UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 2, 2007
ISRAMCO, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 13-3145265
(State or other Jurisdiction of I.R.S. Employer Number
Incorporation or Organization)
11767 Katy Freeway Suite 711, Houston, Texas 77079
(Address of Principal Executive Offices) (Zip Code)
713-621-3882
(Registrant's Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
EXPLANATORY NOTE
We are amending the Current Report on Form 8-K that we filed on March 8, 2007 to
include the Financial Statements of Business Acquired and Pro Forma Financial
Information set forth below under Item 9.01 Financial Statements and Exhibits.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders
Isramco, Inc.
Houston, Texas
We have audited the accompanying statements of combined revenues and direct
operating expenses of the oil and gas properties purchased by Isramco, Inc. from
Five States Energy Company, L.L.C. ("Five States Properties") for the years
ended December 31, 2006, 2005 and 2004. These financial statements are the
responsibility of Isramco, Inc.'s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
Isramco Inc.'s Form 8-K and are not intended to be a complete financial
presentation of the properties described above.
In our opinion, the financial statements referred to above presents fairly, in
all material respects, the combined revenues and direct operating expenses of
the oil and gas properties purchased by Isramco, Inc. in the Five States
Properties for the periods described above, in conformity with accounting
principles generally accepted in the United States.
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
May 11, 2007
2
Isramco, Inc.
Statements of Combined Revenues and Direct Operating Expenses
Of the Oil and Gas Properties Purchased by Isramco, Inc. in the Five States Properties
For the Year Ended December 31,
2006 2005 2004
------------ ------------ ------------
Revenues $ 22,362,552 $ 22,590,022 $ 16,080,225
Direct operating expenses 7,727,804 8,446,249 5,412,631
------------ ------------ ------------
Excess of revenues over direct operating expenses $ 14,634,748 $ 14,143,773 $ 10,667,594
============ ============ ============
The accompanying notes are an integral part of these financial statements.
3
Isramco, Inc.
Notes to Statements of Combined Revenues and Direct Operating Expenses
Of the Oil and Gas Properties Purchased by
Isramco, Inc. in the Five States Properties
(1) The Properties
On March 2, 2007, Isramco, Inc. acquired 650 producing wells and related
property and equipment located in North and West Texas from Five States Energy
Company, L.L.C. The purchase price for the properties was $92.4 million with an
effective date of October 1, 2006.
(2) Basis of Presentation
During the periods presented, the Five States Properties were not accounted for
or operated in accordance with generally accepted accounting principles. The
entities accounted for their operations without capitalizing many of the costs
that related to the full cost method of accounting for oil and gas properties
and did not conduct any reserve studies nor calculate an amortization rate per
equivalent unit of production. Accordingly, full separate financial statements
prepared in accordance with generally accepted accounting principles do not
exist and are not practicable to obtain in these circumstances.
Revenues and direct operating expenses included in the Statements of Combined
Revenues and Direct Operating Expenses of the Oil and Gas Properties Purchased
by Isramco, Inc. in the Five States Properties represent Isramco's interest in
the properties acquired for the periods prior to the respective closing dates
and are presented on the accrual basis of accounting and in accordance with
generally accepted accounting principles. Depreciation, depletion and
amortization, interest, accretion of asset retirement obligation, general and
administrative expenses and corporate income taxes have been excluded. The
financial statements presented are not indicative of the results of operations
of the acquired properties going forward due to changes in the business and
inclusion of the above mentioned expenses.
(3) Commitments and Contingencies
Isramco is not aware of any legal, environmental or other commitments or
contingencies that would have a material effect on the statement of revenues and
direct operating expenses.
4
SUPPLEMENTAL OIL AND GAS INFORMATION
(Unaudited)
Proved oil and gas reserve quantities are based on estimates prepared by the
Company's engineers in accordance with guidelines established by the Securities
and Exchange Commission (SEC).
There are numerous uncertainties inherent in estimating quantities of proved
reserves and projecting future rates of production and timing of development
expenditures. The following reserve data represents estimates only and should
not be construed as being exact.
All of the reserves are located in the United States.
