UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report for the Fiscal year ended December 31, 1998
ISRAMCO, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-12500 13-3145265
(State or Other Jurisdiction Commission File IRS Employer
of Incorporation) Number) Identification No.)
1770 St. James Place, Suite 607, Houston, Texas 77056
(Address of Principal Executive Offices)
713-621-3882
(Registrant's Telephone Number, including Area Code)
[Mark One]
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 1998 [Fee Required]
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [No Fee Required]
Securities registered under Section 12(b) of the Exchange Act:
Title of each Class: Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act: None
Common Stock, par value $0.01
Class A Redeemable Warrants
Class B Redeemable Warrants
(Title of Class)
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Check whether the issuer (1) has field all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for the Fiscal year ended December 31, 1998: $4,502,000.
The aggregate market value of the Registrant's Common Stock at March 31, 1999
held by persons deemed to be non-affiliates was approximately $2,804,000.
As of March 30, 1999, the Registrant had outstanding 2,639,809* shares of $0.01
par value Common Stock.
* The Company declared a one-for-ten reverse stock split during 1998. The
effect of the reverse stock split has been reflected in all share and per share
amounts in the accompanying consolidated financial statements.
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Item 1. Business and Properties
History
Since its formation in 1982, Isramco, Inc. ("Isramco" or the "Company") has
been active in the exploration of oil and gas in Israel. From 1982 to 1985, the
Company, with certain affiliated entities and other participants, expended
approximately $8.5 million for oil and gas exploration in Israel and drilled
four wells onshore Israel. The Company's share of these expenditures was
approximately $2.8 million. Although oil was discovered at the Gurim 4 and 5
wells, only approximately 9,000 Barrels have been produced and none of the wells
sustained commercial production.
The Company, with related and unrelated parties, formed the Negev 1 Venture
in 1985 to continue oil and gas exploration activities in Israel. These parties
included J.O.E.L.-Jerusalem Oil Exploration Ltd. ("JOEL"), Southern Shipping and
Energy (U.K.) ("SSE (U.K.)"), Equital Ltd. (an affiliated company formerly known
as Pass-port Ltd. ("Pass-port")), East Mediterranean Oil and Gas Ltd. ("EMOG"),
Delek - The Israel Fuel Corporation Ltd. ("Delek"), Delek Oil Exploration Ltd.
("DOEX"), Naphtha Israel Petroleum Corporation Ltd. ("Naphtha"), HEI Oil and Gas
Ltd., a California limited partnership, Donesco Venture Fund One, Mazal Oil
Inc., and L.P.S. Israel Oil Inc. ("HEI").
The participants in the Negev 1 Venture expended approximately $19.2
million for oil and gas exploration activities, including seismic exploration,
and drilled two wells, both of which were dry holes. The Company's share of
these expenditures was approximately $576,000. The Negev 1 Venture received no
revenues from its activities and its operations were terminated in 1988.
Following the expiration of the Negev 1 Venture in 1988, the Negev 2
Venture was formed by the same participants and held two licenses - Negev Nirim
and Negev Ashquelon. Within the framework of the Negev 2 Joint Venture, two
offshore wells ("Yam 1" and "Yam 2") were drilled and seismic and geological
studies, both onshore and offshore, were conducted at a cost of $44.55 million.
As of 1991, the activities with the Negev Nirim License were carried out within
the Bessor Carveout Area and as of 1993, the activities within the Negev
Ashquelon License were carried out within the Yam Carveout Area under Sole Risk
Agreements. In February 1995, the Negev Nirim License (including the Bessor
Carveout) was relinquished and in June 1996, the Negev Ashquelon License
(including the Yam Carveout) was relinquished by the Venture participants. The
Company, as the Operator, is in the process of winding down the affairs of the
Negev 2 Joint Venture.
In 1991 the Negev 2 Venture participants (excluding HEI) received a
Preliminary Permit with Priority Rights to receive Petroleum licenses (the
"Negev Med Venture"). Upon the expiration of the Preliminary Permit in 1993, the
Negev 2 Venture participants were granted five (5) licenses: Med Tel Aviv
License, Med Yavne License, Med Ashdod License, Med Hadera License, Med Hasharon
License (the "Med Licenses") with a duration which has been extended until June
14, 2000. The participants in the Negev Med Venture
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have delineated the Yam Ashdod Carveout Area (the "Yam Ashdod Carveout Area)
within the Med Ashdod License, and this area includes all of the areas which
were transferred from the Negev Asquelon License. See "Summary Description of
the Ventures, the Petroleum Assets, Related Work Obligations and Exploration
Efforts in Israel".
On January 24, 1994 the participants in the Med Tel Aviv License spudded
the Yam Yafo 1 well in the Yam Yafo Structure approximately 20 kilometers
northwest of the Tel Aviv coast. There was no economic justification for
producing oil and gas from this well. The total cost of drilling the Yam Yafo
well including tests, was approximately $38 million of which the Company's share
was $382,000.
On November 15, 1994 the participants in the Med Yavne License spudded the
Yam West 1 well (the well is located approximately 32 kilometers northwest of
Ashdod in a water depth of 2,130 feet) which was declared a dry hole. The total
cost of the well was approximately $23 million of which the Company's share was
approximately $231,000.
In 1996 the Ministry of Energy awarded to the Company and other venture
participants an onshore drilling license called Shederot/265. In 1998, the
participants in the Shederot/265 license drilled the Gevim 1 well located
approximately 2 kilometers south of Shederot) to a depth of 15,157 feet. The
well was declared a dry hole. The total cost of the well was approximately $6.6
million of which the Company's share was approximately $66,000. In December,
1998, the Company relinquished the Shederot license.
In 1997 the Company expanded its activities outside of Israel by acquiring
membership interests in Jay Petroleum LLC which owns certain working interests
in oil and gas wells in the United States and by acquiring rights in
exploitation and exploration concessions in the Congo, Africa.
The Operator
The Company is the Operator of the Negev Med Venture which consists of five
offshore licenses, the Yam Ashdod Carveout Venture (Yam Ashdod Carveout is part
of Med Ashdod license) and the Shederot Venture which consists of one onshore
license. As the Operator, the Company is responsible for directing the oil
exploration and drilling activities of each Venture through its Branch Office in
Petach Tikva, Israel. With five (5) full-time employees, outside consultants and
subcontractors, the Company carries out the operations of each Venture within
the framework of approved work programs and budgets and pursuant to the terms of
a Joint Operating Agreement.
The Operator charges each Venture participant for all costs incurred in
connection with the exploration and drilling activities conducted by each
Venture and is entitled to receive a fee for its administrative overhead equal
to 6% of all direct charges or minimum monthly compensation of $6,000 per each
License. During the year ended December 31, 1998, the Company was paid fees of
$288,000 in connection with the Negev Med Venture and fees of $72,000 in
connection with the Yam Ashdod Carveout Venture and fees of $360,000 in
connection with Shederot License. See "Material Agreements". The minimum monthly
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Operator's fee is currently $30,000 per month.
General Partner for the Negev 2 Limited Partnership
In 1989 the Company formed in Israel the Negev 2 Limited Partnership (the
"Limited Partnership") to acquire from the Company a substantial portion of its
working interest in the Negev 2 Venture. In exchange for working interests, the
Limited Partnership paid to the Company $700,000 and granted to the Company
certain overriding royalties. In 1992, the Company transferred to the Limited
Partnership additional rights in the Negev Ashquelon License, the Bessor
Carveout, and the Negev Med Permit with Priority Rights (now the Negev Med
Licenses) in exchange for additional overriding royalties and reimbursement of
expenses. The Company created Isramco Oil and Gas Ltd. ("IOG"), a wholly-owned
subsidiary to act as the General Partner for the Limited Partnership and formed
Isramco Management (1988) Ltd., a wholly-owned subsidiary to act as the nominee
holder of Limited Partnership units held by public investors in Israel. Pursuant
to the Limited Partnership Agreement and the Trust Agreement, a Supervisor was
appointed on behalf of the Limited Partnership unit holders, with sole authority
to appoint the sole director for Isramco Management (1988) Ltd. and to supervise
its activities on behalf of and for the benefit of the Limited Partnership unit
holders. The daily management of the Limited Partnership vests with the General
Partner, however, matters involving the rights of the Limited Partnership unit
holders, such as capital generation or participation in new liscense agreements,
are subject to the supervision of the Supervisor and in certain instances the
approval of the Limited Partnership unit holders. The firm of Igal Brightman &
Co., Accountants and Mr. David Valiano, Accountant has been appointed as
Supervisors.
The Company during 1992 and 1993, in order to assist the Limited
Partnership in the financing of its oil and gas exploration activities, acted as
offeror of Limited Partnership units to the public in Israel and assisted the
Limited Partnership in raising approximately $123 million from public in Israel.
On March 1, 1999 the Limited Partnership had available approximately $56 million
to finance its share of work obligations under the Licenses with regard to the
Petroleum Assets. The Limited Partnership is the largest holder of Working
Interests in the Negev Med Venture and the Yam Ashdod Carveout Venture. See
"Table of Petroleum Assets (Working Interests) Oil and Gas Ventures".
The Company holds overriding royalties in certain Petroleum Assets through
the Limited Partnership and currently receives a management fee of $40,000 per
month from the Limited Partnership for office space, management and other
services. It has been significant to the Company that the Limited Partnership
(in part through the efforts of the Company and others), has been able to raise
monies from the public in Israel to fund the Limited Partnership's share of the
work programs for the Petroleum Assets in connection with the continuation of
oil and gas exploration activities in Israel and to preserve the existence of
the Company's overriding royalties. As of December 31, 1998 the Company held
1.4% of the issued Limited Partnership units and a subsidiary of the Company,
acting as General Partner for the Limited Partnership held a 0.01% interest in
the Limited Partnership.
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Acquisition of Assets
Jay Petroleum, LLC. & Jay Management, LLC.
In February 1997, the Company acquired from NIR Resources Inc. ("NIR"), a
wholly owned subsidiary of Naphtha Israel Petroleum Corp. Ltd. ("Naphtha") and
Stonewall Resources LLC ("Stonewall"), a non-affiliated entity, ownership
interests in Jay Petroleum LLC ("Jay"), a Texas limited liability company. Jay
owns both operated and non-operated varying working interests in oil and gas
wells in the United States.
The Company paid to NIR $677,500 for its 50% Membership Interest (before
recovery of contributions) in Jay, which interest for profit allocation purposes
reduces to 37.5% after recovery of capital contribution. The Company paid to
Stonewall $363,750 for its 25% Membership Interest before recovery of
contributions in Jay, which interest for profit allocation purposes reduces to
18.75% after recovery of capital contributions. Certain Officers and directors
of the Company are associates of officers and directors of Naphtha.
In February 1997, following the Company's acquisition, Jay acquired from
Snyder Oil Corporation of Fort Worth, Texas, various operated and non-operated
interests in oil and gas wells in Louisiana, Texas and Wyoming for a cost of
$3.1 million excluding acquisition costs and purchase price adjustments. The
acquisition was financed primarily with bank financing obtained by Jay through a
$10 million Revolving Credit Facility with Comerica Bank - Texas, Houston,
Texas. The Company is neither a borrower nor guarantor under this Revolving
Credit Facility.
In connection with this acquisition of interests in Jay, the Company
received a Fair Market Value Letter from the firm of Albrecht and Associates
Inc., independent petroleum engineers, with regard to the oil and gas properties
held by Jay. The Fair Market Value Letter was based in part upon reserve
evaluation and net income projections prepared by Riseden Services Inc.,
independent petroleum engineers. A copy of the Fair Market Value Letter dated
January 27, 1997 and the Riseden Report dated January 16, 1997 have been filed
as Exhibits with Form 8-K filed by the Company for the month of February 1997.
In March 1998, the Company purchased the remaining 17.1% ownership interest
in Jay Petroleum held by Jay Resources Corporation and Jay Natural Resources,
Inc. as a result of arbitration. The transfer of ownership was effective on
December 31, 1997. See Item 3 Legal Procedures.
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During 1998, the Company sold 100% working interest in 30 wells for
$415,200 and 81.3% working interest in one well for $1,000,000.
Jay has a Management Agreement with Jay Management Company LLC
("Management"), a Texas limited liability company, to manage certain of the
producing oil and gas interests owned or to be acquired by Jay. Pursuant to the
Management Agreement, Jay was obligated to pay to Management a management fee of
$12,500 per month through February 1998. Due to the sharp decline in oil prices
and the resulting effect on the cash flow of the Company, the obligation for the
payment of this fee was waived with the mutual consent of the parties as of
March 1, 1998. Management also receives payments as operator pursuant to various
operating agreements for approximately 40 contract wells, which it operates.
In March 1998 the Company acquired an additional 30% interest in Management
from Jay Natural Resources, Inc. as a result of arbitration. The transfer of
ownership was effective on December 31, 1997. At December 31, 1998, the Company
purchased the remaining 35% in Management held by N.I.R. Resources, Inc. See
Item 3, Legal Proceeding.
The acquisition of the interests in Jay and Management for consideration of
$255,000 and $60,000 in March 1998 and December 1998, respectively, were made
out of working capital funds available to the Company. The audited financial
statements of both Jay and Management have been consolidated as part of the
Company's financial statements.
Independent estimates of the reserves held by Jay Petroleum LLC as of
December 31, 1998 are approximately 103,000 net barrels of proved developed
producing oil reserves; 2,600 net MMCFs of proved developed producing natural
gas reserves; 784 net MMCFs of proved developed behind pipe natural gas
reserves; 898 net MMCFs of proved undeveloped natural gas reserves; and, 49,000
net barrels of proved developed behind pipe oil reserves.
For information related to future cash inflows, future development and
production costs, future income tax expenses, future net cash flows, discount,
and standardized measure of discounted net cash flows relating to Jay, see the
Supplementary Oil and Gas information immediately following the notes to the
Financial Statements.
CONGO
On September 4, 1997 the Company acquired from Equital Ltd. (an Affiliated
company formerly known as Pass-port Ltd.) a 50 % participation in a joint
venture that holds the following two permits offshore of the Congo (the "Joint
Venture"): (1) the Marine III Exploration permit which has a term of four years
with an extension right of three years; and, (2) the Tilapia Exploitation permit
to develop the Tilapia Field, which has a term of ten years with an extension
right of five years. The purchase price was $2.55 million for the Tilapia permit
and $150,000 for the Marine III permit for an aggregate purchase price of $2.7
million.
The Company's participation in the Joint Venture is subject to an 8%
carried interest payable to Equital Ltd. after payout of its rights regarding
the production sharing contract on the Tilapia Permit. "Payout" in this Joint
Venture means all of the investments made by
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the Company in the Tilapia permit (excluding the Purchase Price paid by the
Company to Equital Ltd.). The Company received a fair market valuation of the
two permits from Forrest A. Garb & Associates, Inc., petroleum consultants,
Dallas, Texas. The valuation in the Tilapia permit made by Forrest A. Garb &
Associates, Inc. reflects a significant discount in value based upon technology,
economics and political uncertainties for the proposed work program, but
significantly exceeds the Company's purchase price.
The Joint Venture holds 100% of the rights under the production sharing
contract for the Tilapia permit and 50% of the rights with regard to the
production sharing contract in the Marine III permit. The other participant in
the Joint Venture is Naphtha Israel Petroleum Corp. Ltd. See Security Ownership
of Certain Beneficial Owners. Work programs for the operator, Naphtha Congo
Ltd., a wholly owned subsidiary of Naphtha Israel Petroleum Corp. Ltd., prepared
the two permits.
Oil was discovered within the area of the Tilapia Exploitation Permit in
the Tilapia Marine I exploration well drilled by the previous operator of the
permit, to a total depth of 5,018 Feet. The well tested 2,040 Barrels of oil per
day from a 31-foot thick sandstone reservoir, at a depth of 3,874 Feet. The
discovery well is located 9.5 nautical miles north of the Point Indienne
productive oil field and less than one mile from the share line.
The Marine III Exploration Permit covers an area of approximately 236,000
acres and is located in shallow water, 0-80 Feet deep, along the coast. No wells
have yet been drilled on this permit. The area of the two permits is covered by
a dense grid of two dimensional seismic lines.
The Joint Venture's rights in the production sharing contract on the
Tilapia Exploration Permit is subject to a 12.5% carried interest and payment of
$350,000 after payout of the Joint Venture's investment costs.
As a result of the civil instability that existed in 1997 in the Congo a
new government has taken control of this country. Due to these events the
operator (Naphtha Congo) has temporarily ceased its activities in the Congo. In
February 1998 the operator presented to the new Petroleum Minister its work plan
for Tilapia and Marine III. The economic and political and civil instability in
the Congo and the change of government could cause significant difficulties for
the operator in connection with the execution of a work program and the possible
development of both the Marine III permit and the Tilapia permit. A Management
Committee meeting between Naphtha Congo and the Congolese Ministry of Petroleum
scheduled for July, 1998, was postponed. On August 26, 1998, the Minister of
Petroleum of the Congo informed the Company that according to a decree signed by
the President, Prime Minister, Minister of Petroleum and Minister of Finance,
the permits will become effective from the date of the publishing of the
production sharing contracts as a law, and that the Management Committee meeting
can only be held after the completion of the formality of this process.
Therefore, until the publishing of the law, the Company cannot proceed with the
work program.
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OIL AND GAS VENTURES AND PETROLEUM ASSETS
LOCATED IN UNITED STATES AND CONGO
See "Supplementary Oil and Gas Information" immediately following Notes to
the audited Financial Statements.
OIL AND GAS VENTURES AND PETROLEUM ASSETS LOCATED IN ISRAEL
The table below sets forth the Working Interests and Petroleum Assets of
the Company and all affiliated and non-affiliated participants in (i) the
Ventures, (ii) the Petroleum Assets, (iii) the total acreage of each Petroleum
Asset, and (iv) the expiration dates of each of the licenses. This information
pertains only to Petroleum Assets located in Israel. The Company also holds
Overriding Royalties in the Petroleum Assets. See "Table of Overriding
Royalties".
