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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
[ ] 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)
11767 KATY FREEWAY, HOUSTON, TX 77079
(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 $0.001
(Title of Class)
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 an accelerated filer (as
defined in Rule 12b-2 of the Act). | | Yes |X| No
The aggregate market value of registrant's common stock at March 29, 2004
was $9.67 million. Such market value was calculated by using the closing price
of such common stock as of such date reported on the NASDAQ market.
As of March 30, 2004, the Registrant had outstanding 2,639,853 shares of
$0.01 par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for in Items 10, 11, 12, 13 and 14 in Part III will
be contained in the issuer's definitive proxy statement which the registrant
intends to file within 120 days after the end of the registrant's fiscal year
ended December 31, 2003 and such information is incorporated herein by
reference.
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 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Since its formation in 1982, Isramco, Inc. ("Isramco" or the "Company") has
been active in the exploration of oil and gas in Israel and in the United
States. In Israel, the Company holds a participation interest in two long-term
off-shore leases and serves as an operator of one. In addition the Company holds
a participation interest in an off-shore license and also serves as the
operator. See "Summary of exploration efforts in Israel".
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 exploration and 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. See "Summary of Exploration Efforts in United States".
THE OPERATOR OF THE ISRAELI LEASES/LICENSES
Under a joint operating agreement entered into among the participants in
the off-shore leases and licenses (collectively, the "JOA"), each party
participates in all the costs, expenses and obligations incurred in relation to
a contract area in the same proportion as its rights and interests in such
contract area. Under the JOA, the Operator carries out all the operations
contemplated in the JOA, in the framework of approved Work Programs and within
the limitations of approved budgets (AFE's). The Operator may be removed for
cause, by notice in writing given by two or more of the other parties
representing at least 65% of the total interests in a contract area.
The Company is currently the Operator of the Med Ashdod Lease and the
3-year Marine South license granted in January 2002. As the Operator, the
Company is responsible for directing the oil exploration and drilling activities
of each Venture through its Branch Office in Petach Tikva, Israel. With [eight
full-time employees], outside consultants and subcontractors, the Company
carries out the operations of each Venture within the framework of approved work
programs
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and budgets and pursuant to the terms of a JOA. With respect to the Med Yavne
Lease, the Company furnishes to BG International Limited, a member of the
British Gas Group ("BG"), the operator of the lease, consulting services of an
administrative and technical nature for which it receives a monthly fee equal to
$10,000.
As operator, the Company charges each venture participant for all costs
incurred in connection with the exploration and drilling activities conducted by
each venture and is entitled to receive a fee for its administrative overhead
equal to 6% of all direct charges or minimum monthly compensation of $6,000 per
each License/Lease. During the year ended December 31, 2003, the Company was
paid a total of $753,000 as operator fees.
GENERAL PARTNER FOR THE ISRAMCO NEGEV 2 LIMITED PARTNERSHIP
In 1989 the Company formed in Israel the Isramco Negev 2 Limited
Partnership (the "Limited Partnership") to acquire from the Company a
substantial portion of its working interest in the Negev 2 Venture, the venture
which the Company and related parties established to hold the rights to the
certain oil and gas properties. In exchange for working interests, the Limited
Partnership granted to the Company certain overriding royalties. In 1992, the
Company transferred to the Limited Partnership additional rights in exchange for
additional overriding royalties and reimbursement of expenses. The Company
created Isramco Oil and Gas Ltd. ("IOG"), a wholly-owned subsidiary to act as
the General Partner for the Limited Partnership and formed Isramco Management
(1988) Ltd., a wholly-owned subsidiary to act as the Limited Partner and the
nominee of Limited Partnership units held by public investors in Israel.
Pursuant to the Limited Partnership Agreement and the Trust Agreement, a
Supervisor was appointed on behalf of the Limited Partnership unit holders, with
sole authority to appoint the sole director for Isramco Management (1988) Ltd.
and to supervise its activities on behalf of and for the benefit of the Limited
Partnership unit holders. The control and management of the Limited Partnership
vests with the General Partner, however, matters involving certain rights of the
Limited Partnership unit holders are subject to the supervision of the
Supervisor and in certain instances the approval of the Limited Partnership unit
holders. The firm of Igal Brightman & Co., Accountants and Mr. David Valiano,
Accountant has been appointed as Supervisors.
The Company currently receives through IOG a management fee of $40,000 per
month from the Limited Partnership for office space, management and other
services. It has been significant to the Company that the Limited Partnership
(in part through the efforts of the Company and others), has been able to raise
monies from the public in Israel to fund the Limited Partnership's share of the
work programs for the Petroleum Assets in connection with the continuation of
oil and gas exploration activities in Israel and to preserve the existence of
the Company's overriding royalties. The Company currently holds 6.65% of the
issued Partnership units and IOG holds an additional 0.008% of the Partnership
units. On December 31, 2003, the Limited Partnership had cash, cash equivalents,
certificates of deposit and marketable securities with a value of approximately
$114 million.
Additionally, IOG (as the general partner) is entitled to 5% overriding
royalties in certain petroleum assets held by the Limited Partnership.
NON-OIL AND GAS PROPERTIES
In June 2002, the Company purchased non oil and gas producing real estate
located in Israel at an aggregate cost of $ 1,887,000. Concurrently with the
purchase of the real estate, the Company entered into a lease agreement with a
third party to lease the property for a 24-month period at a monthly rent of
$7,000.
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, to be secured by a lien on the Vessel, marketable securities and a
Company guarantee. The Company is currently in discussions with several luxury
cruise operators for the purpose of commercially leasing the Vessel as a luxury
cruise liner. No assurance can be given that the Company will be able to
conclude any leasing arrangement on commercially acceptable terms.
In addition, the Company holds certain equity interests in a high-tech
venture. See "Management's Discussion and Analysis of Financial Condition---
Liquidity and Capital Resources."
OIL AND GAS VENTURES AND PETROLEUM ASSETS
3
OIL AND GAS VENTURES AND PETROLEUM ASSETS LOCATED IN ISRAEL
The table below sets forth the Working Interests and Petroleum Assets of
the Company and all affiliated and non-affiliated participants in (i) the
Ventures, (ii) the Petroleum Assets, (iii) the total acreage of each Petroleum
Asset, and (iv) the expiration dates of each of the licenses as of December 31,
2003. This information pertains only to Petroleum Assets located in Israel. The
Company also holds Overriding Royalties in the Petroleum Assets. See "Table of
Overriding Royalties".
