UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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| | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) |
| | OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended September 30, 2011
| | ¨ | For the Fiscal Year Ended September 30, 2009 |
o
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
| | OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the Transition Period From to |
For the Transition Period From to
Commission FileNo. 001-34404
DAWSON GEOPHYSICAL COMPANY
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| Texas | | 75-0970548 |
Texas
(State or other jurisdiction of
incorporation or organization) | | 75-0970548
(I.R.S. Employer
Identification No.) |
508 West Wall, Suite 800, Midland, Texas 79701
(Principal Executive Office)
Telephone Number:432-684-3000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Name of Exchange on Which Registered |
| Common Stock, $0.33 and1/3 par value | | The NASDAQ Stock Market |
Title of Each Class
Common Stock, $0.33 and1/3 par value
Securities registered pursuant to Section 12(g) of the Act:
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 þ
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 þ
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232 405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes oþ No o¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. ¨o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o¨ | | Accelerated filer þ | | Non-accelerated filer o¨ | | Smaller reporting company o¨ |
| (Do not check if a smaller reporting company) |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes o¨ No þ
As of March 31, 2009,2011, the aggregate market value of Dawson Geophysical Company common stock, par value $0.331/3 per share, held by non-affiliates (based upon the closing transaction price on Nasdaq) was approximately $104,261,275.
$334,408,885.On November 30, 2009,2011, there were 7,809,4167,910,885 shares of Dawson Geophysical Company common stock, $0.331/3 par value, outstanding.
As used in this report, the terms “we,” “our,” “us,” “Dawson” and the “Company” refer to Dawson Geophysical Company unless the context indicates otherwise.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its 20092012 Annual Meeting of Shareholders to be held on January 26, 201024, 2012 are incorporated by reference into Part III of this Annual Report onForm 10-K.
DAWSON GEOPHYSICAL COMPANY
FORM 10-K
For the Fiscal Year Ended September 30, 2009
2011
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements other than statements of historical fact included in thisForm 10-K that relate to forecasts, estimates or other expectations regarding future events, including without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” regarding technological advancements and our financial position, business strategy and plans and objectives of our management for future operations, may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in thisForm 10-K, 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 the volatility of oil and natural gas prices, dependence upon energy industry spending, disruptions in the global economy, dependence upon energy industry spending,competition, delays, reductions or cancellations of service contracts, high fixed costs of operations, external factors affecting our crews such as weather interruptions and inability to obtain land access rights of way, industry competition,the type of contracts we enter into, crew productivity, limited number of customers, credit risk related to our customers, asset impairments, the availability of capital resources and operational disruptions. See “Risk Factors” for more information on these and other factors. 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.
Dawson Geophysical Company (the Company)“Company”), a Texas corporation, is the leading provider of onshore seismic data acquisition and processing services in the lower 48 states of the United States as measured by the number of active data acquisition crews. Founded in 1952, we acquire and process2-D,3-D 2-D, 3-D and multi-component seismic data for our clients, ranging from major oil and gas companies to independent oil and gas operators, as well as providers of multi-client data libraries. InOver the past few years substantially allthe focus of our clients have been focused on theefforts has shifted between natural gas and oil-based exploration for and production of natural gas. In recent quarters,projects. Natural gas projects were our primary focus until late 2008. Since that time, we have experienced a gradual shift in activity to more oil exploration, which has accelerated as oil prices increased. We currently have thirty percentincreased in 2010 and 2011. The majority of our crews are currently working in oil producing basins. Our clients rely on seismic data to identify areas where subsurface conditions are favorable for the accumulation of hydrocarbons and to optimize the development and production of hydrocarbon reservoirs. During fiscal 2009,2011, substantially all of our revenues were derived from3-D seismic data acquisition operations.
As of September 30, 2009,2011, we operated tenfourteen 3-D seismic data acquisition crews in the lower 48 states of the United States and a seismic data processing center. In October, we reduced our crew count to nine crews to better align our capacity with the current demand level for our services. We market and supplement our services from our headquarters in Midland, Texas and from additional offices in Houston, Denver, Oklahoma City and Michigan.Pittsburgh. Our geophysicists perform data processing in our Midland, Houston and Oklahoma City offices, and our field operations are supported from our field office facility in Midland. The results of a seismic survey conducted for a client belong to that client. We do not acquire seismic data for our own account nor do we participate in oil and gas ventures.
Demand for our data acquisition services is closely linked to oil and natural gas prices and the related level of spending for domestic exploration and development of oil and natural gas reserves. Higher commodity prices
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beginning in 2004 led to a significant increase in the level of spending for domestic exploration. This resulted in greater demand for newly-acquired seismic data by many exploration companies particularly those seeking natural gas reserves. These factors enabled us to expand our data acquisition and processing capacity. The expansion began in fiscal 2004, when we operated six active crews, and continued through fiscal 2008 with the addition of ten data acquisition crews during this period, as well as increases in recording capacity and channel count company-wide and improvements to our data processing center. Since the beginning of fiscal 2009, withWith the decline in the market prices for oil, and especially natural gas following the financial crisis of late 2008, we have experienced a severe reduction in demand for our services.services beginning in early fiscal 2009. As a result, we reduced the number of active data acquisition crews we operateoperated from sixteen in January 2009 to nine in October 2009.
Since the middle of fiscal 2010, we have experienced stronger demand for our services and, as a result, we redeployed three data acquisition crews during fiscal 2010 and two data acquisition crews during fiscal 2011, bringing our current total to fourteen active crews.Business Strategy
Our strategy is to maintain our leadership position in the U.S. onshore market. Key elements of our strategy include:
Attracting and retaining skilled and experienced personnel for our data acquisition and processing operations;
Providing integrated in-house services necessary in each phase of seismic data acquisition and processing, including project design, land access permitting, surveying and related support functions as well as continuing the enhancement of our in-house health, safety, security and environmental programs;
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| • | Attracting and retaining skilled and experienced personnel for our data acquisition and processing operations; |
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| • | Providing integrated in-house services necessary in each phase of seismic data acquisition and processing, including project design, land access permitting, surveying and related support functions as well as continuing the enhancement of our in-house health, safety, security and environmental programs; |
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| • | Maintaining the focus of our operations solely on the domestic onshore seismic market; |
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| • | Continuing to operate with conservative financial discipline; |
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| • | Updating our capabilities to incorporate advances in geophysical and supporting technologies; and |
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| • | Acquiring equipment to expand the recording channel capacity on our existing crews and equipping additional crews as market conditions dictate. |
Maintaining the focus of our operations on the domestic onshore seismic market;
Continuing to operate with conservative financial discipline;
Updating our capabilities to incorporate advances in geophysical and supporting technologies; and
Acquiring equipment to expand the recording channel capacity on our existing crews and equipping additional crews as market conditions dictate.
Business Description
Geophysical Services Overview. Our business consists of the acquisition and processing of seismic data to produce an image of the earth’s subsurface. The seismic method involves the recording of reflected acoustic or sonic waves from below the ground. In our operations, we introduce acoustic energy into the ground by using an acoustic energy source, usually large vibrating machines or through the detonation of dynamite. We then record the subsequent reflected energy, or echoes, with recording devices placed along the earth’s surface. These recording devices, or geophones, are placed on the ground individually or in groups connected together as a single recording channel. We generally use thousands of recording channels in our seismic surveys. Additional recording channels enhance the resolution of the seismic survey through increased imaging analysis and provide improved operational efficiencies.
efficiencies for our clients.We are able to collect seismic data using either 3-D or 2-D or3-D methods. The2-D method involves the collectionDuring fiscal 2011, substantially all of our revenues were derived from 3-D seismic data in a linear fashion thus generating a single plane of subsurface seismic data.acquisition. Continued technological advances in seismic equipment and computing allow us to economically acquire and process data by placing large numbers of energy sources and recording channels over a broad area. The industry refers to the technique of broad distribution of energy sources and recording channels as the3-D seismic method. The3-D method producescreates an immense volume of seismic data which produces more precise images of the earth’s subsurface. Geophysicists use computers to interpret3-D seismic data volumes, generate geologic models of the earth’s subsurface and identify subsurface features that are favorable for the accumulation of hydrocarbons. During fiscal 2009, substantially allIn contrast with 3-D methods, the 2-D method involves the collection of our revenues were derived from3-D seismic data acquisitions and approximately ten percentin a linear fashion thus generating a single plane of our business involvedsubsurface seismic data. In recent years, the use2-D seismic method has been used as a regional evaluation tool in many of the2-D method.
limited access shale basins, in particular the Marcellus Shale in the Appalachian Basin, in which we operated one small channel count crew for half of fiscal 2011.3-D
seismic data are used in the exploration for new reserves and enable oil and gas companies to better delineate existing fields and to augment their reservoir
completion and management techniques. Benefits of incorporating high resolution
3-D seismic surveys into exploration and development programs include reducing drilling risk, decreasing oil and natural gas finding costs and increasing the efficiencies of reservoir location, delineation,
completion and management. In order to meet the requirements necessary to fully realize the benefits of
3-D seismic data, there
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is an increasing demand for improved data quality with greater subsurface resolution.
We are prepared to meet such demands with the implementation of improved techniques and evolving technology. In recent years, we have steadily increased the recording capacity of our crews by increasing channel count and the number of energy source units we operate. These increases allow for a greater density of both channels and energy sources in order to increase resolution and to improve operating efficiencies. In recent quarters, weWe have also utilized multi-component recording equipment on several projects in an effort to gain more information aboutto help our clients enhance their development of producing reservoirs.
Multi-component recording involves the collection of different seismic waves, including shear waves, which aids in reservoir analysis such as fracture orientation and intensity in shales and more descriptive rock properties.In recent years, we have experienced continued increases in recording channel capacity on a per crew or project basis. This increase in channel count demand is driven by client needs and is necessary in order to produce higher resolution images, increase crew efficiencies and undertake larger scale projects. Due to the increase in demand for higher channel counts, we have continued our investments in additional channels. In response to project-based channel requirements, we routinely deploy a variable number of channels on a variable number of crews in an effort to maximize asset utilization and meet client needs. We believe we will realize the benefit of increased channel counts and flexibility of deployment through increased crew efficiencies, higher revenues and margins.
During fiscal 2011, we purchased and leased a significant number of cable-less recording channels. We have utilized this equipment as stand-alone recording systems and in conjunction with our cable-based systems. As a result of the introduction of cable-less recording systems, we have realized increased crew efficiencies and increased revenue on projects using this equipment. We believe we will experience continued demand for cable-less recording systems in the future. As we have replaced cable-based recording equipment with cable-less equipment on certain crews, the cable-based recording equipment continues to be redeployed on existing crews as needed, including on the additional two crews fielded during the second quarter of fiscal 2011.
Data Acquisition. The seismic survey begins at the time a client requests that we formulate a proposal to acquire seismic data on its behalf. Geophysicists then assist the client in designing the specifications of the proposed3-D survey. If the client accepts our proposal, permit agents, either our employees or contract agents, then obtain access rights of way from surface and mineral estate owners or lessees where the survey is to be conducted.
From time to time, our clients undertake the permitting effort on their own prior to our submittal of a proposal.Utilizing electronic surveying equipment, survey personnel, who are either our employees or contract companies, precisely locate the energy source and receiver positions from which the seismic data are collected. We use vibrator energy sources which are mounted on vehicles, the majority of which weigh 62,000 pounds each, to generate seismic energy, or we detonate dynamite charges placed in drill holes below the earth’s surface. We use third-party contractors for the drilling of holes and the purchasing, handling and disposition of dynamite charges. We also use third-party helicopter services to move equipment in areas of difficult terrain in an effort to increase efficiency and reduce safety risk.
At fiscal year end 2009, we operated ten land-based seismic data acquisition crews (recently reduced to nine crews as of October 2009), 147We currently own 157 vibrator energy source units and had capacity in excess of 108,000over 161,000 recording channels, any of which may be configured to meet the demands of specific survey designs. Each crew consists of approximately forty to eighty technicians, twenty-five or more vehicles with off-road capabilities, up to 75,000 geophones, a seismic recording system, energy sources, electronic cables and a variety of other equipment.
channels. We
also currently own
sufficienteighteen central recording
equipment, energy sources and ancillary vehicles to operate sixteen fully equipped crews.systems. Of the
sixteeneighteen recording systems we owned at September 30,
2009,2011, three are OYO GSR cable-less recording systems, eight are ARAM ARIES cable-based recording systems, six are I/O System II RSR radio-based recording systems, and
two areone is an I/O System II MRX cable-based recording
systems.system. All of our
recording systems
utilize similar types of geophones and record equivalent seismic information but vary in the manner by which seismic data are transferred to the central recording unit, as well as their operational flexibility and channel count expandability.
From time to time, we utilize the cable-less OYO GSR system in conjunction with the ARAM ARIES cable system to increase the flexibility and recording capacity of the cable system.At fiscal year end 2011, we operated fourteen land-based seismic data acquisition crews. Each crew consists of approximately forty to one hundred technicians, twenty-five or more vehicles with off-road capabilities, up to 100,000 geophones, a seismic recording system, energy sources, electronic cables and a variety of other equipment. Our equipment may be configured on our crews in various combinations to meet the demands of specific survey designs.
Of the tenfourteen data acquisition crews in operation at September 30, 2009,2011, three used GSR recording systems, six used ARAM recording systems threeand five used I/O RSR recording systems and one used an I/O MRX recording system.systems. All of our crews utilize either vibrator energy sources or dynamite energy sources. In OctoberWhile the number of 2009,recording systems we reducedown is in excess of the number needed to field our crew countcurrent level of data acquisition crews, we maintain the excess equipment to nine active crews by removing an I/O RSR system from operation.
provide additional operational flexibility and to allow us to quickly deploy additional recording channels and energy source units as needed to respond to client demand and clients’ desire for improved data quality with greater subsurface images.Client demand for more recording channels continues to increase as the industry strives for improved data quality with greaterhigher resolution subsurface resolution.images. We believe this trend will continue and that our ability to deploy a large number of recording channels and multiple energy source units provides us with the competitive advantages of operational versatility and increased productivity, in addition to improved data quality. In November 2009,2011, we placed an order for a 2,000-station OYO GSR four-channel recording system along with three-component geophones.twelve INOVA AHV IV 364 energy sources. The GSR can be operated as a 6,000-channel cable-less recording system with either 3-C or conventional geophones. Alternatively, withpurchase of these additional energy sources will expand our energy source fleet to 169 by the use of our existing geophones and ARAM cables, the system can operate as an 8,000-channel recording system. In either configuration, the GSR can be operated as a stand-alone system or as added channel count with increased operational flexibility with anyend of the Company’s existing ARAM systems.
first quarter of fiscal year 2012.Data Processing. We currently operate a computer center located in Midland, Texas and provide additional processing services through our Houston and Oklahoma City offices. Data processing primarily involves the enhancement of seismic data by improving reflected signal resolution, removing ambient noise and establishing proper spatial relationships of geological features. The data are then formatted in such a manner that computer graphic technology may be employed for examination and interpretation of the data by the user.
We continue to improve data processing efficiency and accuracy with the addition of improved processing software and high-speed computer technology. We purchase, develop or lease seismic data processing software under non-exclusive licensing arrangements.
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Our computer center processes seismic data collected by our crews, as well as by other geophysical contractors. In addition, we reprocess previously recorded seismic data using current technology to enhance the data quality. Our processing contracts may be awarded jointly with, or independently from, data acquisition services. Data processing services comprise a small portion of our overall revenues.
Integrated Services. We maintain integrated in-house operations necessary to the development and completion of seismic surveys. Our experienced personnel have the capability to conduct or supervise the seismic survey design, permitting, surveying, data acquisition and processing functions for each seismic program. In-house support operations include health, safety, security and environmental programs as well as facilities for automotivevehicle repair, automotivevehicle paint and body repair, electronics repair, electrical engineering and software development. In addition, we maintain a fleet of tractor trailers to transport our seismic acquisition equipment to our survey sites. We believe that maintaining as many of these functions in-house as possible in-house contributes to better quality control and improved efficiency in our operations. Our clients generally provide their ownare responsible for the interpretation of the seismic data we provide.
Equipment Acquisition and Capital Expenditures
We monitor and evaluate advances in geophysical technology and commit capital funds to purchase the equipment we deem most effective to maintain our competitive position. Purchasing new assets and upgrading existing capital assets requires a commitment to capital spending. The Company’sDuring fiscal 2011, we invested $35,323,000 in additional OYO GSR recording equipment in response to industry demand for more recording channels and operational flexibility. In addition, we purchased ten INOVA AHV IV 364 vibrator units. These purchases reflect our belief that the trend towards increased channel counts and energy sources in our industry will continue. Our Board of Directors has approved a $10,000,000an initial $20,000,000 capital budget for fiscal 2010 most of2012 which will be used to purchase a 2,000-station OYO GSR four-channel recording system along with three-component geophonestwelve INOVA AHV IV 364 vibrator energy sources units, increase channel count, make technical improvements in various phases of our operations and the remainder used to meet necessary maintenance requirements during the fiscal year. The addition of the OYO GSR recording equipmentcapital requirements. We believe that these additions will allow the Companyus to record 6,000 channels of cable-less multi-component data or upmaintain our competitive position as we respond to 8,000 channels of conventional seismic data, either as a stand-alone system or as added channel count and increased flexibilityclient desire for the Company’s existing ARAM recording systems.
higher resolution subsurface images.Clients
Our services are marketed by supervisory and executive personnel who contact clients to determine geophysical needs and respond to client inquiries regarding the availability of crews or processing schedules. These contacts are based principally upon professional relationships developed over a number of years.
Our clients range from major oil and gas companies to small independent oil and gas operators and also providers of multi-client data libraries. The services we provide to our clients vary according to the size and needs of each client. During fiscal 2009,2011, sales to our two largest client,clients, Chesapeake Energy Corporation and Devon Energy, represented 31%27% and 24% of our revenues.revenue respectively. The remaining balance of our fiscal 20092011 revenue was derived from varied clients and none represented 10% or more of our fiscal 20092011 revenues. Although 31%51% of our fiscal 20092011 revenues were derived from one client,two clients, we believe that our relationship with this clientthese clients is well founded for continued contractual commitments for the foreseeable future in multiple producing basins across the lower 48 states although atstates. While still expected to be significant clients, we do anticipate that sales to Chesapeake and Devon will represent a reduced level.
smaller percentage of our overall revenues during fiscal 2012.We do not acquire data for our own account or for future sale, maintain any multi-client data libraries or participate in oil and gas ventures. The results of a seismic survey conducted for a client belong to that client. It is also our policy that none of our officers, directors or employees actively participate in oil and natural gas ventures. All of our clients’ information is maintained in the strictest confidence.
Our data acquisition services are conducted under master service contracts with our clients. These master service contracts define certain obligations for us and for our clients. A supplemental agreement setting forth the terms of a specific project, which may be cancelled by either party on short notice, is entered into for every data acquisition project. The supplemental agreements are either “turnkey” agreements that provide for a fixed fee to be paid to us for each unit of data acquired, or “term” agreements that provide for a fixed hourly, daily or monthly fee during the term of the project or projects. Turnkey agreements generally provide us more profit potential, but involve more risks because of the potential of crew downtime or operational delays. We attempt to negotiate on aproject-by-project basis some level of weather downtime protection within the turnkey agreements. Under the term
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agreements, we forego an increased profit potential in exchange for a more consistent revenue stream with improved protection from crew downtime or operational delays.
We operate under both turnkey and term supplemental agreements. The percentage of revenues derived from turnkey contracts has grown in the past few years from approximately half of our revenues in fiscal 2008 to in excess of three-quarters of our revenues in fiscal 2011. Currently, the majoritymost of our projects are operated under turnkey agreements.
The acquisition and processing of seismic data for the oil and natural gas industry is a highly competitive business in the United States. Contracts for such services generally are awarded on the basis of price quotations, crew experience and availability of crews to perform in a timely manner, although factors other than price, such as crew safety, performance history and technological and operational expertise, are often determinative. Our competitors include companies with financial resources that are significantly greater than our own as well as companies of comparable and smaller size. Our primary competitors are CGG Veritas, Petroleum Geo-Services ASA, Geokinetics Inc., Global Geophysical Services, and Tidelands Geophysical Company.
Company and TESLA Exploration. In addition, the barriers to entry in the seismic industry are not prohibitive, and it would not be difficult for seismic companies outside of the United States to enter the United States market and compete with us.Employees
As of September 30, 2009,2011, we employed approximately 9421,507 persons, of which 8321,374 were engaged in providing energy sources and acquiring data. With respect to the remainder of our employees, thirteennine are engaged
in data processing, thirty-onesixty are administrative personnel, fifty-twofifty are engaged in equipment maintenance and transport and fourteen are officers. Of the employees listed above, tennine are geophysicists. Our employees are not represented by a labor union. We believe we have good relations with our employees.
All of our Annual Reports onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K and all amendments to those reports filed with or furnished to the Securities and Exchange Commission (“SEC”) on or after May 9, 1995 are available free of charge through our Internet Website, www.dawson3d.com, as soon as reasonably practical after we have electronically filed such material with, or furnished it to, the SEC. Information contained on our Internet Website is not incorporated by reference in this Annual Report onForm 10-K. In addition, the SEC maintains an Internet siteWebsite containing reports, proxy and information statements, and other information filed electronically at www.sec.gov. You may also read and copy this information, for a copying fee, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at1-800-SEC-0330 to obtain information on the operation of the Public Reference Room.
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Item 1A. RISK FACTORS Item 1A.
| RISK FACTORS |
An investment in our common stock is subject to a number of risks, including those discussed below. You should carefully consider these discussions of risk and the other information included in thisForm 10-K. These risk factors Although the risks described below are the risks that we believe are material to our business, they are not the only risks that could materially adversely affect our business. If any of the following events were to occur, our business, financial condition or results of operations.operations could be materially adversely affected.
Recent decreases inOur business depends on the market priceslevel of exploration and production activities by the oil and natural gas disruptions in the global financial markets and the global economy generally have decreased demand for our seismic services, caused downward pressure on the prices we charge and affected our results of operations.
Since August 2008, the market prices for oil and especially natural gas have declined significantly from historic highs. In addition, disruptions and instability in the global financial markets and a worldwide recession have resulted in a significant reduction in the availability of funds from debt and equity capital markets and other capital markets. Furthermore, conditions in the global and domestic economy increased uncertainty and diminished expectations for many businesses, including producers of oil and natural gas. As a result of these developments, many of our customers were unable to implement their development plans and were forced to significantly reduce their capital expenditures during fiscal 2009. As a consequence, during fiscal 2009, we experienced a severe reduction in demand for our services, downward pressure on the prices we charge our customers for our services and our results of operations were adversely affected. We have reduced the number of data acquisition crews we operate from sixteen at the end of fiscal 2008 to nine as of October 2009 to better align our capacity to the reduced demand.
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Current economic conditions remain uncertain and challenging. If economic conditions do not improve or were to worsen, or our customers do not increase their capital expenditures, it would result in continued diminished demand for our seismic services, may cause continued downward pressure on the prices we charge and would continue to affect our results of operations. A significant and prolonged reduction in demand for seismic services would have a material adverse effect on our results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.”
industry. If oil and natural gas prices or the level of capital expenditures by oil and gas companies were to decline, demand for our services would decline and our results of operations would be adversely affected.
Demand for our services depends upon the level of spending by oil and natural gas companies for exploration, production, development and field management activities, which depend, in part, on oil and natural gas prices. Significant fluctuations in oil and natural gas exploration activities and commodity prices have adversely affected the demand for our services and our results of operations in years past and would continue to do so again if there was a sustained decline inthe level of such exploration activities and the prices for oil and natural gas. Whilegas were to decline in recent years, the prices of oil and natural gas have been historically high and exploration activities have been strong, since August 2008, the prices of oil and especially natural gas have declined significantly.future. In addition to the market prices of oil and natural gas, our clients’ willingness to explore, develop and produce depends largely upon prevailing industry conditions that are influenced by numerous factors over which our management has no control, including general economic conditions and the availability of credit. There can be no assurance that the current level of energy prices will not decline furtherbe maintained or that exploration and development activities by our clients will resumebe maintained at the pace of recent years. A significant sustained drop in oil and natural gas prices or the inability of our clients to secure funding for new exploration projects would have a negative impact on demand for our services. Beginning in fiscal 2009, we experienced a severe reduction in demand for our services as clients reduced the size or delayed seismic projects as a result of the decline in oil and natural gas prices and the disruptions in the capital markets and economy. As a result, we reduced the number of our operating data acquisition crews from sixteen at the end of fiscal 2008 to nine as of October 2009. Because the majority of our current clients’ projects are focused on the exploration for natural gas, a sustained significant decline in the price of natural gas has had, and would continue to have, a particularly negative effect on the demand for our services.levels. Any significant decline in exploration or production-related spending by our clients, whether due to a decrease in the market prices for oil and natural gas or otherwise, could cause us to alter our capital spending plans and would have a material adverse effect on our results of operations. Additionally, increases in oil and gas prices may not increase demand for our products and services or otherwise have a positive effect on our results of operations or financial condition.
