UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14.a-11(c) or ss.240.14a-12
CARRIZO OIL & GAS, INC.
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(Name of Registrant as Specified In Its Charter)
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previously. Identify the previous filing by registration statement number,
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(LOGO OF CARRIZO OIL & GAS, INC.)
April 12, 2005
Dear Fellow Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Carrizo Oil & Gas, Inc. (the "Company") to be held at 10:00 a.m. on Tuesday, May
10, 2005, at the Doubletree Hotel Houston Downtown, 400 Dallas Street, Houston,
Texas.
This booklet includes the notice of the meeting and the proxy statement,
which contains information about the Board and its committees and personal
information about the nominees for the Board. Other matters on which action is
expected to be taken during the meeting are also described.
We hope you will find it convenient to attend in person. Whether or not you
expect to attend, to assure representation at the meeting and the presence of a
quorum, please date, sign and promptly mail the enclosed proxy in the return
envelope provided.
A copy of the Company's 2004 Annual Report to Shareholders is also
enclosed.
SINCERELY,
/s/ S.P. JOHNSON IV
S.P. JOHNSON IV Chief Executive Officer
CARRIZO OIL & GAS, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held MAY 10, 2005
To the Shareholders of
Carrizo Oil & Gas, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Carrizo
Oil & Gas, Inc. (the "Company") will be held at Doubletree Hotel Houston
Downtown, 400 Dallas Street, Houston, Texas, on Tuesday, May 10, 2005, at 10:00
a.m. for the following purposes:
(1) to elect seven members to the Board of Directors for the ensuing year;
(2) to approve an amendment to the Incentive Plan (A) replacing automatic
initial awards of stock options to new directors to purchase 10,000
shares of common stock and automatic awards of stock options to Board
committee chairmen with discretionary awards of stock options or
restricted stock that are determined by the Company's compensation
committee or Board of Directors, (B) giving the Company's compensation
committee and Board of Directors additional flexibility in determining
awards to Board committee members and in establishing the specific
terms of awards of options and restricted stock granted to directors,
including without limitation the vesting schedules for those awards
and the dates those awards may be granted, and (C) making certain
clarifications to other provisions of the Incentive Plan;
(3) to approve the appointment of Pannell Kerr Forster of Texas, P.C. as
independent registered public accounting firm for the fiscal year
ending December 31, 2005; and
(4) to transact such other business as may properly come before the
meeting.
The Company has fixed the close of business on April 6, 2005, as the record
date for determining shareholders entitled to notice of, and to vote at, such
meeting or any adjournment thereof.
You are cordially invited to attend the meeting in person. Even if you plan
to attend the meeting, you are requested to mark, sign, date and return the
accompanying proxy as soon as possible.
By Order of the Board of Directors
/s/ PAUL F. BOLING
PAUL F. BOLING
Secretary
April 12, 2005
1000 Louisiana Street, Suite 1500
Houston, TX 77002
CARRIZO OIL & GAS, INC.
1000 Louisiana Street, Suite 1500
Houston, Texas 77002
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Carrizo Oil & Gas, Inc., a Texas
corporation (the "Company"), to be voted at the 2005 Annual Meeting of
Shareholders (the "Annual Meeting") to be held at Doubletree Hotel Houston
Downtown, 400 Dallas Street, Houston, Texas on Tuesday, May 10, 2005, at 10:00
a.m., and any and all adjournments thereof.
This statement and the accompanying form of proxy are first being mailed to
shareholders on or about the week of April 18, 2005. In addition to the
solicitation of proxies by mail, regular officers and employees of the Company
may, without additional compensation, solicit the return of proxies by mail,
telephone, telegram or personal contact. The Company will pay the cost of
soliciting proxies in the accompanying form. The Company will reimburse brokers
or other persons holding stock in their names or in the names of their nominees
for their reasonable expenses in forwarding proxy material to beneficial owners
of stock.
VOTING PROCEDURES
Shareholders of record as of April 6, 2005, the record date for determining
persons entitled to notice of, and to vote at, the Annual Meeting, are entitled
to vote on all matters at the Annual Meeting and at any adjournments thereof. On
that date, the issued and outstanding capital stock of the Company consisted of
22,749,554 shares of common stock, par value $0.01 per share (the "Common
Stock"). No other class of stock is outstanding. Each share of Common Stock is
entitled to one vote on each matter submitted to a vote of shareholders.
Cumulative voting is not allowed. The holders of a majority of the shares
entitled to vote at the Annual Meeting, represented in person or by proxy,
constitute a quorum for the transaction of business at the Annual Meeting.
All duly executed proxies received prior to the Annual Meeting will be
voted in accordance with the choices specified thereon and, in connection with
any other business that may properly come before the meeting, in the discretion
of the persons named in the proxy. As to any matter for which no choice has been
specified in the proxy, the shares represented thereby will be voted by the
persons named in the proxy, to the extent applicable, (1) for the election as a
director of each nominee listed herein; (2) for the approval of an amendment to
the Incentive Plan (A) replacing automatic initial awards of options to new
directors to purchase 10,000 shares of Common Stock with discretionary awards of
stock options or restricted stock that are determined by the Company's
compensation committee or Board of Directors, (B) giving the Company's
compensation committee and Board of Directors the flexibility to establish the
specific terms of awards of options and restricted stock granted to directors,
including without limitation the vesting schedules for those awards and the
dates those awards may be granted, and (C) making certain clarifications to
other provisions of the Incentive Plan; (3) for the appointment of Pannell Kerr
Forster of Texas, P.C. ("PKF") as independent registered public accounting firm
for the fiscal year ending December 31, 2005; and (4) in the discretion of the
persons named in the proxy in connection with any other business that may
properly come before the meeting. A shareholder giving a proxy may revoke it at
any time before it is voted at the Annual Meeting by delivering written notice
to the Secretary of the Company or by delivering a properly executed proxy
bearing a later date. A shareholder who attends the Annual Meeting may, if he or
she wishes, vote by ballot at the Annual Meeting and that vote will cancel any
proxy previously given. Attendance at the Annual Meeting will not in itself,
however, constitute the revocation of a proxy.
Proxies indicating shareholder abstentions will be counted for purposes of
determining whether there is a quorum at the Annual Meeting, but will not be
voted on any matter and therefore will have the same effect as a vote against a
matter, except in the case of director elections, which are determined by a
plurality of votes cast, as to which those abstentions will have no effect.
Shares represented by "broker nonvotes" (i.e., shares held by brokers or
nominees for which instructions have not been received from the beneficial
owners or persons entitled to vote and for which the broker or nominee does not
have discretionary power to vote on a
particular matter) will be counted for purposes of determining whether there is
a quorum at the Annual Meeting, but will not be voted on any matter, and thus
will be disregarded in the calculation of "votes cast" with respect to that
matter (even though those shares may be considered as entitled to vote or be
voted on other matters). Votes cast by proxy or in person at the Annual Meeting
will be counted by the persons appointed as election inspectors for the Annual
Meeting.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The table below sets forth information concerning (i) the only persons
known by the Company, based solely on statements filed by such persons pursuant
to Section 13(d) or 13(g) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), to own beneficially in excess of 5% of the Common Stock as
of December 31, 2004, and (ii) the shares of Common Stock beneficially owned, as
of March 31, 2005, by each director, the Chief Executive Officer and the four
other executive officers who were serving at the end of the Company's last
fiscal year and by all executive officers and directors collectively. Except as
indicated, each individual has sole voting power and sole investment power over
all shares listed opposite his name. As of March 31, 2005, the Company had
22,735,554 shares of Common Stock issued and outstanding.
Amount and Nature of
Beneficial Ownership
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Percent
of Common
Stock
Name and Address of Beneficial Owner(1) Number of Shares(2) (rounded)
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Directors and Executive Officers:
S. P. Johnson IV.................................... 735,556 3.2%
Paul F. Boling...................................... 18,000 *
J. Bradley Fisher................................... 28,333 *
Kendall A. Trahan................................... 17,795 *
Jeremy T. Greene(3)................................. - *
Steven A. Webster................................... 2,568,160(4) 11.2%
Thomas L. Carter, Jr................................ - *
Paul B. Loyd, Jr.................................... 314,665 1.4%
F. Gardner Parker................................... 70,000 *
Roger A. Ramsey..................................... 8,333 *
Frank A. Wojtek..................................... 314,699 1.4%
Executive Officers and Directors as a Group (11
persons)......................................... 4,075,541 17.5%
Wells Fargo & Company and Wells Capital
Management Incorporated.......................... 1,893,340(5) 8.6%
Advisory Research, Inc................................ 1,724,553(6) 7.8%
Wellington Management Company, LLP.................... 1,450,900(7) 6.6%
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* Less than 1%.
(1) Except as otherwise noted and pursuant to applicable community
property laws, each shareholder has sole voting and investment power
with respect to the shares beneficially owned. The business address of
each director and executive officer is c/o Carrizo Oil & Gas, Inc.,
1000 Louisiana Street, Suite 1500, Houston, Texas 77002.
(2) The table includes shares of Common Stock that can be acquired through
the exercise of options within 60 days of March 31, 2005 as follows:
Mr. Johnson -- 203,333, Mr. Boling -- 15,000, Mr. Fisher -- 28,333,
Mr. Trahan -- 17,795, Mr. Greene -- none, Mr. Webster -- 219,167, Mr.
Carter -- none, Mr. Loyd -- 22,500, Mr. Parker -- 40,000, Mr. Ramsey
-- 3,333, Mr. Wojtek -- none, and all officers and directors as a
group -- 549,461. The percent of the class owned by each person has
been computed assuming the exercise of all options deemed to be
beneficially owned by that person, and assuming that no
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options held by any other person have been exercised. The table
excludes shares of Common Stock subject to options that cannot be
exercised within 60 days of March 31, 2005 as follows: Mr. Johnson --
33,335, Mr. Boling -- 30,000, Mr. Fisher -- 16,667, Mr. Trahan --
none, Mr. Greene -- none, Mr. Webster -- 66,667, Mr. Carter -- 10,000,
Mr. Loyd -- 7,000, Mr. Parker -- 15,000, Mr. Ramsey -- 10,167 , Mr.
Wojtek -- 2,500, and all officers and directors as a group -- 191,336.
(3) Mr. Greene left the Company in January 2005.
(4) Shares shown include 2,292,127 shares of Common Stock owned by Mr.
Webster and 56,866 shares owned by Cerrito Partners, of which Mr.
Webster is one of three general partners and could be deemed to share
voting and dispositive power with the other general partners. However,
Mr. Webster does not admit to having such power and disclaims the
beneficial ownership of the Common Stock held by Cerrito Partners.
(5) Based solely on a Schedule 13G filed on January 21, 2005, Wells Fargo
& Company, a parent holding company, reports sole voting power over
1,788,830 shares, sole dispositive power over 1,279,510 shares and
shared dispositive power over 67,810 shares, and Wells Capital
Management Incorporated, an investment adviser, reports sole voting
power over 1,075,300 shares and sole dispositive power over 1,112,000
shares. The address of the principal business office of Wells Fargo &
Company is 420 Montgomery Street, San Francisco, California 94104, and
the address of the principal business office of Wells Capital
Management Incorporated is 525 Market Street, 10th Floor, San
Francisco, California 94105.
(6) Based solely on an amendment to Schedule 13G filed on February 15,
2005, Advisory Research, Inc., an investment advisor, reports shared
dispositive and voting power over these shares, which are held for its
investment advisory clients. The address of the principal business
office of Advisory Research, Inc. is 180 North Stetson Street, Suite
5500, Chicago, Illinois 60601.
(7) Based solely on a Schedule 13G filed on February 14, 2005, Wellington
Management Company, LLP, an investment adviser, reports shared voting
power over 913,300 shares and shares dispositive power over 1,450,900
shares. The address of the principal business office of Wellington
Management Company, LLP is 75 State Street, Boston, Massachusetts
02109.
PROPOSAL I
ELECTION OF DIRECTORS
The persons designated as proxies in the enclosed proxy card intend, unless
the proxy is marked with contrary instructions, to vote for the following
nominees as directors to serve until the 2006 Annual Meeting of Shareholders and
until their successors have been duly elected and qualified or until their
resignation or removal: Mr. S.P. Johnson IV; Mr. Steven A. Webster; Mr. Thomas
L. Carter; Jr., Mr. Paul B. Loyd, Jr.; Mr. F. Gardner Parker; Mr. Roger A.
Ramsey and Mr. Frank A. Wojtek. The Board of Directors has no reason to believe
that any nominee for election as a director will not be a candidate or will be
unable to serve, but if for any reason one or more of these nominees is
unavailable as a candidate or unable to serve when election occurs, the persons
designated as proxies in the enclosed proxy card, in the absence of contrary
instructions, will in their discretion vote the proxies for the election of any
of the other nominees or for a substitute nominee or nominees, if any, selected
by the Board of Directors. The affirmative vote of a plurality of the votes cast
by holders entitled to vote in the election of directors at the Annual Meeting
is required for the election of each nominee for director.
NOMINEES
The following sets forth information concerning the seven nominees for
election as directors at the Annual Meeting, including information as to each
nominee's age as of April 1, 2005, position with the Company and business
experience during the past five years. All nominees are currently serving as
directors and are standing for re-election.
S.P. Johnson IV, age 49, has served as our President and Chief Executive
Officer and a director since December 1993. Prior to that, he worked for Shell
Oil Company for 15 years. His managerial positions
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included Operations Superintendent, Manager of Planning and Finance and Manager
of Development Engineering. Mr. Johnson is also a director of Basic Energy
Services, Inc. (a well servicing contractor). Mr. Johnson is a Registered
Petroleum Engineer and has a B.S. in Mechanical Engineering from the University
of Colorado.
Steven A. Webster, age 53, has been the Chairman of our Board of Directors
since June 1997 and has been a director since 1993. Mr. Webster serves as the
Chairman of Global Energy Partners, Ltd., an affiliate of CSFB Private Equity,
which makes private equity investments in the energy business. From December
1997 to May 1999, Mr. Webster was the Chief Executive Officer and President of
R&B Falcon Corporation, an offshore drilling contractor, and prior to that, was
Chairman and Chief Executive Officer of Falcon Drilling Company, which he
founded in 1988. Mr. Webster is also a director of Grey Wolf, Inc. (an onshore
drilling company), Seabulk International, Inc. (a marine transportation and
service provider), Geokinetics, Inc. (a seismic acquisition and geophysical
services company), Crown Resources Corporation (a precious metals exploration
company), Goodrich Petroleum Corporation (an oil and gas exploration company),
Basic Energy Services, Inc. (a well servicing company) and Brigham Exploration
Company (an oil and gas exploration company), as well as various private
companies. He is also a trust manager of Camden Property Trust (a real estate
investment trust). Mr. Webster holds an M.B.A. degree from Harvard Business
School and a Bachelor of Science in Industrial Management degree from Purdue
University.
Thomas L. Carter, Jr., age 53, became a director in March 2005. He has been
President and Chief Executive Officer of Black Stone Minerals Company, L.P., a
privately-owned Delaware limited partnership located in Houston, Texas, since
its formation in 1998. Mr. Carter has also served as Managing General Partner of
Black Stone Energy Company from 1980 to the present. Prior to the formation of
Black Stone, Mr. Carter served as Managing General Partner of W.T. Carter &
Bros. from 1987 through 1992. From 1975 to 1979, Mr. Carter was with Texas
Commerce Bank in Houston, Texas. Mr. Carter holds an M.B.A. and B.B.A. from the
University of Texas at Austin.
Paul B. Loyd, Jr., age 58, has been a director since 1993. Mr. Loyd was
Chairman of the Board and Chief Executive Officer of Reading & Bates Corporation
from 1991 to 1997 and from 1999 to 2001 until its merger with Transocean Inc.
Mr. Loyd has been the principal of Loyd & Associates, Inc., a private financial
consulting firm, since 1989. Mr. Loyd was Chief Executive Officer and a director
of Chiles-Alexander International, Inc. from 1987 to 1989, President and a
director of Griffin-Alexander Drilling Company, from 1984 to 1987, and prior to
that, a director and Chief Financial Officer of Houston Offshore International,
all of which are companies in the offshore drilling industry. Mr. Loyd is
currently a director of Frontier Oil Corporation (a refining and marketing
company) and is a member of the Board of Trustees of Southern Methodist
University. Mr. Loyd served as President of our company from its inception in
September 1993 until December 1993. Mr. Loyd holds an undergraduate degree from
Southern Methodist University and an M.B.A. degree from Harvard Business School.
F. Gardner Parker, age 63, has been a director since 2000. He has been
Managing Outside Trust Manager with Camden Property Trust since 1998. He also
serves on the boards of Crown Resources Corporation, Sharps Compliance Corp. (a
waste management services provider) and Blue Dolphin Energy Company (a pipeline
operations and oil and gas exploration and production holding company). In
addition, he serves on the board of directors of the following private
companies: Gillman Automobile Dealerships, Net Near U Communications, MCS
Technologies, Camp Longhorn, Inc., nii communications, inc., Sherwood Healthcare
Inc., and Arena Power. Mr. Parker also worked with Ernst & Ernst (now Ernst &
Young LLP) for 14 years, seven of which he served as a partner. He is a graduate
of The University of Texas.
Roger A. Ramsey, age 66, has been a director since 2004. He is the Chairman
and Chief Executive Officer of Med Shred, Inc., a privately held corporation. He
served as Chairman of the Board of Allied Waste Industries, Inc. from October
1989 through his retirement in December 1998, and Chief Executive Officer of
that company from October 1989 through July 1997. Beginning in 1960, Mr. Ramsey
was employed by the international accounting firm of Arthur Andersen LLP. In
1968, Mr. Ramsey co-founded Browning-Ferris Industries, Inc. ("BFI") and served
as its Vice President and Chief Financial Officer until 1976. Mr. Ramsey
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is a director of WCA Waste Corporation (a waste management company). Mr. Ramsey
is also a member of the Board of Trustees at Texas Christian University and
Chairman of the Board of Vericenter, Inc.
Frank A. Wojtek, age 49, has been a director since 1993. He has been Vice
President, Secretary and Director of A-Texian Compressor, Inc. (a natural gas
compression services company) since July 2004. Mr. Wojtek served as our Chief
Financial Officer, Vice President, Secretary and Treasurer from 1993 until
August 2003. From 1992 to 1997, Mr. Wojtek was the Assistant to the Chairman of
the Board of Reading & Bates Corporation (an offshore drilling company). Mr.
Wojtek has also held the positions of Vice President and Secretary/Treasurer of
Loyd & Associates, Inc., a private financial consulting firm, since 1989. Mr.
Wojtek held the positions of Vice President and Chief Financial Officer of
Griffin-Alexander Drilling Company from 1984 to 1987, Treasurer of
Chiles-Alexander International Inc. from 1987 to 1989, and Vice President and
Chief Financial Officer of India Offshore Inc. from 1989 to 1992, all of which
were companies in the offshore drilling industry. Mr. Wojtek is a Certified
Public Accountant and holds a B.B.A. in Accounting with Honors from The
University of Texas.
DIRECTOR INDEPENDENCE
The Board has determined that Messrs. Carter, Loyd, Parker and Ramsey are
"independent directors" within the meaning of Marketplace Rule 4200(a)(15) of
the Nasdaq Stock Market.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company held three meetings during the fiscal
year ended December 31, 2004, and transacted business on six occasions during
the fiscal year by unanimous written consent.
During the fiscal year ended December 31, 2004, each director attended at
least 75% of the aggregate of the total number of Board of Directors' meetings
and of meetings of committees of the Board of Directors on which he served held
during his service on the Board of Directors. The Company's Board of Directors
has a Nominating Committee, an Audit Committee, a Compensation Committee and a
Budget Committee.
The Board of Directors has a Nominating Committee, which currently consists
of Messrs. Webster (chairman), Loyd and Carter. The primary responsibilities of
the Nominating Committee include identifying, evaluating and recommending, for
the approval of the entire Board of Directors, potential candidates to become
members of the Board of Directors and recommending membership on standing
committees of the Board of Directors. The Nominating Committee held no meetings
in 2004 but acted informally on various occasions. A copy of the Nominating
Committee Charter may be found on the Company's website at www.carrizo.cc. On
March 5, 2005, the date that was one year after the date on which the Company
ceased to be a controlled company under the rules of the Nasdaq Stock Market,
all of the members of the Nominating Committee were required to meet the
applicable requirements for independence, subject to the exception contemplated
by Nasdaq Marketplace Rule 4350 (c)(4)(C). The Board of Directors has determined
that Messrs. Loyd and Carter are independent for purposes of Marketplace Rule
4200(a)(15) of the Nasdaq Stock Market. Mr. Webster's service on the Nominating
Committee is pursuant to an exception provided under the Nasdaq rules, which
will permit him to serve on the committee until March 5, 2007. Under the Nasdaq
rules, a non-independent member of the Board of Directors may serve up to two
years as a member of a nominating committee under exceptional and limited
circumstances where such individual's membership is required by the best
interests of the Company and its shareholders. The Board of Directors believes
these criteria are met with respect to Mr. Webster's membership on the
Nominating Committee because of his extensive knowledge of the Company and the
oil and gas industry and because he is a major shareholder of the Company.
