UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
[ ] 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 $0.001
(Title of Class)
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. |X| Yes |_| 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 an accelerated filer (as defined in Rule 12b-2 of the Act). | | Yes |X| No
The aggregate market value of registrant's common stock at March 29, 2004 was $9.67 million. Such market value was calculated by using the closing price of such common stock as of such date reported on the NASDAQ market.
As of March 30, 2004, the Registrant had outstanding 2,639,853 shares of $0.01 par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for in Items 10, 11, 12, 13 and 14 in Part III will be contained in the issuer's definitive proxy statement which the registrant intends to file within 120 days after the end of the registrant's fiscal year ended December 31, 2003 and such information is incorporated herein by reference.
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. DESCRIPTION OF BUSINESS
GENERAL
Since its formation in 1982, Isramco, Inc. ("Isramco" or the "Company") has been active in the exploration 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 an operator of one. In addition the Company holds a participation interest in an off-shore license and also serves as the operator. 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, 2003 are approximately 136,000 net barrels of proved developed producing oil and 2,785 MMCFs of proved developed producing natural gas. See "Summary of Exploration Efforts in United States".
THE OPERATOR OF THE ISRAELI LEASES/LICENSES
Under a joint operating agreement entered into among the participants in the off-shore leases and licenses (collectively, the "JOA"), each party participates in all the costs, expenses and obligations incurred in relation to a contract area in the same proportion as its rights and interests in such contract area. Under the JOA, the Operator carries out all the operations contemplated in the JOA, in the framework of approved Work Programs and within the limitations of approved budgets (AFE's). The Operator may be removed for cause, by notice in writing given by two or more of the other parties representing at least 65% of the total interests in a contract area.
The Company is currently the Operator of the Med Ashdod Lease and the 3-year Marine South license granted in January 2002. As the Operator, the Company is responsible for directing the oil exploration and drilling activities of each Venture through its Branch Office in Petach Tikva, Israel. With [eight full-time employees], outside consultants and subcontractors, the Company carries out the operations of each Venture within the framework of approved work programs
and budgets and pursuant to the terms of a JOA. 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.
As operator, the Company charges each venture participant for all costs incurred in connection with the exploration and drilling activities conducted by each 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 each License/Lease. During the year ended December 31, 2003, the Company was paid a total of $753,000 as operator fees.
GENERAL PARTNER FOR THE ISRAMCO NEGEV 2 LIMITED PARTNERSHIP
In 1989 the Company formed in Israel the Isramco Negev 2 Limited
Partnership (the "Limited Partnership") to acquire from the Company a
substantial portion of its working interest in the Negev 2 Venture, the venture
which the Company and related parties established to hold the rights to the
certain oil and gas properties. In exchange for 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
created Isramco Oil and Gas Ltd. ("IOG"), a wholly-owned subsidiary to act as
the General Partner for the Limited Partnership and formed Isramco Management
(1988) Ltd., a wholly-owned subsidiary to act as the Limited Partner and the
nominee of Limited Partnership units held by public investors in Israel.
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. The control and management of the Limited Partnership vests with the General Partner, however, matters involving certain rights of the Limited Partnership unit holders are subject to the supervision 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 has been appointed as Supervisors.
The Company currently receives through IOG a management fee of $40,000 per month from the Limited Partnership for office space, management and other services. It has been significant to the Company that the Limited Partnership (in part through the efforts of the Company and others), has been able to raise monies from the public in Israel to fund the Limited Partnership's share of the work programs for the Petroleum Assets in connection with the continuation of oil and gas exploration activities in Israel and to preserve the existence of the Company's overriding royalties. The Company currently holds 6.65% of the issued Partnership units and IOG holds an additional 0.008% of the Partnership units. On December 31, 2003, the Limited Partnership had cash, cash equivalents, certificates of deposit and marketable securities with a value of approximately $114 million.
Additionally, IOG (as the general partner) 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. Concurrently with the purchase of the real estate, the Company entered into a lease agreement with a third party to lease the property for a 24-month period at a monthly rent of $7,000.
In March 2004, the Company completed the purchase of a luxury cruise liner for aggregate consideration of $8,050,000. The Vessel, a Bahamas flagged ship, contains 270 passenger cabins spread out over nine decks. The Company has secured commercial bank loans for approximately $7.5 million of the purchase price, to be secured by a lien on the Vessel, marketable securities and a Company guarantee. The Company is currently in discussions with several luxury cruise operators for the purpose of commercially leasing the Vessel as a luxury cruise liner. No assurance can be given that the Company will be able to conclude any leasing arrangement on commercially acceptable terms.
In addition, the Company holds certain equity interests in a high-tech venture. See "Management's Discussion and Analysis of Financial Condition--- Liquidity and Capital Resources."
OIL AND GAS VENTURES AND PETROLEUM ASSETS
OIL AND GAS VENTURES AND PETROLEUM ASSETS LOCATED IN ISRAEL
The table below sets forth the Working Interests and Petroleum Assets of the Company and all affiliated and non-affiliated participants in (i) the Ventures, (ii) the Petroleum Assets, (iii) the total acreage of each Petroleum Asset, and (iv) the expiration dates of each of the licenses as of December 31, 2003. This information pertains only to Petroleum Assets located in Israel. The Company also holds Overriding Royalties in the Petroleum Assets. See "Table of Overriding Royalties".
TABLE OF PETROLEUM ASSETS (WORKING INTEREST)
OIL AND GAS VENTURES (1)(3)
(% Interest of 100%)
Name of Participant Med Yavne Lease* Med Ashdod Lease**(2) The Company 0.4584 0.3625 Affiliates Isramco Negev 2, Limited 32.411 19.1370 Partnership I.N.O.C. Dead Sea -- 5.0525 Limited Partnership Naphtha 1.8033 1.8411 Naphtha Explorations 2.2826 1.8411 Limited Partnership JOEL 2.8807 -- Equital 2.1639 -- Non-affiliated entities Delek Drilling LP 8.000 21.7658 GRANIT - SONOL LP -- 35.000 BG International Ltd. 35.000 -- Middle East Energy (MEE) LP 13.200 13.200 DOR - Gas LP 1.800 1.8000 Total 100.000 100.000 Area (acres) 13,100 61,800 Expiration Date 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) 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 licenses/Leases.
(2) 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) All of the Petroleum Assets are subject to a 12.5% Overriding Royalty due to the Government of Israel under the Petroleum Law.
Name of Participant Marine South Company 1 Isramco Negev 2 59 Limited Partnership Modein Energy Limited 10 Partnership Naphtha Explorations 15 Limited Partnership I.N.O.C. Dead Sea 15 Limited Partnership Total 100 Acres 35,000 Expiration Date 1/15/05 |
OVERRIDING ROYALTIES HELD BY THE COMPANY
The Company holds overriding royalties in certain petroleum assets. Additionally, in connection with the BG Transaction, the Company is entitled to receive from each member of the Isramco Group overriding royalties equal to 2% of each such member's rights to any oil/gas produced within the existing offshore licenses or within any new licenses or to any oil or gas rights which may be obtained in lieu of existing offshore licenses. 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 Petroleum Licenses
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) In a prospectus of the Delek Limited Partnership dated January 26, 1994 it is stated that the Interest which the Delek L.P, received from Delek and DOEX is free from any encumbrances except that Isramco, Inc. 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. Summary Description of the Ventures, the Petroleum Assets, Related Work Obligations and Exploration Efforts.
The Company has no 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 a Petroleum Asset to which an Overriding Royalty exists, the Company could lose its interest in such Overriding Royalty. See Glossary for definition of "Payout ".
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 estimated, 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, and 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. 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 extraction platform (at a distance of 7 Miles) and from there via a transportation pipe to the coast, may be economically feasible.
The Company's participation share 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% interest therein.
Two prospects within the southern sector have been identified and recommended for drilling, one of which is for gas and the second for gas or oil. The operator has examined this report and, based thereon, has established the priorities for continued exploration. The operator presented its recommendation to the lease participants in October 2002 that drilling be commenced for oil (Nizanim 1).
As no decision has yet been taken, the operator has determined to postpone
the drilling of Nitzanim and in lieu of such drilling, has presented an
alternative work program as follows: (i) During 2003 - drill a confirmation gas
well (Nir-2) in the Nir field, with a total budget of approximately $10 million;
(ii) D 2004 - drill Nizanim - 1 to total depth of 5300 meters (17,400 feet),
with a total budget of approximately $35 million.
At a partners meeting held on April 3, 2003, certain of the partners announced their readiness to participate in the confirmation well. On April 30, 2003, the operator, on behalf of Isramco Negev 2 Limited Partnership, one of the partners, issued to the partners a sole risk notice regarding the drilling of the confirmation gas well (Nir-2). As certain of the partners declined to participate in the well, the participation of Isramco Negev 2 Limited partnership in the well increased to 56.17805%.
The Nir - 2 confirmation well was spud on September 1, 2003. On October 8, 2003, production tests commenced, in accordance with the recommendation given by the operator's consultants. On November 19, 2003 the operator presented the partners with an analysis of the results of the production test, which indicated that it is not economically feasible to produce gas from the "Nir 2" well . The total cost of the "Nir 2" well amounted to $10 million. On February 15, 2004 the operator notified the partners that based on the data analyzed, production of gas from the "Nir 1" well is not economically feasible.
On February 15, 2004 the operator presented the partners with two drilling prospect: a) Nizanim 1 well b) Yam-3 well to a total depth of 5700 meter (18,700 feet), with a total budget of $40 million. As of the filing of this report on Form 10-K, the Company did not receive notice of the partners' decision.
MARINE CENTER LICENSE
On September 21, 1999, the Company was awarded a preliminary permit, Marine Center covering an area of 194 square kilometers. The permit included a preferential right to obtain a license. In December 2000, Israeli Petroleum Commissioner issued a license in respect of the area covered by the permit (hereinafter, the "Marine Center License"), which license continues in effect through December 3, 2003. The Company served as the operator of the Marine Center License and held a 1% participation interest therein. The remaining interests were held by affiliated entities.
In December 2000, Romi 1 well was drilled. Following analysis of the logs, it was decided to plug and abandon the well. In December 2003 the Marine Center License expired.
MARINE SOUTH LICENSE
In January 2000, the Company was awarded an offshore preliminary permit known as Marine South, covering an area of approximately 142 square kilometers offshore Israel known as "Marine South" and an additional permit known as "Marine South B", covering an area of approximately 40 square kilometers offshore Israel. The permits include a preferential right to obtain a license. In January 2002, Israeli Petroleum Commissioner issued a license in respect of the area covered by the Marine South permit (hereinafter, the "Marine South License"), which license continues in effect through January 15, 2005 and is subject to (i) the performance of a seismic 3D survey and the processing of the results thereof no later than February 15, 2004, (ii) the preparation of an oil drilling prospect by June 15, 2004 and (iii) the drilling of a well no later than December 15, 2004. The Company serves as operator of the License and holds a 1% participation interest in the License; the remaining participation interests are held by affiliated entities.
As there were no seismic vessels in the general vicinity, a seismic survey was not conducted by February 15, 2004 and, consequently, in February 2004, the Petroleum Commissioner requested that the Company relinquish the license. The Company is currently appealing this decision.
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, 2003 are approximately 136,000 net barrels of proved developed producing oil and 2,785 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.
In March 2003 gas production from Hoover 4 well located in Oklahoma commenced. In June 2003 the Company purchased a 55% working Interest in 13 non producing wells located in west Texas for an aggregate purchase price of approximately $264,000. Certain of the wells were re-entered for purposes of commercial production and are currently producing. The Company's share of the re-entry costs is approximately $125,000. The Company anticipates re-entering the remaining wells.
In addition, the Company purchased a 30% interest in a currently non-producing well for aggregate purchase price of approximately $28,000. To date, the Company expended approximately $100,000 to commence commercial production. The well is currently producing.
WRITE-OFF/EXPIRATION OF INTERESTS IN THE CONGO
The Company formerly held oil and gas properties in the Congo. These consisted of the Marine III Exploration Permit and the Marine 9 Exploration Permit. The Company held a 25% participation interest in the Marine III Exploration Permit (through its affiliate Naphtha Congo Ltd). The Company's participation interest in the Marine 9 Exploration Permit was comprised of 5% (through Naphtha Congo (1995) Limited Partnership, an affiliate); the remaining participants in the Marine 9 License are recognized well-known oil companies.
In March 2003, Naphtha Congo, the operator of the Marine III Exploration Permit, decided to discontinue the planned work program principally because it did not believe that the continuation of such program was commercially reasonable. Based on management's belief the Company wrote-off during the year, 2003 the amount of $150,000 representing the Company's investment in Marine III Permit. In June 2003 the Marin III Permit expired.
In April 2003, Naphtha Congo received notice from the Congolese Ministry of oil that the republic of the Congo has decided to retrieve the rights of Naphtha Congo Ltd in Marine III, providing as a reason Naphtha Congo's non-performance of the required work program. Under applicable law, the Congolese Government is entitled to request reimbursement in the amount of funds not expended on the required work program. Naphtha Congo received a letter dated May 16, 2003 from the Congolese Government official supervising oil and gas exploration demanding that Naphtha Congo remit an unspecified amount equivalent to the aggregate work obligations that were not undertaken and a penalty of $294,000.
In December 2003 the Marine 9 Exploration Permit expired.
EMPLOYEES
As of March 29, 2004, the Company had eight 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.
OIL AND GAS DRILLING IS A SPECULATIVE ACTIVITY AND IS 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.
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 ADVERSELY 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'S NON-OIL AND GAS PROPERTIES MAY PROVE RISKY.
The Company completed the purchase in March 2004 of a luxury cruise liner for approximately $8 million. The Company also owns real estate properties in the state of Israel. See "Description of Business." While the Company believes that it will be able to exploit commercial opportunities associated with leasing the luxury liner and leasing or developing the real estate, no assurance can be given that the Company will be able to conclude any such agreeements on commercially acceptable terms.
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 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.
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.
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 has a lease for office premises (approximately 2,015 square feet) at 11767 Katy Freeway, Houston, TX 77079 expiring in October 2006 with a monthly rental of $2,400. 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. In 2003, the Company paid Naphtha an aggregate of $197,000 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.
ITEM 3. LEGAL PROCEEDINGS
The Company, together with Naphtha Congo Ltd., an Israeli and related entity ("Naphtha Congo"), were served in October 2002 in District Court of Harris county, Texas, with summons and complaint by Romfor International Ltd., a contractor ("Contractor") who provided drilling services in the Tilapia permit in the Congo, alleging breach of contract and damages of approximately $1.5 million and moving for court ordered arbitration. The Contractor and Naphtha Congo entered into a drilling agreement in October 2000 with respect to the Tilapia 1 well. The Company indirectly held, through Naphtha Congo, a 50% participation interest in the Tilapia 1 well.
The Company filed its answer on October 18, 2002, wherein it denied all allegations made and denied that it is a proper party to the suit and moved to dismiss the complaint. On March 20, 2003 , the court granted the Company's motion to compel arbitration against Naphtha Congo, Subsequently, the contractor moved for a new trial and, on July 8, 2003, the court denied the contractor's motion for a new trial. On November 3, 2003 the arbitrator's award was forwarded to Naphtha Congo. According the Arbitrator's award, Naphtha Congo is obliged to pay the contractor the amount of $693,523 as funds due under the drilling contract and in addition, interest at the rate of 18% per annum.
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 February 10, 2004, the Company initiated a lawsuit in the Superior Court of California, County of Los Angeles, against several named defendants (collectively, the "Defendants"), 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. In its lawsuit, the Company is seeking damages in excess of $50 million. Responses are not due until April 9, 2004.
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 29, 2004 was approximately 565, not including an undetermined number of persons who hold their stock in street name. The Company's stock trades under the symbol ISRL.
The high and low daily closing sales prices as reported on the National Association of Securities Dealers Automated Quotations System National Market System are shown in the table below for each quarter during 2003 and 2002.
Common Stock
Quarter Ended High Low
2003
March 31 $4.43 $2.35
June 30 $4.60 $2.78
September 30 $4.60 $3.66
December 31 $7.74 $3.95
2002
March 31 $4.25 $3.60
June 30 $4.20 $3.25
September 30 $3.50 $2.23
December 31 $3.15 $1.89
|
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.
(ii) The following table sets forth certain required information relating to the shares of Common Stock issuable on an aggregated basis under the Company's 1993 Stock Option Plan.
EQUITY COMPENSATION PLAN INFORMATION
Plan Category Number of Weighted- Number of
securities to average securities
be issued exercise price of remaining
upon outstanding available for
exercise of options. future
outstanding issuance.
options.
