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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
CHECK ONE
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2004
or
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
COMMISSION FILE NUMBER 0-12500
ISRAMCO, INC.
(Exact Name of registrant as Specified in its Charter)
Delaware 13-3145265
(State or other Jurisdiction of I.R.S. Employer Number
Incorporation or Organization)
11767 KATY FREEWAY, HOUSTON, TX 77079
(Address of Principal Executive Offices)
713-621-5946
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). | | Yes |X| No
The number of shares outstanding of the registrant's Common Stock as
August 16, 2004 was 2,639,853.
INDEX
PAGE
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2004 and
December 31, 2003 1
Consolidated Statements of Operations for the three and
six months ended June 30, 2004 and 2003 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 2004 and 2003 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION 15
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds and Issuer
Purchases of Equity Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q 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 FORWARD-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.
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share information)
June 30, December 31,
2004 2003
------------- -------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents 1,825 2,429
Marketable securities, at market 6,185 4,064
Accounts receivable - Trade 618 503
Account receivable - other -- 609
Prepaid FIT expenses -- 407
Prepaid expenses and other current assets 203 197
------------- -------------
Total current assets 8,831 8,209
Property and equipment (successful efforts method for oil and gas properties) 3,494 3,264
Real Estate 1,887 1,887
Marketable securities, at market 7,688 8,572
Investment in affiliates 11,103 10,520
Investment in Vessel 9,151 --
Other 162 162
------------- -------------
Total assets 42,316 32,614
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 1,420 798
------------- -------------
Total current liabilities 1,420 798
Asset Retirement Obligations 788 766
Deferred tax liability 1,564 1,169
Bank loan 7,522 --
Commitments, contingencies and other matters
Common stock $.0l par value; authorized 7,500,000
shares; issued 2,669,120 shares; outstanding
2,639,853 at March 31,2003
and December 31,2003 27 27
Additional paid-in capital 26,240 26,240
Retained Earnings 4,034 3,189
Accumulated other comprehensive income (loss) 885 589
Treasury stock, 29,267 shares at (164) (164)
March 31, 2003 and December 31, 2003
------------- -------------
Total shareholders' equity 31,022 29,881
------------- -------------
Total liabilities and shareholders' equity $ 42,316 $ 32,614
============= =============
See notes to the consolidated financial statements.
-1-
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share information)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES:
Operator fees from related party $ 36 $ 52 $ 72 $ 105
Oil and gas sales 778 964 1,612 1,771
Interest income 203 257 413 425
Office services to affiliate and other 193 226 388 426
Gain on Marketable securities 9 464 9 599
Equity in net income of investees 267 941 855 1,179
Other Income 40 38 70 411
----------- ----------- ----------- -----------
Total revenues $ 1,526 $ 2,942 $ 3,419 $ 4,916
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Financial expenses 45 30 52 32
Cost of revenues 195 195
Depreciation, depletion and amortization 156 166 311 328
Accretion expenses 11 11 22 22
Lease operating expenses and severance taxes 241 201 432 420
Exploration costs -- -- -- 22
Operator expense 125 185 344 432
General and administrative 480 423 816 702
Loss on marketable securities -- -- 59 --
Impairment of oil and gas assets -- 20 -- 200
----------- ----------- ----------- -----------
Total expenses $ 1,253 $ 1,036 $ 2,231 $ 2,158
----------- ----------- ----------- -----------
Income before income taxes 273 1,906 1,188 2,758
Income taxes (273) -- (343) --
----------- ----------- ----------- -----------
Net income from continuing operation $ -- $ 1,906 $ 845 $ 2,758
=========== =========== =========== ===========
Cumulative Effect of Accounting change -- -- -- (264)
----------- ----------- ----------- -----------
Net income -- 1,906 845 2,494
=========== =========== =========== ===========
Earnings per common share-basic continuing operation $ -- $ 0.72 $ 0.32 $ 1.04
Cumulative Effect of Accounting change -- (0.10)
----------- ----------- ----------- -----------
$ -- $ 0.72 $ 0.32 $ 0.94
=========== =========== =========== ===========
Weighted average number of shares
outstanding-basic and diluted 2,639,853 2,639,853 2,639,853 2,639,853
=========== =========== =========== ===========
See notes to the consolidated financial statements.
