage covering such prospects; market such prospects; and for related matters. Such generated prospects (i) may include prospects generated solely by Carrizo as well as prospects generated by others and (ii) may be subject to pre-existing burdens ("Pre-existing Burdens") including, but not limited to, landowner's royalty interest, overriding royalty interests, back-in and/or carried interests, third party prospect bonuses, consulting fees or other promotional interest placed on the prospect by third parties. (A) Unless otherwise agreed by Carrizo and the Managing Participant, the interest acquired by Carrizo (the "Available Interest") in any prospect generated pursuant to this Agreement will be allocated as follows: (i) Carrizo Interest: Carrizo will be allocated a Ground-Floor working interest equal to the product of 25% times the working interest comprising the Available Interest (the "Carrizo Share", as adjusted pursuant to Section 2(c)(B) below); provided, however, that Carrizo may not sell or otherwise dispose of its elected share of the Available Interest without the prior written consent of the Managing Participant. (ii) Participant Interest: The Managing Participant, will be allocated a Ground-Floor working interest equal to 25% times the working interest comprising the Available Interest (the "Participant Share" as adjusted pursuant to Section 2(c)(B) below). (iii) Promoted Interest: The remaining interest (the "Promoted Interest Share", as adjusted pursuant to Section 2(c)(B) below) comprising the Available Interest not allocated in (i), and (ii) above will be allocated and marketed to third parties on a promoted basis. 3 4 (iv) Reallocation of Participant Share: The Managing Participant shall have the right, at its sole discretion, to reallocate the Participant Share and assign the related working interests, to other Participants, to affiliates of other Participants, or with the consent of Carrizo which shall not be unreasonably withheld, to third party qualified investors and Carrizo agrees to assist in marketing any such working interests. The Managing Participant may sell such interests at a profit or promote, and if so, shall be entitled to retain any profit or promote so earned for its own account. The Managing Participant shall not offer to sell any portion of the Participant share to any party to which Carrizo is attempting to sell the Promoted Interest Share without the express written consent of Carrizo. Notwithstanding any such reallocation and assignment, the Managing Participant shall remain liable to pay costs associated with any such assigned working interests that are assigned to persons who are not Participants if such costs are not paid by such non-Participants. (v) Participant Payment for Ground Floor Interests: No additional payment will be required for the Participant Share, as it is being allocated in partial consideration for the funding of the Commitment Amount in the Program by the Participants. (vi) Carrizo Payment for Ground Floor Interests: Carrizo shall pay to the Participants (or with the written consent of the Managing Participant, pay into the Program Account) for its Carrizo Share an amount equal to the Carrizo Share of the Ground Floor Cost. Such payments may be made from Carrizo's share of distributions pursuant to paragraph (d) below, to the extent of such distributions. For purposes of this Agreement, "Ground-Floor" and "Ground-Floor Costs" shall mean the actual costs, including an allocated portion of the Management Expense Reimbursement (herein defined), paid with Program Funds to generate, acquire and assemble any prospect pursuant to this Agreement. The Carrizo Share and the Participant Share shall be referred to collectively in this Agreement as the "Ground-Floor Share." (B) Carrizo will use commercially reasonable efforts to sell or otherwise place all of the Promoted Interest Share to third parties on a promoted basis, with promoted terms as determined by Carrizo in its sole business judgment. For purposes of this Agreement, "commercially reasonable efforts" means efforts which are designed to enable Carrizo, directly or indirectly, to achieve such desired result in accordance with industry practice, or otherwise assist in the consummation of such result, and which do not require Carrizo to expend any funds or assume liabilities other than expenditures and liabilities which are customary and reasonable in nature and amount in the context of such action. In the event 75% (being Promoted Interest Share x 75%) or more (but not all) of the Promoted Interest Share is placed on a promoted basis and Carrizo believes it cannot or does not wish to place the remainder of the Promoted Interest Share on a promoted basis, (i) the remaining portion of the Promoted Interest Share will be allocated 50% to Carrizo and 50% to the Managing 4 5 Participant and shall be part of (and shall adjust) the Carrizo Share and the Participant Share, respectively; and (ii) the Promoted Interest Share shall be reduced accordingly. (C) Notwithstanding anything herein to the contrary, with respect to the Carrizo Share, Participant Share and Promoted Interest Shares of each prospect, it is agreed and understood that all assignments of leasehold, farm-in interest and/or any other interest in prospects will be made subject to a Joint Operating Agreement in the form attached as Exhibit "D" (the "JOA"), subject only to such changes, alterations, or amendments as negotiated between Carrizo and the third party purchaser(s) applicable to such prospect. Carrizo and the Managing Participant (or its successor if Carrizo or the Managing Participant sells or otherwise transfers all or a portion of its interest) shall be responsible for, and obligated to pay, their respective share of the drilling costs, if any, of each prospect initial test well and other prospect costs related thereto pursuant to the JOA for the prospect. (d) PROSPECT SALES; PROGRAM FUND DISBURSEMENT TO CARRIZO AND PARTICIPANTS; ALLOCATIONS OF CASH AND NON-CASH BENEFITS; AND PREFERRED RETURN TO PARTICIPANTS. Any and all cash proceeds from the sale of the Promoted Interest Share in each prospect, including cash received in respect of non-cash promotional benefits derived from the Promoted Interest Share, such as carried or back-in interests, or from the sale of any other asset or service acquired or developed with Program Funds, shall be distributed promptly after receipt thereof as follows: (A) first, 100% to the Participants (based on each Participant's Allocable Share) until the Participants as a group are distributed an amount of cash equal to the total amount invested by the Participants in the Program and not previously distributed pursuant to this paragraph (the "Unreturned Capital Contributions"), plus an amount equal to a 20% annually compounded Preferred Return on the Unreturned Capital Contributions, calculated from the date on which the funds were invested through the date on which the corresponding funds are distributed to the Participants. (B) Thereafter, 50% to the Participants (based on each Participant's Allocable Share) and 50% to Carrizo, until all such cash proceeds are accounted for. (C) Notwithstanding the foregoing, any completion costs payable with respect to a retained carried interest in the Promoted Interest Share shall be payable 50% by the Participants (based on each Participant's Allocable Share) and 50% by Carrizo, and any proceeds derived from any such carried interest shall be distributed 50% to the Participants (based on each Participant's Allocable Share) and 50% to Carrizo, until such completion costs have been reimbursed (without any preferential rate of return), after which such proceeds shall be distributed as provided in paragraphs (A) and (B) above. 