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. 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.)"), 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").
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.
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"). The participants in the Negev Med Venture 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".
Since the Med Licenses, seismic surveys covering approximately 2,000 kilometers were performed as well as drilling on five sites was undertaken (Yam Yafo 1, Yam West 1, Yam West 2, Or 1 and Or South 1). With the exception of Or 1, the wells were declared dry holes and were abandoned. In October 1999 the Or 1 well (within the Med Yavne License area) was spudded. The production tests, which were completed in November 1999, reflected an initial gas production flow rate of 21 million cubic feet a day. Additional subsequent tests revealed that the well is capable of producing gas at a higher rate. In January 2000, a preliminary estimate for the gas "in place" at Or 1 placed the figure at 107 billion cubic feet. Following completion of a 3D seismic survey, it will be possible to more accurately asses the amount of gas "in place' at Or 1.
In June 1999, the Company was awarded a preliminary permit referred to as "Marine North/164" covering an area 575 square kilometers offshore Israel, northeast of Med Hadera, Med Tel Aviv and Med Hasharon licenses ("Marine North"). On September 21, 1999, the Company was awarded an additional preliminary permit, "Marine Center/168" covering an area of 194 square kilometers offshore Israel and located adjacent to the Herzliya coastline ("Marine Center"; together with Marine North, the "Offshore Preliminary Permits"). The Offshore
Preliminary Permits include Preferential Rights to Obtain a License. The Company is the operator of the Offshore Preliminary Permits.
On October 20, 1999, an Agreement was reached with BG International Limited a member of the British Gas Group ("BG") providing for the acquisition by BG of a 50% participation interest from the license participants "(Isramco Group") in the Med Licenses in Israel and BG's replacement of the Company as operator of the Med Yavne license and any new license issued in respect of the other Med Licenses scheduled to expire in June 2000. (the "BG Transaction."). See "Summary Description of the Ventures, the Petroleum Assets, Related Work Obligations and Exploration Efforts in Israel".
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 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. 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). 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. See "Table of Petroleum Assets and Oil and Gas Ventures.
The Company is currently the Operator of the Med Licenses, except for Med Yavne, whereby operation of the license has been transferred as of January, 2000 to BG, and the Offshore Preliminary Permits. 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. With respect to the Med Yavne license, the Company furnishes to BG consulting services of an administrative and technical nature for which it receives a monthly fee equal to $10,000. See "Summary Description of the Ventures, the Petroleum Assets, Related Work Obligations and Exploration Efforts in Israel".
The Company 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 and each Offshore Preliminary Permit. During the year ended December 31, 1999, the Company was paid a total of $1,744,000 in operator fees.
The licenses comprising the Med License are scheduled to expire on June 14, 2000. In conjunction with the license participants and BG, the Company and BG intend to file, upon the expiration date of such licenses, an application with the Israel Petroleum Commissioner for new licenses to replace the expiring Med Licenses. With respect to the Med Yavne license (where the
OR 1 find was discovered), the operator intends to file, an application to renew the license for a 2 year period or, alternatively, obtain a 30 year lease covering the intended area of production.
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 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 control and management of the Limited Partnership vests with the General Partner, however, matters involving the rights of the Limited Partnership unit holders 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 holds overriding royalties in certain Petroleum Assets 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. The Company currently holds 4.32% of the issued Partnership units and a wholly-owned subsidiary of the Company, IOG, which serves as the general partner for the Partnership (the "General Partner"), holds an additional 0.008% of the Partnership units. On March 30, 2000, the Limited Partnership had cash, cash equivalents and marketable securities with a value of approximately $90 million.
In connection with the BG Transaction, 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 produced within the existing offshore licenses or within any new licenses or to any oil or gas rights which may be obtained in lieu of the existing offshore licenses.
Additionally, IOG is entitled to 5% overriding royalties in certain petroleum assets held by the Limited Partnership.
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 Louisiana, Texas and Wyoming. The Company's initial interests in Jay were increased in 1998 so that the Company currently holds all of the outstanding membership interests Jay. Certain Officers and directors of the Company are associates of officers and directors of Naphtha.
Independent estimates of the reserves held by Jay Petroleum LLC as of December 31, 1999 are approximately 132,927 net barrels of proved developed producing oil reserves; 2,251 net MMCF's of proved developed producing natural gas reserves; 789 net MMCF's of proved developed behind pipe natural gas;; 49,000 net barrels of proved developed behind pipe oil reserves and 882 net MMCF' s of proved undeveloped natural gas reserves
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. With the purchase of Jay in February 1997, the Company acquired an initial 35% membership interest in Management. In March 1998, the Company acquired from Jay Natural Resources, Inc. its 30% membership interests in Management. The transaction was effective on December 31, 1997. In January 1999, the Company acquired NIR's 35% membership interests in Management . Following these acquisitions, the Company holds 100% of the outstanding membership interests in Management.
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 the Company in the Tilapia permit (excluding the Purchase Price paid by the Company to Equital Ltd.). The Company received in July 1997 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.
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. Naphtha Congo Ltd., a wholly owned subsidiary of Naphtha Israel Petroleum Corp. Ltd., is the operator of 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.
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.
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.
Drilling contractors have been contacted with respect to the drilling within the Talipia permit. 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 currently be made.
