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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
CHECK ONE
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2004 or
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 from _______ to ______
COMMISSION FILE NUMBER 0-12500
ISRAMCO, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3145265
(State or other Jurisdiction of I.R.S. Employer Number
Incorporation or Organization)
11767 KATY FREEWAY, HOUSTON, TX 77079
(Address of Principal Executive Offices)
713-621-3882
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the registrant's Common Stock as of
November 15, 2004 was 2,639,853.
PART I - FINANCIAL INFORMATION:
Page
Item 1. Financial Statements (ii)
Consolidated Balance Sheets at September 30, 2004 and
December 31, 2003 1
Consolidated Statements of Operations for the three and
nine months ended September 30, 2004 and 2003 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003 3
Notes to Consolidated Financial Statements 4
Item 2. Management's discussion and analysis of financial statements 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings 12
Item 2. Changes in Securities & Use of Proceeds 12
Item 3. Defaults upon senior securities 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY
TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS",
"ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE
NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT
LIMITATION, STATEMENTS BELOW REGARDING EXPLORATION AND DRILLING PLANS, FUTURE
GENERAL AND ADMINISTRATIVE EXPENSES, FUTURE GROWTH, FUTURE EXPLORATION, FUTURE
GEOPHYSICAL AND GEOLOGICAL DATA, GENERATION OF ADDITIONAL PROPERTIES, RESERVES,
NEW PROSPECTS AND DRILLING LOCATIONS, FUTURE CAPITAL EXPENDITURES, SUFFICIENCY
OF WORKING CAPITAL, ABILITY TO RAISE ADDITIONAL CAPITAL, PROJECTED CASH FLOWS
FROM OPERATIONS, OUTCOME OF ANY LEGAL PROCEEDINGS, DRILLING PLANS, THE NUMBER,
TIMING OR RESULTS OF ANY WELLS, INTERPRETATION AND RESULTS OF SEISMIC SURVEYS OR
SEISMIC DATA, FUTURE PRODUCTION OR RESERVES, LEASE OPTIONS OR RIGHTS,
PARTICIPATION OF OPERATING PARTNERS, CONTINUED RECEIPT OF ROYALTIES, AND ANY
OTHER STATEMENTS REGARDING FUTURE OPERATIONS, FINANCIAL RESULTS, OPPORTUNITIES,
GROWTH, BUSINESS PLANS AND STRATEGY. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS
REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR
ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF
THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY
FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH
STATEMENTS TO ACTUAL RESULTS.
(ii)
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share information)
(Unaudited)
September 30, December 31,
2004 2003
------------- ------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents 2,457 2,429
Marketable securities, at market 6,858 4,064
Accounts receivable - Trade 1,074 503
Account receivable - other -- 609
Prepaid FIT expenses -- 407
Prepaid expenses and other current assets 574 197
------- -------
Total current assets 10,963 8,209
Property and equipment (successful efforts method for oil and gas 3,498 3,264
properties)
Real Estate 1,887 1,887
Marketable securities, at market 6,089 8,572
Investment in affiliates 11,205 10,520
Investment in Vessel 8,066 --
Other 162 162
------- -------
Total assets 41,870 32,614
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses
1,111 798
------- -------
Total current liabilities 1,111 798
Asset Restirement obligations 800 766
Deferred tax liability 2,536 1,169
Bank loan 7,035 --
------- -------
11,482 2,733
Commitments, contingencies and other matters
Common stock $.0l par value; authorized 7,500,000
shares; issued 2,669,120 shares; outstanding
2,639,853 at September 30,2004
and December 31,2003 27 27
Additional paid-in capital 26,240 26,240
Retained Earnings 3,439 3,189
Accumulated other comprehensive income 846 589
Treasury stock, 29,267 shares at
September 30, 2004 and December 31, 2003 (164) (164)
------- -------
30,388 29,881
Total shareholders' equity
------- -------
Total liabilities and shareholders' equity 41,870 32,614
======= =======
See notes to the consolidated financial statements.
