UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
MARK ONE:
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-12500
ISRAMCO, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3145265
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation)
4801 Woodway Drive Suite 100E Houston Texas 77056
(Address of Principal Executive Offices)
713-621-3882
(Registrant's Telephone Number, including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Act of 1933.
Yes [ ] No [x]
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this Form, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller Reporting Company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act). Yes [ ] No [x]
As of March 31, 2008 there were 2,717,691 shares of the Registrant's common
stock par value $0.01 per share ("Common Stock") outstanding. The aggregate
market value of the Common Stock held by non-affiliates of the Registrant at
June 30, 2007, based on the last sale price of such equity reported on the
Nasdaq market, was approximately $59.7 million.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for in Items 10, 11, 12 and 14 in Part III will be
contained in the issuer's definitive proxy statement which the issuer intends to
file within 120 days after the end of the Issuer's fiscal year ended December
31, 2007 and such information is incorporated herein by reference.
ISRAMCO, INC.
2007 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS.........................................
ITEM 2. DESCRIPTION OF PROPERTY.........................................
ITEM 3. LEGAL PROCEEDINGS...............................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........
ITEM 6. SELECTED FINANCIAL DATA.........................................
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION.....
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.....
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................
ITEM 9A. CONTROLS AND PROCEDURES.........................................
ITEM 9B. OTHER INFORMATION...............................................
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT...................
ITEM 11. EXECUTIVE COMPENSATION..........................................
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.....................................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................
ITEM 14. PRINCIPAL ACCOUNTANT FEES & SERVICES............................
ITEM 15. EXHIBITS........................................................
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS MADE IN THIS ANNUAL REPORT ON FORM 10-K ARE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH AS
"MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS", "ANTICIPATES", "BELIEVES",
"ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE NEGATIVE OF THESE TERMS OR OTHER
COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT LIMITATION, STATEMENTS BELOW
REGARDING EXPLORATION AND DRILLING PLANS, FUTURE GENERAL AND ADMINISTRATIVE
EXPENSES, FUTURE GROWTH, FUTURE EXPLORATION, FUTURE GEOPHYSICAL AND GEOLOGICAL
DATA, GENERATION OF ADDITIONAL PROPERTIES, RESERVES, NEW PROSPECTS AND DRILLING
LOCATIONS, FUTURE CAPITAL EXPENDITURES, SUFFICIENCY OF WORKING CAPITAL, ABILITY
TO RAISE ADDITIONAL CAPITAL, PROJECTED CASH FLOWS FROM OPERATIONS, OUTCOME OF
ANY LEGAL PROCEEDINGS, DRILLING PLANS, THE NUMBER, TIMING OR RESULTS OF ANY
WELLS, INTERPRETATION AND RESULTS OF SEISMIC SURVEYS OR SEISMIC DATA, FUTURE
PRODUCTION OR RESERVES, LEASE OPTIONS OR RIGHTS, PARTICIPATION OF OPERATING
PARTNERS, CONTINUED RECEIPT OF ROYALTIES, AND ANY OTHER STATEMENTS REGARDING
FUTURE OPERATIONS, FINANCIAL RESULTS, OPPORTUNITIES, GROWTH, BUSINESS PLANS AND
STRATEGY. BECAUSE FORWRD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES,
THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. ALTHOUGH
THE COMPANY BELIEVES THAT EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING
STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES
RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THESE FORWARD-LOOKING
STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY FORWARD-LOOKING
STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL
RESULTS.
PART I
ITEM 1. BUSINESS
GENERAL
Isramco, Inc., a Delaware corporation incorporated in 1982, together with its
wholly-owned subsidiaries, Isramco Energy LLC ("IEN"), Jay Petroleum LLC ("Jay
Petroleum") and Jay Management LLC ("Jay Management") (collectively "Isramco" or
the "Company"), explores for, develops and produces natural gas and crude oil in
the United States of America (United States), and in Israel. Isramco's principal
producing and exploring areas are further described in "Exploration, development
and production" below. Isramco 's Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports
are made available, free of charge, through its website, as soon as reasonably
practicable after such reports have been filed with the Securities and Exchange
Commission (SEC).
At December 31, 2007, Isramco's total estimated net proved reserves were 50,353
million cubic feet equivalent (MMcfe), of which 25,352 million cubic feet (Mcf)
were natural gas reserves, 2,003 thousand barrels (Bbl) were crude oil and 2,164
thousand barrels (Bbl) were natural gas liquids (see "Supplemental Information
to Consolidated Financial Statements").
Isramco's business strategy is to maximize the rate of return on investment of
capital by controlling operating and capital costs, acquiring of strategic
Oil&Gas properties and improving the existing Oil & Gas properties. Over the
course of 2007, Isramco has expanded its activities in the United States through
the combination of strategic acquisitions and continued development of existing
proved and unproved properties. An additional important goal for implementing
the Isramco's business strategy is to maintain the lowest possible operating
cost structure by among other things, serving as operator of a substantial
portion of its oil and natural gas properties, among other things.
On December 31, 2007 the Company sold to I.O.C Israel Oil Company, a related
party, the majority of the Company's Israeli based activities and assets
currently conducted and managed by the Company's Israel branch office, including
its share in Isramco Oil & Gas ,the general partner of Isramco Negev 2 LP
("Negev"). The decision was made in light of the Company's expanding oil and gas
operations in the United States and management's decision that it is the
Company's best interests to focus on the oil and gas operations in the United
States and terminate activities in Israel which, prior to the sale transaction
reported hereunder, comprised a relatively insignificant component of the
Company's overall operations. See "Closure of the Israeli Branch office"
EXPLORATION, DEVELOPMENT AND PRODUCTION
UNITED STATES
Isramco, through its wholly-owned subsidiaries, IEN, Jay Petroleum and Jay
Management is involved in oil and gas exploration, developing, production and
operation of wells in the United States. Isramco owns varying working interests
in oil and gas wells in Louisiana, Texas, Oklahoma and Wyoming and, currently
serves as operator of approximately 270 wells located in Texas and New Mexico.
The following is a summary of significant developments during 2007 and certain
2008 plans.
During 2007, Jay Petroleum participated in the drilling and completion of two
gas wells in Parker County, Texas and had a 15 percent working non-operated
position in approximately 13,000 acres. The objective producing formation is the
Barnett Shale. All the wells are directionally drilled to maximize gas recovery.
The operator is XTO Energy, Inc. in Fort Worth, Texas. As of the date of the
10-K the Company has participated in drilling of 21 wells in the Barnett, 11
wells are producing, one well is shut in, 2 wells are on completion process and
7 wells are waiting for pipeline connection. The pipeline connection was
initiated in late December 2006 and will be completed during the year 2008.
On October 19, 2006, Jay Petroleum and Delek Energy US Inc. ("Delek") each
purchased a 50% working interest in 2,800 non producing Barnett Shale acreages
in Wise County Texas from McCommons Oil Company. Jay Petroleum and Delek each
paid $1.2 million for these rights. In addition, Jay Management LLC and Delek
entered into a joint operating agreement as of October 19, 2006 for Jay
Management to serve as operator of the acreages. A 3D seismic survey of the area
has been carried and one exploratory well are currently planned and expected to
be drilled during the year 2008 and, based on the results thereof, additional
drillings will be considered.
TRANSACTION WITH FIVE STATES. On February 16, 2007, Isramco and Five States
Energy Company, L.L.C. ("Five States") entered into a certain Purchase and Sale
Agreement (the "Purchase Agreement"), pursuant to which
1
Isramco agreed to purchase from Five States, through IEN, certain oil and gas
properties (including 650 oil and gas wells) located in Texas and New Mexico).
The closing of the transactions contemplated in the Purchase Agreement was
completed on March 2, 2007 for an aggregate purchase price of $92 million
(before adjustments). According to an engineering report prepared by an
independent consulting company relating to the properties purchased under the
Purchase Agreement, the estimated proved developed producing reserves are
1,447,161 net barrels of oil, 20,078,174 net MCF's of natural gas and 1,305,705
net barrels of natural gas liquids. Isramco funded $7.7 million of the Purchase
Price from working capital and the balance from a combination of commercial bank
loans and loans from related parties. (See "Financing" below. Additionally,
pursuant to an agreement between Sigma Energy Corporation ("Sigma"), an
unrelated party that originated the transaction with Five States, Isramco and
IEN, IEN paid to Sigma on March 2, 2007, the amount of $300,000 and after Payout
(as defined in the Agreement with Sigma), IEN undertook to assign to Sigma a
direct ownership interests equal to 3.75% of the interests acquired by IEN under
the Purchase Agreement
TRANSACTION WITH GFB LLC AND TRANS REPUBLIC RESOURCES LTD. On February 15, 2008,
Jay Petroleum, entered into Purchase and Sale Agreements (the "Agreements") with
GFB Acquisition - I, L.P. ("GFB") and Trans Republic Resources, Ltd. ("Trans
Republic," and, together with GFB, the "Sellers") pursuant to which Jay
Petroleum agreed to purchase the Sellers' interests in certain oil and gas
properties located in Texas, New Mexico and Oklahoma for an aggregate purchase
price of approximately $102 million. The transaction includes mainly operated
oil and gas properties in approximately 40 fields (approximately 490 Leases) in
East Texas, Texas Gulf Coast, Permian, Anadarko and San Juan Basins. Significant
fields are the Alabama Ferry Field in East Texas, the Bagley Field in West Texas
and New Mexico, and the Esperson Dome Field on the Texas Gulf Coast. Net daily
production from the properties is approximately 600 Barrels of oil and 3.6 MMCF.
Based on a third party Consulting firm that has performed a reserve report as of
January 1, 2008, total net proved reserves are approximately 3.26 million
barrels of oil and 18 BCF of natural gas. Contemporaneously with the execution
of the Agreements, the Company paid to GFB a deposit of approximately $10
million (the "Deposit"). The final Purchase Price is subject to adjustment, as
specified in the Purchase Agreement. The closing of the transaction was on March
27, 2008.
For funding the Oil and Gas Properties acquired from GFB LLC and Trans Republic
Resources Ltd. (see Note 19) the Company obtained, during 2008, loans in the
total principle amount of $102.9 million from commercial bank ($54 million) and
from related parties ($48.9 million).
Contemporoneously with cosigning the agreement, the Company entered to swap
agreements with the commercial bank to sell 605,016 barrels of crude oil during
48 months commencing April 1, 2008 and 3,433,348 MMBTU of natural gas during 48
months commencing April 1, 2008, which constitutes 74% out of the forecasted
production for 2008-2011 and 18% out of the forecasted production for 2012.
The following pro forma information assumes the acquisition of the GFB and Trans
Republic properties occurred as of January 1, 2007
--------------------------------------------------------------------------------
ISRAMCO INC COMBINED
December 31, 2007 ISRAMCO INC GFB ACQUISITION WITH GFB
--------------------------------------------------------------------------------
RESERVES
PROVED (MMCFE) 50,353 37,694 88,047
Oil (BBls) 2,003,081 3,258,447 5,261,528
Plant Product (BBls) 2,163,661 - 2,163,661
Gas (Mcf) 25,352,566 18,143,838 43,496,404
VOLUME
Oil (BBls) 96,793 220,487 317,280
Plant Product (BBls) 100,534 - 100,534
Gas (Mcf) 1,550,789 1,338,926 2,889,715
TOTAL PRODUCTION (MMCFE ) 2,735 2,662 5,397
Daily production (MMfce/d) 7.5 7.3 14.8
ISRAEL
MED YAVNE LEASE. Based on the gas finds known as "Or 1" nd "Or South", a 30
years lease, which covers 53 square kilometers (approximately 13,100 acres)
offshore Israel, was granted to the Company in June 2000 (hereinafter: the "Med
Yavne Lease"). The operator of the Med Yavne Lease is BG International Limited,
a member of the British Gas Group ("BG").
According to the operator's estimates, which are based on the results of the
drillings in the Or 1, and a 3D
2
seismic survey performed in the area of the lease, the recoverable gas reserves
of Or 1 reserve are estimated at 37 billion cubic feet. In November 2002 and in
January 2007 and January 2008, Isramco received an opinion from a consulting
firm in the United States that performed a techno-economic examination for the
development of the Or 1 reserve. The opinion indicates that, under certain
assumptions, development of the reserve by connection to a nearby platform (at a
distance of seven miles) and from there via an existing transportation pipeline
to the coast, may be economically feasible. It is the intention of the partners
in Med Yavne Lease to cooperate with independent third parties to jointly
develop Or 1 reserve with their gas reserve.
Isramco's participation interest of the Med Yavne Lease is 0.4585%.
HOF LICENSES. On February 2008 the Petroleum Commissionaire has granted the
company a license which covers 100,000 acres offshore Israel. According to the
License terms the participants are required to drill one well in the license's
area in a dates specified in the license. The Company has sold 40% working
interests in the license in return to 10% carried working interests (up to
investment of $4,000,000 in the license). Currently Isramco's participation
interest of the Hof Licenses is 59% but it intends to sell additional 39%
working interest in the same terms as mentioned above.
MED ASHDOD 2. On February 2008 the Petroleum Commissionaire granted the company
a license that covers 100,000 acres offshore Israel. According to the License
terms the participants are required to drill one well in the license's area in a
dates specified in the license.
The table below sets forth the Working Interests of Isramco and all related and
unrelated participants in the lease and licenses in Israel, the total acreage
and the expiration dates of each of the licenses and the lease as of December
31, 2007.
TABLE OF WORKING INTEREST
(% INTEREST OF 100%)
NAME OF PARTICIPANT MED YAVNE LEASE MED ASHDOD 2 LICENSE HOF
License
Isramco 0.4584 0.35 59.00(3)
Related parties
Isramco Negev 2, Limited 32.411 21.05 30.00
Partnership
I.O.C. 7.800 7.800 1.00
I.N.O.C. Dead Sea -- 5.05 5.00
Limited Partnership
Naphtha 1.8033 1.80 --
Naphtha Explorations 2.2826 1.85 5.00
Limited Partnership
JOEL 2.8807 -- --
Equital 2.1639 -- --
Unrelated parties 54.215 62.1 --
Total 100.000 100.00 100.00
Area (acres) 13,100 100,000 100,000
Expiration Date (2) 6/10/2030 2/14/2011 2/14/2011
(1) All of the oil and gas assets are subject to a 12.5% Overriding Royalty due
to the Government of Israel under the Petroleum Law.
(2) The expiration dates are 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 leases. the area.
3
(3) The Company intends to transfer 39% to third party.
OVERRIDING ROYALTIES. Isramco holds Overriding Royalties in certain oil and gas
assets. Additionally, Isramco is entitled to receive from certain participant in
the Med Yavne lease overriding royalties equal to 2% of each such participant's
rights to any oil/gas produced within those leases. The table below sets forth
the Overriding Royalties held by Isramco:
From the Limited Partnership, on the first 10% of the Limited Partnership's
share of the following leases
Before Payout After Payout
Med Yavne Lease (1) 1% 13%
Michal & Matan Licenses
from Isramco Negev 2, Limited Partnership 5%
(1) A 30 year lease covering an area of approximately 13,100 acres (including
the area of the gas discovery) was granted in June 2000.
FINANCING ACTIVITIES
TRANSACTION WITH FIVE STATES.
Isramco funded $7.7 million of the purchase price for the Five States
transaction from working capital and the balance from a combination of
commercial bank loans and loans from related parties. The loans are discussed
below.
Isramco obtained loans in the total principle amount of $42 million from Naphtha
Israel Petroleum Corp. Ltd., the parent company (including through its wholly
owned subsidiary IOC-Israel Oil Company Ltd) ("Naphtha") with terms and
conditions as below:
Pursuant to a Loan Agreement dated as of February 27, 2007 (the "Loan
Agreement"), Isramco obtained $18.5 million. The outstanding principal amount of
the loan accrues interest at per annum rate equal to the London Inter-bank
Offered Rate (LIBOR) plus 5.5%, not to exceed 11% per annum. Interest is payable
at the end of each loan year. Principal plus any accrued and unpaid interest are
due and payable on February 26, 2014. Interest after the maturity date accrues
at the per annum rate of LIBOR plus 12% until paid in full. At any time, Isramco
is entitled to prepay the outstanding amount of the loan without penalty or
prepayment. To secure its obligations that may be incurred under the Loan
Agreement, Isramco agreed to grant to Naphtha a security interest in certain
specified properties held by Jay Petroleum, its wholly owned subsidiary. Naphtha
can accelerate the loan and exercise its rights under the collateral upon the
occurrence any one or more of the following events of default: (i) Isramco's
failure to secure the indebtedness as provided for in the agreement, pay any
amount that may become due in connection with the loan within five (5) days of
the due date (whether by extension, renewal, acceleration, maturity or
otherwise) or fail to make any payment due under any hedge agreement entered
into in connection with the transaction, (ii) Isramco's material breach of any
of the representations or warranties made in the loan agreement or security
instruments or any writing furnished pursuant thereto, (iii) Isramco's failure
to observe any undertaking contained in transaction documents if such failure
continues for 30 calendar days after notice, (iv) Isramco's insolvency or
liquidation or a bankruptcy event or(v) Isramco's criminal indictment or
conviction under any law pursuant to which such indictment or conviction can
lead to a forfeiture by Isramco of any of the properties securing the loan. Mr.
Jackob Maimon, Isramco's president and director is a director of Naphtha and Mr.
Haim Tsuff, Isramco's Chief Executive Officer and Chairman is a controlling
shareholder of Naphtha. The proceeds of $13.6 million from the selling of the
branch's assets were used to repay part of loan (see "closure of the branch").
Pursuant to a Loan Agreement dated as of February 27, 2007 (the "Second Loan
Agreement") Isramco obtained a loan from Naphtha, in the principal amount of
$11.5 million, repayable at the end of seven years. Interest accrues at a per
annum rate of LIBOR plus 6%. At any time Isramco can make prepayments without
premium or penalty .The Second Loan is not secured. The other terms of the
Second Loan Agreement are identical to the terms of the Loan Agreement. Pursuant
to a Loan Agreement dated as of February 27, 2007 (the "Third Loan Agreement ")
Isramco obtained a loan from Naphtha, in the principal amount of $12
4
million, repayable at the end of five years. Interest accrues at a per annum
rate of LIBOR plus 6%. At any time Isramco can make prepayments without premium
or penalty. The Third Loan is not secured. The other terms of the Third Loan
Agreement are identical to the terms of the Loan Agreement.
