UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
[ ] TRANSITION REPORT PURSUANT TO 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 IRS Employer Identification No.)
of Incorporation)
11767 KATY FREEWAY, HOUSTON, TX 77079
(Address of Principal Executive Offices)
713-621-3882
(Registrant's Telephone Number, including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Act of 1933. Yes [ ]
No [X]
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 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 if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this Form, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
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 Securities Exchange Act). Yes [ ] No [X]
As of March 23, 2006 there were 2,717,691 shares of the Registrant's common
stock par value $0.01 per share ("Common Stock") outstanding. The aggregate
market value of the Common Stock held by non-affiliates of the Registrant at
March 23, 2006 was approximately $19.8 million. Such market value was calculated
using the closing price of the Common Stock as of such date reported on the
NASDAQ Market.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for in Items 10, 11, 12 and 13 in Part III are contained
in the issuer's definitive proxy statement which the issuer filed with the
Commission on May 1, 2006 and such information is incorporated herein by
reference.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (this "Amendment") amends the Annual Report
on Form 10-K (the "Original Annual Report") for the year ended December 31,
2005, which was originally filed with the Securities and Exchange Commission
(the "SEC") on March 24, 2006. The Registrant is filing this Amendment in
response to a comment letter received from the SEC in connection with its review
of the Original Annual Report. In response to the comment letter, we have
included additional disclosures relating to (i) the registrant's effective tax
rate for fiscal 2005 compared to fiscal 2004, included in Item 7 of this
Amendment, (ii) quantitative and qualitative information with respect to foreign
exchange rate, market and commodity price risks for certain investment and
trading securities held by the registrant included in Item 7A of this Amendment,
(iii) a discussion relating to the treatment of the registrant's interest in an
affiliated entity included in Note A [19] to the financial statements
accompanying this Amendment, (iv) a discussion relating to the treatment of
certain derivative instruments included in Note G to the financial statements
accompanying this Amendment. In addition, in response to the comment letter, the
registrant has included (i) a revised report of its independent auditors opining
on the registrant's 2004 financial statements, (ii) the audit reports for the
year ended December 31, 2003 of other auditors of the registrant's subsidiaries
on which the registrant's previous auditors relied and (iii) a revised
Certifications (Exhibit 31).
Except as described above, the amendments included in this Amendment do not
otherwise revise or restate the financial statements included in the Original
Annual Report. In addition, except as described above, no attempt has been made
in this Amendment to modify or update disclosures presented in the Original
Annual Report. This Amendment does not reflect events occurring after the filing
of the Original Annual Report or modify or update those disclosures.
Accordingly, this Amendment should be read in conjunction with the registrants'
filings with the SEC subsequent to the filing of the Original Annual Report.
ISRAMCO, INC.
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS......................................... 1
ITEM 2. DESCRIPTION OF PROPERTY......................................... 12
ITEM 3. LEGAL PROCEEDINGS............................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........ 13
ITEM 6. SELECTED FINANCIAL DATA......................................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION..... 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS..... 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................ 21
ITEM 9A. CONTROLS AND PROCEDURES......................................... 21
ITEM 9B. OTHER INFORMATION............................................... 21
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT............... 22
ITEM 11. EXECUTIVE COMPENSATION.......................................... 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS................................. 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 22
ITEM 14. PRINCIPAL ACCOUNTANT FEES & SERVICES............................ 22
ITEM 15. EXHIBITS........................................................ 24
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS MADE IN THIS ANNUAL REPORT ON FORM 10-K 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.
PART I
ITEM 1. BUSINESS
GENERAL
Isramco, Inc. ("Isramco" or the "Company") is engaged in the exploration for and
production of oil and gas in Israel and in the United States. In Israel, the
Company holds a participation interest in two long- term off-shore leases and
serves as the operator of one of those leases. See "Summary of exploration
efforts in Israel".
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 exploration and 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 MMCFs of proved developed producing
natural gas. See "Summary of Exploration Efforts in United States".
Isramco was incorporated in Delaware in 1982.
THE OPERATOR OF THE MED ASHDOD LEASE
The Company is currently the operator of the Med Ashdod Lease under a joint
operating agreement (the "JOA") entered into among the participants in the
lease, As operator, the Company carries out all the operations contemplated in
the JOA, including directing the oil exploration and drilling activities of the
venture, within the framework of work programs and budgets approved by the
participants in the venture. The Company may be removed as operator for cause by
notice in writing given by two or more of the other parties representing at
least 65% of the total interests in the lease.
Under the JOA, each participant is responsible for the costs, expenses and
obligations incurred in relation to the lease area in proportion to its rights
and interests in the lease.
As operator, the Company charges the venture participant for all costs incurred
in connection with the exploration and drilling activities conducted by the Med
Ashdod venture and is entitled to receive a fee for its administrative overhead
equal to 6% of all direct charges or minimum monthly compensation of $6,000 per
the lease. During the year ended December 31, 2005, the Company was paid a total
of $977,000 as operator fees.
With respect to the Med Yavne Lease, the Company furnishes to BG International
Limited, a member of the British Gas Group ("BG"), the operator of the lease,
consulting services of an administrative and technical nature for which it
receives a monthly fee equal to $10,000.
GENERAL PARTNER OF THE ISRAMCO NEGEV 2 LIMITED PARTNERSHIP
In 1989 the Company transferred a substantial portion of its working interest in
certain oil and gas assets in Israel to Isramco Negev 2 Limited Partnership, an
Israeli limited partnership organized for the purpose of the exploration and the
production of oil and gas in Israel (the "Limited Partnership") In exchange for
the working interests, the Limited Partnership granted to the Company certain
overriding royalties. In 1992, the Company transferred to the Limited
Partnership additional rights in exchange for additional overriding royalties
and reimbursement of expenses. The Company formed Isramco Oil and Gas Ltd.
("IOG"), an Israeli company and the company's wholly-owned subsidiary to act as
the general partner for the Limited Partnership and also formed Isramco
Management (1988) Ltd., an Israeli company and the company's wholly-owned
subsidiary to act as the limited partner. The limited partner is the nominee of
Limited Partnership units held by public investors in Israel.
1
Pursuant to the Limited Partnership Agreement and the Trust Agreement, a
supervisor was appointed on behalf of the Limited Partnership unit holders, with
sole authority to appoint the sole director for Isramco Management (1988) Ltd.
and to supervise its activities on behalf of and for the benefit of the Limited
Partnership unit holders. Although control and management of the Limited
Partnership rests with the general partner matters involving certain rights of
the Limited Partnership unit holders are subject to the approval of the
supervisor and in certain instances the approval of the Limited Partnership unit
holders. The firm of Igal Brightman & Co., Accountants and Mr. David Valiano,
Accountant have been appointed as supervisors.
Through IOG the Company currently receives a management fee of $40,000 per month
from the Limited Partnership for office space, management and other services.
The Company currently holds 6.65% of the issued Limited Partnership units and
IOG holds an additional 0.008% of the Limited Partnership units. On December 31,
2005, the Limited Partnership had cash, cash equivalents, certificates of
deposit and marketable securities with a value of approximately $127 million.
Additionally, IOG (as the general partner of the Limited Partnership) is
entitled to 5% overriding royalties in certain petroleum assets held by the
Limited Partnership.
NON-OIL AND GAS PROPERTIES
In June 2002, the Company purchased non-oil and gas producing real estate
located in Israel at an aggregate cost of $1,887,000. In January 2004, the
Company entered into an agreement with a related entity pursuant to which the
property was leased to such entity for a 24 month period at a monthly rent of
$7,000. On January 1, 2006, the Company entered into a new agreement with a
related entity pursuant to which a significantly smaller part of the property is
leased to such entity for a 24-month period at a monthly rent of $550.
In March 2004, the Company purchased a luxury cruise liner for aggregate
consideration of $8,050,000. The vessel, a Bahamas registered ship, contains 270
passenger cabins on nine decks. The Company, through its wholly owned
subsidiary, Magic 1 Cruise Line Corp., a British Virgin Island corporation
leased the vessel to European based tour operator from April 2005 through
October 2005.
In February 2006, the vessel was leased to the same tour operator for three
specific periods. The first one is scheduled to commence on April 6, 2006 and
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.
2
OIL AND GAS VENTURES AND PETROLEUM ASSETS
OIL AND GAS LEASES LOCATED IN ISRAEL
The table below sets forth the Working Interests of the Company and all
affiliated and non-affiliated participants in the leases in Israel, the total
acreage of each lease, and the expiration dates of each of the leases as of
December 31, 2005. The Company also holds Overriding Royalties in the leases.
See "Table of Overriding Royalties".
TABLE OF WORKING INTEREST
IN THE LEASES(1)
(% Interest of 100%)
Name of Participant Med Yavne Lease* Med Ashdod Lease**(3)
The Company 0.4584 0.3625
Affiliates
Isramco Negev 2, Limited 32.411 19.1370
Partnership
I.O.C. 7.800 7.800
I.N.O.C. Dead Sea -- 5.0525
Limited Partnership
Naphtha 1.8033 --
Naphtha Explorations 2.2826 1.8411
Limited Partnership
JOEL 2.8807 --
Equital 2.1639 --
Non-affiliated entities 50.2 65.8069
Total 100.000 100.000
Area (acres) 13,100 61,800
Expiration Date (2) 6/10/2030 6/15/2030
* The lease was granted in June 2000 and is scheduled to expire in June 2030.
** The lease was granted in January 2002 and is scheduled to expire in June
2030.
(1) All of the oil and gas assets are subject to a 12.5% Overriding Royalty due
to the Government of Israel under the Petroleum Law.
(2) The expiration dates are subject to the fulfillment of applicable provisions
of the Israel Petroleum Law and Regulations, and the conditions and work
obligations of each of the above leases.
(3) Under the Grant Agreement with the Government of Israel, the government may
claim that the Company is contingently obligated to repay to the government the
grant monies in the amount of $110,000 and to pay a 6.5 % Overriding Royalty on
all production from the area.
3
OVERRIDING ROYALTIES HELD BY THE COMPANY
The Company holds Overriding Royalties in certain oil and gas assets.
Additionally, the Company is entitled to receive from certain participant in the
Med Yavne and Med Ashdod leases overriding royalties equal to 2% of each such
participant's rights to any oil/gas produced within those leases. The Company
holds the following Overriding Royalties:
TABLE OF OVERRIDING ROYALTIES
From the Limited Partnership, on the first 10% of the Limited Partnership's
share of the following leases
Before Payout After Payout
------------- ------------
Med Yavne Lease* 1% 13%
Med Ashdod Lease** 1% 13%
From JOEL On 8% of JOEL's Interest
Before Payout After Payout
------------- ------------
Med Ashdod Lease 2.5% 12.5%
From Delek Oil Exploration Ltd.
(DOEX) (1)(2) On 6% of DOEX's Interest
Before Payout After Payout
------------- ------------
Med Ashdod Lease 2.5% 12.5%
From Naphtha, Naphtha Exploration LP,
Joel, Equital, INOC Dead Sea L P
on oil and/or gas produced on the
Med Leases 2%
To IOC On Certain petroleum rights held by
Limited Partnership 5%
* A 30 year lease covering an area of approximately 53 square kilometers
(including the area of the gas discovery) was granted in June 2000.
** A 30-year lease covering an area of approximately 250 square kilometers
(including the area of the gas discovery) was granted in January 2002.
(1) The Working Interests of Delek and DOEX have been assigned to Delek Drilling
Limited Partnership.
(2) The prospectus of the Delek Limited Partnership dated January 26, 1994
states that the interest which Delek L.P, received from Delek and DOEX is free
from any encumbrances except that the Company may argue that the interests are
subject to an Overriding Royalty. The Company has no information available to it
as to why this statement is in the Delek L.P. prospectus.
4
The Company has no direct financial obligation with regard to the Overriding
Royalties, however, in the event the Limited Partnership, JOEL, DOEX or Delek,
fails to fund its obligation with regard to the leases to which an Overriding
Royalty exists, the Company could lose its interest in such Overriding Royalty .
See also "Table of Working Interests" above.
SUMMARY OF EXPLORATION EFFORTS IN ISRAEL
MED YAVNE LEASE
Based on the gas finds known as "Or 1" and "Or South" , a 30 years lease was
granted in June 2000 (hereinafter: the "Med Yavne Lease"). The Med Yavne Lease
covers 53 square kilometers (approximately 13,000 acres) offshore Israel. The
operator of the Med Yavne Lease is BG International Limited, a member of the
British Gas Group ("BG").
According to the operator's estimates, which are based on the results of the
drillings in the "Or 1" and "Or South" wells, and a three-dimensional seismic
survey performed in the area of the lease which also covered parts of nearby gas
reserves (outside the area of the lease), the recoverable gas reserves in the
Med Yanve Lease is estimated at 93 billion cubic feet, out of which it is
estimated that approximately 51 billion cubic feet are in Or 1. In November
2002, the Company received an opinion from a consulting firm in the United
States that performed a techno-economic examination for the development of the
"Or 1" reserve. The opinion indicates that, under certain assumptions,
development of the reserve by connection to a nearby platform (at a distance of
seven Miles) and from there via an existing transportation pipeline to the
coast, may be economically feasible. In respect to the balance of the reserves
(42 billions cubic feet) the Company does not currently believe that development
is feasible or likely.
The Company's participation interest of the Med Yavne Lease is 0.4585%.
MED ASHDOD LEASE
Following the results of "Nir 1" drilling, a 30 year lease was granted in
January 2002. The Med Ashdod Lease covers approximately 250 square kilometers
(approximately 62,000 acres) offshore Israel. The Company serves as the operator
of the Med Ashdod Lease and holds a 0.3625% participation interest therein.
On February 28, 2005, the Company, on behalf of the Limited Partnership, a lease
participant and an affiliate of the Company, issued a sole risk notice to the
other participants in the lease to drill a gas well (the "Gad 1" well) to a
total depth of 2,600 meter (8,350 feet) at a total budget of $13 million. As a
result of the sole risk notice, the rights of lease' participants who did not
respond to the notice were transferred to the Limited Partnership as a result of
which the Limited Partnership's interests in the Gad 1 well increased to
85.103%.
In August and September 2005, the Limited Partnership transferred a 40% working
interests in the Gad 1 well to third parties. On September 25, 2005 the Gad 1
well was spudded. On November 16, 2005, the lease participants decided to plug
and abandon the well. The total cost of the well was approximately $16.4
million.
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 106,368 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.
5
On November 1, 2005, Jay Petroleum purchased from Ness Energy International
Inc., an oil and gas company based in Texas, a 15% working interests in certain
Barnett Shale acreage in north central Texas (Parker County), for a purchase
price of $2.1 million. The purchase was financed from cash generated by
operations. In addition, under the purchase agreement Jay Petroleum has the
right to participate for up to 40% working interest in any well drilled by Ness
in shallower formations from the surface to the top of the Barnett Shale. App.
80 locations for new development wells in the Barnet Shale have been so far
identified in this acreage based on a 3D seismic survey. To date three gas wells
have been drilled and completed to production in this acreage.
NON-OIL AND GAS PROPERTIES
MIRAGE 1 CRUISE LINER
OVERVIEW
In March 2004, the Company purchased a luxury cruise liner (the "Vessel") for
aggregate consideration of $8,050,000. The Vessel, a Bahamas registered ship,
contains 270 passenger cabins on nine decks. The Company leased the Vessel to
tour operator for the period from April 4, 2005 through October 31, 2005 at a
daily rate of $8,000. Under the lease all maintenance and operating costs
associated with the vessel were borne by the operator.
Title to the Vessel is in Magic 1 Cruise Line Corp., a British Virgin Islands
corporation and a wholly owned subsidiary of the Company ("Magic"). As of
December 31, 2005, the Company has expended approximately $1.0 million in each
of 2005 and 2004 in respect of the maintenance, repairs renovation, and upkeep
of the vessel.
CRUISE LINE BUSINESS
Cruise lines compete for consumers' leisure time spending with other vacation
alternatives such as land-based resort hotels and sightseeing destinations.
Demand for such activities is influenced by, among other things, geo-political
and general economic conditions. The Company believes that cruise passengers
currently represent only a small share of the vacation market and that a
significant portion of cruise passengers carried are first-time cruisers.
