SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Check One
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 1999
or
/ / Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
Commission file number 0-12500
ISRAMCO, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 13-3145265
(State or other Jurisdiction of I.R.S. Employer Number
Incorporation or Organization)
1770 St. James Place, Suite 607 Houston, TX 77056
(Address of Principal Executive Offices)
713-621-3882
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No[ ]
The number of shares outstanding of the registrant's Common Stock as of
August 16, 1999 was 2,639,809.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
2
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1999 and December 31, 1998
Consolidated Statement of Operations for the three months
ended June 30, 1999 and 1998
Consolidated Statements of Operations for the six months
ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's discussion and analysis of financial statements
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon senior securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
Signatures
<PAGE>
3
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,648 $ 14,240
Marketable securities, at market 2,859 3,846
Accounts receivable 432 268
Prepaid expenses and other current assets 272 207
-------- --------
Total current assets 17,211 18,561
Property and equipment (successful efforts
method for oil and gas properties), net 5,175 5,450
Marketable securities, at market 1,336 --
Investment in affiliate 1,047 285
Covenants not to compete, net 80 122
Other 58 68
-------- --------
Total assets $ 24,907 $ 24,486
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 374 $ 374
Accounts payable and accrued expenses 517 644
-------- --------
Total current liabilities 891 1,018
Long-term debt 1,217 1,404
-------- --------
Total liabilities 2,108 2,422
-------- --------
Commitments, contingencies and other matters
Shareholders' equity:
Common stock $.0l par value; authorized 7,500,000
shares; issued 2,669,120 27 27
Additional paid-in capital 26,168 26,168
Accumulated other comprehensive income 180 --
Accumulated deficit (3,412) (3,967)
Treasury stock, 29,267 shares (164) (164)
-------- --------
Total shareholders' equity 22,799 22,064
-------- --------
Total liabilities and shareholders' equity $ 24,907 $ 24,486
======== ========
</TABLE>
See notes to the consolidated financial statements.
<PAGE>
4
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share information)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales 319 473 $ 647 $ 880
Operator fees from related party 90 208 198 398
Interest income 209 138 537 293
Gain (loss) on marketable securities 81 (19) 120 (403)
Office services to affiliates and other 189 179 326 299
Reimbursement of exploration costs 53 55 101 98
Equity earnings of Jay Management -- -- -- 15
Gain on sale of assets -- 10 -- 10
----------- ----------- ----------- -----------
Total revenues 941 1,044 1,929 1,590
----------- ----------- ----------- -----------
Expenses:
Interest expense 37 77 76 153
Depreciation, depletion and amortization 173 185 363 361
Lease operating expenses and severance taxes 95 221 181 497
Operator expense 107 133 211 253
General and administrative 224 238 444 680
Exploration costs 4 52 4 52
----------- ----------- ----------- -----------
Total expenses 640 906 1,279 1,996
----------- ----------- ----------- -----------
Income (loss) before taxes and minority interest 301 138 650 (406)
Income taxes (50) -- (95) --
Minority interest -- (2) -- 15
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 251 $ 136 $ 555 $ (391)
=========== =========== =========== ===========
Income (loss) per share (basic and diluted) $ 0.10 $ 0.05 $ 0.21 $ (0.15)
=========== =========== =========== ===========
Weighted average number of shares outstanding 2,639,853 2,639,853 2,639,853 2,639,853
=========== =========== =========== ===========
</TABLE>
See notes to the consolidated financial statements.
<PAGE>
5
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 555 $ (391)
Adjustment to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 363 361
Minority interest -- (15)
(Gain) loss on marketable securities (120) 558
Gain on sale of property and equipment -- (10)
Changes in assets and liabilities
Accounts receivable (164) 238
Prepaid expenses and other current assets (65) 127
Other 8 (2)
Accounts payable and accrued expenses (36) (332)
-------- --------
Net cash provided by operating activities 541 534
-------- --------
Cash flows from investing activities:
Addition to property and equipment (75) (53)
Investment in affiliate (725) --
Proceeds from sale of equipment -- 20
Purchase of interests in Jay Petroleum, LLC and in
Jay Management, LLC (60) (69)
Purchase of marketable securities (1,083) (1,485)
Proceeds from sale of marketable securities 997 1,990
-------- --------
Net cash provided by (used in) investing activities (946) 403
-------- --------
Cash flows from financing activities
Proceeds from long term debt -- 136
Principal payments on long-term debt (187) (218)
-------- --------
Net cash used in financing activities (187) (82)
-------- --------
NET INCREASE (DECREASE ) IN CASH AND CASH EQUIVALENTS (592) 855
Cash and cash equivalents - beginning of year 14,240 9,741
-------- --------
Cash and cash equivalents - end of period $ 13,648 $ 10,596
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 76 $ 120
======== ========
</TABLE>
See notes to the consolidated financial statements.