TABLE OF PETROLEUM ASSETS (WORKING INTEREST)
OIL AND GAS VENTURES (1)(3)
(% Interest of 100%)
Name of Participant Med Yavne Lease* Med Ashdod Lease**(2)
The Company 0.4584 0.3625
Affiliates
Isramco Negev 2, Limited 32.411 19.1370
Partnership
I.N.O.C. Dead Sea -- 5.0525
Limited Partnership
Naphtha 1.8033 1.8411
Naphtha Explorations 2.2826 1.8411
Limited Partnership
JOEL 2.8807 --
Equital 2.1639 --
Non-affiliated entities
Delek Drilling LP 8.000 21.7658
GRANIT - SONOL LP -- 35.000
BG International Ltd. 35.000 --
Middle East Energy (MEE) LP 13.200 13.200
DOR - Gas LP 1.800 1.8000
Total 100.000 100.000
Area (acres) 13,100 61,800
Expiration Date 6/10/2030 6/15/2030
* The lease was granted in June 2000 and is scheduled to expire in June 2030.
** The lease was granted in January 2002 and is scheduled to expire in June
2030.
(1) Subject to the fulfillment of applicable provisions of the Israel Petroleum
Law and Regulations, and the conditions and work obligations of each of the
above licenses/Leases.
(2) Under the Grant Agreement with the Government of Israel, the Government may
claim that the Company is
4
contingently obligated to repay to the Government the Grant monies in the amount
of $110,000 and to pay a 6.5 % Overriding Royalty on all production from the
area.
(3) All of the Petroleum Assets are subject to a 12.5% Overriding Royalty due to
the Government of Israel under the Petroleum Law.
5
Name of Participant Marine South
Company 1
Isramco Negev 2 59
Limited Partnership
Modein Energy Limited 10
Partnership
Naphtha Explorations 15
Limited Partnership
I.N.O.C. Dead Sea 15
Limited Partnership
Total 100
Acres 35,000
Expiration Date 1/15/05
OVERRIDING ROYALTIES HELD BY THE COMPANY
The Company holds overriding royalties in certain petroleum assets.
Additionally, in connection with the BG Transaction, the Company is entitled to
receive from each member of the Isramco Group overriding royalties equal to 2%
of each such member's rights to any oil/gas produced within the existing
offshore licenses or within any new licenses or to any oil or gas rights which
may be obtained in lieu of existing offshore licenses. The Company holds the
following Overriding Royalties:
TABLE OF OVERRIDING ROYALTIES
From the Limited Partnership, on the first 10% of the Limited Partnership's
share of the following Petroleum Licenses
Before Payout After Payout
Med Yavne Lease* 1% 13%
Med Ashdod Lease** 1% 13%
From JOEL On 8% of JOEL's Interest
Before Payout After Payout
Med Ashdod Lease 2.5% 12.5%
From Delek Oil Exploration Ltd.
(DOEX) (1)(2) On 6% of DOEX's Interest
Before Payout After Payout
Med Ashdod Lease 2.5% 12.5%
From Naphtha, Naphtha Exploration LP,
Joel, Equital, INOC Dead Sea L P on
oil and/or gas produced on the Med Leases 2%
6
To IOC On Certain petroleum rights held by
Limited Partnership 5%
* A 30 year lease covering an area of approximately 53 square kilometers
(including the area of the gas discovery) was granted in June 2000.
** A 30-year lease covering an area of approximately 250 square kilometers
(including the area of the gas discovery) was granted in January 2002.
(1) The Working Interests of Delek and DOEX have been assigned to Delek Drilling
Limited Partnership.
(2) In a prospectus of the Delek Limited Partnership dated January 26, 1994 it
is stated that the Interest which the Delek L.P, received from Delek and DOEX is
free from any encumbrances except that Isramco, Inc. may argue that the
Interests are subject to an overriding royalty. The Company has no information
available to it as to why this statement is in the Delek L.P. prospectus.
Summary Description of the Ventures, the Petroleum Assets, Related Work
Obligations and Exploration Efforts.
The Company has no financial obligation with regard to the Overriding
Royalties, however, in the event the Limited Partnership, JOEL, DOEX or Delek,
fails to fund its obligation with regard to a Petroleum Asset to which an
Overriding Royalty exists, the Company could lose its interest in such
Overriding Royalty. See Glossary for definition of "Payout ".
SUMMARY OF EXPLORATION EFFORTS IN ISRAEL
MED YAVNE LEASE
Based on the gas finds known as "Or 1" and "Or South" , a 30 years lease
was granted in June 2000 (hereinafter: the "Med Yavne Lease"). The Med Yavne
Lease covers 53 square kilometers (approximately 13,000 acres) offshore Israel.
The operator of the Med Yavne Lease is BG International Limited, a member of the
British Gas Group ("BG").
According to the operator's estimated, which are based on the results of
the drillings in the "Or 1" and "Or South" wells, and a three-dimensional
seismic survey performed in the area of the lease, and which also covered parts
of nearby gas reserves (outside the area of the lease), the recoverable gas
reserves in the Med Yanve Lease is estimated at 93 billion cubic feet. In
November 2002, the Company 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 extraction platform (at a
distance of 7 Miles) and from there via a transportation pipe to the coast, may
be economically feasible.
The Company's participation share of the Med Yavne Lease is 0.4585%.
MED ASHDOD LEASE
Following the results of "Nir 1" drilling, a 30 year lease was granted in
January 2002. The Med Ashdod Lease covers approximately 250 square kilometers
(approximately 62,000 acres) offshore Israel. 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) D 2004 - drill Nizanim - 1 to total depth of 5300 meters (17,400 feet),
with a total budget of approximately $35 million.
7
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). As certain of the partners declined to
participate in the well, the participation of Isramco Negev 2 Limited
partnership in the well increased to 56.17805%.
