-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OxLdn41mkpXXhTR5mWPNj2+Y86VuMqBDlKeGR+mKEgXzfNmc+h0H4nHZdAQOfegJ 1cfDi0M21CQq7Q6dtKUXlg== 0001005477-99-005291.txt : 19991117 0001005477-99-005291.hdr.sgml : 19991117 ACCESSION NUMBER: 0001005477-99-005291 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISRAMCO INC CENTRAL INDEX KEY: 0000719209 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 133145265 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12500 FILM NUMBER: 99753450 BUSINESS ADDRESS: STREET 1: 1770 ST JAMES PL STREET 2: STE 607 CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7136213882 MAIL ADDRESS: STREET 1: 1770 ST JAMES PLACE STREET 2: SUITE 607 CITY: HOUSTON STATE: TX ZIP: 77056 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB Check One |X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1999 or |_| Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-12500 ISRAMCO, INC. (Exact Name of Small Business Issuer as Specified in its Charter) Delaware 13-3145265 (State or other Jurisdiction of I.R.S. Employer Number Incorporation or Organization) 1770 St. James Place, Suite 607 Houston, TX 77056 (Address of Principal Executive Offices) 713-621-3882 (Issuer's Telephone Number, Including Area Code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| The number of shares outstanding of the registrant's Common Stock as of November 14, 1999 was 2,639,809. Transitional Small Business Disclosure Format: Yes |_| No |X| PART I - FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Balance Sheets at September 30, 1999 and December 31, 1998 Consolidated Statement of Operations for the three months ended September 30, 1999 and 1998 Consolidated Statements of Operations for the nine months ended September 30, 1999 and 1998 Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and~1998 Notes to Consolidated Financial Statements Item 2. Management's discussion and analysis of financial statements PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon senior securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Exhibit 27 - Financial Data Schedule Signatures 2 ISRAMCO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, ASSETS 1999 1998 ------------- ------------ (Unaudited) Current assets: Cash and cash equivalents $ 13,052 $ 14,240 Marketable securities, at market 2,932 3,846 Accounts receivable 1,178 268 Prepaid expenses and other current assets 310 207 -------- -------- Total current assets 17,472 18,561 Property and equipment (successful efforts method for oil and gas properties), net 5,030 5,450 Marketable securities, at market 1,903 -- Investment in affiliates 1,780 285 Covenants not to compete, net 70 122 Other 55 68 -------- -------- Total assets $ 26,310 $ 24,486 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 374 $ 374 Accounts payable and accrued expenses 760 644 -------- -------- Total current liabilities 1,134 1,018 Long-term debt 1,124 1,404 -------- -------- Total liabilities 2,258 2,422 -------- -------- Commitments, contingencies and other matters Shareholders' equity: Common stock $.0l par value; authorized 7,500,000 shares; issued 2,669,120 27 27 Additional paid-in capital 26,168 26,168 Accumulated other comprehensive gain 1,043 -- Accumulated deficit (3,022) (3,967) Treasury stock, 29,267 shares (164) (164) -------- -------- Total shareholders' equity 24,052 22,064 -------- -------- Total liabilities and shareholders' equity $ 26,310 $ 24,486 ======== ======== See notes to the consolidated financial statements. 3 ISRAMCO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except for share information) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues: Oil and gas sales $ 314 $ 378 $ 961 $ 1,258 Operator fees from related party 660 232 858 630 Interest income 138 129 675 422 Gain (loss) on marketable securities (76) (352) 44 (755) Realized Gain on investment in affiliate 100 -- 100 -- Office services to affiliates and other 143 169 469 468 Reimbursement of exploration costs 65 54 166 152 Equity earnings of Jay Management -- 1 -- 16 Gain on sale of assets -- 129 -- 139 ----------- ----------- ----------- ----------- Total revenues 1,344 740 3,273 2,330 ----------- ----------- ----------- ----------- Expenses: Interest expense 38 108 114 261 Depreciation, depletion and amortization 171 190 534 551 Lease operating expenses and severance taxes 126 175 307 672 Operator expense 131 67 342 320 General and administrative 255 183 699 863 Exploration costs 103 19 107 71 ----------- ----------- ----------- ----------- Total expenses 824 742 2,103 2,738 ----------- ----------- ----------- ----------- Income (loss) before taxes and minority interest 520 (2) 1,170 (408) Income taxes (130) (14) (225) (14) Minority interest -- (4) -- 11 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 390 $ (20) $ 945 $ (411) =========== =========== =========== =========== Income (loss) per share (basic and diluted) $ 0.15 $ (0.01) $ 0.36 $ (0.16) =========== =========== =========== =========== Weighted average number of shares outstanding 2,639,853 2,639,853 2,639,853 2,639,853 =========== =========== =========== ===========