Factors affecting the prices of oil and natural gas and our clients’ desire to explore, develop and produce include:
the level of supply and demand for oil and natural gas;
the level of prices, and expectations about future prices, for oil and natural gas;
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| • | the level of supply and demand for oil and natural gas; |
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| • | level of prices, and expectations about future prices, for oil and natural gas; |
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| • | the ability of oil and gas producers to raise equity capital and debt financing; |
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| • | worldwide political, military and economic conditions, including the ability of oil and gas producers to raise equity capital and debt financing; the worldwide political, military and economic conditions; the ability of the Organization of Petroleum Exporting Countries to set and maintain production levels and prices for oil; |
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| • | the cost of exploring for, developing and producing oil and natural gas; |
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| • | government policies regarding the exploration for production and development of oil and natural gas reserves and the use of fossil fuels; |
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| • | level of taxation relating to the energy industry, including taxation of consumption of energy sources; and |
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| • | weather conditions, including large-scale weather events such as hurricanes that affect oil and gas operations over a wide area or affect prices or locally inclement weather that can preclude or delay our seismic operations. |
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the rate of discovery of new oil and gas reserves and the decline of existing oil and gas reserves;
the cost of exploring for, developing and producing oil and natural gas;
the ability of exploration and production companies to generate funds or otherwise obtain capital for exploration, development and production operations;
technological advances affecting energy exploration, production and consumption;
government policies, including environmental regulations and tax policies, regarding the exploration for, production and development of oil and natural gas reserves and the use of fossil fuels; and
weather conditions, including large-scale weather events such as hurricanes that affect oil and gas operations over a wide area or affect prices.
The markets for oil and natural gas have historically been volatile and are likely to continue to be so in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.”
Our clients could delay,Weakness in the global economy during the past few years decreased demand for our seismic services, caused downward pressure on the prices we charge and affected our results of operations. Any renewed weakness in the global economy would adversely affect us in a similar manner.
Beginning in August 2008, disruptions and instability in the global financial markets and a worldwide recession forced many of our customers to abandon their development plans and to significantly reduce or cancel their service contracts with us on short notice, which may lead to lower than expectedcapital expenditures during fiscal years 2009 and 2010. As a consequence, we experienced a severe reduction in demand and revenues.
Our order book consists of written orders or commitments for our services, thatdownward pressure on the prices we believe to be firm. However,charged our clients can delay, reduce or cancel their service contracts with us on short notice. As a result,customers for our order book as of any particular date may not be indicative of actual revenues for any succeeding fiscal period.
The high fixed costs of our operations could adversely affect our results of operations.
Our business has high fixed costs. As a result, any significant downtime or low productivity caused by reduced demand, weather interruptions, equipment failures, permit delays or other causes could adversely affect our results of operations.
Our revenues are subject to fluctuations that are beyond our control which could adversely affectservices, and our results of operations in any financial period.
Our operating results vary in material respects from quarter to quarter and will continue to do so inwere adversely affected during these years. During this period, we also reduced the future. Factors that cause variations include the timingnumber of the receipt and commencement of contracts for data acquisition permit delays, weather delays, holiday schedulescrews we operated from sixteen in January 2009 to nine in October 2009, which reflects the decrease in demand for our services. Since the beginning of fiscal 2010, the financial crisis has eased, the price of oil has stabilized and crew productivity. Combined withdemand for our high fixed costs, these revenue fluctuations could produce unexpected adverseservices and our financial performance has improved. However, if economic conditions were to once again worsen, forcing our customers to reduce their capital expenditures, demand for our seismic services would decline and our results of operations in any fiscal period.
would again be affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.”Our operations are subject to weather conditions which could adversely affect our results of operations.
Our seismic data acquisition operations could be adversely affected by inclement weather conditions. Delays associated with weather conditions could adversely affect our results of operations. See “Business — Contracts.”
Our operations are subject to delays related to obtaining land access rights of way from third parties which could affect our results of operations.
Our seismic data acquisition operations could be adversely affected by our inability to obtain timely right of way usage from both public and private landand/or mineral owners. In recent years, it has become more difficult, costly and time-consuming to obtain access rights of way as drilling activities have expanded into more populated areas, and landowners have become more resistant to seismic and drilling activities occurring on their property. Delays associated with obtaining such rights of way could negatively affect our results of operations.
We face intense competition in our business that could result in downward pricing pressure and the loss of market share.
The acquisition and processing of seismic data for the oil and natural gas industry is a highly competitive business in the United States. Some of our competitors have financial resources that are significantly greater than our own. Additionally, the seismic data acquisition business is extremely price competitive and has a history of periods in which seismic contractors bid jobs below cost and therefore adversely affect industry pricing. Many contracts are awarded on a bid basis, which may further increase competition based primarily on price. In addition, the barriers to entry in the seismic industry are not prohibitive, and it would not be difficult for seismic companies outside of the United States to enter the United States market and compete with us. Competition from these and other competitors could result in downward pricing pressure and the loss of market share. See “Business — Competition.”
Our clients could delay, reduce or cancel their service contracts with us on short notice, which may lead to lower than expected demand and revenues.
Our order book reflects client commitments at levels we believe are sufficient to maintain operations on our existing crews for the indicated periods. However, our clients can delay, reduce or cancel their service contracts with us on short notice. In addition, the timing of the completion of projects and when projects are awarded and contracted for is also uncertain. As a result, our order book as of any particular date may not be indicative of actual demand and revenues for any succeeding fiscal period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.”
The high fixed costs of our operations could adversely affect our results of operations.
Our business has high fixed costs, which primarily consist of depreciation, maintenance expenses associated with our seismic data acquisition and processing equipment and certain crew costs. In periods of significant
downtime or low crew productivity, these fixed costs do not decline as rapidly as our revenues. As a result, any significant downtime or low productivity caused by reduced demand, weather interruptions, equipment failures, permit delays or other causes could adversely affect our results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Our revenues are subject to fluctuations that are beyond our control which could adversely affect our results of operations in any financial period.
Our operating results vary in material respects from quarter to quarter and will continue to do so in the future. Factors that cause variations include the timing of the receipt of contracts for data acquisition, timing of the commencement and completion of work under data acquisition contracts, permit and weather delays, seasonal factors such as holiday schedules, shorter winter days or agricultural or hunting seasons, and crew repositioning and crew productivity. Should one or more of our fourteen crews experience changes in timing due to one or more of these factors, our financial results could be subject to significant variations from period to period. Combined with our high fixed costs, these revenue fluctuations could also produce unexpected adverse results of operations in any fiscal period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.”
Inclement weather may adversely affect our ability to complete projects and could therefore adversely affect our results of operations.
Our seismic data acquisition operations could be adversely affected by inclement weather conditions. Delays associated with weather conditions could adversely affect our results of operations. For example, weather delays could affect our operations on a particular project or an entire region and could lengthen the time to complete data acquisition projects. In addition, even if we negotiate weather protection provisions in our contracts, we may not be fully compensated by our clients for the delay caused by the inclement weather. Delays from adverse weather conditions have particularly affected our results of operations in past periods and are likely to affect our results in future periods. See “Business — Contracts.”
Our operations are subject to delays related to obtaining land access rights from third parties which could affect our results of operations.
Our seismic data acquisition operations could be adversely affected by our inability to obtain timely right of way usage from both public and private land and/or mineral owners. We cannot begin surveys on property without obtaining permits from governmental entities as well as the permission of the private landowners who own the land being surveyed. In recent years, it has become more difficult, costly and time-consuming to obtain access rights of way as drilling activities have expanded into more populated areas. Additionally, while landowners generally are cooperative in granting access rights, some have become more resistant to seismic and drilling activities occurring on their property. In addition, governmental entities do not always grant permits within the time periods expected. Delays associated with obtaining such rights of way have negatively affected our results of operations in past periods and may affect our results in future periods. See “Business — Data Acquisition.”
Our profitability is determined, in part, by the productivity of our crews and the type of contracts we enter into and is affected by numerous external factors that are beyond our control.
Our revenue is determined, in part, by the contract price we receive for our services, the productivity of our data acquisition crews and the accuracy of our cost estimates. Crew productivity is partly a function of external factors, such as delays from inclement weather or in obtaining land access rights, over which we have no control. If our crews encounter operational difficulties or delays on any data acquisition survey, our results of operations may vary, and in some cases, may be adversely affected.
In fiscal 2011, most of our projects were performed on a turnkey basis for which we were paid a fixed price for a defined scope of work or unit of data acquired. The revenue, cost and gross profit realized under our turnkey contracts can vary from our estimates because of changes in job conditions, variations in labor and equipment productivity or because of the performance of our subcontractors. Turnkey contracts may also cause us to bear substantially all of the risks of business interruption caused by external factors over which we may
have no control, such as weather, obtaining land access rights, crew downtime or operational delays. These variations, delays and risks inherent in turnkey contracts may result in reducing our profitability. See “Business — Contracts.”
A limited number of customers operating in a single industry account for a significant portion of our revenues, and the loss of one of these customers could harmadversely affect our results of operations; we bear the risk if any of our clients become insolvent and fail to pay amounts owed to the Company,us, so any failure to pay by these clients could harm our results of operations.
We derive a significant amount of our revenues from a relatively small number of oil and gas exploration and development companies. Although our ten largest customers in fiscal 20092011 and 20082010 have varied, these customers accounted for approximately 68%78% and 83%70% of our total revenue for these respective periods. For the yearsyear ended September 30, 2009 and 2008, the Company’s2011, our two largest clientclients represented approximately 31%27% and 36%, respectively,24% of total revenues. If this client,these clients, or any of our other significant clients, were to terminate their contracts or fail to contract for
8
our services in the future because they are acquired, alter their exploration or development strategy, experience financial difficulties or for any other reason, our results of operations could be adversely affected. See “Business — Clients.”
We bear the credit risk if any of our clients become insolvent and fail to pay amounts owed to the Company.us. Although we perform ongoing credit evaluations of our customers’ financial conditions, we generally require no collateral from our customers. The worldwide recession and the decrease in oil and especially natural gas prices have affected the financial condition and results of operations of our clients, and someSome of our clients have experienced financial difficulties in the past and even filed bankruptcy andwhile others may do so in the future. It is possible that one or more of our clients will become financially distressed, andwhich could cause them to default on their obligations to us and could reduce the Company. Furthermore, the bankruptcyclient’s future need for seismic services provided by us. Our concentration of one or more ofcustomers may also increase our clients, or some other similar procedure, might make it difficult for the Companyoverall exposure to collect all or a significant portion of amounts owed by the client.these credit risks. Our inability to collect our accounts receivable could have a materially adverse effect on our results of operations. In addition, from time to time, we experience contractual disputes with our clients regarding the payment of invoices or other matters. While we seek to minimize these disputes and maintain good relations with our clients, we have in the past, and may in the future, experience disputes that could negatively affect our revenuesrelationship with a client and consequently affect our results of operations in future periods.
We may be unable to attract and retain skilled and technically knowledgeable employees which could adversely affect our business and our growth.
Our continued success depends upon attracting and retaining highly skilled professionals and other technical personnel. A number of our employees are highly skilled scientists and highly trained technicians, and our failure to continue to attract and retain such individuals could adversely affect our ability to compete in the seismic services industry. We may experience significant competition for these skilled and technically knowledgeable personnel, particularly during periods of increased demand for seismic services. None of our employees are under employment contracts, and we have no key man insurance.
Capital requirements for our operations are large. If we are unable to finance these requirements, we may not be able to maintain our competitive advantage.
Seismic data acquisition and data processing technologies historically have progressed rather rapidly, and we expect this trend to continue. In order to remain competitive, we must continue to invest additional capital to maintain, upgrade and expand our seismic data acquisition capabilities. Our working capital requirements continue to increase, primarily due to the expansion of our infrastructure in response to client demand for more recording channels, which has increased as the industry strives for improved data quality with greater subsurface resolution images. Our sources of working capital are limited. We have historically funded our working capital requirements with cash generated from operations, cash reserves and borrowings from commercial banks. In the past, we have also funded our capital expenditures and other financing needs through public equity offerings. If we were to expand our operations at a rate exceeding operating cash flow, if current demand or pricing of geophysical services were to decrease substantially or if technical advances or competitive pressures required us to acquire new equipment faster than our cash flow could sustain, additional financing could be required. If we
were not able to obtain such financing or renew our existing revolving line of credit when needed, our failure could have a negative impact on our ability to pursue expansion and maintain our competitive advantage. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
We rely on a limited number of key suppliers for specific seismic services and equipment.
We depend on a limited number of third parties to supply us with specific seismic services and equipment. From time to time, increased demand for seismic data acquisition services has decreased the available supply of new seismic equipment, resulting in extended delivery dates on orders of new equipment. Any delay in obtaining equipment could delay our deployment of additional crews and restrict the productivity of existing crews, adversely affecting our business and results of operation. In addition, any period.
adverse change in the terms of our suppliers’ arrangements could affect our results of operations.Certain of our suppliers may also be our competitors. If competitive pressures were to become such that our suppliers would no longer sell to us, we would not be able to easily replace the technology with equipment that communicates effectively with our existing technology, thereby impairing our ability to conduct our business.
Technological change in our business creates risks of technological obsolescence and requirements for future capital expenditures. If we are unable to keep up with these technological advances, we may not be able to compete effectively.
Seismic data acquisition and data processing technologies historically have progressed rather rapidly, and we expect this progression to continue. In order to remain competitive, we must continue to invest additional capital to maintain, upgrade and expand our seismic data acquisition capabilities. However, due to potential advances in technology and the related costs associated with such technological advances, we may not be able to fulfill this strategy, thus possibly affecting our ability to compete.
Our results of operations could be adversely affected by asset impairments.
We periodically review our portfolio of equipment for impairment. If we expect significant sustained decreases in oil and natural gas prices and reduced demand for our services, we may be required to write down the value of our equipment if the future cash flows anticipated to be generated from the related equipment falls below net book value. The recent decline in oil and natural gas prices, if sustained, could result in future impairments. If we are forced to write down the value of our equipment, these noncash asset impairments could negatively affect our results of operations in the period in which they are recorded. See discussion of “Impairment of Long-Lived Assets” included in “Critical Accounting Policies.”
We may be unable to attract and retain skilled and technically knowledgeable employees which could adversely affect our business and our growth.
Our success depends upon attracting and retaining highly skilled professionals and other technical personnel. A number of our employees are highly skilled scientists and highly trained technicians, and our failure to continue to attract and retain such individuals could adversely affect our ability to compete in the seismic services industry. We may experience significant and potentially adverse competition for these skilled and technically knowledgeable personnel, particularly during periods of increased demand for seismic services. None of our employees are under employment contracts, and we have no key man insurance.
Capital requirements for our operations are large. If we are unable to finance these requirements, we may not be able to maintain our competitive advantage.
Our sources of working capital are limited. We have historically funded our working capital requirements with cash generated from operations, cash reserves and short-term borrowings from commercial banks. In the past, we have also funded our capital expenditures and other financing needs through public equity offerings. Our working capital requirements continue to increase, primarily due to the expansion of our infrastructure in response to client demand for more recording channels, which has increased as the industry strives for improved data quality with greater subsurface resolutions. If we were to expand our operations at a rate exceeding operating cash flow, or if current demand or pricing of geophysical services were to decrease substantially, additional financing could be required. If we were not able to obtain such financing or renew our existing revolving line of credit when needed, our failure could have a negative impact on our ability to pursue expansion and maintain our competitive advantage. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
The Company relies on a limited number of key suppliers for specific seismic services and equipment.
The Company depends on a limited number of third parties to supply it with specific seismic services and equipment. Any delay in obtaining equipment could delay the Company’s implementation of additional crews and
9
restrict the productivity of its existing crews, adversely affecting the Company’s business and results of operation. In addition, any adverse change in the terms of the Company’s supplier arrangements could affect its results of operations.
Certain of our suppliers may also be competitors of us. If competitive pressures were to become such that our suppliers would no longer sell to us, we would not be able to easily replace the technology with equipment that communicates effectively with our existing technology, thereby impairing our ability to conduct our business.
Technological change in our business creates risks of technological obsolescence and requirements for future capital expenditures. If we are unable to keep up with these technological advances, we may not be able to compete effectively.
Seismic data acquisition and data processing technologies historically have progressed rather rapidly, and we expect this progression to continue. Our strategy is to regularly upgrade our data acquisition and processing equipment to maintain our competitive position. However, due to potential advances in technology and the related costs associated with such technological advances, we might not be able to fulfill this strategy, thus possibly affecting our ability to compete.
We operate under hazardous conditions that subject us to risk of damage to property or personalpersonnel injuries and may interrupt our business.
Our business is subject to the general risks inherent in land-based seismic data acquisition activities. Our activities are often conducted in remote areas under extreme weather and other dangerous conditions, including the use of dynamite as an energy source. These operations are subject to risks of injury to our personnel and equipment, to third parties and damage to buildingsour equipment and other improvements in the areas in which we operate. In addition, our crews often operate in areas where the risk of wildfires is present and may be increased by our activities. Our crews are mobile, and equipment and personnel are subject to vehicular accidents. We use diesel fuel which is classified by the U.S. Department of Transportation as a hazardous material. These risks could cause us to experience equipment losses, injuries to our personnel and interruptions in our business. Delays due to operational disruptions such as equipment losses, personnel injuries and business interruptions could adversely affect our profitability and results of operations.
We may be subject to liability claims that are not covered by our master service agreements or by insurance.
We could be subject to personal injury or real property damage claims in the normal operation of our business. Such claims may not be covered under the indemnification provisions in our master service agreements
to the extent that the damage was due to our or our subcontractors’ negligence, gross negligence or intentional misconduct.
In addition,Although we maintain what we believe is prudent insurance protection, we do not carry insurance against certainsome of the risks that we could experience, including business interruptioninterruptions resulting from equipment losses or weather delays.delays, and the insurance which we do maintain might not be sufficient or adequate to cover all losses or liabilities. We obtain insurance against certain property and personal casualty risks and other risks when such insurance is available and when our management considers it advisable to do so. Such coverage is not always available or applicable and, when available, is subject to unilateral cancellation by the insuring companies on very short notice. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a materially adverse effect on our results of operations.
We may be held liable for the actions of our subcontractors.
We often work as the general contractor on seismic data acquisition surveys and consequently engage a number of subcontractors to perform services and provide products. While we obtain contractual indemnification and insurance covering the acts of these subcontractors and require the subcontractors to obtain insurance for our benefit, there can be no assurance we will notcould be held liable for the actions of these subcontractors. In addition, subcontractors may cause damage or injury to our personnel andor damage to our property that is not fully covered by insurance.
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Our industry is subject to governmental regulation which may adversely affect our future operations.
Our operations are subject to a variety of federal, state and local laws and regulations, including laws and regulations relating to protection of the environment and archeological sites. We are required to expend financial and managerial resources to comply with such laws and related permit requirements in our operations, and we anticipate that we will continue to be required to do so in the future. The fact that such laws or regulations change frequently makes it impossible for us to predict the cost or impact of such laws and regulations on our future operations. The adoption of laws and regulations that have the effect of reducing or curtailing exploration and production activities by energy companies could also adversely affect our results of operations by reducing the demand for our services.
In particular,
inlaws and regulations concerning climate change or regulating hydraulic fracturing could adversely affect our operations and reduce demand for seismic services.Current and future legislation or regulation relating to climate change or hydraulic fracturing could negatively affect the exploration and production of oil and gas and adversely affect demand for our services.
In response to concerns suggesting that emissions of certain gases, commonly referred to as “greenhouse gases” (GHG) (including carbon dioxide and methane) may be contributing to global climate change, legislative and regulatory measures to address the U.S. Congress is actively considering legislation to reduce such emissions. In addition,concerns are in various phases of discussion or implementation at the national and state levels. At least one-third of the states, either individually or through multi-state regional initiatives, have already taken legal measures intended to reduce greenhouse gasGHG emissions, primarily through the planned development of greenhouse gasGHG emission inventoriesand/or greenhouse gas GHG cap and trade programs.
On June 26, 2009,Although various climate change legislative measures have been under consideration by the U.S. House of Representatives approved adoption of the “American Clean Energy and Security Act of 2009,” also known as the “Waxman-MarkeyCap-and-Trade legislation,” or “ACESA.” The purpose of ACESA is to control and reduce emissions of greenhouse gases in the United States. The U.S. Senate is working on its own legislation for controlling and reducing emissions of greenhouse gases. For legislation to become law, both chambers of Congress, would be required to approve the same legislation. Itit is not possible at thethis time to predict whether or when the SenateCongress may act on climate change legislation, how any bill approved by the Senate would be reconciled with ACESA or how federal legislation may be reconciled with state and regional requirements.
legislation. The U.S. Environmental Protection Agency (the “EPA”) is separately considering whether ithas promulgated a series of rulemakings and taken other actions that the EPA states will regulate greenhouse gasesresult in the regulation of GHG as “air pollutants” under the existing federal Clean Air Act. Recently, theFurthermore, in 2010, EPA issued the Final Mandatory Reporting of Greenhouse Gases Rule. This rule will beregulations became effective December 29, 2009that require monitoring and will require the collection of information beginning in January 2010 with annual reporting to begin in 2011 for covered facilities. The rule requires reporting of greenhouse gasGHG emissions on an annual basis, including extensive GHG monitoring and reporting requirements. While this new rule does not control GHG emission levels from any facilities, it will cause covered facilities to incur monitoring and reporting costs. Moreover, lawsuits have been filed seeking to require individual companies to reduce GHG emissions from large sourcestheir operations. These and suppliersother lawsuits relating to GHG emissions may result in the United States,decisions by state and the EPA has statedfederal courts and agencies that it will use the information to guide development of the policies and programs to reduce emissions.
could impact our operations.This increasing governmental focus on global warming may result in new environmental laws or regulations that may negatively affect us, our suppliers and our customers. This could cause us to incur additional direct costs in complying with any new environmental regulations, as well as increased indirect costs resulting from our customers, suppliers or both incurring additional compliance costs that get passed on to us. Moreover, passage of climate change legislation or other federal or state legislative or regulatory initiatives that regulate or restrict emissions of greenhouse gases may curtail production and demand for fossil fuels such as oil and gas in areas where our customers operate and thus adversely affect future demand for our products and services. Reductions in our revenues or increases in our expenses as a result of climate control initiatives could have adverse effects on our business, financial position, results of operations and prospects.
Hydraulic fracturing is an important and commonly used process in the completion of oil and gas wells. Hydraulic fracturing involves the injection of water, sand and chemical additives under pressure into rock formations to stimulate gas production. Due to public concerns raised regarding potential impacts of hydraulic fracturing on groundwater quality, legislative and regulatory efforts at the federal level and in some states have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. At the federal level, a bill was introduced in Congress in March 2011 entitled, the “Fracturing Responsibility and Awareness of Chemicals Act,” or the “FRAC Act,” that would amend the federal Safe Drinking Water Act, or the “SDWA,” to repeal an exemption from regulation for hydraulic fracturing. If enacted, the FRAC Act would amend the definition of “underground injection” in the SDWA to encompass hydraulic fracturing activities. Such a provision could require hydraulic fracturing operations to meet permitting and financial assurance requirements, adhere to certain construction specifications, fulfill monitoring, reporting, and recordkeeping obligations and meet plugging and abandonment requirements. The FRAC Act also proposes to require the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In early 2010, the EPA indicated in a website posting that it intended to regulate hydraulic fracturing under the SDWA and require permitting for any well where hydraulic fracturing was conducted with the use of diesel as an additive. While industry groups have challenged the EPA’s website posting as improper rulemaking, the Agency’s position, if upheld, could require additional permitting. In addition, the EPA has commenced a study of the potential adverse effects that hydraulic fracturing may have on water quality and public health, and a committee of the U.S. House of Representatives has commenced its own investigation into hydraulic fracturing practices. These legislative and regulatory initiatives imposing additional reporting obligations on, or otherwise limiting, the hydraulic fracturing process could make it more difficult or costly to complete natural gas wells. Shale gas cannot be economically produced without extensive fracturing. In the event such legislation is enacted, demand for our seismic acquisition services may be adversely affected.
Certain provisions of our charter and bylaws and our shareholder rights plan may make it difficult for a third party to acquire us, even in situations that may be viewed as desirable by shareholders.
Our articles of incorporation and bylaws contain provisions that authorize the issuance of preferred stock and establish advance notice requirements for director nominations and actions to be taken at shareholder meetings. These provisions could discourage or impede a tender offer, proxy contest or other similar transaction involving control of the Company, even in situations that may be viewed as desirable by our shareholders. In addition, we have adopted a shareholder rights plan that would likely discourage a hostile attempt to acquire control of the Company.
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Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our stock price.
If, in the future, we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could have a material adverse effect on the price of our common stock.
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Item 1B. | UNRESOLVED STAFF COMMENTS |
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Our principal facilities are summarized in the table below.
| | | | | | | | | | |
Location | | Owned or
Leased | | | Purpose | | | | Building Area
Square Feet | |
Midland, TX | | Owned or
| | | | Building Area
|
Location
| | Leased | | Purpose | | Square Feet |
|
Midland, TX | | Leased | | Executive offices and data processing | | | 29,960 | |
Midland, TX | | | Owned | | | Field office | | | 61,402 | |
| | | | | | Equipment fabrication facility | | | | |
| | |
| | | | | Maintenance and repairs shop | | | | |
We have operating leases for general office space in Houston, Denver, and Oklahoma City, for general office space. In addition, we have an operating lease for general office purposes, maintenance and repairs in Lyon Township, Michigan.
Michigan and Pittsburgh.Our operations are limited to one industry segment and the United States.
We believe that our existing facilities are well maintained, suitable for their intended use and adequate to meet our current and future operating requirements.Item 3. 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.
For a discussion of certain contingencies affecting the Company, please refer to Note 13, “Commitments and Contingencies” to the Financial Statements included herein, which is incorporated by reference herein.
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Item 4.
| SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matter has been submitted during the fourth quarter of the 2009 fiscal year to a vote of our security holders, through the solicitation of proxies or otherwise. However, please refer to our Proxy Statement for the Annual Meeting to be held on January 26, 2010 (the “Proxy Statement”), to be filed with the Securities and Exchange Commission, notifying security holders as to the election of directors and selection of KPMG LLP as our independent registered public accounting firm.
