Toreador Resources 10-K 2009
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Amendment No. 1
Commission File Number: 0-02517
Toreador Resources Corporation
(Exact name of Registrant as specified in its charter)
Registrants telephone number, including area code: (214) 559-3933
Securities registered pursuant to Section 12(b) of the Exchange Act:
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check 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. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates, computed by reference to the closing sales price of such stock, as of June 30, 2008 was $115,162,327. (For purposes of determination of the aggregate market value, only directors, executive officers and 10% or greater stockholders have been deemed affiliates.)
The number of shares outstanding of the registrants common stock, par value $.15625, as of April 16, 2009 was 20,227,261 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Explanatory Note about the Report
Toreador Resources Corporation (Toreador, we, us, our or the Company) is filing this Amendment No. 1 on Form 10-K/A (Amendment No. 1) to its Annual Report on Form 10-K for the fiscal year ended December 31, 2008 originally filed with the Securities and Exchange Commission on March 16, 2009 (the Form 10-K) solely to add the conformed signature of its independent registered public accounting firm, Grant Thornton LLP, to the Report of Independent Registered Public Accounting Firm regarding Companys internal control over financial reporting and the Report of Independent Registered Public Accounting Firm regarding the consolidated financial statements of the Company (each a Report) contained in Part IV, Item 15 of the Form 10-K, which are incorporated by reference into Part II, Item 8 of the Form 10-K. The conformed signature of Grant Thornton LLP was inadvertently omitted from the electronic version of Part IV, Item 15 of the Form 10-K although the Company had manually signed copies of each Report in its possession when the Form 10-K was filed. When we filed the Form 10-K, we filed a conformed signature for Exhibit 23.1, the Grant Thornton consent, and had a manually signed copy of the consent when the Form 10-K was filed.
This Amendment No. 1 continues to describe the conditions as of the date of the original Form 10-K for the year ended December 31, 2008, and we have not updated the disclosures contained herein to reflect events that occurred at a later date. This Amendment No. 1 should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-K, including any amendment to those filings. In addition, pursuant to the rules of the Securities and Exchange Commission, Exhibits 31.1, 31.2 and 32.1 of the original Form 10-K have been amended and new Exhibits 31.1, 31.2 and 32.1 are filed herewith to contain currently dated certifications from our President and Chief Executive Officer and our Senior Vice PresidentChief Financial Officer.
The Report of Independent Registered Public Accounting Firm and Consolidated Financial Statements are set forth beginning on page F-1 of this Amendment No. 1 and are incorporated herein.
The financial statement schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes to the Consolidated Financial Statements.
(a) The following documents are filed as part of this report:
1. Index to Consolidated Financial Statements, Reports of Independent Registered Public Accounting Firm, Consolidated Balance Sheets as of December 31, 2008 and 2007, Consolidated Statements of Operations and Comprehensive Income (Loss) for the three years in the period ended December 31, 2008, Consolidated Statements of Changes in Stockholders Equity for each of the three years in the period ended December 31, 2008, Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2008, and Notes to Consolidated Financial Statements.
2. The financial statement schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes to Consolidated Financial Statements.
3. Exhibits: The exhibits required to be filed by this Item 15 are set forth in the Index to Exhibits accompanying this report.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.
INDEX TO EXHIBITS
* Previously filed on March 16, 2009 as an exhibit to our original Annual Report on Form 10-K.
** Filed herewith
+ Management contract or compensatory plan
Item 8. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors and Stockholders
Toreador Resources Corporation
We have audited Toreador Resources Corporation (a Delaware Corporation) and subsidiaries (the Company) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Toreador Resources Corporation and subsidiaries as of December 31, 2008 and 2007, and the related statements of operations and comprehensive income (loss), changes in stockholders equity and cash flows for each of the three years in the period ended December 31, 2008 and our report dated March 16, 2009 expressed an unqualified opinion.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Toreador Resources Corporation
We have audited the accompanying consolidated balance sheets of Toreador Resources Corporation (a Delaware corporation) and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders equity, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Toreador Resources Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 16, 2009 expressed an unqualified opinion.
TOREADOR RESOURCES CORPORATION
See accompanying notes to the consolidated financial statements.
TOREADOR RESOURCES CORPORATION
See accompanying notes to the consolidated financial statements.
TOREADOR RESOURCES CORPORATION
See accompanying notes to the consolidated financial statements.