-1-
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share information)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
REVENUES:
Operator fees from related party 36 451 108 556
Oil and gas sales 836 941 2,448 2,712
Interest income 159 147 572 572
Office services to related party 192 284 580 710
Gain (Loss) on Marketable securities (9) 13 -- 612
Equity in net income of investees 71 64 926 1,243
Other Income 28 28 98 439
Magic 1 vessel revenues 1,809 -- 1,809 --
---------- ---------- ---------- ----------
3,122 1,928 6,541 6,844
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Financial expenses 65 8 117 40
Cost of revenues of vessel 1,082 -- 1,277 --
Depreciation, depletion and amortization 361 161 672 489
Accretion expenses 12 11 34 33
Lease operating expenses and
severance taxes 374 218 806 638
Exploration costs -- -- -- 22
Operator expense 250 201 594 633
General and administrative 412 472 1,228 1,174
Gain (Loss) on marketable securities (22) -- 37 --
Impairment of oil and gas assets -- 31 -- 231
---------- ---------- ---------- ----------
Total expenses 2,534 1,102 4,765 3,260
---------- ---------- ---------- ----------
Income before income taxes 588 826 1,776 3,584
Income taxes (1,183) (18) (1,526) (18)
---------- ---------- ---------- ----------
Net income (loss) from continuing operation (595) 808 250 3,566
Cumulative Effect of Accounting change -- -- -- (264)
---------- ---------- ---------- ----------
Net income (Loss) (595) 808 250 3,302
========== ========== ========== ==========
Earnings per common share-basic and diluted
continuing operation (0.23) 0.31 0.09 1.35
Cumulative Effect of Accounting change -- -- -- (0.10)
---------- ---------- ---------- ----------
(0.23) 0.31 0.09 1.25
========== ========== ========== ==========
Weighted average number of shares
outstanding-basic and diluted 2,639,853 2,639,853 2,639,853 2,639,853
========== ========== ========== ==========
See notes to the consolidated financial statements.
-2-
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Month Ended September 30,
---------------------------------
2004 2003
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 250 3,302
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation, depletion and amortization 672 489
Accretion expense 34 33
Impairment of oil and gas assets -- 231
Loss (gain) on marketable securities 37 (620)
Equity in net loss (gain) of investees (926) (1,243)
Cumulative effect of and Accounting change -- 264
Deferred taxes 1,240 18
Changes in assets and liabilities:
Accounts receivable (571) (101)
Prepaid expenses and other current assets 30 (91)
Accounts payable and accrued liabilities 313 (844)
------ ------
Net cash provided by operating activities 1,079 1,438
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Addition to property and equipment (702) (522)
Proceed from sale of other investment 609 --
Purchase of Vesssel (8,273) --
Purchase of marketable securities (4,202) (273)
Proceeds from sale of marketable securities 4,482 3,706
------ ------
Net cash provided by (used in) investing activities (8,086) 2,911
------
Net cash provided by financial activities
Proceed from Bank loan 7,035 --
------ ------
Net cash provided by financial activities 7,035 --
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 28 4,349
Cash and cash equivalents-beginning of year 2,429 1,617
------ ------
Cash and cash equivalents-end period 2,457 5,966
====== ======
See notes to the consolidated financial statements.
-3-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
As used in these consolidated financial statements, the term "Company" refers to
Isramco, Inc. and subsidiaries.
NOTE 2
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of Management, all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation have been included. Results for the
interim period presented are not necessarily indicative of the results that may
be expected for the year ended December 31, 2004. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2003. Certain re-classification of prior year amounts have been made to conform
to current presentation. New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46. Consolidation of
Variable Interest Enninies, and subsequently revised the interpretation in
December 2003 (FIN 46R). This interpretation of Accounting Research Bulletin No.
51, Consolidated Financial Statements, addresses consolidation by business
enterprises of variable interest entities, which have certain characrenistics.
As revised, FIN 46R is now generally effective for financial statements for
metrim or annual periods ending on or after March 15, 2004. We adopted FIN 46R
effective January 1, 2004, with no material effect on our consolidated financial
statements.