Executive Officers of the Registrant
Set forth below are the names, ages and positions of the Company’s executive officers.
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| | | | | | |
Name
| | Age
| | Position
|
|
L. Decker Dawson | | | 89 | | | Chairman of the Board of Directors |
Stephen C. Jumper | | | 48 | | | President, Chief Executive Officer and Director |
C. Ray Tobias | | | 52 | | | Executive Vice President, Chief Operating Officer |
Christina W. Hagan | | | 54 | | | Executive Vice President, Secretary and Chief Financial Officer |
Howell W. Pardue | | | 73 | | | Executive Vice President |
K.S. Forsdick | | | 58 | | | Senior Vice President |
The Board of Directors elects executive officers annually. Executive officers hold office until their successors are elected and have qualified.
Set forth below are descriptions of the principal occupations during at least the past five years of the Company’s executive officers.
L. Decker Dawson. Mr. Dawson founded the Company in 1952. He served as President of the Company until being elected as Chairman of the Board of Directors and Chief Executive Officer in January 2001. In January 2006, Mr. Dawson was reelected as Chairman of the Board of Directors and retired as Chief Executive Officer of the Company. Prior to 1952, Mr. Dawson was a geophysicist with Republic Exploration Company, a geophysical company. Mr. Dawson served as President of the Society of Exploration Geophysicists(1989-1990), received its Enterprise Award in 1997 and was awarded honorary membership in 2002. He was Chairman of the Board of Directors of the International Association of Geophysical Contractors in 1981 and is an honorary life member of such association. He was inducted into the Permian Basin Petroleum Museum’s Hall of Fame in 1997.
Stephen C. Jumper. Mr. Jumper, a geophysicist, joined the Company in 1985, was elected Vice President of Technical Services in September 1997 and was subsequently elected President, Chief Operating Officer and Director in January 2001. In January 2006, Mr. Jumper was elected President, Chief Executive Officer and Director. Prior to 1997, Mr. Jumper served the Company as manager of technical services with an emphasis on3-D processing. Mr. Jumper has served the Permian Basin Geophysical Society as Second Vice President (1991), First Vice President (1992) and as President (1993).
C. Ray Tobias. Mr. Tobias joined the Company in 1990, and was elected Vice President in September 1997 and Executive Vice President and Director in January 2001. In January 2006, Mr. Tobias was elected Executive Vice President and Chief Operating Officer. Mr. Tobias supervises client relationships and survey cost quotations to clients. He has served on the Board of Directors of the International Association of Geophysical Contractors and is Past President of the Permian Basin Geophysical Society. Prior to joining the Company, Mr. Tobias was employed by Geo-Search Corporation where he was an operations supervisor.
Christina W. Hagan. Ms. Hagan joined the Company in 1988, and was elected Chief Financial Officer and Vice President in 1997 and Senior Vice President, Secretary and Chief Financial Officer in January 2003. In January 2004, Ms. Hagan was elected as Executive Vice President, Secretary and Chief Financial Officer. Prior thereto, Ms. Hagan served the Company as Controller and Treasurer. Ms. Hagan is a certified public accountant.
Howell W. Pardue. Mr. Pardue joined the Company in 1976 as Vice President of Data Processing and Director. Mr. Pardue was elected Executive Vice President of Data Processing in 1997. Prior to joining the Company, Mr. Pardue was employed in data processing for 17 years by Geosource, Inc. and its predecessor geophysical company.
K.S. Forsdick. Mr. Forsdick joined the Company in 1993, was elected Vice President in January 2001 and was subsequently elected Senior Vice President in March 2009. Mr. Forsdick is responsible for soliciting, designing and bidding seismic surveys for prospective clients. Prior to joining the Company, Mr. Forsdick was employed by Grant Geophysical Company and Western Geophysical Company and was responsible for marketing and managing land and marine seismic surveys for domestic and international operations. He has served on the Governmental Affairs Committee of the International Association of Geophysical Contractors.
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| MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Item 5.
| MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
Our common stock trades on the Nasdaq Stock Market® under the symbol “DWSN.” The table below represents the high and low sales prices per share for the period shown.
| | | | | | | | | |
Quarter Ended | | High | | | Low | |
| |
| December 31, 2007 | | $ | 83.86 | | | $ | 64.67 | |
| March 31, 2008 | | $ | 78.00 | | | $ | 48.75 | |
| June 30, 2008 | | $ | 79.95 | | | $ | 56.41 | |
| September 30, 2008 | | $ | 65.93 | | | $ | 40.27 | |
| December 31, 2008 | | $ | 46.15 | | | $ | 14.31 | |
| March 31, 2009 | | $ | 22.23 | | | $ | 9.96 | |
| June 30, 2009 | | $ | 31.42 | | | $ | 13.13 | |
| September 30, 2009 | | $ | 35.98 | | | $ | 23.60 | |
| | | | | | | | |
Quarter Ended | | High | | | Low | |
December 31, 2009 | | $ | 29.61 | | | $ | 21.00 | |
March 31, 2010 | | $ | 32.00 | | | $ | 21.68 | |
June 30, 2010 | | $ | 31.22 | | | $ | 20.58 | |
September 30, 2010 | | $ | 26.91 | | | $ | 20.05 | |
December 31, 2010 | | $ | 31.90 | | | $ | 24.16 | |
March 31, 2011 | | $ | 50.81 | | | $ | 30.50 | |
June 30, 2011 | | $ | 47.02 | | | $ | 29.53 | |
September 30, 2011 | | $ | 42.23 | | | $ | 22.25 | |
As of November 27, 2009,25, 2011, the market price for our common stock was $21.62$30.95 per share, and we had 170149 common stockholders of record, as reported by our transfer agent.
We have not paid cash dividends on our common stock since becoming a public company and have no plans to do so in the foreseeable future.
The following table summarizes certain information regarding securities authorized for issuance under our equity compensation plansplan as of September 30, 2009.2011. See information regarding material features of the plansplan in Note 7, “Stock-Based Compensation” to the Financial Statements included herein.
Equity Compensation Plan Information
| | | | | | | | | | | | | |
| | | | | | | | | Number of
| |
| | | | | | | | | Securities Remaining
| |
| | | | | | | | | Available for
| |
| | | Number of
| | | | | | Future Issuance
| |
| | | Securities to
| | | | | | Under Equity
| |
| | | be Issued
| | | | | | Compensation Plans
| |
| | | Upon Exercise
| | | Weighted-Average Exercise
| | | (Excluding Securities
| |
| | | of Outstanding
| | | Price of
| | | Reflected in
| |
Plan Category | | Options | | | Outstanding Options | | | Column (a)) | |
| | | (a) | | | (b) | | | (c) | |
| |
| Equity compensation plans approved by security holders | | | 152,000 | | | $ | 18.91 | | | | 786,550 | (1) |
| Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | |
| Total | | | 152,000 | | | $ | 18.91 | | | | 786,550 | (1) |
| | |
(1) | | Although 238,550 shares are available to be issued under the 2004 Incentive Stock Plan, the Company does not intend to grant additional shares from this Plan. There are 548,000 shares available to be issued under the 2006 Stock and Performance Incentive Plan. |
14
| | | | | | | | | | | | |
Plan Category | | Number of
Securities to
be Issued
Upon Exercise
of Outstanding
Options | | | Weighted-Average Exercise
Price of
Outstanding Options | | | Number of
Securities Remaining
Available for
Future Issuance
Under the Equity
Compensation Plan
(Excluding Securities
Reflected in
Column (a)) | |
| | | (a) | | | (b) | | | (c) | |
Equity compensation plan approved by security holders | | | 135,300 | | | $ | 18.91 | | | | 463,231 | |
Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Total | | | 135,300 | | | $ | 18.91 | | | | 463,231 | |
| | | | | | | | | | | | |
Performance Graph
The following graph compares the five-year cumulative 5-year total return ofattained by shareholders on the Company’s common stock as compared withrelative to the cumulative total returns of the S&P 500 Stock Indexindex and a peer group made up of companies in the Value-Line Oilfield Services Industry Index. The Value-Line Oilfield Services Industry Index consistsindex. An investment of far larger companies that perform a variety$100 (with reinvestment of services as comparedall dividends) is assumed to land-based acquisitionhave been made in our common stock and processingin each of seismic data performed by the Company.
indexes on 9/30/2006, and its relative performance is tracked through 9/30/2011.Comparison of 5 Year Cumulative Total Return*
Among Dawson Geophysical Company, the S & P 500 Index
and the Value-Line Oilfield Services Industry Index
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 9/04 | | 9/05 | | 9/06 | | 9/07 | | 9/08 | | 9/09 |
| DAWSON GEOPHYSICAL COMPANY | | | 100.00 | | | | 144.60 | | | | 141.97 | | | | 370.51 | | | | 223.18 | | | | 130.88 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| S & P 500 | | | 100.00 | | | | 112.25 | | | | 124.37 | | | | 144.81 | | | | 112.99 | | | | 105.18 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| VALUE-LINE OILFIELD SERVICES | | | 100.00 | | | | 151.20 | | | | 163.68 | | | | 248.78 | | | | 196.06 | | | | 164.08 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | 9/06 | | 9/07 | | 9/08 | | 9/09 | | 9/10 | | 9/11 |
DAWSON GEOPHYSICAL COMPANY | | 100.00 | | 260.98 | | 157.21 | | 92.19 | | 89.73 | | 79.39 |
S & P 500 | | 100.00 | | 116.44 | | 90.85 | | 84.58 | | 93.17 | | 94.24 |
VALUE-LINE OILFIELD SERVICES | | 100.00 | | 154.42 | | 120.84 | | 101.45 | | 106.77 | | 104.11 |
| |
| * | $100 invested on 9/30/0406 in stock or index, including reinvestment of dividends. Fiscal year endingended September 30. |
Copyright© 2009 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
15
The stock price performance included in this graph is not necessarily indicative of future stock price performance. | |
Item 6. | SELECTED FINANCIAL DATA |
Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Company’s financial statements and related notes included in Item 8, “Financial Statements and Supplementary Data.”
| | | | | | | | | | | | | | | | | | | | | |
Years Ended September 30, | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | (In thousands, except per share amounts) | |
| |
| Operating revenues | | $ | 243,995 | | | $ | 324,926 | | | $ | 257,763 | | | $ | 168,550 | | | $ | 116,663 | |
| Net income | | $ | 10,222 | | | $ | 35,007 | | | $ | 27,158 | | | $ | 15,855 | | | $ | 10,016 | |
| Net income per common share | | $ | 1.31 | | | $ | 4.57 | | | $ | 3.57 | | | $ | 2.11 | | | $ | 1.50 | |
| Weighted average equivalent common shares outstanding | | | 7,807 | | | | 7,669 | | | | 7,602 | | | | 7,518 | | | | 6,706 | |
| Total assets | | $ | 237,157 | | | $ | 233,621 | | | $ | 195,862 | | | $ | 149,418 | | | $ | 114,127 | |
| Revolving line of credit | | $ | — | | | $ | — | | | $ | 5,000 | | | $ | — | | | $ | — | |
| Long-term debt-less current maturities | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Stockholders’ equity | | $ | 198,379 | | | $ | 185,960 | | | $ | 149,155 | | | $ | 119,208 | | | $ | 101,904 | |
In March 2005, we successfully completed a public offering of 1,800,000 shares of common stock such that weighted average equivalent common shares outstanding in 2005 reflect these additional shares for a portion of the year.
| | | | | | | | | | | | | | | | | | | | |
Years Ended September 30, | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | (In thousands, except per share amounts) | |
Operating revenues | | $ | 333,279 | | | $ | 205,272 | | | $ | 243,995 | | | $ | 324,926 | | | $ | 257,763 | |
Net (loss) income (1) | | $ | (3,246 | ) | | $ | (9,352 | ) | | $ | 10,222 | | | $ | 35,007 | | | $ | 27,158 | |
Basic (loss) income per common share | | $ | (0.42 | ) | | $ | (1.20 | ) | | $ | 1.31 | | | $ | 4.57 | | | $ | 3.57 | |
Weighted average equivalent common shares outstanding | | | 7,810 | | | | 7,777 | | | | 7,807 | | | | 7,669 | | | | 7,602 | |
Total assets | | $ | 264,824 | | | $ | 235,076 | | | $ | 237,157 | | | $ | 233,621 | | | $ | 195,862 | |
Revolving line of credit | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,000 | |
Current maturities of note payable | | $ | 5,290 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Note payable less current maturities | | $ | 10,281 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Stockholders’ equity | | $ | 188,163 | | | $ | 190,225 | | | $ | 198,379 | | | $ | 185,960 | | | $ | 149,155 | |
| (1) | Net loss for the year ended September 30, 2011 includes $3,866,000 of transaction costs associated with the terminated transaction with TGC. See Note 16, “Subsequent Events” to the Financial Statements included herein. |
| Item 7. MANAGEMENT’S | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included elsewhere in thisForm 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Please see “Risk Factors” and “Disclosure Regarding Forward-Looking Statements” and “Risk Factors” elsewhere in thisForm 10-K.
We are the leading provider of onshore seismic data acquisition services in the lower 48 states of 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 natural gas companies. Demand for our services depends upon the level of spending by these companies for exploration, production, development and field management activities, which depends, in part, on oil and natural gas prices. Significant 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 such fluctuations continue today to be the single most important factor affecting our business and results of operations.
Our return to profitability in fiscal 2004 after several years of losses was 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 was a function of higher prices for oil and natural gas. As a result of the increase in domestic exploration spending, we experienced an increased demand for our seismic data acquisition and processing services during this period, particularly from entities seeking natural gas reserves. Beginning in August 2008, the prices of oil and especially natural gas declined significantly from historic highs due to reduced demand from the global economic slowdown, and during 2009 many domestic oil and natural gas companies reduced their capital expenditures due to the decrease in market prices and disruptions in the credit markets. These factors led to a severe reduction in demand for our services and in our industry in general during 2009 as well as downward pressure on the prices we chargecharged our customers for our services. In order to better align our crew capacity with reduced demand, we have reduced the number of data acquisition crews we operateoperated from sixteen at the end of fiscal 2008in January 2009 to nine as ofin October 2009.
Due to the reductions in the number of our active data acquisition crews and lower utilization rates for our remaining operating crews, we have experienced a reduction in operating revenues and, to a lesser extent, in operating costs during
16
calendar 2009 and
we anticipate that such reductions will continue into calendar
2010.Beginning in the second quarter of fiscal 2010, we began to experience an increase in demand for our services, particularly in the oil basins. Demand for our services has continued to strengthen through fiscal 2011. Our order book is currently at its highest level since late fiscal 2008. In response to this demand increase, we redeployed three seismic data acquisition crews in fiscal 2010 and possibly beyond, depending on future market prices for oil and natural gas and the level of domestic exploration spending. In light oftwo seismic data acquisition crews in fiscal 2011, bringing our current market difficulties, we are focusing our efforts on reducing costs, limiting capital expenditures and maintaining our financial strength. Equipment and key personnel from crews taken out of service will be redeployed on remaining crews as needed or otherwise remain available for rapid expansion of crew count as demandto fourteen active crews. During fiscal 2011, we purchased 25,850 OYO GSR single-channel units, 2,000 OYO GSR four-channel units with three component geophones and market conditions dictateten INOVA AHV IV 364 vibrator energy source units. These additions allowed us to deploy the two additional crews in the future. fiscal 2011 with state-of-the-art cable-less recording equipment.
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, crew repositioning or equipment failure.failure, whether we enter into turnkey or term contracts with our clients, the number and size of crews and the number of recording channels per crew. Consequently, our efforts to negotiate favorable contract terms in our supplemental service agreements, to mitigate access permit delays and to improve overall crew productivity may partially offsetcontribute to growth in our revenues. As demand for our services continues to be robust, we have been able to negotiate more favorable contract terms during fiscal 2011 and into the impactbeginning of reduced demandfiscal 2012. In addition, we believe we will complete operations by the end of calendar 2011 on several legacy contracts contracted during fiscal 2010 with less favorable terms. During fiscal 2011, most of our client contracts were turnkey contracts. The percentage of revenues derived from turnkey contracts has grown in the past few years from approximately half of our revenues in fiscal 2008 to in excess of three-quarters of our revenues in fiscal 2011. While turnkey contracts allow us to capitalize on improved crew productivity, we also bear more risks related to weather and anticipated contract price weaknesses.crew downtime. We expect the percentage of turnkey contracts to remain high as we continue to expand our operations in the mid-continent and Rocky Mountain regions in which turnkey contracts are more common. Although our clients may cancel their service contracts on short notice, our current order book reflects commitment levels sufficient to maintain operation of our ninefourteen data acquisition crews well into calendar 2010.
fiscal 2012.Over time, we have experienced continued increases in recording channel capacity on a per crew or project basis. This increase in channel count demand is driven by client needs and is necessary in order to produce higher resolution images, increase crew efficiencies and undertake larger scale projects. Due to the increase in demand for higher channel counts, we have continued our investments in additional channels. In response to project-based channel requirements, we routinely deploy a variable number of channels on a variable number of crews in an effort to maximize asset utilization and meet client needs. We believe we will realize the benefit of increased channel counts and flexibility of deployment through increased crew efficiencies, higher revenues and margins.
During fiscal 2011, we purchased and leased a significant number of cable-less recording channels. We have utilized this equipment as stand-alone recording systems and in conjunction with our cable-based systems. As a result of the introduction of cable-less recording systems, we have realized increased crew efficiencies and increased revenue on projects using this equipment. We believe we will experience continued demand for cable-less recording systems in the future. As we have replaced cable-based recording equipment with cable-less equipment on certain crews, the cable-based recording equipment continues to be redeployed on existing crews as needed, including on the additional two crews fielded during the second quarter of fiscal 2011.
While the markets for oil and natural gas have been very volatile and are likely to continue to be volatileso 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’ continuing desire for higher resolution subsurface images. If economic conditions do not improve or were to worsen,weaken, our customers do not increasereduce their capital expenditures or there is a significant sustained drop in oil and natural gas prices, it would result in continued diminished demand for our seismic services, maycould cause continued downward pressure on the prices we charge and would continue to affect our results of operations. Because primarily allThe majority of our current clientscrews are focused on the exploration for and production of natural gas, a continued pressure on the price of natural gascurrently working in particular would have a negative effect on the demand for our services. Inoil producing basins. However, in recent quarters this risk has been mitigated somewhat asyears, we have experienced increased demandperiods in which the services we provided were primarily to clients seeking natural gas.
Fiscal 2011 Highlights
Reported revenues of $333,279,000 for our services in severalthe year ended September 30, 2011 compared to $205,272,000 for the year ended September 30, 2010, an increase of 62 percent;
Redeployed two data acquisition crews;
Increased order book capable of fully sustaining fourteen data acquisition crews well into fiscal 2012;
Purchased 25,850 OYO GSR single-channel units, 2,000 OYO GSR four-channel units with three component geophones and ten INOVA vibrator energy source units to better serve client needs;
Balanced portfolio of oil producing basins based on oil prices that began to reboundand natural gas projects in the secondEagle Ford Shale, Niobrara Shale, Bakken Shale, Avalon Shale, Marcellus Shale, Barnett Shale, Permian Basin and third quartersMid-Continent regions;
$74 million of fiscal 2009.working capital at September 30, 2011;
Fiscal 2011 capital expenditures of $59,380,000;
Completed 15,000-channel and 11,000-channel projects utilizing the OYO GSR cable-less system; and
Continued operation on an 18,000-channel ARAM cable-based project.
Results of Operations
Fiscal Year Ended September 30, 20092011 Versus Fiscal Year Ended September 30, 20082010
Operating Revenues. Our operating revenues decreased 25%increased 62% to $243,995,000$333,279,000 in fiscal 20092011 from $324,926,000$205,272,000 in fiscal 2008 as a2010. The revenue increase in fiscal 2011 was primarily the result of a reductionan increase in active crew count during the second quarter of fiscal 2009 (four crews)2011 and the third quarter of fiscal 2009 (two crews), a more competitive pricing environment, substantially lowerhigher utilization rates for remaining crews and, inof the fourth quarter, increased downtime for weather. Recordedexisting crews. Revenues in fiscal 2009 revenues are2011 continued to include high third-party charges primarily related to the use of helicopter support services, specialized survey technologies and dynamite energy sources, allsources. Approximately one-half of which are utilizedthe increase in areas with limited access.revenues during 2011 was due to the increase in these third-party charges. The sustained high level of these charges during fiscal 2009 wasis driven by our continued operations in areas with limited access in the Appalachian Basin, Arkansas,Oklahoma, East Texas and Louisiana.Arkansas. We believe these third-party charges, for which we are reimbursed for these charges by our clients.
clients, will decrease to a more historical level of between 25% and 35% of revenues as we expand our operations in the more wide open terrain of the Western United States.Operating Costs. Our operating expenses decreased 19%increased 58% to $192,839,000$292,519,000 in fiscal 20092011 from $237,484,000$185,588,000 in fiscal 20082010 primarily due to reductionsincreases in field personnel and other expenses ofassociated with operating the sixadditional data acquisition crews taken out ofput into service during the secondfiscal 2010 and third quarters of fiscal 2009.2011. As discussed above, reimbursed charges have a similar impact on operating costs.
General and administrative expenses were 3.2%4.1% of revenues in fiscal 20092011 as compared to 2.1%3.5% of revenues in fiscal 2008.2010. General and administrationadministrative expenses increased by approximately $1,094,000$6,419,000 in fiscal 20092011 as compared to fiscal 2008.2010. The primary factor infactors for the increase in general and administrationadministrative expenses during fiscal 2009 was an increase2011 were increased administrative costs, primarily related to the Company’s allowance for doubtful accounts during the year of $993,000 offset by bad debts during the year of approximately $515,000 resulting in a net allowance for doubtful accounts at September 30, 2009 of $533,000. The deductions against the bad debt allowance were primarilyemployee costs as a result of our increased crew count and operational activity, and transaction costs of $3,866,000 associated with the settlement of a previously disputed invoice for approximately $450,000. We increasedterminated merger agreement with TGC Industries, Inc. (“TGC”). There was no termination fee associated with the allowance for doubtful accounts during fiscal 2009 based on our reviewtermination of the past due accounts and client base. During the second quarter, we became aware that one current client with an accounts receivable balance of approximately $1.0 million and two former
17
clients had filed for reorganization under bankruptcy protection. These facts significantly influenced management’s decision to increase our allowance for doubtful accounts during the second quarter.
We recognized $26,160,000$30,536,000 of depreciation expense in fiscal 20092011 as compared to $24,253,000$27,126,000 in fiscal 2008,2010. Depreciation expense increased 13% from fiscal 2010 to 2011 reflecting the full year ofincreased capital expenditures during fiscal 2010 and 2011. Our depreciation expense fromis expected to continue to increase in fiscal 2012 as a result of our fiscal 2008 capital expenditures. Due to market conditions,significant capital expenditures in fiscal 2009 were limited to necessary maintenance capital requirements. Depreciation expense, however, is expected to remain relatively unchanged during fiscal 2010.
2011.Our total operating costs for fiscal 20092011 were $226,855,000, a decrease$336,605,000, an increase of 16%53% from fiscal 20082010 primarily due to the factors described above.
Taxes. Income tax expense was $7,493,000$439,000 for fiscal 2009 and $21,400,0002011 as compared to income tax benefit of $4,638,000 for fiscal 2008.2010. The effective tax raterates for the income tax provision for fiscal 20092011 and 2008 was 42.3%2010 were (15.6%) and 37.9%33.2%, respectively. The increaseOur effective tax rates differ from the statutory federal rate of 35% for certain items such as state and local taxes, non-deductible expenses, expenses related to share-based compensation that were not expected to result in thea tax deduction and changes in reserves for uncertain tax positions. Our fiscal 2011 effective tax rate between periods was primarily a result of an increase insignificantly impacted by the unrecognizedacquisition transaction costs incurred related to the terminated transaction with TGC. During fiscal 2011, we made the policy decision to treat the transaction costs as permanent non-deductible expenses for tax benefits reserve for prior years, changes in tax rates as a resultpurposes. For further discussion of the varying states in which we operate from yearterminated merger agreement and related policy decisions, see Note 16, “Subsequent Events” to year and the increasing impact of permanent tax differences resulting from lower income before income taxes.
Financial Statements included herein.Fiscal Year Ended September 30, 20082010 Versus Fiscal Year Ended September 30, 20072009
Operating Revenues. Our operating revenues increased 26% from $257,763,000decreased 16% to $205,272,000 in fiscal 2007 to $324,926,0002010 from $243,995,000 in fiscal 2008 as a result of high demand for our services. Revenue growth2009. The revenue decrease in fiscal 20082010 was primarily the result of previously announced reductions in active crew count during the additionsecond quarter of new seismic data acquisition crewsfiscal 2009 (four crews), third quarter of fiscal 2009 (two crews), and first quarter of 2010 (one crew), a more competitive pricing environment in September 20072010 and May 2008 andsubstantially lower utilization rates of the upgrading of recording systems on existing crews, along with increased channel counts and productivity on existingremaining crews. RecordedRevenues in fiscal 2008 revenues are2010 continued to include high third-party charges primarily related to the use of helicopter support services, specialized survey technologies and dynamite energy sources, all of which are utilized in areas with limited access.sources. The sustained level of these charges during fiscal 2008 wasis driven by our continued operations in areas with limited access in the Appalachian Basin, the Rocky Mountains, the Fayetteville ShaleEast Texas and the Arkoma Basin.Arkansas. We are reimbursed for these charges by our clients.