See notes to the consolidated financial statements. 4 ISRAMCO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Nine Months Ended September 30, ------------------------------- 1999 1998 ---- ---- Cash flow from operating activities: Net income (loss) $ 945 $ (411) Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization 534 551 Minority interest -- (11) (Gain) loss on marketable securities (44) 973 Realized Gain on investment in affiliate (100) -- Gain on sale of property and equipment -- (139) Changes in assets and liabilities Accounts receivable (910) 336 Prepaid expenses and other current assets (103) 204 Other 8 (2) Accounts payable and accrued expenses 209 (482) -------- -------- Net cash provided by operating activities 539 534 -------- -------- Cash flows from investing activities: Addition to property and equipment (90) (53) Investment in affiliates (2,207) -- Proceeds from sale of marketable affiliate securities 1,018 Proceeds from sale of equipment -- 240 Purchase of interests in Jay Petroleum, LLC and in Jay Management, LLC (60) (69) Purchase of marketable securities (2,318) (1,886) Proceeds from sale of marketable securities 2,210 3,400 -------- -------- Net cash provided by (used in) investing activities (1,447) 403 -------- -------- Cash flows from financing activities Proceeds from long term debt -- 136 Principal payments on long-term debt (280) (491) -------- -------- Net cash used in financing activities (280) (355) -------- -------- NET INCREASE (DECREASE ) IN CASH AND CASH EQUIVALENTS (1,188) 3,788 Cash and cash equivalents - beginning of year 14,240 9,741 -------- -------- Cash and cash equivalents - end of period $ 13,052 $ 13,529 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 114 $ 261 ======== ========
See notes to the consolidated financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 As used in these financial statements, the term "company" refers to Isramco, Inc. and subsidiaries. NOTE 2 The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Results for the three and nine month periods ended September 30, 1999, are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. NOTE 3 - Consolidation The consolidated financial statements include the accounts of the Company, its direct and indirect wholly-owned subsidiaries Isramco Oil and Gas Ltd. (Oil and Gas) and Isramco Resources Inc., a British Virgin Islands company, its wholly owned subsidiary, Jay Petroleum, L.L.C., (Jay) and an immaterial wholly-owned foreign subsidiary. Intercompany balances and transactions have been eliminated in consolidation. Another wholly-owned subsidiary of the Company, Isramco Management (1988) Ltd., an Israeli Company, is not included in the consolidation because the Company has no voting rights. This entity serves as the nominee for a Limited Partnership and has no significant assets or operations. NOTE 4 - Acquisition and Divestitures of Oil and Gas Properties Although the Company continues to seek to acquire oil and gas properties, no material purchases were made in the first nine months of 1999. Subsequently, on October 20, 1999, the Company, as operator of the offshore licenses, and the other participants (collectively, the "Isramco Group"), entered into an agreement with BG International Limited, a member of the British Gas Group ("BG"), for the acquisition by BG from the Isramco Group of a 50% participation interest in the offshore licenses in Israel and BG's replacement of the Company as operator of such licenses (the "Transaction"). The licenses forming the subject matter of the Transaction are the Med Yavne licenses, Med Tel Aviv, Med Hadera, Med Ashdod and Med Hasharon (collectively, the "Subject Licenses"). Following the consummation of the of the Transaction, the Company's participation in the Subject Licenses will reduced from 1.0043% to approximately 5%. In consideration of the Company's performance of its obligations under the Transaction agreement, BG paid to the Company approximately $1.9 million, with an additional approximate $1.9 million to be paid to the Company by no later than January 15, 2000. Additionally, upon the issuance of each of the three first New Licenses, if any, BG is to pay to the Company approximately $1.6 million. The Company's share of the aggregate 6 consideration payable by BG to the Isramco Group in respect of the transfer of the Subject License rights is approximately $12,000. With respect to the Med Yavne license, subject to the consent of all of the license participants the Joint Operating Agreement will be revised to provide, among other things, that BG will be appointed operator and that the Company