<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
For Quarter Ended June 30, 1998 Commission File number 2-71058
DAWSON GEOPHYSICAL COMPANY
----------------------------
(Exact name of Registrant as specified in its Charter)
TEXAS 75-0970548
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
508 West Wall, Suite 800, Midland, Texas 79701
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 915/684-3000
NONE
- --------------------------------------------------------------------------------
(Former Name, Former Address & Former Fiscal Year if changed since last report)
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 X . No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding at June 30, 1998
-------------------------------- ----------------------------
Common Stock, $.33 1/3 par value 5,356,000 shares
-1-
<PAGE> 2
DAWSON GEOPHYSICAL COMPANY
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Statements of Operations --
Three Months and Nine Months
ended June 30, 1998 and 1997 3
Balance Sheets --
June 30, 1998 and September 30,
1997 4
Statements of Cash Flows --
Nine Months Ended June 30, 1998
and 1997 5
Notes to Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II. Other Information
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues $ 18,647,000 $ 12,520,000 $ 45,991,000 $ 34,304,000
Operating costs:
Operating expenses 11,193,000 8,127,000 30,094,000 22,840,000
General and administrative 478,000 386,000 1,443,000 1,052,000
Depreciation 2,461,000 1,685,000 6,816,000 5,456,000
------------ ------------ ------------ ------------
14,132,000 10,198,000 38,353,000 29,348,000
------------ ------------ ------------ ------------
Income from operations 4,515,000 2,322,000 7,638,000 4,956,000
Other income (expense):
Interest income 209,000 86,000 579,000 167,000
Interest expense -- (111,000) (125,000) (341,000)
Gain on disposal of assets 19,000 3,000 167,000 196,000
Other income 5,000 6,000 28,000 15,000
------------ ------------ ------------ ------------
Income before income tax 4,748,000 2,306,000 8,287,000 4,993,000
Income tax expense:
Current (1,386,000) (622,000) (2,333,000) (1,222,000)
Deferred (275,000) (183,000) (567,000) (523,000)
------------ ------------ ------------ ------------
(1,661,000) (805,000) (2,900,000) (1,745,000)
------------ ------------ ------------ ------------
Net income $ 3,087,000 $ 1,501,000 $ 5,387,000 $ 3,248,000
============ ============ ============ ============
Net income per common share $ .58 $ .36 $ 1.05 $ .78
============ ============ ============ ============
Net income per common share--
assuming dilution $ .57 $ .36 $ 1.04 $ .77
============ ============ ============ ============
Weighted average equivalent shares
outstanding 5,353,582 4,199,247 5,136,652 4,177,432
============ ============ ============ ============
Weighted average equivalent shares
outstanding--assuming
dilution 5,379,341 4,214,035 5,165,082 4,201,552
============ ============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
-3-
<PAGE> 4
DAWSON GEOPHYSICAL COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,473,000 $ 4,774,000
Marketable securities 6,527,000 3,968,000
Accounts receivable 13,104,000 8,724,000
Prepaid expenses 549,000 288,000
----------------- -----------------
Total current assets 22,653,000 17,754,000
----------------- -----------------
Property, plant and equipment 80,036,000 63,267,000
Less accumulated depreciation (33,996,000) (27,460,000)
----------------- -----------------
Net property, plant and equipment 46,040,000 35,807,000
----------------- -----------------
$ 68,693,000 $ 53,561,000
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ -- $ 1,690,000
Accounts payable 1,542,000 3,956,000
Accrued liabilities:
Payroll and other taxes 380,000 566,000
Other 497,000 494,000
----------------- -----------------
Total current liabilities 2,419,000 6,706,000
----------------- -----------------
Long-term debt, less current maturities -- 7,893,000
----------------- -----------------
Deferred income taxes 1,984,000 1,417,000
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;
10,000,000 shares authorized, 5,356,000
and 4,199,250 shares issued and
outstanding 1,785,000 1,400,000
Additional paid-in capital 38,215,000 17,174,000
Retained earnings 24,290,000 18,971,000
----------------- -----------------
Total stockholders' equity 64,290,000 37,545,000
----------------- -----------------
$ 68,693,000 $ 53,561,000
================= =================
</TABLE>
Contingencies (See Note 3)
See accompanying notes to the financial statements.