STOCK-BASED COMPENSATION
We account for employee stock-based compensation granted under our long-term
incentive plans using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. The company did not have any compensation expense for
the nine months periods ended September 30, 2004 and 2003, as there were no
options granted in either of the periods and options historically granted were
fully vested the date of grant. The following table illustrares the effect on
net income and earning per share if we had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation:
NINE MONTH ENDED JUNE 30,
(In thousands)
-------------------------
2004 2003
---- ----
Net income, as reported $ 250 $3,302
Deduct: Total stock-based employee compensation
Expense deremuned under fair value based merhod
For all awards, ner of related tax effects -- --
------ ------
Pro forma net income $ 250 $3,302
Net income per share:
Basic - as reported $ 0.09 $ 1.25
Basic - pro forma $ 0.09 $ 1.25
Diluted - as reported $ 0.09 $ 1.25
Diluted - pro forma $ 0.09 $ 1.25
NOTE 3 - CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
direct and indirect non U.S. based wholly-owned subsidiaries Isramco Oil and Gas
Ltd. (Oil and Gas) and Magic 1 Cruise Line Corp. and its U.S based wholly-owned
subsidiaries: Jay Petroleum, L.L.C. (Jay), Jay Management L.L.C. (Jay
Management) and IsramTec Inc. (IsramTec). Intercompany balances and transactions
have been eliminated in consolidation.
-4-
NOTE 4 - ACCOUNTING CHANGES
Effective January 1, 2003, the Company adopted SFAS No. 143 "Accounting for
Asset Retirement obligations". SFAS No. 143 requires entities to record a
liability for asset retirement obligations at fair value in the period in which
it is incurred and a corresponding increase in the carrying amount of the
related long-lived asset. Accretion expenses for the nine months ended September
30, 2004 was approximately $ 34,000.
NOTE 5 - OIL AND GAS PROPERTIES
The Company follows the "successful efforts" method of accounting for its oil
and gas properties. Under this method of accounting, all property acquisition
costs and costs of exploratory and development wells are capitalized when
incurred, pending determination of whether the well has found proved reserves.
If an exploratory well has not found proved reserves, the costs of the well are
charged to expense. The costs of development wells are capitalized whether
successful or unsuccessful. Geological and geophysical costs and the costs of
carrying and retaining undeveloped properties are expensed as incurred.
Management estimates that the salvage value of lease and well equipment will
approximately offset the future liability for plugging and abandonment of the
related wells. Accordingly, no accrual for such costs has been recorded.
Although the company continues to seek to acquire oil and gas properties, no
such purchases were made during the nine months ended September 30, 2004.
NOTE 6 - INVESTMENT IN VESSEL
In March 2004, the Company completed the purchase of a luxury cruise liner for
aggregate consideration of $8,050,000. The Vessel, a Bahamas flagged ship,
contains 270 passenger cabins spread out over nine decks. The Company has
secured commercial bank loans for approximately $7.5 million of the purchase
price, secured by a lien on the Vessel, marketable securities and a Company
guarantee. The terms of the loan are as follows: Amount of $2.7 million at a
rate of Libor + 0.75% for a duration of twelve months and an amount of $4.8
million at a rate of Libor + 1%, revolving every week. Title and operation of
the vessel is under a wholly-owned Company subsidiary.
The Company leased the vessel to an Israeli based cruise line tour operator for
the period from July 1, 2004 to October 17, 2004, at a daily lease rate of
$21,500.
As of September 30, 2004, the company expended $1.2 million in respect of the
maintenance and upkeep of the Vessel. The Company is expected to spend
additional $1 million during the fourth quarter of 2004 for repairs and
maintenance.
NOTE 7 -- EARNINGS PER SHARE COMPUTATION
SFAS No. 128 requires a reconciliation of the numerator (income) and denominator
(shares) of the basic earnings per share ("EPS") computation to the numerator
and denominator of the diluted EPS computation. The Company's reconciliation is
as follows:
For the Nine Months Ended September 30,
2004 2003
Income Shares Income Shares
------ ------ ------ ------
Earnings per common share-Basic 250,000 2,639,853 3,302,000 2,639,853
Effect of dilutive securities: ========== ========== ========== ==========
Stock Options 250,000 2,639,853 3,302,000 2,639,853
-5-
NOTE 8 -- GEOGRAPHICAL SEGMENT INFORMATION
The Company's operations involve two industry segments--the exploration,
development, production and transportation of oil and natural gas and the
holding of its cruise line vessel. The Company's current oil and gas activities
are concentrated in the United States and Israel. Operating outside the United
States subjects the Company to inherent risks such as a loss of revenues,
property and equipment from such hazards as exploration, nationalization, war
and other political risks, risks of increases of taxes and governmental
royalties, renegotiation of contracts with government entities and changes in
laws and policies governing operations of foreign-based companies.