-2-
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Month Ended June 30,
-------------------------------------
2004 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 845 2,494
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation, depletion and amortization 311 328
Accretion expense 22 22
Impairment of oil and gas assets -- 200
Dry hole costs -- --
Loss (gain) on marketable securities 50 (612)
Interest on loan 22 --
Equity in net loss (gain) of investees (855) (1,179)
Cumulative effect of and Accounting change -- 264
Deferred taxes 186
Changes in assets and liabilities:
Accounts receivable (115) (52)
Prepaid expenses and other current assets 450 274
Accounts payable and accrued liabilities 622 (970)
-------------- --------------
Net cash provided by operating activities 1,538 769
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Addition to property and equipment (541) (368)
Proceed from sale of other investment 609 --
Purchase of Vesssel (9,151) --
Purchase of marketable securities (3,622) (135)
Proceeds from sale of marketable securities 3,063 169
Purchase of convertible from promissory note -- --
-------------- --------------
Net cash used in investing activities (9,642) (334)
-------------- --------------
Net cash provided by financial activities
Proceed from Bank loan 7,500 --
-------------- --------------
Net cash provided by financial activities 7,500 --
-------------- --------------
NET INCREASE (Decrease) IN CASH AND CASH EQUIVALENTS (604) 435
Cash and cash equivalents-beginning of year 2,429 1,617
-------------- --------------
Cash and cash equivalents-end period 1,825 2,052
============== ==============
See notes to the consolidated financial statements.
-3-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
As used in these financial statements, the term "Company" refers to Isramco,
Inc. and subsidiaries.
NOTE 2
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of Management, all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation have been included. Results for the
interim period presented are not necessarily indicative of the results that may
be expected for the year ended December 31, 2004. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2003. Certain re-classification of prior year amounts have been made to conform
to current presentation. New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46. Consolidation of
Variable Interest Enninies, and subsequently revised the interpretation in
December 2003 (FIN 46R). This interpretation of Accounting Research Bulletin No.
51, Consolidated Financial Statements, addresses consolidation by business
enterprises of variable interest entities, which have certain characrenistics.
As revised, FIN 46R is now generally effective for financial statements for
metrim or annual periods ending on or after March 15, 2004. We adopted FIN 46R
effective January 1, 2004, with no material effect on our consolidated financial
statements.
STOCK-BASED COMPENSATION
We account for employee stock-based compensation granted under our
long-term incentive plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. The company did not have any
compensation expense for the three months periods ended March 31, 2004 and 2003,
as there were no options granted in either of the periods and options
historically granted were fully vested the date of grant. The following table
illustrares the effect on net income (loss) and earning (loss) per share if we
had applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation:
SIX MONTH ENDED JUNE 30,
------------------------
2004 2003
---- ----
Net income (loss), as reported $ 845 $ 2,494
Deduct: Total stock-based employee compensation
Expense deremuned under fair value based merhod
For all awards, ner of related tax effects ---- ---
------------- -------------
Pro forma net income (loss) $ 0.32 $ 0.94
Net income (loss) per share:
Basic - as reported $ 0.32 $ 0.94
Basic - pro forma $ 0.32 $ 0.94
Diluted - as reported $ 0.32 $ 0.94
Diluted - pro forma $ 0.32 $ 0.94
-4-
NOTE 3 - CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
direct and indirect non U.S. based wholly-owned subsidiaries Isramco Oil and Gas
Ltd. (Oil and Gas) and Magic 1 Cruise Line Corp. and it's U.S based wholly-owned
subsidiaries: Jay Petroleum, L.L.C. (Jay), Jay Management L.L.C. (Jay
Management) and IsramTec Inc. (IsramTec). Intercompany balances and transactions
have been eliminated in consolidation.
NOTE 4 - ACCOUNTING CHANGES
Effective January 1, 2003, the Company adopted SFAS No. 143 "Accounting for
Asset Retirement obligations". SFAS No. 143 requires entities to record a
liability for asset retirement obligations at fair value in the period in which
it is incurred and a corresponding increase in the carrying amount of the
related long-lived asset. Accretion expenses for the six months ended June 30,
2004 was approximately $ 22,000.
NOTE 5 - OIL AND GAS PROPERTIES
The Company follows the "successful efforts" method of accounting for its oil
and gas properties. Under this method of accounting, all property acquisition
costs and costs of exploratory and development wells are capitalized when
incurred, pending determination of whether the well has found proved reserves.