Pursuant to a Loan Agreement dated as of February 26, 2007 Isramco obtained a
loan from J.O.E.L Jerusalem Oil Exploration Ltd, a related party ("JOEL"), in
the principal amount of $7 million, repayable at the end of 3 months (that was
extended until July 11, 2007). Interest accrues at a per annum rate of 5.36%. On
July 2007 the Company and J.OEL reached an agreement to revise the period of the
Loan to seven years and the interest rate to LIBOR plus 6%. Mr. Jackob Maimon,
Isramco's president and director is a director of JOEL and Mr. Haim Tsuff,
Isramco's Chief Executive Officer and Chairman is a controlling shareholder of
JOEL.
Pursuant to a Credit Agreement, dated as of March 2, 2007 (the "Credit
Agreement") between Isramco Energy and Wells Fargo Bank NA, as administrative
agent, Isramco Energy obtained a $35.3 million credit line from Wells Fargo.
Amounts outstanding under the credit line are payable by March 1, 2011. Interest
on amounts outstanding accrue at a per annum rate equal to LIBOR plus 2%. An
Event of Default under the Credit Agreement shall be deemed to have occurred in
the event of any one or more of the following: (a) Isramco Energy shall default
in the payment or prepayment when due of any principal of or interest on any
loan, or any reimbursement obligation for a disbursement made under any letter
of credit, or any fees or other amount payable by it under the Credit Agreement
or any of the documents entered into in connection therewith (the "Credit
Agreement Documents"); (b) Isramco Energy or any of its subsidiaries shall
default in the payment when due of any principal of or interest on any of its
other debt, or any event specified in any note, agreement, indenture or other
document evidencing or relating to any such debt shall occur if the effect of
such event is to cause, or (with the giving of any notice or the lapse of time
or both) to permit the holder or holders of such debt (or a trustee or agent on
behalf of such holder or holders) to cause, such debt to become due prior to its
stated maturity; (c) Any representation, warranty or certification made or
deemed made pursuant to the Credit Agreement or any other Credit Agreement
Document, or any certificate furnished pursuant to the provisions thereof, shall
prove to be have been false or misleading as of the time made or furnished in
any material respect; (d) Isramco Energy shall (i) default in the performance of
any of its obligations under the Credit Agreement (including the obligation to
provide audited financial statements on an annual basis and the obligation to
report any default, but excluding other affirmative covenants) or (ii) default
in the performance of any of the affirmative covenants under the Credit
Agreement (excluding the obligation to provide audited financial statements on
an annual basis and the obligation to report any default) or in the performance
of its obligations under any other Credit Agreement Document (other than payment
obligations, which are governed by clause (a) above) and such default shall
continue unremedied for a period of thirty (30) days after the earlier to occur
of (A) Isramco Energy receiving notice thereof or (B) Isramco Energy otherwise
becoming aware of such default; (e) Isramco or any of Isramco Energy's
subsidiaries shall default in the performance of any of their respective
obligations under the guaranty agreements entered into pursuant to the Credit
Agreement (other than the payment of amounts due, which shall have no grace
period) and such default shall continue unremedied for a period of thirty (30)
days after the earlier to occur of (i) Isramco receiving notice thereof or (ii)
Isramco, Isramco Energy or any of its subsidiaries otherwise becoming aware of
such default; (f) Isramco Energy shall admit in writing its inability to, or
begenerally unable to, pay its debts as such debts become due; (g) Isramco
Energy shall (i) apply for or consent to the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator of itself or all or
a substantial part of its property, (ii) make a general assignment for the
benefit of creditors, (iii) commence a voluntary case under the Federal
Bankruptcy Code (as now or hereafter in effect), (iv) file a petition seeking to
take advantage of any other law relating to bankruptcy, insolvency,
reorganization, winding-up, liquidation or composition or readjustment of debts,
(v) fail to controvert in a timely and appropriate manner, or acquiesce in
writing to, any petition filed against it in an involuntary case under the
Federal Bankruptcy Code or (vi) take any corporate action for the purpose of
effecting any of the foregoing; (h) A proceeding or case shall be commenced,
without the application or consent of Isramco Energy, in any court of competent
jurisdiction, seeking (i) its liquidation, reorganization, dissolution or
winding-up, or the composition or readjustment of its debts, (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like of Isramco
Energy or all or any substantial part of its assets, (iii) similar relief in
respect of Isramco Energy under any law relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts, and such
proceeding or case shall continue undismissed, or an order, judgment or decree
approving or ordering any of the foregoing shall be entered and continue
unstated and in effect, for a period of 60 days, or (iv) an order for relief
against Isramco Energy shall be entered in an involuntary case under the federal
bankruptcy code; (i) A judgment or judgments for the payment of money in excess
of $100,000 in the aggregate shall be rendered by a court against Isramco Energy
or any subsidiary and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured by posting of a bond or otherwise, within thirty (30) days from the
date of entry thereof and Isramco Energy or such subsidiary shall not, within
said period of 30 days, or such longer period during which execution of the same
shall have been stayed, appeal therefrom and cause the execution thereof to be
stayed during such appeal; (j) The Credit Agreement Documents after delivery
thereof shall for any reason, except to the extent permitted by the terms
thereof, cease to be in full force and effect and valid, binding and enforceable
in accordance with their terms, or cease to create a valid and perfected lien of
the priority
5
required thereby on any of the collateral purported to be covered thereby,
except to the extent permitted by the terms of the Credit Agreement, or Isramco,
Isramco Energy or any of its subsidiaries shall so state in writing; (k) An
event having a material adverse effect on Isramco Energy shall occur; (l)
Isramco Energy discontinues its usual business or a change of control occurs;
(m) Isramco or any of Isramco Energy's subsidiaries takes, suffers or permits to
exist any of the events or conditions referred to in paragraphs (f), (g), (h) or
(i) or if any provision of any guaranty agreement related thereto shall for any
reason cease to be valid and binding on such guarantor or if such guarantor
shall so state in writing; (n) Isramco Energy defaults under certain management,
operating and consulting agreements entered into with respect to properties for
which the lender has a security interest.
In addition to including customary affirmative and negative covenants, the
Credit Agreement requires Isramco Energy to: (a) maintain a ratio of
consolidated current assets (as defined in the Credit Agreement) to consolidated
current liabilities (as defined in the Credit Agreement) of no less than 1.0 to
1.0 at all times; (b) ensure that its leverage ratio is no more than 3.50 to 1.0
as of the end of each fiscal quarter; (c) ensure that its interest coverage
ratio is no more than 2.50 to 1.0 as of the end of each fiscal quarter; (d)
ensure that its capital expenditures in any fiscal year do not exceed
$2.500,000.; ensure that COPAS charges do not exceed $250 per well per month.
Amounts outstanding under the Credit Agreement are secured by a guarantee from
Isramco and a pledge by Isramco of the shares of Isramco Energy. During 2007 the
Company repaid $8.3 million.
TRANSACTION WITH GFB LLC AND TRANS REPUBLIC RESOURCES LTD.
For funding the Oil and Gas Properties acquired from GFB LLC and Trans Republic
Resources Ltd. (see Note 19) the Company obtained, during 2008, loans in the
total principle amount of $102.9 million as described below:
On March 27, 2008 Isramco obtained a loan from JOEL, a related party, in the
principal amount of $48.9 million, repayable at the end of 7 years. Interest
accrues at a per annum rate of LIBOR plus 6%. Mr. Jackob Maimon, Isramco's
president and director is a director of JOEL and Mr. Haim Tsuff, Isramco's Chief
Executive Officer and Chairman is a controlling shareholder of JOEL.
Pursuant to a Credit Agreement, dated as of March 27, 2008 (the "Credit
Agreement") between Isramco and the Bank of Nova Scotia ("Scotia"), as
administrative agent, Isramco obtained a $54 million credit line from Scotia.
Amounts outstanding under the credit line are payable by March 27, 2012.
Interest on amounts outstanding accrue at a per annum rate equal to LIBOR plus
2%. The credit agreement contains covenant that the company needs to comply
with.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Isramco engages in price risk management activities from time to time. These
activities are intended to manage Isramco's exposure to fluctuations in
commodity prices for natural gas and crude oil. Isramco utilizes financial
commodity derivative instruments, primarily price swap contracts, as the means
to manage this price risk. Isramco accounts for financial commodity derivative
contracts using the mark-to-market accounting method.
As of balance sheet date Isramco held swap contracts for aggregrate volume of
389,508 barrels of crude oil during 46 months commencing January 2008, and swap
contracts for volume of 3,014,556 MMBTU of natural gas during 35 months
commencing January 2008.
On February 20, 2008 the Company signed additional swap contract with commercial
bank for aggregrate volume of 25,000 barrels of crude oil during 10 months
commencing January 2011.
Following the cosigning of the Agreements with GFB and Trans Republic., Isramco
signed additional swap contracts with Scotia Bank to secure its future oil and
gas prices as follows:
Swap contracts for aggregrate volume of 605,016 barrels of crude oil during 48
months commencing April 2008. Swap contracts for volume of 3,433,348 MMBTU of
natural gas during 48 months commencing April 2008.
Hereunder are the open swap contracts positions as of March 26, 2008:
6
Swap Contracts
-------------------------------------------------------------------------------
Natural Gas Crude Oil
--------------------------------- -------------------------------
Weighted Weighted
Average Average
Volume Price Volume Price
(MMBTU) ($/MMBTU) (BBL) ($/BBL)
--------- -------- ------- ---------
2008 1,782,118 $ 8.49 255,000 $ 79.12
2009 1,941,096 8.17 276,648 79.60
2010 1,785,648 7.88 245,616 78.75
2011 764,820 8.22 210,307 87.53
2012 174,222 8.65 31,953 88.20
CLOSURE OF THE ISRAELI BRANCH OFFICE
On December 31, 2007, Isramco and I.O.C- Israel Oil Company Ltd, an Israeli
company and related party ("IOC"), entered into an agreement pursuant to which
the Company sold and transferred to IOC its Israeli based activities and assets
currently conducted and managed by the Company's Israel branch office (the
"Branch Office") and its own shares in Isramco Oil&Gas (the general partner of
Negev 2 LP), for aggregate consideration of approximately $13.6 million.
Following the sale of these assets, the Company no longer conducts operations in
Israel though it will continue to hold working interests in certain oil and gas
assets offshore Israel. The decision was made in light of the Company's
expanding oil and gas operations in the United States of America and
management's decision that it is the Company's best interests to focus on the
oil and gas operations in the United States of America and terminate activities
in Israel which, prior to the sale transaction reported hereunder, comprised a
relatively insignificant component of the Company's overall operations.
The principal assets transferred to IOC include participation units in the
Israeli oil and gas limited partnerships Isramco Negev 2 ("Negev") and INOC Dead
Sea ("Dead Sea"), both of which were held by the Branch Office. The
participation units of each of Negev and Dead Sea trade on the Tel Aviv Stock
Exchange. The sale of the units was completed through a private non-market
transaction with IOC where the sale price of the Negev and Dead Sea units was
established at, respectively, a 7% and 10% discount to the closing sale price of
these units on the Tel Aviv Stock Exchange on December 30, 2007. The discounts
were established by an independent appraiser. The Branch Office also transferred
to IOC all operating activities at the Branch Office, including, employees,
fixed assets, marketable securities and certain rights and liabilities, as well
as the Company's holdings of Isramco Oil and Gas Ltd. and title to undeveloped
real estate located in Israel.
IOC is a wholly-owned subsidiary of Naphtha Israel Petroleum Corp, Ltd.
("Naphtha"). Naphtha holds 100% of Naphtha Holdings Ltd. , which holds
approximately 48% of the Company's issued and outstanding stock.
Since this is a transaction between entities under common control, the Company
recorded the loss of approximately $3,046 million from the transaction, as a
reduction of shareholders' equity (additional paid in capital).
The proceeds of the sale were used by the Company to pay down part of certain
loan that Naphtha advanced to the Company in March 2007 for purposes of enabling
the Company to complete the acquisition from Five States of certain oil and gas
properties in the United States.
EMPLOYEES
As of March 28, 2008, Isramco had 7 employees at its office in Houston, Texas.
ITEM 1A. RISK FACTORS
In addition to the other information contained in this Annual Report on Form
10-K, investors should consider carefully the following risks factors which may
not be the only risks we face, as our business and operations may also be
subject to risks that we do not yet know of, or that we currently believe are
immaterial. If any of the events or circumstances described below actually
occurs, our business, financial condition or results of operations could be
materially and adversely affected and the trading price of our common stock
could decline.
OIL AND GAS DRILLING IS A SPECULATIVE ACTIVITY AND RISKY.
Isramco is engaged in the business of oil and natural gas exploration and the
resulting development of productive oil and gas wells. Isramco's growth will be
materially dependent upon the success of its future drilling program. Drilling
for oil and gas involves numerous risks, including the risk that no commercially
productive oil or natural gas reservoirs will be encountered. The cost of
drilling, completing and operating wells is substantial and uncertain, and
drilling operations may be curtailed, delayed or cancelled as a result of a
variety of factors beyond Isramco's control, including unexpected drilling
conditions, pressure or irregularities in formations, equipment failures or
accidents, adverse weather conditions, compliance with governmental requirements
and shortages or delays in the availability of drilling rigs or crews and the
delivery of equipment. Although Isramco believes that its use of 3-D seismic
data and other advanced
7
technology should increase the probability of success of its wells and should
reduce average finding costs through elimination of prospects that might
otherwise be drilled solely on the basis of 2-D seismic data and other
traditional methods, drilling remains an inexact and speculative activity. In
addition, the use of 3-D seismic data and such technologies requires greater
pre-drilling expenditures than traditional drilling strategies and Isramco could
incur losses as a result of such expenditures. Isramco's future drilling
activities may not be successful and, if unsuccessful, such failure could have
an adverse effect on Isramco's future results of operations and financial
condition. Although Isramco may discuss drilling prospects that have been
identified or budgeted for, Isramco may ultimately not lease or drill these
prospects within the expected time frame, or at all. Isramco may identify
prospects through a number of methods, some of which do not include
interpretation of 3-D or other seismic data. The drilling and results for these
prospects may be particularly uncertain. The final determination with respect to
the drilling of any scheduled or budgeted wells will be dependent on a number of
factors, including (i) the results of exploration efforts and the acquisition,
review and analysis of the seismic data, (ii) the availability of sufficient
capital resources to Isramco and the other participants for the drilling of the
prospects, (iii) the approval of the prospects by other participants after
additional data has been compiled, (iv) economic and industry conditions at the
time of drilling, including prevailing and anticipated prices for oil and
natural gas and the availability of drilling rigs and crews, (v) Isramco's
financial resources and results (vi) the availability of leases and permits on
reasonable terms for the prospects and (vii) the payment of royalties to
lessors. There can be no assurance that these projects can be successfully
developed or that the wells discussed will, if drilled, encounter reservoirs of
commercially productive oil or natural gas. There are numerous uncertainties in
estimating quantities of proved reserves, including many factors beyond
Isramco's control.
THE OIL AND NATURAL GAS RESERVE DATA INCLUDED IN THIS REPORT ARE ONLY ESTIMATES
AND THAT MAY TURN OUT TO BE INACCURATE.
There are numerous uncertainties inherent in estimating oil and natural gas
reserves and their estimated values. The reserve data in this report represent
only estimates that may prove to be inaccurate because of these uncertainties.
Estimates of economically recoverable oil and natural gas reserves depend upon a
number of variable factors, such as historical production from the area compared
with production from other producing areas and assumptions concerning effects of
regulations by governmental agencies, future oil and natural gas prices, future
operating costs, severance and excise taxes, development costs and workover and
remedial costs, some or all of these assumptions may in fact vary considerably
from actual results. For these reasons, estimates of the economically
recoverable quantities of oil and natural gas attributable to any particular
group of properties, classifications of such reserves based on risk of recovery,
and estimates of the future net cash flows expected therefrom prepared by
different engineers or by the same engineers but at different times may vary
substantially. Accordingly, reserve estimates may be subject to downward or
upward adjustment. Actual production, revenue and expenditures with respect to
Isramco's reserves will likely vary from estimates, and such variances may be
material.
THERE IS A POSSIBILITY THAT ISRAMCO WILL LOSE THE LEASES TO ITS OIL AND GAS
PROPERTIES.
Isramco's oil and gas revenues are generated through leases to the oil and gas
properties or, in the case of Israeli based properties, licenses that, subject
to certain conditions, may result in leases being granted. The leases are
subject to certain obligations and are renewable at the discretion of various
governmental authorities, as such, Isramco may not be able to fulfill its
obligations under the leases which may result in the modification or
cancellation of such leases, or such leases may not be renewed or may be renewed
on terms different from the current leases. The modification or cancellation of
Isramco's leases may have a material impact on Isramco's revenues.
COMPETITION IN THE INDUSTRY MAY IMPAIR ISRAMCO'S ABILITY TO EXPLORE, DEVELOP AND
COMMERCIALIZE ITS OIL AND GAS PROPERTIES.
The oil and natural gas industry is very competitive. Competition is
particularly intense in the acquisition of prospective oil and natural gas
properties and oil and gas reserves. Isramco competes with a substantial number
of other companies having larger technical staffs and greater financial and
operational resources. Many such companies not only engage in the acquisition,
exploration, development and production of oil and natural gas reserves, but
also carry on refining operations, electricity generation and the marketing of
refined products. Isramco also competes with major and independent oil and gas
companies in the marketing and sale of oil and natural gas, and the oil and
natural gas industry in general competes with other industries supplying energy
and fuel to industrial, commercial and individual consumers. Isramco competes
with other oil and natural gas companies in attempting to secure drilling rigs
and other equipment necessary for drilling and completion of wells. Such
equipment may be in short supply from time to time.
ISRAMCO'S BUSINESS MAY BE AFFECTED BY OIL AND GAS PRICE VOLATILITY.
Historically, natural gas and oil prices have been volatile. These prices rise
and fall based on changes in
8
market demand and changes in the political, regulatory and economic climate and
other factors that affect commodities markets that are generally outside of
Isramco's control. Some of Isramco's projections and estimates are based on
assumptions as to the future prices of natural gas and crude oil. These price
assumptions are used for planning purposes. Isramco expects that its assumptions
will change over time and that actual prices in the future may differ from its
estimates. Any substantial or extended decline in the actual prices of natural
gas and/or crude oil may have a material adverse effect on Isramco's financial
position and results of operations (including reduced cash flow and borrowing
capacity), the quantities of natural gas and crude oil reserves that it can
economically produce and the quantity of estimated proved reserves that may be
attributed to its properties
OUR HEDGING ACTIVITIES MAY PREVENT US FROM BENEFITING FROM PRICE INCREASES AND
MAY EXPOSE US TO OTHER RISKS.