The Board of Directors has an Audit Committee, which currently consists of
Messrs. Parker (chairman), Loyd and Ramsey. The Audit Committee held 20 meetings
and transacted business on one occasion by unanimous written consent during
2004. The Audit Committee has direct responsibility for the appointment,
retention, compensation and oversight of the independent auditors for the
purpose of preparing the Company's annual audit report or performing other
audit, review or attest services for the Company. The Audit Committee has sole
authority to approve all engagement fees and terms of the independent auditors
and to
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establish policies and procedures for preapproval of audit and nonaudit
services. The Audit Committee also reviews and discusses the annual audited
financial statements with management and the independent auditors. A copy of the
Audit Committee Charter may be found on the Company's website at www.carrizo.cc.
The Board has determined that all of the members of the Audit Committee
satisfy the independence standards under the Nasdaq Marketplace Rules and
Securities Exchange Act Rule 10A-3. In addition, the Board has determined that
Mr. Parker is an "audit committee financial expert," as such term is defined in
Item 401(h) of Regulation S-K promulgated by the Securities and Exchange
Commission (the "SEC"). Mr. Parker is a certified public accountant and served
as partner in a major accounting firm.
The Board of Directors has a Compensation Committee which currently
consists of Messrs. Parker (chairman) and Ramsey. The Compensation Committee
held five meetings during 2004. The primary responsibilities of the Compensation
Committee are to review and approve the compensation of the CEO and the
Company's other executive officers and oversee and advise the Board on the
policies that govern the Company's compensation programs. The Compensation
Committee has been appointed by the Board of Directors to administer the
Company's stock option plans (subject in some cases to action by the full
Board). A copy of the Compensation Committee Charter can be found on the
Company's website at www.carrizo.cc. The Board of Directors has determined that
Messrs. Parker and Ramsey are independent for purposes of Marketplace Rule
4200(a)(15) of the Nasdaq Stock Market.
DIRECTOR NOMINATIONS PROCESS
In assessing the qualifications of candidates for director, the Nominating
Committee considers, in addition to qualifications set forth in the Company's
bylaws, each potential nominee's personal and professional integrity,
experience, reputation, skills, ability and willingness to devote the time and
effort necessary to be an effective board member, and commitment to acting in
the best interests of the Company and its shareholders. The Nominating Committee
also considers requirements under the listing standards of the Nasdaq Stock
Market, Inc. for a majority of independent directors, as well as qualifications
applicable to membership on Board committees under the listing standards and
various regulations. The Nominating Committee makes recommendations to the
Board, which in turn makes the nominations for consideration by the
shareholders.
Suggestions for potential nominees for director can come to the Nominating
Committee from a number of sources, including incumbent directors, officers,
executive search firms and others. The Nominating Committee will consider
director candidates recommended by shareholders. The extent to which the
Nominating Committee dedicates time and resources to the consideration and
evaluation of any potential nominee brought to its attention depends on the
information available to the Committee about the qualifications and suitability
of the individual, viewed in light of the needs of the Board, and is at the
Committee's discretion. Recognizing the contribution of incumbent directors who
have been able to develop, over a period of time, increasing insight into the
Company and its operations and, therefore, provide an increasing contribution to
the Board as a whole, the Nominating Committee reviews each incumbent director's
qualifications to continue on the Board in connection with the selection of
nominees to take office when that director's term expires, and conducts a more
detailed review of each director's suitability to continue on the Board
following expirations of the director's term. Mr. Carter was recommended to the
Nominating Committee for election as a director by Mr. Webster.
In addition, the Nominating Committee's policy is that it will consider
candidates for the Board recommended by shareholders. Any such recommendation
should include the candidate's name and qualifications for Board membership and
should be submitted in writing to the Secretary, Carrizo Oil & Gas, Inc., 1000
Louisiana Street, Suite 1500, Houston, Texas 77002, along with:
o a signed statement of the proposed candidate consenting to be named as
a candidate and, if nominated and elected, to serve as a director;
o a statement that the writer is a shareholder of the Company and is
proposing a candidate for consideration by the Nominating Committee;
6
o a statement detailing any relationship between the candidate and any
customer, supplier or competitor of the Company;
o the financial and accounting background of the candidate, to enable
the Nominating Committee to determine whether the candidate would be
suitable for Audit Committee membership; and
o detailed information about any relationship or understanding between
the proposing shareholder and the candidate.
Although the Nominating Committee will consider candidates recommended by
shareholders, it may determine not to recommend that the Board, or the Board may
determine not to, nominate those candidates for election to the Board of
Directors.
SHAREHOLDER COMMUNICATION WITH THE BOARD OF DIRECTORS
Shareholders may communicate with the Board by submitting their
communications in writing, addressed to the Board as a whole or, at the election
of the shareholder, to one or more specific directors, c/o Secretary, Carrizo
Oil & Gas, Inc., 1000 Louisiana Street, Suite 1500, Houston, Texas 77002.
The Audit Committee of the Board of Directors has established procedures
for the receipt, retention and treatment of complaints regarding accounting,
internal accounting controls, or auditing matters. Shareholders who wish to
submit a complaint under these procedures should submit the complaint in writing
to: F. Gardner Parker, Chairman of the Audit Committee, Carrizo Oil & Gas, Inc.,
1000 Louisiana Street, Suite 1500, Houston, Texas 77002. The Company also has a
confidential hotline by which employees can communicate concerns or complaints
regarding these matters.
DIRECTOR ATTENDANCE AT ANNUAL MEETING OF SHAREHOLDERS
The Company does not have a policy regarding director attendance at annual
meetings of shareholders. Five of the Company's directors attended the 2004
Annual Meeting of Shareholders.
CODE OF CONDUCT
The Company has a Code of Conduct that is applicable to all employees and
directors that satisfies the requirements of Nasdaq Marketplace Rule 4350(n).
The Code of Conduct is available on the Company's website at www.carrizo.cc.
SECTION 16(A) REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires that the Company's executive
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, file reports of ownership and changes of
ownership with the SEC. Officers, directors and greater than 10% shareholders
are required by SEC regulation to furnish the Company with copies of all such
forms they file.
Based solely on its review of the copies of such forms received by the
Company, and on written representations by the Company's officers and directors
regarding their compliance with the filing requirements, the Company believes
that during the fiscal year ended December 31, 2004, all reports required by
Section 16(a) to be filed by its directors, officers and greater than 10%
beneficial owners were filed on a timely basis, except two Form 4s each filed
one day late by Mr. Wojtek on October 13, 2004 and September 7, 2004, one Form 4
filed by Douglas A.P. Hamilton on July 12, 2004 and one Form 4 reporting option
grants filed by each of Bryan Martin, Christopher Behrens, J.P. Morgan Partners
(23A SBIC), LLC, Mr. Hamilton, Mr. Wojtek, Mr. Parker and Mr. Loyd on June 22,
2004. Mr. Martin, Mr. Behrens and Mr. Hamilton are former directors of the
Company, and JP Morgan Partners (23A SBIC), LLC is a former 10% beneficial
owner.
7
COMPENSATION OF NONEMPLOYEE DIRECTORS
The Board of Directors has recommended the following amendments to the
Incentive Plan, subject to shareholder approval:
o replacing automatic initial awards of options to purchase 10,000
shares of Common Stock to each director not employed by the Company or
any of its subsidiaries (an "Outside Director") with discretionary
awards of stock options or restricted stock that are determined by the
Compensation Committee or the Board of Directors; and
o giving the Compensation Committee and the Board of Directors
additional flexibility in establishing the specific terms of awards of
stock options and restricted stock to directors, including without
limitation the vesting schedules for and dates those awards may be
granted.
In March 2005, the Board of Directors approved an annual retainer for the
2005-2006 director term for each Outside Director not employed by the Company or
any of its subsidiaries (an "Outside Director") of $10,000 per year plus
compensation of $2,500 per regular meeting attended ($1,000 if attended via
telephone), $1,000 per special meeting attended ($500 if attended via telephone)
and $1,000 per committee meeting attended ($500 if attended via telephone). The
Chairmen of the Audit, Compensation and Nominating Committees will receive an
additional retainer of $12,500, $6,000 and $2,500, respectively. The Board of
Directors also approved an annual retainer of $7,500 per annual term for
non-chairman members of the Audit Committee and $4,000 per annual term for
non-chairman members of the Compensation Committee.
For the 2004-2005 director term, each Outside Director received an annual
retainer of $10,000 plus compensation of $2,500 per regular meeting attended
($1,000 if attended via telephone), $1,000 per special meeting attended ($500 if
attended via telephone) and $500 per committee meeting ($250 if attended via
telephone). The additional retainers for the Chairmen of the Audit and
Compensation Committees were $10,000 and $5,000, respectively, and for
non-chairman members of the Audit, Compensation and Nominating Committees were
$2,000, $1,000 and $1,000, respectively.
Directors who are also employees of the Company receive no payment for
serving as directors. All directors are reimbursed for travel and lodging
expenses of attending meetings. Under the Incentive Plan, each Outside Director
is currently automatically granted nonqualified options to purchase 10,000
shares of Common Stock on the date that person first becomes an Outside Director
of the Company. Messrs. Ramsey and Carter received such grants upon becoming
directors in May 2004 and March 2005, respectively. If the proposal to amend the
Incentive Plan is approved, these automatic grants will be replaced with
discretionary awards of stock options or restricted stock. Until the Company's
2004 Annual Meeting of Shareholders, each Outside Director serving on the day
after the date of the annual meeting of shareholders was automatically granted
options to purchase an additional 2,500 shares of Common Stock, subject to the
availability for issuance of those shares under the Incentive Plan. Currently,
annual awards of stock options and restricted stock are at the discretion of the
Compensation Committee or the Board of Directors. During 2004, each of Messrs.
Loyd, Parker and Ramsey were granted options to purchase 2,500 shares at an
exercise price per share of $9.215 under the Incentive Plan. On February 19,
2003, the Incentive Plan was amended to provide for a one-time grant of options
to purchase 25,000 shares of Common Stock to Mr. Parker at a price of $4.65 per
share, the fair market value as of the date of the grant, as compensation for
serving as the Chairman of the Audit Committee.
Under the Incentive Plan, the Chairmen of the Audit, Compensation and
Nominating Committees are currently automatically granted additional options to
purchase 3,000, 2,000 and 2,000 shares of Common Stock, respectively, on the
first business day following the date on which each annual meeting of the
Company's shareholders is held; and the Board of Directors may, in its
discretion, grant options to purchase of up to 3,000, 2,000 and 2,000 shares,
respectively, on that date to nonchairmen members of the Audit, Compensation and
Nominating Committees who are deemed by the Committee to be independent for
purposes of the rules of the Nasdaq Stock Market. These grants may be made to
the chairman or a member of the Audit Committee, Compensation Committee or
Nominating Committee, notwithstanding that the same person may also receive
grants as a chairman or member of another committee. During 2004, Mr. Parker was
8
granted options to purchase 5,000 shares at an exercise price of $8.38 as
chairman of both the Audit Committee and the Compensation Committee. During
2004, the independent nonchairmen members of the Compensation Committee and the
Nominating Committee were each granted options to purchase 1,000 shares of
common stock at an exercise price of $9.215, and the independent nonchairmen
members of the Audit Committee were each granted options to purchase 1,000
shares of common stock at an exercise price of $9.215. If the proposal to amend
the Incentive Plan is approved, the automatic grants will be replaced with
awards at the discretion of the Compensation Committee or the Board of
Directors. The Company expects to grant shares of restricted stock to the
Outside Directors in the 2005-2006 director term as set forth in the table
below.
Currently, each option granted to an Outside Director (i) has a ten-year
term, (ii) has an exercise price equal to the fair market value of a share of
Common Stock on the date of grant and (iii) becomes exercisable in cumulative
annual increments of one-third of the total number of shares of Common Stock
subject thereto, beginning on the first anniversary of the date of grant. Shares
of restricted stock granted to an Outside Director currently vest in cumulative
annual increments of one-third of the total number of shares, beginning on the
first anniversary of the date of grant. If the proposal to amend the Incentive
Plan is approved, the vesting terms of any options or shares of restricted stock
granted to Outside Directors will be at the discretion of the Compensation
Committee or the Board of Directors. The Company does not expect to make any
regular grants of options or restricted stock to Mr. Webster.
A summary of our proposed director compensation for the 2005-2006 director
term, certain portions of which are subject to the approval of the proposed
amendments to the Incentive Plan, and our actual director compensation for the
2004-2005 director term, is set forth below:
DIRECTOR COMPENSATION PROPOSED 2005-2006 2004-2005
------------------------------------------ ------------------------------------------- -----------------------------------------
Annual Retainer $10,000 $10,000
------------------------------------------ ------------------------------------------- -----------------------------------------
Committee Annual Cash Retainer:
------------------------------------------ ------------------------------------------- -----------------------------------------
o Audit Committee $12,500 Chairman / $7,500 Member $10,000 Chairman / $2,000 Member
------------------------------------------ ------------------------------------------- -----------------------------------------
o Compensation Committee $6,000 Chairman / $4,000 Member $5,000 Chairman / $1,000 Member
------------------------------------------ ------------------------------------------- -----------------------------------------
o Nominating Committee $2,500 Chairman - Chairman / $1,000 Member
------------------------------------------ ------------------------------------------- -----------------------------------------
Regular Board Cash Meeting Attendance Fee $2,500 / $1,000 Telephonic $2,500 / $1,000 Telephonic
------------------------------------------ ------------------------------------------- -----------------------------------------
Special Board Cash Meeting Attendance Fee $1,000 / $500 Telephonic $1,000 / $500 Telephonic
------------------------------------------ ------------------------------------------- -----------------------------------------
Committee Cash Meeting Attendance Fee $1,000 / $500 Telephonic $500 / $250 Telephonic
------------------------------------------ ------------------------------------------- -----------------------------------------
New Member Restricted Stock Award / 3,000 shares of restricted stock options to purchase 10,000 shares
Stock Option Award
------------------------------------------ ------------------------------------------- -----------------------------------------
Annual Member Restricted Stock / Stock 1,000 shares of restricted stock options to purchase 2,500 shares granted
Option Award
------------------------------------------ ------------------------------------------- -----------------------------------------
Committee Restricted Stock Award / Stock
Option Award
------------------------------------------ ------------------------------------------- -----------------------------------------
o Audit Committee 2,500 shares of restricted stock to the options to purchase 3,000 shares
Chairman / 1,500 shares of restricted granted to the Chairman / options to
stock to each Member purchase 1,000 shares granted to each
Member
------------------------------------------ ------------------------------------------- -----------------------------------------
o Compensation Committee 1,500 shares of restricted stock to the options to purchase 2,000 shares
Chairman / 1,000 shares of restricted granted to the Chairman / options to
stock to each Member purchase 1,000 shares granted to each
Member
------------------------------------------ ------------------------------------------- -----------------------------------------
o Nominating Committee 1,500 shares of restricted stock to the options to purchase - shares
Chairman / None to Members granted to the Chairman / options to
purchase 1,000 shares granted to each
Member
------------------------------------------ ------------------------------------------- -----------------------------------------
9
We expect that shares of restricted stock granted to Outside Directors in
the 2005-2006 director term will become fully vested on the first anniversary of
the date of grant, subject to approval of the proposed amendments to the
Incentive Plan by our shareholders.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the annual, long-term and total compensation
for (i) the Company's Chief Executive Officer for the fiscal years ended
December 31, 2004, 2003 and 2002 and (ii) its other four executive officers for
the fiscal years ended December 31, 2004, 2003 and 2002 (collectively, the
"Named Executives").
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation
Compensation Awards
------------------------------------------------ ------------
Name And Other Annual Stock All Other
Principal Position Year Salary($) Bonus($)(1) Compensation($)(2) Options(#) Compensation($)(3)
------------------------------ ------ ----------- ------------- -------------------- ------------ --------------------
S.P. Johnson, IV 2004 257,548 130,046 -- 8,334 38,605
President and Chief 2003 241,668 123,796 -- 50,000 5,515
Executive Officer 2002 233,604 48,017 -- -- 4,736
Paul F. Boling(4) 2004 157,500 56,421 25,000 6,315
Chief Financial Officer, 2003 68,626 31,382 -- 20,000 1,249
Vice President, Secretary
and Treasurer
J. Bradley Fisher (5) 2004 187,425 109,796 -- -- 40,669
Vice President of 2003 175,771 72,496 -- 25,000 10,825
Operations 2002 163,848 43,845 -- -- 7,368
Jeremy T. Greene (6) 2004 187,425 0 -- -- 39,392
Vice President of 2003 173,499 70,496 -- 40,000 3,441
Exploration 2002 84,499 26,345 -- 25,000 267
Kendall A. Trahan 2004 165,567 42,671 -- -- 27,504
Vice President of Land 2003 155,210 32,796 -- -- 5,269
2002 150,174 8,805 -- -- 4,676
----------
(1) Consists of bonuses earned with respect to the fiscal years listed. The
bonuses for 2004 are expected to be paid in April 2005.
(2) For the fiscal years 2002, 2003 and 2004 the Named Executives did not
receive any annual compensation not properly categorized as salary or
bonus, except for certain perquisites and other personal benefits which are
not shown because the aggregate amount of such compensation, if any, for
each Named Executive during each of those fiscal years did not exceed the
lesser of $50,000 or 10% of total salary and bonus reported for that Named
Executive.
(3) For the fiscal year 2004, all other compensation consists of special cash
bonuses in lieu of stock options of $25,000, $30,000, $30,000 and $15,000
for Messrs. Johnson, Fisher, Greene and Trahan, respectively; contributions
of $12,794, $5,559, $8,581, $8,358 and $11,693 by the Company under its
401(k) plan for Messrs. Johnson, Boling, Greene, Fisher and Trahan,
respectively; life insurance premiums of $811, $756, $811, $811 and $811
for Messrs. Johnson, Boling, Greene, Fisher and Trahan, respectively; and
overriding royalties of $1,500 for Mr. Fisher. Due to the low number of
shares of Common Stock available for issuance under the Incentive Plan, in
the first quarter of 2004, the Compensation Committee recommended and the
Board of Directors approved the award of a special cash bonus in lieu of
stock options to a number of key employees, including Messrs. Johnson,
Fisher, Greene and Trahan. Subsequently, because of the availability of
additional shares under the Incentive Plan, the Board of
10
Directors gave these employees the option to receive stock options in lieu
of a portion of the cash bonus. The special bonuses described above were
paid to Messrs. Johnson, Fisher, Greene and Trahan over three equal
installments on April 15, 2004, August 31, 2004 and February 28, 2005. Mr.
Johnson elected to receive stock options in lieu of a portion of his cash
bonus and therefore he received $25,000 and options to purchase 16,668
shares of Common Stock.
For the fiscal year 2003, all other compensation consists of contributions
of $4,818, $1,125, $4,674, $4,622, $2,753 and $3,222 by the Company under
its 401(k) plan for Messrs. Johnson, Boling, Trahan, Fisher and Greene,
respectively, life insurance premiums of $697, $124, $595, $604, $688 and
$464 for Messrs. Johnson, Boling, Trahan, Fisher and Greene, respectively,
and overriding royalties of $5,599 for Mr. Fisher. For the fiscal year
2002, all other compensation consists of contributions of $4,088, $4,129,
and $3,947 by the Company under its 401(k) plan for Messrs. Johnson, Trahan
and Fisher, respectively, life insurance premiums of $648, $546, $533 and
$267 for Messrs. Johnson, Trahan, Fisher and Greene, respectively, and
overriding royalties of $7,368 for Mr. Fisher. The compensation from
overriding royalties awarded to Mr. Fisher arises from a one-time award of
an overriding royalty interest on the Pitchfork Ranch A-90 #1 well to Mr.
Fisher in 2001. The Company has since adopted a policy that it will not
grant any overriding royalty interests to its employees.
(4) Mr. Boling commenced his employment with the Company in August 2003.
(5) Mr. Fisher became Vice President and Chief Operating Officer in March 2005.
(6) Mr. Greene commenced his employment with the Company in August 2002. He
left the Company in January 2005.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted during the fiscal year 2004 to the Named Executives.