If an exploratory well has not found proved reserves, the costs of the well are
charged to expense. The costs of development wells are capitalized whether
successful or unsuccessful. Geological and geophysical costs and the costs of
carrying and retaining undeveloped properties are expensed as incurred.
Management estimates that the salvage value of lease and well equipment will
approximately offset the future liability for plugging and abandonment of the
related wells. Accordingly, no accrual for such costs has been recorded.
Although the company continues to seek to acquire oil and gas properties, no
such purchases were made in the first three months of 2004.
NOTE 6 - INVESTMENT IN VESSEL
In March 2004, the Company completed the purchase of a luxury cruise liner for
aggregate consideration of $8,050,000. The Vessel, a Bahamas flagged ship,
contains 270 passenger cabins spread out over nine decks. The Company has
secured commercial bank loans for approximately $7.5 million of the purchase
price, secured by a lien on the Vessel, marketable securities and a Company
guarantee. The terms of the loan are as follows: Amount of $2.7 million at a
rate of Libor + 0.75% for a duration of twelve months and an amount of $4.8
million at a rate of Libor + 1%, revolving every week. Title and operation of
the vessel is under a wholly-owned Company subsidiary.
In May 2004 the Company and an Israeli based tour operator enter into an
agreement in principle pursuant to which the Company is leasing the cruise line
vessel beginning July 1, 2004 through October 31, 2004 at a daily rate of
$21,500. Under the agreement the Company will be responsible for the mechanical
and technical operation of the vessel. The tour operator has the option of
extending, under certain conditions, the lease term. If the tour operator elects
to extend the lease term for an additional three periods or five periods of
seven months each (in each of the succeeding consecutive years), then under
certain conditions, it would be entitled to purchase a 33% or 49% interest,
respectively, in the vessel (or the subsidiary). The purchase price will be
based on Company's cost of purchase of the vessel as well as all amounts
expended through such time in respect of the vessel.
-5-
NOTE 6 - EARNINGS PER SHARE COMPUTATION
SFAS No. 128 requires a reconciliation of the numerator (income) and denominator
(shares) of the basic earnings per share ("EPS") computation to the numerator
and denominator of the diluted EPS computation. The Company's reconciliation is
as follows:
For the Six Months Ended June 30,
---------------------------------
2004 2003
---- ----
Income Shares Income Shares
------ ------ ------ ------
Earnings per common share-Basic $ 845,000 2,639,853 $2,494,000 2,639,853
Effect of dilutive securities of stock options -- -- -- --
========== ========== ========== ==========
$ 845,000 2,639,853 $2,494,000 2,639,853
NOTE 7 - GEOGRAPHICAL SEGMENT INFORMATION
The Company's operations involve a single industry segment--the exploration,
development, production and transportation of oil and natural gas. Its current
oil and gas activities are concentrated in the United States and Israel.
Operating in foreign countries subjects the Company to inherent risks such as a
loss of revenues, property and equipment from such hazards as exploration,
nationalization, war and other political risks, risks of increases of taxes and
governmental royalties, renegotiation of contracts with government entities and
changes in laws and policies governing operations of foreign-based companies.
The Company's oil and gas business is subject to operating risks associated with
the exploration, and production of oil and gas, including blowouts, pollution
and acts of nature that could result in damage to oil and gas wells, production
facilities or formations. In addition, oil and gas prices have fluctuated
substantially in recent years as a result of events, which were outside of the
Company's control. Financial information, summarized by geographic area, is as
follows (in thousands):
-6-
GEOGRAPHIC SEGMENT
United Consolidated
States Israel Africa Total
------ ------ ------ -----
Identifiable assets at June 30, 2004 3,397 97 3,494
Cash and corporate assets 38,822
---------
Total Assets at June 31, 2004 42,316
=========
Identifiable assets at December 31, 2003 $ 3,183 $ 81 $ -- $ 3,264
Cash and corporate assets 29,350
---------
Total Assets at December 31, 2003 $ 32,614
Six Months Ended June 30, 2004 42,316
Sales and other operating revenue $ 1,704 368 -- 2,072
Costs and operating expenses $ (765) (344) -- (1,109)
======== ======== ======== =========
Operating profit $ 939 24 -- $ 963
Interest income
Financial Income, net 361
General corporate expenses (816)
Loss on marketable securities and
equity in net income of investees 805
Other expenses (125)
Income Texas (343)
---------
Total Assets at June 31, 2004 845
=========
Six Months Ended June 30, 2003
Sales and other operating revenue $ 1,837 $ 465 $ --- $ 2,302
Costs and operating expenses $ (876) $ (398) $ (150) $ (1,424)