From time to time, we use derivative instruments (primarily price swaps) to
hedge the impact of market fluctuations of natural gas and crude oil prices on
our net income and cash flow. To the extent that we engage in hedging
activities, we may be prevented from realizing the benefits of price increases
above the levels of the hedges.
ISRAMCO HAS NO MEANS TO MARKET ITS OIL AND GAS PRODUCTION WITHOUT THE ASSISTANCE
OF THIRD PARTIES.
The marketability of Isramco's production depends upon the proximity of its
reserves to, and the capacity of, facilities and third party services, including
oil and natural gas gathering systems, pipelines, trucking or terminal
facilities, and processing facilities. The unavailability or lack of capacity of
such services and facilities could impair or delay the production of new wells
or the delay or discontinuance of development plans for properties. A shut-in or
delay or discontinuance could adversely affect Isramco's financial condition. In
addition, regulation of oil and natural gas production transportation in the
United States or in other countries may affect its ability to produce and market
its oil and natural gas on a profitable basis.
THE UNAVAILABILITY OR INCREASED COST OF DRILLING RIGS, EQUIPMENT, SUPPLIES,
PERSONNEL AND OILFIELD SERVICES COULD ADVERSELY AFFECT ISRAMCO'S ABILITY TO
EXECUTE ON A TIMELY BASIS ON ITS DEVELOPMENT PLANS WITHIN ITS BUDGET.
Shortages or an increase in cost of drilling rigs, equipment, supplies or
personnel could delay or adversely affect Isramco's operations, which could have
a material adverse effect on its business, financial condition and results of
operations. In periods of increased drilling activity, Isramco may experience
increases in associated costs, including those related to drilling rigs,
equipment, supplies and personnel and the services and products of other vendors
to the industry. Increased drilling activity in the Texas area also decreases
the availability of rigs and associated equipment. These costs may increase
further and necessary equipment and services may not be available to us at
economical prices.
ISRAMCO'S OPERATIONS MAY BE IMPACTED BY CERTAIN RISKS COMMON IN THE INDUSTRY.
Isramco's exploration and drilling operations are subject to various risks
common in the industry, including catering, explosions, fires and uncontrollable
flows of oil, gas or well fluids. The drilling operations are also subject to
the risk that no commercially productive natural gas or oil reserves will be
encountered. The cost of drilling, completing and operating wells is often
uncertain, and drilling operations may be curtailed, delayed or canceled as a
result of a variety of factors, including drilling conditions, pressure or
irregularities in formations, equipment failures or accidents and adverse
weather conditions.
In accordance with industry practice, Isramco maintains insurance against some,
but not all, of the risks described above. Isramco cannot provide assurance that
its insurance will be adequate to cover losses or liabilities. Also, it cannot
predict the continued availability of insurance at premium levels that justify
its purchase.
GOVERNMENT REGULATION AND ABILITY FOR ENVIRONMENTAL MATTERS MAY ADVERSELY AFFECT
ISRAMCO'S BUSINESS AND RESULTS OF OPERATIONS.
Oil and natural gas operations are subject to various federal, state and local
government regulations, which may be changed from time to time. Matters subject
to regulation include discharge permits for drilling operations, drilling bonds,
reports concerning operations, the spacing of wells, unitization and pooling of
properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and natural gas wells below actual production capacity in order to conserve
supplies of oil and natural gas. There are federal, state and local laws and
regulations primarily relating to protection of human health and the environment
applicable to the development, production, handling, storage, transportation and
disposal of oil and natural gas, by-products thereof and other substances and
materials produced or used in connection with oil and natural gas operations. In
addition, Isramco may be liable for environmental damages caused by previous
owners of property it purchases or leases. As a result, Isramco may incur
substantial liabilities to third parties or governmental entities. Isramco
9
is also subject to changing and extensive tax laws, the effects of which cannot
be predicted. The implementation of new, or the modification of existing, laws
or regulations could have a material adverse effect on Isramco's business.
ISRAMCO MAY BE UNABLE TO IDENTIFY LIABILITIES ASSOCIATED WITH THE PROPERTIES
THAT IT ACQUIRES OR OBTAIN PROTECTION FROM SELLER AGAINST THEM.
The acquisition of properties requires Isramco to assess a number of factors,
including recoverable reserves, development and operating costs and potential
environmental and other liabilities. Such assessments are inexact and inherently
uncertain. In connection with the assessments, Isramco performs a review of the
subject properties, but such a review will not reveal all existing or potential
problems. In the course of our due diligence, we may not inspect every well,
platform or pipeline. Isramco cannot necessarily observe structural and
environmental problems, such as pipeline corrosion, when an inspection is made.
Isramco may not be able to obtain contractual indemnities from the seller for
liabilities that it created. Isramco may be required to assume the risk of the
physical condition of the properties in addition to the risk that the properties
may not perform in accordance with its expectations.
MEMBERS OF ISRAMCO'S MANAGEMENT TEAM OWE A SIGNIFICANT AMOUNT OF COMMON STOCK,
GIVING THEM INFLUENCE OR CONTROL IN CORPORATE TRANSACTIONS AND OTHER MATTERS,
AND THE INTERESTS OF THESE INDIVIDUALS COULD DIFFER FROM THOSE OTHER
SHAREHOLDERS.
Members of Isramco's management team beneficially own approximately 51.3% of
Isramco's outstanding shares of common stock as of March 28, 2008. As a result,
these shareholders are in a position to significantly influence or control the
outcome of matters requiring a shareholder vote, including the election of
directors, the adoption of an amendment to our articles of incorporation or
bylaws and the approval of mergers and other significant corporate transactions.
RAPID GROWTH MAY PLACE SIGNIFICANT DEMANDS AND RESOURCES.
Isramco experienced rapid growth in operations occasioned by the purchase of
approximately 650 producing oil and gas wells from Five States, approximately
590 producing oil and gas wells from GFB and Trans Republic and expects that
significant expansion of its operations will continue. The rapid growth has
placed, and the anticipated future growth will continue to place, a significant
demand on Isramco's managerial, operational and financial resources due to:
o the need to manage relationships with various strategic partners
and other third parties;
o difficulties in hiring and retaining skilled personnel necessary
to support our business;
o the need to train and manage a growing employee base; and
o pressures for the continued development of our financial and
information management systems.
If Isramco has not made adequate allowances for the costs and risks associated
with this expansion or if its systems, procedures or controls are not adequate
to support its operations, its business could be adversely impacted.
ISRAMCO'S STOCK PRICE IS VOLATILE AND COULD CONTINUE TO BE VOLATILE.
Investor interest in Isramco's common stock may not lead to the development of
an active or liquid trading market. The market price of Isramco's common stock
has fluctuated in the past and is likely to continue to be volatile and subject
to wide fluctuations. In addition, the stock market has experienced extreme
price and volume fluctuations. The stock prices and trading volumes for
Isramco's stock has fluctuated widely and may continue to so for reasons that
may be unrelated to business or results of operations. General economic, market
and political conditions could also materially and adversely affect the market
price of Isramco's common stock and investors may be unable to resell their
shares of common stock at or above their purchase price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
OIL AND GAS EXPLORATION AND PRODUCTION - PROPERTIES AND RESERVES
10
RESERVE INFORMATION. For estimates of Isramco's net proved reserves of natural
gas, crude oil and natural gas liquids, see Supplemental Information to
Consolidated Financial Statements.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the producer. The
reserve data set forth in Supplemental Information to Consolidated Financial
Statements represent only estimates.
Reserve engineering is a subjective process of estimating underground
accumulations of natural gas, crude oil and natural gas liquids that cannot be
measured in an exact manner. The accuracy of any reserve estimate is a function
of the amount and quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates of different engineers
normally vary. In addition, results of drilling, testing and production
subsequent to the date of an estimate may justify revision of such estimate
(upward or downward). Accordingly, reserve estimates are often different from
the quantities ultimately recovered. The meaningfulness of such estimates is
highly dependent upon the accuracy of the assumptions upon which they were
based. For related discussion, see ITEM 1A. Risk factors.
ITEM 3. LEGAL PROCEEDING
From time to time, Isramco is involved in disputes and other legal actions
arising in the ordinary course of business. In management's opinion, none of
these other disputes and legal actions is expected to have a material impact on
Isramco's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders of Isramco.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The number of record holders of Isramco's Common Stock on March 31, 2008 was
approximately 396, not including an undetermined number of persons who hold
their stock in street name.
Our common stock is listed on the Nasdaq Capital Market under the symbol "ISRL".
The following table sets forth for the periods indicated, the reported high and
low closing prices for our common stock.
11
COMMON STOCK
2006 HIGH LOW
March 31 $ 15.33 $ 12.22
June 30 $ 17.98 $ 16.06
September 30 $ 18.55 $ 16.40
December 31 $ 31.66 $ 21.25
2007
March 31 $ 33.16 $ 32.66
June 30 $ 42.91 $ 42.73
September 30 $ 45.89 $ 37.27
December 31 $ 47.47 $ 47.37
Isramco has not declared or paid any cash dividends on its Common Stock. Isramco
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. Isramco intends to retain all earnings for use in its
business operations and in expansion.
ITEM 6. SELECTED FINANCIAL DATA (CONSOLIDATED)
The data presented below with respect to Isramco should be read in conjunction
with the Consolidated Financial Statements and related Notes thereto of Isramco
included elsewhere in this Report and Item 7-- "Management's Discussion and
Analysis of Financial Condition and Results of Operations." (in Thousands)
----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2007 2006 2005 2004
----------------------------------------------------------------------------------------------------------------------
Statement of Income Data:
Total Revenues $ 22,756 $ 5,562 $ 5,895 $ 5,448
Oil and Gas Sales 20,827 2,167 3,319 3,174
Total Operating Expenses 21,183 4,777 6,428 4,816
Lease Operating Expenses, Transportation and Taxes 7,500 1,119 1,458 1,149
Impairment of Oil&Gas properties 3,203 668 759 268
Interest Expenses (Income), net 6,344 (154) (293) 636
Loss (gain) from Swap Transactions 8,638 (2,604) 641 --
Income (Loss) from Continuing Operations (6,411) 6,569 (253) 1,424
(Loss) from Discontinuing Operations -- (2,727) (879) (431)
--------------------------------------------------------------
Net Income (Loss) $ (6,411) $ 3,842 $ (1,132) $ 993
==============================================================
Basic and Diluted Earnings (Loss) Per Common Share-
Basic and Diluted:
Continuing Operations $ (2.36) $ 2.42 $ (0.09) $ 0.54
Discontinuing Operations -- (1.01) (0.33) (0.16)
--------------------------------------------------------------
Total $ (2.36) $ 1.41 $ (0.42) $ 0.38
==============================================================
Weighted Average Number of
Common Shares Outstanding - Basic and Diluted 2,717,691 2,717,691 2,709,355 2,639,853
==============================================================
----------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31 2007 2006 2005
----------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Total assets $ 110,708 $ 62,073 $ 38,615
Total liabilities 85,237 27,329 10,122
Long-term obligations 73,964 4,768 3,242
Shareholders' equity 25,471 34,744 28,493
--------------------------------------------------------------
12
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS FORM 10-K.
THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL
PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY THESE FORWARD-LOOKING STATEMENTS BY
TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "PLAN," "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "PREDICT," "POTENTIAL," "INTEND," OR "CONTINUE," AND
SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. OUR ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS
AS A RESULT OF A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K.
OVERVIEW
Isramco, Inc., a Delaware corporation, is active in the exploration of oil and
gas in the United States. Isramco acts as an operator of certain leases and
licenses and also holds participation interests in certain other interests.
CRITICAL ACCOUNTING POLICIES
Estimation of oil and gas reserves is important to the effective management of
Isramco. They are integral to making investment decisions about oil and gas
properties such as whether development should proceed or enhanced recovery
methods should be undertaken. Oil and gas reserve quantities are also used as
the basis of calculating the unit-of-production rates for depreciation and
evaluating for impairment. Oil and gas reserves are divided between proved and
unproved reserves. Proved reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions; i.e., prices
and costs as of the date the estimate is made. Unproved reserves are those with
less than reasonable certainty of recoverability and are classified as either
probable or possible.
The estimation of proved reserves is an ongoing process based on rigorous
technical evaluations and extrapolations of well information such as flow rates
and reservoir pressure declines. Although Isramco is reasonably certain that
proved reserves will be produced, the timing and amount recovered can be
affected by a number of factors including completion of development projects,
reservoir performance, regulatory approvals and significant changes in long-term
oil and gas price levels.
The calculation of unit-of-production depreciation is a critical accounting
estimate that measures the depreciation of upstream assets. It is the ratio of
(1) actual volumes produced to (2) total proved developed reserves (those proved
reserves recoverable through existing wells with existing equipment and
operating methods) applied to the (3) asset cost. The volumes produced and asset
costs are known and, while proved developed reserves have a high probability of
recoverability, they are based on estimates that are subject to some
variability.
Isramco accounts for impairments under the provisions of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." When
circumstances indicate that an asset may be impaired, Isramco compares expected
undiscounted future cash flows at a producing field level to the unamortized
capitalized cost of the asset. If the future undiscounted cash flows, based on
Isramco and third party's estimate of future crude oil and natural gas prices,
operating costs, anticipated production from proved reserves and other relevant
data, are lower than the unamortized capitalized cost, the capitalized cost is
reduced to fair value. Fair value is calculated by discounting the future cash
flows at an appropriate risk-adjusted discount rate.
Isramco records a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. While Isramco has considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event that Isramco
were to determine that it would be able to realize its deferred tax assets in
the future in excess of its net recorded amount, an adjustment to the deferred
tax asset would increase net income in the period such determination was made.
Isramco does not participate in, nor has it created, any off-balance sheet
special purpose entities or other off-balance sheet financing.
13
Isramco records a liability for asset retirement obligation at fair value in the
period in which it is incurred and a corresponding increase in the carrying
amount of the related long live assets. At least annually, the Company
reassesses the obligation to determine whether a change in the estimated
obligation is necessary. The Company evaluates whether there are indicators that
suggest the estimated cash flows underlying the obligation have materially
changed. Should those indicators suggest the estimated obligation may have
materially changed the Company will accordingly update its assessment.
LIQUIDITY AND CAPITAL RESOURCES
Isramco finances its operations primarily from cash generated by operations.
Isramco's operating activities provided (used) net cash of $(662,000) and
$7,233,000 for the years ended December 31, 2007 and 2006, respectively. The
availability of cash generated by operations could be affected by other business
risks discussed in the "Risk Factors" section of this annual report.
Working capital (current assets minus current liabilities) was $(170,000) and
$5,752,000 at December 31, 2007 and 2006, respectively. The decrease in working
capital is primarily attributable to the current maturities of long-term debt
and derivative liability.
Net cash used in investing activities in fiscal 2007 was $(63,656,000) compared
to $(24,041,000) in fiscal 2006. The increase in net cash used in investing
activities in 2007 is primarily attributable to the purchase of oil and gas
wells through the acquisition of Five States assets.
Capital expenditures for property and equipment were $86,123,000 in fiscal 2007
and $9,737,000 in fiscal 2006, respectively. Capital expenditures in 2007 and
2006 were primarily attributable to the drilling of oil and gas wells in the
United States.
RESULTS OF OPERATION
YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006
Isramco reported net loss from continuing operations of $6,411,000 in 2007 (loss
of $2.36 per share) compared to net income from continuing operations of
$6,569,000 (gain of $2.42 per share) in 2006. The decrease in the net income in
2007 compared to 2006 is primarily attributable to: (i) an increase in net loss
on derivative contracts of $8,638,000 compare to a net gain of $2,604,000 in
2006 (ii) an impairment of $928,000 as results of the sale of the land in Israel
(iii) increase of $2,535,000 of impairment of oil and gas assets due to low
production of gas wells drilled to the Barnett Shale (iv) an increase in
interest expenses of $6,344,000 compare to interest income of $154,000 in 2006
(v) compensation for legal settlement of $2,536,000 that recorded in 2006 , all
of which partially offset by increasing of oil and gas operating income,
realized gain on sale of investment in high -tech company ($1,700,000) and
income tax benefit ($5,192,000).
Set forth below is a break-down of revenues results.
UNITED STATES
OIL AND GAS VOLUME AND REVENUES
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2007 2006
---------------------------------------------------------------------------
VOLUME
Oil Sold (MBbl) 96.7 13
Plant Product(MBbl) 100.5 -
14
Gas Sold (MMCF) 1,550.8 213
VALUE
Oil Sales (M$) 6,874 796
Plant Product(M$) 3,923 -
Gas Sales (M$) 10,030 1,371
AVERAGE UNIT PRICE
Oil ($/Bbl) (*) 71.1 59.14
Gas ($/MCF) (**) 6.46 6.42
(*) Bbl - Barrel Equivalent to 42 U.S. Gallons
(**) MCF - 1,000 Cubic Feet
OIL AND GAS EXPLORATION COSTS
In 2007, Isramco incurred $292,000 in exploration costs mainly incurred for 3D
seismic survey covered Jay's acres in Wise County, compared to $125,000 in 2006,
mainly incurred for geological and geophysical consulting relating to the
operation in United States.
OPERATOR'S FEES
In 2007 Isramco earned $ $18,000 in operator fees compared to $69,000 in 2006.
OIL AND GAS REVENUES
In 2007 and 2006 Isramco had oil and gas revenues of $20,827,000 and $2,167,000
respectively. The increase is primarily attributable to the purchase of oil and
gas wells through the acquisition of Five States assets, partially offset by a
decline in production from the Company's older wells and shutdown of certain
production in one of the fields due to unanticipated pipeline maintenance.
LEASE OPERATING EXPENSES AND SEVERANCE TAXES
Lease operating expenses and severance taxes were incurred primarily in
connection with oil and gas fields in the United States. Oil and gas lease
operating expenses and severance taxes were $7,500,000 and $1,119,000,000 for
2007 and 2006, respectively. The increase is primarily attributable to the
purchase of oil and gas wells through the acquisition of Five States assets.
INTEREST EXPENSES
During 2007, total debt increased $50,209,000 to $67,720,000. The increase is
primarily attributable to loans that were taken to finance the Five States
acquisition (see Note 8 to Consolidated Financial Statements).