The Company's oil and gas business is subject to operating risks associated with
the exploration, and production of oil and gas, including blowouts, pollution
and acts of nature that could result in damage to oil and gas wells, production
facilities or formations. In addition, oil and gas prices have fluctuated
substantially in recent years as a result of events, which were outside of the
Company's control. The Company does not directly operate the cruise line vessel.
The Company leases the vessel to third party cruise line operators. This segment
of the Company's business is subject to many risks, all of which cannot be
presently anticipated, including losses resulting from unexpected repairs and
maintenance and competition.
Financial information, summarized by segments and geographic area, is as follows
(in thousands):
United Consolidated
States Israel Africa Vessel Total
------ ------ ------ ------ -----
Identifiable assets at September 30, 2004 $3,433 $65 -- $8,411 $11,909
Cash and corporate assets $30,183
-------
Total Assets at September 30, 2004 $42,092
=======
Identifiable assets at December 31, 2003 $3,183 $81 $ -- $3,264
Cash and corporate assets
$29,350
-------
Total Assets at December 31, 2003
$32,614
=======
Nine Months Ended September 30, 2004
Sales and other operating revenue 2,584 552 -- 1,809 4,914
Costs and operating expenses (1,288) (611) -- (1,483) (3,018)
====== ===== ====== ======= =======
Operating profit 1,297 (59) -- 326 1,564
Financial Income, net 453
General corporate expenses (1,228)
Loss on marketable securities (37)
Equity in net gain of investees 926
Other Income 98
Income taxes (1,526)
-------
Net Income from continuing operations 250
=======
Nine Months Ended September 30, 2003
Sales and other operating revenue 2,817 1,163 -- 3,980
Costs and operating expenses (1,292) (606) (150) (2,048)
====== ===== ====== =======
Operating profit 1,525 557 (150) 1,932
Financial Income, net 532
General corporate expenses (1,174)
Gain on marketable securities 612
Equity in net loss of investees 1,243
Other income 439
Income taxes (18)
-------
Net Loss from continuing operations 3,566
=======
-6-
Three Months Ended September 30, 2003
United Consolidated
States Israel Africa Vessel Total
------ ------ ------ ------ -----
Sales and other operating revenue 980 698 -- 1,678
Costs and operating expenses (416) (208) -- (624)
------ ----- ------ -------
Operating profit 564 (490) -- 1,054
Financial Income, net 139
General corporate expenses (472)
Loss on marketable securities and 77
equity in net loss of investees 28
Income Taxes (18)
-------
Net Income from continuing operation 808
=======
Three Months Ended September 30, 2004
Sales and other operating revenue 880 184 -- 1,809 2,842
Costs and operating expenses (523) (267) -- (1,287) (1,713)
------ ----- ------ ------ -------
Operating profit 358 (83) -- 522 796
Financial Income, net 92
General corporate expenses (412)
Gain on marketable securities 13
Equity in net loss of investees 71
Other Income 28
Income taxes (1,183)
-------
Net Loss from continuing operations (595)
=======
NOTE 9 - COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) for the nine month and three month
period ended September 30, 2004 and 2003 was as follows: (in thousands)
Nine months
ended September 30,
2004 2003
---- ----
Net Income 250 3,302
Other comprehensive gain
- -available - for - sale securities, net 415 556
- -foreign currency translation adjustments, net (158) 385
---- -----
Comprehensive income 507 4,243
Three months
ended September 30,
2004 2003
---- ----
Net Income (Loss) (595) 808
Other comprehensive gain (loss) (65) 333
- -available - for - sale securities, net
- -foreign currency translation adjustments, net 25 (207)
---- -----
Comprehensive income (loss) (635) 934
==== =====
NOTE 10 - CONTINGENCIES
The company is also involved in various other legal proceedings arising in the
normal course of business. In opinion of management, the Company's ultimate
liability, if any, in these pending actions would not have a material adverse
effect on the financial position, operating results of liquidity of the Company.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS REPORT ON
FORM 10-Q. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE
FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY THESE FORWARD-LOOKING
STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "PLAN,"
"ANTICIPATE," "BELIEVE," "ESTIMATE," "PREDICT," "POTENTIAL," "INTEND," OR
"CONTINUE," AND SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. OUR
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING, BUT
NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
REPORT ON FORM 10-Q.