The Company's principal operating strategy is to lease the Vessel through time
charter or bareboat charter. Under a bareboat charter the lessee operates the
vessel and solely bears all expenses associated with the operation, maintenance
and upkeep of the vessel. Under a time charter the owner of the Vessel is
responsible for those expenses and provides a crew. Under a time charter, the
lessee is responsible for marketing, itinerary and providing all cruise line
services to passengers. Generally, revenue from time charter is higher than with
respect to bareboat charters.
Cruising season in the Mediterranean is generally from April to October. So long
as the Vessel is leased for use in the Mediterranean, the Company anticipates
that revenues from the lease of the vessel will remain seasonal. In May 2004,
Magic entered into a time charter with an Israeli based tour operator for the
period from July 1, 2004 through October, 2004 at a daily rate of $21,500. The
tour operator targeted the Israeli consumer market and promoted Vessel cruises
to various destinations in the Mediterranean including Cyprus, Greek islands and
Turkey.
In March 2005 Magic entered into a bareboat charter with a European based tour
operator for the lease of the Vessel for the period from April 14, 2005 through
October 31, 2005 at a daily rate of $8,000. Under the bareboat charter the tour
operator operated the Vessel in and around the Mediterranean and solely bore all
outlays associated with the operation, maintenance and upkeep of the Vessel.
The Vessel was delivered by the Company to the operator on April 21, 2005 (due
to necessary repairs which delayed the Vessel's delivery). Accordingly, it was
agreed between the Company and the operator that the lease period was to
commence on April 21, 2005 and conclude on October 27, 2005.
6
Contemporaneous with its entry into the bareboat charter the tour operator
entered into an agreement (the "Marketing Agreement") with a subsidiary of one
of the leading transportation companies in Israel ("the "Marketing Party")
pursuant to which the operator granted to the Marketing Party the exclusive
marketing of the tours on the Vessel, and under which the operator is entitled
to minimum payments from the Marketing Party.
In connection with the bareboat charter, on March 9, 2005, the Company furnished
a limited guarantee (the "Guarantee") to and in favor of the Marketing Party,
pursuant to which the Company undertook to indemnify the Marketing Party in an
amount not exceeding $1 million in respect of any loss or damage incurred by the
Marketing Party arising out of the breach by the Operator of its obligations
under the Marketing Agreement. To induce the Company to issue the Guarantee, the
operator granted to the Company a security interest on all amounts due to it
under the Marketing Agreement and agreed to provide the Company with a bank
guarantee in the amount of $600,000 (which will secure its obligations under the
bareboat charter as well).
In February 2006, the Company entered into a bareboat charter with the same tour
operator, pursuant to which the vessel is to be leased for three specific
periods, with the first such period scheduled to commence on April 6, 2006 and
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 terminating on November 7, 2008, at a daily rate of $8,000. The
operator may cancel the second charter period and the third charter period, by
giving a written notice to the Company no later than November 1, 2006 and it may
cancel the third charter period by giving a written notice to the Company no
later than November 1, 2007.
REGULATORY
The operation of the Vessel is subject to various international laws and
regulations relating to environmental protection. Under such laws and
regulations, the Company is prohibited from, among other things, discharging
certain materials, such as petrochemicals and plastics, into the waterways. The
Company has made, and will continue to make, capital and other expenditures to
comply with environmental laws and regulations. From time to time, environmental
and other regulators consider more stringent regulations which may affect
operations and increase Company's compliance costs. The Company believes that
the impact of cruise ships on the global environment will continue to be an area
of focus by the relevant authorities throughout the world and, accordingly, this
will likely subject to increasing compliance costs in the future.
The Company believes that The Company is in material compliance with all the
regulations applicable to the Vessel and that have all licenses necessary to
conduct our business. Health, safety, security and financial responsibility
issues are, and believe will continue to be, an area of focus by the relevant
government authorities. From time to time, various regulatory and legislative
changes may be proposed that could impact our operations and would likely
subject to increasing compliance costs in the future.
REAL ESTATE IN ISRAEL
In June 2002, the Company purchased non oil and gas producing real estate
located in Israel at an aggregate cost of $1,887,000. As of December 1, 2004,
the Company entered into an agreement with a related entity pursuant to which
the property is leased to such entity for a 24 month period at a monthly rent of
$7,000 through December 31, 2005. On January 1, 2006, the Company entered into a
new agreement with a related entity pursuant to which a significantly smaller
part of the property is leased to such entity for a 24-month period at a monthly
rent of $550.
EMPLOYEES
As of December 31, 2005, the Company had ten employees at its branch office in
Israel and three employees in its office in Houston, Texas.
RISK FACTORS
In addition to the other information contained in this Annual Report on Form
10-K, investors should consider carefully the following risks. If any of these
risks occurs, the Company's business, financial condition or operating results
could be adversely affected.
7
RISKS RELATED THE COMPANY'S OIL AND GAS BUSINESS
OIL AND GAS DRILLING IS A SPECULATIVE ACTIVITY AND RISKY
The Company is engaged in the business of oil and natural gas exploration and
the resulting development of productive oil and gas wells. The Company's growth
will be materially dependent upon the success of its future drilling program.
Drilling for oil and gas involves numerous risks, including the risk that no
commercially productive oil or natural gas reservoirs will be encountered. The
cost of drilling, completing and operating wells is substantial and uncertain,
and drilling operations may be curtailed, delayed or cancelled as a result of a
variety of factors beyond the Company's control, including unexpected drilling
conditions, pressure or irregularities in formations, equipment failures or
accidents, adverse weather conditions, compliance with governmental requirements
and shortages or delays in the availability of drilling rigs or crews and the
delivery of equipment. Although the Company believes that its use of 3-D seismic
data and other advanced technology should increase the probability of success of
its wells and should reduce average finding costs through elimination of
prospects that might otherwise be drilled solely on the basis of 2-D seismic
data and other traditional methods, drilling remains an inexact and speculative
activity. In addition, the use of 3-D seismic data and such technologies
requires greater pre-drilling expenditures than traditional drilling strategies
and the Company could incur losses as a result of such expenditures. The
Company's future drilling activities may not be successful and, if unsuccessful,
such failure could have an adverse effect on the Company's future results of
operations and financial condition. Although the Company may discuss drilling
prospects that have been identified or budgeted for, the Company may ultimately
not lease or drill these prospects within the expected time frame, or at all.
The Company may identify prospects through a number of methods, some of which do
not include interpretation of 3-D or other seismic data. The drilling and
results for these prospects may be particularly uncertain. The final
determination with respect to the drilling of any scheduled or budgeted wells
will be dependent on a number of factors, including (i) the results of
exploration efforts and the acquisition, review and analysis of the seismic
data, (ii) the availability of sufficient capital resources to the Company and
the other participants for the drilling of the prospects, (iii) the approval of
the prospects by other participants after additional data has been compiled,
(iv) economic and industry conditions at the time of drilling, including
prevailing and anticipated prices for oil and natural gas and the availability
of drilling rigs and crews, (v) the Company's financial resources and results
(vi) the availability of leases and permits on reasonable terms for the
prospects and (vii) the payment of royalties to lessors. There can be no
assurance that these projects can be successfully developed or that the wells
discussed will, if drilled, encounter reservoirs of commercially productive oil
or natural gas. There are numerous uncertainties in estimating quantities of
proved reserves, including many factors beyond the Company's control.
THE OIL AND NATURAL GAS RESERVE DATA INCLUDED IN THIS REPORT ARE ONLY
ESTIMATES AND MAY PROVE TO BE INACCURATE.
There are numerous uncertainties inherent in estimating oil and natural gas
reserves and their estimated values. The reserve data in this report represent
only estimates that may prove to be inaccurate because of these uncertainties.
Estimates of economically recoverable oil and natural gas reserves depend upon a
number of variable factors, such as historical production from the area compared
with production from other producing areas and assumptions concerning effects of
regulations by governmental agencies, future oil and natural gas prices, future
operating costs, severance and excise taxes, development costs and workover and
remedial costs, some or all of these assumptions may in fact vary considerably
from actual results. For these reasons, estimates of the economically
recoverable quantities of oil and natural gas attributable to any particular
group of properties, classifications of such reserves based on risk of recovery,
and estimates of the future net cash flows expected therefrom prepared by
different engineers or by the same engineers but at different times may vary
substantially. Accordingly, reserve estimates may be subject to downward or
upward adjustment. Actual production, revenue and expenditures with respect to
the Company's reserves will likely vary from estimates, and such variances may
be material.
8
THERE IS A POSSIBILITY THAT THE COMPANY WILL LOSE THE LEASES TO ITS OIL
AND GAS PROPERTIES.
The Company's oil and gas revenues are generated through leases to the oil and
gas properties or, in the case of Israeli based properties, licenses that,
subject to certain conditions, may result in leases being granted. The leases
are subject to certain obligations and are renewable at the discretion of
various governmental authorities, as such, the Company may not be able to
fulfill its obligations under the leases which may result in the modification or
cancellation of such leases, or such leases may not be renewed or may be renewed
on terms different from the current leases. The modification or cancellation of
the Company's leases may have a material impact on the Company's revenues.
COMPETITION IN THE INDUSTRY MAY IMPAIR THE COMPANY'S ABILITY TO EXPLORE,
DEVELOP AND COMMERCIALIZE ITS OIL AND GAS PROPERTIES.
The oil and natural gas industry is very competitive. Competition is
particularly intense in the acquisition of prospective oil and natural gas
properties and oil and gas reserves. The Company competes with a substantial
number of other companies having larger technical staffs and greater financial
and operational resources. Many such companies not only engage in the
acquisition, exploration, development and production of oil and natural gas
reserves, but also carry on refining operations, electricity generation and the
marketing of refined products. The Company also competes with major and
independent oil and gas companies in the marketing and sale of oil and natural
gas, and the oil and natural gas industry in general competes with other
industries supplying energy and fuel to industrial, commercial and individual
consumers. The Company competes with other oil and natural gas companies in
attempting to secure drilling rigs and other equipment necessary for drilling
and completion of wells. Such equipment may be in short supply from time to
time.
THE COMPANY'S BUSINESS MAY BE AFFECTED BY OIL AND GAS PRICE VOLATILITY.
Historically, natural gas and oil prices have been volatile. These prices rise
and fall based on changes in market demand and changes in the political,
regulatory and economic climate and other factors that affect commodities
markets that are generally outside of the Company's control. Some of the
Company's projections and estimates are based on assumptions as to the future
prices of natural gas and crude oil. These price assumptions are used for
planning purposes. The Company expects that its assumptions will change over
time and that actual prices in the future may differ from its estimates. Any
substantial or extended decline in the actual prices of natural gas and/or crude
oil may have a material adverse effect on the Company's financial position and
results of operations (including reduced cash flow and borrowing capacity), the
quantities of natural gas and crude oil reserves that it can economically
produce and the quantity of estimated proved reserves that may be attributed to
its properties
THE COMPANY HAS NO MEANS TO MARKET ITS OIL AND GAS PRODUCTION WITHOUT
THE ASSISTANCE OF THIRD PARTIES.
The marketability of the Company's production depends upon the proximity of its
reserves to, and the capacity of, facilities and third party services, including
oil and natural gas gathering systems, pipelines, trucking or terminal
facilities, and processing facilities. The unavailability or lack of capacity of
such services and facilities could impair or delay the production of new wells
or the delay or discontinuance of development plans for properties. A shut-in or
delay or discontinuance could adversely affect the Company's financial
condition. In addition, regulation of oil and natural gas production
transportation in the United States or in other countries may affect its ability
to produce and market its oil and natural gas on a profitable basis.
THE COMPANY IS SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS.
The Company conducts business from its facilities in Israel and the United
States. Its international operations and activities subject the Company to a
number of risks, including the risk of political and economic instability,
difficulty in managing foreign operations, potentially adverse taxes, higher
expenses and difficulty in collection of accounts receivable. Although the
Company Israeli subsidiary receives most of its operating funds in U.S. dollars,
a portion of its payroll and other expenses and certain of its investments are
fixed in the currency of Israel. Because the Company's financial results are
reported in U.S. dollars, they are affected by changes in the value of the
various foreign currencies that the Company uses to make payments in relation to
the U.S. dollar.
9
THE COMPANY'S OPERATIONS MAY BE IMPACTED BY CERTAIN RISKS COMMON IN THE
INDUSTRY.
The Company's exploration and drilling operations are subject to various risks
common in the industry, including cratering, explosions, fires and
uncontrollable flows of oil, gas or well fluids. The drilling operations are
also subject to the risk that no commercially productive natural gas or oil
reserves will be encountered. The cost of drilling, completing and operating
wells is often uncertain, and drilling operations may be curtailed, delayed or
canceled as a result of a variety of factors, including drilling conditions,
pressure or irregularities in formations, equipment failures or accidents and
adverse weather conditions.
In accordance with industry practice, the Company maintains insurance against
some, but not all, of the risks described above. The Company cannot provide
assurance that its insurance will be adequate to cover losses or liabilities.
Also, it cannot predict the continued availability of insurance at premium
levels that justify its purchase.
GOVERNMENT REGULATION AND LIABILITY FOR ENVIRONMENTAL MATTERS MAY
ADVERSELY AFFECT THE COMPANY'S BUSINESS AND RESULTS OF OPERATIONS.
Oil and natural gas operations are subject to various federal, state and local
government regulations, which may be changed from time to time. Matters subject
to regulation include discharge permits for drilling operations, drilling bonds,
reports concerning operations, the spacing of wells, unitization and pooling of
properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and natural gas wells below actual production capacity in order to conserve
supplies of oil and natural gas. There are federal, state and local laws and
regulations primarily relating to protection of human health and the environment
applicable to the development, production, handling, storage, transportation and
disposal of oil and natural gas, by-products thereof and other substances and
materials produced or used in connection with oil and natural gas operations. In
addition, the Company may be liable for environmental damages caused by previous
owners of property it purchases or leases. As a result, the Company may incur
substantial liabilities to third parties or governmental entities. The Company
is also subject to changing and extensive tax laws, the effects of which cannot
be predicted. The implementation of new, or the modification of existing, laws
or regulations could have a material adverse effect on the Company's business.
RISKS RELATED TO THE VESSEL
THE DESIGNATION OF THE VESSEL AS AN `ISRAELI VESSEL' COULD INCREASE THE COST OF
OPERATING THE VESSEL AND MAY POTENTIALLY REDUCE THE INCOME FROM LEASING THE
VESSEL.
In January 2005, Israeli authorities advised Naphtha Israel Petroleum Corp. that
in their view the Vessel qualified as an Israeli vessel (notwithstanding its
foreign registration and ownership) as Naphtha holds 49.8% of the issued and
outstanding shares of the Company. Consequently, the authorities contend that
certain Israeli maritime rules and regulations govern the Vessel and its
operations. These rules impose certain requirements as to operation of the
vessel and require among other things that the vessel be staffed by Israeli
crew, satisfy certain security requirements and allow for the mobilization of
the Vessel by the Israeli authorities during periods of war or hostilities.
In February 2005 Naphtha applied to the Israeli high court for a declaratory
order that the Vessel is not an Israeli vessel. In the event that the Israeli
court declines to grant Naphtha's application, the operating costs of the Vessel
will increase and result in a reduction of potential charter (lease)
opportunities for exploitation of the Vessel. In March 2005, Naphtha was advised
that under a 'bareboat charter' the authorities will not deem the vessel to be
an Israeli vessel.
10
As of the filing of the annual report on Form 10-K, the Company cannot determine
the outcome of the matter.
A POTENTIAL LOSS OF BUSINESS DUE TO COMPETITORS THROUGHOUT THE VACATION
MARKET.
The Company faces significant competition from other cruise lines, in terms of
the types of ships and services. Additionally, oceanline cruises are only one of
many alternatives for people choosing a vacation. Therefore risk losing
potential lessors of the Vessel due to competition form other cruise lines and
also due to other vacation operators that provide other travel and leisure
options, including hotels, resorts and package holidays and tours. Any failure
to lease the Vessel for a significant period of time may adversely affect
Company's results of operations and financial condition.
THE POLITICAL AND ECONOMIC CLIMATE AND OTHER WORLD EVENTS AFFECTING
SAFETY AND SECURITY COULD ADVERSELY AFFECT THE DEMAND FOR CRUISES AND COULD HARM
THE FUTURE LEASING AND PROFITABILITY.