The information for the reserves for the year ended December 31, 2006 is as
follows:
Gas Oil Plant Products
(MCF) (Bbls) (Bbls)
Proved and undeveloped reserves:
Balance, December 31, 2003 29,938,321 2,007,679 1,425,218
Production (2,059,195) (123,207) (5,540)
---------- --------- ---------
Balance, December 31, 2004 27,879,126 1,884,472 1,419,679
Production (2,041,077) (133,705) (21,436)
---------- --------- ---------
Balance, December 31, 2005 25,838,049 1,750,767 1,398,243
Production (1,762,311) (124,912) (117,443)
---------- --------- ---------
Balance, December 31, 2006 24,075,738 1,625,855 1,280,800
========== ========= =========
5
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS.
The standardized measure of discounted future net cash flows from the Company's
estimated proved gas reserves is provided for the financial statement user as a
common base for comparing oil and gas reserves of enterprises in the industry
and may not represent the fair market value of the Company's oil and gas
reserves or the present value of future cash flows of equivalent reserves due to
various uncertainties inherent in making these estimates. Those factors include
changes in oil and gas prices from year end prices used in the estimates,
unanticipated changes in future production and development costs and other
uncertainties in estimating quantities and present values of oil and gas
reserves.
The following table presents the standardized measure of discounted future net
cash flows from the ownership interest in proved oil and gas reserves for the
year ended December 31, 2006. The standardized measure of future net cash flows
for the year ended December 31, 2006 was calculated using the price received by
the seller as of the end of the year. The average prices were $6.43 per mcf and
$68.88 per barrel.
The resulting estimated future cash inflows are reduced by estimated future
costs to produce the estimated proved reserves based on actual year-end
operating cost levels. Future income taxes are based on year-end statutory
rates, adjusted for any operating loss carry forwards and tax credits. The
future cash flows are reduced to present value by applying a 10% discount rate.
The standardized measure of estimated discounted future cash flow is not
intended to represent the replacement cost or fair market value of the oil and
gas properties.
The information for the reserves as of December 31, 2006 is as follows (in
thousands):
2006
Future cash inflows $ 320,852
Future production costs 105,930
Future development costs 2,115
----------
Future net cash flows before income taxes 212,807
Future income tax (38,510)
----------
Future net cash flows 174,297
Effect of discounting future annual net cash flows at 10% (78,371)
----------
Discounted future net cash flow $ 95,926
==========
The following table sets forth the principal sources of change in discounted
future net cash flows for the reserves for the year ended December 31, 2006 is
as follows:
2006
Beginning of the period $ 109,656
Sales, net of production costs (14,635)
Net change in prices and production costs (5,865)
Accretion of discount 11,916
Change in income tax 7,315
Net change in timing (12,461)
----------
End of period $ 95,926
=========
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Isramco, Inc.
Unaudited Pro Forma Condensed Financial Statements
The following unaudited pro forma condensed financial statements and related
notes are presented to show the pro forma effects of the acquisition of oil and
gas properties from Five States on March 2, 2007.
The pro forma condensed statement of operations for the year ended December 31,
2006 that follows contain a column entitled "Five States Historical". This
column contains only the revenue and direct operating expenses of the Five
States Properties. During the period presented, the Five States Properties were
not accounted for or operated in accordance with generally accepted accounting
principles. Five States accounted for their operations without capitalizing many
of the costs that related to the successful cost method of accounting as
followed by Isramco and the Five States entities did not conduct any reserve
studies nor calculated an amortization rate per equivalent unit of production.
Also excluded are other expenses which include interest, accretion of retirement
obligations, general and administrative expenses and corporate income taxes.
This condensed pro forma statement of operations is not indicative of the
results of operations of the acquired properties due to the exclusion of the
above mentioned expenses.
The pro forma condensed statement of operations is presented to show income from
continuing operations as if the Five States transactions occurred as of the
beginning of the period presented. The pro forma condensed balance sheet is
based on the assumption that the Five States transaction occurred effective
December 31, 2006.
