UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
CHECK ONE
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 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 August 10,
2006 was 2,717,691.
EXPLANATORY NOTE This Amendment No. 1 on Form 10-Q/A (this "Amendment") amends
the Quarterly Report on Form 10-Q (the "Original Quarterly Report") for the
three months ended June 30, 2006, which was originally filed with the Securities
and Exchange Commission (the "SEC") on August 14, 2006 to correct the following
typographical errors: (i) page 1, the value ascribed to "Marketable securities,
at market" should read $"14,950"; (ii) page 6, the amount recorded for
"Identifiable assets at December 31, 2005" under the column entitled "United
States" should read "5,236" and the corresponding figure under the column
"Consolidated Total" should read "24,832", the amount recorded for "Costs and
operating expenses" under the column entitled "Total oil and gas" should read
"(813)" and the corresponding figure under the column "Consolidated Total"
should read "(2361)" and the amount recorded for "Identifiable assets at June
30, 2006" under the column entitled "United States" should read "6,201". In
addition, on pages 1 and 2 and in Management's Discussion and Analysis of
Financial Condition and Results of Operations, we have adjusted various numbers
due to rounding. Other than the changes referred to above, all other information
in our Form 10-Q described above remains unchanged. This amendment does not
reflect events occurring after the filing of the Original Quarterly Report and
does not modify or update the disclosures in any way other than to correct the
typographical errors described above. Accordingly, this Amendment should be read
in conjunction with the registrants' filings with the SEC subsequent to the
filing of the Original Annual Report.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2006 and December 31, 2005 1
Consolidated Statements of Operations for the three and six months
ended June 30, 2006 and 2005 2
Consolidated Statements of Cash Flows for the six months ended
June 30, 2006 and 2005 3
Notes to Consolidated Financial Statements 4
Item 2. Management's discussion and analysis of Financial Condition and
Result of Operation 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
Item 4. Controls and Procedures 12
PART II.OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds and Issuer Purchases of
Equity Securities 13
Item 3. Defaults upon senior securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits 14
Signatures 15
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
(A) CONSOLIDATED BALANCE SHEETS
(in thousands except for share information)
June 30, December 31,
2006 2005
-------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,124 $ 1,249
Marketable securities, at market 5,320 5,570
Accounts receivable - Trade 542 605
Prepaid expenses and other current assets 132 98
-------- --------
Total current assets 8,118 7,522
Property and equipment (successful efforts method for oil and gas
properties) 6,261 5,110
Real Estate 1,887 1,887
Marketable securities, at market 3,631 3,619
Investment in affiliates 14,950 11,836
Investment in Vessel 5,748 8,479
Other 162 162
-------- --------
Total assets $ 40,757 $ 38,615
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,631 $ 2,243
Income tax payable 1,131 --
Credit from Bank -- 370
Bank Loan 1,244 1,010
-------- --------
Total current liabilities 5,006 3,623
Long Term Liabilities
Asset retirement obligations 333 343
Deferred tax liability 2,408 2,899
Current portion of long-term bank loan 2,738 3,257
-------- --------
Total Long Term Liabilities 5,479 6,499
-------- --------
Total Liabilities 10,485 10,122
Commitments, contingencies and other matters
Common stock $.0l par value; authorized 7,500,000 shares;
issued 2,746,958 shares; outstanding 2,717,891 shares 27 27
Additional paid-in capital 26,240 26,240
Retained earnings 3,017 1,557
Accumulated other comprehensive income (loss) 1,152 833
Treasury stock, 29,267 shares (164) (164)
-------- --------
Total shareholders' equity 30,272 28,493
-------- --------
Total liabilities and shareholders' equity $ 40,757 $ 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 Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUES:
Operator fees from related party $ 14 $ 18 $ 35 $ 36
Oil and gas sales 542 672 1,206 1,517
Revenue from Vessel 688 568 688 568
Interest income 42 55 296 156
Office services to affiliate and other 194 273 380 456
Gain on marketable securities 527 -- 812 219
Equity in net income of Investees 958 -- 1,663 389
Net gain in legal settlement -- -- 2,565 --
Other Income 28 35 593 64
----------- ----------- ----------- -----------
Total revenues $ 2,993 $ 1,621 $ 8,238 $ 3,405
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Interest expenses 88 91 211 157
Cost of vessel revenues 152 444 1,017 742
Depreciation, depletion
amortization and impairment 317 323 818 830
Accretion expenses 37 15 37 19
Lease operating expenses and
severance taxes 179 320 400 625
Exploration costs 89 160 89 160
Operator expense 200 139 376 362
General and administrative 363 463 772 803
Loss on marketable securities -- 7 -- --
Impairment of vessel -- -- 2,200 --
Equity in net loss of Investees -- 411 -- --
----------- ----------- ----------- -----------
Total expenses 1,425 2,373 5,920 3,698
----------- ----------- ----------- -----------
Income (loss) before income taxes 1,568 (752) 2,318 (293)
Income tax (expense) benefit (502) 156 (858) --
----------- ----------- ----------- -----------
Net income (loss) $ 1,066 $ (596) $ 1,460 $ (293)
=========== =========== =========== ===========
Earnings (loss) per common share -
basic and diluted $ 0.39 $ (0.22) $ 0.54 $ (0.11)
=========== =========== =========== ===========
Weighted average number of shares
Outstanding - basic and diluted 2,717,891 2,717,891 2,717,891 2,717,891
=========== =========== =========== ===========
See notes to the consolidated financial statements.