Operating Costs. Our operating expenses increased 25% from $190,117,000decreased 4% to $185,588,000 in fiscal 2007 to $237,484,0002010 from $192,839,000 in fiscal 20082009 primarily due to reductions in field personnel and other expenses associated with operating the full yeardata acquisition crews taken out of service for the three acquisition crews deployed induring fiscal 20072009 and the additional crew placed into service in fiscal 2008.2010. As discussed above, reimbursed charges have a similar impact on operating costs.
General and administrative expenses were 2.1%3.5% of revenues in fiscal 20082010 as compared to 2.4%3.2% of revenues in fiscal 2007. While2009. General and administrative expenses decreased by $725,000 in fiscal 2010 as compared to fiscal 2009. The primary factor in the ratio ofdecrease in general and administrative expenses to revenue declinedduring fiscal 2010 was a decrease in fiscal 2008 due to the increase in revenues, the actual dollar amount increased. The increase of $567,000 from fiscal 2007 to fiscal 2008 reflects ongoing expenses necessary to support expanded field operations.
our bad debt expense.We recognized $24,253,000$27,126,000 of depreciation expense in fiscal 20082010 as compared to $18,103,000$26,160,000 in fiscal 2007,2009. Depreciation expense increased a relatively modest 4% from fiscal 2009 to 2010 reflecting the full year of depreciation expense from our fiscal 2007limited maintenance capital expenditures.
expenditures in 2009.Our total operating costs for fiscal 20082010 were $268,499,000, an increase$219,845,000, a decrease of 25%3% from fiscal 20072009 primarily due to the factors described above.
Taxes. Income tax expensebenefit was $21,400,000$4,638,000 for fiscal 2008 and $17,300,0002010 as compared to income tax expense of $7,493,000 for fiscal 2007.2009. The effective tax rate for the income tax provision for fiscal 20082010 and 20072009 was 37.9%33.2% and 38.9%42.3%, respectively. The decrease in theOur effective tax rates differ from the statutory federal rate between periods was primarilyof 35% for certain items such as state and local taxes, non-deductible expenses, expenses related to share-based compensation that were not expected to result in a result oftax deduction and changes in statereserves for uncertain tax rates as a result of the varying states in which we operate from year to year.
positions.Liquidity and Capital Resources
Introduction. Our principal sources of cash are 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 have been sufficient to fund our working capital requirements, and to some extent, our capital expenditures.
18
Cash Flows. Net cash provided by operating activities was $54,598,000$16,951,000 for fiscal 20092011 and $50,930,000$6,244,000 for fiscal 2008. The amount in fiscal 20082010. These amounts primarily reflectsreflect an increase in total revenues resulting from our expanded business andwhich resulted in an increase in accounts receivable without a correlatingreceivable. Despite an increase in accounts payable. Net cash provided by operating activities in fiscal 2009 primarily reflects our reduced revenuesoutstanding receivables, our collection experience during fiscal 2009 and a decrease in accounts receivable. The decrease in accounts receivable primarily reflects the decrease in our revenues,period as thean average number of days in receivablesaccounts receivable has not significantly changedremained at approximately fifty-five over the last twelve months.
Amounts in our trade accounts receivable that are over sixty days as of September 30, 2011 represent less than 15% of our total trade accounts receivables, which is less than historical levels. We believe our allowance for doubtful accounts of $155,000 at September 30, 2011 is adequate to cover exposures related to our trade account balances.Net cash used in investing activities was $26,538,000$36,417,000 in fiscal 20092011 and $53,240,000$13,365,000 in fiscal 2008. In2010. During fiscal 2008, the net cash used in investing activities primarily represents2011, we funded our capital expenditures made withprimarily from $22,500,000 in cash generated from operations. Duematured short-term investments and $16,427,000 in proceeds from the Term Note used to market conditions, our capital expenditures in fiscal 2009 were limited to necessary maintenance capital requirements rather than investing in additionalpurchase OYO GSR recording equipment as in the past few years. During the third quarterwell as $16,951,000 of fiscal 2009,cash provided by operating activities. In 2010, we used cash generated from operations in excess of capital expenditures to acquire short-term investments. Ourmatured short-term investments consist of two U.S. Treasury bills and two U.S. Treasury notes with a total cost of $20,192,000 and three FDIC guaranteed bonds with a total cost of $5,121,000. The contractual maturities of these short-term investments range from December 2009 to December 2010.fund capital expenditures. In fiscal 2009,2011, we invested excess funds of $2,500,000 in certificates of deposit, and in fiscal 2010, we invested $14,964,000 in U.S. treasury instruments. In fiscal 2011, we collected proceeds from an insurance claim on our equipment burned in a March 2008an October 2010 wildfire of $2,843,000.
$1,392,000.Net cash provided by financing activities in fiscal 20092011 and fiscal 2010 was $15,868,000 and $4,000, respectively. In fiscal 2011, our primary source of $421,000net cash provided by financing activities were the proceeds and subsequent principal payments for the $16,427,000 Term Note described above. Net cash provided by financing activities in fiscal 2010 primarily representsrepresented proceeds from the exercise of stock options. Net cash used by financing activities in fiscal 2008 of $4,254,000 primarily represents the net decrease on our revolving line of credit loan agreement from a balance at September 30, 2007 of $5,000,000 to a zero balance at September 30, 2008.
Capital Expenditures. For fiscal year 2009,2011, we made capital expenditures of $4,448,000. During the first quarter of fiscal 2009, we purchased an ARAM ARIES II recording system equipped with channels from existing crews$59,380,000, primarily to purchase 2,000 OYO GSR four-channel units, 25,850 OYO GSR single-channel units, additional geophones, ten INOVA AHV IV 364 vibrator energy sources units and replacement vehicles. For the remainder of fiscal 2009, we limited our capital expenditures tomeet necessary maintenance capital requirements. TheThese purchases reflect our belief that the trend towards increased channel counts and energy sources in our industry will continue. Our Board of Directors has approved an initial fiscal 20102012 capital budget of $10,000,000, $6,100,000 of$20,000,000, which will be used, in part, to purchase a 2,000-station OYO GSR four-channel recording system along with three-component geophonestwelve INOVA AHV IV 364 vibrator energy source units, and the remainder will be used to increase channel count, make technical improvements in various phases of our operations and meet necessary maintenance requirements duringcapital requirements. We believe that our fiscal 2010. The addition of the OYO GSR recording equipment2011 capital investments as well as our planned fiscal 2012 capital investments will allow us to record 6,000 channels of cable-less multi-component data or up to 8,000 channels of conventional seismic data, either as a stand-alone system or as added channel count and increased flexibility formaintain our ARAM recording systems. We believe these additions will allow the Company to maintain its competitive position as it respondswe respond to client desire for higher resolution subsurface images.
We continually strive to supply our clients with technologically advanced3-D data acquisition recording services 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 from time to time through public equity offerings.
Our revolving line of credit loan agreement is with Western National Bank. OnThe agreement was renewed June 2, 2009, we renewed the existing agreement for a two-year term on substantially2011 under the same terms as the previous facility. In addition, based on our assessment of our current needs, we reduced the size of the facility to $20.0 million from $40.0 million. The agreement and permits us to borrow, repay and reborrow, from time to time until June 2, 2011,2013 up to $20.0 million based on the borrowing base calculation as defined in the agreement. Our obligations under this agreement are secured by a security interest in our accounts receivable, equipment and related collateral. Interest on the facility accrues at an annual rate equal to either the30-day London Interbank Offered Rate (“LIBOR”), plus two and one-quarter percent or the Prime Rate, minus three-quartersthree-
quarters percent as we direct monthly, subject to an interest rate floor of 4%. Interest on the outstanding amount under the loan agreement is payable monthly. The loan agreement contains customary covenants for credit facilities of this type, including limitations on disposition of assets, mergers and reorganizations. We are also obligated to meet certain financial covenants under the loan agreement, including maintaining specified ratios with respect to cash flow coverage, current assets and liabilities and debt to tangible net worth. We were in compliance with all covenants including specific ratios as of September 30, 20092011 and November 30, 2009.2011 and have the full line of credit available for borrowing. We have not utilized the
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line of credit loan agreement
sinceduring the fiscal years ended September 30, 2011 or 2010.On June 24, 2011, we paid offexercised our purchase option for certain OYO GSR recording equipment we had been leasing. In order to finance this purchase, we restated our credit loan agreement with Western National Bank to add a new term loan note (“Term Note”) provision, which provided $16,427,000 in financing for the entire outstanding balancepurchase of $20.0 millionthe equipment. The Term Note bears interest at an annual rate equal to either the 30-day London Interbank Offered Rate (“LIBOR”) plus two and one-quarter percent or the Prime Rate minus three-quarters percent, as we direct monthly, subject to an interest rate floor of 4%, and otherwise has the same terms as our revolving loan, except that the Term Note is collateralized by the OYO equipment and matures on June 30, 2014.
The following table summarizes payments due in specific periods related to our contractual obligations with initial terms exceeding one year as of September 30, 2008.
2011. | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Payments Due by Period (in 000’s) | |
Contractual Obligations | | | | Total | | | Within 1
Year | | | 1-2 Years | | | 3-5 Years | | | After 5
Years | |
Operating lease obligations | | | | $ | 1,344 | | | $ | 435 | | | $ | 609 | | | $ | 300 | | | $ | — | |
Debt obligations | | | | | 15,571 | | | | 5,290 | | | | 10,281 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | |
Total | | | | $ | 16,915 | | | $ | 5,725 | | | $ | 10,890 | | | $ | 300 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | |
On March 31, 2009, we filed a shelf registration statement with the SEC covering the periodic offer and sale of up to $100.0 million in debt securities, preferred and common stock and warrants. The registration statement allows us to sell securities 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 filed separately with the SEC at the time of the offering. The filing of the shelf registration statement will enable us to act quickly if and when opportunities arise.
The following table summarizes payments due in specific periods related to our contractual obligations with initial terms exceeding one year as of September 30, 2009.
| | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period (in 000’s) |
| | | | | Less than
| | 1-3
| | 3-5
| | More than
|
| | | Total | | 1 Year | | Years | | Years | | 5 Years |
| |
| Operating lease obligations | | $ | 1,209 | | | $ | 578 | | | $ | 610 | | | $ | 21 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | |
We believe that our capital resources and cash flow from operations are adequate to meet our current operational needs. We believe we will be able to finance our capital requirements through cash flow from operations, and, if necessary,cash on hand, through borrowings under our revolving line of credit.credit or additional equipment term loans. However, our ability to satisfy our working capital requirements and fund future capital requirements will depend principally upon our future operating performance, which is subject to the risks inherent in our business including the demand for our seismic services from clients.
Off-Balance Sheet Arrangements
As of September 30, 2009,2011, we had no off-balance sheet arrangements.
We do not believe that inflation has had a material effect on our business, results of operations or financial condition during the past three fiscal years.
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 periods. 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. Under both types of agreements, we recognize revenues when revenue is realizable and services are performed. Services are defined as the commencement of data acquisition or processing operations. Revenues are considered realizable when earned according to the terms of the service contracts. 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 to the date of cancellation.
We also receive reimbursements for certainout-of-pocket expenses under the terms of our service contracts. We record amounts billed to clients in revenue at the gross amount includingout-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. As services are performed, those deferred revenue amounts are reversed and recognized as revenue.
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When it becomes evident that the estimates of total costs to be incurred on a contract will exceed the total estimates of revenue to be earned, an estimated contract loss is recognized in the period in which the loss is identifiable.Allowance for Doubtful Accounts. We prepare our allowance for doubtful accounts receivable based on our review of past-due accounts, our past experience of historical write-offs and our current client base. While the collectibility of outstanding client invoices is continually assessed, the inherent volatility of the energy industry’s business cycle can cause swift and unpredictable changes in the financial stability of our clients.
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 undiscounted net cash flows are insufficient to recover the carrying value of the assets and the fair value of the assets is below the carrying value of the assets. Our forecast of future cash flows used to perform impairment analysis includes estimates of future revenues and expenses based on our anticipated future results while considering anticipated future oil and gas prices, which is fundamental in assessing demand for our services. If the carrying amountamounts of the assets exceedsexceed the estimated expected undiscounted future cash flows, we measure the amount of possible impairment by comparing the carrying amount of the asset to its fair value.
Depreciable Lives of Property, Plant and Equipment. Our property, plant and equipment areis capitalized at historical cost and depreciated over the useful life of the asset. Our estimation of this useful life is based on circumstances that exist in the seismic industry and information available at the time of the purchase of the asset. As circumstances change and new information becomes available, these estimates could change.
Depreciation is computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the balance sheet, and any resulting gain or loss is reflected in the results of operations for the period.
Tax Accounting. We account for our income taxes with 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 in effect for
the year in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates of deferred tax assets and liabilities is recognized in income in the year of an enacted rate change. The deferred tax asset is reduced 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 a variance between actual results and estimates and could have a material impact on our provision or benefit for income taxes.
Stock-Based Compensation. We measure all employee stock-based compensation awards, includingwhich include stock options and restricted stock, using the fair value method and recognize compensation cost, net of forfeitures, in our financial statements. We record compensation expense as operating or general and administrative expense as appropriate in the Statements of Operations on a straight-line basis over the vesting period of the related stock options or restricted stock awards.
Recently Issued Accounting Pronouncements
In September 2006,May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC)820-10,Update (ASU) No. 2011-04, “Fair Value MeasurementsMeasurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosures.Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards,” ASC820-10 clarifies thatto provide a consistent definition of fair value isand ensure that the amount that would be exchanged to sell an asset or transfer a liability in an orderly transaction between market participants. Further, the standard establishes a framework for measuring fair value in generally accepted accountingmeasurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and expands certain disclosures aboutenhances disclosure requirements, particularly for Level 3 fair value measurements. ASC820-10 becameASU 2011-04 will be effective for all financial assetsin our second quarter of fiscal 2012 and financial liabilities aswill be applied prospectively. We are currently evaluating the impact of October 1, 2008,ASU 2011-04 and uponbelieve the adoption ASC820-10 didwill not have a material impacteffect on our financial statements.
In February 2008,June 2011, the FASB issued ASC820-10-15-1A, “Fair Value MeasurementsASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” to require an entity to present the total of comprehensive income, the components of net income, and Disclosures — Transition and Open Effective Date Information,” which delays the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. This update does not change what items are reported in other comprehensive income or the requirement to report reclassification of items from other comprehensive income to net income. ASU 2011-05 will be effective datein our first quarter of ASC820-10 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).fiscal 2013, though earlier adoption is permitted. The update will be applied retrospectively upon adoption. We do not expectbelieve the adoption of ASC820-10-15-1A to have a material impact on our financial statements.
In February 2007, the FASB issued ASC825-10, “Financial Instruments.” ASC825-10 provides companies with an option to report selected financial assets and liabilities at fair value. As of September 30, 2009, we have not
21
elected the fair value option for any additional financial assets and liabilities beyond those already prescribed by accounting principles generally accepted in the United States.
In April 2009, the FASB issued ASC825-10-65-1, “Financial Instruments — Transition and Open Effective Date Information.” ASC825-10-65-1 requires fair value disclosures in both interim and annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. ASC825-10-65-1 became effective for us as of June 15, 2009. The adoption of this standard didwill not have a material impacteffect on our financial statements.
In May 2009,Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from the FASB issued ASC855-10, ���Subsequent Events,” which establishes general standardsuse of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. We adopted the provisions of ASC855-10 for the quarter ended June 30, 2009. The adoption of ASC855-10 did not have a material impact on our financial statements. We have evaluated events subsequent to our balance sheet date (September 30, 2009) through the issue date of thisForm 10-K (November 30, 2009) and concluded that no subsequent events have occurred that require recognitioninstruments in the Financial Statements or disclosure in the Notesordinary course of business. These risks arise primarily as a result of potential changes to the Financial Statements.
In June 2009, the FASB issued ASC105-10, “Generally Accepted Accounting Principles.” ASC105-10 provides for the FASB Accounting Standards Codification (the “Codification”) to become the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles. The Codification did not change GAAP but reorganizes the literature. ASC105-10 became effective for us for the year ended September 30, 2009. The adoption of this standard did not have an impact on our financial statements.
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Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our primary sources of marketoperating concentration and credit risk include fluctuations in commodity prices which affect demand for and pricing of our services as well as interest rate fluctuations. Our revolving line of credit carries a variable interest rate that is tied to market indices and, therefore, our results of operations and our cash flows could be impacted by changes in interest rates. Outstanding balances under our revolving line of credit bear interest at our monthly direction of the lower of the Prime rate minus three-quarters percent or the30-day LIBOR plus two and one-quarter percent, subject to an interest rate floor of 4%. At September 30, 2009, we had no balances outstanding on our revolving line of credit. Short-term investments held at September 30, 2009 consist of two U.S. Treasury bills and two U.S. Treasury notes of approximately $5,000,000 each with a total cost of $20,192,000 and a fair value of $20,167,000 and three FDIC guaranteed bonds with a total cost of $5,121,000 and a fair value of $5,100,000. The contractual maturities of these short-term investments range from December 2009 to December 2010. Our short-term investments are classified for accounting purposes asavailable-for-sale. If these short-term investments are not held to maturity, the proceeds obtained when the instruments are sold will be impacted by the current interest rates at the time they are sold. 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 not generally subject to foreign currency exchange rate risk.
Concentration and Credit Risk. Our principal market risks include fluctuations in commodity prices which affect demand for and pricing of our services and the risk related to the concentration of our clients in the oil and natural gas industry. Since all of our clients are involved in the oil and natural gas industry, there may be a positive or negative effect on our exposure to credit risk because our clients may be similarly affected by changes in economic and industry conditions. As an example, changes to existing regulations or the adoption of new regulations may unfavorably impact us, our suppliers or our clients. In the normal course of business, we provide credit terms to our clients. Accordingly, we perform ongoing credit evaluations of our clients and maintain allowances for possible losses. We believe that our allowance for doubtful accounts of $155,000 at September 30, 2011 is adequate to cover exposures related to our trade account balances.
We generally provide services to certain key clients that account for a significant percentage of our accounts receivable at any given time. Our key clients vary over time. We extend credit to various companies in the oil and natural gas industry, including our key clients, for the acquisition of seismic data, which results in a concentration of credit risk. This concentration of credit risk may be affected by changes in the economic or other conditions of our key clients and may accordingly impact our overall credit risk. If any of these significant clients were to terminate their contracts or fail to contract for our services in the future because they are acquired, alter their exploration or development strategy, or for any other reason, our results of operations could be affected. Because of the nature of our contracts and clients’ projects, our largest clients can change from year to year, and the largest clients in any year may not be indicative of the largest clients in any subsequent year.
Interest Rate Risk. We are exposed to the impact of interest rate changes on the outstanding indebtedness under our credit loan agreement which has variable interest rates. Amounts drawn under the revolving line of credit and equipment Term Note bear interest at variable rates based on the lower of the Prime Rate minus three-quarters percent or 30-day LIBOR plus a margin of two and one-quarter percent, subject to an interest rate floor of 4%. At September 30, 2011, we had a balance of $15,571,000 on our equipment Term Note, and no amounts were outstanding under the revolver.
We have cash in the bank which, at times, may exceed federally insured limits. Historically, we have not experienced any losses in such accounts. Recent volatility in financial markets may impact our credit risk on cash and short-term investments. At September 30, 2011, cash and cash equivalents totaled $26,077,000.
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| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information required by this item appears on pages F-1 through F-23F-22 hereof and are incorporated herein by reference.
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| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
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| Item 9A. | CONTROLS AND PROCEDURES |
Management’s Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of our disclosure controls and
22
procedures pursuant toRule 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, our President and Chief Executive Officer and our Executive Vice President, Secretary and Chief Financial Officer concluded that, as of September 30, 2009,2011, our disclosure controls and procedures were effective, in all material respects, with regard to the recording, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, for information required to be disclosed by us in the reports that we file or submit under the Exchange Act. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our President and Chief Executive Officer and our Executive Vice President, Secretary and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. 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 President and Chief Executive Officer and Executive Vice President, Secretary and Chief Financial Officer, we evaluated the effectiveness of our internal controls over financial reporting as of September 30, 20092011 using the criteria set forth inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, we have concluded that, as of September 30, 2009,2011, our internal control over financial reporting was effective. Our internal control over financial reporting as of September 30, 2009,2011 has been audited by KPMG LLP, the independent registered public accounting firm who also audited our financial statements. Their attestation report appears onpage F-3.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as defined in Exchange ActRule 13a-15(f) and15d-15(f) of the Securities Exchange Act of 1934) during the quarter endingended September 30, 20092011 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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| Item 9B. | OTHER INFORMATION |
Part III
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| Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by Item 10 is incorporated by reference to our definitive proxy statement for our Annual Meeting of StockholdersShareholders to be held on January 26, 2010,24, 2012, which we expect to file with the Securities and Exchange Commission within 120 days after September 30, 2009.2011. Certain information with respect to our executive officers is set forth under the caption “Executive Officers of the Registrant” in Part I of this report.below. Our code of ethics (as defined in Item 406 ofRegulation S-K) was adopted by our Board of Directors on May 25, 2004. The Code of Business Conduct and Ethics applies to our directors, officers and employees, including our principal executive officer and principal financial and principal accounting officer. Our Code of Business Conduct and Ethics is posted on our website athttp://www.dawson3d.com in the “Corporate Governance” area of the “Investor Relations” section. Changes to and waivers granted with respect to our Code of Business Conduct and Ethics related to officers identified above, and our other executive officers and directors that we are required to disclose pursuant to applicable rules and regulations of the SEC, will also be posted on our website.
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Executive Officers of the RegistrantSet forth below are the names, ages and positions of the Company’s executive officers.
| | | | | | |
Name | | Age | | | Position |
L. Decker Dawson | | | 91 | | | Chairman of the Board of Directors |
Stephen C. Jumper | | | 50 | | | President, Chief Executive Officer and Director |
C. Ray Tobias | | | 54 | | | Executive Vice President, Chief Operating Officer |
Christina W. Hagan | | | 56 | | | Executive Vice President, Secretary and Chief Financial Officer |
Howell W. Pardue | | | 75 | | | Executive Vice President |
K.S. Forsdick | | | 60 | | | Senior Vice President |
The Board of Directors elects executive officers annually. Executive officers hold office until their successors are elected and have qualified.
Set forth below are descriptions of the principal occupations during at least the past five years of the Company’s executive officers.
L. Decker Dawson. Mr. Dawson founded the Company in 1952. He served as President of the Company until being elected as Chairman of the Board of Directors and Chief Executive Officer in January 2001. In January 2006, Mr. Dawson was reelected as Chairman of the Board of Directors and retired as Chief Executive Officer of the Company. Prior to 1952, Mr. Dawson was a geophysicist with Republic Exploration Company, a geophysical company. Mr. Dawson served as President of the Society of Exploration Geophysicists (1989-1990), received its Enterprise Award in 1997 and was awarded honorary membership in 2002. He was Chairman of the Board of Directors of the International Association of Geophysical Contractors in 1981 and is an honorary life member of such association. He was inducted into the Permian Basin Petroleum Museum’s Hall of Fame in 1997.
Stephen C. Jumper. Mr. Jumper, a geophysicist, joined the Company in 1985, was elected Vice President of Technical Services in September 1997 and was subsequently elected President, Chief Operating Officer and Director in January 2001. In January 2006, Mr. Jumper was elected President, Chief Executive Officer and Director. Prior to 1997, Mr. Jumper served the Company as manager of technical services with an emphasis on 3-D processing. Mr. Jumper has served the Permian Basin Geophysical Society as Second Vice President (1991), First Vice President (1992) and as President (1993).
C. Ray Tobias. Mr. Tobias joined the Company in 1990 and was elected Vice President in September 1997 and Executive Vice President and Director in January 2001. In January 2006, Mr. Tobias was elected Executive Vice President and Chief Operating Officer. Mr. Tobias supervises client relationships and survey cost quotations to clients. He has served on the Board of Directors of the International Association of Geophysical Contractors and served as President of the Permian Basin Geophysical Society. Prior to joining the Company, Mr. Tobias was employed by Geo-Search Corporation where he was an operations supervisor.
Christina W. Hagan. Ms. Hagan joined the Company in 1988 and was elected Chief Financial Officer and Vice President in 1997 and Senior Vice President, Secretary and Chief Financial Officer in January 2003. In January 2004, Ms. Hagan was elected as Executive Vice President, Secretary and Chief Financial Officer. Prior thereto, Ms. Hagan served the Company as Controller and Treasurer. Ms. Hagan is a certified public accountant.
Howell W. Pardue. Mr. Pardue joined the Company in 1976 as Vice President of Data Processing and Director. Mr. Pardue was elected Executive Vice President of Data Processing in 1997. Prior to joining the Company, Mr. Pardue was employed in data processing for 17 years by Geosource, Inc. and its predecessor geophysical company.
K.S. Forsdick. Mr. Forsdick joined the Company in 1993, was elected Vice President in January 2001 and was subsequently elected Senior Vice President in March 2009. Mr. Forsdick is responsible for soliciting, designing and bidding seismic surveys for prospective clients. Prior to joining the Company, Mr. Forsdick was employed by Grant Geophysical Company and Western Geophysical Company and was responsible for marketing and managing land and marine seismic surveys for domestic and international operations. He has served on the Governmental Affairs Committee of the International Association of Geophysical Contractors.
| Item 11. | EXECUTIVE COMPENSATION |
The information required by Item 11 is incorporated by reference to our definitive proxy statement for our Annual Meeting of StockholdersShareholders to be held on January 26, 2010,24, 2012, which we expect to file with the Securities and Exchange Commission within 120 days after September 30, 2009.
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| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required with respect to our equity compensation plans is set forth in Item 5 of thisForm 10-K. Other information required by Item 12 is incorporated by reference to our definitive proxy statement for our Annual Meeting of StockholdersShareholders to be held on January 26, 2010,24, 2012, which we expect to file with the Securities and Exchange Commission within 120 days after September 30, 2009.
