SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
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, 2003
or
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 from _______ to ______
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)
713-621-3882
(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 Exchange Act). Yes |_| No |X|
The number of shares outstanding of the registrant's Common Stock as of August
14, 2003 was 2,639,853.
EXPLANATORY NOTICE
This Amendment No. 1 to our Quarterly Report on Form 10-Q for the three months
ended June 30, 2003, as originally filed on August 14, 2003 is being filed
solely to reflect the plugging and abandonment obligations related to our oil
and gas properties in accordance with the Statement of Financial Accounting
Standards No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143")
effective January 1, 2003. The obligations related to these activities have been
included in the newly inserted Note 9 to the Consolidated Statements. SFAS 143
was to be adopted in January 2003 but the Registrant first recorded these
obligations only during the quarter ended December 31, 2003. The effect of the
restatement was a decrease to net income of $39,000 for the quarter ended June
30, 2003, and a decrease to net income of $352,000 for the six months ended June
30, 2003 from the amounts included in the Quarterly Report on Form 10-Q filed on
August 14, 2003 with the Securities and Exchange Commission.
Except as described above, no other changes have been made to this Report. This
Amendment No. 1 does not update any other disclosures to reflect developments
since the original date of filing.
PART I - FINANCIAL INFORMATION:
Page
Item 1. Financial Statements (ii)
Consolidated Balance Sheets at June 30, 2003 and December 31, 2002 1
Consolidated Statements of Operations for the three and six months
ended June 30, 2003 and 2002 2
Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 and 2002 3
Notes to Consolidated Financial Statements 4
Item 2. Management's discussion and analysis of financial statements 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities & Use of Proceeds 18
Item 3. Defaults upon senior securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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.
(ii)
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share information)
(Unaudited)
June 30, December 31,
2003 2002
-------- -----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents 2,052 1,617
Marketble securities, at market 3,755 3,177
Accounts receivable 610 558
Prepaid expenses and other current assets 167 441
------- -------
Total current assets 6,584 5,793
Property and equipment (successful efforts method for oil and gas properties) 3,739 3,505
Real Estate 1,887 1,887
Marketable securities, at market 8,071 7,733
Investment in affiliates 10,717 8,641
Deferred tax asset 532 887
Other 221 221
------- -------
Total assets 31,751 28,667
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 1,231 2,175
------- -------
Total current liabilities 1,231 2,175
Asset Retirement Obligation 720 --
Shareholders' equity:
Common stock $.0l par value; authorized 7,500,000
shares; issued 2,669,120 shares; outstanding
2,639,853 at June 30,2003 27 27
and December 31,2002
Additional paid-in capital 26,240 26,240
Retained Earnings 3,427 933
Accumulated other comprehensive income (loss) 270 (544)
Treasury stock, 29,267 shares at
June 30, 2003 and December 31, 2002 (164) (164)
------- -------
Total shareholders' equity 29,800 26,492
------- -------
Total liabilities and shareholders' equity 31,751 28,667
======= =======
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,
----------------------------- -----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
REVENUES:
Operator fees from related party 52 64 105 147
Oil and gas sales 964 625 1,771 1,141
Interest income 257 105 425 296
Office services to related party 226 227 426 513
Gain on Marketable securities 464 -- 599 --
Equity in net income of investees 941 -- 1,179 --
Other Income 38 -- 411 --
----------- ----------- ----------- -----------
Total revenues 2,942 1,021 4,916 2,097
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Financial expenses 30 84 32 188
Depreciation, depletion and
amortization 166 962 328 1,080
Accretion expense 11 -- 22 --
Lease operating expenses and
severance taxes 201 257 420 437
Exploration costs -- 841 22 843
Operator expense 185 155 432 342
General and administrative 423 292 702 702
Loss on marketable securities -- 88 -- 193
Equity in net loss of investees -- 176 -- 306
Impairment of oil and gas assets 20 -- 200 --
----------- ----------- ----------- -----------
Total expenses 1,036 2,855 2,158 4,091
----------- ----------- ----------- -----------
Income (loss) before income taxes 1,906 (1,834) 2,758 (1,994)
Income taxes -- 464 -- 464
----------- ----------- ----------- -----------
Net income (loss) from continuing operation 1,906 (1,370) 2,758 (1,530)
Cumulative Effect of Accounting change -- -- (264) 3,516
----------- ----------- ----------- -----------
Net income (Loss) 1,906 (1,370) 2,494 1,986
=========== =========== =========== ===========
Earnings per common share-basic
continuing operation 0.72 (0.52) 1.04 (0.58)
Cumulative Effect of Accounting change -- -- (0.10) 1.33
----------- ----------- ----------- -----------
0.72 (0.52) 0.94 0.75