TOREADOR RESOURCES CORPORATION
See accompanying notes to the consolidated financial statements.
TOREADOR RESOURCES CORPORATION
NOTE 1 DESCRIPTION OF BUSINESS
Toreador Resources Corporation (Toreador) is an independent energy company engaged in foreign oil and natural gas exploration, development, production, leasing and acquisition activities in France, Turkey, Romania and Hungary. The accompanying consolidated financial statements are presented in U.S. dollars and in accordance with accounting principles generally accepted in the United States.
BASIS OF PRESENTATION
Toreador consolidates all of its majority-owned subsidiaries (collectively, we, us, our, or the Company). All intercompany accounts and transactions are eliminated in consolidation. We account for our investments in entities in which we hold less than a majority interest under the equity method.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
The Companys estimates of crude oil and natural gas reserves are the most significant estimates used. All of the reserve data in the Annual Report on Form 10-K for the year ended December 31, 2008 are estimates. Reservoir engineering is a subjective process of estimating underground accumulations of crude oil and natural gas. There are numerous uncertainties inherent in estimating quantities of proved crude oil and natural gas reserves. The accuracy of any reserve estimates is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, reserve estimates may be different from the quantities of crude oil and natural gas that are ultimately recovered.
Other items subject to estimates and assumptions include the carrying amounts of oil and natural gas properties, goodwill, asset retirement obligations and deferred income tax assets. Actual results could differ significantly from those estimates.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include cash on hand, amounts due from banks and all highly liquid investments with original maturities of three months or less. We believe we maintain our cash in bank deposit accounts, substantially all of which exceed federally insured limits. We have not experienced any losses in such accounts.
As of December 31, 2008 and 2007 we had $16.8 million and $10.7 million, respectively, on deposit in foreign banks.
Restricted cash consists $2.9 million for letters of credit to secure additional permits in Hungary. The total amount is on deposit in a foreign bank. As of December 31, 2007 we had restricted cash of $8.7 million used to secure a bank Letter Guarantee that was issued as required under mediation proceedings with Micoperi, Srl and $2.1 million for a letter of credit to secure additional permits in Hungary.
CONCENTRATION OF CREDIT RISK AND ACCOUNTS RECEIVABLE
Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash, accounts receivable, and our hedging and derivative financial instruments. We place our cash with high credit quality financial institutions. We sell oil and natural gas to various customers. An allowance for doubtful accounts was established for
accounts receivable in Romania in 2007. The balance of this allowance for doubtful accounts was $219,772 in 2008 and $120,000 in 2007. Substantially all of our accounts receivable are due from purchasers of oil and natural gas. We place our hedging and derivative financial instruments with financial institutions and other firms that we believe have high credit ratings. For a discussion of the credit risks associated with our hedging activities, please see Derivative Financial Instruments below.
We periodically review the collectability of accounts receivable and record a valuation allowance for those accounts which are, in our judgment, unlikely to be collected. We have not had any significant credit losses in the past and we believe our accounts receivable are fully collectable with the exception of the current allowance.
The carrying amounts of financial instruments including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate fair value, at December 31, 2008 and 2007, due to the short-term nature or maturity of the instruments.
Long-term debt approximated fair value based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same maturities.
On December 31, 2008 the convertible subordinate notes which had a book value of $80.28 million, were trading at $770.00, which would equal a fair market value of approximately $61.8 million.
DERIVATIVE FINANCIAL INSTRUMENTS
We periodically utilize derivatives instruments such as futures and swaps for purposes of hedging our exposure to fluctuations in the price of crude oil and natural gas sales. We entered into futures and swap contracts for approximately 16,000 Bbls per month for the months of January 2008 through September 2008. This resulted in a fair value loss of $1.8 million. For the comparable period in 2007, we entered into futures and swap contracts for approximately 15,000 Bbls per month for the months of June 2007 through December 2008 and subsequently sold all contracts as of September 30, 2007 which resulted in a net loss of $813,000. As of December 31, 2008 we had no open commodity derivative contracts.
At December 31, 2007 we had the following open commodity contract with Total Oil Trading SA:
As of December 31, 2007, we recorded a net unrealized loss of $192,000 on the above open derivative contract. For the year ended December 31, 2007 we recognized a total derivative fair value loss of $1 million.