Demand for cruises and other vacation options has been, and is expected to
continue to be, affected by the public's attitude towards the safety of travel,
the international political climate and the political climate of destination
countries. Events such as the terrorist attacks in the U.S. on September 11,
2001 and the instability in much of the Mediterranean region (the region in
which our Vessel operates) and the threats of attacks in the Mediterranean and
elsewhere, concerns of an outbreak of additional hostilities, national
government travel advisories, the resulting political instability and concerns
over safety and security aspects of traveling, have had a significant adverse
impact on demand and pricing in the travel and vacation industry and may
continue to do so in the future. Demand for cruises is also likely to be
increasingly dependent on the underlying economic strength of the countries from
which cruise companies source their passengers. Economic or political changes
that reduce disposable income or consumer confidence in the countries may affect
demand for vacations, including cruise vacations, which are a discretionary
purchase. Decreases in demand could adversely affect our ability to lease the
Vessel and negatively affect profitability.
ACCIDENTS AND OTHER INCIDENTS OR ADVERSE PUBLICITY CONCERNING THE CRUISE
INDUSTRY AND COULD AFFECT COMPANY'S REPUTATION AND HARM FUTURE LEASING AND
PROFITABILITY.
The operation of cruise ships involves the risk of accidents, passenger and crew
illnesses, mechanical failures and other incidents at sea or while in port,
which may bring into question passenger safety, health, security and vacation
satisfaction and thereby adversely effect future industry performance, sales and
profitability. It is possible that these factors could adversely affect our
leasing ability or existing charter, which would have an adverse affect on
profitability. In addition, adverse publicity concerning the vacation industry
in general or the cruise industry or us in particular could affect our
reputation and impact demand and, consequently, have an adverse affect on our
profitability.
NEW REGULATIONS OF HEALTH, SAFETY, SECURITY, ENVIRONMENTAL AND OTHER
REGULATORY ISSUES COULD INCREASE COMPANY'S OPERATING COSTS AND ADVERSELY AFFECT
NET INCOME.
The Company is subject to various international, national, state and local
health, safety and security laws, regulations and treaties. We believe that
health, safety, security and other regulatory issues will continue to be areas
of focus by relevant government authorities. Resulting legislation or
regulations, or changes in existing legislation or regulations, could impact
Company's operations and would likely subject to increasing compliance costs in
the future.
PROBLEMS ENCOUNTERED AT PORTS COULD REDUCE COMPANY'S PROFITABILITY.
Industrial actions and insolvency or financial problems of the ports where the
Vessel is docked could adversely affect Company's profitability.
11
RISKS RELATED TO OPERATIONS GENERALLY
THE COMPANY IS SUBJECT TO RISKS ASSOCIATED WITH OPERATIONS IN ISRAEL.
The Company is involved in oil and gas exploration activities in Israel as
operator of certain offshore licenses or otherwise. The Company also purchased
significant non-oil and gas real-estate properties in Israel. The Company also
maintains a significant presence within Israel. Accordingly, a significant
portion of the Company's business is directly affected by prevailing economic,
military and political conditions that affect Israel. Any major hostilities
involving Israel might have a material adverse effect on the Company's business,
financial condition or results of operations.
THE COMPANY'S STOCK PRICE IS VOLATILE AND COULD CONTINUE TO BE VOLATILE.
Investor interest in the Company's common stock may not lead to the development
of an active or liquid trading market. The market price of the Company's common
stock has fluctuated in the past and is likely to continue to be volatile and
subject to wide fluctuations. In addition, the stock market has experienced
extreme price and volume fluctuations. The stock prices and trading volumes for
the Company's stock has fluctuated widely and may continue to so for reasons
that may be unrelated to business or results of operations. General economic,
market and political conditions could also materially and adversely affect the
market price of the Company's common stock and investors may be unable to resell
their shares of common stock at or above their purchase price.
PENNY STOCK REGULATIONS ARE APPLICABLE TO INVESTMENT IN SHARES OF THE
COMPANY'S COMMON STOCK.
Broker-dealer practices in connection with transactions in "penny stocks" are
regulated by certain penny stock rules adopted by the Securities and Exchange
Commission. Penny stocks generally are equity securities with a price of less
than $5.00 (other than securities registered on certain national securities
exchanges or quoted on the Nasdaq system, provided that current prices and
volume information with respect to transactions in such securities are provided
by the exchange or system). The penny stock rules require a broker-dealer, prior
to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document that provides information about
penny stocks and the risks in the penny stock market. The broker-dealer also
must provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, the penny stock rules
generally require that prior to a transaction in a penny stock the broker-dealer
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction. These disclosure requirements may have the effect of reducing
the level of trading activity in the secondary market for a stock that becomes
subject to the penny stock rules. Many brokers will not deal with penny stocks;
this restricts the market.
ITEM 2. PROPERTIES
The Company maintains offices in Houston, Texas. The Company leases office space
premises (approximately 2,015 square feet) at 11767 Katy Freeway, Houston, TX
77079 under a lease expiring in October 2006 at a monthly rental of $2,508. The
Company anticipates that it will be able to extend the lease, or find
replacement premises, on commercially reasonable terms.
The Company also leases office space in Israel from Naphtha at 8 Granit St.,
Petach Tikva, Israel. In 2005, the Company paid Naphtha an aggregate of $235,000
for rental space, office services, secretarial services and computer services.
The Company believes that the payment for the above services are reasonable
compared to other similar locations.
12
ITEM 3. LEGAL PROCEEDING
From time to time, the Company is involved in disputes and other legal actions
arising in the ordinary course of business. In management's opinion, none of
these other disputes and legal actions is expected to have a material impact on
the Company's consolidated financial position or results of operations.
RECENT DEVELOPMENT
On January 20, 2006 the "Company entered into a settlement agreement and mutual
release (the "California Settlement") with the defendant parties named therein
(the "California Defendants") relating to the lawsuit initiated by the Company
against the Defendants on February 10, 2004 in the Superior Court of California,
County of Los Angeles, alleging breach of contract and tort claims in connection
with an agreement between the Company and the California Defendants to jointly
purchase and develop certain parcels of real estate outside Los Angeles (the
"California Action"). The California Settlement provides for the settlement of
the California Action with no finding or admission of fault on the part of any
party and, pursuant thereto, certain of the California Defendant paid to the
Company $2,500,000 as reimbursement for costs and expenses incurred by the
Company in connection with its pursuit of the real estate investment opportunity
that was the subject of the California Action. Under the California Settlement,
the Company and the California Defendants mutually released one another from any
claims or causes of actions arising out of or relating to the California Action,
any claim that could have been asserted in the California Action, and any and
all claims and/or allegations relating to the real estate (and the development
thereof) that was the subject of the California Action.
On February 1, 2006 the Company entered into a settlement agreement and mutual
release (the "Texas Settlement") with the defendant parties named therein (The
"Texas Defendants") relating to the lawsuit initiated by the Company against the
Texas Defendants on 2004 in the District court of Harris County, Texas, alleging
a tort claim in connection with an agreement between the Company and a third
Party pursuant to which the Company purchased all of the outstanding capital
stock of a company that owns oil and gas assets in Illinois (the "Texas
Action"). Under the Texas Settlement the Texas Defendants paid to the Company
$550,000 and the Company filed a motion to dismiss the Texas Action. As a result
of the payment received under the California and Texas Settlements, the Company
anticipates recording a net gain of approximately $2,500,000 (after payment of
legal fees and other expenses) during the first quarter of 2006.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The number of record holders of the Company's Common Stock on March 23, 2006 was
approximately 456, not including an undetermined number of persons who hold
their stock in street name.
Our common stock is listed on the Nasdaq Capital Market under the symbol "ISRL".
The following table sets forth for the periods indicated, the reported high and
low closing prices for our common stock.
Common Stock
Quarter Ended High Low
------------- -------- -------
2005
March 31 $ 8.99 $ 8.72
June 30 $ 10.93 $ 9.60
September 30 $ 15.09 $ 14.27
December 31 $ 15.27 $ 14.91
2004
March 31 $ 7.59 $ 7.01
June 30 $ 6.50 $ 6.40
September 30 $ 6.08 $ 6.08
December 31 $ 5.28 $ 5.24
The Company has not declared or paid any cash dividends on its Common Stock. The
Company does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. The Company intends to retain all earnings for use in its
business operations and in expansion.
13
ITEM 6. SELECTED FINANCIAL DATA (CONSOLIDATED)
The data presented below with respect to the Company should be read in
conjunction with the Consolidated Financial Statements and related Notes thereto
of the Company included elsewhere in this Report and Item 7-- "Management's
Discussion and Analysis of Financial Condition and Results of Operations." (in
Thousands)
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Operator's fees $ 977 $ 137 $ 753 $ 249 $ 234
Oil and Gas Sales $ 3,319 $ 3,137 $ 3,439 $ 2,423 $ 3,068
Revenue from vessel $ 1,520 $ 2,034
Interest income $ 293 $ 729 $ 760 $ 738 $ 541
Office services to related parties and other $ 912 $ 772 $ 939 $ 913 $ 857
Equity in earnings (losses) of investees $ 661 $ 1,365 $ 1,098 $ (440) $ (177)
Gain from sale of oil and gas properties and equipment -- -- $ 4
Capital Gain -- -- $ 549 -- --
Gain (Loss) on marketable securities $ 551 $ 240 $ 872 $ (189) $ (199)
Other $ (524) $ 492 $ 475 $ 49 $ --
Impairment of oil & gas properties $ 759 $ 268 $ 617 -- $ --
Impairment of Investment $ 110 -- -- -- $ --
Exploration costs -- -- $ 165 $ 1,747 $ 204
Lease operating expenses and severance
Taxes $ 1,458 $ 1,149 $ 872 $ 844 $ 905
Depreciation, depletion and Amortization $ 2,139 $ 1,334 $ 621 $ 642 $ 564
Operator expense $ 767 $ 807 $ 795 $ 791 $ 696
General and administrative expenses $ 2,314 $ 1,717 $ 2,012 $ 1,422 $ 2,048
Interest Expense $ 205 $ 168 $ 52 $ 210 $ --
Accretion Expense $ 25 $ 5 $ 43 -- --
Income tax expense (benefit) $ (40) $ (576) $ 1,188 $ 114 $ 50
Net Income (loss) before cumulative effect $ (1,132) $ 993 $ 2,520 $ (1,799) $ (139)
Cumulative effect of change in accounting principles -- -- $ (264) $ 3,516 --
Basic and diluted earnings (loss) per share for:
Net income (loss) before cumulative effect $ (0.42) $ 0.38 $ 0.95 $ (0.68) $ (0.05)
Cumulative effect of accounting change, net -- $ (0.10) 1.33 --
Net income (loss) $ (0.42) $ 0.38 $ 0.85 $ 0.65 $ (0.05)
Weighted average number of
Common shares outstanding - basic 2,709,355 2,639,853 2,639,853 2,639,853 2,639,853
Weighted average number of
Common shares outstanding - diluted 2,709,355 2,640,751 2,639,853 2,639,853 2,639,853
December 31,
------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Balance Sheet Data
Total assets $ 38,615 $ 41,358 $ 32,614 $ 28,667 $ 26,615
Total liabilities $ 10,122 $ 11,322 $ 2,733 $ 2,175 $ 1,160
Shareholders' equity $ 28,493 $ 30,036 $ 29,881 $ 26,492 $ 25,455
ITEM 7. 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 FORM 10-K.
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 FORM 10-K.
14
OVERVIEW
Isramco, Inc., a Delaware corporation, 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 holds participation interests in certain other
interests. The Company also holds certain non-oil and gas properties discussed
below.
CRITICAL ACCOUNTING POLICIES
Estimation of oil and gas reserves is important to the effective management of
the Company. They are integral to making investment decisions about oil and gas
properties such as whether development should proceed or enhanced recovery
methods should be undertaken. Oil and gas reserve quantities are also used as
the basis of calculating the unit-of-production rates for depreciation and
evaluating for impairment. Oil and gas reserves are divided between proved and
unproved reserves. Proved reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions; i.e., prices
and costs as of the date the estimate is made. Unproved reserves are those with
less than reasonable certainty of recoverability and are classified as either
probable or possible.
The estimation of proved reserves is an ongoing process based on rigorous
technical evaluations and extrapolations of well information such as flow rates
and reservoir pressure declines. Although the company is reasonably certain that
proved reserves will be produced, the timing and amount recovered can be
affected by a number of factors including completion of development projects,
reservoir performance, regulatory approvals and significant changes in long-term
oil and gas price levels.
The calculation of unit-of-production depreciation is a critical accounting
estimate that measures the depreciation of upstream assets. It is the ratio of
(1) actual volumes produced to (2) total proved developed reserves (those proved
reserves recoverable through existing wells with existing equipment and
operating methods) applied to the (3) asset cost. The volumes produced and asset
costs are known and, while proved developed reserves have a high probability of
recoverability, they are based on estimates that are subject to some
variability.
Our cruise line operation is capital intensive. At December 31, 2005, we have
approximately $8.5 million of net investment in the vessel recorded on our
balance sheet. We depreciate our assets on a straight-line basis over their
estimated useful lives. The estimates of the useful lives are based on the
nature of the assets as well as our current operating strategy. Future events,
such as property expansions, new competition and new regulations, could result
in a change in the manner in which we are using certain assets requiring a
change in the estimated useful lives of such assets. In assessing the
recoverability of the carrying value of property and equipment, we must make
assumptions regarding estimated future cash flows and other factors. If these
estimates or the related assumptions change in the future, we may be required to
record impairment charges for these assets.
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.
15
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.
The Company's operating activities provided net cash of $1,545,000 and
$1,573,000 for the years ended December 31, 2005 and 2004, respectively. The
availability of cash generated by operations could be affected by other business
risks discussed in the "Risk Factors" section of this annual report.
Working capital (current assets minus current liabilities) was $4,441,000 and
$6,590,000 at December 31, 2005 and 2004, respectively. The decrease in working
capital is primarily attributable to the purchase of oil and gas assets,
participation in drilling of two wells in United States and investments in
repairs and renovation of the cruise line vessel Net cash used in investing
activities in fiscal 2005 was $741,000 compared to $8,195,000 in fiscal 2004.
The decrease in net cash used in investing activities is primarily attributable
to the purchase in March 2004 and maintenance, repairs and renovation of the
Vessel ($9,028,000) and the outlays associated with the drilling of wells in
Texas and Oklahoma ($1,096,000), offset by the increase in the value of
marketable securities. The cash used in investing activities in 2005 was
primarily attributable to purchase of oil and gas properties.
Capital expenditures for property and equipment were $4,703,000 and $10,126,000
in fiscal 2005 and 2004, respectively. Capital expenditures in 2005 were
primarily attributable to purchase of oil and gas properties in the United
States. Capital expenditures in 2004 were primarily attributable to purchase of
the cruise line Vessel.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004.
The Company reported net loss before cumulative effect of $1,132,000 (loss of
$0.42 per share) in 2005 compared to a net profit of $993,000 (loss of $0.38 per
share) in 2004. The decrease in the net income in 2005 compared to 2004 is
primarily attributable to: (i) an increase in losses associated with the
operation of the vessel, (ii) an increase in the impairment of oil and gas
assets, (iii) an increase in lease operation expenses of the wells in the United
States and (iv) an increase in the general and administration expenses.
Set forth below is a break-down of these results.
UNITED STATES
OIL AND GAS VOLUME AND REVENUES (IN THOUSANDS)
2005 2004
------------ ------------
Oil Volume Sold (Bbl) 16 18
Gas Volume Sold (MCF) 355 470
Oil Sales ($) 806 678
Gas Sales ($) 2,525 2,524
Average Unit Price
Oil ($/Bbl) * 51.25 38.12
Gas ($/MCF) ** 7.11 5.38
* Bbl - Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 CUBIC FEET
16
OIL AND GAS EXPLORATION COSTS
In 2005 the Company incurred $110,000 in exploration costs. These costs were
incurred mainly for a well drilled in Israel that was plugged and abandoned.
OPERATOR'S FEES
In 2005 the Company earned $977,000 in operator fees compared to $137,000 in
2004. The increase is due to the drilling of the Gad 1 well.
OIL AND GAS REVENUES
In 2005 and 2004 the Company had oil and gas revenues of $3,319,000 and
$3,174,000, respectively. The increase is due to the increase in oil and gas
prices in 2005 partially offset by the decline in oil and gas production.
LEASE OPERATING EXPENSES AND SEVERANCE TAXES
Lease operating expenses and severance taxes were incurred primarily in
connection with oil and gas fields in the United States. Oil and gas lease
operating expenses and severance taxes were $1,458,000 and $1,149,000 for 2005
and 2004, respectively. The increase in lease operating expenses and severance
taxes is primarily attributable to workovers performed on two wells.
