e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2006
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From _________ to __________
Commission File No. 0-10144
DAWSON GEOPHYSICAL COMPANY
|
|
|
Texas |
|
75-0970548 |
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
508 West Wall, Suite 800, Midland, Texas 79701
(Principal Executive Office)
Telephone Number: 432-684-3000
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. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date.
|
|
|
Title of Each Class |
|
Outstanding at April 23,2006 |
Common Stock, $.33 1/3 par value
|
|
7,527,744 shares |
DAWSON GEOPHYSICAL COMPANY
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
Six Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Operating revenues |
|
$ |
40,042,000 |
|
|
$ |
26,515,000 |
|
|
$ |
75,535,000 |
|
|
$ |
48,074,000 |
|
Operating costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
29,109,000 |
|
|
|
21,378,000 |
|
|
|
57,247,000 |
|
|
|
38,222,000 |
|
General and administrative |
|
|
1,314,000 |
|
|
|
989,000 |
|
|
|
2,441,000 |
|
|
|
1,783,000 |
|
Depreciation |
|
|
3,188,000 |
|
|
|
1,662,000 |
|
|
|
6,164,000 |
|
|
|
3,132,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,611,000 |
|
|
|
24,029,000 |
|
|
|
65,852,000 |
|
|
|
43,137,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
6,431,000 |
|
|
|
2,486,000 |
|
|
|
9,683,000 |
|
|
|
4,937,000 |
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
167,000 |
|
|
|
99,000 |
|
|
|
328,000 |
|
|
|
123,000 |
|
Interest expense |
|
|
|
|
|
|
(65,000 |
) |
|
|
|
|
|
|
(65,000 |
) |
Gain on disposal of assets |
|
|
142,000 |
|
|
|
|
|
|
|
136,000 |
|
|
|
|
|
Loss on sale of marketable securities |
|
|
(6,000 |
) |
|
|
|
|
|
|
(17,000 |
) |
|
|
|
|
Other |
|
|
(23,000 |
) |
|
|
233,000 |
|
|
|
17,000 |
|
|
|
239,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax |
|
|
6,711,000 |
|
|
|
2,753,000 |
|
|
|
10,147,000 |
|
|
|
5,234,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
(1,307,000 |
) |
|
|
(733,000 |
) |
|
|
(1,842,000 |
) |
|
|
(733,000 |
) |
Deferred |
|
|
(1,053,000 |
) |
|
|
307,000 |
|
|
|
(1,654,000 |
) |
|
|
(574,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,360,000 |
) |
|
|
(426,000 |
) |
|
|
(3,496,000 |
) |
|
|
(1,307,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,351,000 |
|
|
$ |
2,327,000 |
|
|
$ |
6,651,000 |
|
|
$ |
3,927,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share |
|
$ |
0.58 |
|
|
$ |
0.37 |
|
|
$ |
0.89 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share-assuming dilution |
|
$ |
0.57 |
|
|
$ |
0.37 |
|
|
$ |
0.88 |
|
|
$ |
0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average equivalent common shares outstanding |
|
|
7,504,811 |
|
|
|
6,262,794 |
|
|
|
7,495,499 |
|
|
|
5,947,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average equivalent common
shares outstanding-assuming dilution |
|
|
7,593,193 |
|
|
|
6,360,345 |
|
|
|
7,583,611 |
|
|
|
6,051,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
1
DAWSON GEOPHYSICAL COMPANY
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
505,000 |
|
|
$ |
2,803,000 |
|
Short-term investments |
|
|
13,840,000 |
|
|
|
20,326,000 |
|
Accounts receivable, net of allowance
for doubtful accounts of $51,000 in March 2006
and $331,000 in September 2005 |
|
|
34,572,000 |
|
|
|
28,696,000 |
|
Prepaid expenses and other assets |
|
|
644,000 |
|
|
|
1,127,000 |
|
Current deferred tax asset |
|
|
18,000 |
|
|
|
1,229,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
49,579,000 |
|
|
|
54,181,000 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
143,388,000 |
|
|
|
124,478,000 |
|
Less accumulated depreciation |
|
|
(70,045,000 |
) |
|
|
(64,532,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment |
|
|
73,343,000 |
|
|
|
59,946,000 |
|
|
|
|
|
|
|
|
|
|
|
$ |
122,922,000 |
|
|
$ |
114,127,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6,230,000 |
|
|
$ |
6,601,000 |
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
Payroll costs and other taxes |
|
|
1,300,000 |
|
|
|
1,198,000 |
|
Other |
|
|
3,288,000 |
|
|
|
2,182,000 |
|
Deferred revenue |
|
|
245,000 |
|
|
|
190,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
11,063,000 |
|
|
|
10,171,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability |
|
|
2,495,000 |
|
|
|
2,052,000 |
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock-par value $1.00 per share;
5,000,000 shares authorized, none outstanding |
|
|
|
|
|
|
|
|
Common stock-par value $.33 1/3 per share;
50,000,000 and 10,000,000 shares authorized in each
period; 7,493,544 and 7,484,044 shares issued
and outstanding in each period |
|
|
2,508,000 |
|
|
|
2,495,000 |
|
Additional paid-in capital |
|
|
81,786,000 |
|
|
|
80,987,000 |
|
Other comprehensive income, net of tax |
|
|
(80,000 |
) |
|
|
(77,000 |
) |
Retained earnings |
|
|
25,150,000 |
|
|
|
18,499,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
109,364,000 |
|
|
|
101,904,000 |
|
|
|
|
|
|
|
|
|
|
|
$ |
122,922,000 |
|
|
$ |
114,127,000 |
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
2
DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,651,000 |
|
|
$ |
3,927,000 |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to
net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
6,164,000 |
|
|
|
3,132,000 |
|
Gain on disposal of assets |
|
|
(136,000 |
) |
|
|
|
|
Realized loss on sale of marketable securities |
|
|
17,000 |
|
|
|
|
|
Deferred income tax expense |
|
|
1,654,000 |
|
|
|
574,000 |
|
Non-cash compensation |
|
|
536,000 |
|
|
|
45,000 |
|
Excess tax benefit from share based payment arrangement |
|
|
(46,000 |
) |
|
|
|
|
Other |
|
|
(30,000 |
) |
|
|
27,000 |
|
|
|
|
|
|
|
|
|
|
Change in current assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable |
|
|
(5,876,000 |
) |
|
|
1,755,000 |
|
Decrease (increase) in prepaid expenses |
|
|
483,000 |
|
|
|
(130,000 |
) |
Increase (decrease) in accounts payable |
|
|
(371,000 |
) |
|
|
255,000 |
|
Increase in deferred revenue |
|
|
55,000 |
|
|
|
367,000 |
|
Increase (decrease) in accrued liabilities |
|
|
1,208,000 |
|
|
|
(217,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
10,309,000 |
|
|
|
9,735,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(19,713,000 |
) |
|
|
(21,408,000 |
) |
Proceeds from maturity of short-term investments |
|
|
6,510,000 |
|
|
|
|
|
Proceeds from disposal of assets |
|
|
320,000 |
|
|
|
|
|
Acquisition of short-term investments |
|
|
|
|
|
|
(21,309,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(12,883,000 |