3. PROGRAM TERM. This Agreement and the Program shall remain in full force and effect for a period commencing on the Effective Date (May 1, 2001) of this Agreement and ending on May 1, 2003; provided, however, as to In Progress Prospects only, this Agreement shall continue until such time as such In Progress Prospects are fully assembled and either 100% placed or abandoned by Carrizo. If on May 1, 2003, the Commitment Amount plus Program Account earned interest, less the Management Expense Reimbursement, has not been fully expended, then Carrizo 5 6 and the Managing Participant may elect to either (i) extend this Agreement and the Program Term for an additional period of time to be determined by mutual agreement of Carrizo and the Managing Participant, or (ii) terminate and be released from the Program and this Agreement and any future obligations. Upon the final termination of the Program and this Agreement, Carrizo will promptly distribute (in the case of the Program Account) all of the Program Funds to the Participants based on each Participant's Allocable Share of such funds less such Participant's Allocable Share of any reserve established by Carrizo to cover the Program's proportionate share of the costs of any In-Progress Prospects or other contingencies. Carrizo will release and disburse any reserved Program Funds as soon as the funds are no longer needed for the relevant Program prospect(s). After the final termination of the Program and this Agreement, Carrizo agrees that it will not, either independently or in conjunction with a third party, pursue any action with regard to any prospects acquired or developed in whole or in part with Program Funds, without the prior written approval of the Managing Participant, which shall not be unreasonably withheld or delayed. Until December 31, 2003, Participants shall have a right of first offer to (i) provide financing to Carrizo to extend the Program, including those certain Elective Prospects defined in Section 2(b) herein, or (ii) form a new program to cover any additional projects as mutually agreed within the Project Areas or AMI's. Carrizo shall not complete any transaction covered by this first offer right with third parties on the same terms or terms which are less favorable to Carrizo than those of this Program unless first offered to and rejected by the Program Participants. 4. PROGRAM INFORMATION. Carrizo will furnish the Participants with the following information concerning Program operations and activities: monthly information concerning (i) the balance of the Program Funds, (ii) prospect-by-prospect expenditure reports showing reasonable detail of specific expenditures, including dates, amounts and type of expenditure, (iii) an Activity Report containing information for all Program prospects, including whether any prospects have been abandoned and the dated of such abandonment and (iv) an accurate and complete accounting of the Management Expense Reimbursement. Each Participant agrees to keep confidential and not to disclose to any person any information or matter relating to this Agreement, the Program's investments or any information obtained in connection with this Agreement except to the extent that (x) the information to be disclosed is publicly known at the time of the proposed disclosure; (y) such Participant receives the prior written approval of Carrizo; or (z) such disclosure is reasonably and in good faith believed to be required by law or in response to any governmental agency request or in connection with an examination by any regulatory authorities. 5. OPERATIONS RELATING TO THE PROGRAM AND THE PROSPECTS. Carrizo will administer and otherwise manage all matters related to this Agreement and the Program, including, without limitation, selecting the financial institution with which to deposit Program Funds, investing the Program Funds, disbursing Program Funds and accounting for Program activities, including allocating costs among prospects. Except to the extent written amendments are required pursuant to Section 12 below, such administrative and management decisions will be made by Carrizo in its sole discretion, after consultation with the Managing Participant. Carrizo will conduct all the Program operations including, without limitation, engaging and supervising engineers, geologists, geophysicists and other consultants or analysts in connection with all Program operations, defining the areas covered by each prospect, and determining all matters relating to the manner, method and timing of Program transactions. The Managing Participant shall be provided Program Information 6 7 on an ongoing basis through final termination of the Program. The Managing Participant shall not have decision-making authority, but shall be allowed to provide input and recommendations. Carrizo's management duties and rights shall not be limited except that Carrizo shall not direct or spend the Commitment Amount outside of the Project Areas without first obtaining the Managing Participant's prior written consent. Except those rights and benefits expressly stated in this agreement, no Participant will have any rights, liens against or ownership in, or any management or other rights with respect to, any prospect or the assets, rights or interest comprising any prospect (including any Geological Data and Acreage) or any other assets of Carrizo. 6. MANAGEMENT EXPENSE REIMBURSEMENT. Carrizo will pay its own overhead costs and expenses relating to generating and marketing prospects pursuant to this Agreement and managing the Program, provided Carrizo will be reimbursed for any direct costs related thereto and a reasonable allocation of overhead for employees primarily dedicated to this Program (the "Management Expense Reimbursement") which amount will be paid from the Commitment Amount as depicted on Exhibit "B"; An allocation of the The Management Expense Reimbursement to the identified prospects shall be included for purposes of determining the Ground-Floor Cost of any prospect. The Management Expense Reimbursement will be allocated among the Participants based on each Participant's Allocable Share. 7. PROGRAM AREAS. Carrizo has identified the prospects defined in Exhibit "C" as being available to the Program, and Carrizo shall use reasonable commercial efforts to cause such prospects to be included in the Program. Any and all potential prospects within areas defined in Exhibit C in which Carrizo acquires an interest during the Program Term or in contemplation of the Program Term will be fully dedicated to the Program. 8. PUT OF PROGRAM INTEREST FOR STOCK. (a) PARTICIPANTS' EXCHANGE OPTION. At any time prior to the earlier of (i) May 1, 2003, or (ii) the date the Participant's Unreturned Capital Contributions are equal to zero, a Participant may at its sole option elect to exchange its entire Program interest for common stock, $.01 par value, of Carrizo (the "Common Stock"), subject to the terms and provisions of this Section 8. The number of shares of Common Stock for which the Program interest shall be exchangeable shall be equal to the Participant's Unreturned Capital Contribution on the effective date of the exchange divided by $9.00. (b) EXERCISE OR EXCHANGE OPTION. Any Participant exercising its exchange option provided in paragraph 8(a) must notify Carrizo in writing of its desire to exchange its entire Program interest for the Common Stock. Within ten (10) days following such notice, Carrizo shall issue to the exchanging Participant the number of shares of the Common Stock to which the exchanging Participant is entitled. At such time, and as a condition to delivery of the shares of Common Stock, the exchanging Participant shall deliver to Carrizo an assignment of all such Participant's Program interest. (c) REGISTRATION OF COMMON STOCK. If Carrizo has in effect a shelf registration statement under the Securities Act of 1933 that can be used to register the issuance of the Common Stock provided for herein, then the Common Stock shall be issued pursuant to such registration 7 8 statement. If the Common Stock cannot be issued pursuant to an effective registration statement, and the Common Stock is therefore restricted as provided below, then the exchanging Participants shall have piggy-back registration rights for sales by other Carrizo shareholders with respect to such Common Stock, on terms customary for such registration rights. (d) ACCESS TO INFORMATION REGARDING THE GENERAL PARTNER. If the issuance of the Common Stock is not registered as contemplated in paragraph (c) above, Carrizo shall furnish the exchanging Participant all information material to the decision by the exchanging Participant to exchange its Program interest for the Common Stock, and any other information necessary to make the information furnished not misleading. (e) RESTRICTIONS ON TRANSFER. If the issuance of the Common Stock is not registered as contemplated in paragraph (c) above, it may not be sold or transferred in the absence of an effective registration statement under the Securities Act or an exemption from registration thereunder. Accordingly, the certificates evidencing such Common Stock shall bear legends substantially as follows: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND STATE SECURITIEES LAWS, AND MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE APPLICABLE ACTS OR UNTIL THE CORPORATION HAS RECEIVED ADVICE OF ITS COUNSEL THAT THE SHARES MAY BE TRANSFERRED WITHOUT SUCH REGISTRATION. (f) REPRESENTATIONS AND COVENANTS OF PARTICIPANT. Each Participant, at the time of execution of this Agreement and prior to the consummation of any exchange of interest in the Program for Common Stock as contemplated herein, represents and warrants to Carrizo and its counsel: (i) that it is acquiring its