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 March 31, 2006 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)
713-621-5946
(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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (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
May 22, 2006 was 2,717,691.
INDEX
Page
----
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2006 and December 31, 2005 1
Consolidated Statements of Operations for the three months ended
March 31, 2006 and 2005 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 2006 and 2005 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Disclosure Controls and Procedures 13
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 1A.Risk Factors 14
Item 2. Changes in Securities 14
Item 3. Defaults upon senior securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits 15
Signatures 16
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.
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share information)
March 31, December 31,
2006 2005
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,300 $ 1,249
Marketable securities, at market 5,737 5,570
Accounts receivable - Trade 692 605
Prepaid expenses and other current assets 163 98
-------- --------
Total current assets 9,893 7,522
Property and equipment (successful efforts method for oil and gas
properties) 5,221 5,110
Real Estate 1,887 1,887
Marketable securities, at market 3,777 3,619
Investment in affiliates 12,384 11,836
Investment in Vessel 5,978 8,479
Other 162 162
-------- --------
Total assets $ 39,301 $ 38,615
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,336 $ 2,243
Credit from banks 593 370
Bank loan 1,019 1,010
-------- --------
Total current liabilities 3,948 3,623
-------- --------
Long-Term Liabilities
Asset retirement obligations 323 343
Deferred tax liability 3,146 2,899
Current portion of long-term bank loan 2,998 3,257
-------- --------
Total Long-Term Liabilities 6,467 6,498
-------- --------
Total Liabilities 10,415 10,122
-------- --------
Commitments and contingencies
Shareholders' Equity
Common stock $.0l par value; authorized 7,500,000 shares;
issued 2,746,958 shares; outstanding 2,717,691 shares 27 27
Additional paid-in capital 26,240 26,240
Retained earnings 1,951 1,557
Accumulated other comprehensive income 832 833
Treasury stock, 29,267 shares (164) (164)
-------- --------
Total shareholders' equity 28,886 28,493
-------- --------
Total liabilities and shareholders' equity $ 39,301 $ 38,615
======== ========
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,
-----------------------------
2006 2005
----------- -----------
REVENUES:
Operator fees from related party $ 21 $ 18
Oil and gas sales 664 845
Interest income 254 101
Office services to affiliate and other 185 183
Gain on marketable securities 285 226
Equity in net income of investees 706 799
Net gain on legal settlements 2,565 --
Other income 565 29
----------- -----------
Total revenues 5,245 2,201
----------- -----------
COSTS AND EXPENSES:
Financial expenses 123 65
Depreciation, depletion and
amortization and impairment 502 507
Cost of revenue 865 297
Accretion -- 4
Lease operating expenses and
severance taxes 221 305
Exploration costs -- --
Operator expense 176 223
General and administrative 408 340
Impairment of vessel 2,200 --
----------- -----------
Total expenses 4,495 1,741
----------- -----------
Income before income taxes 750 460
Income taxes (356) (156)
----------- -----------
Net income $ 394 $ 304
=========== ===========
Earnings per common share-basic and diluted $ 0.14 $ 0.11
=========== ===========
Weighted average number of shares
outstanding-basic and diluted 2,717,691 2,717,691
=========== ===========
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,
2006 2005
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 394 $ 304
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 517 507
Impairment of vessel 2,200 --
Accretion -- 4
Loss (gain) on marketable securities (285) (226)
Gain on sale of oil any gas properties
Equity in net loss (gain) of investees (706) (799)
Deferred taxes 247 116
Changes in assets and liabilities:
Accounts receivable (88) 239
Prepaid expenses and other current assets (66) 54
Accounts payable and accrued liabilities 92 (191)
------- -------
Net cash provided by operating activities 2,305 8
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Addition to property and equipment (346) (1,073)
Purchase of marketable securities (785) (1,456)
Proceeds from sale of marketable securities 903 3,023
------- -------
Net cash provided by (used in) investing activities (228) 494
------- -------
NET CASH FROM FINANCING ACTIVITIES:
Repayment of loans (250) --
Change in short-term credit from bank 223 (807)
------- -------
Net cash used in financing activities (27) (807)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,051 (305)
Cash and cash equivalents-beginning of period 1,249 2,087
------- -------
Cash and cash equivalents-end of period $ 3,300 $ 1,782
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 123 $ 65
======= =======
Cash paid during the period for taxes $ -- $ --
======= =======
See notes to the consolidated financial statements.
-3-
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
As used in these financial statements, the terms "Company" and "Isramco" refer
to Isramco, Inc. and subsidiaries.
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, 2006, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2006. For further
information, refer to the consolidated financial statements and footnotes
thereto included in Isramco's Annual Report on Form 10-K for the fiscal year
ended December 31, 2005. Certain re-classification of prior year amounts have
been made to conform to current presentation.