will furnish to BG consulting services of an administrative and technical nature. In consideration therefor, the Company is entitled to a monthly fee equal to $10,000. The Company is entitled to receive from each member of the Isramco Group overriding royalties equal to 2% of each such member's rights to any oil and/or gas which is produced within the offshore licenses or within any other oil and gas rights which may be obtained in lieu of these offshore licenses. NOTE 5 - Long-term Debt At September 30, 1999, Jay has outstanding indebtedness of $1,498,000 under a bank loan facility of $10 million. The loan bears interest at the base rate of the bank plus 1.5% with monthly payments of $31,208 plus interest and matures in 2000. The loan is collateralized by oil and gas properties and cannot exceed the "Borrowing Base", as defined, which is subject to annual determination. The borrowing base at September 30, 1999 was $ 1,498,000 Isramco Inc. is not a borrower or guarantor under this bank financing. Under the terms of the financing agreement with the bank, Jay must meet certain covenant requirements. The most restrictive covenants include maintenance of a positive working capital ratio, exclusive of current maturities of amounts outstanding under the bank loan facility. Jay was not in violation of its debt covenants as of September 30, 1999. NOTE 6 - New Pronouncements SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued by the FASB in June 1998 SFAS No.133 standardizes the accounting for derivatives instruments, including certain derivative instruments embedded in other contracts. SFAS No. 133, as amended, is effective for periods beginning after June 15, 2000. The Company believes that adoption of this financial accounting standard will not have material effect on its financial condition or results of operations. NOTE 7 - Geographical Segment Information The Company's operations involve a single industry segment--the exploration, development, production and transportation of oil and natural gas. Its current oil and gas activities are concentrated in the United States, Israel, and the Republic of Congo, Africa. Operating in foreign countries subjects the Company to inherent risks such as a loss of revenues, property and equipment from such hazards as exploration, nationalization, war and other political risks, risks of increases of taxes and governmental royalties, renegotiation of contracts with government entities and changes in laws and policies governing operations of foreign-based companies. The Company's oil and gas business is subject to operating risks associated with the exploration, and production of oil and gas, including blowouts, pollution and acts of nature that could result in damage to oil and gas wells, production facilities or formations. In addition, oil and gas prices have fluctuated substantially in recent years as a result of events, which were outside of the Company's control. Financial information, summarized by geographic area, is as follows (in thousands): 7
Geographic Segment ------------------ United Consolidated States Israel Africa Total ------ ------ ------ ----- Identifiable assets at September 30, 1999 $ 2,257 $ 73 $ 2,700 $ 5,030 Cash and corporate assets $ 21,280 -------- Total Assets at September 30, 1999 $ 26,310 ======== Identifiable assets at December 31, 1998 $ 2,686 $ 64 $ 2,700 $ 5,450 Cash and corporate assets $ 19,036 -------- Total assets at December 31, 1998 $ 24,486 ======== Nine Months Ended September 30, 1999 Sales and other operating revenue $ 1,020 $ 1,434 -- $ 2,454 Costs and operating expenses $ (825) $ (465) -- $ (1,290) ------- ------- ------- -------- Operating profit $ 195 $ 969 -- $ 1,164 ======= ======= ======= Interest Income $ 675 General corporate expenses $ (699) Interest expense, gain on marketable securities and other $ 30 Income taxes $ (225) -------- Net Income $ 945 ======== Three Months Ended September 30, 1999 Sales and other operating revenue $ 338 $ 844 -- $ 1,182 Costs and operating expenses $ (288) $ (243) -- $ (531) ------- ------- ------- -------- Operating profit $ 50 $ 601 -- $ 651 ======= ======= ======= Interest income $ 138 General corporate expenses $ (255) Interest expense, gain on marketable securities and other $ (14) Income taxes $ (130) -------- Net income $ 390 ======== Nine Months Ended September 30, 1998 Sales and other operating revenue $ 1,382 $ 1,142 -- $ 2,524 Costs and operating expenses $(1,197) $ (417) -- $ (1,614) ------- ------- ------- -------- Operating profit $ 185 $ 725 -- $ 910 ======= ======= ======= Interest income $ 422 General corporate expenses $ (863) Interest expense, loss on marketable securities and other $ (877) Income taxes $ (14) Minority interest $ 11 -------- Net loss $ (411) ========
8