Pro forma data are based on assumptions and include adjustments as explained in
the notes to the unaudited pro forma condensed financial statements. The pro
forma data are not necessarily indicative of the financial results that would
have been attained had the Five States transaction occurred on the dates
referenced above and should not be viewed as indicative of operations in future
periods. The unaudited pro forma condensed financial statements should be read
in conjunction with notes thereto, Isramco's Annual Report on Form 10-K for the
year ended December 31, 2006 and the Statements of Combined Revenues and Direct
Operating Expenses included herein.
7
Isramco, Inc.
Unaudited Pro Forma Condensed Statement of Operations
For The Year Ended December 31, 2006
(in thousands)
ISRAMCIO
HISTORICAL FIVE STATES ADJUSTMENTS TOTAL
REVENUES:
Operator fees from related party $ 69 $ -- $ -- $ 69
Oil and gas sales 2,167 22,363 -- 25,530
Interest income 448 -- -- 448
Office services to related parties 480 -- -- 480
Office services to others 276 -- -- 276
Gain on marketable securities 1,177 -- -- 1,177
Equity in net gain of investees 2,570 -- -- 2,570
Compensation for legal settlement 2,536
Gain from swap transactions 2,604
Other income 39 -- -- 5,179
----------- ----------- ----------- -----------
TOTAL REVENUES 12,366 22,363 -- 34,729
EXPENSES:
Interest expense 294 -- 7,059 (a) 7,353
Accretion expenses 71 -- 128 (c) 199
Depreciation, depletion and amortization 455 -- 5,956 (b) 6,411
Lease operating expenses and severance
taxes 1,119 7,728 -- 8,847
Exploration costs 125 -- -- 125
Operator expense 330 -- -- 330
General and administrative
To related parties 227 -- -- 227
To others 1,782 -- 213 (d) 1,995
Impairment of oil and gas assets 668 -- -- 668
----------- ----------- ----------- -----------
TOTAL EXPENSES 5,071 7,728 13,356 26,155
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAXES 7,295 14,635 (13,356) 8,574
Income taxes (726) -- (371) (i) (1,097)
----------- ----------- ----------- -----------
Income (loss) from continuing operations 6,569 14,635 (13,727) 7,477
Loss on discontinued operations (3,111) -- -- (3,111)
Gain from disposal of discontinued
operation 384 -- -- 384
----------- ----------- ----------- -----------
NET INCOME $ 3,842 $ 14,635 $ (13,727) $ 4,750
EARNINGS PER SHARE - BASIC AND DILUTED
Continuing operations $ 2.42 $ 2.75
Discontinued operations (1.01) (1.01)
----------- -----------
Total $ 1.41 $ 1.74
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 2,717,691 2,717,691
=========== ===========
See notes to the unaudited pro forma condensed financial statements.
8
Isramco, Inc.
Unaudited Pro Forma Condensed Balance Sheet
As of December 31, 2006
(in thousands)
FIVE STATES
ISRAMCO PRO FORMA
HISTORICAL ADJUSTMENTS TOTAL
CURRENT ASSETS
Cash and cash equivalents $ 573 $ 84,300 (e) $ 273
(85,300) (g)
700 (h)
Restricted cash 17,000 (17,000) (g) --
Marketable securities, at market 3,130 (1,200) (f) 1,930
Accounts receivable 403 -- 403
Prepaid expenses and other current assets 5,057 (3,000) 2,057
Accounts receivable - sale of Magic 1 2,150 -- 2,150
--------- --------- ---------
TOTAL CURRENT ASSETS 28,313 (21,500) 6,813
Property and equipment, net 12,537 90,790 (g) 103,327
Marketable securities, at market 5,759 -- 5,759
Investment in affiliates 15,302 -- 15,302
Other assets 162 -- 162
--------- --------- ---------
TOTAL ASSETS $ 62,073 $ 69,290 $ 131,363
========= ========= =========
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 5,050 $ -- $ 5,050
Bank loans 347 -- 347
Short term loan from related party 17,164 7,000 (e) 7,164
(17,000) (e)
--------- --------- ---------
TOTAL CURRENT LIABILITIES 22,561 (10,000) 12,561
--------- --------- ---------
Long-term bank loan -- 35,300 (e) 35,300
Long-term loans from related party -- 42,000 (e) 42,000
Asset retirement obligations 356 1,290 (g) 1,646
Deferred income taxes 4,412 4,412
--------- --------- ---------
TOTAL LONG-TERM LIABILITIES 4,768 78,590 83,358
--------- --------- ---------
TOTAL LIABILITIES 27,329 68,590 95,919
--------- --------- ---------
SHAREHOLDERS' EQUITY
Common stock 27 -- 27
Additional paid-in capital 26,240 -- 26,240
Retained earnings 5,399 700 (h) 6,099
Accumulated other comprehensive income 3,242 -- 3,242
Treasury stock (164) -- (164)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 34,744 700 35,444
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 62,073 $ 69,290 $ 131,363
========= ========= =========
See notes to the unaudited pro forma condensed financial statements.