TABLE OF PETROLEUM ASSETS (WORKING INTEREST)
OIL AND GAS VENTURES (1)(3)
(% Interest of 100%)
<TABLE>
<CAPTION>
Med Tel Aviv License
Med Ashdod License Yam Ashdod
Med Hadera License Carveout Med Yavne Shederot
Name of Participant Med Hasharon License Venture (2) License License
- ------------------- -------------------- ----------- ------- -------
<S> <C> <C> <C> <C>
The Company (4) 1.0043 1.0043 1.0043 1.0043
Affiliates
- ----------
Isramco Negev 2,
Isramco Negev 2, Limited Partnership (5) 70.9957 53.0268 70.9957 77.9957
I.O.C. Limited Partnership (6) 14.0000 14.0000 ----- 14.0000
Naphtha 5.0000 5.10145 5.0000 4.0000
Naphtha Explorations Limited Partnership 5.0000 5.10145 5.0000 -----
JOEL (6) ------- ------- 8.0000 -----
Equital (6) ------- ------- 6.0000 -----
Non-affiliated entities
- -----------------------
Delek Drilling Limited Partnership 4.0000 21.7660 4.0000 3.0000
Total 100.0000 100.0000 100.0000 100.0000
Area (acres) 400,000 84,220 100,000 90,000
Expiration Date 6/14/2000 6/14/2000 6/14/2000 12/31/98
</TABLE>
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(1) Subject to the fulfillment of applicable provisions of the Israel Petroleum
Law and Regulations, and the conditions and work obligations of each of the
above licenses.
(2) Under the Grant Agreement with the Government of Israel, the Government may
claim that the Company is contingently obligated to repay to the Government
the Grant monies in the amount of $110,000 and to pay a 6. 5 % Overriding
Royalty on all production from the area.
(3) All of the Petroleum Assets are subject to a 12.5% Overriding Royalty due
to the Government of Israel under the Petroleum Law.
(4) The Company and its subsidiaries also hold the Overriding Royalties and
1.4% of the Limited Partnership Units.
(5) On November 11, 1997, Delek Drilling Limited Partnership transferred 5% of
its rights in the Shederot License to Isramco-Negev 2 Limited Partnership.
(6) In November 1997, J.O.E.L. and Equital sold to I.O.C. Limited Partnership
its working interests in the Shederot Venture, the Negev Med Venture
(excluding Med Yavne) and the Yam Ashdod Carveout Venture. In December
1998, the Company relinquished the Shederot license.
Overriding Royalties held by the Company
The Company holds the following Overriding Royalties:
TABLE OF OVERRDDING ROYALTIES
<TABLE>
<CAPTION>
On the First 10% of the Limited Partnership
Share of the following Petroleum Licenses
From The Limited Partnership Before Payout After Payout
---------------------------- ------------- ------------
<S> <C> <C>
Med Tel Aviv License 1.06% 13.83%
Med Yavne License 1.06% 13.83%
Med Ashdod License 1.06% 13.83%
Med Hadera License 1.06% 13.83%
Med Hasharon License 1.06% 13.83%
Yam Ashdod Carveout 1.06% 13.83%
Shederot License 5.00% 13.00%
</TABLE>
<TABLE>
<CAPTION>
From JOEL From JOEL
--------- ---------
On 8% of JOEL's Interes
------------------------
Before Payout After Payout
------------- ------------
<S> <C> <C>
Yam Ashdod Carveout 2.5% 12.5%
</TABLE>
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<TABLE>
<CAPTION>
From Delek Oil Exploration Ltd.
(DOEX) (1)(2) On 6% of DOEX's Interest
------------- ------------------------
Before Payout After Payout
------------- ------------
<S> <C> <C>
Yam Ashdod Carveout 2.5% 12.5% Ashdod Carveout
2.5%
</TABLE>
From Delek (1)
--------------
On 2% of DOEX's Interest From
-----------------------------
Before Payout After Payout
------------- ------------
Yam Ashdod Carveout 2.5% 12.5%
The Company has no financial obligation with regard to the Overriding
Royalties, however, in the event the Limited Partnership, JOEL, DOEX or Delek,
fails to fund its obligation with regard to a Petroleum Asset to which an
Overriding Royalty exists, the Company could lose its interest in such
Overriding Royalty. See Glossary for definition of "Payout".
(1) The Working Interests of Delek and DOEX have been assigned to Delek
Drilling Limited Partnership.
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Summary Description of the Ventures, the Petroleum Assets, Related Work
Obligations and Exploration Efforts in Israel
Negev Med Venture and Yam Ashdod Carveout Venture
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When the Negev Med Venture was formed in October of 1991, the Petroleum
Commissioner granted to the participants the Negev Med Preliminary Permit with
priority rights. The Negev Med Preliminary Permit expired on April 28, 1993 and
the participants requested and received five new drilling licenses (the Negev
Med Licenses). The Negev Med Licenses comprise the Med Tel Aviv License, the Med
Yavne License, the Med Hadera License, the Med Ashdod License and the Med
Hasharon License. The duration of the licenses relating to the Negev Med Venture
has been extended until June 14, 2000.
In June of 1996, upon the relinquishment of the Negev Ashquelon License,
the boundaries of the Med Ashdod License were modified to include the area of
the structure on which the Yam 1 and Yam 2 wells were drilled, as well as,
another additional structure which was part of the area of the relinquished
Negev Ashquelon License. The participants in the Negev Med License have
delineated the Yam Ashdod Carveout Area within the Med Ashdod License and this
Carveout Area includes all of the areas, which were transferred from the Negev
Ashquelon License. Each participant's share in this new Carveout is the same as
it was in the Yam Carveout Venture (which was part of the Negev Ashquelon
License). The activities of the Yam Ashdod Carveout Venture, including the
accounts and expenses of the Carveout, are reported separately. No operating fee
is charged under the Joint Operating Agreement with respect to the Med Ashdod
License Area outside of the Yam Ashdod Carveout. The Licenses for the Yam Ashdod
Carveout Venture continue through June 14, 2000.
Certain of the areas within the offshore licenses granted to the Company in
connection with the Negev Ned Venture and the Yam Ashdod Carveout Venture are
subject to various drilling restrictions imposed by the Israeli Ministry of
Defense, which restrictions significantly impede the Company's drilling efforts.
During the course of 1998, various meeting were held with the Israeli Ministry
of Defense and the Petroleum Commissioner in an attempt to find an acceptable
solution to the restrictive conditions of the licenses so as to enable the
Company to carry out prospective drilling within the license areas. In view of
the restrictive conditions of the licenses, the Company requested from the
Petroleum Commissioner that the period from June 1996 through November, 1998 be
excluded from the duration of the period, so that the period of the license is
effectively extended beyond June 2000. The Company's request has been rejected.
In light of the continuing delays caused by these restrictions, in
November, 1998, the Company requested from the Petroleum Commissioner that the
work program previously approved by the Commissioner be revised such that the
drilling of the first and second wells be postponed to, respectively, September
1999 and January 2000. Previously, in November, 1997, the Petroleum Commissioner
specified the following terms: (i) the performance of a
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seismic survey of at least 186 miles to be conducted no later than February 1,
1998, intended to assist in the upgrading of the prospects in the Med Ashdod
license and (ii) the drilling of three wells to a depth of at least 3,000 meters
(approximately 9,800 feet) deep, with the drilling on the first to begin no
later than January 1, 1999; the drilling on the second to begin before June 1,
1999; and the drilling on the third to begin no later than December 1, 1999.
Deepening of any existing well is considered be a drilling of a new well.
In its application filed in November, 1998, the Company advised that it
would explore the following options:
(a) Offshore drilling of Yam 3 prospect or deepening of Yam 2, subject
to the approval of the Israeli Ministry of Defense, or drilling of the Yam
Nitzanim prospect; and
(b) Drilling in Med Ashdod or Med Yavne (the "Sharon South" prospect
or the "Yam West 2" prospect).
In December, 1998, the Petroleum Commissioner advised the Company that in
response to its request, the work program has been revised to allow for the
drilling of 2 wells, each to a total depth of at least 3,000 meters, with the
drilling on the first well to begin no later than October 1, 1999 and the
drilling on the second no later than February 1, 2000. Any deepening of the Yam
2 well would be deemed to be a new drilling. In order to conform to the planned
schedule, the Company must:
(i) Prepare a first draft of the engineering plans and public tender
documentation, including a drilling contract, and submit proposals to
drilling contractors for the first well by February 1, 1999 and for the
second well by June 1, 1999;
(ii) Maintain on-going relations with the drilling contractors and
receive their responses by March 15, 1999 for the first well and by August
15, 1999 for the second well;
(iii) Sign a contract for the first well with a contractor by April
15, 1999 and for the second well by October 31, 1999.
Following further contact and correspondence between the Company and the
Ministry of Defense, the Company proposed a number of potential offshore
drilling sites during 1999. Additionally, the Company requested that it be
permitted to undertake drilling activity in areas, which, in the Company's best
estimate, are outside of the zones whereby the restrictions apply. The Company
advised that it intends to concentrate on two drilling sites-Nitzanim (in the
Med Ashdod Carveout) and Yam West (within the Med Yavne license). On December
23, 1998, the Ministry of Defense responded by permitting drilling activity on
five sites within the license areas wherein the Ministry of Defense restrictions
do not apply-Nitzanim prospect, Sharon South prospect and an additional site on
the southern side of "Yam West 2" prospect. The Ministry of Defense permits also
provided that the Company is required to obtain a drilling permit and to
coordinate all drilling activities with the Ministry of Defense.
-13-
<PAGE>
As of the date hereof, no solution to the conditions imposed by the
Ministry of Defense respecting the drilling in Med Ashdod (Yam 2 and 3) and in
part of the Med Yavne license (which is subject to the restrictions imposed by
the Ministry of Defense) has been found. No assurance can be given that the
Company's requests in this matter will be granted and that the conditions will
be changed. Under these circumstances, the prevailing conditions may prevent any
further drilling in these areas.
In December 1998, the Company reported that it has reached an initial
understanding with the Ministry of Defense to carry out drilling in a section of
the area of the offshore licenses. As a result of this initial understanding,
the Company presented to the partners the following proposal:
(i) The drilling of the Nitzanim prospect to a depth of 5,400 meters
at a water depth of 70 meters. The prospect is located in the Med Ashdod
Carveout, approximately 18 kilometers southwest of the Yam-2 well, drilled
in 1991. Oil was discovered in the Yam-2 well, but due to technical
problems, the test of the well was not completed.
(ii) The drilling of the Yam West prospect located in the Med Yavne
license to a depth of 3,500 meters at a water depth of 350 meters The Yam
West prospect is located approximately 38 kilometers northwest of
Ashquelon.
The total estimated cost of the two wells is $45 million. The participants
have not yet approved the proposed work program. All drilling activity is
subject to the Ministry of Defense authorizations, the availability of
appropriate offshore drilling units, execution of drilling contractor agreements
and authorization for expenditure (AFE) for the above wells by the participants.
In order to start preparation for the drilling of the two wells; the
participants have been requested to approve an AFE of $250,000.
The Company is continuing in its efforts to obtain approval from the
Ministry of Defense to permit drilling activities within the restricted areas,
including areas of the Yam-2 and the proposed Yam-3 wells. Additionally, the
Company is undertaking efforts to farm-out part of the partners' interest to a
non-Israeli oil company. The participation of a non-Israeli oil company and/or
reaching an agreement with the Ministry of Defense may, in the Company's view,
cause changes in the drilling plans.
On March 1, 1999, the Company published a request for quotations for the
semisubmersible to drill the Yam West 2 well.
Yam Ashdod Carveout
- -------------------
Standard processing of the seismic data acquired at the end of 1997 in
connection with the Yam Ashdod Carveout has been completed. Interpretation was
completed. The results indicate the existence of drillable prospects in the
southern part of the Carveout (Yam Nitzanim well). The Company has evaluated
different drilling companies concerning their
-14-
<PAGE>
availability to supply an offshore drilling unit (Jack-Up) in order to explore
the possibility of drilling the Yam 3 well, subject to he approval of the
Ministry of Defense, or the Yam Nitzanim well during the 1999. The Company has
received positive responses from several drilling companies that are willing and
capable to drill the above wells.
In light of the fact that the Company has not reached an understanding with
the Ministry of Defense respecting drilling on Yam 3, the Company notified the
participants of its intention to include the drilling of Nitzanim which is
located within the Yam Ashdod Carveout in its work plans for 1999. The Company
intends to publish a request for quotations to drill the Yam Nitzanim West
prospect with a Jack-Up.
On January 6, 1999, Delek Drilling Ltd. advised the Company that it intend
to reduce its participation in the Nitzanim drilling from a level of 22% to 3%.
To date, no agreement has been reached by the participants as to the allocation
of the working interests foregone by Delek. Accordingly, no agreement as to
drilling in Nitzanim can be signed until such agreement among the participants
is reached.
During the period from inception to December 31, 1998 the participants
authorized expenditure (AFE) in the various licenses and paid advances as
detailed below (in thousands):
<TABLE>
<CAPTION>
Isramco's share
-------------------------------
License Authorization for Advances Authorization for Advances
- ------- Expenditure paid Expenditure paid
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Med Tel Aviv $39,390 $39,122 $396 $393
Med Yavne $25,206 $24,885 $253 $250
Med Hasharon $ 1,615 $ 1,530 $ 16 $ 15
Med Hadera $ 1,150 $ 1,007 $ 12 $ 10
Med Ashdod $ 762 $ 762 $ 8 $ 8
------- ------- ---- ----
Total $68,123 $67,306 $685 $586
======= ======= ==== ====
</TABLE>
Shederot License
- ----------------
On January 1, 1996 the Petroleum Commissioner awarded the Company and other
participants an onshore drilling license called Shederot/265 covering an area of
88,750 acres. On March 18, 1996 the Petroleum Commissioner agreed to enlarge the
Shederot License Area to 98,800 acres and added an additional condition to the
terms of the license according to which the participants must commence drilling
of a second well to the same depth as the first not later than December 31,
1998.
-15-
<PAGE>
In January 1998 the participants in the Shederot license drilled the Gevim
well to a total depth of 15,157 feet. The well was declared a dry hole. The
total cost of the well was approximately $6.6 million, of which the Company's
share was $66,000. The Company relinquished the license in December 1998.
Accounting Treatment of Oil and Gas Properties on the Company's Financial
Statements
The Company uses the "successful efforts" method of accounting whereby all
costs of acquiring acreage, costs of drilling successful exploration wells and
development costs are capitalized. Producing and non-producing properties are
evaluated periodically, and if conditions warrant (i.e., should a well prove to
be dry and abandoned, or not of commercial value or no development activity is
contemplated in the near future), the related costs are written off. Annual
lease rentals and exploration costs, including geologic and geophysical costs
and exploratory dry hole costs, are charged to expense as incurred.
MATERIAL AGREEMENTS
The Negev 2 Joint Venture Agreement (the "Joint Venture Agreement") and the
Negev 2 Joint Operating Agreement (the "JOA"), as amended were entered into
between the participants of the Negev 2 Venture to explore, develop and produce
petroleum and/or gas in certain areas onshore and offshore in Israel. The Joint
Venture Agreement is governed by and construed in accordance with the laws of
the State of Israel, and the place of jurisdiction is the courts of the State of
Israel. Subject to the provisions of the Joint Venture Agreement and the JOA,
each party participates in all the costs, expenses and obligations incurred in
relation to a contract area in the same proportion as its rights and interests
in such contract area. Under the JOA, the Operator carries out all the
operations contemplated in the JOA, in the framework of approved Work Programs
and within the limitations of approved budgets (AFE's). Subject to the general
supervision of the Operating Committee, the Operator controls and manages all
operations conducted pursuant to the JOA. The Operator may be removed for cause,
by notice in writing given by two or more of the other parties representing at
least 65% of the total interests in a contract area. The Company with its
affiliates hold more than 65% of the total interest in each contract area,
however, the Company only holds a 1.0043% interest in each Venture and does not
control the affiliated parties which are public companies. See "Table of
Petroleum Assets and Oil and Gas Ventures.
Under the JOA, the Operator bills the participants in each Venture for all
costs incurred in the Operator's head office, field office, on site or elsewhere
in connection with a contract area, including, without limitation, rentals,
labor, consultants, materials, transportation, contract services, taxes, legal
and audit expenses, premiums for insurance, losses of joint property, repairs
for damages not covered by insurance and reasonable personal and travel
expenses.
The services and related costs incurred by the Operator in connection with
a contract
-16-
<PAGE>
area (provided they are not charged as a direct charge), are covered by a
monthly overhead charge equal to 6% of all gross direct charges. An Operating
Committee on an annual basis may verify that the monthly overhead charge of the
Operator equitably compensates the Operator for actual costs incurred. Based on
the results of this annual cost analysis, the percentage chargeable for the
benefit of the Operator can be adjusted, upward or downward as determined by the
participants in a contract area.
The holders of the Negev Med Licenses have also entered into a Deed of
Arbitrator dated November 10, 1993 to the effect that the parties agreed to
submit to a single arbitrator the following question:
Is it justified, by custom, industry practice, history of previous
agreements between the parties, or otherwise, that in the majority
required under the JOA applicable to the Licenses constituting a
"determining vote" there should be included a party which is not a
member of the "Isramco Group" (namely a party other than Isramco-Negev
2 Limited Partnership, J.O.E.L. - Jerusalem Oil Exploration Ltd.,
Pass-port Ltd. or Isramco, Inc.).