Potential Realizable
Values at Assumed
Number of % of Total Annual Rates of Stock
Securities Options/SARs Price Appreciation for
Underlying Granted to Option Term(1)(2)
Options/SARs Employees in Exercise Price -----------------------
Name Granted Fiscal Year ($/share)(1) Expiration Date 5%($) 10%($)
------------------ ------------ ------------ -------------- --------------- ---------- ----------
S. P. Johnson IV. 8,334 9.7 8.265 09/03/2014 48,962 127,635
Paul F. Boling... 25,000 29.1 6.98 02/19/2014 155,375 354,625
J. Bradley Fisher -- -- -- -- -- --
Jeremy T. Greene. -- -- -- -- -- --
Kendall A. Trahan -- -- -- -- -- --
----------
(1) The exercise price of the options granted is equal to or greater than the
market value of the Common Stock on the date of grant.
(2) Potential realizable value of each grant assumes that the market price of
the underlying security (based upon the value of the Common Stock on the
date of grant) appreciates at annualized rates of 5% and 10% over the term
of the award. Actual gains, if any, on stock option exercises are dependent
on the future performance of Common Stock and overall market conditions.
There can be no assurance that the amounts reflected on this table will be
achieved.
11
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the unexercised
options to purchase the Common Stock held by the Named Executives at December
31, 2004.
Number of Securities Value of Unexercised In-the-
Underlying Unexercised Money Options at Fiscal
Shares Value Options at Fiscal Year-End Year-End($)(2)
Acquired on Realized --------------------------- ----------------------------
Name Exercise(#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
----------------- ------------- ---------- ----------- ------------- ----------- -------------
S. P. Johnson IV. -- -- 186,667 41,667 1,551,535 254,294
Paul F. Boling... -- -- 6,667 38,333 37,133 182,267
J. Bradley Fisher -- -- 28,333 41,667 203,550 324,150
Jeremy T. Greene. -- -- 29,999 35,001 218,062 247,638
Kendall A. Trahan 39,500 185,200 82,295 - 568,722 -
----------
(1) Value realized is calculated based on the difference between the option
exercise price and the closing market price of the Company's Common Stock
on the date of exercise, multiplied by the number of shares underlying the
options.
(2) Value of unexercised in-the-money options is calculated based upon the
difference between the option price and the closing price of the Company's
Common Stock at fiscal year-end, multiplied by the number of shares
underlying the options. The closing price of the Company's Common Stock, as
reported on the Nasdaq Stock Market on December 31, 2004, was $11.30.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the compensation committee during the last completed fiscal
year were Mr. Parker, Mr. Loyd and Bryan R. Martin, our former director. Mr.
Martin resigned from the Board and the compensation committee in December 2004.
Mr. Loyd stepped down from the compensation committee, and Mr. Ramsey was
appointed to the committee, in February 2005. Mr. Loyd served as our President
from our inception in September 1993 to December 1993. See "Certain
Transactions."
CERTAIN TRANSACTIONS
Pinnacle Transaction
During the second quarter of 2003, we and Rocky Mountain Gas, Inc. ("RMG")
each contributed our interests in certain natural gas and oil leases in Wyoming
and Montana in areas prospective for coalbed methane to a newly formed joint
venture, Pinnacle Gas Resources, Inc. In exchange for the contribution of these
assets, we and RMG each received 37.5% of the common stock of Pinnacle and
options to purchase additional Pinnacle common stock, or on a fully diluted
basis, we and RMG each received an ownership interest in Pinnacle of 26.9%. We
retained our interests in approximately 145,000 gross acres in the Castle Rock
project area in Montana and the Oyster Ridge project area in Wyoming. We no
longer have a drilling obligation in connection with the oil and natural gas
leases contributed to Pinnacle.
Simultaneously with the contribution of these assets, affiliates and
related parties of CSFB Private Equity (the "CSFB Parties") contributed
approximately $17.6 million of cash to Pinnacle in return for redeemable
preferred stock of Pinnacle, 25% of Pinnacle's common stock as of the closing
date and warrants to purchase Pinnacle common stock at an exercise price of
$100.00 per share, subject to adjustments ("Series A Warrants"). The CSFB
Parties currently have greater than 50% of the voting power of the Pinnacle
capital stock through their ownership of Pinnacle common and preferred stock.
In February 2004, the CSFB Parties contributed additional funds of $11.8
million to continue funding the 2004 development program of Pinnacle. Assuming
that we and RMG exercise our Pinnacle options, the CSFB Parties' ownership
interest in Pinnacle would be 54.6%, and we and RMG each would own 22.7%, on a
fully diluted basis. On the other hand, assuming we and RMG each elect not to
exercise our Pinnacle options, our interest, on a fully diluted basis, would
each decline to 16.7%, and, concurrently, the CSFB Parties' ownership
12
interest would increase to 66.7%. Our options are exercisable as long as we own
Pinnacle common stock, but the exercise price increases by 15% every year.
Immediately following its formation, Pinnacle acquired an approximate 50%
working interest in existing leases and approximately 36,529 gross acres
prospective for coalbed methane development in the Powder River Basin of Wyoming
from an unaffiliated party for $6.2 million. At the time of the Pinnacle
transaction, these wells were producing at a combined gross rate of
approximately 2.5 MMcfd, or an estimated 1 MMcfd net to Pinnacle. At the end of
2004 Pinnacle's production was approximately 13 Mmcfe/d gross (5.6 Mmcfe/d net).
In June 2004, Pinnacle fulfilled a $14.5 million funding commitment for future
drilling and development costs on these properties on behalf of the third party
prior to December 31, 2005. The drilling and development work will be done under
the terms of an earn-in joint venture agreement between Pinnacle and Gastar. As
of December 31, 2004, Pinnacle owned interests in approximately 131,000 gross
acres in the Powder River Basin.
Historically, the business operations and development program of Pinnacle
has not required us to provide any further capital infusion. In March 2005,
Pinnacle acquired additional undeveloped acreage from an undisclosed company
which would also significantly increase Pinnacle's development program budget in
2005. Accordingly, CCBM and the other Pinnacle shareholders have the option to
participate in the equity contribution into Pinnacle needed to finance the
acquisition and the related development program in 2005. The CSFB Parties have
already made the first of their pro rata contributions. Should we elect to
maintain our proportionate ownership interest in Pinnacle, we estimate that we
would be required to contribute two payments of $2.5 million each. The first of
these payments is due in mid April 2005. If CCBM opts not to contribute any or
all of its share of the equity contribution, its fully diluted ownership in
Pinnacle would be reduced. CCBM plans to contribute $2.5 million in April 2005,
its share of the equity capital needed to close the acquisition and fund part of
the additional development program. There can be no assurance regarding CCBM's
level of participation in the second of the two payments or in future equity
contributions needed, if any. On March 29, 2005, we elected to participate in
the first payment and contribute $2.5 million to Pinnacle in exchange for Series
A Warrants, Series B warrants to purchase Pinnacle common stock at an exercise
price of $0.01 per share, subject to adjustments, and preferred stock.
The Company's Chairman, Steven A. Webster, is also Chairman of Global
Energy Partners, Ltd., an affiliate of CSFB Private Equity.
The Company has mutually agreed with RMG, its majority shareholder and the
CSFB Parties to provide Pinnacle the right until June 23, 2008 to acquire at
cost any interest in natural gas and oil leases or mineral interests in the
Powder River Basin in Wyoming and Montana, but excluding most of Powder River
County, Montana, that such parties may have acquired in the covered area,
subject to specified exceptions.
The Company, the CSFB Parties, RMG, RMG's parent company, Peter G.
Schoonmaker, Gary W. Uhland and Pinnacle also entered into a security holders'
agreement providing for an initial eight person board of directors, which
initially includes four directors nominated by the CSFB Parties and two
nominated by each of the Company and RMG, subject to change as their respective
ownership percentages change. Each party to the security holders' agreement also
granted to the others a right of first offer and co-sale rights. If the CSFB
Parties propose to sell all of their Pinnacle shares to a third party, under
specified circumstances the CSFB Parties may require the other security holders
to include all of their Pinnacle shares in that sale. In event of such a sale,
the Pinnacle preferred stock will have a preferred right to receive an amount
equal to its liquidation value (as defined below) per share plus accrued and
unpaid dividends prior to distributions to the holders of shares of Pinnacle
common stock and common stock equivalents. Pinnacle also granted the security
holders pre-emptive rights to purchase additional securities in order to
maintain their proportionate ownership of Pinnacle. The security holders'
agreement also provides generally for multiple demand registration rights with
respect to the Pinnacle common stock in favor of the CSFB Parties and certain
piggyback registration rights for the Company and RMG subject to the
satisfaction of specified conditions.
The Pinnacle redeemable preferred stock generally has the right to vote
together with the Pinnacle common stock and has a class vote on specified
matters, including specified extraordinary transactions. In the event of any
dissolution, liquidation, or winding up by Pinnacle, the holder of each share of
Pinnacle preferred
13
stock will be entitled to be paid a liquidation value of $100 per share out of
the assets of Pinnacle available for distribution to its shareholders.
Dividends on the Pinnacle preferred stock are payable either in cash at a
rate of 10.5% per annum through June 23, 2011 and 12.5% thereafter or, at
Pinnacle's option, by payment in kind of additional shares of the Pinnacle
preferred stock. For each additional share of Pinnacle preferred stock
distributed to a holder as an in-kind dividend, Pinnacle will also deliver to
that holder one Pinnacle warrant, which will have an exercise price equal to the
exercise price of the outstanding Pinnacle warrants on the date of such
distribution. On or after July 1, 2005, Pinnacle may redeem all or any portion
of the Pinnacle preferred stock, provided that if any Pinnacle warrants are
still outstanding, Pinnacle may redeem all but a single share; if the redemption
occurs at any time before July 1, 2009, the redemption price will be at a
premium to the liquidation value of the shares.
Pinnacle is required to redeem its preferred stock upon:
o specified changes of control, at a price per share equal to 101% of
its liquidation value; or
o specified events of default, at a price per share equal to 110% of the
liquidation value prior to June 30, 2005 and, thereafter, equal to an
optional redemption price that decreases over time.
The Pinnacle warrants entitle the holders to purchase up to 130,000 shares
of Pinnacle common stock at a price of $100 per share and are exercisable at any
time until June 30, 2013. The Pinnacle warrants can be exercised in cash, by
tender of the Pinnacle preferred stock and on a cashless net exercise basis. The
Pinnacle warrants are subject to adjustments, including, in specified cases, an
adjustment of the exercise price to equal the lowest price at which Pinnacle
common stock is sold if such shares are sold below the then-current exercise
price.
2002 Financing
On February 20, 2002, the Company consummated the transactions (the "2002
Financing") contemplated by a Securities Purchase Agreement dated February 20,
2002 (the "2002 Securities Purchase Agreement") among the Company, Mellon
Ventures, L.P. ("Mellon") and Steven A. Webster (excluding the Company, the
"2002 Investors"). Such transactions included (i) the payment by the 2002
Investors of an aggregate purchase price of $6,000,000, (ii) the sale of 60,000
shares of Series B Convertible Participating Preferred Stock (the "Series B
Preferred Stock") the terms of which are set forth in the Statement of
Resolution Establishing Series of Shares designated Series B Convertible
Participating Preferred Stock (the "Statement of Resolution") and which include
the right to convert such shares into Common Stock (the "Underlying Shares") at
a price of $5.70 per share, subject to adjustments, to the 2002 Investors
pursuant to the terms of the 2002 Securities Purchase Agreement and (iii) the
sale of warrants (the "2002 Warrants") to purchase up to 252,632 shares of the
Company's Common Stock (the "2002 Warrant Shares") at the exercise price of
$5.94 per share, subject to adjustments, to the 2002 Investors pursuant to the
terms of Warrant Agreement dated February 20, 2002 (the "2002 Warrant
Agreement") among the Company, Mellon and Steven A. Webster, (iv) the execution
of the Shareholders Agreement dated February 20, 2002 (the "2002 Shareholders
Agreement") among the Company, Mellon, Paul B. Loyd, Jr., Douglas A.P. Hamilton,
Steven A. Webster, S.P. Johnson IV, Frank A. Wojtek and DAPHAM Partnership,
L.P., (v) the execution of the Registration Rights Agreement dated February 20,
2002 ("2002 Registration Rights Agreement") among the Company, Mellon and Steven
A. Webster and (vi) the execution of a Compliance Sideletter dated as of
February 20, 2002 by and between the Company and Mellon (the "2002 Compliance
Sideletter"). The Company sold $4.0 million and $2.0 million of Series B
Preferred Stock and 168,422 and 84,210 2002 Warrants to Mellon and Mr. Webster,
respectively. In the first quarter of 2004, Mellon converted all of its 2002
Warrants into 168,421 shares of Common Stock.
In June 2004, the 2002 Shareholders Agreement was terminated by agreement
of the parties. Mellon converted all of its shares of Series B Preferred Stock
(approximately 49,938 shares) into 876,099 shares of Common Stock on May 25,
2004. Steven A. Webster converted all of his Series B Preferred Stock
(approximately 25,195 shares) into 442,025 shares of Common Stock on June 30,
2004. As a result, no shares of Series B Preferred Stock remain outstanding.
14
The 2002 Warrants had a five-year term and originally entitled the holders
to purchase up to 252,632 shares of our common stock at a price of $5.94 per
share, subject to adjustment, and were exercisable at any time after issuance.
As of December 31, 2004, 84,211 of the 2002 Warrants remained outstanding (all
held by Mr. Webster). On March 22, 2005, Mr. Webster converted all of his 2002
Warrants into 54,669 shares of Common Stock. As a result, no 2002 Warrants
remain outstanding. For accounting purposes, the 2002 Warrants were valued at
$0.06 per Warrant. Each of our series of warrants was exercisable on a cashless
basis at the option of the holder.
1999 Financing
On December 15, 1999, the Company consummated the transactions (the "1999
Financing") contemplated by a Securities Purchase Agreement dated December 15,
1999 (the "1999 Securities Purchase Agreement") among the Company, CB Capital
Investors, L.P. ("Chase") (now JPMorgan Partners (23A SBIC), LLC), Mellon,
Steven A. Webster, Douglas A.P. Hamilton and Paul B. Loyd, Jr. (excluding the
Company, the "Investors"). Such transactions included (i) the payment by the
Investors of an aggregate purchase price of $30,000,000, (ii) the sale of an
aggregate of $22,000,000 principal amount of 9% Senior Subordinated Notes due
2007 (the "Notes") to the Investors, (iii) the sale of an aggregate of 3,636,364
shares of Common Stock for $2.20 per share to the Investors, (iv) the sale of
warrants (the "1999 Warrants") to purchase up to 2,760,189 shares of the
Company's Common Stock (the "1999 Warrant Shares") at the exercise price of
$2.20 per share, subject to adjustments, to the Investors, (v) the execution of
a Shareholders Agreement dated December 15, 1999 among the Company, Chase,
Mellon, Paul B. Loyd, Jr., Douglas A.P. Hamilton, Steven A. Webster, S.P.
Johnson IV, Frank A. Wojtek and DAPHAM Partnership, L.P., (vi) the execution and
delivery of the Warrant Agreement dated December 15, 1999 (the "Warrant
Agreement") among the Company, Chase, Mellon, Paul B. Loyd, Jr., Douglas A.P.
Hamilton and Steven A. Webster, (vii) the execution of the Registration Rights
Agreement dated December 15, 1999 ("Chase Registration Rights Agreement") among
the Company, Chase and Mellon, (viii) the execution of the Amended and Restated
Registration Rights Agreement dated December 15, 1999 ("Amended Founders
Registration Rights Agreement") among the Company, Paul B. Loyd, Jr., Douglas
A.P. Hamilton, Steven A. Webster, S.P. Johnson IV, Frank A. Wojtek and DAPHAM
Partnership, L.P., and (ix) the execution of a Compliance Sideletter dated
December 15, 1999 among the Company, Chase and Mellon (the "1999 Compliance
Sideletter"). The Company sold $17.6 million, $2.2 million, $0.8 million, $0.8
million and $0.8 million principal amount of the Notes; 2,909,091, 363,636,
121,212, 121,212 and 121,212 shares of the Company's common stock and 2,208,151,
276,019, 92,006, 92,006 and 92,006 1999 Warrants to Chase, Mellon, Mr. Loyd, Mr.
Hamilton and Mr. Webster, respectively.
In April 2004, the 1999 Shareholders Agreement was amended so that Messrs.
Hamilton and Loyd and DAPHAM Partnership, L.P. are no longer parties to the
agreement. In June 2004, the 1999 Shareholders Agreement was again amended so
that Mellon, Messrs. Johnson, Wojtek and Webster are no longer parties to the
agreement.
On June 7, 2004, an unaffiliated third party (the "Subordinated Notes
Purchaser") purchased all the outstanding Subordinated Notes in an aggregate
principal amount of $27,702,426.55 from the original note holders. In exchange
for a $415,536.40 amendment fee, certain terms and conditions of the
Subordinated Notes were amended, to provide for, among other things, (1) a one
year extension of the maturity to December 15, 2008, (2) a one year extension,
through December 15, 2005, of the paid-in-kind ("PIK") interest option to
pay-in-kind 60% of the interest due each period by increasing the principal
balance by a like amount (the "PIK option"), (3) an additional one year option
to extend the PIK option through December 15, 2006 at an annual interest rate on
the deferred amount of 10% and the payment of a one-time fee equal to 0.5% of
the principal then outstanding, (4) an increase and extension on the prepayment
premium on the Subordinated Notes, (5) a modification of a covenant regarding
maximum quarterly leverage that our Total Debt will not exceed 3.5 times EBITDA
(as such terms are defined in the securities purchase agreement related to the
Subordinated Notes) for the last 12 months at any time and (6) additional
flexibility to obtain a separate project financing facility in the future.
15
In 2004, Mellon, JPMorgan Partners (23A SBIC), Mr. Webster and Mr. Hamilton
exercised 1999 Warrants to purchase 276,019, 2,208,152, 92,006 and 92,006 shares
of Common Stock, respectively, on a cashless exercise basis for a total of
205,692, 1,684,949, 70,205 and 70,205 shares of Common Stock, respectively, and
Mr. Loyd exercised 1999 Warrants to purchase 92,006 shares for a total of 92,006
shares of Common Stock. As a result, no 1999 Warrants remain outstanding.
Pursuant to amendments in June 2004, the 1999 Shareholders Agreement
provided that the Company's board of directors will nominate and solicit proxies
on behalf of one or two, depending on the amount of Company securities held by
Chase, nominees for director designated by Chase. Currently, Chase does not own
the requisite amount of stock to trigger this obligation and no Chase designated
nominees are nominated for election at the 2005 Annual Meeting of Shareholders.
The Company agreed in the 1999 Shareholders Agreement to limit the maximum
number of common stock equivalents issuable under the Company's equity incentive
plans to 2.5 million shares and equivalents (including any shares and
equivalents issued or issuable as of the date of the 1999 Shareholders
Agreement). In April 2004, the Company received a waiver under the 1999
Shareholders Agreement allowing the Company to increase the number of authorized
shares available under the Incentive Plan to 2,350,000. The 1999 Shareholders
Agreement has since terminated in accordance with its own terms.
Additional information concerning the Subordinated Notes, the 1999 Warrants
and the transactions relating to the 1999 Securities Purchase Agreement may be
found in the Company's Current Report on Form 8-K dated December 15, 1999 and
the Company's Current Report on Form 8-K dated June 7, 2004, including the
exhibits to each document.
Certain Matters Regarding Mr. Webster
In December 2001, the Company sold to Mr. Webster a 2% working interest in
certain leases in Matagorda County and the right to participate in the Staubach
#1 well located within those leases in exchange for $20,000 and the payment by
Mr. Webster of a 33% promoted interest for the drilling costs through casing
point of that well. The terms of this sale were consistent with the terms of
sales to other participants in this project.
In November 1999, the Company entered into a month-to-month agreement with
San Felipe Resource Company, an entity owned by Mr. Webster, under which Mr.
Webster provides consulting services to the Company in exchange for a fee of
$9,000 per month, which was increased to $12,000 per month effective April 2003.
The Company provides office space for Mr. Webster's son.
In the first quarter of 2004, due to the low number of shares of Common
Stock available for issuance under the Incentive Plan, the Compensation
Committee recommended and the Board of Directors approved the award of a special
cash bonus in lieu of stock options to Mr. Webster. The special bonus was paid
to Mr. Webster in three equal installments of $40,000 on April 15, 2004, August
31, 2004 and February 28, 2005.