<PAGE>
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
As used in these financial statements, the term "company" refers to Isramco,
Inc. and subsidiaries.
NOTE 2
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of Management, all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation have been included. Results for the
three and six month periods ended June 30, 1999, are not necessarily indicative
of the results that may be expected for the year ended December 31, 1999. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998.
NOTE 3 - Consolidation
The consolidated financial statements include the accounts of the Company, its
direct and indirect wholly-owned subsidiaries Isramco Oil and Gas Ltd. (Oil and
Gas) and Isramco Resources Inc., a British Virgin Islands company, its wholly
owned subsidiary, Jay Petroleum, L.L.C., (Jay) and an immaterial wholly-owned
foreign subsidiary. Intercompany balances and transactions have been eliminated
in consolidation. Another wholly-owned subsidiary of the Company, Isramco
Management (1988) Ltd., an Israeli Company, is not included in the consolidation
because the Company has no voting rights. This entity serves as the nominee for
a Limited Partnership and has no significant assets or operations.
NOTE 4 - Acquisition of Oil and Gas Properties
Although the Company continues to seek to acquire oil and gas properties, no
such purchases were made in the first six months of 1999.
NOTE 5 - Long-term Debt
At June 30, 1999, Jay has outstanding indebtedness of $1,591,000 under a bank
loan facility of $10 million. The loan bears interest at the base rate of the
bank plus 1.5% with monthly payments of $31,208 plus interest and matures in
2000. The loan is collateralized by oil and gas properties and cannot exceed the
"Borrowing Base", as defined, which is subject to annual determination. The
borrowing base at June 30, 1999 was $ 1,591,000 Isramco Inc. is not a borrower
or guarantor under this bank financing.
Under the terms of the financing agreement with the bank, Jay must meet certain
covenant requirements. The most restrictive covenants include maintenance of a
positive working capital ratio, exclusive of current maturities of amounts
outstanding under the bank loan facility. Jay was in compliance with its debt
covenants as of June 30, 1999.
<PAGE>
7
NOTE 6 - New Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
issued by the FASB in June 1998. SFAS No. 133 standardizes the accounting for
derivatives instruments, including certain derivative instruments embedded in
other contracts. SFAS No. 133, as amended, is effective for periods beginning
after June 15, 2000. The Company believes that adoption of this financial
accounting standard will not have material effect on its financial condition or
results of operations.
NOTE 7 - Geographical Segment Information
The Company's operations involve a single industry segment--the exploration,
development, production and transportation of oil and natural gas. Its current
oil and gas activities are concentrated in the United States, Israel, and the
Republic of Congo, Africa. Operating in foreign countries subjects the Company
to inherent risks such as a loss of revenues, property and equipment from such
hazards as exploration, nationalization, war and other political risks, risks of
increases of taxes and governmental royalties, renegotiation of contracts with
government entities and changes in laws and policies governing operations of
foreign-based companies.