The Nir - 2 confirmation well was spud on September 1, 2003. On October 8,
2003, production tests commenced, in accordance with the recommendation given by
the operator's consultants. On November 19, 2003 the operator presented the
partners with an analysis of the results of the production test, which indicated
that it is not economically feasible to produce gas from the "Nir 2" well . The
total cost of the "Nir 2" well amounted to $10 million. On February 15, 2004 the
operator notified the partners that based on the data analyzed, production of
gas from the "Nir 1" well is not economically feasible.
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 5700 meter (18,700
feet), with a total budget of $40 million. As of the filing of this report on
Form 10-K, the Company did not receive notice of the partners' decision.
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 license continues in effect
through December 3, 2003. The Company served as the operator of the Marine
Center License and held a 1% participation interest therein. The remaining
interests were held by affiliated entities.
In December 2000, Romi 1 well was drilled. Following analysis of the logs,
it was decided to plug and abandon the well. In December 2003 the Marine Center
License expired.
MARINE SOUTH LICENSE
In January 2000, the Company was awarded an offshore preliminary permit
known as Marine South, covering an area of approximately 142 square kilometers
offshore Israel known as "Marine South" and an additional permit known as
"Marine South B", covering an area of approximately 40 square kilometers
offshore Israel. The permits include a preferential right to obtain a 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 February 15, 2004, (ii) the preparation of an oil
drilling prospect by June 15, 2004 and (iii) the drilling of a well no later
than December 15, 2004. 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.
As there were no seismic vessels in the general vicinity, a seismic survey
was not conducted by February 15, 2004 and, consequently, in February 2004, the
Petroleum Commissioner requested that the Company relinquish the license. The
Company is currently appealing this decision.
8
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 net 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 non
producing wells located in west Texas for an aggregate purchase price of
approximately $264,000. Certain of the wells were re-entered for purposes of
commercial production and are currently producing. The Company's share of the
re-entry costs is approximately $125,000. The Company anticipates re-entering
the remaining wells.
In addition, the Company purchased a 30% interest in a currently
non-producing well for aggregate purchase price of approximately $28,000. To
date, the Company expended approximately $100,000 to commence commercial
production. The well is currently producing.
WRITE-OFF/EXPIRATION OF INTERESTS IN THE CONGO
The Company formerly held oil and gas properties in the Congo. These
consisted of the Marine III Exploration Permit and the Marine 9 Exploration
Permit. The Company held a 25% participation interest in the Marine III
Exploration Permit (through its affiliate Naphtha Congo Ltd). The Company's
participation interest in the Marine 9 Exploration Permit was comprised of 5%
(through Naphtha Congo (1995) Limited Partnership, an affiliate); the remaining
participants in the Marine 9 License are recognized well-known 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 the Company wrote-off during the year,
2003 the amount of $150,000 representing the Company's investment in Marine III
Permit. In June 2003 the Marin III Permit expired.
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 Naphtha Congo's non-performance
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.
In December 2003 the Marine 9 Exploration Permit expired.
EMPLOYEES
As of March 29, 2004, the Company had eight employees at its branch office
in Israel and three employees in its office in Houston, Texas.
RISK FACTORS
In addition to the other information contained in this Annual Report on
Form 10-K, investors should consider carefully the following risks. If any of
these risks occurs, the Company's business, financial condition or operating
results could be adversely affected.
OIL AND GAS DRILLING IS A SPECULATIVE ACTIVITY AND IS RISKY.
The Company is engaged in the business of oil and natural gas exploration
and the resulting development of productive oil and gas wells. The Company's
growth will be materially dependent upon the success of its future drilling
9
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 the Company'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 the Company
believes that its use of 3-D seismic data and other advanced 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 the Company could incur losses as a result
of such expenditures. The Company's future drilling activities may not be
successful and, if unsuccessful, such failure could have an adverse effect on
the Company's future results of operations and financial condition. Although the
Company may discuss drilling prospects that have been identified or budgeted
for, the Company may ultimately not lease or drill these prospects within the
expected time frame, or at all. The Company 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 the
Company 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) the Company'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 the Company's control.
THE OIL AND NATURAL GAS RESERVE DATA INCLUDED IN THIS REPORT ARE ONLY
ESTIMATES AND MAY PROVE 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
the Company's reserves will likely vary from estimates, and such variances may
be material.
THERE IS A POSSIBILITY THAT THE COMPANY WILL LOSE THE LEASES TO ITS OIL AND
GAS PROPERTIES.
The Company'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, the Company 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
the Company's leases may have a material impact on the Company's revenues.
COMPETITION IN THE INDUSTRY MAY IMPAIR THE COMPANY'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. The Company 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
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refining operations, electricity generation and the marketing of refined
products. The Company 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. The Company
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.
THE COMPANY'S BUSINESS MAY BE ADVERSELY 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 market demand and changes in the political,
regulatory and economic climate and other factors that affect commodities
markets that are generally outside of the Company's control. Some of the
Company'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. The Company 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 the Company'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
THE COMPANY HAS NO MEANS TO MARKET ITS OIL AND GAS PRODUCTION WITHOUT THE
ASSISTANCE OF THIRD PARTIES.
The marketability of the Company'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 the Company'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 COMPANY'S NON-OIL AND GAS PROPERTIES MAY PROVE RISKY.
The Company completed the purchase in March 2004 of a luxury cruise liner
for approximately $8 million. The Company also owns real estate properties in
the state of Israel. See "Description of Business." While the Company believes
that it will be able to exploit commercial opportunities associated with leasing
the luxury liner and leasing or developing the real estate, no assurance can be
given that the Company will be able to conclude any such agreeements on
commercially acceptable terms.
THE COMPANY IS SUBJECT TO RISKS ASSOCIATED WITH OPERATIONS IN ISRAEL.
The Company is involved in oil and gas exploration activities in Israel as
operator of certain offshore licenses or otherwise. The Company also purchased
significant non-oil and gas real-estate properties in Israel. The Company also
maintains a significant presence within Israel. Accordingly, a significant
portion of the Company's business is directly affected by prevailing economic,
military and political conditions that affect Israel. Any major hostilities
involving Israel might have a material adverse effect on the Company's business,
financial condition or results of operations.