Geographic Segment ------------------ United Consolidated States Israel Africa Total ------ ------ ------ ----- Three Months Ended September 30, 1998 Sales and other operating revenue $ 428 $ 406 -- $ 834 Costs and operating expenses $ (300) $ (151) -- $ (451) ------- ------- ------- -------- Operating profit $ 128 $ 255 -- $ 383 ======= ======= ======= Interest income $ 129 General corporate expenses $ (183) Interest expense, loss on marketable securities and other $ (331) Income taxes $ (14) Minority interest $ (4) -------- Net loss $ (20) ========
NOTE 8 - Marketable securities SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires the Company to classify its debt and equity securities in one of three categories: trading, available-for-sale and held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which the Company has both the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for sale. At December 31, 1998, the Company considered all of its marketable securities to be held for trading purposes. During the first quarter of 1999, the Company transferred certain investments in marketable securities, with a historical cost of $2,750,000, to available-for-sale at fair market value. The Company holds no held-to-maturity securities. Trading and available-for-sale are recorded at fair market value. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effects, on available-for sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. At September 30, 1999 and December 31, 1998, the Company had net unrealized losses on the trading of marketable securities of $173,000 and $1,756,000, respectively. The change in the net unrealized holding gains or losses included in earnings is a gain of $44,000 for the nine months ended September 30, 1999. Trading securities, which are primarily traded on the Tel-Aviv Stock Exchange, consists of the following: September 30, 1999 December 31, 1998 ------------------ ----------------- Cost Market Value Cost Market Value ---- ------------ ---- ------------ Debentures and Convertible Debentures $2,487,000 $2,319,000 $2,959,000 $2,728,000 Equity securities 458,000 459,000 2,643,000 1,118,000 Investment Trust Fund 160,000 154,000 -- -- ---------- ---------- ---------- ---------- $3,105,000 $2,932,000 $5,602,000 $3,846,000 ========== ========== ========== ========== 9 Available-for-sale securities, which are primarily traded on the Tel-Aviv Stock Exchange, consist of equity securities, including investment in affiliates, with amortized cost of $2,639,000, gross unrealized holding gains of $1,043,000 and a fair market value of $3,682,000 at September 30, 1999. The Company held no available-for-sale securities at December 31, 1998. Sales of marketable securities resulted in realized gains of $77,000 for the nine months ended September 30, 1999. NOTE 9 The Company's comprehensive income for the three and nine months ended September 30, 1999 and 1998 were as follows:
Nine months ended September 30, Three months ended September 30, ------------------------------- -------------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net income (loss) $ 945,000 $ (411,000) $ 390,000 $ (20,000) Other comprehensive gain -available for sale securities $1,043,000 -- $ 863,000 -- ---------- ---------- ---------- ---------- Comprehensive income (loss) $1,988,000 $ (411,000) $1,253,000 $ (20,000) ========== ========== ========== ==========
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this document as well as statements made in press releases and oral statements that may be made by the Company or by officers, directors or employees of the Company acting on the Company's behalf that are not statements of historical or current fact constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward looking statements. Liquidity and Capital Resources The decrease in the Company's consolidated cash and cash equivalents of $1,188,000 from $14,240,000 at December 31, 1998 to $13,052,000 at September 30, 1999 is primarily the result of purchases of marketable securities. In the nine month period ended September 30, 1999, the Company had net cash outflow from purchases and sales of marketable securities (including those of affiliates) of $1,296,000 as compared to a net cash inflow from purchases and sales of marketable securities of $1,514,000 in the nine months ended September 30, 1998. As of September 30, 1999 the Company owned 5.5% of the issued shares of J.O.E.L. - Jerusalem Oil Exploration Ltd. ("JOEL"), the controlling shareholder of Naphtha Israel Petroleum Company Ltd. ("Naphtha"). Naphtha through a wholly owned subsidiary holds approximately 50.2% of the Company's outstanding common stock. Shares of JOEL and Naphtha are traded on the Tel Aviv Stock Market. As of September 30, 1999, Jay had outstanding indebtedness of $1,498,000 under a bank loan facility of $10 million. The loan bears interest at the base rate of the bank plus 1.5% with monthly payments of $31,208 plus interest and matures in 2000. The loan is