We have elected not to designate the derivative financial instruments to which we are a party as hedges, and accordingly, we record such contracts at fair value and recognize changes in such fair value in current earnings as they occur.
At December 31, 2008 and 2007, other current assets included $727,000, and $2.5 million of inventory, respectively. Those amounts consist of tubular goods and crude oil held in storage tanks. Inventories are stated at the lower of actual cost or market based on the average cost method.
ADVANCES PAID TO VENDORS
At December 31, 2008 and 2007, other current assets included $1.6 million and $0 of payments made to vendors in advance of performing the services or receiving the equipment.
OIL AND NATURAL GAS PROPERTIES
We follow the successful efforts method of accounting for oil and natural gas exploration and development expenditures. Under this method, costs of successful exploratory wells and all development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves are expensed. Significant costs associated with the acquisition of oil
and natural gas properties are capitalized. Upon sale or abandonment of units of property or the disposition of miscellaneous equipment, the cost is removed from the asset account, net of the accumulated depreciation or depletion, and the gain or loss is credited to or charged against operations.
Maintenance and repairs are charged to expense; betterments of property are capitalized and depreciated as described above.
We capitalize interest on major projects that require an extended period of time to complete. Interest capitalized in 2008, 2007 and 2006 was $1 million, $3.7 million, and $4.3 million, respectively.
We record furniture, fixtures and equipment at cost.
OIL AND NATURAL GAS PROPERTIES HELD FOR SALE
On September 17, 2008, we entered into an Assignment Agreement with Petrol Ofisi AS, a Turkish Company, to sell a 26.75% interest in the South Akcakoca sub-basin (SASB) assets, which was subsequently amended on January 30, 2009, for $55 million. These assets have been classified on the balance sheet as held for sale and are valued at lower of the book value or fair value less the cost to sale. Subsequent to the sale to Petrol Ofisi, the Company has retained a 10% working interest in the SASB assets.
DEPRECIATION, DEPLETION AND AMORTIZATION
We provide depreciation, depletion and amortization of our investment in producing oil and natural gas properties on the units-of-production method, based upon independent reserve engineers estimates of recoverable oil and natural gas reserves from the property. Depreciation expense for furniture, fixtures and equipment is generally calculated on a straight-line basis based upon estimated useful lives of three to seven years.
IMPAIRMENT OF ASSETS
We evaluate producing property costs for impairment and reduce such costs to fair value if the sum of expected undiscounted future cash flows is less than net book value pursuant to Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144). We assess impairment of non-producing leasehold costs and undeveloped mineral and royalty interests periodically on a property-by-property basis. We charge any impairment in value to expense in the period incurred.
Impairment charged in 2008 was $85.2 million compared to $13.4 million in 2007. The impairment was a result of the following:
(1) In 2008, the impairment charge in Turkey was a result of a decline in the fair market value of the Companys interest in South Akcakoca Sub-Basin assets. In June 2008, we determined the fair market value based on a Letter of Intent to sell a 26.75% interest in the South Akcakoca Sub-Basin assets to Petrol Ofisi AS for $80.3 million. This sale price indicated that the fair value of our 36.75% working interest was approximately $103.8 million. The net book value of the Black Sea asset at June 30, 2008 was $157.3 million, resulting in an impairment of $53.5 million.
(2) In January 2009, the Company and Petrol Ofisi agreed to a revised purchase price of $55 million. This resulted in an impairment on assets held for sale, which is comprised of the 26.75% interest in the South Akcakoca Sub-basin assets, of $25.6 million.
(3) In December 2008, we incurred an additional $2.4 million impairment charge in Turkey for assets that were unrelated to the sale of South Akcakoca Sub-Basin assets. The impairment was a result of writing off an exploratory well where sufficient progress was not made to develop the area and a plan of development will not be prepared, by the operator, in the foreseeable future.
(4) We recorded an impairment charge of $2 million for the undeveloped leasehold costs in Trinidad, due to managements decision to exit Trinidad and discontinue our association with our registered agent in the country.
(5) When recording the acquisition of Madison Oil in 2002, we recorded $833,000 of goodwill associated with the Turkish assets. We periodically review the value of goodwill to determine if an impairment is required. The review at December 31, 2008, indicated that the total amount recorded for goodwill should be impaired. The reason for this impairment is due to the fair value of the Turkish subsidiary, based on the discounted present value of the oil and gas reserves being less than the carrying value of the Turkish subsidiary. This resulted in an impairment charge of $833,000.