9
Isramco Inc.
Notes to Unaudited Pro Forma Condensed Financial Statements
(1) BASIS OF PRESENTATION
The unaudited pro forma statement of operations for the year ended December 31,
2006, is based on the audited financial statements of Isramco for the year ended
December 31, 2006, the audited statement of combined revenues and direct
operating expenses for the Five States Properties for the year ended December
31, 2006, the adjustments and assumptions described below and the Form 8-K on
the Five States Acquisition filed on March 8, 2007.
The closing on March 2, 2007 contemplated an aggregate purchase price of $92
million, subject to adjustment. The purchase price was funded $7.7 million from
working capital and the balance from a combination of commercial bank loans and
loans from related parties. Isramco obtained a $35.3 million credit line from
Wells Fargo. Amounts outstanding under the credit line are payable by March 1,
2011. Interest on amounts outstanding accrue at a per annum rate equal to London
Inter-bank Offered Rate ("LIBOR") plus 2%.
Isramco obtained loans in the total principal amount of $42 million from Naphtha
Israel Petroleum Corp. Ltd., the parent company (including through its wholly
owned subsidiary IOC-Israel Oil Company Ltd) as follows:
o $18.5 million. The outstanding principal amount of the loan
accrues interest at per annum rate equal to the LIBOR plus 5.5%,
not to exceed 11% per annum. Interest is payable at the end of
each loan year. Principal plus any accrued and unpaid interest
are due and payable on February 26, 2014.
o $12 million, repayable at the end of five years. Interest
accrues at a per annum rate of LIBOR plus 6%.
o $11.5 million, repayable at the end of seven years. Interest
accrues at a per annum rate of LIBOR plus 6%.
Isramco also obtained a loan from J.O.E.L Jerusalem Oil Exploration Ltd, a
related party, in the principal amount of $7 million, repayable on May 26, 2007.
Interest accrues at a per annum rate of 5.36%.
Additionally, Isramco paid $300,000 as a fee to a third party that originated
the transaction with Five States. After payout (as defined in the agreement with
the third party), Isramco will assign direct ownership interests equal to 3.75%
of the interests acquired by Isramco.
(2) PRO FORMA ADJUSTMENTS:
The unaudited pro forma statements reflect the following adjustments:
(a) Record incremental financing expenses resulting from loans obtained by
Isramco from the bank and related parties.
(b) Record incremental depreciation, depletion, amortization expenses using
the depletion of the wells based on engineering report.
(c) Record accretion expenses due to increase in asset retirement
obligations.
(d) Record expected increase in general and administrative expense as a
result of the purchase.
(e) Record the loans and fees associated with the bank and related party
loans. Includes the payoff of $17 million bridge loan obtained in
November 2006.
(f) Record sale of $1.2 million on marketable securities. Proceeds used to
pay for the purchase.
(g) Record the purchase price and related purchase price adjustments from
the acquisition of the Five States Properties. Purchase price was
adjusted for approximately $2.8 million of activity from effective date
of purchase (October 1, 2006) to the closing date. Purchase price
adjustments are subject to further review, post-closing adjustments and
audit.
(h) Reflect impact of cash flow from operations generated during 2007 that
was used for the acquisition.
(i) Record income tax effects of operations from purchase.
10
Isramco Inc.