) |
|
|
(42,717,000 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
230,000 |
|
|
|
35,000 |
|
Proceeds from line of credit |
|
|
|
|
|
|
10,000,000 |
|
Repayment on line of credit |
|
|
|
|
|
|
(10,000,000 |
) |
Proceeds from stock offering |
|
|
|
|
|
|
41,004,000 |
|
Excess tax benefit from share based payment arrangement |
|
|
46,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
276,000 |
|
|
|
41,039,000 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(2,298,000 |
) |
|
|
8,057,000 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
|
|
2,803,000 |
|
|
|
3,587,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
505,000 |
|
|
$ |
11,644,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes |
|
$ |
604,000 |
|
|
$ |
376,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON CASH INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investments |
|
$ |
(29,000 |
) |
|
$ |
(144,000 |
) |
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
3
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Dawson Geophysical Company (the Company) is the leading provider of onshore seismic data
acquisition services in the United States as measured by the number of active data acquisition
crews. Founded in 1952, the Company acquires and processes 2-D, 3-D and multi-component seismic
data for its clients, ranging from major oil and gas companies to independent oil and gas operators
as well as providers of multi-client data libraries.
2. OPINION OF MANAGEMENT
Although the information furnished is unaudited, in the opinion of management of the Company,
the accompanying financial statements reflect all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the financial condition and results of operations
necessary for the periods presented. The results of operations for the three months and the six
months ended March 31, 2006, are not necessarily indicative of the results to be expected for the
fiscal year.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been condensed or omitted
in this Form 10-Q report pursuant to certain rules and regulations of the Securities and Exchange
Commission. These financial statements should be read with the financial statements and notes
included in the Companys 2005 Form 10-K.
Critical Accounting Policies
The preparation of the Companys financial statements in conformity with generally accepted
accounting principles requires that certain assumptions and estimates be made that affect the
reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Because of the use of assumptions and
estimates inherent in the reporting process, actual results could differ from those estimates.
Revenue Recognition. Contracts for services are provided under cancelable service contracts.
These contracts are either turnkey or term agreements. The Company recognizes revenues when
services are performed under both types of agreements. Services are defined as the commencement of
data acquisition or processing operations. Under turnkey agreements, revenue is recognized on a per
unit of data acquired rate, as services are performed. Under term agreements, revenue is recognized
on a per unit of time worked rate, as services are performed. In the case of a cancelled service
contract, revenue is recognized and the customer is billed for services performed up to the date of
cancellation. The Company receives reimbursements for certain out-of-pocket expenses under the
terms of our service contracts. Amounts billed to clients are recorded in revenue at the gross
amount including out-of-pocket expenses that are reimbursed by the client.
In some instances, clients are billed in advance of the services performed. In those cases,
the Company recognizes the liability as deferred revenue.
Allowance for Doubtful Accounts. Management prepares its allowance for doubtful accounts
receivable based on its past experience of historical write-offs, its current customer base and
review of past due accounts. The inherent volatility of the energy industrys business cycle can
cause swift and unpredictable changes in the financial stability of the Companys customers.
Impairment of Long-lived Assets. Long-lived assets are reviewed for impairment when triggering
events occur suggesting deterioration in the assets recoverability or fair value. Recognition of
an impairment charge is required if future expected net cash flows are insufficient to recover the
carrying value of the asset. Managements forecast of future cash flow used to perform impairment
analysis includes estimates of future revenues and future gross margins. If the Company is unable
to achieve these cash flows an
impairment charge would be recorded.
Depreciable Lives of Property, Plant and Equipment. Property, plant and equipment is
capitalized at historical cost and depreciated over the useful life of the asset. Managements
estimation of useful lives is based on circumstances that exist in the seismic industry and
information available at the time of the purchase of the asset. The technology of the equipment
used to gather data in the seismic industry has historically evolved such that obsolescence does
not occur quickly. As circumstances change and new information becomes available, these estimates
could change. Depreciation is computed using the straight-line method.
4
Tax Accounting. The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires the recognition of amounts of taxes payable or
refundable for the current year and an asset and liability approach in recognizing the amount of
deferred tax liabilities and assets for the future tax consequences of events that have been
recognized in the Companys financial statements or tax returns. Management determines deferred
taxes by identifying the types and amounts of existing temporary differences, measuring the total
deferred tax asset or liability using the applicable tax rate and reducing the deferred tax asset
by a valuation allowance if, based on available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Managements methodology for
recording income taxes requires judgment regarding assumptions and the use of estimates, including
determining the annual effective tax rate and the valuation of deferred tax assets, which can
create variance between actual results and estimates. The process involves making forecasts of
current and future years taxable income and unforeseen events may significantly affect these
estimates. Those factors, among others, could have a material impact on the Companys provision or
benefit for income taxes.