interest in the Program and the Common Stock for its own account (and not for the account of others) with the present intention of holding its interest in the Program and such Common Stock for purposes of investment; (ii) that it has no intention of selling its interest in the Program and any such Common Stock in a public distribution in violation of the federal securities laws or any applicable state securities laws; (iii) that it understands that its interest in the Program and the Common Stock it may acquire in the exchange has not been registered under the Securities Act on the basis that the offers and sales to such Participant are exempt from the registration provisions thereof and that Carrizo's reliance on such exemption is predicated upon the representations of each Participant set forth herein; (iv) that it is an "accredited investor" as such term in defined in Regulation D promulgated under the Securities Act; (v) the state of its residence is as set forth on Exhibit "A" hereto; and (vi) that it has been given full and complete access to, and the opportunity to ask questions of Carrizo's executive officers regarding, any information it deemed material to its decision purchase its interest in the Program and to exchange its Program interest for the Common Stock. Each Participant acquiring its interest in the Program and Common Stock in an exchange of its Program interest as contemplated hereby, shall as a condition precedent to consummation of such acquisition and exchange, take any and all action and execute any and all 8 9 documents or instruments as reasonably requested by Carrizo for the purpose of compliance with any state or federal securities laws, and obtaining exemptions from registration. 9. NO LOAN OR GUARANTEED REPAYMENT. Nothing in this Agreement is intended to create a loan from the Participants to Carrizo or otherwise guarantee the Participants that they will fully recover a specific amount of money. Except as specifically set forth in the terms of this Agreement, the Participants shall not be entitled to the return of any part of the Program Funds, to demand early repayment or the partition of any Program Funds or to be paid interest on the Program Funds. 10. NO FIDUCIARY RELATIONSHIP. This Agreement is intended as a sharing agreement among co-owner of working interests subject to an operating agreement. Nothing in this Agreement is intended to create a partnership, mining partnership, joint venture, agency or other relationship creating fiduciary or quasi-fiduciary duties or similar duties and obligations or otherwise subject any of the Parties to joint and several or vicarious liability or to impose any duty, obligation or liability that would arise therefrom with respect to the Parties. The obligations of the Participants hereunder shall be several and not joint. 11. LIMITATION ON LIABILITY. Except to the extent arising from the bad faith, gross negligence or willful misconduct by Carrizo, Carrizo shall not be liable to any Program Participant for any expenses, claims, losses, damages, demands, suits or liabilities, including attorneys' fees and costs of litigation ("Claims"), of every kind to the extent arising out of or connected directly or indirectly with (i) this Agreement, (ii) any action by any person taken as a result of this Agreement, or (iii) Carrizo's management and decisions with respect to the operations and activities of the Program. To the extent of any judgment rendered as a result of Carrizo's gross negligence or willful misconduct, Carrizo shall indemnify and hold harmless the Participants from any such judgment. Carrizo shall indemnify and hold harmless each Program Participant from and against any claims incurred by such Participant asserted by a third party to the extent it is determined such claim arises out of, or results from, Carrizo's conduct relating to the operations of the Program or the Program prospects, provided that Carrizo shall be permitted to utilize Program Funds to defend and satisfy any Claims relating to the operations of the Program or the Program prospects and pay any costs (including damages and attorney's fees) related thereto except to the extent it is determined that such Claims result solely from the bad faith, gross negligence or willful misconduct of Carrizo. Each Participant shall hold Carrizo harmless from and against any Claims (i) as among or between the Participants arising out of any alleged breach of this Agreement by any other Participant, (ii) arising from any alleged breach of duty by the Managing Participant claimed to be owed to any other Participant, (iii) based on any allegedly false statements or omissions of a material fact in statements made between or among Participants, (iv) brought by an assignee, transferee or successor of any Participant as a result of any transaction by which such assignee, transferee or successor acquires an interest in the Program from a Participant or acquires any rights under this Agreement. 12. AMENDMENT. Any provision of this Agreement may be amended, modified or waived by written consent of both (i) Carrizo and (ii) Participants having Allocable Shares representing more than two-thirds of the Allocable Shares of all Participants; provided that (i) no amendment, modification or waiver which extends or shortens the Program Term shall be effective 9 10 without consent of all Parties; (ii) no amendment, modification or waiver which releases all or a substantial portion of the Program Funds, releases Carrizo from or defers its obligation to pay cash proceeds or assign non-cash promotional benefits, or releases any Participant or Carrizo from its obligation to participate in any prospect and pay its proportionate costs related thereto, shall be effective without consent of all Parties; and (iii) no amendment, modification or waiver which modifies the percentages of Carrizo Interest, Participant Interest or Promoted Interest, or which increases the amount of the Management Expense Reimbursement, shall be effective without consent of all Parties. 13. ASSIGNMENT. Except as otherwise provided herein, Participant shall not transfer, assign or otherwise alienate any or all of its rights, title or interest under this Agreement to any other person without Carrizo's prior written consent, which shall not be unreasonably withheld. This Agreement shall be binding upon the Parties' respective successors and assigns. 14. APPLICABLE LAW. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT UNDER, AND SHALL BE CONSTRUED, INTERPRETED AND GOVERNED BY AND ACCORDING TO, THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES WHICH, IF APPLIED, MIGHT PERMIT OR REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION. 15. NOTICES. Notices under this Agreement shall be in writing and shall be sent by registered or certified mail, or by telefax, and shall be sent to the address set forth below for each party: If to Carrizo: Carrizo Oil & Gas, Inc. 14701 St. Mary's Lane, Suite 800 Houston, TX 77079 Telefax#: (281) 496-0884 Attn: S. P. Johnson IV If to the Managing Participant: Berea Oil & Gas, Corp. 50 Fountain Plaza Suite 1220 Buffalo, NY 14202 If to the Participants: Berea Associates, LLC 50 Fountain Plaza Suite 1220 Buffalo, NY 14202 10 11 Berea Oil & Gas Corp. 50 Fountain Plaza Suite 1220 Buffalo, NY 14202 PAC Finance (USA) Inc. c/o Colonial Navigation 750 Lexington Avenue 26th Floor New York, NY 10022 William R. Ziegler Satterlee Stephens Burke & Burke LLP 230 Park Avenue New York, NY 10169 Thomas H. O'Neill, Jr. 50 Fountain Plaza Suite 1220 Buffalo, NY 14202 Berea Associates II LLC 50 Fountain Plaza Suite 1220 Buffalo, NY 14202 Any party may, by proper written notice hereunder, change the address or individuals to which such notices to it shall thereafter be sent. 16. EFFECTIVE DATE. This Agreement is effective as of the date first written above. In witness of the foregoing, Carrizo and the undersigned Participants hereby execute this Agreement as of the date first above written. Sincerely, CARRIZO OIL & GAS, INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- 11 12 ACCEPTED AND AGREED TO BY THE FOLLOWING PARTICIPANTS: Berea Associates, LLC By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- Berea Oil & Gas Corp. By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- PAC Finance (USA) Inc. By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- - ------------------------------------- William R. Ziegler - ------------------------------------- Thomas H. O'Neill, Jr. Berea Associates II LLC by Berea Oil & Gas Corp. its Managing Member By: ---------------------------------- Thomas H. O'Neill, Jr. 12 13 EXHIBIT A PROGRAM PARTICIPANTS, INVESTMENT AMOUNTS AND ALLOCABLE SHARES
