SEC Filing | Dawson Geophysical

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 March 31, 1999 -------------- 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 March 31, 1999 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 March 31, 1999 - -------------------------------- ----------------------------- Common Stock, $.33 1/3 par value 5,406,794 shares -1-

2 DAWSON GEOPHYSICAL COMPANY INDEX Page No. -------- Part I. Financial Information: Statements of Operations -- Three Months and Six Months ended March, 1999 and 1998 3 Balance Sheets -- March 31, 1999 and September 30, 1998 4 Statements of Cash Flows -- Six Months Ended March 31, 1999 and 1998 5 Notes to Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. Other Information -2-

3 PART I. FINANCIAL INFORMATION DAWSON GEOPHYSICAL COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Six Months Ended March 31 March 31 -------------------------- ---------------------- 1999 1998 1999 1998 ---------- ----------- ----------- ------------ Operating revenues $6,053,000 $13,557,000 $14,071,000 $27,344,000 ---------- ----------- ----------- ----------- Operating costs: Operating expenses 5,308,000 9,808,000 11,741,000 18,901,000 General and administrative 494,000 483,000 1,040,000 965,000 Depreciation 2,698,000 2,244,000 5,409,000 4,355,000 ---------- ---------- ----------- ----------- 8,500,000 12,535,000 18,190,000 24,221,000 ---------- ---------- ----------- ----------- Income (loss) from operations (2,447,000) 1,022,000 (4,119,000) 3,123,000 Other income (expense): Interest income 212,000 223,000 398,000 370,000 Interest expense - - - (125,000) Gain (loss) on disposal of assets (23,000) 3,000 (12,000) 148,000 Other income 36,000 8,000 42,000 23,000 ---------- ---------- ----------- ---------- Income (loss) before income tax (2,222,000) 1,256,000 (3,691,000) 3,539,000 Income tax benefit (expense): Current 845,000 (281,000) 1,461,000 (947,000) Deferred (84,000) (158,000) (205,000) (292,000) ---------- ---------- ---------- ---------- 761,000 (439,000) 1,256,000 (1,239,000) ---------- ---------- ----------- ---------- Net income (loss) $(1,461,000) $ 817,000 $(2,435,000) $ 2,300,000 =========== ========== =========== =========== Net income (loss) per common share $(.27) $.15 $(.45) $.46 =========== =========== =========== ========== Net income (loss) per common share- assuming dilution $(.27) $.15 $(.45) $.45 =========== ========== ========== ========== Weighted average equivalent common shares outstanding 5,406,416 5,351,000 5,387,397 5,028,187 =========== =========== =========== ========== Weighted average equivalent common shares outstanding-assuming dilution 5,406,416 5,376,636 5,387,397 5,057,918 =========== =========== =========== ========== See accompanying notes to the financial statements. -3-

4 DAWSON GEOPHYSICAL COMPANY BALANCE SHEETS March 31 1999 September 30, 1998 -------------- ------------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $11,966,000 $ 5,745,000 Short-term investments 6,486,000 6,515,000 Accounts receivable 6,460,000 11,821,000 Income taxes receivable 1,484,000 1,050,000 Prepaid expenses 392,000 416,000 ----------- ----------- Total current assets 26,788,000 25,547,000 ----------- ----------- Property, plant and equipment 72,084,000 73,584,000 Less accumulated depreciation (31,617,000) (27,672,000) ----------- ----------- Net property, plant and equipment 40,467,000 45,912,000 ----------- ----------- $67,255,000 $71,459,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 577,000 $ 1,766,000 Accrued liabilities: Payroll costs and other taxes 373,000 635,000 Other 31,000 810,000 ----------- ----------- Total current liabilities 981,000 3,211,000 ----------- ----------- Deferred income taxes 2,811,000 2,606,000 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, 5,406,794 and 5,361,000 shares issued and outstanding in 1999 and 1998, respectively 1,802,000 1,787,000 Additional paid-in capital 38,497,000 38,256,000 Retained earnings 23,164,000 25,599,000 ----------- ----------- Total stockholders' equity 63,463,000 65,642,000 ----------- ----------- $67,255,000 $71,459,000 =========== =========== Contingencies (See Note 3) See accompanying notes to the financial statements. -4-