Stock Based Compensation. On December 16, 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment
(SFAS 123(R)). SFAS 123(R) requires companies to measure all employee stock-based compensation
awards using a fair value method and recognize compensation cost in its financial statements. SFAS
123(R) is effective beginning as of the first annual reporting period beginning after June 15,
2005. The Company adopted on a prospective basis SFAS 123(R) beginning October 1, 2005 for
stock-based compensation awards granted after that date and for unvested awards outstanding at that
date using the modified prospective application method. The Company recognizes the fair value of
stock-based compensation awards as wages in the Statements of Operations on a straight-line basis
over the vesting period.
Prior to October 1, 2005, the Company accounted for stock-based compensation utilizing the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 Accounting for
Stock Issued to Employees (APB 25) and related interpretations. Under APB 25, no compensation
expense was recognized for stock-based compensation. The following pro forma information, as
required by Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based
Compensation (SFAS 123), as amended by Statement of Financial Accounting Standards No. 148
(SFAS 148), presents net income and earnings per share information as if the stock options issued
since February 2, 1999 were accounted for using the fair value method. The fair value of stock
options issued for each year was estimated at the date of grant using the Black-Scholes option
pricing model.
The SFAS 123 pro forma information for the three months and the six months ended March 31,
2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31, 2005 |
|
|
March 31, 2005 |
|
Net income, as reported |
|
$ |
2,327,000 |
|
|
$ |
3,927,000 |
|
Add: Stock-based employee compensation expense
included in net income, net of tax |
|
|
|
|
|
|
45,000 |
|
Deduct: Stock-based employee compensation expense
determined under fair value based method (SFAS 123), net of tax |
|
|
(106,000 |
) |
|
|
(251,000 |
) |
|
|
|
|
|
|
|
Net income, pro forma |
|
$ |
2,221,000 |
|
|
$ |
3,721,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
Net income per common share, as reported |
|
$ |
0.37 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
Net income per common share, pro forma |
|
$ |
0.35 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
Net income per common share, as reported |
|
$ |
0.37 |
|
|
$ |
0.65 |
|
|
|
|
|
|
|
|
Net income per common share, pro forma |
|
$ |
0.35 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
The adoption of SFAS 123(R) in the first quarter of fiscal year 2006 resulted in
prospective changes in our accounting for stock-based compensation awards including recording
stock-based compensation expense related to stock options that became vested during the quarter on
a prospective basis. Because the Companys plans are incentive stock option plans, no tax deduction
is recorded when options are granted. If an exercise and sale of vested options results in a
disqualifying disposition, a tax deduction for the Company occurs. The excess tax benefit from the
disqualifying disposition is reflected in the cash flow statement.
5
The adoption of SFAS 123(R) resulted in the recognition of compensation expense of $91,000, or
$0.01 per share, and $182,000, or $0.02 per share in wages in the Statement of Operations for the
three months and the six months ended March 31, 2006. In accordance with the modified prospective
application method of SFAS 123(R), prior period amounts have not been restated to reflect the
recognition of stock-based compensation costs. The total cost related to non-vested awards not yet
recognized at March 31, 2006 totals approximately $373,000 which is expected to be recognized over
a weighted average of 1.87 years.
In periods ending prior to October 1, 2005, the income tax benefits from the exercise of stock
options were classified as net cash provided by operating activities pursuant to Emerging Issues
Task Force Issue No. 00-15. However, for periods ending after December 31, 2005, pursuant to SFAS
123(R), the excess tax benefits are required to be reported in net cash provided by financing
activities. For the six months ended March 31, 2006, excess tax benefits from disqualifying
dispositions of options of $46,000 were reflected as an outflow in cash flows from operating
activities and an inflow in cash flows from financing activities in the Statements of Cash Flows.
In the prior year period, income tax benefits resulting from the disqualifying disposition of
options of $19,000 were reflected in net cash provided by operating activities.
The Company adopted the 2000 Incentive Stock Plan during fiscal 1999, which provides options
to purchase 500,000 shares of authorized but unissued common stock of the Company. The option price
is the market value of the Companys common stock at date of grant. Options are exercisable 25%
annually from the date of the grant and the options expire five years from the date of grant. The
2000 Plan provides that 50,000 of the 500,000 shares of authorized but unissued common stock may be
awarded to officers, directors and employees of the Company for the purpose of additional
compensation.
In fiscal 2004, the Company adopted the 2004 Incentive Stock Plan which provides 375,000
shares of authorized but unissued common stock of the Company. The 2004 Incentive Stock Plan
operates like the 2000 Incentive Stock Plan except that of the 375,000 shares, up to 125,000 shares
may be awarded to officers, directors, and employees of the Company for the purpose of additional
compensation and up to 125,000 shares may be awarded with restrictions.
Options for 80,500, 55,500 and 204,750 shares were exercisable with weighted average exercise
prices of $7.02, $7.42 and $6.94 as of September 30, 2005, 2004 and 2003, respectively.
Outstanding options at March 31, 2006 expire between April, 2006 and November, 2009 and have
exercise prices ranging from $5.21 to $17.91.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes
valuation model. The expected volatility is based on historical volatility over the expected
vesting term of 48 months. As the Company has not declared dividends since it became a public
entity, no dividend yield is used in the calculation. Actual value realized, if any, is dependent
on the future performance of the Companys 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. There were no stock options granted during the six months period ended March
31, 2006. Option activity for the three months and the six months ended March 31, 2006 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Number of Optioned |
|
|
|
Average Price |
|
|
Shares |
|
Balance as of December 31, 2005 |
|
$ |
8.94 |
|
|
|
218,000 |
|
Exercised |
|
$ |
8.57 |
|
|
|
(21,750 |
) |
|
|
|
|
|
|
|
Balance as of March 31, 2006 |
|
$ |
8.98 |
|
|
|
196,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2005 |
|
$ |
8.87 |
|
|
|
224,500 |
|
Exercised |
|
$ |
8.10 |
|
|
|
(28,250 |
) |
|
|
|
|
|
|
|
Balance as of March 31, 2006 |
|
$ |
8.98 |
|
|
|
196,250 |
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the first quarter of
fiscal 2005 was $10.18. There were no options granted during the first six months of fiscal 2006.
The total intrinsic value of options exercised during the six months ended March 31, 2006 and March
31, 2005 were $557,286 and $110,567, respectively.