Certain Matters Regarding Mr. Carter
On March 3, 2005, the Board of Directors appointed Mr. Carter to the Board
of Directors and the Nominating Committee. Mr. Carter and his immediate family
members collectively own interests directly and indirectly through entities,
which are royalty owners in the Company's Louisiana Delta Farms #1, Louisiana
Delta Farms #2 and King Gas #1. Mr. Carter also serves as an executive officer,
general partner or controlling shareholder of these entities (the "Black Stone
Entities") and in some cases he and his family hold substantial interests in
these entities. The Black Stone Entities acquired the royalty interests from a
third party in June 2004. The Company estimates that, during 2004, (i) the Black
Stone Entities collectively earned approximately $444,770 from working interests
in which the Company is a partial owner, (ii) approximately $24,000 of the
amount received from these working interests was attributable to the ownership
of Mr. Carter and his immediate family, and (iii) Mr. Carter's family members
received $2,063 directly from these working interests. These amounts reflect
production from the Company's wells for only the trailing seven months of 2004
and are expected to increase for a full year of production in 2005. In addition,
the Black Stone Entities
16
own royalty interests in the undeveloped Lazarus and Twins Prospects, which the
Company may develop in the future.
The Board of Directors determined that Mr. Carter's existing relationship
with the Company and his interest in the Black Stone Entities does not currently
and will not in the future be deemed to create a conflict of interest under the
Code of Ethics and is in compliance with the Code of Ethics. The Board of
Directors determined that Mr. Carter would recuse himself on matters relating to
the Delta Farms Wells and Lazarus and Twins Prospects as an appropriate and
preventative action to eliminate future conflicts of interest relating to Mr.
Carter's interest in the Black Stone Entities.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each executive
officer listed below. The following chart shows the annual base salaries that
the executive officers listed therein are currently being paid by the Company.
Name and Current Position Annual Salary
------------------------------------------------------------ -------------
S. P. Johnson IV............................................ $ 283,500
President and Chief Executive Officer
Paul F. Boling.............................................. $ 173,250
Chief Financial Officer, Vice President, Secretary and
Treasurer
Gregory E. Evans(1)......................................... $ 175,000
Vice President of Exploration
J. Bradley Fisher (2)....................................... $ 226,800
Vice President of Operations
Jeremy T. Greene (3)........................................ N/A
Vice President of Exploration
Kendall A. Trahan........................................... $ 173,845
Vice President of Land
----------
(1) Mr. Evans' employment commenced in March 2005.
(2) Mr. Fisher became Vice President and Chief Operating Officer in March 2005.
(3) Mr. Greene left the Company in January 2005.
Each of the employment agreements of Mr. Johnson, Mr. Trahan, Mr. Greene
and Mr. Fisher has an initial three-year term; provided that at the end of the
second year of such initial term and on every day thereafter, the term of each
such employment agreement will automatically be extended for one day, such that
the remaining term of the agreement shall never be less than one year. The
employment agreements for Mr. Boling and Mr. Evans have an initial one year
term; provided that at the date of the agreement and on every day thereafter,
the term of such employment agreement is automatically extended for one day,
such that the remaining term of the agreement shall never be less than one year.
Under each agreement, both the Company and the employee may terminate the
employee's employment at any time. Upon termination of employment on account of
disability or if employment is terminated by the Company for any reason (except
under certain limited circumstances defined as "for cause" in the agreement), or
if employment is terminated either (x) for any reason (including by reason of
death) during a sixty day period following the elapse of one year after such a
change of control ("window period") or (y) by the employee with good reason (as
defined), under the agreements the employee will generally be entitled to (i) an
immediate lump sum cash payment equal to 150% for Messrs. Johnson, Trahan and
Fisher, 125% in the case of Mr. Greene and 100% in the case of Mr. Boling and
Mr. Evans (375% for Messrs. Johnson and Trahan, 275% for Mr. Fisher and 175% for
Mr. Greene, if termination occurs after or in anticipation of a change of
control) of his annual base salary that would have been payable for the
remainder of the term of the applicable agreement discounted at 6%, (ii)
continued participation in all the Company's welfare benefit plans and continued
life insurance and medical benefits coverage, (iii) a pro-rated bonus for the
year of termination and (iv) the immediate vesting of any stock options or
restricted stock previously granted to such employee and outstanding as of the
time
17
immediately prior to the date of his termination, an extension of the period of
exercisability of any such awards until the earlier of (A) one year following
his date of termination or (B) the date such awards would have lapsed had the
employee remained employed for the remaining term, or, in the case of Mr.
Johnson, Mr. Fisher and Mr. Trahan, a cash payment in lieu of each outstanding
compensatory equity award (the "Cash Election"). In the event of a Cash
Election, Mr. Fisher and Mr. Trahan will receive in exchange for any or all
compensatory awards that are either denominated in or payable in Common Stock,
including options and restricted stock, an amount in cash equal to the excess of
(x) the highest price per share (as defined below) over (y) the exercise or
purchase price, if any, of such awards. The Term "Highest Price Per Share"
generally means the highest price per share that can be determined to have been
paid or agreed to be paid for any share of Common Stock by certain classes of
persons, including (1) a beneficial owner of 10% or more of the outstanding
voting stock of the Company and (2) a person who has any material involvement in
proposing or effectuating a change of control (as defined). If the termination
is after or in anticipation of a change of control, the assumed remaining
employment period for Mr. Boling and Mr. Evans for purposes of calculating the
lump sum described above in subparagraph (i) shall be 18 months. If employment
terminates due to death of the employee and other than in a window period, the
Company will pay a sum equal to the amount of the employee's annual base salary
for the remaining term of the agreement, reduced by the amount payable under any
life insurance policies to the extent that such amounts are attributable to
premiums paid by the Company, a prorated annual bonus for the year of death,
continued welfare benefits for the employee's dependents for one year following
death and immediate vesting and extension of exercisability of equity awards as
described above. The salaries in each of these agreements are subject to
periodic review and provide for increases consistent with increases in base
salary generally awarded to other executives of the Company. Each agreement
entitles the employee to participate in all of the Company's incentive, savings,
retirement and welfare benefit plans in which other executive officers of the
Company participate. The agreements each provide for an annual bonus in an
amount comparable to the annual bonus of other Company executives, taking into
account the individual's position and responsibilities. In the event of a
dispute regarding the employee's rights upon termination of employment, the
agreements also provide that the employee is entitled to payment of his legal
fees and any amounts potentially due under the Agreement pending resolution of
the dispute, provided that he must return any attorneys' fees advanced in the
event he is not the prevailing party in the dispute. The agreements also provide
that the employees will be entitled to a gross-up payment to offset the effect
of any excise tax imposed under Section 4999 of the Internal Revenue Code (the
"Code") in connection with payments contingent on a change of control. Upon a
voluntary termination of employment, the employees have agreed to be subject to
specified noncompetition covenants.
AUDIT COMMITTEE REPORT
The Audit Committee's purpose is to assist the Board of Directors in its
oversight of the Company's internal controls and financial statements and the
audit process. The Board of Directors, in its business judgment, has determined
that the members of the Audit Committee, are "independent," as required by
applicable standards of the Nasdaq Stock Market. The Audit Committee operates
pursuant to a written charter adopted by our Board of Directors. A copy of the
Audit Committee Charter is available on the Company's website at www.carrizo.cc.
Management is responsible for the preparation, presentation and integrity
of the Company's financial statements, accounting and financial reporting
principles and internal controls and procedures designed to assure compliance
with accounting standards and applicable laws and regulations. The independent
auditors are responsible for performing an independent audit of the consolidated
financial statements in accordance with generally accepted auditing standards.
In performing its oversight role, the Audit Committee has reviewed and
discussed the audited financial statements with management and the independent
auditors. The Audit Committee has also discussed with the independent auditors
the matters required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as currently in effect. The Audit Committee
has received the written disclosures and the letter from the independent
auditors required by Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committees, as currently in effect.
18
Based on the reports and discussions described in this report, and subject
to the limitations on the role and responsibilities of the Audit Committee
referred to below and in the charter, the Audit Committee recommended to the
Board of Directors that the audited financial statements be included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2004.
Members of the Audit Committee rely, without independent verification, on
the information provided to them and on the representations made by management
and the independent auditors. Accordingly, the Audit Committee's oversight does
not provide an independent basis to determine that management has maintained
appropriate accounting and financial reporting principles or appropriate
internal controls and procedures designed to assure compliance with accounting
standards and applicable laws and regulations. Furthermore, the Audit
Committee's considerations and discussions referred to above do not assure that
the audit of the Company's financial statements has been carried out in
accordance with generally accepted auditing standards, that the financial
statements are presented in accordance with generally accepted accounting
principles or that the independent auditors are in fact "independent."
The Audit Committee
F. Gardner Parker
Paul B. Loyd, Jr.
Roger A. Ramsey
PURSUANT TO SEC RULES, THE FOREGOING AUDIT COMMITTEE REPORT IS NOT DEEMED
"FILED" WITH THE SEC AND IS NOT INCORPORATED BY REFERENCE INTO THE COMPANY'S
ANNUAL REPORT ON FORM 10-K.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation programs are designed to attract and
retain highly qualified executives and to motivate them to maximize shareholder
returns. The Company's executive compensation program is intended to provide
competitive compensation levels and incentive pay levels that vary based on
corporate and individual performance.
There are three basic components to the Company's current compensation
system: base pay; annual incentive compensation in the form of a cash bonus; and
long-term equity-based incentive compensation. Each component is addressed in
the context of individual and Company performance and competitive conditions. In
determining competitive compensation levels, the Company analyzes data that
includes information regarding the general oil and natural gas exploration and
production industry.
Actual individual awards and changes in remuneration to the individual
executives are recommended by the Compensation Committee but approved by the
Board of Directors. The Chief Executive Officer works with the Compensation
Committee in the design of the plans and makes recommendations to the Committee
regarding the salaries and bonuses of Company employees that report directly to
him. Grants or awards of stock, including stock options, are individually
determined and administered by the Compensation Committee.
Base Pay. Base pay is designed to be competitive with salary levels for
comparable executive positions at other oil and natural gas exploration and
production companies and the Compensation Committee reviews such comparable
salary information as one factor to be considered in determining the base pay
for the Company's executive officers. Other factors the Compensation Committee
considers in determining base pay for each of the executive officers are that
officer's responsibilities, experience, leadership, potential future
contribution, and demonstrated individual performance. The types and relative
importance of specific financial and other business objectives vary among the
Company's executives depending on their positions and the particular operations
and functions for which they are responsible. The Compensation Committee also
considers the Company's earnings levels and progress in implementing its
business strategy in establishing base salary increases for executives. The
employment contracts of the executive officers provide that base pay is to be
reviewed at least annually and will be increased at any time and from time to
time, and that any increase will be substantially consistent with increases in
base salary generally awarded in the ordinary course
19
of business to executives of the Company. As a result of the Company's positive
financial results and continued drilling success, the base salary of Mr. Fisher
was increased by 16% in January 2005 and each of Messrs. Johnson, Boling, Fisher
and Trahan was increased by 10%, 10%, 4% and 5%, respectively, effective April
2005.
Annual Bonus. The annual bonus is determined by the Compensation Committee.
The employment contracts with the executive officers contemplate annual bonus
awards in an amount comparable to the annual bonus of other Company executives,
taking into account the individual's position and responsibilities. As a result
of the Company's positive financial results and continued drilling success in
2004, each of Messrs. Johnson, Boling, Fisher and Trahan was awarded a bonus
equal to 50%, 35%, 58% and 25%, respectively, of their annual base pay.
Special Cash Bonus in lieu of Stock Options. Due to the low number of
shares of Common Stock available for issuance under the Incentive Plan, in the
first quarter of 2004, the Compensation Committee recommended and the Board of
Directors approved the award of a special cash bonus in lieu of stock options to
a number of key employees, including the Company's executive officers.
Subsequently, because of the availability of additional shares under the
Incentive Plan, the Board of Directors gave these employees the option to
receive stock options in lieu of a portion of the cash bonus. The special
bonuses were paid to each recipient over three equal installments on April 15,
2004, August 31, 2004 and February 28, 2005. Messrs. Fisher, Greene and Trahan
did not elect to receive any stock options and received total cash bonuses of
$45,000, $45,000 and $22,500, respectively. Mr. Johnson elected to receive stock
options in lieu of a portion of his cash bonus and therefore he received $25,000
and options to purchase 16,668 shares of Common Stock.
Long-Term Equity-Based Compensation. To date, the Company has relied
primarily upon stock option awards to provide long-term incentives for
executives, although most recently the Compensation Committee has begun to rely
upon restricted stock. Prior to the Company's IPO, the shareholders and the
Board of Directors of the Company approved the Company's Incentive Plan. The
objectives of the Incentive Plan are to (i) attract and retain the services of
key employees, qualified independent directors and qualified consultants and
other independent contractors and (ii) encourage a sense of proprietorship in
and stimulate the active interest of those persons in the development and
financial success of the Company by making awards designed to provide
participants in the Incentive Plan with proprietary interest in the growth and
performance of the Company. Long-term equity-based compensation is tied to
shareholder return.
Under the Company's Incentive Plan, long-term incentive compensation
includes stock options, which generally have a ten-year term and vest in 33%
increments in each of the three years following the date of the grant. The
exercise price of stock options granted is equal to or greater than the fair
market value of the Common Stock on the date of grant; accordingly, executives
receiving stock options are rewarded only if the market price of the Common
Stock appreciates. Stock options are thus designed to align the interests of the
Company's executives with those of its shareholders by encouraging executives to
enhance the value of the Company and, hence, the price of the Common Stock and
each shareholder's return.
On February 19, 2004 and September 3, 2004, the Company granted options to
purchase 25,000 and 8,334 shares of Common Stock to Mr. Boling and Mr. Johnson,
at an exercise price per share of $6.98 and $8.265, respectively. These options
have a ten-year term and vest in 33% increments in each of the three years
following the date of the grant.
Particularly given the significant increase in the Company's stock price in
the past few years, the Compensation Committee believes that the use of
restricted stock may be a preferable tool to incentivize executive officers, and
on April 11, 2005, granted 9,300, 4,710, 5,800 and 3,000 shares of restricted
stock to Messrs. Johnson, Boling, Fisher and Trahan, respectively. The
Compensation Committee retains the flexibility to grant either restricted stock
or stock options in the future, depending on various factors, including the
price of the Common Stock.
The Company may periodically grant new awards to provide continuing
incentive for future performance. In making the decision to grant additional
awards, the Compensation Committee would expect to consider factors such as the
size of previous grants and the number of awards held. In determining whether to
grant
20
executive officers awards under the Plan, the Compensation Committee considers
factors, including that executive's current ownership stake in the Company, the
degree to which increasing that ownership stake would provide the executive with
additional incentives for future performance, the likelihood that the grant of
those awards would encourage the executive to remain with the Company and the
value of the executive's service to the Company.
Section 162(m) of the Internal Revenue Code. Section 162(m) of the Internal
Revenue Code of 1986, as amended, generally limits (to $1 million per covered
executive) the deductibility for federal income tax purposes of annual
compensation paid to a company's chief executive officer and each of its other
four most highly compensated executive officers. The Compensation Committee and
the Board of Directors will take deductibility or nondeductibility of
compensation into account but have in the past authorized, and will retain the
discretion in the future to authorize, the payment of potentially nondeductible
amounts.
Compensation of the Chief Executive Officer. The Compensation Committee
based the compensation of the Company's Chief Executive Officer, Mr. Johnson, on
the same considerations described above for other executive officers. As a
result of the Company's positive financial results and continued drilling
success, in April 2005, the Company increased Mr. Johnson's salary by 10%,
awarded him a bonus of $128,750 and granted him 9,300 shares of restricted
stock.
Executive compensation is an evolving field. The Compensation Committee
monitors trends in this area, as well as changes in law, regulation and
accounting practices, that may affect either its compensation practices or its
philosophy. Accordingly, the Committee reserves the right to alter its approach
in response to changing conditions.
The Compensation Committee
F. Gardner Parker
Roger A. Ramsey
21
PERFORMANCE GRAPH
The following graph presents a comparison of the yearly percentage change
in the cumulative total return on the Common Stock over the period from December
31, 1999 to December 31, 2004, with the cumulative total return of the S&P 500
Index and of the American Stock Exchange Natural Resource Industry Index of
publicly traded companies over the same period. The graph assumes that $100 was
invested on December 31, 1999, in the Common Stock at the closing market price
at the beginning of this period and in each of the other two indices and the
reinvestment of all dividends, if any.
The graph is presented in accordance with SEC requirements. Shareholders
are cautioned against drawing any conclusions from the data contained therein,
as past results are not necessarily indicative of future financial performance.
COMPARISON OF CUMULATIVE TOTAL RETURN*
AMONG CARRIZO OIL & GAS, INC., THE S&P 500 INDEX AND
THE AMERICAN STOCK EXCHANGE NATURAL RESOURCE INDUSTRY INDEX
(PERFORMANCE GRAPH)
--------------- ------- -------- ----------
S & P AMEX C O & G
--------------- ------- -------- ----------
12/31/99 100 100 100
--------------- ------- -------- ----------
03/31/00 102 109 194
--------------- ------- -------- ----------
06/30/00 99 120 300
--------------- ------- -------- ----------
09/30/00 98 130 700
--------------- ------- -------- ----------
12/31/00 90 140 456
--------------- ------- -------- ----------
03/31/01 79 131 325
--------------- ------- -------- ----------
06/30/01 83 122 271
--------------- ------- -------- ----------
09/30/01 71 111 221
--------------- ------- -------- ----------
12/31/01 78 114 222
--------------- ------- -------- ----------
03/31/02 78 131 278
--------------- ------- -------- ----------
06/30/02 67 131 213
--------------- ------- -------- ----------
09/30/02 55 123 211
--------------- ------- -------- ----------
12/31/02 60 125 264
--------------- ------- -------- ----------
03/31/03 58 134 230
--------------- ------- -------- ----------
06/30/03 66 147 305
--------------- ------- -------- ----------
09/30/03 68 150 355
--------------- ------- -------- ----------
12/31/03 76 186 360
--------------- ------- -------- ----------
03/31/04 77 193 363
--------------- ------- -------- ----------
06/30/04 78 192 511
--------------- ------- -------- ----------
09/30/04 76 215 480
--------------- ------- -------- ----------
12/31/04 82 237 565
--------------- ------- -------- ----------
----------
* $100 Invested on December 31, 1999 in Stock or Index (Including Reinvestment
of Dividends).
PURSUANT TO SEC RULES, THE FOREGOING COMPENSATION COMMITTEE REPORT AND
STOCK PERFORMANCE GRAPH ARE NOT DEEMED "FILED" WITH THE SEC AND ARE NOT
INCORPORATED BY REFERENCE INTO THE COMPANY'S ANNUAL REPORT ON FORM 10-K.
22
EQUITY COMPENSATION PLANS
Information concerning our equity compensation plan at December 31, 2004 is
as follows:
Number of Number of Securities
Securities to be Weighted- Remaining Available
Issued Upon Average Exercise for Future
Exercise of Price of Issuance Under
Outstanding Outstanding Equity Compensation
Options, Warrants Options, Plans (Excluding
and Rights Warrants and Securities Reflected
Plan Category (a) Rights (b) in Column (a)) (c)
-------------------------------- ----------------- ---------------- --------------------
Equity compensation plans
approved by security
holders.................... 1,280,507 $ 4.07 394,832
Equity compensation plans
not approved by security
holders(1)................. 42,295 $ 3.60 -
----------------- ---------------- --------------------
Total...................... 1,322,802 $ 4.05 394,832
================= ================ ====================
----------
(1) Includes options to purchase 42,295 shares of Common Stock granted to Mr.
Trahan prior to the closing of the Company's IPO. These options, which were
not granted under the Company's Incentive Plan, have vested and are fully
exercisable at the exercise price stated above.
PROPOSAL 2
PROPOSAL TO AMEND INCENTIVE PLAN
At the time of its initial public offering, the Company adopted the
Incentive Plan. The objectives of the Incentive Plan are to:
o attract and retain the services of key employees, qualified directors
and qualified consultants and other independent contractors; and
o encourage the sense of proprietorship in and stimulate the active
interest of those persons in the development and financial success of
the Company by making awards ("Awards") designed to provide
participants in the Incentive Plan with proprietary interest in the
growth and performance of the Company.
The Company currently has reserved 2,350,000 shares of Common Stock for use
in connection with the Incentive Plan. Persons eligible for Awards are (i)
employees holding positions of responsibility with the Company and whose
performance can have a significant effect on the success of the Company, (ii)
nonemployee directors and (iii) certain nonemployee consultants and other
independent contractors.
As of April 11, 2005, 1,870,338 options (excluding awards that have been
forfeited or otherwise again become available under the Incentive Plan) and
69,075 shares of restricted stock had been granted under the Incentive Plan to
72 current and former employees and directors of the Company to purchase a total
of approximately 1,939,413 shares of Common Stock. As of April 11, 2005, there
were 410,587 shares available for issuance under the Incentive Plan.
