SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
CHECK ONE
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended March 31, 2003
or
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
COMMISSION FILE NUMBER 0-12500
ISRAMCO, INC.
(Exact Name of registrant as Specified in its Charter)
Delaware 13-3145265
(State or other Jurisdiction of I.R.S. Employer Number
Incorporation or Organization)
11767 KATY FREEWAY, HOUSTON, TX 77079
(Address of Principal Executive Offices)
713-621-3882
(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 Act). | | Yes |X| No
The number of shares outstanding of the registrant's Common Stock as May 15,
2003 was 2,639,853.
EXPLANATORY NOTICE
This Amendment No. 1 to our Quarterly Report on Form 10-Q for the three months
ended March 31, 2003, as originally filed on May 15, 2003, is being filed solely
to reflect the plugging and abandonment obligations related to our oil and gas
properties in accordance with the Statement of Financial Accounting Standards
No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143") effective
January 1, 2003. The obligations related to these activities have been included
in the newly inserted Note 9 to the Consolidated Statements. SFAS 143 was to be
adopted in January 2003 but the Registrant first recorded these obligations only
during the quarter ended December 31, 2003. The effect of the restatement was to
decrease net income for the quarter ended March 31, 2003 by $313,000 from the
amount included in the Quarterly Report on Form 10-Q filed on May 15, 2003 with
the Securities and Exchange Commission. The revised net income for the quarter
was $588,000.
Except as described above, no other changes have been made to this Report. This
Amendment No. 1 does not update any other disclosures to reflect developments
since the original date of filing.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Forward looking statements (i)
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2003 and December 31, 2002 1
Consolidated Statements of Operations for the three months ended
March 31, 2003 and 2002 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2002 3
Notes to Consolidated Financial Statements 4
Item 2. Management's discussion and analysis of financial statements 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon senior securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act 16
(i)
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)
March 31, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,844 $ 1,617
Marketable securities, at market 3,328 3,177
Accounts receivable 629 558
Prepaid expenses and other current assets 271 441
-------- --------
Total current assets 6,072 5,793
Property and equipment (successful efforts method for oil and gas 3,626 3,505
properties)
Real estate 1,888 1,887
Marketable securities, at market 7,745 7,733
Investment in affiliates 8,976 8,641
Deferred tax asset 915 887
Other 221 221
-------- --------
Total assets $ 29,443 $ 28,667
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 1,621 2,175
-------- --------
Total current liabilities 1,621 2,175
-------- --------
Asset Reitrement Obbigation 670
Shareholders' equity:
Commonstock $.0l par value; authorized 7,500,000 shares; issued 2,669,120
shares; outstanding 2,639,853 at March 31,2003
and December 31,2002 27 27
Additional paid-in capital 26,240 26,240
Retained earnings 1522 933
Accumulated other comprehensive income (loss) (473) (544)
Treasury stock, 29,267 shares at (164) (164)
March 31, 2003 and December 31, 2002
-------- --------
Total shareholders' equity 27,152 26,492
-------- --------
Total liabilities and shareholders' equity $ 29,443 $ 28,667
======== ========
See notes to the consolidated financial statements.