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| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by Item 13 is incorporated by reference to our definitive proxy statement for our Annual Meeting of StockholdersShareholders to be held on January 26, 2010,24, 2012, which we expect to file with the Securities and Exchange Commission within 120 days after September 30, 2009.
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| Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by Item 14 is incorporated by reference to our definitive proxy statement for our Annual Meeting of StockholdersShareholders to be held on January 26, 2010,24, 2012, which we expect to file with the Securities and Exchange Commission within 120 days after September 30, 2009.
Part IV
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| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) The following documents are filed as part of this report:
(1) Financial Statements.
The following financial statements of the Company appear on pages F-1 through F-22F-21 and are incorporated by reference into Part II, Item 8:
Reports of Independent Registered Public Accounting Firm
Statements of Stockholders’ Equity and Other Comprehensive Income
(Loss)Statements of Cash Flows
Notes to Financial Statements
(2) Financial Statement Schedules.
The following financial statement schedule appears onpage F-23F-22 and is hereby incorporated by reference:
Schedule II — Valuation and Qualifying Accounts for the three years ended September 30, 2009, 20082011, 2010 and 2007.
2009.All other schedules are omitted because they are either not applicable or the required information is shown in the financial statements or notes thereto.
The information required by this item 15(a)(3) is set forth in the Index to Exhibits accompanying this Annual Report ofForm 10-K and is hereby incorporated by reference.
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SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Midland, and the State of Texas, on the 30th9th day of November, 2009.
December, 2011.DAWSON GEOPHYSICAL COMPANY
| | |
| DAWSON GEOPHYSICAL COMPANY |
| |
| By: | | /s/ Stephen C. Jumper |
| | Stephen C. Jumper |
| | President and Chief |
| | Executive Officer |
Stephen C. Jumper
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | |
Signature | | Title | | | | Date |
Signature
| | Title
| | Date
|
|
| | | | |
L. Decker Dawson | | Chairman of the Board of Directors | | 11-30-0912-9-11 |
| | | | |
Stephen C. Jumper | | President, Chief Executive Officer and Director (principal executive officer) | | 11-30-0912-9-11 |
| | | | |
Paul H. Brown | | Director | | 11-30-0912-9-11 |
| | |
/s/ Craig W. Cooper Craig W. Cooper | | Director | | 12-9-11 |
| | |
/s/ Gary M. Hoover
Gary M. Hoover | | Director | | 11-30-0912-9-11 |
| | | | |
Jack D. Ladd | | Director | | 11-30-0912-9-11 |
| | | | |
Ted R. North | | Director | | 11-30-0912-9-11 |
| | | | |
Tim C. Thompson | | Director | | 11-30-0912-9-11 |
| | | | |
Christina W. Hagan | | Executive Vice President, Secretary and Chief Financial Officer (principal financial and accounting
officer) | | 11-30-0912-9-11 |
25
INDEX TO FINANCIAL STATEMENTS
| | | | |
Financial Statements of Dawson Geophysical Company | | Page |
| |
| | | F-2 | |
| | | F-4 | |
| | | F-5 | |
| | | F-6 | |
| | | F-7 | |
| | | F-8 | |
Financial Statement Schedule: | | | | |
| | | F-23F-22 | |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Dawson Geophysical Company:
We have audited the accompanying balance sheets of Dawson Geophysical Company as of September 30, 20092011, and 2008,2010, and the related statements of operations, stockholders’ equity and other comprehensive income (loss), and cash flows for each of the years in the three-year period ended September 30, 2009.2011. In connection with our audits of the financial statements, we also have audited financial statement Schedule II. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 financial statements referred to above present fairly, in all material respects, the financial position of Dawson Geophysical Company as of September 30, 20092011 and 2008,2010, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2009,2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Dawson Geophysical Company’s internal control over financial reporting as of September 30, 2009,2011, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated November 30, 2009,December 9, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
November 30, 2009
F-2
December 9, 2011REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Dawson Geophysical Company:
We have audited Dawson Geophysical Company’s internal control over financial reporting as of September 30, 20092011 based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Dawson Geophysical Company’s 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 Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s 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, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures, as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s 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 company’s 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 company’s 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, Dawson Geophysical Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2009,2011, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Dawson Geophysical Company as of September 30, 20092011 and 2008,2010, and the related statements of operations, stockholders’ equity and other comprehensive income (loss), and cash flows for each of the years in the three-year period ended September 30, 2009,2011, and the related financial statement schedule, and our report dated November 30, 2009,December 9, 2011, expressed an unqualified opinion on those financial statements.
November 30, 2009
F-3
December 9, 2011DAWSON GEOPHYSICAL COMPANY
| | | | | | | | | |
| | | September 30,
| | | September 30,
| |
| | | 2009 | | | 2008 | |
| |
ASSETS |
Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 36,792,000 | | | $ | 8,311,000 | |
| Short-term investments | | | 25,267,000 | | | | — | |
| Accounts receivable, net of allowance for doubtful accounts of $533,000 in September 2009 and $55,000 in September 2008 | | | 40,106,000 | | | | 76,221,000 | |
| Prepaid expenses and other assets | | | 7,819,000 | | | | 877,000 | |
| Current deferred tax asset | | | 1,694,000 | | | | 873,000 | |
| | | | | | | | | |
| Total current assets | | | 111,678,000 | | | | 86,282,000 | |
Property, plant and equipment | | | 240,820,000 | | | | 250,519,000 | |
| Less accumulated depreciation | | | (115,341,000 | ) | | | (103,180,000 | ) |
| | | | | | | | | |
| Net property, plant and equipment | | | 125,479,000 | | | | 147,339,000 | |
| | | | | | | | | |
| Total assets | | $ | 237,157,000 | | | $ | 233,621,000 | |
| | | | | | | | | |
| |
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 6,966,000 | | | $ | 15,308,000 | |
| Accrued liabilities: | | | | | | | | |
| Payroll costs and other taxes | | | 2,720,000 | | | | 3,363,000 | |
| Other | | | 10,600,000 | | | | 14,869,000 | |
| Deferred revenue | | | 2,230,000 | | | | 993,000 | |
| | | | | | | | | |
| Total current liabilities | | | 22,516,000 | | | | 34,533,000 | |
Deferred tax liability | | | 16,262,000 | | | | 13,128,000 | |
Stockholders’ equity: | | | | | | | | |
| Preferred stock-par value $1.00 per share; 5,000,000 shares authorized, none outstanding | | | — | | | | — | |
Common stock-par value $.331/3 per share; 50,000,000 shares authorized, 7,822,994 and 7,794,744 shares issued and outstanding in each period | | | 2,608,000 | | | | 2,598,000 | |
| Additional paid-in capital | | | 89,220,000 | | | | 87,051,000 | |
| Other comprehensive income, net of tax | | | 18,000 | | | | — | |
| Retained earnings | | | 106,533,000 | | | | 96,311,000 | |
| | | | | | | | | |
| Total stockholders’ equity | | | 198,379,000 | | | | 185,960,000 | |
| | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 237,157,000 | | | $ | 233,621,000 | |
| | | | | | | | | |
| | | | | | | | |
| | | September 30,
2011 | | | September 30,
2010 | |
| ASSETS | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 26,077,000 | | | $ | 29,675,000 | |
Short-term investments | | | — | | | | 20,012,000 | |
Accounts receivable, net of allowance for doubtful accounts of $155,000 and $639,000 at September 30, 2011 and 2010, respectively | | | 86,716,000 | | | | 57,726,000 | |
Prepaid expenses and other assets | | | 4,254,000 | | | | 7,856,000 | |
Current deferred tax asset | | | 1,236,000 | | | | 1,764,000 | |
| | | | | | | | |
Total current assets | | | 118,283,000 | | | | 117,033,000 | |
| | |
Property, plant and equipment | | | 302,647,000 | | | | 248,943,000 | |
Less accumulated depreciation | | | (156,106,000 | ) | | | (130,900,000 | ) |
| | | | | | | | |
Net property, plant and equipment | | | 146,541,000 | | | | 118,043,000 | |
| | | | | | | | |
Total assets | | $ | 264,824,000 | | | $ | 235,076,000 | |
| | | | | | | | |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 18,732,000 | | | $ | 14,274,000 | |
Accrued liabilities: | | | | | | | | |
Payroll costs and other taxes | | | 1,436,000 | | | | 2,969,000 | |
Other | | | 9,230,000 | | | | 8,619,000 | |
Deferred revenue | | | 9,616,000 | | | | 204,000 | |
Current maturities of note payable | | | 5,290,000 | | | | — | |
| | | | | | | | |
Total current liabilities | | | 44,304,000 | | | | 26,066,000 | |
| | |
Long-term liabilities: | | | | | | | | |
Note payable less current maturities | | | 10,281,000 | | | | — | |
Deferred tax liability | | | 22,076,000 | | | | 18,785,000 | |
| | | | | | | | |
Total long-term liabilities | | | 32,357,000 | | | | 18,785,000 | |
| | |
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 shares authorized, 7,910,885 and 7,902,106 shares issued and outstanding at September 30, 2011 and 2010, respectively | | | 2,637,000 | | | | 2,634,000 | |
Additional paid-in capital | | | 91,591,000 | | | | 90,406,000 | |
Accumulated other comprehensive income, net of tax | | | — | | | | 4,000 | |
Retained earnings | | | 93,935,000 | | | | 97,181,000 | |
| | | | | | | | |
Total stockholders’ equity | | | 188,163,000 | | | | 190,225,000 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 264,824,000 | | | $ | 235,076,000 | |
| | | | | | | | |
See accompanying notes to the financial statements.
F-4
DAWSON GEOPHYSICAL COMPANY
| | | | | | | | | | | | | |
| | | Years Ended September 30, | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Operating revenues | | $ | 243,995,000 | | | $ | 324,926,000 | | | $ | 257,763,000 | |
| Operating costs: | | | | | | | | | | | | |
| Operating expenses | | | 192,839,000 | | | | 237,484,000 | | | | 190,117,000 | |
| General and administrative | | | 7,856,000 | | | | 6,762,000 | | | | 6,195,000 | |
| Depreciation | | | 26,160,000 | | | | 24,253,000 | | | | 18,103,000 | |
| | | | | | | | | | | | | |
| | | | 226,855,000 | | | | 268,499,000 | | | | 214,415,000 | |
| Income from operations | | | 17,140,000 | | | | 56,427,000 | | | | 43,348,000 | |
| Other income (expense): | | | | | | | | | | | | |
| Interest income | | | 249,000 | | | | 497,000 | | | | 749,000 | |
| Interest expense | | | — | | | | (482,000 | ) | | | (145,000 | ) |
| Other income (expense) | | | 326,000 | | | | (35,000 | ) | | | 506,000 | |
| | | | | | | | | | | | | |
| Income before income tax | | | 17,715,000 | | | | 56,407,000 | | | | 44,458,000 | |
| Income tax expense: | | | | | | | | | | | | |
| Current | | | (5,193,000 | ) | | | (17,834,000 | ) | | | (13,906,000 | ) |
| Deferred | | | (2,300,000 | ) | | | (3,566,000 | ) | | | (3,394,000 | ) |
| | | | | | | | | | | | | |
| | | | (7,493,000 | ) | | | (21,400,000 | ) | | | (17,300,000 | ) |
| | | | | | | | | | | | | |
| Net income | | $ | 10,222,000 | | | $ | 35,007,000 | | | $ | 27,158,000 | |
| | | | | | | | | | | | | |
| Net income per common share | | $ | 1.31 | | | $ | 4.57 | | | $ | 3.57 | |
| | | | | | | | | | | | | |
| Net income per common share-assuming dilution | | $ | 1.30 | | | $ | 4.53 | | | $ | 3.54 | |
| | | | | | | | | | | | | |
| Weighted average equivalent common shares outstanding | | | 7,807,385 | | | | 7,669,124 | | | | 7,601,889 | |
| | | | | | | | | | | | | |
| Weighted average equivalent common shares outstanding-assuming dilution | | | 7,853,531 | | | | 7,728,651 | | | | 7,669,462 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Years Ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
Operating revenues | | $ | 333,279,000 | | | $ | 205,272,000 | | | $ | 243,995,000 | |
Operating costs: | | | | | | | | | | | | |
Operating expenses | | | 292,519,000 | | | | 185,588,000 | | | | 192,839,000 | |
General and administrative | | | 13,550,000 | | | | 7,131,000 | | | | 7,856,000 | |
Depreciation | | | 30,536,000 | | | | 27,126,000 | | | | 26,160,000 | |
| | | | | | | | | | | | |
| | | 336,605,000 | | | | 219,845,000 | | | | 226,855,000 | |
(Loss) income from operations | | | (3,326,000 | ) | | | (14,573,000 | ) | | | 17,140,000 | |
Other income (expense): | | | | | | | | | | | | |
Interest income | | | 35,000 | | | | 185,000 | | | | 249,000 | |
Interest expense | | | (167,000 | ) | | | — | | | | — | |
Other income | | | 651,000 | | | | 398,000 | | | | 326,000 | |
| | | | | | | | | | | | |
(Loss) income before income tax | | | (2,807,000 | ) | | | (13,990,000 | ) | | | 17,715,000 | |
Income tax (expense) benefit: | | | | | | | | | | | | |
Current | | | 2,929,000 | | | | 7,102,000 | | | | (5,193,000 | ) |
Deferred | | | (3,368,000 | ) | | | (2,464,000 | ) | | | (2,300,000 | ) |
| | | | | | | | | | | | |
| | | (439,000 | ) | | | 4,638,000 | | | | (7,493,000 | ) |
| | | | | | | | | | | | |
Net (loss) income | | $ | (3,246,000 | ) | | $ | (9,352,000 | ) | | $ | 10,222,000 | |
| | | | | | | | | | | | |
Basic (loss) income per common share | | $ | (0.42 | ) | | $ | (1.20 | ) | | $ | 1.31 | |
| | | | | | | | | | | | |
Diluted (loss) income per common share | | $ | (0.42 | ) | | $ | (1.20 | ) | | $ | 1.30 | |
| | | | | | | | | | | | |
Weighted average equivalent common shares outstanding | | | 7,809,561 | | | | 7,777,404 | | | | 7,807,385 | |
| | | | | | | | | | | | |
Weighted average equivalent common shares outstanding- assuming dilution | | | 7,809,561 | | | | 7,777,404 | | | | 7,853,531 | |
| | | | | | | | | | | | |
See accompanying notes to the financial statements.
F-5
DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated
| | | | | | | |
| | | Common Stock | | | Additional
| | | Other
| | | | | | | |
| | | Number
| | | | | | Paid-in
| | | Comprehensive
| | | Retained
| | | | |
| | | of Shares | | | Amount | | | Capital | | | Income (Expense) | | | Earnings | | | Total | |
| |
Balance September 30, 2006 | | | 7,549,244 | | | $ | 2,517,000 | | | $ | 82,370,000 | | | $ | (33,000 | ) | | $ | 34,354,000 | | | $ | 119,208,000 | |
| Net income | | | | | | | | | | | | | | | | | | | 27,158,000 | | | | 27,158,000 | |
| Other comprehensive income net of tax: | | | | | | | | | | | | | | | | | | | | | | | | |
| Realization of gains on investments | | | | | | | | | | | | | | | 51,000 | | | | | | | | | |
| Income tax expense | | | | | | | | | | | | | | | (18,000 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income | | | | | | | | | | | | | | | 33,000 | | | | | | | | 33,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income for the period | | | | | | | | | | | | | | | | | | | | | | | 27,191,000 | |
| Excess tax benefit of employee stock plan | | | | | | | | | | | 1,312,000 | | | | | | | | | | | | 1,312,000 | |
| Stock-based compensation expense | | | | | | | | | | | 588,000 | | | | | | | | | | | | 588,000 | |
| Issuance of common stock as compensation | | | 3,000 | | | | 1,000 | | | | 119,000 | | | | | | | | | | | | 120,000 | |
| Exercise of stock options | | | 106,250 | | | | 35,000 | | | | 701,000 | | | | | | | | | | | | 736,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance September 30, 2007 | | | 7,658,494 | | | | 2,553,000 | | | | 85,090,000 | | | | — | | | | 61,512,000 | | | | 149,155,000 | |
Impact of adopting certain provisions of ASC740-10 | | | | | | | | | | | | | | | | | | | (208,000 | ) | | | (208,000 | ) |
| Net income | | | | | | | | | | | | | | | | | | | 35,007,000 | | | | 35,007,000 | |
| Excess tax benefit of employee stock plan | | | | | | | | | | | 440,000 | | | | | | | | | | | | 440,000 | |
| Stock-based compensation expense | | | | | | | | | | | 836,000 | | | | | | | | | | | | 836,000 | |
| Issuance of common stock as compensation | | | 6,500 | | | | 2,000 | | | | 423,000 | | | | | | | | | | | | 425,000 | |
| Issuance of restricted stock awards and | | | | | | | | | | | | | | | | | | | | | | | | |
| unearned compensation | | | 94,500 | | | | 31,000 | | | | (32,000 | ) | | | | | | | | | | | (1,000 | ) |
| Exercise of stock options | | | 35,250 | | | | 12,000 | | | | 294,000 | | | | | | | | | | | | 306,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance September 30, 2008 | | | 7,794,744 | | | | 2,598,000 | | | | 87,051,000 | | | | — | | | | 96,311,000 | | | | 185,960,000 | |
| Net income | | | | | | | | | | | | | | | | | | | 10,222,000 | | | | 10,222,000 | |
| Other comprehensive income net of tax: | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized holding gains arising during the period | | | | | | | | | | | | | | | 31,000 | | | | | | | | | |
| Income tax expense | | | | | | | | | | | | | | | (13,000 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income | | | | | | | | | | | | | | | 18,000 | | | | | | | | 18,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income for the period | | | | | | | | | | | | | | | | | | | | | | | 10,240,000 | |
| Excess tax benefit of employee stock plan | | | | | | | | | | | 5,000 | | | | | | | | | | | | 5,000 | |
| Stock-based compensation expense | | | | | | | | | | | 1,667,000 | | | | | | | | | | | | 1,667,000 | |
| Issuance of common stock as compensation | | | 5,000 | | | | 2,000 | | | | 89,000 | | | | | | | | | | | | 91,000 | |
| Exercise of stock options | | | 23,250 | | | | 8,000 | | | | 408,000 | | | | | | | | | | | | 416,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance September 30, 2009 | | | 7,822,994 | | | $ | 2,608,000 | | | $ | 89,220,000 | | | $ | 18,000 | | | $ | 106,533,000 | | | $ | 198,379,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, | | | | September 30, | | | | September 30, | | | | September 30, | | | | September 30, | | | | September 30, | |
| | | Common Stock | | | Additional
Paid-in
Capital | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Retained
Earnings | | | Total | |
| | | Number
of Shares | | | Amount | | | | | |
Balance September 30, 2008 | | | 7,794,744 | | | $ | 2,598,000 | | | $ | 87,051,000 | | | $ | — | | | $ | 96,311,000 | | | $ | 185,960,000 | |
Net income | | | | | | | | | | | | | | | | | | | 10,222,000 | | | | 10,222,000 | |
Other comprehensive income net of tax: | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized holding gains arising during the period | | | | | | | | | | | | | | | 31,000 | | | | | | | | | |
Income tax expense | | | | | | | | | | | | | | | (13,000 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income | | | | | | | | | | | | | | | 18,000 | | | | | | | | 18,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income for the period | | | | | | | | | | | | | | | | | | | | | | | 10,240,000 | |
Excess tax benefit of employee stock plan | | | | | | | | | | | 5,000 | | | | | | | | | | | | 5,000 | |
Stock-based compensation expense | | | | | | | | | | | 1,667,000 | | | | | | | | | | | | 1,667,000 | |
Issuance of common stock as compensation | | | 5,000 | | | | 2,000 | | | | 89,000 | | | | | | | | | | | | 91,000 | |
Exercise of stock options | | | 23,250 | | | | 8,000 | | | | 408,000 | | | | | | | | | | | | 416,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance September 30, 2009 | | | 7,822,994 | | | | 2,608,000 | | | | 89,220,000 | | | | 18,000 | | | | 106,533,000 | | | | 198,379,000 | |
Net loss | | | | | | | | | | | | | | | | | | | (9,352,000 | ) | | | (9,352,000 | ) |
Other comprehensive loss net of tax: | | | | | | | | | | | | | | | | | | | | | | | | |
Realization of losses on investment | | | | | | | | | | | | | | | (28,000 | ) | | | | | | | | |
Unrealized holding gains arising during the period | | | | | | | | | | | | | | | 3,000 | | | | | | | | | |
Income tax benefit | | | | | | | | | | | | | | | 11,000 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss | | | | | | | | | | | | | | | (14,000 | ) | | | | | | | (14,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss for the period | | | | | | | | | | | | | | | | | | | | | | | (9,366,000 | ) |
Stock-based compensation expense | | | | | | | | | | | 1,398,000 | | | | | | | | | | | | 1,398,000 | |
Issuance of common stock as compensation | | | 8,340 | | | | 3,000 | | | | 182,000 | | | | | | | | | | | | 185,000 | |
Issuance of restricted stock awards and unearned compensation | | | 84,100 | | | | 28,000 | | | | (28,000 | ) | | | | | | | | | | | — | |
Exercise of stock options | | | 250 | | | | | | | | 4,000 | | | | | | | | | | | | 4,000 | |
Shares exchanged for taxes on stock-based compensation | | | (13,578 | ) | | | (5,000 | ) | | | (370,000 | ) | | | | | | | | | | | (375,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance September 30, 2010 | | | 7,902,106 | | | | 2,634,000 | | | | 90,406,000 | | | | 4,000 | | | | 97,181,000 | | | | 190,225,000 | |
Net loss | | | | | | | | | | | | | | | | | | | (3,246,000 | ) | | | (3,246,000 | ) |
Other comprehensive loss net of tax: | | | | | | | | | | | | | | | | | | | | | | | | |
Realization of losses on investment | | | | | | | | | | | | | | | (6,000 | ) | | | | | | | | |
Income tax benefit | | | | | | | | | | | | | | | 2,000 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss | | | | | | | | | | | | | | | (4,000 | ) | | | | | | | (4,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss for the period | | | | | | | | | | | | | | | | | | | | | | | (3,250,000 | ) |
Tax deficit resulting from share-based compensation | | | | | | | | | | | (453,000 | ) | | | | | | | | | | | (453,000 | ) |
Stock-based compensation expense | | | | | | | | | | | 1,485,000 | | | | | | | | | | | | 1,485,000 | |
Issuance of common stock as compensation | | | 6,479 | | | | 2,000 | | | | 184,000 | | | | | | | | | | | | 186,000 | |
Forfeiture of restricted stock awards | | | (4,000 | ) | | | (1,000 | ) | | | | | | | | | | | | | | | (1,000 | ) |
Shares exchanged for taxes on stock-based compensation | | | (9,400 | ) | | | (3,000 | ) | | | (323,000 | ) | | | | | | | | | | | (326,000 | ) |
Exercise of stock options | | | 15,700 | | | | 5,000 | | | | 292,000 | | | | | | | | | | | | 297,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance September 30, 2011 | | | 7,910,885 | | | $ | 2,637,000 | | | $ | 91,591,000 | | | $ | — | | | $ | 93,935,000 | | | $ | 188,163,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to the financial statements.