Equity compensation plans approved by
security holders 29,750 $21.00 20,250
Equity compensation plans not approved
by security holders 139,990 $ 4.28 --
--------- -------- ---------
Total
169,740 $ 7.21 20,250
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)
2003 2002 2001 2000 1999
Operator's fees $753 $249 $234 $1,265 $1,744
Oil and Gas Sales $3,439 $2,423 $3,068 $2,080 $1,107
Interest income $760 $738 $541 $1,277 $1,011
Office services to related parties
and other $939 $913 $857 $1,018 $881
Equity in earnings (losses) of investees $1,098 $(440) $(177) $106 $108
Reinbursement of exploration cost $-- $-- $-- $--
Gain from sale of oil and gas properties
and equipment -- -- $4 $6 $17
Capital Gai $549 -- -- -- --
Gain (Loss) on marketable securities $872 $(189) $(199) $(9) $1,264
Other $475 $49 $-- $-- $13
Realized gain on investment in affiliate $-- $-- $-- $-- $100
Gain on BG Transaction -- -- $-- $3,626 $--
Impairment of oil & gas properties $617 -- $-- $2,550 $--
Impairment of Investment -- -- $-- $400 $--
Exploration costs $165 $1,747 $204 $2,956 $154
Lease operating expenses and severance
Taxes $872 $844 $905 $630 $469
Depreciation, depletion and
Amortization $621 $642 $564 $443 $609
Operator expense $795 $791 $696 $634 $514
General and administrative expenses $2,012 $1,422 $2,048 $1,740 $1,061
Interest Expense $52 $210 $-- $55 $157
Accretion Expence $43 -- -- -- --
|
Income tax expense (benefit) $1,188 $114 $50 $(356) $298 Net Income (loss) before cumulative effect $2,520 $(1,799) $(139) $317 $2,983 Cumulative effect of change in accounting principles $(264) $3,516 -- -- -- Basic and diluted earnings (loss) per share for: Net income (loss) before cumulative effect $0.95 $(0.68) $(0.05) $0.12 $1.13 Cumulative effect of accounting change, net $(0.10) 1.33 -- -- -- Net income (loss) $0.85 $ 0.65 $(0.05) $0.12 $1.13 Weighted average number of common shares outstanding - basic 2,639,853 2,639,853 2,639,853 2,639,853 2,639,853 Weighted average number of common shares outstanding - diluted 2,639,853 2,639,853 2,639,853 2,706,731 2,639,853 |
December 31,
2003 2002 2001 2000 1999
Balance Sheet Data
Total assets $32,614 $28,667 $26,615 $27,281 $30,713
Total liabilities $ 2,733 $ 2,175 $ 1,160 $ 1,449 $ 4,537
Shareholders' equity $29,881 $26,492 $25,455 $25,832 $26,176
|
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.
OVERVIEW
Isramco, Inc., a Delaware company, is active in the exploration of oil and gas in Israel and the United States. The Company acts as an operator of certain leases and licenses and also hold participation interests in certain other interests. The Company also holds certain non-oil and gas properties. See "Business".
CRITICAL ACCOUNTING POLICIES
In response to the SEC's Release No. 33-8040 "CAUTIONARY ADVICE EGARDING DISCLOSURE AND CRITICAL ACCOUNTING POLICIES", the Company identified the accounting principles which it believes are most critical to the reported financial status by considering accounting policies that involve the most complex of subjective decisions or assesment.
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than is temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investment that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future.
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase net income in the period such determination was made.
The Company does not participate in, nor has it created, any off-balance sheet special purpose entities or other off-balance sheet financing. In addition, the Company does not enter into any derivative financial instruments.
The Company records a liability for asset retirement obligation at fair value in the period in which it is incurred and a corresponding increase in the carrying amount of the related long live assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations primarily from cash generated by operations. The Company's operating activities provided net cash of $1,288,000, $1,372,000 and $1,667,000 in 2003, 2002 and 2001, 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 $6,645,000 and $3,618,000 at December 31, 2003 and 2002, respectively. The increase in working capital is primarily attributable to increased oil and gas prices and value of marketable securities.
Net cash used in investing activities in 2003 was $476,000 compared to $4,554,000 in 2002. The cash used in 2002 was primarily attributable to purchases of marketable securities, capitalization of drilling cost expended during 2002 and purchase in June 2002 of non oil and gas producing real estate located in Israel at an aggregate cost of $1,887,000. The real estate is located in an area that is currently zoned for agricultural purposes. Concurrently with the purchase of the real estate, the Company entered into a lease agreement with an unaffiliated third party to let the entirety of such property for a 24 month period at a monthly rent of $7,000. The cash used in investing activities in 2003 was primarily attributable to purchase of oil and gas properties.
Capital expenditures for property and equipment were $676,000 and $1,617,000 in 2003 and 2002, respectively. Capital expenditures are primarily attributable to purchase of oil and gas properties.
In June 2000, the Company established IsramTec, Inc., a Delaware corporation and wholly-owned subsidiary (hereinafter, "IsramTec") for purposes primarily of identifying and investing in promising high-tech ventures. In July 2000, IsramTec invested approximately $400,000 in a high tech company. In 2001 and 2002, the Company invested, by way of convertible loans, in such entity additional aggregate amounts of $171,000 and $50,000 respectively. In December 2001, the Company determined the original investment to be impaired and, accordingly, charged $400,000 to impairment expenses. In 2002, the entire amount invested in such entity was converted into equity capital therein. In December 2003, the Company sold part of its equity interests for aggregate consideration of approximately $609,000.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002.
The Company reported net income before cumulative effect of $2,520,000 (income of $0.95 per share) in 2003 compared to a net loss before cumulative effect $1,799,000 (loss of $ 0.68 per share) in 2002. The increase in the net income is primarily attributable to an increase in oil and gas price in 2003 and due to the gain in marketable securities and net income of investees.
Set forth below is a break-down of these results.
United States
Oil and Gas Volume and Revenues (in thousands)
2003 2002
Oil Volume Sold (Bbl) 19 21
Gas Volume Sold (MCF) 600 720
Oil Sales ($) 542 470
Gas Sales ($) 2,897 1,953
Average Unit Price
Oil ($/Bbl) * 28.09 22.54
Gas ($/MCF) ** 4.82 2.71
|
* Bbl - Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet
THE OFFSHORE LICENSES (ISRAEL)
In each of 2003 and 2002, the Company expended approximately $88,243 and $27,000, respectively, in respect of the Offshore Licenses.
OIL AND GAS EXPLORATION COSTS
The Company expended in 2003 approximately $165,000 in oil and gas exploration costs as compared to approximately $1,747,000 expended in 2002. The exploration cost in 2003 attributable to the investment in Tilapia (Congo) and in respect of the Israeli offshore wells (Nir 2 and Nir 2). The oil and gas exploration costs in 2002 is primarily attributable to the unsuccessful drilling of the Read well in Texas and the unsuccessful drilling in the Marine 9 permit (the Congo).
OPERATOR'S FEES
In 2003 the Company earned $ 753,000 in operator fee compared to $ 249,000 in 2002. The increase is due to the drilling of Nir 2 well.
OIL AND GAS REVENUES
In 2003 and 2002 the Company had oil and gas revenues of $3,439,000 and $2,423,000, respectively. The increase is due mainly to the increase in the oil and gas price during 2003.
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 $872,000 and $844,000 for 2003 and 2002, respectively.
INTEREST AND DIVIDEND INCOME
Interest income during the year ended December 31, 2003 was $760,000 compared to 738,000 for the year ended December 31, 2002. The increase in interest income is primarily attributable to interest receivable on marketable securities (Debentures).
GAIN ON MARKETABLE SECURITIES
In 2003, the Company recognized net realized and unrealized gain on marketable securities of $872,000 compared to net realized and unrealized losses on marketable securities of $189,000 in 2002.
Increases or decreases in the gains and losses from marketable securities are dependent on the market prices in general and the composition of the portfolio of the Company.
OPERATOR EXPENSES
In 2003 the Company expended $795,000 in respect of the operator expenses compare to $791,000 in 2002.
GENERAL AND ADMINISTRATIVE EXPENSES
In 2003, the Company incurred $2,012,000 as general and administrative expenses compared to $1,422,000 incurred in 2002. The relatively higher amount in 2003 is primarily attributable to bonuses awarded to senior officers and increase in legal fees.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001.
The Company reported net loss before cumulative effect of $1,799,000 (loss of $0.68 per share) in 2002 compared to a net loss of $139,000 (loss of $0.05 per share) in 2001. The increase in net loss in 2002 compared to 2001 is primarily attributable to an increase in exploration costs from $204,000 in 2001 to $1,747,000 in 2002 and to a decrease in gas prices in 2002.
Set forth below is a break-down of these results.
United States
Oil and Gas Volume and Revenues (in thousands)
2002 2001
Oil Volume Sold (Bbl) 21 20
Gas Volume Sold (MCF) 720 643
Oil Sales ($) 470 477
Gas Sales ($) 1,953 2,591
Average Unit Price
Oil ($/Bbl) * 22.54 23.59
Gas ($/MCF) ** 2.71 4.03
|
* Bbl - Barrel Equivalent to 42 U.S. Gallons ** MCF - 1,000 Cubic Feet
THE OFFSHORE LICENSES (ISRAEL)
In each of 2002 and 2001, the Company expended approximately $27,000 and $5,000, respectively, in respect of the Offshore Licenses.
OIL AND GAS EXPLORATION COSTS
The Company expended in 2002 approximately $1,747,000 in oil and gas exploration costs as compared to approximately $204,000 expended in 2001. The increase is oil and gas exploration costs is primarily attributable to the unsuccessful drilling in 2002 of the Read well in Texas and the unsuccessful drilling in the Marine 9 permit (the Congo).
OPERATOR'S FEES
In 2002 the Company earned $ 249,000 in operator fees, compared to $ 234,000 in 2001.
OIL AND GAS REVENUES
In 2002 and 2001 the Company had oil and gas revenues of $2,423,000 and $3,068,000, respectively. The decrease is due mainly to the decrease in the gas price.
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 $844,000 and $905,000 for 2002 and 2001, respectively. The relatively higher amounts in 2001 in lease operating expenses and severance taxes is primarily due to the work-overs performed in connection with producing wells in 2001.
INTEREST AND DIVIDEND INCOME
Interest income during the year ended December 31, 2002 was $738,000 compared to $541,000 for the year ended December 31, 2001. The increase in interest income is primarily attributable to interest receivable on marketable securities (Debentures).
GAIN ON MARKETABLE SECURITIES
In 2002, the Company recognized net realized and unrealized losses on marketable securities of $189,000 compared to net realized and unrealized losses on marketable securities of $199,000 in 2001.
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 2002 the Company expended $791,000 in respect of the operator expenses compare to $696,000 in 2001. The increase in operator expense is primarily attributable to increased office lease payments.
GENERAL AND ADMINISTRATIVE EXPENSES
In 2002, the Company incurred $1,422,000 as general and administrative expenses compared to $2,048,000 incurred in 2001. The relatively higher amount in 2001 is primarily attributable to bonuses awarded to senior officers.
CONTRACTUAL OBLIGATIONS
The Company leases office facilities in Texas and in Israel and certain equipment pursuant to non-cancellable operating lease agreements. Future minimum lease payments pursuant to these leases as of December 31, 2003 were as follows (in thousands).
Total 2004 2005 2006 2007 2008 Thereafter
----- ---- ---- ---- ---- ---- ----------
Operating Leases:
Texas: 83,000 28,000 29,000 26,000 -- -- --
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, and subsequently revised the Interpretation in December 2003 (FIN 46R). This Interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities, which have certain characteristics. As revised, FIN 46R is now generally effective for financial statements for interim or annual periods ending on or after March 15, 2004. We have no identified any variable interest entities. In the event a variable interest entity is identified, we do not expect the requirements of FIN 46R to have a material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity," ("SFAS 150") which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 for public companies. The adoption of SFAS No 150 did not have a material impact on our consolidated financial statements.
In July 2003, an issue was bought before the Financial Accounting Standards Board regarding whether or not sontract-based oil and gas mineral rights held by lease or contact ("mineral rights") should be recorded or disclosed as intangible assets. The issue presents a view that these mineral rights are classified assests as defined in SFAS No. 141, "Business Combinations," and therefore, should be classified separately on the balance sheet as intangible assets. SFAS No. 141 and SFAS No. 142, "Goodwill and Other Intangible Assets," became effective for transactions subsquent to June 30, 2001, with the disclosure requirments of SFAS No. 142 required as of January 1, 2002. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method and that intangible assets be disaggregated and reported separately from goodwill SFAS No. 142 established new accounting guidelines for both finite lived intangible assets and indefinite lived intangible assets. Under the statement, intangible assets should be separately reported on the face of the balance sheet and accompanied by disclosure in the notes to financial statements. SFAS No. 142 does not apply to accounting utilized by the oil and gas industry as prescribed by SFAS No. 19, and is silent about whether ot not its disclosure provisions apply to oil and gas mineral rights to an upcoming agenda, which may result in a change in how Isramco classifies these assets.
Should such a change be required the amounts related to business combinations and major asset purchases that would be classified as "intangible mineral interest" are estimated to be $4,617,333 as of December 31, 2003 and $4,434,828 as December 31, 2002.
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.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
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 Chief 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 Chief Financial Officer concluded that our disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING . During the quarter ended December 31, 2003, 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.
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, 2002 and such information is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Company has adopted a code of conduct and ethics applicable to all of senior executive officers and senior financial officers, including the Chief Executive Officer. A copy of such code of conduct and ethics is filed as Exhibit 14.1 to this Annual Report on Form 10-K.
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.
"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.
"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.
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, undared, 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.
23
|
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.
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 *
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, 2003 *
|
* Attached hereto as an exhibit
(b) Reports on Form 8-K
Isramco filed a report on Form 8-K on December 9, 2003 announcing the resignation of its Vice President and the appointment of Mr. Doron Avrahan as its new Vice President.
(c) Financial Statements
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,
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
Date: March 30, 2004
|
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 March 30, 2004 Jackob Maimon /s/ Eyal Gibor Director March 30, 2004 Eyal Gibor /s/ Max Pridgeon Director March 30, 2004 Max Pridgeon /s/ Donald D. Lovell Director March 30, 2004 Donald D. Lovell |
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Reports F-1
Consolidated Balance Sheets at December 31, 2003 and 2002 F-2
Consolidated Statements of Operations for the years ended December 31,
2003,2002,and 2001 F-3
Consolidated Statements of changes in Shareholders' Equity for the years
ended December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001 F-5
Notes to Consolidated Financial Statements F-6
|
Independent Auditors' Report
To the Shareholders and Board of Directors of Isramco, Inc. and Subsidiaries
We have audited the consolidated balance sheets of Isramco, Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period 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 assets of $ 11,249,799 and $ 12,494,523 as of December 31, 2003 and 2002, respectively, and total revenues of $ 3,422,000 and $1,728,732 for the years then ended, respectively. 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 audits in accordance with auditing standards generally accepted in the 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 and reports of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Isramco, Inc. and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period 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. Also discussed in Note A, the Company adopted the provisions of Atatement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets in 2002".
/s/ MANN FRANKFORT STEIN & LIPP CPAs, LLP Houston, Texas March 5, 2004 |
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share information)
DECEMBER 31
-----------------------------
2003 2002
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,429 $1,617
Marketable securities, at market 4,064 3,177
Accounts receivable - trade 503 558
Accounts receivable - other 609 --
Prepaid FIT expenses 407 315
Prepaid expenses and other current assets 197 126
---------- ----------
TOTAL CURRENT ASSETS 8,209 5,793
Property and equipment, net (successful efforts
method for oil and gas properties) 3,264 3,505
Real Estate 1,887 1,887
Marketable securities, at market 8,572 7,733
Investment in affiliates 10,520 8,641
Deferred tax asset -- 887
Other 162 221
---------- ----------
TOTAL ASSETS $32,614 $28,667
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $798 $2,175
---------- ----------
TOTAL CURRENT LIABILITIES 798 2,175
---------- ----------
Asset retirement obligations 766 --
Deferred tax liability 1,169 --
SHAREHOLDERS' EQUITY
Common stock $ 0.0l par value; authorized 7,500,000 shares; 27 27
issued 2,669,120 shares; outstanding 2,639,853 shares
Additional paid-in capital 26,240 26,240
Retained earnings (accumulated deficit) 3,189 933
Accumulated other comprehensive income (loss) 589 (544)
Treasury stock, 29,267 shares at cost (164) (164)
---------- ----------
Total shareholders' equity 29,881 26,492
---------- ----------
Total liabilities and shareholders' equity $ 32,614 $28,667
========== ==========
See notes to the consolidated financial statements.
|
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share information)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
---------- ---------- ----------
Revenues and other income : --- ---
Operator fees from related party $ 753 $249 $ 234
Oil and gas sales 3,439 2,423 3,068
Interest income 760 738 541
Office services
To related parties 635 773 754
To others 304 140 103
Gain on sale of investment 549
Gain from sale oil and gas properties and
Equipment --- --- 4
Gain on marketable securities 872 --- ---
Equity in net income of investees 1,098 --- ---
Other 475 49 ---
---------- ---------- ----------
Total revenues and other income 8,885 4,372 4,704
---------- ---------- ----------
Expenses :
Interest expense 52 210 ---
Accretion expense 43 --- ---
Depreciation, depletion and amortization 621 642 564
Lease operation expense and severance taxes 872 844 905
Exploration costs 165 1,747 204
Operator expense 795 791 696
General and administrative
To related parties 317 120 240
To others 1,695 1,302 1,808
Loss on sale of marketable securities --- 189 199
Equity in net loss of investees --- 440 177
Impairment of oil and gas assets 617 --- ---
---------- ---------- ----------
Total expenses 5,177 6,285 4,793
---------- ---------- ----------
Income (loss) before income taxes 3,708 (1,913) (89)
Income taxes (benefit) 1,188 114 50
---------- ---------- ----------
Net income (loss) before cumulative effect of change in accounting principle 2,520 (1,799) (139)
Cumulative effect of change in accounting principle, net (264) 3,516 ---
---------- ---------- ----------
Net income (loss) $ 2,256 $1,717 $(139)
========== ========== ==========
Earnings (loss) per share
Basic and diluted earnings (loss) per share for:
Net income (loss) before cumulative effect $0.95 $(0.68) $(0.05)
Cumulative effect of accounting change, net $ (0.10) $ 1.33 $ ---
---------- ---------- ----------
Net income (loss) $ 0.85 $ 0.65 $(0.05)
========== ========== ==========
Weighted average number of common shares
outstanding-basic 2,639,853 2,639,853 2,639,853
========== ========== ==========
Weighted average number of common shares outstanding -diluted 2,639,853 2,639,853 2,639,853
========== ========== ==========
See notes to the consolidated financial statements.