-1-
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share information)
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2003 2002
----------- -----------
REVENUES:
Operator fees from related party $ 53 $ 83
Oil and gas sales 807 516
Interest income 168 191
Office services to related party 200 286
Gain on Marketable securities, net 135 --
Equity in net income of investees 238 --
Other Income 373 --
----------- -----------
Total revenues $ 1,974 $ 1,076
----------- -----------
COSTS AND EXPENSES:
Financial expenses 2 104
Depreciation, depletion and amortization 162 118
Accretion expenses 11
Lease operating expenses and severance taxes 219 180
Exploration costs 22 2
Operator expense 247 187
General and administrative 279 410
Loss on marketable securities, net -- 105
Equity in net loss of investees -- 130
Impairment of oil and gas assets 180 --
----------- -----------
Total expenses $ 1,122 $ 1,236
----------- -----------
Income before income taxes 852 (160)
Income taxes -- --
----------- -----------
Net income (loss) from continuing operations $ 852 $ (160)
=========== ===========
Cumulative effect of accounting change (264) 3,516
=========== ===========
Net income $ 588 $ 3,356
=========== ===========
Earnings per common share-basic and diluted
Continuing operations $ 0.32 $ (0.06)
Cumulative effect of accounting change (0.10) $ 1.33
----------- -----------
$ 0.22 $ 1.27
=========== ===========
Weighted averagew number of shares
Outstanding - basic and diluted 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)
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 588 $ 3,356
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 162 118
Accretion expenses 11
Impairment of oil and gas assets 180
Loss (gain) on marketable securities (135) 127
Equity in net loss (gain) of investees (238) 130
Cumulative effect of accounting change 264 (3,516)
Deferred taxes --
Changes in assets and liabilities:
Accounts receivable (71) 107
Prepaid expenses and other current assets 170 (124)
Accounts payable and accrued liabilities (580) (77)
------- -------
Net cash provided by operating activities 351 121
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Addition to property and equipment (107) (361)
Purchase of marketable securities (100) (867)
Proceeds from sale of marketable securities 84 335
Purchase of convertible promissory note -- (50)
------- -------
Net cash (used in) provided by investing activities (123) (943)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 228 (822)
Cash and cash equivalents-beginning of year 1,616 4,280
------- -------
Cash and cash equivalents-end of period $ 1,844 $ 3,458
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for taxes --
=======
See notes to the consolidated financial statements.
-3-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
As used in these financial statements, the term "Company" refers to Isramco,
Inc. and subsidiaries.
NOTE 2
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of Management, all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation have been included. Results for the
three month period ended March 31, 2003, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2003. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002. Certain re-classification of prior year amounts have
been made to conform to current presentation.
NOTE 3 - CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
direct and indirect non U.S. based wholly-owned subsidiaries Isramco Oil and Gas
Ltd. (Oil and Gas), Isramco B.V., a Netherlands company and Isramco Resources
Inc., a British Virgin Islands company, and its wholly owned subsidiaries, Jay
Petroleum, L.L.C. (Jay), Jay Management L.L.C. (Jay Management) and IsramTec
Inc. (IsramTec). Intercompany balances and transactions have been eliminated in
consolidation.
NOTE 4 - ACCOUNTING CHANGES
In June 2002, the Financial Accounting Standard Board (FASB) issued SFAS 146,
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES WHICH NULLIFIES
EITF 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFIT AND
OTHER EXIT COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A
RESTRUCTURING). The principal difference between Statement 146 and Issue 94-3
relates to its requirements for recognition of a liability for a cost associated
with an exit or disposal activity. Statement146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost as defined
in Issue 94-3 was recognized at the date of an entity's commitment to an exit
plan. SFAS 146 is required to be adopted for exit or disposal activities
initiated after December 31, 2002.
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, "GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS" (the Interpretation),
which addresses the disclosure to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantee. The
Interpretation also requires the recognition of a liability by a guarantor at
the inception of certain guarantees.
The Interpretation requires the guarantor to recognize a liability for the
non-contingent component of the guarantee, this is the obligation to stand ready
to perform in the event that specified triggering events or conditions occur.
The initial measurement of this liability is the fair value of the guarantee at
inception. The recognition of the liability is required even if it is not
probable that payments will be required under the guarantee or if the guarantee
was issued with a premium payment or as part of a transaction with multiple
elements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock Based
Compensation - Transition and disclosure - an amendment of FASB Statement No.