F-6
DAWSON GEOPHYSICAL COMPANY
| | | | | | | | | | | | | |
| | | Years Ended September 30, | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
| Net income | | $ | 10,222,000 | | | $ | 35,007,000 | | | $ | 27,158,000 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation | | | 26,160,000 | | | | 24,253,000 | | | | 18,103,000 | |
| Noncash compensation | | | 1,758,000 | | | | 1,259,000 | | | | 707,000 | |
| Deferred income tax expense | | | 2,300,000 | | | | 3,566,000 | | | | 3,394,000 | |
| Excess tax benefit from share-based payment arrangement | | | (5,000 | ) | | | (440,000 | ) | | | (1,312,000 | ) |
| Provision for bad debts | | | 993,000 | | | | 32,000 | | | | 51,000 | |
| Other | | | 106,000 | | | | 443,000 | | | | 995,000 | |
| Change in current assets and liabilities: | | | | | | | | | | | | |
| Decrease (increase) in accounts receivable | | | 31,641,000 | | | | (15,743,000 | ) | | | (10,684,000 | ) |
| Increase in prepaid expenses and other assets | | | (6,942,000 | ) | | | (62,000 | ) | | | (125,000 | ) |
| (Decrease) increase in accounts payable | | | (7,960,000 | ) | | | 2,900,000 | | | | 646,000 | |
| (Decrease) increase in accrued liabilities | | | (4,912,000 | ) | | | 1,644,000 | | | | 10,435,000 | |
| Increase (decrease) in deferred revenue | | | 1,237,000 | | | | (1,929,000 | ) | | | 2,059,000 | |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 54,598,000 | | | | 50,930,000 | | | | 51,427,000 | |
| | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
| Acquisition of short-term investments | | | (25,313,000 | ) | | | — | | | | — | |
| Proceeds from maturity of short-term investments | | | — | | | | — | | | | 6,500,000 | |
| Proceeds from disposal of assets | | | 124,000 | | | | 29,000 | | | | 537,000 | |
| Partial proceeds on fire insurance claim | | | 2,843,000 | | | | — | | | | — | |
| Capital expenditures, net of noncash capital expenditures summarized below in noncash investing activities | | | (4,192,000 | ) | | | (53,269,000 | ) | | | (58,701,000 | ) |
| | | | | | | | | | | | | |
| Net cash used in investing activities | | | (26,538,000 | ) | | | (53,240,000 | ) | | | (51,664,000 | ) |
| | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
| Proceeds from exercise of stock options | | | 416,000 | | | | 306,000 | | | | 736,000 | |
| Proceeds from revolving line of credit | | | — | | | | 15,000,000 | | | | 5,000,000 | |
| Repayment on revolving line of credit | | | — | | | | (20,000,000 | ) | | | — | |
| Excess tax benefit from share-based payment arrangement | | | 5,000 | | | | 440,000 | | | | 1,312,000 | |
| | | | | | | | | | | | | |
| Net cash provided (used) by financing activities | | | 421,000 | | | | (4,254,000 | ) | | | 7,048,000 | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 28,481,000 | | | | (6,564,000 | ) | | | 6,811,000 | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | | 8,311,000 | | | | 14,875,000 | | | | 8,064,000 | |
| | | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 36,792,000 | | | $ | 8,311,000 | | | $ | 14,875,000 | |
| | | | | | | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | | | | | | |
| Cash paid for interest expense | | $ | — | | | $ | 541,000 | | | $ | 145,000 | |
| Cash paid during the period for income taxes | | $ | 13,222,000 | | | $ | 18,812,000 | | | $ | 10,259,000 | |
NONCASH INVESTING ACTIVITIES: | | | | | | | | | | | | |
| Accrued purchases of property and equipment | | $ | — | | | $ | 382,000 | | | $ | 790,000 | |
| Equipment purchase through reduction of insurance proceeds | | $ | 638,000 | | | $ | — | | | $ | — | |
| Unrealized gain on investments | | $ | 31,000 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
| | | Years Ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net (loss) income | | $ | (3,246,000 | ) | | $ | (9,352,000 | ) | | $ | 10,222,000 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation | | | 30,536,000 | | | | 27,126,000 | | | | 26,160,000 | |
Noncash compensation | | | 1,671,000 | | | | 1,583,000 | | | | 1,758,000 | |
Deferred income tax expense | | | 3,368,000 | | | | 2,464,000 | | | | 2,300,000 | |
Excess tax benefit from share-based payment arrangement | | | — | | | | — | | | | (5,000 | ) |
Provision for bad debts | | | 231,000 | | | | 256,000 | | | | 993,000 | |
Other | | | (516,000 | ) | | | (343,000 | ) | | | 106,000 | |
Change in current assets and liabilities: | | | | | | | | | | | | |
(Increase) decrease in accounts receivable | | | (30,613,000 | ) | | | (17,876,000 | ) | | | 31,641,000 | |
Decrease (increase) in prepaid expenses and other assets | | | 3,402,000 | | | | (37,000 | ) | | | (6,942,000 | ) |
Increase (decrease) in accounts payable | | | 3,628,000 | | | | 6,181,000 | | | | (7,960,000 | ) |
Decrease in accrued liabilities | | | (922,000 | ) | | | (1,732,000 | ) | | | (4,912,000 | ) |
Increase (decrease) in deferred revenue | | | 9,412,000 | | | | (2,026,000 | ) | | | 1,237,000 | |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 16,951,000 | | | | 6,244,000 | | | | 54,598,000 | |
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
Capital expenditures, net of noncash capital expenditures summarized below in noncash investing activities | | | (58,550,000 | ) | | | (18,835,000 | ) | | | (4,192,000 | ) |
Acquisition of short-term investments | | | (2,500,000 | ) | | | (14,964,000 | ) | | | (25,313,000 | ) |
Proceeds from maturity of short-term investments | | | 22,500,000 | | | | 20,000,000 | | | | — | |
Proceeds from disposal of assets | | | 741,000 | | | | 434,000 | | | | 124,000 | |
Proceeds on fire insurance claim | | | 1,392,000 | | | | — | | | | 2,843,000 | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (36,417,000 | ) | | | (13,365,000 | ) | | | (26,538,000 | ) |
| | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
Proceeds from note payable | | | 16,427,000 | | | | — | | | | — | |
Principal payments on note payable | | | (856,000 | ) | | | — | | | | — | |
Proceeds from exercise of stock options | | | 297,000 | | | | 4,000 | | | | 416,000 | |
Excess tax benefit from share-based payment arrangement | | | — | | | | — | | | | 5,000 | |
| | | | | | | | | | | | |
Net cash provided by financing activities | | | 15,868,000 | | | | 4,000 | | | | 421,000 | |
| | | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (3,598,000 | ) | | | (7,117,000 | ) | | | 28,481,000 | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | | 29,675,000 | | | | 36,792,000 | | | | 8,311,000 | |
| | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 26,077,000 | | | $ | 29,675,000 | | | $ | 36,792,000 | |
| | | | | | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | | | | | | |
Cash paid for interest expense | | $ | 115,000 | | | $ | — | | | $ | — | |
Cash paid for income taxes | | $ | 509,000 | | | $ | 839,000 | | | $ | 13,222,000 | |
Cash received for income taxes | | $ | 7,366,000 | | | $ | 8,125,000 | | | $ | — | |
NONCASH INVESTING ACTIVITIES: | | | | | | | | | | | | |
Accrued purchases of property and equipment | | $ | 830,000 | | | $ | 1,127,000 | | | $ | — | |
Equipment purchase through asset trade in | | $ | — | | | $ | 2,260,000 | | | $ | — | |
Equipment purchase through reduction of insurance proceeds | | $ | — | | | $ | — | | | $ | 638,000 | |
Unrealized gain on investments | | $ | — | | | $ | 3,000 | | | $ | 31,000 | |
See accompanying notes to the financial statements.
F-7
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS
| |
1. Summary of Significant Accounting Policies 1.
| Summary of Significant Accounting Policies |
Organization and Nature of Operations
Founded in 1952, the Company acquires and processes2-D,3-D 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.
For purposes of the financial statements, the Company considers demand deposits, certificates of deposit, overnight investments, money market funds and all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents.
The Company classifieshas historically classified its investments consisting of U.S. Treasury Securities and FDIC guaranteed bonds as“available-for-sale” “available-for-sale” and records the net unrealized holding gains and losses as accumulated comprehensive income in stockholders’ equity. The cost of short-term investments sold is based on the specific identification method.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, short-term investments, trade and other receivables, other current assets, accounts payable and other current liabilities approximate theirthe fair values based on theirthe short-term nature.nature of the financial instruments. The fair value of investments is based on quoted market prices.
The carrying amount for the Company’s Term Note approximates its fair value due to the fact that the interest rate on the Term Note is reset each month based on the prevailing market interest rate.Concentrations of Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk at any given time may consist of cash and cash equivalents, money market funds and overnight investment accounts, short-term investments, and trade and other receivables.receivables and other current assets. At September 30, 20092011 and 2008,2010, the Company had deposits with domestic banks in excess of federally insured limits. Management believes the credit risk associated with these deposits is minimal. Money market funds seek to preserve the value of the investment, but it is possible to lose money investing in these funds. The Company invests funds overnight under a repurchase agreement with its bank which is collateralized by securities of the United States Federal agencies. The Company generally invests primarily in short-term U.S. Treasury Securities. During fiscal 2009,2010, the Company also invested funds in FDIC guaranteed bonds. The Company believes all of its investments are low risk investments.of high credit quality. The Company’s sales are to clients whose activities relate to oil and natural gas exploration and production. The Company generally extends unsecured credit to these clients; therefore, collection of receivables may be affected by the economy surrounding the oil and natural gas industry.industry or other economic conditions. The Company closely monitors extensions of credit and may negotiate payment terms that mitigate risk. At September 30, 2009,2011, sales to the Company’s largest client represented 31%27% of its revenues and 22%18% of its revenues net of third-party charges as compared to 36%32% and 31%25%, respectively, at September 30, 2008. At September 30, 2007,2010. The sales to the Company’s second largest client represented 49%24% of its revenues and 40%20% of its revenues net of third-party charges.charges as compared to 9% and 7% respectively, at September 30, 2010. The remaining balance of the Company’s fiscal 20092011 revenues was derived from varied clients and none represented 10% or more of its fiscal 20092011 revenues.
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
Property, Plant and Equipment
Property, plant and equipment areis capitalized at historical cost and depreciated over the useful life of the asset. Management’s estimation of this useful life is based on circumstances that exist in the seismic industry and information available at the time of the purchase of the asset. As circumstances change and new information becomes available, these estimates could change.
F-8
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
Depreciation is computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the balance sheet, and any resulting gain or loss is reflected in the results of operations for the period.
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 undiscounted net cash flows are insufficient to recover the carrying value of the assets and the fair value of the assets is below the carrying value of the assets. Management’s forecast of future cash flows used to perform impairment analysis includes estimates of future revenues and expenses based on the Company’s anticipated future results while considering anticipated future oil and natural gas prices which is fundamental in assessing demand for the Company’s services. If the carrying amountamounts of the assets exceed the estimated expected undiscounted future cash flows, the Company measures the amount of possible impairment by comparing the carrying amount of the assets to the fair value. No impairment charges were recognized in the Statements of Operations for the years ended September 30, 2009, 20082011, 2010 or 2007.
Services are provided under cancelable service contracts. These contracts are either “turnkey” or “term” agreements. Under both types of agreements, the Company recognizes revenues when revenue is realizable and services have been performed. Services are defined as the commencement of data acquisition or processing operations. Revenues are considered realizable when earned according to the terms of the service contracts. 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 certainout-of-pocket expenses under the terms of the service contracts. Amounts billed to clients are recorded in revenue at the gross amount includingout-of-pocket expenses that are reimbursed by the client.
In some instances, customers are billed in advance of services performed. In those cases, the Company recognizes the liability as deferred revenue. As services are performed, those deferred revenue amounts are reversed and recognized as revenue.
When it becomes evident that the estimates of total costs to be incurred on a contract will exceed the total estimates of revenue to be earned, an estimated contract loss is recognized in the period in which the loss is identifiable.
Allowance for Doubtful Accounts
Management prepares its allowance for doubtful accounts receivable based on its review of past-due accounts, its past experience of historical write-offs and its current client base. While the collectibility of outstanding client invoices is continually assessed, the inherent volatility of the energy industry’s business cycle can cause swift and unpredictable changes in the financial stability of the Company’s clients.
The Company accounts for income taxes by recognizing amounts of taxes payable or refundable for the current year and by using 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 Company’s financial statements
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
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 reducingin effect for the year in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates of deferred tax assets and liabilities is recognized in income in the year of an enacted rate change. The deferred tax asset is reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assetsasset will not be realized. Management’s methodology for recording income taxes requires
F-9
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
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 variances between actual results and estimates and could have a material impact on the Company’s provision or benefit for income taxes.
Use of Estimates in the Preparation of Financial Statements
Preparation of the accompanying financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities 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.
The Company measures all employee stock-based compensation awards, includingwhich includes stock options and restricted stock, using the fair value method and recognizes compensation cost, net of forfeitures, in its financial statements. The Company records compensation expense as operating or general and administrative expense as appropriate in the Statements of Operations on a straight-line basis over the vesting period of the related stock options or restricted stock awards.
Certain prior year amounts have been reclassified in the current year in order to be consistent with the current year presentation.
| |
2. | Short-term Investments |
2. Short-term Investments
The Company had no short-term investments at September 30, 2011. The components of the Company’s short-term investments areat September 30, 2010 were as follows:
| | | | | | | | | | | | | | | | | |
| | | As of September 30, 2009 (in 000’s) | |
| | | Amortized
| | | Unrealized
| | | Unrealized
| | | Estimated
| |
| | | Cost | | | Gains | | | Losses | | | Fair Value | |
| |
| Short-term investments: | | | | | | | | | | | | | | | | |
| U.S. Treasury bills | | $ | 9,987 | | | $ | 7 | | | $ | — | | | $ | 9,994 | |
| U.S. Treasury notes | | | 10,153 | | | | 20 | | | | — | | | | 10,173 | |
| FDIC guaranteed bonds | | | 5,096 | | | | 4 | | | | — | | | | 5,100 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 25,236 | | | $ | 31 | (a) | | $ | — | | | $ | 25,267 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | As of September 30, 2010 (in 000’s) | |
| | | Amortized
Cost | | | Unrealized
Gains | | | Unrealized
Losses | | | Estimated
Fair Value | |
Short-term investments: | | | | | | | | | | | | | | | | |
U.S. Treasury bills | | $ | 14,991 | | | $ | 2 | | | $ | — | | | $ | 14,993 | |
FDIC guaranteed bonds | | | 5,015 | | | | 4 | | | | — | | | | 5,019 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 20,006 | | | $ | 6 | (a) | | $ | — | | | $ | 20,012 | |
| | | | | | | | | | | | | | | | |
| | |
| (a) | | OtherAccumulated other comprehensive income reflected on the Balance Sheet reflects unrealized gains and losses net of the tax effect of approximately $13,000.$2,000. |
The Company’s short-term investments have contractual maturities ranging from December 2009 to December 2010. These investments have been classified asavailable-for-sale.3. Fair Value of Financial Instruments The Company had no short-term investments at September 30, 2008.
| |
3. | Fair Value of Financial Instruments |
At September 30, 20092011 and 2010, the Company’s financial instruments included cash and cash equivalents, short-term investments, trade and other receivables, other current assets, accounts payable and other current liabilities. Due to the short-term maturities of cash and cash equivalents, trade and other receivables, andother current assets, accounts payables and other current liabilities, the carrying amounts approximate fair value at the respective balance sheet dates.
F-10
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
Term Note:
The Company’s Term Note approximates its fair value due to the fact that the interest rate on the Term Note is reset each month based on the prevailing market interest rate.
Short-term Investments:
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including short-term investments.
The Company had no short-term investments at September 30, 2011. The fair value measurements of thesethe short-term investments at September 30, 2010 were determined using the following inputs:
| | | | | | | | | | | | | | | | | |
| | | As of September 30, 2009 (in 000’s) | |
| | | Fair Value Measurements at Reporting Date Using: | |
| | | | | | Quoted Prices in
| | | Significant Other
| | | Significant
| |
| | | | | | Active Markets for
| | | Observable
| | | Unobservable
| |
| | | | | | Identical Assets | | | Inputs | | | Inputs | |
| | | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| |
| Short-term investments: | | | | | | | | | | | | | | | | |
| U.S. Treasury bills | | $ | 9,994 | | | $ | 9,994 | | | $ | — | | | $ | — | |
| U.S. Treasury notes | | | 10,173 | | | | 10,173 | | | | — | | | | — | |
| FDIC guaranteed bonds | | | 5,100 | | | | 5,100 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 25,267 | | | $ | 25,267 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | As of September 30, 2010 (in 000’s) | |
| | | Fair Value Measurements at Reporting Date Using: | |
| | | | | | Quoted Prices in
Active Markets for
Identical Assets | | | Significant Other
Observable
Inputs | | | Significant
Unobservable
Inputs | |
| | | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Short-term investments: | | | | | | | | | | | | | | | | |
U.S. Treasury bills | | $ | 14,993 | | | $ | 14,993 | | | $ | — | | | $ | — | |
FDIC guaranteed bonds | | | 5,019 | | | | 5,019 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total | | $ | 20,012 | | | $ | 20,012 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
Investments in U.S. Treasury bills and notes and FDIC guaranteed corporate bonds classified asavailable-for-sale are were measured using unadjusted quoted market prices (Level 1) at the reporting date provided by our investment custodian.
The Company had no short-term investments at September 30, 2008.
| |
4. | Property, Plant and Equipment |
date.4. Property, Plant and Equipment
Property, plant and equipment, together with annual depreciation rates, consist of the following:
| | | | | | | | | | | | | |
| | | September 30, | | | | |
| | | 2009 | | | 2008 | | | Useful Lives | |
| |
| Land, building and other | | $ | 5,589,000 | | | $ | 5,350,000 | | | | 3 to 40 years | |
| Recording equipment | | | 149,444,000 | | | | 160,516,000 | | | | 5 to 10 years | |
| Vibrator energy sources | | | 58,745,000 | | | | 58,750,000 | | | | 10 to 15 years | |
| Vehicles | | | 26,856,000 | | | | 25,713,000 | | | | 2 to 10 years | |
| Other(a) | | | 186,000 | | | | 190,000 | | | | — | |
| | | | | | | | | | | | | |
| | | | 240,820,000 | | | | 250,519,000 | | | | | |
| Less accumulated depreciation | | | (115,341,000 | ) | | | (103,180,000 | ) | | | | |
| | | | | | | | | | | | | |
| Net property, plant and equipment | | $ | 125,479,000 | | | $ | 147,339,000 | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | September 30, | | | | |
| | | 2011 | | | 2010 | | | Useful Lives | |
Land, building and other | | $ | 7,532,000 | | | $ | 6,467,000 | | | | 3 to 40 years | |
Recording equipment | | | 199,347,000 | | | | 155,949,000 | | | | 5 to 10 years | |
Vibrator energy sources | | | 65,175,000 | | | | 59,103,000 | | | | 10 to 15 years | |
Vehicles | | | 30,337,000 | | | | 27,133,000 | | | | 2 to 10 years | |
Other(a) | | | 256,000 | | | | 291,000 | | | | — | |
| | | | | | | | | | | | |
| | | 302,647,000 | | | | 248,943,000 | | | | | |
Less accumulated depreciation | | | (156,106,000 | ) | | | (130,900,000 | ) | | | | |
| | | | | | | | | | | | |
Net property, plant and equipment | | $ | 146,541,000 | | | $ | 118,043,000 | | | | | |
| | | | | | | | | | | | |
| | |
| (a) | | Other represents accumulated costs associated with equipment fabrication and modification not yet completed. |
F-11
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
| |
5. | Supplemental Balance Sheet Information |
5. Supplemental Balance Sheet Information
Accounts receivable consist of the following at September 30, 20092011 and 2008:
| | | | | | | | | |
| | | September 30, | |
| | | 2009 | | | 2008 | |
| |
| Trade and accrued trade receivables | | $ | 33,910,000 | | | $ | 67,186,000 | |
| Allowance for doubtful accounts | | | (533,000 | ) | | | (55,000 | ) |
| Insurance receivable associated with fire damage | | | 1,836,000 | | | | 4,339,000 | |
| Accrued receivable for worker’s compensation stop loss policy | | | 4,893,000 | | | | 4,751,000 | |
| | | | | | | | | |
| Total accounts receivable | | $ | 40,106,000 | | | $ | 76,221,000 | |
| | | | | | | | | |
2010: | | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
Trade and accrued trade receivables | | $ | 82,676,000 | | | $ | 54,349,000 | |
Allowance for doubtful accounts | | | (155,000 | ) | | | (639,000 | ) |
Accrued receivable for workers’ compensation stop loss policy | | | 3,852,000 | | | | 3,668,000 | |
Other | | | 343,000 | | | | 348,000 | |
| | | | | | | | |
Total accounts receivable | | $ | 86,716,000 | | | $ | 57,726,000 | |
| | | | | | | | |
Prepaid expenses and other assets consist of the following at September 30, 20092011 and 2008:
| | | | | | | | | |
| | | September 30, | |
| | | 2009 | | | 2008 | |
| |
| Prepaid other | | $ | 591,000 | | | $ | 877,000 | |
| Income tax receivable | | | 7,228,000 | | | | — | |
| | | | | | | | | |
| Total prepaid expenses and other assets | | $ | 7,819,000 | | | $ | 877,000 | |
| | | | | | | | | |
| |
| Other current liabilities consist of the following at September 30, 2009 and 2008: |
| | | | | | | | | |
| | | | | | | | | |
| | | September 30, | |
| | | 2009 | | | 2008 | |
| |
| Accrued self insurance reserves | | $ | 6,698,000 | | | $ | 6,704,000 | |
| Accrued bonus and profit sharing | | | 1,014,000 | | | | 3,855,000 | |
| Income and franchise taxes payable | | | 674,000 | | | | 1,262,000 | |
| Accrued payables associated with fire damage | | | — | | | | 794,000 | |
| Other accrued expenses and current liabilities | | | 2,214,000 | | | | 2,254,000 | |
| | | | | | | | | |
| Total other current liabilities | | $ | 10,600,000 | | | $ | 14,869,000 | |
| | | | | | | | | |
2010: | | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
Prepaid expenses and other | | $ | 943,000 | | | $ | 616,000 | |
Income tax receivable | | | 3,311,000 | | | | 7,240,000 | |
| | | | | | | | |
Total prepaid expenses and other assets | | $ | 4,254,000 | | | $ | 7,856,000 | |
| | | | | | | | |
Other current liabilities consist of the following at September 30, 2011 and 2010:
| | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
Accrued self insurance reserves | | $ | 5,567,000 | | | $ | 5,318,000 | |
Income and franchise taxes payable | | | 897,000 | | | | 879,000 | |
Other accrued expenses and current liabilities | | | 2,766,000 | | | | 2,422,000 | |
| | | | | | | | |
Total other current liabilities | | $ | 9,230,000 | | | $ | 8,619,000 | |
| | | | | | | | |
6. Debt
The Company’s revolving line of credit loan agreement is with Western National Bank. OnThe agreement was renewed June 2, 2009, the Company renewed the existing agreement for a two-year term on substantially2011 under the same terms as the previous facility. In addition, based on the Company’s assessment of its current needs, the Company reduced the size of the facility to $20.0 million from $40.0 million.agreement. The agreement permits the Company to borrow, repay and reborrow, from time to time until June 2, 2011,2013, up to $20.0 million based on the borrowing base calculation as defined in the agreement. The Company’s obligations under this agreement are secured by a security interest in its accounts receivable, equipment and related collateral. Interest on the facility accrues at an annual rate equal to either the30-day London Interbank Offered Rate (“LIBOR”), plus two and one-quarter percent or the Prime Rate, minus three-quarters percent as the Company directs monthly, subject to an interest rate floor of 4%. Interest on the outstanding amount under the loan agreement is payable monthly. The loan agreement contains customary covenants for credit facilities of this type, including limitations on disposition of assets, mergers and reorganizations. The Company is also obligated to meet certain financial covenants under the loan agreement, including maintaining specified ratios with respect to cash flow coverage, current assets and liabilities and debt to tangible net worth. The Company was in compliance with all covenants as of September 30, 20092011 and November 30, 2009.2011 and has the full line of credit available for borrowing. The Company has not utilized the line of credit loan agreement since it paid offduring the entire outstanding balance as offiscal years ended September 30, 2008.
F-12
On June 24, 2011, the Company exercised its purchase option for OYO GSR equipment it had been previously leasing. In connection with the purchase of this equipment, the Company amended its credit loan agreement with Western National Bank on June 30, 2011 to add the Term Note provision, under which theDAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
| |
7. | Stock-Based Compensation |
Company obtained $16,427,000 in financing for the purchase of this equipment. The Term Note is repayable over a period of 36 months at $485,444 per month plus any applicable interest in excess of 4%. Interest on the Term Note accrues at an annual rate equal to either the 30-day London Interbank Offered Rate (“LIBOR”) plus two and one-quarter percent or the Prime Rate minus three-quarters percent, as the Company directs monthly, subject to an interest rate floor of 4%, and otherwise has the same terms as the revolving line of credit. The Term Note is collateralized by the equipment and matures with all outstanding balances due on June 30, 2014. The fair value of the Term Note approximates its carrying value at September 30, 2011 due to the fact that the interest rate on the Term Note is reset each month based on the prevailing market interest rate.
Minimum principal payments under the Term Note for the twelve months ended September 30 are as follows:
| | | | |
2012 | | $ | 5,290,000 | |
2013 | | | 5,510,000 | |
2014 | | | 4,771,000 | |
| | | | |
Total | | $ | 15,571,000 | |
Less current maturities | | | 5,290,000 | |
| | | | |
Note payable, less current maturities | | $ | 10,281,000 | |
| | | | |
7. Stock-Based Compensation
At September 30, 2009,2011, the Company had twoone stock-based compensation plans. Each plan, theplan. The awards outstanding under these plansthis plan and the associated accounting treatment are discussed below.
In fiscal 2004, the Company adopted the 2004 Incentive Stock Plan (the “2004 Plan”) which provides 375,000 shares of authorized but unissued common stock of the Company. The option price is the market value of the Company’s 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 2004 Plan provides that of the 375,000 shares, up to 125,000 shares may be awarded to officers, directors, and employees of the Company, and up to 125,000 shares may be awarded with restrictions for the purpose of additional compensation. Although shares are available under the 2004 Plan, the Company does not intend to issue shares from this plan in the future.
In fiscal 2007, the Company adopted the Dawson Geophysical Company 2006 Stock and Performance Incentive Plan (“the Plan”). The Plan provides 750,000 shares of authorized but unissued common stock of the Company which may be awarded to officers, directors, employees and consultants of the Company in various forms including options, grants, restricted stock grants and others. Stock option grant prices awarded under the Plan may not be less than the fair market value of the common stock subject to such option on the grant date, and the term of stock options shall extend no more than ten years after the grant date. The Plan was approved by shareholders at the Company’s Annual Shareholders Meeting on January 23, 2007.
The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes option pricing model. The expected volatility is based on historical volatility.volatility of the Company’s stock. The expected term represents the average period that the Company expects stock options to be outstanding and is determined based on the Company’s historical experience. The risk free interest rate used by the Company as the discounting interest rate is based on the U.S. Treasury rates on the grant date for securities with maturity dates of approximately the expected term. As the Company has not historically declared dividends and does not expect to declare dividends over the near term, the dividend yield used in the calculation is zero. Actual value realized, if any, is dependent on the future performance of the Company’s common stock and overall stock market conditions. There is no assurance the value realized by an optionee will be at or near the value estimated by the Black-Scholes model.