Interest expenses during the year ended December 31, 2007 were $6,344,000
compared to interest income of $154,000 for the year ended December 31, 2006.
The increase in interest expenses in 2007 is primarily attributable to interest
on loans that were taken to finance the Five States acquisition while the income
in 2006 is primarily attributable to earned on interest bearing on marketable
securities held by the Company.
GAIN ON MARKETABLE SECURITIES
In 2007, Isramco recognized net realized and unrealized gain on marketable
securities of $52,000 compared to net realized and unrealized gain on marketable
securities of $1,177,000 in 2006.
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 Isramco.
GENERAL AND ADMINISTRATIVE EXPENSES
In 2007 Isramco incurred $2,902,000 in general and administrative expenses
compared to $2,339,000 (including operator expenses) in 2006. The Increase is
primarily due to the Five States acquisition which increased the volume of the
activities and as a result the indirect expenses such as auditor's fee, wages,
consultants and rent.
15
EQUITY IN EARNING OF UNCONSOLIDATED AFFILIATES
Isramco's equity in earnings of unconsolidated affiliates for 2007 was
$1,201,000 compared to $2,570,000 for 2006. The decrease is primarily
attributable to the decrease in the gain of marketable securities held by the
Limited Partnerships Isramco Negev 2 and I.O.C Dead Sea LP, affiliates of
Isramco.
DEPRECIATION, DEPLETION AMORTIZATION (DD&A) AND IMPAIRMENT
Depreciation, Depletion &Amortization of the cost of proved oil and gas
properties is calculated using the unit-of-production method. Isramco's DD&A
rate and expense are the composite of numerous individual field calculations.
There are several factors that can impact Isramco's composite DD&A rate and
expense, such as field production profiles, drilling or acquisition of new
wells, disposition of existing wells, reserve revisions (upward or downward)
primarily related to well performance, and impairments. Changes to these factors
may cause Isramco's composite DD&A rate and expense to fluctuate from year to
year.
During 2007, Isramco recorded depreciation, depletion and amortization expenses
of $6,139,000 compared to $455,000 in 2006. The main reason for the increase is
the increase of the Company's oil and gas assets in United States due to the
acquisition of Five States assets.
Impairments include amortization of unproved leases, as well as impairments
under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which requires an entity to compute impairments to the carrying value
of long-lived assets based on estimate future cash flow. Impairments of
$3,203,000 in 2007 were $2,535,000 higher than 2006. The increase in the
impairment on 2007 is mainly due to the low volume of gas produced in the wells
that the Company participated on the Barnett in Parker County.
REALIZED GAIN ON SALE OF INVESTMENT AND CAPITAL GAIN
In April 2007, IsramTecc ,a wholly owned subsidiary of the Company ,sold part of
its equity interests in High -Tech company ,for aggregate consideration of
$1,700,000 (net of commission). As a result of the transaction, the Company
recorded a one-time non-recurring net gain of $1,621,000.
NET LOSS ON DERIVATIVE CONTRACTS
From time to time, Isramco enters into derivative commodity instruments to hedge
its exposure to price fluctuations on anticipated oil and natural gas
production. Under price swaps, the Company is required to make payments to, or
receive payments from, the counterparties based upon the differential between a
specified fixed price and a price related to those quoted on the New York
Mercantile Exchange for each respective period. The Company elected not to
designate any positions as cash flow hedges for accounting purposes for the
years ended December 31, 2007, 2006 and 2005. Accordingly, the Company records
the net change in the mark-to-market valuation of these derivative contracts in
the consolidated statement of operations as a component of other income and
expenses on the consolidated statements of operations. See Note 7 to
Consolidated Financial Statements.
The Company recorded a net derivative loss of $8.6 million in 2007.
YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
Isramco reported income from continuing operations of $6,569,000 (gain of $2.42
per share) in 2006 compared to income from continuing operation of $253,000
(loss of $0.09 per share) in 2005. The increase in the net income in 2006
compared to 2005 is primarily attributable to: (i) an increase in the gain of
marketable securities, (ii) an increase in the net income of investees, (iii) an
increase in other income due to recording of non-recurring one time receipt of
$2,565,000 for the settlement of certain lawsuit that were initiated by Isramco
and income related to mark-to market of swap contracts on oil and gas prices.
Set forth below is a break-down of these results.
UNITED STATES
OIL AND GAS VOLUME AND REVENUES
2006 2005
Oil Volume Sold (MBbl) 13 16
16
Gas Volume Sold (MMCF) 213 355
Oil Sales (M$) 796 806
Gas Sales (M$) 1,371 2,513
Average Unit Price
Oil ($/Bbl) * 59.14 51.25
Gas ($/MCF) ** 6.42 7.11
* Bbl - Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 CUBIC FEET
OIL AND GAS EXPLORATION COSTS
In 2006, Isramco incurred $125,000 in exploration costs mainly for geological
and geophysical consulting relating to the operation in United States, compared
to $110,000 in 2005, which was mainly related to well drilled in Israel which
was plugged and abandoned.
OPERATOR'S FEES
In 2006 Isramco earned $69,000 in operator fees compared to $977,000 in 2005.
The decrease is mainly due to the drilling of the Gad 1 well, offshore Israel,
in 2005.
OIL AND GAS REVENUES
In 2006 and 2005 Isramco had oil and gas revenues of $2,167,000 and $3,319,000,
respectively. The decrease is primarily attributable to the decline in oil and
gas production and decrease in the gas price.
LEASE OPERATING EXPENSES AND SEVERANCE TAXES
Lease operating expenses and severance taxes were incurred primarily in
connection with oil and gas fields in the United States. Oil and gas lease
operating expenses and severance taxes were $1,119,000 and $1,458,000 for 2006
and 2005, respectively. The decline is primarily due to the decline in oil and
gas revenues caused by a decline in production.
INTEREST INCOME
Interest income during the year ended December 31, 2006 was $154,000 compared to
$293,000 for the year ended December 31, 2005. The decrease in interest income
is primarily attributable to interest on loan $17,000,000 received from related
party.
GAIN ON MARKETABLE SECURITIES
In 2006, Isramco recognized net realized and unrealized gain on marketable
securities of $1,177,000 compared to net realized and unrealized gain on
marketable securities of $551,000 in 2005.
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 Isramco.
OPERATOR EXPENSES
In 2006 Isramco expended $ 330,000 for operator expenses compared to $767,000 in
2005.The decrease is primarily attributable to decrease in Isramco's exploration
activities.
GENERAL AND ADMINISTRATIVE EXPENSES
In 2006 Isramco incurred $2,009,000 in general and administrative expenses
compared to $2,298,000 in 2005. The decrease in mainly due to a decrease in
legal consultant expenses and due to the lower bonus payments to executives in
2006
EQUITY IN NET INCOME OF INVESTEE
Isramco's equity in the net income of investees for 2006 was $2,570,000 compared
to its equity in net income
17
of investees of $661,000 for 2005. The increase is primarily attributable to the
increase in the gain of marketable securities held by the Limited Partnerships
Isramco Negev 2 and I.O.C Dead Sea LP, affiliates of Isramco.
DEPRECIATION, DEPLETION AMORTIZATION AND IMPAIRMENT
Depreciation depletion and amortization expenses are connected to the producing
wells in the United States.
During 2006 Isramco recorded depreciation depletion and amortization expenses
$455,000 compared to $1,011,000 in 2005. The main reasons for the decrease are
due to decrease in oil and gas production volumes in 2006 and impairment charges
recorded in 2005.
During 2006 and 2005, Isramco recorded impairment charges of 668,000 and
$759,000, respectively relating to oil and gas assets in the United States.
DISCONTINUED OPERATION
Isramco recorded in 2006 a loss of $2,727,000 on discontinued operation of the
Magic 1 Cruise Line Corp. compared to a loss of $879,000 in 2005. The increase
of net and operating loss of the vessel discontinued activity in 2006 compared
to 2005 is attributable mainly to a one time impairment of cost of vessel in
total of $ 2.2 million and increase of maintenance expenses, net of capital gain
from the sale of the activity of $0.4 million. As result of the sale of the
vessel, the company recorded a one time capital gain of $ 384,000.
OTHER INCOME
Other Income in 2006 was $39,000 compared to $117,000 in 2005.
GAIN FROM SWAP TRANSATION
Isramco recorded in 2006 net gain of $2,604, 000 related to market to market of
swap contracts on oil and gas prices, compared to net loss of $641,000 in 2005.
COMPENSATION FOR LEGAL SETTLEMENT
In January 2006, the Company entered into a settlement agreement and mutual
release with the defendant parties named therein relating to the lawsuit
initiated by the Company against the defendants in February 2004 in the Superior
Court of California, County of Los Angeles, alleging breach of contract and tort
claims in connection with an agreement between the Company and the defendants to
jointly purchase and develop certain parcels of real estate outside Los Angeles.
The agreement provides for the settlement of the action with no finding or
admission of fault on the part of any party and, pursuant thereto, certain of
the defendants paid to the Company $2,500,000 as reimbursement for costs and
expenses incurred by the Company in connection with its pursuit of the real
estate investment opportunity that was the subject of the action. Under the
agreement, the Company and the defendants mutually released one another from any
claims or causes of actions arising out of or relating to the action, any claim
that could have been asserted in the action, and any and all claims and/or
allegations relating to the real estate (and the development thereof) that was
the subject of the action.
(ii) In February 2006, the Company entered into a settlement agreement and
mutual release with the defendant parties named therein relating to the lawsuit
initiated by the Company against the defendants in 2004 in the District Court of
Harris County, Texas, alleging a tort claim in connection with an agreement
between the Company and a third party pursuant to which the Company purchased
all of the outstanding capital stock of a company that owns oil and gas assets
in Illinois. Under the agreement the defendants paid the Company $550,000 and
the Company filed a motion to dismiss its claims against the defendants with
prejudice.
As a result of the payment received under the settlements agreement, the Company
recorded a net gain of $2,536,000 (after payment of legal fees and other
expenses) during 2006.
INCOME TAXES
Isramco recorded income tax expense of $726,000 for the year ended December 31,
2006 as compared to $40,000 for the year ended December 31, 2005. The primary
difference from the statutory tax expense and the actual tax expense for 2006
results from intangible drilling costs incurred during 2006 that are fully
deductible for tax purposes and are depleted from book purposes. This is
partially offset by the foreign income tax expense incurred for the foreign
operations.
18
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
We discuss recently adopted and issued accounting standards in Item 8.
Consolidated Financial Statements and Supplementary Data-Note 1, "Summary of
Significant Accounting Policies."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Isramco is exposed to market risk, including adverse changes in commodity
prices.
Isramco produces and sells natural gas and crude oil. As a result, Isramco's
financial results can be significantly affected if these commodity prices
fluctuate widely in response to changing market forces.
Isramco uses swap contracts to manage the risk on commodity prices. Isramco's
positions are monitored and managed on a daily basis to ensure compliance with
Isramco's risk management policy. The swap contracts are entered into
principally with a major financial institution. All derivatives are recorded at
fair value on the consolidated balance sheet with resulting gains and losses
reflected in income. Fair values are derived principally from market quotes and
other independent third-party quotes. Changes in the price of natural gas or
crude oil would change the liability of the derivatives contracts.
As of December 31, 2007, Isramco had swap contracts for volume of 399,108
barrels of crude oil during 46 months commencing January 2008 and swap contracts
for volume of 3,014,556 MMBTU of natural gas during 35 months commencing January
2008.
On February 20, 2008 the Company signed additional swap contracts with
commercial bank for volume of 25,000 barrels of crude oil during 10 months
commencing January 2011.
Following the cosigning of the Agreements with GFB and Trans Republic., Isramco
signed additional swap contracts with Scotia Bank to secure its future oil and
gas prices as follows:
Swap contracts for volume of 605,016 barrels of crude oil during 48 months
commencing April. Swap contracts for volume of l 3,433,348 MMBTU of natural gas
during 48 months commencing April 2008.
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A (T). CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Disclosure controls and procedures are controls and other procedures of a
registrant designed to ensure that information required to be disclosed by the
registrant in the reports that it files or submits under the Exchange Act is
properly recorded, processed, summarized, and reported, within the time periods
specified in the Securities and Exchange Commission's ("SEC") rules and forms.
Disclosure controls and procedures include processes to accumulate and evaluate
relevant information and communicate such information to a registrant's
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required disclosures.
We evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2007, as required by Rule 13a-15 of
the Exchange Act. As described below, under "Management's Report on Internal
Control Over Financial Reporting," material weaknesses were identified in our
internal control over financial reporting as of December 31, 2007, relating
primarily to the shortage of support and resources in our accounting. Based on
the evaluation described above, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 2007, our disclosure controls
and procedures were not effective to ensure (i) that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized, and reported, within the time periods specified
in the SEC's rules and forms, and (ii) information required to be disclosed by
us in our reports that we file or submit under the Exchange Act is accumulated
and communicated to our management,
19
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING; CHANGES IN
INTERNAL CONTROLS OVER FINANCIAL REPORTING.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of our financial statements for
external reporting purposes in accordance with generally accepted accounting
principles.
Internal control over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives because of its inherent limitations.
Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management override. Because of
such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.
A "material weakness" in internal control over financial reporting (as defined
in Auditing Standard No. 2 of the Public Company Accounting Oversight Board) is
a significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected. A
"significant deficiency" is a control deficiency, or combination of control
deficiencies, that adversely affects a company's ability to initiate, authorize,
record, process, or report external financial data reliably in accordance with
generally accepted accounting principles, such that there is more than a remote
likelihood that a misstatement of the company's annual or interim financial
statements that is more than inconsequential will not be prevented or detected.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2007, the end of the fiscal period
covered by this report, but management was unable complete its assessment before
March 28, 2007, the day on which this annual report on Form 10-KSB is being
filed. Accordingly, management has identified its inability to conclude in a
timely manner the necessary assessment and testing procedures as a material
weakness. Management's assessment process did not conclude in sufficient time
prior to the filing of this annual report on Form 10-KSB primarily due to due to
a number of factors, including: (i) our failure to prepare and plan for a timely
completion of management's assessment, including adding the resources necessary
to do so; and (ii) our failure to ensure that our accounting department was
adequately staffed and sufficiently trained to meet deadlines.
Management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007, using the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
Control--Integrated Framework. In assessing the effectiveness of our internal
control over financial reporting, management identified the following additional
material weaknesses in internal control over financial reporting as of December
31, 2007:
o DEFICIENCIES IN THE COMPANY'S CONTROL ENVIRONMENT. Our control
environment did not sufficiently promote effective internal
control over financial reporting throughout the organization.
Specifically, we had a shortage of support and resources in our
accounting department, which resulted in inadequate: (i)
documentation and communication of our accounting policies and
procedures; and (ii) internal audit processes of our accounting
policies and procedures.
As a result of the material weaknesses described above, our management concluded
that we did not maintain effective internal control over financial reporting as
of December 31, 2007, based on the criteria established by COSO.
Management believes that our rapid growth since the acquisition of in March 2007
approximately 650 oil & gas wells also contributed to the environment in which
the material weaknesses described above resulted. The March 2007 transaction,
whereby our activities and revenues grew by a factor of almost 1,000%, required
that we fundamentally re-organize the Company and its operations. In this
connection, we sold our Israeli based businesses to concentrate exclusively on
our oil and gas exploration activities in the United States, retained qualified
personnel to oversee our expansion as well as other significant revisions. In
February 2008, we also announced that we intend to purchase additional 590
operating gas wells and the closing of the new acquisition was on March 27,
2008. The efforts and resources that we invested in completing the above
20
described transaction and reorganizing our operations adversely affected the
time and other resources that we were able in investing in our internal control
compliance efforts. We retained Deloitte & Touche, a registered accounting firm,
to assist in our internal control compliance efforts, including establishing new
internal audit procedures appropriate for a rapidly growing business and
selection of appropriate accounting controls software.
Remediation Initiatives
During 2008, we plan to implement a number of remediation measures to address
the material weaknesses described above. The Company's remediation plans
include:
1. We plan to hire additional personnel to assist us with
documenting and communicating our accounting policies and procedures to
ensure the proper and consistent application of those policies and
procedures throughout the Company. Recruitment for this positions has
begun and we actually hired two accountants in the last months and we
are planning to hire more accountants and other professional staff. The
selection process is expected to be completed during the second quarter
of 2008.
2. We plan to implement formal processes requiring periodic
self-assessments, independent tests, and reporting of our personnel's
adherence to our accounting policies and procedures.
3. We plan to (i) require additional training for our current
accounting personnel; (ii) to hire additional accounting personnel to
enable the allocation of job functions among a larger group of
accounting staff;; and (iii) to consider restructuring our accounting
department, each to increase the likelihood that our accounting
personnel will have the resources, experience, skills, and knowledge
necessary to effectively perform the accounting system functions
assigned to them.
4. We plan to absorb a new accounting system with automatic control
checkpoints for day-to-day business processes. The selection process of
the new accounting software is expected to be completed during April
2008 and the absorption process is expected be finished by July 2008.
Management recognizes that many of these enhancements require continual
monitoring and evaluation for effectiveness. The development of these actions is
an iterative process and will evolve as the Company continues to evaluate and
improve our internal controls over financial reporting.
Management will review progress on these activities on a consistent and ongoing
basis at the Chief Executive Officer and Chief Financial Officer level in
conjunction with our Audit Committee. We also plan to take additional steps to
elevate Company awareness about and communication of these important issues
through formal channels such as Company meetings, departmental meetings, and
training.
Changes in Internal Controls Over Financial Reporting
Other than as described above, no material change in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934) occurred during the fourth quarter of fiscal 2007 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. Management and the Audit Committee of the
Company's Board of Directors have begun to develop remedial measures to address
the internal control deficiencies identified above. The Company will monitor the
effectiveness of planned actions and will make any other changes and take such
other actions as management or the Audit Committee determines to be appropriate.
PART III
The information called for by items 10, 11, 12 13 and 14 will be contained in
the Company's definitive proxy statement which the Company intends to file
within 120 days after the end of the Company's fiscal year ended December 31,
2007 and such information is incorporated herein by reference.
GLOSSARY
"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
21
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" 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 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.
"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.
"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
22
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 therefore and seek markets for and
market such petroleum.
23
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
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 Promissory Note dated as of February 27, 2007, issued to NAPHTHA ISRAEL
PETROLEUM CORP., LTD. in the principal amount of $18,500,000., filed as
an Exhibit to the 10-Q for the quarter ended March 31, 2007 and
incorporated herein by reference.