PROGRAM ALLOCABLE SHARE OF STATE OF PROGRAM PARTICIPANT COMMITMENT AMOUNT COMMITMENT AMOUNT RESIDENCE ------------------- ----------------- ----------------- --------- 1 Berea Associates, LLC $ 425,000 12.14% New York 2 Berea Oil & Gas Corp. -0- -0- New York 3 PAC Finance (USA) Inc. 212,500 6.07% New York 4 William R. Ziegler 181,250 5.18% New York 5 Thomas H. O'Neill, Jr. 181,250 5.18% New York 6 Berea Associates II, LLC 2,500,000 71.43% New York ----------- ------ TOTAL $ 3,500,000 100.00% =========== ======
13 14 EXHIBIT B MANAGEMENT EXPENSE REIMBURSEMENT ESTIMATES ----------------------------------------------------------- May, 2001 $ 17,000 June, 2001 $ 17,000 July, 2001 $ 17,000 August, 2001 $ 17,000 September, 2001 $ 17,000 October, 2001 $ 17,000 November, 2001 $ 17,000 December, 2001 $ 17,000 January, 2002 $ 18,000 February, 2002 $ 18,000 March, 2002 $ 18,000 April, 2002 $ 18,000 May, 2002 $ 18,000 June, 2002 $ 18,000 July, 2002 $ 18,000 August, 2002 $ 18,000 September, 2002 $ 18,000 October, 2002 $ 18,000 November, 2002 $ 18,000 December, 2002 $ 18,000 January, 2003 $ 19,000 February 2003 $ 19,000 March 2003 $ 19,000 April 2003 $ 19,000 -------- TOTAL $428,000 ======== 14 15 EXHIBIT C PROJECT AREAS 1. Beauty Project - The area depicted on Schedule C-1 attached within the bold outline, less any areas within such bold outline labeled "Pre-Existing AMI". 2. Tri-County Project - The area depicted on Schedule C-2 attached within the bold outline, less any areas within such bold outline labeled "Pre-Existing AMI". 15 EX-4.2 4 h89811ex4-2.txt AMEND.1 TO LETTER AGREEMENT RE PARTICIPATION 1 EXHIBIT 4.2 AMENDMENT NO. 1 TO LETTER AGREEMENT REGARDING PARTICIPATION IN CARRIZO 2001 PROGRAM Carrizo Oil & Gas, Inc., a Texas corporation ("Carrizo"), Berea Associates, LLC, Berea Oil & Gas Corp., PAC Finance (USA) Inc., William R. Ziegler, Thomas H. O'Neill, Jr. and Berea Associates II LLC, entered into a Letter Agreement Regarding Participation in Carrizo 2001 Program dated as of May 1, 2001 (the "Letter Agreement"), and by this agreement hereby, pursuant to Section 12 of the Letter Agreement, amend the Letter Agreement effective as of June 1, 2001 as follows (all capitalized terms used herein which are defined in the Letter Agreement shall have the meanings assigned to them in the Letter Agreement unless otherwise defined herein): ARTICLE I. Subsection 8(c) of the Letter Agreement shall be amended and restated in its entirety as follows: (c) REGISTRATION OF COMMON STOCK. If Carrizo has in effect a shelf registration statement under the Securities Act of 1933 than can be used in compliance with the laws, rules, regulations and interpretations of the Securities and Exchange Commission (the "SEC") (the parties recognizing that such use would not currently be in compliance with the laws, rules, regulations and interpretations of the SEC) to register the issuance of the Common Stock provided for herein, then the Common Stock shall be issued pursuant to such registration statement. If the Common Stock cannot be issued pursuant to an effective registration statement, and the Common Stock is therefore restricted as provided below, then the exchanging Participants shall have piggy-back registration rights for sales by other Carrizo shareholders on customary terms which shall be consistent with and subject to the restrictions, limitations and covenants of (including, without limitation, by including counterparts of Sections 5.9, 5.12, 5.13 and 6.4 of) the Registration Rights Agreement dated as of December 15, 1999 by and among Carrizo, CB Capital Investors, L.P. and Mellon Ventures, L.P. and the Amended and Restated Registration Rights Agreement dated December 15, 1999 by and among Carrizo, Douglas A. P. Hamilton, Paul B. Loyd, Jr., Steven A. Webster, Frank A. Wojtek, S. P. Johnson IV and DAPHAM Partnership, L.P., but such piggy-back rights shall in all events be subject to the limitations imposed by Section 5.5 of both such agreements. ARTICLE II. Subsection 8(d) of the Letter Agreement shall be amended by inserting the following sentence after the last sentence of the paragraph: The Participants agree to keep strictly confidential all nonpublic information received in connection with the preceding sentence. 1 2 ARTICLE III. Subsection 8(e) of the Letter Agreement shall be amended by inserting the following sentence at the end of the Subsection: The Participants agree to comply with the restrictions contemplated by such legend and further agree that any offer, sale, assignment, transfer, pledge or disposition of an interest in the Program or the option provided in Section 8(a) hereof shall be subject to the same restrictions on transfer as are applicable to the Common Stock. ARTICLE IV. A new subsection 8(g) will be added to the Letter Agreement to read in its entirety as follows: (g) ADJUSTMENT FOR STOCK SPLITS AND REVERSE STOCK SPLITS. If at any time after the date of this Agreement, Carrizo shall subdivide, split or reclassify its outstanding shares of Common Stock into a larger number of shares of Common Stock, or combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then the number of shares of Common Stock issuable upon the exercise of the Participant's option to convert its interest in the Program to Common Stock shall be adjusted so as to equal the number of shares of Common Stock (or other securities) that such Participant would have held immediately after the occurrence of such event if the Participant has exercised its option immediately prior to such event. ARTICLE V. A new subsection 8(h) will be added to the Letter Agreement to read in its entirety as follows: (h) CONSOLIDATION, MERGER OR SALE OF SUBSTANTIALLY ALL OF CARRIZO'S ASSETS. If at any time after the date of this Agreement, there shall be any consolidation, merger, conversion or other business combination of Carrizo with another entity or any sale or conveyance by Carrizo of all or substantially all of its assets or property to another entity, and in any such case the Common Stock is to be exchanged or converted into shares of stock, other securities, cash or other property, then in each case the exchange option provided for herein shall thereafter be exercisable for the kind and number of shares of stock, other securities, cash or other property to which a holder of the number of shares of Common Stock issuable upon the exercise of such exchange option would have been entitled upon such event. ARTICLE VI. This Agreement is effective as of the date first written above. In witness of the foregoing, Carrizo and the undersigned Participants hereby execute this Agreement as of the date first written above. 2 3 Sincerely, CARRIZO OIL & GAS, INC. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- ACCEPTED AND AGREED TO BY THE FOLLOWING PARTICIPANTS: Berea Associates, LLC By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Berea Oil & Gas Corp. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- PAC Finance (USA) Inc. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- - -------------------------------------- William R. Ziegler - -------------------------------------- Thomas H. O'Neill, Jr. 3 4 Berea Associates II LLC by Berea Oil & Gas Corp. its Managing Member By: ----------------------------------- Thomas H. O'Neill, Jr. 4 EX-4.3 5 h89811ex4-3.txt PROMISSORY NOTE 1 EXHIBIT 4.3 PROMISSORY NOTE U.S.$7,500,000.00 June 30, 2001 FOR VALUE RECEIVED, CCBM, Inc. (together with its successors and assigns, the "Maker") by this promissory note (this "Note") hereby unconditionally promises to pay to the order of ROCKY MOUNTAIN GAS, INC. (together with its successors and assigns, "Payee"), the principal sum of Seven Million Five Hundred Thousand and No/One-Hundredths Dollars (U.S.$7,500,000.00) in installments as hereinafter provided and to pay interest on the principal balance hereof from time to time outstanding, as hereinafter provided, at the rate of 8% per annum. The terms used in this Note shall have the following meanings: (a) The term "Business Day" shall mean any day upon which commercial banks are open for the transaction of business in Houston. (b) The term "Mortgaged Properties" shall have the meaning given to such term in the Mortgage and Financing Statement dated June 9, 2001, as the same may be modified or amended from time to time. (c) The term "Loan Documents" shall collectively mean this Note, the Mortgage and Financing Statement and all other documents and instruments now or hereafter executed and delivered in connection therewith or otherwise pertaining to this Note, as the same may be modified or amended from time to time. The principal hereof shall be paid in forty-one (41) installments, of $125,000 each, payable on the last Business Day of each month, commencing July 31, 2001 (each a "Payment Date"). On December 31, 2004, the Maker shall repay in full the outstanding principal, together with accrued but unpaid interest. Interest on this Note is payable on each Payment Date, beginning on July 31, 2001. Interest will be calculated on the basis of the actual number of days elapsed (including the first day, but excluding the last day) over a year of 365 days. This Note may be prepaid, in whole or in part, at any time without penalty or premium. The Maker hereby waives demand, diligence, presentment, protest and notice of every kind, and warrants to the holder that all action and approvals required for the execution and delivery hereof as a legal, valid and binding obligation of the undersigned, enforceable in accordance with the terms hereof, have been duly taken and obtained. This Note is secured by certain leasehold interests and property rights which are identified in the Mortgage and Financing Statement, together with all of Maker's right, title and interest therein or otherwise described as set forth therein. 