=========== =========== =========== ===========
Weighted average number of shares
outstanding-basic 2,639,853 2,639,853 2,639,853 2,639,853
=========== =========== =========== ===========
Earnings per common share-diluted
continuing operation 0.72 (0.52) 1.04 (0.58)
Cumulative Effect of Accounting change -- (0.10) (0.10) 1.33
----------- ----------- ----------- -----------
0.72 (0.52) 0.94 0.75
=========== =========== =========== ===========
Weighted average number of shares
outstanding-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 Months Ended June 30,
-------------------------
2003 2002
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 2,494 1,986
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 328 232
Accretion expense 22 --
Impairment of oil and gas assets 200 --
Dry hole costs -- 1,657
Loss (gain) on marketable securities (612) 258
Equity in net loss (gain) of investees (1,179) 306
Cumulative effect of an Accounting change 264 (3,516)
Deferred taxes -- (464)
Changes in assets and liabilities:
Accounts receivable (52) (117)
Prepaid expenses and other current assets 274 (289)
Accounts payable and accrued liabilities (970) 149
------ ------
Net cash provided by operating activities 769 201
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Addition to property and equipment (368) (450)
Purchase of Real Estate -- (1,202)
Purchase of marketable securities (135) (2,768)
Proceeds from sale of marketable securities 169 704
Purchase of convertible from promissory note -- (50)
------ ------
Net cash used in investing activities (334) (3,766)
------ ------
NET INCREASE (Decrease) IN CASH AND CASH EQUIVALENTS 435 (3,565)
Cash and cash equivalents-beginning of year 1,617 4,280
------ ------
Cash and cash equivalents-end of period 2,052 715
====== ======
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
six months ended June 30, 2003, are not necessarily indicative of the results
that may be expected for the year ended December 31, 2003. 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, 2002. Certain re-classification of prior year amounts have
been made to conform to current presentation.
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), Isramco B.V., a Netherlands company and Isramco Resources
Inc., a British Virgin Islands company, and its 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 Statement of Financial Accounting
Standards No. 145, "Rescission of SFAS No. 4, 44, and 64, Amendment of SFAS No.
13, and Technical Corrections" ("SFAS No. 145"). SFAS No. 145 requires gains and
losses on early extinguishment of debt to not be classified as extraordinary
items as previously required under SFAS No. 4. SFAS No. 145 further requires any
gain or loss on extinguishment of debt that was classified as an extraordinary
item in prior periods presented to be reclassified. Previously recorded losses
on the early extinguishment of debt that were classified as an extraordinary
item in prior periods have been reclassified to interest expense. The adoption
of SFAS No. 145 had no effect on the Company's consolidated financial position,
consolidated results of operations, or cash flows.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148
also amends the disclosure provisions of SFAS No. 123 to require disclosure
about the effects on reported net income of an entity's stock-based employee
compensation in interim financial statements. The Company adopted SFAS No. 148
on January 1, 2003. The Company did not change to the fair value based method of
accounting for stock-based employee compensation. Accordingly, the adoption of
SFAS No. 148 would only affect the Company's financial condition or results of
operations if the Company elects to change to the fair value method specified in
SFAS No. 123. The adoption of SFAS No. 148 requires the Company to disclose the
effects of its stock-based employee compensation in interim financial statements
beginning with the first quarter of 2003 (see Note 1).
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. The new guidance amends SFAS No. 133
-4-
for decisions made: (a) as part of the Derivatives Implementation Group process
that effectively required amendments to SFAS No. 133, (b) in connection with
other Board projects dealing with financial instruments, and (c) regarding
implementation issues raised in relation to the application of the definition of
a derivative. The amendments set forth in SFAS No. 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of SFAS No. 149 will not have a
material impact on the Company's consolidated financial position, consolidated
results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
SFAS No. 150 requires certain financial instruments that embody obligations of
the issuer and have characteristics of both liabilities and equity to be
classified as liabilities. The provisions of SFAS No. 150 are effective for
financial instruments entered into or modified after May 31, 2003 and to all
other instruments that exist as of the beginning of the first interim financial
reporting period beginning after June 15, 2003. The Company does not have any
financial instruments that meet the provisions of SFAS No. 150; therefore,
adopting the provisions of SFAS No. 150 had no effect on the Company's
consolidated financial position, consolidated results of operations, or cash
flows.