-2-
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Month Ended June 30,
------------------------------------------------
2006 2005
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,460 $ (293)
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation, depletion amortization and impairment 834 830
Impairment of vessel 2,200 --
Accretion expense 37 19
Loss (gain) on marketable securities (811) (219)
Equity in net loss (gain) of investees (1,663) (389)
Deferred taxes (496) --
Changes in assets and liabilities:
Accounts receivable 62 176
Prepaid expenses and other current assets (34) (124)
Accounts payable and accrued liabilities 228 276
Income tax payable 1,131 --
------- -------
Net cash provided by operating activities 2,948 276
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in affiliate (979) --
Addition to property and equipment (1,500) (1,768)
Purchase of marketable securities (1,373) (2,150)
Proceeds from sale of marketable securities 2,435 4,197
------- -------
Net cash provided (used) in investing activities (1,417) 279
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loan (501) (236)
Change in short term credit from banks (154) (840)
------- -------
Net cash used by financial activities (655) (1,076)
------- -------
Net increase (decrease) in cash and cash equivalents 876 (521)
Cash and cash equivalents-beginning of period 1,249 2,087
------- -------
Cash and cash equivalents-end period $ 2,125 $ 1,566
======= =======
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 June 30, 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 Statement of Financial Accounting Standards
Board ("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 June 30, 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 MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 2005 JUNE 30, 2005
------------- -------------
Net loss, as reported $(596,000) $ (293,000)
========== ===========
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 loss $(596,000) $ (293,000)
========== ===========
Net loss per share:
Basic and diluted - as reported $ (0.22) $ (0.11)
---------- ===========
Basic and diluted - pro forma $ (0.22) $ (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"). Intercompany balances and transactions have been eliminated
in consolidation.
NOTE 3 - INVESTMENT IN VESSEL
In February 2006, Isramco's wholly owned subsidiary Magic, entered into a
bareboat charter with a tour operator pursuant to which Magic's 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 in April and May 2006 as part of the
preparation of the financial statements for the period ended March 31, 2006,
management determined that there has been a decrease in the fair market value of
Isramco's investment in such vessel and, that as a consequence thereof, Isramco
believed the investment to have been impaired. Accordingly, Isramco recorded an
impairment charge in March 2006 in the amount of $2,200,000 for the three month
period ended March 31, 2006.
NOTE 4 - 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 June 30,
------------------------------------
2006 2005
------------------------ ------------------------
Income Shares Income Shares
--------- --------- ----------- ----------
Earnings (loss) - Basic $1,066,000 2,717,891 $ (596,000) 2,717,891
Effect of dilutive securities of
stock options -- -- -- --
---------- ---------- ---------- ----------
Earnings (loss) - Diluted $1,066,000 2,717,891 $ (596,000) 2,717,891
========== ========== ========== ==========
--------------------------------------------------------------------------------------------------------------
For the Six Months Ended June 30,
------------------------------------
2006 2005
------------------------ ------------------------
Income Shares Income Shares
--------- --------- ----------- ----------
Earnings (loss) - Basic $1,460,000 2,717,891 $ (293,000) 2,717,891
Effect of dilutive securities of
stock options -- -- -- --
---------- ---------- ---------- ----------
Earnings (loss) - Diluted $1,460,000 2,717,891 $ (293,000) 2,717,891
========== ========== ========== ==========
--------------------------------------------------------------------------------------------------------------
-5-
NOTE 5 - GEOGRAPHICAL SEGMENT INFORMATION
Isramco's operations for 2006 involve two industry segments - the exploration,
development production and transportation of oil and natural gas and holding and
leasing its cruise live 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.