4.2 Promissory Note dated as of February 27, 2007, issued to NAPHTHA ISRAEL
PETROLEUM CORP., LTD. in the principal amount of $11,500,000., filed as
an Exhibit to the 10-Q for the quarter ended March 31, 2007 and
incorporated herein by reference.
4.3 Promissory Note dated as of February 27, 2007, issued to and I.O.C.
ISRAEL OIL COMPANY, LTD. in the principal amount of $12,000,000., filed
as an Exhibit to the 10-Q for the quarter ended March 31, 2007 and
incorporated herein by reference.
4.4 Promissory Note dated as of February 27, 2007, issued to and J.O.E.L
JERUSALEM OIL EXPLORATION, LTD. in the principal amount of $7,000,000.,
filed as an Exhibit to the 10-Q for the quarter ended March 31, 2007 and
incorporated herein by reference.
10.1 Oil Marketing Agreement, filed as Exhibit with the S-l Registration
Statement, File No. 2-83574.
10.2 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.
10.3 Grant Agreement with the Government of Israel, undated, 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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,
24
1993 and incorporated herein by reference.
10.11 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.
10.12 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.
10.13 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.
10.14 Inventory Services Management Agreement dated December 1997 between the
Company and Equital Ltd. filed herewith as Exhibit 10.70.
10.15 Consulting Agreement dated as of November 1, 1999 between the Company
and Worldtech, Inc.
10.16 Agreement dated June 12, 2002 between the Company and Mati Properties
and Construction Ltd. and Boaz Avrahami, filed as an Exhibit to the Form
10-Q for the quarter ended June 30, 2002.
10.17 Share Purchase and Sale Agreement dated as of December 31, 2006 between
Isramco Inc. and Chesny Estates Ltd., filed as an Exhibit to the Form
10-K for the year ended December 31, 2007., filed as an Exhibit to the
10-Q for the quarter ended March 31, 2007 and incorporated herein by
reference.
10.18 Addendum Agreement dated as of February 12, 2007 between Isramco Inc.
and Chesny Estates., filed as an Exhibit to the Form 10-K for the year
ended December 31, 2007., filed as an Exhibit to the 10-Q for the
quarter ended March 31, 2007 and incorporated herein by reference.
10.19 Purchase and Sale Agreement, dated as of February 16, 2007, among Five
States Energy Company, L.L.C. and each of the other parties listed as a
party "Seller" on the signature pages thereof and ISRAMCO, Inc., filed
as an Exhibit to the 10-Q for the quarter ended March 31, 2007 and
incorporated herein by reference., filed as an Exhibit to the 10-Q for
the quarter ended March 31, 2007 and incorporated herein by reference.
10.20 LOAN AGREEMENT, dated as of February 27, 2007, between ISRAMCO, INC.,
and NAPHTHA ISRAEL PETROLEUM CORP., LTD., filed as an Exhibit to the
10-Q for the quarter ended March 31, 2007 and incorporated herein by
reference., filed as an Exhibit to the 10-Q for the quarter ended March
31, 2007 and incorporated herein by reference.
10.21 LOAN AGREEMENT, dated as of February 27, 2007, between ISRAMCO, INC.,
and NAPHTHA ISRAEL PETROLEUM CORP., LTD., filed as an Exhibit to the
10-Q for the quarter ended March 31, 2007 and incorporated herein by
reference.
10.22 LOAN AGREEMENT, dated as of February 27, 2007, Between ISRAMCO, INC.,
and I.O.C. ISRAEL OIL COMPANY, LTD., filed as an Exhibit to the 10-Q for
the quarter ended March 31, 2007 and incorporated herein by reference.
10.23 LOAN AGREEMENT, dated as of February 26, 2007, between ISRAMCO, INC.,
and J.O.E.L JERUSALEM OIL EXPLORATION, LTD., filed as an Exhibit to the
10-Q for the quarter ended March 31, 2007 and incorporated herein by
reference.
10.24 CREDIT AGREEMENT dated as of March 2, 2007 among ISRAMCO ENERGY,
L.L.C.,; each of the lenders that is a signatory hereto or which becomes
a signatory hereto; and WELLS FARGO BANK, N. A., a national banking
association, as agent for the Lenders., filed as an Exhibit to the 10-Q
for the quarter ended March 31, 2007 and incorporated herein by
reference.
10.25 GUARANTY AGREEMENT, dated as of March 2, 2007 by ISRAMCO, Inc. in favor
of Wells Fargo Bank, N.A., as administrative agent (the "ADMINISTRATIVE
AGENT") for the lenders that are or become parties to the Credit
25
Agreement referred to in Item 10.6., filed as an Exhibit to the 10-Q for
the quarter ended March 31, 2007 and incorporated herein by reference.
10.26 PLEDGE AGREEMENT, dated as of March 2, 2007 by Isramco, Inc. in favor of
Wells Fargo Bank, N.A., as administrative agent for itself and the
lenders (the "LENDERS") which are parties to the Credit Agreement
referred to in Item Note 4, filed as an Exhibit to the 10-Q for the
quarter ended March 31, 2007 and incorporated herein by reference.
10.27 Employment Agreement dated as of September 1, 2007 between Isramco Inc.
and Edy Francis, filed as an Exhibit to the 10-Q for the quarter ended
September 30, 2007 and incorporated herein by reference
14.1 Code of Ethics, filed as an Exhibit to Form 10-K for the year ended
December 31, 2003.
31 Certification of Chief Executive and Principal Financial Officer
pursuant to Section 302 of Sarbanes-Oxley Act *
32 Certification of Chief Executive and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley act of 2002. *
99.1 Financial Statements of Isramco Negev 2 Limited Partnership as of
December 31, 2006 *
26
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.
/S/ HAIM TSUFF
HAIM TSUFF,
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
DATE: MARCH 31, 2008
/S/ EDY FRANCIS
EDY FRANCIS,
CHIEF FINANCIAL OFFICER
(AND PRINCIPAL FINANCIAL OFFICER)
DATE: MARCH 31, 2008
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 TITLE DATE
/S/ JACKOB MAIMON PRESIDENT, DIRECTOR MARCH 31, 2008
--------------------
JACKOB MAIMON
/S/ MAX PRIDGEON DIRECTOR MARCH 31, 2008
--------------------
MAX PRIDGEON
/S/FRANS SLUITER DIRECTOR MARCH 31, 2008
--------------------
FRANS SLUITER
/S/ MICHELLE CINNAMON DIRECTOR MARCH 31, 2008
--------------------
MICHELLE CINNAMON
27
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets at December 31, 2007 and 2006 F-2
Consolidated Statements of Operations for the years ended December 31,
2007, 2006 and 2005 F-3
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2007, 2006 and 2005 F-4
Consolidated Statements of Cash Flows for the years ended December 31,
2007, 2006 and 2005 F-5
Notes to Consolidated Financial Statements F-6
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Isramco, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Isramco, Inc. as
of December 31, 2007 and 2006, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for each of the
three years ended December 31, 2007. These consolidated financial statements are
the responsibility of Isramco's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Isramco, Inc., as
of December 31, 2007 and 2006, and the consolidated results of its operations
and its cash flows for each of the three years ended December 31, 2007, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ MALONE & BAILEY, PC
www.malone-bailey.com
Houston, Texas
March 31, 2008
F-1
ISRAMCO INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
-------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31 2007 2006
-------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,212 $ 573
Accounts receivable 6,595 403
Restricted and designated cash 1,501 17,000
Deferred Income Taxes 1,047 --
Marketable securities, at market -- 3,130
Derivative asset -- 1,718
Prepaid expenses and other 748 3,339
Accounts receivable - sale of Magic 1 -- 2,150
--------- ---------
Total Current Assets 11,103 28,313
--------- ---------
Property and Equipment, at cost - successful efforts method:
Proved properties 93,626 16,850
Unproved properties 15,314 --
Other 81 2,212
--------- ---------
Total Property and Equipment 109,021 19,062
Accumulated depreciation, depletion and amortization (16,338) (6,525)
--------- ---------
Net Property and Equipment 92,683 12,537
--------- ---------
Marketable securities, at market 6,809 5,759
Investment in affiliates -- 15,302
Other 113 162
--------- ---------
Total assets $ 110,708 $ 62,073
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,259 $ 5,050
Current maturities of long-term debt and bank overdraft 3,706 347
Derivative liability 3,081 --
Short term loan from related party -- 17,164
Other current liability 227 --
--------- ---------
Total current liabilities 11,273 22,561
--------- ---------
Long-term debt 24,000 --
Long-term debt - related party 40,014 --
Other Long-term Liabilities:
Asset retirement obligations 2,670 356
Derivative liability - non-current 6,325 --
Deferred income taxes 955 4,412
--------- ---------
Total other long-term liabilities 9,950 4,768
--------- ---------
Commitments and contingencies (Note 14)
Shareholders' equity:
Common stock $0.0l par value; authorized 7,500,000 shares;
issued 2,746,958 shares; outstanding 2,717,691 shares 27 27
Additional paid-in capital 23,194 26,240
Retained earnings (1,012) 5,399
Accumulated other comprehensive income 3,426 3,242
Treasury stock, 29,267 shares at cost (164) (164)
--------- ---------
Total shareholders' equity 25,471 34,744
--------- ---------
Total liabilities and shareholders' equity $ 110,708 $ 62,073
========= =========
See notes to the consolidated financial statements.
F-2
ISRAMCO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
--------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2007 2006 2005
--------------------------------------------------------------------------------------------------------
REVENUES
Oil and gas sales $ 20,827 $ 2,167 $ 3,319
Operator fees from related party 18 69 977
Office services to affiliate and other
To related parties 480 480 476
To others 230 276 462
Equity in earnings of unconsolidated affiliates 1,201 2,570 661
----------- ----------- -----------
Total revenues 22,756 5,562 5,895
----------- ----------- -----------
OPERATING EXPENSES
Lease operating expense, transportation and taxes 7,500 1,119 1,458
Depreciation, depletion and amortization 6,139 455 1,011
Impairment of oil and gas assets 3,203 668 759
Impairment of other properties 928 -- --
Accretion expense 219 71 25
Exploration costs 292 125 110
Operator expense -- 330 767
General and administrative
To related parties 226 227 503
To others 2,676 1,782 1,795
----------- ----------- -----------
Total operating expenses 21,183 4,777 6,428
----------- ----------- -----------
OPERATING INCOME (LOSS) 1,573 785 (533)
OTHER EXPENSES (INCOME)
Interest expenses (income), net 6,344 (154) (293)
Unrealized gain on marketable securities (52) (1,177) (551)
Realized gain on sale of investment and other (1,754) (39) (117)
Net loss (gain) on derivative contracts 8,638 (2,604) 641
Compensation for legal settlement -- (2,536) --
----------- ----------- -----------
Total other expenses (income) 13,176 (6,510) (320)
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES (11,603) 7,295 (213)
INCOME TAX BENEFIT (EXPENSE) 5,192 (726) (40)
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (6,411) 6,569 (253)
LOSS FROM DISCONTINUED OPERATION -- (3,111) (879)
GAIN FROM DISPOSAL OF DISCONTINUED OPERATION -- 384 --
----------- ----------- -----------
NET INCOME (LOSS) $ (6,411) $ 3,842 $ (1,132)
=========== =========== ===========
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED:
Continuing operations $ (2.36) $ 2.42 $ (0.09)
Discontinued operations -- (1.01) (0.33)
----------- ----------- -----------
Total $ (2.36) $ 1.41 $ (0.42)
Weighted average number of shares outstanding-basic
2,717,691 2,717,691 2,709,355
=========== =========== ===========
Weighted average number of shares outstanding -diluted
2,717,691 2,717,691 2,709,355
=========== =========== ===========
See notes to the consolidated financial statements.
F-3
ISRAMCO INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
COMMON STOCK
--------------------------
ADDITIONAL ACCUMULATED TOTAL
OTHER
NUMBER PAID-IN COMPREHENSIVE RETAINED TREASURY SHAREHOLDERS'
OF SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS STOCK EQUITY
---------- ---------- ---------- ---------- ---------- --------- ----------
$ IN THOUSANDS, EXCEPT SHARE AMOUNTS
------------------------------------------------------------------------------------------
Balances at December 31, 2004 (Restated) 2,639,853 $ 27 $ 26,240 $ 1,244 $ 2,689 $ (164) $ 30,036
Shares issued for exercise of options 77,838
Net loss (1,132) (1,132)
Net unrealized gain on available for
sale marketable securities, net of taxes 113 113
Net loss on foreign exchange rate,
net of taxes (524) (524)
----------
Total comprehensive loss (1,543)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 2005 2,717,691 27 26,240 833 1,557 (164) 28,493
3,842 3,842
Net income
Net unrealized gain on available for
sale marketable securities, net of taxes 810 810
Net gain (loss) on foreign exchange rate,
net of taxes 1,599 1,599
----------
Total comprehensive income 6,251
---------- ---------- ---------- ---------- ---------- ---------- ----------
2,717,691 27 26,240 3,242 5,399 (164) 34,744
Balance of December 31, 2006
Sale of Israeli operations to sister company (3,046) (3,046)
Net loss (6,411) (6,411)
Net unrealized gain on available for
sale marketable securities, net of taxes 874 874
Net loss on foreign exchange rate,
net of taxes (690) (690)
----------
Total comprehensive loss (6,227)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance of December 31, 2007 2,717,691 $ 27 $ 23,194 $ 3,426 $ (1,012) $ (164) $ 25,471
========== ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements.
F-4
ISRAMCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
-----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2007 2006 2005
-----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,411) $ 3,842 $ (1,132)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Discontinued operations -- 2,727 879
-------- -------- --------
Income (loss) from continuing operations (6,411) 6,569 253
Depreciation, depletion, amortization and impairment 10,270 1,123 1,769
Accretion expense 219 71 25
Unrealized gain on marketable securities (344) (1,177) (550)
Equity in earnings of unconsolidated affiliates (741) (1,316) (661)
Changes in deferred taxes (5,488) 271 (355)
Net unrealized loss (gain) on derivative contracts 11,352 (1,718) --
Realized gain on sale of investment and (1,664) -- --
Changes in components of working capital and other assets and
liabilities
Accounts receivable (6,192) 202 30
Prepaid expenses and other current assets 92 (1,103) (1,061)
Accounts payable and accrued liabilities (1,755) 3,271 871
-------- -------- --------
Net cash provided by (used in) operating activities
Continuing operating (662) 6,193 (185)
Discontinuing operating -- 1,040 1,741
-------- -------- --------
Net cash provided by (used in) operating activities (662) 7,233 1,556
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in affiliate -- (1,197) --
Addition to property and equipment, net (86,123) (9,737) (3,686)
Proceeds from sale of gas properties and equipment 36 -- --
Proceeds from restricted deposit, net 15,498 (17,000) --
Proceeds from sale of subsidiary - Magic 2,150 -- --
Proceeds from sale of other investment 2,270 -- --
Purchase of marketable securities (740) (2,056) (3,353)
Proceeds from sale of marketable securities 3,253 5,957 7,315
-------- -------- --------
Continuing operating (63,656) (24,033) 276
Discontinuing operating -- (8) (1,017)
-------- -------- --------
Net cash used in investing activities (63,656) (24,041) (741)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from loans - related parties 36,716 17,164 --
Proceeds from long-term debt 35,300 -- --
Repayment of long-term debt (8,300) -- --
Borrowings (repayments) of short - term debt, net 1,241 (22) (907)
-------- -------- --------
Continuing operating 64,957 17,142 (907)
Discontinuing operating -- (961) (735)
-------- -------- --------
Net cash provided by (used in) financing activities 64,957 16,181 (1,642)
639 (627) (827)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
573 1,200 2,027
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
-------- -------- --------
$ 1,212 $ 573 $ 1,200
CASH AND CASH EQUIVALENTS AT END OF YEAR
======== ======== ========
See notes to the consolidated financial statements.
F-5
ISRAMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Isramco Inc. and subsidiaries ("Isramco" or the "Company") are primarily engaged
in the acquisition, development, production and exploration of oil and natural
gas properties located, mainly in United States of America ("United states").
The Company operates in one segment, oil and natural gas exploration and
exploitation. The consolidated financial statements include the accounts of all
majority-owned, controlled subsidiaries. Investments in unconsolidated
affiliates, in which Isramco is able to exercise significant influence, are
accounted for using the equity method. All intercompany accounts and
transactions have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year presentation.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires the Company's management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities, if any, at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
respective reporting periods. These estimates include oil and natural gas
reserve quantities which form the basis for the calculation of amortization of
oil and natural gas properties. Management emphasizes that reserve estimates are
inherently imprecise and that estimates of more recent reserve discoveries are
more imprecise than those for properties with long production histories. Actual
results may differ from the estimates and assumptions used in the preparation of
the Company's consolidated financial statements.
CASH AND CASH EQUIVALENTS.
Isramco records as cash equivalents all highly liquid short-term investments
with original maturities of three months or less.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company establishes provisions for losses on accounts receivable if it
determines that it will not collect all or part of the outstanding balance. The
Company regularly reviews collectibility and establishes or adjusts the
allowance as necessary using the specific identification method. There is no
significant allowance for doubtful accounts as of December 31, 2007 or 2006.
OIL AND GAS OPERATIONS.
Isramco accounts for its natural gas and crude oil exploration and production
activities under the successful efforts method of accounting.
Oil and gas lease acquisition costs are capitalized when incurred. Unproved
properties with individually significant acquisition costs are assessed, at
least anually, on a lease-by-lease basis, and any impairment in value is
recognized. Lease rentals are expensed as incurred.
Oil and gas exploration costs, other than the costs of drilling exploratory
wells, are charged to expense as incurred. The costs of drilling exploratory
wells are capitalized pending determination of whether they have discovered
proved commercial reserves. Exploratory drilling costs are capitalized when
drilling is complete if it is determined that there is economic producibility
supported by either actual production, a conclusive formation test. If proved
commercial reserves are not discovered, such drilling costs are expensed. In
some circumstances, it may be uncertain whether proved commercial reserves have
been found when drilling has been completed. Such exploratory well drilling
costs may continue to be capitalized if the reserve quantity is sufficient to
justify its completion as a producing well and sufficient progress in assessing
the reserves and the economic and operating viability of the project is being
made. A significant portion of the property costs reflected in the accompanying
consolidated balance sheets are from acquisitions of proved properties from
other oil and gas company (see Note 2). Costs to develop proved reserves,
including the costs of all development wells and related equipment used in the
production of natural gas and crude oil, are capitalized.