The fair valuevalues of stock options granted during 2009 waswere $8.59 and $10.49 using the Black-Scholes model and included the following assumptions:
| | | | | |
| | | Group A | | Group B |
| |
| Expected term | | 4 years | | 6 years |
| Expected volatility | | 57.57% | | 56.85% |
| Risk free interest rate | | 1.67% | | 2.82% |
| Expected dividend yield | | — | | — |
| | | | | | | | |
| | | Group A | | | Group B | |
Expected term | | | 4 years | | | | 6 years | |
Expected volatility | | | 57.57% | | | | 56.85% | |
Risk free interest rate | | | 1.67% | | | | 2.82% | |
Expected dividend yield | | | — | | | | — | |
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
A summary of the Company’s employee stock options as of September 30, 2009,2011, as well as activity during the year then ended is presented below.
F-13
| | | | | | | | | | | | | | | | |
| | | Number of
Optioned
Shares | | | Weighted
Average
Exercise
Price | | | Weighted
Average
Remaining
Contractual
Term in Years | | | Aggregate
Intrinsic
Value ($000) | |
Balance as of September 30, 2010 | | | 151,000 | | | $ | 18.91 | | | | | | | | | |
Granted | | | — | | | | — | | | | | | | | | |
Exercised | | | (15,700 | ) | | | 18.91 | | | | | | | $ | 318 | |
Forfeited | | | — | | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Balance as of September 30, 2011 | | | 135,300 | | | $ | 18.91 | | | | 7.173 | | | $ | 632 | |
| | | | | | | | | | | | | | | | |
Exercisable as of September 30, 2011 | | | 59,800 | | | $ | 18.91 | | | | 7.173 | | | $ | 279 | |
| | | | | | | | | | | | | | | | |
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Weighted
| | | | |
| | | | | | Weighted
| | | Average
| | | | |
| | | Number of
| | | Average
| | | Remaining
| | | Aggregate
| |
| | | Optioned
| | | Exercise
| | | Contractual
| | | Intrinsic
| |
| | | Shares | | | Price | | | Term in Years | | | Value ($000) | |
| |
| Balance as of September 30, 2008 | | | 23,250 | | | $ | 17.91 | | | | | | | | | |
| Granted | | | 152,000 | | | | 18.91 | | | | | | | | | |
| Exercised | | | (23,250 | ) | | | 17.91 | | | | | | | $ | 206 | |
| Forfeited | | | — | | | | — | | | | | | | | | |
| Balance as of September 30, 2009 | | | 152,000 | | | $ | 18.91 | | | | 9.17 | | | $ | 1,287 | |
| | | | | | | | | | | | | | | | | |
| Exercisable as of September 30, 2009 | | | — | | | $ | — | | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
No options were granted during fiscal 2011 or 2010. During fiscal 2009, 152,000 options were issued to employees of the Company. NoThese options were granted during fiscalvest 25% annually from the date of grant and expire ten years 2008 and 2007.from the date of grant. These options had a weighted average grant date fair value of $9.59. The total intrinsic value of options exercised during fiscal 2011, 2010 and 2009 2008was $318,000, $1,000, and 2007 was $206,000, $1,812,000 and $4,650,000, respectively. The total fair value of options vested during fiscal 2011, 2010 and 2009 2008was $362,000, $364,000, and 2007 was $148,000, $201,000 and $367,000,$84,000, respectively.
A summary of the status of the Company’s nonvested stock option awards as of September 30, 20092011 and changes during the fiscal year then ended September 30, 2009 is presented below.
| | | | | | | | | |
| | | Number of
| | | Weighted Average
| |
| | | Nonvested
| | | Grant Date
| |
| | | Share Awards | | | Fair Value | |
| |
| Nonvested option awards outstanding September 30, 2008 | | | 8,250 | | | $ | 17.91 | |
| Granted | | | 152,000 | | | | 18.91 | |
| Vested | | | (8,250 | ) | | | 17.91 | |
| Forfeited | | | — | | | | — | |
| | | | | | | | | |
| Nonvested option awards outstanding September 30, 2009 | | | 152,000 | | | $ | 18.91 | |
| | | | | | | | | |
| | | | | | | | |
| | | Number of
Nonvested
Share Awards | | | Weighted Average
Grant Date
Fair Value | |
Nonvested option awards outstanding September 30, 2010 | | | 113,250 | | | $ | 9.59 | |
Granted | | | — | | | | — | |
Vested | | | (37,750 | ) | | | 9.59 | |
Forfeited | | | — | | | | — | |
| | | | | | | | |
Nonvested option awards outstanding September 30, 2011 | | | 75,500 | | | $ | 9.59 | |
| | | | | | | | |
Outstanding options at September 30, 20092011 expire in December 2018 and have an exercise price of $18.91. As of September 30, 2009,2011, there was approximately $1,090,000$416,000 of unrecognized compensation cost related to nonvested stock option awards to be recognized over a weighted average period of 2.01.17 years.
Stock options issued under the Company’s 2004 and 2006 PlansPlan are incentive stock options. No tax deduction is recorded when options are awarded. If an exercise and sale of vested options results in a disqualifying disposition, a tax deduction for the Company occurs. For the years ended September 30, 2009, 20082011 and 2007,2010, there were no excess tax benefits from disqualifying dispositions. For fiscal year 2009, excess tax benefits from disqualifying dispositions of options of $5,000 $440,000 and $1,312,000, respectively, werewas reflected in both cash flows from operating activities and cash flows from financing activities on the Statements of Cash Flows.
Cash received from option exercises under all share-based payment arrangements during the years ended September 30, 2011, 2010 and 2009 was $297,000, $4,000 and 2008 was $416,000, and $306,000, respectively.
The Company recognized compensation expense of $315,000, $78,000 and $83,000 in fiscal 2009, 2008 and 2007, respectively, associated with stock option awards.awards of $362,000, $363,000, and $315,000 in fiscal 2011, 2010 and 2009, respectively. This amount is included in operating or general and administrative expense as appropriate in the Statements of Operations.
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
Stock Awards:
There were no restricted stock grants in fiscal 2011 and 2009. The Company granted 84,100 of restricted stock to employees in fiscal 2010. The weighted average grant date fair value of restricted stock awards in 2008 and 20072010 was $67.25 and $27.05, respectively.$23.33. The fair value of the restricted stock granted equals the market price on the grant date and vests after three years.
F-14
| | | | | | | | |
| | | Number of
Restricted
Share Awards | | | Weighted Average
Grant Date
Fair Value | |
Nonvested restricted shares outstanding September 30, 2010 | | | 122,600 | | | $ | 37.12 | |
Granted | | | — | | | | — | |
Vested | | | (37,500 | ) | | $ | 67.57 | |
Forfeited | | | (4,000 | ) | | $ | 31.30 | |
| | | | | | | | |
Nonvested restricted shares outstanding September 30, 2011 | | | 81,100 | | | $ | 23.33 | |
| | | | | | | | |
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | |
| | | Number of
| | | Weighted Average
| |
| | | Restricted
| | | Grant Date
| |
| | | Share Awards | | | Fair Value | |
| |
| Nonvested restricted shares outstanding September 30, 2008 | | | 94,500 | | | $ | 43.43 | |
| Granted | | | — | | | | — | |
| | | | | | | | | |
| Nonvested restricted shares outstanding September 30, 2009 | | | 94,500 | | | $ | 43.43 | |
| | | | | | | | | |
The Company’s tax benefit with regards to restricted stock awards is consistent with the tax election of the recipient of the award. No elections under IRC Section 83(b) have been made for the restricted stock awards granted by the Company. As a result, the compensation expense recorded for restricted stock resulted in a deferred tax asset for the Company equal to the tax effect of the amount of compensation expense recorded.
The Company recognized compensation expense of $1,352,000, $758,000 and $505,000 in fiscal 2009, 2008 and 2007, respectively, related to restricted stock awards.awards of $1,123,000, $1,035,000, and $1,352,000 in fiscal 2011, 2010 and 2009, respectively. This amount is included in operating or general and administrative expense as appropriate in the Statements of Operations. As of September 30, 2009,2011, there was approximately $1,326,000$1,113,000 of unrecognized compensation cost related to nonvested restricted stock awards granted. The cost is expected to be recognized over a weighted average period of 1.61.8 years.
The Company granted 5,000 common shares with immediate vesting to outside directors and employees in the first quarter of fiscal 2009 as compensationyears 2011, 2010 and 3,000 common shares with immediate vesting to outside directors in the first quarter of both 2008 and 2007 as compensation. The grant date fair value equaled $18.19, $69.64 and $39.77 in each quarter, respectively. The Company granted 2,000 common shares with immediate vesting to employees as compensation in the second quarter of fiscal 2008. The grant date fair value equaled $55.22. The Company granted 500 and 1,000 common shares with immediate vesting to employees as compensation during the third quarter of fiscal 2008. The grant date fair value equaled $69.22 and $70.46, respectively. No stock awards were granted during the remaining periods of fiscal 2009, 2008 and 2007. 2009:
| | | | | | | | |
| | | Number of
Shares Granted | | | Weighted Average
Grant Date
Fair Value | |
2011 | | | 6,479 | | | $ | 28.69 | |
2010 | | | 8,340 | | | $ | 22.11 | |
2009 | | | 5,000 | | | $ | 18.19 | |
The Company recognized expense of $91,000, $423,000$186,000, $185,000, and $119,000$91,000 in fiscal 2009, 20082011, 2010 and 2007,2009, respectively, as well as the related tax benefit associated with these awards in fiscal years ended September 30, 2009, 2008 and 2007.
| |
8. | Employee Benefit Plans |
awards.8. Employee Benefit Plans
The Company provides a 401(k) plan as part of its employee benefits package in order to retain quality personnel. During 2009fiscal years 2011, 2010 and 2008,2009, the Company elected to match 100% of the employee contributions up to a maximum of 6% of the participant’s gross salary. The Company’s matching contributions for fiscal 2009, 20082011, 2010 and 20072009 were approximately $1,366,000, $1,270,000, and $1,213,000, $1,117,000 and $912,000, respectively.
9. Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs totaled $181,000, $288,000$370,000, $256,000, and $292,000$181,000 during the fiscal years ended September 30, 2011, 2010 and 2009, 2008 and 2007, respectively.
10. Income Taxes
The Company recorded income tax expense in the current year of $7,493,000$439,000 as compared to $21,400,000income tax benefit of $4,638,000 in 2010 and $17,300,000income tax expense of $7,493,000 in 2008 and 2007, respectively. The decrease in the provision for 2009 from 2008 is primarily the result of a substantial decrease in income before income taxes.
F-15
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
Income tax expense (benefit) from operations:
| | | | | | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Current Federal | | $ | 3,770,000 | | | $ | 16,082,000 | | | $ | 11,778,000 | |
| Current State | | | 1,423,000 | | | | 1,752,000 | | | | 2,128,000 | |
| Deferred Federal | | | 1,921,000 | | | | 3,296,000 | | | | 3,280,000 | |
| Deferred State | | | 379,000 | | | | 270,000 | | | | 114,000 | |
| | | | | | | | | | | | | |
| Total | | $ | 7,493,000 | | | $ | 21,400,000 | | | $ | 17,300,000 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
Current federal | | $ | (3,167,000 | ) | | $ | (7,342,000 | ) | | $ | 3,770,000 | |
Current state | | | 238,000 | | | | 240,000 | | | | 1,423,000 | |
Deferred federal | | | 3,920,000 | | | | 2,817,000 | | | | 1,921,000 | |
Deferred state | | | (552,000 | ) | | | (353,000 | ) | | | 379,000 | |
| | | | | | | | | | | | |
Total | | $ | 439,000 | | | $ | (4,638,000 | ) | | $ | 7,493,000 | |
| | | | | | | | | | | | |
The income tax provision differs from the amount computed by applying the statutory federal income tax rate to (losses) income from continuing operations before income taxes as follows:
| | | | | | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Tax expense computed at statutory rates | | $ | 6,200,000 | | | $ | 19,743,000 | | | $ | 15,560,000 | |
| Change in valuation allowance | | | (12,000 | ) | | | (18,000 | ) | | | (2,000 | ) |
| State income tax | | | 1,089,000 | | | | 1,270,000 | | | | 1,505,000 | |
| Other | | | 216,000 | | | | 405,000 | | | | 237,000 | |
| | | | | | | | | | | | | |
| Income tax expense | | $ | 7,493,000 | | | $ | 21,400,000 | | | $ | 17,300,000 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
Tax (benefit) expense computed at statutory rate of 35% | | $ | (982,000 | ) | | $ | (4,896,000 | ) | | $ | 6,200,000 | |
Change in valuation allowance | | | (19,000 | ) | | | (39,000 | ) | | | (12,000 | ) |
State income tax (benefit) expense | | | (284,000 | ) | | | (82,000 | ) | | | 1,089,000 | |
Transaction costs (not deductible for tax purposes) | | | 1,353,000 | | | | — | | | | — | |
Other | | | 371,000 | | | | 379,000 | | | | 216,000 | |
| | | | | | | | | | | | |
Income tax expense (benefit) | | $ | 439,000 | | | $ | (4,638,000 | ) | | $ | 7,493,000 | |
| | | | | | | | | | | | |
The principal components of the Company’s net deferred tax liability are as follows:
| | | | | | | | | |
| | | September 30, | |
| | | 2009 | | | 2008 | |
| |
| Deferred tax assets: | | | | | | | | |
| Receivables | | $ | 199,000 | | | $ | 20,000 | |
| Restricted stock | | | 978,000 | | | | 464,000 | |
| Workers’ compensation | | | 408,000 | | | | 493,000 | |
| Other | | | 716,000 | | | | 430,000 | |
| | | | | | | | | |
| Total gross deferred tax assets | | | 2,301,000 | | | | 1,407,000 | |
| Less valuation allowance | | | (58,000 | ) | | | (70,000 | ) |
| | | | | | | | | |
| Total deferred tax assets | | | 2,243,000 | | | | 1,337,000 | |
| Deferred tax liabilities: | | | | | | | | |
| Property and equipment | | | (16,798,000 | ) | | | (13,592,000 | ) |
| Other | | | (13,000 | ) | | | — | |
| | | | | | | | | |
| Total gross deferred tax liabilities | | | (16,811,000 | ) | | | (13,592,000 | ) |
| | | | | | | | | |
| Net deferred tax liability | | $ | (14,568,000 | ) | | $ | (12,255,000 | ) |
| | | | | | | | | |
| Current portion of net deferred tax asset/liability | | $ | 1,694,000 | | | $ | 873,000 | |
| Non-current portion of net deferred tax asset/liability | | | (16,262,000 | ) | | | (13,128,000 | ) |
| | | | | | | | | |
| Total net deferred tax liability | | $ | (14,568,000 | ) | | $ | (12,255,000 | ) |
| | | | | | | | | |
| | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
Deferred tax assets: | | | | | | | | |
Receivables | | $ | 550,000 | | | $ | 129,000 | |
Restricted stock | | | 258,000 | | | | 802,000 | |
Workers’ compensation | | | 331,000 | | | | 368,000 | |
State tax net operating loss (NOL) carry forward | | | 853,000 | | | | 484,000 | |
Federal tax NOL carry forward | | | 13,625,000 | | | | — | |
Self insurance | | | 298,000 | | | | 251,000 | |
AMT credit carry forward | | | 177,000 | | | | — | |
Other | | | 262,000 | | | | 329,000 | |
| | | | | | | | |
Total gross deferred tax assets | | | 16,354,000 | | | | 2,363,000 | |
Less valuation allowance | | | — | | | | (19,000 | ) |
| | | | | | | | |
Total net deferred tax assets | | | 16,354,000 | | | | 2,344,000 | |
Deferred tax liabilities: | | | | | | | | |
Property and equipment | | | (37,194,000 | ) | | | (19,363,000 | ) |
Other | | | — | | | | (2,000 | ) |
| | | | | | | | |
Total gross deferred tax liabilities | | | (37,194,000 | ) | | | (19,365,000 | ) |
| | | | | | | | |
Net deferred tax liability | | $ | (20,840,000 | ) | | $ | (17,021,000 | ) |
| | | | | | | | |
Current portion of net deferred tax asset/liability | | $ | 1,236,000 | | | $ | 1,764,000 | |
Non-current portion of net deferred tax asset/liability | | | (22,076,000 | ) | | | (18,785,000 | ) |
| | | | | | | | |
Total net deferred tax liability | | $ | (20,840,000 | ) | | $ | (17,021,000 | ) |
| | | | | | | | |
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
At September 30, 2009, substantially2011, the Company had a gross NOL for U.S. federal and state income tax purposes of approximately $48,589,000. This NOL expires in 2031. The Company intends to carryback a portion of the federal NOL for two years to offset against prior taxable income. The Company will then carry forward the remaining net federal NOL of approximately $13,625,000. The Company also had net state NOLs that will affect state taxes of approximately $853,000 at September 30, 2011. State NOLs will begin to expire in 2015. Carryback provisions are not allowed by states, so the entire state NOLs give rise to a deferred tax asset. The Company believes, based on past levels of income, it is more likely than not that the results of future operations will generate sufficient taxable income in which to realize these deferred tax assets. As such, no valuation allowance was considered necessary related to the federal or state NOLs.
At September 30, 2011, the Company released all of the valuation allowance of $58,000 washeld at September 30, 2010 related to the Company’s deferred tax assets for capital loss carryforwards that are deemed more likely than not to not be realized in the foreseeable future.
F-16
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
The following presents a roll forward of the Company’s unrecognized tax benefits:
| | | | | | | | | |
| | | September 30, | |
| | | 2009 | | | 2008 | |
| |
| Balance at beginning of fiscal year | | $ | 135,000 | | | $ | 137,000 | |
| Increase (decrease) in prior year tax positions | | | 350,000 | | | | — | |
| Increase (decrease) in current year tax positions | | | — | | | | — | |
| Settlement with taxing authorities | | | — | | | | — | |
| Expiration of statutes of limitations | | | (69,000 | ) | | | (2,000 | ) |
| | | | | | | | | |
| Balance at end of fiscal year | | $ | 416,000 | | | $ | 135,000 | |
| | | | | | | | | |
| | | | | | | | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
Balance at beginning of fiscal year | | $ | 235,000 | | | $ | 416,000 | |
Expiration of statutes of limitations | | | (74,000 | ) | | | (181,000 | ) |
| | | | | | | | |
Balance at end of fiscal year | | $ | 161,000 | | | $ | 235,000 | |
| | | | | | | | |
As of September 30, 2009,2011, the Company recognized $579,000$259,000 of liabilities for unrecognized tax benefits of which $163,000$98,000 related to penalties and interest. The Company expects approximately $282,000all of the liabilities for unrecognized tax benefits including the related penalties and interest to settle or lapse in the statutes of limitations by September 30, 2012. The Company did not record any changes in prior year tax positions, current year tax positions or settlements with taxing authorities related to uncertain tax positions during fiscal 2011 or 2010.
The tax years generally subject to future examination by tax authorities are for years endingended September 30, 20052007 and after. While it is expected that the amount of unrecognized tax benefits will change in the next twelve months, the Company does not expect any change to have a significant impact on its results of operations. The recognition of the total amount of unrecognized tax benefits of $579,000$259,000 would have an impact on the effective tax rate.
The Company’s continuing practice is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. At September 30, 2008,In fiscal years 2011 and 2010, the Company’s net accrued interest and penalties wasdecreased by approximately $108,000. The Company’s Statements of Operations at September 30, 2009 included accrued interest$11,000 and penalties of $55,000.
| |
11. | Net Income per Common Share |
$54,000, respectively.11. Income (loss) per Common Share
Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares and common share equivalents outstanding during the period.
F-17
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
The following table sets forth the computation of basic and diluted income (loss) per common share.
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
Numerator: | | | | | | | | | | | | |
Net (loss) income and numerator for basic and diluted (loss) income per common share — income available to common shareholders | | $ | (3,246,000 | ) | | $ | (9,352,000 | ) | | $ | 10,222,000 | |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Denominator for basic (loss) income per common share-weighted average common shares | | | 7,809,561 | | | | 7,777,404 | | | | 7,807,385 | |
Effect of dilutive securities-employee stock options and restricted stock grants | | | — | | | | — | | | | 46,146 | |
| | | | | | | | | | | | |
Denominator for diluted (loss) income per common share-adjusted weighted average common shares and assumed conversions | | | 7,809,561 | | | | 7,777,404 | | | | 7,853,531 | |
| | | | | | | | | | | | |
Basic (loss) income per common share | | $ | (0.42 | ) | | $ | (1.20 | ) | | $ | 1.31 | |
| | | | | | | | | | | | |
Diluted (loss) income per common share | | $ | (0.42 | ) | | $ | (1.20 | ) | | $ | 1.30 | |
| | | | | | | | | | | | |
The Company had a net loss in 2011 and 2010, therefore the denominator for diluted loss per common share is the same as the denominator for basic loss per common share for these periods.
The following weighted average numbers of certain securities have been excluded from the calculation of diluted (loss) income per common share.
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
Numerator: | | | | | | | | | | | | |
| Net income and numerator for basic and diluted net income per common share — income available to common shareholders | | $ | 10,222,000 | | | $ | 35,007,000 | | | $ | 27,158,000 | |
| | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
| Denominator for basic net income per common share-weighted average common shares | | | 7,807,385 | | | | 7,669,124 | | | | 7,601,889 | |
| Effect of dilutive securities-employee stock options and restricted stock grants | | | 46,146 | | | | 59,527 | | | | 67,573 | |
| | | | | | | | | | | | | |
| Denominator for diluted net income per common share-adjusted weighted average common shares and assumed conversions | | | 7,853,531 | | | | 7,728,651 | | | | 7,669,462 | |
| | | | | | | | | | | | | |
| Net income per common share | | $ | 1.31 | | | $ | 4.57 | | | $ | 3.57 | |
| | | | | | | | | | | | | |
| Net income per common share-assuming dilution | | $ | 1.30 | | | $ | 4.53 | | | $ | 3.54 | |
| | | | | | | | | | | | | |
share, as their effects would be anti-dilutive. | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
Stock options | | | 140,487 | | | | 151,710 | | | | 126,181 | |
Restricted stock | | | 105,655 | | | | 54,397 | | | | 38,500 | |
12. Major Customers
The Company operates in only one business segment, contract seismic data acquisition and processing services. The major customers in 2009, 2008fiscal 2011, 2010 and 20072009 have varied. Sales to these customers, as a percentage of operating revenues that exceeded 10%, were as follows:
| | | | | | | | | | | | | |
| | | 2009 | | 2008 | | 2007 |
| |
A | | | 31 | % | | | 36 | % | | | 49 | % |
B | | | — | | | | 20 | % | | | — | |
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
A | | | 27 | % | | | 32 | % | | | 31 | % |
B | | | 24 | % | | | — | | | | — | |
Although 31%27% and 24% of the Company’s fiscal 20092011 revenues were derived from one client (“A”),two clients, the Company believes that the relationship is well founded for continued contractual commitments for the foreseeable future in multiple producing basins across the lower 48 states. The Company’s client “B” in the table remained one of the Company’s clients in 2009, although sales to this customer as a percentage of operating revenue did not exceed 10%.
| |
13. | Commitments and Contingencies |
On March 14, 2008, a wildfire in West Texas burned a remote area in which one of the Company’s data acquisition crews was operating. The fire destroyed approximately $2.9 million net book value of the Company’s equipment, all of which was covered by the Company’s liability insurance, net of the deductible. In addition to the loss of equipment, a number of landowners in the fire area suffered damage to their grazing lands, livestock, fences and other improvements. The Company repaired damage incurred by such landowners as a result of the fire. The total cost to repair landowner damages was approximately $1.8 million. This amount is included in accounts receivable on our Balance Sheet. The Company believes the damages paid by the Company to repair landowner damages will be covered by the Company’s liability insurance. In February 2009, the Company received the remaining insurance proceeds for equipment losses sustained by the Company during the fire and for the Company’s debrispick-upContingencies costs. The Company recorded an immaterial gain on the receipt of such insurance proceeds in the second quarter of fiscal 2009.
F-18
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
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 Company’s financial condition, results of operations or liquidity as the Company believes it is adequately indemnified and insured.
The Company experiences contractual disputes with its clients from time to time regarding the payment of invoices or other matters. While the Company seeks to minimize these disputes and maintain good relations with its clients, the Company has in the past, and may in the future, experience disputes that could affect its revenues and results of operations in any period.
During the quarter ended March 31, 2009, one of the Company’s clients filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. As of September 30, 2009, this client had an accounts receivable balance with the Company of approximately $1.0 million. The Company increased its allowance for doubtful accounts during the second fiscal quarter to cover estimated exposures related to this bankruptcy.
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
The Company has non-cancelable operating leases for office space in Midland, Houston, Denver, Oklahoma City, and Lyon Township, Michigan.
Michigan and Pittsburgh.The following table summarizes payments due in specific periods related to the Company’s contractual obligations with initial terms exceeding one year as of September 30, 2009.
| | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period (in 000’s) |
| | | | | Less than
| | | | | | More than
|
| | | Total | | 1 Year | | 1-3 Years | | 3-5 Years | | 5 Years |
| |
| Operating lease obligations | | $ | 1,209 | | | $ | 578 | | | $ | 610 | | | $ | 21 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | |
2011. | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period (in 000’s) | |
| | | Total | | | Less than
1 Year | | | 1-3 Years | | | 3-5 Years | | | More than
5 Years | |
Operating lease obligations | | $ | 1,344 | | | $ | 435 | | | $ | 609 | | | $ | 300 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
Some of the Company’s operating leases contain predetermined fixed increases of the minimum rental rate during the initial lease term. For these leases, the Company recognizes the related expense on a straight-line basis and records deferred rent as the difference between the amount charged to expense and the rent paid as deferred rent.paid. Rental expense under the Company’s operating leases with initial terms exceeding one year was $575,000, $528,000$717,000, $619,000 and $432,000$575,000 for fiscal 2011, 2010 and 2009, 2008 and 2007, respectively.
