Edgar Filing: BARNWELL INDUSTRIES INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2008

or

[ ]		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-5103

BARNWELL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		72-0496921
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1100 Alakea Street, Suite 2900, Honolulu, Hawaii		96813
(Address of principal executive offices)		(Zip code)

(808) 531-8400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o			Accelerated filer o
Non-accelerated filer o			Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

As of May 9, 2008 there were 8,269,460 shares of common stock, par value $0.50, outstanding.

BARNWELL INDUSTRIES, INC.

AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION:

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets - March 31, 2008 and September 30, 2007 (Unaudited)	3

	Condensed Consolidated Statements of Earnings - three and six months ended March 31, 2008 and 2007 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows - six months ended March 31, 2008 and 2007 (Unaudited)	5

	Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income - three months ended March 31, 2008 and 2007 (Unaudited)	6

	Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income - six months ended March 31, 2008 and 2007 (Unaudited)	7

	Notes to Condensed Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

PART II.	OTHER INFORMATION:

Item 1A.	Risk Factors	39

Item 4.	Submission of Matters to a Vote of Security Holders	39

Item 6.	Exhibits	40

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,			September 30,
	2008			2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	8,187,000			$	10,107,000
Accounts receivable, net	9,059,000				7,131,000
Deferred income taxes	1,714,000				2,171,000
Current taxes receivable	-				1,040,000
Other current assets	2,003,000				1,030,000
TOTAL CURRENT ASSETS	20,963,000				21,479,000

DEPOSITS ON RESIDENTIAL PARCELS	600,000				800,000

RESIDENTIAL LOTS UNDER DEVELOPMENT	6,421,000				5,009,000

INVESTMENT IN RESIDENTIAL PARCELS	5,022,000				2,383,000

INVESTMENT IN JOINT VENTURES	2,765,000				2,765,000

INVESTMENT IN LAND INTERESTS	1,450,000				1,450,000

PROPERTY AND EQUIPMENT	205,620,000				202,342,000
ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION	(115,349,000		)		(111,663,000		)
PROPERTY AND EQUIPMENT, NET	90,271,000				90,679,000

TOTAL ASSETS	$	127,492,000			$	124,565,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	6,137,000			$	5,983,000
Accrued capital expenditures	4,672,000				2,774,000
Accrued stock appreciation rights	973,000				1,672,000
Accrued incentive plan costs	1,633,000				2,029,000
Other accrued compensation costs	2,339,000				3,228,000
Drilling advances	401,000				1,407,000
Payable to joint interest owners	1,480,000				1,123,000
Income taxes payable	610,000				-
Current portion of long-term debt	582,000				354,000
Other current liabilities	2,687,000				2,160,000
TOTAL CURRENT LIABILITIES	21,514,000				20,730,000

LONG-TERM DEBT	24,976,000				22,104,000

LIABILITY FOR RETIREMENT BENEFITS	2,542,000				2,387,000

ASSET RETIREMENT OBLIGATION	4,830,000				4,734,000

DEFERRED INCOME TAXES	16,453,000				19,299,000

MINORITY INTEREST	863,000				707,000

STOCKHOLDERS’ EQUITY:
Common stock, par value $0.50 per share; Authorized, 20,000,000 shares:
8,393,060 issued at March 31, 2008,
8,280,060 issued at September 30, 2007	4,197,000				4,140,000
Additional paid-in capital	1,003,000				738,000
Retained earnings	49,168,000				44,988,000
Accumulated other comprehensive income, net	3,815,000				4,933,000
Treasury stock, at cost:
123,600 shares at March 31, 2008,
11,900 shares at September 30, 2007	(1,869,000		)		(195,000		)
TOTAL STOCKHOLDERS’ EQUITY	56,314,000				54,604,000

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	127,492,000			$	124,565,000