(6) In December 2008, we recorded an impairment in Romania of $600,000 due to the net book value of the oil and natural gas properties exceeding future cash flows.
(7) In April 2007, we sold our interest in ePsolutions for $3.4 million in cash and 50,000 shares of preferred stock with a value of $10.00 per share. Due to the rising cost of electricity and the deterioration of the deregulated electric market in Texas, ePsolutions has reduced their forecasted growth for the next several years. Accordingly, we have reduced our carrying value of our investment in ePsolutions by $300,000 which we believe more accurately reflects the current market value of this investment.
ASSET RETIREMENT OBLIGATIONS
We account for our asset retirement obligations in accordance with Statement No. 143, Accounting for Asset Retirement Obligations (Statement 143), which requires us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, we either settle the obligation for its recorded amount or incur a gain or loss upon settlement.
The following table summarizes the changes in our asset retirement liability during the years ended December 31, 2008 and 2007:
We account for goodwill in accordance with Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (Statement 142). Under Statement 142, goodwill and indefinite-lived intangible assets are not amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life are amortized over their useful lives. At December 31, 2008 and 2007 we did not have any intangible assets that did not have an indefinite life.
We review annually the value of goodwill recorded or more frequently if impairment indicators arise. We recognized $883,000, $0 and $0 goodwill impairment during 2008, 2007 and 2006 respectively. The impairment of goodwill was due to the fair value of the Turkish subsidiary, based on the discounted present value of the oil and gas reserves being less than the carrying value of the Turkish subsidiary. Goodwill was adjusted $222,000 in 2008 and $391,000 in 2007 for the foreign currency translation adjustment. The balance of goodwill at December 31, 2008 and 2007 is approximately $3.8 million and $4.9 million, respectively.
Our French crude oil production accounts for the majority of our sales. We sell our French crude oil to Elf Antar France S.A. (ELF), and recognize the related revenues when the production is delivered to ELFs refinery, typically via truck. At the time of delivery to the plant, title to the crude oil transfers to ELF. The terms of the contract with ELF state that
the price received for oil sold will be the arithmetic mean of all average daily quotations of Dated Brent published in Platts Oil Market Wire for the month of production less a specified differential per barrel. The pricing of oil sales is done on the first day of the month following the month of production. In accordance with the terms of the contract, payment is made within six working days of the date of issue of the invoice. The contract with ELF is automatically extended for a period of one year unless either party cancels it in writing no later than six months prior to the beginning of the next year. We periodically review ELFs payment timing to ensure that receivables from ELF for crude oil sales are collectible. In 2008, 2007 and 2006 sales to ELF represents approximately 55%, 62% and 67%, respectively, of the Companys total revenue and approximately 18% and 21% of the Companys accounts receivable at December 31, 2008 and 2007, respectively.
We recognize revenue for our remaining production when the quantities are delivered to or collected by the respective purchaser. Title to the produced quantities transfers to the purchaser at the time the purchaser collects or receives the quantities. Prices for such production are defined in sales contracts and are readily determinable based on certain publicly available indices. The purchasers of such production have historically made payment for crude oil and natural gas purchases within thirty and sixty days of the end of each production month, respectively. We periodically review the difference between the dates of production and the dates we collect payment for such production to ensure that receivables from those purchasers are collectible. Taxes associated with production are classified as lease operating expense.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment, (SFAS 123R). SFAS 123R establishes the accounting for transactions in which an entity pays for employee services in share-based payment transactions. SFAS 123R requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The fair value of employee share options and similar instruments is estimated using option-pricing models adjusted for the unique characteristics of those instruments. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. The Company adopted SFAS 123R effective January 1, 2006, using the modified-prospective transition method. Under this method, compensation cost is recognized for awards granted and for awards modified, repurchased or cancelled in the period after adoption. Compensation cost is also recognized for the unvested portion of awards granted prior to adoption. The Companys results for the year ended December 31, 2006, include an additional compensation expense of $65,916, that is included in general and administrative expenses relating to the adoption of SFAS 123R. Additionally, upon adoption of SFAS 123R, excess tax benefits related to stock option exercises of $293,000 were presented as a cash inflow from financing activities.