THE COMPANY IS SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
The Company conducts business from its facilities in Israel and the United
States. Its international operations and activities subject the Company to a
number of risks, including the risk of political and economic instability,
difficulty in managing foreign operations, potentially adverse taxes, higher
expenses and difficulty in collection of accounts receivable. Although the
Company Israeli subsidiary receives most of its operating funds in U.S. dollars,
a portion of its payroll and other expenses and certain of its investments are
fixed in the currency of Israel. Because the Company's financial results are
reported in U.S. dollars, they are affected by changes in the value of the
various foreign currencies that the Company uses to make payments in relation to
the U.S. dollar.
THE COMPANY'S OPERATIONS MAY BE IMPACTED BY CERTAIN RISKS COMMON IN THE
INDUSTRY.
The Company's exploration and drilling operations are subject to various
risks common in the industry, including cratering, 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.
11
In accordance with industry practice, the Company maintains insurance
against some, but not all, of the risks described above. The Company 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 LIABILITY FOR ENVIRONMENTAL MATTERS MAY ADVERSELY
AFFECT THE COMPANY'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, the Company may be liable for environmental
damages caused by previous owners of property it purchases or leases. As a
result, the Company may incur substantial liabilities to third parties or
governmental entities. The Company 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 the Company's business.
THE COMPANY'S STOCK PRICE IS VOLATILE AND COULD CONTINUE TO BE VOLATILE.
Investor interest in the Company's common stock may not lead to the
development of an active or liquid trading market. The market price of the
Company'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 the Company'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 the Company's common stock and investors may be
unable to resell their shares of common stock at or above their purchase price.
PENNY STOCK REGULATIONS ARE APPLICABLE TO INVESTMENT IN SHARES OF THE
COMPANY'S COMMON STOCK.
Broker-dealer practices in connection with transactions in "penny stocks"
are regulated by certain penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks generally are equity securities with a price
of less than $5.00 (other than securities registered on certain national
securities exchanges or quoted on the Nasdaq system, provided that current
prices and volume information with respect to transactions in such securities
are provided by the exchange or system). The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
the penny stock rules generally require that prior to a transaction in a penny
stock the broker-dealer make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market for a
stock that becomes subject to the penny stock rules. Many brokers will not deal
with penny stocks; this restricts the market.
ITEM 2. PROPERTIES
The Company maintains offices in Houston, Texas. The Company has a lease
for office premises (approximately 2,015 square feet) at 11767 Katy Freeway,
Houston, TX 77079 expiring in October 2006 with a monthly rental of $2,400. The
Company anticipates that it will be able to extend the lease, or find
replacement premises, on commercially reasonable terms.
The Company also leases office space in Israel from Naphtha at 8 Granit
St., Petach Tikva. In 2003, the Company paid Naphtha an aggregate of $197,000
for rental space, office services, secretarial services and computer services.
The Company believes that the payment for the above services are reasonable
compared to other similar locations.
12
ITEM 3. 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 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. On November 3, 2003 the arbitrator's award was forwarded
to Naphtha Congo. According the Arbitrator's award, Naphtha Congo is obliged to
pay the contractor the amount of $693,523 as funds due under the drilling
contract and in addition, interest at the rate of 18% per annum.
From time to time, the Company 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 the Company's consolidated financial position or results of
operations.
RECENT DEVELOPMENT
On February 10, 2004, the Company initiated a lawsuit in the Superior Court
of California, County of Los Angeles, against several named defendants
(collectively, the "Defendants"), 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. In its
lawsuit, the Company is seeking damages in excess of $50 million. Responses are
not due until April 9, 2004.
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 the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The number of record holders of the Company's Common Stock on March 29,
2004 was approximately 565, not including an undetermined number of persons who
hold their stock in street name. The Company's stock trades under the symbol
ISRL.
The high and low daily closing sales prices as reported on the National
Association of Securities Dealers Automated Quotations System National Market
System are shown in the table below for each quarter during 2003 and 2002.
Common Stock
Quarter Ended High Low
2003
March 31 $4.43 $2.35
June 30 $4.60 $2.78
September 30 $4.60 $3.66
December 31 $7.74 $3.95
2002
March 31 $4.25 $3.60
June 30 $4.20 $3.25
September 30 $3.50 $2.23
December 31 $3.15 $1.89
13
The Company has not declared or paid any cash dividends on its Common
Stock. The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The Company intends to retain all earnings for
use in its business operations and in expansion.
(ii) The following table sets forth certain required information relating
to the shares of Common Stock issuable on an aggregated basis under the
Company's 1993 Stock Option Plan.
EQUITY COMPENSATION PLAN INFORMATION
Plan Category Number of Weighted- Number of
securities to average securities
be issued exercise price of remaining
upon outstanding available for
exercise of options. future
outstanding issuance.
options.
Equity compensation plans approved by
security holders 29,750 $21.00 20,250
Equity compensation plans not approved
by security holders 139,990 $ 4.28 --
--------- -------- ---------
Total
169,740 $ 7.21 20,250
ITEM 6. SELECTED FINANCIAL DATA (CONSOLIDATED)
The data presented below with respect to the Company should be read in
conjunction with the Consolidated Financial Statements and related Notes thereto
of the Company included elsewhere in this Report and Item 7-- "Management's
Discussion and Analysis of Financial Condition and Results of Operations." (in
Thousands)
2003 2002 2001 2000 1999
Operator's fees $753 $249 $234 $1,265 $1,744
Oil and Gas Sales $3,439 $2,423 $3,068 $2,080 $1,107
Interest income $760 $738 $541 $1,277 $1,011
Office services to related parties
and other $939 $913 $857 $1,018 $881
Equity in earnings (losses) of investees $1,098 $(440) $(177) $106 $108
Reinbursement of exploration cost $-- $-- $-- $--
Gain from sale of oil and gas properties
and equipment -- -- $4 $6 $17
Capital Gai $549 -- -- -- --
Gain (Loss) on marketable securities $872 $(189) $(199) $(9) $1,264
Other $475 $49 $-- $-- $13
Realized gain on investment in affiliate $-- $-- $-- $-- $100
Gain on BG Transaction -- -- $-- $3,626 $--
Impairment of oil & gas properties $617 -- $-- $2,550 $--
Impairment of Investment -- -- $-- $400 $--
Exploration costs $165 $1,747 $204 $2,956 $154
Lease operating expenses and severance
Taxes $872 $844 $905 $630 $469
Depreciation, depletion and
Amortization $621 $642 $564 $443 $609
Operator expense $795 $791 $696 $634 $514
General and administrative expenses $2,012 $1,422 $2,048 $1,740 $1,061
Interest Expense $52 $210 $-- $55 $157
Accretion Expence $43 -- -- -- --
14
Income tax expense (benefit) $1,188 $114 $50 $(356) $298
Net Income (loss) before cumulative
effect $2,520 $(1,799) $(139) $317 $2,983
Cumulative effect of change in
accounting principles $(264) $3,516 -- -- --
Basic and diluted earnings (loss)
per share for:
Net income (loss) before
cumulative effect $0.95 $(0.68) $(0.05) $0.12 $1.13
Cumulative effect of accounting change, net $(0.10) 1.33 -- -- --
Net income (loss) $0.85 $ 0.65 $(0.05) $0.12 $1.13
Weighted average number of
common shares outstanding - basic 2,639,853 2,639,853 2,639,853 2,639,853 2,639,853
Weighted average number of
common shares outstanding - diluted 2,639,853 2,639,853 2,639,853 2,706,731 2,639,853
December 31,
2003 2002 2001 2000 1999
Balance Sheet Data
Total assets $32,614 $28,667 $26,615 $27,281 $30,713
Total liabilities $ 2,733 $ 2,175 $ 1,160 $ 1,449 $ 4,537
Shareholders' equity $29,881 $26,492 $25,455 $25,832 $26,176
ITEM 7. 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
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 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 SEC's Release No. 33-8040 "CAUTIONARY ADVICE EGARDING
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 assesment.