-------- -------- -------- ---------
Operating profit $ 961 $ 67 $ (150) $ 878
======== ======== ======== =========
Interest Income
Financial Income, net 393
General corporate expenses (702)
Gain on marketable securities
and equity in net Income of investees 1,778
Other income 411
---------
Net Income from continuing operations $ 2,758
=========
-7-
United Consolidated
States Israel Africa Total
------ ------ ------ ------
Three Months Ended June 30, 2004
Sales and other operating revenue $ 823 $ 184 -- $ 1,007
Costs and operating expenses $ (408) $ (125) -- (533)
-------- -------- -------- ---------
Operating profit $ 276 $ 59 -- 474
======== ======== ======== =========
Financial Income, net 158
General corporate expenses (480)
Gain (Loss) on marketable securities 9
Equity in net income of investees 267
Income Taxes (273)
Other expenses (net) (155)
=========
Net income from continuing operations --
Three Months Ended June 30, 2003
Sales and other operating revenue 1,012 230 -- 1,242
Costs and operating expenses (438) (145) -- (583)
-------- -------- -------- ---------
Operating profit 574 185 -- 659
======== ======== ======== =========
Financial Income, net 227
General corporate expenses (423)
Gain on marketable securities and 1,405
Equity in net income of investees 38
Other income ---------
Net Income from continuing operations 1,906
=========
NOTE 8 - COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) for the six month period ended June
30, 2004 and 2003 was as follows (in thousands):
Six months
ended June 30,
2004 2003
---- ----
Net Income 845 2,494
Other comprehensive gain (loss)
- -available - for - sale securities 480 223
- -foreign currency translation adjustments (183) 592
--------- ---------
Comprehensive income (loss) 1,142 3,309
========= =========
-8-
NOTE 9 - CONTINGENCIES
The Company is also involved in various other legal proceedings arising in the
normal course of business. In the opinion of management, the Company's ultimate
liability, if any, in these pending actions would not have a material adverse
effect on the financial position, operating results or liquidity of the Company.
-10-
ITEM 2. MANAGEMENT'S 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
REPORT ON FORM 10-Q. 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
REPORT ON FORM 10-Q.
OVERVIEW
Isramco, Inc., a Delaware company, is active in the exploration of oil
and gas in Israel and the United States. The Company acts as an operator of
certain leases and licenses and also hold participation interests in certain
other interests. The Company also holds certain non-oil and gas properties. See
"Business".
CRITICAL ACCOUNTING POLICIES
In response to the Release No. 33-8040 OF THE securities and Exchange
Commission, "CAUTIONARY ADVICE REGARDING DISCLOSURE AND CRITICAL ACCOUNTING
POLICIES", the Company identified the accounting principles which it believes
are most critical to the reported financial status by considering accounting
policies that involve the most complex of subjective decisions or assessments.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of customers to make required payments. If
the financial condition of customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
The Company records an investment impairment charge when it believes an
investment has experienced a decline in value that is other than is temporary.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
carrying value of the investment that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment charge in the
future.
The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While the
Company 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 the Company 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.
The Company does not participate in, nor has it created, any off-balance
sheet special purpose entities or other off-balance sheet financing. In
addition, the Company does not enter into any derivative financial instruments.
The Company 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations primarily from cash generated by
operations.
The decrease in the Company's consolidated cash and cash equivalents of
$604,000 from $2,429,000 at December 31, 2003 to $1,825,000 at June 30, 2004, is
primarily attributable to purchase of the cruise liner (the "Vessel") in a sum
of $9.15 million. See Note 6. The Company secured commercial bank loans in the
principal amount of approximately $7.5 million, secured by liens on the vessel,
Company marketable securities and a Company guarantee.
-11-
Net cash used in investing activities for the six-month period ended
June 30, 2004 was $9,613,000 as compared to $334,000 used during the six-month
period ended June 30, 2004. The increase in net cash used during the six months
ended June 30, 2004, is primarily attributable to the purchase in March 2004 of
the Vessel.
Capital expenditures for property and equipment during the six months
ended June 30, 2004 were $512,000 compared to $368,000 for the same period in
2003. Capital expenditures are primarily attributable to the cost of drilling of
a new well in Oklahoma.