Depreciation, depletion and amortization of the cost of proved oil and gas
properties is calculated using the unit-of-production method. The reserve base
used to calculate depreciation, depletion and amortization is the sum of proved
developed reserves and proved undeveloped reserves for leasehold acquisition
costs and the cost to acquire proved properties. With respect to lease and well
equipment costs, which include development costs and successful exploration
drilling costs, the reserve base includes only proved developed reserves.
Estimated future dismantlement, restoration and abandonment costs, net of
salvage values, are taken into account.
Assets are grouped in accordance with paragraph 30 of Statement of Financial
Accounting Standards (SFAS) No. 19, "FINANCIAL ACCOUNTING AND REPORTING BY OIL
AND GAS PRODUCING COMPANIES." The basis for grouping is a reasonable aggregation
of properties with a common geological structural feature or stratigraphic
condition, such as a reservoir or field.
F-6
Amortization rates are updated to reflect: 1) the addition of capital costs, 2)
reserve revisions (upwards or downwards) and additions, 3) property acquisitions
and/or property dispositions and 4) impairments.
Isramco accounts for impairments under the provisions of SFAS No. 144,
"ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS." When
circumstances indicate that an asset may be impaired, Isramco compares expected
undiscounted future cash flows at a producing field level to the unamortized
capitalized cost of the asset. If the future undiscounted cash flows, based on
Company and third party 's estimate of future crude oil and natural gas prices,
operating costs, anticipated production from proved reserves and other relevant
data, are lower than the unamortized capitalized cost, the capitalized cost is
reduced to fair value. Fair value is calculated by discounting the future cash
flows at an appropriate risk-adjusted discount rate.
In 2007, 2006 and 2005, The Company reported impairment charge of $3,203
thousand, $668 thousand and $759 thousand, respectively, relating to its proved
properties.
PROPERTY, PLANT AND EQUIPMENT OTHER THAN OIL AND NATURAL GAS PROPERTIES
Other operating property and equipment are stated at the lower of cost or fair
market value. Provision for depreciation and amortization is calculated using
the straight-line method over the estimated useful lives of the respective
assets. The cost of normal maintenance and repairs is charged to operating
expense as incurred. Material expenditures, which increase the life of an asset,
are capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of properties sold, or otherwise disposed of, and the related
accumulated depreciation or amortization are removed from the accounts and any
gains or losses are reflected in current operations. On December 31, 2007 we
sold undeveloped real estate located in Israel to related party (for further
information see Note 5 "closure of the Israeli branch office").
In 2007, The Company reported impairment charge of $928 thousand to undeveloped
real estate located in Israel.
In 2006, The Company reported impairment charge of $2,200 thousand to the vessel
included in discontinued operation.
MARKETABLE SECURITIES
Statement of Financial Accounting Standard No. 115 (SFAS No. 115),"ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES", requires Isramco 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 Isramco 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.
Trading and available-for-sale securities are recorded at fair market value.
Isramco holds no held-to-maturity securities. 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 net of applicable taxes as accumulated
other comprehensive income, a separate component of shareholders' equity, until
realized.
ASSET RETIREMENT OBLIGATION
In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS (SFAS 143). SFAS 143 requires that the fair value of an asset
retirement cost, and corresponding liability, should be recorded as part of the
cost of the related long-lived asset and subsequently allocated to expense using
a systematic and rational method. Upon adoption, the Company recorded an asset
retirement obligation to reflect the Company's legal obligations related to
future plugging and abandonment of its oil and natural gas wells. The Company
estimated the expected cash flow associated with the obligation and discounted
the amount using a credit-adjusted, risk-free interest rate. At least annually,
the Company reassesses the obligation to determine whether a change in the
estimated obligation is necessary. The Company evaluates whether there are
indicators that suggest the estimated cash flows underlying the obligation have
materially changed. Should those indicators suggest the estimated obligation may
have materially changed the Company will accordingly update its assessment.
Additional retirement obligations increase the liability associated with new oil
and natural gas wells as these obligations are incurred.
CONCENTRATIONS OF CREDIT RISK
The Company through its wholly-owned subsidiary Jay Management LLC ("Jay
Management") operates a substantial portion of its oil and natural gas
properties. As the operator of a property, the Company makes full payments for
costs associated with the property and seeks reimbursement from the other
working interest owners in the property for their share of those costs. The
Company's joint interest partners consist primarily of independent oil and
natural gas producers. If the oil and natural gas exploration and production
industry in general were adversely affected, the ability of the Company's joint
interest partners to reimburse the Company could be adversely affected.
F-7
The purchasers of the Company's oil and natural gas production consist primarily
of independent marketers, major oil and natural gas companies and gas pipeline
companies. The Company has not experienced any significant losses from
uncollectible accounts. The Company does not believe the loss of any one of its
purchasers would materially affect the Company's ability to sell the oil and
natural gas it produces. The Company believes other purchasers are available in
the Company's areas of operations.
REVENUE RECOGNITION
Revenues from the sale of oil and natural gas are recognized when the products
are sold to a purchaser at a fixed or determinable price, delivery has occurred
and title has transferred, and collectibility of the revenue is reasonably
assured. The Company follows the entitlement method of accounting for recording
oil and gas revenues under that method, any revenues received in excess of the
Company's share is treated as a liability. If revenues received are less than
Company's share, the deficiency is recorded as an asset. The Company's imbalance
position was not significant in terms of volumes or values at December 31, 2007
and 2006.
PRICE RISK MANAGEMENT ACTIVITIES
The Company follows Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING Activities, as amended by SFAS No. 138, ACCOUNTING FOR
CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, AN AMENDMENT OF
FASB STATEMENT NO. 133 and as amended by SFAS No. 149, AMENDMENT OF STATEMENT
NO. 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. From time to time, the
Company may hedge a portion of its forecasted oil and natural gas production.
Derivative contracts entered into by the Company have consisted of transactions
in which the Company hedges the variability of cash flow related to a forecasted
transaction. The Company has elected to not designate any of its positions for
hedge accounting for the years ended December 31, 2007, 2006 and 2005.
Accordingly, the Company records the net change in the mark-to-market valuation
on its derivative contracts in current earnings as a component of other income
and expenses on the consolidated statements of operations.
In 2007, 2006 and 2005, The Company recorded gain (loss) of $(8.6) million, $2.6
million and $(0.67) million, respectively, related to its derivative
instruments. Fair values are derided principally from market quoted and other
independent third-party quotes.
INCOME TAXES
Uncertainty in July 2006, the FASB issued Financial Interpretation (FIN) 48,
Accounting for In created a single model to address Income Taxes--an
Interpretation of FASB 109 (FIN 48). FIN 48 created a single model to address
accounting for the uncertainty in income tax positions and prescribes a minimum
recognition threshold a tax position must meet before recognition in the
financial statements.
The evaluation of a tax position in accordance with FIN 48 is a two-step
process. The first step is a recognition process to determine whether it is more
likely than not that a tax position will be sustained upon examination,
including resolution of any related appeals or litigation processes, based on
the technical merits of the position. In evaluating whether a tax position has
met the more likely than not recognition threshold, it is presumed that the
position will be examined by the appropriate taxing authority with full
knowledge of all relevant information. The second step is a measurement process
whereby a tax position that meets the more likely than not recognition threshold
is calculated to determine the amount of benefit/expense to recognize in the
financial statements. The tax position is measured at the largest amount of
benefit/expense that is more likely than not of being realized upon ultimate
settlement.
The Company adopted the provisions of FIN 48 effective January 1, 2007 which did
not have a material impact on the Company's operating results, financial
position or cash flows. The Company did not record a cumulative effect
adjustment related to the adoption of FIN 48.
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. Isramco has
determined its functional currency is the United States (U.S.) dollar since all
of its contracts are in U.S. dollars. Adjustments resulting from the process of
translating foreign functional currency financial statements into U.S. dollars
are included in accumulated other comprehensive income in stockholders' equity.
Foreign currency transaction gains and losses are included in current income.
The functional currency of our Israeli subsidiaries is the New Israeli Shekel.
EARNINGS PER SHARE
Isramco 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.
Basic EPS is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common shares were exercised or converted into common shares
or resulted in the issuance of common shares that then shared in the earnings of
the entity. For the year ended December 31, 2005, Isramco's stock options were
anti-dilutive.
F-8
ENVIRONMENTAL
Isramco 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 Isramco to remove or
mitigate the environmental effects of the disposal or release of petroleum or
chemical substances at various sites. Liabilities for expenditures of no capital
nature are recorded when environmental assessment and/or remediation is
probable, and the costs can be reasonably estimated. No significant amounts for
environmental liabilities were recorded at December 31, 2007 and 2006.
STOCK-BASED COMPENSATION
In January 2006, the Company adopted SFAS No. 123(R), SHARE-BASED PAYMENT (SFAS
123(R)). SFAS 123(R) revises SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION (SFAS 123), and focuses on accounting for share-based payments for
services provided by employee to employer. The statement requires companies to
expense the fair value of employee stock options and other equity-based
compensation at the grant date. The statement does not require a certain type of
valuation model, and either a binomial or Black-Scholes model may be used. The
Company used the modified prospective application method as detailed in SFAS
123(R).
Prior to adopting SFAS 123(R), the Company adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS 123) prospectively, using the fair value
recognition method to all employee and director awards granted, modified or
settled after January 1, 2003. Prior to the adoption, the Company elected to
follow Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES (APB 25) and related interpretations in accounting for its
employee stock options. There were no costs accounted for under APB 25 during
the years ended December 31, 2007, 2006 and 2005.
RECENTLY ISSUED ACCOUNTING STANDARDS AND DEVELOPMENTS
In February 2007, the FASB issued SFAS 159, THE FAIR VALUE OPTION FOR FINANCIAL
ASSETS AND FINANCIAL LIABILITIES INCLUDING AN AMENDMENT OF FASB STATEMENT NO.
115 (SFAS 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value (the Fair Value Option).
Election of the Fair Value Option is made on an instrument-by-instrument basis
and is irrevocable. At the adoption date, unrealized gains and losses on
financial assets and liabilities for which the Fair Value Option has been
elected would be reported as a cumulative adjustment to beginning retained
earnings. If the Company elects the Fair Value Option for certain financial
assets and liabilities, the Company will report unrealized gains and losses due
to changes in fair value in earnings at each subsequent reporting date. The
provisions of SFAS 159 are effective January 1, 2008. The Company is currently
assessing the impact, if any, that the adoption of this pronouncement will have
on the Company's operating results, financial position or cash flows.
In September 2006, the FASB issued SFAS No. 157, "FAIR VALUE MEASUREMENTS." SFAS
No. 157 provides a definition of fair value and provides a framework for
measuring fair value. The standard also requires additional disclosures on the
use of fair value in measuring assets and liabilities. SFAS No. 157 establishes
a fair value hierarchy and requires disclosure of fair value measurements within
that hierarchy. In February 2008, the FASB issued a Staff Position on SFAS No.
157, FASB Staff Position No. FAS 157-2, "EFFECTIVE DATE OF FASB STATEMENT NO.
157," (FSP 157-2). FSP 157-2 delays the effective date of SFAS No. 157 for all
nonrecurring fair value measurements of nonfinancial assets and nonfinancial
liabilities until fiscal years beginning after November 15, 2008, except as
provided by FSP 157-2. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007 and interim periods within those years. FSP 157-2
requires an entity that does not adopt SFAS No. 157 in its entirety to disclose,
at each reporting date until fully adopted, that it has only partially adopted
SFAS No. 157 and the categories of assets and liabilities recorded or disclosed
at fair value to which SFAS No. 157 has not been applied. The adoption of SFAS
No. 157 is not expected to have a material impact on the Company's financial
statements, but will result in additional disclosures related to the use of fair
values in the financial statements.
During July 2006, the FASB issued FASB Interpretation (FIN) No. 48, "ACCOUNTING
FOR UNCERTAINTY IN INCOME TAXES - AN INTERPRETATION OF FASB STATEMENT NO. 109."
FIN No. 48 addresses the accounting for uncertainty in income taxes recognized
in an enterprise's financial statements in accordance with SFAS No. 109,
"Accounting for Income Taxes." FIN No. 48 prescribes specific criteria for the
financial statement recognition and measurement of the tax effects of a position
taken or expected to be taken in a tax return. This interpretation also provides
guidance on derecognition of previously recognized tax benefits, classification
of tax liabilities on the balance sheet, recording interest and penalties on tax
underpayments, accounting in interim periods and disclosure requirements. FIN
No. 48 is effective for fiscal periods beginning after December 15, 2006.
The Company adopted the provisions of FIN 48 effective January 1, 2007 which did
not have a material impact on the Company's operating results, financial
position or cash flows. The Company did not record a cumulative effect
adjustment related to the adoption of FIN 48.
F-8
2. ACQUISITIONS
TRANSACTION WITH FIVE STATES
On March 2, 2007, Isramco purchased certain oil and gas properties located in
Texas and New Mexico from Five States Energy Company, LLC for an aggregate
preliminary purchase price of $92 million (before adjustments as defined in the
agreement). Although the acquisition was closed on March 2, 2007, the effective
dated of the purchase was determined to be October 1, 2006 (the "Effective
Date"). Accordingly, the Company is entitled to the net revenues, less direct
operating expenses, of the acquired properties from the Effective Date through
the Acquisition Date. This will result in an adjustment to the preliminary
purchase price. These financial statements reflect the assets acquired and
operations related to those assets from the Acquisition Date through December
31, 2007. According to an engineering report prepared by an independent
consulting company relating to the properties purchased, the estimated proved
developed producing reserves are 1,447,161 net barrels of oil and 20,078,174 net
MMCF's of natural gas and 1,305,705 net of liquid products. Isramco funded $7.7
million of the Purchase Price from working capital and the balance from a
combination of commercial bank loans and loans from related parties (for further
information see Note 8 "Long-Term Debt"). Additionally, pursuant to an agreement
between Sigma Energy Corporation ("Sigma"), an unrelated party that originated
the transaction with Five States, Isramco and IEN, IEN paid to Sigma on March 2,
2007, the amount of $300 thousand and after Payout (as defined in the Agreement
with Sigma), IEN undertook to assign to Sigma a direct ownership interests of
3.75% of the interests acquired by IEN under the Purchase Agreement
The following table summarizes the preliminary estimated fair values of assets
that Isramco acquired and the liabilities assumed in connection with the
acquisition of the Five States properties (in thousands):
-------------------------------------------------------
AS OF DECEMBER 31 2007
-------------------------------------------------------
Oil and gas properties (after adjustments) $ 88,304
Asset retirement obligation (2,020)
--------
Net asset acquired $ 86,284
========
The following pro forma information assumes the acquisition of the Five States
properties occurred as of January 1, 2006. The pro forma results are not
necessarily indicative of what actually would have occurred had the acquisition
been in effect for the period presented. (in thousands, except for share data)
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2007 AS REPORTED PRO FORMA
------------------------------------------------------------------------
Revenues $ 22,756 $ 25,949
Net loss $ (6,411) $ (6,181)
Income (loss) per share - basic and diluted
Continuing $ (2.36) $ (2.27)
operations
Discontinued
operations -- --
---------- --------
$ (2.36) $ (2.27)
Total
========== ========
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2006 AS REPORTED PRO FORMA
------------------------------------------------------------------------
Revenues $ 5,562 $ 27,925
Net income $ 3,842 $ 4,750
Income (loss) per share - basic and diluted
Continuing $ 2.42 $ 2.75
operations
Discontinued $ (1.01) $ (1.01)
operations
--------- ----------
Total $ 1.41 $ 1.74
========= ==========
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2005 AS REPORTED PRO FORMA
------------------------------------------------------------------------
Revenues $ 5,895 $ 28,485
Net $ (1,132) $ (909)
loss
Income (loss) per share - basic and diluted
Continuing $ (0.09) $ (0.00)
operations
Discontinued (0.33) (0.33)
operations
--------- ----------
$ (0.42) $ (0.33)
Total
========= ==========
F-9
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Until December 31, 2007, we acted as operator for joint ventures with related
parties in Israel engaged in the exploration of oil and gas for which it
receives operating fees equal to the largest of 6% of the actual direct costs or
minimum monthly fees of $6,000.
In December 2003, we entered into a consulting agreement with Doron Avraham, at
that time the Vice President of the Isramco. Pursuant to this agreement, we
agreed to pay the consultant the sum of $15 thousand per month plus expenses in
consideration of the services that he provides to Isramco. The consulting
agreement expired in November 2007.
We paid Israel Oil Company ("I.O.C") $226 thousand and, $235 thousand for the
years ended December 31, 2007 and 2006, respectively, for rent and office,
secretarial and computer services. I.O.C is fully owned by Naphtha Israel
Petroleum Corp. Naphtha is the sole shareholder of Naphtha Holdings, Ltd., which
is the record holder of 48.4% of our outstanding common stock and which may be
deemed to be controlled by Haim Tsuff, the Chairman of the Board of Directors
and Chief Executive Officer of Isramco.In addition, We paid Israel Oil Company
Ltd $120 thousand consulting fee for Isramco's projects in the U.S.
Isramco Oil and Gas Ltd. ("IOG"), a wholly-owned subsidiary of Isramco (on
December 31, 2007 we sold IOG to related party, for further information see Note
5 "closure of the Israeli branch office") was the general partner of
Isramco-Negev 2 Limited Partnership, from which we received management fees and
expense reimbursements of approximately $480 thousand for each of the years
ended December 31, 2007, 2006, and 2005.
In May 1996, we 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 Isramco. Pursuant to this consulting
agreement, we pay the consultant $144 thousand per annum in installments of $12
thousand per month plus expenses in consideration of the services that Mr. Tsuff
provides to Isramco. In April 1997, the consulting fees payable under the
agreement was increased to $240 thousand per annum in installments of $20
thousand per month. The term of the consulting agreement expires in May 2008. In
the event that we terminate the agreement, the consultant will be entitled to
receive a lump sum severance payment equal to the balance of the unpaid
consulting fees due for the remaining term of the agreement.
In November 1999, we entered into a consulting agreement with Worldtech Inc., a
Mauritus company of which Jackob Maimon, the President. Jackob Maimon is a
director of Isramco. Pursuant to this consulting agreement, we pay the
consultant $240 thousand per annum in installments of $20 thousand per month
plus expenses in consideration of the services that he provides to Isramco. The
agreement expires in May 2008. In the event that we terminate the agreement, ,
the consultant shall be entitled to receive a lump sum severance payment equal
to the balance of the unpaid consulting fees due for the remaining term of the
agreement.