123" (SFAS 148"). SFAS 148 permits two additional methods for entities that
adopt the fair value based method of accounting for stock-based employee
compensation. The statement also requires new disclosures about the ramp-up
effect of stock-based employee compensation on reported results. The Statement
also requires that those effects be disclosed more prominently by specifying the
form, content, and location of those disclosures. The transition guidance and
annual disclosure provisions of
-4-
SFAS 148 are effective for fiscal years ending after December 15, 2002, with
earlier application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statement
for interim periods beginning after December 15, 2002.
The Company has decided to continue accounting for its options in accordance
with APB 25.
In accordance with SFAS 143, the Company has recorded an asset retirement
obligation in connection with the plugging and abandomnment of its oil and gas
properties. The fair value of the liability is added to the carrying amount of
the associated asset and this additional carrying amount is depreciated over the
life of the asset.
NOTE 5 - OIL AND GAS PROPERTIES
Although the company continues to seek to acquire oil and gas properties, no
such purchases were made in the first three months of 2003.
In the three month period ended March 31, 2003, drilling costs in the amount of
approximately $107,000 were capitalized.
The Company also recorded an impairment expense in the amount of $150,000
relating to the write-off of its investment in the Marine III Permit in the
Congo.
NOTE 6 - EARNINGS PER SHARE COMPUTATION
SFAS No. 128 requires a reconciliation of the numerator (income) and denominator
(shares) of the basic earnings per share ("EPS") computation to the numerator
and denominator of the diluted EPS computation. The Company's reconciliation is
as follows:
For the Three Months Ended March 31,
------------------------------------
2003 2002
---- ----
Income Shares Income Shares
------ ------ ------ ------
Earnings per common share-Basic $ 588,000 2,639,853 $ 3,356,000 2,639,853
Effect of dilutive securities: ========== ========== ============ ==========
Stock Options $ 588,000 2,639,000 $ 3,356,000 2,639,853
NOTE 7 - GEOGRAPHICAL SEGMENT INFORMATION
The Company's operations involve a single industry segment--the exploration,
development, production and transportation of oil and natural gas. Its current
oil and gas activities are concentrated in the United States, Israel, and the
Republic of Congo, Africa. Operating in foreign countries subjects the Company
to inherent risks such as a loss of revenues, property and equipment from such
hazards as exploration, nationalization, war and other political risks, risks of
increases of taxes and governmental royalties, renegotiation of contracts with
government entities and changes in laws and policies governing operations of
foreign-based companies.
The Company's oil and gas business is subject to operating risks associated with
the exploration and production of oil and gas, including blowouts, pollution and
acts of nature that could result in damage to oil and gas wells, production
facilities or formations. In addition, oil and gas prices have fluctuated
substantially in recent years as a result of events, which were outside of the
Company's control. Financial information, summarized by geographic area, is as
follows (in thousands):
-5-
GEOGRAPHIC SEGMENT
United Consolidated
States Israel Africa Total
------ ------ ------ -----
Identifiable assets at March 31, 2003 $ 3,326 $ 72 $ 228 $ 3,626
Cash and corporate assets $ 25,817
--------
Total Assets at March 31, 2003 $ 29,443
========
Identifiable assets at December 31, 2002 $ 3,178 $ 177 $ 150 $ 3,505
Cash and corporate assets $ 25,162
--------
Total Assets at December 31, 2002 $ 28,667
========
Three Months Ended March 31, 2003
Sales and other operating revenue $ 825 $ 235 $ -- $ 1,060
Costs and operating expenses $ (438) $ (253) $ (150) $ (841)
-------- -------- -------- --------
Operating profit $ 387 $ (18) $ (150) $ 219
======== ======== ========
Financial Income, net $ 166
General corporate expenses $ (279)
Gain on marketable securities and
equity in net gain of investees $ 373
Other income $ 373
--------
Net income from continuing operations $ 852
========
Three Months Ended March 31, 2002
Sales and other operating revenue $ 557 $ 328 $ -- $ 885
Costs and operating expenses $ (293) $ (194) $ -- $ (487)
-------- -------- -------- --------
Operating profit $ 264 $ 134 $ -- $ 398
======== ======== ========
Financial Income, net $ 87
General corporate expenses $ (410)
Loss on marketable securities and
equity in net loss of investees $ (235)
--------
Net Loss from continuing operations $ (160)
========
NOTE 8 - COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) for the three month period ended March
31, 2003 and 2002 was as follows:
Three months
ended March 31,
2003 2002
---- ----
Net Income $ 588 $ 3,356
Other comprehensive gain (loss)
-available - for - sale securities $ 35 $ (149)
-foreign currency translation adjustments $ 63 $ (341)
------- -------
Comprehensive income (loss) $ 686 $ 2,866
======= =======
-6-
NOTE 9 -ASSET RETIREMENT OBLIGATIONS
Effective January 1, 2003, Company adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record a liability
for asset retirement obligations at fair value in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. As of January 1, 2003, the Company recorded asset retirement
costs of $458,581 and asset retirement obligations of $650,240. The cumulative
effect of change in accounting principle was $263,955, net of taxes of $39,158.