See Notes to Condensed Consolidated Financial Statements

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

	Three months ended							Six months ended
	March 31,							March 31,
	2008				2007			2008			2007
Revenues:
Oil and natural gas		$	11,503,000			$	8,660,000		$	21,593,000	$	17,028,000
Contract drilling		2,383,000				1,258,000			4,593,000		2,345,000
Sale of interest in leasehold land, net		201,000				957,000			709,000		2,217,000
Sale of development rights, net		-				-			2,497,000		2,292,000
Gas processing and other		220,000				288,000			575,000		549,000

		14,307,000				11,163,000			29,967,000		24,431,000
Costs and expenses:
Oil and natural gas operating		2,551,000				2,391,000			4,932,000		4,831,000
Contract drilling operating		1,956,000				1,073,000			3,777,000		2,098,000
General and administrative		3,208,000				2,209,000			6,283,000		5,950,000
Depreciation, depletion and amortization		3,636,000				3,127,000			7,379,000		6,389,000
Interest expense		255,000				231,000			577,000		456,000
Minority interest in earnings (losses)		(24,000		)		168,000			559,000		864,000

		11,582,000				9,199,000			23,507,000		20,588,000

Earnings before income taxes		2,725,000				1,964,000			6,460,000		3,843,000

Income tax provision		1,040,000				706,000			1,456,000		1,471,000

NET EARNINGS		$	1,685,000			$	1,258,000		$	5,004,000	$	2,372,000

BASIC NET EARNINGS PER COMMON SHARE		$	0.20			$	0.15		$	0.61	$	0.29

DILUTED NET EARNINGS PER COMMON SHARE		$	0.20			$	0.15		$	0.59	$	0.27

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
BASIC		8,245,086				8,194,707			8,228,811		8,181,742
DILUTED		8,424,153				8,613,439			8,462,332		8,642,402

See Notes to Condensed Consolidated Financial Statements

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended
	March 31,
	2008				2007
Cash flows from operating activities:
Net earnings		$	5,004,000			$	2,372,000
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, depletion, and amortization		7,379,000				6,389,000
Minority interest in earnings		559,000				864,000
Retirement benefits expense		239,000				216,000
Accretion of asset retirement obligation		137,000				115,000
Share-based compensation payments		-				(1,189,000		)
Asset retirement obligation payments		(84,000		)		(67,000		)
Share-based compensation (benefit) expense		(669,000		)		887,000
Additions to residential lots under development		(1,344,000		)		-
Deferred income tax (benefit) expense		(1,378,000		)		601,000
Sale of interest in leasehold land, net		(709,000		)		(2,217,000		)
Sale of development rights, net		(2,497,000		)		(2,292,000		)
Decrease from changes in current assets and liabilities		(2,440,000		)		(710,000		)

Net cash provided by operating activities		4,197,000				4,969,000

Cash flows from investing activities:
Proceeds from sale of development rights, net of fees paid		2,497,000				2,292,000
Proceeds from sale of interest in leasehold land, net of fees paid		709,000				2,217,000
Proceeds from gas over bitumen royalty adjustments		114,000				121,000
Return of capital distribution from joint venture		-				525,000
Purchase of lot acquisition rights		-				(1,400,000		)
Deposits on residential parcels		-				(1,400,000		)
Investment in joint ventures		-				(3,000,000		)
Capital expenditures - oil and gas		(6,840,000		)		(9,162,000		)
Capital expenditures - all other		(519,000		)		(328,000		)
Additions to investment in residential parcel		(261,000		)		-

Net cash used in investing activities		(4,300,000		)		(10,135,000		)

Cash flows from financing activities:
Proceeds from long-term debt borrowings		1,327,000				2,700,000
Proceeds from exercise of stock options		145,000				59,000
Repayments of long-term debt		(54,000		)		-
Payment of loan commitment fee		(100,000		)		-
Distributions to minority interest partners		(653,000		)		(864,000		)
Payment of dividends		(824,000		)		(1,227,000		)
Purchases of common stock for treasury		(1,596,000		)		-

Net cash (used in) provided by financing activities		(1,755,000		)		668,000

Effect of exchange rate changes on cash and cash equivalents		(62,000		)		(116,000		)

Net decrease in cash and cash equivalents		(1,920,000		)		(4,614,000		)
Cash and cash equivalents at beginning of period		10,107,000				11,972,000