United Total Vessel Consolidated
States Israel Oil and gas Total
-------- -------- -------- -------- --------
Identifiable assets at June 30, 2006 $ 6,201 $ 60 $ 6,261 $ 5,748 $ 12,009
Cash and corporate assets $ 28,748
--------
Total Assets at June 30, 2006 $ 40,757
========
Identifiable assets at December 31, 2005 $ 5,236 $ 68 $ 5,304 $ 8,479 $ 13,783
Cash and corporate assets $ 24,832
--------
Total Assets at December 31, 2005 $ 38,615
========
Six Months Ended June 30, 2006
Sales and other operating revenue $ 1,319 $ 301 $ 1,620 $ 688 $ 2,308
Costs and operating expenses $ (802) $ (11) $ (813) $ (1,548) $ (2,361)
-------- -------- -------- -------- --------
Operating profit $ 517 $ 290 $ 807 $ (860) $ (53)
======== ======== ======== ========
Interest income 297
Financial Income, net (211)
General corporate expenses (1,148)
Gain on marketable securities and
equity in net income of investees 2,475
Impairment of vessel (2,200)
Other income 3,158
Income Taxes (858)
--------
Net income 1,460
========
Six Months Ended June 30, 2005
Sales and other operating revenue $ 1,609 $ 400 $ 2,009 $ 568 $ 2,577
Costs and operating expenses $ (1,115) $ (372) $ (1,487) $ (1,252) $ (2,739)
-------- -------- -------- -------- --------
Operating profit $ 494 $ 28 $ 522 $ (684) $ (162)
======== ======== ======== ========
Interest income 156
Financial Income, net (156)
General corporate expenses (803)
Loss on marketable securities and
equity in net income of investees 608
Other income 64
Income taxes --
--------
Net loss (293)
========
-6-
Three Months Ended June 30, 2006
Sales and other operating revenue $ 620 $ 130 $ 750 $ 688 $ 1,438
Costs and operating expenses $ (386) $ (6) $ (392) $ (382) $ (774)
------- ------- ------- ------- -------
Operating profit $ 234 $ 124 $ 358 $ 306 $ 664
======= ======= ======= =======
Interest Income 42
Financial Income, net (88)
General corporate expenses (563)
Gain (Loss) on marketable securities and
Equity in net income of investees 1,485
Other Income 28
Income Taxes (502)
-------
1,066
=======
Net income
United Total Vessel Consolidated
States Israel Oil and gas Total
-------- -------- -------- -------- --------
Three Months Ended June 30, 2005
Sales and other operating revenue 749 247 996 568 1,564
Costs and operating expenses (574) (134) (708) (683) (1,391)
------- ------- ------- ------- -------
Operating profit 175 113 288 (115) 173
======= ======= ======= =======
Interest Income 55
Financial Income, net (91)
General corporate expenses (506)
Loss on marketable securities (7)
Equity in net loss of investees (411)
Other income 35
Income taxes 156
-------
Net loss (596)
=======
NOTE 6 - COMPREHENSIVE INCOME
Isramco's comprehensive income for the three months ended June 30, 2006 and 2005
was as follows:
Three months
ended June 30,
2006 2005
---- ----
Net income (loss) $ 1,066 $ (596)
Other comprehensive gain (loss)
available-for-sale securities (96) (340)
foreign currency translation adjustments 415 (477)
------- -------
Comprehensive income (loss) 1,385 (1,413)
======= =======
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS REPORT ON
FORM 10-Q. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE
FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY THESE FORWARD-LOOKING
STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "PLAN,"
"ANTICIPATE," "BELIEVE," "ESTIMATE," "PREDICT," "POTENTIAL," "INTEND," OR
"CONTINUE," AND SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. OUR
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING, BUT
NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
REPORT ON FORM 10-Q 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
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 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 June 30, 2006, the Company's consolidated cash and
cash equivalents increased by $876,000 from $1,249,000 at December 31, 2005 to
$2,124,000 at June 30, 2006. The increase in the Company's consolidated cash and
cash equivalents is primarily attributable to the receipt of $2,565,000 from the
settlement of two lawsuit initiated by the Company.