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.
15
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 Company's operating activities provided net cash of $1,288,000,
$1,372,000 and $1,667,000 in 2003, 2002 and 2001, 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 $6,645,000
and $3,618,000 at December 31, 2003 and 2002, respectively. The increase in
working capital is primarily attributable to increased oil and gas prices and
value of marketable securities.
Net cash used in investing activities in 2003 was $476,000 compared to
$4,554,000 in 2002. The cash used in 2002 was primarily attributable to
purchases of marketable securities, capitalization of drilling cost expended
during 2002 and purchase in June 2002 of non oil and gas producing real estate
located in Israel at an aggregate cost of $1,887,000. The real estate is located
in an area that is currently zoned for agricultural purposes. Concurrently with
the purchase of the real estate, the Company entered into a lease agreement with
an unaffiliated third party to let the entirety of such property for a 24 month
period at a monthly rent of $7,000. The cash used in investing activities in
2003 was primarily attributable to purchase of oil and gas properties.
Capital expenditures for property and equipment were $676,000 and
$1,617,000 in 2003 and 2002, respectively. Capital expenditures are primarily
attributable to purchase of oil and gas properties.
In June 2000, the Company established IsramTec, Inc., a Delaware
corporation and wholly-owned subsidiary (hereinafter, "IsramTec") for purposes
primarily of identifying and investing in promising high-tech ventures. In July
2000, IsramTec invested approximately $400,000 in a high tech company. In 2001
and 2002, the Company invested, by way of convertible loans, in such entity
additional aggregate amounts of $171,000 and $50,000 respectively. In December
2001, the Company determined the original investment to be impaired and,
accordingly, charged $400,000 to impairment expenses. In 2002, the entire amount
invested in such entity was converted into equity capital therein. In December
2003, the Company sold part of its equity interests for aggregate consideration
of approximately $609,000.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002.
The Company reported net income before cumulative effect of $2,520,000
(income of $0.95 per share) in 2003 compared to a net loss before cumulative
effect $1,799,000 (loss of $ 0.68 per share) in 2002. The increase in the net
income is primarily attributable to an increase in oil and gas price in 2003 and
due to the gain in marketable securities and net income of investees.
16
Set forth below is a break-down of these results.
United States
Oil and Gas Volume and Revenues (in thousands)
2003 2002
Oil Volume Sold (Bbl) 19 21
Gas Volume Sold (MCF) 600 720
Oil Sales ($) 542 470
Gas Sales ($) 2,897 1,953
Average Unit Price
Oil ($/Bbl) * 28.09 22.54
Gas ($/MCF) ** 4.82 2.71
* Bbl - Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet
THE OFFSHORE LICENSES (ISRAEL)
In each of 2003 and 2002, the Company expended approximately $88,243 and
$27,000, respectively, in respect of the Offshore Licenses.
OIL AND GAS EXPLORATION COSTS
The Company expended in 2003 approximately $165,000 in oil and gas
exploration costs as compared to approximately $1,747,000 expended in 2002. The
exploration cost in 2003 attributable to the investment in Tilapia (Congo) and
in respect of the Israeli offshore wells (Nir 2 and Nir 2). The oil and gas
exploration costs in 2002 is primarily attributable to the unsuccessful drilling
of the Read well in Texas and the unsuccessful drilling in the Marine 9 permit
(the Congo).
OPERATOR'S FEES
In 2003 the Company earned $ 753,000 in operator fee compared to $ 249,000
in 2002. The increase is due to the drilling of Nir 2 well.
OIL AND GAS REVENUES
In 2003 and 2002 the Company had oil and gas revenues of $3,439,000 and
$2,423,000, respectively. The increase is due mainly to the increase in the oil
and gas price during 2003.
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 $872,000 and $844,000 for 2003 and
2002, respectively.
17
INTEREST AND DIVIDEND INCOME
Interest income during the year ended December 31, 2003 was $760,000
compared to 738,000 for the year ended December 31, 2002. The increase in
interest income is primarily attributable to interest receivable on marketable
securities (Debentures).
GAIN ON MARKETABLE SECURITIES
In 2003, the Company recognized net realized and unrealized gain on
marketable securities of $872,000 compared to net realized and unrealized losses
on marketable securities of $189,000 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.
OPERATOR EXPENSES
In 2003 the Company expended $795,000 in respect of the operator expenses
compare to $791,000 in 2002.
GENERAL AND ADMINISTRATIVE EXPENSES
In 2003, the Company incurred $2,012,000 as general and administrative
expenses compared to $1,422,000 incurred in 2002. The relatively higher amount
in 2003 is primarily attributable to bonuses awarded to senior officers and
increase in legal fees.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001.