Cash and cash equivalents at end of period		$	8,187,000			$	7,358,000

See Notes to Condensed Consolidated Financial Statements

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Three months ended March 31, 2008 and 2007

(Unaudited)

													Accumulated
				Additional									Other						Total
	Shares	Common		Paid-In		Comprehensive				Retained			Comprehensive			Treasury			Stockholders’
	Outstanding	Stock		Capital		Income				Earnings			Income			Stock			Equity

Balance at December 31, 2006	8,169,060	$	4,085,000	$	171,000					$	43,821,000		$	1,531,000		$	-		$	49,608,000

Exercise of stock options, 50,000 shares net of 1,900 shares tendered and placed in treasury	48,100	25,000		74,000												(40,000		)	59,000

Share-based compensation costs				16,000															16,000

Dividends declared, $0.05 per share										(410,000		)							(410,000		)

Comprehensive income:
Net earnings						$		1,258,000		1,258,000									1,258,000
Other comprehensive income – foreign currency translation adjustments, net of $220,000 of taxes						279,000							279,000						279,000
Total comprehensive income						$	1,537,000

At March 31, 2007	8,217,160	$	4,110,000	$	261,000					$	44,669,000		$	1,810,000		$	(40,000	)	$	50,810,000

Balance at December 31, 2007	8,196,460	$	4,160,000	$	889,000					$	47,895,000		$	5,250,000		$	(1,869,000	)	$	56,325,000

Exercise of stock options, 73,000 shares	73,000	37,000		107,000															144,000

Share-based compensation costs				7,000															7,000

Dividends declared, $0.05 per share										(412,000		)							(412,000		)

Comprehensive income:
Net earnings						$	1,685,000			1,685,000									1,685,000
Other comprehensive loss – foreign currency translation adjustments, net of $834,000 of tax benefit						(1,463,000			)				(1,463,000		)				(1,463,000		)
Other comprehensive income – retirement plans – amortization of accumulated other comprehensive loss into net periodic benefit cost, net of $15,000 of taxes						28,000							28,000						28,000
Total comprehensive income						$	250,000

At March 31, 2008	8,269,460	$	4,197,000	$	1,003,000					$	49,168,000		$	3,815,000		$	(1,869,000	)	$	56,314,000

See Notes to Condensed Consolidated Financial Statements

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Six months ended March 31, 2008 and 2007

(Unaudited)

													Accumulated
					Additional								Other						Total
	Shares		Common		Paid-In		Comprehensive			Retained			Comprehensive			Treasury			Stockholders’
	Outstanding		Stock		Capital		Income			Earnings			Income			Stock			Equity

Balance at September 30, 2006	8,169,060		$	4,085,000	$	144,000				$	43,524,000		$	2,852,000		$	-		$	50,605,000

Exercise of stock options, 50,000 shares net of 1,900 shares tendered and placed in treasury	48,100		25,000		74,000											(40,000		)	59,000

Share-based compensation costs					43,000														43,000

Dividends declared, $0.15 per share										(1,227,000		)							(1,227,000		)

Comprehensive income:
Net earnings							$	2,372,000		2,372,000									2,372,000
Other comprehensive loss – foreign currency translation adjustments, net of $577,000 tax benefit							(1,042,000		)				(1,042,000		)				(1,042,000		)
Total comprehensive income							$	1,330,000

At March 31, 2007	8,217,160		$	4,110,000	$	261,000				$	44,669,000		$	1,810,000		$	(40,000	)	$	50,810,000

Balance at September 30, 2007	8,268,160		$	4,140,000	$	738,000				$	44,988,000		$	4,933,000		$	(195,000	)	$	54,604,000

Exercise of stock options, 113,000 shares net of 5,200 shares tendered and placed in treasury	107,800		57,000		166,000											(78,000		)	145,000

Share-based compensation costs					21,000														21,000

Tax benefit from employee stock option transactions					78,000														78,000

Purchases of 106,500 common shares for treasury	(106,500	)														(1,596,000		)	(1,596,000		)