The person to be appointed as arbitrator was to be selected by mutual
agreement of the parties within thirty (30) days from November 10, 1993,
however, if they failed to do so, an arbitrator will be appointed at the request
of either party by Mr. Avigdor Bartel. The parties have not selected a mutually
agreed upon arbitrator.
Consulting Agreement with Haim Tsuff
In May of 1996 the Company entered into a Consulting Agreement with
Goodrich Global L.T.D. B.V.I., a company owned and controlled by Haim Tsuff, the
Chairman of the Board of Directors and Chief Executive Officer of the
Corporation. Pursuant to this Consulting Agreement which had a term of two (2)
years, the Company agreed to pay the sum of $144,000 per annum in installments
of $12,000 per month, in addition to reimbursing all reasonable business
expenses incurred during the term in connection with the performance of services
on behalf of the Company. In April 1997 the consulting compensation was
increased to $240,000 per annum and in December 1997 the term was extended to
May 31, 2001. The Consulting Agreement as amended, provides that the term shall
be automatically extended for an additional term of three (3) years, commencing
June 1, 2001, unless the Company has given notice at least ninety (90) days
prior to June 1, 2001 that it does not intend that the term be renewed.
Consulting Agreement with Daniel Avner
In August of 1997 the Company entered into a one year Consulting Agreement
with Romulas Investment Ltd. (which Agreement has been assigned to Remarkable
Holdings Ltd.), a company owned and controlled by Daniel Avner, the President of
the Company, pursuant to which the Company has agreed to pay the sum of $7,500
per month plus expenses. The Company ratified the extension of the term of the
Consulting Agreement through July 31, 2000 and, effective February 1999 agreed
to increase the monthly compensation paid thereunder to $15,000, while
disallowing the reimbursement of expenses. The Company has also agreed to
provide a company car and company furnished
-17-
<PAGE>
apartment, if available.
EMPLOYEES
During calendar year ending December 31, 1998, the Company had five (5)
employees at its Branch Office in Israel and 3 employees, including contract
personnel, at the offices in Houston, Texas.
Reverse Stock SplitStock Split
The Company declared a one-for-ten reverse stock split in May 1998. The
action was taken in order to comply with the modified listing requirements of
the Nasdaq Stock Market (Nasdaq) for the Nasdaq SmallCap market. The effect of
this reverse stock split has been reflected in all shares and per share amounts
in the accompanying financial statements. The Company declared a one-for-ten
reverse stock split during 1998. The effect of this reverse stock split has been
reflected in all shares and per share amounts in the accompanying financial
statements and financial summary in this Form 10-KSB.
Item 2. OFFICES 2. OFFICES
Israel
The Company leases office space from Naphtha at 8 Granit St., Petach Tikva.
In 1998 the Company paid Naphtha $67,000 for rental space, office services,
secretarial services and computer services. The Company believes that the
payment for the above services are reasonable compared to other similar
locations.
United States
The Company maintains its executive offices in Houston, Texas. The Company
has a lease for office premises (approximately 2,146 square feet) at 1770 St.
James Place, Suite 607, Houston, Texas 77056 expiring September 2000, with a
monthly rental of $2,718.
The Company leases a corporate apartment in the City of Houston on a month
to month basis, at a monthly rental charge of $1,110 per month. This apartment
is for use by the Company's officers, directors and employees in connection with
their activities relating to the business of the Company.
Item 3. Legal Proceedings
Effective October 27, 1997 Mr. Reuven Hollo was removed by the Company as
Manager of Jay Petroleum LLC and Jay Management Company LLC. The Company
commenced a law suit against Reuven Hollo which proceeding was stayed pending
resolution of an arbitration proceeding by Reuven Hollo, Jay Resources
Corporation, Jay Natural Resources Inc., Jay Petroleum LLC and Jay Management
Company LLC, as Claimants against the Company, NIR Resources Inc., Jay Petroleum
LLC and Jay
-18-
<PAGE>
Management Company LLC, as Respondents. The arbitration proceeding and the law
suit have been resolved pursuant to a Settlement Agreement and Release, a copy
of which was filed as an Exhibit to Form 8-K for the month of March, 1998. The
Claimants are hereinafter referred to as the "Hollo Group" and the Respondents
are hereinafter referred to as the "Isramco Group".
Pursuant to the terms of the Settlement Agreement and Release, the Hollo
Group assigned all of their right, title and interest in Jay Petroleum LLC and
Jay Management Company LLC including their complete ownership interest and any
and all rights to undistributed profits in these entities to the Company in
consideration for the Company (i) paying to Jay Resources Corporation and Jay
Natural Resources Inc. the sum of $255,000, (ii) agreeing to assume any tax
liabilities or tax burdens arising solely from such undistributed profits, and
(iii) agreeing to assume a debt of $69,754 reflected as an accounts receivable
of Jay Resources Corporation owed to Jay Petroleum LLC. In addition, the Isramco
Group agreed to use its best efforts, without cost, to effect a removal of the
Hollo Group as a guarantor and/or co-maker of any loan of Jay Petroleum LLC
and/or Jay Management Company LLC. The effective date of the Settlement
Agreement was December 31, 1997.
The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware Law and the By-laws of the
Corporation provide for indemnification of officers and directors of the Company
as permitted by Section 145 of the Delaware General Corporation Law. The Company
has also entered into agreements to indemnify its officers and directors and the
officers and directors of its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 18, 1998 and the
shareholders voted as to the following: (a) election of Haim Tsuff, Daniel
Avner, Tina Maimon Arckens, Professor Avihu Ginzburg and Professor Linda Canina
as directors to serve for a term of one (i) year or until his/her successor is
duly elected; (ii) approval of an amendment to the Company's Articles of
Incorporation to effect a one-for-ten reverse stock split of the Company's
Common Stock and (b) the approval of the firm of Hein & Associates, LLP. as
auditors for the year ending December 31, 1998. Hein & Associates has resigned
in November 1998 and, on March 10 1999, the Company has retained the services of
KPMG LLP to audit its 1998 financial statements. See Item 8.
No other matters were submitted to a vote of shareholders during the year
ended December 31, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The number of record holders of the Company's Common Stock on March 31,
1999 was approximately 341 not including an undetermined number of persons who
hold their
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<PAGE>
stock in street name.
The high and low bid prices as reported on the National Association of
Securities Dealers Automated Quotations System National Market System are shown
in the table below. These over-the-market quotations reflect prices between
dealers, without retail mark-ups, mark-downs or commissions and may not
represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Class A Warrants** Class B Warrants**
Quarter Ended High Low High Low High Low
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
March 31 9 1/16 4 3/8 4/16 3/16 1/32 1/32
June 30* 5 15/16 3 3/32 3/16 3/32 1/32 1/32
September 30 3 3/8 1 21/32 3/32 1/64 1/32 1/32
December 31 3 2 7/32 ** ** ** **
1997
March 31 7 1/2 5 5/16 3/32 1/16 1/16 1/32
June 30 6 1/4 5 5/16 3/32 1/16 1/32 1/32
September 30 11 1/4 5 15/16 5/16 5/32 7/32 1/16
December 31 10 5/8 6 1/4 17/64 5/32 1/8 1/16
</TABLE>
* In May 1998, the Company effected a one-for-ten reverse stock split.
** In November, 1998, the Class A Warrants and the Class B Warrants were
delisted.
The Company has never paid a dividend on its Common Stock. The payment by
the Company of dividends, if any, in the future rests within the discretion of
its Board of Directors and will depend, among other things, upon the Company's
earnings, capital requirements and financial condition.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations and Selected Financial Data
Statements contained in this Report on Form 10-KSB that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's expectations,
hopes, intentions or strategies regarding the future. Such forward-looking
statements involve known and unknown factors that could cause 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.
-20-
<PAGE>
Set forth below is a summary of certain financial information of the Company.
Statement of Operations Data (thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operator's fees $720 $461 $468 $1,115 $3,149
Oil and Gas Revenue $1,410 $2,001 $335 $644 --
Interest income $557 $1,085 $1,175 $1,126 $769
Office services and other $613 $483 $463 $428 $444
Equity in earnings of Jay Management LLC $16 $39 -- -- --
Reinbursement of exploration cost 255 -- -- -- --
Gain from sale of oil and gas properties and equipment 931 -- -- -- --
Gain (Loss) on marketable securities $(973) $(272) $706 $(367) $(2,269)
Impairment of oil & gas properties $571 $12 -- -- --
Exploration costs $81 $11 $34 $173 $532
Lease operating expenses and severance taxes $883 $972 -- -- --
Depreciation, depletion and amortization $815 $684 -- -- --
Operator expense $487 $507 $657 $619 $704
General and administrative expenses $1,196 $1,289 $1,254 $720 $720
Interest Expense $326 $341 -- -- --
Net Income (loss) $(851) $(14) $828 $635 $59
Net Income (loss) per share $(0.32) $(0.01) $0.31 $0.24 $0.02
Weighted average number of shares 2,640 2,640 2,649 2,669 2,660
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets $24,486 $26,783 $23,263 $22,620 $22,077
Total liabilities $2,422 $3,868 $335 $358 $450
Shareholders' equity $22,064 $22,915 $22,928 $22,262 $21,628
</TABLE>
Liquidity and Capital Resources
Working capital (current assets minus current liabilities) was $17,543,000
and $18,287,000 at December 31, 1998 and 1997, respectively.
Net cash flow provided by operating activities was $1,082,000 and $506,000
in 1998 and 1997, respectively.
Net cash flow provided by investing activities was $4,864,000 in 1998
compared to net cash (used in) investing activities of $8,909,000 in 1997. The
increase in cash flow provided by investing activities is primarily attributable
to net cash inflow from the purchase and sale of marketable securities of
$2,024,000 in 1998 as compared to a net cash outflow from the purchase and sale
of marketable securities of $703,000 in 1997 and the $1,900,000 proceeds from
certificates of deposits in 1998 compared to the $1,900,000 payments for
certificates of deposits in 1997. As of December 31, 1998, the Company owned
approximately 5.5% of the issued shares of J.O.E.L. - Jerusalem Oil Exploration
Ltd. ("JOEL"), the controlling shareholder of Naphta Israel Exploration Ltd.
("Naphta"). Naphta, through a wholly owned subsidiary, holds approximately 58%
of the Company's outstanding common stock (assuming the exercise of all of the
Class A & B Warrants held by Naphta). Shares of JOEL and Naphta are traded on
the Tel Aviv Stock Market.
-21-
<PAGE>
Capital expenditures were $212,000 and $6,328,000 in 1998 and 1997,
respectively. The higher amount in 1997 was attributable to purchase by Jay of
the Snyder properties and the purchase by the Company of interests in the Congo.
As of December 31, 1998, Jay had outstanding indebtedness of $1,778,891
under a bank loan facility of $10 million from Comerica Bank-Texas (the
"Comerica Loan"). The Comerica Loan bears interest at prime plus 1% with monthly
payments of $31,208 plus interest and matures in 2000. The Comerica 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 by
Comerica. The Company is not a borrower or guarantor under the Comerica Loan
Facility. The Comerica Loan documentation contains restrictions on Jay's ability
to freely declare or pay a dividend or make any distribution in cash or
otherwise. Jay was in default of certain debt covenants at December 31, 1998 for
which waivers were obtained from the bank in respect of the period ended
December 31, 1998. Future principal payments on the bank loan facility as of
December 31, 1988 are $374,496 and $1,404,395 in 1999 and 2000.
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 Comerica Loan facility.
Results of Operations
The Company reported net loss of $851,000 ($0.32 per share) in 1998
compared to a net loss of $14,000 ($0.01 per share) in 1997. The loss during
1998 compared to 1997 is primarily a result of the decrease in operating income
from oil and gas activities and from the increase in a loss attributable to
marketable securities of $701,000.
Set forth below is a break-down of these results.
United States
Oil and Gas Revenues (in thousands)
1998 1997
---- ----
Oil Volume Sold (Barrels) 31 40
Gas Volume Sold (MMCF) 523 604
Oil Sales ($) 395 676
Gas Sales ($) 1,015 1,325
Average Unit Price
Oil ($/Bbl) * 12.74 16.90
Gas ($/MMCF) ** 1.94 2.19
* Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons
** MMCF - 1,000 Cubic Feet
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<PAGE>
On August 27, 1998, Jay Petroleum sold 100% working interest in 25 wells
located in Jack & Clay Counties Texas, for $220,000. The effective date of
this sale was August 1, 1998.
During October 1998, Jay Petroleum sold:
a. 100% working Interest in 5 wells located in Beckham County, Oklahoma
for $195,200. The effective date of this sale was October 1, 1998.
b. 81.3% working interest in one gas well located in Devil field,
Jefferson County, Texas. The amount received was $1,000,000, and an
overriding royalty interest of 2.02% on a 320 acre gas unit which
includes the production of the gas well. The effective date of this
sale was July 1, 1998.
The impact of the August and October sales is a monthly reduction of about
22,000 MMCF of gas and 90 Barrels of oil, and a reduction in cash flow of
approximately $16,000 per month.
As a result of the above sales, the Company paid down Jay's debt with
Comerica Bank in 1998, by the amount of $1,137,900, and reduced the monthly
loan payment from $45,000 to $31,208.
Israel
- ------
The Negev Med Licenses Venture
- ------------------------------
During 1998 the Negev Med Joint Venture expended $345,000, primarily for
the purposes of acquiring, processing and interpreting the results of seismic
surveys. The Company's share or the expense was $3,500. The result indicates the
existence of drillable prospects of Yam Nitzanim.
Several meetings were held with the representatives of the Israeli Ministry
of Defense and the Petroleum Commissioner to discuss a possible solution to the
restrictive conditions of the licenses so as to enable the Company to carry out
prospective drilling within the license areas. See "Summary Description of the
Ventures, the Petroleum Assets, Related Work Obligations and Explorations
Efforts in Israel"
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<PAGE>
Yam Ashdod Carveout Venture (within the Med Ashdod License)
- -----------------------------------------------------------
During the year of 1998 the Yam Ashdod Carveout Venture expended $174,000.
The Company's share was $1,700. Standard processing of the seismic data that was
acquired in connection with the Yam Ashdod Carveout was completed and the
results have been interpreted. The preliminary results of the interpretation
indicate the existence of a drillable prospect in the southern part of the
Carveout (Yam Nitzanim prospect). The Company has evaluated different drilling
companies concerning their availability to supply an offshore drilling unit in
order to explore the possibility of drilling the Yam 3 well, subject to the
approval of the Ministry of Defense, or the Yam Nitzanim well during the year
1999. The Company has received positive responses from several drilling
companies that are willing and capable to drill the above wells.
If the Company reaches an agreement with the Ministry of Defense, the
Company shall give priority to the drilling of the Yam-3 well or possibly
deepening and re-testing of the Yam-2 well. If no such agreement is reached, the
Company shall consider drilling the Nitzanim well. The Company estimates that
the cost of drilling these wells will be approximately $25,000,000, of which the
Company's share is estimated at $125,000.
Shederot License
- ----------------
In 1998 the participants of the venture drilled the Gevim well to a depth
of 15,157 feet. The well was declared a dry hole. The total cost of the well was
$6.6 million, of which the Company' share was approximately $66,000.
Congo
The Operator, Naphtha Congo, has submitted to the Congolese Ministry of
Petroleum a work program for the development of the Tilapia and Marine 3
concessions. A Management Committee meeting between Naphtha Congo and the
Congolese Ministry of Petroleum scheduled for July 1998 was postponed. On August
26, 1998 the Minister of Petroleum of Congo informed the Company that according
to the Decree submitted to the Company and signed by the President, Prime
Minister, Minister of Petroleum and Minister of Finance, the permits will become
effective from the date of publishing the production sharing contracts as a law,
and that the Management Committee meeting can only be held after the completion
the formality of these process. Therefor, until the publishing of the law , the
Company cannot go forward with the work program.
The two permits are included in oil and gas properties in the balance sheet
at $2,700,000. Management believes that the permits are not impaired at December
31, 1998. However, the Company's recovery of its investment in the Congo is
dependent upon successful outcome of the permitting and production sharing
contracts which cannot be assessed.
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<PAGE>
Operator's Fees
In 1998 the Company earned $720,000 in operator fees, compared to $461,000
in 1997. The increase in the operator fees is due primarily to the drilling
activities at Gavin under the Shederot license.
Oil and Gas Revenues and Gas Revenues
In 1998 and 1997 the Company had oil and gas revenues of $1,410,000 and
$2,001,000, respectively. The decrease is due mainly to 34%-43% decline in oil
and gas prices and the sale of oil and gas properties in 1998, which resulted in
a gain of $931,000.
Lease Operating Expenses and Severance Taxes
Lease operating expenses and severance taxes were primarily in connection
with oil and gas fields in the United States. Oil and gas lease operating
expenses and severance taxes were $883,000 and $972,000 for 1998 and 1997,
respectively. The decrease in lease operating expenses and severance taxes is
due to the decline in oil and gas prices and lower production in 1998.
Interest Income
Interest income during the year ended December 31, 1998 was $557,000
compared to $1,085,000 for the year ended December 31, 1997. The decrease is
attributable mainly to lower average earning investment balances and to the
devaluation of the Israeli currency against the US Dollar.
Loss on Marketable Securities
In 1998, the Company recognized net realized and unrealized losses of
$973,000 compared to $272,000 in 1997.
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.
Impairment of Oil and Gas Properties
The increase in the impairment of oil and gas properties in 1998 is mainly
due to the 34% - 43% decline in oil and gas prices.
Operator Costs
Operator's costs decreased in 1998 as compared to 1997, primarily as a
result of lower manpower costs and reduced rent payments for the Company's
offices in Israel.