The Company believes that existing cash balances and cash flows from
activities will be sufficient to meet its financing needs. The Company intends
to finance its ongoing oil and gas exploration activities from working capital.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30,
2003 and the three months ended June 30, 2004 compared to the three months ended
June 30, 2003.
The Company reported net income of $845,000 ($0.32 per share) for the
six-month period ended June 30, 2004 compared to net income of $2,494,000 ($0.94
per share) for the same period in 2003 and no income for the three months ended
June 30, 2004 compared to a net income of $1,906,000 for the comparable period
in 2003. The decrease in reported net income for the six months ended June 30,
2004 as compared to the corresponding period in 2003 as well as for the three
months ended June 30, 2004 compared to the same period in 2003 is primarily
attributable to (i) a decrease in the gains on the securities of certain
investee-affiliates held by the Company whose shares are traded on the Tel Aviv
Stock Exchange (discussed below), (ii) decrease in the gains on other publicly
traded securities held by the Company and (iii) declining gas sales during the
period.
Set forth below is a break-down of these results.
United States
Oil and Gas Revenues (in thousands)
Three Months ended June 30, Six Months ended June 30,
2004 2003 2004 2003
Oil Volume Sold (Bbl) 5 4 9.2 8.7
Gas Volume Sold (MCF) 124 161 256 308
Oil Sales ($) 180 105 316 247
Gas Sales ($) 600 859 1,298 1,526
Average Unit Price
Oil ($/Bbl) * $ 35.89 $ 26.27 $ 34.17 $ 28.24
$ 4.85 $ 5.33 $ 5.07 $ 5.16
Gas ($/MCF) **
o Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet
-12-
SUMMARY OF EXPLORATION EFFORTS IN ISRAEL
MED YAVNE LEASE
The Med Yavne Lease covers approximately 53 square kilometers
(approximately 12,000 acres). The Company's participation share of the Med Yavne
Lease is 0.4585%.
MED ASHDOD LEASE
The Med Ashdod Lease covers approximately 250 square kilometers
(approximately 62,000 acres). The Company serves as the operator of the Med
Ashdod Lease and holds a 0.3625% interest therein.
On February 15, 2004, the operator presented the partners with two
drilling prospect (a) Nizanim 1 Well (b) Yam 3 Well to a total depth of 5,700
meter (18,700 feet), at a total budget of $40 million. The Company has received
notice from partners representing approximately 38.5% interest in the lease of
their readiness to invest in Yam 3 Well. On July 25, 2004 the Company, or behalf
of Isramco Negev 2 L.P.issued a Sole Risk notice to the other partners in the
Lease to drill Yam 3 well. On July 27, 2004, the Israeli Ministry of Defense
advised the Company that the Ministry will not approve the drilling of Yam 3 on
the basis of the data submitted. The Company and the Ministry are currently in
the process of exploring other alternatives. No assurance can be given that the
Ministry will in fact approve any alternative that is acceptable to the
partners.
MARINE SOUTH LICENSE
Marine South License covers approximately 142 square kilometers
(approximately 35,200 acres). The Company Serves as the operator and holds 1 %
interest.
SUMMARY OF EXPLORATION EFFORTS IN THE UNITED STATES
The Company, through its wholly-owned subsidiaries, Jay Petroleum LLC
("Jay Petroleum") and Jay Management LLC ("Jay Management"), is involved in oil
and gas production in the United States. Jay Petroleum owns varying working
interests in oil and gas wells in Louisiana, Texas, Oklahoma and Wyoming.
Independent estimates of the reserves held by Jay Petroleum as of December 31,
2003 are approximately 136,000 net barrels of proved developed producing oil and
2,785 MMCFs of proved developed producing natural gas. Jay Management acts as
the operator of certain of the producing oil and gas interests owned or acquired
by Jay Petroleum.
OPERATOR'S FEES
During the six months ended June 30, 2004, the Company earned $72,000 in
operator fees compared to $105,000 respect of the same period in 2003, and
$36,000 for the three months ended June 30, 2003 compared to $52,000 for the
comparable period in 2003.
OIL & GAS REVENUES
For the six months ended June 30, 2004, the Company had oil and gas
revenues of 1,612,000 compared to $1,771,000 for the same period in 2003 and
$776,000 for the three months ended June 30, 2004 compared to $964,000 for the
comparable period in 2003. The decrease in the 2004 period as compared to the
same period in 2003 is primarily attributable to the decline of 23% on the gas
production of the Company's wells in USA.