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%)
Negev Med Venture
Med Tel Aviv License Med Ashdod License Yam Ashdod Med Hadera License Carveout MedYavne Name of Participant Med Hasharon License Venture (2) License - ------------------- -------------------- ----------- -------
The Company 0.4813 0.36244 0.4584
Affiliates Isramco Negev 2,
Isramco Negev 2, Limited Partnership 34.0188 19.13693 32.4111
I.O.C. Limited Partnership 6.7083 5.05248 -- Naphtha 2.3958 1.84107 1.8033
Naphtha Explorations Limited Partnership 2.3958 1.84107 2.2826
JOEL -- -- 2.8807
Equital -- -- 2.1639
Non-affiliated entities Delek Drilling Limited Partnership 8.0000 21.7660 4.0000
BG International Ltd. 50.000 50.000 50.000
Total 100.0000 100.0000 100.0000
Area (acres) 400,000 84,220 100,000
Expiration Date 6/14/2000 6/14/2000 6/14/2000
(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.
Offshore Preliminary Permits
Name of Participant Marine North Marine Center - ------------------- ------------ -------------
The Company 1 11(1)
Isramco Negev 2 Limited Partnership 79 59
Modein Energy Limited Partnership 20 ---
Naphtha Explorations Limited Partnership --- 15
IOC limited Partnership --- 15
Total 100 100
Acres 143,750 48,500
Expiration Date 12/1/2000 3/21/2001
(1) Modein Energy Limited Partnership has been granted an option through April 30, 2000 to purchase up to 10%. If exercised in full, the Company's share would be 1%.
Overriding Royalties held by the Company
The Company holds the following Overriding Royalties:
TABLE OF OVERRDDING ROYALTIES
From The Limited Partnership On the first 10% of the Limited Partnership's Share of the following Petroleum Licenses
Before Payout After Payout ------------- ------------
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%
From JOEL On 8% of JOEL's Interest
Before Payout After Payout ------------- ------------
Yam Ashdod Carveout 2.5% 12.5%
From Delek Oil Exploration Ltd. (DOEX) (1)(2) On 6% of DOEX's Interest
Before Payout After Payout ------------- ------------
Yam Ashdod Carveout 2.5% 12.5%
From Naphtha, Naphtha Exploration LLP, Joel, Equital, IOC Limited Partnership
And Equital On oil and/or gas produced on existing offshore licenses and new - ----------- licenses issued in respect of expiring Med License --------------------------------------------------
2%
To IOG On Certain petroleum rights held by Limited Partnership - ------- -------------------------------------------------------
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.
(2) In a prospectus of the Delek Limited Partnership dated January 26, 1994 it is stated that the Interest which the Delek L.P, received from Delek and DOEX is free from any encumbrances except that Isramco, Inc. may argue that the Interests are subject to an overriding royalty. The Company has no information available to it as to why this statement is in the Delek L.P. prospectus.
Summary Description of the Ventures, the Petroleum Assets, Related Work Obligations and Exploration Efforts in Israel
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 Med Licenses). The 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 Med Licenses 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 Med 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 and 1999, 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. To date, no resolution has been reached.
Sale of Interests to British Gas
On October 20, 1999, the Company 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 Med Licenses in Israel and BG's replacement of the Company as operator of the Med Yavne License and any new license issued in respect of the other Med Licenses scheduled to expire in June 2000 (the " BG Transaction"). Following the consummation of the of the Transaction, the Company's participation in the Med Licenses was reduced to approximately .5% (reduced from 1.0043%).
Under the terms of the BG Transaction, BG replaced the Company as operator of the Med Yavne license as of January 1, 2000. The Company will continue to serve as operator of each of the remaining Med Licenses on the same terms and conditions currently existing among the Company and the other license participants until each such license's expiration. Other than for the Med Yavne License, BG is not required to pay to the Company its share of any administrative overhead in respect of the remaining four Med Licenses until their scheduled expiration.
Pursuant to the BG Transaction, the Company and BG will coordinate their respective efforts in consolidating and completing work programs in respect of the areas included within the Med Licenses (other than for Med Yavne) for the purpose of jointly applying for new oil licenses in replacement of the expiring Med Licenses. In conjunction with its license participants and BG, the Company and BG intend to file, upon the expiration of the Med Licenses, an application for new licenses in replacement of the expiring licenses, except that with respect to the Med Yavne licenses (where the Or 1 find was discovered), the operator intends to file an application for an extension of the existing license or, alternatively, an application for a 30 year lease covering the intended area of production.
In consideration of the Company's performance of its obligations under the BG Transaction, BG paid to the Company approximately $3.8 million Additionally, upon the issuance of each of the three first new licenses, if any, which may be obtained in lieu of the
expiring Med Licenses, the Company is entitled to a payment of approximately $1.7 million (or a total of approximately $5 million if all licenses are obtained).
With respect to the Med Yavne license, the Joint Operating Agreement has been 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 existing offshore licenses or within any new licenses or within other oil and gas rights which may be obtained in lieu of these offshore licenses.
Exploration Efforts in Israel
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 was 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 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).
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.
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 (which was
drilled within the carveout) 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 August, 1999, drilling on the Yam West 2 well commenced. 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 of 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 $10 million, of which the Company's share was 1.0043% or $102,000.
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).
Upon the plugging of the Yam West 2 well, on October 6, 1999, the "Or 1" well (within the Med Yavne license area) was spudded to a depth of 2,000 meters (approximately 6,540 feet). The production tests, which were completed by November 2, 1999, reflected an initial gas production flow rate of 21 million cubic feet a day. Additional subsequent tests revealed that the well is capable of producing gas at a higher rate. In January 2000, a preliminary estimate for the gas "in place" at Or 1 placed the figure at 107 billion cubic feet. Following completion of a 3D seismic survey, it will be possible to more accurately asses the amount of gas "in place' at Or 1. The total expenditures, including the production tests, for the Or 1 well was approximately $5 million, of which the Company's share was approximately $23,000
Following the drilling of Or 1, the decision was taken to move the drilling rig to the "Or South 1"drilling site, approximately 4.5 kilometers (approximately 2.8 miles) south of Or 1. Drilling on Or South 1 commenced in November 1999 to a depth of 2,000 meters (approximately 6,540 feet). Based on results of log analysis at the site, a decision was taken to abandon the well. The total expenditures for the Or South well was approximately $9 million, of which the Company's share was approximately $41,000.