secured by oil and gas properties and cannot exceed the "Borrowing Base" (as defined in the loan documents), which is subject to annual re-determination. The Borrowing Base at September 30, 1999 was $ 1,498,000. Isramco, Inc. is not a borrower or guarantor under the loan facility. Under the terms of the financing agreement with the bank, Jay must meet certain covenant requirements. The most restrictive covenants include maintenance of a positive working capital ratio, exclusive of current maturities of amounts outstanding under the bank loan facility. Jay was not in violation of its debt covenants as of September 30, 1999. The Company believes that existing cash balances and cash flows from activities will be sufficient to meet its financing needs. The Company intends to finance its ongoing oil and gas exploration activities from working capital and the loan facility. 11 Results of Operations United States Oil and Gas Revenues (in thousands)
Nine months ended September 30, Three months ended September 30, ------------------------------- -------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Oil Volume Sold (Barrels) Total 18 23 4 9 Gas Volume Sold (MCF) Total 381 491 131 201 Oil Sales ($) Total 251 326 81 99 Gas Sales ($) Total 708 932 231 279 Average Unit Price Oil ($/Bbl) * $13.9 $13.1 $20.2 $11.0 Gas ($/MCF) ** $1.9 $1.9 $1.8 $1.8
* Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons ** MCF - 1,000 Cubic Feet Israel The Negev Med License During the nine months period ended September 30, 1999, the Negev Med Venture expended $10,700,000. The Company's share is 1.0043% or $107,000. On April 26, 1999, the Company, as operator of the offshore licenses in Israel, presented to its participants in the licenses the following proposals for its oil exploration work plans in the license areas: (i) Offshore drilling of the Yam West 2 well in the Med Yavne license area to a depth of 3,500 meters (approximately 11,483 feet) and a water depth of 750 meters (approximately 2,461 feet). The amount budgeted for the drilling was approximately $21 million, of which the Company's share is 1.0043% or approximately $211,000. (ii) Deepening of the Yam 2 well by approximately an additional 300 meters (approximately 984 feet), to a depth of 5,700 meters (approximately 18,702 feet). The amount budgeted for the drilling was approximately $12 million, of which the Company's share was 1.0043% or approximately $120,000. Deepening of the Yam 2 well is subject to the conclusion of an agreement with the Israeli Ministry of Defense, the availability of drilling equipment appropriate for elevated water pressure and temperatures, as well as additional examination of the well head and its 12 condition. In management's best judgement, the likelihood that the Company will be able to enter into an agreement with the Ministry of Defense prior to the scheduled expiration of the licenses on June 14, 2000 in respect of the deepening of the Yam 2 well on mutually acceptable terms is low. On May 6, 1999, the Company signed a drilling contract with an international drilling contractor to drill the Yam West 2 and an additional optional well. The drilling commenced on August 5, 1999. The primary objective of the drilling was to test for the existence of oil and/or gas at depths ranging from 8,690 feet (2,650 meters) and deeper. A secondary objective was to test for a gas reservoir at a depth of 5,412 feet (1,650 meters). Following the SOLE RISK notice furnished to the Med Yavne participants who did not approve the budget (AFE) for the Yam West 2 drilling, a carveout was created in the Med Yavne license area--the "Yam West 2 Carveout". The participants in the Yam West 2 Carveout (that includes the Yam West 2 well) are: Isramco Inc. (1.0043%), Delek Drilling Limited Partnership (8.0%) Naphtha Exploration Limited Partnership (5.0%) and Isramco Negev 2 Limited Partnership (85.9957%). In July 1999, approximately 500 kilometers (311 miles) of 2D high-resolution seismic lines were shot over three prospective areas within the Med Yavne license area. The purposes of this survey were to recognize and delineate Pliocene gas sand prospects. These seismic data were subsequently processed and, in addition, 300 line kilometers (186 miles) of pre-existing seismic data were also reprocessed. The entire seismic set was interpreted in August and several Pliocene gas sand prospects were delineated. Following comparative analysis of the gas prospects, the decision was taken to select the Or prospect for drilling (in lieu of the Yam 2 prospect). In October 1999, the drilling of the Yam West 2 well reached a depth of 3,210 meters (approximately 10,500 feet). Upon the completion of the analysis of the logs conducted I the well, the participants decided to plug and abandon the Yam West 2 well. The total expenditures for the Yam West 2 well were approximately $11 million, of which