The reconciliation of the beginning and ending asset retirement obligations as
of March 31, 2003 was as follows (in thousands):
Asset retirement obligations, as of December 31, 2002 $ --
Liabilities upon adoption of SFAS No. 143 on January 1, 2003 650
Liabilities incurred 9
Liabilities settled --
Accretion expense 11
Revisions in estimated cash flows --
-------
Asset retirement obligations, as of March 31, 2003 $ 670
=======
The following table summarizes the pro forma net income and earnings per share
for the three months ended March 31, 2002 and for the years ended December 31,
2002, 2001 and 2000 as if SFAS No. 143 had been adopted on January 1, 2000 (in
thousands, except per share amounts):
DECEMBER 31,
----------------------------------------------
MARCH 31, 2002 2002 2001 2000
-------------- -------------- -------------- --------------
Net income:
As reported $ 3,356 $ 1,717 $ (139) $ 317
Pro forma 3,343 1,663 (186) 114
Net income per share, as reported:
Basic $ 1.27 $ 0.65 $ (0.05) $ 0.12
Diluted 1.27 0.65 (0.05) 0.12
Net income per share, pro forma:
Basic $ 1.27 $ 0.63 $ (0.07) $ 0.04
Diluted 1.27 0.63 (0.07) 0.04
The following table summarizes pro forma asset retirement obligations as of
March 31, 2002 and December 31, 2002, 2001 and 2000 as if SFAS No. 143 had been
adopted on January 1, 2000 (in thousands):
DECEMBER 31,
----------------------------------------------
MARCH 31, 2002 2002 2001 2000
-------------- -------------- -------------- --------------
Asset retirement obligations,
pro forma $ 623 $ 650 $ 613 $ 483
-7-
NOTE 10- OTHER INCOME
Other income includes a sum of $350,000 which represents the settlement of a
liability recorded in connection with a well drilled in Marine 9 Permit and was
recorded during 2002 as exploration costs.
NOTE 11 - CONTINGENCIES
The Company is involved in a dispute with a contractor relating to drilling
costs of the Tilapia well in Congo during 2000. The Company believes that it has
adequately accrued for all amounts due to this contractor as of March 31, 2003.
The Company is also involved in various other legal proceedings arising in the
normal course of business. In the opinion of management, the Company's ultimate
liability, if any, in these pending actions would not have a material adverse
effect on the financial position, operating results or liquidity of the Company.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The increase in the Company's consolidated cash and cash equivalents of $
228,000 from $1,616,000 at December 31, 2002 to $ 1,844,000 at March 31, 2003,
is primarily attributable to increased retail gas prices in the United States.
Net cash used in investing activities for the three-month period ended March 31,
2003 was $123,000 as compared to $943,000 used during the three-month period
ended March 31, 2002. The decrease is primarily attributable to decreased
investment in marketable securities and in property and equipment.