The Company is proposing to amend the Incentive Plan to replace the
automatic grant of options to nonemployee directors to purchase 10,000 shares of
Common Stock when they first join the Company's Board of Directors with
discretionary awards of options to purchase Common Stock and shares of
restricted stock that are determined by the Compensation Committee of the Board
of Directors (the "Compensation Committee") or the Board, subject to the
availability for issuance of those shares under the Incentive Plan. The Company
is also proposing to amend the Incentive Plan to give the Compensation Committee
and the Board of Directors additional flexibility in establishing specific terms
of awards of stock options and restricted stock, including without limitation
the vesting schedules for those awards and the dates the awards may be granted.
The Company believes the amendments allow for increased flexibility in the
awards granted to nonemployee directors under the Incentive Plan.
23
The Compensation Committee administers the Incentive Plan and has broad
power to take actions thereunder, to interpret the Incentive Plan and to adopt
rules, regulations and guidelines for carrying out its purposes. With respect to
Awards to employees and independent contractors, the Compensation Committee may,
in its discretion, among other things, extend or accelerate the exercisability
of, accelerate the vesting of or eliminate or make less restrictive any
restrictions contained in any Award, waive any restrictions or other provision
of the Incentive Plan or in any Award or otherwise amend or modify any Award in
any manner that is either (i) not adverse to that participant holding the Award
or (ii) consented to by that participant. The Compensation Committee also may
delegate to the chief executive officer and other senior officers of the Company
its duties under the Incentive Plan. In February 2005, the Compensation
Committee delegated authority to the Chief Executive Officer to designate
certain eligible participants, including executive officers and directors, to
receive options under the Plan and to determine the number of options to be
issued to each such designee, subject to certain limitations.
The Board of Directors may amend, modify, suspend or terminate the
Incentive Plan for the purpose of addressing any changes in legal requirements
or for any other lawful purpose, except that (i) no amendment or alteration that
would adversely affect the rights of any participant under any Award previously
granted to such participant shall be made without the consent of such
participant and (ii) no amendment or alteration shall be effective prior to its
approval by the shareholders of the Company to the extent such approval is then
required pursuant to Rule 16b-3 in order to preserve the applicability of any
exemption provided by such rule to any Award then outstanding (unless the holder
of such Award consents) or to the extent shareholder approval is otherwise
required by applicable legal requirements. The Board of Directors may make
certain adjustments in the event of any subdivision, split or consolidation of
outstanding shares of Common Stock, any declaration of a stock dividend payable
in shares of Common Stock, any recapitalization or capital reorganization of the
Company, any consolidation or merger of the Company with another corporation or
entity, any adoption by the Company of any plan of exchange affecting the Common
Stock or any distribution to holders of Common Stock of securities or property
(other than normal cash dividends).
Awards to employees and independent contractors may be in the form of (i)
rights to purchase a specified number of shares of Common Stock at a specified
price not less than that of the fair market value on the date of grant
("Options"), (ii) rights to receive a payment, in cash or Common Stock, equal to
the fair market value or other specified value of a number of shares of Common
Stock on the rights exercise date over a specified strike price, (iii) grants of
restricted or unrestricted Common Stock units denominated in Common Stock, (iv)
grants denominated in cash and (v) grants denominated in cash, Common Stock,
units denominated in Common Stock or any other property which are made subject
to the attainment of one or more performance goals ("Performance Awards").
Subject to certain limitations, the Compensation Committee has the authority to
determine the other terms, conditions and limitations of Awards under the
Incentive Plan. An Option may be either an incentive stock option ("ISO") that
qualifies, or a nonqualified stock option ("NSO") that does not qualify, with
the requirements of Sections 422 of the Code; provided that independent
contractors cannot be awarded ISOs. The Compensation Committee will determine
the employees and independent contractors to receive Awards and the terms,
conditions and limitations applicable to each such Award, which conditions may,
but need not, include continuous service with the Company, achievement of
specific business objectives, attainment of specified growth rates, increases in
specified indices or other comparable measures of performance. Performance
Awards may include more than one performance goal, and a performance goal may be
based on one or more business criteria applicable to the grantee, the Company as
a whole or one or more of the Company's business units and may include any of
the following: increased revenue, net income, stock price, market share,
earnings per share, return on equity or assets or decrease in costs.
On the date of his or her first appointment or election to the Board of
Directors, a nonemployee director is currently granted NSOs to purchase 10,000
shares of Common Stock. The Compensation Committee or Board of Directors may
grant NSOs to nonemployee directors annually at its discretion. Currently, each
NSO granted to nonemployee directors (i) has a ten-year term, (ii) has an
exercise price per share equal to the fair market value of a Common Stock share
on the date of grant and (iii) becomes exercisable in cumulative annual
increments of one-third of the total number of shares of Common Stock subject
thereto, beginning on
24
the first anniversary of the date of grant. If a nonemployee director resigns
from the Board without the consent of a majority of the other directors, such
director's NSOs may be exercised only to the extent that they were exercisable
on the resignation date. If the proposal is approved by shareholders, the
automatic initial Award of NSOs to purchase 10,000 shares of Common Stock will
be replaced by discretionary Awards of NSOs or shares of restricted stock that
are determined by the Compensation Committee or the Board of Directors and the
specific terms of the Awards, including the vesting schedule, will be at the
discretion of the Compensation Committee or the Board of Directors.
The Incentive Plan also currently provides for discretionary Awards of
options to purchase Common Stock and shares of restricted stock that are
determined by the Compensation Committee or the Board of Directors; automatic
annual Awards of options to purchase 3,000, 2,000 and 2,000 shares to the
Chairmen of the Audit, Compensation and Nominating Committees, respectively; and
discretionary annual grants of options to purchase up to 3,000, 2,000 and 2,000
shares to non-chairman members of the Audit, Compensation and Nominating
Committees, respectively, who are deemed "independent" for purposes of Nasdaq
rules. Currently, the date on which the automatic Awards and the discretionary
Awards, if any, are granted is the first business day after the annual meeting
of the shareholders of the Company.
If the shareholders vote in favor of the proposal set forth herein, the
automatic initial Awards of options to purchase 10,000 shares of Common Stock to
each new nonemployee director, the discretionary Awards to nonemployee
directors, the automatic Awards to Board committee chairmen and the
discretionary Awards to certain Board committee members will be replaced by
discretionary Awards of stock options or shares of restricted stock that are
determined by the Compensation Committee or the Board of Directors, and the
Compensation Committee and the Board of Directors will have additional
flexibility in establishing the specific terms of Awards of stock options and
restricted stock granted to directors, including without limitation the vesting
schedules for those Awards and the dates the Awards may be granted.
Although the Incentive Plan currently allows the Board and the Compensation
Committee discretion as to the type of Award and number of shares covered by
annual Awards, the proposal, if adopted by shareholders, will increase
discretion as to the type of Award and number of shares covered by Awards
granted to Board committee chairmen and members. In particular, automatic Awards
of NSOs for service as chairmen on Board committees would be discontinued and
would be replaced by discretionary Awards, initially of restricted stock. Stock
option Awards to committee members, which currently are discretionary but
limited in amount, would become discretionary Awards, initially of restricted
stock.
Currently, the Incentive Plan provides with respect to vesting of stock
option Awards to nonemployee directors that each option granted (i) has a
ten-year term, (ii) has an exercise price equal to the fair market value of a
share of Common Stock on the date of grant and (iii) becomes exercisable in
cumulative annual increments of one-third of the total number of shares of
Common Stock subject thereto, beginning on the first anniversary of the date of
grant. The Incentive Plan also currently provides that Awards of restricted
stock to nonemployee directors vest in increments of one-third of the total
number of shares on the first and second anniversaries of the date of grant, and
the remaining shares vest on the third anniversary of the date of grant. If the
proposal is approved, the Board and the Compensation Committee will have the
discretion to set the vesting schedule for Awards to nonemployee directors and
it is expected that Awards of restricted stock granted in 2005 will become fully
vested on the first anniversary of the date of grant.
If the proposal to amend the Incentive Plan is adopted, the Company will no
longer be required to grant certain Awards on the first business day after the
annual meeting of the Company's shareholders. Instead, the Board or the
Compensation Committee may determine the date of these Awards in its discretion.
The amendment also allows the flexibility of granting more than one Award in a
year.
The Incentive Plan currently provides that unvested shares of restricted
stock held by nonemployee directors will vest upon a change in control of the
Company. If the amendments to the Incentive Plan are adopted, all unvested stock
options held by nonemployee directors will vest upon a change in control of the
Company as well. In addition, all unvested shares of restricted stock and stock
options held by a nonemployee director will vest upon such nonemployee
director's death.
25
If the proposal to amend the Incentive Plan is not adopted, the Board would
expect to make the 2005 grants in the same amount and type of Award as specified
below under "New Plan Benefits," but subject to the currently existing vesting
schedule and the requirement that the Awards be granted on the first business
day after the annual meeting of the Company's shareholders. In addition, the
Board or the Compensation Committee would consider the receipt by the Board
committee chairmen of automatic grants of stock options currently provided for
in the Incentive Plan in connection with the determination of discretionary
restricted stock Awards to be granted to the committee chairmen.
Section 162(m) of the Code generally limits the deductibility for federal
income tax purposes of annual compensation paid to a company's executive
officers to $1 million per covered executive in a taxable year. The Compensation
Committee and the Board of Directors may take deductibility and nondeductibility
of compensation into account but have in the past authorized, and retain in the
future the discretion to authorize, the payment of potentially nondeductible
amounts.
As of April 1, 2005, the last reported sales price of Common Stock on the
Nasdaq National Market was $17.90.
NEW PLAN BENEFITS
The allocation of some of the proposed new benefits under the Incentive
Plan is not currently determinable as such allocation depends on future
decisions to be made by the Compensation Committee or the Board of Directors in
their sole discretion, subject to applicable provisions of the Incentive Plan.
If the proposal to amend the Incentive Plan is approved, the Company expects to
award (1) each nonemployee director 1,000 shares of restricted stock; (2) each
member of the Audit and Compensation Committees 1,500 and 1,000 additional
shares of restricted stock, respectively; and (3) the chairmen of the Audit,
Compensation and Nominating Committees 2,500, 1,500 and 1,500 additional shares
of restricted stock, respectively. The Company plans to grant these awards on or
after the first business day following the date on which the annual meeting of
the Company's shareholders is held. In light of the consulting agreement
described under "Certain Transactions - Certain Matters Regarding Mr. Webster,"
Mr. Webster, the current chairman of the Nominating Committee, will not receive
the award of 1,500 shares of restricted stock that the chairman of the
Nominating Committee would otherwise receive. Because future Awards are in the
discretion of the Board and Compensation Committee, the number of shares subject
to future Awards could increase or decrease and the type and terms of future
Awards could change as well, all without the need for future shareholder
approval.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the general rules of present federal income
tax law relating to the tax treatment of stock awards, ISOs and NSOs issued
under the Incentive Plan. The discussion is general in nature and does not take
into account a number of considerations which may apply in light of the
particular circumstances of a participant under the Incentive Plan.
Stock Awards and Related Tax Payments
Under the Code, federal income tax consequences with respect to a stock
award depend on the facts and circumstances of each stock award and, in
particular, the nature of the restrictions imposed with respect to the shares
which are the subject of the stock award. In general, if shares which are the
subject of the stock award are actually issued to a participant, but are subject
to a "substantial risk of forfeiture" (for example, if rights to ownership of
the shares are conditioned upon the future performance of substantial services
by the participant), a taxable event generally occurs only when the risk of
forfeiture lapses. At such time as the substantial risk of forfeiture lapses,
the participant will realize ordinary income to the extent of the excess of the
fair market value of the shares on the date the risk of forfeiture lapses over
the participant's cost for such shares (if any), and the same amount is then
deductible by the Company as compensation expense. If the restrictions with
respect to the shares that are the subject of such stock award, by their nature,
do not subject the key employee to a "substantial risk of forfeiture" of the
shares, then the participant will realize ordinary income with respect to the
shares to the extent of the excess at the time of the grant of the fair market
value of
26
the shares over the participant's cost; and the same amount is then deductible
by the Company. If no shares are actually issued to the participant at the time
the stock award is granted, the participant will generally realize ordinary
income at the time the participant receives shares free of any substantial risk
of forfeiture, and the amount of such income will be equal to the fair market
value of the shares at such time over the participant's cost, if any; and the
same amount is then deductible by the Company. The Company's deductions for
compensation paid under the Incentive Plan are in all cases subject to certain
applicable tax law limitations.
Options
Some of the options issuable under the Incentive Plan may constitute ISOs
within the meaning of Section 422 of the Code, while other options granted under
the Incentive Plan may be NSOs. Grants to nonemployee directors are NSOs. The
Code provides for tax treatment of stock options qualifying as ISOs that may be
more favorable to participants than the tax treatment accorded NSOs. Generally,
upon the exercise of an ISO, the optionee will recognize no income for federal
income tax purposes. The difference between the exercise price of the ISO and
the fair market value of the stock at the time of exercise is an addition to
income in determining alternative minimum taxable income and such amount may be
sufficient in amount to subject the optionee to the alternative minimum tax. On
the sale of shares acquired by exercise of an ISO (assuming that the sale does
not occur within two years of the date of grant of the option or within one year
from the date of exercise), any gain will be taxed to the optionee as long-term
capital gain. In contrast, upon the exercise of an NSO, the optionee recognizes
taxable income (subject to withholding) in an amount equal to the difference
between the then-fair market value of the shares on the date of exercise and the
exercise price. Upon any sale of such shares by the optionee, any difference
between the sale price and the fair market value of the shares on the date of
exercise of the NSO will be treated generally as capital gain or loss. No
deduction is available to the Company upon the grant or exercise of an ISO
(although a deduction may be available if the participant disposes of the shares
so purchased before the applicable holding periods expire), whereas, upon
exercise of an NSO, the Company is entitled to a deduction in an amount equal to
the income recognized by the participant. Except with respect to death or
disability, an optionee has three months after termination of employment in
which to exercise an ISO and retain favorable tax treatment at exercise.
Other
In general, a federal income tax deduction is allowed to the Company in an
amount equal to the ordinary income recognized by a participant with respect to
awards under the Incentive Plan, provided that such amount constitutes an
ordinary and necessary business expense of the Company, that such amount is
reasonable and that the Company satisfies any withholding obligation with
respect to such income.
Copies of the Amended and Restated Incentive Plan, the First, Second, Third
and Fourth Amendments to the Incentive Plan, and the proposed Fifth Amendment to
the Incentive Plan are attached as Appendix A.
BOARD RECOMMENDATION
The Board believes that the amendment of the Incentive Plan is in the best
interest of the Company and its shareholders. THE BOARD THEREFORE RECOMMENDS A
VOTE FOR APPROVAL OF THE AMENDMENT, AND IT IS INTENDED THAT THE PROXIES NOT
MARKED TO THE CONTRARY WILL BE SO VOTED. Directors also have an interest in and
may benefit from the adoption of the amendment because it provides for
discretionary awards of stock options and restricted stock to the nonemployee
directors of the Company. Approval of the amendment to the Incentive Plan will
require the affirmative vote of a majority of the shares of Common Stock cast
and voted for or against or expressly abstained with respect to the
consideration of the amendment. Accordingly, abstentions will have the effect of
a vote against the proposal and broker nonvotes will not be included in the
tabulation of votes cast on this matter.
27
PROPOSAL 3
APPOINTMENT OF PANNELL KERR FORSTER OF TEXAS, P.C.
AS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors has appointed, and recommends the approval of the
appointment of, Pannell Kerr Forster of Texas, P.C. as independent registered
public accounting firm for the fiscal year ending December 31, 2005. PKF served
as the Company's independent public registered accounting firm for the fiscal
year ended December 31, 2004. Representatives of PKF are expected to be present
at the Annual Meeting and will be given the opportunity to make a statement, if
they desire to do so, and to respond to appropriate questions.
Unless shareholders specify otherwise in the proxy, proxies solicited by
the Board of Directors will be voted by the persons named in the proxy at the
Annual Meeting to ratify the selection of PKF as the Company's auditors for
2005. The affirmative vote of a majority of the votes cast at the Annual Meeting
will be required for ratification. Although the appointment of an independent
registered public accounting firm is not required to be submitted to a vote of
shareholders, the Board of Directors recommended that the appointment be
submitted to our shareholders for approval. If our shareholders do not approve
the appointment of PKF, the Board of Directors will consider the appointment of
another independent registered public accounting firm.
On August 25, 2004, Ernst & Young LLP advised the Company by letter that it
had resigned from serving as the independent registered public accounting firm
of the Company. Neither the Audit Committee nor the Board of Directors of the
Company recommended or approved Ernst & Young's resignation.
As noted in the Company's Current Report on Form 8-K filed on August 31,
2004, Ernst & Young's audit reports on the Company's consolidated financial
statements as of and for the years ended December 31, 2003 and 2002 did not
contain an adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles, except as
follows:
(i) Ernst & Young's audit report on the consolidated financial
statements of the Company for the year ended December 31, 2003 contained
two separate paragraphs stating, respectively, that "As described in Note
2, the Company revised the reported amount of the after-tax write-down that
would have been taken as of December 31, 2001 using prices in effect at
that date. We audited the adjustments described in Note 2 that were applied
to revise the reported amount of the full cost ceiling test write-down had
the Company not utilized the improvements in pricing subsequent to December
31, 2001 and/or the addition of proved oil and natural gas reserves on
existing properties subsequent to the end of the period but prior to
issuance of financial statements. Our procedures included (a) agreeing the
revised tax basis in the full cost ceiling test computation to the
Company's underlying records obtained from management, and (b) testing the
mathematical accuracy of the revisions to the full cost ceiling
computation. In our opinion such adjustments are appropriate and have been
properly applied. However, we were not engaged to audit, review, or apply
any procedures to the 2001 consolidated financial statements of the Company
other than with respect to such adjustments and accordingly, we do not
express an opinion or any other form of assurance on the 2001 consolidated
financial statements taken as a whole," and "As discussed in Note 2 to the
consolidated financial statements, effective January 1, 2003, the Company
changed its method of accounting for asset retirement obligations"; and
(ii) Ernst & Young's audit report on the consolidated financial
statements of the Company for the year ended December 31, 2002 contained a
separate paragraph stating that "As discussed above, the consolidated
financial statements of the Company as of December 31, 2001 and for the two
years then ended were audited by other auditors who have ceased operations.
As described in Note 5, the Company revised the reported amounts of certain
temporary differences at December 31, 2001. We audited the adjustments
described in Note 5 that were applied to revise the reported amounts of
temporary differences in the 2001 consolidated financial statements. Our
procedures included (a) agreeing the revised temporary differences to the
Company's underlying records obtained from management, and (b) testing the
mathematical accuracy of the revisions to the temporary differences. In our
opinion, such adjustments are appropriate and have been properly applied.
However, we were not engaged to audit,
28
review, or apply any procedures to the 2001 consolidated financial
statements of the Company other than with respect to such adjustments and,
accordingly, we do not express an opinion or any other form of assurance on
the 2001 consolidated financial statements taken as a whole."
During the Company's last two fiscal years and for the period from January
1, 2004 to August 31, 2004, there were no disagreements between the Company and
Ernst & Young on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Ernst & Young, would have caused them to
make reference to the subject matter of the disagreements in connection with
their reports.
None of the "reportable events" described in item 304(a)(l)(v) of
Regulations S-K under the Securities Act of 1933, as amended, occurred with
respect to the Company within the last two fiscal years or for the period from
January 1, 2004 to August 31, 2004.
On September 17, 2004, the Company retained the services of PKF as its new
independent registered public accounting firm. The Audit Committee approved
PKF's engagement.
During the fiscal years ended December 31, 2002 and December 31, 2003 and
the period from January 1, 2004 to September 17, 2004, neither the Company nor
someone on its behalf consulted with PKF regarding any of the matters or events
set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS' FEES
PKF billed the Company as set forth in the table below for professional
services rendered for the audit of the Company's annual financial statements for
the year ended December 31, 2004 and for the review of the Company's quarterly
financial statements included in the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004 and for work on other SEC filings. PKF did
not provide any non-audit services for the Company during 2004. All amounts
billed by PKF were for work performed subsequent to its engagement on September
23, 2004 and are reflected in the "Fiscal 2004" column below. Ernst & Young LLP,
the predecessor auditor, billed the Company for the audit of the Company's
annual financial statements for the year ended December 31, 2003 and for other
audit services, as set forth in the "Fiscal 2003" column below. Ernst & Young
LLP did not bill the Company for any non-audit services during 2004 and billed
the Company $2,500 for non-audit services during 2003.