2 Payee shall not enforce the liability and obligation of Maker under this Note and the other Loan Documents by any action or proceeding wherein a money judgment shall be sought against Maker, except that Payee may bring a foreclosure action or any other appropriate action or proceeding to enable Payee to enforce and realize upon its interest in the Mortgaged Properties; provided any judgment in any such action or proceeding shall be enforceable against Maker only to the extent of Maker's interest in the Mortgaged Properties, and Payee, by accepting this Note, agrees that it shall not sue for, seek or demand any deficiency judgment against Maker in any such action or proceeding under or by reason of or under or in connection with this Note or any other Loan Document. In the event Maker defaults on this Note and Payee is required to bring legal action against Maker on this Note, Maker shall be entitled to recover all attorney's fees, costs and expenses incurred as a result of such default. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF WYOMING, U.S.A. CCBM, Inc. By: ---------------------------------------- (Signature) Name: -------------------------------------- (Print) Title: ------------------------------------- ACCEPTED: ROCKY MOUNTAIN GAS, INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- EX-10.1 6 h89811ex10-1.txt PURCHASE AND SALE AGREEMENT 1 EXHIBIT 10.1 PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered into this 29th day of June, 2001, by and between Rocky Mountain Gas, Inc., with an address of 877 North 8th West, Riverton, Wyoming 82501 (hereinafter as "RMG") and CCBM, Inc., a Delaware Corporation, with an address of 14701 St. Mary's Lane, Suite 800, Houston, Texas (herein referred to as "CCBM"). BACKGROUND WHEREAS, RMG is the owner of certain oil and gas or gas leases and certain contractual rights related thereto, all being specifically described in the following instruments (collectively, the "RMG Assets"): A. Those certain Oil & Gas Leases or Option Agreements and wells described on Exhibit "A", attached hereto and made a part hereof (the "Leases"), and the royalty and overriding royalty in same as denoted on said Exhibit "A". B. Agreement dated January 1, 2000, a copy of which is attached hereto and made a part hereof as Exhibit "B-1", together with all amendments and revisions thereto (the "Quantum Agreement"). C. Agreement dated December 31, 2000, a copy of which is attached hereto and made a part hereof as Exhibit "B-2", together with all amendments and revisions thereto (the "Suncor Agreement"). D. Agreement dated December 17, 1999, a copy of which is attached hereto and made a part hereof as Exhibits "C-1, C-2, C-3", and C-4, together with all amendments and revisions thereto (the , UPR Agreement, Infinity Agreement, Lebsack Agreement, and Patina Agreement collectively referred as the " Oyster Ridge Agreements"). WHEREAS, CCBM desires to purchase an undivided 50% interest in the RMG Assets (the "Acquired Assets"); and NOW, THEREFORE, in consideration of the mutual covenants, agreements, valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties, the parties hereto agree as follows: 1 2 ARTICLE I PURCHASE AND SALE OF ACQUIRED ASSETS 1.1 Transfer of Acquired Assets. Subject to the terms and conditions hereof, RMG hereby sells, conveys, transfers, assigns and delivers to CCBM, and CCBM purchases, acquires and accepts from RMG, an undivided fifty percent (50%) of RMG's right, title and interest in and to the RMG Assets, together with an undivided 50% of RMG's right, title and interest in and to any Oil and Gas Leases, Option Agreements, contractual rights, coalbed methane leases, wells, facilities and/or other right ("Interest") of RMG within the Area of Mutual Interests whether or not the Interest is described in this Purchase and Sales Agreement. 1.2 Representations and Warranties. RMG represents that (i) the Acquired Assets are valid and in full force and effect, (ii) RMG owns the interest set forth on the attached Exhibits and (iii) RMG owns the Acquired Assets free and clear of all mortgages, pledges, liens, charges, security interests, encumbrances and any burdens (excepting the rights created by the Suncor and Quantum Agreements and provided for in the lease documents) or otherwise set forth in the lease documents created by or in favor of RMG. RMG shall warrant title to the interest conveyed to CCBM in the Acquired Assets as to all parties claiming by, through or under RMG, but not otherwise. 1.3 Earnest Money Deposit. In accordance with that certain Letter of Intent dated May 31, 2001 between RMG and CCBM, CCBM paid RMG the sum of a non-refundable Earnest Money Deposit of $50,000, and RMG hereby acknowledges the timely receipt of the Deposit. The Earnest Money Deposit shall be credited against CCBM's obligation to spend $2.5 million for RMG's share of the drilling program described in Section 2.1. Such credit shall apply to the final payment (s) due by CCBM for such obligation. 1.4 Payment for Purchase. As consideration for the purchase and assignment of the Acquired Assets, in addition to the remaining obligations set forth elsewhere in this Agreement, CCBM will pay at closing to RMG a purchase price of $7.5 million subject to reductions provided for in Section 1.5 (the "Purchase Price") in the form of a promissory note in a form identical to Exhibit "D" attached hereto ("the Note") secured solely by the Acquired Assets, excluding any acreage or wells deemed to be earned pursuant to Section 2.1 (a) below. For the consideration set forth herein, CCBM will be entitled to a 50% interest in the RMG Assets. At Closing, RMG will assign the Acquired Assets to CCBM. The Acquired Assets will be pledged back to RMG as collateral for the Note and Mortgage until such collateral is released. RMG shall release 25% interest in the Acquired Assets upon receiving principal payments totaling 33.3% of the Purchase Price. When RMG receives principal payments totaling 66.6% of the Purchase Price, 50% interest in the Acquired Assets shall be released as collateral. Upon RMG receiving the entire Purchase Price plus all interest due, all the remaining interest in the Acquired Assets shall be released as collateral. 2 3 1.5 Title Defects and Remedies. CCBM has identified certain title defects as identified in that certain letter dated June 15, 2001 a copy of which is attached as Exhibit "I" and in the event that additional title defects arise within 60 days of the Closing Date for any of the Acquired Assets, upon written notice to RMG of the title deficiencies, RMG shall have curative rights as follows: a. RMG shall have 120 days from the date of the notice to cure the defects; b. If the defect cannot be cured to CCBM's satisfaction within 120 days, RMG will have 60 additional days to offer to CCBM alternative acreage located in the same vicinity and of the same quality and quantity. CCBM, in its sole discretion may accept the alternative properties, recommend alternative properties or refuse the substitute properties; c. If alternative property can not be agreed upon and if title is not cured within 180 days of notice, the Purchase Price (initially $7.5 million) and the outstanding principal balance of the Note shall be reduced in an amount equal to the amount specified for each respective property identified on Exhibit " E" at the price per acre listed and the final payment due on the Note shall be reduced by such amount. ARTICLE II DRILLING PROGRAM AND AREA OF MUTUAL INTEREST 2.1 Drilling Program for 2001. CCBM and RMG shall enter into a Joint Operating Agreement ("JOA") identical in form to the agreement attached hereto as Exhibit "F", which shall govern operations on the RMG Assets, and the Area of Mutual Interest ("AMI"), as defined below. RMG shall