Effective January 1, 2003, the Company adopted FASB Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34"
("FIN No. 45"). The interpretation requires that upon issuance of a guarantee,
the entity must recognize a liability for the fair value of the obligation it
assumes under that guarantee. In addition, FIN No. 45 requires disclosures about
the guarantees that an entity has issued, including a roll forward of the
entity's product warranty liabilities. This interpretation is intended to
improve the comparability of financial reporting by requiring identical
accounting for guarantees issued with separately identified consideration and
guarantees issued without separately identified consideration. Adoption of this
Interpretation had no effect on the Company's consolidated financial position,
consolidated results of operations, or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN No. 46"). The
interpretation requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. The Company has not utilized such entities and therefore the
adoption of FIN No. 46 had no effect on the Company's consolidated financial
position, consolidated results of operations, or cash flows.
In November 2002, the FASB reached a consensus on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." This issue
addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services, and/or rights to use assets. The
final consensus of this issue is applicable to agreements entered into in fiscal
periods beginning after June 15, 2003. Additionally, companies will be permitted
to apply the consensus guidance in this issue to all existing arrangements as
the cumulative effect of a change in accounting principle in accordance with APB
Opinion No. 20, "Accounting Changes." the adoption of this issue did not have a
material impact on the Company's consolidated financial position, consolidated
results of operations, or cash flows.
In accordance with SFAS 143, the Company has recorded an asset retirement
obligation in connection with the plugging and abandomnment of its oil and gas
properties. The fair value of the liability is added to the carrying amount of
the associated asset and this additional carrying amount is depreciated over the
life of the asset.
NOTE 5 -- OIL AND GAS PROPERTIES
During the six month period ended June 30, 2003, the Company Purchased a 55%
working interest in 13 gas wells located in west Texas. During the six month
period ended June 30, 2003, the Company recorded an impairment expense in the
amount of $150,000 relating to the write-off of its investment in the Marine III
Permit in the Congo.
-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,
-------------------------------------
2003 2002
---- ----
Income Shares Income Shares
------ ------ ------ ------
Earnings per common share-Basic $2,494,000 2,639,853 $1,986,000 2,639,853
Effect of dilutive securities:
Stock Options $2,494,000 2,639,853 $1,986,000 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, Israel, and the
Republic of Congo, Africa. Operating in foreign countries subjects the Company
to inherent risks such as a loss of revenues, property and equipment from such
hazards as exploration, nationalization, war and other political risks, risks of
increases of taxes and governmental royalties, renegotiation of contracts with
government entities and changes in laws and policies governing operations of
foreign-based companies.
The Company's oil and gas business is subject to operating risks associated with
the exploration, and production of oil and gas, including blowouts, pollution
and acts of nature that could result in damage to oil and gas wells, production
facilities or formations. In addition, oil and gas prices have fluctuated
substantially in recent years as a result of events, which were outside of the
Company's control. Financial information, summarized by geographic area, is as
follows (in thousands):
-6-
GEOGRAPHIC SEGMENT
United Consolidated
States Israel Africa Total
------ ------ ------ -----
Identifiable assets at June 30, 2003 3,668 71 -- 3,739
Cash and corporate assets 28,012
-------
Total Assets at June 30, 2003 31,751
=======
Identifiable assets at December 31, 2002 3,178 177 150 3,505
Cash and corporate assets 25,162
-------
Total Assets at December 31, 2002 28,667
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
====== ====== ======
Financial Income, net 393
General corporate expenses (702)
Gain on marketable securities and
equity in net loss of investees 1,778
Other income 411
Net Income from continuing operations -------
2,758
=======
Six Months Ended June 30, 2002
Sales and other operating revenue 1,214 587 -- 1,801
Costs and operating expenses (1,537) (356) (809) (2,702)