Stock-Based Compensation
On January 1, 2006 Isramco adopted SFAS No. 123(R), "Share-Based Payment" ("SFAS
123(R)"). SFAS 123(R) replaced SFAS No. 123 and supersedes APB Opinion No. 25.
SFAS 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. The pro forma disclosures previously permitted under SFAS 123
are no longer an alternative to financial statement recognition. Isramco adopted
SFAS 123(R) using the modified prospective method which requires the application
of the accounting standard as of January 1, 2006. The consolidated financial
statements as of and for the quarter ended March 31, 2006 reflect the impact of
adopting SFAS 123(R). In accordance with the modified prospective method, the
consolidated financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R).
Prior to 2006, Isramco accounted 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. Isramco did not have any compensation
expense for the three months periods ended March 31, 2006 and 2005, as there
were no options granted in either of the periods and options historically
granted were fully vested on the date of grant. The following table illustrates
the effect on net income and earnings per share if we had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation:
THREE MONTH
ENDED MARCH 31,
2005
-----------
Net income, as reported $ 304,000
===========
Add: Total stock-based employee compensation expense determined under intrinsic value based
method for all awards, net of related tax effects --
Deduct: Total stock-based employee compensation expense determined under fair value based
method for all awards, net of related tax effects --
-----------
Pro forma net income $ 304,000
===========
Net income per share:
Basic - as reported $ 0.11
-----------
Basic - pro forma $ 0.11
-----------
Diluted - as reported $ 0.11
-----------
Diluted - pro forma $ 0.11
-----------
-4-
NOTE 2 - CONSOLIDATION
The consolidated financial statements include the accounts of Isramco, 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. ("Magic") 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.
NOTE 3 - OIL AND GAS PROPERTIES
Isramco 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.
NOTE 4 - INVESTMENT IN VESSEL
In February 2006, Isramco's wholly owned subsidiary Magic entered into a
bareboat charter with a tour operator pursuant to which the luxury cruise liner
is being leased for three specific periods, with the first such period having
commenced on April 6, 2006 and scheduled to terminate on November 5, 2006, the
period thereafter to commence on March 29, 2007 and terminate on October 28,
2007 and the third period to commence on April 8, 2008 and terminate on November
7, 2008, at a daily rate of $8,000. The operator may cancel the second and third
charter periods by giving a written notice to the Magic to such effect by no
later that November 1, 2006 and it may cancel the third charter period by giving
a written notice to the Magic to such effect by no later than November 1, 2007.
Following management's assessment conducted at the end of the three months
period ending March 31, 2006, management believes that there has been a decrease
in the fair market value of Isramco's investment in such vessel based on the
vessel's recoverable amount due to a re-evaluation of the vessel's expected
maintenance costs. As a consequence thereof, Isramco believes the investment to
have been impaired. Accordingly, Isramco recorded an impairment charge for the
three months ended March 31, 2006, in the amount of $2,200,000.
NOTE 5 - 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 reconciliation is as
follows:
For the Three Months Ended March 31,
------------------------------------
2000 2005
---- ----
Income Shares Income Shares
---------- ---------- ---------- ----------
Earnings per common share-Basic $ 394,000 2,717,691 $ 304,000 2,717,691
Effect of dilutive securities of
stock options -- -- -- --
---------- ---------- ---------- ----------
$ 394,000 2,717,691 $ 304,000 2,717,691
========== ========== ========== ==========
-5-
NOTE 6 - GEOGRAPHICAL SEGMENT INFORMATION
Isramco's operations for 2006 involve two industry segments - the exploration,
development production and transportation of oil and natural gas and the holding
and leasing its cruise line vessel. Prior to 2004 Isramco operated in a single
operating segment - oil and gas activities. Its 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 increase of takes and governmental
royalties, renegotiation of contracts with governmental royalties, renegotiation
of contracts with government entities and change in laws and policies governing
operations of foreign-based companies.
Isramco'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 of formations. In additions, oil and gas prices have fluctuated
substantially in recent years as a result of events, which were outside of
Isramco's control. Isramco does not directly operator the operators. This
segment of Isramco's business is subject to many risks all of which cannot be
presently anticipated, including losses resulting from unexpected repairs and
maintenance and competition.