6
Recently Issued Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which
supersedes APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes
in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and
reporting of changes in accounting principles. The statement requires the retroactive application
to prior periods financial statements of changes in accounting principles, unless it is
impracticable to determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 does not change the guidance for reporting the correction of an error in
previously issued financial statements or the change in an accounting estimate. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The Company does not expect the adoption of SFAS No. 154 to have a material
impact on its financial position and results of operations and financial condition.
3. NET INCOME PER COMMON SHARE
The Company accounts for earnings per share in accordance with Statement of Financial
Accounting Standards No. 128, Earnings per Share (Statement 128). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share amounts for all
periods have been presented, and when appropriate, restated to conform to the Statement 128
requirements.
The following table sets forth the computation of basic and diluted net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31 |
|
|
March 31 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
NUMERATOR: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income and numerator for basic and diluted
net income per common share-income
available to common shareholders |
|
$ |
4,351,000 |
|
|
$ |
2,327,000 |
|
|
$ |
6,651,000 |
|
|
$ |
3,927,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DENOMINATOR: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per common
share-weighted average common shares |
|
|
7,504,811 |
|
|
|
6,262,794 |
|
|
|
7,495,499 |
|
|
|
5,947,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities-employee stock options |
|
|
88,382 |
|
|
|
97,551 |
|
|
|
88,112 |
|
|
|
104,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per common
share-adjusted weighted average common shares
and assumed conversions |
|
|
7,593,193 |
|
|
|
6,360,345 |
|
|
|
7,583,611 |
|
|
|
6,051,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share |
|
$ |
0.58 |
|
|
$ |
0.37 |
|
|
$ |
0.89 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share-assuming dilution |
|
$ |
0.57 |
|
|
$ |
0.37 |
|
|
$ |
0.88 |
|
|
$ |
0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. DEBT
On December 22, 2004, the Company entered into a revolving line of credit loan agreement with
Western National Bank under which it may borrow, repay and reborrow, from time to time until
December 22, 2005, up to $10.0 million. The Companys obligations under this agreement are secured
by a security interest in the Companys accounts receivable and related collateral. Interest on the
outstanding amount under the line of credit loan agreement is payable monthly at a rate equal to
the greater of (i) the Prime Rate or (ii) 5.0%. The loan agreement contains customary covenants for
credit facilities of this type, including limitations on distributions and dividends, disposition
of assets and mergers and acquisitions. There are certain financial covenants under the loan
7
agreement, including maintaining a minimum tangible net worth (as defined in the loan
agreement) of $40.0 million and maintaining specified ratios with respect to cash flow coverage,
current assets and liabilities, and debt to tangible net worth. On January 18, 2006, the Company
renewed this revolving line of credit loan agreement for an additional year on the same terms and
conditions. The Company is in compliance with all covenants and as of May 8, 2006, no funds have
been borrowed under this credit loan agreement.
In connection with equipping and deploying two crews in fiscal 2005 the Company borrowed $10
million on the revolving line of credit loan agreement. As of March 31, 2005, the Company repaid
the $10 million balance outstanding under the loan agreement and the associated interest as a
partial use of proceeds from the public offering of 1,800,000 shares of common stock. The Company
did not borrow under the loan agreement during the remainder of fiscal 2005 or during the first
or second quarters of fiscal 2006.
5. CONTINGENCY
From time to time the Company is a party to various legal proceedings arising in the ordinary
course of business. Although the Company cannot predict the outcomes of any such legal proceedings,
management believes that the resolution of pending legal actions will not have a material adverse
effect on the Companys financial condition, results of operations or liquidity.
8
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Companys financial statements
and notes thereto included elsewhere in this Form 10-Q.
Forward Looking Statements
All statements other than statements of historical fact included in this Form 10-Q, including
without limitation, statements under Managements Discussion and Analysis of Financial Condition
and Results of Operations regarding technological advancements and our financial position,
business strategy and plans and objectives of our management for future operations, are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as
anticipate, believe, estimate, expect, intend, and similar expressions, as they relate to
us or our management, identify forward-looking statements. Such forward-looking statements are
based on the beliefs of our management as well as assumptions made by and information currently
available to management. Actual results could differ materially from those contemplated by the
forward-looking statements as a result of certain factors, including but not limited to dependence
upon energy industry spending, weather interruptions, managing growth, inability to obtain land
access rights of way, the volatility of oil and gas prices, and the availability of capital
resources. A discussion of these factors, including risks and uncertainties, is set forth under
Risk Factors in our Form 10-K and in our other reports filed from time to time with the
Securities and Exchange Commission. These forward-looking statements reflect our current views with
respect to future events and are subject to these and other risks, uncertainties and assumptions
relating to our operations, results of operations, growth strategies and liquidity. All subsequent
written and oral forward-looking statements attributable to us or persons acting on our behalf are
expressly qualified in their entirety by this paragraph. We assume no obligation to update any such
forward-looking statements.
Overview
We are the leading provider of onshore seismic data acquisition services in the United States
as measured by the number of active data acquisition crews. Substantially all of our revenues are
derived from the seismic data acquisition services we provide to our clients, mainly domestic oil
and gas companies. Demand for our services depends upon the level of spending by these oil and gas
companies for exploration, production, development and field management activities, which
activities depend, in part, on oil and natural gas prices. Fluctuations in domestic oil and natural
gas exploration activities and commodity prices have affected the demand for our services and our
results of operations in years past and continue to be the single most important factor affecting
our business and results of operations.
Accordingly, our return to profitability beginning in fiscal 2004 after several years of
losses is directly related to an increase in the level of exploration for domestic oil and natural
gas reserves by the petroleum industry since 2003. The increased level of exploration is a function
of higher prices for oil and natural gas. As a result of the increase in domestic exploration
spending, we have experienced an increased demand for our seismic data acquisition and processing
services. While the markets for oil and natural gas have historically been volatile and are likely
to continue to be so in the future and we can make no assurances as to future levels of domestic
exploration or commodity prices, we believe opportunities exist for us to enhance our market
position by responding to our clients desire for higher resolution subsurface images.