-8-
Net cash used in investing activities for the six-month period ended June 30,
2006 was $1,417,000 compared to $279,000 provided during the six-month period
ended June 30, 2005. The cash used in 2006 period was used for investment in the
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 from working capital.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2006 (THE "2006 PERIOD") COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 2005 (THE "2005 PERIOD") AND THE THREE MONTHS ENDED JUNE 30, 2006
COMPARED TO THE THREE MONTHS JUNE 30, 2005.
The Company reported a net income of $1,460,000 ($(0.54 per share) for the
six-month period ended June 30, 2006 compared to net loss of $293,000 ($0.11 per
share) for the same period in 2005 and net income of $1,066,000 ($0.39 per
share) for the three months period ended June 30, 2006 compared to net loss of
$596,000 ($0.22 per share) for the same period in 2005. The increase in net
income for the three month ended June 30, 2006 compared to the same period in
2005 is primarily attributable to an increase in the gain on marketable
securities and an increase in the equity in net income of investees, offset by a
decrease in gas sales. The increase in the net income for the 2006 Period
compared to the 2005 Period is primarily attributable to the recording of a
non-recurring one time payment of $2,565,000 for the settlement of certain
lawsuits that were initiated by the Company, offset by decreases in oil and gas
sales and impairment of the cruise line vessel discussed below.
Set forth below is a break-down of these results:
UNITED STATES
Oil and Gas Revenues (in thousands)
Three Months ended June 30, Six Months ended June 30,
2005 2006 2005 2006
Oil Volume Sold (Bbl) 3.2 3.6 7.1 7.1
Gas Volume Sold (MCF) 85 51 195 112
Oil Sales ($) 158 218 325 427
Gas Sales ($) 541 291 1,181 740
Average Unit Price
Oil ($/Bbl) * $46.64 $60.22 $ 45.45 $ 59.57
$ 6.38 $ 5.75 $ 6.05 $ 6.60
Gas ($/MCF) **
o Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 CUBIC FEET
-9-
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 six months ended June 30, 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, seven gas wells have
been drilled of which one well has been completed for production and the
remainder are in various stages of completion. The total investments of the
Company in the six months period of 2006 was $ 1,498,342.
OPERATOR'S FEES
During the 2006 Period, the Company earned $35,000 in operator fees compared to
$14,000 for the 2005 Period and $14,000 for the three months ended June 30, 2006
compared to $18,000 for the comparable period in 2005.
OIL & GAS REVENUES
During the 2006 Period, the Company had oil and gas revenues of $1,206,000
compared to $1,517,000 for the 2005 Period and $542,000 for the three months
ended June 30, 2005 compared to $672,000 for the comparable period in 2005. The
decrease in 2006 Period and for the three months ended June 2006 compared to
same periods in 2005 ,is attributable to a decline of production in the gas
wells and the shutdown of 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 2006 Period were $400,000 compared to $625,000 for
the 2005 Period and $179,000 for the three months ended June 30, 2006 compared
to $320,000 for the comparable period in 2005. Texas.
OIL AND GAS EXPLORATION COSTS
During the 2006 Period the Company incurred expenses for exploration costs in
the amount of $89,000 compared to $160,000 for the 2005 Period.
INTEREST INCOME
Interest income in respect of the 2006 Period was $296,000 compared to $156,000
for the 2005 Period and $42,000 in respect of the three months ended June 30,
2006 compared to $55,000 for the same period in 2005.
GAIN (LOSS) ON MARKETABLE SECURITIES
During the 2006 Period, the Company recognized a net realized and unrealized
gain on trading securities of $812,000 compared to gain of $219,000 for the 2005
Period and gain of $527,000 for the three months ended June 30, 2006 compared to
loss of $7,000 for the same period in 2005.
Increases or decreases in the gains and losses from marketable securities are
dependent on the market prices in general and the composition of the portfolio
of the Company.