INTEREST AND DIVIDEND INCOME
Interest income during the year ended December 31, 2005 was $293,000 compared to
$729,000 for the year ended December 31, 2004. The decrease in interest income
is primarily attributable to interest receivable on marketable securities
(Debentures).
GAIN ON MARKETABLE SECURITIES
In 2005, the Company recognized net realized and unrealized gain on marketable
securities of $551,000 compared to net realized and unrealized gain on
marketable securities of $240,000 in 2004.
Increases or decreases in the gains and losses from marketable securities are
dependent on the market prices in general and the composition of the portfolio
of the Company.
OPERATOR EXPENSES
In 2005, the Company expended $767,000 for operator expenses compared to
$807,000 in 2004.
GENERAL AND ADMINISTRATIVE EXPENSES
In 2005, the Company incurred $2,313,000 in general and administrative expenses
compared to $1,717,000 in 2004. The relatively higher amount in 2005 is
primarily attributable to bonus payments totaling $245,000 to the president,
vice president and secretary, fees associated with lawsuits initiated by the
Company and consultants' fees.
EQUITY IN NET INCOME OF INVESTEE
The Company's equity in the net income of investees for 2005 was $661,000
compared to its equity in net income of investees of $1,365,600 for 2004. The
decrease is primarily attributable to the decrease in the gain of marketable
securities held by the Limited Partnerships Isramco Negev 2 and I.O.C Dead Sea
LP, affiliates of the Company.
17
CRUISE LINE VESSEL INCOME
Income from the leasing of the cruise line vessel for 2005 was $1,520,000,
compare to a net income of $2,034,000 in 2004. The decrease is due to the fact
that during 2004 the Vessel was leased under a time charter while in the year
2005 the Vessel was leased under a bareboat charter.
CRUISE LINE VESSEL EXPENSES
Expenses of the Vessel for 2005 were $1,051,000 compared to expenses of
$1,926,000 in 2004. The decrease in the expenses is due to the fact that during
the year 2004 the Vessel was leased under a time charter while in the year 2005
the Vessel was leased under a bareboat charter.
DEPRECIATION, DEPLETION AMORTIZATION AND IMPAIRMENT
Depreciation depletion and amortization expenses are connected to the producing
wells in the United States and to the Cruise line vessel.
During 2005, the Company recorded $2,139,000 compared to $1,334,000 in 2004. The
increase is attributable to an increase in depreciation of the Vessel from
$438,000 in 2004 to $1,128,000 in 2005 resulting from a full year of
depreciation in 2005 and only a partial year of depreciation in 2004.
During 2005 and 2004, the Company recorded impairment charges of $759,000 and
$268,000, respectively, relating to oil and gas assets in the United States.
OTHER INCOME
Other Income in 2005 was $(524,000) compared to $492,000 in 2004. Other Income
in 2005 is primarily attributable to monthly income of $7,000 related to lease
of the real estate in Israel, $195,000 received from the European tour operator
of the cruise line vessel for office services provided by the Company and
($671,000) related to net expense for the mark-to-market of swap contracts on
oil and gas prices.
INCOME TAXES
The Company recorded income tax expense of $40,000 in 2005 compared to $576,000
in 2004. The effective tax rate for 2005 was -3.7% compared to 36.7% for 2004.
This decrease in effective tax rate is due to the Company's Israeli branch
office having foreign tax expense of $370,000 on income before tax of $838,000
in 2005. During 2004, the Israeli branch office had income before tax of
$2,117,000 with no foreign tax due to the utilization of tax loss carryforward
from prior years. The Company did not record a deferred tax asset for the
foreign tax loss carryforwards due to the uncertainty of future profits to
utilize the carryforwards. Additionally, the Company has historically treated
the operations of the cruise line vessel as a separate entity for tax purposes
through December 31, 2005. During 2005 and 2004, the Company recorded losses
before income taxes of $1,063,000 and $527,000, respectively, from the cruise
line vessel operations, and therefore there is no tax expense effect on the
Company's financial statements. The Company expects the effective tax rate for
2006 to be approximately 37%.
CONTRACTUAL OBLIGATIONS
The Company leases office facilities in Texas and in Israel and certain
equipment pursuant to non-cancelable operating lease agreements. Future minimum
lease payments pursuant to these leases as of December 31, 2005 were as follows
(in thousands).
TOTAL 2006 2007 2008 Thereafter
----- ---- ---- ---- ----------
Operating Leases:
Texas: 26,000 26,000 -- -- --
-- -- -- -- --
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003.
The company reported net income of $993,000 ($0.38 per share) in 2004 compared
to a net income of $2,256,000 ($0.85 per share) in 2003. The decrease in the net
income in 2004 compared to 2003 is primarily attributable to: (i) a decrease in
operators' fee collected during 2004 (ii) decrease in oil and gas sales due to
decline in gas production, (iii) decrease in the gain on marketable securities.
Set forth below is a break-down of these results.
UNITED STATES
OIL AND GAS VOLUME AND REVENUES (IN THOUSANDS)
2004 2003
------------ ------------
Oil Volume Sold (Bbl) 18 19
Gas Volume Sold (MCF) 470 600
Oil Sales ($) 678 542
Gas Sales ($) 2,524 2,897
Average Unit Price
Oil ($/Bbl) * 38.12 28.09
Gas ($/MCF) ** 5.38 4.82
* Bbl - Barrel Equivalent to 42 U.S. Gallons ** MCF - 1,000 Cubic Feet
18
THE OFFSHORE LICENSES (ISRAEL)
The Company did not expend any amount in respect of the offshore licenses
compared to $88,243 in 2003.
OIL AND GAS EXPLORATION COSTS
During 2004 the Company did not expand any amounts in respect of oil and gas
exploration, as compared to $165,000 in 2003.
OPERATOR'S FEES
In 2004 the Company earned $137,000 in operator fees compared to $753,000 in
2003.
The decrease in operator fees is due to the decrease in oil and gas exploration
activity in 2004 compared to 2003 in which the Company drilled the Nir 2 well
offshore Israel.
OIL AND GAS REVENUES
In 2004 and 2003 the Company had oil and gas revenues of $3,174,000 and
$3,439,000, respectively. The decrease is due mainly to the decline of gas
production in 2004.
LEASE OPERATING EXPENSES AND SEVERANCE TAXES
Lease operating expenses and severance taxes were incurred primarily in
connection with oil and gas fields in the United States. Oil and gas lease
operating expenses and severance taxes were $1,149,000 and $872,000 for 2004 and
2003, respectively. The relatively higher amounts in 2004 in lease operating
expenses and severance taxes is primarily due to the workovers performed in
connection with producing wells in 2004.
INTEREST AND DIVIDEND INCOME
Interest income during the year ended December 31, 2004 was $729,000 compared to
$760,000 for the year ended December 31, 2003. The income is primarily
attributable to interest receivable on marketable securities (Debentures).
GAIN ON MARKETABLE SECURITIES
In 2004, the Company recognized net realized and unrealized gains on marketable
securities of $240,000 compared to net realized and unrealized gains on
marketable securities of $872,000 in 2003.
Increases or decreases in the gains and losses from marketable securities are
dependent on the market prices in general and the composition of the portfolio
of the Company.
OPERATOR EXPENSES
In 2004 the Company expended $807,000 in respect of operator expenses compared
to $795,000 in 2003.
GENERAL AND ADMINISTRATIVE EXPENSES
In 2004, the Company incurred $1,705,000 as general and administrative expenses
compared to $2,012,000 incurred in 2003. The relatively higher amount in 2003 is
primarily attributable to bonuses awarded to senior officers and increase in
legal and other professional fees paid by the Company.
19
EQUITY IN NET INCOME OF INVESTEE
The Company's equity in the net income of Investee for 2004 was $1,365,000
compared to its equity in net income of $1,098,000 for 2003. The increase is
primarily attributable to the increase in the marketable value of the marketable
securities hold by Isramco Negev 2 and I.O.C Dead Sea LP, affiliates of the
Company.
CRUISE LINE VESSEL INCOME AND EXPENSES
Income from the leasing of the cruise line vessel for 2004 (July through October
2004) were $2,034,000. The associated expenses in 2004 were $1,926,000 and are
primarily attributable to insurance, maintenance, repair upkeep and payroll.
Additionally, depreciation expense of $438,000 for the vessel was recorded in
2004.
DEPRECITION, 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 2004, the Company recorded $1,334,000 compared to $621,000 in 2003. The
increase in 2004 compared to 2003 is attributable to depreciation of the Vessel
($438,000) and increase of $315,000 in the depreciation of the wells it the
United Stated due to the decline in production of the gas wells.
During 2004 and 2003, the Company recorded impairment charges of $268,000 and
$617,000 respectively relating to oil and gas assets.
OTHER INCOME
Other Income in 2004 was $492,000 compared to $475,000 in 2003. Other Income is
primarily attributable to monthly income of $7,000 related to lease of the real
estate in Israel and $369,000 related to a change of estimate for asset
retirement obligations. Other Income in the year 2003 included the sum of
$350,000 which represents the settlement of a liability recorded in connection
which a well drilled in Marine 9 permit offshore Congo, and was recorded during
2002 as exploration costs.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123R, "Accounting for Stock-Based
Compensation." SFAS No. 123R establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123R requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS No. 123R, only certain pro forma disclosures of fair
value were required. SFAS No. 123R shall be effective for small business issuers
as of the beginning of the first interim or annual reporting period that begins
after December 15, 2005. The adoption of this new accounting pronouncement is
not expected to have a material impact on the financial statements of the
Company during the calendar year 2006.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including adverse changes in commodity
prices.
The Company produces and sells natural gas and crude oil. As a result, the
Company's financial results can be significantly affected if these commodity
prices fluctuate widely in response to changing market forces.
The Company uses swap contracts to manage the risk on commodity prices. The
Company's positions are monitored and managed on a daily basis to ensure
compliance with the Company's risk management policy. The swap contracts are
entered into principally with a major financial institution. All derivatives are
recorded at fair value on the consolidated balance sheet with resulting gains
and losses reflected in income. Fair values are derived principally from market
quotes and other independent third-party quotes.
Each hypothetical 10 percent increase in the price of natural gas and crude oil
would increase the liability of the natural gas derivative contracts by
approximately $236,000 and increase the liability of the crude oil sale
derivative contracts by about $76,000. The same hypothetical decrease in the
prices of these commodities would result in the same opposite effects on the
values of the contracts. The hypothetical effect on these contracts was
estimated by calculating the cash value of the contracts as the difference
between the hypothetical and contract delivery prices multiplied by the contract
amounts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item 8 is included following the "Index to
Financial Statements" contained in this Annual Report on Form 10-K.
20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 13, 2005, the audit committee of the board of directors (the "Audit
Committee") of the Company accepted the resignation of UHY - Mann Frankfort
Stein & Lipp CPAS, LLP ("UHY LLP") (formerly - Mann Frankfort Stein & Lipp CPAS,
L.L.P.) as the Company's independent accountants. Concurrent with UHY LLP's
resignation, the Audit Committee appointed Malone & Bailey, PC (the "New
Accountants") as the independent accounting firm to audit the financial
statements of the Company for the year ended December 31, 2004.
The reports by UHY LLP with respect to the Company's financial statements for
the year ended December 31, 2003 did not contain any adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. During the fiscal year ended December 31
2003 and during the subsequent interim period, there were no disagreements
between the Company and UHY LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which,
if not resolved to the satisfaction of UHY LLP, would have caused it to make
reference to the subject matter of thereof in connection with its reports.
During the fiscal year ended December 31 2003, and through the date of their
resignation, UHY LLP did not advise the Company with respect to any matters
described in paragraphs (a)(1)(v)(A) through (D) of Item 304 of Regulation S-K.
During the fiscal year ended December 31, 2003, and through the date of their
engagement, the Company did not consult with the New Accountants regarding
either (i) the application of accounting principles to a specified transaction,
either completed or proposed; (ii) the type of audit opinion that might be
rendered on the Company's financial statements; (iii) any matter that was either
the subject of disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K)
or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Company's Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure
based closely on the definition of "disclosure controls and procedures" in Rule
13a-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 on the foregoing, our Chief Executive Officer (and Principal
Financial Officer) concluded that our disclosure controls and procedures were
effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter ended
December 31, 2005, 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.
ITEM 9B. OTHER INFORMATION
None.
21
PART III
The information called for by items 10, 11, 12 13 and 14 will be contained in
the Company's definitive proxy statement which the Company intends to file
within 120 days after the end of the Company's fiscal year ended December 31,
2005 and such information is incorporated herein by reference.
GLOSSARY
"Grant Agreement" shall mean the agreement between the Company and the
Government of Israel pursuant to which the Government of Israel has provided
assistance to the Company in connection with its investment in the Negev 2
Venture by providing a grant of 44.34(cent) for each U.S. dollar ($1.00)
invested and expended by the Company in oil and gas activities in Israel within
the framework of the Negev 2 Venture. The Government financing provided for
under the Grant is repayable only from funds emanating from commercial
production in any payout area and then, only to the extent of 30% of the
recipient's share of the net revenue from said payout area, as and when
received. The Grant Agreement entitles the Government of Israel, to receive a
12.5% royalty on oil sales, as well as an overriding royalty of 6.5% of the
Company's share in the petroleum produced and saved after payout. If there is no
commercial discovery of oil, the Company will not be required to repay the grant
monies. A grant agreement was also entered into between the Government of Israel
and HEI, Donesco, L.P.S. and Mazal Oil.
"Joint Operating Agreement" shall mean the Joint Operating Agreement of the
Negev 2 Venture which was signed as of the 30th day of June, 1988, between the
participants in the Negev 2 Venture, as amended or as shall be amended from time
to time.
"Joint Venture Agreement" shall mean the Joint Venture Agreement of the Negev 2
Venture which was signed as of the 30th of June, 1988 between the participants
in the Negev 2 Venture, as amended from time to time.
"Limited Partnership" shall mean Isramco-Negev 2 Limited Partnership, a Limited
Partnership founded pursuant to a Limited Partnership Agreement made on the 2nd
and 3rd days of March, 1989 (as amended on September 7, 1989, July 28, 1991,
March 5, 1992 and June 11, 1992) between the Trustee on part as Limited Partner
and Isramco Oil and Gas Ltd., as General Partner on the other part.
"Limited Partnership Agreement" shall mean the Limited Partnership Agreement
made the 2nd and 3rd days of March, 1989 (as amended September 7, 1989, July 28,
1991, March 5, 1992 and June 11, 1992), between Isramco Oil and Gas Ltd., as
General Partner, and Isramco Management (1988) Ltd. as the Limited Partner.
"Negev 2 Venture Agreements" shall mean the Joint Venture Agreement, the Joint
Operating Agreement, the Voting Agreement and every agreement into which the
parties to said agreements have entered, in connection with the Negev 2 Venture.
"Overriding Royalty" shall mean a percentage interest over and above the base
royalty and is free of all costs of exploration and production, which costs are
borne by the Grantor of the Overriding Royalty Interest and which is related to
a particular Petroleum License.
"Payout" shall mean the defined point at which one party has recovered its prior
costs.
"Petroleum" shall mean any petroleum fluid, whether liquid or gaseous, and
includes oil, natural gas, natural gasoline, condensates and related fluid
hydrocarbons, and also asphalt and other solid petroleum hydrocarbons when
dissolved in and producible with fluid petroleum.
"Petroleum Exploration" shall mean test drilling; any other operation or search
for petroleum, including geological, geophysical, geochemical and similar
investigations and tests; and, drilling solely for obtaining geological
information.
"Petroleum Production" shall mean the production of petroleum from a petroleum
field and all operations incidental thereto, including handling and treatment
thereof and conveyance thereof to tankers, a pipe line or a refinery in or in
the vicinity of the field.
"Preliminary Permit", "Preferential Right to Obtain a License", "License" shall
have the meaning(s) set forth in the Petroleum Law of Israel.
22
"Trust Agreement" shall mean the Trust Agreement made on the 3rd day of March,
1989 (as amended September 7, 1989, July 28, 1991, March 5, 1992 and June 11,
1992) for the Trust Company of Kesselman and Kesselman. "Working Interest" shall
mean an interest in a Petroleum Asset granting the holder thereof the right to
participate pro rata in exploiting the Petroleum Asset for petroleum
exploration, development and petroleum production, subject to its pro rata
participation in the expenses involved therein after acquiring the Working
Interest.