Award of Offshore Preliminary Permits
Marine North
In June 1999, the Company was awarded a preliminary permit referred to as the "Marine North/ 164" covering an area of 575 square kilometers off shore Israel northeast of the Med Hadera, Med Tel Aviv and Med HaSharon licenses. The duration of the permit is eighteen months. Isramco Negev 2 Limited Partnership holds a 79% interest in the permit, Modien Energy Limited Partnership, an Israeli entity ("Modien"), holds a 20% participation interest and the Company holds the remaining 1% interest. The permit includes a preferential right to obtain a license. The Company serves as operator of the permit. A budget (AFE) of $224,000 was approved.
As of March 27, 2000, the collection of all of the data and an analysis of the seismic lines of the area was undertaken, with an emphasis being placed on the shallower parts of the area.
Additionally, a 2D seismic survey was completed. The seismic data was analyzed and a geophysical analysis of the data is being undertaken with a view to identify possible drilling prospects. If the foregoing do not identify a drilling prospect, then the Company plans to undertake a 3D survey of the area.
Marine Center
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 duration of The permit is for eighteen months. Isramco Negev 2 Limited Partnership holds a 59% interest in the permit, Naphtha Exploration Limited Partnership holds a 15% interest, IOC Limited Partnership 15% and the Company holds the remaining 11% participation interest. The Company has granted to Modien an option, exercisbale through April 30, 2000, to purchase up to 10%, which option, if exercised in full by Modien, would reduce the Company share to 1%. The permit includes a preferential right to obtain a license. The Company serves as operator of the permit. A budget (AFE) of $205,000 was approved.
As of March 27, 2000, the collection and analysis of the geophysical data has been completed. A 2D seismic survey was undertaken. The seismic data was analyzed and a geophysical analysis of the data is being undertaken with a view to identify possible drilling prospects. If the foregoing do not identify a drilling prospect, then the Company plans to undertake a 3D survey of the area.
Summary of Exploration Efforts in the 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.
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 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, 1999
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.
Contacts with potential drilling contractors have been established. 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.
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.
EMPLOYEES
During calendar year ending December 31, 1999, the Company had five (5) employees at its Branch Office in Israel and three (3) employees in its offices in Houston, Texas.
Item 2.
Item 2. OFFICES
Israel
The Company leases office space from Naphtha at 8 Granit St., Petach Tikva. In 1999 the Company paid Naphtha $77,000 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.
Item 3.
Item 3. Legal Proceedings
The Company is not subject to any pending litigation the outcome of which can have a material adverse effect on the Company business or affairs.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on June 25, 1999 and the shareholders voted as to the following: (a) election of Haim Tsuff, Noa Lendner, Adv., 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; (b) approval of an amendment to the Company's Certificate of Incorporation to reduce the number of shares that the Company is authorized to issue from time to time from 75,000,000 to 7,500,000 (c) the approval of the firm of KPMG LLP as
Company auditors for the year ended December 31, 1999. All matters were approved at the meeting.
In September of 1999, Noa Lendner resigned her position as director of the Company. In October of 1999, Jackob Maimon was designated to serve on the Company's Board of Directors and was elected President of the Company. Mr. Maimon is the Chairman of the Board of Directors of Naphtha Israel Petroleum Corporation Ltd. ("Naphtha"), an Israeli entity, which held, on December 31, 1999, indirectly through Naphtha Holdings Ltd., another Israeli entity, over 50% of the issued and outstanding stock of the Company.
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters
The number of record holders of the Company's Common Stock on March 30, 2000 was approximately 885 not including an undetermined number of persons who hold their 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.
Common Stock Class A Warrants** Class B Warrants** Quarter Ended High Low High Low High Low - -------------------------------------------------------------------------------- March 31 2 1/8 1 21/32 June 30 2 11/16 2 1/8 September 30 3 1/2 2 5/8 December 31 7 3/8 3 5/32
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 ** ** ** **
* 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.
Item 6. Selected Consolidated Financial Data
The data presented below with respect to the Company should be read in conjunction with the Consolidated Financial Statements and related Notes thereto of the Company included elsewhere in this Report and Item 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Statements contained in this Report on Form 10-K 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.
Liquidity and Capital Resources
Working capital (current assets minus current liabilities) was $15,142,000 and $17,543,000 at December 31, 1999 and 1998, respectively.
Net cash flow provided by operating activities was $3,490,000 and $1,082,000 in 1999 and 1998, respectively.
Net cash flow used in investing activities in 1999 was $2,042,000 compared to $4,864,000 in 1998 provided by investing activities. The cash used in 1999 was primarily attributable to purchases of marketable securities and investments in affiliates, offset by sales of such investments. The cash provided by investing activities in 1998 was attributable to sales of gas and oil interests and gains on marketable securities. The Company sold approximately 2% of the issued shares of J.O.E.L. - Jerusalem Oil Exploration Ltd. ("JOEL") to I.O.C. - Israel Oil Company, a wholly-owned subsidiary of Naphtha, for $842,000. As of December 31, 1999, the Company owned approximately 3.5% of the issued shares of JOEL, the controlling shareholder of Naphtha Israel Exploration Ltd. ("Naphtha"). Naphtha, through a wholly owned subsidiary, held, on December 31, 1999, approximately 50.2% of the Company's outstanding common stock. Shares of JOEL and Naphtha are traded on the Tel Aviv Stock Market.