The Company's oil and gas business is subject to operating risks associated with
the exploration, and production of oil and gas, including blowouts, pollution
and acts of nature that could result in damage to oil and gas wells, production
facilities or formations. In addition, oil and gas prices have fluctuated
substantially in recent years as a result of events, which were outside of the
Company's control. Financial information, summarized by geographic area, is as
follows (in thousands):
<TABLE>
<CAPTION>
Geographic Segment
---------------------------------------------------
United Consolidated
States Israel Africa Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Identifiable assets at June 30, 1999 $ 2,410 $ 65 $ 2,700 $ 5,175
Cash and corporate assets $ 19,732
--------
Total Assets at June 30, 1999 $ 24,907
========
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
========
Six Months Ended June 30, 1999
Sales and other operating revenue $ 682 $ 590 -- $ 1,272
Costs and operating expenses $ (537) $ (222) -- $ (759)
-------- -------- -------- --------
Operating profit $ 145 $ 368 -- $ 513
======== ======== ========
Interest Income $ 537
General corporate expenses $ (444)
Interest expense, gain on marketable
securities and other $ 44
Income taxes $ (95)
--------
Net Income $ 555
========
</TABLE>
<PAGE>
8
<TABLE>
<CAPTION>
Geographic Segment
---------------------------------------------------
United Consolidated
States Israel Africa Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Three Months Ended June 30, 1999
Sales and other operating revenue $ 337 $ 314 -- $ 651
Costs and operating expenses $ (263) $ (116) -- $ (379)
-------- -------- -------- --------
Operating profit $ 74 $ 198 -- $ 272
======== ======== ========
Interest income $ 209
General corporate expenses $ (224)
Interest expense, gain on marketable
securities and other $ 44
Income taxes $ 50
--------
Net income $ 251
========
Six Months Ended June 30, 1998
Sales and other operating revenue $ 954 $ 736 -- $ 1,690
Costs and operating expenses $ (897) $ (266) -- $ (1,163)
-------- -------- -------- --------
Operating profit $ 57 $ 470 -- $ 527
======== ======== ========
Interest income and gain on sale of assets $ 303
General corporate expenses $ (680)
Interest expense, loss on marketable
securities and other $ (556)
Minority interest $ 15
--------
Net loss $ (391)
========
Three Months Ended June 30, 1998
Sales and other operating revenue $ 532 $ 383 -- $ 915
Costs and operating expenses $ (451) $ (140) -- $ (591)
-------- -------- -------- --------
Operating profit $ 81 $ 243 -- $ 324
======== ======== ========
Interest income and gain on sale of assets $ 148
General corporate expenses $ (238)
Interest expense, loss on marketable
securities and other $ (96)
Minority interest $ (2)
--------
Net income $ 136
========
</TABLE>
NOTE 8 - Marketable securities
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,
requires the Company to classify its debt and equity securities in one of three
categories: trading, available-for-sale and held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in the near
term. Held-to-maturity securities are those securities in which the Company has
both the ability and intent to hold the security until maturity. All other
securities not included in trading or held-to-maturity are classified as
available-for sale.
<PAGE>
9
At December 31, 1998, the Company considered all of its marketable securities to
be held for trading purposes. During the first quarter of 1999, the Company
transferred certain investments in marketable securities, with a historical cost
of $2,750,000, to available-for-sale at fair market value. The Company holds no
held-to-maturity securities. Trading and available-for-sale are recorded at fair
market value. Unrealized holding gains and losses on trading securities are
included in earnings. Unrealized holding gains and losses, net of the related
tax effects, on available-for sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity until realized.
At June 30, 1999 and December 31, 1998, the Company had net unrealized losses on
marketable securities of $217,000 and $1,756,000, respectively. The change in
the net unrealized holding gains or losses included in earnings is a gain of
$120,000 for the six months ended June 30, 1999.
Trading securities, which are primarily traded on the Tel-Aviv Stock Exchange,
consists of the following:
June 30, 1999 December 31, 1998
------------------------- -------------------------
Cost Market Value Cost Market Value
---------- ---------- ---------- ----------
Debentures and
Convertible
Debentures $2,793,000 $2,557,000 $2,959,000 $2,728,000
Equity securities $ 214,000 $ 224,000 $2,643,000 $1,118,000
Investment Trust
Fund $ 69,000 $ 78,000 -- --
---------- ---------- ---------- ----------
$3,076,000 $2,859,000 $5,602,000 $3,846,000
========== ========== ========== ==========
Available-for-sale securities, which are primarily traded on the Tel-Aviv Stock
Exchange, consist of equity securities, including investment in affiliates, with
amortized cost of $2,203,000, gross unrealized holding gains of $180,000 and a
fair market value of $2,383,000 at June 30, 1999. The Company held no
available-for-sale securities at December 31, 1998.
Sales of marketable securities resulted in realized gains of $300,000 for the
six months ended June 30, 1999.
NOTE 9
The Company's comprehensive income for the three and six months ended June 30,
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Six months ended June 30, Three months ended June 30,
------------------------- ---------------------------
b1999 1998 b1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 555,000 $(391,000) $ 251,000 $ 136,000
Other comprehensive income
-available for sale securities 180,000 -- 305,000 --
--------- --------- --------- ---------
Comprehensive income (loss) $ 735,000 $(391,000) $ 556,000 $ 136,000
========= ========= ========= =========
</TABLE>
<PAGE>
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this document as well as
statements made in press releases and oral statements that may be made by the
Company or by officers, directors or employees of the Company acting on the
Company's behalf that are not statements of historical or current fact
constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown factors that could cause the actual results of the
Company to be materially different from the historical results or from any
future results expressed or implied by such forward looking statements.