"Israel Petroleum Law"
The Company's business in Israel is subject to regulation by the State of Israel
pursuant to the Petroleum Law, 1952. The administration and implementation of
the Petroleum Law is vested in the Minister of National Infrastructure (the
"Minister") and an Advisory Council.
The following includes brief statements of certain provisions of the Petroleum
Law in effect at the date of this Prospectus. Reference is made to the copy of
the Petroleum Law filed as an exhibit to the Registration Statement referred to
under "Additional Information" and the description which follows is qualified in
its entirety by such reference.
The holder of a preliminary permit is entitled to carry out petroleum
exploration, but not test drilling or petroleum production, within the permit
areas. The Commissioner determines the term of a preliminary permit and it may
not exceed eighteen (18) months. The Minister may grant the holder a priority
right to receive licenses in the permit areas, and for the duration of such
priority right no other party will be granted a license or lease in such areas.
Drilling for petroleum is permitted pursuant to a license issued by the
Commissioner. The term of a license is for three (3) years, subject to extension
under certain circumstances for an additional period up to four (4) years. A
license holder is required to commence test drilling within two (2) years from
the grant of a license (or earlier if required by the terms of the license) and
not to interrupt operations between test drillings for more than four (4)
months. If any well drilled by the Company is determined to be a commercial
discovery prior to expiration of the license, the Company will be entitled to
receive a Petroleum Lease granting it the exclusive right to explore for and
produce petroleum in the lease area. The term of a lease is for thirty (30)
years, subject to renewal for an additional term of twenty (20) years.
The Company, as a lessee, will be required to pay the State of Israel the
royalty prescribed by the Petroleum Law which is presently, and at all times
since 1952 has been, 12.5% of the petroleum produced from the leased area and
saved, excluding the quantity of petroleum used in operating the leased area.
The Minister may require a lessee to supply at the market price such quantity of
petroleum as, in the Minister's opinion, is required for domestic consumption,
subject to certain limitations.
As a lessee, the Company will also be required to commence drilling of a
development well within six (6) months from the date on which the lease is
granted and, thereafter, with due diligence to define the petroleum field,
develop the leased area, produce petroleum therefore and seek markets for and
market such petroleum.
23
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of Registrant with all amendments
filed as an Exhibit to the S-l Registration Statement, File No.
2-83574.
3.2 Amendment to Certificate of Incorporation filed March 17, 1993,
filed as an Exhibit with the S-l Registration Statement, File
No. 33-57482.
3.3 By-laws of Registrant with all amendments, filed as an Exhibit
to the S-l Registration Statement, File No. 2-83570.
10.1 Oil Marketing Agreement, filed as Exhibit with the S-l
Registration Statement, File No. 2-83574.
10.2 Joint Venture Agreement and Joint Operating Agreement dated June
30, 1988 by and among HEI Oil and Gas Limited Partnership, JOEL
- Jerusalem Oil Exploration Ltd., Delek Oil Exploration Ltd.,
Delek, The Israel Fuel Corporation Ltd., the Company, Southern
Shipping and Energy (U.K.), Naphtha, Israel Petroleum Company
Ltd., Oil Exploration of Pat Ltd., LPS Israel Oil Inc., Donesco
Venture Fund One, a Limited Partnership and Mazaloil Inc. filed
as an Exhibit to Form 8-K for the month of September 1988.
10.3 Grant Agreement with the Government of Israel, undated, between
the Company and the Government of Israel on behalf of the State
of Israel, filed as an Exhibit to Form 10-Q for the Company for
the period ending September 30, 1988 and incorporated herein by
reference.
10.4 Translated from Hebrew, Indemnity Agreement between the Company
and Isramco Management (1988) Ltd. dated March _, 1989, filed as
an Exhibit to Form 8-K for the month of March 1989 and
incorporated herein by reference.
10.5 Amendment Agreement to Grant Agreement between the Company and
the Government of Israel, filed as an Exhibit to this
Post-effective Amendment No. 8 to Form S-l Registration
Statement. File No. 2- 83574.
10.6 Translated from Hebrew, Limited Partnership Agreement between
Isramco Oil and Gas Ltd. and Isramco Management (1988) Ltd.
dated March 2, 1989, filed as an Exhibit to Form 8-K for the
month of March 1989 and incorporated herein by reference.
10.7 Translated from Hebrew, Trust Agreement between Isramco
Management (1988) Ltd. and Kesselman and Kesselman dated March
3, 1989, filed as an Exhibit to Form 8-K for the month of March
1989 and incorporated herein by reference.
10.8 Translated from Hebrew, Indemnity Agreement between the Company
and Isramco Management (1988) Ltd. dated March _, 1989, filed as
an Exhibit to Form 8-K for the month of March 1989 and
incorporated herein by reference.
10.9 Equalization of Rights Agreement between Isramco-Negev 2 Limited
Partnership and Delek Oil Exploration Ltd. and Delek - The
Israel Fuel Corporation Ltd, filed as an Exhibit to Form 8-K for
the month of January 1993 dated January 21, 1993 and
incorporated herein by reference.
10.10 Option Agreement between Isramco Resources Inc. and Delek Oil
Exploration Ltd. and Delek - The Israel Fuel Corporation Ltd.
filed as an Exhibit to Form 8-K for the month of January 1993
dated January 21, 1993 and incorporated herein by reference.
10.11 Agreement by and among Naphtha Congo Ltd., Equital Ltd. and the
Company dated September 4, 1997, filed as an Exhibit to Form 8-K
for the month of September, 1997 and incorporated herein by
reference.
10.12 Amendment to Consulting Agreement between Goodrich Global L.T.D.
B.V.I. and the Company dated December _, 1997, filed as an
Exhibit to Form 8-K for the month of December, 1997 and
incorporated herein by reference.
24
10.13 Consulting Agreement between Romulas Investment Ltd. and the
Company dated August _, 1997, filed as an Exhibit to Form 8-K
for the month of September, 1997 and incorporated herein by
reference, assigned by Romulas Investment Ltd. on December 31,
1997 to Remarkable Holdings Ltd.
10.14 Inventory Services Management Agreement dated December 1997
between the Company and Equital Ltd. filed herewith as Exhibit
10.70.
10.15 Consulting Agreement dated as of November 1, 1999 between the
Company and Worldtech, Inc.
10.16 Agreement dated June 12, 2002 between the Company and Mati
Properties and Construction Ltd. and Boaz Avrahami, filed as an
Exhibit to the Form 10-Q for the quarter ended June 30, 2002.
14.1 Code of Ethics, filed as an Exhibit to Form 10-K for the year
ended December 31, 2003.
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. *
99.1 Financial Statements of Isramco Negev 2 Limited Partnership as
of December 31, 2004 *
* Attached hereto as an exhibit
25
SIGNATURES
In accordance with Section 13 or 15(d) 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.
/s/ HAIM TSUFF
--------------
HAIM TSUFF,
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE
OFFICER (AND PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
DATE: OCTOBER 17, 2006
In accordance with 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, in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ JACKOB MAIMON PRESIDENT, DIRECTOR OCTOBER 17, 2006
-----------------
JACKOB MAIMON
/S/ AMIR ESKANDARI DIRECTOR OCTOBER 17, 2006
------------------
AMIR ESKANDARI
/S/ MAX PRIDGEON DIRECTOR OCTOBER 17, 2006
----------------
MAX PRIDGEON
/S/ DONALD D. LOVELL DIRECTOR OCTOBER 17, 2006
---------------------
26
INDEX TO FINANCIAL STATEMENTS
Page
----
Reports of Independent Registered Public Accounting Firms F-1,2
Consolidated Balance Sheets at December 31, 2005 and 2004 F-3
Consolidated Statements of Operations for the years ended December 31,
2005, 2004 and 2003 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2005, 2004 and 2003 F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2005, 2004 and 2003 F-6
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Isramco, Inc. and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheet of Isramco, Inc. and
subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of Isramco, Inc's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Isramco, Inc., as of
December 31, 2005 and 2004, and the results of its operations and its cash flows
for the periods described above in conformity with accounting principles
generally accepted in the United States of America.
As described in Note S, the financial statements for 2004 have been restated.
MALONE & BAILEY, PC
www.malone-bailey.com
Houston, Texas
March 20, 2006
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Isramco, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations, changes
in shareholders' equity, and cash flows of Isramco, Inc. and subsidiaries (the
"Company") for the year ended December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of
Isramco Oil and Gas, Ltd.; Isramco B.V., Cruquius; or Isramco, Inc. - Israel
Branch, which are wholly - owned subsidiaries whose combined statements reflect
total revenues of $3,422,000 for the year ended December 31, 2003. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for these
subsidiaries, is based solely on the reports of the other auditors.
We conducted our audit 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
audit and the reports of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated results of the operations and the cash flows
for the year ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note A, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 143 "Accounting for Asset Retirement
Obligations" as of January 1, 2003.
/S/ UHY MANN FRANKFORT STEIN & LIPP CPAS, LLP
(FORMERLY MANN FRANKFORT STEIN & LIPP CPAS, L.L.P)
HOUSTON, TEXAS
MARCH 5, 2004
F-2
[KPMG logo]
Somekh Chaikin
Mail address Office address Telephone 972 3 684 8000
PO Box 609 KPMG Millennium Tower Fax 972 3 684 8444
Tel Aviv 61006 17 Ha'arba'a Street
Israel Tel Aviv 64739
Israel
AUDITORS' REPORT TO THE MANAGEMENT
OF ISRAMCO OIL AND GAS LIMITED
We have audited the accompanying balance sheets of Isramco Oil and Gas Limited
(hereinafter - "the Company") as at December 31, 2003 and 2002, and the related
statements of income and the Cash flows for each of the years ended on such
dates. These financial statements are the responsibility of the Company's Board
of Director's and of its Management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Israel, including standards prescribed by the Auditors Regulations (Manner of
Auditor's Performance) 1973. Such standards require that we plan and perform the
audit to obtain reasonable assurance that 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 the Board of Director's and of its Management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The above-mentioned financial statements were prepared on the basis of the
historical cost convention and no information on the effect of changes in the
general purchasing power of the Israeli currency on the operating results in the
financial statements has been provided.
In our opinion, except for the non-inclusion of the information mentioned in the
previous paragraph, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as at December
31, 2003 and 2002 and the results of its operations and its cash flows for each
of the years ended on such dates, in conformity with generally accepted
accounting principles, in Israel.
Somekh Chaikin
Certified Public Accountants (Isr.)
March 5, 2004
[KPMG logo]
Somekh Chaikin
Mail address Office address Telephone 972 3 684 8000
PO Box 609 KPMG Millennium Tower Fax 972 3 684 8444
Tel Aviv 61006 17 Ha'arba'a Street
Israel Tel Aviv 64739
Israel
AUDITORS' REPORT TO THE MANAGEMENT
OF ISRAMCO INC. - ISRAEL BRANCH
We have audited the accompanying balance sheets of Isramco Inc. - Israel Branch
(hereinafter - "the Branch") as at December 31, 2003 and 2002, and the related
statements of income and the Cash flows for each of the years ended on such
dates. These financial statements are the responsibility of the Branch's
Management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Israel, including standards prescribed by the Auditors Regulations (Manner of
Auditor's Performance) 1973. Such standards require that we plan and perform the
audit to obtain reasonable assurance that 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 the Management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The above-mentioned financial statements were prepared on the basis of the
historical cost convention and no information on the effect of changes in the
general purchasing power of the Israeli currency on the operating results in the
financial statements has been provided.
In our opinion, except for the non-inclusion of the information mentioned in the
previous paragraph, the financial statements referred to above present fairly,
in all material respects, the financial position of the Branch as at December
31, 2003 and 2002 and the results of its operations and its cash flows for each
of the years ended on such dates, in conformity with generally accepted
accounting principles, in Israel.
Somekh Chaikin
Certified Public Accountants (Isr.)
March 5, 2004
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share information)
DECEMBER 31
------------------------
2005 2004
---------- ----------
(RESTATED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,249 $ 2,087
Marketable securities, at market 5,570 6,203
Accounts receivable - Trade 605 776
Prepaid expenses and other current assets 98 194
---------- ----------
TOTAL CURRENT ASSETS 7,522 9,260
Property and equipment, net (successful efforts
method for oil and gas properties) 5,110 3,190
Real estate 1,887 1,887
Marketable securities, at market 3,619 6,225
Investment in affiliates 11,836 12,044
Investment in Vessel 8,479 8,590
Other 162 162
---------- ----------
TOTAL ASSETS $ 38,615 $ 41,358
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,243 $ 1,261
Credit from banks 370 676
Current portion of bank loan 1,010 733
---------- ----------
TOTAL CURRENT LIABILITIES 3,623 2,670
---------- ----------
LONG-TERM LIABILITIES
Asset retirement obligations 343 314
Deferred tax obligation 2,899 3,469
Long-term bank loan 3,257 4,869
---------- ----------
TOTAL LONG-TERM LIABILITIES 6,499 8,652
---------- ----------
TOTAL LIABILITIES 10,122 11,322
---------- ----------
SHAREHOLDERS' EQUITY
Common stock $0.0l par value; authorized 7,500,000 shares; 27 27
issued 2,746,958 in 2005 and 2,669,120 shares in 2004; outstanding
2,717,691 shares in 2005 and 2,639,853 shares in 2004
Additional paid-in capital 26,240 26,240
Retained earnings 1,557 2,689
Accumulated other comprehensive income 833 1,244
Treasury stock, 29,267 shares at cost (164) (164)
---------- ----------
Total shareholders' equity 28,493 30,036
---------- ----------
Total liabilities and shareholders' equity $ 38,615 $ 41,358
========== ==========
See notes to the consolidated financial statements.
F-3
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share information)
YEAR ENDED DECEMBER 31,
------------------------------------------------
2005 2004 2003
------------ ------------ ------------
(RESTATED)
Revenues and other income :
Operator fees from related party $ 977 $ 137 $ 753
Oil and gas sales 3,319 3,174 3,439
Revenue from Vessel 1,520 2,034 --
Interest income 293 729 760
Office services
To related parties 476 592 635
To others 462 180 304
Capital gain -- -- 549
Gain on marketable securities 551 240 872
Equity in net income of investees 661 1,365 1,098
Other (524) 492 475
------------ ------------ ------------
Total revenues and other income 7,735 8,943 8,885
------------ ------------ ------------
Expenses :
Interest expense 205 168 52
Cost of revenue from vessel 1,051 1,926 --
Accretion expense 25 5 43
Depreciation, depletion and amortization 2,139 1,334 621
Lease operation expense and severance taxes 1,458 1,149 872
Exploration costs 110 -- 165
Operator expense 767 807 795
General and administrative
To related parties 503 358 317
To others 1,810 1,359 1,695
Impairment of oil and gas assets 759 268 617
------------ ------------ ------------
Total expenses 8,827 7,374 5,177
------------ ------------ ------------
Income (loss) before income taxes (1,092) 1,569 3,708
Income (taxes) benefit (40) (576) (1,188)
------------ ------------ ------------
Net income (loss) before cumulative effect (1,132) 993 2,520
Cumulative effect of change in accounting principle, net -- -- (264)
------------ ------------ ------------
Net income (loss) $ (1,132) $ 993 $ 2,256
============ ============ ============
Earnings (loss) per share
Basic and diluted earnings (loss) per share for:
Net income (loss) before cumulative effect $ (0.42) $ 0.38 $ 0.95
Cumulative effect of accounting change, net -- -- (0.10)
------------ ------------ ------------
Net income (loss) $ (0.42) $ 0.38 $ 0.85
============ ============ ============
Weighted average number of shares
outstanding-basic 2,709,355 2,639,853 2,639,853
============ ============ ============
Weighted average number of shares outstanding -diluted 2,709,355 2,640,751 2,639,853
============ ============ ============
See notes to the consolidated financial statements.