Description Fiscal 2004 Fiscal 2003
--------------------------------------------- --------------- ----------------
Audit Fees................................... $244,949 $472,033
Audit Related Fees........................... $0 $0
Tax Fees..................................... $0 $0
All Other Fees............................... $0 $2,500
----------
AUDIT COMMITTEE PREAPPROVAL POLICY
The Audit Committee has adopted a policy that all audit, review or attest
engagements and permissible non-audit services, including the fees and terms
thereof, to be performed by the independent auditors, (subject to, and in
compliance with, the de minimis exception for non-audit services described in
Section 10A(i)(1)(B) of the Securities Exchange Act of 1934 and the applicable
rules and regulation of the SEC) will be subject to specific pre-approval of the
Audit Committee. No non-audit services were performed by Ernst & Young or PKF
pursuant to the de minimis exception in 2004.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF PKF AS INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM FOR THE COMPANY FOR 2005.
29
ADDITIONAL INFORMATION
OTHER BUSINESS
As of the date of this proxy statement, the Board of Directors is not
informed of any other matters, other than those above, that may be brought
before the meeting. The persons named in the enclosed form of proxy or their
substitutes will vote with respect to any such matters in accordance with their
best judgment.
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Rule 14a-8 under the Securities Exchange Act of 1934, as amended, addresses
when a company must include a shareholder's proposal in its proxy statement and
identify the proposal in its form of proxy when the company holds an annual or
special meeting of shareholders. Under Rule 14a-8, proposals that shareholders
intend to have included in the Company's proxy statement and form of proxy for
the 2006 Annual Meeting of Shareholders must be received by the Company no later
than December 19, 2005. However, if the date of the 2006 Annual Meeting of
Shareholders changes by more than 30 days from the date of the 2005 Annual
Meeting of Shareholders, the deadline is a reasonable time before the Company
begins to print and mail its proxy materials, which deadline will be set forth
in a Quarterly Report on Form 10-Q or will otherwise be communicated to
shareholders. Shareholder proposals must also be otherwise eligible for
inclusion.
If a shareholder desires to bring a matter before an annual or special
meeting and the proposal is submitted outside the process of Rule 14a-8, the
shareholder must follow the procedures set forth in the Company's Bylaws. The
Company's Bylaws provide generally that shareholders who wish to nominate
directors or to bring business before a shareholders' meeting must notify the
Company and provide certain pertinent information at least 80 days before the
meeting date (or within ten days after public announcement pursuant to the
Bylaws of the meeting date, if the meeting date has not been publicly announced
more than 90 days in advance). If the date of the 2006 Annual Meeting of
Shareholders is the same as the date of the 2005 Annual Meeting of Shareholders,
shareholders who wish to nominate directors or to bring business before the 2006
Annual Meeting of Shareholders must notify the Company no later than February
19, 2006.
A copy of the Company's Bylaws setting forth the requirements for the
nomination of director candidates by stockholders and the requirements for
proposals by stockholders may be obtained from the Company's Secretary at the
address indicated on the first page of this proxy statement. A nomination or
proposal that does not comply with the above procedures will be disregarded.
Compliance with the above procedures does not require the Company to include the
proposed nominee or proposal in the Company's proxy solicitation material.
ANNUAL REPORT ON FORM 10-K
CARRIZO WILL PROVIDE TO EACH SHAREHOLDER, WITHOUT CHARGE AND UPON WRITTEN
REQUEST, A COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR 2004, INCLUDING THE
FINANCIAL STATEMENTS, SCHEDULES AND A LIST OF EXHIBITS. ANY SUCH WRITTEN
REQUESTS SHOULD BE DIRECTED TO PAUL F. BOLING, THE SECRETARY OF THE COMPANY, AT
THE ADDRESS INDICATED ON THE FIRST PAGE OF THIS PROXY STATEMENT.
By Order of the Board of Directors
/s/ PAUL F. BOLING
---------------------------
Paul F. Boling
Secretary
Dated: April 12, 2005
Houston, Texas
30
INCENTIVE PLAN
OF
CARRIZO OIL & GAS, INC.
(AS AMENDED AND RESTATED EFFECTIVE AS OF FEBRUARY 17, 2000. HOWEVER, THE
CHANGES TO THE DEFINITION OF "INDEPENDENT CONTRACTOR" IN SECTION 3
AND TO THE NUMBER OF AUTHORIZED SHARES IN SECTION 5 ARE SUBJECT
TO SHAREHOLDER APPROVAL AT THE 2000 MEETING OF SHAREHOLDERS.)
1. Plan. This Incentive Plan of Carrizo Oil & Gas, Inc. (the "Plan") was
adopted by Carrizo Oil & Gas, Inc. to reward certain corporate officers and key
employees of Carrizo Oil & Gas, Inc. and certain independent consultants by
enabling them to acquire shares of common stock of Carrizo Oil & Gas, Inc.
2. Objectives. This Plan is designed to attract and retain key employees of
the Company and its Subsidiaries (as hereinafter defined), to attract and retain
qualified directors of the Company, to attract and retain consultants and other
independent contractors, to encourage the sense of proprietorship of such
employees, directors and independent contractors and to stimulate the active
interest of such persons in the development and financial success of the Company
and its Subsidiaries. These objectives are to be accomplished by making Awards
(as hereinafter defined) under this Plan and thereby providing Participants (as
hereinafter defined) with a proprietary interest in the growth and performance
of the Company and its Subsidiaries.
3. Definitions. As used herein, the terms set forth below shall have the
following respective meanings:
"Annual Director Award Date" means, for each year beginning on or
after the IPO Closing Date, the first business day of the month next
succeeding the date upon which the annual meeting of stockholders of the
Company is held in such year.
"Authorized Officer" means the Chairman of the Board or the Chief
Executive Officer of the Company (or any other senior officer of the
Company to whom either of them shall delegate the authority to execute any
Award Agreement).
"Award" means an Employee Award, a Director Award or an Independent
Contractor Award.
"Award Agreement" means any Employee Award Agreement, Director Award
Agreement or Independent Contractor Award Agreement.
"Board" means the Board of Directors of the Company.
"Cash Award" means an award denominated in cash.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Committee" means (i) the Compensation Committee of the Board or (ii)
such other committee of the Board as is designated by the Board to
administer the Plan or (iii) to the extent contemplated hereby, the Board.
"Common Stock" means the Common Stock, par value $.01 per share, of
the Company.
"Company" means Carrizo Oil & Gas, Inc., a Texas corporation.
"Director" means an individual serving as a member of the Board.
"Director Award" means the grant of a Director Option.
"Director Award Agreement" means a written agreement between the
Company and a Participant who is a Nonemployee Director setting forth the
terms, conditions and limitations applicable to a Director Award.
31
"Disability" means, with respect to a Nonemployee Director, the
inability to perform the duties of a Director for a continuous period of
more than three months by reason of any medically determinable physical or
mental impairment.
"Dividend Equivalents" means, with respect to shares of Restricted
Stock that are to be issued at the end of the Restriction Period, an amount
equal to all dividends and other distributions (or the economic equivalent
thereof) that are payable to stockholders of record during the Restriction
Period on a like number of shares of Common Stock.
"Employee" means an employee of the Company or any of its Subsidiaries
and an individual who has agreed to become an Employee of the Company or
any of its Subsidiaries and is expected to become such an Employee within
the following six months.
"Employee Award" means the grant of any Option, SAR, Stock Award, Cash
Award or Performance Award, whether granted singly, in combination or in
tandem, to a Participant who is an Employee pursuant to such applicable
terms, conditions and limitations as the Committee may establish in order
to fulfill the objectives of the Plan.
"Employee Award Agreement" means a written agreement between the
Company and a Participant who is an Employee setting forth the terms,
conditions and limitations applicable to an Employee Award.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
"Fair Market Value" of a share of Common Stock means, as of a
particular date, (i) if shares of Common Stock are listed on a national
securities exchange, the mean between the highest and lowest sales price
per share of Common Stock on the consolidated transaction reporting system
for the principal national securities exchange on which shares of Common
Stock are listed on that date, or, if there shall have been no such sale so
reported on that date, on the last preceding date on which such a sale was
so reported, (ii) if shares of Common Stock are not so listed but are
quoted on the Nasdaq National Market, the mean between the highest and
lowest sales price per share of Common Stock reported by the Nasdaq
National Market on that date, or, if there shall have been no such sale so
reported on that date, on the last preceding date on which such a sale was
so reported, (iii) if the Common Stock is not so listed or quoted, the mean
between the closing bid and asked price on that date, or, if there are no
quotations available for such date, on the last preceding date on which
such quotations shall be available, as reported by the Nasdaq Stock Market,
or, if not reported by the Nasdaq Stock Market, by the National Quotation
Bureau Incorporated or (iv) if shares of Common Stock are not publicly
traded, the most recent value determined by an independent appraiser
appointed by the Company for such purpose; provided that, notwithstanding
the foregoing, "Fair Market Value" in the case of any Award made in
connection with the IPO, means the price per share to the public of the
Common Stock in the IPO, as set forth in the final prospectus relating to
the IPO.
"Incentive Option" means an Option that is intended to comply with the
requirements set forth in Section 422 of the Code.
"Independent Contractor" means a person providing services to the
Company or any of its Subsidiaries, including an Employee or Nonemployee
Director.
"Independent Contractor Award" means the grant of any Nonqualified
Stock Option, SAR, Stock Award, Cash Award or Performance Award, whether
granted singly, in combination or in tandem, to a Participant who is an
Independent Contractor pursuant to such applicable terms, conditions and
limitations as the Committee may establish in order to fulfill the
objectives of the Plan.
"Independent Contractor Award Agreement" means a written agreement
between the Company and a Participant who is an Independent Contractor
setting forth the terms, conditions and limitations applicable to an
Independent Contractor Award.
"IPO" means the first time a registration statement filed under the
Securities Act of 1933 and respecting an underwritten primary offering by
the Company of shares of Common Stock is declared
32
effective under that Act and the shares registered by that registration
statement are issued and sold by the Company (otherwise than pursuant to
the exercise of any over allotment option).
"IPO Closing Date" means the date on which the Company first receives
payment for the shares of Common Stock it sells in the IPO.
"Nonemployee Director" has the meaning set forth in paragraph 4(b)
hereof.
"Nonqualified Stock Option" means an Option that is not an Incentive
Option.
"Option" means a right to purchase a specified number of shares of
Common Stock at a specified price.
"Participant" means an Employee, Director or Independent Contractor to
whom an Award has been made under this Plan.
"Performance Award" means an award made pursuant to this Plan to a
Participant who is an Employee or Independent Contractor who is subject to
the attainment of one or more Performance Goals.
"Performance Goal" means a standard established by the Committee, to
determine in whole or in part whether a Performance Award shall be earned.
"Restricted Stock" means any Common Stock that is restricted or
subject to forfeiture provisions.
"Restriction Period" means a period of time beginning as of the date
upon which an Award of Restricted Stock is made pursuant to this Plan and
ending as of the date upon which the Common Stock subject to such Award is
no longer restricted or subject to forfeiture provisions.
"Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act, or
any successor rule.
"SAR" means a right to receive a payment, in cash or Common Stock,
equal to the excess of the Fair Market Value or other specified valuation
of a specified number of shares of Common Stock on the date the right is
exercised over a specified strike price, in each case, as determined by the
Committee.
"Stock Award" means an award in the form of shares of Common Stock or
units denominated in shares of Common Stock.
"Subsidiary" means (i) in the case of a corporation, any corporation
of which the Company directly or indirectly owns shares representing more
than 50% of the combined voting power of the shares of all classes or
series of capital stock of such corporation which have the right to vote
generally on matters submitted to a vote of the stockholders of such
corporation and (ii) in the case of a partnership or other business entity
not organized as a corporation, any such business entity of which the
Company directly or indirectly owns more than 50% of the voting, capital or
profits interests (whether in the form of partnership interests, membership
interests or otherwise).
4. Eligibility.
(a) Employees. Key Employees eligible for Employee Awards under this Plan
are those who hold positions of responsibility and whose performance, in the
judgment of the Committee, can have a significant effect on the success of the
Company and its Subsidiaries.
(b) Directors. Directors eligible for Director Awards under this Plan are
those who are not employees of the Company or any of its Subsidiaries
("Nonemployee Directors").
(c) Independent Contractors. Independent Contractors eligible for
Independent Contractor Awards under this Plan are those Independent Contractors
providing services to, or who will provide services to, the Company or any of
its Subsidiaries.
5. Common Stock Available for Awards. Subject to the provisions of
paragraph 15 hereof, there shall be available for Awards under this Plan granted
wholly or partly in Common Stock (including rights or options that may be
exercised for or settled in Common Stock) an aggregate of 1,500,000 shares of
Common
33
Stock, all of which shall be available for Incentive Options. The number of
shares of Common Stock that are the subject of Awards under this Plan, that are
forfeited or terminated, expire unexercised, are settled in cash in lieu of
Common Stock or in a manner such that all or some of the shares covered by an
Award are not issued to a Participant or are exchanged for Awards that do not
involve Common Stock, shall again immediately become available for Awards
hereunder. The Committee may from time to time adopt and observe such procedures
concerning the counting of shares against the Plan maximum as it may deem
appropriate. The Board and the appropriate officers of the Company shall from
time to time take whatever actions are necessary to file any required documents
with governmental authorities, stock exchanges and transaction reporting systems
to ensure that shares of Common Stock are available for issuance pursuant to
Awards.
6. Administration.
(a) This Plan, as it applies to Participants who are Employees or
Independent Contractors but not with respect to Participants who are Nonemployee
Directors, shall be administered by the Committee. To the extent required in
order for Employee Awards to be exempt from Section 16 of the Exchange Act by
virtue of the provisions of Rule 16b-3, (i) the Committee shall consist of at
least two members of the Board who meet the requirements of the definition of
"non-employee director" set forth in Rule 16b-3(b)(3)(i) promulgated under the
Exchange Act or (ii) Awards may be granted by, and the Plan may be administered
by, the Board.
(b) Subject to the provisions hereof, insofar as this Plan relates to the
Employee Awards or Independent Contractor Awards, the Committee shall have full
and exclusive power and authority to administer this Plan and to take all
actions that are specifically contemplated hereby or are necessary or
appropriate in connection with the administration hereof. Insofar as this Plan
relates to Employee Awards or Independent Contractor Awards, the Committee shall
also have full and exclusive power to interpret this Plan and to adopt such
rules, regulations and guidelines for carrying out this Plan as it may deem
necessary or proper, all of which powers shall be exercised in the best
interests of the Company and in keeping with the objectives of this Plan. The
Committee may, in its discretion, provide for the extension of the
exercisability of an Employee Award or Independent Contractor Award, accelerate
the vesting or exercisability of an Employee Award or Independent Contractor
Award, eliminate or make less restrictive any restrictions contained in an
Employee Award or Independent Contractor Award, waive any restriction or other
provision of this Plan (insofar as such provision relates to Employee Awards or
to Independent Contractor Awards) or an Employee Award or Independent Contractor
Award or otherwise amend or modify an Employee Award or Independent Contractor
Award in any manner that is either (i) not adverse to the Participant to whom
such Employee Award or Independent Contractor Award was granted or (ii)
consented to by such Participant. The Committee may make an award to an
individual who it expects to become an Employee of the Company or any of its
Subsidiaries within the next six months, with such award being subject to the
individual's actually becoming an Employee within such time period, and subject
to such other terms and conditions as may be established by the Committee. The
Committee may correct any defect or supply any omission or reconcile any
inconsistency in this Plan or in any Employee Award or Independent Contractor
Award in the manner and to the extent the Committee deems necessary or desirable
to further the Plan purposes. Any decision of the Committee in the
interpretation and administration of this Plan shall lie within its sole and
absolute discretion and shall be final, conclusive and binding on all parties
concerned.
(c) No member of the Committee or officer of the Company to whom the
Committee has delegated authority in accordance with the provisions of paragraph
7 of this Plan shall be liable for anything done or omitted to be done by him or
her, by any member of the Committee or by any officer of the Company in
connection with the performance of any duties under this Plan, except for his or
her own willful misconduct or as expressly provided by statute.
7. Delegation of Authority. The Committee may delegate to the Chief
Executive Officer and to other senior officers of the Company its duties under
this Plan pursuant to such conditions or limitations as the Committee may
establish, except that the Committee may not delegate to any person the
authority to grant Awards to, or take other action with respect to, Participants
who are subject to Section 16 of the Exchange Act.
34
8. Employee and Independent Contractor Awards.
(a) The Committee shall determine the type or types of Employee Awards to
be made under this Plan and shall designate from time to time the Employees who
are to be the recipients of such Awards. Each Employee Award may be embodied in
an Employee Award Agreement, which shall contain such terms, conditions and
limitations as shall be determined by the Committee in its sole discretion and
shall be signed by the Participant to whom the Employee Award is made and by an
Authorized Officer for and on behalf of the Company. Employee Awards may consist
of those listed in this paragraph 8(a) hereof and may be granted singly, in
combination or in tandem. Employee Awards may also be made in combination or in
tandem with, in replacement of, or as alternatives to, grants or rights under
this Plan or any other employee plan of the Company or any of its Subsidiaries,
including the plan of any acquired entity. An Employee Award may provide for the
grant or issuance of additional, replacement or alternative Employee Awards upon
the occurrence of specified events, including the exercise of the original
Employee Award granted to a Participant. All or part of an Employee Award may be
subject to conditions established by the Committee, which may include, but are
not limited to, continuous service with the Company and its Subsidiaries,
achievement of specific business objectives, increases in specified indices,
attainment of specified growth rates and other comparable measurements of
performance. Upon the termination of employment by a Participant who is an
Employee, any unexercised, deferred, unvested or unpaid Employee Awards shall be
treated as set forth in the applicable Employee Award Agreement.
(i) Stock Option. An Employee Award may be in the form of an Option.
An Option awarded pursuant to this Plan may consist of an Incentive Option
or a Nonqualified Option. The price at which shares of Common Stock may be
purchased upon the exercise of an Incentive Option shall be not less than
the Fair Market Value of the Common Stock on the date of grant. The price
at which shares of Common Stock may be purchased upon the exercise of a
Nonqualified Option shall be not less than the Fair Market Value of the
Common Stock on the date of grant. Subject to the foregoing provisions, the
terms, conditions and limitations applicable to any Options awarded
pursuant to this Plan, including the term of any Options and the date or
dates upon which they become exercisable, shall be determined by the
Committee.
(ii) Stock Appreciation Right. An Employee Award may be in the form of
an SAR. The terms, conditions and limitations applicable to any SARs
awarded pursuant to this Plan, including the term of any SARs and the date
or dates upon which they become exercisable, shall be determined by the
Committee.
(iii) Stock Award. An Employee Award may be in the form of a Stock
Award. The terms, conditions and limitations applicable to any Stock Awards
granted pursuant to this Plan shall be determined by the Committee.
(iv) Cash Award. An Employee Award may be in the form of a Cash Award.
The terms, conditions and limitations applicable to any Cash Awards granted
pursuant to this Plan shall be determined by the Committee.
(v) Performance Award. Without limiting the type or number of Employee
Awards that may be made under the other provisions of this Plan, an
Employee Award may be in the form of a Performance Award. A Performance
Award shall be paid, vested or otherwise deliverable solely on account of
the attainment of one or more pre-established, objective Performance Goals
established by the Committee prior to the earlier to occur of (x) 90 days
after the commencement of the period of service to which the Performance
Goal relates and (y) the lapse of 25% of the period of service (as
scheduled in good faith at the time the goal is established), and in any
event while the outcome is substantially uncertain. A Performance Goal is
objective if a third party having knowledge of the relevant facts could
determine whether the goal is met. Such a Performance Goal may be based on
one or more business criteria that apply to the individual, one or more
business units of the Company, or the Company as a whole, and may include
one or more of the following: increased revenue, net income, stock price,
market share, earnings per share, return on equity, return on assets or
decrease in costs. Unless otherwise stated, such a Performance Goal need
not be based upon an increase or positive result under a particular
business
35
criterion and could include, for example, maintaining the status quo or
limiting economic losses (measured, in each case, by reference to specific
business criteria). In interpreting Plan provisions applicable to
Performance Goals and Performance Awards, it is the intent of the Plan to
conform with the standards of Section 162(m) of the Code and Treasury
Regulation ss. 1.162-27(e)(2)(i), and the Committee in establishing such
goals and interpreting the Plan shall be guided by such provisions. Prior
to the payment of any compensation based on the achievement of Performance
Goals, the Committee must certify in writing that applicable Performance
Goals and any of the material terms thereof were, in fact, satisfied.
Subject to the foregoing provisions, the terms, conditions and limitations
applicable to any Performance Awards made pursuant to this Plan shall be
determined by the Committee.