The Company believes that existing cash balances and cash flows from activities
will be sufficient to meet its financing needs. The Company intends to finance
its ongoing oil and gas exploration activities from working capital.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2002
The Company reported net income of $588,000 ($0.22 per share) for the
three-month period ended March 31, 2003 compared to net income of $3,356,000
($1.27 per share) for the same period in 2002. The relatively higher net income
for the 2002 period compared to the income for the same period in 2003 is
primarily attributable to non-cash income booked as a result of the cumulative
effect of accounting changes deriving from the Company's adoption, as of January
1st 2002, of SFAS 141 "Business Combination" and SFAS 142 "Goodwill and
Intangible Assets" and a portion of the variance is due to the Company's
adoption, as of January 1, 2003, of SFAS 143 Accounting for "Asset Retirement
Obligations". The increase in net income from continuing operations during the
three months ended March 31, 2003 compared to the same period in 2002 is
primarily attributable to an increase in oil and gas prices, a gain on
marketable securities and the settlement of a liability for a well drilled in
Marine 9 Exploration Permit in the Congo in 2002.
Set forth below is a break-down of these results.
United States
Oil and Gas Revenues (in thousands)
Three Months Ended March 31,
----------------------------
2003 2002
Oil Volume Sold (Bbl) 5 6
Gas Volume Sold (MCF) 134 177
Oil Sales ($) 142 102
Gas Sales ($) 665 414
Average Unit Price
Oil ($/Bbl) * $ 29.90 $ 16.95
Gas ($/MCF) ** $ 4.94 $ 2.33
o Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet
-9-
SUMMARY OF EXPLORATION EFFORTS IN ISRAEL
To date, three gas fields were discovered offshore Israel known respectively as
Or, Or South and Nir. Based on the gas finds, a 30 year lease (including the
area of the Or gas discovery) was granted in June 2000 (hereinafter, the "Med
Yavne Lease") and an additional 30 year lease (including the area of the Nir gas
discovery) was granted in January 2002 (hereinafter, the "Med Ashdod Lease").
MED YAVNE LEASE
The Med Yavne Lease covers approximately 53 square kilometers (approximately
12,000 acres). The Company's participation share of the Med Yavne Lease is
0.4585%.
MED ASHDOD LEASE
The Med Ashdod Lease covers approximately 250 square kilometers (approximately
62,000 acres). The Company serves as the operator of the Med Ashdod Lease and
holds a 0.3625% interest therein.
Two prospects within the southern sector have been identified and recommended
for drilling, one of which is for gas and the second for gas or oil. The
operator has examined this report and, based thereon, has established the
priorities for continued exploration. The operator presented its recommendation
to the lease participants in October 2002 that drilling be commenced for oil
(Nizanim 1).
As no decision has yet been taken, the Operator has determined to postpone the
drilling of Nitzanim and, in lieu of such drilling, has presented an alternative
work program as follows: (i) During 2003 - drill a confirmation gas well (Nir-2)
in the Nir field, with a total budget of approximately $10 million; (ii) During
2004 - drill Nizanim-1 to total depth of 5300 meters (17,400 feet), with a total
budget of approximately $35 million.
At a partners meeting held on April 3, 2003, some of the partners announced
their readiness to participate in the confirmation well. On April 30, 2003, the
operator, on behalf of Isramco Negev 2 Limited Partnership, one of the partners,
issued to the partners a sole risk notice regarding the drilling of the
confirmation gas well (Nir-2). The well is planned to a total depth of 2050
meters (6,725 feet), with a total budget of approximately $10.5 million. In
accordance with the Joint Operating Agreement the partners may elect to
participate in the well within 30 days after receipt of the sole risk notice. At
the time of the filing of this report, partners holding, in the aggregate,
approximately a 48.2% interest in the Lease, replied and confirmed participation
in the well. Non-participating partners stand to forfeit their participating
interest in the drilling project.