be designated as the Operator, subject to the JOA. (a) CCBM agrees to fund $5,000,000 for an initial drilling program on the Acquired Assets. As funded, CCBM will earn a 50% interest of RMG's interest in each well drilled and a 50% ownership in RMG's ownership interest in the associated acreage, (i.e. 80 acres per well), and production. CCBM's ownership in such wells shall be earned regardless of the status of the Note or CCBM's ownership in the balance of the RMG Assets. RMG will be carried for the initial drilling program and will retain the remaining 50% interest. After the above $5,000,000 is expended, subject to the JOA, all future operations will be funded equally by CCBM and RMG. (b) Notwithstanding anything to the contrary, prior to the expenditure of any monies attributable to the $5,000,000 to be funded by CCBM, RMG shall furnish CCBM with an Authority for Expenditure ("AFE") in accordance with the Procedure set forth in the JOA for CCBM's review and approval for each individual well to be drilled and completed or for facilities construction. Such AFE's shall be in a form similar to that set out in Exhibit "G". Multiple AFE's may be submitted by RMG to CCBM, however for the period beginning July 1, 2001, and ending November 30, 2001 no more than a cumulative amount of $1.5 3 4 million of AFE's may be submitted during any thirty (30) day period unless mutually agreed upon by both parties. RMG shall cash call CCBM only for work RMG reasonably expects to complete during the ensuing 30 day period. Cash calls and such AFE amounts shall be due and payable by CCBM to RMG within five (5) business days of commencement of work related to each individual AFE. Any portion of the $5,000,000 not expended during calendar year 2001 shall be carried over to the 2002 and 2003 drilling program or to property acquisitions, if mutually agreed to by the parties. No payment shall be due until CCBM has received copies of all permits, rights of way, title opinions, surface use agreements and any other ancillary agreements necessary for the operation for which the cash call is being made along with representations from RMG that the operation will be conducted during the ensuing 30 day period, unless mutually agreed upon in writing by the parties. It is specifically agreed and understood that the aforementioned $5,000,000 funded by CCBM shall not be expended for any operation associated with water disposal wells, compression beyond 100 PSIG nor for facilities downstream of compression beyond 100 PSIG. Further, the $5,000,000 funded by CCBM will only be used to pay for CCBM's final working interest and an equal working interest for RMG. CCBM's final working interest will not be less than 50% of CCBM's paying interest, less and except the $225,000 Suncor drilling program per section 2.5, unless approved by CCBM in writing. Should a cash call amount not be expended during the ensuing 30 day period, the unspent portion of such cash call shall be applied to a subsequently due cash call or shall be immediately refunded if not used for the AFE for which the cash call was made within 90 days of being delivered. (c) In the event less then the entire $5,000,000 is expended as provided above, within two (2) years of the closing date (subject to extensions for Force Majeure), CCBM shall pay to RMG one-half of the unspent portion of the $5,000,000. The foregoing payment is subject to RMG complying with all of the terms and provisions of this Agreement, the JOA and the procedures set forth therein for submitting AFE's to drill $5 million worth of "reasonable wells". A "reasonable well" shall meet the following economic criteria: 1. Individual well cost, including hook-up to sales, must meet a projected internal rate of return ("IRR") in excess of 15% at prevailing market prices. 2. Such wells must be on acreage blocks that are touching and contain a minimum size as follows: a) Kirby - at least 2560 acres b) Clearmont - at least 640 acres c) Arvada - at least 480 acres 3. No more than 10 wells/calendar year at Oyster Ridge qualify as reasonable. The intent of this provision is for CCBM to spend $2.5 million on behalf of RMG. If CCBM fails to do this despite a total of $5,000,000 of reasonable well proposals by RMG 4 5 then CCBM shall be obligated to pay any remaining unspent portion of the $2.5 million directly to RMG. 2.2 Allocation and Payment of Revenue. CCBM is entitled to 20% of RMG's net revenue interest from all wells jointly drilled under this Agreement (per Sections 2.1 or 2.2) until such time as the net revenue received by CCBM from this additional interest equals a total of $1,250,000 in dollars of the day or CCBM defaults on the Note. The revenues due CCBM shall not be paid to CCBM in cash, but instead, RMG shall apply such revenue towards prepayment of the Note, with such payments being applied towards the final payment due under the Note. The $1,250,000 mentioned above will be reduced proportionately with reductions in the Purchase Price, if any, under Section 1.5. 2.3 Area of Mutual Interest. CCBM and RMG hereby establish an AMI, which shall include the entire State of Wyoming and the Powder River Basin of Montana as outlined on Exhibit "H", which is attached hereto and made a part hereof, and subject to pre-existing AMI's between RMG, Quaneco and Suncor. The AMI shall be for a four year term commencing on June 30, 2001 and ending on June 30, 2005 unless otherwise modified by the terms herein or modified by the mutual written consent of the parties. The JOA shall govern operations within the AMI with CCBM and RMG each owning a 50% interest in the AMI. 2.4 Management Committee. CCBM and RMG shall form a Management Committee for the purpose of overseeing operations on the RMG Assets. (a) The Management Committee shall be composed of two (2) Members representing CCBM and two (2) Members representing RMG. There shall be at least two (2) Members representing CCBM and two (2) Members representing RMG at a meeting to constitute a quorum for the Management Committee. (b) Upon payment of the Purchase Price, and with the consent of Quaneco, CCBM shall be allocated one of the RMG Managing Member seats with Powder River Gas, LLC provided for in the Quaneco Agreement (Exhibit B-1 in Section 3.4(c) (ii)). Prior to such time, RMG agrees to consult with CCBM in order to come to mutual Agreement on all major decisions made by Powder River Gas, LLC. (c) The Management Committee shall: i. Review and recommend overall annual and quarterly capital expenditures and preparing for approval budgets for all expenditures for each succeeding quarter relating to the Acquired Assets. ii. Review such other matters as may be necessary to option and/or lease lands, drill and complete or otherwise conduct activities within the AMI. 5 6 iii. Review drilling results and the costs thereof in relation to the budget approved by the Management Committee, and make recommendations and modifications to the budget as necessary; iv. Review all drilling contracts to determine that they are competitive, and if necessary negotiate competitive drilling contracts for future drilling; v. Investigate whether to build or contract out the building of the gathering system; vi. Meet not less than quarterly or at the request of either CCBM or RMG. The meeting site shall alternate between Sheridan/Riverton, Wyoming and CCBM offices in Houston, Texas, unless otherwise agreed to by the Parties; vii. Conduct any other business necessary to oversee this Agreement. (d) It is specifically agreed that RMG shall have a tie breaking vote concerning all general operations as outlined herein until the $5 million drilling commitment has been expended and until the Purchase Price has been paid. 2.5 Suncor Option Acreage. (a) The Suncor Agreement (Exhibit B-2) contains a provision whereby RMG has provided Suncor Energy of Calgary, Alberta ("Suncor") an option to purchase a 37.5% net working interest in approximately 112,000 acres in Montana ("Option Acreage") known as the Castle Rock Project with a remaining balance of approximately $2,900,000 from Suncor to RMG, due in February 2002, plus various drilling commitments. If Suncor exercises the option, all proceeds of such sale will be solely for the benefit of RMG. If Suncor does not exercise its option with RMG, then CCBM shall have thirty (30 day) after receipt of written notice from RMG to elect to purchase 50% of RMG's interest in the Option Acreage for the equivalent value that would have been due RMG under the Suncor Agreement. If CCBM does not exercise this option on or before thirty (30) days after receipt of written notice, then the Option Acreage will belong solely to RMG and will be removed from the AMI. CCBM and RMG have agreed that RMG will AFE CCBM for $225,000 on July 1, 2001 for RMG's obligations for the wells to be drilled for the drilling program that will take place beginning in July of 2001 with Suncor as operator on the Castle Rock Properties in Montana. Subject to obtaining the consent of Quaneco and Suncor, and as consideration for CCBM funding the above-mentioned AFE, CCBM shall receive an undivided 6.25% working interest in the wells drilled and the leases underlying an 80 acre area attributable thereto during the 2001 drilling program conducted by Suncor. The $225,000 funded and paid by CCBM shall be part of the $5,000,000 drilling program described in Section 2.1. 