-4-
<PAGE> 5
DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,387,000 $ 3,248,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 6,816,000 5,456,000
Gain on disposal of assets (167,000) (196,000)
Other 99,000 (3,000)
Deferred income tax expense 567,000 523,000
Change in current assets and liabilities:
Increase in accounts receivable (4,380,000) (2,293,000)
Increase in prepaid expenses (261,000) (145,000)
Decrease in income taxes receivable -- 193,000
Decrease in accounts payable (2,414,000) (519,000)
Decrease in accrued liabilities (183,000) (113,000)
Increase in federal and state income
taxes payable -- 174,000
------------ ------------
Net cash provided by operating activities 5,464,000 6,325,000
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of assets 264,000 288,000
Capital expenditures (17,322,000) (2,340,000)
Proceeds from sale and maturity of
marketable securities 14,993,000 742,000
Investment in marketable securities (17,531,000) (3,377,000)
------------ ------------
Net cash used in investing activities (19,596,000) (4,687,000)
------------ ------------
Cash flows from financing activities:
Principal payments on debt (9,583,000) (643,000)
Issuance of common stock 21,371,000 --
Proceeds from exercise of stock options 43,000 157,000
------------ ------------
Net cash provided (used) by financing activities 11,831,000 (486,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,301,000) 1,152,000
Cash and cash equivalents at beginning of period 4,774,000 1,493,000
------------ ------------
Cash and cash equivalents at end of period $ 2,473,000 $ 2,645,000
============ ============
</TABLE>
See accompanying notes to the financial statements.
-5-
<PAGE> 6
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS
1. OPINION OF MANAGEMENT
Although the information furnished is unaudited, in the opinion of
management of the Registrant, the accompanying financial statements reflect all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the financial condition and results of operations for the
periods presented. The results of operations for the three months and the nine
months ended June 30, 1998, are not necessarily indicative of the results to be
expected for the fiscal year.
2. NOTES PAYABLE
In April 1997, the Company entered into a loan agreement, as amended
(the "Loan Agreement"), with a bank. The Loan Agreement consists of (1) a
revolving line of credit of $6,000,000 which matures on April 15, 1999, (2) a
term note in the aggregate principal amount of $6,000,000 bearing interest at
the bank's prime rate and which matures on March 25, 2003 and (3) a term note in
the aggregate principal amount of $5,000,000 bearing interest at the prime rate
as published in The Wall Street Journal and which matures on April 15, 2003. The
notes are secured by eligible accounts receivable and equipment purchased from
loan proceeds.
On November 25, 1997, the Company repaid all outstanding principal and
interest on the two Term Promissory Notes which have no reborrowing capacity.
The Company has not utilized the revolving line of credit.
3. CONTINGENCIES
The Company is a defendant in two lawsuits pending in the 112th and
83rd District Courts of Pecos County, Texas relating to a July 1995 accident
involving a van owned by the Company which was used to transport employees to
various job sites and a non-Company owned vehicle. The accident resulted in the
deaths of four Company employees who were passengers in such van. The Company is
one of several named defendants in such suits. Other named defendants include
the estate of the deceased driver of such van, who was an employee of the
Company, the driver of such non-Company owned vehicle, who was then an employee
of the Company, the owner of such vehicle, and Ford Motor Company, the
manufacturer of the Company van involved in such accident. In general, the
claims against the Company include allegations of negligence, gross negligence
and/or intentional tort as a result of, among other things, the Company's
alleged failure to provide safe transportation for its employees and to properly
select, train and supervise the deceased driver of such van. The plaintiffs in
such suits are seeking actual damages from the defendants of $15.5 million,
additional unspecified actual damages, prejudgment and post-judgment interest
and costs of suit as well as exemplary and punitive damages in an amount not to
exceed four times the amount of actual damages. The Company believes that it has
meritorious defenses to the
-6-
<PAGE> 7
Notes to Financial Statements (continued)
claims asserted against it in such suits and it intends to continue to
vigorously defend itself against such claims. In addition, the Company believes
that it has approximately $11 million of liability insurance coverage to provide
against an unfavorable outcome. Due to the uncertainties inherent in litigation,
no assurance can be given as to the ultimate outcome of such suits or the
adequacy or availability of the Company's liability insurance to cover the
damages, if any, which may be assessed against the Company is such suits. A
judgment awarding plaintiffs an amount significantly exceeding the Company's
available insurance coverage could have a material adverse effect on the
Company's financial condition, results of operations and liquidity.
The Company is party to other legal actions arising in the ordinary
course of its business, none of which management believes will result in a
material adverse effect on the Company's financial position or results of
operation, as the Company believes it is adequately insured.
4. PUBLIC OFFERING
On November 21, 1997, the Company completed an offering of 1,150,000
shares. The proceeds of the offering were approximately $21,371,000 after
deducting costs payable by the Company.
5. NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income and numerator for basic
and diluted net income per
common share-income available
to common stockholders $3,087,000 $1,501,000 $5,387,000 $3,248,000
---------- ---------- ---------- ----------
Denominator:
Denominator for basic net income
per common share-weighted
average common shares 5,353,582 4,199,247 5,136,652 4,177,432
Effect of dilutive securities-
employee stock options 25,759 14,788 28,430 24,120
---------- ---------- ---------- ----------
Denominator for diluted net
income per common share-
adjusted weighted average
common shares and assumed
conversions 5,379,341 4,214,035 5,165,082 4,201,552
---------- ---------- ---------- ----------
Basic net income per common share $ .58 $ .36 $ 1.05 $ .78
========== ========== ========== ==========
Diluted net income per common
share $ .57 $ .36 $ 1.04 $ .77
========== ========== ========== ==========
</TABLE>
-7-
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The results of operations for the three months ended June 30, 1998 are
indicative of near-perfect operating conditions along with continued strong
demand for the Company's 3-D seismic services. Hot and dry weather, favorable
permitting and relatively large prospects contributed to minimal down time and
optimal operating results. As the Company continues to enjoy favorable weather
during the fourth quarter of fiscal 1998, it is experiencing typical transitions
as crews complete one prospect and move to another. In May 1998, a 3,100-channel
Input/Output System Two Remote Recording System (RSR) became productive,
replacing the Halliburton MDS-18X recording system. With this upgrade the
Company operates four Input/Output System Two conventional cable connected
telemetry systems and two RSR systems. Capital expenditures for fiscal 1998 of
$17,322,000 are comprised of the system upgrade, additional data channels for
the existing crews, automotive units, and peripheral equipment. In November
1997, the Company completed a secondary public offering of 1,150,000 common
shares with net proceeds of $21,371,000. In reviewing the Company's financial
statements it should be noted that quarterly fluctuations in the Company's
results of operations can occur due to weather, land use permitting and other
factors.
RESULTS OF OPERATIONS
The Company's operating revenues for the first nine months of 1998 totaled
$45,991,000 versus $34,304,000 for the same period of fiscal 1997, an increase
of 34.1%. For the three months ended June 30, 1998, operating revenues totaled
$18,647,000 versus $12,520,000 for the same period of fiscal 1997, an increase
of 48.9%. The increase for the nine-month period reflects the Company's added
production capacity in response to continued strong demand for 3-D seismic
services. In August 1997, the Company added its first RSR system to bring the
number of crews to six. To further complement capacity, the Company has
continually added channels to each of its crews. The increase in the quarter
ended June 30, 1998 versus the same period of fiscal 1997 reflects the
near-perfect conditions described above in the Overview.
Operating expenses for the nine months ended June 30, 1998 totaled $30,094,000,
an increase of $7,254,000, or 31.8%, over the same period of fiscal 1997. For
the quarter ended June 30, 1998, operating expenses increased $3,066,000, or
37.7%. Operating expenses increased primarily as a result of increased personnel
and other expenses associated with equipment acquisitions and technological
upgrades.
General and administrative expenses for the nine months ended June 30, 1998
totaled $1,443,000, an increase of $391,000 from the same period of fiscal 1997.
For the quarter ended June 30, 1998, general and administrative expenses totaled
$478,000, an increase of $92,000 from the same quarter of fiscal 1997. The
increase primarily reflects
8
<PAGE> 9
additional personnel required to support expanding operations. Due to the
Company's significant growth in recent years, the office building occupied since
1960 became outgrown, and the functions performed in that building have been
moved to a facility that accommodates the Company's continued growth. General
and administrative expenses totaled 3.1% of operating revenues for the nine
months ended June 30, 1998 as well as for the same period of the prior year.
Depreciation for the nine months ended June 30, 1998 totaled $6,816,000, an
increase of $1,360,000 from the same period of fiscal 1997. For the quarter
ended June 30, 1998, depreciation increased $776,000, or 46.1%. Depreciation
increased as a result of the capital expansion discussed below in "Liquidity and
Capital Resources."
Total operating costs for the first nine months of fiscal 1998 totaled
$38,353,000, an increase of 30.7%, from the same period of fiscal 1997 due to
the factors described above. For the quarter ended June 30, 1998, operating
costs increased 38.6% from the same period of the prior year. These increases
are consistent with the high proportion of relatively fixed total operating
costs (including personnel costs and depreciation) in conjunction with the
addition of the Company's sixth crew in August 1997. Income from operations of
$4,515,000 represents 24.2% of revenues for the three months ended June 30, 1998
as compared to a ratio of 18.5% for the same period of the prior year. For the
nine-month periods of fiscal years 1998 and 1997, the ratios of income from
operations to revenues are 16.6% and 14.4% respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash provided by operating activities for the nine months ended June 30,
1998 of $5,464,000 as compared to $6,325,000 for the same period of the prior
year is a decrease of $861,000. The net decrease is due to fluctuations in
working capital components as net income and depreciation increased for the
first nine months of fiscal 1998 as compared to the same period of fiscal 1997.