the Company's share was 1.0043% or $110,000. Upon the completion of the plugging of the Yam West 2 well, on October 6, 1999, the "Or 1" well (within the Med Yavne license area) was spudded. The production tests, which were completed by November 2, 1999, reflect an initial gas production flow rate of 21 million cubic feet a day. Additionally, the test results suggest that the Or 1 well may be able to produce gas at a higher flow rate, so long as the well will be prepared for orderly gas production and lower levels of the well are perforated. Currently, the analysis of the test results is underway and, upon its completion, a more accurate estimate of the overall gas production potential can be furnished. Based on the positive test results received, the decision was taken to discontinue additional tests on the Or 1 well and to move the drilling rig to the "Or South 1"drilling site, approximately 4.5 kilometers (approximately 2.8 miles) south of Or 1. The drilling budget (AFE), including the production tests, for each of the Or 1 and Or South wells is approximately $8.5 million, of which the Company's share in each case is approximately $39,000. In July 1999, the operator requested of the Petroleum Commissioner to approve a revision in the drilling terms previously approved in the off shore work program such that the drilling of the second well could be to a depth of 2,000 meters (approximately 6,562 feet), instead of 3,000 meters (approximately 9,843 feet) or the deepening of an existing drilling site. In August, 1999, the Petroleum Commissioner approved the Company's request. 13 Award of Offshore Preliminary Permits In June 1999, the Company was awarded a preliminary permit referred to as the "Marine North/ 164" covering an area of 297 square kilometers off shore Israel northeast of the Med Hadera, Med Tel Aviv and Med HaSharon licenses. Isramco Negev 2 Limited Partnership holds a 79% interest in the permit, Modien Energy Limited Partnership, an Israeli entity, holds a 20% participation interest and the Company holds the remaining 1% interest. On September 21, 1999, the Company was awarded an additional preliminary permit, "Marine Center" covering an area of 194 square kilometers and located between the Med Hedera and Med Tel Aviv license areas. The Company intends to approach several entities respecting their participation in the permit. Sale of Interests to British Gas On October 20, 1999, the Company, as operator of the offshore licenses, and the other participants (collectively, the "Isramco Group"), entered into an agreement with BG International Limited, a member of the British Gas Group ("BG"), for the acquisition by BG from the Isramco Group of a 50% participation interest in the offshore licenses in Israel and BG's replacement of the Company as operator of such licenses (the "Transaction"). The licenses forming the subject matter of the Transaction are the Med Yavne licenses, Med Tel Aviv, Med Hadera, Med Ashdod and Med Hasharon (collectively, the "Subject Licenses"). Following the consummation of the of the Transaction, the Company's participation in the Subject Licenses will be approximately .5% (reduced from 1.0043%). Under the terms of the Transaction, BG will replace the Company as operator of the Med Yavne license by no later than January 1, 2000. The Company will continue to serve as operator of each of the remaining Subject Licenses on the same terms and conditions currently existing among the Company and the other license participants until each such license's expiration. Pursuant to the Transaction, the Company and BG will coordinate their respective efforts in consolidating and completing work programs in respect of the areas included within the Subject Licenses (other than for Med Yavne) for the purpose of jointly applying for new oil licenses in replacement of any expiring license ("New Licenses"). In consideration of the Company's performance of its obligations under the Transaction agreement, BG paid to the Company approximately $1.9 million, with an additional approximate $1.9 million to be paid to the Company by no later than January 15, 2000. Additionally, upon the issuance of each of the three first New Licenses, if any, BG is to pay to the Company approximately $1.6 million. The Company's share of the aggregate consideration payable by BG to the Isramco Group in respect of the transfer of the Subject License rights is approximately $12,000. With respect to the Med Yavne license, subject to the consent of all of the license participants the Joint Operating Agreement will be revised to provide, among other things, that BG will be appointed operator and that the Company will furnish to BG consulting services of an administrative and technical nature. In consideration therefor, the Company is entitled to a monthly fee equal to $10,000. The Company is entitled to receive from each member of the Isramco Group overriding royalties equal to 2% of each such member's rights to any oil and/or gas which is produced within the offshore licenses or within any other oil and gas rights which may be obtained in lieu of these offshore licenses. 