2.6 Rentals, Surface Use and Option Payments. Subject to the provisions of the JOA, RMG and CCBM will each be obligated to pay one-half (1/2) of all on going payments of any kind to maintain any and all leases, options and farmin agreements and pay for all surface use 6 7 agreements and other ongoing obligations on the Acquired Assets. RMG shall AFE CCBM for these costs (not to exceed $500,000), which will be part of the $5,000,000 drilling program. After completion of the $5,000,000 drilling program or expenditures of this type reaching the $500,000 cap each party shall be responsible for its share of these payments. 2.7 Land Bank Fund. CCBM agrees that it will use its best efforts to seek out, obtain and secure financing and raise no less than $20 million to be used for the acquisition of lease hold interests to develop oil and gas properties within the AMI. Such funds will be secured and be available for use on or before June 30, 2002, subject to the terms of the financing agreement(s) between the lender(s) and RMG and CCBM. In the event CCBM is unable to establish the Land Bank Fund prior to June 30, 2002, RMG shall notify CCBM of its desire to extend the AMI for or before December 20, 2002. Failure to notify CCBM shall result in AMI being reduced to a 6 mile radius on all then existing properties held jointly by the Parties. ARTICLE III RIGHT TO RECORDS AND INSPECTION OF PROPERTIES 3.1 Book and records. Upon 10 days of CCBM's written request, RMG shall provide CCBM with access to and upon request the ability to copy all books, maps, records, title records, files or other information related to the Acquired Assets in the possession of RMG, or within RMG's control to obtain, relating to RMG's activity on the Acquired Assets and within the AMI. CCBM shall reimburse RMG for its reasonable costs in providing such copies. Similarly, upon 10 days written request, CCBM shall provide to RMG access to and upon request, the ability to copy all books, maps, records, title records, files or other information related to the RMG Assets in the possession of CCBM, or within CCBM's control to obtain, relating to CCBM's activity on the RMG Assets and within the AMI. RMG shall reimburse CCBM for its reasonable costs in providing such copies. 3.2 Access to Inspection of the RMG Assets. Either Party may independently inspect or cause to be inspected by other qualified persons, at their sole cost and expense, all aspects of the RMG Assets which in its sole discretion are relevant or material to their undivided working interest in the RMG Assets. ARTICLE IV CLOSING 4.1 CCBM's Conditions to Closing. The obligation of CCBM to close the transaction consistent with this Agreement is subject to CCBM's satisfaction, as determined solely by CCBM, of the following conditions which are for the sole benefit of CCBM and which may be waived in whole or in part by CCBM at any time on or before the Closing Date. (a) CCBM shall have satisfied itself regarding RMG's represented interests in the Acquired Assets including, but not limited to, verification that RMG owns such 7 8 represented interests as listed on the attached on Exhibit "A" and is capable of assigning such interest to CCBM; (b) Any consents, rights of refusal or other restrictions on the farmout, transfer, disposition, sale or assignment by RMG of any of the working interests or net revenue interests represented in Exhibit "A" shall have been waived or complied with; (c) CCBM shall have the opportunity to review, and shall be satisfied with, all agreements relating to RMG's interest in the Acquired Assets. (d) RMG shall continue to diligently pursue all permits necessary for drilling and production for state, fee and federal land locations on the Acquired Assets and CCBM shall be satisfied with the status thereof; (e) Subject to no material change in the environmental issues or liabilities occurring between May 31, 2001 and the Closing Date, CCBM shall have the opportunity to conduct an environmental audit or inspection on the Acquired Assets and be satisfied that there are: (1) no significant environmental issues which would constrain coalbed methane exploration, development and production activity, and (2) no significant outstanding environmental liabilities; (f) If appropriate, CCBM shall have received releases and registerable discharges from all parties holding security interests against RMG's interest in the Acquired Assets. (g) Subject to no material change in the facts occurring between May 31, 2001 and the Closing Date, CCBM shall review and evaluate any and all claims or proceedings threatened or pending involving RMG in connection with the Acquired Assets. (h) All of RMG's interest in the Acquired Assets shall not be subject to any contracts for the sale of petroleum substances. (i) Subject to the approval of the Board of Directors of CCBM and the consent and approval CCBM's lenders under existing debt agreements. 4.2 RMG's Conditions to Closing. The obligation of RMG to close the transaction consistent with this Agreement is subject to RMG's satisfaction, as determined solely by RMG, of the following conditions which are for the sole benefit of RMG and which may be waived in whole or in part by RMG at any time on or before the Closing Date. 8 9 (a) RMG shall have received the $50,000 non-refundable Earnest Money Deposit as described in Section 1.3. (b) RMG shall have satisfied itself that CCBM will commit to establishing a "Land Bank" in the amount of $20 million or more from outside sources for the financing of future land acquisitions within the AMI. If such Land Bank is not established by June 30, 2002, the AMI described in paragraph 2.7, may be reduced consistent with paragraph 2.7. If a Land Bank is established in an amount less than $20 million and committed to be used to fund an AMI acquisition, such AMI Interest shall be included in the existing joint property package. (c) Subject to the approval of the Board of Directors of RMG. 4.3 Closing Date. The transfer of an undivided fifty percent (50%) of RMG's right, title and interest in the RMG Assets to CCBM and all other transactions contemplated by this Agreement (the "Closing") shall take place at the offices of RMG in Riverton, Wyoming at 2:00 p.m., local time on June 29, 2001 or at such other time or other place as RMG and CCBM may mutually agree (the "Closing Date"). 4.4 Deliveries by RMG. At the Closing, RMG shall deliver the following to CCBM, the receipt of which shall be a condition to Closing: (a) The duly executed Assignment in recordable form transferring an undivided fifty percent (50%) of RMG's right, title and interest in the RMG Assets to CCBM. (b) Such other documents as may are reasonably requested by CCBM or its counsel. 4.5 Deliveries by CCBM. At the Closing, CCBM shall deliver the following, the receipt of which shall be a condition to Closing: (a) The Note and Mortgage as described in Section 1.4. (a). ARTICLE V REPRESENTATIONS AND WARRANTIES OF RMG The RMG represents and warrants to CCBM as follows: 5.1 Organization and Qualification. RMG is a corporation duly organized under the laws of the State of Wyoming, and has all corporate powers to own its properties and to carry on its business as now owned and operated by RMG. RMG is qualified to do business, is in good standing, and has all appropriate or necessary licenses in each jurisdiction or place in which the nature of its business or the character of its properties requires such registration. 9 10 5.2 Authority to Transfer. RMG has the right, power, legal capacity and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby, and no approvals, authorizations or consents of any person other than RMG are necessary in connection with RMG's execution, performance and delivery of this Agreement. This Agreement constitutes the legal, valid and binding obligation of RMG, enforceable against RMG in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditor's rights generally. 5.3 Title to Acquired Assets. RMG has unencumbered title to all of the Acquired Assets. 