F-4
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 (RESTATED) AND 2003 (RESTATED)
COMMON STOCK
--------------------- ACCUMULATED RETAINED
ADDITIONAL OTHER EARNINGS TOTAL
NUMBER PAID-IN COMPREHENSIVE (ACCUMULATED TREASURY SHAREHOLDERS'
OF SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT) STOCK EQUITY
----------- -------- ---------- ------------- ------------ --------- -------------
$ IN THOUSANDS, EXCEPT SHARE AMOUNTS
Balances at December 31, 2002 2,669,120 $ 27 $ 26,240 $ (544) $ (560) $ (164) $ 24,999
Comprehensive income:
Net Income 2,256 2,256
Net unrealized gain on available
for sale marketable
securities, net of taxes -- -- -- 524 -- -- 524
Net gain (loss) on foreign
exchange rate, net of taxes 609 609
-------------
3,389
----------- -------- ---------- ------------- ------------ --------- -------------
Balances at December 31, 2003 2,669,120 27 26,240 589 1,696 (164) 28,388
Net Loss 993 993
Net unrealized gain on available
for sale marketable
securities, net of taxes -- -- 504 -- 504
Net realized gain (loss) on foreign
exchange rate, net of taxes 151 151
-------------
Total Comprehensive income 1,558
----------- -------- ---------- ------------- ------------ --------- -------------
Balances at December 31, 2004 2,669,120 27 26,240 1,244 2,689 (164) 30,036
Shares issued for exercise of options 77,838 -- -- -
Net Loss (1,132) (1,132)
Net unrealized gain on available
for sale marketable securities,
net of taxes 113 113
Net gain (loss) on foreign exchange
rate, net of taxes (524) (524)
-------------
Total Comprehensive income (loss) (1,543)
----------- -------- ---------- ------------- ------------ --------- -------------
Balances at December 31, 2005 2,746,958 $ 27 $ 26,240 $ 833 $ 1,557 $ (164) $ 28,493
=========== ======== ========== ============= ============ ========= =============
See notes to the consolidated financial statements.
F-5
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
------------------------------------------------
2005 2004 2003
------------ ------------ ------------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,132) $ 993 $ 2,256
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation, depletion, amortization and provision for impairment 2,898 1,140 1,238
Accretion of asset retirement obligation 25 5 43
Dry hole costs -- -- 99
Loss (gain) on marketable securities (550) (336) (872)
Gain from sale of securities -- -- (549)
Equity in net loss (income) of investees (661) (1,366) (1,098)
Cumulative effect of an accounting change -- -- 264
Deferred taxes (355) 790 1,532
Changes in assets and liabilities:
Accounts receivables 172 (272) 53
Prepaid expenses and other current assets 169 160 (163)
Accounts payable and accrued expenses 980 462 (1,377)
Marketable securities trading -- -- (138)
------------ ------------ ------------
Net cash provided by operating activities 1,545 1,576 1,288
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,703) (1,098) (676)
Investment in vessel (9,028) --
Proceeds from sale of oil and gas properties and equipment 14 --
Purchase of real estate -- --
Purchase of marketable securities (3,353) (4,807) (3,070)
Proceeds from sale of marketable securities 7,315 6,115 3,270
Proceeds from sale of other investment -- 609 --
------------ ------------ ------------
Net cash used in investing activities (741) (8,195) (476)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipt of loans from banks -- 9,800 --
Payments on short-term debt (1,336) (4,800) --
Change in short-term credit from banks (306) 1,277 --
------------ ------------ ------------
Net cash provided by financing activities (1,642) 6,277 --
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (838) (342) 812
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,087 2,429 1,617
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,249 $ 2,087 $ 2,429
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR INTEREST $ 205 $ 168 $ 52
============ ============ ============
CASH PAID DURING THE PERIOD FOR TAXES $ 65 $ 82 $ 50
============ ============ ============
See notes to the consolidated financial statements.
F-6
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE A) -- General and Summary of Significant Accounting Policies:
[1] The Company
Isramco Inc. (the "Company") is primarily engaged in the acquisition,
exploration, operation and development of oil and gas properties. As of December
31, 2005, the Company had oil and gas interests in Texas, Louisiana, Oklahoma,
Wyoming, New Mexico, and working interests in various properties located in
Israel.
In addition, the Company owns real estate in Israel and a luxury cruise liner.
[2] Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries: Jay Petroleum, L.L.C., a Texas limited liability
company (Jay); Jay Management L.L.C., a Texas limited liability company (Jay
Management); IsramTec Inc., a Delaware corporation (IsramTec); Isramco Oil and
Gas Ltd., an Israeli company; and Magic 1 Cruise Line, Corp., a British Virgin
Island corporation. Inter-company balances and transactions have been eliminated
in consolidation.
[3] Method of Accounting for Oil and Gas Operations
The Company follows the "successful efforts" method of accounting for its oil
and gas producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill exploratory
wells that do not find proved reserves, geological and geophysical costs, and
costs of carrying and retaining unproved properties are expensed. Costs incurred
for exploratory wells that find reserves that cannot yet be classified as proved
are capitalized on the Company's balance sheet if (a) the well has found a
sufficient quantity of reserves to justify its completion as a producing well
and (b) the Company is making sufficient progress assessing the reserves and the
economic and operating viability of the project. Otherwise, well costs are
expensed if a determination as to whether proved reserves were found cannot be
made within one year following the completion of drilling and these criteria are
not met.
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.
[4] Marketable Securities
Statement of Financial Accounting Standard No. 115 (SFAS No. 115), Accounting
for Certain Investments in Debt and Equity Securities, requires the Company to
classify its debt and equity securities in one of three categories: trading,
available-for-sale and held-to-maturity. Trading securities are bought and held
principally for the purposes of selling them in the near term. Held-to-maturity
securities are those securities in which the Company has both the ability and
intent to hold the security until maturity. All other securities not included in
trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair market value. The
Company holds no held-to-maturity securities. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains
or losses, net of the related tax effects, on available-for-sale securities are
excluded from earnings and are reported net of applicable taxes as accumulated
other comprehensive income, a separate component of shareholders' equity, until
realized.
[5] Investment in Affiliates
The Company uses the equity method to account for its investments in affiliate
entities over which it has the ability to exercise significant influence over
operating and financial policies.
F-7
[6] Equipment
Equipment, consisting of motor vehicles, office furniture and equipment, is
carried at cost less accumulated depreciation, computed on the straight-line
method over the estimated useful lives of the assets.
[7] Translation of Foreign Currencies
Foreign currency is translated in accordance with Statement of Financial
Accounting Standards No. 52, which provides the criteria for determining the
functional currency for entities operating in foreign countries. The Company has
determined its functional currency is the United States (U.S.) dollar since all
of its contracts are in U.S. dollars. The financial statements of Oil and Gas
and the Israel branch the Company's Israeli subsidiaries have been translated
into U.S. dollars as follows: at rates prevailing during the year for revenue
and expense items (except depreciation); at year-end rates for assets and
liabilities except for fixed assets and prepaid expenses which are translated at
the rate in effect at the time of their acquisition. Depreciation is translated
based on the historical dollar cost of the underlying assets. The net effects of
currency translations were not material in any period.
[8] Earnings Per Share (EPS)
The Company follows SFAS No. 128, Earnings per Share, for computing and
presenting earnings per share, which requires, among other things, dual
presentation of basic and diluted loss per share on the face of the statement of
operations. Basic EPS is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common shares were exercised or converted
into common shares or resulted in the issuance of common shares that then shared
in the earnings of the entity. For the year ended December 31, 2005, the
Company's stock options were anti-dilutive.
[9] Cash Equivalents
Cash equivalents include short-term investments with original maturities of
ninety days or less and are not limited in their use.
[10] Non-compete Agreements
Non-compete agreements are amortized over the terms of the agreements, which are
generally from three to five years.
[11] Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and related notes.
Actual results could differ from those estimates.
Oil and gas reserve quantities are the basis for the calculation of
depreciation, depletion and impairment of oil and gas properties. An independent
petroleum engineering firm estimates the Company's reserves. However, management
emphasizes that reserve estimates are inherently imprecise and that estimates of
more recent discoveries and non-producing reserves are more imprecise than those
for properties with long production histories. At December 31, the Company's oil
and gas reserves were attributable to non-producing reserves. Accordingly, the
estimates of the Company's reserves are expected to change as additional
information becomes available.
As mandated under SFAS No. 144, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets" (SFAS No. 144), the Company is required under
certain circumstances to evaluate the possible impairment of the carrying value
of its long-lived assets. For proved oil and gas properties, this involves a
comparison to the estimated future undiscounted cash flows, as described in the
paragraph below. In addition to the uncertainties inherent in the reserve
estimation process, these amounts are affected by management's estimates for
projected prices for oil and natural gas, which have typically been volatile. It
is reasonably possible that the Company's oil and gas reserve estimates may
materially change in the forthcoming year.
F-8
[12] Impairment of Long-Lived Assets
The Company adopted SFAS No. 144, effective as of January 1, 2002. This
Statement requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to undiscounted future cash
flows expected to be generated by the asset or used in its disposal. If the
carrying amount of an asset exceeds its estimated undiscounted future cash
flows, an impairment charge is recognized equal to the amount by which the
carrying amount exceeds the fair market value of the asset. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
During 2005 and 2004, the Company reported impairment charges of $759,000 and
$50,000 respectively, relating to its proved properties. During 2003, the
Company recorded impairment charges of $248,000 relating to its proved
properties and $81,000 related to the retirement obligation assets.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment value, and a loss is recognized to the
extent, if any, that the cost of the property has been impaired. During 2005,
2004 and 2003, the Company recorded impairments of $0, $218,000 and $288,000,
respectively, relating to its unproved properties.
[13] Income Taxes
The Company accounts for income taxes using the asset and liability method as
prescribed by SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. The measurement of deferred tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits that are not expected to be realized.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rate changes are enacted.
[14] Oil and Gas Revenues
The Company follows the entitlement method of accounting for recording oil and
gas revenues under that method, any revenues received in excess of the Company's
share is treated as a liability. If revenues received are less than the
Company's share, the deficiency is recorded as an asset. The Company's imbalance
position was not significant in terms of volumes or values at December 31, 2005
and 2004.
[15] Environmental
The Company is subject to extensive federal, state, local and foreign
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites. Liabilities for
expenditures of no capital nature are recorded when environmental assessment
and/or remediation is probable, and the costs can be reasonably estimated. No
significant amounts for environmental liabilities were recorded at December 31,
2005 and 2004.
[16] Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. In December 2002, the FASB issued SFAS No.
148, to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. The
statement also amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based compensation and the effect of the method
used on reported results.
The Company has chosen to continue to account for stock-based compensation
issued to employees using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is
F-9
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
The fair value of options is calculated using the Black-Scholes option-pricing
model. Had the Company adopted the fair value method of accounting for stock
based compensation, compensation expense would have been higher, and net loss
and net loss attributable to common shareholders would have increased for the
periods presented. No change in cash flows would occur. The effects of applying
SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.
Year Ended December 31,
(in thousands)
------------------------------------
2005 2004 2003
---------- ---------- ----------
Net income (loss) reported.................................. $ (1,132) $ 993 $ 2,256
Deduct:
Total stock based employee compensation expense
determined under fair value based method for all
awards, net of related income tax.................. -- --
Pro forma net (loss)........................................ (1,132) 993 2,256
Net Loss Per Share..........................................
Basic-as reported......................................... $ (0.42) $ 0.38 $ 0.85
Basic-pro forma........................................... (0.42) 0.38 0.85
Diluted-as reported....................................... (0.42) 0.38 0.85
Diluted-pro forma......................................... (0.42) 0.38 0.85
[17] Accounting Changes
Effective January 1, 2003, the Company adopted SFAS No. 143 "Accounting for
Asset Retirement Obligations" and recognized a loss of $264,000 that is included
as a cumulative effect of change in accounting principle. Effective January 1,
2002, the Company applied the provisions of Statement SFAS No.142 "Goodwill and
Other Intangible Assets". In 2002, the Company performed the transitional
impairment evaluation as provided in the said standard. Accordingly, the Company
recognized for the year ended December 31, 2003 a gain in the amount of
$3,516,000 from a negative goodwill that is included as a cumulative effect of a
change in accounting principle.
[18] Reclassifications
Certain amounts in prior financial statements have been reclassified to conform
to the 2005 financial statements presentation.
[19] New Pronouncements need to update
In April 2003, the Financial Accounting Standards Board issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
The statement amends and clarifies accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. This statement is designed to improve
financial reporting such that contracts with comparable characteristics are
accounted for similarly. The statement, which is generally effective for
contracts entered into or modified after June 30, 2003, has been considered for
the Company's derivative instruments.
In December 2004, the FASB issued SFAS No. 123R, "Accounting for Stock-Based
Compensation." SFAS No. 123R establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123R requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS No. 123R, only certain pro forma disclosures of fair
value were required. SFAS No. 123R shall be effective for small business issuers
as of the beginning of the first interim or annual reporting period that begins
after December 15, 2005. The adoption of this new accounting pronouncement is
not expected to have a material impact on the financial statements of the
Company during the calendar year 2006.
In June 2005, the FASB ratified the conclusions of Emerging Issues Task Force
No. 04-05 ( EITF 04-05), "Determining Whether a General Partner or the General
Partners as a Group, Controls a Limited Partnership or Similar Entity When the
Limited Partners Have Certain Rights." EITF 04-05 provides a framework for
determining whether a general partner controls, and should consolidate, a
limited partnership or similar entity. EITF 04-05 is effective for all limited
partnerships beginning January 1, 2006. Under EITF 04-05, the Company will
continue to account for the investment in Isramco Negev 2 Limited Partnership
using the equity method because all major transactions of the partnership, such
as raising equity and obtaining a license, require limited partner approval.
Accordingly, the Company does not expect the adoption of EITF 04-05 will have a
material impact on its financial statements.
F-10
(NOTE B) - Transactions with Affiliates and Related Parties
The Company acts as operator for joint venture with related parties in Israel
engaged in the exploration of oil and gas for which it receives operating fees
equal to the larger of 6% of the actual direct costs or minimum monthly fees of
$6,000.
Operator fees earned and related operator expenses are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004 2003
$ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS
---------------- ---------------- ----------------
Operator fees:
Nir 2 $ -- $ -- $ 559
Gad 1 905 -- --
Med Ashdod Lease 72 -- 56
GAL C -- 72 --
Marine North -- -- --
Marine Center -- 66
Marine South -- 65 72
---------------- ---------------- ----------------
Operator Income $ 977 $ 137 $ 753
================ ================ ================
Operator expenses $ 767 $ 807 $ 795
================ ================ ================
In December 2003, the Company entered into a consulting agreement with Doron
Avraham, the Vice President of the Company. Pursuant to this agreement, the
Company agreed to pay the consultant the sum of $15,000 per month plus expenses
in consideration of the services that he provides to the Company. The term of
the consulting agreement expires in November 2007.
The Company paid Naphtha Israel Petroleum Corp., Ltd. ("Naphtha") $235,000,
$228,000 and $197,000 for the years ended December 31, 2005, 2004 and2003,
respectively, for rent and office, secretarial and computer services. Naphtha is
the sole shareholder of Naphtha Holdings, Ltd., which is the record holder of
48.39% of the Company's outstanding common stock and which may be deemed to be
controlled by Haim Tsuff, the Chairman of the Board of Directors and Chief
Executive Officer of the Company.
The Company paid Equital Ltd. $148,375 consulting fee for Isramco's projects in
US and in Israel .Equital is company controlled by Haim Tsuff, the chairman of
the Board and Chief Executive Officer of the Company.
Isramco Oil and Gas Ltd. ("IOG"), a wholly-owned subsidiary of the Company, is
the general partner of Isramco-Negev 2 Limited Partnership, from which the
Company received management fees and expense reimbursements of $480,000 for each
of the years ended December 31, 2005, 2004 and 2003.
In May 1996, the Company entered into a consulting agreement with Goodrich
Global L.T.D. B.V.I., a company owned and controlled by Haim Tsuff, the Chairman
of the Board of Directors and Chief Executive Officer of the Company. Pursuant
to this consulting agreement, the Company pays the consultant $144,000 per annum
in installments of $12,000 per month plus expenses in consideration of the
services that Mr. Tsuff provides to the Company. In April 1997, the consulting
fees payable under the agreement was increased to $240,000 per annum in
installments of $20,000 per month. The term of the consulting agreement expires
in May 2006. In the event that the Company terminates the agreement, the
consultant will be entitled to receive a lump sum severance payment equal to the
balance of the unpaid consulting fees due for the remaining term of the
agreement.