OVERVIEW
Isramco, Inc., a Delaware corporation (the "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 discussed below.
CRITICAL ACCOUNTING POLICIES
In response to the Release No. 33-8040 OF THE securities and Exchange
Commission, "CAUTIONARY ADVICE REGARDING DISCLOSURE AND CRITICAL ACCOUNTING
POLICIES", the Company identified the accounting principles which it believes
are most critical to the reported financial status by considering accounting
policies that involve the most complex of subjective decisions or assessments.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of customers to make required payments. If the
financial condition of customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
The Company records an investment impairment charge when it believes an
investment has experienced a decline in value that is other than is temporary.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
carrying value of the investment that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment charge in the
future.
The Company records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event that
the Company were to determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax asset would increase net income in the period such determination
was made.
The Company does not participate in, nor has it created, any off balance
sheet special purpose entities or other off- balance sheet financing. In
addition, the Company does not enter into any derivative financial instruments.
The Company records a liability for asset retirement obligation at fair
value in the period in which it is incurred and 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.
During the nine month ended September 30, 2004, the Company's consolidated cash
and cash equivalents increased by $28,000 from $2,429,000 at December 31, 2003
to $2,457,000 at September 30,2004.
Net cash used in investing activities for the nine-month period ended September
30, 2004 was $8,068,000 as compared to $2,911,000 net cash used during the
nine-month period ended September 30, 2003. The increase in net cash used during
the nine months ended September 30, 2004 is primarily attributable to the
purchase of the cruise line vessel for $8,273,000 and the drilling of two wells
in Texas and in Oklahoma for $595,000.
Net cash provided by financing activities for the nine-months ended September
30, 2004 was $7,035,000. This amount represents the proceeds of commercial loans
to purchase the cruise line vessel.
Net cash provided by operating activities for the nine month ended September 30,
2004 was $1,079,000 compared to $1,438,000 for the corresponding nine months in
2003. The decrease is primarily attributable to a decline in gas and oil
production during the period in 2004.
The Company expects that it will expend approximately $1 million during the
fourth quarter of 2004 in connection with the upkeep and maintenance of the
cruise line vessel.
The Company believes that existing cash balances and cash flows from activities
will be sufficient to meet its financing needs. The Company intends to finance
its ongoing oil and gas exploration activities from working capital.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2004 (the "2004 Period") Compared to the Nine
Months Ended September 30, 2003 (the "2003 Period") and the three months ended
September 30, 2004 compared to the three months ended September 30,2003.
The Company reported net income of $250,000 ($0.09 per share) for the 2004
Period compared to a net income of $3,302,000 ($1.25 per share) for the 2003
Period and loss of $595,000 ($(0.23) per share) for the three months ended
September 30, 2004, compared to a net income of $808,000 ($0.31 per share) for
the comparable three month period in 2003. The decrease in reported net income
for the nine months ended September 30, 2004 as compared to the corresponding
period in 2003 as well as for the three months ended September 30, 2004 compared
to the same period in 2003 is primarily attributable to (i) a decrease in the
gains on the securities of certain investee-affiliates held by the company whose
shares are traded on the Tel-Aviv stock exchange (ii) losses during 2004 period
on other publicly traded securities held by the company and (iii) declining gas
production during the period and (iv) Increase of deferred tax liability.
Set forth below is a break-down of these results.
-8-
SUMMARY OF EXPLORATION EFFORTS IN ISRAEL
MED YAVNE LEASE
The Med Yavne Lease covers approximately 53 square kilometers (approximately
12,000 acres). The Company's participation share of the Med Yavne Lease is
0.4585%.