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<PAGE>
General and Administrative Expenses
The decrease in general and administrative expenses for the year ended
December 31, 1998 compared to the year ended December 31, 1997 was mainly due to
a decrease in consulting fees and salaries. General and administrative expenses
as of December 31, 1998 include approximately $190,000 of legal expenses related
to the settlement with Mr. Reuven Hollo, Jay Resources Inc. and Jay Natural
Resources.
Impact of the Year 2000 Issueof 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 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 has not initiated formal communications with all of 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
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<PAGE>
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 will be 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.
Item 7. Financial Statements and Supplementary Data.
The information called for by this Item 7 is included following the "Index
to Financial Statements" contained in this Annual Report on Form 10KSB.
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<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
On March 10, 1999, the Company retained the certified public accounting
firm of KPMG LLP as independent accountants of the Company to audit the
Company's financial statements. The Company's previous principal auditors, Hein
& Associates LLP ("Hein"), resigned in November, 1998.
During the fiscal year ended December 31, 1997 and the period between
January 1, 1998, up to and including the day of its resignation, there were no
disagreements between the Company and Hein on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures which if not resolved to Hein's satisfaction would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement. However, Hein advised the Company that it would be able to accept
the appointment to audit the Company's financial statements for the fiscal year
ended December 31, 1998 only if the Company hired a corporate controller to
reside and work in Houston, Texas and if Hein and the Company would come to an
agreement concerning fees for the audit. The Company declined to hire a
corporate controller to reside and work in Houston.
Hein's report on the financial statements of the Company for the year ended
December 31, 1997, contained no adverse opinion or disclaimer of opinion and was
not qualified as to uncertainty, audit scope or accounting principles. Hein's
furnished the Company with a letter addressed to the SEC confirming its
agreement with the above statements, a copy of which was filed as an exhibit to
the report filed on Form 8-K on November 23, 1998.
PART III
Item 9. Directors and Executive Officers of the Registrant
As of March 30, 1998, the executive officers and directors of the Company
are as follows:
Name Age Position
Haim Tsuff 41 Chairman of the Board and Chief
Executive Officer of the Company
Daniel Avner 36 President of the Company
Yossi Levy 47 Branch Manger of the Company's Branch Office in
Israel
Pinchas Pinchas 44 Chief Controller of the Company Branch Office in Israel
Adv. Noa Lendner 48 Director
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<PAGE>
Tina Maimon
Arckens 44 Director and Secretary
Prof. Linda
Canina 44 Director
Prof. Avihu
Ginzburg 72 Director
All officers serve until the next annual meeting of directors and until
their successors are elected and qualified.
Haim Tsuff has been a director of the Company since January 1996 and the
Chairman of the Board of Directors and Chief Executive Officer since May 1996.
Mr. Tsuff is the sole director and owner of United Kingsway Ltd. and Chairman of
YHK General Manager Ltd. (which entity effectively controls Equital Ltd., JOEL
Ltd., Naphtha, Naphtha Holdings Ltd., public companies in Israel) and may be
deemed to control the Company. During the past five years, Mr. Tsuff has served
as General Manager of Painton Chemical Industries Ltd., a private company, which
produces printed material. Mr. Tsuff is also the Managing Director and Chairman
of the Board of Y. Habaron Ltd. (real estate), Painton Chemical Factors Ltd.
(printed material), Madad Ltd. (printed material), Benfica Holdings Ltd.
(construction) and Benfica Ltd. (construction), all of which are private
companies. See Security Ownership of Certain Beneficial Owners.
Daniel Avner has been President of the Company since July 1997. On July 9,
1998, Mr. Avner resigned as director and as Secretary of the Company, positions
which he has held since May 1996. Since 1992, Mr. Avner has been the General
Manager of E.D.R. GMBH Co., a company that engages in investment, development
and management of residential property in Germany. From 1991 to 1992 Mr. Avner
was a Financial Analyst with Proctor & Gamble Company in Germany. Mr. Avner
holds a BA Degree in Accounting and Economics from the University of Tel Aviv
and a Masters of Business Administration from Duke University.
Yossi Levy has been Branch Manager of the Company's Branch Office in Israel
since August, 1996. Since 1988 Mr. Levy has held the position of General Manager
of Naphtha - Israel Petroleum Corp. (Naphtha), a public company in the oil and
gas business in Israel. Since 1995 Mr. Levy has been General Manager of N.I.R.
(Naphtha International Resources) Ltd. Naphtha through its subsidiary (Naphtha
Holdings Ltd.) may be deemed to be a controlling shareholder of the Company.
Pinchas Pinchas has been the Chief Controller of the Company's Israel
Branch since December 31, 1997. Mr. Pinchas is not employed or otherwise
retained by the Company. Mr. Pinchas serves as the Controller of Naphta (which
holds 100% of Naphta Holdings Ltd., which company holds 58% of the outstanding
common stock of the Company (assuming exercise of the Class A & B Warrants)) and
also as controller of
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<PAGE>
J.O.E.L. (which holds approximately 87% of Naphta) and Equital. The Company
participates in Mr. Pinchas salary' which is payable by J.O.E.L. in an aggregate
monthly amount of $4,000.
Noa Lendner, Adv. has been a director of the Company since July 1998. Ms.
Lendner has served as legal counsel to Equital, Naphtan and J.O.E.L. since
February 1997. Ms. Lendner also serves as Secretary of Naphta, a related entity,
since 1997. From December, 1995 through January 1997, Ms. Lendner has also
served on the Board of Directors of J.O.E.L. From 1995 through January 1997, Ms.
Lendner engaged in the private practice of law, specializing in the commercial
and corporate areas. Ms. Lendner received an LL.B. degree form the Hebrew
University in Jerusalem in 1976 and since 1977 has been a member of the Israeli
Bar.
Tina Maimon Arckens has been a director of the Company and a director of
Isramco Oil and Gas Ltd. since March 1997 and Secretary of the Company since
July 14, 1998. Mrs. Arckens is a director of YHK General Manager Ltd. Mrs.
Arckens is the sister of Jackob Maimon, the Chairman of the Board of Directors
of Naphtha Israel Petroleum Corp. Ltd. Mrs. Maimon Arckens is a housewife.
Linda Canina has been a director of the Company since December 1997. From
1993 to the present Dr. Canina has held the position of Professor of Finance at
Cornell University, Ithaca, New York. Dr. Canina also holds the position of
Visiting Assistant Professor of Finance at the Recanati School of Business in
Tel Aviv, Israel. From July 1992 - January 1993 Dr. Canina was a Research
Fellow, Johnson Graduate School of Management, Cornell University.
Avihu Ginzburg has been a director of the Company since July 1997. Dr.
Ginzburg is currently Emeritus Professor in Geophysics at Tel Aviv University.
In 1996 he was Visiting Professor in Exploration Geophysics at Curtin
University, Perth, Western Australia; and, Research Fellow at the Department of
Geological Sciences, University College, London. From 1992 - 1995 Dr. Ginzburg
held the position of Chairman of Geophysics and Planetary Science at Tel Aviv.
There are no family relationships, as defined, between any of the above
executive officers, and there is no arrangement or understanding between any of
the above executive officers and any other person pursuant to which he was
selected as an officer. Each of the above executive officers was elected by the
Board of Directors to hold office until the next annual election of officers and
until his successor is elected and qualified or until his earlier resignation or
removal. The Board of Directors elects the officers in conjunction with each
annual meeting of the stockholders.
SECTION 16 FILINGS
No person who, during the fiscal year ended December 31, 1998, was a
director, officer or beneficial owner of more than ten percent of the Company's
Common Stock, or a 'Reporting Person', failed to file on a timely basis, reports
required by Section 16 of the
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<PAGE>
Act during the most recent fiscal year. The foregoing is based solely upon a
review by the Company of Forms 3 and 4 during the most recent fiscal year as
furnished to the Company under Rule 16a-3(d) under the Act, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, and any representation received by the Company from any reporting
person that no Form 5 is required.
Item 10. Executive Compensation
The following table sets forth the compensation paid for 1998 and 1997 to
the Chief Executive Officer and the other highly paid officers and/or key
employees of the Company.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
--------------------------------------------- ---------------------------
Other Securities All
Name and Salary/ Annual Underlying Other
Principal Position Year Consulting Fee Bonus Compensation (7) Option Compensation
------------------ ---- -------------- ----- ---------------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Haim Tsuff 1998 240,000 --- --- --- ---
Chairman of the Board 1997 216,000 --- --- --- ---
and Chief Executive Officer(1)
Daniel Avner 1998 90,000 --- --- --- ---
President and Secretary(2) 1997 37,900 --- --- --- ---
Yossi Levy 1998 88,000 --- --- --- ---
Branch Manager(3) 1997 92,230 --- --- --- ---
Pinchas Pinchas 1998 48,000 --- --- --- ---
Controller Branch Office(4) 1997 --- --- --- --- ---
Joshua Folkman 1998 95,600 --- --- --- ---
Exploration Manager 1997 101,128 --- --- --- ---
Branch Office
Yuval Ran(5) 1998 ---- --- --- --- ---
Former President 1997 151,000 --- --- --- ---
Raanan Wiessel 1998 ---- --- --- --- ---
Former Treasurer 1997 91,358 --- --- --- ---
Controller, Branch
Office(6)
</TABLE>
Notes
(1) In May of 1996 the Company entered into a Consulting Agreement with a
company owned and controlled by Haim Tsuff, the Chairman of the Board and
Chief Executive
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<PAGE>
Officer of the Corporation. Pursuant to this Consulting Agreement as
amended April 1997, the Company pays to consultant the sum of $240,000 per
annum in installments of $20,000 per month in addition to reimbursing all
reasonable business expenses incurred in connection with the services
rendered on behalf of the Company.
(2) In August of 1997 the Company entered into a Consulting Agreement with
Romulas Investment Ltd. (which Agreement has been assigned to Remarkable
Holdings Ltd.), a company which is wholly owned and controlled by Daniel
Avner, the President of the Company. Pursuant to this agreement, the
Company has agreed to pay the Consultant the sum of $7,500 per month plus
expenses. In February 1999, the agreement was amended to increase the
amount payable per month to $15,000. Pursuant to the amendment in February
1999, expenses are no longer reimbursable. The Company has also agreed to
provide a company car and company furnished apartment to Consultant, if
available. The agreement is in force through July 2,000.
(3) In November of 1996 the Company entered into an Employment Agreement with
Yossi Levy, the Managing Director of Naphtha Israel Petroleum Company Ltd.
to employ Mr. Levy as the General Manager of the Israel Branch of the
Company.
(4) Mr. Pinchas is employed as Controller of Naphta, J.O.E.L. and Equital,
affiliates of the Company. As of January 1, 1998, the Company participates
in the payment by J.O.E.L. of Mr. Pinchas' salary in an aggregate monthly
amount of $4,000.
(5) In August of 1996 the Company entered into a Consulting Agreement with
Yuval Ran, the former President of the Company. Pursuant to the Consulting
Agreement as amended April 1997, the Company has agreed to pay to Mr. Ran
the sum of $240,000 per annum payable in installments of $20,000 per month
in addition to reimbursing all reasonable business expenses incurred in
connection with performing the consulting services on behalf of the
Company. Mr. Ran resigned as President of the Company on July 15, 1997.
(6) Mr. Wiessel's services were terminated in December 1997.
(7) Does not include personal benefits, which do not exceed 10% of the cash
compensation of all officers as a group.
The following table sets forth information concerning the exercise of stock
options during 1997 by each of the named executive officer and key employee and
the year end value of unexercised options.
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<PAGE>
Aggregated Option Exercises in 1998 and Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying In the Money
Acquired Value Unexercised Options at Year
Name on Exercise Realized ($) Options (#) End ($) (2)
---- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Joshua Folkman 0 0 2,000 0
Raanan Wiessel(1) 0 0 2,500 0
</TABLE>
Notes
(1) The services of Raanan Wiessel, the Company's former treasurer and
controller of the Company's Israel Branch, were terminated as of December
1997.
(2) The value reported is based on the closing price of the common stock of the
Company as reported on NASDAQ on the date of the exercise less the exercise
price.
There were no grants of any options in 1998 and 1997.
All stock options were granted with an exercise price equal to the market
price of the common stock on the date of grant.
The Company during 1998 did not amend or adjust the exercise price of
outstanding stock options previously awarded to any of the named executive
officers or directors or employees. The only incentive plan, which the Company
has, is its 1993 Stock Option Plan (the "Stock Option Plan").
Stock Option Plan
Directors, officers, employees and consultants of the Company and its
subsidiaries adopted the Company's Stock Option Plan with the intention of
encouraging stock ownership. The plan provides for stock options of up to 50,000
shares of common stock of the Company (after giving effect to the reverse stock
split). Options may either be options intended to qualify as "incentive stock
options" or "non-statutory stock options", as those terms are defined in the
Internal Revenue Code.
Employees (including officers) of the Company are eligible to receive
incentive stock options, however, non-statutory stock options may be granted to
officers, directors, employees and consultants of the Company and its
subsidiaries. Options are granted for a period of up to ten (10) years from the
grant date for an exercise price of not less than 100% of the fair market value
of the securities of the Company's common stock on the date of grant. As of this
date no persons have been appointed to fill the current vacancies on the
committee which administers this plan.
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<PAGE>
Item 11. Security Ownership of Directors, Officers and Key Employees
The following table sets forth certain information, as of March 30, 1999,
concerning the ownership of the Common Stock (comprising of the shares of common
stock if the Company's Class A and Class B Warrants were exercised)by (a) each
person who, to the best of the Company's knowledge, beneficially owned on that
date more than 5% of the outstanding Common Stock (b) each of the Company's
directors (c) all current directors, officers and significant employees of the
Company as a group. Except as otherwise indicated, the stockholders listed in
the table have the sole voting and investment power with respect to the shares
indicated.
<TABLE>
<CAPTION>
Number of Percent
Shares Owned of
Name Position Beneficially Class
- ---- -------- ------------ -----
<S> <C> <C> <C>
Haim Tsuf Chairman of the
Board, Chief Executive
Officer and Director 1,320,222(1) 50.01%
Daniel Avner President 0
Yossi Levy Manager of the Company's
Israel Branch 0
Pinchas Pinchas Controller of the Company's
Israel Branch 0
Joshua Folkman Exploration Manager (Israel) 0
Noa Lendner, Adv. Director 0
Tina Maimon
Arckens Director and Secretary 0
Prof. Avihu Ginzburg Director 0
Prof. Linda Canina Director 0
All directors and
Officers as a group 1,320,222 50.01%
</TABLE>
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<PAGE>
Notes
(1) Haim Tsuff owns 100% of United Kingsway Ltd., which through YHK General
Manager Ltd. controls various entities, which may be deemed to control the
Company. For more information see Security Ownership of Certain Beneficial
Owners.
Security Ownership of Certain Beneficial Owners
Set forth below is certain information with respect to ownership of the
Company's securities as of March 30, 1999 by persons or entities who are known
by the Company to own beneficially more than 5% of the outstanding shares of the
common stock, as determined in accordance with Rule 13d-3 under the Act.
Name of No. of
Beneficial Owner Common Shares Percentage
---------------- ------------- ----------
Naphtha Holdings Ltd.* 1,320,222 50.01%
Haim Tsuff*
United Kingsway Ltd.*
YHK Investment Limited Partnership*
Notes
* Haim Tsuff owns and controls 100% of United Kingsway Ltd. (Kingsway) which
holds a 74% interest in YHK Investment Limited Partnership (YHK). Avraham
Livnat Ltd. through its subsidiary Carmen Management and Assets (1997) Ltd.
owns 26% of YHK. The General Partner of YHK is YHK General Manager Ltd. and
Haim Tsuff, Joseph Tsuff (the father of Haim Tsuff) and Tina Maimon-Arckens
(the sister of the Chairman of the Board of Naphtha are the directors of
YHK General Manager Ltd. YHK owns of record 42.4% of Equital Ltd. (formerly
known as Pass-port Ltd.), Equital Ltd. owns 43.4% of J.O.E.L. - Jerusalem
Oil Exploration Ltd. (JOEL), JOEL owns 86.6% of Naphtha, which holds 100%
of Naphtha Holdings Ltd. JOEL also owns 9.7% of the shares of Equital Ltd..
Naphtha Holdings Ltd. owns of record approximately 58% of the issued and
outstanding common stock of the Company (if the Class A and Class B
Warrants are exercised). Naphtha Holdings Ltd. holds 250,000 Class A
Warrants and 250,000 Class B Warrants of the Company.
Information regarding these relationships is set forth on the Chart of
Ownership and in Schedule 13d filings and amendments made thereto made on
behalf of the above entities, which are on file with the Securities and
Exchange Commission.
As a result of the foregoing, Haim Tsuff, Kingsway, YHK, Equital Ltd.,
JOEL,
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<PAGE>
Naphtha and Naphtha Holdings Ltd. may be deemed to control the Company.
This percentage is based on 2,639,809 shares of common stock outstanding
March 31, 1999.
Item 12. Certain Relationships and Related Transactions
In May of 1996 the Company entered into a Consulting Agreement with
Goodrich Global L.T.D. B.V.I., a company owned and controlled by Haim Tsuff, the
Chairman of the Board of Directors and Chief Executive Officer of the
Corporation. Pursuant to this Consulting Agreement which had a term of two (2)
years, the Company agreed to pay the sum of $144,000 per annum in installments
of $12,000 per month, in addition to reimbursing all reasonable business
expenses incurred during the term in connection with the performance of services
on behalf of the Company. In April 1997 the consulting compensation was
increased to $240,000 per annum and in December 1997 the term of the Agreement
was extended to May 31, 2001. The Consulting Agreement provides that the term
shall be automatically extended for an additional term of three (3) years,
commencing June 1, 2001, unless the Company has given notice at least ninety
(90) days prior to June 1, 2001, that it does not intend that the term be
renewed.