The increase in accounts receivable reflects increased activity, and accounts
receivable are considered collectible.
Net cash used in investing activities increased to $19,596,000 from $4,687,000
resulting from investment of offering proceeds and increased capital
expenditures in the first nine months of fiscal 1998 as compared to the same
period of fiscal 1997.
The cash flows provided by financing activities for the fiscal 1998 represent
the net of the offering proceeds reduced by the retirement of debt.
Capital Expenditures
The Company continually strives to supply market demand with technologically
advanced 3-D data acquisition recording systems and leading edge data processing
capabilities. In April of 1998 the Company announced the purchase of a
3,100-channel
9
<PAGE> 10
Input/Output System Two Remote Recording System to replace the Halliburton
MDS-18X recording system. The approximate cost of the new system is $5,000,000.
Capital expenditures to date of $17,322,000 include the new system as well as
additions and replacements of cables and geophones, vehicles and other
peripheral equipment. For the remainder of fiscal 1998, the Company anticipates
the purchase of seismic data processing hardware and software, ancillary seismic
data acquisition instrumentation, and leasehold improvements for the move of its
corporate office. Depreciation has increased as a new crew has been placed into
service each year for the past several years.
Capital Resources
The Company believes that its capital resources including its holdings of
marketable securities, the availability of bank borrowings, and cash flow from
operations are adequate to meet its current operational needs and finance
capital needs as determined by market demand and technological developments.
Year 2000
The Company utilizes software and technologies throughout its operations that
may be affected by the date change in the year 2000 (Year 2000 Issue). An
assessment of the systems that will be affected by the Year 2000 Issue is
underway. The Company does not believe the costs related the Year 2000 Issue
will materially impact its results of operations. However, there can be no
guarantee that the systems of other companies, on which the Company's systems
rely, will be timely converted or that a failure to convert by another company
or a conversion that is incompatible with the Company's systems would not have a
material adverse effect on the Company.
10
<PAGE> 11
SIGNATURE
Pursuant to the requirements 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.
DAWSON GEOPHYSICAL COMPANY
(REGISTRANT)
By: /s/ L. Decker Dawson
-----------------------------------
L. Decker Dawson
President
/s/ Christina W. Hagan
-----------------------------------
Christina W. Hagan
Vice President and Chief Financial
Officer
DATE: August 10, 1998
---------------------------------
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
27 Financial Data Schedule
27.1 Restated Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,473,000
<SECURITIES> 6,527,000
<RECEIVABLES> 13,104,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,653,000
<PP&E> 80,036,000
<DEPRECIATION> (33,996,000)
<TOTAL-ASSETS> 68,693,000
<CURRENT-LIABILITIES> 2,419,000
<BONDS> 0
0
0
<COMMON> 1,785,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 68,693,000
<SALES> 45,991,000
<TOTAL-REVENUES> 45,991,000
<CGS> 38,353,000
<TOTAL-COSTS> 38,353,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (125,000)
<INCOME-PRETAX> 8,287,000
<INCOME-TAX> (2,900,000)
<INCOME-CONTINUING> 5,387,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,387,000
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.04
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1997
<PERIOD-END> JUN-30-1997 MAR-31-1997
<CASH> 2,645,000 1,249,000
<SECURITIES> 3,680,000 3,632,000
<RECEIVABLES> 8,454,000 7,240,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 15,072,000 12,398,000
<PP&E> 55,225,000 54,396,000
<DEPRECIATION> (25,550,000) (23,697,000)
<TOTAL-ASSETS> 44,747,000 43,097,000
<CURRENT-LIABILITIES> 3,182,000 3,001,000
<BONDS> 0 0
0 0
0 0
<COMMON> 1,400,000 1,400,000
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 36,220,000 34,719,000
<SALES> 34,304,000 21,784,000
<TOTAL-REVENUES> 34,304,000 21,784,000
<CGS> 29,348,000 19,150,000
<TOTAL-COSTS> 29,348,000 19,150,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (341,000) (230,000)
<INCOME-PRETAX> 4,993,000 2,687,000
<INCOME-TAX> (1,745,000) (940,000)
<INCOME-CONTINUING> 3,248,000 1,747,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,248,000 1,747,000
<EPS-PRIMARY> .78 .42
<EPS-DILUTED> .77 .42
</TABLE>