5.4 Condition of Acquired Assets. From May 31, 2001 through the Closing Date, RMG shall not enter into any agreements, or amend any existing agreements relating to the Acquired Assets, nor shall RMG enter into any agreements relating to the sale of production of petroleum substances therefrom, save and except for such agreements and expenditures as are in the normal course of business or approved in writing by CCBM. Furthermore, RMG agrees to not directly or indirectly market its interest in the Acquired Assets or the AMI to any other party through the Closing Date. 5.5 Agreement Not in Breach of Other Instruments. Subject to the consent requirements in the Suncor, Quantum and Oyster Ridge Agreements, the execution and delivery of this Agreement and the other documents to be executed and delivered in connection herewith and the consummation of the transactions contemplated hereby and thereby will not result in or constitute any of the following: (a) a default or event that, with the giving of notice or lapse of time, or both, would be a default breach or violation of any operating agreement of RMG or any agreement, instrument or arrangement to which RMG is a party or by which RMG or any assets or property of RMG is bound; (b) an event that would permit any party to terminate any contract or other agreement; or (c) the creation or imposition of any lien, charge, or encumbrance an any of the Acquired Assets. 5.6 Indemnity Suncor. RMG agrees to defend, indemnify and hold harmless CCBM, and its Acquired Asset from any and all debts, losses, liabilities, duties, damages, obligations, payments, settlement, judgment or compromise, cost and expenses (including, without limitation, any attorneys' fees and any and all expenses incurred for investigating, preparing or defending any such Action) under, out of or in connection with any dispute, suite arbitration, or proceeding (collectively "Action") related in any way whatsoever to the Article IV, Section 4.2, ;under the Suncor Agreement. 10 11 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF CCBM CCBM represents and warrants to RMG as follows: 6.1 Organization and Qualifications. CCBM is a corporation duly organized under the laws of the State of Texas, and has all corporate power to own its properties and to carry on its business as now owned and operated by CCBM. CCBM is qualified to do business, is in good standing, and has all appropriate or necessary licenses in each jurisdiction or place in which the nature of its business or the character of its properties requires such registration. 6.2 Authority to Purchase. CCBM has the right, power, legal capacity and authority to enter into this Agreement, to perform its obligation hereunder and to consummate the transactions contemplated hereby, and no approvals, authorizations or consents of any person other than CCBM is necessary in connection with CCBM's execution, performance and delivery of this Agreement. This Agreement constitutes the legal, valid, and binding obligation of CCBM, enforceable against CCBM in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditor's rights generally. ARTICLE VII TERMINATION 7.1 Termination. This Agreement may only be terminated by the mutual consent of both RMG and CCBM. ARTICLE VIII CONFIDENTIALITY 8.1 Confidentiality (a) Until the Closing Date, there shall be no public release of information of any kind by RMG or CCBM with respect to this transaction unless mutually approved by the parties, or, if such release is required by the law, including necessary disclosure under the security laws, then the parties shall receive and approve a copy of such release at least twenty four (24) hours prior to its dissemination, unless waived by both parties. (b) In the event CCBM does not close the transaction consistent with this Agreement, CCBM agrees to return all information of any kind obtained by it from RMG, and its agent and representative, concerning the Acquired Assets, including proprietary data obtained from drilling and testing coalbed methane wells on the Acquired Assets ("Information") and to keep any and all Information obtained by CCBM or its agents and representatives confidential for a period of four (4) years from May 31, 2001. The Information obtained by CCBM shall not be considered confidential if: 11 12 (i) It obtained such Information from the public domain other than as a result of a disclosure by RMG, or one of its agents or representatives; (ii) Such Information became available to CCBM on a non-confidential basis from a source other than RMG, or one of its agents or representatives, where that source has represented CCBM it is entitled to disclose it; or (iii) Such Information was known to CCBM on a non-confidential basis prior to its disclosure to CCBM by RMG, or one of its agents or representatives. ARTICLE IX GENERAL PROVISIONS 9.1 Notices. All notices and other communication hereunder ("Notices") shall be in writing and shall be deemed given upon personal delivery, facsimile transmissions (with written or facsimile confirmation of receipt), or delivery by a reputable overnight commercial delivery service (delivery, postage or freight charges prepaid) on the fourth day following deposit in the United States mail (if sent by registered or certified mail, return receipt requested, delivery, postage or freight charges prepaid), addressed to the parties at the following addresses (or at such other address for a party as shall be specified by like Notice): If to RMG: Rocky Mountain Gas, Inc. 1 East Alger Suite 206 Sheridan, WY 82801 Fax: (307) 673-9711 Attn: Peter G. Schoonmaker, President And U.S. Energy Corp. 877 N. 8TH West Riverton, WY 82501 Fax: (307) 857-3050 Attn: Keith G. Larsen, President If to CCBM: CCBM, INC. 14701 St. Mary's Lane, Suite 800 Houston, TX 77079 Fax: (281) 496-0884 Attn: Ken Trahan 12 13 9.2 Survival of Representations, Warranties, Covenants and Agreements, All representations, warranties, covenants, obligations, liabilities and agreements of the parties contained in this Agreement or in any schedule, document certificate or other instrument delivered by or on behalf of the parties pursuant to this Agreement, shall survive the Closing Date, except for the representations and warranties contained in Sections 1.2 and 5.3, which are limited in their application solely to events or circumstances occurring or arising before the transfer of the Acquired Assets to CCBM. 9.3 Further Assurances. The parties hereto agree to do such further acts and to execute and deliver any additional agreements or documents as maybe required to consummate, evidence or confirm the transactions and agreements contained in this Agreement. 9.4 Entire Agreement, Amendment Waivers. This Agreement and any exhibits delivered by the parties hereto contemporaneously herewith constitute the entire agreement between the parties pertaining to the subject matter contained herein and supersede all prior agreement, representations and understandings of the parties hereto. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by all of the parties hereto. 9.5 Binding Upon Heirs and Successors. This Agreement shall be binding upon and inure to the benefit of the respective successors, heirs, assigns and personal representatives of the parties hereto. 9.6 Signatures in a Representative Capacity. Each party whose signature is affixed hereto in a representative capacity represents and warrants that he is authorized to execute this Agreement on behalf of and to bind the entity on whose behalf his signature is affixed. 9.7 Governing Law. This Agreement shall be construed in accordance with and be governed by the laws of the State of Wyoming. 9.8 Severability. In the event any provision of this Agreement shall be held to be void or unenforceable, the remaining provisions shall remain in full force and effect. 9.9 Expenses. Each party to this Agreement shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby. 9.10 Currency. All references herein to dollars or "$" shall be in the currency of the United States of America. 9.11 Headings. The paragraph heading in this Agreement are included for ease and reference only and are in no way intended to describe, interpret, define or limit the scope of this Agreement or any provisions hereof. 9.12 Arbitration. Any dispute that arises by virtue of this Agreement between CCBM and RMG shall be resolved by arbitration pursuant to the rules and procedures of the American 13 14 Arbitration Association and governed by the laws of the State of Wyoming. Arbitration shall be conducted in the state of Colorado. IN WITNESS WHEREOF, the parties have executed this Agreement as of the _____ day of June, 2001. ROCKY MOUNTAIN GAS, INC. CCBM, INC. By: By: --------------------------------- --------------------------------- Title: Title: ------------------------------ ------------------------------ 14 -----END PRIVACY-ENHANCED MESSAGE-----