|
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
COMMON STOCK
--------------------------
ACCUMULATED
ADDITIONAL OTHER
NUMBER PAID-IN COMPREHENSIVE
OF SHARES AMOUNT CAPITAL INCOME (LOSS)
------------ ------------ ------------ -------------
$ IN THOUSANDS, EXCEPT SHARE AMOUNTS
Balances at December 31, 2000 2,669,120 27 26,240 374
Comprehensive income:
Net Income - - - -
Net unrealized loss on available for sale marketable
securities, net of taxes - - - (238)
Total comprehensive income
------------ ------------ ------------ -------------
Balances at December 31, 2001 2,669,120 27 26,240 136
Comprehensive income:
Net Income - - - -
Net unrealized loss on available for sale marketable
securities, net of taxes - - - (243)
Net realized gain (loss) on foreign exchange rates, net of taxes - - - (437)
Total comprehensive income
------------ ------------ ------------ -------------
Balances at December 31, 2002 2,669,120 $27 $26,240 $(544)
Comprehensive income:
Net Income
Net unrealized gain on available for sale marketable - - - -
securities, net of taxes - - - 524
Net realized gain (loss) on foreign exchange rates, net of taxes - - - 609
Total comprehensive income
------------ ------------ ------------ -------------
Balances at December 31, 2003 2,669,120 $27 $26,240 $589
============ ============ ============ =============
(CONTINUED)
RETAINED
EARNINGS TOTAL
(ACCUMULATED TREASURY SHAREHOLDERS'
DEFICIT) STOCK EQUITY
------------ ------------ -------------
Balances at December 31, 2000 (645) (164) 25,832
Comprehensive income:
Net Income (139) - (139)
Net unrealized loss on available for sale marketable
securities, net of taxes - - (238)
-------------
Total comprehensive income (377)
------------ ------------ -------------
Balances at December 31, 2001 (784) (164) 25,455
Comprehensive income:
Net Income 1,717 - 1,717
Net unrealized loss on available for sale marketable
securities, net of taxes - - (243)
Net realized gain (loss) on foreign exchange rates, net of taxes - - (437)
-------------
Total comprehensive income 1,037
------------ ------------ -------------
Balances at December 31, 2002 $ 933 $ (164) $26,492
Comprehensive income:
Net Income 2,256 2,256
Net unrealized gain on available for sale marketable
securities, net of taxes - - 524
Net realized gain (loss) on foreign exchange rates, net of taxes - - 609
-------------
Total comprehensive income 3,389
------------ ------------ -------------
Balances at December 31, 2003 $2,929 $(164) $29,881
============ ============ =============
|
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 2,256 $1,717 $(139)
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation, depletion, amortization and provision for impairment 1,238 642 564
Accretion of asset retirement obligation 43
Dry hole costs 99 1,642 -
Loss (gain) on marketable securities (872) 189 199
Gain on sale of investment (549) - -
Gain on sale of oil properties and equipment - (4)
Equity in net loss (income) of investees (1,098) 440 177
Cumulative effect of an accounting change 264 (3,516) -
Employee stock awards - - -
Deferred taxes 1,532 195 -
Changes in assets and liabilities:
Accounts receivables 53 (103) 376
Prepaid expenses and other current assets (163) (329) 468
Other - - (166)
Accounts payable and accrued expenses (1,377) 1,015 (289)
Marketable securities-trading (138) (519) 481
---------- ---------- ----------
Net cash provided by operating activities 1,288 1,372 1,667
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (676) (1,617) (2,276)
Proceeds from sale of oil and gas properties and equipment - 10 3
Purchase of real estate - (1,887) -
Purchase of marketable securities (3,070) (491) (6,706)
Proceeds from BG transaction --- - -
Proceeds from sale of marketable securities 3,270 - -
Purchase of convertible promissory note - (50) -
Purchase of investment in affiliates - - (1,114)
---------- ---------- ----------
Net cash used in investing activities (476) (4,035) (9,612)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt - - -
---------- ---------- ----------
Net cash used in financing activities - - -
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 812 (2,663) (8,426)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,617 4,280 12,706
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR 2,429 $1,617 $4,280
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR INTEREST $ - $ - $ -
========== ========== ==========
CASH PAID DURING THE YEAR FOR TAXES $ - $ - $ 25
========== ========== ==========
|
See notes to the consolidated financial statements.
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE A) -- GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] The Company
Isramco Inc. and subsidiaries (the Company) is primarily engaged in the acquisition, exploration, operation and development of oil and gas properties. As of December 31, 2003, the Company has oil and gas interest in Texas, Louisiana, Oklahoma, Wyoming, New Mexico, the Republic of Congo, Africa, and
approximately a 0.5% working interest in various properties located in Israel. In addition the company purchased real estate in Israel in 2002.
[2] Consolidation
The consolidated financial statements include the accounts of the Company, its direct and indirect wholly-owned subsidiaries Isramco Oil and Gas Ltd. (Oil and Gas) and Isramco Resources Inc., a British Virgin Islands company, its wholly owned subsidiary, Jay Petroleum, L.L.C., (Jay), Jay Management L.L.C (Jay Management), IsramTec Inc. (IsramTec) and a wholly-owned foreign subsidiary. Intercompany 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 properties. Under this method of accounting, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether the well has found proved reserves. If an exploratory well has not found proved reserves, the costs of the well are charged to expense. The costs of development wells are capitalized whether successful or unsuccessful. Geological and geophysical costs and the costs of carrying and retaining undeveloped properties are expensed as incurred. Management estimates that the salvage value of lease and well equipment will approximately offset the future liability for plugging and abandonment of the related wells. Accordingly, no accrual for such costs has been recorded.
In July 2003, an issue was brought before the Financial Accounting Standards Board regarding whether or not contract-based oil and gas mineral rights held by lease or contract ("mineral rights") should be recorded or disclosed as intangible assets. The issue presents a view that these mineral rights are intangible assets as defined in SFAS No. 141, "Business Combinations," and therefore, should be classified separately on the balance sheet as intangible assets. SFAS No. 141 and SFAS No. 142, "Goodwill and Other Intangible Assets," became effective for transactions subsequent to June 30, 2001, with the disclosure requirements of SFAS No. 142 required as of January 1, 2002. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method and that intangible assets be disaggregated and reported separately from goodwill. SFAS No. 142 established new accounting guidelines for both finite lived intangible assets and indefinite lived tangible assets. Under the statement, intangible assets should be separately reported on the face of the balance sheet and accompanied by disclosure in the notes to financial statements. SFAS No. 142 does not apply to accounting utilized by the oil and gas industry as prescribed by SFAS No. 19, and is silent about whether or not its disclosure provisions apply to oil and gas companies. The Emerging Issues Task Force (EITF) has added the treatment of oil and gas mineral rights to an upcoming agenda, which may result in a change in how Isramco classifies theses assets.
Should such a change be required, the amounts related to business combinations and major asset purchases that would be classified as "intangible mineral interest" are estimated to be $4,617,333 as of December 31, 2003 and $4,434,828 December 31, 2002.
Depletion and depreciation of capitalized costs for producing oil and gas properties is provided using the units-of-production method based upon proved reserves. Depreciation, depletion, amortization and provision for impairment expense for the Company's oil and gas properties amounted to approximately $1,179,000, $2,589,000 and $519,000 for 2003, 2002 and 2001, respectively.
In accordance with SFAS 143, the Company has recorded an asset retirement obligation in connection with the plugging and abandonment of its oil and gas properties. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset.
[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 accounts for its investments in affiliate entities in which it has the ability to exercise significant influence over operating and financial policies using the equity method.
[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 have been remeasured 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 remeasured based on the historical dollar cost of the underlying assets. The net effects of currency translations were not material for 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 years ended December 31, 2003, 2002 and 2001, 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 period to be benefitted, generally from three to five years.
[12] 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 determines the Company's reserve estimates. 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, 2003, approximately 18% of the Company's oil and gas reserves were attributable to non-producing reserves. Accordingly, the Company's estimates are expected to change as future information becomes available.
As mandated under SFAS No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of, 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 will materially change in the forthcoming year.
[13] Impairment of Long-Lived Assets
The Company adopted SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" (SFAS No. 144) as from 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 2003 the company recorded impairment charge 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 2003, the Company recorded an impairment of $ 288,000 relating to its unproved properties. There are no such impairments recognized during 2002 and 2001.
[14] 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 which, 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.
[15] Oil and Gas Revenues
The Company records oil and gas revenues following the entitlement method of accounting for production, in which any excess amounts received above the Company's share is treated as a liability. If less than the Company's share is received, the underproduction is recorded as an asset. The Company's imbalance position was not significant in terms of volumes or values at December 2003 and 2002.
[16] 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 are recorded at December 31, 2003 and 2002.
[17] 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, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE-AN
AMENDMENT OF FASB STATEMENT NO. 123, 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 contimue 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 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,
-------------------------
2003 2002 2001
------- ------- -------
Net income (loss) reported..................................... $2,256 $1,717 $(139)
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)........................................... 2,256 1,717 (139)
Net Loss Per Share.............................................
Basic-as reported......................................... $ .85 $ .65 $(.05)
Basic-pro forma........................................... .85 .65 (.05)
Diluted-as reported....................................... .85 .65 (.05)
Diluted-pro forma......................................... .85 .65 (.05)
|
[18] 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 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.
(19) Reclassifications
Certain amounts in prior financial statements have been reclassed to conform to the 2003 financial statements presentation.
[19] New Pronouncements
In May 2002, the FASB issued Statement of Financial Accounting Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".. This Statement rescinds FASB Statements No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of Statement No. 4 and FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 is effective for fiscal years beginning after May 15, 2002. The Company's management does not expect the adoption of SFAS 145 to have a material effect on the Company's financial condition and results of operations.
In June 2002, the Financial Accounting Standard Board (FASB) issued SFAS 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES which nullifies EITF 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER EXIT COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). The principal difference between Statement 146 and Issue 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS 146 is required to be adopted for exit or disposal activities initiated after December 31, 2002.
On December 31, 2002, the FASB issued Accounting for Stock-Based Compensation
("SFAS No. 148") amending FASB No. 123, to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. The three methods provided in SFAS No 148 include (1) the
prospective method which is the method currently provided for in SFAS No. 123,
(2) the retroactive restatement method which would allow companies to restate
all periods presented and (3) the modified prospective method which would allow
companies to present the recognition provisions of all outstanding stock based
employee compensation instruments as of the beginning of the fiscal year of
adoption. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No.
123 to require disclosure in the summary of significant accounting policies of
the effects of an entity's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual
and interim financial statements. FASB No. 148 does not amend SFAS No. 123 to
require companies to account for their employee stock-based awards using the
fair value method. However, the disclosure provisions are required for all
companies with stock-based employee compensation, regardless of whether they
utilize the fair method of accounting described in SFAS No. 123 or the intrinsic
value method described in APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Company does not intend on adopting the fair value method of
accounting for stock-based compensation of SFAS123 and accordingly SFAS 148 is
not expected to have a material impact on the Company's reported results of
operations or financial position in 2003.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, and subsequently revised the Interpretation in December 2003 (FIN 46R). This Interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities, which have certain characteristics. As revised, FIN 46R is now generally effective for financial statements for interim or annual periods ending on or after March 15, 2004. We have no identified any variable interest entities. In the event a variable interest entity is identified, we do not expect the requirements of FIN 46R to have a material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity," ("SFAS 150") which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 for public companies. The adoption of SFAS No 150 did not have a material impact on our consolidated financial statements.
(NOTE B) - Transactions with Affiliates and Related Parties
The Company acts as operator for joint ventures 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 per license.
Operator fees earned and related operator expenses are as follows:
2003 2002 2001
-------------- -------------- --------------
$ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS
-------------- -------------- --------------
Operator fees:
Nir 2 559 - -
Med Ashdod Lease 56 55 54
GAL C - 27 -
Marine North - 23 72
Marine Center 66 72 72
Marine South 72 72 36
--- ---
-------------- -------------- --------------
753 249 234
============== ============== ==============
Operator expenses 795 791 696
============== ============== ==============
|
In August 1997 the Company entered into a Consulting Agreement with Romulas Investment Ltd. (which Agreement has been assigned to Remarkable Holdings Ltd.), a company which is wholly owned and controlled by Daniel Avner, the Vice President of the Company. Pursuant to this Agreement, the Company agreed to pay the Consultant the sum of $7,500 per month plus expenses. In February 1999, the Consulting Agreement was amended to increase the monthly compensation payable thereunder to $15,000 and pursuant to the amendment, the reimbursement of expenses was disallowed. The Consulting Agreement was extended until July 2004. On December 9, 2003, following the resignations of Daniel Avner from his position as Vice President, the Consulting Agreement was terminated.
On December 9, 2003, the company entered into a Consulting Agreement with Doron Avraham, the new Vice President of the Company. Pursuant to this Agreement the Company agreed to pay the Consultant the sum of $ 15,000 Per month, in addition to reimbursement of all business expenses. The Consulting Agreement is in effect through November 30, 2004.
The Company paid Naphtha $ 6,500 per month for rent, office, secretarial and computer services from July 1998 through April 30, 2000 , $9,125 per month from May 1, 2000 and $15,760 per month from January 1, 2002 for such services. The company paid Naphtha a sum of $197,000 for the year 2003 and a sum of $ 192,000 for 2002. A subsidiary of the Company is the general partner of Isramco-Negev 2 Limited Partnership from which it received management fees and expense reimbursements of $480,000 for each of the years ended December 31, 2003, 2002.
In May of 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 Corporation. Pursuant to this Consulting Agreement which had a term of two years, the Company agreed to pay the sum of $144,000 per annum in installments of $12,000 per month, in addition to reimbursing all reasonable business expenses incurred during the term in connection with the performance of services on behalf of the Company. In April 1997 the consulting compensation was increased to $240,000 per annum in installments of $20,000 per month and in December 1997 the term was extended to May 31,2001. The Consulting Agreement was extended in 2001 and is in effect through May 31, 2004. In the event that the Company shall terminate the services provided by Mr. Tsuff, he shall be entitled to receive a lump sum severance payment equal to the balance of the unpaid consulting fee due for the remaining term of the agreement.
In November of 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, which is in effect through May 31, 2004, the Company agreed to pay the sum of $240,000 per annum in installments of $20,000 per month, in addition to reimbursing all reasonable business expenses incurred during the term in connection with the performance of services on behalf of the Company. In the event that the Company terminates the services provided by Mr. Maimon, he shall be entitled to receive a lump sum severance payment equal to the balance of the unpaid consulting fee due for the remaining term of the agreement.
In November, 2001 the Company awarded bonuses of $125,000 to the chairman of the board, $125,000 to the president and $75,000 to the vice president.
In December 2003 the company awarded bonuses of $125,000 to the chaiman of the board and $125,000 to the president.
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 LLC and Jay Management Company LLC (a wholly owned subsidiaries of the Company). The Company agreed to pay I.O.C. the sum of $240,000 for the year 2001 and $120,000 for each of the years 2002 and 2003.
(NOTE C) - Investments in Affiliate
A wholly owned subsidiary of the Company is the General Partner in the Isramco Negev 2 Limited Partnership. The daily management of the Limited Partnership vests with the General Partner, however, matters involving the rights of
the Limited Partnership unit holders, are subject to supervision of the Supervisor, appointed to supervise the Limited Partnership activities, and in some instances the approval of the Limited Partnership unit holders. The Company's General Partner's interest in the Limited Partnership is 0.05% which is accounted for by the equity method of accounting due to its ability to exercise significant influence.
At December 31, 2003 and 2002, the Company also owned 283,171,196 units (6.65%of the issued Partnership units) of the Isramco Negev 2 Limited Partnership with a cost of $5,018,000. This investment is also accounted for under the equity method of accounting.
Summarized financial information of Isramco Negev 2 Limited Partnership is as follows (amounts in thousands):
Balance Sheet 2003 2002
--------- ---------
Current Assets $114,900 $ 95,000
Other Assets 1,700 4,000
--------- ---------
Total Assets $116,600 $ 99,000
========= =========
Current Liabilities $ 100 -
Equity $116,500 99,000
--------- ---------
Total liabilities and equity $116,600 $ 99,000
========= =========
Year Ended December 31,
-------------------------------------
Statement of Operations 2003 2002 2001
--------- --------- ---------
Income $19,700 $ 1,000 $ 8,000
Expenses $ 8,500 3,000 7,000
--------- --------- ---------
Net income (loss) $11,200 $(2,000) $ 1,000
========= ========= =========
|
At December 31, 2003 and 2002 the Company also owned 7,877,248 units (24.72% of the issued Partnership units) of the I.N.O.C Dead Sea Limited Partnership with a cost of $ 1,270,067. This investment is also accounted for under the equity method of accounting.