-6-
GEOGRAPHIC SEGMENT
UNITED TOTAL CONSOLIDATED
STATES ISRAEL OIL AND GAS VESSEL TOTAL
-------- -------- ----------- -------- --------
Identifiable assets at March 31, 2006 $ 5,122 $ 23 $ 5,145 $ 5,978 $ 11,122
Cash and corporate assets $ 28,179
--------
Total assets at March 31, 2006 $ 39,301
========
Identifiable assets at December 31, 2005 $ 5,326 $ 68 $ 5,304 $ 8,479 $ 13,783
Cash and corporate assets 25,049
--------
Total Assets at December 31, 2005 $ 38,615
========
Three Months Ended March 31, 2006
Sales and other operating revenue $ 699 $ 171 $ 870 -- $ 870
Costs and operating expenses $ (416) $ (5) $ (421) (1,166) $ (1,588)
======== ======== ======== ======== ========
Operating profit $ 283 $ (166) $ 449 (1,166) $ (718)
Interest Income 254
Financial expenses, net (123)
General corporate expenses (585)
Gain on marketable securities and 285
equity in net Income of investees 706
Other income 3,130
Impairment of vessel 2,200
Income taxes (356)
--------
Net Income $ 394
========
Three Months Ended March 31, 2005
Sales and other operating revenue $ 860 $ 153 $ 1,013 -- $ 1,013
Costs and operating expenses $ (565) $ (228) $ (793) $ (567) $ (1,360)
-------- -------- -------- -------- --------
Operating profit $ 295 $ (75) $ 220 $ (567) $ (348)
======== ======== ======== ======== ========
Interest Income 101
Financial expenses, net (65)
General corporate expenses (283)
Gain on marketable securities 226
equity in net Income of investees 800
Other income 29
Income taxes (156)
--------
Net Income $ 304
========
-7-
NOTE 7 - COMPREHENSIVE INCOME
Isramco's comprehensive income for the three month period ended March 31, 2006
and 2005 was as follows:
Three months
ended March 31,
2006 2005
----- -----
Net Income $ 394 $ 304
Other comprehensive gain (loss)
-Unrealized gain (loss) on available-for-sale securities 104 192
-Foreign currency translation adjustments of the Israeli Branch and the limited
partnerships (104) (120)
----- -----
Comprehensive income $ 394 $ 316
===== =====
NOTE 8 - CONTINGENCIES
Isramco is involved in various other legal proceedings arising in the normal
course of business. In the opinion of management, Isramco'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 Isramco.
-8-
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 IN THIS REPORT ON
FORM 10-Q AS WELL AS THOSE CONTAINED IN THE ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2005. 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" IN OUR ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005. ISRAMCO, INC. DISCLAIMS ANY
OBLIGATION TO UPDATE SUCH FORWARD LOOKING STATEMENTS.
OVERVIEW
Isramco, Inc., a Delaware company, is active in the exploration of oil
and gas in Israel and the United States. The Company acts as an operator of
certain leases and licenses and also hold participation interests in certain
other interests. The Company also holds certain non-oil and gas properties.
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 a corresponding increase in the
carrying amount of the related long live assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations primarily from cash generated by
operations.
During the three months ended March 31, 2006, the Company's
consolidated cash and cash equivalents increased by $2,051,000 from $1,249,000
at December 31, 2005 to $3,300,000 at March 31, 2006. The increase in the
Company's consolidated cash and cash equivalents is
-9-
primarily attributable to the receipt of $2,565,000 from the settlement of two
lawsuit initiated by the Company.
Net cash used in investing activities for the three-month period ended
March 31, 2006 was $228,000 as compared to $494,000 provided during the
three-month period ended March 31, 2005. The net cash used during the three
month period ended March 31, 2005 are primarily attributable to investments in
drilling of gas wells in Texas.
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 form working capital.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2005.
The Company reported net gain of $394,000 ($0.14 per share) for the
three-month period ended March 31, 2006 compared to net income of $304,000
($0.11 per share) for the corresponding three-month period in 2005. The increase
in net gain during the three month period ended March 31, 2006 is primarily
attributable to recording of a non-recurring one time receipt of $2,565,000 for
the settlement of certain lawsuits that were initiated by the Company, offset by
decrease in oil and gas sales and impairment of the cruise line vessel discussed
below.
Set forth below is a break-down of these results.
United States
Oil and Gas Revenues (in thousands)
Three Months ended March 31,
2006 2005
Oil Volume Sold (Bbl) 3.5 4
Gas Volume Sold (MCF) 61.5 110
Oil Sales ($) 209 167
Gas Sales ($) 449 640
Average Unit Price
Oil ($/Bbl) * $ 58.90 $42.10
Gas ($/MCF) ** $ 7.30 $5.80
* Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet
-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,
2005 are approximately 106,638 net barrels of proved developed producing oil and
1,645 net MMCFs of proved developed producing natural gas. Jay Management acts
as the operator of certain of the producing oil and gas interests owned or
acquired by Jay Petroleum.
During the three months ended March 31, 2006 the Company continued to
invest in drilling activities in the Barnett Shale in North Central Texas
(Parker County) in which the Company holds 15% working interests. To date five
gas wells have been drilled and so far only one has been completed for
production, two being completed and the others are waiting for completion.