In response to the continued high demand for our services, we anticipate placing an additional
data acquisition crew, our twelfth crew, into service late in the third quarter of fiscal 2006.
The twelfth crew will be equipped with a 5,000 channel ARAM ARIES cable based recording system. We
currently operate six I/O RSR radio crews and five I/O II MRX cable based crews. Three of the MRX
crews have been upgraded in the last year to I/O Image central electronics which increases the
recording channel capacity from 3,000 channels to 6,000 channels. In addition, we have in excess of
60,000 channels and 87 vibrator energy source units with six more units on order.
We continue to focus on increasing revenues from and profitability of our existing crews by
increasing our recording capacity and channel count, increasing crew productivity, and securing
more favorable contract terms with our clients.. We will also continue to explore new
technologies. While our revenues are mainly affected by the level of client demand for our
services, our revenues are also affected by the pricing for our services that we negotiate with our
clients and the productivity of our data acquisition crews, including factors such as crew downtime
related to inclement weather, delays in acquiring land access permits, or equipment failure.
Consequently, our successful efforts to negotiate more favorable weather protection provisions in
our supplemental service agreements, to mitigate access permit delays and to improve overall crew
productivity may contribute to growth in our revenues.
9
Although our clients may cancel their supplemental service agreement with us on short notice,
we believe we currently have a sufficient order book to sustain operations at full capacity well
into calendar year 2006, with several of the crews booked into calendar year 2007. Our data
processing operation continued to show improvement during the first six months of fiscal 2006 due
to client recognition of quality performance and our expansion into the Houston market for these
services.
We have entered into a letter of intent and are negotiating an agreement with WesternGeco, a
subsidiary of Schlumberger, to provide Q-Land seismic data acquisition services in the lower 48
United States. The Q-Land system is a unique integrated acquisition and processing system that is
producing superior results thoughout the Middle East and North Africa. The Q-Land system uses
30,000 channels of finely spaced point-receivers to correctly sample both signal and noise. By
removing the noise, the resolution of the subsurface is dramatically increased. Under the terms of
the agreement, we will provide crew personnel, energy source units, necessary vehicles, land access
permitting, surveying, and serve as primary contractor. WesternGeco will provide survey design,
the seismic recording system with operators, and all Q-Land data processing services. Both
companies will share marketing services. We intend to deploy the Q-Land recording system by using
an existing crew as demand for the technology requires.
Highlights of the Quarter Ended March 31, 2006
Our financial performance from operations for the second quarter of fiscal 2006 significantly
improved when compared to our financial performance for the second quarter of fiscal 2005 as a
result of continuing high demand for our services due to increased exploration and development
activity by domestic oil and gas companies and increases in oil and gas prices. The following are
the highlights of our second quarter performance:
|
|
|
We operated eleven acquisition crews during the second fiscal quarter of 2006, as
compared to ten crews in the second fiscal quarter of 2005. |
|
|
|
|
We experienced the price improvements and more favorable contract terms in our
agreements with clients that we negotiated in calendar 2005. These factors helped improve
our revenues during the second quarter of fiscal 2006. |
|
|
|
|
We experienced favorable weather and operating conditions during the second quarter of
fiscal 2006 which increased crew productivity. |
|
|
|
|
We continued to grow by upgrading our recording capacity, expanding the channel count
of existing crews, adding to our energy source fleet and making technical improvements in
all phases of our operations. |
Results of Operations
Operating Revenues. Our operating revenues for the first six months of fiscal 2006 increased
57% to $75,535,000 from $48,074,000 for the first six months of fiscal 2005. For the three months
ended March 31, 2006, operating revenues totaled $40,042,000 versus $26,515,000 for the same period
of fiscal 2005, a 51% increase. These results reflect improved prices and contract terms
obtained in calendar 2005, favorable weather conditions, increased crew productivity, and an
increase in crew count as well as recording capacity. As a result of the increased demand for our
services, we deployed two additional data acquisition crews in fiscal 2005, and we are preparing to
deploy our twelfth data acquisition crew in the latter part of our third quarter of fiscal 2006. In
addition, our revenues have been positively affected by our ability to obtain price improvements in
the markets for our services and negotiate favorable contract provisions. We also experienced
favorable weather conditions during the second quarter of fiscal 2006 which increased overall crew
productivity.
Operating Costs. Operating expenses for the six months ended March 31, 2006 totaled
$57,247,000 versus $38,222,000 for the same period of fiscal 2005. For the quarter ended March 31,
2006, operating expenses totaled $29,109,000 versus $21,378,000 for the quarter ended March 31,
2005. Increases in operating expenses are due to ongoing expenses of the two crews added after the
first quarter of fiscal 2005 and the expenses associated with preparation of our twelfth crew.
General and administrative expenses were approximately 3.2% and 3.7% of revenues in the first
six months of fiscal 2006 and 2005, respectively. For the quarter ended March 31, 2006, general and
administrative expenses were approximately 3.3% of revenues as compared to 3.7% for the comparable
quarter of fiscal 2005. The increase in actual dollars of general and administrative expenses from
$1,783,000 in the first six months of fiscal 2005 to $2,441,000 in the first six months of fiscal
2006 was due principally to the increase in expenses necessary to support expanded field operations
and to maintain compliance with Sarbanes-Oxley reporting requirements. While we strive to
maintain a low ratio of general and administrative expenses to revenue, our absolute level of
10
general and administrative expenses are expected to continue to increase as we expand
operations. In the first quarter of fiscal 2006, we adjusted our allowance for doubtful accounts in
response to business activity and accounts receivable. Historically, we have had no significant
write-offs of trade accounts receivable; however, we believe that it is prudent to monitor the
allowance for doubtful accounts in response to increased demand from new customers.
Depreciation for the six months ended March 31, 2006 totaled $6,164,000 as compared to
$3,132,000 for the six months ended March 31, 2005. We recognized $3,188,000 of depreciation
expense in the second quarter of fiscal 2006 as compared to $1,662,000 in the comparable quarter of
fiscal 2005 as a result of the significant capital expenditures we made during 2005 and the first
quarter of fiscal 2006. Our depreciation expense is also expected to increase during the
remaining quarters of fiscal 2006 reflecting our significant capital expenditures in fiscal 2005
and the first six months of fiscal 2006, and our expected capital budget for the remainder of
fiscal 2006.