FOREIGN CURRENCY TRANSLATION
The functional currency of the countries in which we operate is the U.S. dollar in the United States, Turkey, Romania and Hungary and the Euro in France. Gains and losses resulting from the translation of Euros into U.S. dollars are included in other comprehensive income for the current period. Gains and losses resulting from the transactions in the New Turkish Lira in Turkey, the Lei in Romania and the Forint in Hungary are included in income available to common shares for the current period. We periodically review the operations of our entities to ensure the functional currency of each entity is the currency of the primary economic environment in which we operate. In October 2007, we made a change in accounting method regarding intercompany accounts receivable due from our subsidiaries in Turkey, Romania and Hungary. Pursuant to a Board of Directors resolution, we expect to be repaid the intercompany accounts receivable from our subsidiaries in Turkey, Romania and Hungary in the foreseeable future. Due to this resolution, subsequent to October 1, 2007, the change in intercompany accounts receivable balances is reflected in current earnings, as a foreign exchange gain or loss rather than accumulated other comprehensive income.
We are subject to income taxes in the United States, France, Turkey, Hungary and Romania. The current provision for taxes on income consists primarily of income taxes based on the tax laws and rates of the countries in which operations were conducted during the periods presented. All interest and penalties related to income tax is charged to general and administrative expense. We compute our provision for deferred income taxes using the liability method. Under the liability method, deferred income tax assets and liabilities are determined based on differences between financial reporting and income tax basis of assets and liabilities and are measured using the enacted tax rates and laws. The measurement of deferred tax assets is adjusted by a valuation allowance, if necessary, to reduce the future tax benefits to the amount, based on available evidence it is more likely than not deferred tax assets will be realized. We made a commitment to be fully reinvested in our international subsidiaries.
Effective January 1, 2007, we adopted the provisions of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes An Interpretation of FASB Statement No. 109 (FIN No. 48). FIN No. 48 clarifies financial statement recognition and disclosure requirements for uncertain tax positions taken or expected to be taken in a tax return. Financial statement recognition of the tax position will be sustained upon examination, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions are recorded as interest expense and general and administrative expenses, respectively. The adoption of FIN No. 48 did not have a significant effect on our reported financial position or earnings. See Note 9.
We do not accrue for estimated legal fees or other related costs when accruing for loss contingencies, rather they are expensed as incurred.
DEFERRED DEBT ISSUE COST
Deferred debt issue costs are amortized on a straight line basis, which approximates the effective interest method over the term of the loan as a component of interest expense. Deferred debt issue costs, which are included in other assets, totaled approximately $4,073,000 and $4,652,000 net of accumulated amortization of $889,000 and $552,000 as of December 31, 2008 and 2007, respectively.
At December 31, 2008 and 2007 we had 721,027 shares of treasury stock valued at a historical cost of approximately $2.5 million or $3.47 a share.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement No. 157 Fair Value Measurements (SFAS No. 157). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. It applies whenever other standards require or permit assets or liabilities to be measured at fair value but it does not expand the use of fair value in any new circumstances. In November 2007, the FASB issued FSP No. 157-2 (FASB No. 157-2) to defer the effective date of SFAS 157 to fiscal year beginning after November 15, 2008, and the interim period for that fiscal year for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value on a recurring basis. We are currently evaluating the impact of our adoption of FSP No. 157-2 which will be adopted effective January 1, 2009. The provisions of SFAS No. 157 that were not deferred were effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157, effective January 1, 2008, did not have a significant effect on our reported financial position or earnings. In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157, which the Company adopted as of January 1, 2008, in cases where a market is not active. The Company has considered FSP 157-3 in its determination of estimated fair values as of December 31, 2008, and the impact was not material.
In February 2007, the FASB issued Statement 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement 115 (SFAS No. 159). SFAS No. 159 permits entities to choose to measure certain financial instruments and other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Unrealized gains and losses on any items for which we elect the fair value measurement option are to be reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company elected not to measure any eligible items using the fair value option in accordance with SFAS No. 159 and therefore the adoption of SFAS No. 159, effective January 1, 2008, did not have an effect on our reported financial position or earnings.