Capital expenditures were $177,000 and $212,000 in 1999 and 1998, respectively.
As of December 31, 1999, Jay had outstanding indebtedness of $1,404,000 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 April 5, 2000. The Company is currently negotiating with the lender terms for re-scheduling the maturity date; though, no assurance can be given of any success in extending the due date. 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. Future principal payments on the bank loan facility as of December 31, 1999 are $1,404,395, payable in 2000.
In connection with the transfer to BG of the Company's participation interests in the Med Licenses, the Company received $12,500. In consideration of the Company's performance of its obligations under the agreement with BG, the Company received in October 1999 $1,925,000 and in January 2000 an additional $1,925,000.
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
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
The Company reported net income of $2,845,000 ($1.08 per share) in 1999 compared to a net loss of $851,000 ($0.32 per share) in 1998. The net income in 1999 compared to the loss in 1998 is primarily attributable to increased operator fees resulting from the offshore drilling
with the Med Yavne license, gains attributable to marketable securities and decreases in operating expenses.
Set forth below is a break-down of these results.
United States
Oil and Gas Revenues (in thousands)
1999 1998 ---- ----
Oil Volume Sold (Barrels) 23 31
Gas Volume Sold (MMCF) 410 523
Oil Sales ($) 310 395
Gas Sales ($) 797 1,015
Average Unit Price
Oil ($/Bbl) * 13.48 12.74 Gas ($/MMCF) ** 1.90 1.94
* Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons
** MMCF - 1,000 Cubic Feet
Israel
The Med Licenses
During 1999, approximately $173,000 were expended by the Company in respect of the Med Licenses compared to $3,500 in 1998. The increased amount is primarily for the purposes of the offshore drilling on the Yam West 2, Or 1 and Or 1 South wells.
Operator's Fees
In 1999 the Company earned $1,744,000 in operator fees, compared to $720,000 in 1998. The increase in the operator fees is due primarily to the offshore drilling activities in Yam West 2, Or 1 and Or South 1.
Oil and Gas Revenues
In 1999 and 1998 the Company had oil and gas revenues of $1,107,000 and $1,410,000, respectively. The decrease is due mainly to the sale in of producing wells during 1998.
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 $469,000 and $883,000 for 1999 and 1998, respectively. The decrease in lease operating expenses and severance taxes is due to the sale of gas and oil wells with relatively high operating costs.
Interest Income
Interest income during the year ended December 31, 1999 was $1,011,000 compared to $557,000 for the year ended December 31, 1998. The increase is attributable mainly to Interest earned on marketable securities.
Gain on Marketable Securities
In 1999, the Company recognized net realized and unrealized gains on marketable securities of $1,264,000 compared to net realized and unrealized losses of $973,000 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.
Impairment of Oil and Gas Properties
The Company recorded provisions for impairment of oil and gas properties in 1999 and 1998 of $0 and $571,000 respectively, as the result of capitalized costs being in excess of future net revenues.
Operator Costs
There was no material change in operator costs in 1999 compared to 1998.
General and Administrative Expenses
There was no material change in general and administrative expenses for the year ended December 31, 1999 compared to the year ended December 31, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
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
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 Med Licenses Venture
During 1998 the Med Licenses 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.
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.
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 during 1998. The total cost of the well was $6.6 million, of which the Company' share was approximately $66,000.
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
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.
General and Administrative Expense
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.
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 data-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.
To address this issue, the Company conducted a review of its operations to identify those systems that could have been affected by the Y2K issues. The review covered information systems, mainframe and personal computers, and the Company's delivery systems. The Company's information systems include administrative and financial applications, such as order processing and collection. In addition, the Company also considered various alternatives and developed contingency plans, including alternative source of supply, customer communication, plant, and business response plans, and performance of certain functions manually that had been performed manually before the applicable computer system was in use.
The Company did not encounter any critical financial and administrative system failures during the date rollover to the Year 2000, and has not experienced any disruptions of business activities as a result of Year 2000 failures encountered by third parties (customers, suppliers, and service providers). To date, the Company has not incurred, and does not expect to incur any material expenditures in connection with identifying, assessing, or remediating Y2K compliance issues.
Item 7A.
Item 7A.
The Company is exposed to market risk, including adverse changes in commodity prices and interest rates as discussed below
Commodity Price Risk- The Company produces and sells natural gas and crude oil. As a result, the Company's financial results can be significantly affected if these commodity prices fluctuate widely in response to changing market forces.
Interest Rate Risk- The Company's exposure to changes in rates primarily results from its short-term and long-term debt with floating interest rates. See Note L to Consolidated Financial Statements of Isramco, Inc. and Subsidiaries and incorporated herein by reference for information relating to the existing credit facility. Based upon the current credit facility, a 10% change in the interest rate would result in a minimal increase in interest expense.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information called for by this Item 8 is included following the "Index to Financial Statements" contained in this Annual Report on Form 10-K.
Item 9.
Item 9. 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 10.
Item 10. Directors and Executive Officers of the Registrant
As of March 30, 2000, the executive officers and directors of the Company are as follows:
Name Age Position
Haim Tsuff 42 Chairman of the Board and Chief Executive Officer of the Company
Jackob Maimon 44 President of the Company, Director
Daniel Avner 37 Vice- President of the Company
Yossi Levy 48 Branch Manger of the Company's Branch Office in Israel
Pinchas Pinchas 45 Chief Controller of the Company Branch Office in Israel
Tina Maimon Arckens 45 Director and Secretary
Prof. Linda Canina 45 Director
Prof. Avihu Ginzburg 73 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 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.