Our total operating costs for the first six months of fiscal 2006 were $65,852,000, an
increase of 52.6% from the first six months of fiscal 2005. For the quarter ended March 31, 2006,
our operating expenses were $33,611,000 representing a 39.9% increase from the comparable quarter
of fiscal 2005. These increases in the first six months period and for the second quarter were
primarily due to the factors described above.
Taxes. The provision for income taxes for the first six months of fiscal 2006 was $0.46 per
share as compared to $0.22 per share during the first six months of fiscal 2005. The increase in
expense per share reflects the fact that Dawson fully utilized its federal net operating loss
(NOL) during the second quarter and started remitting regular tax reduced by alternative minimum
tax (AMT) credits. We anticipate that we will continue to recognize increased income tax expense
in the future as we fully utilize our AMT credits.
Liquidity and Capital Resources
Introduction. Our principal source of cash is amounts earned from the seismic data acquisition
services we provide to our clients. Our principal uses of cash are the amounts used to provide
these services, including expenses related to our operations and acquiring new equipment.
Accordingly, our cash position depends (as do our revenues) on the level of demand for our
services. Historically, cash generated from our operations along with cash reserves and short term
borrowings from commercial banks has been sufficient to fund our working capital requirements, and
to some extent, our capital expenditures. In March 2005 we completed a public offering of 1,800,000
shares of our common stock that raised net proceeds of approximately $41 million. We have used
these proceeds for continued expansion and to repay borrowing under our revolving line of credit
agreement and have invested the remainder in short-term investments.
Cash Flows. Net cash provided by operating activities was $10,309,000 for the first six months
of fiscal 2006 and $9,735,000 for the first six months of fiscal 2005. These amounts primarily
reflect results of operations offset by changes in working capital components, depreciation, and
other non-cash components, including deferred income tax expense. Cash provided by operating
activities in the first six months of fiscal 2006 were impacted by the increase in accounts
receivable at March 31, 2006. We received payments with respect to a significant portion of these
accounts receivable in April 2006.
Net cash used in investing activities was $12,883,000 through the six months ended March 31,
2006 and $42,717,000 through the six months ended March 31, 2005. These results represent capital
expenditures and activity in the short-term investment portfolio. Capital expenditures in fiscal
2006 were made with cash generated from operations and the sale of short-term investments. During
fiscal 2005 capital expenditures were also made with cash from our revolving line of credit
agreement that was repaid with proceeds from our public offering that was completed in March 2005.
Additional proceeds from the public offering were used in the acquisition of short-term
investments.
Net cash provided by financing activities for the first six months ended March 31, 2006 was
$276,000 and reflects proceeds from the exercise of stock options and the excess tax benefits from
disqualifying dispositions in the period.
Capital Expenditures. Capital expenditures during the first six months of fiscal 2006 were
$19,713,000, which we used to acquire additional recording channels and energy source units to expand the
capabilities of our existing crews and for maintenance capital requirements.
We have approved budgeted capital expenditures of $35,000,000 for fiscal year 2006, of which
approximately $10,000,000 reflects expenditures used to field and equip our twelfth crew. The
remainder will be used to expand and update existing crews and
11
for maintenance capital requirements.
We continually strive to supply market demand with technologically advanced 3-D seismic data
acquisition recording systems and data processing capabilities. We maintain equipment in and out of
service in anticipation of increased future demand for our services.
Capital Resources. Historically, we have primarily relied on cash generated from operations,
cash reserves and short term borrowings from commercial banks to fund our working capital
requirements and, to some extent, capital expenditures. We have also funded our capital
expenditures and other financing needs through public equity offerings. Due to our recent increased
capital needs as a result of the continued expansion of our business, we obtained a $10 million
revolving line of credit in December 2004 that has been renewed through January 18, 2007.
On January 18, 2006, we renewed our revolving line of credit loan agreement with Western
National Bank under which we may borrow, repay and reborrow, from time to time until January 18,
2007, up to $10.0 million. Our obligations under this agreement are secured by a security interest
in our accounts receivable and related collateral. Interest on the outstanding amount under the
line of credit loan agreement is payable monthly at a rate equal to the greater of (i) the Prime
Rate or (ii) 5.0%. The loan agreement contains customary covenants for credit facilities of this
type, including limitations on distributions and dividends, disposition of assets and mergers and
acquisitions. We are also obligated to meet certain financial covenants under the loan agreement,
including maintaining a minimum tangible net worth (as defined in the loan agreement) of $40.0
million and maintaining specified ratios with respect to cash flow coverage, current assets and
liabilities, and debt to tangible net worth. We are in compliance with all covenants, and as of May
1, 2006, we have not borrowed any funds under this credit loan agreement.
On August 5, 2005, we filed a shelf registration statement with the Securities and Exchange
Commission covering the offer and sale from time to time of up to $75 million in debt securities,
preferred and common stock, and warrants. The registration statement allows us to sell securities,
after the registration statement has been declared effective by the SEC, in one or more separate
offerings with the size, price and terms to be determined at the time of sale. The terms of any
securities offered would be described in a related prospectus to be separately filed with the SEC
at the time of the offering. We do not expect to make an offering at this time. However, the filing
will enable us to act quickly as opportunities arise.
The following table summarizes payments due in specific periods related to our contractual
obligations as of March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
Within |
|
|
|
|
|
|
|
|
|
After |
|
|
Total |
|
1 Year |
|
1-3 Years |
|
3-5 Years |
|
5 Years |
|
|
(In thousands) |
Operating lease obligations |
|
$ |
339 |
|
|
$ |
151 |
|
|
$ |
188 |
|
|
|
0 |
|
|
|
0 |
|
We believe that our capital resources, including our short-term investments and cash flow from
operations are adequate to meet our current operational needs. We believe we will be able to
finance our remaining fiscal 2006 capital requirements through our short-term investments, cash
flow from operations, and borrowings under our revolving line of credit. However,
our ability to satisfy our working capital requirements and to fund future capital requirements
will depend principally upon our future operating performance, which is subject to the risks
inherent in our business.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies
The preparation of our financial statements in conformity with generally accepted accounting
principles requires us to make certain assumptions and estimates that affect the reported amounts
of assets and liabilities at the date of our financial statements and the reported amounts of
revenues and expenses during the reporting period. Because of the use of assumptions and estimates
inherent in the reporting process, actual results could differ from those estimates.