Summarized financial information of I.N.O.C. Dead Sea Limited Partnership is as follows (amount in thousand - unaudited):
Balance Sheet 2003 2002
--------- ---------
Current Assets $11,330 $ 9,300
Other Assets - 600
--------- ---------
Total Assets $11,330 $ 9,900
========= =========
Current Liabilities $ 60 -
Equity $11,270 $ 9,900
--------- ---------
Total liabilities and equity $11,330 $ 9,900
========= =========
|
Year Ended December 31,
-------------------------------------
Statement of Operations 2003 2002 2001
--------- --------- ---------
Income $ 2,070 $ 680 $ 620
Expenses $ 1,400 1,900 1,058
--------- --------- ---------
Net income (loss) $ 670 $(1,220) $ (438)
========= ========= =========
|
(NOTE D) - Marketable Securities
At December 31, 2003, 2002 and 2001, the Company had net unrealized gains (losses) on marketable securities of $524,000, $ (371,000) and (179,000), respectively.
Trading securities, which are primarily traded on the Tel-Aviv Stock Exchange, consists of the following:
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
COST MARKET VALUE COST MARKET VALUE
---- ------------ ---- ------------
Debentures and Convertible Debentures 2,423,000 3,170,000 $2,953,000 $2,603,000
Equity securities 1,201,000 735,000 595,000 574,000
Investment Trust Funds 157,000 159,000 -- --
$3,781,000 $4,064,000 $3,548,000 $3,177,000
--------- --------- ========== ==========
Available-for-sale securities, which are primarily traded on the Tel-Aviv Stock
Exchange and on OTC, consist of the following:
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
COST MARKET VALUE COST MARKET VALUE
---- ------------ ---- ------------
$8,068,000 $8,572,000 $8,172,000 $7,733,000
--------- --------- --------- ---------
|
Sales of marketable securities resulted in realized gains (losses) of $95,000, $3,000 and ($3,000) for the years ended December 31, 2003, 2002 and 2001 respectively. Amounts reclassified from accumulated other comprehensive income into earings associated with the particular marketable securities were $51,000 for the year ended December 31, 2003. There were no reclassifications from accumulated other comprehensive income into earnings for the year ending December 31, 2002.
(NOTE E) - Other assets - Investment in a high-tech company.
In July 2000, the Company invested approximately $400,000 in a high-tech company through the purchase of 5% convertible promissory note issued by such company, convertible at the discretion of the Company, under certain conditions, into equity capital of the company. On December 31, 2001 the Company determined the investment to be impaired and recorded an impairment charge for the full amount of the note.
The Company invested, by way of a convertible loan in such high-tech company approximately $50,000 and $171,000 during 2002 and 2001 respectively. During 2002 the company converted the loans into equity capital.
The Company sold 203,000 shares of Eyeblast for $609,000 recognizing a gain of $549,000 in December of 2003.
(NOTE F) - Oil and Gas Properties
TOTAL CAPITALIZED
----- -----------
UNPROVED PROVED COSTS
-------- ------ -----
Balance - December 31, 2000 $277,000 $4,012,000 $4,289,000
Acquisition costs -- 1,599,000 1,599,000
Development costs -- 624,000 624,000
Balance - December 31, 2001 $277,000 $6,235,000 $6,512,000
|
TOTAL CAPITALIZED
----- -----------
UNPROVED PROVED COSTS
-------- ------ -----
Acquisition costs 194,000 443,000 637,000
Development costs ----------- (694,000) (694,000)
----------- ----------- -----------
Balance - December 31, 2002 $471,000 $5,984,000 $6,455,000
=========== =========== ===========
Acquisition costs -- 292,000 292,000
Development costs (150,000) 384,000 234,000
----------- ----------- -----------
Balance - December 31, 2003 $321,000 $6,660,000 $6,981,000
|
Office equipment and furniture 7%--20%
Motor vehicles 15%--30%
A summary of property and equipment is as follows:
2003 2002
---- ----
Unproved properties -- $471,000
Oil and gas properties 6,981,000 5,984,000
Retirement obligation assets 449,000 --
Transportation equipment 142,000 142,000
Office equipment 133,000 111,000
------- -------
7,705,000 6,708,000
Less accumulated depletion, depreciation,
amortization and provision for impairment 4,441,000 3,203,000
--------- ---------
3,264,000 $3,505,000
========= ==========
|
(NOTE G) - 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,
-------------------------------
2003 2002 2001
---- ---- ----
INCOME SHARES INCOME SHARES INCOME SHARES
------ ------ ------ ------ ------ ------
Earnings per common share-basic $ 2,256,000 2,639,853 $ 1,717,000 2,639,853 $ (139,000) 2,639,853
Effect of dilutive securities:
Stock options -- -- -- --
Earnings per common share-Diluted $ 2,256,000 2,639,853 $ 1,717,000 2,639,853 $ (139,000) 2,639,853
(NOTE H) - STOCK OPTION
The 1993 stock option plan (the 1993 Plan) was approved at the Annual
General Meeting of Shareholders held on August 13, 1993. At December 31, 2002,
2001 and 2000, 50,000 shares of common stock are reserved under the 1993 Plan.
Options granted under the 1993 Plan might be either incentive stock options
under the Internal Revenue Code or options which do not qualify as incentive
stock options. Options are granted 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. The options granted under this plan were fully vested at grant date. The
administrator may set the exercise price for a nonqualified stock option.
Summary of the status of the Company's stock options is presented below:
WEIGHTED-AVERAGE
----------------
1993 Plan: OPTIONS EXERCISE PRICE
------- --------------
Outstanding at December 31, 2000 29,750 $21.00
Granted -- --
Expired -- --
Outstanding at December 31, 2001 29,750 $21.00
Granted -- --
Expired -- --
Outstanding at December 31, 2002 29,750 $21.00
Granted -- --
Expired (24,250) --
Outstanding at December 31, 2003 5,500 $10.45
As of December 31, 2003, 5,500 options were outstanding and exercisable at a
price of $10.45 and a weighted average remaining contractual life of .5 years.
During 1994, the Company granted 2,500 options to an employee pursant to the
1993 Plan exercisable through March 2004 at an exercise price of $ 19.1. During
1995 the Company granted 3,000 options to a director under the 1993 Plan
exercisable through July 2005 at an exercise price of $5.06 per share.
WEIGHTED-AVERAGE
----------------
Consultants and others: OPTIONS EXERCISE PRICE
------- --------------
Outstanding at December 31, 2,000 $23.00
2000
Granted -- --
Expired -- --
Outstanding at December 31, 2,000 $23.00
2001
Granted -- --
Expired -- --
Outstanding at December 31, 2,000 $23.00
2002
Granted -- --
Expired (2,000) --
Outstanding at December 31, -- --
2003
|
No stock options were granted during 2003. Shares of common stock reserved for future issuance are:
Options granted under the 1993 Plan 5,500
Options available for grant under the 1993 Plan 20,250
Options granted to directors 139,990
-------
Total 165,740
=======
|
Pursuant to requirements of SFAS No. 123, the weighted average fair market value of options granted during 2000 was $3.57 per share. The weighted average closing bid prices for the Company's stock at the date the options were granted during 2000 was $5.13 per share. The fair market value pursuant SFAS No. 123 of each option granted is estimated on the date of grant using the Black-Scholes options-pricing model. The model assumes expected volatility of 76 %, risk-free interest rate of 6.51% for grants during 2000, an expected life of 5 years and no dividend yield. Actual value realized, if any, is dependant on the future performance of the Company's common stock and overall stock market conditions. There is no assurance the value realized by an optionee will be at or near the value estimated by the Black-Scholes model.
The Company applies Accounting Principles Bulletin Opinion No. 25 and related interpretations in accounting for its options. Accordingly, compensation expense of $118,000 has been recognized for its stock option grants to its directors during 2000.
NOTE I) -- Income Taxes
Income (loss) before income taxes from U.S. and foreign results of operations is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
---- ---- ----
U.S. $ 1,022,000 $ (203,000) $ 605,000
Foreign 2,426,000 $(1,710,000) $ (694,000)
------------ ---------- -----------
Total $ 3,448,000 $(1,913,000) $ (89,000)
============ ============ ===========
Total income tax expense (benefit) for each of the years ended December 31,
2002, 2001 and 2000 were allocated as follows:
2003 2002 2001
---- ---- ----
Income taxes (benefit) $ 1,188,000 $(114,000) $ 50,000
Shareholders' equity for unrealized holding
gains (loses) on marketable securities 80,000 (43,000) $ (63,000)
------------ ---------- -----------
Total $ 1,268,000 $(157,000) $ (13,000)
============ ========== ===========
|
Income tax expense (benefit) attributable to income from continuing operations consist of:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
---- ---- ----
Current:
State 17,000 6,000 10,000
Federal 1,171,000 (315,000) 73,000
Foreign -- -- 276,000
Deferred federal -- 195,000 (309,000)
------------ ---------- -----------
Total $ 1,188,000 $(114,000) $ 50,000
============ ========== ===========
The deferred tax assets (liabilities) as of December 31, 2003 and 2002 are as follows:
AS OF DECEMBER 31,
------------------
2003 2002
---- ----
Net unrealized depreciation (appreciation) of marketable securities $ (130,000) $ 275,000
Basis differences in property and equipment 356,000 48,000
Losses carry forward -- 724,000
Other timing differences (1,655,000) 202,000
---------- -----------
Total (1,169,000) 1,249,000
Valuation allowance -- (362,000)
---------- -----------
($1,169,000) $ 887,000
========== ===========
The Company has determined that a valuation allowance of $362,000 was
required for deferred tax assets for 2002. A valuation allowance for such assets
was not required at December 31, 2001.This determination considered, among other
things, estimated future cash flows from proved reserves and the market value of
securities and expected resulting taxable income.
Reconciliation between the actual income tax expense 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,
-----------------------
2003 2002 2001
---- ---- ----
Computed at U.S. statutory rates (35.0)% (35.0)% (35.0)%
State income taxes, net of federal benefit 0.5% (3.1)% (11.2)%
Adjustment to valuation allowance -- 18.9% --
Other 1.05% 13.2% (10)%
------------ ---------- -----------
(34.45)% (6.0)% (56.2)%
|
(NOTE J) -- 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 exists at December 31, 2003.
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 K) -- Commitments and Contingencies
COMMITMENTS:
The Company leases corporate office facilities under a 3-year operating lease expiring October 2006 at a monthly rental of $ 2,400 with an escalation to $2500 on November 2005. The Company shares office space with Jay Petroleum, L.L.C. and Jay Management L.L.C., affiliates, under an informal sublease agreement. The Company is also responsible for its prorate share of the operating expenses that exceed a certain threshold.
At December 31, 2003, future minimum lease payments under non-cancelable operating leases are approximately $ 83,000.
Further annual minimum lease payments are follows:
Year Ending
December 31,
2004 28,000
2005 29,000
2006 26,000
------
83,000
|
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.
The Company, together with Naphtha Congo Ltd,. as Israeli and related entity ("Naphthat Congo"), were served in October 2002 in District Court of Harris County, Texas, with summons and complaint by Romfar International Ltd., a contractor ("Contractor") who provided drilling services in the Tilapia permit million and movig for court ordered arbitraction. The Contractor and Naphtha Tilapia 1 well. The Company indirectly held, througth Naphtha Congo, a 50% participation interest in the Tilapia 1 well.
The Company filed it answer on October 18, 2002, where it denied all allegations made and denied that it is a proper party to the suit and moved to dismiss the complaint. On March 20, 2003, the courtgranted the Company's motion to compel arbitraction against Naphtha Congo. Subsequently, the contractor motion for a new trial and on July 8, 2003, the court denied the contractor's motion for a new trial. On November 3, 2003 the arbitrator's award was forwarded to Naphtha Congo. According the Arbitrator's award, Naphtha Congo is obliged to pay the contractor the amount of $693,523 as funds due under the drilling contract and in addition, interest at the rate of 18% per annum. The Company extinguished this oblogation on November 19, 2003.
(NOTE L) - Geographical Segment Information
The Company's operations involve a single operating segment--the exploration, development, production and transportation of oil and natural gas. Its current oil and gas activities are concentrated in the United States, Israel, and the Republic of Congo, Africa. Operating in foreign countries subjects the Company to inherent risks such as a loss of revenues, property and equipment from such hazards as exploration, nationalization, war and other political risks, risks of increases of taxes and governmental royalties, renegotiation of contracts with government entities and changes in laws and policies governing operations of foreign-based companies.
The Company's oil and gas business is subject to operating risks associated with the exploration, and production of oil and gas, including blowouts, pollution and acts of nature that could result in damage to oil and gas wells, production facilities or formations. In addition, oil and gas prices have fluctuated substantially, in recent years as a result of events, which were outside of the Company's control. Financial information, summarized by geographic area, is as follows (in thousands):
GEOGRAPHIC SEGMENTS
-------------------
CONSOLIDATED
UNITED STATES ISRAEL CONGO TOTAL
------------- ------ ----- -----
2003
Sales and other operating revenue $ 3,582 $ 1,549 -- $ 5,131
Costs and operating expenses (1,960) (820) (150) (2,930)
------- ----- ----- -------
Operating profit (loss) $ 1,622 $ 729 $ (150) $ 2,201
Interest income and other corporate revenues 760
Net gain in investee and gain on marketable 1,098
securities
General corporate expenses (2,012)
Interest expense (52)
Capital gain 549
Other income 475
Accretion expenses (43)
Income taxes (1,188)
Net income 2,256
Identifiable assets at December 31, 2003 $ 2,987 $ 81 -- $ 3,068
Net property and equipment
Cash and corporate assets 29,627
Total assets at December 31, 2003 $32,614
======
GEOGRAPHIC SEGMENTS
-------------------
CONSOLIDATED
UNITED STATES ISRAEL CONGO TOTAL
------------- ------ ----- -----
2002
Sales and other operating revenue $ 2,563 $ 1,022 $ -- $ 3,585
Costs and operating expenses (2,021) (817) (887) (4,024)
Operating profit (loss) 243 205 (887) (439)
------- ----- ----- -------
Interest income and other corporate revenues 787
loss on marketable securities and net loss in investee (629)
General corporate expenses (1,422)
Interest expense (210)
Income taxes 114
Net loss (1,717)
Identifiable assets at December 31, 2002 $ 3,178 $ 177 $ 150 $ 3,505
Cash and corporate assets 25,162
Total assets at December 31, 2002 $28,667
======
GEOGRAPHIC SEGMENTS
-------------------
CONSOLIDATED
UNITED STATES ISRAEL CONGO TOTAL
------------- ------ ----- -----
2001
Sales and other operating revenue $ 3,171 $ 988 $ -- $ 4,159
Costs and operating expenses (1,451) (723) (199) (2,373)
------- ----- ----- -------
Operating profit (loss) $ 1,720 $ 265 $ (199) $ 1,786
Interest income and other corporate revenues 545
General corporate expenses (2,044)
Loss on marketable securities and
net loss in investee (376)
Income taxes (50)
Net loss $ (139)
Identifiable assets at December 31, 2001
Net property and equipment $ 3,850 $ 180 $ 150 $ 4,180
Cash and corporate assets $22,435
Total assets at December 31, 2001 $26,615
======
|
(NOTE M) - Asset Retirement Obligations
We recognize the fair value of a liability for an asset retirement obligation in the period at which time th asset was placed in service. 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 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 change in accounting principle was $263,955, after taxes of $39,158.
The reconciliation of the beginning and ending asset retirement obligations as of December 31, 2003 is as follows (in thousands):
Asset retirement obligations, as of December 31, 2002 $ --
Liabilities upon adoption of SFAS No. 143 on January 1, 2003 650
Liabilities incurred 73
Liabilities settled -
Accretion expense 43
Revisions in estimated cash flows -
-------------
Asset retirement obligations, as of December 31, 2003 $ 766
=============
|
The following table summarizes the PRO FORMA net income and earnings per share for the years ended December 31, 2002 and 2001 as if SFAS No. 143 had been adopted on January 1, 2000 (in thousands, except per share amounts):
2002 2001
------------ ------------
Net income (loss):
As reported $ 1,717 $ (139)
Pro forma 1,663 (186)
Net income (loss) per share, as reported:
Basic & diluted $ .65 $ (.05)
Net income (loss) per share, pro forma:
Basic & diluted $ .63 $ (.07)
|
The following table summarizes PRO FORMA asset retirement obligations as of December 31, 2002 and 2001 as if SFAS No. 143 had been adopted on January 1, 2000 (in thousands):
2002 2001
--------- --------
Asset retirement obligations, beginning of year $ 613 $ 482
Liabilities incurred $ - $ 96
Accretion expense $ 37 $ 35
--------- --------
Asset retirement obligations, end of year $ 650 $ 613
========= ========
|
(NOTE N) - Subsequent Event
In March 2004, the Company completed the purchase of a luxury cruise liner for aggregate consideration of $8,050,000. The vessel, a Bahamas flagged ship, contains 270 passenger cabins spread out over nine decks. The Company has secured commercial bank loans for approximately $7.5 million of the purchase price, to be secured by a lien on the vessel, marketable securities anda company guarantee. The Company is currently in discussions with several luxury cruise operators for the purpose of commercially leasing the vessel as a luxury cruise liner. No assurance can be given that the Company will be able to conclude any leasing arrangement on commercially acceptable terms.