Jackob Maimon has been President of the Company since November of 1999. Mr. Maimon is the Chairman of the Board of Directors of Naphtha Israel Petroleum Corporation Ltd. ("Naphtha") an Israeli entity, which holds indirectly through Naphtha Holdings, Ltd. Another Israeli entity, over 50% of the issued and outstanding stock of the Company. Mr. Maimon has held the position at Naphtha since August 1996. Mr. Maimon is the brother of Tina Maimon Arckens, a director of the Company.
Daniel Avner has been President of the Company from July 1997 through October 1999, whereupon he resigned. Upon his resignation from the position of president, Mr. Avner was elected in October 1999 as Vice President. 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. Ltd. (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 serves as the Controller of Naphtha (which holds 100% of Naphtha Holdings Ltd., which company holds 50.2% of the outstanding common stock of the Company and also as controller of J.O.E.L. (which holds approximately 87% of Naphtha). The Company participates in Mr. Pinchas salary' which is payable by J.O.E.L. in an aggregate monthly amount of $4,000.
Tina Maimon Arckens has been a director of the Company 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. From August 1996 through July 1998 Dr. Canina also held 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.
Except as noted above, there are no family relationships 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.
SECTION 16 FILINGS
No person who, during the fiscal year ended December 31, 1999, 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 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 11.
Item 11. Executive Compensation
The following table sets forth the compensation paid for 1999 and for the previous two years to the Chief Executive Officer and the five (5) other highly paid officers and/or key
employees of the Company.
Summary Compensation 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 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) Mr. Maimon was elected to the position of President in November of 1999. In November of 1999, the Company entered into a Consulting Agreement with a company of which Jackob Maimon is a director. Pursuant to this Consulting Agreement, 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.
(3) 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. Mr. Avner resigned from his position as President of the Company in October 1999, whereupon he was elected as a Vice-President.
(4) 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.
(5) Mr. Pinchas is employed as Controller of Naphtha and J.O.E.L., 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.
(6) 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.
Aggregated Option Exercises in 1999 and Year End Option Values
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 1999.
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 1999 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.
Item 12.
Item 12. 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.
Number of Percent Shares Owned of Name Position Beneficially Class - ---- -------- ------------ -----
Haim Tsuff Chairman of the Board, Chief Executive Officer and Director 1,395,217(1) 50.19%
Jackob Maimon President and Director 69,995(2) 2.52%
Daniel Avner Vice-President 0
Yossi Levy Manager of the Company's Israel Branch 0
Pinchas Pinchas Controller of the Company's Israel Branch 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 1,465,212 52.71%
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. In March 2,000, Mr. Tsuff was granted five year options to purchase up to 69,995 shares of the Company's stock at an exercise price per share of $4.28. For more information see Security Ownership of Certain Beneficial Owners.
(2) In March 2,000, Mr. Maimon was granted five year options to purchase up to 69,995 shares of the Company's stock at an exercise price per share of $4.28.
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, 2000 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. * 1,325,222 47.67%
Haim Tsuff * 69,995 2.52%
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 42.4% 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 8.2% of the shares of Equital Ltd.. Naphtha Holdings Ltd. owns of record approximately 47.67% of the issued and outstanding common stock 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, Naphtha and Naphtha Holdings Ltd. may be deemed to control the Company.
Item 13.
Item 13. 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 Vice-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 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) 292,675 shares of the common stock of the Company held by Southern Shipping and Energy Inc. for a purchase price of $208,238.
In November of 1999 the Company entered into a Consulting Agreement with Worldtech Inc., a Mauritus company of which Jackob Maimon, the President of the Company, is a director. Pursuant to this Consulting Agreement which is in effect through May 31, 2001, the Company agreed to pay the sum of $240,000 per annum in installments of $20,000 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. The Consulting Agreement as amended, provides that the term shall be automatically extended for an additional term of three (3) years, unless the Company has given notice at least ninety (90) days prior to the scheduled expiration, that it does not intend that the term be renewed.
In March 2000, each of Messrs. Tsuff and Maimon were granted five year options to purchase up to 69,995 shares of the Company's common stock at an exercise price per share of $4.28.
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.
"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.
"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 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.
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.
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.
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 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.
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 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 Ist 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.
10.69 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.
10.70 Inventory Services Management Agreement dated December 1, 1997 between the Company and Equital Ltd. filed as an Exhibit to Form 10KSB for the year ended December 31, 1997.
10.71 Consulting Agreement dated August 20, 1997 between the Company and JFC Enterprises, LLC filed as an Exhibit to Form 10KSB for the year ended December 31, 1997.
10.72 Farmout Agreement dated October 29, 1999 between the Company and Isramco Negev 2 - Limited Partnership, J.O.E.L. - Jerusalem Oil Exploration Ltd., Equital Ltd., Naphtha Exploration Limited Partnership, Naphtha Israel Petroleum Corp. Ltd., INOC - Dead Sea - Limited Partnership and BG International Limited, filed herewith.
10.73 Consulting Agreement dated as of November 1, 1999 between the Company and Worldtech Inc., filed herewith.
(b) Reports on Form 8-K
(i) Report on Form 8-K filed on November 2, 1999.
(ii) Report on Form 8-K filed on November 1, 1999.
(iii) Report on Form 8-K filed on October 20, 1999.
(iv) Report on Form 8-K filed on October 8, 1999.