------ ------ ------ -------
Operating profit (323) 231 (809) (901)
====== ====== ======
Financial Income, net 108
General corporate expenses (702)
Loss on marketable securities and
equity in net loss of investees (499)
Income Taxes 464
-------
Net Loss from continuing operations (1,530)
=======
-7-
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
equity in net loss of investees 1,405
Other income 38
-------
Net Income from continuing operations 1,906
=======
Three Months Ended June 30, 2002
Sales and other operating revenue 687 259 -- 946
Costs and operating expenses (1,274) (162) (809) (2,245)
------ ------ ------ -------
Operating profit (587) 97 (809) (1,299)
====== ====== ======
Financial Income, net 21
General corporate expenses (292)
Loss on marketable securities and
equity in net loss of investees (264)
Income Taxes 464
-------
Net Loss from continuing operations (1,370)
=======
NOTE 8 - COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) for the six month and three month
period ended June 30, 2003 and 2002 was as follows: (in thousands)
Six months
ended June 30,
2003 2002
---- ----
Net Income 2,494 1,986
Other comprehensive gain (loss)
-available - for - sale securities 223 (252)
-foreign currency translation adjustments 592 (721)
------ ------
Comprehensive income (loss) 3,309 1,013
====== ======
-8-
Three months
ended June 30,
2003 2002
---- ----
Net Income 1,906 (1,370)
Other comprehensive gain (loss)
-available - for - sale securities 216 (103)
-foreign currency translation adjustments 529 (380)
------ -------
Comprehensive income (loss) 2,651 (1,853)
====== =======
-9-
NOTE 9 - ASSET RETIREMENT OBLIGATIONS
Effective January 1, 2003, 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. As of January 1, 2003, the Company recorded asset retirement
costs of $458,581 and asset retirement obligations of $650,240. The cumulative
effect of change in accounting principle was $263,955, net of taxes of $39,158.
The reconciliation of the beginning and ending asset retirement obligations as
of June 30, 2003 is as follows (in thousands):
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2003 JUNE 30, 2003
--------------------- ---------------------
Asset retirement obligations, beginning of period $ 670 $ --
Liabilities upon adoption of SFAS No. 143 on
January 1, 2003 -- 650
Liabilities incurred 39 48
Liabilities settled -- --
Accretion expense 11 22
Revisions in estimated cash flows -- --
--------------------- ---------------------
Asset retirement obligations, as of June 30, 2003 $ 720 $ 720
===================== =====================
The following table summarizes the pro forma net income and earnings per share
for the three and six months ended June 30, 2002 and for the years ended
December 31, 2002, 2001 and 2000 as if SFAS No. 143 had been adopted on January
1, 2000 (in thousands, except per share amounts):
THREE MONTHS SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ENDED -----------------------------------
JUNE 30, 2002 JUNE 30, 2002 2002 2001 2000
--------------- -------------- ---------- --------- ---------
Net income:
As reported $ (1,370) $ 1,986 $ 1,717 $ (139) $ 317
Pro forma (1,383) 1,959 1,663 (185) 114
Net income per share, as reported:
Basic $ (0.52) $ 0.75 $ 0.65 $ (0.05) $ 0.12
Diluted (0.52) 0.75 0.65 $ (0.05) $ 0.12
Net income per share, pro forma:
Basic $ (0.52) $ 0.74 $ 0.63 $ (0.07) $ 0.04
Diluted (0.52) 0.74 0.63 (0.07) 0.04
-10-
The following table summarizes pro forma asset retirement obligations as of June
30, 2002 and December 31, 2002, 2001 and 2000 as if SFAS No. 143 had been
adopted on January 1, 2000 (in thousands):
AS OF
JUNE AS OF DECEMBER 31,
30, ------------------------------
2002 2002 2001 2000
------- ------- ------- -------
Asset retirement obligations, pro forma $ 632 $ 650 $ 613 $ 483
-11-
NOTE 10 - CONTINGENCIES
The Company is involved in a dispute with a contractor relating to drilling
costs of the Tilapia well in Congo during 2000. The Company believes that it has
adequately accrued for all amounts due to this contractor as of June 30, 2003.
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.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The increase in the Company's consolidated cash and cash equivalents of $435,000
from $1,617,000 at December 31, 2002 to $2,052,000 at June 30, 2003, is
primarily attributable to increased retail gas prices in the United States;
Net cash used in investing activities for the six-month period ended June 30,
2003 was $334,000 as compared to $3,766,000 used during the six-month period
ended June 30, 2002. The decrease is primarily attributable to a reduction in
investment in marketable securities and in property and equipment.