14 Congo On June 15, 1999, an order approving the sharing contracts was signed by the President of the Republic of Congo, the Petroleum Minister and the Minister of Finance. On July 5, 1999, the Petroleum Minister confirmed in writing to the Company that the Production Sharing contracts are valid and comply with the requirements of local Congolese law and advised the Company that it was possible to organize management committee meetings. Additionally, in July 1999 the orders were published in a French language daily in the Congo. The oil and gas properties in the Congo consist of the Marine III and the Talipia concessions. On October 6, 1999, the management committee held a meeting in Port Noir in the Congo. The management committee approved the Marine III budget in the amount of $445,000 and the Tilapia budget in the amount of $3,600,000, in each case for the period commencing September 1999 through December 2000. The Company's share is $222,500 in respect of the Marine III concession and $1,800,000 in respect of the Talipia concession. The Company's recovery of its investment in the Congo is dependent upon successful drilling and production under the sharing contracts. No assessment of success can be made. The permits relating to the Tilapia and Marine 3 concessions are included in oil and gas properties in the balance sheet at $2.7 million. Operator Fees In the nine month period ended September 30, 1999 and 1998, the Company earned $858,000 and $630,000, respectively, and in the three month period ended September 30, 1999 and 1998, the Company earned $660,000 and $232,000, respectively. The amounts earned were based on the minimum monthly compensation for each period. Oil and Gas Revenues In the nine month period ended September 30, 1999 and 1998, the Company had oil and gas revenues of $961,000 and $1,258,000, respectively and in the three month period ended September 30, 1999 and 1998, the Company had revenues of $314,000 and $378,000, respectively. The decrease is attributable to the decline in oil and gas prices between the periods, the sale of certain interests in oil and gas properties and slightly lower production in 1999. Lease Operating Expenses and Severance Taxes In the nine month period ended September 30, 1999 and 1998, lease operating expenses were primarily in connection with oil and gas fields in the United States. Oil and gas lease operating expenses and severance taxes in the nine month periods ended September 30, 1999 and 1998 were $307,000 and $672,000, respectively and for the three month period ended September 30, 1999 and 1998, they were $126,000 and $175,000, respectively. The decrease in lease operating expenses and severance taxes is due to, among other things, the decline in oil and gas prices and slightly lower production in 1999. In 1998, the lease operating expenses included workover expenses on several wells which totaled over $77,000, overhead charges from previous years which were not billed until then and yearly COPAS overhead escalation. 15 Interest Income Interest income increased in the three and nine month periods ended September 30, 1999 compared to interest income for the same periods ended September 30, 1998 primarily due to the strengthening of the Israeli currency against the U.S. currency. Marketable Securities In the nine month period ended September 30, 1999 the Company recognized net realized and unrealized gains of $144,000 compared to net realized and unrealized losses of $755,000 in the same period in 1998. For the three month period ended September 30, 1999, the Company recognized net realized and unrealized gains of $24,000 compared to a net realized and unrealized losses of $352,000 for the same period in 1998. Increases or decreases in the gains and losses from marketable securities are dependent on the market prices in general and the composition of the portfolio of the Company. Operator Costs Operator costs increased in the three and nine month periods ended September 30, 1999 as compared to the same periods ended September 30, 1998, primarily attributable to increase in salaries. General and Administrative Expenses General and administrative expenses increased during the three month period ended September 30, 1999 compared to the same period in 1998 and decreased during the nine month period ended September 30, 1999 compared to the same period in 1998. The decrease was primarily due to a decrease in consulting fees and salaries. Impact of the Year 2000 Issue The Year 2000 Issue ("Y2K") is a general term used to describe the various problems that may arise as a result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Y2K