(b) Notwithstanding anything to the contrary contained in this Plan, the
following limitations shall apply to any Employee Awards made hereunder:
(i) no Participant may be granted, during any one-year period,
Employee Awards consisting of Options or SARs that are exercisable for more
than 250,000 shares of Common Stock;
(ii) no Participant may be granted, during any one-year period, Stock
Awards covering or relating to more than 50,000 shares of Common Stock (the
limitation set forth in this clause (ii), together with the limitation set
forth in clause (i) above, being hereinafter collectively referred to as
the "Stock Based Awards Limitations"); and
(iii) no Participant may be granted Employee Awards consisting of cash
or in any other form permitted under this Plan (other than Employee Awards
consisting of Options or SARs or otherwise consisting of shares of Common
Stock or units denominated in such shares) in respect of any one-year
period having a value determined on the date of grant in excess of
$500,000.
(c) The Committee shall have the sole responsibility and authority to
determine the type or types of Independent Contractor Awards to be made under
this Plan and may make any such Awards as could be made to an Employee, other
than Incentive Options.
9. Director Awards. Each Nonemployee Director of the Company shall be
granted Director Awards in accordance with this paragraph 9 and subject to the
applicable terms, conditions and limitations set forth in this Plan and the
applicable Director Award Agreement. Notwithstanding anything to the contrary
contained herein, Director Awards shall not be made in any year in which a
sufficient number of shares of Common Stock are not available to make such
Awards under this Plan.
(a) Initial Director Options. On the IPO Closing Date, each Nonemployee
Director shall be automatically awarded a Director Option on 10,000 shares of
Common Stock.
(b) Other Director Options. Effective upon the IPO Closing Date, on the
date of his or her first appointment or election to the Board of Directors, a
Nonemployee Director shall automatically be granted a Director Option that
provides for the purchase of 10,000 shares of Common Stock. In addition, on each
Annual Director Award Date, each Nonemployee Director shall automatically be
granted a Director Option that provides for the purchase of 2,500 shares of
Common Stock.
(c) Terms. Each Director Option shall have a term of ten years from the
date of grant, notwithstanding any earlier termination of the status of the
holder as a Nonemployee Director. The purchase price of each share of Common
Stock subject to a Director Option shall be equal to the Fair Market Value of
the Common Stock on the date of grant. All Director Options shall vest and
become exercisable in increments of one-third of the total number of shares of
Common Stock that are subject thereto (rounded up to the nearest whole number)
on the first and second anniversaries of the date of grant and of all remaining
shares of Common Stock that are subject thereto on the third anniversary of the
date of grant. All unvested Director Options shall be forfeited if the
Nonemployee Director resigns as a Director without the consent of a majority of
the other Directors.
(d) Agreements. Any Award of Director Options shall be embodied in a
Director Award Agreement, which shall contain the terms, conditions and
limitations set forth above and shall be signed by the Participant to whom the
Director Options are granted and by an Authorized Officer for and on behalf of
the Company.
36
10. Payment of Awards.
(a) General. Payment of Employee Awards or Independent Contractor Awards
may be made in the form of cash or Common Stock, or a combination thereof, and
may include such restrictions as the Committee shall determine, including, in
the case of Common Stock, restrictions on transfer and forfeiture provisions. If
payment of an Employee Award or Independent Contractor Award is made in the form
of Restricted Stock, the applicable Award Agreement relating to such shares
shall specify whether they are to be issued at the beginning or end of the
Restriction Period. In the event that shares of Restricted Stock are to be
issued at the beginning of the Restriction Period, the certificates evidencing
such shares (to the extent that such shares are so evidenced) shall contain
appropriate legends and restrictions that describe the terms and conditions of
the restrictions applicable thereto. In the event that shares of Restricted
Stock are to be issued at the end of the Restricted Period, the right to receive
such shares shall be evidenced by book entry registration or in such other
manner as the Committee may determine.
(b) Deferral. With the approval of the Committee, amounts payable in
respect of Employee Awards or Independent Contractor Awards may be deferred and
paid either in the form of installments or as a lump-sum payment. The Committee
may permit selected Participants to elect to defer payments of some or all types
of Employee Awards or Independent Contractor Awards in accordance with
procedures established by the Committee. Any deferred payment of an Employee
Award or Independent Contractor Award, whether elected by the Participant or
specified by the Award Agreement or by the Committee, may be forfeited if and to
the extent that the Award Agreement so provides.
(c) Dividends and Interest. Rights to dividends or Dividend Equivalents may
be extended to and made part of any Employee Award or Independent Contractor
Award consisting of shares of Common Stock or units denominated in shares of
Common Stock, subject to such terms, conditions and restrictions as the
Committee may establish. The Committee may also establish rules and procedures
for the crediting of interest on deferred cash payments and Dividend Equivalents
for Employee Awards or Independent Contractor Awards consisting of shares of
Common Stock or units denominated in shares of Common Stock.
(d) Substitution of Awards. At the discretion of the Committee, a
Participant who is an Employee or Independent Contractor may be offered an
election to substitute an Employee Award or Independent Contractor Award for
another Employee Award or Independent Contractor Award or Employee Awards or
Independent Contractor Awards of the same or different type.
11. Stock Option Exercise. The price at which shares of Common Stock may be
purchased under an Option shall be paid in full at the time of exercise in cash
or, if elected by the optionee, the optionee may purchase such shares by means
of tendering Common Stock or surrendering another Award, including Restricted
Stock or Director Restricted Stock, valued at Fair Market Value on the date of
exercise, or any combination thereof. The Committee shall determine acceptable
methods for Participants who are Employees or Independent Contractors to tender
Common Stock or other Employee Awards or Independent Contractor Awards; provided
that any Common Stock that is or was the subject of an Employee Award or
Independent Contractor Award may be so tendered only if it has been held by the
Participant for six months. The Committee may provide for procedures to permit
the exercise or purchase of such Awards by use of the proceeds to be received
from the sale of Common Stock issuable pursuant to an Employee Award or
Independent Contractor Award. Unless otherwise provided in the applicable Award
Agreement, in the event shares of Restricted Stock are tendered as consideration
for the exercise of an Option, a number of the shares issued upon the exercise
of the Option, equal to the number of shares of Restricted Stock or Director
Restricted Stock used as consideration therefor, shall be subject to the same
restrictions as the Restricted Stock or Director Restricted Stock so submitted
as well as any additional restrictions that may be imposed by the Committee.
12. Taxes. The Company shall have the right to deduct applicable taxes from
any Employee Award payment and withhold, at the time of delivery or vesting of
cash or shares of Common Stock under this Plan, an appropriate amount of cash or
number of shares of Common Stock or a combination thereof for payment of taxes
required by law or to take such other action as may be necessary in the opinion
of the Company to satisfy all obligations for withholding of such taxes. The
Committee may also permit withholding to be satisfied by
37
the transfer to the Company of shares of Common Stock theretofore owned by the
holder of the Employee Award with respect to which withholding is required. If
shares of Common Stock are used to satisfy tax withholding, such shares shall be
valued based on the Fair Market Value when the tax withholding is required to be
made. The Committee may provide for loans, on either a short term or demand
basis, from the Company to a Participant who is an Employee or Independent
Contractor to permit the payment of taxes required by law.
13. Amendment, Modification, Suspension or Termination. The Board may
amend, modify, suspend or terminate this Plan for the purpose of meeting or
addressing any changes in legal requirements or for any other purpose permitted
by law, except that (i) no amendment or alteration that would adversely affect
the rights of any Participant under any Award previously granted to such
Participant shall be made without the consent of such Participant and (ii) no
amendment or alteration shall be effective prior to its approval by the
stockholders of the Company to the extent such approval is then required
pursuant to Rule 16b-3 in order to preserve the applicability of any exemption
provided by such rule to any Award then outstanding (unless the holder of such
Award consents) or to the extent stockholder approval is otherwise required by
applicable legal requirements.
14. Assignability. Unless otherwise determined by the Committee and
provided in the Award Agreement, no Award or any other benefit under this Plan
constituting a derivative security within the meaning of Rule 16a-1(c) under the
Exchange Act shall be assignable or otherwise transferable except by will or the
laws of descent and distribution or pursuant to a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder. The Committee may prescribe and include
in applicable Award Agreements other restrictions on transfer. Any attempted
assignment of an Award or any other benefit under this Plan in violation of this
paragraph 14 shall be null and void.
15. Adjustments.
(a) The existence of outstanding Awards shall not affect in any manner the
right or power of the Company or its stockholders to make or authorize any or
all adjustments, recapitalizations, reorganizations or other changes in the
capital stock of the Company or its business or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or prior preference
stock (whether or not such issue is prior to, on a parity with or junior to the
Common Stock) or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding of any kind, whether or not of a character similar to that of
the acts or proceedings enumerated above.
(b) In the event of any subdivision or consolidation of outstanding shares
of Common Stock, declaration of a dividend payable in shares of Common Stock or
other stock split, then, except with respect to the Existing Options, (i) the
number of shares of Common Stock reserved under this Plan, (ii) the number of
shares of Common Stock covered by outstanding Awards in the form of Common Stock
or units denominated in Common Stock, (iii) the exercise or other price in
respect of such Awards, (iv) the appropriate Fair Market Value and other price
determinations for such Awards, (v) the number of shares of Common Stock covered
by Director Options automatically granted pursuant to paragraph 9 hereof and
(vi) the Stock Based Awards Limitations shall each be proportionately adjusted
by the Board to reflect such transaction. In the event of any other
recapitalization or capital reorganization of the Company, any consolidation or
merger of the Company with another corporation or entity, the adoption by the
Company of any plan of exchange affecting the Common Stock or any distribution
to holders of Common Stock of securities or property (other than normal cash
dividends or dividends payable in Common Stock), the Board shall make
appropriate adjustments to (i) the number of shares of Common Stock covered by
Awards in the form of Common Stock or units denominated in Common Stock, (ii)
the exercise or other price in respect of such Awards, (iii) the appropriate
Fair Market Value and other price determinations for such Awards, (iv) the
number of shares of Common Stock covered by Director Options automatically
granted pursuant to paragraph 9 hereof and (v) the Stock Based Awards
Limitations to give effect to such transaction shall each be proportionately
adjusted by the Board to reflect such transaction; provided that such
adjustments shall only be such as are necessary to maintain the proportionate
interest of the holders of the Awards and preserve, without exceeding,
38
the value of such Awards. In the event of a corporate merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation, the
Board shall be authorized to issue or assume Awards by means of substitution of
new Awards, as appropriate, for previously issued Awards or to assume previously
issued Awards as part of such adjustment.
(c) In the event of a corporate merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation, the Board may make
such adjustments to outstanding Awards or other provisions for the disposition
of outstanding Awards as it deems equitable, and shall be authorized, in its
discretion, (i) to provide for the substitution of a new Award or other
arrangement (which, if applicable, may be exercisable for such property or stock
as the Board determines) for an outstanding Award or the assumption of an
outstanding Award, regardless of whether in a transaction to which Section
424(a) of the Code applies, (ii) to provide, prior to the transaction, for the
acceleration of the vesting and exercisability of, or lapse of restrictions with
respect to, the outstanding Award and, if the transaction is a cash merger, to
provide for the termination of any portion of the Award that remains unexercised
at the time of such transaction or (iii) to provide for the acceleration of the
vesting and exercisability of an outstanding Award and the cancellation thereof
in exchange for such payment as shall be mutually agreeable to the Participant
and the Board.
16. Restrictions. No Common Stock or other form of payment shall be issued
with respect to any Award unless the Company shall be satisfied based on the
advice of its counsel that such issuance will be in compliance with applicable
federal and state securities laws. It is the intent of the Company that grants
of Awards under this Plan comply with Rule 16b-3 with respect to persons subject
to Section 16 of the Exchange Act unless otherwise provided herein or in an
Award Agreement, that any ambiguities or inconsistencies in the construction of
such an Award or this Plan be interpreted to give effect to such intention.
Certificates evidencing shares of Common Stock delivered under this Plan (to the
extent that such shares are so evidenced) may be subject to such stop transfer
orders and other restrictions as the Committee may deem advisable under the
rules, regulations and other requirements of the Securities and Exchange
Commission, any securities exchange or transaction reporting system upon which
the Common Stock is then listed or to which it is admitted for quotation and any
applicable federal or state securities law. The Committee may cause a legend or
legends to be placed upon such certificates (if any) to make appropriate
reference to such restrictions.
17. Unfunded Plan. Insofar as it provides for Awards of cash, Common Stock
or rights thereto, this Plan shall be unfunded. Although bookkeeping accounts
may be established with respect to Participants who are entitled to cash, Common
Stock or rights thereto under this Plan, any such accounts shall be used merely
as a bookkeeping convenience. The Company shall not be required to segregate any
assets that may at any time be represented by cash, Common Stock or rights
thereto, nor shall this Plan be construed as providing for such segregation, nor
shall the Company, the Board or the Committee be deemed to be a trustee of any
cash, Common Stock or rights thereto to be granted under this Plan. Any
liability or obligation of the Company to any Participant with respect to an
Award of cash, Common Stock or rights thereto under this Plan shall be based
solely upon any contractual obligations that may be created by this Plan and any
Award Agreement, and no such liability or obligation of the Company shall be
deemed to be secured by any pledge or other encumbrance on any property of the
Company. Neither the Company nor the Board nor the Committee shall be required
to give any security or bond for the performance of any obligation that may be
created by this Plan.
18. Governing Law. This Plan and all determinations made and actions taken
pursuant hereto, to the extent not otherwise governed by mandatory provisions of
the Code or the securities laws of the United States, shall be governed by and
construed in accordance with the laws of the State of Texas.
19. Effectiveness. The Plan as hereby amended and restated shall be
effective as of February 17, 2000, except for the change to the definition of
"Independent Contractor" and to the number of authorized shares in Section 5,
which shall become effective upon shareholder approval at the 2000 Annual
Meeting of Shareholders.
39
INCENTIVE PLAN OF CARRIZO OIL & GAS, INC.
(As Amended and Restated Effective February 17, 2000)
FIRST AMENDMENT
WHEREAS, Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"),
maintains the Incentive Plan of Carrizo Oil & Gas, Inc., as amended and restated
effective February 17, 2000 (the "Plan");
WHEREAS, the Company desires amend the Plan to increase the aggregate
number of shares the Company's common stock available for issuance under the
Plan from 1,500,000 shares to 1,850,000 shares;
WHEREAS, the Company's shareholders approved such increase in the aggregate
number of shares of the Company's common stock available for issuance under the
Plan at the Company's annual shareholder meeting held on May 22, 2002; and
WHEREAS, under Section 13 of the Plan, the Board of Directors of the
Company has reserved the right to amend the Plan;
NOW, THEREFORE, the Plan is hereby amended, effective May 22, 2002, to
increase the aggregate number of shares of the Company's common stock available
for issuance under the Plan by deleting the number "1,500,000" from Section 5 of
the Plan and replacing said number with the number "1,850,000."
IN WITNESS WHEREOF, The Board of Directors of Carrizo Oil & Gas, Inc. has
caused this amendment to be executed by a duly authorized officer of the Company
in a number of copies, all of which shall constitute one and the same
instrument, which may be sufficiently evidenced by any executed copy hereof,
this 13th day of August, 2002, but effective as of the date specified herein.
CARRIZO OIL & GAS, INC.
By: /s/ FRANK A. WOJTEK
-----------------------
Name: Frank A. Wojtek
Title: V.P. and Chief Financial Officer
40
INCENTIVE PLAN OF CARRIZO OIL & GAS, INC.
(As Amended and Restated Effective as of February 17, 2000)
AMENDMENT
Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), having
reserved the right under Section 13 of the Incentive Plan of Carrizo Oil & Gas,
Inc. (the "Plan"), to amend the Plan, does hereby add at the end of Section 9 of
the Plan, effective as of February 18, 2003, a new subsection (e), to read as
follows:
(e) Special Grant of Audit Committee Chairman Options. Effective
February 18, the chairman of the audit committee of the Company shall as a
one-time grant be granted a Director Option that provides for the purchase
of 25,000 shares of Common Stock, has a term of ten years from the date of
such grant, notwithstanding any earlier termination of the status of the
holder as a Nonemployee Director, and vests and becomes exercisable in
increments of one-third of the total number of shares of Common Stock that
are subject thereto (rounded up to the nearest whole number) on the first
and second anniversaries of the date of grant and of all remaining shares
of Common Stock that are subject thereto on the third anniversary of the
date of grant and the purchase price of each share of Common Stock subject
to such Director Option shall be equal to the Fair Market Value of the
Common Stock on the date of grant.
IN WITNESS WHEREOF, this Amendment has been executed effective as of
February 18, 2003.
CARRIZO OIL & GAS, INC.
By: /s/ FRANK A. WOJTEK
-----------------------
Frank A. Wojtek
Vice President, Chief Financial
Officer, Secretary and Treasurer
41
INCENTIVE PLAN OF CARRIZO OIL & GAS, INC.
THIRD AMENDMENT
Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), having
reserved the right under Section 13 of the Incentive Plan of Carrizo Oil & Gas,
Inc. (the "Plan"), to amend the Plan, does hereby amend and restate Section 9(b)
of the Plan, effective as of May 23, 2003, to read in its entirety as follows:
(b) Other Director Options. On the date of his or her first
appointment or election to the Board of Directors, a Nonemployee Director
shall automatically be granted a Director Option that provides for the
purchase of 10,000 shares of Common Stock. In addition, on each Annual
Director Award Date:
(i) each Nonemployee Director shall automatically be granted a
Director Option that provides for the purchase of 2,500 shares of
Common Stock;
(ii) each Nonemployee Director that is the chairman of each of
the audit and compensation committees, in addition to the Director
Options granted under Section 9(b)(i), also shall automatically be
granted a Director Option that provides for the purchase of an
additional 3,000 and 2,000 shares, respectively; and
(iii) the Board or the Committee may, in its discretion, in
addition to the Director Options granted under Section 9(b)(i), grant
Director Options for the purchase of up to 3,000 shares and up to
2,000 shares, respectively, to non-chairmen members of the audit and
compensation committees who are deemed by the Committee to be
"independent" for purposes of the rules of The Nasdaq Stock Market,
Inc.
Grants under Sections 9(b)(ii) and (iii) may be made to the chairman or a
member of the audit committee or compensation committee, respectively,
notwithstanding that the same person may also receive grants under Section
9(b)(ii) or (iii) as a chairman or member of the compensation committee or audit
committee, respectively.
The Company also does hereby amend and restate Section 19 of the Plan,
effective as of May 23, 2003, to read in its entirety as follows:
19. Effectiveness. The Plan was amended and restated effective
February 17, 2000 and subsequently amended by a First Amendment effective
May 22, 2002, a Second Amendment effective February 18, 2003 and a Third
Amendment effective May 23, 2003.
IN WITNESS WHEREOF, this Amendment has been executed effective as of May
23, 2003.
CARRIZO OIL & GAS, INC.
By: /s/ FRANK A. WOJTEK
-----------------------
Frank A. Wojtek
Vice President, Chief Financial
Officer, Secretary and Treasurer
42
INCENTIVE PLAN OF CARRIZO OIL & GAS, INC.
FOURTH AMENDMENT
Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), having
reserved the right under Section 13 of the Incentive Plan of Carrizo Oil & Gas,
Inc. (the "Plan"), to amend the Plan, does hereby amend the Plan, effective as
of May 21, 2004, as follows:
1. The definition of "Annual Director Award Date" in Section 3 of the
Plan is hereby amended in its entirety to read as follows:
"`Annual Director Award Date' means, for each year, the first
business day following the date on which the annual meeting of
stockholders of the Company is held in such year."
2. The definition of "Director Award" in Section 3 of the Plan is
hereby amended in its entirety to read as follows:
"`Director Award' means the grant of a Director Option or
Director Restricted Stock."
3. Section 3 of the Plan is hereby amended by adding the following
definitions to Section 3 of the Plan in their respective alphabetical
order:
"`Change in Control' is defined in Attachment A."
"`Director Restricted Stock" means Restricted Stock granted to
Nonemployee Directors pursuant to the applicable terms, conditions and
limitations specified in Section 9(f) hereof."
4. Section 5 of the Plan is hereby amended by replacing the number
"1,850,000" with the number "2,350,000."
5. Subsection 9(b) of the Plan is hereby amended to read in its
entirety as follow:
"(b) Other Director Options. On the date of his or her first
appointment or election to the Board of Directors, a Nonemployee
Director shall automatically be granted a Director Option that
provides for the purchase of 10,000 shares of Common Stock. In
addition, on each Annual Director Award Date:
(i) the Board or the Committee may, in its discretion, grant each
Nonemployee Director a Director Option that provides for the purchase
of such number of shares of Common Stock as the Board or the Committee
may determine in its discretion, subject to the limitation that such
awards may not exceed the number of shares of Common Stock then
available for award under this Plan;
(ii) each Nonemployee Director that is the chairman of each of
the audit, compensation and nominating committees, in addition to the
Director Options granted under Section 9(b)(i), also shall
automatically be granted a Director Option that provides for, in the
case of the chairman of the audit committee, the purchase of an
additional 3,000 shares of Common Stock and, in the case of the
chairman of each of the compensation or nominating committees, the
purchase of an additional 2,000 shares of Common Stock, respectively;
and
(iii) the Board or the Committee may, in its discretion, in
addition to the Director Options granted under Section 9(b)(i), grant
Director Options for the purchase of up to 3,000 shares to each
Nonemployee Director who is a non-chairman member of the audit
committee and may grant Director Options for the purchase of up to
2,000 shares to each Nonemployee Director who is a non-chairman member
of the compensation or nominating committees, provided that each such
non- chairman member of the audit, compensation or nominating
committees to whom such Director Option is to be granted is deemed by
the Committee to be "independent" for purposes of the rules of The
Nasdaq Stock Market, Inc."