LEASE OPERATING EXPENSES AND SEVERANCE TAXES
Lease operating expenses and severance taxes were primarily in
connection with oil and gas fields in the United States. Oil and gas lease
operating expenses and severance taxes for the six months ended on June 30, 2004
were $432,000 compared to $420,000 for the same period in 2003 and $241,000 for
the three months ended June 30, 2004 compared to $201,000 for the comparable
period in 2003.
OIL AND GAS EXPLORATION COSTS
During the six months ended June 30, 2004, the Company did not expend
any amount in oil and gas exploration, as compared to $22,000 for the same
period in 2003.
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INTEREST INCOME
Interest income during the three months ended June 30, 2004 was
$413,0000 compared to $425,000 for the same period in 2003 and $203,000 in
respect of the three months ended June 30, 2004 compared to $257,000 for the
same period in 2003. The decrease in interest income earned by the company
during the three months and the six months ended June 30, 2004 compared to the
comparable periods in 2003 is primarily attributable to interest earned on
marketable securities.
GAIN (LOSS) ON MARKETABLE SECURITIES
During the six months ended June 30, 2004, the Company recognized net
realized and unrealized loss on trading securities of $50,000 compared to net
realized and unrealized gain of $599,000 for the same period in 2003 and gain of
$9,000 for the three months ended June 30, 2004 compared to a gain of $464,000
for the same period in 2003.
Increases or decreases in the gains and losses from marketable
securities are dependent on the market prices in general and the composition of
the portfolio of the Company.
EQUITY IN NET INCOME OF INVESTEES
At June 30, 2004, the available cash resources of INOC Dead Sea Limited
Partnership and Isramco Negev 2 Limited Partnership, investee-affiliates of the
Company was $130 million. During the six months ended June 30, 2004, the Company
recognized net income of $855,000, compared to net income of $1,179,000 for the
same period in 2003. The decrease in net income is primarily attributable to a
decline in the market value of these securities on the Tel Aviv Stock Exchange,
where the securities of these entities are quoted for trading.
OPERATOR EXPENSE
Operator expenses for the 2004 period were $344,000 compared to $432,000
for the 2003 period and $125,000 for the three months ended June 30, 2004
compared to $185,000 for the comparable period in 2003. The decrease is
primarily attributable to decrease of oil and gas activities in Israel.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three month period ended
June 30, 2004 were $816,000 as compared to $702,000 for the same period in 2003
and $480,000 for the three months ended June 30, 2003 compared to $423,000 for
the same period in 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to changes in interest rates and foreign currency
exchanges rates were reported in Item 7A of the Company's Annual Report on Form
10-K for the year ended December 31, 2003. There has been no material change in
these market risks since the end of the fiscal year 2003.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Principal
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of management,
including our Chief Executive Officer and Principal Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Principal
Financial Officer concluded that our disclosure controls and procedures were
effective.
Changes in Internal Controls Over Financial Reporting. During the quarter ended
June 30, 2004, there have been no changes in our internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Quarterly Report on Form 10-Q for the
three months ended March 31, 2004 relating to an action commenced by the Company
in February 2004.
ITEM 2. CHANGE IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 2, 2004.
The following matters were voted on: (i) Election of Directors and (ii)
Appointment of Auditors. The vote tally was as follows:
(1) Proposal to Elect Directors to Serve until the 2005 Annual
Meeting of Stockholders.
FOR WITHHOLD
-------------- --------------
Haim Tsuff 2,265,173 17,893
Jackob Maimon 2,265,773 17,293
Eyal Gibor 2,265,673 17,393
Max Pridgeon 2,265,773 17,293
Donald D. Lovell 2,265,873 17,193
Mr. Eyal Gibor resigned from the Company's Board of directors on August
5, 2004 and was replaced by Mr. Amir Mireskandari.
(2) Proposal to ratify the appointment of Mann Frankfort Stein &
Lipp, CAPs as the Company's auditors for the year ending
December 31, 2004.
FOR AGAINST ABSTAIN
-------------- -------------- --------------
2,254,141 14,483 14,442
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(i) Exhibits
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
15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ISRAMCO, INC.
DATE: AUGUST 16, 2004 BY /S/ HAIM TSUFF
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE
AND PRINCIPAL
FINANCIAL OFFICER
16