F-11
In November 1999, the Company entered into a consulting agreement with Worldtech
Inc., a Mauritus company of which Jackob Maimon, the President of the Company,
is a director. Pursuant to this consulting agreement, the Company pays the
consultant $240,000 per annum in installments of $20,000 per month plus expenses
in consideration of the services that he provides to the Company. The term of
the agreement expires in May 2006. In the event that the Company terminates the
agreement, , the consultant shall be entitled to receive a lump sum severance
payment equal to the balance of the unpaid consulting fees due for the remaining
term of the agreement.
In December 2003, the Company awarded bonuses of $125,000 to its Chief Executive
Officer and Chairman of the Board of Directors and $125,000 to its President.
In December 2004, the Company awarded a bonus of $150,000 to its Chief Executive
Officer and Chairman of the Board of Directors.
In December 2005, the Company awarded bonuses of $150,000 to its Chief Executive
Officer and Chairman of the Boards of Directors, $150,000 to its President and
$75,000 to its Vice President.
In December 2004, the Company leased real estate to I.O.C. Israel Oil Company
LTD pursuant to a two-year lease at a monthly rental of $7,000.
On January 1, 2001 the Company retained the services of I.O.C. Israel Oil
Company LTD in connection with the operation of Jay Petroleum and Jay
Management. The Company paid I.O.C. $120,000 for each of the years 2005, 2004
and 2003. I.O.C is a company fully owned by Naphtha Israel Petroleum
Corporation, a company controlled by Haim Tsuff.
(NOTE C) - Investments in Affiliate
Isramco Oil and Gas Ltd. ("IOG"), a wholly-owned subsidiary of the Company, is
the general partner of the Isramco Negev 2 Limited Partnership (the "Limited
Partnership"). The daily management of the Limited Partnership is under the
control of the general partner; however, matters involving the rights of the
Limited Partnership unit holders are subject to supervision of a supervisor,
appointed to supervise the Limited Partnership activities, and in some instances
the approval of the Limited Partnership unit holders. Through IOG, the Company
owns a 0.05% interest in the Limited Partnership, which is accounted for by the
equity method of accounting due to the Company's ability to exercise significant
influence over the Limited Partnership.
At December 31, 2005 and 2004, the Company owned 282,817,359 units (6.65% of the
issued Limited Partnership units) of the Limited Partnership, with a cost of
valued at $4,050,000 and market value of $6,768,000 and $6,498,000,
respectively. This investment is also accounted for under the equity method of
accounting.
F-12
Summarized financial information of the Limited Partnership is as follows
(amounts in thousands) (unaudited):
AS OF DECEMBER 31,
------------------------------
Balance Sheet 2005 2004
-------------- --------------
Current Assets $ 127,661 $ 128,016
Other Assets 1,653 2,908
-------------- --------------
Total Assets 129,314 130,924
============== ==============
Current Liabilities 109 129
Equity $ 129,205 $ 130,795
-------------- --------------
Total Liabilities and equity $ 129,314 $ 130,924
============== ==============
Year Ended December 31,
----------------------------------------------
Statement of Operations 2005 2004 2003
-------------- -------------- --------------
Income $ 15,509 $ 13,080 $ 19,700
Expenses (7,267) (807) (8,500)
-------------- -------------- --------------
Net income $ 8,242 $ 12,273 $ 11,200
============== ============== ==============
At December 31, 2005 and 2004 the Company also owned 7,877,248 of units (24.97%
of the issued Partnership units) of the I.N.O.C Dead Sea Limited Partnership
with a cost of $1,270,000 and value at $2,530,000 and $2,452,000, respectively.
This investment is also accounted for under the equity method of accounting.
F-13
Summarized financial information of I.N.O.C. Dead Sea Limited Partnership is as
follows (amounts in thousands - unaudited):
AS OF DECEMBER 31,
------------------------------
Balance Sheet 2005 2004
-------------- --------------
Current Assets $ 13,277 $ 13,752
Other Assets -- --
-------------- --------------
Total Assets $ 13,277 13,752
============== ==============
Current Liabilities 65 71
Equity $ 13,212 $ 13,681
-------------- --------------
Total Liabilities and Equity $ 13,277 $ 13,752
============== ==============
Year Ended December 31,
----------------------------------------------
Statement of Operations 2005 2004 2003
-------------- -------------- --------------
Income $ 1,495 $ 2,488 $ 2,070
Expenses (262) (300) (1,400)
-------------- -------------- --------------
Net income $ 1,233 $ 2,188 $ 670
============== ============== ==============
(NOTE D) - Marketable Securities
At December 31, 2005 and 2004, the Company had net unrealized gains on
marketable securities (trading and available for sale) of $1,538,000 and
$1,717,000 respectively. Sales of marketable securities resulted in realized
gains of $550,000, $240,000 and $872,000 for the years ended December 31, 2005,
2004 and 2003, respectively.
Trading securities, which are primarily traded on the Tel-Aviv Stock Exchange,
consists of the following:
DECEMBER 31, 2005 DECEMBER 31, 2004
---------------------------- ----------------------------
COST MARKET VALUE COST MARKET VALUE
------------ ------------ ------------ ------------
Debentures and Convertible Debentures $ 3,852,000 $ 3,981,000 $ 2,222,000 $ 3,164,000
Equity securities 1,476,000 1,432,000 2,433,000 1,931,000
Investment Trust Funds 145,000 157,000 1,091,000 1,108,000
------------ ------------ ------------ ------------
$ 5,473,000 $ 5,570,000 $ 5,746,000 $ 6,203,000
============ ============ ============ ============
F-14
Available-for-sale securities, which are primarily traded on the Tel-Aviv Stock
Exchange and on the OTC Bulletin Board, consist of the following:
DECEMBER 31, 2005 DECEMBER 31, 2004
---------------------------- ----------------------------
COST MARKET VALUE COST MARKET VALUE
------------ ------------ ------------ ------------
$ 2,178,000 $ 3,619,000 $ 4,955,000 $ 6,225,000
------------ ------------ ------------ ------------
(NOTE E) - Other assets - Investment in a high-tech company.
The Company sold 203,000 shares of high tech Company, Eyeblaster for $609,000
recognizing a gain of $549,000 in December 2003.
(NOTE F) - Oil and Gas Properties and Equipment
Annual rates of depreciation are as follows:
Office equipment and furniture 7%--20%
Motor vehicles 15%--30%
2005 2004
------------- -------------
Transportation equipment 167,000 142,000
Office equipment 100,000 100,000
------------- -------------
267,000 242,000
------------- -------------
Less accumulated depletion, (174,000) (170,000)
------------- -------------
Equipment, net 93,000 72,000
------------- -------------
A summary of property and equipment is as follows:
2005 2004
------------- -------------
Unproved properties $ 37,000 $ 37,000
Proved Oil and gas properties 10,552,000 7,305,000
Retirement obligation assets 230,000 108,000
Equipment 271,000 242,000
------------- -------------
11,090,000 7,692,000
Less accumulated depletion, depreciation,
amortization and provision for impairment (5,970,000) (4,502,000)
------------- -------------
$ 5,110,000 $ 3,190,000
============= =============
(NOTE G) Derivative Instruments
The Company enters into derivative contracts to provide a measure of stability
in the cash flows associated with the Company's oil and gas production and to
manage exposure to commodity price. The Company's objective is to lock in a
range of oil and gas prices.
Derivative contracts not designated as hedges are "marked to market" at each
period end and the increases or decreases in fair values recorded as other
revenue in the statement of operations. No derivative instruments have been
designated as cash flow hedges. During 2005, 2004 and 2003, the Company had
recorded losses of $671,000, $0 and $0, respectively, related to its derivative
instruments.
The Company uses swap contracts to manage the risk on commodity prices. The
Company's positions are monitored and managed on a daily basis to ensure
compliance with the Company's risk management policy. The swap contracts are
entered into principally with a major financial institution. All derivatives are
recorded at fair value on the consolidated balance sheet with resulting gains
and losses reflected in income. Fair values are derived principally from market
quotes and other independent third-party quotes.
The Company is exposed to credit risk in the event of nonperformance by the
counter party to these contracts, Bank of Oklahoma. However, the Company
periodically assesses their credit worthiness to mitigate this credit risk.
F-15
(NOTE H) Debt
The Company's debt consists of the following as of: DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
Bank loan, repayable in 19 equal quarterly installments
(of principal and interest) over the period beginning
June 20, 2005, interest rate of LIBOR + 1% per annum, due
December 20, 2009 $ 4,267,000 $ 5,002,000
Bank loan, due on March 29, 2005, interest of 3.35% -- 600,000
----------------- -----------------
Total debt 4,267,000 5,602,000
Less: current portion (1,010,000) (733,000)
----------------- -----------------
Long term debt $ 3,257,000 $ 4,869,000
================= =================
For purpose of securing its liability, the Company agreed to the placement of a
lien on the cruise line vessel.
(NOTE I) EPS Computation
SFAS No. 128, "Earnings Per Share", requires a reconciliation of the numerator
(income) and denominator (shares) of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. The company's reconciliation is
as follows:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2005 2004 2003
------------------------- ------------------------- -------------------------
INCOME SHARES INCOME SHARES INCOME SHARES
------------ ---------- ------------ ---------- ------------ ----------
Earnings (loss) - basic $(1,132,000) 2,709,355 $ 993,000 2,639,853 $ 2,256,000 2,639,853
Effect of dilutive securities:
Stock options -- -- -- 898 -- --
Earnings (loss) - diluted $(1,132,000) 2,709,355 $ 993,000 2,640,751 $ 2,256,000 2,639,853
(NOTE J) Stock Options
The 1993 stock option plan (the 1993 Plan) was approved at the annual meeting of
shareholders held in August 1993. At December 31, 2005, 50,000 shares of common
stock were reserved for issuance under the 1993 Plan. Options granted under the
1993 Plan may be either incentive stock options under the Internal Revenue Code
or options which do not qualify as incentive stock options. Options granted
under the 1993 Plan may be exercised for a period of up to ten years from the
grant date. The exercise price for an incentive stock option may not be less
than 100% of the fair market value of the Company's common stock on the date of
grant. All the options granted under the 1993 Plan to date were fully vested on
the date of grant. The administrator of the 1993 Plan may set the exercise price
for a nonqualified stock option at less than 100% of the fair market value of
the Company's common stock on the date of grant.
F-16
A summary of the stock options outstanding under the 1993 Plan is presented
below:
WEIGHTED-AVERAGE
1993 Plan: OPTIONS EXERCISE PRICE
---------------- ----------------
Outstanding at December 31, 2002 29,750 $ 21.00
Granted -- --
Expired (24,250) 23.39
---------------- ----------------
Outstanding at December 31, 2003 5,500 $ 10.45
Granted -- --
Expired (2,500) 16.92
---------------- ----------------
Outstanding at December 31, 2004 3,000 $ 5.06
Expired (3,000) 5.06
---------------- ----------------
Outstanding at December 31, 2005 -- $ --
================ ================
No stock options were granted during 2005, 2004 and 2003. Shares of common stock
reserved for future issuance under the 1993 plane are 20,050 shares.
(NOTE K) -- Income Taxes
Income (loss) before income taxes from U.S. and foreign results of operations is
as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2005 2004 2003
-------------- -------------- --------------
U.S. $ (600,000) $ 1,107,000 $ 1,022,000
Foreign (492,000) 462,000 2,426,000
-------------- -------------- --------------
Total $ (1,092,000) $ 1,569,000 $ 3,448,000
============== ============== ==============
Total income tax expense (benefit) for each of the years ended December 31,
2005, 2004 and 2003 were allocated as follows:
Year Ended December 31,
----------------------------------------------
2005 2004 2003
-------------- -------------- --------------
(RESTATED)
Income taxes (benefit) $ 40,000 $ 576,000 $ 1,188,000
Shareholders' equity for
unrealized holding gains
(losses) on marketable
securities 212,000 260,000 80,000
-------------- -------------- --------------
Total $ 252,000 $ 836,000 $ 1,268,000
============== ============== ==============
Income tax expense (benefit) attributable to income from continuing operations
consist of:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2005 2004 2003
-------------- -------------- --------------
Current:
State $ 25,000 $ 24,000 $ 17,000
Federal -- -- 1,171,000
Foreign 370,000 -- --
Deferred federal (355,000) 552,000 --
-------------- -------------- --------------
Total $ 40,000 $ 576,000 $ 1,188,000
============== ============== ==============
F-17
The deferred tax assets (liabilities) as of December 31, 2005 and 2004 are as
follows:
2005 2004
------------- -------------
(RESTATED)
Net unrealized depreciation (appreciation) of marketable $ (523,000) $ (589,000)
securities
Investments in partnerships (2,510,000) (2,780,000)
Basis differences in property and equipment (708,000) (254,000)
Losses carry-forward 456,000 154,000
Foreign tax credit carry-forward 370,000 --
Other timing differences 16,000 --
------------- -------------
Total $ (2,899,000) $ (3,469,000)
============= =============
Reconciliation between the actual income tax expense (benefit) and income taxes
computed by applying the U.S. Federal income tax rate to income before income
taxes is as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2005 2004 2003
-------------- -------------- --------------
(RESTATED)
Computed at U.S. statutory rates (35.0)% 35.0% 35.0%
State income taxes, net of
federal benefit 2.3% 1.1% 0.5%
Foreign income taxes 33.9% -- --
Other 2.5% 0.6% (1.05)%
3.7% 36.7% 34.45%
(NOTE L) -- Concentrations of Credit Risk
Financial instruments, which potentially expose the Company to concentrations of
credit risk, consist primarily of trade accounts receivable. The Company's
customer base includes several of the major United States oil and gas operating
and production companies. Although the Company is directly affected by the
well-being of the oil and gas production industry, management does not believe a
significant credit risk existed at December 31, 2005.
The Company maintains deposits in banks, which may exceed the amount of federal
deposit insurance available. Management periodically assesses the financial
condition of the institutions and believes that any possible deposit loss is
minimal.
A significant portion of the Company's cash and cash equivalents is invested in
marketable securities. Substantially all marketable securities owned by the
Company are held by banks in Israel and Switzerland.
(NOTE M) -- Luxury Cruise Liner
In March 2004, the Company purchased a luxury cruise liner for aggregate
consideration of $8,050,000.
In March 2004, the Company borrowed approximately $7.5 million from commercial
banks to finance the purchase of the vessel. The loans are secured by a lien on
the vessel, marketable securities and a Company guarantee. As of December 31,
2005, approximately $4.3 million in principal of the loans remain outstanding.
Interest on the loan accrues at the per annum rate of LIBOR+1% per annum.
Title to the vessel is held by Magic 1 Cruise Line Corp., a wholly owned
subsidiary of the Company ("Magic").
The Company leased the vessel to a European-based tour operator for the period
from April 21, 2005 through October 27, 2005 at a daily rate of $8,000.
F-18
(NOTE N) -- Commitments and Contingencies
COMMITMENTS:
The Company leases corporate office facilities under a three-year operating
lease expiring in October 2006 at a monthly rental of $2,400 with escalation to
$2,500 on November 2005. The Company is also responsible for its pro rate share
of the operating expenses that exceed a certain threshold.
At December 31, 2005, future minimum lease payments under non-cancelable
operating leases were approximately $26,000. Future annual minimum lease
payments are follows:
Year Ending
December 31,
------------
2006 $ 26,000
------------
$ 26,000
============
CONTINGENCIES:
The Company is involved in various other legal proceedings arising in the normal
course of business. In the opinion of management, the Company's ultimate
liability, if any, in these pending actions would not have a material adverse
effect on the financial position, operating results or liquidity of the Company.
(NOTE O) - Geographical Segment Information
The Company's operations for 2005 involve two industry segments - the
exploration, development production and transportation of oil and natural gas
and holding and leasing its cruise line vessel. Prior to 2004, the Company
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, terrorism and other political risks, risks of increased
taxes and governmental royalties, renegotiation of contracts with government
entities and change in laws and policies governing operations of foreign-based
companies.
The Company's oil and gas business is subject to operating risks associated with
the exploration, and production of oil and gas, including blowouts, pollution
and acts of nature that could result in damage to oil and gas wells, production
facilities of formations. In additions, oil and gas prices have fluctuated
substantially in recent years as a result of events, which were outside of the
Company's control. The Company does not directly operate the cruise line vessel.
The Company leases the vessel to third party cruise line operators. This segment
of the Company's business is subject to many risks all of which cannot be
presently anticipated, including losses resulting from unexpected repairs and
maintenance and competition.