5 DAWSON GEOPHYSICAL COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended March 31 -------------------------------- 1999 1998 ----------- ------------ Cash flows from operating activities: Net income (loss) $ (2,435,000) $ 2,300,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 5,409,000 4,355,000 Loss (gain) on disposal of assets 12,000 (148,000) Non-cash interest income (11,000) (31,000) Non-cash compensation 256,000 -- Deferred income taxes 205,000 292,000 Other 160,000 83,000 Change in current assets and liabilities: Decrease (increase) in accounts receivable 5,361,000 (1,591,000) Decrease (increase) in prepaid expenses 24,000 (267,000) Increase in income taxes receivable (434,000) (520,000) Decrease in accounts payable (1,189,000) (2,368,000) Decrease in accrued liabilities (1,041,000) (229,000) ------------ ----------- Net cash provided by operating activities 6,317,000 1,876,000 ------------ ----------- Cash flows from investing activities: Proceeds from disposal of assets 16,000 240,000 Capital expenditures (134,000) (6,154,000) Proceeds from maturity of short term investments 1,000,000 5,500,000 Investment in short term investments (978,000) (14,523,000) ------------ ----------- Net cash used in investing activities (96,000) (14,937,000) ------------ ----------- Cash flows from financing activities: Principal payments on debt -- (9,583,000) Proceeds from exercise of stock options -- 7,000 Issuance of common stock -- 21,371,000 ------------ ----------- Net cash provided by financing activities -- 11,795,000 ------------ ----------- Net increase (decrease) in cash and cash equivalents 6,221,000 (1,266,000) Cash and cash equivalents at beginning of period 5,745,000 4,774,000 ------------ ------------ Cash and cash equivalents at end of period $ 11,966,000 $ 3,508,000 ============ ============ See accompanying notes to the financial statements. -5-

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 six months ended March 31, 1999, 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 matured 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 did not utilize 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 (respectively, Cause No. 8812, Ernestine Bernal, et al. Vs. Javier Antonio Orona, et al.; and Cause No. P5565-83-CV, Carla Jaquez, et al. Vs. Javier Antonio, et al.) 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 claims asserted against it in such suits and it intends to -6-

7 Notes to Financial Statements (continued) vigorously defend itself against such claims. In addition, the Company believes that it has approximately $11 million of liability insurance coverage to provided against an unfavorable outcome. Such suits are currently in the discovery stage and the Company currently has pending before the court a motion for summary judgment in Cause No. 8812 requesting that the Company be dismissed from such suit based upon various legal theories. Such motion has not yet been heard by the court. 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 in 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. NET INCOME PER COMMON SHARE The following table sets forth the computation of basic and diluted net income per common share: Six Months Ended Three Months Ended March 31 March 31 -------------------------- --------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Numerator: Net income (loss) and numerator for basic and diluted net income per common share-income available to common stockholders $(2,435,000) $ 2,300,000 $(1,461,000) $ 817,000 ----------- ----------- ----------- ----------- Denominator: Denominator for basic net income per common share-weighted average common shares 5,387,397 5,028,187 5,406,416 5,351,000 Effect of dilutive securities- employee stock options -- 29,731 -- 25,636 ----------- ----------- ----------- ----------- Denominator for diluted net income per common share- adjusted weighted average common shares and assumed conversions 5,387,397 5,057,918 5,406,416 5,376,636 ----------- ----------- ----------- ----------- Net income (loss) per common share $ (.45) $ .46 $ (.27) $ .15 =========== =========== =========== =========== Net income (loss) per common share--assuming dilution $ (.45) $ .45 $ (.27) $ .15 =========== =========== =========== =========== -7-

8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's financial statements. In addition, in reviewing the Company's financial statements it should be noted that the Company's revenues directly relate to oil and gas exploration and production activity and fluctuations in the Company's results of operations can occur due to weather, land use permitting and other factors. Decreases in oil and gas activities have adversely affected the demand for the Company's services and the Company's results of operations. This report may contain certain forward-looking information regarding the Company, including projections, estimates, forecasts, plans and objectives. Although management believes that all such statements are based upon reasonable assumptions, no assurance can be given that the actual results will not differ materially from those contained in such forward-looking statements. Overview The revenues of the Company continue to be severely impacted due to low crude oil prices. Demand for the Company's services is expected to be directly related to crude oil prices; however, the Company is prepared for some delay in demand for its services as crude oil prices recover. The Company has taken cost reduction measures in response to decreased demand for its services. Results of Operations The Company's operating revenues for the first six months of 1999 totaled $14,071,000 versus $27,344,000 for the same period of fiscal 1998, a decrease of 49%. For the three months ended March 31, 1999, operating revenues totaled $6,053,000 versus $13,557,000 for the same period of fiscal 1998, a decrease of 55%. Demand for the Company's services has been negatively impacted by low crude oil prices. During the quarter ended December 31, 1998, the Company reduced the number of operating crews from six to three. The Company operated three crews throughout the quarter ended March 31, 1999. Operating expenses for the six months ended March 31, 1999 totaled $11,741,000, a decrease of 38% from the same period of fiscal 1998. For the quarter ended March 31, 1999, operating expenses decreased from $9,808,000 to $5,308,000, or 46%. Operating expenses decreased as a result of decreased demand for the Company's services. -8-