In August of 1997 the Company entered into a Consulting Agreement with
Romulas Investment Ltd. (which Agreement has been assigned to Remarkable
Holdings Ltd.), a company which is wholly owned and controlled by Daniel Avner,
the President of the Company. Pursuant to this Agreement which has a term of one
(1) year through July 31, 1998, the Company has agreed to pay the Consultant the
sum of $7,500 per month plus expenses. In February 1999, the Consulting
Agreement was amended to increase the monthly compensation payable thereunder to
$15,000 and pursuant to the amendment, the reimbursement of expenses was
disallowed. The Company has also agreed to make provide a company car and
company furnished apartment to Consultant, if available. The Consulting
Agreement is in effect through July 2000.
On January 21, 1998, the Company entered into a Inventory Management
Agreement with Equital Ltd. pursuant to which the Company is obligated to pay to
Equital Ltd. $1,650 plus VAT payable December, March, June and September of each
year during the term of the Agreement. In the case of the drilling of a well if
the total monthly hours of services provided to the Company by Equital Ltd.
exceed 30 hours per month, then the Company shall pay an additional $40.00 per
hour plus VAT for services rendered. The Agreement may be terminated on three
(3) month's written notice. The Company believes that the prices charged by
Equital Ltd. to the Company for these services are comparable to the cost for
such services negotiated in arm's length transactions. Equital Ltd. may be
deemed to be a control person to the Company.
Pursuant to the agreement terminating the employment of Mr. Toledano as the
Company's President and Chief Operating Officer in October 1995, Mr. Toledano
executed a Covenant Not to Compete Agreement with the Company. Pursuant to the
terms of the Covenant Not to Compete, Mr. Toledano agreed that for a period of
five (5) years he would
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<PAGE>
not directly or indirectly compete with the Company in connection with the
exploration for oil and gas in the State of Israel, the territorial waters off
Israel or the territories currently under control of the State of Israel. In
consideration for the Covenant Not To Compete, the Company paid to Mr. Toledano
the sum of $200,000. The Company also entered into a Consulting Agreement with
Natural Resources Exploration Services B.V., a Netherlands corporation
controlled by Mr. Toledano. Pursuant to the Consulting Agreement between the
Company and Natural Resources Exploration Services B.V., the Company paid a lump
sum payment of $72,000 to Natural Resources Exploration Services B.V. to provide
the services of Mr. Toledano to the Company through June 23, 1997.
In July of 1995 the Company formalized its existing oral consulting
agreement with Dr. Joseph Elmaleh and entered into a written Consulting
Agreement for the payment to Dr. Elmaleh of an annual fee of $99,000 payable in
equal monthly installments of $8,250. The expiration of the term of the
Consulting Agreement commenced August 1, 1995 and was to expire July 31, 1997.
Under the terms of a Termination Agreement made on April 17, 1996, Dr. Elmaleh
resigned as the Chairman of the Board, Chief Executive Officer and a director of
Isramco and its subsidiaries, the Company terminated the 1995 Consulting
Agreement with Dr. Elmaleh and (i) paid to him the sum of $123,750 representing
the balance of unpaid consulting fees; (ii) paid to him the sum of $270,000 for
a non-compete agreement for a term of three (3) years in connection with the
exploration for oil and gas in the State of Israel, the territorial waters off
Israel or the territories currently under control of the State of Israel. The
Company also purchased from Southern Shipping and Energy Inc. (a company
controlled by Dr. Elmaleh) 29,268 shares of the common stock of the Company held
by Southern Shipping and Energy Inc. for a purchase price of $208,238.
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<PAGE>
GLOSSARY
"Authorization for Expenditure (AFE)" shall mean a proposal for financial
expenditure within the framework of petroleum explorations, which the Operator
proposes from time to time to the partners in the Petroleum Assets which it
manages, for the purpose of the approval of the participants. When approved by
them, it constitutes the budget for the execution of the petroleum exploration
and the remainder of the operations of the Petroleum Assets.
"Carveout" shall mean an area in a Petroleum License or Lease in which the
ownership is different from the ownership in the License or Lease.
"Grant Agreement" shall mean the agreement between the Company and the
Government of Israel pursuant to which the Government of Israel has provided
assistance to the Company in connection with its investment in the Negev 2
Venture by providing a grant of 44.34(cent) for each U.S. dollar ($1.00)
invested and expended by the Company in oil and gas activities in Israel within
the framework of the Negev 2 Venture. The Government financing provided for
under the Grant is repayable only from funds emanating from commercial
production in any payout area and then, only to the extent of 30% of the
recipient's share of the net revenue from said payout area, as and when
received. The Grant Agreement entitles the Government of Israel, to receive a
12.5% royalty on oil sales, as well as an overriding royalty of 6.5% of the
Company's share in the petroleum produced and saved after payout. If there is no
commercial discovery of oil, the Company will not be required to repay the grant
monies. A grant agreement was also entered into between the Government of Israel
and HEI, Donesco, L.P.S. and Mazal Oil.
"Joint Operating Agreement" shall mean the Joint Operating Agreement of the
Negev 2 Venture which was signed as of the 30th day of June, 1988, between the
participants in the Negev 2 Venture, as amended or as shall be amended from time
to time.
"Joint Venture Agreement" shall mean the Joint Venture Agreement of the
Negev 2 Venture which was signed as of the 30th of June, 1988 between the
participants in the Negev 2 Venture, as amended from time to time.
"Limited Partnership" shall mean Isramco-Negev 2 Limited Partnership, a
Limited Partnership founded pursuant to a Limited Partnership Agreement made on
the 2nd and 3rd days of March, 1989 (as amended on September 7, 1989, July 28,
1991,March 5, 1992 and June 11, 1992) between the Trustee on part as Limited
Partner and Isramco Oil and Gas Ltd., as General Partner on the other part.
"Limited Partnership Agreement" shall mean the Limited Partnership
Agreement made the 2nd and 3rd days of March, 1989 (as amended September 7,
1989, July 28, 1991, March 5, 1992 and June 11, 1992), between Isramco Oil and
Gas Ltd., as General Partner, and Isramco Management (1988) Ltd. as the Limited
Partner.
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<PAGE>
"Negev 2 Venture Agreements" shall mean the Joint Venture Agreement, the
Joint Operating Agreement, the Voting Agreement and every agreement into which
the parties to said agreements have entered, in connection with the Negev 2
Venture.
"Overriding Royalty Interest" shall mean a percentage interest over and
above the base royalty and is free of all costs of exploration and production,
which costs are borne by the Grantor of the Overriding Royalty Interest and
which is related to a particular Petroleum License.
"Payout" shall mean the defined point at which one party has recovered its
prior costs.
"Petroleum" shall mean any petroleum fluid, whether liquid or gaseous, and
includes oil, natural gas, natural gasoline, condensates and related fluid
hydrocarbons, and also asphalt and other solid petroleum hydrocarbons when
dissolved in and producible with fluid petroleum.
"Petroleum Exploration" shall mean test drilling; any other operation or
search for petroleum, including geological, geophysical, geochemical and similar
investigations and tests; and, drilling solely for obtaining geological
information.
"Petroleum Law" shall mean the Israel Petroleum Law, 5712-1952.
"Petroleum Production" shall mean the production of petroleum from a
petroleum field and all operations incidental thereto, including handling and
treatment thereof and conveyance thereof to tankers, a pipe line or a refinery
in or in the vicinity of the field.
"Preliminary Permit", "Preferential Right to Obtain a License", "License"
shall have the meaning(s) set forth in the Petroleum Law of Israel.
"Sole Risk operation" is an operation in which fewer than all of the
participants in a venture participate, and the non-consenting participant has no
financial obligation but also loses his right to participate in the results of
the operation.
"Test Drilling" shall mean the drilling of test wells for the purpose of
finding of petroleum or ascertaining the size or boundaries of a petroleum
field.
"Trust Agreement" shall mean the Trust Agreement made on the 3rd day of
March, 1989 (as amended September 7, 1989, July 28, 1991, March 5, 1992 and June
11, 1992) for the Trust Company of Kesselman and Kesselman.
"Voting Agreement" shall mean the Voting Agreement made the 30th day of
June, 1988 between the Negev 2 Venture participants, excluding HEI.
"Working Interest" shall mean an interest in a Petroleum Asset granting the
holder
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<PAGE>
thereof the right to participate pro rata in exploiting the Petroleum Asset for
petroleum exploration, development and petroleum production, subject to its pro
rata participation in the expenses involved therein after acquiring the Working
Interest.
Israel Petroleum Law
The Company's business in Israel is subject to regulation by the State of
Israel pursuant to the Petroleum Law, 1952. The administration and
implementation of the Petroleum Law is vested in the Minister of National
Infrastructure (the "Minister") and an Advisory Council.
The following includes brief statements of certain provisions of the Petroleum
Law in effect at the date of this Prospectus. Reference is made to the copy of
the Petroleum Law filed as an exhibit to the Registration Statement referred to
under "Additional Information" and the description which follows is qualified in
its entirety by such reference.
The holder of a preliminary permit is entitled to carry out petroleum
exploration, but not test drilling or petroleum production, within the permit
areas. The Commissioner determines the term of a preliminary permit and it may
not exceed eighteen (18) months. The Minister may grant the holder a priority
right to receive licenses in the permit areas, and for the duration of such
priority right no other party will be granted a license or lease in such areas.
Drilling for petroleum is permitted pursuant to a license issued by the
Commissioner. The term of a license is for three (3) years, subject to extension
under certain circumstances for an additional period up to four (4) years. A
license holder is required to commence test drilling within two (2) years from
the grant of a license (or earlier if required by the terms of the license) and
not to interrupt operations between test drillings for more than four (4)
months.
If any well drilled by the Company is determined to be a commercial
discovery prior to expiration of the license, the Company will be entitled to
receive a Petroleum Lease granting it the exclusive right to explore for and
produce petroleum in the lease area. The term of a lease is for thirty (30)
years, subject to renewal for an additional term of twenty (20) years.
The Company, as a lessee, will be required to pay the State of Israel the
royalty prescribed by the Petroleum Law which is presently, and at all times
since 1952 has been, 12.5% of the petroleum produced from the leased area and
saved, excluding the quantity of petroleum used in operating the leased area.
The Minister may require a lessee to supply at the market price such
quantity of petroleum as, in the Minister's opinion, is required for domestic
consumption, subject to certain limitations.
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<PAGE>
As a lessee, the Company will also be required to commence drilling of a
development well within six (6) months from the date on which the lease is
granted and, thereafter, with due diligence to define the petroleum field,
develop the leased area, produce petroleum therefrom and seek markets for and
market such petroleum.
Item 13. Exhibits and Reports on Form 8-K and Financial Statements
(a) Exhibits
1.1 Underwriting Agreement, filed as an Exhibit with the S-l Registration
Statement, File No. 33-57482.
1.2 Selected Dealers Agreement, filed as an Exhibit with the S-l
Registration Statement, File No. 33-57482.
1.3 Underwriter's Warrant Agreement, filed as an Exhibit with the S-l
Registration Statement, File No.33-57482.
3.1 Articles of Incorporation of Registrant with all amendments filed as
an Exhibit to the S-l Registration Statement, File No. 2-83574.
3.2 Amendment to Certificate of Incorporation filed March 17, 1993, filed
as an Exhibit with the S-l Registration Statement, File No. 33-57482.
3.3 By-laws of Registrant with all amendments, filed as an Exhibit to the
S-l Registration Statement, File No. 2-83570.
4.1 Form of Warrant Agreement with respect to Class A and Class B
Redeemable Warrants, filed as an Exhibit with the S-l Registration
Statement, File No. 33-57482.
4.2 Form of Deposit Agreement, filed as an Exhibit with the S-l
Registration Statement, File No. 33-57482.
10.1 Oil Marketing Agreement, filed as Exhibit with the S-l Registration
Statement, File No. 2-83574.
10.3 License Agreement dated February 29, 1984 between the Company and
Petronav, Inc., filed as an Exhibit to Form 10-K Fiscal 1984, and
incorporated herein by reference.
10.5 Consulting Agreement dated April 1, 1985 between the Company and Elmco
Holdings Limited (subsequently assigned by Elmco Holdings Ltd. to H.G.
Finance Ltd.), filed as an Exhibit to Form 10-K Fiscal 1985, and
incorporated herein by reference.
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<PAGE>
10.6 Employment Agreement and Stock Option Agreement dated March 1, 1985
between the Company and William W. Houck, filed as an Exhibit to Form
10-K Fiscal 1985, and incorporated herein by reference (now expired).
10.9 Farmout Agreement dated March 30, 1986 between the Company and Naphtha
Israel Petroleum Corp. Ltd., filed as an Exhibit to Form 10-K Fiscal
1986, and incorporated herein by reference.
10.12 Exchange Agreement dated May 22, 1986 between the Company and SSE
(UK), filed as an Exhibit to Form 8-K for the month of May 1986 and
incorporated herein by reference.
10.13 Assignment Agreement dated as of May 5, 1988 between the Company and
SSE (UK), filed as an Exhibit to Form 8-K for the month of June 1988
and incorporated herein by reference.
10.14 Joint Venture Agreement and Joint Operating Agreement dated June 30,
1988 by and among HEI Oil and Gas Limited Partnership, JOEL -
Jerusalem Oil Exploration Ltd., Delek Oil Exploration Ltd., Delek, The
Israel Fuel Corporation Ltd., the Company, Southern Shipping and
Energy (U.K.), Naphtha, Israel Petroleum Company Ltd., Oil Exploration
of Pat Ltd., LPS Israel Oil Inc., Donesco Venture Fund One, a Limited
Partnership and Mazaloil Inc. filed as an Exhibit to Form 8-K for the
month of September 1988.
10.15 Agreement(re: Negev Joint Venture No. 2 - Assignment of Interest)
dated December 9, 1988 between the Company and Southern Shipping and
Energy (U.K.), filed as an Exhibit to Form 8-K for the month of
November 1988 and incorporated herein by reference.
10.17 Amendment No. 1 to Agreement (re: Negev Joint Venture No. 2 -
Assignment of Interest) with Southern Shipping and Energy (U.K.) dated
January 12, 1989 between the Company and Southern Shipping and Energy
(U.K.), filed as an Exhibit to Form 8-K for the month of January 1989
and incorporated herein by reference.
10.19 Management Services Agreement dated November, 1988 and effective as of
July 1, 1988 between the Company and H.G. Finance Ltd., filed as an
Exhibit to Form 10-Q for the Company for the quarter ending September
30, 1988 and incorporated herein by reference.
10.20 Grant Agreement with the Government of Israel, undared, between the
Company and the Government of Israel on behalf of the State of Israel,
filed as an Exhibit to Form 10-Q for the Company for the period ending
September 30, 1988 and incorporated herein by reference.
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<PAGE>
10.23 Translated from Hebrew, Transfer of Rights Agreement between the
Company and Isramco-Negev 2 dated March 5, 1989, filed as an Exhibit
to Form 8-K for the month of March 1989 and incorporated herein by
reference.
10.24 Translated from Hebrew, Limited Partnership Agreement between Isramco
Oil and Gas Ltd. and Isramco Management (1988) Ltd. dated March 2,
1989, filed as an Exhibit to Form 8-K for the month of March 1989 and
incorporated herein by reference.
10.25 Translated from Hebrew, Trust Agreement between Isramco Management
(1988) Ltd. and Kesselman and Kesselman dated March 3, 1989, filed as
an Exhibit to Form 8-K for the month of March 1989 and incorporated
herein by reference.
10.26 Translated from Hebrew, Indemnity Agreement between the Company and
Isramco Management (1988) Ltd. dated March _, 1989, filed as an
Exhibit to Form 8-K for the month of March 1989 and incorporated
herein by reference.
10.27 Consulting and Option Agreement dated March 17 1989 between the
Company and M.H. Meyerson & Co., Inc., filed as an Exhibit to Form 8-K
dated March 20, 1989 and incorporated herein by reference.
10.29 Agreement dated as of March 30, 1989 between the Company and SSE
(U.K.) and filed as an Exhibit to Form 8-K for the month of June 1989
and incorporated herein by reference.
10.33 Negev Ashquelon/224 License, filed with Post-effective Amendment No. 7
to Form S-l Registration Statement and incorporated herein by
reference. File No. 2-83574.
10.34 Consulting and Option Agreement dated December 4, 1989 between the
Company and Ladenburg, Thalmann & Co., Inc., filed as an Exhibit to
Form 8-K for the month of December 1989.
10.36 Amendment No. 1 to the Negev 2 Venture Agreement made as of August 1,
1989 and Amendment No. 2 to the Negev 2 Venture Agreement made as of
September 22, 1989 by and between the Negev 2 Venture Participants,
filed as an Exhibit to the Post-effective Amendment No. 8 to Form S-l
Registration Statement. File No. 2-83574.
10.37 Amendment Agreement to Grant Agreement between the Company and the
Government of Israel, filed as an Exhibit to this Post-effective
Amendment No. 8 to Form S-l Registration Statement. File No. 2- 83574.
10.38 Amendment to Agreement between the Company and M.H. Meyerson & Co.,
Inc. made as of February 28, 1991, as filed as an Exhibit to Form 8-K
for the month of
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<PAGE>
February 1991 and incorporated herein by reference.
10.40 Stock Option Agreement dated as of May 25, 1990 between the Company
and J. Jerome Williams, filed as an Exhibit to Form 8-K for the month
of May, 1990 and incorporated herein by reference.
10.41 Supplement to Transfer of Rights Agreement dated July 22, 1991 between
the Company and Isramco-Negev 2, Limited Partnership filed as an
Exhibit to Form 8-K of the Company, dated August 27, 1991, and
incorporated herein by reference.
10.42 Clarification Agreement dated March 3, 1992 between the Company and
JOEL - Jerusalem Oil Exploration Ltd., filed as an Exhibit to Form
10-K for Calendar Year ended December 31, 1991 dated March 26, 1992,
and incorporated herein by reference.