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, 2003 (the "2003 Period") Compared to the Six Months
Ended June 30, 2002 (the "2002 Period") and the three months ended June 30, 2003
compared to the three months ended June 30,2002.
The Company reported net income of $2,494,000 ($1.04 Per share) for the 2003
Period compared to a net income of $1,986,000 ($0.75 Per share) for the 2002
Period and income of $1,906,000 ($0.72 Per share) for the three months ended
June 30, 2003, compared to a loss of $1,370,000 ($0..52 Per share) for the
comparable period in 2002. The relatively higher net income for the 2003 Period
compared to the 2002 Period as well as for the three months ended June 30, 2003
compared to the same period in 2002 is primarily attributable to an increase in
revenues from oil and gas sales resulting from higher oil and gas prices, gains
on marketable securities, the recording of a loss of $1,657,000 during the 2002
Period in connection with the drilling of the Read well in Texas and an
additional well in Congo (Marine 9 permit), both of which were plugged and
abandoned, and the recording of a net profit of $1,179,000 during the 2003
Period in connection with an increase in the net income of Isramco Negev 2
Limited Partnership and I.N.O.C Dead Sea Limited Partnerships,
affiliate-investees of the Company, resulting primarily from unrealized gains on
marketable securities by such affiliates (compared to a loss of $306,000 for the
comparable period in 2002).
Set forth below is a break-down of these results.
UNITED STATES
OIL AND GAS REVENUES (IN THOUSANDS)
Three Months ended June 30 Six Months Ended June 30
-------------------------- --------------------------
2003 2002 2003 2002
Oil Volume Sold (Bbl) 4 5 8.7 11
Gas Volume Sold (MCF) 161 192 308 370
Oil Sales ($) 105 120 247 223
Gas Sales ($) 859 503 1,526 917
Average Unit Price
Oil ($/Bbl) * 26.27 22.98 28.24 19.77
Gas ($/MCF) ** 5.33 2.62 5.16 2.48
o Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet
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SUMMARY OF EXPLORATION EFFORTS IN ISRAEL
To date, three gas fields were discovered offshore Israel known respectively as
Or, Or South and Nir. Based on the gas finds, a 30 year lease (including the
area of the Or gas discovery) was granted in June 2000 (hereinafter, the "Med
Yavne Lease") and an additional 30 year lease (including the area of the Nir gas
discovery) was granted in January 2002 (hereinafter, the "Med Ashdod Lease").
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.
Two prospects within the southern sector have been identified and recommended
for drilling, one of which is for gas and the second for gas or oil. The
operator has examined this report and, based thereon, has established the
priorities for continued exploration. The operator presented its recommendation
to the lease participants in October 2002 that drilling be commenced for oil
(Nizanim 1).
As no decision has yet been taken, the Operator has determined to postpone the
drilling of Nitzanim and, in lieu of such drilling, has presented an alternative
work program as follows: (i) During 2003 - drill a confirmation gas well (Nir-2)
in the Nir field, with a total budget of approximately $10 million; (ii) During
2004 - drill Nizanim-1 to total depth of 5300 meters (17,400 feet), with a total
budget of approximately $35 million.
At a partners meeting held on April 3, 2003, certain of the partners announced
their readiness to participate in the confirmation well. On April 30, 2003, the
operator, on behalf of Isramco Negev 2 Limited Partnership, one of the partners,
issued to the partners a sole risk notice regarding the drilling of the
confirmation gas well (Nir-2). The well is planned to a total depth of 2050
meters (6,725 feet), with a total budget of approximately $10.5 million and
expected to be drill at September 1, 2003. As certain of the partners declined
to participate in the well, the participation of Isramco Negev 2 Limited
Partnership in the well increased to 67%.
MARINE CENTER LICENSE
On September 21, 1999, the Company was awarded a preliminary permit, Marine
Center covering an area of 194 square kilometers. The permit included a
preferential right to obtain a license. In December 2000, Israeli Petroleum
Commissioner issued a license in respect of the area covered by the permit
(hereinafter, the "Marine Center License"), which
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license continues in effect through December 3, 2003. The Company holds a 1%
participation interest in the Marine Center License and the remaining interests
are held by affiliated entities.
The Company serves as operator of the Marine Center License.