9 Additional cost reduction measures, such as employee layoffs and salary reductions, were implemented in January 1999. The Company has reduced the number of employees from 377 at September 30, 1998 to 191 at March 31, 1999. The Company has retained key field personnel in anticipation of increased demand. General and administrative expenses for the six months ended March 31, 1999 totaled $1,040,000, an increase of 8% from the same period of fiscal 1998. For the quarter ended March 31, 1999, general and administrative expenses totaled $494,000, an increase of $11,000, or 2%, over the same period of fiscal 1998. The increase reflects personnel and other expenses added throughout fiscal 1998 that were required to support expanding operations. Cost reduction measures were implemented in January 1999 to reduce general and administrative expenses. Rent expense is also reflected in the six month period and the quarter ended March 31, 1999 as the office building owned and occupied since 1960 became outgrown, and the functions performed in that building were moved to a more accommodating, leased facility in July 1998. Depreciation for the six months ended March 31, 1999 totaled $5,409,000, an increase of $1,054,000 from the same period of fiscal 1998. For the quarter ended March 31, 1999, depreciation increased $454,000. Depreciation continued to increase as a result of capital expansion during fiscal 1998. See the discussed below in "Liquidity and Capital Resources." Total operating costs for the first six months of fiscal 1999 totaled $18,190,000, a decrease of 25%, from the same period of fiscal 1998 due to the factors described above. For the quarter ended March 31, 1999, operating costs decreased 32%. The 49% decrease of revenues as compared to the 25% decrease of total operating costs for the six months ended March 31, 1999 reflects the high proportion of relatively fixed total operating costs (including personnel costs of active crews and depreciation costs) inherent in the Company. Liquidity and Capital Resources Cash Flows Net cash provided by operating activities of $6,317,000 for the six months ended March 31, 1999 reflects decreases in accounts receivable and current liabilities which occurred due to reduced revenues and cost cutting measures. The Company historically has not had need to establish a reserve for bad debts. Accounts receivable that are determined uncollectible will be recognized in the period first determined to be uncollectible. The increase in income taxes receivable in fiscal 1999 is a result of the Company's recognition of a tax benefit generated by the net loss for the six month period ended March 31, 1999. -9-

10 Net cash used in investing activities decreased to $96,000 from $14,937,000 resulting from significantly decreased capital expenditures in fiscal 1999 as compared to fiscal 1998; and, in fiscal 1998, the Company invested proceeds from the November 1997 public offering in U.S. Treasury instruments. The cash flows provided by financing activities for the six month period ended March 31, 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. Depreciation has increased as a new crew has been placed into service each year for the past several years. Capital expenditures for fiscal 1999 are not anticipated to be material. The Company will maintain equipment in and out of service in anticipation of increased future demand of the Company's services. Capital Resources The Company believes that its capital resources including its short-term investments 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. Litigation The Company is a defendant in two lawsuits relating to a July 1995 accident involving a van owned by the Company in which four Company employees died. The Company believes that it has meritorious defenses to the claims asserted against it in such suits. Further, while the plaintiffs seek damages in excess of the Company's liability insurance policies, the Company believes that its liability insurance should provide adequate coverage of the damages, if any, which may be assessed against the Company in such litigation. 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 any such damages. 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. Year 2000 The Company utilizes software and technologies throughout its operations that may be vulnerable to the date change in the year 2000. Identification, assessment, and in some -10-

11 cases, replacement of equipment that may be affected by the year 2000 is underway. Software controlled by the Company, including its propriety seismic processing package, has been tested successfully. Replacements and upgrades have not been accelerated by the year 2000 issue and do not represent costs in addition to normal operating expenditures. The Company has begun communications with its significant suppliers to determine if those parties have appropriate plans to remedy year 2000 issues when their systems interface with the Company's systems or may otherwise impact the operations of the Company. 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. To date, the Company has spent approximately $20,000 primarily in the assessment of and testing for year 2000 compliance. Assessment will continue throughout fiscal 1999, with an additional estimated cost of $30,000. Although the Company is not aware of any material operational issues, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the necessary systems and changes to address the year 2000. A potential source of risk includes, but is not limited to, the inability of principal suppliers to be year 2000 compliant, which could result in an interruption of the Company's services. The Company currently does not have a formal contingency plan. If unforeseen problems are encountered that relate to the year 2000, possible solutions will be evaluated and the most efficient will be enacted. -11-

12 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 Chief Financial Officer DATE: April 23, 1999 -------------- -12-

13 INDEX TO EXHIBITS Exhibit No. Description ----------- ----------- 27 Financial Data Schedule

5 3-MOS SEP-30-1999 MAR-31-1999 11,966,000 6,486,000 6,460,000 0 0 26,788,000 72,084,000 (31,617,000) 67,255,000 981,000 0 0 0 1,802,000 61,661,000 67,255,000 14,071,000 14,071,000 18,190,000 18,190,000 0 0 0 (3,691,000) 1,256,000 (2,435,000) 0 0 0 (2,435,000) (.45) (.45)