Dividends declared, $0.10 per share										(824,000		)							(824,000		)

Comprehensive income:
Net earnings							$	5,004,000		5,004,000									5,004,000
Other comprehensive loss – foreign currency translation adjustments, net of $659,000 of tax benefit							(1,174,000		)				(1,174,000		)				(1,174,000		)
Other comprehensive income – retirement plans – amortization of accumulated other comprehensive loss into net periodic benefit cost, net of $29,000 of taxes							56,000						56,000						56,000
Total comprehensive income							$	3,886,000

At March 31, 2008	8,269,460		$	4,197,000	$	1,003,000				$	49,168,000		$	3,815,000		$	(1,869,000	)	$	56,314,000

See Notes to Condensed Consolidated Financial Statements

BARNWELL INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

Basis of Consolidation

The condensed consolidated financial statements include the accounts of Barnwell Industries, Inc. and all majority-owned subsidiaries, including an indirect 77.6%-owned land investment general partnership and two 80%-owned joint ventures (collectively referred to herein as “Barnwell,” “we,” “our,” “us,” or the “Company”). All significant intercompany accounts and transactions have been eliminated. Investments in companies over which Barnwell has the ability to exercise significant influence, but not control, are accounted for using the equity method.

Unless otherwise indicated, all references to “dollars” in this Form 10-Q are to U.S. dollars.

Unaudited Interim Financial Information

The Condensed Consolidated Balance Sheet as of March 31, 2008, the Condensed Consolidated Statements of Earnings for the three and six months ended March 31, 2008 and 2007, the Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2008 and 2007, and the Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the three and six months ended March 31, 2008 and 2007 have been prepared by Barnwell and are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2008 and for all periods presented have been made. The Condensed Consolidated Balance Sheet as of September 30, 2007 has been derived from audited consolidated financial statements.

Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in Barnwell’s September 30, 2007 Annual Report on Form 10-K. The results of operations for the period ended March 31, 2008 are not necessarily indicative of the operating results for the full year.

Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management of Barnwell to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates.

Significant Accounting Policies

Barnwell’s significant accounting policies are described in the Notes to Consolidated Financial Statements included in Item 8 of the Company’s most recently filed Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to the March 31, 2007 condensed consolidated financial statements to conform to classifications used in the March 31, 2008 condensed consolidated financial statements.

2. EARNINGS PER COMMON SHARE

Reconciliations between net earnings and common shares outstanding of the basic and diluted net earnings per share computations for the three and six months ended March 31, 2008 and 2007 are as follows:

Three months ended March 31, 2008

Net Earnings

Per-Share

(Numerator)

(Denominator)

Amount

Basic net earnings per share

1,685,000

8,245,086

0.20

Effect of dilutive securities - common stock options

179,067

Diluted net earnings per share

1,685,000

8,424,153

0.20

Six months ended March 31, 2008

Net Earnings

Per-Share

(Numerator)

(Denominator)

Amount

Basic net earnings per share

5,004,000

8,228,811

0.61

Effect of dilutive securities - common stock options

233,521

Diluted net earnings per share

5,004,000

8,462,332

0.59

Three months ended March 31, 2007

Net Earnings

Per-Share

(Numerator)

(Denominator)

Amount

Basic net earnings per share

1,258,000

8,194,707

0.15

Effect of dilutive securities - common stock options

418,732

Diluted net earnings per share

1,258,000

8,613,439

0.15

	Six months ended March 31, 2007
	Net Earnings			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
Basic net earnings per share		$	2,372,000		8,181,742		$	0.29

Effect of dilutive securities - common stock options		-			460,660

Diluted net earnings per share		$	2,372,000		8,642,402		$	0.27

3. SHARE-BASED PAYMENTS

On March 3, 2008, the stockholders of Barnwell approved the 2008 Equity Incentive Plan (the “2008 Plan”). Under the 2008 Plan, the Compensation Committee, which consists of independent members of Barnwell’s Board of Directors, is authorized to grant incentive stock options, nonstatutory stock options, stock options with stock appreciation rights, restricted stock, restricted stock units and performance units, qualified performance-based awards, and stock grants to employees, consultants and non-employee members of the Board of Directors. 800,000 shares of Barnwell common stock have been reserved for issuance pursuant to the 2008 Plan.