43
6. Section 9 of the Plan is hereby amended by adding to the end
thereof a new subsection (f), to read in its entirety as follows:
"(f) Director Restricted Stock.
(i) On each Annual Director Award Date, the Board or the
Committee may, in its discretion, grant each Nonemployee Director an
Award of Director Restricted Stock for such number of shares of
Restricted Stock as the Board or the Committee may determine in its
discretion, subject to the limitation that such Awards may not exceed
the number of shares of Common Stock then available for award under
this Plan.
(ii) Each Award of Director Restricted Stock shall vest in
increments of one-third of the total number of shares of Restricted
Stock that are subject thereto (rounded up to the nearest whole
number) on the first and second anniversaries of the date of grant and
of all remaining shares of Restricted Stock that are subject thereto
on the third anniversary of the date of grant; provided, however, that
upon a Change in Control, all shares of Director Restricted Stock
shall immediately vest. All unvested shares of Director Restricted
Stock shall be forfeited if the Nonemployee Director resigns as a
Director without the consent of a majority of the other Directors.
(iii) Any Award of Director Restricted Stock shall be embodied in
a Director Award Agreement, which shall contain the terms, conditions
and limitations set forth above and shall be signed by the Participant
to whom the Director Restricted Stock is granted and by an Authorized
Officer for and on behalf of the Company."
7. The Plan is hereby amended by adding "Attachment A" attached to
this Amendment to the end of the Plan as a new "Attachment A" thereto.
IN WITNESS WHEREOF, this Amendment has been executed effective as of May
21, 2004.
CARRIZO OIL & GAS, INC.
By: /s/ Paul F. Boling
----------------------
Paul F. Boling
Vice President, Chief Financial
Officer, Secretary and Treasurer
44
ATTACHMENT A
"CHANGE IN CONTROL"
The following definitions apply regarding Change in Control provisions of
the foregoing Plan:
"Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 of
the General Rules and Regulations under the Exchange Act, as in effect on the
date of this Agreement.
"Associate" shall mean, with reference to any Person, (a) any corporation,
firm, partnership, association, unincorporated organization or other entity
(other than the Company or a subsidiary of the Company) of which such Person is
an officer or general partner (or officer or general partner of a general
partner) or is, directly or indirectly, the Beneficial Owner of 10% or more of
any class of equity securities, (b) any trust or other estate in which such
Person has a substantial beneficial interest or as to which such Person serves
as trustee or in a similar fiduciary capacity and (c) any relative or spouse of
such Person, or any relative of such spouse, who has the same home as such
Person.
"Beneficial Owner" shall mean, with reference to any securities, any Person
if:
(a) such Person or any of such Person's Affiliates and Associates,
directly or indirectly, is the "beneficial owner" of (as determined
pursuant to Rule 13d-3 of the General Rules and Regulations under the
Exchange Act, as in effect on the date of this Agreement) such securities
or otherwise has the right to vote or dispose of such securities, including
pursuant to any agreement, arrangement or understanding (whether or not in
writing); provided, however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," any security under this
subsection (a) as a result of an agreement, arrangement or understanding to
vote such security if such agreement, arrangement or understanding: (i)
arises solely from a revocable proxy or consent given in response to a
public (i.e., not including a solicitation exempted by Rule 14a-2(b)(2) of
the General Rules and Regulations under the Exchange Act) proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
provisions of the General Rules and Regulations under the Exchange Act and
(ii) is not then reportable by such Person on Schedule 13D under the
Exchange Act (or any comparable or successor report);
(b) such Person or any of such Person's Affiliates and Associates,
directly or indirectly, has the right or obligation to acquire such
securities (whether such right or obligation is exercisable or effective
immediately or only after the passage of time or the occurrence of an
event) pursuant to any agreement, arrangement or understanding (whether or
not in writing) or upon the exercise of conversion rights, exchange rights,
other rights, warrants or options, or otherwise; provided, however, that a
Person shall not be deemed the Beneficial Owner of, or to "beneficially
own," (i) securities tendered pursuant to a tender or exchange offer made
by such Person or any of such Person's Affiliates or Associates until such
tendered securities are accepted for purchase or exchange or (ii)
securities issuable upon exercise of Exempt Rights; or
(c) such Person or any such Person's Affiliates or Associates (i) has
any agreement, arrangement or understanding (whether or not in writing)
with any other Person (or any Affiliate or Associate thereof) that
beneficially owns such securities for the purpose of acquiring, holding,
voting (except as set forth in the proviso to subsection (a) of this
definition) or disposing of such securities or (ii) is a member of a group
(as that term is used in Rule 13d-5(b) of the General Rules and Regulations
under the Exchange Act) that includes any other Person that beneficially
owns such securities;
provided, however, that nothing in this definition shall cause a Person
engaged in business as an underwriter of securities to be the Beneficial
Owner of, or to "beneficially own," any securities acquired through such
Person's participation in good faith in a firm commitment underwriting
until the expiration of 40 days after the date of such acquisition. For
purposes hereof, "voting" a security shall include voting, granting a
proxy, consenting or making a request or demand relating to corporate
action (including, without limitation, a demand for stockholder list, to
call a stockholder meeting or to inspect corporate books and records) or
otherwise giving an authorization (within the meaning of Section 14(a) of
the Exchange Act) in respect of such security.
45
The terms "beneficially own" and "beneficially owning" shall have meanings
that are correlative to this definition of the term "Beneficial Owner".
"Change of Control" shall mean any of the following:
(a) any Person (other than an Exempt Person) shall become the
Beneficial Owner of 40% or more of the shares of Common Stock then
outstanding or 40% or more of the combined voting power of the Voting Stock
of the Company then outstanding; provided, however, that no Change of
Control shall be deemed to occur for purposes of this subsection (a) if
such Person shall become a Beneficial Owner of 40% or more of the shares of
Common Stock or 40% or more of the combined voting power of the Voting
Stock of the Company solely as a result of (i) an Exempt Transaction or
(ii) an acquisition by a Person pursuant to a reorganization, merger or
consolidation, if, following such reorganization, merger or consolidation,
the conditions described in clauses (i), (ii) and (iii) of subsection (c)
of this definition are satisfied; or
(b) individuals who, as of May 21, 2004, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to May 21, 2004 whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board; provided,
further, that there shall be excluded, for this purpose, any such
individual whose initial assumption of office occurs as a result of any
actual or threatened election contest that is subject to the provisions of
Rule 14a-11 under the Exchange Act; or
(c) the Company engages in and completes a reorganization, merger or
consolidation, in each case, unless, following such reorganization, merger
or consolidation, (i) more than 85% of the then outstanding shares of
common stock of the corporation resulting from such reorganization, merger
or consolidation and the combined voting power of the then outstanding
Voting Stock of such corporation beneficially owned, directly or
indirectly, by all or substantially all of the Persons who were the
Beneficial Owners of the outstanding Common Stock immediately prior to such
reorganization, merger, or consolidation in substantially the same
proportions as their ownership, immediately prior to such reorganization,
merger or consolidation, of the outstanding Common Stock, (ii) no Person
(excluding any Exempt Person or any Person beneficially owning, immediately
prior to such reorganization, merger or consolidation, directly or
indirectly, 40% or more of the Common Stock then outstanding or 40% or more
of the combined voting power of the Voting Stock of the Company then
outstanding) beneficially owns, directly or indirectly, 40% or more of the
then outstanding shares of common stock of the corporation resulting from
such reorganization, merger or consolidation or the combined voting power
of the then outstanding Voting Stock of such corporation and (iii) at least
a majority of the members of the board of directors of the corporation
resulting from such reorganization, merger or consolidation were members of
the Incumbent Board at the time of the execution of the initial agreement
or initial action by the Board providing for such reorganization, merger or
consolidation; or
(d) the Company engages in and completes (i) a complete liquidation or
dissolution of the Company unless such liquidation or dissolution is
approved as part of a plan of liquidation and dissolution involving a sale
or disposition of all or substantially all of the assets of the Company to
a corporation with respect to which, following such sale or other
disposition, all of the requirements of clauses (ii) (A), (B) and (C) of
this subsection (d) are satisfied, or (ii) the sale or other disposition of
all or substantially all of the assets of the Company, other than to a
corporation, with respect to which, following such sale or other
disposition, (A) more than 85% of the then outstanding shares of common
stock or such corporation and the combined voting power of the Voting Stock
of such corporation is then beneficially owned, directly or indirectly, by
all or substantially all of the Persons who were the Beneficial Owners of
the outstanding Common Stock immediately prior to such sale or other
disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the outstanding
Common Stock, (B) no Person (excluding any Exempt Person and any Person
beneficially owning, immediately prior to such sale or other disposition,
directly or indirectly, 40% or more of the Common
46
Stock then outstanding or 40% or more of the combined voting power of the
Voting Stock of the Company then outstanding) beneficially owns, directly
or indirectly, 40% or more of the then outstanding shares of common stock
of such corporation and the combined voting power of the then outstanding
Voting Stock of such corporation and (C) at least a majority of the members
of the board of directors of such corporation were members of the Incumbent
Board at the time of the execution of the initial agreement or initial
action of the Board providing for such sale or other disposition of assets
of the Company.
Notwithstanding the foregoing, no Change of Control shall be deemed to
have occurred pursuant to subsections (a), (c) or (d) of this definition as
a result of (i) any Person that is currently party to the Shareholders
Agreement dated as of December 15, 1999 among the Company, C.B. Capital
Investors, L.P. (now J.P. Morgan Partners (23A SBIC), LLC), S.P. Johnson
IV, Frank A. Wojtek, Steven A. Webster and Mellon Ventures, L.P., as
amended from time to time, or the Shareholders Agreement dated as of
February 20, 2002 among the Company, Mellon Ventures, L.P., S.P. Johnson
IV, Frank A. Wojtek and Steven A. Webster, as amended from time to time
(collectively, the "Shareholders Agreements"), becoming the Beneficial
Owner at any time of 40% or more of the shares of Common Stock or 40% or
more of the combined voting power of the Voting Stock of the Company, or
(ii) any other Person becoming the Beneficial Owner at any time of 40% or
more of the shares of Common Stock or 40% or more of the combined voting
power of the Voting Stock of the Company to the extent caused by the
attribution to that other Person of the beneficial ownership of the Common
Stock or Voting Stock of a Person who is listed in clause (i) above and is
a member of a group with such other Person solely because of a voting
agreement, tag-along rights or other rights substantially similar to the
rights set forth in the Shareholders Agreements.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exempt Person" shall mean the Company, any subsidiary of the Company, any
employee benefit plan of the Company or any subsidiary of the Company, and any
Person organized, appointed or established by the Company for or pursuant to the
terms of any such plan.
"Exempt Rights" shall mean any rights to purchase shares of Common Stock or
other Voting Stock of the Company if at the time of the issuance thereof such
rights are not separable from such Common Stock or other Voting Stock (i.e., are
not transferable otherwise than in connection with a transfer of the underlying
Common Stock or other Voting Stock) except upon the occurrence of a contingency,
whether such rights exist as of May 21, 2004 or are thereafter issued by the
Company as a dividend on shares of Common Stock or other Voting Securities or
otherwise.
"Exempt Transaction" shall mean an increase in the percentage of the
outstanding shares of Common Stock or the percentage of the combined voting
power of the outstanding Voting Stock of the Company beneficially owned by any
Person solely as a result of a reduction in the number of shares of Common Stock
then outstanding due to the repurchase of Common Stock or Voting Stock by the
Company, unless and until such time as (a) such Person or any Affiliate or
Associate of such Person shall purchase or otherwise become the Beneficial Owner
of additional shares of Common Stock constituting 1% or more of the then
outstanding shares of Common Stock or additional Voting Stock representing 1% or
more of the combined voting power of the then outstanding Voting Stock, or (b)
any other Person (or Persons) who is (or collectively are) the Beneficial Owner
of shares of Common Stock constituting 1% or more of the then outstanding shares
of Common Stock or Voting Stock representing 1% or more of the combined voting
power of the then outstanding Voting Stock shall become an Affiliate or
Associate of such Person.
"Person" shall mean any individual, firm, corporation, partnership,
association, trust, unincorporated organization or other entity.
"Voting Stock" shall mean, with respect to a corporation, all securities of
such corporation of any class or series that are entitled to vote generally in
the election of directors of such corporation (excluding any class or series
that would be entitled so to vote by reason of the occurrence of any
contingency, so long as such contingency has not occurred).
47
INCENTIVE PLAN OF CARRIZO OIL & GAS, INC.
FIFTH AMENDMENT
Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), having
reserved the right under Section 13 of the Incentive Plan of Carrizo Oil & Gas,
Inc. (the "Plan"), to amend the Plan, does hereby amend Section 9 of the Plan,
effective as of May 10, 2005, to read in its entirety as follows:
"9. Director Awards. Each Nonemployee Director of the Company shall be
granted Director Awards in accordance with this paragraph 9 and subject to
the applicable terms, conditions and limitations set forth in this Plan and
the applicable Director Award Agreement. Notwithstanding anything to the
contrary contained herein, Director Awards shall not be made in any year in
which a sufficient number of shares of Common Stock are not available to
make such Awards under this Plan.
(a) Director Options. On the date of a Nonemployee Director's
first appointment or election to the Board of Directors and on or
after each Annual Director Award Date, the Board or the Committee may,
in its discretion, grant such Nonemployee Director one or more
Director Options that provides for the purchase of such number of
shares of Common Stock as the Board or the Committee may determine in
its discretion, subject to the limitation that such Awards may not
exceed the number of shares of Common Stock then available for award
under this Plan.
Each Director Option shall, unless otherwise provided in the specific
Award granted, have a term of ten years from the date of grant,
notwithstanding any earlier termination of the status of the holder as
a Nonemployee Director. The purchase price of each share of Common
Stock subject to a Director Option shall be equal to the Fair Market
Value of the Common Stock on the date of grant. Upon a Change in
Control, all Director Options shall immediately vest. All Director
Options held by a Nonemployee Director shall vest upon such Director's
death. All unvested Director Options shall be forfeited if the
Nonemployee Director resigns as a Director without the consent of a
majority of the other Directors.
Any Award of Director Options shall be embodied in a Director Award
Agreement, which shall contain the terms, conditions and limitations
of the Award, including without limitation those set forth above, and
shall be signed by the Participant to whom the Director Options are
granted and by an Authorized Officer for and on behalf of the Company.
Without limiting the generality of any other provision hereof,
Director Options in addition to those provided for in the first
paragraph of this subsection may be granted by the Board or the
Committee to a Nonemployee Director who serves as chairman or a member
of the Audit, Compensation or Nominating committees of the Board;
provided that each such non-chairman member of any such committee to
whom a Director Option is to be granted is deemed by the Committee to
be "independent" for purposes of the rules of The Nasdaq Stock Market,
Inc.
(b) Director Restricted Stock. On the date of a Nonemployee
Director's first appointment or election to the Board of Directors and
on or after each Annual Director Award Date, the Board or the
Committee may, in its discretion, grant such Nonemployee Director one
or more Awards of Restricted Stock for such number of shares of
Restricted Stock as the Board or the Committee may determine in its
discretion, subject to the limitation that such Awards may not exceed
the number of shares of Common Stock then available for award under
this Plan.
Upon a Change in Control, all shares of Director Restricted Stock shall
immediately vest. All unvested Restricted Stock held by a Nonemployee Director
shall vest upon such Director's death. All unvested shares of Director
Restricted Stock shall be forfeited if the Nonemployee Director resigns as a
Director without the consent of a majority of the other Directors.
Any Award of Director Restricted Stock shall be embodied in a Director
Award Agreement, which shall contain the terms, conditions and limitations of
the Award, including without limitation those set forth above, and shall be
signed by the Participant to whom the Director Restricted Stock is granted and
by an Authorized Officer for and on behalf of the Company. Without limiting the
generality of any other provision hereof,
48
Awards of Restricted Stock in addition to those provided for in the first
paragraph of this subsection may be granted by the Board or the Committee to a
Nonemployee Director who serves as chairman or a member of the Audit,
Compensation or Nominating committees of the Board; provided that each such
non-chairman member of any such committee to whom an Award of Restricted Stock
is to be granted is deemed by the Committee to be "independent" for purposes of
the rules of The Nasdaq Stock Market, Inc." The Company also does hereby amend
and restate the definition of "Director Restricted Stock" in Section 3 of the
Plan, effective as of May 10, 2005, to read in its entirety as follows:
""Director Restricted Stock" means Restricted Stock granted to
Nonemployee Directors pursuant to Section 9 hereof."
The Company also does hereby amend and restate Section 19 of the Plan,
effective as of May 10, 2005, to read in its entirety as follows:
"19. Effectiveness. The Plan was amended and restated effective
February 17, 2000 and subsequently amended by a First Amendment effective
May 22, 2002, a Second Amendment effective February 18, 2003, a Third
Amendment effective May 23, 2003, a Fourth Amendment effective May 21, 2004
and a Fifth Amendment effective May 10, 2005."
IN WITNESS WHEREOF, this Amendment has been executed effective as of May
10, 2005.
CARRIZO OIL & GAS, INC.
By:
---------------------
Paul F. Boling
Vice President, Chief Financial
Officer, Secretary and Treasurer
49
CARRIZO OIL & GAS, INC.
MAY 10, 2005
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTOR
The undersigned hereby appoints S.P. Johnson IV and Paul F. Boling, jointly
and severally, proxies, with full power of substitution and with discretionary
authority to vote all shares of Common Stock that the undersigned is entitled to
vote at the Annual Meeting of Shareholders of Carrizo Oil & Gas, Inc. (the
"Company") to be held on Tuesday, May 10, 2005, at the Doubletree Hotel Houston
Downtown, Houston, Texas at 10:00 a.m., or at any adjournment thereof, hereby
revoking any proxy heretofore given. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE
VOTED IN THE MANNER DIRECTED HEREIN. IN THE ABSENCE OF SPECIFIC DIRECTIONS TO
THE CONTRARY, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3 AND 4.
The undersigned hereby acknowledges receipt of the Notice of, and Proxy
Statement for, the aforementioned Annual Meeting.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
ANNUAL MEETING OF SHAREHOLDERS OF
CARRIZO OIL & GAS, INC.
May 10, 2005
PLEASE DATE, SIGN AND MAIL
YOUR PROXY CARD IN THE
ENVELOPE PROVIDED AS SOON
AS POSSIBLE.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF DIRECTORS AND
"FOR" PROPOSALS 2 AND 3. PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [X]
FOR AGAINST ABSTAIN
1. Election of Directors: * 2. Approval of the Amendment to the Incentive Plan. [ ] [ ] [ ]
NOMINEES *
[ ] FOR ALL NOMINEES [ ] S.P. Johnson IV * 3. Approval of the Appointment of Pannell Kerr [ ] [ ] [ ]
[ ] Steven A. Webster * Forster of Texas, P.C. as the Company's
[ ] WITHHOLD AUTHORITY [ ] Thomas L. Carter, Jr. * Independent Registered Public Accounting Firm for
FOR ALL NOMINEES [ ] Paul B. Loyd, Jr. * the fiscal year ending December 31, 2005.
[ ] F. Gardner Parker *
[ ] FOR ALL EXCEPT [ ] Roger A. Ramsey * 4. With discretionary authority as to such other
(See instructions [ ] Frank A. Wojtek * matters as may properly come before the meeting.
below). *
*
INSTRUCTIONS: *
To withold authority to vote for any individual *
nominee(s), mark "FOR ALL EXCEPT" and fill in *
the circle next to each nominee you wish to *
withhold, as shown here: [X] *
***************************************************
To change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that changes
to the registered name(s) on the account may not be submitted via this method.
Signature of Shareholder
-------------------------------
Date
------------------------
Signature of Shareholder
-------------------------------
Date
------------------------
NOTE: Please sign exactly as your name or names appear on this Proxy. When
shares are hold jointly, each holder should sign. When signing as executor,
administrator, attorney, trustee or guardian, please give full title as such. If
the signer is a corporation, please sign full corporate name by duly authorized
officer, giving full title as such. If signer is a partnership, please sign in
parternship name by authorized person.