The Company reported net loss before cumulative effect of $1,799,000 (loss
of $0.68 per share) in 2002 compared to a net loss of $139,000 (loss of $0.05
per share) in 2001. The increase in net loss in 2002 compared to 2001 is
primarily attributable to an increase in exploration costs from $204,000 in 2001
to $1,747,000 in 2002 and to a decrease in gas prices in 2002.
Set forth below is a break-down of these results.
United States
Oil and Gas Volume and Revenues (in thousands)
2002 2001
Oil Volume Sold (Bbl) 21 20
Gas Volume Sold (MCF) 720 643
Oil Sales ($) 470 477
Gas Sales ($) 1,953 2,591
Average Unit Price
Oil ($/Bbl) * 22.54 23.59
Gas ($/MCF) ** 2.71 4.03
* Bbl - Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet
THE OFFSHORE LICENSES (ISRAEL)
In each of 2002 and 2001, the Company expended approximately $27,000 and
$5,000, respectively, in respect of the Offshore Licenses.
18
OIL AND GAS EXPLORATION COSTS
The Company expended in 2002 approximately $1,747,000 in oil and gas
exploration costs as compared to approximately $204,000 expended in 2001. The
increase is oil and gas exploration costs is primarily attributable to the
unsuccessful drilling in 2002 of the Read well in Texas and the unsuccessful
drilling in the Marine 9 permit (the Congo).
OPERATOR'S FEES
In 2002 the Company earned $ 249,000 in operator fees, compared to $
234,000 in 2001.
OIL AND GAS REVENUES
In 2002 and 2001 the Company had oil and gas revenues of $2,423,000 and
$3,068,000, respectively. The decrease is due mainly to the 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 $844,000 and $905,000 for 2002 and
2001, respectively. The relatively higher amounts in 2001 in lease operating
expenses and severance taxes is primarily due to the work-overs performed in
connection with producing wells in 2001.
INTEREST AND DIVIDEND INCOME
Interest income during the year ended December 31, 2002 was $738,000
compared to $541,000 for the year ended December 31, 2001. The increase in
interest income is primarily attributable to interest receivable on marketable
securities (Debentures).
GAIN ON MARKETABLE SECURITIES
In 2002, the Company recognized net realized and unrealized losses on
marketable securities of $189,000 compared to net realized and unrealized losses
on marketable securities of $199,000 in 2001.
Increases or decreases in the gains and losses from marketable securities
are dependent on the market prices in general and the composition of the
portfolio of the Company.
OPERATOR EXPENSES
In 2002 the Company expended $791,000 in respect of the operator expenses
compare to $696,000 in 2001. The increase in operator expense is primarily
attributable to increased office lease payments.
GENERAL AND ADMINISTRATIVE EXPENSES
In 2002, the Company incurred $1,422,000 as general and administrative
expenses compared to $2,048,000 incurred in 2001. The relatively higher amount
in 2001 is primarily attributable to bonuses awarded to senior officers.
CONTRACTUAL OBLIGATIONS
The Company leases office facilities in Texas and in Israel and certain
equipment pursuant to non-cancellable operating lease agreements. Future minimum
lease payments pursuant to these leases as of December 31, 2003 were as follows
(in thousands).
Total 2004 2005 2006 2007 2008 Thereafter
----- ---- ---- ---- ---- ---- ----------
Operating Leases:
Texas: 83,000 28,000 29,000 26,000 -- -- --
19
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, 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 characteristics.
As revised, FIN 46R is now generally effective for financial statements for
interim or annual periods ending on or after March 15, 2004. We have no
identified any variable interest entities. In the event a variable interest
entity is identified, we do not expect the requirements of FIN 46R to have a
material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity," ("SFAS 150")
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003 for public companies. The adoption of SFAS No 150 did not have a material
impact on our consolidated financial statements.
In July 2003, an issue was bought before the Financial Accounting Standards
Board regarding whether or not sontract-based oil and gas mineral rights held by
lease or contact ("mineral rights") should be recorded or disclosed as
intangible assets. The issue presents a view that these mineral rights are
classified assests as defined in SFAS No. 141, "Business Combinations," and
therefore, should be classified separately on the balance sheet as intangible
assets. SFAS No. 141 and SFAS No. 142, "Goodwill and Other Intangible Assets,"
became effective for transactions subsquent to June 30, 2001, with the
disclosure requirments of SFAS No. 142 required as of January 1, 2002. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method and that intangible assets be
disaggregated and reported separately from goodwill SFAS No. 142 established new
accounting guidelines for both finite lived intangible assets and indefinite
lived intangible assets. Under the statement, intangible assets should be
separately reported on the face of the balance sheet and accompanied by
disclosure in the notes to financial statements. SFAS No. 142 does not apply to
accounting utilized by the oil and gas industry as prescribed by SFAS No. 19,
and is silent about whether ot not its disclosure provisions apply to oil and
gas mineral rights to an upcoming agenda, which may result in a change in how
Isramco classifies these assets.
Should such a change be required the amounts related to business
combinations and major asset purchases that would be classified as "intangible
mineral interest" are estimated to be $4,617,333 as of December 31, 2003 and
$4,434,828 as December 31, 2002.
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including adverse changes in
commodity prices.
The Company produces and sells natural gas and crude oil.. As a result, the
Company's financial results can be significantly affected if these commodity
prices fluctuate widely in response to changing market forces.
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. 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
SEC's rules and forms, and that such information is accumulated and communicated
to management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure
based closely on the definition of "disclosure controls and procedures" in Rule
13a-14(c). 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 our Chief 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 Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING . During the quarter
ended December 31, 2003, 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.
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,
2002 and such information is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Company has adopted a code of conduct and ethics applicable to all of
senior executive officers and senior financial officers, including the Chief
Executive Officer. A copy of such code of conduct and ethics is filed as Exhibit
14.1 to this Annual Report on Form 10-K.
21
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 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.
"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.
22
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.
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, undared, between the
Company and the Government of Israel on behalf of the State of Israel,
filed as an Exhibit to Form 10-Q for the Company for the period ending
September 30, 1988 and incorporated herein by reference.
10.4 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.
23
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,
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.
14.1 Code of Ethics *
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, 2003 *
* Attached hereto as an exhibit
(b) Reports on Form 8-K
Isramco filed a report on Form 8-K on December 9, 2003 announcing the
resignation of its Vice President and the appointment of Mr. Doron Avrahan as
its new Vice President.