Liquidity and Capital Resources
The slight decrease in the Company's consolidated cash and cash equivalents
of $592,000 from $14,240,000 at December 31, 1998 to $13,648,000 at June 30,
1999 is the result of investment in affiliates.
In the six month period ended June 30, 1999, the Company had net cash
outflow from purchases and sales of marketable securities of $86,000 as compared
to a net cash inflow from purchases and sales of marketable securities of
$505,000 in the six months ended June 30, 1998. As of June 30, 1999 the Company
owned 5.5% of the issued shares of J.O.E.L. - Jerusalem Oil Exploration Ltd.
("JOEL"), the controlling shareholder of Naphtha Israel Petroleum Company Ltd.
("Naphtha"). Naphtha through a wholly owned subsidiary holds approximately 50.1%
of the Company's outstanding common stock. Shares of JOEL and Naphtha are traded
on the Tel Aviv Stock Market.
As of June 30, 1999, Jay had outstanding indebtedness of $1,591,000 under a
bank loan facility of $10 million. The loan bears interest at the base rate of
the bank plus 1.5% with monthly payments of $31,208 plus interest and matures in
2000. The loan is secured by oil and gas properties and cannot exceed the
"Borrowing Base" (as defined in the loan documents), which is subject to annual
re-determination. The Borrowing Base at June 30, 1999 was $ 1,591,000. Isramco,
Inc. is not a borrower or guarantor under the loan facility. Under the terms of
the financing agreement with the bank, Jay must 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 compliance with its debt covenants as of June 30,
1999.
The Company believes that existing cash balances and cash flows from
activities will be sufficient to meet its financing needs. The Company intends
to finance its ongoing oil and gas exploration activities from working capital
and the loan facility.
<PAGE>
11
Results of Operations
United States
Oil and Gas Revenues (in thousands)
<TABLE>
<CAPTION>
Six months ended June 30, Three months ended June 30,
------------------------- ---------------------------
1999 1998 b1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Oil Volume Sold (Barrels)
Total 14 16 8 7
Gas Volume Sold (MCF)
Total 250 339 111 199
Oil Sales ($)
Total 170 227 102 86
Gas Sales ($)
Total 477 653 217 387
Average Unit Price
Oil ($/Bbl) * $12.14 $14.19 $12.75 $12.29
Gas ($/MCF) ** $ 1.91 $ 1.93 $ 1.95 $ 1.94
</TABLE>
* Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet
Israel
The Negev Med Licenses Venture
During the six months period ended June 30, 1999, the Negev Med Venture
expended $370,000. The Company's share is 1.0043% or $4,000.
Yam Ashdod Carveout Venture (within the Med Ashdod License)
During the six-month period ended June 30, 1999, the Yam Ashdod Carveout
Venture expended $77,000. The Company's share is 1.0043% or $1,000.
On April 26, 1999, the Company, as operator of the offshore licenses in
Israel, presented to its participants in the licenses the following proposals
for its oil exploration work plans in the license areas:
(i) Offshore drilling of the Yam West 2 well in the Med Yavne license area
to a depth of 3,500 meters (approximately 11,483 feet) and a water depth of 750
meters (approximately 2,461 feet). The amount budgeted for the drilling is
approximately $21 million, of which the Company's share is 1.0043% or
approximately $211,000.
(ii) Deepening of the Yam 2 well by approximately an additional 300 meters
(approximately 984 feet), to a depth of 5,700 meters (approximately 18,702
feet). The amount
<PAGE>
12
budgeted for the drilling is approximately $21 million, of which the Company's
share is 1.0043% or approximately $211,000.
Deepening of the Yam 2 well is subject to the conclusion of an agreement
with the Israeli Ministry of Defense, the availability of drilling equipment
appropriate for elevated water pressure and temperatures, as well as additional
examination of the well head and its condition. In management's best judgement,
the likelihood that the Company will be able to enter into an agreement with the
Ministry of Defense within at least the next 6-8 months in respect of the
deepening of the Yam 2 well on mutually acceptable terms is low.