MED ASHDOD LEASE
The Med Ashdod Lease covers approximately 250 square kilometers (approximately
62,000 acres). The Company serves as the operator of the Med Ashdod Lease and
holds a 0.3625% interest therein.
On February 15, 2004, the operator presented the partners with two drilling
prospect (a) Nizanim 1 Well (b) Yam 3 Well to a total depth of 5,700 meter
(18,700 feet), at a total budget of $40 million. The Company has received notice
from partners representing approximately 43% interest in the lease of their
readiness to invest in Yam 3 Well. On July 25, 2004 the Company, or behalf of
Isramco Negev 2 L.P.issued a Sole Risk notice to the other partners in the Lease
to drill Yam 3 well. On July 27, 2004, the Israeli Ministry of Defense advised
the Company that the Ministry will not approve the drilling of Yam 3 on the
basis of the data submitted. The Company and the Ministry are currently in the
process of exploring other alternatives. No assurance can be given that the
Ministry will in fact approve any alternative that is acceptable to the
partners.
In light of these developments, the operator applied for, and received, from the
petroleum commissioner an extension of the period in which the drilling on the
Yam 3 well needs to be commenced to December 1, 2005.
MARINE SOUTH LICENSE
The Marine South License covers approximately 142 square kilometers
(approximately 35,200 acres). The Company Serves as the operator and holds 1 %
interest.
SUMMARY OF EXPLORATION EFFORTS IN THE UNITED STATES
The Company, through its wholly-owned subsidiaries, Jay Petroleum LLC ("Jay
Petroleum") and Jay Management LLC ("Jay Management"), is involved in oil and
gas production in the United States. Jay Petroleum owns varying working
interests in oil and gas wells in Louisiana, Texas, Oklahoma and Wyoming.
Independent estimates of the reserves held by Jay Petroleum as of December 31,
2003 are approximately 136,000 net barrels of proved developed producing oil and
2,785 MMCFs of proved developed producing natural gas. Jay Management acts as
the operator of certain of the producing oil and gas interests owned or acquired
by Jay Petroleum.
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UNITED STATES
OIL AND GAS REVENUES (IN THOUSANDS)
Three Months ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
2004 2003 2004 2003
Oil Volume Sold (Bbl) 4.6 6 14 15
Gas Volume Sold (MCF) 110 162 366 458
Oil Sales ($) 184 176 500 423
Gas Sales ($) 641 767 1,940 2,293
Average Unit Price
Oil ($/Bbl) * 39.43 29.00 35.93 28.55
Gas ($/MCF) ** 5.81 4.74 5.29 5.01
o Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet
OPERATOR'S FEES
During the 2004 Period, the Company earned $108,000 in operator fees compared to
$556,000 for the 2003 Period and $36,000 for the three months ended September
30, 2004 compared to $451,000 for the comparable three month period in 2003. The
decrease in 2004 Period and for the three months ended September 2004, compared
to the same periods in 2003 is primarily attributable to fees associated with an
offshore well drilled in the third quarter of 2003
OIL & GAS REVENUES
During the 2004 Period, the Company had oil and gas revenues of $2,448,000
compared to $2,712,000 for the 2003 Period and $836,000 for the three months
ended September 30, 2004 compared to $941,000 for the comparable period in 2003.
The decrease in the 2004 Period and for the three months ended September 2004,
compared to the same periods in 2003 is primarily attributable to a decline in
gas production of the Company's wells in the United States.
LEASE OPERATING EXPENSES AND SEVERANCE TAXES
Lease operating expenses and severance taxes were primarily in connection with
oil and gas fields in the United States. Oil and gas lease operating expenses
and severance taxes for the 2004 Period were $806,000 compared to $638,000 for
the 2003 Period and $374,000 for the three months ended September 30, 2004
compared to $218,000 for the comparable period in 2003. The increase in the 2004
period and for the three months ended September 2004 as compared to the
corresponding periods in 2003 is primarily attributable to workover in one well
in Texas.
OIL AND GAS EXPLORATION COSTS
During the 2004 Period, the Company did not expend any amounts in respect of oil
and gas exploration, as compared to $22,000 for the same period in 2003.