(c) Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statement of Operations for the years ended December 31, 1999, 1998 and 1997
Consolidated Statement of changes in Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
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, 2000
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
/s/ Jackob Maimon Director, President April 14, 2000
/s/ Tina Maimon Arckens Director and Secretary April 14, 2000
/s/ Prof. Avihu Ginzburg Director April 14, 2000
/s/ Prof. Linda Canina Director April 14, 2000
INDEPENDENT AUDITORS' REPORT
The Board of Directors Isramco Inc.:
We have audited the consolidated balance sheets of Isramco Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in shareholders' equity and comprehensive income, and cash flows for the years 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 audits 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Isramco Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles.
KPMG LLP
Houston, Texas March 30, 2000
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 Isramco, 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 Isramco 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
ISRAMCO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands except for share information)
See accompanying notes to the consolidated financial statements.
ISRAMCO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except for share information)
See accompanying notes to the consolidated financial statements.
ISRAMCO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (in thousands except for share information)
See accompanying notes to the consolidated financial statements.
ISRAMCO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes to the consolidated financial statements.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED 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, 1999, the Company owns properties in Texas, Louisiana, Oklahoma, Wyoming, New Mexico, the Republic of Congo, Africa, and approximately a .5% 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. 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 acquisition 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 $450,000, $1,255,000 and $502,000 for 1999, 1998 and 1997, respectively.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED 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 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 purposes 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 securities are recorded at fair market value. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains or losses, net of the related tax effects, on available-for-sale securities are excluded from earnings and are reported as accumulated other comprehensive income, a separate component of shareholders' equity, until realized.
[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 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] Earnings 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, 1999, 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.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
[10] New Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement, as amended by SFAS No. 137, establishes standards for of accounting for and disclosures of derivative instruments and hedging activities. This statement requires all derivative instruments to be carried on the balance sheet at fair value and is effective for the Company beginning January 1, 2001, however, early adoption is permitted. The Company has not yet determined the impact of this statement 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, 1999, approximately 43% of the Company's oil and gas reserves were attributable to non-producing reserves. Accordingly, the Company's estimates are expected to change, as future information becomes available.
As mandated under SFAS No. 121, Accounting for the Impairment 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 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 an impairment is recognized to reduce the carrying value to the estimated fair value. The Company recorded impairment provisions of $0, $571,000 and $12,000 during 1999, 1998 and 1997, respectively, 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.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
[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 under the entitlements method.
[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, 1999.
(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.
Operator fees earned and related operator expenses are as follows:
Year Ended December 31, ------------------------------------ 1999 1998 1997 ------ ------ ------ (in thousands)
Operator fees: Negev Med Venture ............... $ 252 $ 288 $ 288 Shederot Venture ................ 18 360 72 Yam Ashdod Carveout ............. 65 72 101 Yam West 2 ...................... 575 -- -- Or-1 ............................ 283 -- -- Or South-1 ...................... 509 -- -- Marine North .................... 42 -- -- ------ ------ ------ $1,744 $ 720 $ 461 ====== ====== ======
Operator expenses ................. $ 514 $ 487 $ 507 ====== ====== ======
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 Vice-President of the Company. Pursuant to this Agreement which had 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 provide a company car and company furnished apartment to the Consultant, if available. The Consulting Agreement is in effect through July 2000.
On January 21, 1998, the Company entered into an 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.
In November of 1999 the Company entered into a Consulting Agreement with Worldtech Inc., a Mauritus company of which Jackob Maimon, the President of the Company, is a director. Pursuant to this Consulting Agreement which is in effect through May 31, 2001, the Company agreed to pay the sum of $240,000 per annum in installments of $20,000 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. The Consulting Agreement provides that the term shall be automatically extended for an additional term of three (3) years, unless the Company has given notice at least ninety (90) days prior to the scheduled expiration, that it does not intend that the term be renewed. In the event that the Company terminates Mr. Maimon, 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.
The Company paid J.O.E.L. Jerusalem Oil Exploration Limited ("JOEL"), a related party, $30,000 during 1997 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, the Company's Parent, $6,000 per month, then effective October 1997 through June 30, 1998, $4,600 per month and then effective July 1998 through December 31, 1999, $6,500 per month for such services.
A subsidiary of the Company is the general partner of Isramco-Negev 2 Limited Partnership from which it received management fees and expense reimbursements of $580,000, $480,000 and $480,000 for the year ended December 31, 1999, 1998 and 1997, respectively.
During the years ended December 31, 1999, 1998 and 1997, the Company incurred $273,000, $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.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 Isramco Negev 2 Limited Partnership. The daily management 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% and is accounted for using the equity method of accounting.
At December 31, 1999 the Company also owned 122,742,565 units of the Isramco Negev 2 Limited Partnership, with a cost and market value of $3,031,000 and $3,665,000, respectively. At December 31, 1998 the Company owned 3,891,590 units, adjusted for a one-to-ten reverse unit split during 1999, of the Isramco Negev 2 Limited Partnership with a cost and market value of $296,000 and $285,000, respectively. These investments are also accounted for using the equity method of accounting. During 1999, the Company sold approximately 43,100,000 units, realizing a gain of $100,000 in earnings.
For additional related party transactions, see acquisitions Footnote J.
(NOTE C) - Marketable Securities
At December 31, 1999 and 1998, the Company had net unrealized gains (losses) on marketable securities of $8,000 and $(1,756,000), respectively.