As of November 30, 2009,2011, the Company had unused letters of credit totaling $4,080,000.$3,580,000. The Company’s letters of credit principally back obligations associated with the Company’s self-insured retention on workers’ compensation claims.
14. Rights Agreement
On July 8, 2009, the Board of Directors of the Company authorized and declared a dividend to the holders of record at the close of business on July 23, 2009 of one Right (a “Right”) for each outstanding share of the Company’s common stock. When exercisable, each Right will entitle the registered holder to purchase from the Company a unit consisting of one one-hundredth of a share (a “Fractional Share”) of Series A Junior Participating Preferred Stock, par value $1.00 per share, of the Company (the “Preferred Shares”), at a purchase price of $130.00 per Fractional Share, subject to adjustment (the “Purchase Price”). The description and terms of the Rights are set forth in a Rights Agreement (the “Rights Agreement”) effective as of the close of business on July 23, 2009 as it may from time to time be supplemented or amended between the Company and Mellon Investor Services LLC, as Rights Agent. The Rights Agreement replaced the previous rights plan that was originally adopted in 1999 which expired on July 23, 2009.
Initially, the Rights are attached to all certificates representing outstanding shares of Common Stock. The Rights will only separate from the Common Stock and a “Distribution Date” will only occur, with certain exceptions, upon the earlier of (i) ten days following a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock, or (ii) ten business days following the commencement of
F-19
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
a tender offer or exchange offer that would result in a person’s becoming an Acquiring Person. In certain circumstances, the Distribution Date may be deferred by the Board of Directors.
The Rights are not exercisable until the Distribution Date and will expire at the close of business on July 23, 2019, unless earlier redeemed or exchanged by the Company as described below.
In the event (a “Flip-In Event”) that a person becomes an Acquiring Person (except pursuant to a tender or exchange offer for all outstanding shares of Common Stock at a price and on terms that a majority of the directors of the Company who are not, and are not representatives, nominees, Affiliates or Associates of, an Acquiring Person or the person making the offer determines to be fair to and otherwise in the best interests of the Company and its shareholders (a “Permitted Offer”)), each holder of a Right will thereafter have the right to receive, upon exercise of such Right, a number of shares of Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a Current Market Price (as defined in the Rights Agreement) equal to two times the exercise price of the Right. Notwithstanding the foregoing, following the occurrence of
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
any Triggering Event, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by or transferred to an Acquiring Person (or by certain related parties) will be null and void in the circumstances set forth in the Rights Agreement. However, Rights are not exercisable following the occurrence of any Flip-In Event until such time as the Rights are no longer redeemable by the Company as set forth below.
In the event (a “Flip-Over Event”) that, at any time from and after the time an Acquiring Person becomes such, (i) the Company is acquired in a merger or other business combination transaction (other than certain mergers that follow a Permitted Offer), or (ii) 50% or more of the Company’s assets, cash flow or earning power is sold or transferred, each holder of a Right (except Rights that are voided as set forth above) shall thereafter have the right to receive, upon exercise, a number of shares of common stock of the acquiring company having a Current Market Price equal to two times the exercise price of the Right. Flip-In Events and Flip-Over Events are collectively referred to as “Triggering Events.”
At any time until ten days following the first date of public announcement of the occurrence of a Flip-In Event, the Company may redeem the Rights in whole, but not in part, at a price of $0.01 per Right, payable, at the option of the Company, in cash, shares of Common Stock or such other consideration as the Board of Directors may determine. After a person becomes an Acquiring Person, the right of redemption is subject to certain limitations in the Rights Agreement.
At any time after the occurrence of a Flip-In Event and prior to a person’s becoming the beneficial owner of 50% or more of the shares of Common Stock then outstanding or the occurrence of a Flip-Over Event, the Company may exchange the Rights (other than Rights owned by an Acquiring Person or an affiliate or an associate of an Acquiring Person, which will have become void), in whole or in part, at an exchange ratio of one share of Common Stock,and/or other equity securities deemed to have the same value as one share of Common Stock, per Right, subject to adjustment.
Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
| |
15. | Recently Issued Accounting Pronouncements |
15. Recently Issued Accounting Pronouncements
In September 2006,May 2011, the FASBFinancial Accounting Standards Board (FASB) issued ASC820-10,Accounting Standards Update (ASU) No. 2011-04, “Fair Value MeasurementsMeasurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosures.Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards,” ASC820-10 clarifies thatto provide a consistent definition of fair value isand ensure that the amount that would be exchanged to sell an asset or transfer a liability in an orderly transaction between market participants. Further, the standard establishes a framework for measuring fair value in generally accepted accountingmeasurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and expands certain disclosures aboutenhances disclosure requirements, particularly for Level 3 fair value measurements. ASC820-10 becameASU 2011-04 will be effective for all financial assetsthe Company in its second quarter of fiscal 2012 and financial liabilities aswill be applied prospectively. The Company is currently evaluating the impact of October 1, 2008,ASU 2011-04 and uponbelieves the adoption ASC820-10 didwill not have a material impacteffect on the Company’sits financial statements.
In February 2008,June 2011, the FASB issued ASC820-10-15-1A, “Fair Value MeasurementsASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” to require an entity to present the total of comprehensive income, the components of net income, and Disclosures — Transition and Open Effective Date Information,” which delays the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. This update does not change what items are reported in other comprehensive income or the requirement to report reclassification of items from other comprehensive income to net income. ASU 2011-05 will be effective datefor the Company in its first quarter of ASC820-10 for all non-financial assets and non-financial
F-20
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
liabilities, except16. Subsequent Events
On March 20, 2011, the Company, 6446 Acquisition Corp., a wholly-owned subsidiary of the Company (“Merger Sub”), and TGC entered into an Agreement and Plan of Merger (as amended by Amendment to Agreement and Plan of Merger, dated August 23, 2011, the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, Merger Sub would have merged with and into TGC, with TGC continuing as the surviving entity and a wholly owned subsidiary of the Company. The Merger Agreement was terminated by TGC on October 28, 2011.
During the quarter ended March 31, 2011, the Company made the policy decision to treat the acquisition transaction costs incurred by the Company related to the Merger Agreement as permanent, non-deductible expenses for items that are recognized or disclosedtax purposes. Upon the termination of the Merger Agreement, all acquisition transaction costs incurred by the Company became deductible expenses for tax purposes. As the Merger Agreement terminated after September 30, 2011, the termination of the acquisition was deemed a subsequent event. Therefore, all acquisition transaction costs remained permanent, non-deductible expenses for tax purposes at fair valueSeptember 30, 2011. As permanent differences in the financial statements on a recurring basis (at least annually). The Company does not expectCompany’s current year-end tax provision, the adoption of ASC820-10-15-1A toacquisition transaction costs have a materialsignificant impact on its financial statements.
In February 2007, the
FASB issued ASC825-10, “Financial Instruments.” ASC825-10 provides companies with an option to report selected financial assets and liabilities at fair value.Company’s fiscal 2011 effective tax rate. Further, these expenses will become fully tax deductible in the year ending September 30, 2012. The acquisition transaction costs will be recorded as deductible expenses in fiscal 2012’s provision for income taxes thus also impacting the fiscal 2012 effective tax rate. As of September 30,
2009,2011, acquisition transaction costs totaled $3,866,000. There was no termination fee associated with the
termination of the Merger Agreement.The Company has not electedevaluates subsequent events through the fair value option for any additional financial assets and liabilities beyond those already prescribed by accounting principles generally accepted indate the United States.
In April 2009, the FASB issued ASC825-10-65-1, “Financial Instruments — Transition and Open Effective Date Information.” ASC825-10-65-1 requires fair value disclosures in both interim and annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. ASC825-10-65-1 became effective for the Company as of June 15, 2009. The adoption of this standard did not have a material impact on its financial statements.
In May 2009, the FASB issued ASC855-10, “Subsequent Events,” which establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted the provisions of ASC855-10 for the quarter ended June 30, 2009. The adoption of ASC855-10 did not have a material impact on its financial statements. The Company has evaluated events subsequent to its balance sheet date (September 30, 2009) through the issue date of thisForm 10-K (November 30, 2009) and concluded that no significant subsequent events have occurred that require recognition in the Financial Statements or disclosure in the Notes to the Financial Statements.
In June 2009, the FASB issued ASC105-10, “Generally Accepted Accounting Principles.” ASC105-10 provides for the FASB Accounting Standards Codification (the “Codification”) to become the single official source of authoritative, nongovernmental U.S.conformity with generally accepted accounting principles. The
Codification did not change GAAP but reorganizesCompany considers its financial statements issued when they are widely distributed to users, such as filing with the
literature. ASCSEC.105-1017. Quarterly Financial Data (Unaudited) became effective for the Company for the year ended September 30, 2009. The adoption of this standard did not have an impact on the Company’s financial statements.
The Company has evaluated events subsequent to the balance sheet date (September 30, 2009) through the issue date of thisForm 10-K (November 30, 2009) | | | | | | | | | | | | | | | | |
| | | Quarter Ended | |
| | | December 31 | | | March 31 | | | June 30 | | | September 30 | |
Fiscal 2010: | | | | | | | | | | | | | | | | |
Operating revenues | | $ | 36,330,000 | | | $ | 48,585,000 | | | $ | 61,178,000 | | | $ | 59,179,000 | |
Loss from operations | | $ | (6,720,000 | ) | | $ | (4,330,000 | ) | | $ | (1,571,000 | ) | | $ | (1,952,000 | ) |
Net loss | | $ | (4,216,000 | ) | | $ | (2,706,000 | ) | | $ | (1,019,000 | ) | | $ | (1,411,000 | ) |
Basic loss per common share | | $ | (0.54 | ) | | $ | (0.35 | ) | | $ | (0.13 | ) | | $ | (0.18 | ) |
Diluted loss per common share | | $ | (0.54 | ) | | $ | (0.35 | ) | | $ | (0.13 | ) | | $ | (0.18 | ) |
Fiscal 2011: | | | | | | | | | | | | | | | | |
Operating revenues | | $ | 72,653,000 | | | $ | 78,337,000 | | | $ | 98,033,000 | | | $ | 84,256,000 | |
(Loss) income from operations | | $ | (2,817,000 | ) | | $ | (6,545,000 | ) | | $ | 898,000 | | | $ | 5,138,000 | |
Net (loss) income | | $ | (1,667,000 | ) | | $ | (4,857,000 | ) | | $ | 334,000 | | | $ | 2,944,000 | |
Basic (loss) income per common share | | $ | (0.21 | ) | | $ | (0.62 | ) | | $ | 0.04 | | | $ | 0.38 | |
Diluted (loss) income per common share | | $ | (0.21 | ) | | $ | (0.62 | ) | | $ | 0.04 | | | $ | 0.37 | |
Basic (loss) income per share and concluded that no significant subsequent events have occurred that require recognition in the Financial Statements or disclosure in the Notes to the Financial Statements.
F-21
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
| |
17. | Quarterly Financial Data (Unaudited) |
| | | | | | | | | | | | | | | | | |
| | | Quarter Ended | |
| | | December 31 | | | March 31 | | | June 30 | | | September 30 | |
| |
| Fiscal 2008: | | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 77,599,000 | | | $ | 78,363,000 | | | $ | 84,568,000 | | | $ | 84,396,000 | |
| Income from operations | | $ | 12,217,000 | | | $ | 13,143,000 | | | $ | 16,145,000 | | | $ | 14,922,000 | |
| Net income | | $ | 7,704,000 | | | $ | 8,292,000 | | | $ | 9,707,000 | | | $ | 9,304,000 | |
| Net income per common share | | $ | 1.01 | | | $ | 1.08 | | | $ | 1.27 | | | $ | 1.21 | |
| Net income per common share assuming dilution | | $ | 1.00 | | | $ | 1.07 | | | $ | 1.26 | | | $ | 1.20 | |
| Fiscal 2009: | | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 80,216,000 | | | $ | 64,625,000 | | | $ | 52,319,000 | | | $ | 46,835,000 | |
| Income (loss) from operations | | $ | 12,445,000 | | | $ | 9,951,000 | | | $ | (2,337,000 | ) | | $ | (2,919,000 | ) |
| Net income (loss) | | $ | 7,734,000 | | | $ | 6,170,000 | | | $ | (1,626,000 | ) | | $ | (2,056,000 | ) |
| Net income (loss) per common share | | $ | 1.00 | | | $ | 0.79 | | | $ | (0.21 | ) | | $ | (0.26 | ) |
| Net income (loss) per common share assuming dilution | | $ | 0.99 | | | $ | 0.79 | | | $ | (0.21 | ) | | $ | (0.26 | ) |
Netdiluted (loss) income (loss) per common share (basic) and net income (loss) per common share assuming dilution (diluted) are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal the annual basic and diluted earnings per share.
F-22
Schedule Valuation and Qualifying AccountsSchedule II
Dawson Geophysical Company
| | | | | | | | | | | | | | | | | |
| | | Balance at
| | | Charged to
| | | | | | Balance at
| |
| | | Beginning
| | | Costs and
| | | | | | End of
| |
| | | of Period | | | Expenses | | | Deductions | | | Period | |
| |
| Allowance for doubtful accounts*: | | | | | | | | | | | | | | | | |
| Fiscal Year: | | | | | | | | | | | | | | | | |
| 2009 | | $ | 55,000 | | | $ | 993,000 | | | $ | 515,000 | | | $ | 533,000 | |
| 2008 | | | 176,000 | | | | 32,000 | | | | 153,000 | | | | 55,000 | |
| 2007 | | | 148,000 | | | | 51,000 | | | | 23,000 | | | | 176,000 | |
| Valuation allowance for deferred tax assets: | | | | | | | | | | | | | | | | |
| Fiscal Year: | | | | | | | | | | | | | | | | |
| 2009 | | $ | 70,000 | | | $ | (12,000 | ) | | $ | — | | | $ | 58,000 | |
| 2008 | | | 88,000 | | | | (18,000 | ) | | | — | | | | 70,000 | |
| 2007 | | | 90,000 | | | | (2,000 | ) | | | — | | | | 88,000 | |
| | | | | | | | | | | | | | | | |
| | | Balance at
Beginning
of Period | | | Charged to
Costs and
Expenses | | | Deductions | | | Balance at
End of
Period | |
Allowance for doubtful accounts*: | | | | | | | | | | | | | | | | |
Fiscal Year: | | | | | | | | | | | | | | | | |
2011 | | $ | 639,000 | | | $ | 231,000 | | | $ | 715,000 | | | $ | 155,000 | |
2010 | | | 533,000 | | | | 256,000 | | | | 150,000 | | | | 639,000 | |
2009 | | | 55,000 | | | | 993,000 | | | | 515,000 | | | | 533,000 | |
Valuation allowance for deferred tax assets: | | | | | | | | | | | | | | | | |
Fiscal Year: | | | | | | | | | | | | | | | | |
2011 | | $ | 19,000 | | | $ | (19,000 | ) | | $ | — | | | $ | — | |
2010 | | | 58,000 | | | | (39,000 | ) | | | — | | | | 19,000 | |
2009 | | | 70,000 | | | | (12,000 | ) | | | — | | | | 58,000 | |
| | |
| * | | Deductions related to allowance for doubtful accounts represent amounts that have been deemed uncollectible and written off by the Company. |
F-23
INDEX TO EXHIBITS
| | | | | |
Number | | Exhibit |
| |
| | 3 | .1 | | Second Restated Articles of Incorporation of the Company, as amended (filed on February 9, 2007 as Exhibit 3.1 to the Company’s Quarterly Report onForm 10-Q for the first quarter ended December 31, 2006 (FileNo. 000-10144) and incorporated herein by reference and filed on November 28, 2007 as Exhibit 3.1 to the Company’s Current Report onForm 8-K (FileNo. 000-10144) and incorporated herein by reference). |
| | 3 | .2 | | Amended and Restated Bylaws of the Company (filed on August 7, 2007 as Exhibit 3.2 to the Company’s Quarterly Report onForm 10-Q for the third quarter ended June 30, 2007 (FileNo. 000-10144) and incorporated herein by reference). |
| | 3 | .3 | | Statement of Resolution Establishing Series of Shares of Series A Junior Participating Preferred Stock of the Company (filed on July 9, 2009 as Exhibit 3.1 to the Company’s Current Report onForm 8-K (FileNo. 000-10144) and incorporated herein by reference). |
| | 4 | .1 | | Rights Agreement effective as of July 23, 2009 between the Company and Mellon Investor Services LLC as Rights Agent, which includes as Exhibit A the form of Statement of Resolution Establishing Series of Shares of Series A Junior Participating Preferred Stock setting forth the terms of the Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Stock (filed on July 9, 2009 as Exhibit 4.1 to the Company’s Current Report onForm 8-K (FileNo. 000-10144) and incorporated herein by reference). |
| | 10 | .1† | | Dawson Geophysical Company 2006 Stock and Performance Incentive Plan (the “2006 Plan”), dated November 28, 2006 (filed on January 29, 2007 as Exhibit 10.1 to the Company’s Current Report onForm 8-K (FileNo. 000-10144) and incorporated herein by reference). |
| | 10 | .2† | | Dawson Geophysical Company 2004 Incentive Stock Plan (filed on March 12, 2004 as Exhibit 10.1 to the Company’s Registration Statement onForm S-8 (FileNo. 333-113576) and incorporated herein by reference). |
| | 10 | .3† | | Form of Restricted Stock Agreement for the 2006 Plan (filed on February 11, 2008 as Exhibit 10.3 to the Company’s Quarterly Report onForm 10-Q (FileNo. 000-10144) and incorporated herein by reference). |
| | 10 | .4† | | Form of Stock Option Agreement for the 2006 Plan (filed on February 11, 2008 as Exhibit 10.4 to the Company’s Quarterly Report onForm 10-Q (FileNo. 000-10144) and incorporated herein by reference). |
| | 10 | .5† | | Form of Restricted Stock Agreement for the 2006 Plan (filed on August 6, 2007 as Exhibit 10.1 to the Company’s Current Report onForm 8-K (FileNo. 000-10144) and incorporated herein by reference). |
| | 10 | .6† | | Form of Stock Option Agreement for the 2006 Plan (filed on August 6, 2007 as Exhibit 10.2 to the Company’s Current Report onForm 8-K (FileNo. 000-10144) and incorporated herein by reference). |
| | 10 | .7† | | Description of Profit Sharing Plan (filed on December 3, 2007 as Exhibit 10.1 to the Company’s Current Report onForm 8-K (FileNo. 000-10144) and incorporated herein by reference). |
| | 10 | .8† | | Description of Profit Sharing Plan (filed on September 29, 2008 as Exhibit 10.1 to the Company’s Current Report onForm 8-K (FileNo. 000-10144) and incorporated herein by reference). |
| | 10 | .9† | | Summary of Non-Employee Director Compensation (filed on February 9, 2009 as Exhibit 10.3 to the Company’s Quarterly Report onForm 10-Q (FileNo. 000-10144) and incorporated herein by reference). |
| | 10 | .10 | | Form of Master Geophysical Data Acquisition Agreement (filed on December 11, 2003 as Exhibit 10 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended September 30, 2003 (FileNo. 000-10144) and incorporated herein by reference). |
| | 10 | .11 | | Master Geophysical Data Acquisition Agreement between SandRidge Energy, Inc. and the Company, dated December 19, 2006 (filed on February 9, 2009 as Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q (FileNo. 000-10144) and incorporated herein by reference). |
| | 10 | .12 | | Master Service Contract between Chesapeake Operating, Inc. and the Company, dated December 18, 2003 (filed on February 9, 2009 as Exhibit 10.2 to the Company’s Quarterly Report onForm 10-Q (FileNo. 000-10144) and incorporated herein by reference). |
| | 10 | .13 | | Revolving Line of Credit Loan Agreement, dated June 2, 2009, between the Company and Western National Bank (filed on June 5, 2009 as Exhibit 10.1 to the Company’s Current Report onForm 8-K (FileNo. 000-10144) and incorporated herein by reference). |
| | 10 | .14 | | Security Agreement, dated June 2, 2009, between the Company and Western National Bank (filed on June 5, 2009 as Exhibit 10.2 to the Company’s Current Report onForm 8-K and incorporated herein by reference). |
| | | | |
Number | | | Exhibit |
| |
| | 3 | .1 | | Second Restated Articles of Incorporation of the Company, as amended (filed on February 9, 2007 as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the first quarter ended December 31, 2006 (File No. 000-10144) and incorporated herein by reference and filed on November 28, 2007 as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 000-10144) and incorporated herein by reference). |
| |
| | 3 | .2 | | Second Amended and Restated Bylaws of the Company, as amended (filed on November 23, 2010 as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 (File No. 001-34404) and incorporated herein by reference). |
| |
| | 3 | .3 | | Amendment No. 2 to Second Amended and Restated Bylaws, as amended, of the Company (filed on March 21, 2011 as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-34404) and incorporated herein by reference). |
| |
| | 3 | .4 | | Statement of Resolution Establishing Series of Shares of Series A Junior Participating Preferred Stock of the Company (filed on July 9, 2009 as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 000-10144) and incorporated herein by reference). |
| |
| | 4 | .1 | | Rights Agreement effective as of July 23, 2009 between the Company and Mellon Investor Services LLC as Rights Agent, which includes as Exhibit A the form of Statement of Resolution Establishing Series of Shares of Series A Junior Participating Preferred Stock setting forth the terms of the Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Stock (filed on July 9, 2009 as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 000-10144) and incorporated herein by reference). |
| |
| | 10 | .1† | | Dawson Geophysical Company 2006 Stock and Performance Incentive Plan (the “2006 Plan”), dated November 28, 2006 (filed on January 29, 2007 as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10144) and incorporated herein by reference). |
| |
| | 10 | .2† | | Dawson Geophysical Company 2004 Incentive Stock Plan (filed on March 12, 2004 as Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (File No. 333-113576) and incorporated herein by reference). |
| |
| | 10 | .3† | | Form of Restricted Stock Agreement for the 2006 Plan (filed on February 11, 2008 as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10144) and incorporated herein by reference). |
| |
| | 10 | .4† | | Form of Stock Option Agreement for the 2006 Plan (filed on February 11, 2008 as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10144) and incorporated herein by reference). |
| |
| | 10 | .5† | | Form of Restricted Stock Agreement for the 2006 Plan (filed on August 6, 2007 as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10144) and incorporated herein by reference). |
| |
| | 10 | .6† | | Form of Stock Option Agreement for the 2006 Plan (filed on August 6, 2007 as Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 000-10144) and incorporated herein by reference). |
| |
| | 10 | .7† | | Description of Profit Sharing Plan (filed on December 3, 2007 as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10144) and incorporated herein by reference). |
| |
| | 10 | .8† | | Description of Profit Sharing Plan (filed on September 29, 2008 as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10144) and incorporated herein by reference). |
| |
| | 10 | .9† | | Summary of Non-Employee Director Compensation (filed on February 9, 2009 as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10144) and incorporated herein by reference). |
| | |
Number | | Exhibit |
| |
| 10.10 | | Form of Master Geophysical Data Acquisition Agreement (filed on December 11, 2003 as Exhibit 10 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003 (File No. 000-10144) and incorporated herein by reference). |
Number
| |
| 10.11 | | Master Geophysical Data Acquisition Agreement between SandRidge Energy, Inc. and the Company, dated December 19, 2006 (filed on February 9, 2009 as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10144) and incorporated herein by reference). |
| |
| 10.12 | 23 | .1*Master Service Contract between Chesapeake Operating, Inc. and the Company, dated December 18, 2003 (filed on February 9, 2009 as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10144) and incorporated herein by reference). |
| |
| 10.13† | | Form of Indemnification Agreement with Directors and Officers of the Company (filed on March 21, 2011 as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-34404) and incorporated herein by reference). |
| |
| 10.14 | | Revolving Line of Credit and Term Loan Agreement, dated as of June 30, 2011, between the Company and Western National Bank (filed on August 9, 2011 as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 001-34404) and incorporated herein by reference). |
| |
| 10.15 | | Security Agreement, dated as of June 30, 2011, between the Company and Western National Bank (filed on August 9, 2011 as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q (File No. 001-34404) and incorporated herein by reference). |
| |
| 23.1* | | Consent of Independent Registered Public Accounting Firm. |
| 31 |
.1*31.1* | | Certification of Chief Executive Officer of Dawson Geophysical Company pursuant toRule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. |
| 31 |
.2*31.2* | | Certification of Chief Financial Officer of Dawson Geophysical Company pursuant toRule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. |
| 32 |
.1*32.1* | | Certification of Chief Executive Officer of Dawson Geophysical Company pursuant toRule 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 Release34-47551, this Exhibit is furnished to the SEC and shall not be deemed to be “filed.” |
| 32 |
.2*32.2* | | Certification of Chief Financial Officer of Dawson Geophysical Company pursuant toRule 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 Release34-47551, this Exhibit is furnished to the SEC and shall not be deemed to be “filed.” |
| | |
| **101 | | The following materials from the Company’s Annual Report on Form 10-K for the year ended September 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Balance Sheets at September 30, 2011 and September 30, 2010, (ii) Statements of Operations for the years ended September 30, 2011, 2010 and 2009, (iii) Statements of Stockholders’ Equity and Other Comprehensive Income (Loss) for the years ended September 30, 2011, 2010 and 2009, (iv) Statements of Cash Flows for the years ended September 30, 2011, 2010 and 2009, and (v) Notes to Financial Statements. |
| ** | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections. |
| † | | Identifies exhibit that consists of or includes a management contract or compensatory plan or arrangement. |