(c) Financial Statements
24
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,
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
Date: March 30, 2004
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 30, 2004
Jackob Maimon
/s/ Eyal Gibor Director March 30, 2004
Eyal Gibor
/s/ Max Pridgeon Director March 30, 2004
Max Pridgeon
/s/ Donald D. Lovell Director March 30, 2004
Donald D. Lovell
25
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Reports F-1
Consolidated Balance Sheets at December 31, 2003 and 2002 F-2
Consolidated Statements of Operations for the years ended December 31,
2003,2002,and 2001 F-3
Consolidated Statements of changes in Shareholders' Equity for the years
ended December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001 F-5
Notes to Consolidated Financial Statements F-6
(i)
26
Independent Auditors' Report
To the Shareholders and Board of Directors of
Isramco, Inc. and Subsidiaries
We have audited the consolidated balance sheets of Isramco, Inc. and
subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of Isramco Oil and Gas, Ltd.; Isramco B.V., Cruquius; or Isramco,
Inc. - Israel Branch, which are wholly owned subsidiaries whose combined
statements reflect total assets of $ 11,249,799 and $ 12,494,523 as of December
31, 2003 and 2002, respectively, and total revenues of $ 3,422,000 and
$1,728,732 for the years then ended, respectively. Those statements were audited
by other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for these subsidiaries, is based
solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Isramco, Inc. and
subsidiaries at December 31, 2003 and 2002, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States.
As discussed in Note A, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 143 "Accounting for Asset Retirement
Obligations" as of January 1, 2003. Also discussed in Note A, the Company
adopted the provisions of Atatement of Financial Accounting Standard No. 142
"Goodwill and Other Intangible Assets in 2002".
/s/ MANN FRANKFORT STEIN & LIPP CPAs, LLP
Houston, Texas
March 5, 2004
F-1
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share information)
DECEMBER 31
-----------------------------
2003 2002
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,429 $1,617
Marketable securities, at market 4,064 3,177
Accounts receivable - trade 503 558
Accounts receivable - other 609 --
Prepaid FIT expenses 407 315
Prepaid expenses and other current assets 197 126
---------- ----------
TOTAL CURRENT ASSETS 8,209 5,793
Property and equipment, net (successful efforts
method for oil and gas properties) 3,264 3,505
Real Estate 1,887 1,887
Marketable securities, at market 8,572 7,733
Investment in affiliates 10,520 8,641
Deferred tax asset -- 887
Other 162 221
---------- ----------
TOTAL ASSETS $32,614 $28,667
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $798 $2,175
---------- ----------
TOTAL CURRENT LIABILITIES 798 2,175
---------- ----------
Asset retirement obligations 766 --
Deferred tax liability 1,169 --
SHAREHOLDERS' EQUITY
Common stock $ 0.0l par value; authorized 7,500,000 shares; 27 27
issued 2,669,120 shares; outstanding 2,639,853 shares
Additional paid-in capital 26,240 26,240
Retained earnings (accumulated deficit) 3,189 933
Accumulated other comprehensive income (loss) 589 (544)
Treasury stock, 29,267 shares at cost (164) (164)
---------- ----------
Total shareholders' equity 29,881 26,492
---------- ----------
Total liabilities and shareholders' equity $ 32,614 $28,667
========== ==========
See notes to the consolidated financial statements.
F-2
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share information)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
---------- ---------- ----------
Revenues and other income : --- ---
Operator fees from related party $ 753 $249 $ 234
Oil and gas sales 3,439 2,423 3,068
Interest income 760 738 541
Office services
To related parties 635 773 754
To others 304 140 103
Gain on sale of investment 549
Gain from sale oil and gas properties and
Equipment --- --- 4
Gain on marketable securities 872 --- ---
Equity in net income of investees 1,098 --- ---
Other 475 49 ---
---------- ---------- ----------
Total revenues and other income 8,885 4,372 4,704
---------- ---------- ----------
Expenses :
Interest expense 52 210 ---
Accretion expense 43 --- ---
Depreciation, depletion and amortization 621 642 564
Lease operation expense and severance taxes 872 844 905
Exploration costs 165 1,747 204
Operator expense 795 791 696
General and administrative
To related parties 317 120 240
To others 1,695 1,302 1,808
Loss on sale of marketable securities --- 189 199
Equity in net loss of investees --- 440 177
Impairment of oil and gas assets 617 --- ---
---------- ---------- ----------
Total expenses 5,177 6,285 4,793
---------- ---------- ----------
Income (loss) before income taxes 3,708 (1,913) (89)
Income taxes (benefit) 1,188 114 50
---------- ---------- ----------
Net income (loss) before cumulative effect of change in accounting principle 2,520 (1,799) (139)
Cumulative effect of change in accounting principle, net (264) 3,516 ---
---------- ---------- ----------
Net income (loss) $ 2,256 $1,717 $(139)
========== ========== ==========
Earnings (loss) per share
Basic and diluted earnings (loss) per share for:
Net income (loss) before cumulative effect $0.95 $(0.68) $(0.05)
Cumulative effect of accounting change, net $ (0.10) $ 1.33 $ ---
---------- ---------- ----------
Net income (loss) $ 0.85 $ 0.65 $(0.05)
========== ========== ==========
Weighted average number of common shares
outstanding-basic 2,639,853 2,639,853 2,639,853
========== ========== ==========
Weighted average number of common shares outstanding -diluted 2,639,853 2,639,853 2,639,853
========== ========== ==========
See notes to the consolidated financial statements.