Under SFAS No. 123(R), share-based compensation cost is measured at fair value. Barnwell utilizes a closed-form valuation model to determine the fair value of each option award. Expected volatilities are based on the historical volatility of Barnwell’s stock over a period consistent with that of the expected terms of the options. The expected terms of the options represent expectations of future employee exercise and are estimated based on factors such as vesting periods, contractual expiration dates, historical trends in Barnwell’s stock price, and historical exercise behavior. The risk-free rates for periods within the contractual life of the options are based on the yields of U.S. Treasury instruments with terms comparable to the estimated option terms. Expected dividends are based on current and historical dividend payments. Share-based compensation expense recognized in earnings for the three and six months ended March 31, 2008 and 2007 are reflected in “General and administrative” expenses in the Condensed Consolidated Statements of Earnings.

The Company’s share-based compensation expense (benefit) and related income tax effects are as follows:

	Three months ended								Six months ended
	March 31,								March 31,
	2008				2007				2008				2007
Share-based compensation expense (benefit)		$	(95,000	)		$	(390,000	)		$	(669,000	)		$	887,000
Income tax effect - provision (benefit)		$	35,000			$	139,000			$	237,000			$	(292,000	)

As of March 31, 2008, there was $408,000 of total unrecognized compensation cost related to nonvested equity-classified and liability-classified share options. That cost is expected to be recognized over 3.1 years.

Total share-based compensation expense related to the vesting of awards in the three and six months ended March 31, 2008 was $84,000 and $129,000, respectively, as compared to $117,000 and $294,000 during the same periods of the prior year.

Equity-classified Awards

A summary of the activity in Barnwell’s equity-classified share options as of the beginning and end of the three and six months ended March 31, 2008 is presented below:

Three months ended March 31, 2008
						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
Options	Shares			Price		Term		Value
Outstanding at January 1, 2008		305,000			$6.48
Granted		-
Exercised		(73,000	)		$1.98
Forfeited/Expired		-
Outstanding at March 31, 2008		232,000			$7.90		3.0		$	699,000

Exercisable at March 31, 2008		179,500			$7.51		2.9		$	611,000

Six months ended March 31, 2008
						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
Options	Shares			Price		Term		Value
Outstanding at October 1, 2007		345,000			$5.96
Granted		-
Exercised		(113,000	)		$1.98
Forfeited/Expired		-
Outstanding at March 31, 2008		232,000			$7.90		3.0		$	699,000

Exercisable at March 31, 2008		179,500			$7.51		2.9		$	611,000

Total share-based compensation expense for equity-classified awards vested in the three and six months ended March 31, 2008 was $7,000 and $21,000, respectively, as compared to $16,000 and $43,000 during the three and six months ended March 31, 2007, respectively. There was no impact on income taxes as the expense relates to qualified options.

The total intrinsic value of equity options exercised during the three and six months ended March 31, 2008 was $524,000 and $1,047,000, respectively, as compared to $950,000 during the three and six months ended March 31, 2007.

Barnwell recorded a tax benefit of $78,000 related to employees’ disqualification of qualified stock options in the six months ended March 31, 2008. The tax benefit is reflected as an increase in additional paid-in capital in the six months ended March 31, 2008. There were no tax benefits from disqualification of stock options in the three months ended March 31, 2008 or in the three and six months ended March 31, 2007.

Liability-classified Awards

On December 11, 2007, Barnwell granted stock options to acquire 100,000 shares of Barnwell’s common stock under a non-qualified plan at a purchase price of $12.92 per share (market price on date of grant). The stock options were issued in March 2008 under the 2008 Plan, which received shareholder approval on March 3, 2008. These options vest annually over four years commencing one year from the date of grant and expire in December 2017. These options have stock appreciation rights that permit the holder to receive stock, cash or a combination thereof equal to the amount by which the fair market value, at the time of exercise of the option, exceeds the option price.