10.43 Underwriting Agreement dated March 11, 1992 between Isramco-Negev 2
Limited Partnership, Isramco Oil and Gas Ltd., Pat Oil Exploration
Limited, JOEL -Jerusalem Oil Exploration Ltd., Isramco Management
(1988) Limited, East Mediterranean Oil and Gas Limited and the Company
(executed in Hebrew with an English translation attached), filed as an
Exhibit to Form 10-K for Calendar Year ended December 31, 1991 dated
March 26, 1992, and incorporated herein by reference.
10.44 Assignment of Rights Agreement dated March 8, 1992 between JOEL
Jerusalem Oil Exploration Ltd., Pat Oil Exploration Limited, the
Company and Isramco-Negev 2 Limited Partnership (executed in Hebrew
with an English translation attached), filed as an Exhibit to Form
10-K for Calendar Year ended December 31, 1991 dated March 26, 1992,
and incorporated herein by reference.
10.45 Supplement to Assignment of Rights Agreement dated March 8, 1992
between JOEL -Jerusalem Oil Exploration Ltd., Pat Oil Exploration
Limited, the Company and Isramco-Negev 2 Limited Partnership (executed
in Hebrew with an English translation attached), filed as an Exhibit
to Form 10-K for Calendar Year ended December 31, 1991 dated March 26,
1992, and incorporated herein by reference.
10.46 Sole Risk Agreement #1 (NIRIM) dated as of October 1 , 1991 between
Isramco-Negev 2 Limited Partnership, JOEL - Jerusalem Oil Exploration
Ltd., the Company, Delek Oil Exploration Ltd., Delek - The Israeli
Fuel Corporation Ltd., Oil Exploration of Pat Ltd. and Naphtha Israel
Petroleum Company Ltd., filed as an Exhibit to Form 10-K for Calendar
Year ended December 31, 1991 dated March 26, 1992, and incorporated
herein by reference.
10.47 Sole Risk Notice (Nirim) dated August 30, 1991, filed as an Exhibit to
Form 10-K for Calendar Year ended December 31, 1991 dated March 26,
1992, and incorporated herein by reference.
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<PAGE>
10.48 Deed of Assignment for Petroleum License No. 224/Negev Ashhquelon and
Petroleum License No. 227/Nirim for the benefit of Isramco Resources
Inc. filed as an Exhibit to Form 8-K for the month of ended August
1992 and dated September 9, 1992.
10.49 Service Letter Agreement dated June 28, 1992 between J.O.E.L. -
Jerusalem Oil Exploration Ltd. and the Company regarding office space
and services filed as an Exhibit to Form 10-Q for the six (6) months
ending June 30, 1992, dated August 10, 1992 and incorporated herein by
reference.
10.50 Cancellation of Forfeiture and Ratification Agreement and Amendment
No. 1 to Cancellation of Forfeiture and Ratification Agreement filed
as an Exhibit to Form 8-K for the month of January 1993 dated January
21, 1993 and incorporated herein by reference.
10.51 Option Agreement between Isramco Resources Inc. and Naphtha Petroleum
Corporation Ltd. filed as an Exhibit to Form 8-K for the month of
January 1993 dated January 21, 1993 and incorporated herein by
reference.
10.52 Option Agreement between Isramco Resources Inc. and J.O.E.L. -
Jerusalem Oil Exploration Ltd., Oil Exploration of Pat Ltd., Isramco-
Negev 2 Limited Partnership and the Company filed as an Exhibit to
Form 8-K for the month of January 1993 dated January 21, 1993 and
incorporated herein by reference.
10.53 Equalization of Rights Agreement between Isramco-Negev 2 Limited
Partnership and Delek Oil Exploration Ltd. and Delek - The Israel Fuel
Corporation Ltd, filed as an Exhibit to Form 8-K for the month of
January 1993 dated January 21, 1993 and incorporated herein by
reference.
10.54 Option Agreement between Isramco Resources Inc. and Delek Oil
Exploration Ltd. and Delek - The Israel Fuel Corporation Ltd. filed as
an Exhibit to Form 8-K for the month of January 1993 dated January 21,
1993 and incorporated herein by reference.
10.55 Letter to Isramco-Negev 2 Limited Partnership dated as of January 6,
1993 re: Negev Ashquelon License and Negev Nirim License filed as an
Exhibit to Form 8-K for the month of January 1993 dated January 21,
1993 and incorporated herein by reference.
10.56 Agreement between the Company and Technion Research and Development
Foundation dated November 2, 1992 filed as an Exhibit to Form 10-K for
1993 and incorporated herein by reference.
10.57 Investment Banking Agreement filed as an Exhibit with the S-l
Registration
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<PAGE>
Statement, Filed No. 33-574482.
10.58 Consulting Agreement with Dr. Joseph Elmaleh dated June 20, 1995,
filed as an Exhibit to Form 8-K for the month of July, 1995 and
incorporated herein by reference.
10.59 Employment Agreement with Danny Toledano made as of the 16th day of
October, 1995, filed as an Exhibit to Form 8-K for the month of
November, 1995 and incorporated herein by reference.
10.60 Consulting Agreement with Zenith Holdings Ltd., a company which
employs Haim Tsuff made May _, 1996, filed as an Exhibit to Form 8-K
for the month of June, 1996 and incorporated herein by reference.
10.61 Termination Agreement between the Company and Danny Toledano made as
of the 23rd day of June 1996, filed as an Exhibit to Form 8-K for the
month of June, 1996 and incorporated herein by reference.
10.62 Non-Compete Agreement between the Company and Danny Toledano made as
of the 23rd day of June 1996, filed as an Exhibit to Form 8-K for the
month of June, 1996 and incorporated herein by reference.
10.63 Consulting Agreement between the Company and Danny Toledano made as of
the 23rd day of June 1996, filed as an Exhibit to Form 8-K for the
month of June, 1996 and incorporated herein by reference.
10.64 Termination Agreement between the Company and Dr. Joseph Elmaleh dated
April 16, 1996, filed as an Exhibit to Form 10-Q for the three month
period ending March 31, 1996 and incorporated herein by reference.
10.65 Consulting Agreement between the Company and Yuval Ran dated the 1st
day of August, 1996, filed as an Exhibit to Form 8-K for the month of
August, 1996 and incorporated herein by reference.
10.66 Agreement by and among Naphtha Congo Ltd., Equital Ltd. and the
Company dated September 4, 1997, filed as an Exhibit to Form 8-K for
the month of September, 1997 and incorporated herein by reference.
10.67 Amendment to Consulting Agreement between Goodrich Global L.T.D.
B.V.I. and the Company dated December _, 1997, filed as an Exhibit to
Form 8-K for the month of December, 1997 and incorporated herein by
reference.
10.68 Consulting Agreement between Romulas Investment Ltd. and the Company
dated August _, 1997, filed as an Exhibit to Form 8-K for the month of
September, 1997 and incorporated herein by reference, assigned by
Romulas Investment Ltd. on December 31, 1997 to Remarkable Holdings
Ltd.
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<PAGE>
10.69 Amendment dated February 23, 1999, to Consulting Agreement between
Remarkable Holdings Ltd. and the Company filed hereto as Exhibit 10.69
10.70 Settlement Agreement and Release dated March _, 1998 between Reuven
Hello, Jay Resources Corporation, Jay Natural Resources Inc., Jay
Petroleum LLC and Jay Management Company LLC, as Claimants and the
Company, NIR Resources Inc., Jay Petroleum LLC and Jay Management
Company LLC, as Respondents, filed as an Exhibit to Form 8-K for the
month of March, 1998 and incorporated herein by reference.
10.71 Inventory Services Management Agreement dated December _, 1997 between
the Company and Equital Ltd. filed as Exhibit 10.70 to the Annual
Report on Form 10KSB for the year ended December 31, 1997.
10.72 Consulting Agreement dated August 20, 1997 between the Company and JFC
Enterprises, LLC filed as Exhibit 10.71 to the Annual Report on Form
10KSB for the year ended December 31, 1997.
(b) Reports on Form 8-K
1. Form 8-K for Janurary 1998, dated January 27, 1998.
2. Form 8-K for February 1998, dated February 11, 1998.
3. Amendment to Form 8-K for February 1998, dated February 20, 1998.
4. Form 8-K for March 1998, dated March 18, 1998.
5. Form 8-K for March 1998, dated March 26, 1998.
6. Form 8-K for July 1998, dated July 16, 1998.
7. Form 8-K for August 1998, dated August 21, 1998.
8. Form 8-K for November 1998, dated November 30, 1998.
9. Amendment to Form 8-K for December 1998, dated December 10, 1998.
(c) Financial Statements
Report of Independent Auditors'
Consolidated Balance Sheets at December 31, 1998
Consolidated Statement of Operations for the years ended
December 31, 1998 and 1997
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1998 and 1997
Consolidated Statement of Cash Flows for the years ended
December 31, 1998 and 1997
Notes to Consolidated Financial Statements
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<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ISRAMCO, INC.
Registrant
By: /s/ HAIM TSUFF
Haim Tsuff,
Chairman of the Board and
Chief Executive Officer
Date: April 14, 1999
In accordance with 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, in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
Noa Lendner Director
Tina Maimon Arckens Director and Secretary
Prof. Avihu Ginzburg Director
Prof. Linda Canina Director
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<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Isramco Inc.
We have audited the consolidated balance sheet of Isramco Inc. and subsidiaries
as of December 31, 1998, and the related consolidated statement of operations,
shareholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Isramco, Inc. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
March 29, 1999
Houston, Texas
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Isramco Inc.
We have audited the consolidated statement of operations, changes in
shareholders' equity and cash flows of Iramsco, Inc. and subsidiaries for the
year ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of their operations and their
cash flows of Iramsco, Inc. and subsidiaries for the year ended December 31,
1997, in conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Houston, Texas
March 24, 1998
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<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands except for share information)
December 31, 1998
-----------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,240
Marketable securities, at market 3,846
Accounts receivable 268
Prepaid expenses and other current assets 207
--------
Total current assets 18,561
Property and equipment, (successful efforts method for oil
and gas properties), net of accumulated depreciation,
depletion, amortization and provision for impairment of
$1,863 at December 31, 1998 5,450
Other assets:
Investment in affiliate 285
Covenants not to compete, less accumulated amortization
of $348 at December 31, 1998 122
Other 68
--------
Total assets $ 24,486
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 374
Accounts payable and accrued expenses 644
--------
Total current liabilities 1,018
Long-term debt 1,404
--------
Total liabilities 2,422
Commitments, contingencies and other matters
Shareholders' equity:
Common stock, $.01 par value; authorized 75,000,000 shares;
2,669,120 shares issued and outstanding at
December 31, 1998 27
Additional paid-in capital 26,168
Accumulated deficit (3,967)
Treasury stock, 29,267 shares at December 31, 1998 (164)
--------
Total shareholders' equity 22,064
--------
Total liabilities and shareholders' equity $ 24,486
========
See accompanying notes to the consolidated financial statements.
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<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share information)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Operator fees from related party $ 720 $ 461
Oil and gas sales 1,410 2,001
Interest income 557 1,085
Office services to related party 613 483
Equity in earnings of Jay Management, L.L.C 16 39
Reimbursement of exploration costs 255 --
Gain from sale of oil and gas properties and equipment 931 --
----------- -----------
Total revenues 4,502 4,069
----------- -----------
Expenses:
Impairment of oil and gas properties 571 12
Interest expense 326 341
Depreciation, depletion and amortization 815 684
Lease operating expense and severance taxes 883 972
Exploration costs 81 11
Operator expense 487 507
General and administrative 1,196 1,289
Loss on marketable securities 973 272
----------- -----------
Total expenses 5,332 4,088
----------- -----------
Loss before taxes and minority interest (830) (19)
Minority interest 17 5
Income taxes 38 --
----------- -----------
NET LOSS $ (851) $ (14)
=========== ===========
Loss per share (basic and diluted) $ (0.32) $ (0.01)
=========== ===========
Weighted average number of shares outstanding 2,639,853 2,639,853
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands except for share information)
<TABLE>
<CAPTION>
Common Stock Additional Total Treasury Stock
------------------- Paid-In Accumulated -------------------- Shareholders'
Shares Amount Capital Deficit Shares Amount Equity
------ ------ ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances-December 31, 1996 2,669,120 $27 $26,168 $(3,102) (29,267) $(164) $22,929
Net Loss -- -- -- (14) -- -- (14)
--------- --- ------- ------- ------- ----- --------
Balances - December 31, 1997 2,669,120 $27 $26,168 $(3,116) (29,267) $(164) $22,915
Net Loss -- -- -- (851) -- -- (851)
--------- --- ------- ------- ------- ----- --------
Balances December 31, 1998 2,669,120 $27 $26,168 $(3,967) (29,267) $(164) $22,064
========= === ======= ======= ======= ===== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (851) $ (14)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion, amortization and provision
for impairment 1,386 696
Minority interest (17) (5)
Loss on marketable securities 1,243 68
Gain on sale of oil and gas properties
and equipment (931) (3)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 505 (215)
(Increase) decrease in prepaid expenses
and other current assets 96 (15)
(Increase) decrease in other assets 15 (78)
Increase (decrease) in accounts payable
and accrued expenses (364) 72
-------- --------
Net cash provided by operating activities 1,082 506
-------- --------
Cash flows from investing activities:
Exploration costs -- (11)
Purchase of equipment (60) (96)
Purchase of oil and gas properties (89) (5,196)
Purchase of Jay Petroleum, L.L.C. and of Jay Management
L.L.C., net of cash acquired (63) (1,036)
Proceeds from sale of oil and gas properties and equipment 1,437 6
Purchase of marketable securities (1,966) (3,767)
Proceeds from sale of marketable securities 3,990 3,064
Proceeds from (payments for) Certificate of deposit 1,900 (1,900)
Investment in affiliate (285) --
Other -- 27
-------- --------
Net cash provided by (used in) investing activities 4,864 (8,909)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt 137 3,000
Principal payments on long-term debt (1,584) (855)
-------- --------
Net cash (used in) provided by financing activities (1,447) 2,145
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,499 (6,258)
Cash and cash equivalents - beginning of year 9,741 15,999
-------- --------
Cash and cash equivalents - end of year $ 14,240 $ 9,741
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 326 $ 341
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) -- General and Summary of Significant Accounting Policies:
[1] The Company
Isramco, Inc. and subsidiaries (the Company), is engaged in the
acquisition, exploration, operation and development of oil and gas properties
and the temporary investment of surplus funds in securities. As of December 31,
1998, the Company owns properties in Texas, Louisiana, Oklahoma, Wyoming, New
Mexico, the Republic of Congo, Africa, and a 1.0043% working interest in various
properties located in Israel.
[2] 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. The Company held a 35% interest in Jay Management, L.L.C. (Jay
Management) during January, February and March 1998. This investment was
accounted for under the equity method of accounting prior to acquistion of an
additional 30% interest in Jay Management interest in March 1998. At December
31, 1998 the Company acquired the remaining 35% interest in Jay Management.
[3] Method of Accounting for Oil and Gas Operations
The Company follows the "successful efforts" method of accounting for its
oil and gas properties. Under this method of accounting, all property
acquisition costs and costs of exploratory and development wells are capitalized
when incurred, pending determination of whether the well has found proved
reserves. If an exploratory well has not found proved reserves, the costs of
drilling the well are charged to expense. The costs of development wells are
capitalized whether productive or nonproductive. Geological and geophysical
costs and the costs of carrying and retaining undeveloped properties are
expensed as incurred. Management estimates that the salvage value of lease and
well equipment will approximately offset the future liability for plugging and
abandonment of the related wells. Accordingly, no accrual for such costs has
been recorded.
Depletion and depreciation of capitalized costs for producing oil and gas
properties is provided using the units-of-production method based upon proved
reserves. Depreciation, depletion, amortization and provision for impairment
expense for the Company's oil and gas properties amounted to approximately
$1,255,000 and $502,000 for 1998 and 1997, respectively.
-55-
<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
[4] Marketable Securities
Statement of Financial Accounting Standard No. 115 (SFAS No. 115),
Accounting for Certain Investments in Debt and Equity Securities, requires that
marketable securities held for trading be recorded at their market value.
Company management considers its marketable securities to be held for trading
purposes as defined by SFAS No. 115, and as such the securities are recorded at
fair value, including such investment securities of related parties, and
realized gains and losses from the sale of the marketable securities are
determined on the specific identification method. Unrealized gains and losses
arising from the marketable securities are reflected in current operations.
[5] Equipment
Equipment, consisting of motor vehicles, office furniture and equipment, is
carried at cost less accumulated depreciation, computed on the straight-line
method over the estimated useful lives of the assets.
[6] Translation of Foreign Currencies
Foreign currency is translated in accordance with Statement of Financial
Accounting Standards No. 52, which provides the criteria for determining the
functional currency for entities operating in foreign countries. The Company has
determined its functional currency is the United States (U.S.) dollar since all
of its contracts are in U.S. dollars. The financial statements of Oil and Gas
and the Israel branch have been remeasured into U.S. dollars as follows: at
rates prevailing during the year for revenue and expense items (except
depreciation); at year-end rates for assets and liabilities except for fixed
assets and prepaid expenses which are translated at the rate in effect at the
time of their acquisition. Depreciation is remeasured based on the historical
dollar cost of the underlying assets. The net effects of currency translations
were not material in any period.
[7] Income Per Common Share
The Company follows SFAS No. 128, Earnings per Share, for computing and
presenting earnings per share, which requires, among other things, dual
presentation of basic and diluted loss per share on the face of the statement of
operations. At December 31, 1998 and 1997 earnings per share amounts are based
on the weighted average number of shares outstanding. The assumed conversion of
warrants and exercise of options do not result in material dilution.