MARINE SOUTH LICENSE
In January 2002, Israeli Petroleum Commissioner issued a license in respect of
the area covered by the Marine South permit (hereinafter, the "Marine South
License"), which license continues in effect through January 15, 2005 and is
subject to (i) the performance of a seismic 3D survey and the processing of the
results thereof no later than January 15, 2003, (ii) the preparation of an oil
drilling prospect by July 15, 2003 and (iii) the drilling of a well no later
than January 15, 2004.. In March 2003, the Petroleum Commissioner granted an
eight month extension for the period in which the above work plan is to be
performed. The Company serves as operator of the License and holds a 1%
participation interest in the License; the remaining participation interests are
held by affiliated entities.
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,
2002 are approximately 109,183 net barrels of proved developed producing oil and
3,381 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.
In March 2003 gas production from Hoover 4 well located in Oklahoma commenced.
In June 2003 the company purchased a 55% working Interest in 13 existing wells
located in west Texas. The Company intends to re-enter the wells for the purpose
of gas production.
SUMMARY OF EXPLORATION EFFORTS IN THE CONGO
The oil and gas properties in the Congo consist of the Marine III Exploration
Permit and the Marine 9 Exploration Permit. The Company holds 25% participation
interest in the Marine III Exploration Permit (through Naphtha Congo Ltd.). The
Company's participation interest in the Marine 9 Exploration Permit is 5%, held
through Naphtha Congo Limited Partnership ("Naphtha Congo"). The remaining
participants in the Marine 9 License are recognized oil companies.
In March 2003, Naphtha Congo, the operator of the Marine III Exploration Permit,
decided to discontinue the planned work program principally because it did not
believe that the continuation of such program was commercially reasonable. Based
on management's belief that the value of the Company's investment has been
impaired, the Company wrote-off during the six months ended June 30, 2003 the
amount of $150,000, representing the Company's investment in Marine III Permit.
In April 2003, Naphtha Congo received notice from the Congolese Ministry of Oil
that the Republic of the Congo has decided to retrieve the rights of Naphtha
Congo Ltd. in Marine III, providing as a reason therefore Naphtha Congo's
non-perform of the required work program. Under applicable law, the Congolese
Government is entitled to request reimbursement in the amount of funds not
expended on the required work program. Naphtha Congo received a letter dated May
16, 2003, from the Congolese Government official supervising oil and gas
exploration demanding that Naphtha Congo remit an unspecified amount equivalent
to the aggregate work obligations that were not undertaken and a penalty of
$294,000.
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OPERATOR'S FEES
During the 2003 Period, the Company earned $105,000 in operator fees compared to
$147,000 for the 2002 Period and $52,000 for the three months ended June 30,
2002 compared to $ 64,000 for the comparable period in 2002.
OIL & GAS REVENUES
During the 2003 Period, the Company had oil and gas revenues of $1,771,000
compared to $1,141,000 for the 2002 Period and $964,000 for the three months
ended June 30, 2003 compared to $625,000 for the comparable period in 2002. The
increase in the 2003 Period is primarily attributable to an increase in oil &
gas prices
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 2003 Period were $420,000 compared to $437,000 for
the 2002 Period and $201,000 for the three months ended June 30, 2003 compared
to $257,000 for the comparable period in 2001.
OIL AND GAS EXPLORATION COSTS
During the 2003 Period, the Company expended $22,000 in oil and gas exploration,
as compared to $843,000 for the same period in 2002. The decrease in oil and gas
exploration costs is primarily attributable to a well that was drilled in Texas
during 2002 Period. The well was plugged and abandoned.
IMPAIRMENT OF OIL AND GAS INTERESTS
During the 2003 Period, the Company wrote-off the amount of $150,000,
representing the Company's investment in the Marine III Permit in the Congo. The
Company's decision was based on management's assessment that the value of such
investment has been impaired. See "Summary of Exploration Efforts in the Congo".
INTEREST INCOME
Interest income in respect of the 2003 Period was $425,000 compared to $296,000
for the 2002 Period and $257,000 in respect of the three months ended June 30,
2003 compared to $105,000 for the same period in 2002. The increase in interest
income earned by the company during the 2003 Period as compared to the 2002
Period and during the three months ended June 30,2003 as compared to the same
period in 2002 is primarily attributable to interest earned on marketable
securities.