In December 2007, the FASB issued Statement No. 141R, Business Combinations (SFAS No. 141R). Under SFAS No. 141R, a company is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and any contingent consideration measured at their fair value at the acquisition date. It further requires that research and development assets acquired in a business combination that have no alternative future use are to be measured at their acquisition-date fair value and then immediately charged to expense, and that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. Among other changes, this statement also requires that negative goodwill be recognized in earnings as a gain attributable to the acquisition, and any deferred tax benefits resultant in a business combination be recognized in income from continuing operations in the period of the combination. SFAS No. 141R
is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. We are currently determining the effect of adopting SFAS No. 141R.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. The effect of adopting SFAS No. 160 is not expected to have an effect on our reported financial position or earnings.
In March 2008, the FASB issued Statement No. 161 Disclosures about Derivative Instruments and Hedging Activities an Amendment of FASB Statement No. 133 (SFAS No. 161). This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. SFAS No. 161 is effective for annual periods beginning after November 15, 2008. We are currently assessing the effect, if any, the adoption of SFAS No. 161 will have on our financial statements and related disclosures.
In May 2008, the FASB issued Statement No. 162 The Hierarchy of Generally Accepted Accounting Principles (SFAS No. 162). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities. SFAS No. 162 will be effective 60 days following the SECs approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We are currently assessing the effect, if any, the adoption of SFAS No. 162 will have on our financial statements and related disclosures.
On December 31, 2008 the Securities and Exchange Commission (SEC) issued the final rule, Modernization of Oil and Gas Reporting (Final Reporting Rule). The Final Reporting Rule adopts revisions to the SECs oil and gas reporting disclosure requirements and is effective for annual reports on Forms 10-K for years ending on or after December 31, 2009. The revisions are intended to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves to help investors evaluate their investments in oil and gas companies. The amendments are also designed to modernize the oil and gas disclosure requirements to align them with current practices and changes in technology. Revised requirements in the Final Reporting Rule include, but are not limited to:
· Oil and gas reserves must be reported using the un-weighted arithmetic average of the first day of the month price for each month within a 12 month period, rather than year-end prices;
· Companies will be allowed to report, on an optional basis, probable and possible reserves;
· Non-traditional reserves, such as oil and gas extracted from coal and shales, will be included in the definition of oil and gas producing activities;
· Companies will be permitted to use new technologies to determine proved reserves, as long as those technologies have been demonstrated empirically to lead to reliable conclusions with respect to reserve volumes;
· Companies will be required to disclose, in narrative form, additional details on their proved undeveloped reserves (PUDs), including the total quantity of PUDs at year end, and any material changes to PUDs that occurred during the year, investments and progress made to convert PUDs to developed oil and gas reserves and an explanation of the reasons why material concentrations of PUDs in individual fields or countries have remained undeveloped for five years or more after disclosure as PUDs; and
· Companies will be required to report the qualifications and measures taken to assure the independence and objectivity of any business entity or employee primarily responsible for preparing or auditing reserve estimates.
We are currently evaluating the potential impact of adopting the Final Reporting Rule. The SEC is discussing the Final Reporting Rule with the FASB staff to align FASB accounting standards with the new SEC rules. These discussions may delay the required compliance date. Absent any change in the effective date, we will comply with the disclosure requirements in our annual report on Form 10-K for the year ended December 31, 2009.
In November 2008, the FASB ratified EITF 08-6, Equity Method Investment Accounting Considerations (EITF08-6) which clarifies how to account for certain transactions involving equity method investments. The initial measurement, decreases in value and changes in the level of ownership of the equity method investment are addressed. EITF 08-6 is effective on a prospective basis for our fiscal year beginning January 1, 2009 and interim periods within the years. Early application by an entity that has previously adopted an alternative accounting policy is not permitted. Adoption is not expected to have a significant impact on our consolidated results of operations or cash flows.
In May 2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (FSP APB No. 14-1). FSP APB No. 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entitys nonconvertible debt borrowing rate when interest costs are recognized in subsequent periods. FSP APB No. 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. FSP ABP No. 14-1 should be applied retrospectively for all periods presented. The Company is currently evaluating what impact the adoption of this pronouncement will have on its consolidated financial statements.
NOTE 3 EARNINGS PER SHARE
In accordance with the provisions of FASB Statement of Financial Accounting Standards No. 128, Earnings per Share (Statement 128), basic earnings per share are computed on the basis of the weighted-average number of common shares outstanding during the periods. Diluted earnings per share are computed based upon the weighted-average number of common shares plus the assumed issuance of common shares for all potentially dilutive securities.