On May 6, 1999, the Company signed a drilling contract with an
international drilling contractor to drill the Yam West 2 and an additional
optional well. The drilling commenced on August 5, 1999. The primary objective
of the drilling is to test for the existence of oil and/or gas at depths ranging
from 8,690 feet (2,650 meters) and deeper. A secondary objective is to test for
a gas reservoir at a depth of 5,412 feet (1,650 meters). The company anticipates
that a decision respecting the drilling of the optional well will be taken in
the second half of August.
Following the SOLE RISK notice furnished to the Med Yavne participants who
did not approve the budget (AFE) for the Yam West 2 drilling, a carveout was
created in the Med Yavne license area--the "Yam West 2 Carveout". The
participants in the Yam West 2 Carveout (that includes the Yam West 2 well) are:
Isramco Inc. (1.0043%), Delek Drilling Limited Partnership (8.0%) Naphta
Exploration Limited Partnership (5.0%) and Isramco Negev 2 Limited Partnership
(85.9957%).
The Company, as operator of the offshore licenses, completed a seismic
survey of the Med Yavne license area to a depth of 450 meters (approximately
1,476 feet), as well as seismic surveys at the Yam 2 well drilling site and two
additional potential drilling sites in the license areas. Additionally, the
Company completed a review of seismic survey results for the license area that
were previously obtained. The operator is currently analyzing the survey results
in order to verify the existence of additional gas prospects in the license
area. The overall cost of the surveys and the subsequent analyses are
approximately $400,000.
The operator requested of the Ministry of Defense to approve an additional
four drilling sites, on one of which the operator intends to commence drilling
with the completion of the Yam West 2 drilling. Additionally, in July 1999, the
operator requested of the Petroleum Commissioner to approve a revision in the
drilling terms previously approved in the offshore work program such that the
drilling of the second well could be to a depth of 2,000 meters (approximately
6,562 feet), instead of 3,000 meters (approximately 9,843 feet) or the deepening
of an existing drilling site. In August, 1999, the Petroleum Commissioner
approved the Company's request.
Award of an Offshore Preliminary Permit
In June 1999, the Company was awarded a preliminary permit referred to as
the "Marine Zaphon/ 164" covering an area of 297 kilometers offshore Israel
northeast of the Med Hadera, Med Tel Aviv and Med HaSharon licenses. The Company
has approached Isramco Negev 2 Limited Partnership and other entities respecting
their participation in the permit. Isramco Negev 2 Limited Partnership has
agreed to hold at least a 50% participation interest in the permit. Management
anticipates that the Company's participation interest will be 1.0043%
Letter of Intent Relating to Oil and Gas Exploration
A letter of intent ("LOI") was entered into on August 13, 1999, among the
Company, Naphtha Israel Petroleum Coropration, Equital Ltd., J.O.E.L.--Jerusalem
Oil Exploration Ltd. and Isramco Negev 2 Limited Partnerhsip, on the one hand,
and a leading company engaged in oil and gas exploration and production based in
the United States ("US Company"), on the other hand, whereby the US Company is
to participate in the Offshore exploration efforts in Israel. According to the
LOI, the US Company is to hold a participation interest in an amount equal to
between 25% to 50% in each of the Med Yavne License (except for the Yam West 2
Carveout) and the Marine Zaphone 164 Prelimiary Permit. Additionally, the US
Company, the Company and each of the participants granted to each other an
option to participate, at a rate equal to such party's current holdings, in any
other license or preliminary permit respecting offshore Israel which any of them
may be awarded in the future. The LOI further provides that should parties not
reach by August 31, 1999 a legally binding agreement respecting the matters
addressed in the LOI, then, unless otherwise mutually agreed, the LOI will
terminate and not be of any force or effect.
<PAGE>
13
Congo
On June 15, 1999, an order approving the sharing contracts was signed by
the President of the Republic of Congo, the Petroleum Minister and the Minister
of Finance. On July 5, 1999, the Petroleum Minister confirmed in writing to the
Company that the Production Sharing contracts are valid and comply with the
requirements of local Congolese law and advised the Company that it was possible
to organize Management committee meetings. Additionally, in July 1999 the orders
were published in a French language daily in the Congo.
The Company's recovery of its investment in the Congo is dependent upon
successful drilling and production under the sharing contracts. No assessment of
success can be made.
The permits relating to the Tilapia and Marine 3 concessions are included
in oil and gas properties in the balance sheet at $2.7 million.
Operator Fees
In the six month period ended June 30, 1999 and 1998, the Company earned
$198,000 and $398,000, respectively, and in the three month period ended June
30, 1999 and 1998, the Company earned $90,000 and $208,000, respectively. The
amounts earned were based on the minimum monthly compensation for each period.
