1
EXHIBIT 13
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. Sustained declines in crude oil prices have negatively impacted the
profitability of our clients during the past year. This situation combined with
inclement weather have negatively impacted the Company's revenues and earnings
during the first quarter of fiscal 1999. The Company anticipates reduced
utilization levels until demand for its services increases.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1997
The Company's operating revenues increased 27.3% to $61,400,000 in fiscal
year 1998. The increase is due to the Company's added production capacity in
response to demand for 3-D seismic services. In the fourth quarter of fiscal
1997 the Company placed a new crew into service. In May 1998, a 3,100-channel
Input/Output System Two Remote System Recorder became productive, replacing the
Halliburton MDS-18X recording system. The Company has increased capacity on each
of its existing six crews by adding channels.
Operating expenses increased 24.9% in fiscal 1998 as compared to fiscal
1997 as a result of increased personnel and other expenses associated with
equipment acquisitions and technological upgrades.
General and administrative expenses for fiscal 1998 totaled $1,931,000,
an increase of $454,000 from fiscal 1997. The increase reflects additional
personnel required to support expanding operations. Due to the Company's
significant growth in recent years, the office building occupied since 1960 had
been outgrown, and the functions performed in that building have been moved to a
more accommodating facility. General and administrative expenses totaled 3.1% of
operating revenues for the fiscal years of 1998 and 1997.
Depreciation for fiscal 1998 totaled $9,472,000, an increase of 29.4%
from fiscal 1997. Depreciation continues to increase as a result of the capital
expansion discussed below in "Liquidity and Capital Resources."
Total operating costs for fiscal 1998 totaled $51,729,000, an increase of
25.9% over fiscal 1997 due to the factors described above. Income from
operations in fiscal 1998 increased to $9,671,000, 15.8% of revenues, from
$7,136,000, 14.8% of revenues, in fiscal 1997. This increase is the direct
result of the Company's operating expenses being relatively fixed as compared to
revenue trends. Because of the high proportion of relatively fixed total
operating costs (including personnel costs for active crews and depreciation
costs), income from operations in fiscal 1998 reflects the benefit of efficient
production with steady demand through fiscal 1998.
The Company's effective tax rate for fiscal 1998 is 36.4% as compared to
35.8% for fiscal 1997. These rates reflect the effects of federal and state
income taxes over the periods reported.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1996
The Company's operating revenues increased 43.9% from $33,518,000 for
fiscal 1996 to $48,227,000 for fiscal 1997. The increase in revenues is
primarily due to increased capacity and improved efficiency resulting from
fiscal 1996 capital expenditures. The fiscal 1996 capital expenditures consisted
of the addition of a fifth crew in the third quarter combined with additional
channel capacity of the existing crews and additional vibrator energy source
units. During the fourth quarter of fiscal 1997, the Company placed a sixth crew
into service.
Operating expense increased 35.9% in 1997 as compared to 1996 as a result
of adding a fifth 3-D seismic crew in fiscal 1996, as well as increased
personnel and other expenses associated with equipment additions and
technological upgrades made primarily during the third quarter of fiscal 1996.
General and administrative expenses for fiscal 1997 totaled $1,477,000,
an increase of $178,000 from fiscal 1996. The increase for fiscal year 1997 was
primarily due to timing adjustments of certain expenses. General and
administrative expenses totaled 3.1% of operating revenues for fiscal 1997
versus 3.9% for fiscal 1996.
12
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Total operating costs for fiscal 1997 totaled $41,091,000, an increase of
33.1% over fiscal 1996 due to the factors described above. Income from
operations in fiscal 1997 increased to $7,136,000, 14.8% of revenues, from
$2,638,000, 7.9% of revenues, in fiscal 1996. As in fiscal 1998, this increase
reflects the Company's operating expenses being relatively fixed as compared to
revenue trends.
Interest is paid monthly at prime rates on the principal of the term
notes described below in "Liquidity and Capital Resources -- Loan Agreement".
The Company's effective tax rate for 1997 is 35.8% as compared to 32.0%
for 1996. These rates reflect the effects of federal and state income taxes over
the periods reported.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash provided by operating activities increased to $11,307,000 in
fiscal 1998 as compared to $10,335,000 in fiscal 1997. The net increase is due
to the 45% increase in net income in fiscal 1998 from fiscal 1997, the increase
in depreciation, and fluctuations in working capital components. The increase in
accounts receivable reflects increased activity, and accounts receivable are
considered collectible.
Net cash used in investing activities increased to $22,210,000 from
$11,079,000 resulting from increased capital expenditures in fiscal 1998 as
compared to fiscal 1997. In addition the Company invested certain proceeds from
the November 1997 public offering in U.S. Treasury instruments.