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 holds a 1% participation interest in the
Marine Center License and the remaining interests are held by affiliated
entities.
The Company serves as operator of the Marine Center License.
MARINE SOUTH LICENSE
In January 2002, Israeli Petroleum Commissioner issued a license in respect of
the area covered by the Marine South permit (hereinafter, the "Marine South
License"), which license continues in effect through January 15, 2005 and is
subject to (i) the performance of a seismic 3D survey and the processing of the
results thereof no later than January 15, 2003, (ii) the preparation of an oil
drilling prospect by July 15, 2003 and (iii) the drilling of a well no later
than January 15, 2004. In March 2003,the Petroleum Commissioner granted an eight
month extension for the period in which the above work plan is to be performed.
The Company serves as operator of the License and holds a 1% participation
interest in the License; the remaining participation interests are held by
affiliated entities.
-10-
SUMMARY OF EXPLORATION EFFORTS IN THE UNITED STATES
The Company, through its wholly-owned subsidiaries, Jay Petroleum LLC ("Jay
Petroleum") and Jay Management LLC ("Jay Management"), is involved in oil and
gas production in the United States. Jay Petroleum owns varying working
interests in oil and gas wells in Louisiana, Texas, Oklahoma and Wyoming.
Independent estimates of the reserves held by Jay Petroleum as of December 31,
2002 are approximately 109,183 net barrels of proved developed producing oil and
3,381 MMCFs of proved developed producing natural gas. Jay Management acts as
the operator of certain of the producing oil and gas interests owned or acquired
by Jay Petroleum.
In March 2003 gas production from the Hoover 4 well located in Oklahoma
commenced.
SUMMARY OF EXPLORATION EFFORTS IN THE CONGO
The oil and gas properties in the Congo consist of the Marine III Exploration
Permit and the Marine 9 Exploration Permit. The Company holds 25% participation
interest in the Marine III Exploration Permit (through Naphtha Congo Ltd.). The
Company's participation interest in the Marine 9 Exploration Permit is 5%, held
through Naphtha Congo Limited Partnership ("Naphtha Congo"). The remaining
participants in the Marine 9 License are recognized widely-known oil companies.
In April 2003, Naphtha Congo Ltd. received notice from the Congolese Ministry of
Oil that the Republic of the Congo has decided to retrieve the rights of Naphtha
Congo Ltd. in Marine III, providing as a reason therefore the company's
non-perform of the required work program. Naphtha Congo, the operator of the
Marine III Exploration Permit, has decided to discontinue the planned work
program principally because it did not believe that the continuation of such
program was commercially reasonable. Under applicable law, the Congolese
Government is entitled to request reimbursement in the amount of funds not
expended on the required work program. Based on the foregoing and management's
belief that the value of the Company's investment has been impaired, the Company
wrote-off during the three months ended March 31, 2003 the amount of $150,000,
representing the Company's investment in Marine III Permit.
OPERATOR'S FEES
During the three months ended March 31, 2003, the Company earned $53,000 in
operator fees compared to $83,000 respect of the same period in 2002.
OIL & GAS REVENUES
For the three months ended March 31, 2003, the Company had oil and gas revenues
of $ 807,000 compared to $516,000 for the same period in 2002. The increase in
the 2003 period as compared to the same period in 2002 is primarily attributable
to increased of oil & gas prices.
LEASE OPERATING EXPENSES AND SEVERANCE TAXES
Lease operating expenses and severance taxes were primarily in connection with
oil and gas fields in the United States. Oil and gas lease operating expenses
and severance taxes for the three months ended on March 31, 2003 were $219,000
compared to $180,000 for the same period in 2002. The increase in lease
operating expenses during the 2003 period as compared to the 2002 period is
primarily attributable to the higher operating expenses associated with the oil
and gas wells in the United States.