F-19
GEOGRAPHIC SEGMENTS
-------------------
(IN THOUSANDS)
--------------
TOTAL
OIL AND GAS CONSOLIDATED
UNITED STATES ISRAEL AND OTHER VESSEL TOTAL
------------- ---------- ------------- ---------- --------------
2005
Sales and other operating revenue $ 3,319 $ 1,915 $ 5,234 $ 1,520 $ 6,754
Costs and operating expenses (3,233) (897) (4,130) (2,179) (6,309)
------------- ---------- ------------- ---------- --------------
Operating profit (loss) 86 1,018 1,104 (659) 445
Interest income 293
Interest expense (205)
Gain on marketable securities and net gain
in investee 1,212
General corporate expenses (2,313)
Other income (524)
Income taxes (40)
Net loss (1,132)
Identifiable assets at December 31, 2005 $ 5,236 $ 68 $ 5,304 $ 8,479 $ 13,783
Cash and corporate assets 25,049
Total assets at December 31, 2005 38,615
2004
Sales and other operating revenue $ 3,174 $ 909 $ 4,083 $ 2,034 $ 6,117
Costs and operating expenses (2,309) (816) (3,125) (2,364) (5,489)
------------- ---------- ------------- ---------- --------------
Operating profit (loss) 865 93 958 (330) 628
Interest income 729
Interest expense (168)
General corporate expenses (1,717)
Gain on marketable securities and
net income in investee 1,605
Other income 492
Income taxes (576)
Net loss 993
Identifiable assets at December 31, 2004 $ 3,135 $ 59 $ 3,194 $ 8,590 $ 11,784
Cash and corporate assets 29,574
Total assets at December 31, 2004 41,358
2003
Sales and other operating revenue $ 3,582 $ 1,549 $ 5,131 $ -- $ 5,131
Costs and operating expenses 1,960 (820) (2,780) (150) (2,930)
------------- ---------- ------------- ---------- --------------
Operating profit (loss) $ 1,622 $ 729 $ 2,351 $ (150) $ 2,201
Interest income and other corporate revenues 760
Net gain in investee and gain on marketable
securities 1,098
General corporate expenses (2,012)
Internet expense (52)
Capital gain 549
Other income 475
Accretion expenses (43)
Income taxes (1,188)
Net income before cumulative effect 2,256
Identifiable assets at December 31, 2003 $ 2,987 $ 81 $ 3,068 $ -- $ 3,068
Net property and equipment
Cash and corporate assets 29,627
Total assets at December 31, 2003 32,614
F-20
(NOTE P) -- Asset Retirement Obligations
The Company recognizes the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. The associated asset
retirement costs are capitalized as part of the carrying amount of the asset.
The fair value of a liability for an asset retirement obligation is the amount
for which that liability could be settled in a current transaction between
willing parties. The Company uses the expected cash flow approach for
calculating asset retirement obligations. The liability is discounted using the
credit-adjusted risk-free interest rate in effect when the liability is
initially recognized. The changes in the liability for an asset retirement
obligation due to the passage of time are measured by applying an interest
method of allocation to the amount of the liability at the beginning of the
period. This amount is recognized as an increase in the carrying amount of the
liability and as accretion expense classified as an operating item in the
statement of operations.
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 requires entities to record a
liability for asset retirement obligations at fair value in the period in which
it is incurred and a corresponding increase in the carrying amount of the
related long-lived asset. As of January 1, 2003, the Company recorded asset
retirement costs of $458,581 and asset retirement obligations of $650,240.
The cumulative effect of the change in accounting principles as of January 1,
2003 was $263,955, after taxes of $39,158.
The reconciliation of the beginning and ending asset retirement obligations for
the years ended December 31, 2005 and 2004 is as follows (in thousands):
2005 2004
---------- ----------
Asset retirement obligations, as of beginning of the year $ 314 $ 766
Liabilities incurred 7 8
Liabilities settled -- --
Accretion expense 19 18
Revisions in estimated cash flows 3 (478)
---------- ----------
Asset retirement obligations, as of end of year $ 343 $ 314
========== ==========
(NOTE Q) -- Common Stock
In March 2005, the Company issued 38,919 shares of its common stock to each of
Haim Tsuff, Chairman of the Board of Directors and Chief Executive Officer of
the Company, and Jackob Maimon, President of the Company. The shares were issued
upon the exercise of options to purchase 69,995 shares common stock at an
exercise price of $4.28 per share granted to each of Mr. Tsuff and Mr. Maimon on
March 25, 2000. The options were exercised pursuant to "cashless" exercise
provisions under which the number of shares of common stock issued upon exercise
was reduced by the number of shares, valued at the closing price of the common
stock on the Nasdaq Small Cap Market on the trading day immediately prior to
exercise, equal to the aggregate exercise price of the option.
(NOTE R) -- Subsequent Events
(i) In January 2006, the Company entered into a settlement agreement and mutual
release with the defendant parties named therein relating to the lawsuit
initiated by the Company against the defendants in February 2004 in the Superior
Court of California, County of Los Angeles, alleging breach of contract and tort
claims in connection with an agreement between the Company and the defendants to
jointly purchase and develop certain parcels of real estate outside Los Angeles.
The agreement provides for the settlement of the action with no finding or
admission of fault on the part of any party and, pursuant thereto, certain of
the defendants paid to the Company $2,500,000 as reimbursement for costs and
expenses incurred by the Company in connection with its
F-21
pursuit of the real estate investment opportunity that was the subject of the
action. Under the agreement, the Company and the defendants mutually released
one another from any claims or causes of actions arising out of or relating to
the action, any claim that could have been asserted in the action, and any and
all claims and/or allegations relating to the real estate (and the development
thereof) that was the subject of the action.
(ii) In February 2006, the Company entered into a settlement agreement and
mutual release with the defendant parties named therein relating to the lawsuit
initiated by the Company against the defendants in 2004 in the District Court of
Harris County, Texas, alleging a tort claim in connection with an agreement
between the Company and a third party pursuant to which the Company purchased
all of the outstanding capital stock of a company that owns oil and gas assets
in Illinois. Under the agreement the defendants paid the Company $550,000 and
the Company filed a motion to dismiss its claims against the defendants with
prejudice.
As a result of the payment received under the settlements agreement, the Company
anticipates recorded a net gain of approximately $2,500,000 (after payment of
legal fees and other expenses) during 2006.
(NOTE S) -- Restatement
The Company has restated its 2004 financial statements from the amounts
previously reported. The restatements include adjustments to the calculation of
the deferred tax in 2004 related to temporary differences that originated prior
to 2003. Following is a summary of the restatement adjustments:
AS REPORTED ADJUSTMENTS AS RESTATED
2004 SUMMARY BALANCE SHEET
Total assets $ 41,358 -- $ 41,358
Current Liabilities 2,670 -- 2,670
Assets retirement obligation 314 -- 314
Deferred tax obligation 2,989 480 3,469
Current portion of long-term bank loan 4,869 -- 4,869
Total Long term Liabilities 8,172 480 8,652
Total Liabilities 10,842 480 11,322
Total Shareholder's Equity 30,516 (480) 30,036
AS REPORTED ADJUSTMENTS AS RESTATED
2004 SUMMARY STATEMENT OF OPERATIONS
Total Revenues $ 8,943 $ -- $ 8,943
Total Expenses 7,374 -- 7,374
Income before taxes 1,569 -- 1,569
Income taxes (1,589) 1,013 (576)
Net Income $ (20) $ 1,013 $ 993
Earning Per Share $ -- $ 0.38 $ 0.38
(NOTE T) -- Supplementary Oil and Gas Information (Unaudited)
The following supplemental information regarding the oil and gas activities of
the Company for 2005, 2004 and 2003 is presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and SFAS No.
69, "Disclosures About Oil and Gas Producing Activities." Capitalized costs
relating to oil and gas activities and costs incurred in oil and gas property
acquisition, exploration and development activities for each year are shown
below.
F-22
CAPITALIZED COST OF OIL AND GAS PRODUCING ACTIVITIES (IN THOUSANDS)
2005 2004 2003
-------- -------- -------------------
UNITED UNITED UNITED CONGO
STATES STATES STATES
-------- -------- -------- --------
Unproved properties not being amortized $ -- $ -- $ -- $ 150
Proved property being amortized 10,566 7,427 6,352 --
Accumulated depreciation, depletion
amortization and impairment (5,347) (4,316) (3,338) (150)
-------- -------- -------- --------
Net capitalized costs $ 5,219 $ 3,111 $ 3,014 $ --
======== ======== ======== ========
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION, AND DEVELOPMENT
ACTIVITIES (IN THOUSANDS)
2005 2004 2003
-------- -------- -------------------
UNITED UNITED UNITED CONGO
STATES STATES STATES
-------- -------- -------- --------
Property acquisition costs--proved and
unproved properties
Exploration costs $ 2,557 $ -- $ 260 $ --
Development costs 110 -- 22 54
582 1,098 393 --
(Israel exploration costs in 2005-$110,
2004-$0 and 2003-$88)
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (IN THOUSANDS)
2005 2004 2003
-------- -------- -------------------
UNITED UNITED UNITED CONGO
STATES STATES STATES
-------- -------- -------- --------
Oil and gas sales $ 3,319 $ 3,174 $ 3,439 $ --
Lease operating expense and severance taxes (1,457) (1,149) (872) --
Depreciation, depletion, amortization
and provision for impairment 1,397 (1,181) (1,088) (150)
Exploration costs (160) -- (22) (54)
Income (Loss) before tax provision -------- -------- -------- --------
Provision for income taxes 305 843 1,457 (204)
-- -- -- 71
Results of operations -------- -------- -------- --------
$ 305 $ 843 $ 1,457 $ (133)
======== ======== ======== ========
F-23
OIL AND GAS RESERVES
Oil and gas proved reserves cannot be measured exactly. The engineers
interpreting the available data, as well as price and other economic factor base
reserve estimates on many factors related to reservoir performance, which
require evaluation. The reliability of these estimates at any point in time
depends on both the quality and quantity of the technical and economic data, the
production performance of the reservoirs as well as extensive engineering
judgment. Consequently, reserve estimates are subject to revision, as additional
data become available during the producing life of a reservoir. When a
commercial reservoir is discovered, proven reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define theextent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. The evolution of technology may also result in the application of
improved recovery techniques such as supplemental or enhanced recovery projects,
or both, which have the potential to increase reserves beyond those envisioned
during the early years of a reservoir's producing life.
The following table represents the Company's net interest in estimated
quantities of proved developed and undeveloped reserves of crude oil,
condensate, natural gas liquids and natural gas and changes in such quantities
at December 31, 2005, 2004 and 2003, and for the years then ended. Net proved
reserves are the estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserve volumes that
can be expected to be recovered through existing wells with existing equipment
and operating methods. Proved undeveloped reserves are proved reserve volumes
that are expected to be recovered from new wells on undrilled acreage or from
existing wells where a significant expenditure is required for recompilation.
All of the Company's proved reserves are in the United States. The Company's oil
and gas reserves are priced at $58.80 per barrel and $9.30 per Mcf,
respectively, at December 31, 2005.
OIL BBLS GAS MCF
---------- ----------
December 31, 2002 161,933 3,919,474
Revisions of previous estimates 55,261 (317,234)
Acquisition of minerals in place -- --
Sales of minerals in place -- --
Production (19,294) (599,000)
December 31, 2003 197,900 3,003,240
========== ==========
Revisions of previous estimates (40,031) (522,242)
Acquisition of minerals in place
Sales of minerals in place -- --
Production (17,789) (469,558)
December 31, 2004 140,080 2,011,440
========== ==========
Revisions of previous estimates (20,269) (118,402)
Acquisition of minerals in place 1,280 106,670
Sales of minerals in place -- --
Production (15,723) (355,008)
December 31, 2005 105,368 1,644,700
========== ==========
The Company's proved developed reserves are as follows:
DEVELOPED UNDEVELOPED
---------------------------- ----------------------------
OIL BBLS GAS MCF OIL BBLS GAS MCF
---------- ---------- ---------- ----------
December 31, 2005 105,368 1,644,700 20,652 484,101
December 31, 2004 140,080 2,011,440 32,880 334,100
December 31, 2003 197,900 3,003,240 -- 516,440
December 31, 2002 161,933 3,919,474 -- 138,050
F-24
Interest in proved reserves of unconsolidated affiliates
OIL BBLS GAS MCF
---------- ----------
December 31, 2005 1,979,000
December 31, 2004 -- 1,979,000
December 31, 2003 -- 1,979,000
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOW
The standardized measure of discounted future net cash flows relating to the
Company's proved oil and gas reserves is calculated and presented in accordance
with Statement of Financial Accounting Standards No. 69. Accordingly, future
cash inflows were determined by applying year-end oil and gas prices to the
Company's estimated share of the future production from proved oil and gas
reserves.
Future production and development costs were computed by applying year-end costs
to future years. Applying year-end statutory tax rates to the estimated net
future cash flows derived future income taxes. A prescribed 10% discount factor
was applied to the future net cash flows.
In the Company's opinion, this standardized measure is not a representative
measure of fair market value. The standardized measure is intended only to
assist financial statement users in making comparisons among companies.
2005 2004 2003
-------------- -------------- --------------
Future cash inflows $ 20,859,000 $ 16,308,760 $ 21,705,930
Future development costs (158,000) (73,800) (160,780)
Future production costs (4,547,000) (6,691,180) (7,453,960)
-------------- -------------- --------------
Future net cash flows 16,154,000 9,548,750 14,091,190
Future income tax expenses (1,965,000) (3,426,575) (4,791,004)
Annual 10% discount rate (5,666,000) (300,190) (4,650,009)
-------------- -------------- --------------
Standardized measure discounted future net cash flows $ 8,523,000 $ 6,001,810 $ 4,650,177
============== ============== ==============
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The principal sources of change in the standardized measure of discounted future
net cash flows for the years ended December 31, 2005, 2004 and 2003 were as
follows:
2005 2004 2003
-------------- -------------- --------------
Beginning of the year $ 6,001,810 $ 4,650,177 $ 5,875,253
Sales and transfers of oil and gas produced, net of production costs (1,862,000) (2,025,000) (2,567,000)
Net changes in prices and production costs 12,533,000 2,475,000 --
Net changes in income taxes 1,461,575 1,364,429 113,710
Changes in estimated future development costs, net of current
development costs (84,200) 86,980 29,097
Acquisition of minerals in place 3,656,740 1,074,485 --
Revision of previous estimates and other (7,818,115) (5,974,080) 631,911
Changes in discount (5,365,810) 4,349,819 567,206
-------------- -------------- --------------
End of year $ 8,523,000 $ 6,001,810 4,650,177
============== ============== ==============
F-25
(NOTE U) -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
-------------
(amounts in thousands, except per share data)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
2005 2005 2005 2005 2005
---- ---- ---- ---- ----
Total Revenues $ 2,201 $ 1,621 $ 3,301 $ 612 $ 7,735
Net Income (loss) before taxes $ 460 $ (752) $ 1,342 $ (2,142) $ (1,092)
Cumulative effect of an accounting change $ -- $ -- $ -- $ -- $ --
Net Income (loss) $ 304 $ (596) $ 992 $ (1,832) $ (1,132)
Earnings (loss) per Common Share
-Basic and Diluted $ 0.11 $ (0.22) $ 0.36 $ (0.67) $ (0.42)
QUARTER ENDED
-------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
2004 2004 2004 2004 2004
---- ---- ---- ---- ----
Total Revenues $ 1,893 $ 1,526 $ 3,122 $ 2,402 $ 8,943
Net Income (loss) before taxes $ 915 $ 273 $ 588 $ (207) $ 1,569
Cumulative effect of an accounting change $ -- $ -- $ -- $ -- $ --
Net Income (loss) $ 845 $ -- $ (595) $ 743 $ 993
Earnings (loss) per Common Share
-Basic and Diluted $ 0.32 $ 0.00 $ (0.23) $ 0.29 $ 0.38
QUARTER ENDED
-------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
2003 2003 2003 2003 2003
---- ---- ---- ---- ----
Total Revenues $ 1,974 $ 2,942 $ 1,928 $ 2,041 $ 8,885
Net Income (loss) before taxes $ 852 $ 1,906 $ 826 $ 124 $ 3,708
Cumulative effect of an accounting change $ (264) $ -- $ -- $ -- $ (264)
Net Income $ 588 $ 1,906 $ 808 $ (1,046) $ 2,256
Earnings (loss) per Common Share
-Basic and Diluted $ 0.22 $ 0.72 $ 0.31 $ (0.40) $ 0.85
F-26