[8] Cash Equivalents
Cash equivalents include short-term investments with original maturities of
ninety days or less and are not limited in their use.
[9] Noncompete Agreements
Noncompete agreements are amortized over the period to be benefited,
generally from three to five years.
-56-
<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
[10] New Pronouncements
In June 1997, The Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that displays these
items with the same prominence as other financial statements. SFAS No. 130 is
effective for both interim and annual periods beginning after December 15, 1997.
Adoption by the Company of SFAS No. 130 effective January 1, 1998, has had no
impact to the Company's financial statements presented herein.
In June 1997, the FASB issued SFAS No. 131 establishing standards on the
way that public companies report financial information about operating segments
in annual financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to the public.
It also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company in which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance. SFAS No. 131 is
effective for periods beginning after December 15, 1997. The Company has adopted
SFAS No. 131 for the fiscal year ended December 31, 1998.
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 is effective for periods beginning after June
15, 1999. The Company believes that adoption of this financial accounting
standard will not have material effect on its financial condition or results of
operations.
[11] Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
related notes. Actual results could differ from those estimates.
Oil and gas reserve quantities are the basis for the calculation of
depreciation, depletion and impairment of oil and gas properties. An independent
petroleum-engineering firm determines the Company's reserve estimates. However,
management emphasizes that reserve estimates are inherently imprecise and that
estimates of more recent discoveries and non-producing reserves are more
imprecise than those for properties with long production histories. At December
31, 1998, approximately 38% of the Company's oil and gas reserves were
attributable to non-producing properties. Accordingly, the Company's estimates
are expected to change, as future information becomes available.
As mandated under SFAS No. 121, Accounting for the Impariment of Long-Lived
Assets and for Long-Lived Assets to be disposed of, the Company is required
under certain circumstances to evaluate the possible impairment of the carrying
value of its long-lived assets. For proved oil and gas properties, this involves
a comparison to the estimated future undiscounted cash flows, as described in
the paragraph below. In addition to the uncertainties inherent in the reserve
-57-
<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
estimation process, these amounts are affected by historical and projected
prices for oil and natural gas, which have typically been volatile. It is
reasonably possible that the Company's oil and gas reserve estimates will
materially change in the forthcoming year.
[12] Impairment of Long-Lived Assets
The provisions of SFAS No. 121 require the Company to assess impairment
whenever events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable. When an assessment for impairment of
oil and gas properties is performed, the Company is required to compare the net
carrying value of oil and gas properties on a field-by-field basis (the lowest
level at which cash flows can be determined on a consistent basis) to the
related estimates of undiscounted future net cash flows for such properties. If
the net carrying value exceeds the net cash flows, then impairment is recognized
to reduce the carrying value to the estimated fair value. At December 31, 1998
the Company recorded an impairment of $505,325 on the excess of the carrying
value of the Company's oil and gas properties over the estimated future
discounted cash flows from such properties.
[13] Income Taxes
The Company accounts for income taxes using the asset and liability method
as prescribed by SFAS No. 109, Accounting for Income Taxes. Deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits which, are not expected
to be realized. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that such tax rate changes are enacted.
[14] Oil and Gas Revenues
The Company recognizes oil and gas revenues as production occurs under the
entitlement method. As a result, the Company accrues revenue relating to
production for which the Company has not received payment.
[15] Environmental
The Company is subject to extensive Federal, state, local and foreign
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites. Liabilities for
expenditures of noncapital nature are recorded when environmental assessment
and/or remeditaion is probable, and the costs can be reasonably estimated. No
significant amounts for environmental liabilities are recorded at December 31,
1998.
(NOTE B) - Transactions with Affiliates and Related Parties
The Company acts as Operator for joint ventures with related parties in
Israel engaged in the exploration for oil and gas for which it receives
operating fees equal to the larger of 6% of the actual direct costs or minimum
monthly fees of $6,000 per license.
-58-
<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Operator fees earned and related operator expenses are as follows:
Year Ended December 31,
-----------------------------
1998 1997
------ ------
(in thousands)
Operator fees:
Negev Med Venture $ 288 $ 288
Shederot Venture 360 72
Yam Ashdod Carveout 72 101
------ ------
$ 720 $ 461
====== ======
Operator expenses $ 487 $ 507
====== ======
In November 1996, Jerusalem Oil Exploration Limited ("JOEL"), then a 36%
holder of the Company's issued and outstanding common stock and 33% holder of
the Company's outstanding Class A and Class B Warrants, sold such shares and
warrants to Naphtha Israel Petroleum Corporation Limited ("Naphtha"), its
majority owned subsidiary. Naphtha subsequently transferred the investments to a
wholly owned subsidiary, Naphtha Holding Ltd. JOEL and Naphtha are Israeli
corporations whose shares are traded on the Tel-Aviv Stock Exchange.
In August of 1997 the Company entered into a Consulting Agreement with
Romulas Investment Ltd. (which Agreement has been assigned to Remarkable
Holdings Ltd.), a company which is wholly owned and controlled by Daniel Avner,
the President of the Company. Pursuant to this Agreement which has a term of one
(1) year through July 31, 1998, the Company has agreed to pay the Consultant the
sum of $7,500 per month plus expenses. In February 1999, the Consulting
Agreement was amended to increase the monthly compensation payable thereunder to
$15,000 and pursuant to the amendment, the reimbursement of expenses was
disallowed. The Company has also agreed to make provide a company car and
company furnished apartment to Consultant, if available. The Consulting
Agreement is in effect through July 2000.
On January 21, 1998, the Company entered into a Inventory Management
Agreement with Equital Ltd. pursuant to which the Company is obligated to pay to
Equital Ltd. $1,650 plus VAT payable December, March, June and September of each
year during the term of the Agreement. In the case of the drilling of a well if
the total monthly hours of services provided to the Company by Equital Ltd.
exceed 30 hours per month, then the Company shall pay an additional $40.00 per
hour plus VAT for services rendered. The Agreement may be terminated on three
(3) month's written notice.
During 1998 and 1997, the Company paid JOEL $0 and $30,000, respectively,
for rent, office, secretarial and computer services. From January 1997 to March
1997 the Company paid JOEL $8,000 per month for such services. From April 1997
through September 1997, the Company paid Naphtha $6,000 per month, then
effective October 1997 through June 30, 1998, $4,600 per month and then
effective July 1998 through December 31, 1998, $6,500 per month for such
services.
A subsidiary of the Company is the general partner of Isramco-Negev 2
Limited
-59-
<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Partnership from which it received management fees and expense reimbursements of
$480,000 and $480,000 for the year ended December 31, 1998 and 1997,
respectively.
During the years ended December 31, 1998 and 1997, the Company incurred
$214,000 and $253,900, respectively, for consulting services rendered by
officers/directors of the Company.
In June 1996, the Company paid its former President $200,000 in
consideration for a five year covenant not to compete and entered into a
consulting agreement with a company owned by the former President.
The Company agreed to pay its former Chief Executive Officer, $8,250 per
month through July 1997 for consulting services. In April 1996, the executive
resigned from his position. Pursuant to a termination agreement, the Company
agreed to pay him $123,750 representing the balance of unpaid consulting fees,
$270,000 in consideration for a three year covenant not to compete, and,
purchased from Southern Shipping and Energy, Inc., a company controlled by the
former Chief Executive Officer, 29,268 shares of the Company's common stock for
$208,240.
In May of 1996 the Company entered into a Consulting Agreement with
Goodrich Global L.T.D. B.V.I., a company owned and controlled by Haim Tsuff, the
Chairman of the Board of Directors and Chief Executive Officer of the
Corporation. Pursuant to this Consulting Agreement which had a term of two
years, the Company agreed to pay the sum of $144,000 per annum in installments
of $12,000 per month, in addition to reimbursing all reasonable business
expenses incurred during the term in connection with the performance of services
on behalf of the Company. In April 1997 the consulting compensation was
increased to $240,000 per annum in installments of $20,000 per month and in
December 1997 the term was extended to May 31, 2001. The Consulting Agreement,
as amended, provides that the term shall be automatically extended for an
additional term of three years, commencing June 1, 2001, unless the Company has
given notice at least 90 days prior to June 1, 2001 that it does not intend that
the term be renewed. In the event that the Company terminates Mr. Tsuff, he
shall be entitled to receive a lump sum severance payment equal to the balance
of the unpaid consulting fee due for the remaining term of the agreement.
A wholly-owned subsidiary of the Company is the General Partner in the
Negev 2 Limited Partnership. The daily managment of the Limited Partnership vest
with the General Partner, however, matters involving the rights of the Limited
Partnership unit holders, are subject to supervision of the Supervisor,
appointed to supervise the Limited Partnership activities, and in some instances
the approval of the Limited Partnership unit holders. The Company's General
Partnership interest in the Limited Partnership is 0.01% which is accounted for
by the equity method of accounting.
At December 31, 1998 the Company also owned 38,915,902 units of the Isramco
Negev 2 Limited Partnership, with a cost and market value of $296,000 and
$285,000 respectively. At December 31, 1997 the Company owned 319,529 Units of
the Isramco Negev 2, Limited Partnership with a cost and market of value of
$22,000 and $3,000. These investments are also accounted for under the equity
method of accounting.
For additional related party transactions, see acquisitions Footnote J.
-60-
<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - Marketable Securities
Marketable securities denominated in Israeli currency are presented herein
based on the December 31, 1998 exchange rate of $1 = NIS 4.16.
At December 31, 1998 and 1997 the Company owned 4,576,561 shares
(approximately 5%) of JOEL, a related party (see Note B), with a cost and market
value of $2,316,000 and $770,000, respectively, in 1998 and $2,316,000 and
$1,573,000, respectively, in 1997.
At December 31, 1998 the Company owned 14,999,000 units of the I.N.O.C. -
Dead Sea, Limited Partnership a related party with a cost and market value of
$265,000 and $296,000.
Sales of marketable securities resulted in realized (losses) gains of
$(83,000) and $193,000 for the years ended December 31, 1998 and 1997,
respectively.
At December 31, 1998 and 1997, the Company had net unrealized losses on
marketable securities of $1,756,00 and $866,000, respectively. The change in the
net unrealized holdings gain or loss included in earnings is a loss of $890,000
and $466,000 in 1998 and 1997, respectively.
Marketable securities, which are primarily traded on the Tel-Aviv Stock
Exchange, consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
Market Market
Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Debentures $2,959,000 $2,728,000 $5,152,000 $5,068,000
Equity securities 2,643,000 1,118,000 2,827,000 2,045,000
---------- ---------- ---------- ----------
Total $5,602,000 $3,846,000 $7,979,000 $7,113,000
========== ========== ========== ==========
</TABLE>
-61-
<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - Oil and Gas Properties
<TABLE>
<CAPTION>
Total
Capitalized
Unproved Proved Costs
----------- ----------- -----------
<S> <C> <C> <C>
Balance--December 31, 1997 $2,700,000 $ 4,731,000 $ 7,431,000
Acquisition costs -- 260,000 260,000
Sale of oil and gas properties -- (644,000) (644,000)
---------- ----------- -----------
Balance--December 31, 1998 $2,700,000 $ 4,347,000 $ 7,047,000
========== =========== ===========
</TABLE>
(NOTE E) -- Equipment
December, 31
1998
----------
Cost:
Balance--beginning of year $ 251,000
Purchases 60,000
Sales and dispositions (45,000)
---------
Balance--end of year 266,000
---------
Accumulated depreciation:
Balance--beginning of year 130,000
Depreciation expense 48,000
Depreciation of equipment that was sold or retired (34,000)
---------
Balance--end of year 144,000
---------
Balance--cost less accumulated depreciation $ 122,000
=========
Annual rates of depreciation are as follows:
Office equipment and furniture 7%--20%
Motor vehicles 15%--30%
-62-
<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
A summary of property and equipment is as follows:
December 31, 1998
-----------------
Unproved properties $2,700,000
Oil and gas properties 4,347,000
Transportation equipment 135,000
Office equipment 131,000
----------
7,313,000
Less accumulated depletion, depreciation,
amortization and provision for impairment 1,863,000
----------
$5,450,000
==========
-63-
<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Shareholders' Equity
The Company declared a one-for-ten reverse stock split during 1998. The
effect of the reverse stock split has been reflected in all share and per share
amounts in the accompanying consolidated financial statements.
The Company's 1983 stock option plan which expired on January 31, 1993,
provided for both incentive stock options and nonqualified stock options.
The 1993 stock option plan (the 1993 Plan) was approved at the Annual
General Meeting of Shareholders held on August 13, 1993. At December 31, 1998,
50,000 shares of common stock are reserved under the 1993 Plan. Options granted
under the 1993 Plan might be either incentive stock options under the Internal
Revenue Code or options which do not qualify as incentive stock options. Options
are granted for a period of up to ten years from the grant date. The exercise
price for an incentive stock option may not be less than 100% of the fair market
value of the Company's common stock on the date of grant. The options granted
under this plan were fully vested at grant date. The administrator may set the
exercise price for a nonqualified stock option.
Summary of the status of the Company's stock options is presented below:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997
---------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
1993 Plan:
Outstanding at beginning of year 29,750 $21.00 29,750 $21.00
Granted -- -- -- --
Expired -- -- -- --
Outstanding at end of year 29,750 $21.00 29,750 $21.00
Options exercisable at end of year 29,750 $21.00 29,750 $21.00
</TABLE>
As of December 31, 1998, 29,750 options were outstanding and exercisable with a
price of $21.00 and a weighted-average remaining contractual life of 5.3 years.
-64-
<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1998 1997
-----------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Consultants and others:
Outstanding at beginning of year 2,000 $23.00 2,000 $23.00
Granted -- -- -- --
Expired -- -- -- --
Outstanding at end of year 2,000 $23.00 2,000 $23.00
Options exercisable at year-end 2,000 $23.00 2,000 $23.00
</TABLE>
As of December 31, 1998, 2,000 options were outstanding and exercisable at
a price of $23.00 and a weighted average remaining contractual life of 4.7
years.
The Company has outstanding Class A Redeemable Warrants and Class B
Redeemable Warrants which it issued pursuant to a public offering in 1993. A
Class A Redeemable Warrant entitles the holder to purchase one share of common
stock at a price of $20.00 at any time after the date of issuance until April
16, 1999 (extended from April 16, 1998). A Class B Redeemable Warrant entitles
the holder to purchase one share of common stock at a price of $40.00 at any
time after issuance until April 16, 1999 (extended from April 15, 1998). At
December 31, 1997, 749,889 Class A Redeemable Warrants and 767,500 Class B
Redeemable Warrants are outstanding. The Class A and Class B warrants are
subject to redemption by the Company at a price of $0.01 per warrant on thirty
days' notice after the price of the Company's common shares exceeds $21.00 and
$42.00, respectively.
In connection with the offering the Company issued to the Underwriter a
warrant to purchase 22,500 units (the "Underwriter Warrant") exercisable one
year after issuance but not later than five years at a price of $66.00 per unit.
Each unit is identical to those sold to the public except that the exercise
prices of the Class A Redeemable Warrants and Class B Redeemable Warrants are
$32.00 and $64.00, respectively. Each unit consists of .4 shares of common
stock, .2 Class A Redeemable Warrants and .2 Class B Redeemable Warrants.
-65-
<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Shares of common stock reserved for future issuance are:
Options granted under the 1993 Plan 29,750
Options available for grant under the 1993 Plan 20,250
Class A Redeemable Warrants 749,889
Class B Redeemable Warrants 767,500
Shares underlying the Underwriter Warrant 18,000
Other 2,000
---------
Total 1,587,389
=========
The Company applies Accounting Principles Bulletin Opinion No. 25 and
related interpretations in accounting for its options. Accordingly, no
compensation cost has been recognized for its stock option grants to its
employees. Had compensation cost for the Company's stock option grants been
determined based on the fair value at the grant dates for awards consistent with
the method of SFAS No. 123, Accounting for Stock-based Compensation, the
Company's net loss and loss per share would have been reduced to the pro forma
amounts indicated below.
Year Ended December 31,
-------------------------
1998 1997
----------- ----------
Net loss -- as reported $ (851,000) $ (14,000)
=========== ==========
-- pro forma $ (851,000) $ (14,000)
=========== ==========
Loss per share -- as reported (basic and diluted) $ (0.32) $ (0.01)
=========== ==========
-- pro forma (basic and diluted) $ (0.32) $ (0.01)
=========== ==========
(NOTE G) -- Income Taxes
Loss before income taxes and minority interest from U.S. and foreign
results of operations is as follows:
1998 1997
--------- --------
U.S. $(938,400) $(29,000)
Foreign 108,400 10,000
--------- --------
Total $(830,000) $(19,000)
========= ========
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<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The provision for income taxes is as follows:
1998 1997
------- -------
Current:
State $38,000 $ --
Foreign -- --
Deferred -- --
------- -------
Total $38,000 $ --
======= =======
Deferred taxes are provided principally in relation to temporary
differences in unrealized appreciation (depreciation) in marketable securities
and net operating losses.
The deferred tax assets as of December 31, 1998 and 1997 are as follows:
Assets / (Liabilities)
--------------------------
1998 1997
----------- -----------
Unrealized depreciation of marketable securities $ 614,600 $ 303,100
U.S. federal net operating losses 294,000 499,200
U.S. federal alternative minimum tax credits 94,700 88,600
Basis differences in property and equipment 310,800 115,600
U.S. state taxes 45,000 --
----------- -----------
1,359,100 1,006,500
Valuation allowance (1,359,100) (1,006,500)
----------- -----------
$ -- $ --
=========== ===========
The change in the valuation allowance from December 31, 1997 to December
31, 1998 amounted to $352,600 and was caused primarily by the reduction of the
net operating loss carryforward offset by the increase in unrealized
depreciation of marketable securities and basis differences in property and
equipment.