Revenue Recognition. Our services are provided under cancelable service contracts. These
contracts are either turnkey or term agreements. The Company recognizes revenues when services
are performed under both types of agreements. Services are defined as the commencement of data
acquisition or processing operations. Under turnkey agreements, revenue is recognized on a per unit
of data acquired rate, as services are performed. Under term agreements, revenue is recognized on a
per unit of time worked rate, as services are performed. In the case of a cancelled service
contract, we recognize revenue and bill our client for services performed up
12
to the date of cancellation. We also receive reimbursements for certain out-of-pocket expenses
under the terms of our service contracts. We record amounts billed to clients in revenue at the
gross amount including out-of-pocket expenses that are reimbursed by the client.
In some instances, we bill clients in advance of the services performed. In those cases, we
recognize the liability as deferred revenue.
Allowance for Doubtful Accounts. We prepare our allowance for doubtful accounts receivable
based on our past experience of historical write-offs, our current customer base and our review of
past due accounts. The inherent volatility of the energy industrys business cycle can cause swift
and unpredictable changes in the financial stability of our customers.
Impairment of Long-lived Assets. We review long-lived assets for impairment when triggering
events occur suggesting deterioration in the assets recoverability or fair value. Recognition of an
impairment charge is required if future expected net cash flows are insufficient to recover the
carrying value of the asset. Our forecast of future cash flows used to perform impairment analysis
includes estimates of future revenues and future gross margins based on our historical results and
analysis of future oil and gas prices which is fundamental in assessing demand for our services. If
we are unable to achieve these cash flows, an impairment charge would
be recorded.
Depreciable Lives of Property, Plant and Equipment. Our property, plant and equipment are
capitalized at historical cost and depreciated over the useful life of
the asset. Our estimation of useful lives is based on circumstances that exist in the seismic industry and information
available at the time of the purchase of the asset. The technology of the equipment used to gather
data in the seismic industry has historically evolved such that obsolescence does not occur
quickly. As circumstances change and new information becomes available, these estimates could
change. We depreciate capitalized items using the straight-line method.
Tax Accounting. We account for our income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes, which requires the recognition of amounts of taxes payable or refundable for the
current year and an asset and liability approach in recognizing the amount of deferred tax
liabilities and assets for the future tax consequences of events that have been recognized in our
financial statements or tax returns. We determine deferred taxes by identifying the types and
amounts of existing temporary differences, measuring the total deferred tax asset or liability
using the applicable tax rate and reducing the deferred tax asset by a valuation allowance if,
based on available evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Our methodology for recording income taxes requires judgment
regarding assumptions and the use of estimates, including determining our annual effective tax rate
and the valuation of deferred tax assets, which can create variance between actual results and
estimates. The process involves making forecasts of current and future years taxable income and
unforeseen events may significantly affect these estimates. Those factors, among others, could have
a material impact on our provision or benefit for income taxes.
Stock Based Compensation. In prior periods we accounted for share-based compensation utilizing
the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 Accounting for
Stock Issued to Employees (ABP 25) and related interpretations. No compensation expense was
recorded for stock options or other stock-based awards that were granted with an exercise price
equal to or above the common stock market price on the grant date. Pro forma disclosures were made
as required by Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based
Compensation (SFAS 123), as amended by Statement of Financial Accounting Standards No. 148
(SFAS 148), presenting net income and earnings per share information as if the stock options
issued since February 2, 1999 were accounted for using the fair value method. The fair value of
stock options issued for each year was estimated at the date of grant using the Black-Scholes
option pricing model.
Without making modifications to outstanding share options, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)) as of October 1,
2005. SFAS 123(R) requires us to recognize compensation expense for all share-based payment
arrangements based on the fair value of the share-based payment on the date of grant. We elected
the modified prospective application method of adoption, which requires compensation expense to be
recorded for all stock-based awards granted after October 1, 2005 and for all unvested stock
options outstanding as of October 1, 2005, beginning in the first quarter of adoption. For all
unvested options outstanding as of October 1, 2005, the remaining previously measured but
unrecognized compensation expense, based on the fair value at the original grant date, will be
recognized as wages in the Statements of Operations on a straight-line basis over the remaining
vesting period. For share-based payments granted subsequent to October 1, 2005, compensation
expense, based on the fair value on the date of grant, will be recognized in the Statements of
Operations in wages on a straight-line basis over the vesting period. We did not grant stock
options in the quarter or the six months ended March 31, 2006. In determining the fair value of
stock options that may be granted in the future, we plan to continue to use the Black-Scholes
option pricing model that employs the following assumptions:
13
|
|
|
Expected volatility of our stock price on historical volatility over the expected term
of the option. |
|
|
|
|
Expected term of the option based on historical employee stock option exercise behavior,
the vesting term of the respective option and the contractual term. |
|
|
|
|
Risk-free interest rate for periods within the expected term
of the option. |
|
|
|
|
Dividend yield. |
Our stock price volatility and expected option lives are based on managements best estimates
at the time of grant, both of which impact the fair value of the option calculated under the
Black-Scholes methodology and, ultimately, the expense that will be recognized over the vesting
term of the option.
SFAS 123(R) also requires that we recognize compensation expense for only the portion of
share-based payment arrangements that are expected to vest. Therefore, we apply estimated
forfeiture rates that are based on historical employee termination behavior. We periodically adjust
the estimated forfeiture rates so that only the compensation expense related to share-based payment
arrangements that vest are included in wages. If the actual number of forfeiture differs from those
estimated by management, additional adjustments to compensation expense may be required in future
periods.