SUPPLEMENTARY OIL AND GAS INFORMATION
For the years ended December 31, 2003, 2002 and 2001 (unaudited)
The following supplemental information regarding the oil and gas activities of the Company 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.
CAPITALIZED COST OF OIL AND GAS PRODUCING ACTIVITIES (IN THOUSANDS)
2003 2002 2001
------------------ ------------------ ------------------
UNITED CONGO UNITED CONGO UNITED CONGO
STATES STATES STATES
------ ----- ------ ----- ------ -----
Unproved properties not being amortized 150 194 $ 150 $ 123 $ 150
Proved property being amortized 6,352 -- 5,504 -- 5,632 --
Accumulated depreciation, depletion
amortization and impairment (3,338) (150) (2,526) -- (1,937) --
------ ----- ------ ----- ------ -----
Net capitalized costs $3,014 -- $3,172 $ 150 $3,818 $ 150
====== ===== ====== ===== ======= =====
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION, AND DEVELOPMENT ACTIVITIES (IN THOUSANDS)
2003 2002 2001
------------------ ------------------ ------------------
UNITED CONGO UNITED CONGO UNITED CONGO
STATES STATES STATES
------ ----- ------ ----- ------ -----
Property acquisition costs--proved and
unproved properties $ 260 $ -- $ -- $1,059 $ --
Exploration costs 22 54 833 887 765 199
Development costs 393 500 -- 399 --
------ ----- ------ ----- ------ -----
(Israel exploration costs in 2003-$ 88; 2002-27$
2001 - $5)
|
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (IN THOUSANDS)
2003 2002 2001
------------------ ------------------ ------------------
UNITED CONGO UNITED CONGO UNITED CONGO
STATES STATES STATES
------ ----- ------ ----- ------ -----
Oil and gas sales $3,439 -- $2,423 -- $3,068 $ --
Lease operating expense and (872) -- (844) -- (905) --
severance taxes
Depreciation, depletion, (1,088) (150) (589) -- (519) --
amortization and provision for
impairment
Exploration costs (22) (54) (833) 809 (5) 199
------ ----- ------ ----- ------ -----
Income (Loss) before tax provision 1,457 (204) 155 (809) 1,639 (199)
Provision for income taxes -- 71 283 (535) 70
------ ----- ------ ----- ------ -----
Results of operations $1,457 $(133) $ 155 $ 526 $1,104 $(129)
====== ===== ====== ===== ======= =====
|
OIL AND GAS RESERVES
Oil and gas proved reserves can not 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 the extent 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, condense, natural gas liquids and natural gas and changes in such quantities at December 31, 2003, 2002 and 2001, 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 $ 30.56 per barrel and $ 5.16 per Mcf, respectively, at December 31, 2003.
OIL BBLS GAS MCF
---------- ----------
December 31, 2000 182,036 5,559,366
Revisions of previous estimates (19,580) 118,727
Acquisition of minerals in place 47,689 190,345
Sales of minerals in place -- --
Net discoveries and extensions -- --
Production (19,835) (656,169)
---------- ----------
December 31, 2001 190,310 5,212,269
Revisions of previous estimates (7,525) (572,723)
Acquisition of minerals in place -- --
Sales of minerals in place -- --
Net discoveries and extensions -- --
Production (20,852) (720,072)
---------- ----------
December 31, 2002 161,933 3,919,474
Revisions of previous estimates 55,261 (317,234)
Acquisition of minerals in place -- --
Production (19,294) (599,000)
---------- ----------
December 31, 2003 197,900 3,003,240
|
The Company's proved reserves are as follows:
DEVELOPED UNDEVELOPED
OIL BBLS GAS MCF OIL BBLS GAS MCF
-------- -------- -------- --------
December 31, 2003 197,900 3,003,240 -- 516,440
December 31, 2002 161,933 3,919,474 -- 138,050
December 31, 2001 190,310 5,212,269 -- --
OIL BBLS GAS MCF
-------- --------
Interest in proved reserves
of unconsolidated affiliates
December 31, 2003 -- 1,979,000
December 31, 2002 -- 1,979,000
December 31, 2001 -- 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.
2003 2002 2001
-------------- -------------- ------------
Future cash inflows $ 21,705,930 $ 20,637,745 $ 16,363,650
Future development costs (160,780) (189,877) (141,574)
Future production costs (7,472,950) (6,131,777) (5,180,472)
-------------- -------------- ------------
Future net cash flows 14,091,190 14,862,770 11,041,604
Future income tax expenses (4,791,004) (4,904,714) (3,643,729)
Annual 10% discount rate (4,650,009) (4,082,803) (3,020,874)
-------------- -------------- ------------
Standardized measure discounted future net cash
flows $ 4,650,177 $ 5,875,253 $ 4,377,001
============== ============== ============
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, 2003, 2002 and
2001 were as follows:
2003 2002 2001
-------------- -------------- ------------
Beginning of the year $ 5,875,253 $ 4,377,001 $ 14,874,872
Sales and transfers of oil and gas produced,
net of production costs -- -- --
Sales of reserves in place -- -- --
Net changes in prices and production costs (1,341,179) 1,498,252 (4,100,459)
Net changes in income taxes (113,710) -- --
Changes in estimated future development costs,
net of current -- 48,303 (284,951)
development costs
Acquisition of minerals in place -- -- $ 1,212,580
Revision of previous estimates -- -- (7,325,041)
Changes in production rate and other -- -- --
Accretion of discount -- -- --
End of year 4,650,177 5,875,253 $ 4,377,001
============== ============== ============
Selected Quarterly Financial Data (amounts in thousands, except per share data) (Unaudited):
QUARTER ENDED
-------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
2003 2003 2003 2003 2003
---- ---- ---- ---- ----
Total Revenues $ 1,974 $ 2,982 $ 1,928 $ 1,741 $ 8,625
Net Income (loss) before taxes $ 901 $ 1,945 $ 876 $ (274) $ 3,448
Cumulative effect of an accounting change $ (264) $ (264)
Net Income (loss) $ 901 $ 1,945 $ 858 $(1,448) $ 2,256
Earnings (loss) per Common Share
-Basic and Diluted $ 0.34 $ 0.74 $ 0.33 $ (0.55) $ 0.85
|
QUARTER ENDED
-------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
2002 2002 2002 2002 2002
---- ---- ---- ---- ----
Total Revenues $ 1,076 $ 1,130 $ 1,047 $ 1,119 $ 4,372
Net Income (loss) before taxes $ (160) $(1,833) $ (60) $ 140 $(1,913)
Cumulative effect of an accounting change $ 3,516 -- -- -- $ 3,516
Net Income $ 3,356 $(1,369) $ (60) $ (210) $ 1,717
Earnings (loss) per Common Share
-Basic and Diluted $ 1.27 $ (0.52) $ (0.02) $ (0.08) $ 0.65
QUARTER ENDED
-------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
2002 2002 2002 2002 2002
---- ---- ---- ---- ----
Total Revenues $ 1,475 $ 1,263 $ 1,002 $ 574 $ 4,704
Net Income (loss) before taxes $ 352 $ 767 $ (277) $ (931) $ (49)
Net Income $ 195 $ 524) $ (177) $ (261) $ (139)
Earnings (loss) per Common Share
-Basic and Diluted $ 0.07 $ 0.20 $ 0.07 $ 0.24 $ 0.05
|
EXHIBIT 14. 1
ISRAMCO, INC.
CODE OF ETHICS FOR SENIOR EXECUTIVE OFFICERS
AND
SENIOR FINANCIAL OFFICERS
This Code of Ethics applies to Isramco Inc.'s Chief Executive Officer, President, Chief Financial Officer and Controller (and others performing similar senior executive and financial functions at Isramco from time to time in the future). Isramco expects all of its employees to act in accordance with the highest standards of professional integrity in all aspects of their business activities, to comply with all applicable laws, rules and regulations, to deter wrongdoing and abide by all policies and procedures adopted by Isramco that govern the conduct of its employees. But because of your leadership positions, you are setting an example for the rest of our employees and are expected to comply with this Code of Ethics to foster a culture of integrity and honesty in all of our dealings.
Accordingly, you agree to:
1. Engage in and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
2. Avoid conflicts of interest and disclose to the Audit Committee of the Board of Directors any material transaction or relationship that reasonably could be expected to give rise to such a conflict;
3. Take all reasonable measures to protect the confidentiality of non-public information about Isramco or its subsidiaries obtained or created in connection with your activities and prevent the unauthorized disclosure of such information unless required by applicable law or regulation or legal or regulatory process;
4. Take all reasonable measures to achieve responsible use of and control over Isramco's assets and resources.
5. Promote full, fair, accurate, timely and understandable disclosure in reports and documents that Isramco or its subsidiaries files with, or submits to, the Securities and Exchange Commission and other regulators and in other public communications made by Isramco.
6. Comply with Isramco's policies and procedures as they may be in effect from time to time.
7. Act in good faith, responsibly, with due care, competence, diligence, and without knowingly misrepresenting material facts or allowing your better judgment to be subordinated.
8. Comply with applicable governmental laws, rules and regulations, as well as the rules and regulations of The Nasdaq Stock Market and any other self-regulatory organizations of which Isramco is a member; and
9. Prompt report any possible violation of this Code of Ethics to the Audit Committee of the Board of Directors.
You will make every effort to cooperate with Isramco and its subsidiaries' internal auditor and independent auditors.
You understand that you will be held accountable for your adherence to this Code of Ethics. Your failure to observe the terms of this Code of Ethics may result in disciplinary action, up to and including termination of employment. Violations of this Code of Ethics may also constitute violations of law and may result in civil and criminal penalties for you, your supervisors and Isramco.
If you have any questions regarding the best course of action in a particular situation, you should promptly contact a member of the Audit Committee or Isramco's outside legal counsel.
YOUR PERSONAL COMMITMENT TO THE ISRAMCO INC.'S CODE OF ETHICS FOR
SENIOR EXECUTIVE OFFICERS AND SENIOR FINANCIAL OFFICERS
I acknowledge that I have received and read the Isramco Inc. Code of Ethics for Senior Executive Officers and Senior Financial Officers, and understand my obligations to comply with the Code of Ethics.
I understand that my agreement to comply with the Code of Ethics does not constitute a contract of my employment.
Please sign here: _________________________ Date: _______________
Please print your name: ____________________________
EXHIBIT 31
RULE 13A-14(A) / 15D-14(A) CERTIFICATIONS
I, Haim Tsuff, Chief Executive and Principal Financial Officer of Isramco, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Isramco, Inc. for the year ended December 31, 2003;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and I have:
a) Designed such disclosure controls and procedures, or caused such controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of the internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons fulfilling the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 30, 2004
/S/ HAIM TSUFF
HAIM TSUFF
CHIEF EXECUTIVE OFFICER
(AND PRINCIPAL FINANCIAL OFFICER)
|
EXHIBIT 32
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Isramco, Inc. (the "Company") on Form 10-K for the year ended December 31, 2003 (the "Report") filed with the Securities and Exchange Commission, I, Haim Tsuff, Chief Executive and Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Company's Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
MARCH 30, 2004 /s/ HAIM TSUFF
------------------------
HAIM TSUFF
CHIEF EXECUTIVE OFFICER
(AND PRINCIPAL FINANCIAL
OFFICER)
|
A signed original of this statement required by Section 906 has been provided to Isramco, Inc. and will be retained by Isramco, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.1
ISRAMCO NEGEV 2
LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2003
"Isramco -Negev 2" Limited Partnership
CONTENTS
PAGE
Auditors' Report 2 Balance Sheets 3 Statements of Earnings 4 Statements of Changes in Limited Partnership's Capital 5 Statements of Cash Flows 6 Notes to the Financial Statements 8 |
AUDITORS' REPORT TO THE PARTNERS OF
"ISRAMCO - NEGEV 2" LIMITED PARTNERSHIP
We have audited the accompanying balance sheets of "Isramco - Negev 2" Limited Partnership (hereinafter - "the Limited Partnership") as at December 31, 2003 and 2002, and the related statements of earnings, changes in Limited Partnership's equity capital and cash flows, for each of the years in the three-year period ended December 31, 2003. These financial statements are the responsibility of the Board of Directors and the Management of the General Partner of the Limited Partnership. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the USA. Those 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 Directors and by the Management of the General Partner of the Limited Partnership, 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 financial statements referred to above present fairly, in all material respects, the financial position of the Limited Partnership as at December 31, 2003 and 2002, and the results of its operations, the changes in the Limited Partnership's equity and its cash flows for each of the years in the three year period ended December 31, 2003, in conformity with generally accepted accounting principles (GAAP) in Israel. In addition, the aforementioned financial statements were prepared in accordance with the Securities Regulation (Preparation of Annual Financial Statements), 1993.
Accounting principles generally accepted in Israel differ in certain significant respects from accounting principles generally accepted in the United States. Application of accounting principles generally accepted in the United States would have affected the financial position of the Limited Partnership as at December 31, 2003 and 2002 and the results of its operations, the changes in the Limited Partnership's capital and its cash flows for each of the three years the last of which ended December 31, 2003, to the extent summarized in Note 14 to the financial statements.
As discussed in Note 3B, the above mentioned financial statements are stated in values adjusted for the changes in the general purchasing power of the Israeli currency, in accordance with opinions of the Institute of Certified Public Accountants in Israel.
Somekh Chaikin
Certified Public Accountants (Isr.)
February 19, 2004
"Isramco - Negev 2" Limited Partnership
BALANCE SHEETS AS AT DECEMBER 31
-------------------------------------------------------------------------------------------------------
IN TERMS OF SHEKELS OF DECEMBER 2003
2003 2002
--------------- ---------------
NOTE NIS THOUSANDS NIS THOUSANDS
------------ --------------- ---------------
CURRENT ASSETS
Cash and cash equivalents 25,937 32,851
Marketable securities 4 472,658 407,295
Joint ventures for oil and gas exploration 5 4,249 1,321
Other receivables 6 318 213
--------------- ---------------
503,162 441,680
--------------- ---------------
INVESTMENTS
Investments in oil and gas properties 7 7,609 18,558
--------------- ---------------
510,771 460,238
=============== ===============
CURRENT LIABILITIES
Other payables 8 412 443
Joint ventures for oil and gas exploration 5 56 750
--------------- ---------------
468 1,193
--------------- ---------------
CONTINGENT LIABILITIES AND COMMITMENTS 9
LIMITED PARTNERSHIP'S CAPITAL 10 510,303 459,045
--------------- ---------------
510,771 460,238
=============== ===============
----------------------------------------------- ------------------------------------------------
Pinkstone Ltd. - Director Yossi Levy - CEO
Isramco Oil and Gas Ltd. - General Partner Isramco Oil and Gas Ltd. - General Partner
Represented by Ya'akov Meimon
-----------------------------------------------
Eli Fish - Controller
Isramco Oil and Gas Ltd. - General Partner
February 19, 2004
The notes are an integral part of the financial statements.
3
|
"Isramco - Negev 2" Limited Partnership
STATEMENTS OF EARNINGS FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------------------------
IN TERMS OF SHEKELS OF DECEMBER 2003
2003 2002 2001
NOTES NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
---------- --------------- --------------- ---------------
INCOME
Financing income, net 11A 89,694 - 26,721
--------------- --------------- ---------------
EXPENSES
Financing expenses, net 11A - 34,577 -
Participation in oil and gas
exploration, net 11B 35,769 2,145 26,648
General and administrative
expenses 11C 2,667 2,713 2,655
--------------- --------------- ---------------
38,436 39,435 29,303
--------------- --------------- ---------------
NET INCOME (LOSS) 51,258 (39,435) (2,582)
--------------- --------------- ---------------
INCOME (LOSS) PER PARTICIPATION UNIT
NIS NIS NIS
--------------- --------------- ---------------
Basic and diluted income (loss) per
participation unit 11D 0.0120 (0.0093) (0.0006)
=============== =============== ==============
The notes are an integral part of the financial statements.
4
|
"Isramco - Negev 2" Limited Partnership
STATEMENTS OF CHANGES IN LIMITED PARTNERSHIP'S CAPITAL
---------------------------------------------------------------------------------------------------------
IN TERMS OF SHEKELS OF DECEMBER 2003
PARTNERSHIP'S ACCUMULATED
EQUITY LOSS TOTAL
--------------- --------------- ---------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- --------------- ---------------
BALANCE AS AT JANUARY 1, 2001 856,391 (355,329) 501,062
Net loss - (2,582) (2,582)
--------------- --------------- ---------------
BALANCE AS AT DECEMBER 31, 2001 856,391 (357,911) 498,480
Net loss - (39,435) (39,435)
--------------- --------------- ---------------
BALANCE AS AT DECEMBER 31, 2002 856,391 (397,346) 459,045
Net income - 51,258 51,258
--------------- --------------- ---------------
BALANCE AS AT DECEMBER 31, 2003 856,391 (346,088) 510,303
=============== =============== ===============
The notes are an integral part of the financial statements.