F-3
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
COMMON STOCK
--------------------------
ACCUMULATED
ADDITIONAL OTHER
NUMBER PAID-IN COMPREHENSIVE
OF SHARES AMOUNT CAPITAL INCOME (LOSS)
------------ ------------ ------------ -------------
$ IN THOUSANDS, EXCEPT SHARE AMOUNTS
Balances at December 31, 2000 2,669,120 27 26,240 374
Comprehensive income:
Net Income - - - -
Net unrealized loss on available for sale marketable
securities, net of taxes - - - (238)
Total comprehensive income
------------ ------------ ------------ -------------
Balances at December 31, 2001 2,669,120 27 26,240 136
Comprehensive income:
Net Income - - - -
Net unrealized loss on available for sale marketable
securities, net of taxes - - - (243)
Net realized gain (loss) on foreign exchange rates, net of taxes - - - (437)
Total comprehensive income
------------ ------------ ------------ -------------
Balances at December 31, 2002 2,669,120 $27 $26,240 $(544)
Comprehensive income:
Net Income
Net unrealized gain on available for sale marketable - - - -
securities, net of taxes - - - 524
Net realized gain (loss) on foreign exchange rates, net of taxes - - - 609
Total comprehensive income
------------ ------------ ------------ -------------
Balances at December 31, 2003 2,669,120 $27 $26,240 $589
============ ============ ============ =============
(CONTINUED)
RETAINED
EARNINGS TOTAL
(ACCUMULATED TREASURY SHAREHOLDERS'
DEFICIT) STOCK EQUITY
------------ ------------ -------------
Balances at December 31, 2000 (645) (164) 25,832
Comprehensive income:
Net Income (139) - (139)
Net unrealized loss on available for sale marketable
securities, net of taxes - - (238)
-------------
Total comprehensive income (377)
------------ ------------ -------------
Balances at December 31, 2001 (784) (164) 25,455
Comprehensive income:
Net Income 1,717 - 1,717
Net unrealized loss on available for sale marketable
securities, net of taxes - - (243)
Net realized gain (loss) on foreign exchange rates, net of taxes - - (437)
-------------
Total comprehensive income 1,037
------------ ------------ -------------
Balances at December 31, 2002 $ 933 $ (164) $26,492
Comprehensive income:
Net Income 2,256 2,256
Net unrealized gain on available for sale marketable
securities, net of taxes - - 524
Net realized gain (loss) on foreign exchange rates, net of taxes - - 609
-------------
Total comprehensive income 3,389
------------ ------------ -------------
Balances at December 31, 2003 $2,929 $(164) $29,881
============ ============ =============
F-4
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 2,256 $1,717 $(139)
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation, depletion, amortization and provision for impairment 1,238 642 564
Accretion of asset retirement obligation 43
Dry hole costs 99 1,642 -
Loss (gain) on marketable securities (872) 189 199
Gain on sale of investment (549) - -
Gain on sale of oil properties and equipment - (4)
Equity in net loss (income) of investees (1,098) 440 177
Cumulative effect of an accounting change 264 (3,516) -
Employee stock awards - - -
Deferred taxes 1,532 195 -
Changes in assets and liabilities:
Accounts receivables 53 (103) 376
Prepaid expenses and other current assets (163) (329) 468
Other - - (166)
Accounts payable and accrued expenses (1,377) 1,015 (289)
Marketable securities-trading (138) (519) 481
---------- ---------- ----------
Net cash provided by operating activities 1,288 1,372 1,667
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (676) (1,617) (2,276)
Proceeds from sale of oil and gas properties and equipment - 10 3
Purchase of real estate - (1,887) -
Purchase of marketable securities (3,070) (491) (6,706)
Proceeds from BG transaction --- - -
Proceeds from sale of marketable securities 3,270 - -
Purchase of convertible promissory note - (50) -
Purchase of investment in affiliates - - (1,114)
---------- ---------- ----------
Net cash used in investing activities (476) (4,035) (9,612)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt - - -
---------- ---------- ----------
Net cash used in financing activities - - -
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 812 (2,663) (8,426)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,617 4,280 12,706
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR 2,429 $1,617 $4,280
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR INTEREST $ - $ - $ -
========== ========== ==========
CASH PAID DURING THE YEAR FOR TAXES $ - $ - $ 25
========== ========== ==========
See notes to the consolidated financial statements.
F-5
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE A) -- GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] The Company
Isramco Inc. and subsidiaries (the Company) is primarily engaged in the
acquisition, exploration, operation and development of oil and gas properties.
As of December 31, 2003, the Company has oil and gas interest in Texas,
Louisiana, Oklahoma, Wyoming, New Mexico, the Republic of Congo, Africa, and
approximately a 0.5% working interest in various properties located in Israel.
In addition the company purchased real estate in Israel in 2002.
[2] Consolidation
The consolidated financial statements include the accounts of the Company, its
direct and indirect wholly-owned subsidiaries Isramco Oil and Gas Ltd. (Oil and
Gas) and Isramco Resources Inc., a British Virgin Islands company, its wholly
owned subsidiary, Jay Petroleum, L.L.C., (Jay), Jay Management L.L.C (Jay
Management), IsramTec Inc. (IsramTec) and a wholly-owned foreign subsidiary.
Intercompany balances and transactions have been eliminated in consolidation.
[3] Method of Accounting for Oil and Gas Operations
The Company follows the "successful efforts" method of accounting for its oil
and gas properties. Under this method of accounting, all property acquisition
costs and costs of exploratory and development wells are capitalized when
incurred, pending determination of whether the well has found proved reserves.
If an exploratory well has not found proved reserves, the costs of 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.
In July 2003, an issue was brought before the Financial Accounting Standards
Board regarding whether or not contract-based oil and gas mineral rights held by
lease or contract ("mineral rights") should be recorded or disclosed as
intangible assets. The issue presents a view that these mineral rights are
intangible assets as defined in SFAS No. 141, "Business Combinations," and
therefore, should be classified separately on the balance sheet as intangible
assets. SFAS No. 141 and SFAS No. 142, "Goodwill and Other Intangible Assets,"
became effective for transactions subsequent to June 30, 2001, with the
disclosure requirements of SFAS No. 142 required as of January 1, 2002. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method and that intangible assets be
disaggregated and reported separately from goodwill. SFAS No. 142 established
new accounting guidelines for both finite lived intangible assets and indefinite
lived tangible assets. Under the statement, intangible assets should be
separately reported on the face of the balance sheet and accompanied by
disclosure in the notes to financial statements. SFAS No. 142 does not apply to
accounting utilized by the oil and gas industry as prescribed by SFAS No. 19,
and is silent about whether or not its disclosure provisions apply to oil and
gas companies. The Emerging Issues Task Force (EITF) has added the treatment of
oil and gas mineral rights to an upcoming agenda, which may result in a change
in how Isramco classifies theses assets.
Should such a change be required, the amounts related to busines