OIL AND GAS EXPLORATION COSTS
During the three months ended March 31, 2003, the Company expended $22,000 in
oil and Gas Exploration, as compared to $2,000 for the same period in 2002.
IMPAIRMENT OF OIL AND GAS INTERESTS
During the three months ended March 31, 2003, the Company wrote-off the amount
of $150,000, representing the Company's investment in the Marine III Permit in
the Congo. The Company's decision was based on management's assessment that the
value of such investment has been impaired. See "Summary of Exploration Efforts
in the Congo".
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INTEREST INCOME
Interest income during the three months ended March 31, 2003 was $168,000
compared to $191,000 for the same period in 2002. The increase in interest
income earned by the company during the three months ended March 31, 2003
compared to the comparable period in 2002 is primarily attributable to interest
earned on marketable securities.
GAIN (LOSS) ON MARKETABLE SECURITIES
During the three months ended March 31, 2003, the Company recognized net
realized and unrealized gain on trading securities of $135,000 compared to net
realized and unrealized losses of $105,000 for the same period in 2002.
Increases or decreases in the gains and losses from marketable securities are
dependent on the market prices in general and the composition of the portfolio
of the Company.
OPERATOR EXPENSE
Operator expenses were primarily in connection with oil & gas fields in the
United States. Operator expenses for the 2003 period were $247,000 compared to
$187,000 for the 2002 period. The increase in operator expenses during the 2003
period compared to the same period in 2002 is primarily attributable to
increased salary expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three month period ended March 31,
2003 were $279,000 as compared to $410,000 for the same period in 2002. The
decrease in general and administrative expenses during the 2003 period as
compared to the same period in 2002 is primarily attributable to professional
services rendered by related and third parties during the three months ended
March 31,2002.
OTHER INCOME
Other Income includes a sum of $350,000 which represents the settlement of a
liability recorded in connection with a well drilled in Marine 9 Permit and was
recorded during 2002 as exploration costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to changes in interest rates and foreign currency
exchanges rates were reported in Item 7A of the Company's Annual Report on Form
10-K for the year ended December 31, 2002. There has been no material change in
these market risks since the end of the fiscal year 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and that
such information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Principal Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Within the 90 days prior to the filing date of this report on Form 10-Q, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's Chief Executive and Principal Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14).
Based upon that evaluation, the Chief Executive and Principal Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting him to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings. Subsequent to the date of that evaluation, there have been no
significant changes in internal controls or in other factors that could
significantly affect internal controls.
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PART II
ITEM 1. LEGAL PROCEEDINGS
The Company, together with Naphtha Congo Ltd. an Israeli and related entity
("Naphtha Congo"), were served in October 2002 in District Court of Harris
County, Texas, with summons and complaint by Romfor International, Ltd., a
contractor ("Contractor") who provided drilling services in the Tilapia permit
in the Congo, alleging breach of contract and damages of approximately $1.5
million and moving for court ordered arbitration. The Contractor and Naphtha
Congo entered into a drilling agreement in October 2000 with respect to the
Tilapia 1 well. The Company indirectly held, through Naphtha Congo, a 50%
participation interest in the Tilapia 1 well.
The Company filed its answer on October 18, 2002, wherein it denied all
allegations made and denied that it is a proper party to the suit and moved to
dismiss the complaint. On March 20, 2003, the court granted the Company's motion
to dismiss the complaint against it and concurrently granted Contractor's motion
to compel arbitration against Naphtha Congo. The dismissal of the lawsuit
against the Company is not final and the Contractor is entitled, under certain
conditions, to move for a new trail of motion for reconsideration.
ITEM 2. CHANGE IN SECURITIES & USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(i) Exhibits
99.1 Certification of Chief Executive and Principal Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 ofthe
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: AUGUST 16, 2004 BY /s/ HAIM TSUFF
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CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE
OFFICER AND PRINCIPAL FINANCIAL OFFICER
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