-67-
<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Reconciliation between the actual income tax expense and income taxes
computed by applying the U.S. Federal income tax rate to income before income
taxes and minority interest is as follows:
Year Ended December 31,
-----------------------
1998 1997
----- -----
Computed at U.S. statutory rates 35.0% 35.0%
State income taxes, net of federal benefit 2.9 --
Adjustment to valuation allowance (42.5) (35.0)
----- -----
(4.6)% 0.00%
===== =====
At December 31, 1998, net operating loss carryforwards available to reduce
future federal taxable income amounted to approximately $840,000, expiring at
various dates through 2007. Due to certain changes in ownership by shareholders
owning greater than 5% of the Company's outstanding common stock, the net
operating loss carryforward may be subject to annual limitations.
The Company also has significant net operating loss carryforwards available
to reduce future Israeli taxable income from its Israel Branch and its Israeli
subsidiaries. These net operating loss carryforwards are not limited by an
expiration date.
(NOTE H) -- Concentration of Credit Risk
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of trade accounts receivable.
The Company's customer base includes several of the major United States oil and
gas operating and production companies. Although the Company is directly
affected by the well-being of the oil and gas production industry, management
does not believe a significant credit risk exists at December 31, 1998.
The Company maintains deposits in banks, which may exceed the amount of
federal deposit insurance available. Management periodically assesses the
financial condition of the institutions and believes that any possible deposit
loss is minimal.
A significant portion of the Company's cash and cash equivalents is
invested in money-market funds.
Substantially all marketable securities owned by the Company are held by
banks in Israel.
-68-
<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) -- Commitments and Contingencies
Commitments: The Company leases corporate office facilities under a
three-year operating lease expiring September 2000 at a monthly rental of
$2,718. The Company shares office space with Jay Petroleum, L.L.C. and Jay
Management L.L.C., affiliates, under an informal sublease agreement.
The Company leases a corporate apartment in the city of Houston on a
month-to-month basis at a monthly rental of $1,100. This apartment was used by
the Company's officers, directors and employees in connection with their
activities relating to the operations of the Company.
At December 31, 1998, future minimum lease payments under noncancellable
operating leases are approximately:
Years Ending December 31,
- ---------------------------
1999 $32,616
2000 24,462
-------
$57,078
=======
Rent expense for the years ended December 31, 1998 and 1997 was immaterial.
Contingencies: The Company is involved in various legal proceedings arising
in the normal course of business. In the opinion of management, the Company's
ultimate liability, if any, in these pending actions would not have a material
adverse effect on the financial position, operating results or liquidity of the
Company.
(NOTE J) -- Acquisitions
On February 5, 1997 the Company acquired an 82.9% membership interest in
Jay at an aggregate cost of $1.2 million; $677,500 for a 50% interest from
N.I.R. Resources, Inc. (NIR), $363,750 for a 25% interest from Stonewall
Resources, LLC, and $132,650 as a capital contribution to Jay for a 7.9%
interest. The Company assumed long-term bank debt of approximately $1,065,000,
resulting in a total purchase price of $2,141,000 substantially, all of which
was allocated to oil and gas properties. The acquisition was accounted for on
the purchase method of accounting. NIR is a wholly owned subsidiary of Naphtha.
The Branch Manager of the Company's Israel Branch is the General Manager of
Naphtha and the Company's President is also a director of Naphtha. In addition,
officers and directors of the Company are associates of officers and directors
of Naphtha.
Jay entered into a Management Agreement with Jay Management, a Texas
limited liability company formed in February 1997 for the purpose of operating
certain oil and gas interests and managing certain oil and gas interests owned
or to be acquired by Jay. For a capital contribution of $350 the Company
acquired a 35% interest in Jay Management. Pursuant to the Management Agreement,
Jay paid to Jay Management a management fee of $12,500 per month. Effective
March 1, 1998 the management fees to be paid under the Management Agreement were
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<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
terminated. Jay Management also receives all operating fees pursuant to the
Operating Agreement for the contract wells. The term of the Management Agreement
is for ten years, unless terminated by either party on not less than one hundred
eighty days notice. The designated manager of Jay Management receives a
management fee of $5,000 per month.
In March 1998, the Company purchased the remaining 17.1% ownership interest
in Jay Petroleum held by Jay Resources Corporation and Jay Natural Resources,
Inc. as a result of arbitration. In March 1998 the Company acquired an
additional 30% interest in Jay Management from Jay Natural Resources, Inc. as a
result of arbitration. The transfer of ownership of both transactions was
effective on December 31, 1997. At December 31, 1998 the Company purchased the
remaining 35% in Jay Management held by N.I.R. Resources, Inc.
On February 13, 1997 Jay acquired from Snyder Oil Corporation of Fort
Worth, Texas, various operated and nonoperated interests in oil and gas wells in
Louisiana, Texas and Wyoming for a cost of $2,669,000 million. The acquisition
was financed primarily with bank financing obtained by Jay through a $10 million
Master Note Facility with Comerica Bank--Texas, Houston, Texas. The Company is
not a borrower or guarantor under this Master Note Facility.
On September 4, 1997 the Company acquired from Equital Ltd. an affiliated
company formerly known as Pass-port Ltd., which controls JOEL (see Note B)--a
50% participation in a joint venture that holds two permits offshore of the
Republic of Congo, the Marine III Exploration permit and the Tilapia
Exploitation permit to develop the Tilapia Field. The purchase price was $2.7
million, all of which was paid in cash. In addition, the Company granted Equital
an 8% carried interest after payout in its rights regarding the
production-sharing contract on the Tilapia permit. "Payout" as defined in the
agreement means recovery of all of the investments to be done by the Company in
the Tilapia permit, excluding the purchase price paid by the Company to Equital
Ltd. for Tilapia of $2.55 million. The other 50% participant in the joint
venture is Naphtha Israel Petroleum Corp. Ltd., which controls the Company. The
operator for this project is Naphtha Congo Ltd., a wholly owned subsidiary of
Naphtha Israel Petroleum Corp. Ltd. Naphtha Congo is paid $14,000 annually which
costs are shared equally between the Company and Naphtha annually in
consideration for office services, accounting and overhead. It will also receive
from these parties fees as to be detailed in a joint operating agreement. The
Company received a fair market valuation of the two permits from an independent
petroleum-engineering consultant.
During 1997, a new government was established in the Congo. Although the
political situation in the Congo has not to date had a material adverse effect
on the Company's 50% investment in the joint venture that holds two permits
offshore of the Republic of Congo, no assurances can be made that continued
political unrest in West Africa will not have a material adverse effect on the
Company and the joint venture's operation in the Congo in the future.
(NOTE K) - Long-term Debt
Jay has a $10 million bank line of credit facility in place to finance
acquisitions of oil and gas prospects. The loan bears interest at the base rate
of the bank plus 1.5% (8.75% at December 31, 1998) and matures in February 2000.
Advances outstanding under the bank loan facility are collateralized by the oil
and gas properties acquired and are limited to the "Borrowing Base", as
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<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
defined, which is subject to an annual redetermination. Payments of $31,208 per
month, plus interest, are required until the April 1, 1999 redetermination date.
The borrowing base at December 31, 1998 was $3,235,000.
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 in violation of
certain of its debt covenants as of December 31, 1998. These violations were
waived by the bank for the period ended December 31, 1998. Future principal
payments on the bank loan facility as of December 31, 1998 are $374,496 and
$1,404,395 in 1999 and 2000, respectively.
(NOTE L) - 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):
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<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Geographic Segment
---------------------------------------------------------------
United Consolidated
1998 States Israel Africa Total
---- -------- ------- ------ -------
<S> <C> <C> <C> <C>
Sales and other operating revenue $ 1,543 $ 1,455 $ -- $ 2,998
Costs and operating expense (2,244) (512) -- (2,756)
-------- ------- ------ -------
Operating profit (loss) $ (701) $ 943 $ -- $ 242
======== ======= ====== =======
Interest income
and other corporate revenues 1,504
General corporate expenses (1,277)
Interest expense, loss on marketable securities and other (1,299)
Minority interest 17
Income taxes (38)
-------
Net loss $ (851)
=======
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
=======
</TABLE>
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<PAGE>
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Geographic Segment
--------------------------------------------------------------
United Consolidated
1997 States Israel Africa Total
---- -------- ------- ------ -------
<S> <C> <C> <C> <C>
Sales and other operating revenue $ 2,001 $ 944 $ -- $ 2,945
Total revenue
Costs and operating expense (1,668) (518) -- (2,186)
-------- -------- ------ -------
Operating profit (loss) $ 333 $ 426 $ -- $ 759
======= ======= ====== =======
Interest income, loss on marketable securities and other
corporate revenues 852
General corporate expenses (1,289)
Interest expense (341)
Minority interest 5
-------
Net loss (14)
=======
Identifiable assets at December 31, 1997 $ 4,107 $ 83 $2,700 $ 6,890
Cash and corporate assets 19,893
-------
Total assets at December 31, 1997 $26,783
=======
</TABLE>
-73-
<PAGE>
SUPPLEMENTARY OIL AND GAS INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997 (unaudited)
The following supplemental information regarding the oil and gas activities
of the Company is presented pursuant to the disclosure requirements promolgated
by the Securities and Exchange Commission and SFAS No. 69, Disclosures About Oil
and Gas Producing Activities. Capitalized costs relating to oil and gas
activities and costs incurred in oil and gas property acquisition, exploration
and development activities for each year are shown below. The Company had no oil
and gas assets or operations prior to 1997.
Capitalized Cost of Oil and Gas Producing Activities (in thousands)
1998
---------------------
United
States Congo
------- ------
Unproved property not being amortized $ -- $2,700
Proved property being amortized 4,347 --
Accumulated depreciation, depletion,
amortization and provision for impairment (1,719) --
------- ------
Net capitalized costs $ 2,628 $2,700
======= ======
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development
Activities
(in thousands)
<TABLE>
<CAPTION>
United United
States Congo States Congo
------- ------- ------- ------
1998 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Property acquisition costs--proved and unproved properties $ 260 $ -- $ 4,347 $2,700
Exploration Costs -- -- -- --
Development costs -- -- -- --
(Israel exploration costs in 1998-$81)
Results of Operations for Oil and Gas Producing Activities (in thousands)
Oil and gas sales $ 1,410 $ -- $ 2,001 $ --
Lease operating expense and severance taxes 883 -- 972 --
Depreciation, depletion, amortization
and provision for impairment 1,386 -- 502 --
Explorations costs -- -- -- --
------- ------- ------- ------
(Loss) Income before tax provision (859) -- 527 --
Provision for income taxes (38) -- -- --
------- ------- ------- ------
Results of operations $ (897) $ -- $ 527 --
======= ======= ======= ======
</TABLE>
-74-
<PAGE>
SUPPLEMENTARY OIL AND GAS INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997 (unaudited)
Oil and Gas Reserves
Oil and gas proved reserves could not be measured exactly. The engineers
interpreting the available data, as well as price and other economic factor base
reserve estimates on many factors related to reservoir performance, which
require evaluation. The reliability of these estimates at any point in time
depends on both the quality and quantity of the technical and economic data, the
production performance of the reservoirs as well as extensive engineering
judgment. Consequently, reserve estimates are subject to revision, as additional
data become available during the producing life of a reservoir. When a
commercial reservoir is discovered, proven reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define the extent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. The evolution of technology may also result in the application of
improved recovery techniques such as supplemental or enhanced recovery projects,
or both, which have the potential to increase reserves beyond those envisioned
during the early years of a reservoir's producing life.
The following table represents the Company's net interest in estimated
quantities of proved developed and undeveloped reserves of crude oil, condense,
natural gas liquids and natural gas and changes in such quantities at December
31, 1997, and for the year then ended. Net proved reserves are the estimated
quantities of crude oil and natural gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserve are proved reserve volumes that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Proved undeveloped reserves are proved reserve volumes that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
significant expenditure is required for recompletion. All of the Company's
proved reserves are in the United States. The Company had no proved reserves
prior to 1997. The Company's oil and gas reserves are priced at $9.48 per barrel
and $1.59 per Mcf, respectively, at December 31, 1998.
OIL BBLS GAS MCF
-------- ----------
January 1, 1997 -- --
Acquisition of minerals in place 155,879 5,392,558
Production 40,483 (604,010)
-------- ----------
December 31, 1997 115,396 4,788,548
Revisions of previous estimates 67,584 945,551
Acquisition of minerals in place -- 56,961
Sales of minerals in place -- (984,600)
Production (31,000) (523,000)
-------- ----------
December 31, 1998 151,980 4,283,460
The Company's proved developed reserves are as follows:
Oil BBls Gas Mcf
-------- -------
December 31, 1998 151,435 3,384,986
December 31, 1997 115,396 4,788,548
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<PAGE>
SUPPLEMENTARY OIL AND GAS INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997 (unaudited)
Standardized Measure of Discounted Future Net Cash Flow
The standardized measure of discounted future net cash flows relating to the
Company's proved oil and gas reserves is calculated and presented in accordance
with Statement of Financial Accounting Standards No. 69. Accordingly, future
cash inflows were determined by applying year-end oil and gas prices to the
Company's estimated share of the future production from proved oil and gas
reserves. Future production and development costs were computed by applying
year-end costs to future years. Applying year-end statutory tax rates to the
estimated net future cash flows derived future income taxes. A prescribed 10%
discount factor was applied to the future net cash flows.
In the Company's opinion, this standardized measure is not a representative
measure of fair market value. The standardized measure is intended only to
assist financial statement users in making comparisons among companies.
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Future cash inflows $ 8,247,017 $ 15,410,237
Future development costs (289,517) (541,678)
Future production costs (3,081,781) (5,905,863)
----------- ------------
Future net cash flows 4,875,719 8,962,696
Annual discount 10% rate (2,125,207) (3,625,706)
----------- ------------
Standardized measure discounted future net cash flows $ 2,750,512 $ 5,336,990
=========== ============
</TABLE>
Estimated future income taxes were eliminated because estimated future tax
deductions related to oil and gas properties exceeded estimated future net
revenues based on oil and gas prices and related costs at December 31, 1998.
Changes in Standardized Measure of Discounted Future Net Cash Flows
The principal sources of change in the standardized measure of discounted future
net cash flows for the year ended December 31, 1997 were as follows:
1998 1997
----------- -----------
Beginning of year $ 5,336,990 $ --
Sales and transfer of oil and gas produced,
net of production costs (527,500) (1,029,853)
Sales of reserves in place (1,609,800) --
Net changes in prices and production costs (1,050,678) (329,000)
Acquisition of minerals in place 67,500 6,125,843
Accretion of discount 534,000 570,000
----------- -----------
End of year $ 2,750,512 $ 5,336,990
=========== ===========
-76-
ASSIGNMENT & AMENDMENT
ASSIGNMENT & AMENDMENT made as of the 23rd day of February, 1999, to
AGREEMENT made as of the 25th day of August 1997 by and between Isramco, Inc.
(the "Company") and Romulas Investment Ltd. ("Consultant").
W I T N E S S E T H
WHEREAS, the Company and the Consultant have entered into that certain
Agreement dated as of the 25th day of August, 1997, relating to the provision by
Romulas to the Company of certain advisory and consulting services (hereinafter
the "Consulting Agreement"); and
WHEREAS, the Company and Romulas desire to amend the agreement as
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and promises herein
contained, the Company and the Consultant hereby agree as follows:
1. Ratification of Assignment of Consultant's Obligations.
The Company hereby approves and ratifies the assignment by Consultant of
all of its obligations and rights in and to the Consulting Agreement to
Remarkable Holdings Ltd. (hereinafter, "Remarkable"). By its signature below,
Remarkable agrees to bound by each and every term, representation, condition and
other provision contained in the Consulting Agreement, as such Consulting
Agreement is hereby amended. Henceforth, each and every reference in the
Agreement to "Consultant" shall be deemed to refer to, and bind, Remarkable.
2. Amendment
2.1 Extension of the Term of the Consulting Agreement. Section 5 of the
Consulting Agreement is hereby amended to extend the term of the Consulting
Agreement by deleting the date "July 31, 1998" and substituting therefor the
date "July 31, 2000".
2.2 Amendment to Section 2. Section 2 of the Consulting Agreement is hereby
amended to delete the figure "Seven Thousand Five Hundred ($7,500)" and to
substitute therefor the figure "Fifteen Thousand ($15,000)". The terms of
Section 2, as amended, shall take effect as of February, 1999.
2.3 Amendment to Section 3. Section 3 of the Consulting Agreement is hereby
deleted in its entirety and, in substitution therefor, a new Section 3 is
inserted, the text of which shall read as follows:
" 3. Non-Reimbursement of Expenses. Consultant shall not be entitled to
reimbursement for any amounts expended in the performance of the services.
It is the intention of parties that the amounts payable to Consultant under
Section 2 as shall comprise the entire amount payable by the Company to
Consultant in connection with the service performed hereunder."
The terms of Section 3, as amended, shall take effect as of February, 1999.
<PAGE>
2.4 Continuing Force and Effect of Other Provisions of the Agreement. This
instrument shall be deemed to be a modification of the Consulting Agreement
pursuant to Section 10 thereof. Except as hereby modified, each and every other
term or condition of the Consulting Agreement shall remain and continue in full
force and effect. Henceforth, all references to the Consulting Agreement shall
mean the Consulting Agreement as herein amended.
IN WITNESS WHEREOF, the parties hereto have executed or caused to be
executed this instrument as of the date first above written.
Isramco, Inc.
By:
-----------------------------
Haim Tsuf, Chairman
Romulas Investment Ltd.
By: -----------------------------
Daniel Avner
Remarkable Holdings Ltd.
By: -----------------------------
Daniel Avner