Recently Issued Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which
supersedes APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes
in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and
reporting of changes in accounting principles. The statement requires the retroactive application
to prior periods financial statements of changes in accounting principles, unless it is
impracticable to determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 does not change the guidance for reporting the correction of an error in
previously issued financial statements or the change in an accounting estimate. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. We do not expect the adoption of SFAS No. 154 to have a material impact on our
financial position and results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary sources of market risk include fluctuations in commodity prices which affect
demand for and pricing of our services and interest rate fluctuations. At March 31, 2006, we had no
indebtedness. Our short-term investments were fixed-rate and we do not necessarily intend to hold
them to maturity, and therefore, the short-term investments expose us to the risk of earnings or
cash flow loss due to changes in market interest rates. As of March 31, 2006, the carrying value of
our investments approximates fair value. We have not entered into any hedge arrangements, commodity
swap agreements, commodity futures, options or other derivative financial instruments. We do not
currently conduct business internationally, so we are generally not subject to foreign currency
exchange rate risk.
ITEM 4. CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our
internal control over financial reporting is 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. 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. Under the supervision and with the participation
of management, including our chief executive officer and chief financial officer, we evaluated the
effectiveness of our internal controls over financial reporting as of March 31, 2006 using the
criteria set forth in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, management has concluded that,
as of March 31, 2006, our internal control over financial reporting was effective. There have not
been any changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) of
the Securities Exchange Act) during the quarter ended March 31, 2006 that have materially affected
or are reasonably likely to materially affect our internal control over financial reporting.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we are a party to various legal proceedings arising in the ordinary course
of business. Although we cannot predict the outcomes of any such legal proceedings, our management
believes that the resolution of pending legal actions will not have a material adverse effect on
our financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on January 24, 2006.
The following proposals were adopted by the margins indicated:
1. To elect a Board of Directors to hold office until the next annual meeting of shareholders and
until their successors are elected and qualified.
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
For |
|
Withheld |
Paul H. Brown |
|
|
6,154,505 |
|
|
|
193,380 |
|
L. Decker Dawson |
|
|
6,302,993 |
|
|
|
44,892 |
|
Gary M. Hoover |
|
|
6,081,589 |
|
|
|
266,296 |
|
Stephen C. Jumper |
|
|
6,230,677 |
|
|
|
117,208 |
|
Tim C. Thompson |
|
|
6,154,305 |
|
|
|
193,580 |
|
2. To amend the Restated Articles of Incorporation to increase the authorized common stock from
10,000,000 shares to 50,000,000 shares.
|
|
|
|
|
For |
|
|
5,543,199 |
|
Against |
|
|
1,321,950 |
|
Abstain |
|
|
9243 |
|
Broker Non-Votes |
|
|
0 |
|
3. To ratify the appointment of KPMG LLP as the Companys independent registered public accounting
firm for the fiscal year ending September 30, 2006.
|
|
|
|
|
For |
|
|
6,383,070 |
|
Against |
|
|
50,136 |
|
Abstain |
|
|
282,578 |
|
Broker Non-Votes |
|
|
0 |
|
The following proposal was not adopted by the margins indicated:
1. To amend the Dawson Geophysical Company 2004 Incentive Stock Plan to increase the number of
shares of common stock available for allocation under such plan by 250,000 shares.
|
|
|
|
|
For |
|
|
2,688,113 |
|
Against |
|
|
747,599 |
|
Abstain |
|
|
282,578 |
|
Broker Non-Votes |
|
|
0 |
|
15
ITEM 6. EXHIBITS
The information required by this Item 6 is set forth in the Index to Exhibits accompanying
this Form 10-Q and is hereby incorporated by reference.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
DAWSON GEOPHYSICAL COMPANY |
|
|
|
|
|
|
|
|
|
DATE: May 9, 2006
|
|
By:
|
|
/s/ Stephen C. Jumper
|
|
|
|
|
|
|
|
|
|
|
|
Stephen C. Jumper |
|
|
|
|
President and
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
DATE: May 9, 2006
|
|
By:
|
|
/s/ Christina W. Hagan |
|
|
|
|
|
|
|
|
|
|
|
Christina W. Hagan |
|
|
|
|
Executive Vice President, Treasurer, |
|
|
|
|
Secretary and Chief Financial Officer |
|
|
17
INDEX TO EXHIBITS
|
|
|
Number |
|
Exhibit |
3.1
|
|
Restated Articles of Incorporation of the Company (filed on December 10, 2004 as Exhibit 3.1 to the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2004 (File No. 000-10144) and incorporated herein by reference).
|
|
|
|
3.2
|
|
Bylaws of the Company, as amended (filed on December 11, 2003 as Exhibit 3 to the Companys Annual
Report on Form 10-K for the fiscal year ended September 30, 2003 (File No. 000-10144) and incorporated
herein by reference). |
|
|
|
4.1
|
|
Rights Agreement by and between the Company and Mellon Investor Services, LLC (f/k/a Chasemellon
Shareholder Services, L.L.C.), as Rights Agent, dated July 13, 1999 (filed on December 11, 2003 as
Exhibit 4 to the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2003 (File
No. 000-10144) and incorporated herein by reference). |
|
|
|
10.1*
|
|
First Amendment to Loan Agreement, dated January 18, 2006, between the Company and Western National Bank. |
|
|
|
31.1*
|
|
Certification of Chief Executive Officer of Dawson Geophysical Company pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended. |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer of Dawson Geophysical Company pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended. |
|
|
|
32.1*
|
|
Certification of Chief Executive Officer of Dawson Geophysical Company pursuant to Rule 13a-14(b)
promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of
Title 18 of the United States Code. Pursuant to SEC Release 34-47551, this Exhibit is furnished to
the SEC and shall not be deemed to be filed. |
|
|
|
32.2*
|
|
Certification of Chief Financial Officer of Dawson Geophysical Company pursuant to Rule 13a-14(b)
promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of
Title 18 of the United States Code. Pursuant to SEC Release 34-47551, this Exhibit is furnished to the
SEC and shall not be deemed to be filed. |
18