5
|
"Isramco - Negev 2" Limited Partnership
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------------------------
IN TERMS OF SHEKELS OF DECEMBER 2003
2003 2002 2001
--------------- --------------- ---------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- --------------- ---------------
CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Net income (loss) 51,258 (39,435) (2,582)
Adjustment to reconcile net income (loss) to net
cash flows generated by operating activities (A) (35,324) 42,575 (6,431)
--------------- --------------- ---------------
NET CASH INFLOW (OUTFLOW) GENERATED BY OPERATING
ACTIVITIES 15,934 3,140 (9,013)
--------------- --------------- ---------------
CASH FLOWS GENERATED BY INVESTING ACTIVITIES:
Investment in oil and gas properties (24,668) - -
Investment in marketable securities (187,069) (254,761) (303,573)
Proceeds from redemption of bank deposits - 45,482 33,263
Proceeds from sale of marketable securities 188,889 167,789 218,177
--------------- --------------- ---------------
NET CASH OUTFLOW GENERATED BY INVESTING ACTIVITIES (22,848) (41,490) (52,133)
--------------- --------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS (6,914) (38,350) (61,146)
Balance of cash and cash equivalent
at the beginning of the year 32,851 71,201 132,347
--------------- --------------- ---------------
BALANCE OF CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR 25,937 32,851 71,201
=============== =============== ===============
The notes are an integral part of the financial statements.
6
|
"Isramco - Negev 2" Limited Partnership
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONT'D)
------------------------------------------------------------------------------------------------------------------
IN TERMS OF SHEKELS OF DECEMBER 2003
2003 2002 2001
--------------- --------------- ---------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- --------------- ---------------
A. ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH FLOWS GENERATED BY OPERATING ACTIVITIES
INCOME AND EXPENSES NOT INVOLVING CASH FLOWS:
Loss (gain) on sale of marketable securities, net (67,183) 50,017 (7,683)
Interest and inflationary erosion of short-term bank deposits - 31 (660)
Accrued interest and inflationary erosion of long-term
bank deposits - - (1,682)
Amortization of investment in oil and gas properties 35,617 - -
CHANGES IN ASSET AND LIABILITY ITEMS:
Increase in other receivables (105) (115) (36)
Decrease in other payables (31) (355) (1,121)
Change in joint ventures for oil and gas exploration, net (3,622) (7,003) 4,751
--------------- --------------- ---------------
(35,324) 42,575 (6,431)
--------------- --------------- ---------------
The notes are an integral part of the financial statements.
7
|
"Isramco - Negev 2" Limited Partnership
NOTE 1 - GENERAL
A. Isramco - Negev 2, Limited Partnership (hereinafter - "the Limited
Partnership" or "the Partnership") was established according to a
limited partnership agreement that was signed on March 2 and 3,
1989 (and amended from time to time), between the general partner
- Isramco Oil and Gas Ltd. (hereinafter - "the General Partner")
and the limited partner - Isramco Management (1988) Ltd.
(hereinafter - "the Limited Partner" or "the Trustee"). The
Limited Partnership was registered on March 3, 1989, under the
Partnerships Ordinance (New Version) 5735 - 1975.
According to Section 61(a) of the Partnerships Ordinance, the limited partnership agreement constitutes the Partnership Agreement and Articles of Association of the Limited Partnership.
B. Under the Limited Partnership agreement, as amended from time to time, the General Partner and the Limited Partner will bear the expenses and losses of the limited partnership and will be entitled to income in accordance with their proportionate share of the capital they invested in the Limited Partnership's capital. (Amendment of November 4, 1993).
C. The day-to-day management of the Limited Partnership is carried out by the General Partner, under the supervision of the Supervisor, Yigal Brightman & Co., Certified Public Accountants, and Mr. David Valiano, CPA (Isr.). Under the Limited Partnership agreement, the Supervisor was granted certain supervisory powers.
D. The Limited Partner - Isramco Management (1988) Ltd., has various rights in the Limited Partnership. Under the trust agreement, the Limited Partner acts as trustee for this right on behalf of the owners of the participation units.
E. The Limited Partnership was approved by the Income Tax Commissioner for purposes of the Income Tax Regulations (Rules for Calculating Tax for Holding and Sale of Units of Participation in an Oil Exploration Partnership), 5748 - 1988. These Regulations are in effect up to December 31, 2003.
F. The items in the financial reports are presented in accordance with the principles provided in the Securities Regulations (Preparation of Annual Financial Statements) 5753-1993, except for items presented in the format dictated by the nature of the Limited Partnership's business.
G. On June 7, 2000, the Petroleum Commissioner, in accordance with his authority under the Petroleum Law, announced the closure for purposes of oil exploration and production of all the offshore areas up to the point where the depth of water above them permits utilization of the natural resources and which are not subject to a petroleum right or a preliminary permit with a valid priority right.
"Isramco - Negev 2" Limited Partnership
NOTE 2 - THE OBJECTIVE OF THE LIMITED PARTNERSHIP
A. The objective of the Limited Partnership is to participate in oil and gas exploration and production. For this purpose the Limited Partnership signed operating agreements (J.O.A.) with its partners in joint ventures.
B. As at the approval date of the financial statements, the Limited Partnership's rights in oil and/or gas properties are as follows:
PRINCIPAL RATE DATE OF EXPIRATION OF RIGHTS
---------------- ------------------------------
%
----------------
"Med Yavne" lease 32.4111 June 10, 2030
"Med Ashdod" lease 19.1369 June 15, 2030
"Marine South" license 59.0000 January 15, 2005
Gal licenses (Michal, Matan) 5.0000 December 3, 2004
Shikma Carveout (depth of 1,500 meters and under) 10.0000 April 1, 2009
|
For additional details in connection with the Partnership's rights in oil and/or gas properties - see Note 5, below.
NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES
A. DEFINITIONS
1. RELATED PARTY - as defined in Opinion No. 29 of the Institute of Certified Public Accountants in Israel (hereinafter - the ICPAI).
2. INTERESTED PARTY - as defined in Paragraph 1 of the definition of an "interested party" in a company in Section 1 of the Securities Law.
3. CPI - the Consumer Price Index published by the Central Bureau of Statistics.
4. DOLLAR - the U.S. dollar.
"Isramco - Negev 2" Limited Partnership
NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)
B. FINANCIAL STATEMENTS IN INFLATION ADJUSTED VALUES
1. GENERAL
The financial statements are prepared on the basis of historical cost adjusted for changes in the general purchasing power of the NIS, as measured by the changes in the CPI.
The Limited Partnership maintains its accounts on a current basis in historical NIS. The historical cost financial statements were adjusted to NIS of a stable purchasing power, in accordance with the principles prescribed in Opinions 36 and 50 of the ICPAI.
Condensed financial statements of the Limited Partnership in nominal historical values, which served as the basis for preparation of the Limited Partnership's adjusted financial statements, are included in Note 15.
The adjusted value of non-monetary assets represents their historical cost as adjusted for the changes in the general purchasing power of the Israeli currency and does not necessarily represent their market value or their value to the Limited Partnership.
In the adjusted financial statements the term "cost" means "adjusted cost".
All comparative data for prior periods (including amounts of monetary items) is also stated in term of shekels of December 2003.
2. PRINCIPLES OF ADJUSTMENT
A. BALANCE SHEET
(1) Non-monetary items, investment in oil and gas exploration assets and the Limited Partnership's capital were adjusted according to the changes in the CPI, between the index of the month in which the investments were made and capital was increased, respectively, and the month of the balance sheet date.
(2) Monetary items are stated in the adjusted balance sheet at their historical values.
"Isramco - Negev 2" Limited Partnership
NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)
B. FINANCIAL STATEMENTS IN INFLATION ADJUSTED VALUES (CONT'D)
B. STATEMENT OF EARNINGS
Items of the statement of earnings are adjusted on the basis of the changes in the CPI as follows:
(1) The other components of the statement of earnings, excluding the financing item, were adjusted on the basis of the changes in CPI from the index of the month of each transaction until the index of the month of the balance sheet date.
(2) The net financing item reflects financing income and expenses in real values (net of inflation), the inflationary erosion over the year of monetary items, as well as gains (losses) from marketable securities, net.
C. CASH EQUIVALENTS
Cash equivalents include bank deposits having an original maturity, as at the date of the investment therein, not in excess of three months.
D. MARKETABLE SECURITIES
Marketable securities are stated at their market value as at the balance sheet date. Changes in the value of such securities are recorded in the statement of earnings as incurred.
E. INVESTMENTS IN OIL AND GAS EXPLORATION
The Limited Partnership uses the "successful efforts" method with respect to the accounting treatment of the recording of oil and gas exploration expenses, as follows:
(1) The Limited Partnership's expenses in executing geological and seismic tests and surveys are expensed immediately in the statement of earnings as incurred.
(2) Investments in oil and gas wells, which are in the drilling stages, and regarding which it has not yet been proven whether they will produce oil or gas, or which have not yet been determined to be non-commercial, are stated in the balance sheet at cost.
(3) Investments in oil and gas wells which were proven to be dry and were abandoned, or were determined to be non-commercial, or for which no development plans were prepared for the near future, are written off in full to the statement of earnings.
"Isramco - Negev 2" Limited Partnership
NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)
F. DECLINE IN VALUE OF ASSETS
The Limited Partnership applies Accounting Standard No. 15 - "Decline in the Value of Assets" (hereinafter - "the Standard"). The Standard provides procedures which an entity must apply in order to assure that its assets in the balance sheet (in respect of which the Standard applies) are not presented at an amount greater than their recoverable value, which is the higher of the net selling price and the realization value (the present value of the estimated future cash flows expected to derive from the use of the asset and its realization).
The Standard applies to all assets in the balance sheet, except for tax assets and financial assets (except for financial assets which are investments in investee companies which are not subsidiaries). In addition, the Standard provides presentation and disclosure rules regarding assets whose value has decreased. Where the value of an asset in the balance sheet is greater than its recoverable value, the Limited Partnership recognizes a loss from decline in value in an amount equal to the difference between the book value of the asset and its recoverable value. The loss recognized, as stated, will be eliminated only if there have been changes in the estimates used in determining the asset's recoverable value from the date on which the last loss from decline in value was recognized.
G. INCOME (LOSS) PER PARTICIPATION UNIT
The income (loss) per participation unit was computed in accordance with Opinion No. 55 of the ICPAI, on the basis of the weighted-average number of the outstanding participation units.
H. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from such estimates.
I. RATES OF EXCHANGE AND LINKAGE BASIS
Assets and liabilities denominated in or linked to foreign currency are stated in the balance sheet according to the representative exchange rates published by Bank of Israel as at balance sheet date.
Assets and liabilities linked to the CPI are stated in accordance with the specific linkage terms relating to each asset or liability.
Below are the figures for the Consumer Price Index and the rates of exchange:
DECEMBER 31 % CHANGE
------------------------- ------------------------------------
2003 2002 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Index - in points 99.4 101.31 (1.89) 6.49 1.41
Exchange rate of
the dollar in NIS 4.379 4.737 (7.56) 7.27 9.28
|
"Isramco - Negev 2" Limited Partnership
NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)
J. DISCLOSURE OF THE IMPACT OF NEW ACCOUNTING STANDARDS IN THE PERIOD PRIOR TO THEIR APPLICATION
In 2001, the Israeli Accounting Standards Board (hereinafter - "the Board") published, among other things, Accounting Standard No. 12 - "Discontinuance of the Adjustment of Financial Statements". According to this Standard, the adjustment of financial statements for the effect of the changes in the general purchasing power of the Israeli currency will be discontinued commencing January 1, 2003. In December 2002, the Board published Accounting Standard No. 17, which provides that implementation of Standard No. 12 shall be postponed to January 1, 2004. Therefore, adjustment of the financial statements will be discontinued commencing January 1, 2004. Until December 31, 2003, the Limited Partnership will continue to prepare adjusted financial statements in accordance with Opinion No. 36 of the Institute of Certified Public Accountants in Israel. The adjusted amounts included in the financial statements as at December 31, 2003, will serve as the starting point for the nominal financial reporting commencing on January 1, 2004. The extent of the impact of application of the Standard depends on the rate of inflation and the composition of the Limited Partnership's assets and the sources of it financing.
NOTE 4 - MARKETABLE SECURITIES
DECEMBER 31 DECEMBER 31
2003 2002
--------------- ---------------
NIS THOUSANDS NIS THOUSANDS
--------------- ---------------
Shares and options (1) 76,974 42,961
Government debentures (2) 91,429 72,323
Convertible debentures 131,327 146,058
Corporate debentures (3) 158,167 137,356
Participation certificates in mutual funds 11,584 5,778
Participation units (1) 3,177 2,819
--------------- ---------------
472,658 407,295
=============== ===============
(1) Including marketable securities of related parties 4,997 3,627
=============== ===============
|
"Isramco - Negev 2" Limited Partnership
NOTE 4 - MARKETABLE SECURITIES (CONT'D)
As at December 31, 2003, the Limited Partnership holds 4.43% of the total participation units in the I.N.O.C Dead Sea Limited Partnership (market value as at the balance sheet date equals NIS 1 million) and 13.52% of the total participation units in Naphtha Exploration (market value as at the balance sheet date equals NIS 2.2 million). In addition, the Limited Partnership holds 1.31% of the issued share capital of J.O.E.L Jerusalem Oil Exploration Ltd. (market value as at the balance sheet date equals NIS 1.8 million).
The income from investment in the marketable securities of the related parties in the year 2003 amounts to NIS 1,370 thousand (2002 - loss NIS 2,927 thousand).
DECEMBER 31 DECEMBER 31
2003 2002
--------------- ---------------
NIS THOUSANDS NIS THOUSANDS
--------------- ---------------
(2) LINKAGE BASES
CPI linked 313 12,717
Unlinked 91,116 59,606
--------------- ---------------
91,429 72,323
--------------- ---------------
(3) LINKAGE BASES
CPI linked 105,502 82,829
Linked to dollar 39,287 47,979
Unlinked 13,378 6,548
--------------- ---------------
158,167 137,356
--------------- ---------------
|
"Isramco - Negev 2" Limited Partnership
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION
COMPOSITION
DECEMBER 31 DECEMBER 31
2003 2002
--------------- ---------------
NIS THOUSANDS NIS THOUSANDS
--------------- ---------------
DEBIT BALANCES
"Med Yavne" Joint Venture 1,120 1,127
"Nir 2" Joint Venture 2,766 -
"Sderot" Joint Venture - 11
"David 2" Joint Venture - 6
"Nissanit 1 Well " Joint Venture 11 11
"Marine South" Joint Venture 27 161
"Or 1" Joint Venture - 5
"Nordon 1" Joint Venture 325 -
--------------- ---------------
4,249 1,321
=============== ===============
CREDIT BALANCES
"Marine Center" Joint Venture - 628
"Nordon 1" Joint Venture - 56
"Med Ashdod" Lease Joint Venture 56 64
"Gal C" Joint Venture - 2
--------------- ---------------
56 750
--------------- ---------------
|
"Isramco - Negev 2" Limited Partnership
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)
ADDITIONAL INFORMATION:
GENERAL
The balances shown in the balance sheet and relating to the joint ventures constitute the amount of the actual investment of the Limited Partnership in each joint venture less its share in the losses of that venture (or its share in the venture's losses less the amounts invested therein).
A. "MED YAVNE" LEASE
1. GENERAL
In June 2000, the Petroleum Commissioner (hereinafter - "the Commissioner") granted the partners to the Offshore License 239/"Med Yavne" (hereinafter - "Med Yavne License"), in which the Limited Partnership had oil rights, a lease for a period of 30 years for an area of 250 sq.km. out of the area of the aforesaid license, following the results of the "Or 1" and "Or South" drillings executed in the license area.
The following conditions, inter alia, were established as part of the lease conditions:
A. The leaseholder shall act with due diligence to develop the lease and to produce gas from the lease.
B. At least one well for Pliocene target shall be commenced no later then July 1, 2002, (subsequent to the grant of an extension of one year from the original date - July 1, 2001). If it is decided not to drill, the leaseholder shall be required to return part of the lease area.
C. At the end of five years, the leaseholder shall submit a plan for continued activity in the lease area.
The lease is limited in the entire area thereof, to the subterranean space as far as the roof of messenian ophorites or to the base of the Pliocene in absence of the ophorites.
In 2001, the Commissioner approved the return of an area of 105 square kilometers of the northern area of the lease in which no drilling prospects were located. In 2002, an additional area of 92 square kilometers out of the northern portion of the lease was returned in light of the operator's recommendation not to carry out any drilling in accordance with the conditions of the lease since, based on the existing data, the prospects currently indicated are at a level of high risk. The remaining lease area after return of the said portions is 53 square kilometers and it includes the gas reserves at "Or 1" and "Or South".
Regarding the lease period - see Note 9G., below.
Regarding the Partnership's liability for payment of royalties - see Note 9A., below.
"Isramco - Negev 2" Limited Partnership
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)
A. "MED YAVNE" LEASE (CONT'D)
2. THE "OR 1" WELL IN THE"MED YAVNE" LICENSE
In October 1999, the "Or 1 " well was begun in the "Med Yavne" License. The results of the production test performed at the well indicated that the rate of production was 21 million cubic feet per day. Nonetheless, in the operator's estimation, the well is capable of producing gas at a higher rate, once the well is completed for regular production, with appropriate equipment and by opening up additional zones in the target layer.
The Partnership's participation percentage in the "Or 1" well is 32.4111%. The cost of the well amounted to $5.2 million. The Partnership's share in the drilling costs, recorded in the category "investments in oil and gas assets", amounted to NIS 7.6 million.
3. THE "OR SOUTH" WELL IN THE "MED-YAVNE" LICENSE
In November 1999, the "Or South" well was commenced in the "Med Yavne" License. In December 1999, the operator reported to the Partnership that although an analysis of the results of the electrical examinations (logs) performed at the well indicates the existence of gas in the well, production of gas out of this well will not be commercially feasible. The partners accepted the operator's recommendation not to perform production tests and to abandon the well.