The cash flows provided by financing activities for 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 Input/Output System Two Remote System Recorder to
replace the Halliburton MDS-18X recording system. The approximate cost of the
new system was $5,000,000. Capital expenditures in fiscal 1998 include the new
system as well as additions and replacements of cables and geophones, vehicles,
other data acquisition peripheral equipment, seismic data processing hardware
and software, 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 expenditures for fiscal 1999 are expected to
be minimal in response to the anticipated reduced demand for the Company's
services.
Loan Agreement
The Company is a party to a loan agreement, as amended (the "Loan
Agreement"), with Norwest Bank Texas, N.A. ("Norwest"). The Loan Agreement
consists of (1) a revolving line of credit of $6,000,000 which matures April 15,
1999, (2) a term note in the aggregate principal amount of $6,000,000 bearing
interest at Norwest's prime rate and which matures on March 15, 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 the 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.
13
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Capital Resources
The Company believes that its capital resources, including its short-term
investments, 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.
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 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
"Reporting Comprehensive Income". FAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. FAS No. 130 is effective for interim
and annual periods beginning after December 15, 1997. The Company plans to adopt
FAS No. 130 for the period ended December 31, 1999.
FORWARD LOOKING STATEMENTS
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.
14
4
INDEPENDENT AUDITORS' REPORT
[KPMG LOGO] Peat Marwick LLP
The Board of Directors and Stockholders
Dawson Geophysical Company:
We have audited the accompanying balance sheets of Dawson Geophysical
Company as of September 30, 1997 and 1998, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1997 and 1998, and the results of its operations and
its cash flows for each of the years in the three-year period ended September
30, 1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Midland, Texas
October 30, 1998
15
5
BALANCE SHEETS
September 30, 1998 and 1997
1998 1997
ASSETS
- --------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 5,745,000 $ 4,774,000
Short-term investments 6,515,000 3,968,000
Accounts receivable 11,821,000 8,724,000
Income taxes receivable 1,050,000 --
Prepaid expenses 416,000 288,000
- --------------------------------------------------------------------------------------
Total current assets 25,547,000 17,754,000
- --------------------------------------------------------------------------------------
Property, plant and equipment 73,584,000 63,267,000
Less accumulated depreciation (27,672,000) (27,460,000)
- --------------------------------------------------------------------------------------
Net property, plant and equipment 45,912,000 35,807,000
- --------------------------------------------------------------------------------------
$ 71,459,000 $ 53,561,000
======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ -- $ 1,690,000
Accounts payable 1,766,000 3,956,000
Accrued liabilities:
Payroll costs and other taxes 635,000 566,000
Other 810,000 494,000
- --------------------------------------------------------------------------------------
Total current liabilities 3,211,000 6,706,000
- --------------------------------------------------------------------------------------
Long-term debt, less current maturities -- 7,893,000
Deferred income taxes 2,606,000 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, 5,361,000
and 4,199,250 shares issued and outstanding
in 1998 and 1997, respectively 1,787,000 1,400,000
Additional paid-in capital 38,256,000 17,174,000
Retained earnings 25,599,000 18,971,000
- --------------------------------------------------------------------------------------
Total stockholders' equity 65,642,000 37,545,000
- --------------------------------------------------------------------------------------
Contingencies (see note 11)
$ 71,459,000 $ 53,561,000
======================================================================================
See accompanying notes to the financial statements.
16
6
STATEMENTS OF OPERATIONS
Years Ended September 30, 1998, 1997 and 1996
1998 1997 1996
- --------------------------------------------------------------------------------------------------
Operating revenues $ 61,400,000 $ 48,227,000 $ 33,518,000
Operating costs:
Operating expenses 40,326,000 32,293,000 23,763,000
General and administrative 1,931,000 1,477,000 1,299,000
Depreciation 9,472,000 7,321,000 5,818,000
- --------------------------------------------------------------------------------------------------
51,729,000 41,091,000 30,880,000
- --------------------------------------------------------------------------------------------------
Income from operations 9,671,000 7,136,000 2,638,000
Other income (expense):
Interest income 720,000 260,000 253,000
Interest expense (125,000) (486,000) (144,000)
Gain on disposal of assets 134,000 196,000 11,000
Other 25,000 10,000 2,000
- --------------------------------------------------------------------------------------------------
Income before income tax 10,425,000 7,116,000 2,760,000
Income tax expense:
Current 2,607,000 1,738,000 599,000
Deferred 1,190,000 808,000 273,000
- --------------------------------------------------------------------------------------------------
3,797,000 2,546,000 872,000
- --------------------------------------------------------------------------------------------------
Net income $ 6,628,000 $ 4,570,000 $ 1,888,000
==================================================================================================
Net income per common share $ 1.27 $ 1.09 $ .45
==================================================================================================
Net income per common share-assuming dilution $ 1.27 $ 1.08 $ .45
==================================================================================================
Weighted average equivalent common
shares outstanding 5,205,926 4,182,882 4,153,125
==================================================================================================
Weighted average equivalent common
shares outstanding-assuming dilution 5,232,007 4,212,419 4,187,688
==================================================================================================
See accompanying notes to the financial statements.