OPERATOR'S FEES
During the three months ended March 31, 2006, the Company earned
$21,000 in operator fees compared to $18,000 respect of the corresponding period
in 2005.
OIL & GAS REVENUES
For the three months ended March 31, 2006, the Company had oil and gas
revenues of $664,000 compared to $845,000 for the corresponding period in 2005.
The decrease in the 2006 period as compared to the same period in 2005 is
primarily attributable to decline of production in the oil and gas wells and
shutdown of the production caused by unanticipated pipeline maintenance in one
of the fields.
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,
2006 were $221,000 compared to $305,000 for the same period in 2005.
INTEREST INCOME
Interest income during the three months ended March 31, 2006 was
$254,000 compared to $101,000 for the same period in 2005. The decrease in
interest income earned by the company during the three months ended March 31,
2006 compared to the comparable period in 2005 is primarily attributable to
interest earned on marketable securities.
GAIN (LOSS) ON MARKETABLE SECURITIES
During the three months ended March 31, 2006, the Company recognized
net realized and unrealized gain on trading securities of $285,000 compared to
net realized and unrealized gain of $226,000 for the same period in 2005.
-11-
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.
CRUISE LINE VESSEL EXPENSES
Expenses of the Vessel for the three months ended March 31, 2006 were
$865,000 compared to expenses of $297,000 during the corresponding period in
2005. The increase in vessel related expenses during the three months ended
March 31, 2006 is due to maintenance expenses accrued during such period as
preparation of the vessel for the Cruise season.
OPERATOR EXPENSE
Operator expenses for the three months ended March 31, 2006 period were
$176,000 compared to $223,000 for the corresponding period in 2005.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three month period ended
March 31, 2006 were $408,000 as compared to $340,000 for the corresponding three
months in 2005.
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 three month ended March 31, 2006, the Company recorded $502,000
compared to $507,000 in the first quarter of 2005.
EQUITY NET INCOME OF INVESTEE
The Company's equity in the net income of investee for the first
quarter of 2006 was $706,000 compared to its net income of investee of $799,000
for the first quarter of 2005. The net income is primarily attributable to the
gain of marketable securities held by the limited partnerships Isramco Negev 2
and I.O.C. Dead Sea LP, affiliates of the Company.
NET GAIN ON LEGAL SETTLEMENTS
Net Gain on Legal Settlements in 2006 is attributable to the receipt of
approximately $3,050,000 million from the settlement by the Company in February
2006 of certain lawsuits that it initiated. Consistent with the agreements with
the defendants settling these lawsuits, the Company recorded a net gain of
$2,565,000.
OTHER INCOME
Other income in the three months ended March 31, 2006 was $565,000
compared to $29,000 during the corresponding period in 2005. Other income in
2006 is primarily attributable to $560,000 related to the mark to market of swap
contracts on oil and gas prices.
IMPAIRMENT OF ASSETS
The Company recorded an impairment charge in the amount of $2,200,000
in the three months ended March 31, 2006 by reducing the value of the cruise
line vessel. The impairment was recorded due to management's belief that there
has been a decrease in the fair value of the vessel as of the end of the first
quarter due to a re-evaluation of the vessel's recoverable amount based on the
vessel's expected maintenance costs.
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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, 2005. There has been no material change in
these market risks since the end of the fiscal year 2005.
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 recoded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to management, including our Chief Executive Officer (and Principal Financial
Officer), as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13 a- 14 c.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of management,
including our Chief Executive Officer (and our Principal Financial Officer), of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based of 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 March 31, 2006, 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.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
The Risk Factors included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2005 have not materially changed other
than as set forth below.
In March 2004, the Company purchased a luxury cruise liner (the
"Vessel") for aggregate consideration of $8,050,000. The Vessel is being
operated by the Company's wholly owned subsidiary Magic.
Based on a re-evaluation of the vessel's recoverable amount that is
based on a revision of the vessel's anticipated maintenance costs, the Company's
management believes that there has been a decrease in the fair market value of
the vessel and that the Company's investment in the vessel has thus been
impaired. Accordingly, the Company recorded an impairment charge of $2,200,000
for the three months ended March 31, 2006. The Company periodically re-evaluates
the carrying value of the vessel. No assurance can be given that future
developments in the cruise line industry generally or in the costs associated
with the maintenance of the vessel will not result in additional impairment to
the value of the vessel.
ITEM 2. CHANGE IN SECURITIES & USE OF PROCEEDS
None
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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
(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: MAY 22, 2006 BY /S/ HAIM TSUFF
-------------------
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE
AND PRINCIPAL
FINANCIAL AND ACCOUNTING
OFFICER
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