The rate of the Partnership's participation in the "Or South" well is 32.4111%. The cost of drilling amounted to $9 million. The Partnership's share in the cost of the well amounted to NIS 12.8 million, which were recorded on the statement of earnings in 1999.
4. THE GAS RESERVES AT THE "MED-YAVNE" LEASE
According to the operator's estimations, 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, and which also covered parts of nearby gas reserves (outside the area of the lease), the recoverable gas reserves in the Med Yavne Lease amount to 93 billion cubic feet.
In November 2002, the Partnership received an opinion from a consulting firm in the United States, the object of which was to perform a techno-economic examination for the development of the "Or 1" reserve. The said opinion indicates that, under certain assumptions, development of the reserve, by connecting it to a nearby extraction platform (at a distance of 12 km) and from there via a transportation pipe to the coast, is economically feasible.
"Isramco - Negev 2" Limited Partnership
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)
B. THE "MED ASHDOD" LEASE
1. GENERAL
In January 2002, the Commissioner granted the partners in the Offshore License 242/"Med Ashdod", which also included the "Yam Ashdod Carveout" (hereafter - "the Med Ashdod License" and "the Yam Ashdod Carveout", respectively), a lease in an area of 250 square kilometres out of the "Med Ashdod" License area for a period of 30 years (as from June 2000), this being based on the findings of the "Nir 1" drilling, which was executed in the "Yam Ashdod Carveout". For the most part, the lease covers the area that was included in the "Yam Ashdod Carveout". The "Yam Ashdod Carveout" included the area of the structure at which the "Yam 1" and "Yam 2" wells were drilled and also an additional structure that includes oil prospects which has not yet been drilled ("Nizanim"). The Partnership's share in the "Yam Ashdod Carveout" and, accordingly, in the lease, is 19.1369%.
Regarding the lease period - see Note 9G., below.
The work plan in the Lease, as determined by the Commissioner, for the first three years, is as follows:
A Drilling for Tertiary age prospects or Mesozoic age prospects within two years from the grant date of the Lease.
B. If no such drilling takes place within two years of the grant date of the Lease, then the Lease shall be restricted to the Pliocene base only.
C. If drilling takes place, for the purpose of the Tertiary age only, within two years of the grant date of the lease, then an extension of one more year shall be given for drilling for the purposes of the Jurassic age. If no further discovery is made beneath the Pliocene base, then the Lease shall be restricted to the Pliocene base.
On October 9, 2002, the Commissioner stated that whether the first drilling made by February 1, 2004 is for Tertiary age or Jurassic age targets, an extension will be given to February 1, 2005, for execution of the second drilling. As a result of execution of the "Nir 2" drilling in September 2003 (as detailed below), the aforesaid extension took effect.
Regarding the Partnership's liability for payment of royalties - see Note 9A., below.
2. "NIR 1" AND "NIR 2" WELLS
In 2000, drilling of the "Nir 1" well was executed in the "Yam Ashdod Carveout" for gas purposes. The rate of the Partnership's participation in the "Nir 1" well is 19.1369%. The cost of the well amounted to $13.3 million. The Partnership's share in the drilling costs, which were recorded in the category "investments in oil and gas assets", amounted to NIS 10.9 million.
"Isramco - Negev 2" Limited Partnership
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CCONT'D)
B. THE "MED ASHDOD" LEASE
2. "NIR 1" AND "NIR 2" WELLS (cont'd)
A. In 2002, Isramco Inc., the operator of the Lease (hereinafter - "the Lease"), obtained from three different overseas firms, opinions designed to provide an assessment of the potential gas that can be produced in the "Nir" reservoir and the economic feasibility of its production. These opinions offer different assessments of the existence of the producing gas potential in the reservoir. The opinions indicate that in order to verify whether an economic gas reserve exists, at least one confirmation drilling must be made.
At partners' meeting held on April 3, 2003, the operator recommended making a confirmation drilling, "Nir 2", in 2003. On April 30, 2003, the Partnership issued to the other partners a "sole risk" notification for execution of a confirmation drilling at the "Nir 2" reservoir, meaning that to the extent the partners or any one of them shall decide not to participate in the drilling, the Partnership is prepared to accept on itself their percentages in the drilling.
As a result of the said notification, the limited partnerships, I.N.O.C Dead Sea, Naphtha Exploration, Dor Gas and Delek Drillings joined (in addition to the Partnership) the aforesaid drilling, as well as Naphtha the Israel Petroleum Corp. Ltd. and Isramco Inc. The rate of their aggregate participation in the drilling is 51.8%. The participation percentages of partners who did not give notice of their joining the drilling (48.2%) were transferred to the Partnership.
B. The Partnership transferred part of the rights in the "Nir 2" drilling which were transferred to it, as stated from the partners who did not give notice of their joining the drilling, to the limited partnerships Oil Fields Explorations (1992) - 6.5%, Ratzio Oil Explorations (1992) - 2.08%, and Modi'in Energy - 2.58%. All the said rights were transferred with no immediate consideration and subject to payment of royalties if the drilling becomes a gas producing well. After transfer of the rights as stated, the Partnership remained with rights at the rate of 56.18%.
On September 1, 2003, execution of the drilling in the "Nir 2" well was begun. On November 19, 2003, the operator presented the partners with an analysis of the results of the production test executed at the "Nir 2" well, which indicated that it is not economically feasible to produce gas from the "Nir 2" well. The total cost of the "Nir 2" well amounted to NIS 44 million. Subsequent to the balance sheet date, on February 15, 2004, the operator notified the partners that based on the data analyzed, production of gas from the "Nir 1" well is not economically feasible.
C. In light of that stated above, the Partnership wrote off the full amount of its investment in the "Nir 1" well (in the amount of approximately NIS 10.9 million) and its investment in the "Nir 2" well (in the amount of approximately NIS 24.7 million).
"Isramco - Negev 2" Limited Partnership
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)
C. "MARINE NORTH A" AND "MARINE NORTH B" LICENSES
On December 3, 2000, two new licenses were granted in the preliminary permit area "Marine North" 311/ Marine North A" in an area of 368 square kilometers and "Marine North B" /312 in an area of 207 square kilometers, for a period of three years. The rights holders in the licenses were the limited partnerships: Modi'in Energy (20%), the Partnership (79%) and Isramco Inc, which serves as operator within the license area (1%).
In April 2002, the operator gave notice in the name of the partners of the return of the said licenses, since, based on the existing data, the prospects indicated in the licenses are at high level of risk that does not justify the drilling.
D. THE "MARINE CENTRAL" LICENSE
The "Marine Central" License was issued on December 3, 2000, for a period of 3 years. In December 2000, the "Romi 1" well was drilled and was found to be dry and was abandoned. The Partnership's share in the costs of the drilling (59%) was recorded in the statement of earnings in the year 2000. On December 3, 2003, the License expired.
E. "MARINE SOUTH" LICENSE
On January 15, 2002, the Commissioner granted "Marine South"/316 License in an area of 142 square kilometers for a period of three years. The holders of the rights in the License are the limited partnerships: the Partnership (59%), Naphtha Exploration (15%), INOC Dead Sea (15%), Modi'in Energy (10%), and Isramco Inc. (which serves as operator of the License (1%)). On October 28, 2003, the Commissioner's approval was received for deferral of execution of the three-dimensional seismic survey up to February 15, 2004. In addition, the Commissioner provided that the last date for preparing the prospect for drilling is June 15, 2004, and execution of drilling for Tertiary age and/or Mesozoic age purposes shall begin no later than December 15, 2004.
Subsequent to the balance sheet date, in January 2004, the operator requested from the Commissioner to increase the area of the "Marine South" by 208 square kilometers in order to permit a three-dimensional seismic survey on an enlarged area. The operator requested from the Commissioner to deferral the date of execution of the said seismic survey up to January 1, 2005, and that if the said survey is executed to approve extension of the License for two more years, this being for purposes of preparing the prospect for drilling and execution of the drilling.
"Isramco - Negev 2" Limited Partnership
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)
F. THE "GAL" LICENSES
GENERAL
In 2001, the Partnership acquired rights at the rate of 5% in six offshore licenses which were received in the areas of the preliminary permits with a priority right, Gal - A/165, Gal-B/166 and Gal - C/167 (licenses: Michal, Matan, Tommy Orli, Shira and Aya) (hereinafter - the Gal Licenses). In exchange for the acquired oil rights, the sum of $250 thousand was paid in respect of the expenses of a three-dimensional seismic survey conducted under the preliminary permit Gal-C, and also the proportionate share (5%) of the other expenses in connection with the other activities executed in the said preliminary permits and in the Gal Licenses, and which amount to $69 thousand.
Regarding the Partnership's liability to pay first priority royalties - see Note 9B, below.
THE TOMI, ORLI, AYA AND SHIRA LICENSES (GAL C)
In August 2002, BG, operator of the offshore licenses Tomi, Orli, Aya and Shira (Gal C) (hereafter - the Licenses), notified the partners in the Licenses, that based on analysis of the geological and geophysical findings of the explorations made by BG in the area of the Licenses, it recommends not to continue with the exploration plan in accordance with the conditions of the Licenses,
Following a second opinion, based on the same data, given at the request of the Israeli partners by a US consulting firm, whereby there is a suitable prospect for drilling in the area of the Licenses, the Israeli partners decided to examine the possibility of continuing the exploration project.
On October 2001, BG notified the partners in the Licenses that it will resign from its position as operator of the Licenses and will transfer to them all of its participation rights in the Licenses (at a rate of 40%), this being in proportion to their shares in the Licenses. In January 2002, BG transferred to the partners in the Licenses, each partner based on its proportionate share, such that the Partnership received 3.334% (out of 100%).
In June 2002, Isramco Inc. gave notice in the name of the partners in the Orli, Aya and Tommy Licenses that in the absence of suitable prospects for drilling it has been decided to return the said Licenses.
"Isramco - Negev 2" Limited Partnership
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)
F. THE "GAL" LICENSES (CONT'D)
On July 24, 2003, the Commissioner gave notice that the partners in the
Shira License did not comply with the work plan for the License.
Therefore, the Commissioner gave notice, pursuant to his authority under
Section 55 of the Petroleum Law, that if within 60 days the problem is
not corrected, the License will expire. On September 24, 2003, the Shira
License expired. The partners had rights in the License at the rate of
8.334%.
MICHAL AND MATAN LICENSES (GAL A AND B)
In 2001, a three dimensional seismic survey was conducted in the areas of the Michal and Matan Licenses (Gal A and B). In December 2001, the operator presented the partners with the results of the seismic interpretation of the survey that had been conducted and according to which two prospects had been mapped, one for each license.
In the year 2002, the operator presented the Commissioner with drilling prospects for these Licenses in accordance with the terms of the said Licenses.
On May 23, 2002, the Commissioner approved changes in the terms of the licenses as follows:
1. During the month of December 2002, the Commissioner will be presented with the final reports in regard to the "Tamar" prospect in the "Matan" License.
2. No later than March 1, 2003, the Commissioner will be presented with the final reports in regard to the "Dalit" prospect in the "Michal" License.
3. No later than March 1, 2003, the Commissioner will be presented with a contract with a drilling contractor for one of the two said Licenses.
4. The drilling will begin no later than six months from the date on which the contract is signed with the drilling contractor.
In November 2002, the operator recommended to the partners to execute a drilling in the "Tamar 1"prospect in the "Matan" License (hereinafter - "Tamar 1" Well) at an expected cost of to $40 million.
On February 4, 2003, the partners in the Licenses reached an agreement, according to which each partner specified the percentage at which he wished to participate in the "Tamar 1" Well.
The Partnership undertook to participate in the well to the full extent of its Rights in the said Licenses, (5%). As a result of the withdrawal of some of the partners and the decision of other the partners to reduce their participation in the drilling, the partners decided to authorize the operator (BG) to act up to November 30, 2003, to market the balance of the participation percentages to a third party.
"Isramco - Negev 2" Limited Partnership
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)
On February 27, 2003, the Commissioner agreed to extend the validity of the Licenses to December 3, 2004, and provided that the latest date for beginning the drilling shall be no later than September 1, 2004.
On December 16, 2003, the Commissioner notified that, in light of the business condition created in the joint venture due to the withdrawal of some of the partners and the failure to recruit other partners to participate in the drilling, there is no obligation to execute a drilling up the end of the License period.
At this stage, and so long as their is no commitment to participate in the full amount of the rights in the drilling (100%), the General Partner cannot estimate if and when the said drilling will be executed.
G. LICENSE 253 / "SHIKMA YAM"
In July 2001, the Partnership acquired participation rights from I.N.O.C (a company controlled by the controlling shareholder in the general partner) at a rate of 27.5% in the License 523 / "Shikma Yam", which was planned for drilling for gas purposes, "Nordan 1".
According to the terms of purchase, the Partnership undertook to bear 55% of the exploration and development costs of the License out of an amount of $7.7 million, after which each of the participants in the License will be responsible for the additional exploration and development costs pro rata to the rate of their rights in the License.
On December 14, 2001, drilling began at "Nordan 1". The drilling was planned for a depth of 1,900 meters with a budget of approximately $8.6 million. On December 25, 2001, the validity of the license was extended until drilling is concluded at "Nordan 1" and the execution of further tests therein. In January 2002, in view of the findings from the drilling, the partners decided not to perform production tests in the well. As a result, the well was abandoned and the License expired.
The cost of the well amounted to $9.3 million. The Partnership's share in the cost of the well amounts to NIS 20.9 million and was recorded to the statement of earnings for the years 2001 and 2002.
"Isramco - Negev 2" Limited Partnership
NOTE 6 - OTHER RECEIVABLES
DECEMBER 31 DECEMBER 31
2003 2002
--------------- ---------------
NIS THOUSANDS NIS THOUSANDS
--------------- ---------------
Accrued income - 8
Isramco Inc. - related party - 4
Other 318 201
--------------- ---------------
318 213
=============== ===============
|
NOTE 7 - INVESTMENTS IN OIL AND GAS PROPERTIES
DECEMBER 31 DECEMBER 31
2003 2002
--------------- ---------------
NIS THOUSANDS NIS THOUSANDS
--------------- ---------------
Investment in "Or 1" drilling (1) 7,609 7,609
Investment in "Nir 1" drilling (2) - 10,949
--------------- ---------------
7,609 18,558
=============== ===============
|
(1) See Note 5A. (2) See Note 5B.
NOTE 8 - OTHER PAYABLES
DECEMBER 31 DECEMBER 31
2003 2002
--------------- ---------------
NIS THOUSANDS NIS THOUSANDS
--------------- ---------------
Accrued expenses 412 441
Other - 2
--------------- ---------------
412 443
=============== ===============
24
|
"Isramco - Negev 2" Limited Partnership
NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS
A. In the event of discovery of oil and or gas or other valuable material that can be produced within the licenses in which the Partnership is active at present and other licenses in which the Partnership will participate, the Partnership undertook to pay royalties from the revenues generated from the first 10% of its share in the license/lease/permit, as follows:
ONSHORE LICENSES OFFSHORE LICENSES
------------------------------------ ---------------------------------
UP TO THE DATE FOLLOWING THE UP TO THE DATE FOLLOWING THE
OF RETURN OF THE DATE OF RETURN OF RETURN OF DATE OF RETURN
INVESTMENT OF THE INVESTMENT THE INVESTMENT OF THE INVESTMENT
----------------- ----------------- -------------- -----------------
To Isramco Inc. 5.00% 13.0% 1.00% 13.00%
|
In addition, in the event of a discovery of oil and/or gas and/or other valuable material that will be extracted and realized from the Med Ashdod Lease and the Med Yavneh Lease, the limited partnership has undertaken to pay royalties from the revenues generated from the first 10% of its share in the lease as specified below:
THE MED ASHDOD LEASE AND MED YAVNEH LEASE
--------------------------------------------
UP TO THE DATE OF FOLLOWING THE DATE OF
RETURN OF THE RETURN OF THE
INVESTMENT INVESTMENT
-------------------- ---------------------
To J. O. E. L. 0.51% 6.58%
To Equital Ltd. 0.38% 4.93%
To Isramco Inc. 0.06% 0.83%
|
Isramco Inc. is entitled to an overriding royalty of 2% from the Partnership's share in the oil and/or gas, that is produced from the Med Ashdod and Med Yavneh lease and/or of any Petroleum right that comes in their place, this being in addition to any other royalty and/or consideration to which Isramco is entitled at present.
B. The Partnership has an obligation for the payment of an overriding royalty to the general partner of 5% of the Partnership's share of the revenues from oil and/or gas (gross, before expenses and other payments including a royalty to the State according to the Petroleum Law, 5712 - 1952), that is produced from the Gal Licenses, including any oil assets that may come in their place.
C. According to an agreement dated February 1997, the Partnership acquired the full rights of Equital Ltd., a related party, in the Shikma Carveout in the Ashdod Lease (10%) to a depth of 1,500 meters and below.
The Partnership has undertaken to pay Equital Ltd. if the well is found to be commercial, the amount of $84.5 thousand, as well as a royalty at the rate of 6% before and after the return of the investment.
D. The Partnership has an undertaking to pay royalties to the State of Israel in accordance with the Petroleum Law, 5712 - 1952.