software compliance issues affect the Company and most companies in the world. The Company is conducting a review of its operations to identify those systems that could be affected by the Y2K issue. The review covers information systems, mainframe and personal computers and the Company's delivery systems. The Company's information systems include administrative and financial applications, such as for order processing and collection. In the event one of these systems were to fail, the Company's ability to capture, schedule and fulfill customer demands would be impaired. Similarly, if a collection processing system were to fail, the Company would not be able to properly apply payment to customer balances or correctly determine cash balances. However, the Company would consider various alternatives, including performing manually certain functions that it had performed manually before the applicable computer system was in use. Management also 16 intends to review its external relationships to address potential Y2K issues arising from relationships with significant suppliers, service providers and customers. Management presently believes that the Company has substantially completed its Y2K planning of its internal systems and facilities utilizing both internal and external resources. The Company has been advised that its accounting system software systems will properly utilize dates beyond December 31, 1999. The Company plans to complete its Y2K project not later than November 30, 1999. Management anticipates that the total cost of the Y2K project should not exceed $25,000 and will be funded through operating cash flows. The Company is continuing to initiate formal communications with its significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Issue. The costs of the project and the date on which the Company plans to complete the Y2K modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Contingency plans are being considered by the Company and to the extent practicable will be put in place, as required, in the event that the Company determines that it is at significant risk in regard to suppliers, customers or its own internal hardware and software. Contingency plans may include consideration of alternative sources of supply, customer communication plans and plant and business response plans. In general, the Company's plans are intended to provide a means of managing risk, but cannot eliminate the potential for disruption due to third party failure. The Company believes that due to the widespread nature of the potential Y2K issues, its contingency planning is an ongoing process which will require further consideration as the Company obtains additional information. The Company will define strategy based on the importance of a particular relationship. The Company's efforts with respect to specific problems identified will depend in part upon its assessment of the risk that such problem may have an adverse impact on its operations. The failure to correct a material Y2K problem could, of course, result in an interruption in, or failure of, certain normal business activities or operations, including curtailment of production and failure to bill and collect revenues. Such failures could materially and adversely affect the Company. More specifically, the Company would be materially adversely affected if third parties with which it does business or that provide essential products or services are not Year 2000 ready. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of the Company's suppliers, other third party providers and customers, the Company is unable to determine at this time whether the consequences of any Year 2000 failures will have a material impact on the Company. The Company believes that with the implementation of the new accounting systems and the completion of its other measures, the possibility of significant interruptions of normal operations should be mitigated. 17 PART II Item 1. Legal Proceedings Not Applicable Item 2. Change in Securities & Use of Proceeds Not Applicable Item 3. Default Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on 8-K a) Reports on From 8-K (i) Form 8-K for the month of August 1999. (ii) Form 8-K for the month of September 1999 (iii) Form 8-K dated October 7, 1999 (iv) Form 8-K dated October 20, 1999 (v) Form 8-K dated November 1, 1999 (vi) Form 8-K dated November 2, 1999 b) Exhibit 27 - - Financial Data Schedule 18 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ISRAMCO, INC. Registrant Date: November 15, 1999 By /s/ Haim Tsuff Chairman of the Board, Chief Executive Officer and Chief Financial Officer 19 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 13,052 6,615 1,178 0 0 17,472 7,372 2,342 26,310 1,134 0 0 0 27 24,025 26,310 2,454 3,273 0 (2,103) 819 0 (114) 1,170 (225) 945 0 0 0 945 0.36 0.36
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