In December 2006, we awarded bonuses of $ 150 thousand to our President.
In December 2005, we awarded bonuses of $150 thousand to our Chief Executive
Officer and Chairman of the Boards of Directors, $150 thousand to our President
and $75 thousand to our Vice President.
4. INVESTMENTS IN AFFILIATE
Isramco Oil and Gas Ltd. ("IOG"), a wholly-owned subsidiary of Isramco, was the
general partner of the Isramco Negev 2 Limited Partnership (the "Limited
Partnership"). The daily management of the Limited Partnership is under the
control of the general partner; however, matters involving the rights of the
Limited Partnership unit holders are subject to supervision of a supervisor,
appointed to supervise the Limited Partnership activities, and in some instances
the approval of the Limited Partnership unit holders. Through IOG, we own a
0.05% interest in the Limited Partnership, which is accounted for by the equity
method of accounting.
On December 31, 2007 Isramco sold IOG including the participation unit in
Isramco Negev 2 LP to related party (for further information see Note 5 "closure
of the Israeli branch office"). As of December 31, 2006, Isramco owned
345,309,522 units or 8.17% of the issued Limited Partnership units of the
Limited Partnership, Isramco Negev 2. Summarized financial information of
Isramco Negev 2 Limited Partnership is as follows (in thousands):
F-10
BALANCE SHEET
-----------------------------------------
AS OF DECEMBER 31 2006
-----------------------------------------
Current Assets $134,628
Other Assets 3,277
--------
Total Assets $137,905
========
Current Liabilities $ 996
Equity 136,909
--------
Total Liabilities and equity $137,905
========
STATEMENT OF OPERATIONS
------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2007 2006 2005
------------------------------------------------------------------
Income $3,778 $ 14,819 $ 15,509
Expenses 1,094 1,001 (7,267)
--------------------------------
Net income $2,684 $ 13,818 $ 8,242
================================
On December 31, 2007 Isramco sold the participation unit in IOC Dead Sea 2 LP to
related party (for further information see Note 5 "closure of the Israeli branch
office"). As of December 31, 2006, Isramco owned 7,877,248 of units (24.97%% of
the issued Partnership units) of the I.N.O.C Dead Sea Limited Partnership.
Summarized financial information of I.N.O.C. Dead Sea Limited Partnership is as
follows (in thousands):
BALANCE SHEET
-----------------------------------------
AS OF DECEMBER 31 2006
-----------------------------------------
Current Assets $17,004
Other Assets --
-------
Total Assets $17,004
=======
Current Liabilities $ 67
Equity 16,937
-------
Total Liabilities and Equity $17,004
========
STATEMENT OF OPERATIONS
------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2007 2006 2005
------------------------------------------------------------------
Income $ 4,222 $ 3,091 $ 1,495
Expenses $ 293 (280) (262)
--------------------------------
Net income $ 3,929 $ 2,811 $ 1,233
================================
F-11
5. CLOSURE OF THE ISRAELI BRANCH OFFICE
On December 31, 2007, Isramco and I.O.C- Israel Oil Company Ltd, an Israeli
company and related party ("IOC"), entered into an agreement pursuant to which
the Company sold and transferred to IOC its Israeli based activities and assets
currently conducted and managed by the Company's Israel branch office (the
"Branch Office") and its own shares in Isramco Oil&Gas (the general partner of
Negev 2 LP), for aggregate consideration of approximately $13.6 million.
Following the sale of these assets, the Company no longer conducts operations in
Israel though it will continue to hold working interests in certain oil and gas
assets offshore Israel. The decision was taken in light of the Company's
expanding oil and gas operations in the United States of America and
management's decision that it is the Company's best interests to focus on the
oil and gas operations in the United States of America and terminate activities
in Israel which, prior to the sale transaction reported hereunder, comprised a
relatively insignificant component of the Company's overall operations.
The principal assets transferred to IOC include participation units in the
Israeli oil and gas limited partnerships Isramco Negev 2 ("Negev") and INOC Dead
Sea ("Dead Sea"), both of which were held by the Branch Office. The
participation units of each of Negev and Dead Sea trade on the Tel Aviv Stock
Exchange. The sale of the units was completed through a private non-market
transaction with IOC where the sale price of the Negev and Dead Sea units was
established at, respectively, a 7% and 10% discount to the closing sale price of
these units on the Tel Aviv Stock Exchange on December 30, 2007. The discounts
were established by an independent appraiser. The Branch Office also transferred
to IOC all operating activities at the Branch Office, including, employees,
fixed assets, marketable securities and certain rights and liabilities, as well
as the Company's holdings of Isramco Oil and Gas Ltd. and title to undeveloped
real estate located in Israel.
IOC is a wholly-owned subsidiary of Naphtha Israel Petroleum Corp, Ltd.
("Naphtha"). Naphtha holds 100% of Naphtha Holdings Ltd., which holds
approximately 48% of the Company's issued and outstanding stock.
Since this is a transaction between entities under common control, the Company
recorded the loss of approximately $3,046 million from the transaction, as a
reduction of shareholders' equity (additional paid in capital).
The proceeds of the sale were used by the Company to pay down part of our loan
with Naphtha.
6. MARKETABLE SECURITIES
As of December 31 2006, we had net unrealized gains on marketable securities of
$1,054 thousand. Sales of marketable securities resulted in realized gains of
$52 thousand, $1,177 thousand and $551 thousand for the years ended December 31,
2007, 2006 and 2005, respectively.
Trading securities, which are primarily traded on the Tel-Aviv Stock Exchange,
consists of the following (in thousands):
------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31 2007 2006
------------------------------------------------------------------------------------------------------------
COST MARKET VALUE COST MARKET VALUE
-------------------------------------------------------------------
Debentures and Convertible Debentures -- -- $ 495 $ 1,560
Equity securities -- -- 1,407 1,375
Investment Trust Funds -- -- 174 195
-------------------------------------------------------------------
$ -- $ -- 2,076 $ 3,130
-------------------------------------------------------------------
Available-for-sale securities, which are primarily traded on the Tel-Aviv Stock Exchange and on the OTC
Bulletin Board, consist of the following (in thousands):
------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31 2007 2006
------------------------------------------------------------------------------------------------------------
COST MARKET VALUE COST MARKET VALUE
-------------------------------------------------------------------
$ 1,619 $ 6,809 $ 1,894 $ 5,759
-------------------------------------------------------------------
F-12
7. DERIVATIVE AND HEDGING ACTIVITIES
From time to time, the Company enters into derivative commodity instruments to
hedge its exposure to price fluctuations on anticipated oil and natural gas
production. Under price swaps, the Company is required to make payments to, or
receive payments from, the counterparties based upon the differential between a
specified fixed price and a price related to those quoted on the New York
Mercantile Exchange for each respective period. The Company elected not to
designate any positions as cash flow hedges for accounting purposes for the
years ended December 31, 2007, 2006 and 2005. Accordingly, the Company records
the net change in the mark-to-market valuation of these derivative contracts in
the consolidated statement of operations as a component of other income and
expenses on the consolidated statements of operations.
As of December 31, 2007, the Company had a $9.4 million derivative liability,
$3.1 million of which was classified as current. The Company recorded a net
derivative loss of $8.6 million ($11.3 million unrealized loss and a $2.7
million net gain for cash received on settled contracts) for the year ended
December 31, 2007.
As of December 31, 2006, the Company had a $1.7 million derivative asset, all of
which was classified as current. The Company recorded a net derivative gain of
$2.6 million for the year ended December 31, 2007.
For the year ended December 31, 2005 the Company recorded a net derivative loss
of $0.6 million
-------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2007 Swap Contracts
-------------------------------------------------------------------------------------------------
Natural Gas Crude Oil
-------------------------------------- ----------------------------------------
Weighted Weighted
Price range Average Price range Average
Volume Price Volume Price
(MMBTU) ($/MMBTU) ($/MMBTU) (Bbl) ($/MMBTU) ($/Bbl)
------------------------------------ ----------------------------------------
2008 93,876 8.2-8.365 8.22 10,516 64.15-68.46 65.2
2009 85,874 7.77 7.77 9,796 63.9-67.86 64.71
2010 79,286 7.49 7.49 8,147 63.3-63.8 63.63
2011 4,800 82.1-83.42 68.97
On February 20, 2008 the Company signed additional swap contract with commercial
bank to sell 25,000 barrels of crude oil during 10 months commencing January
2011.
Following the cosigning of the Agreements with GFB and Trans Republic (for
further information See Note 19 "subsequent events"), Isramco signed additional
swap contracts with Scotia Bank to secure its future oil and gas prices. 4 swap
contracts to for volume of 605,016 barrels of crude oil during 48 months
commencing April 2008. Swap contracts for volume of 3,433,348 MMBTU of natural
gas during 48 months commencing April 2008.
8. LONG-TERM DEBT
Long-Term Debt as December 31 consisted of the following (in thousands):
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
Libor + 2% Bank Revolving Credit Facility due 2011 27,000 --
Libor + 6% Related party Debt due 2012 13,128 --
Libor + 5.5% Related party Debt due 2014 6,788 --
Libor + 6% Related party Debt due 2014 20,098 --
------------------
67,014 --
Less: Current Portion of Long-Term Debt (3,000) --
------------------
Total 64,014 --
==================
F-13
For funding the Oil and Gas Properties acquired from Five States in 2007 (see
Note 2) the Company obtained loans in the total principle amount of $84.3
million as described below:
Isramco obtained loans in the total principle amount of $42 million from Naphtha
Israel Petroleum Corp. Ltd., the parent company (including through its wholly
owned subsidiary IOC-Israel Oil Company Ltd) ("Naphtha") with terms and
conditions as below:
On February 27, 2007 (the "Loan Agreement"), Isramco obtained $18.5 million. The
outstanding principal amount of the loan accrues interest at per annum rate
equal to the London Inter-bank Offered Rate (LIBOR) plus 5.5%, not to exceed 11%
per annum. Interest is payable at the end of each loan year. Principal plus any
accrued and unpaid interest are due and payable on February 26, 2014. Interest
after the maturity date accrues at the per annum rate of LIBOR plus 12% until
paid in full. At any time, Isramco is entitled to prepay the outstanding amount
of the loan without penalty or prepayment. To secure its obligations that may be
incurred under the Loan Agreement, Isramco agreed to grant to Naphtha a security
interest in certain specified properties held by Jay Petroleum, its wholly owned
subsidiary. Naphtha can accelerate the loan and exercise its rights under the
collateral upon the occurrence any one or more of the following events of
default: (i) Isramco's failure to secure the indebtedness as provided for in the
agreement, pay any amount that may become due in connection with the loan within
five (5) days of the due date (whether by extension, renewal, acceleration,
maturity or otherwise) or fail to make any payment due under any hedge agreement
entered into in connection with the transaction, (ii) Isramco's material breach
of any of the representations or warranties made in the loan agreement or
security instruments or any writing furnished pursuant thereto, (iii) Isramco's
failure to observe any undertaking contained in transaction documents if such
failure continues for 30 calendar days after notice, (iv) Isramco's insolvency
or liquidation or a bankruptcy event or(v) Isramco's criminal indictment or
conviction under any law pursuant to which such indictment or conviction can
lead to a forfeiture by Isramco of any of the properties securing the loan. Mr.
Jackob Maimon, Isramco's president and director is a director of Naphtha and Mr.
Haim Tsuff, Isramco's Chief Executive Officer and Chairman is a controlling
shareholder of Naphtha. During 2007 the Company repaid $13.6 million as part of
the proceeds received from the selling of the Israeli activities (for further
information see Note 5 "closure of the Israeli office").
On February 27, 2007 (the "Second Loan Agreement") Isramco obtained a loan from
Naphtha, in the principal amount of $11.5 million, repayable at the end of seven
years. Interest accrues at a per annum rate of LIBOR plus 6%. At any time
Isramco can make prepayments without premium or penalty .The Second Loan is not
secured. The other terms of the Second Loan Agreement are identical to the terms
of the Loan Agreement.
On February 27, 2007 (the "Third Loan Agreement ") Isramco obtained a loan from
Naphtha, in the principal amount of $12 million, repayable at the end of five
years. Interest accrues at a per annum rate of LIBOR plus 6%. At any time
Isramco can make prepayments without premium or penalty. The Third Loan is not
secured. The other terms of the Third Loan Agreement are identical to the terms
of the Loan Agreement.
On February 26, 2007 Isramco obtained a loan from J.O.E.L Jerusalem Oil
Exploration Ltd, a related party ("JOEL"), in the principal amount of $ 7
million, repayable at the end of 3 months (that was extended until July 11,
2007). Interest accrues at a per annum rate of 5.36%. On July 2007 the Company
and J.OEL reach an agreement to revise the period of the Loan to seven years and
the interest rate to LIBOR plus 6%. Mr. Jackob Maimon, Isramco's president and
director is a director of JOEL and Mr. Haim Tsuff, Isramco's Chief Executive
Officer and Chairman is a controlling shareholder of JOEL.
In 2007 the Company recorded interest expenses of $4,728,000 in relating to the
loans from related party.
Pursuant to a Credit Agreement, dated as of March 2, 2007 (the "Credit
Agreement") between Isramco Energy and Wells Fargo Bank NA, as administrative
agent, Isramco Energy obtained a $35.3 million credit line from Wells Fargo.
Amounts outstanding under the credit line are payable by March 1, 2011. Interest
on amounts outstanding accrue at a per annum rate equal to LIBOR plus 2%. The
Credit Agreement contains covenant that the Company needs to comply with.
Amounts outstanding under the Credit Agreement are secured by a guarantee from
Isramco and a pledge by Isramco of the shares of Isramco Energy.
F-14
9. INCOME TAXES
The principal components of Isramco's deferred tax assets and liabilities as of
December 31 were as follows (in thousands):
----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
DEFERRED CURRENT TAX ASSETS:
Commodity hedging contracts $ 1,047 --
----------------------------------------------------------------------------
Deferred current tax assets $ 1,047 --
============================================================================
DEFERRED NONCURRENT TAX LIABILITIES:
Book-tax differences in property basis $ (860) $(1,369)
Book-tax differences in investment in partnerships -- (3,048)
Book-tax differences in marketable securities (1,764) (1,467)
Commodity hedging contracts $ 2,151 $ --
Losses carry-forward -- 1,072
Other (482) 400
----------------------------------------------------------------------------
Net long-term deferred tax liabilities $ (955) $(4,412)
============================================================================
The principal components of Isramco's Income Tax Provision for the years
indicated below were as follows (in thousands):
--------------------------------------------------------------------
2007 2006 2005
--------------------------------------------------------------------
CURRENT INCOME TAX:
Federal -- $ (167) $ --
Foreign 741 400 370
State -- 150 25
-----------------------------------
Total current income tax $ 741 $ 383 $ 395
-----------------------------------
DEFERRED INCOME TAX
Federal $(5,933) $ 343 $ (355)
Foreign -- -- --
State -- -- --
-----------------------------------
Total deferred income tax $(5,933) $ 343 $ (355)
-----------------------------------
PROVISION FOR INCOME TAX $(5,192) $ 726 $ 40
===================================
The domestic and non-U.S. components of income (loss) before income taxes and a
reconciliation of the income tax provision (benefit) to theoretical income tax
computed by applying the U.S. federal statutory tax rate are as follows:
--------------------------------------------------------------------
2007 2006 2005
--------------------------------------------------------------------
Computed at U.S. statutory -35.00% 35.00% -35.00%
rates
State income taxes, net of
federal benefit 2.10% 2.10% 2.30%
Income tax on sale of foreign
operation -10.00% -- --
Foreign income taxes -- 9.60% 33.90%
Accretion expense -- -35.20% --
Other -1.86% 0.20% 2.50%
-----------------------------------
EFFECTIVE INCOME TAX RATE -44.76% 11.70% 3.70%
===================================
F-15
10. EARNINGS PER SHARE
The following table sets forth the computation of Net Income Per Share Available
to Common Stockholders for the years ended December 31 (in thousands, except per
share data):
---------------------------------------------------------------------------------------------------------------------
2007 2006 2005
---------------------------------------------------------------------------------------------------------------------
Numerator for Basic and Diluted Earnings per Share - $ (6,411) $ 6,569 $ (253)
Net Income (loss) from continuing operations $ (6,411) $ 3,842 $ (1,132)
Net Income (loss)
Denominator for Basic Earnings per Share -
Weighted Average Shares 2,717,691 2,717,691 2,709,355
---------------------------------------------------
Potential Dilutive Common Shares - 2,717,691 2,717,691 2,709,355
Adjusted Weighted Average Shares
Net Income Per Share Available to Common Stockholders -
Basic and Diluted
Continuing operations $ (2.36) $ 2.42 $ (0.09)
Discontinuing operations - (1.01) (0.33)
----------------------------------------------------
Total $ (2.36) $ 1.41 $ (0.42)
===================================================
11. STOCK OPTIONS
As of December 31, 2007, 20,050 shares of common stock were reserved for
issuance under the 1993 Plan. Options granted under the 1993 Plan may be either
incentive stock options under the Internal Revenue Code or options which do not
qualify as incentive stock options. Options granted under the 1993 Plan may be
exercised 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 Isramco's common stock on the date of grant. All the options granted
under the 1993 Plan to date were fully vested on the date of grant. The
administrator of the 1993 Plan may set the exercise price for a nonqualified
stock option at less than 100% of the fair market value of Isramco's common
stock on the date of grant.
No stock options were granted during 2007, 2006 and 2005. Shares of common stock
reserved for future issuance under the 1993 plan are 20,050 shares. There are no
granted stock options outstanding under the 1993 Plan as of balance sheet date.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes was as follows for the years ended
December 31 (in thousands):
------------------------------------------------------------------
2007 2006 2005
------------------------------------------------------------------
$3,284 $ 217 $ 205
Interest
$ 174 $ 76 $ 65
Income taxes
The consolidated statements of cash flows exclude the following non-cash
transactions:
o Property and equipment of $700 thousand included in accounts payable
o Sale of assets, liabilities and rights for $13.6 million offset against
loan from related party
13. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially expose Isramco to concentrations of
credit risk, consist primarily of trade accounts receivable. Isramco's customer
base includes several of the major United States oil and gas operating and
production companies. Although Isramco is directly affected by the well-being of
the oil and gas production industry, management does not believe a significant
credit risk existed as of December 31, 2007.
F-16
Isramco 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 Isramco's cash and cash equivalents is invested in
marketable securities. Substantially all marketable securities owned by Isramco
are held by banks in Israel and Switzerland.