EQUITY IN NET INCOME OF INVESTEES
The Company's equity in the net income of investees for the 2006 Period was
$1,663,000 compared to its equity in net income of $389,000 for the 2005 Period
and gain of $958,000 in respect of the three months ended June 30, 2006 compared
to
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loss of $411,000 for the same three month period in 2005. The increase is
primarily attributable to increase in the market value of the marketable
securities held by Negev 2 and IOC Dead Sea LP.
OPERATOR EXPENSE
Operator expenses were incurred primarily in connection with the offshore
activities in Israel. Operator expenses for the 2006 Period were $376,000
compared to $362,000 for the 2005 Period and $200,000 for the three months ended
June 30, 2005 compared to $139,000 for the corresponding period in 2005
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the 2005 Period were $ 772,000 compared
to $ 803,000 for the 2005 Period and $ 363,000 for the three months ended June
30, 2006 compared to $ 463,000 for the same period in 2005.
CRUISE LINE VESSEL REVENUES
During the 2006 period the Company earned $688,000 from leasing the cruise line
Vessel. The lease began in April 6, 2006 and is scheduled to expire in October
31, 2006.
CRUISE LIVE VESSEL EXPENSES
Cruise Line vessel expenses for the 2006 Period were $1,017,000 and $152,000 for
the three months ended June 30, 2006. The expenses are primarily attributable to
maintenance, repairs and payroll.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation depletion and amortization expenses are connected to the producing
wells in the United States and to the cruise line. During the 2006 Period, the
Company recorded the amount of $818,000 compared to $830,000 for the 2005 Period
and $317,000 for the three months ended June 2006 compared to $323,000 for the
comparable period in 2005. The increase is 2006 Period and for the three months
is primarily attributable to increase in the deprecation of the oil and gas
wells.
NET GAIN ON LEGAL SETTLEMENTS
Net Gain on Legal Settlements in 2006 Period is attributable to the receipt of
approximately $3,050,000 from the settlement by the Company in February 2006 of
certain lawsuits that it initiated. The Company recorded a net gain of
$2,565,000.
OTHER INCOME
Other income in the six months ended June 30, 2006 was $593,000 compared to
$64,000 during the corresponding period in 2005. Other income in 2006 is
primarily attributable to the mark to market of swap contracts on oil and gas
prices.
IMPAIRMENT OF ASSETS
Following management's assessment conducted in April and May 2006 as part of the
preparation of the financial statements for the period ended March 31, 2006,
management determined that there has been a decrease in the fair market value of
the Company's investment in such vessel and, that as a consequence thereof, the
Company believed the investment to have been impaired. Accordingly, the Company
recorded an impairment charge in March 2006 in the amount of $2,200,000 for the
three month period ended March 31, 2006.
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.
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ITEM 4. 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
and Accounting 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, the Company carried out an
evaluation, under the supervision and with participation of management,
including its Chief Executive Officer (and Principal Financial and Accounting
Officer), of the effectiveness of the design and operation of the disclosure
controls and procedures. Based of the foregoing, the Company's Chief Executive
Officer (and Principal Financial and Accounting Officer) concluded that the
Company's disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter ended
June 30, 2006, there have been no changes in the Company's 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. The update to the risk factors contained below was first
included in the Company quarterly report on Form 10-QSB for the three months
ended March 31, 2006.
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 completed in May 2006 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 as of 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 AND ISSUER PURCHASES OF EQUITY
SECURITIES None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 27, 2006. The
following matters were voted on: (1) Election of Directors and (2) Appointment
of Auditors. The vote tally was as follows:
(1) Proposal to Elect Directors to Serve until the 2006 Annual Meeting of
Stockholders.
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FOR WITHHOLD
------------ ------------
Haim Tsuff 2,181,507 6,021
Jackob Maimon 2,174,617 12,911
Max Pridgeon 2,182,317 5,211
Donald D. Lovell 2,175,217 12,311
Amir Mireskandari 2,182,317 5,211
2) Proposal to ratify the appointment of Malone & Bailey, PC as the Company's
auditors for the year ending December 31, 2006.
FOR AGAINST ABSTAIN BROKER NON-VOTE
2,179,994 6,332 1,262 --
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
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: SEPTEMBER 25, 2006 BY /S/ HAIM TSUFF
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER
(AND PRINCIPAL
FINANCIAL AND ACCOUNTING
OFFICER)
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