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INTEREST INCOME
Interest income in respect of the 2004 Period was $572,000 compared to $572,000
for the 2003 Period and $155,000 in respect of the three months ended September
30, 2004 compared to $147,000 for the same period in 2003.
GAIN (LOSS) ON MARKETABLE SECURITIES
During the 2004 Period, the Company recognized a net realized and unrealized
gain on trading securities of $37,000 compared to gain of $612,000 for the 2003
Period and loss of $9,000 for the three months ended September 30,2004 compared
to a gain of $13,000 for the same period in 2003.
Increases or decreases in the gains and losses from marketable securities are
dependent on the market prices in general and the composition of the portfolio
of the Company.
EQUITY IN NET INCOME OF INVESTEES
The Company's equity in the net income of investees for the 2004 Period was
$926,000 compared to its equity in net income of $1,243,000 for the 2003 Period
and $71,000 in respect of the three months ended September 30, 2004 compared to
$64,000 for the same three month period in 2003. The decrease is primarily
attributable to decline in the market value of the marketable securities held by
Isramco Negev 2 LP and IOC Dead See LP.
OPERATOR EXPENSE
Operator expenses were incurred primarily in connection with the offshore
activities in Israel. Operator expenses for the 2004 Period were $594,000
compared to $633,000 for the 2003 Period and $250,000 for the three months ended
September 30, 2004 compared to 201,000 for the comparable period in 2003
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the 2004 Period were $1,228,000 compared
to $1,174,000 for the in 2003 Period and $412,000 for the three months ended
September 30, 2004 compared to $472,000 for the same period in 2003. The
increase in general and administrative expenses during the 2004 Period compared
to the 2003 Period and for the three months ended September 2004 compared to the
same period in 2003 is primarily attributable to expenses incurred in the
provision of professional services by related and third parties during 2004.
CRUISE LINE VESSEL REVENUES
During the 2004 period and during the three months ended September 2004, the
Company earned $1,809,000 from the lease of its cruise line vessel to an
unaffiliated tour operator. The lease began in July 1, 2004 and expired in
October 17, 2004.
CRUISE LINE VESSEL EXPENSES
Cruise Line vessel expenses for the 2004 period were $1,277,000 and $1,082,000
for the three months ended September 30, 2004. The expenses are primarily
attributable to insurance, maintenance, repairs and payroll.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation depletion and amortization expenses are connected to the producing
wells in the United States and to the cruise line Vessel. During the 2004
period, the company recorded the amount of $672,000 compared to $489,000 for the
2003 period and $361,000 for the three months ended September 2004 compared to
$161,000 for the comparable period in 2003. The increase is 2004 the period and
for the three months is primarily attributable to the depreciation of the
vessel.
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OTHER INCOME
Othe income for the 2004 period were $98,000 compared to $439,000 in 2003 period
and $28,000 for the three months ended September 30, 2004, the same amount as
the same period in 2003. Other income is primarily attributable to monthly
income of $7,000 related to lease of the real estate in Israel. Other income in
2003 period includes a sum of $350,000 which represents the settlement of a
liability recorded in connection with a well drilled in Marine 9 permit offshore
Congo, and was recorded during 2002 as exploration costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to changes in interest rates and foreign currency
exchanges rates were reported in Item 7A of the Company's Annual Report on Form
10-K for the year ended December 31, 2003. There has been no material change in
these market risks since the end of the fiscal year 2003.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and that
such information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Principal Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of management,
including our Chief Executive Officer and Principal Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Principal
Financial Officer concluded that our disclosure controls and procedures were
effective.
Changes in Internal Controls Over Financial Reporting. During the quarter ended
September 30, 2004, there have been no changes in our internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls.
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGE IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(i) Exhibits
31 Certification of Chief Executive and Principal Financial Officer pursuant
to Section 302 of Sarbanes-Oxley Act
32 Certification of Chief Executive and Principal Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley act of 2002
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ISRAMCO, INC.
DATE: NOVEMBER 15, 2004 BY /S/ HAIM TSUFF
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE
AND PRINCIPAL
FINANCIAL OFFICER
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