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