"Isramco - Negev 2" Limited Partnership
NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
E. According to an amendment to the Limited Partnership agreement, dated August 6, 1993, that is valid from June 1993, it was determined that the Limited Partnership shall pay the general partner an amount that is the equivalent of $35,000 a month for placing the services of the employees of the general partner, as needed, at the disposal of the Limited Partnership and for rent and regular maintenance of part of the offices of Isramco Inc. in Israel that is used also by the Limited Partnership.
At the General Meeting of owners of the participation units, that was held in February 1997, it was decided to approve an update of the payment to the general partner to a sum that is the equivalent of $42,000 (plus Value Added Tax) from January 1997. At that meeting, a commitment was given by the general partner according to which the general partner would collect a monthly payment of only $40,000 (plus Value Added Tax).
F. According to an agreement (hereinafter - "the Marketing Agreement") signed in March 1989 between the Limited Partnership and the East Mediterranean Oil and Gas Company Ltd. (hereinafter - "EMOG"), EMOG was granted the right to be appointed the exclusive marketing agent of the Limited Partnership in Israel and areas under its control for the wholesale marketing of crude oil from the oil fields of the Negev 2 Venture to which the Limited Partnership is entitled. In an agreement signed in March 1992 between the Limited Partnership and other companies some of whom at that time were parties having an interest in the general partner (J. O. E. L. Jerusalem Oil Explorations Ltd. and Isramco Inc.), various oil rights were transferred to the Limited Partnership, including the "Negev Med" preliminary permit on the basis of which the Med Ashdod and Med Yavneh leases were issued later on (hereinafter - "the Rights Transfer Agreement"). In the Rights Transfer Agreement, it was determined that the marketing of the crude oil produced from the oil assets that had been transferred to it from the above interested parties according to the Rights Transfer Agreement would be carried out by EMOG in accordance with the Marketing Agreement.
The period of the agreement is fifteen years from the first commercial production. EMOG may assign its rights and obligations under the agreement.
G. The oil rights in which the Limited Partnership has a share are allocated for a short term and on certain conditions. An extension of the validity of an oil asset is usually at the discretion of the authorities in accordance with the Petroleum Law as well as the renewal of any part thereof or additional conditions. In the event of failure to fully comply with the conditions, the right may be cancelled or reduced. The ability to exploit the oil assets in accordance with the lease and the licenses is contingent, among other things, on the Limited Partnership and the partners therein being willing and able to finance the various operations therein as well as the availability of appropriate equipment and personnel in Israel. The lack of equipment or personnel is liable to increase the costs or totally prevent fulfillment of the terms of the lease or the license or the permit or prevent or reduce the period of their extension or even lead to their cancellation.
"Isramco - Negev 2" Limited Partnership
NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
In addition, in accordance with the Petroleum Law, if within the first three years of the granting of the lease, oil/gas is not produced from the lease site in commercial quantities, the appointed Minister is permitted to send the lease owner a notification demanding that production of oil/gas in commercial quantities be commenced within the time period determined by the Minister in the notification - which may not be less than 60 days. If production, as stated, is not commenced, the lease will expire. To the best of the knowledge of the General Partner, the Ministry of Infrastructures is endeavoring to revise the legislation in such a way that with respect to the production of gas an extension of 10 years will be given and, therefore, in the estimation of the General Partner, expiration of the Med Yavneh lease is not anticipated.
H. According to the trust agreement, in the event of termination of the trust, the cash received as a result of the realization of the trust assets less the costs involved in the realization and termination of the trust, will be divided among the owners of the participation units and the holders of the options (if any) less the exercise premium.
I. The Supervisor is entitled to receive wages from the Limited Partnership in an amount in shekels which is the equivalent to $3,500 per month, as long as the trust agreement remains in effect. Similarly, the Supervisor is entitled to receive from the Limited Partnership expenses that were duly incurred in the discharge of his duties and that were approved by the general partner.
J. According to the trust agreement, the limited partner is entitled to receive annual wages of $1,000.
K. The Limited Partnership has undertaken to indemnify the general partner and any of his employees and/or directors for any loss, expenses or damage that they or their agents bear or are required to bear, whether directly or indirectly, as a result of any act or omission for which they are not liable according to the provisions of the Limited Partnership agreement.
L. Some of the offshore drillings in which the partnership may be a partner, are subject to the conditions and restrictions that determined or that may be determined in future by the Defense system. These conditions and restrictions could cause a change and delay in the time schedules and, as a result, to generate an increase in expected costs and a failure to comply with the license.
M. In 2002, the Income Tax Authority granted the Partnership an exemption from withholding of tax at the source according to which tax was not withheld from the Partnership's income in that year. As part of the examination of the Income Tax Authority regarding the issuance of a certificate for purposes of calculating the deduction to an eligible holder due to the holding of participation units for the 2002 tax year, the Partnership was required to pay NIS 1,751 thousand in respect of the tax deriving from the taxable income for the 2002 tax year, which relates to the unit holders. As a result of discussions with the Income Tax Authority, on August 26, 2003, the certificate was issued, without the said tax payment by the Partnership.
"Isramco - Negev 2" Limited Partnership
NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
As part of discussions with the Income Tax Authority in connection with the Partnership's request to receive an exemption from withholding of tax at the source, the Income Tax Authority demanded that the tax due in respect of the taxable income allocated to the holders of the participation units, if any, shall be paid by the Partnership for such holders. In the estimation of the general partner, in 2003, no taxable income is expected to be allocated to the holders of the participation units and, accordingly, no provision for taxes was recorded.
N. (1) The Limited Partnership shall be dissolved upon the occurrence of any of the following instances:
a. At the end of the period in which the Limited Partnership holds, directly or indirectly, a valid oil asset or rights therein or in the oil to be produced.
b. If the general partner should cease to fulfill its position and no other partner is appointed in its place within 6 months from the date on which he left office.
c. If the partners agree to dissolve the Limited Partnership.
(2) According to the directives of the Stock Exchange, the Board of Directors of the Stock Exchange may delist the Limited Partnership's securities from trading in the following instances:
a. If the Limited Partnership ceases to operate in the area of the activities that were specified by the Limited Partnership before the registration for trading, for a period of nine consecutive months in which the most of the Partnership's expenses are not expenses for exploration and development, within the meaning of the Income Tax Regulations (Deductions from Income of Holders of Oil Rights) 5716 - 1956.
b. The Limited Partnership commences to also engage in areas of activity that are not within the limits of its exclusive occupation.
c. The Limited Partnership commences to also engage in projects other than those that were specified by the Limited Partnership before the first registration for trading or other than those that were specified in the Limited Partnership agreement after the first registration for trading and that an amendment of the partnership agreement was approved by the General Meeting of the owners of the participation units.
In addition thereto, the processes of delisting the Partnership's securities will be identical to the delisting of securities of a registered company.
"Isramco - Negev 2" Limited Partnership
NOTE 10 - LIMITED PARTNERSHIP'S CAPITAL
DECEMBER 31 DECEMBER 31
2003 2002
-------------- --------------
Participation units of NIS 0.01 par value (in thousands) 4,250,908 4,250,908
============== ==============
|
A. THE GENERAL PARTNER - ISRAMCO OIL AND GAS LTD.
Up to December 31, 2003, the general partner invested until NIS 389 thousand in the capital of the Limited Partnership, and it participates in the Limited Partnership's expenses and losses and is entitled to its income according to the share of the general partner in the capital invested in the Limited Partnership's capital.
As at December 31, 2003, the share of the general partner in the capital is 0.05% and is progressively reduced with every increase in capital.
B. THE LIMITED PARTNER - ISRAMCO MANAGEMENT (1988) LTD.
As at December 31, 2003, the Limited Partner invested in the capital of the Limited Partnership, NIS 856,002 thousand (after deduction of the issuance costs) and it participates in the Limited Partnership's expenses and losses and is entitled to its income according to its share in the capital invested in the Limited Partnership's capital. As at December 31, 2003, the share of the limited partner in the capital is 99.95% and is progressively increased with every increase in capital.
C. THE CAPITAL OF THE LIMITED PARTNERSHIP
The composition of the capital of the Limited Partnership is as follows:
LIMITED PARTNER GENERAL PARTNER TOTAL
---------------- ----------------- ---------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
---------------- ----------------- ---------------
Investment in the Partnership, net 856,002 389 856,391
---------------- ----------------- ---------------
Loss balance at beginning of the year (397,092) (254) (397,346)
Net income for year 51,232 26 51,258
---------------- ----------------- ---------------
Loss balance at end of the year (345,860) (228) (346,088)
---------------- ----------------- ---------------
Limited Partnership capital at end of the year 510,142 161 510,303
================ ================= ===============
|
D. In a legal opinion the Limited Partnership received, it was recommended that when the partners will have accrued profits, the limited partner and/or the Supervisor would request the Court to issue instructions in respect of the doubts raised in the opinion regarding the distributable profits and if and when distribution of profits by the Limited Partnership will be deemed to be a withdrawal of part of the investment of the limited partner within the meaning of Section 63(B) of the Partnerships Ordinance.
"Isramco - Negev 2" Limited Partnership
NOTE 11 - DETAILS TO STATEMENT OF EARNINGS CATEGORIES
A. FINANCE INCOME (EXPENSE), NET
FOR THE YEAR ENDED 31 DECEMBER
----------------------------------------------------
2003 2002 2001
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- --------------- ----------------
Gain (loss) on marketable securities, net 67,183 (50,017) 7,683
Interest on deposits in banks 642 384 9,360
Dividend and interest income from marketable
securities 25,492 18,997 13,327
Commissions, management fees and others (3,623) (3,941) (3,649)
--------------- --------------- ----------------
89,694 (34,577) 26,721
=============== =============== ================
B. PARTICIPATION IN GAS AND OIL EXPLORATION, NET
FOR THE YEAR ENDED 31 DECEMBER
----------------------------------------------------
2003 2002 2001
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- --------------- ----------------
"Med Ashdod" holding (including "Nir 1" and "Nir 2"
wells) 35,617 638 1,318
"Negev 2" venture - (498) -
"North Marine" license - 200 441
"Center Marine" license (including "Romi 1" well) (459) 229 459
"Granite" license - - 285
"Netanya" license - - 82
"South Marine" license 227 254 135
"Med Yavne" lease 315 449 1,209
"Gal" licenses 429 302 2,249
"Shikma Sea" license - "Nordon 1" well (382) 497 20,445
Others 22 74 25
--------------- --------------- ----------------
35,769 2,145 26,648
=============== =============== ================
Including expenses to related parties 4,942 1,105 2,592
=============== =============== ================
|
"Isramco - Negev 2" Limited Partnership
NOTE 11 - DETAILS TO STATEMENT OF EARNINGS CATEGORIES (CONT'D)
C. GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE YEAR ENDED 31 DECEMBER
----------------------------------------------------
2003 2002 2001
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- --------------- ----------------
Management fee to general partner -
related party 2,168 2,287 2,122
Professional services 126 88 179
Taxes and permits 122 104 118
Wages to limited partner and
supervisor 219 198 187
Others 32 36 49
--------------- --------------- ----------------
2,667 2,713 2,655
=============== =============== ================
D. INCOME (LOSS) PER PARTICIPATION UNIT
FOR THE YEAR ENDED 31 DECEMBER
----------------------------------------------------
2003 2002 2001
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- --------------- ----------------
Number of participation units used to compute
the basic and diluted income (loss) per
participation unit (in thousands) 4,250,908 4,250,908 4,250,908
Income (loss) used in computing basic and
diluted loss (in NIS 000) per participation unit 51,232 (39,435) (2,582)
|
NOTE 12 - INTERESTED PARTIES AND RELATED PARTIES
A. The limited partnerships, Naphtha Explorations, I.N.O.C. Dead Sea, Modi'in Energy and Partners and the Partnership, are managed by related companies that are controlled by the same controlling interest. The said partnerships together with Isramco Inc., which is also under the control of the same controlling interest, are partners, in full or in part, in different gas and oil explanations.
The joint ventures for oil and gas exploration in which the said partnerships participate and the Partnership receive services from companies that are related parties and are controlled by the same controlling interest. Also, in most of the joint ventures, in which the Partnership participates, some of the partners are related parties and interested parties that also act in part as venture operators who are entitled to venture operator fees at a set rate of the direct expenses or venture operator fees at a fixed monthly amount, according to the joint venture agreements.
B. Balances and transactions with related and interested parties are included in the notes to the financial statements in the appropriate categories.
C. For information on undertakings with related and interested parties - See Note 9.
D. For information on royalties to related parties and interested parties - See Note 9.
"Isramco - Negev 2" Limited Partnership
NOTE 13 - EVENTS OCCURRING SUBSEQUENT TO THE BALANCE SHEET DATE
A. For information on events subsequent to the balance sheet date on the "Med Ashdod" Lease - see Note 5B.
B. For information on events subsequent to the balance sheet date on the "South Marine" License - see Note 5E.
NOTE 14 - DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP
A. GENERAL
The Limited Partnership's financial statements are prepared in accordance with generally accepted accounting principles in Israel ("Israeli GAAP"), which differ in certain respects from generally accepted accounting principles in the United States ("U.S. GAAP"). Differences which have a significant effect on the Limited Partnership's net assets, income and equity, are set forth below.
1. EFFECT OF INFLATION
The Limited Partnership includes the effect of price level changes in the accompanying financial statements, as required under Israeli GAAP and as discussed in Note 3 to these financial statements.
U.S. GAAP does not provide for recognition of the effects of such price level changes. However, the U.S. Securities and Exchange Commission permits recognition of the effects of price level changes and, therefore, such effects are not included in the reconciliation of net income or equity presented herein.
2. MARKETABLE SECURITIES
The Limited Partnership owns 13.5% of the participation units of a related limited partnership, which is engaged in oil and gas exploration. Under Israeli GAAP, these participation units, which are designated for sale in the short term, are recorded at market value as at the balance sheet date with unrealized income/losses being recorded in the statements of earnings. Under U.S. GAAP, the participation units are recorded using the equity method in accordance with EITF - D-46 which requires implementation of Statement of Position 78-9 for the Limited Partnership's investments.
"Isramco - Negev 2" Limited Partnership
NOTE 15 - CONDENSED OF FINANCIAL STATEMENTS IN NOMINAL VALUES
A. BALANCE SHEETS
31 DECEMBER 31 DECEMBER
2003 2002
--------------- ---------------
NIS THOUSANDS NIS THOUSANDS
--------------- ---------------
CURRENT ASSETS
Cash and cash equivalents 25,937 33,482
Marketable securities 472,658 415,121
Joint ventures in gas and oil
exploration 4,249 1,346
Receivables and debit balances 318 216
--------------- ---------------
503,162 450,165
--------------- ---------------
INVESTMENTS
Investments in gas and oil properties 7,186 17,495
--------------- ---------------
510,348 467,660
=============== ===============
CURRENT LIABILITIES
Payables and credit balances 412 452
Joint ventures in gas and oil exploration 56 764
--------------- ---------------
468 1,216
--------------- ---------------
LIMITED PARTNERSHIP CAPITAL 509,880 466,444
--------------- ---------------
510,348 467,660
=============== ===============
|
"Isramco - Negev 2" Limited Partnership
NOTE 15 - CONDENSED OF FINANCIAL STATEMENTS IN NOMINAL VALUES (CONT'D)
B. STATEMENTS OF EARNINGS
FOR THE YEAR ENDED
-------------------------------------------------
31 DECEMBER 31 DECEMBER 31 DECEMBER
2003 2002 2001
--------------- --------------- ---------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- --------------- ---------------
INCOME
Financing income, net 81,344 - 31,894
--------------- --------------- ---------------
EXPENSES
Financing expense, net - 5,512 -
Participation in gas and oil
exploration, net 35,216 2,107 25,456
Administrative and general
expenses 2,692 2,738 2,532
--------------- --------------- ---------------
37,908 10,357 27,988
--------------- --------------- ---------------
NET INCOME (LOSS) 43,436 (10,357) 3,906
=============== =============== ===============
|
"Isramco - Negev 2" Limited Partnership
NOTE 15 - CONDENSED OF FINANCIAL STATEMENTS IN NOMINAL VALUES (CONT'D)
C. STATEMENTS OF CHANGES IN LIMITED PARTNERSHIP CAPITAL
INVESTMENTS IN
PARTNERSHIP
CAPITAL LOSSES TOTAL
--------------- --------------- ---------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- --------------- ---------------
BALANCE AS OF JANUARY 1, 2001 587,280 (114,385) 472,895
Net income for the year - 3,906 3,906
--------------- --------------- ---------------
BALANCE AS OF DECEMBER 31, 2001 587,280 (110,479) 476,801
Net loss for the year - (10,357) (10,357)
--------------- --------------- ---------------
BALANCE AS OF DECEMBER 31, 2002 587,280 (120,836) 466,444
Net income for the year - 43,436 43,436
--------------- --------------- ---------------
BALANCE AS OF DECEMBER 31, 2003 587,280 (77,400) 509,880
=============== =============== ===============
D. LIMITED PARTNERSHIP CAPITAL
The Limited Partnership capital is comprised as follows:
LIMITED PARTNER GENERAL PARTNER TOTAL
--------------- --------------- ---------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- --------------- ---------------
Partners' investments, net 587,141 139 587,280
--------------- --------------- ---------------
Loss balance at beginning of year (120,695) (141) (120,836)
Net income for the year 43,414 22 43,436
--------------- --------------- ---------------
Loss balance at end of year (77,281) (119) (77,400)
--------------- --------------- ---------------
Partnership capital at end of year 509,860 20 509,880
=============== ================ ===============
|