Trading securities, which are primarily traded on the Tel-Aviv Stock Exchange, consist of the following:
December 31, 1999 December 31, 1998 ------------------------ ------------------------ Cost Market Value Cost Market Value ---------- ------------ ---------- ------------ Debentures ................ $2,012,000 $1,968,000 $2,959,000 $2,728,000 Equity securities ......... 517,000 569,000 2,643,000 1,118,000 Investment trust fund ..... 155,000 155,000 -- -- ---------- ---------- ---------- ---------- Total ..................... $2,684,000 $2,692,000 $5,602,000 $3,846,000 ========== ========== ========== ==========
Available for sale securities, which are primarily traded on the Tel-Aviv Stock Exchange, consist of equity securities with amortized cost of $1,725,000, gross holding gains of $1,388,000 and a fair market value of $3,113,000. The Company held no available-for-sale securities at December 31, 1998.
Sales of marketable securities (trading and available for sale) resulted in realized gains (losses) of $1,256,000, $(83,000) and $193,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(NOTE D) - Oil and Gas Properties
Total Capitalized Unproved Proved Costs ----------- ----------- ----------- 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 Acquisition costs .................. -- 57,000 57,000 Sale of oil and gas properties ..... -- (402,000) (402,000) ----------- ----------- ----------- Balance--December 31, 1999 ......... $ 2,700,000 $ 4,002,000 $ 6,702,000 =========== =========== ===========
(NOTE E) -- Equipment
Cost: Balance--December 31, 1997 ..................................... $ 251,000 Purchases ...................................................... 60,000 Sales and dispositions ......................................... (45,000) --------- Balance--December 31, 1998 ..................................... 266,000 Purchases ...................................................... 28,000 Sales .......................................................... -- --------- Balance--December 31, 1999 ..................................... 294,000
Accumulated Depreciation: Balance--December 31, 1997 ..................................... 130,000 Depreciation expense ........................................... 48,000 Depreciation of equipment that was sold or retired ............. (34,000) --------- Balance at December 31, 1998 ................................... 144,000 Depreciation expense ........................................... 48,000 Depreciation of equipment that was sold or retired ............. -- --------- Balance--December 31, 1999 ..................................... 192,000
Cost less accumulated depreciation--December 31, 1998 .......... $ 122,000 ========= Cost less accumulated depreciation--December 31, 1999 .......... $ 102,000 =========
Annual rates of depreciation are as follows: Office equipment and furniture ............................. 7%--20% Motor vehicles ............................................. 15%--30%
A summary of property and equipment is as follows:
December 31, ------------------------- 1999 1998 ---- ---- Unproved properties .............................. $2,700,000 $2,700,000 Oil and gas properties ........................... 4,002,000 4,347,000 Transportation equipment ......................... 149,000 135,000 Office equipment ................................. 145,000 131,000 ---------- ---------- 6,996,000 7,313,000 ---------- ---------- Less accumulated depletion, depreciation, amortization and provision for impairment ..... 2,031,000 1,863,000 ---------- ---------- $4,965,000 $5,450,000 ========== ==========
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED 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 1993 stock option plan (the 1993 Plan) was approved at the Annual General Meeting of Shareholders held on August 13, 1993. At December 31, 1999 and 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.
A summary of the status of the Company's stock options is presented below:
Weighted- Average 1993 Plan: Options Exercise Price ------- --------------
Outstanding at January 1, 1997 ..... 29,750 $21.00 Granted ............................ -- -- Expired ............................ -- -- ------- Outstanding at December 31, 1997 ... 29,750 $21.00 Granted ............................ -- -- Expired ............................ -- -- ------- Outstanding at December 31, 1998 ... 29,750 $21.00 Granted ............................ -- -- Expired ............................ -- -- ------- Outstanding at December 31, 1999 ... 29,750 $21.00
As of December 31, 1999, 29,750 options were outstanding and exercisable with a price of $21.00 and a weighted-average remaining contractual life of 4.3 years.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Weighted- Average Consultants and others: Options Exercise Price ------- --------------
Outstanding at January 1, 1997 ...... 2,000 $23.00 Granted ............................. -- -- Expired ............................. -- -- ------- Outstanding at December 31, 1997 .... 2,000 $23.00 Granted ............................. -- -- Expired ............................. -- -- ------- Outstanding at December 31, 1998 .... 2,000 $23.00 Granted ............................. -- -- Expired ............................. -- -- ------- Outstanding at December 31, 1999 .... 2,000 $23.00 =======
As of December 31, 1999, 2,000 options were outstanding and exercisable with a price of $23.00 and a weighted-average remaining contractual life of 3.7 years.
At December 31, 1998, the Company had 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 entitled 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 entitled 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, 1998, 749,889 Class A Redeemable Warrants and 767,500 Class B Redeemable Warrants were outstanding. The Class A and Class B warrants were 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. All Class A and Class B warrants expired on April 16, 1999.
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.
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 Shares underlying the Underwriter Warrant .............. 18,000 Other .................................................. 2,000 ------ Total .................................................. 70,000 ======
Subsequently, in March 2000, two directors were each granted five year options to purchase up to 69,995 shares of the Company's common stock at an exercise price of $4.28.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 not have been materially different from that reported.
