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Basic earnings per common share is based on
the weighted average number of shares of common stock outstanding
during the periods. Diluted earnings per common share is based on
the weighted average number of common shares and all dilutive potential
common shares outstanding during the period. The Company had outstanding
172,333, 117,000 and 30,000 stock options at December 31, 2002,
2003 and 2004, respectively, that were antidilutive. The Company
had outstanding 252,632 warrants at December 31, 2002 that were
antidilutive. These antidilutive stock options and warrants were
not included in the calculation because the exercise price of these
instruments exceeded the underlying market value of the options
and warrants as of the dates presented. The Company had 1,145,515
and 1,262,930 convertible preferred shares at December 31, 2002
and 2003, respectively, that were antidilutive and were not included
in the calculation.
CONTINGENCIES
Liabilities and other contingencies are recognized
upon determination of an exposure, which when analyzed indicates
that it is both probable that an asset has been impaired or that
a liability has been incurred and that the amount of such loss is
reasonably estimable.
ASSET RETIREMENT OBLIGATION
In June 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 requires
that an asset retirement obligation (ARO) associated with the retirement
of a tangible long-lived asset be recognized as a liability in the
period in which a legal obligation is incurred and becomes determinable,
with an offsetting increase in the carrying amount of the associated
asset. The cost of the tangible asset, including the initially recognized
ARO, is depleted such that the cost of the ARO is recognized over
the useful life of the asset. The ARO is recorded at fair value,
and accretion expense will be recognized over time as the discounted
liability is accreted to its expected settlement value. The fair
value of the ARO is measured using expected future cash outflows
discounted at the company's credit-adjusted risk-free interest rate.
The Company adopted SFAS No. 143 on January
1, 2003, which resulted in an increase to net oil and natural gas
properties of $0.4 million and additional liabilities related to
asset retirement obligations of $0.6 million. These amounts reflect
the ARO of the Company had the provisions of SFAS No. 143 been applied
since inception and resulted in a non-cash cumulative effect decrease
to earnings of $0.1 million ($0.2 million pretax). In accordance
with the provisions of SFAS No. 143, the Company records an abandonment
liability associated with its oil and natural gas wells when those
assets are placed in service, rather than its past practice of accruing
the expected undiscounted abandonment costs on a unit-of-production
basis over the productive life of the associated full cost pool.
Under SFAS No. 143, depletion expense is reduced since a discounted
ARO is depleted in the property balance rather than the undiscounted
value previously depleted under the old rules. The lower depletion
expense under SFAS No. 143 is offset, however, by accretion expense,
which is recognized over time as the discounted liability is accreted
to its expected settlement value.
Inherent in the fair value calculation of ARO
are numerous assumptions and judgments including the ultimate settlement
amounts, inflation factors, credit adjusted discount rates, timing
of settlement, and changes in the legal, regulatory, environmental
and political environments. To the extent future revisions to these
assumptions impact the fair value of the existing ARO liability,
a corresponding adjustment is made to the oil and natural gas property
balance. Settlements greater than or less then amounts accrued with
the ARO are recovered as a gain or loss upon settlement.
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