Pro Forma Supplemental Oil and Gas Disclosures
(Unaudited)
The following table sets forth certain unaudited pro forma information
concerning Isramco's proved oil and gas reserves at December 31, 2006 giving
effect to the Five States Properties as if it had occurred as of the beginning
of 2006. There are numerous uncertainties inherent in estimating the quantities
of proved reserves and projecting future rates of production and timing of
development expenditures. The following reserve data represents estimates only
and should not be construed as being exact.
All of the reserves are located in the United States.
Proved and undeveloped reserves:
OIL RESERVES OIL (MBBLS)
------------------------------------------
ISRAMCO FIVE STATES PRO FORMA
------- ----------- ---------
Balance, December 31, 2005 105,368 1,750,767 1,856,135
Production (13,464) (124,912) (138,376)
Revisions of previous estimates 24,071 -- 24,071
------- --------- ---------
Balance, December 31, 2006 115,975 1,625,855 1,741,830
======= ========= =========
GAS RESERVES OIL (MCF)
-----------------------------------------
ISRAMCO FIVE STATES PRO FORMA
------- ----------- ---------
Balance, December 31, 2005 1,644,700 25,838,049 27,482,749
Production (59,066) (1,762,311) (1,821,377
Revisions of previous estimates (213,634) (213,634)
--------- ---------- ----------
Balance, December 31, 2006 1,372,000 24,075,738 25,447,738
========= ========== ==========
11
The standardized measure of discounted future net cash flows from the Company's
estimated proved gas reserves is provided for the financial statement user as a
common base for comparing oil and gas reserves of enterprises in the industry
and may not represent the fair market value of the Company's oil and gas
reserves or the present value of future cash flows of equivalent reserves due to
various uncertainties inherent in making these estimates. Those factors include
changes in oil and gas prices from year end prices used in the estimates,
unanticipated changes in future production and development costs and other
uncertainties in estimating quantities and present values of oil and gas
reserves.
The following table presents the standardized measure of discounted future net
cash flows from the ownership interest in proved oil and gas reserves as
December 31, 2006. The standardized measure of future net cash flows as of
December 31, 2006 is calculated using the price received by the seller as of the
end of the year. The prices for Five States were $6.43 per mcf and $68.88 per
barrel at December 31, 2006.
The resulting estimated future cash inflows are reduced by estimated future
costs to produce the estimated proved reserves based on actual year-end
operating cost levels. Future income taxes are based on year-end statutory
rates, adjusted for any operating loss carryforwards and tax credits. The future
cash flows are reduced to present value by applying a 10% discount rate.
YEAR ENDED DECEMBER 31, 2006
ISRAMCO FIVE STATES PRO FORMA
------- ----------- ---------
(IN THOUSANDS)
Future cash inflows $ 18,208 $ 320,852 $ 339,060
Future production costs (866) (105,930) (106,796)
Future development costs (7,170) (2,115) (9,285)
Future net cash flows before income taxes 10,172 212,807 222,979
Future income tax (2,976) (38,510) (41,486)
Future net cash flows 7,196 174,297 181,493
Effect of discounting future annual net cash flows at 10% (2,875) (78,371) (81,246)
--------- --------- ---------
Discounted future net cash flow $ 4,321 $ 95,926 $ 100,247
========= ========= =========
Beginning of the year $ 7,488 $ 109,656 $ 117,144
Sales, net of production costs (1,048) (14,635) (15,683)
Net change in prices and production costs (5,629) (5,865) (11,494)
Change in income tax 4,961 7,315 12,276
Acquisition of minerals in place 993 -- 993
Revision of previous estimates (1,716) -- (1,716)
Change in discount 1,395 11,916 13,311
Change in production rate and other (2,123) (12,461) (14,584)
--------- --------- ---------
End of year $ 4,321 $ 95,926 $ 100,247
========= ========= =========
12
SIGNATURE
Pursuant to 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, hereunto duly authorized.
ISRAMCO INC.
DATE: May 15, 2007 By: /s/ Haim Tsuff
--------------------------------
Haim Tsuff
Chairman and Chief Executive Officer
13