(NOTE G) -- Income Taxes
Income (loss) before income taxes and minority interest from U.S. and foreign results of operations is as follows:
Year Ended December 31, ----------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- U.S .......... $ (640,000) $ (938,400) $ (29,000) Foreign ...... $ 3,706,000 108,400 10,000 ----------- ----------- ----------- Total ........ $ 3,066,000 $ (830,000) $ (19,000) =========== =========== ===========
The provision for income taxes is as follows:
Year Ended December 31, ------------------------------------- 1999 1998 1997 --------- --------- -------- Current: State ............. $ -- $ 38,000 $ -- Federal ........... 234,000 Foreign ........... 72,000 -- -- Deferred ............... (85,000) -- -- --------- --------- -------- Total ............. $ 221,000 $ 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, 1999 and 1998 are as follows:
As of December 31, -------------------------- 1999 1998 ----------- ----------- Marketable securities ...................... $ 403,000 614,600 U.S. federal net operating losses .......... -- 294,000 U.S. federal alternative minimum tax credits -- 94,700 Basis differences in property and equipment 177,000 310,800 Other timing differences ................... (46,000) -- U.S. state taxes ........................... (46,000) 45,000 ----------- ----------- 488,000 1,359,100 Valuation allowance ........................ (403,000) (1,359,100) ----------- ----------- $ 85,000 $ -- =========== ===========
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The decrease in the valuation allowance from December 31, 1998 to December 31, 1999 amounted to $956,000 and was caused primarily by the utilization of the net operating loss carryforward and by the change in the unrealized appreciation/depreciation of marketable securities and basis differences in property and equipment.
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, ------------------------------- 1999 1998 1997 ------- ------- ------- Computed at U.S. statutory rates 35.0% 35.0% 35.0% State income taxes, net of federal benefit 2.9 2.9 -- Adjustment to valuation allowance (31.2) (42.5) (35.0) Other .5 -- -- ------- ------- ------- 7.2% (4.6)% 0.00% ======= ======= =======
(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, 1999.
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.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED 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.
At December 31, 1999, future minimum lease payments under noncancellable operating leases are approximately $24,462 through the year ending December 31, 2000.
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 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. 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.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 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)--Sale of Interests
On October 20, 1999, the Company 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 Med Licenses in Israel and BG's replacement of the Company as operator of the Med Yavne License and any new license issued in respect of the other Med Licenses scheduled to expire in June 2000 (the " BG Transaction"). Following the consummation of the BG Transaction, the Company's participation in the Med Licenses was reduced to approximately 0.5% (reduced from 1.0043%).
In consideration of the Company's performance of its obligations under the BG Transaction, BG paid to the Company approximately $3.8 million, of which $1.9 million was paid in October 1999 and the remainder in January 2000. Included in advance payments received on the balance sheet at December 31, 1999 is $1.7 million relating to the cash received in 1999 from BG of $1.9 million, less costs incurred of approximately $200,000. This amount is being deferred until the completion of the agreement and the Company's performance of its obligations under the BG Transaction in January 2000, and at which time is expected to be recognized as a gain along with the January 2000 payment. Additionally, upon the issuance of each of the three first new licenses, if any, which may be obtained in lieu of the expiring Med Licenses, the Company is entitled to a payment of approximately $1.7 million (or a total of approximately $5 million if all licenses are obtained).
Under the terms of the BG Transaction, BG replaced the Company as operator of the Med Yavne license as of January 1, 2000. The Company will continue to serve as operator of each of the remaining Med Licenses on the same terms and conditions currently existing among the Company and the other license participants until each such license's expiration. Other than for the Med Yavne License, BG is not required to pay to the Company its share of any administrative overhead in respect of the remaining four Med Licenses until their scheduled expiration.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Pursuant to the BG Transaction, the Company and BG will coordinate their respective efforts in consolidating and completing work programs in respect of the areas included within the Med Licenses (other than for Med Yavne) for the purpose of jointly applying for new oil licenses in replacement of the expiring Med Licenses. In conjunction with its license participants and BG, the Company and BG intend to file, upon the expiration of the Med Licenses, an application for new licenses in replacement of the expiring licenses, except that with respect to the Med Yavne licenses (where the Or 1 find was discovered), the operator intends to file an application for an extension of the existing license or, alternatively, an application for a 30 year lease covering the intended area of production.
With respect to the Med Yavne license, the Joint Operating Agreement has been revised to provide, among other things, that BG will be appointed operator and 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 existing offshore licenses or within any new licenses or within other oil and gas rights which may be obtained in lieu of these offshore licenses.
(NOTE L) - 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% (9.25% at December 31,1999 and 8.75% at December 31, 1998) and matures in April 2000, as amended 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 defined, which is subject to an annual redetermination. Payments of $31,208 per month, plus interest, were required until the April 1, 1999 redetermination date. The borrowing base at December 31, 1999 and 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. Future principal payments on the bank loan facility as of December 31, 1999 are $1,404,395 in 2000.
(NOTE M) - 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.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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):
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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)
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The following table represents the Company's net interest in estimated quantities of proved developed and undeveloped reserves of crude oil, condensate, natural gas liquids and natural gas and changes in such quantities at December 31, 1999, 1998 and 1997, and for the years 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 reserves 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 $23.74 per barrel and $2.85 per Mcf, respectively, at December 31, 1999.
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 Revisions of previous estimates ............ 57,843 245,207 Acquisition of minerals in place ........... -- -- Sales of minerals in place ................. (4,200) (195,500) Production ................................. (23,200) (409,668) ---------- ----------
December 31, 1999 .......................... 182,423 3,923,499 ========== ==========
The Company's proved developed reserves are as follows:
Oil BBls Gas Mcf -------- -------
December 31, 1999 .......................... 182,423 3,040,710 December 31, 1998 .......................... 151,435 3,384,986 December 31, 1997 .......................... 115,396 4,788,548
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.
ISRAMCO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The standardized measure is intended only to assist financial statement users in making comparisons among companies.
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 each year end.
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 years ended December 31, 1999, 1998 and 1997 were as follows:
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
Selected Quarterly Financial Data (amounts in thousands, except per share data) (Unaudited):
(1) Includes a increase in fourth quarter due to a gain on marketable securities of $1.2 million (2) Includes a increase in fourth quarter due to gains on sales of oil and gas properties of $0.8 million