14. COMMITMENTS AND CONTINGENCIES
Commitments
Isramco has several non-cancelable leases, however, the aggregate commitment is
not material
Contingencies
From time to time, the Company may be a plaintiff or defendant in a pending or
threatened legal proceeding arising in the normal course of its business. All
known liabilities are accrued based on the Company's best estimate of the
potential loss. In the opinion of management, Isramco's ultimate liability, if
any, in these pending actions is not expected to have a material adverse effect
on the financial position, operating results or liquidity of Isramco.
15. ASSET RETIREMENT OBLIGATION
If a reasonable estimate of the fair value of an obligation to perform site
reclamation, dismantle facilities or plug and abandon wells can be made, the
Company records a liability (an asset retirement obligation or ARO) on the
consolidated balance sheet and capitalizes the asset retirement cost in oil and
natural gas properties in the period in which the retirement obligation is
incurred. In general, the amount of an ARO and the costs capitalized will be
equal to the estimated future cost to satisfy the abandonment obligation using
current prices that are escalated by an assumed inflation factor up to the
estimated settlement date, which is then discounted back to the date that the
abandonment obligation was incurred using an assumed cost of funds for the
company. After recording these amounts, the ARO is accreted to its future
estimated value using the same assumed cost of funds and the additional
capitalized costs are depreciated on a unit-of-production basis.
The following table presents the reconciliation of the beginning and ending
aggregate carrying amount legal obligations associated with the retirement of
oil and gas properties at December 31 (in thousands):
---------------------------------------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------------------------------------
Liability for asset retirement obligation at the beginning of
the year $ 356 $ 343
Liabilities Incurred 2,050 8
Liabilities Settled -- --
Accretion 219 71
Revisions 45 (66)
------------------------------
$ 2,670 $ 356
------------------------------
Liability for asset retirement obligation at the end of the year
F-17
16. GEOGRAPHICAL SEGMENT INFORMATION
Isramco's operations for 2007 involve one industry segment - the exploration,
development production and transportation of oil and natural gas and holding and
leasing its cruise line vessel. Prior to 2007, Isramco operated in two industry
segments - oil and gas activities and leasing its cruise line vessel. Its
current oil and gas activities are concentrated in the United States and Israel
(on December 31, 2007 the Company sold the majority of the Company's Israeli
based activities and assets, for further information see Note 5 "closure of the
Israeli branch") . Operating outside the United States subjects Isramco to
inherent risks such as a loss of revenues, property and equipment from such
hazards as exploration, nationalization, war, terrorism and other political
risks, risks of increased taxes and governmental royalties, renegotiation of
contracts with government entities and change in laws and policies governing
operations of foreign-based companies.
Isramco'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 of formations. In additions, oil and gas prices have fluctuated
substantially in recent years as a result of events, which were outside of
Isramco's control.
--------------------------------------------------------------------------------------------------
TOTAL
GEOGRAPHIC SEGMENTS (IN THOUSANDS) UNITED STATES ISRAEL OIL AND GAS
--------------------------------------------------------------------------------------------------
2007
Sales and other operating revenues $ 20,916 $ 1,840 $ 22,756
Costs and operating expenses 19,796 1,387 21,183
-----------------------------------------
Operating profit (loss) $ 1,120 $ 453 $ 1,573
Interest income (434)
Interest expense 6,778
Gain on marketable securities and net gain in
investee (52)
Realized gain on sale of investment and
capital gain (1,754)
Loss from swap transaction 8,638
Income benefit (5,192)
-----------------------------------------
Net loss before discontinued operation (6,411)
Loss on discontinued operation --
-----------------------------------------
Net loss (6,411)
=========================================
Identifiable assets at December 31, 2007 $ 99,955 $ -- $ 99,955
Cash and corporate assets 10,753
---------
Total assets at December 31, 2007 $ 110,708
2006
Sales and other operating revenues $ 2,167 $ 825 $ 2,992
Costs and operating expenses 2,290 251 2,541
-----------------------------------------
Operating profit (loss) (123) 574 451
Interest income and other 448
Net gain in investee and gain on marketable 3,747
Securities
General corporate expenses (1,964)
Internet expense (294)
Compensation for legal settlement 2,536
Gain from swap transaction 2,604
Other income 39
Income taxes (726)
-----------------------------------------
Net income before discontinued operation 6,569
Loss on discontinued operation (2,727)
-----------------------------------------
Net income $ 3,842
=========================================
Identifiable assets at December 31, 2006 $ 10,560 $ 66 $ 10,626
Cash and corporate assets 51,447
F-18
---------
Total assets at December 31, 2006 $ 62,073
Sales and other operating revenues $ 3,140 $ 1,550 $ 4,690
Costs and operating expenses (3,075) (787) (3,862)
-----------------------------------------
Operating profit (loss) 65 763 828
Interest income 294
Gain on marketable securities and net gain in 1,212
investee
General corporate expenses (2,045)
Other income (expense) (524)
Compensation for legal settlement --
Gain from swap transaction (641)
Income taxes (40)
-----------------------------------------
Net loss before discontinued operation (253)
Loss on discontinued operation (879)
-----------------------------------------
Net loss $ (1,132)
=========================================
Identifiable assets at December 31, 2005 $ 5,236 $ 68 $ 5,304
Cash and corporate assets 33,311
---------
Total assets at December 31, 2005 $ 38,615
F-19
17. COMMON STOCK
In March 2005, Isramco issued 38,919 shares of its common stock to each of Haim
Tsuff, Chairman of the Board of Directors and Chief Executive Officer of
Isramco, and Jackob Maimon, President of Isramco. The shares were issued upon
the exercise of options to purchase 69,995 shares common stock at an exercise
price of $4.28 per share granted to each of Mr. Tsuff and Mr. Maimon on March
25, 2000. The options were exercised pursuant to "cashless" exercise provisions
under which the number of shares of common stock issued upon exercise was
reduced by the number of shares, valued at the closing price of the common stock
on the Nasdaq Small Cap Market on the trading day immediately prior to exercise,
equal to the aggregate exercise price of the option.
18. DISCONTINUED OPERATION
In March 2004, Isramco purchased a luxury cruise liner for aggregate
consideration of $8.05 million. Isramco, through its wholly owned subsidiary,
Magic 1 Cruise Line Corp., a British Virgin Island corporation ("Magic I
Corp."), leased the vessel to European based tour operator from April 2005
through October 2005 and from April 6, 2006 through November 5, 2006. In
December 2006, Isramco sold all of the outstanding share capital of Magic 1
Corp. to an unrelated third party for total consideration of approximately $2.15
million The sale included the assumption by the purchaser of a loan in the
principal amount of $3.3 million. Following the sale, Isramco is no longer
engaged in the business of cruise line vessel
RESULTS OF OPERATION FROM DISCONTINUED OPERATION FOR THE YEAR ENDED DECEMBER 31,
(in thousands except for share information)
-------------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------------
REVENUES $ 1,712 $ 1,520
----------------------------
EXPENSES :
Interest expense 622 389
Cost of revenue from vessel 1,418 1,051
Depreciation 945 1,128
General and administrative 7 15
Impairment of vessel 2,200 -
----------------------------
TOTAL EXPENSES 5,192 2,583
----------------------------
LOSS BEFORE INCOME TAXES 3,480 1,063
INCOME TAXES - -
-----------------------------
NET LOSS FROM VESSEL ACTIVITY 3,480 1,063
-----------------------------
Interest expenses to parent company 369 184
Capital gain from sale of activity 384 -
-----------------------------
NET LOSS FROM DISCONTINUED OPERATION $ 2,727 $ 879
=============================
F-20
19. SUBSEQUENT EVENTS
TRANSACTION WITH GFB LLC AND TRANS REPUBLIC RESOURCES LTD
On February 15, 2008, Jay Petroleum, entered into Purchase and Sale Agreements
(the "Agreements") with GFB Acquisition - I, L.P. ("GFB") and Trans Republic
Resources, Ltd. ("Trans Republic," and, together with GFB, the "Sellers")
pursuant to which Jay Petroleum agreed to purchase the Sellers' interests in
certain oil and gas properties located in Texas, New Mexico and Oklahoma for an
aggregate purchase price of approximately $102 million (the "Purchase Price").
The transaction includes mainly operated oil and gas properties in approximately
40 fields (approximately 490 Leases) in East Texas, Texas Gulf Coast, Permian,
Anadarko and San Juan Basins. Significant fields are the Alabama Ferry Field in
East Texas, the Bagley Field in West Texas and New Mexico, and the Esperson Dome
Field on the Texas Gulf Coast. Net daily production from the properties is
approximately 600 Barrels of oil and 3.6 MMCF. Based on a third party Consulting
firm that has performed a reserve report as of January 1, 2008, total net proved
developed producing reserves are approximately 3.26 million barrels of oil and
18 BCF of natural gas. Contemporaneously with the execution of the Agreements,
the Company paid to GFB a deposit of approximately $10 million (the "Deposit").
The final Purchase Price is subject to adjustment, as specified in the Purchase
Agreement. The closing of the transaction was on March 27, 2008.
For funding the Oil and Gas Properties acquired from GFB LLC and Trans Republic
Resources Ltd. (see Note 19) the Company obtained, during 2008, loans in the
total principle amount of $102.9 million as described below:
On March 27, 2008 Isramco obtained a loan from JOEL, a related party, in the
principal amount of $48.9 million, repayable at the end of 7 years. Interest
accrues at a per annum rate of LIBOR plus 6%. Mr. Jackob Maimon, Isramco's
president and director is a director of JOEL and Mr. Haim Tsuff, Isramco's Chief
Executive Officer and Chairman is a controlling shareholder of JOEL.
Pursuant to a Credit Agreement, dated as of March 27, 2008 (the "Credit
Agreement") between Isramco and the Bank of Nova Scotia ("Scotia"), as
administrative agent, Isramco obtained a $54 million a line of credit. Amounts
outstanding under the credit line are payable by March 27, 2012. Interest on
amounts outstanding accrue at a per annum rate equal to LIBOR plus 2%.
Simultaneously to the cosigning of the agreement, the Company entered to 4 crude
oil swap contracts agreements and 4 natural gas price swap contracts with the
commercial bank to sell 605,016 barrels of crude oil during 48 months commencing
April 1, 2008 and 3,433,348 MMBTU of natural gas during 48 months commencing
April 1, 2008, which constitute 74% out of the forecasted production for
2008-2011 and 18% out of the forecasted production for 2012.
Hereunder are the open swap contracts positions as of March 26, 2008:
-----------------------------------------------------------------------------
Swap Contracts
-----------------------------------------------------------------------------
Natural Gas Crude Oil
----------------------------------- --------------------------------
Weighted Weighted
Price range Average Price range Average
Volume Price Volume Price
(MMBTU) ($/MMBTU) ($/MMBTU) (Bbl) ($/MMBTU) ($/Bbl)
----------------------------------- --------------------------------
2008 1,782,118 8.20-8.85 $ 8.49 255,006 4.15-92.75 $ 79.12
2009 1,941,096 7.77-8.63 8.17 276,648 63.90-90.60 79.60
2010 1,785,648 7.49-8.32 7.88 245,616 63.30-88.75 78.75
2011 764,820 8.22 210,307 82.10-88.55 87.53
2012 174,222 8.65 31,953 88.20 88.20
F-21
20. SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED)
The following supplemental information regarding the oil and gas activities of
Isramco for 2007, 2006 and 2005 is presented pursuant to the disclosure
requirements promulgated 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.
CAPITALIZED COST OF OIL AND GAS PRODUCING ACTIVITIES (IN THOUSANDS)
---------------------------------------------------------------------------------------------------
As of December 31 2007 2006
---------------------------------------------------------------------------------------------------
UNITED STATES UNITED STATES
----------------- -----------------
Unproved properties not being amortized $ 15,314 $ --
Proved property being amortized 93,626 16,850
Accumulated depreciation, depletion amortization and impairment (16,291) (5,610)
----------------- -----------------
Net capitalized costs 92,649 11,240
================= =================
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION, AND DEVELOPMENT
ACTIVITIES (IN THOUSANDS)
---------------------------------------------------------------------------
As of December 31 2007 2006 2005
---------------------------------------------------------------------------
UNITED STATES
-------------------------------
Property acquisition costs--proved and
unproved properties $ 86,284 $ 1,609 $ 2,557
Exploration costs $ 269 125 110
Development costs $ 2,691 $ 4,652 $ 582
OIL AND GAS RESERVES
Oil and gas proved reserves cannot be measured exactly. The engineers
interpreting the available data, as well as price and other economic factor base
reserve estimates on many factors related to reservoir performance, which
require evaluation. The reliability of these estimates at any point in time
depends on both the quality and quantity of the technical and economic data, the
production performance of the reservoirs as well as extensive engineering
judgment. Consequently, reserve estimates are subject to revision, as additional
data become available during the producing life of a reservoir. When a
commercial reservoir is discovered, proven reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define the extent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. The evolution of technology may also result in the application of
improved recovery techniques such as supplemental or enhanced recovery projects,
or both, which have the potential to increase reserves beyond those envisioned
during the early years of a reservoir's producing life.
The following table represents Isramco'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, 2007,
2006 and 2005, 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 recompilation.
All of Isramco's proved reserves are in the United States. Isramco's oil and gas
reserves are priced at $7.465 and $95.95 per barrel per Mcf, respectively, at
December 31, 2007
F-22
-------------------------------------------------------------------------------------
OIL BBLS GAS MCF NGL BBLS
-------------------------------------------------------------------------------------
December 31, 2004 140,080 2,011,440 --
Revisions of previous estimates (20,269) (118,402) --
Acquisition of minerals in place 1,280 106,670 --
Sales of minerals in place -- -- --
Production (15,723) (355,008) --
December 31, 2005 105,368 1,644,700 --
--
Revisions of previous estimates 24,071 (59,066) --
Acquisition of minerals in place -- -- --
Sales of minerals in place -- -- --
Production (13,464) (213,634) --
December 31, 2006 115,975 1,372,000 --
Revisions of previous estimates 358,044 1,455,617 838,595
Acquisition of minerals in place 1,625,855 24,075,738 1,425,600
Sales of minerals in place -- -- --
Production (96,793) (1,550,789) (100,534)
----------- ----------- -----------
December 31, 2007 2,003,081 25,352,566 2,163,661
===============================================
F-23
Isramco's proved developed reserves are as follows:
DEVELOPED UNDEVELOPED
---------------------------------------------------------------------------------------------------------------------
OIL BBLS GAS MCF NGL BBLS OIL BBLS GAS MCF NGL BBLS
-------------------------------------------------------------------------------------------------
December 31, 2007 1,808,317 23,338,079 1,873,949 194,764 2,014,487 289,711
December 31, 2006 115,975 1,372,000 - 5,876 618,700 -
December 31, 2005 105,368 1,644,700 - 20,652 484,101 -
December 31, 2004 140,080 2,011,440 - 32,880 334,100 -
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOW
The standardized measure of discounted future net cash flows relating to
Isramco'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
Isramco's estimated share of the future production from proved oil and gas
reserves.
Future production and development costs were computed by applying year-end costs
to future years. Applying year-end statutory tax rates to the estimated net
future cash flows derived future income taxes. A prescribed 10% discount factor
was applied to the future net cash flows.
In Isramco's opinion, this standardized measure is not a representative measure
of fair market value. The standardized measure is intended only to assist
financial statement users in making comparisons among companies.
2007 2006 2005
------------- ------------ ------------
Future cash inflows $ 450,981,415 $ 18,208,000 $ 27,812,000
Future development
costs (3,502,500) (866,000) (894,000)
Future production
costs (178,384,211) (7,170,000) (8,045,000)
------------- ------------ ------------
Future net cash flows 269,094,704 10,172,000 18,873,000
Future income tax
expenses (63,983,746) (2,976,000) (6,458,000)
Annual 10% discount
rate (108,345,218) (2,875,000) (4,927,000)
------------- ------------ ------------
Standardized measure $ 96,765,740 $ 4,321,000 $ 7,488,000
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, 2007, 2006 and 2005 were as
follows:
2007 2006 2005
------------ ------------ ------------
Beginning of the year $ 4,321,000 $ 7,488,000 $ 6,001,810
Sales and transfers of oil
and gas produced, net of
production costs (13,267,315) (1,048,000) (1,861,000)
Net changes in prices and
production costs 6,084,956 (5,629,000) 10,962,000
Net changes in income taxes (8,075,637) 4,961,000 220,000
Changes in estimated future
development costs, net of
current development costs (3,395,813) -- --
Acquisition of minerals in
place 95,870,804 992,000 --
Revision of previous
estimates 23,413,049 (1,716,000) 1,000,000
Change of discount 794,008 1,395,000 943,000
Change in production rate
and other (8,979,313) (2,123,000) (9,740,577)
------------ ------------ ------------
End of year $ 96,765,740 $ 4,321,000 $ 7,488,000
============ ============ ============
F-24
UNAUDITED QUARTERLY FINANCIAL INFORMATION
(In Thousands, Except Per Share Data)
---------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------------------------------------------------------------------------------------------------
2007
Total Revenues $ 3,122 $ 7,215 $ 5,355 $ 7,064
Net Income (loss) before taxes $(2,807) $ 1,936 $ (970) $(9,762)
Net income (loss) from discontinued operation -- -- -- --
Net Income $(1,766) $ 1,198 $ (647) $(5,196)
Earnings (loss) per Common Share
-Basic and Diluted $ (0.65) $ 0.44 $ (0.24) $ (1.91)
2006
Total Revenues $ 1,576 $ 1,708 $ 1,081 $ 1,197
Net Income (loss) before taxes $ 2,650 $ 1,337 $ 225 $ 3,083
Net income (loss) from discontinued operation
$(2,500) $ 231 $ 458 $ (916)
Net Income $ 394 $ 1,066 $ 582 $ 1,800
Earnings (loss) per Common Share
-Basic and Diluted $ 0.14 $ 0.39 $ 0.21 $ 0.67
2005
Total Revenues $ 1,845 $ 963 $ 2,105 $ 982
Net Income (loss) before taxes $ 989 $ (953) $ 1,152 $ (1,401)
Net income (loss) from discontinued operation
-- $ (201) $ 190 $ (529)
Net Income $ 304 $ (596) $ 992 $(1,832)
Earnings (loss) per Common Share
-Basic and Diluted $ 0.11 $ (0.22) $ 0.36 $ (0.67)
F-25