GAIN (LOSS) ON MARKETABLE SECURITIES
During the 2003 Period, the company recognized a net realized and unrealized
gain on trading securities of $599,000 compared to losses of $193,000 for the
2002 Period and gain of $464,000 for the three months ended June 30,2003
compared to a loss of $88,000 for the same period in 2002.
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.
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EQUITY IN NET INCOME OF INVESTEES
The Company's equity in the net income of investees for the 2003 Period was
$1,179,000 compared to a loss of $306,000 for the 2002 Period. The increase is
primarily attributable to unrealized gains on marketable securities by Isramco
Negev 2 Limited Partnership and I.N.O.C. Dead Sea Limited Partnerships,
affiliate-investees of the Company.
OPERATOR EXPENSE
Operator expenses were incurred primarily in connection with the offshore
activities in Israel. Operator expenses for the 2003 Period were $432,000
compared to $342,000 for the 2002 Period and $185,000 for the three months ended
June 30, 2003 compared to 155,000 for the comparable period in 2002. .The
increase is primarily attributable to increase of legal expenses during the 2003
Period compare to the 2002 Period.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the 2003 Period were $702,000 compared
to $702,000 for the in 2002 Period and $423,000 for the three months ended June
30, 2003 compared to $292,000 for the same period in 2002. The increase in
general and administrative expenses during the 2003 Period compared to the 2002
Period is primarily attributable to expenses incurred in the provision of
professional services by related and third parties during 2002.
OTHER INCOME
Other income includes a sum of $350,000 which represents the settlement of a
liability recorded in connection with a well drilled in Marine 9 Permit and was
recorded during 2002 as exploration costs.
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, 2002. There has been no material change in
these market risks since the end of the fiscal year 2002.
ITEM 4. 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.
Within 90 days prior to the filing of this report on Form 10-Q, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's Chief Executive and Principal Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13(a)-15(e)). Based upon that
evaluation, the Chief Executive and Principal
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Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting him to material information relating
to the Company (including its consolidated subsidiaries) required to be included
in the Company's periodic SEC filings. Subsequent to the date of that
evaluation, there have been no significant changes in internal controls or in
other factors that could significantly affect internal controls.
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company, together with Naphtha Congo Ltd., an Israeli and related entity
("Naphtha Congo"), were served in October 2002 in District Court of Harris
County, Texas, With summons and complaint by Romfor International, Ltd., a
contractor ("Contractor") who provided drilling services in the Tilapia permit
in the Congo, alleging breach of contract and damages of approximately $1.5
million and moving for court ordered arbitration. The Contractor and Naphtha
Congo entered into a drilling agreement in October 2000 with respect to the
Tilapia 1 well. The Company indirectly held, through Naphtha Congo, a 50%
participation interest in the Tilapia 1 well.
The Company filed its answer on October 18, 2002, wherein it denied all
allegations made and denied that it is a proper party to the suit and moved to
dismiss the complaint. On March 20, 2003, the court granted the Company's motion
to dismiss the complaint against it and concurrently granted Contractor's motion
to compel arbitration against Naphtha Congo. Subsequently, the Contractor moved
for a new trial and, on July 8, 2003, the court denied the Contractor's motion
for a new trial.
ITEM 2. CHANGE IN SECURITIES & USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 10, 2003 and the
stockholders voted as to the following: (i) to elect Haim Tsuff, Jackob Maimon,
Avihu Ginzberg, Eyal Gibor and Max Pridgeon as directors to serve for a term of
one year or until a successor is duly elected and (ii) to ratify the appointment
of Mann Frankfort Stein & Lipp CPA, LLP, as auditors for the year ending
December 31, 2003.
Voting results are as follows:
For Withheld Abstain
1. Directors
Haim Tsuff 2,171,404 19,897 --
Jackob Maimon 2,171,304 19,997 --
Avihu Ginzberg 2,171,504 19,797 --
Eyal Gibor 2,171,504 19,797 --
Max Pridgeon 2,171,504 19,797 --
For Against Abstain
2. Auditors 2,174,021 5,272 12,008
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No other matters were submitted to a vote of stockholders during the three-month
period ended June 30, 2003.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(i) Exhibits
31. Rule 13a-14(a)/15d-14(a) Certification
32. Section 1350 Certification
(ii) Reports on Form 8-K
None
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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
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