Oil and Gas Revenues
In the six month period ended June 30, 1999 and 1998, the Company had oil
and gas revenues of $647,000 and $880,000, respectively and in the three month
period ended June 30, 1999 and 1998, the Company had revenues of $319,000 and
$473,000, respectively. The decrease is due primarily to the decline in oil and
gas prices between the periods and the slightly lower production in 1999.
Lease Operating Expenses and Severance Taxes
In the six month period ended June 30, 1999 and 1998, lease operating
expenses were primarily in connection with oil and gas fields in the United
States. Oil and gas lease operating expenses and severance taxes in the
six-month periods ended June 30, 1999 and 1998 were $181,000 and $497,000,
respectively and for the three month period ended June 30, 1999 and 1998, they
were $95,000 and $221,000, respectively. The decrease in lease operating
expenses and severance taxes is due to, among other things, the decline in oil
and gas prices and slightly lower production in 1999. In 1998, the lease
operating expenses included workover expenses on several wells which totaled
over $77,000, overhead charges from previous years which were not billed until
then and yearly COPAS overhead escalation.
Interest Income
Interest income increased in the three and six month periods ended June 30,
1999 compared to interest income for the same periods ended June 30, 1998
primarily due to the strengthening of the Israeli currency against the U.S.
currency.
Marketable Securities
In the six month period ended June 30, 1999 the Company recognized net
realized and unrealized gains of $120,000 compared to net realized and
unrealized losses of $403,000 in the same period in 1998. For the three month
period ended June 30, 1999, the Company
<PAGE>
14
recognized net realized and unrealized gains of $81,000 compared to a net
realized and unrealized losses of $19,000 for the same period in 1998.
Increases or decreases in the gains and losses from marketable securities
are dependent on the market prices in general and the composition of the
portfolio of the Company.
Operator Costs
Operator costs decreased in the three and six month periods ended June 30,
1999 as compared to the same periods ended June 30, 1998, primarily as a result
of lower manpower costs and reduced rent payments for the Company's offices in
Israel.
General and Administrative Expenses
The decrease in general and administrative expenses during the three and
six month periods ended June 30, 1999 compared to the same periods in 1998 was
mainly due to a decrease in consulting fees and salaries.
Impact of the Year 2000 Issue
The Year 2000 Issue ("Y2K") is a general term used to describe the various
problems that may arise as a result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Y2K software compliance issues
affect the Company and most companies in the world.
The Company is conducting a review of its operations to identify those
systems that could be affected by the Y2K issue. The review covers information
systems, mainframe and personal computers and the Company's delivery systems.
The Company's information systems include administrative and financial
applications, such as for order processing and collection. In the event one of
these systems were to fail, the Company's ability to capture, schedule and
fulfill customer demands would be impaired. Similarly, if a collection
processing system were to fail, the Company would not be able to properly apply
payment to customer balances or correctly determine cash balances. However, the
Company would consider various alternatives, including performing manually
certain functions that it had performed manually before the applicable computer
system was in use. Management also 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 modifications are based on
<PAGE>
15
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.
<PAGE>
16
PART II
Item 1. Legal Proceedings
Not Applicable
Item 2. Change in Securities & Use of Proceeds
Not Applicable
Item 3. Default Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on 8-K
a) Reports on From 8-K
(i) Form 8-K for the month of March 1999.
(ii) Form 8-K for the month of April 1999
(iii) Form 8-K for the month of May 1999
(iv) Form 8-K for the month of June 1999
(x) Form 8-K for the month of August 1999
b) Exhibit 27 -- Financial Data Schedule
<PAGE>
17
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ISRAMCO, INC.
Registrant
Date: August 16, 1999 By /s/ Haim Tsuff
Chairman of the Board and
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED 06-30-99 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 13,648
<SECURITIES> 5,242
<RECEIVABLES> 432
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,211
<PP&E> 7,357
<DEPRECIATION> 2,182
<TOTAL-ASSETS> 24,907
<CURRENT-LIABILITIES> 891
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 22,772
<TOTAL-LIABILITY-AND-EQUITY> 24,907
<SALES> 651
<TOTAL-REVENUES> 941
<CGS> 0
<TOTAL-COSTS> 603
<OTHER-EXPENSES> 290
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> 301
<INCOME-TAX> 50
<INCOME-CONTINUING> 251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 251
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