17
7
STATEMENTS OF CASH FLOWS
Years Ended September 30, 1998, 1997 and 1996
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 6,628,000 $ 4,570,000 $ 1,888,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 9,472,000 7,321,000 5,818,000
Gain on disposal of assets (134,000) (196,000) (11,000)
Non-cash interest income (31,000) (63,000) (101,000)
Deferred income taxes 1,190,000 808,000 273,000
Other 262,000 91,000 --
Change in current assets and liabilities:
Increase in accounts receivable (3,097,000) (2,563,000) (1,153,000)
Decrease (increase) in prepaid expenses (128,000) (140,000) 72,000
Decrease (increase) in income
taxes receivable (1,050,000) 193,000 (67,000)
Decrease in accounts payable (2,190,000) (42,000) (222,000)
Increase in accrued liabilities 385,000 267,000 235,000
Increase in income taxes payable -- 89,000 --
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,307,000 10,335,000 6,732,000
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from disposal of assets 287,000 340,000 33,000
Capital expenditures (19,959,000) (8,528,000) (15,597,000)
Proceeds from sale of short-
term investments 5,993,000 742,000 2,884,000
Proceeds from maturity of short-
term investments 9,000,000 750,000 2,100,000
Investment in short-term investments (17,531,000) (4,383,000) (2,096,000)
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (22,210,000) (11,079,000) (12,676,000)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on debt (9,583,000) (927,000) (286,000)
Proceeds from debt -- 4,795,000 6,000,000
Issuance of common stock 21,371,000 -- --
Proceeds from exercise of stock options 86,000 157,000 52,000
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,874,000 4,025,000 5,766,000
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 971,000 3,281,000 (178,000)
Cash and cash equivalents at beginning of year 4,774,000 1,493,000 1,671,000
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,745,000 $ 4,774,000 $ 1,493,000
===================================================================================================
See accompanying notes to the financial statements.
18
8
STATEMENTS OF STOCKHOLDERS' EQUITY
Net
Common Stock Unrealized
---------------------- Additional Loss on
Number Paid-in Short-term Retained
of Shares Amount Capital Investments Earnings Total
- ----------------------------------------------------------------------------------------------------------------------
Balance,
October 1, 1995 4,149,050 $ 1,383,000 $16,973,000 $ (13,000) $12,513,000 $30,856,000
Exercise of stock
options 12,500 4,000 48,000 -- -- 52,000
Net unrealized gain
on short-term
investments -- -- -- 8,000 -- 8,000
Net income -- -- -- -- 1,888,000 1,888,000
- ----------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1996 4,161,550 1,387,000 17,021,000 (5,000) 14,401,000 32,804,000
Issuance of common
stock 1,200 1,000 8,000 -- -- 9,000
Exercise of stock
options 36,500 12,000 145,000 -- -- 157,000
Net unrealized gain
on short-term
investments -- -- -- 5,000 -- 5,000
Net income -- -- -- -- 4,570,000 4,570,000
- ----------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1997 4,199,250 1,400,000 17,174,000 -- 18,971,000 37,545,000
Issuance of common
stock 1,151,100 384,000 20,999,000 -- -- 21,383,000
Exercise of stock
options 10,650 3,000 83,000 -- -- 86,000
Net income -- -- -- -- 6,628,000 6,628,000
- ----------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1998 5,361,000 $ 1,787,000 $38,256,000 $ -- $25,599,000 $65,642,000
======================================================================================================================
See accompanying notes to the financial statements.
19
9
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Dawson Geophysical Company (the "Company"), which was incorporated in
Texas in 1952, has been listed and traded on the NASDAQ National Market System
("NMS") under the symbol "DWSN" since 1981.
The Company acquires and processes 3-D seismic data for major and
intermediate-sized oil and gas companies and independent oil operators who
retain exclusive rights to the information obtained. The Company's land-based
acquisition crews operate primarily in the southwestern United States, and data
processing is performed by geophysicists at the Company's computer center in
Midland, Texas.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers
demand deposits, certificates of deposit and all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
Short-Term Investments
The Company accounts for its short-term investments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (Statement 115). In accordance with
Statement 115, the Company has classified its investment portfolio, consisting
of U.S. Treasury securities, as "available-for-sale" and records the net
unrealized holding gains and losses as a separate component of stockholders'
equity. The cost of marketable securities sold is based on the specific
identification method.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial Accounting
Standards No. 105, consist primarily of trade accounts receivable and short-term
investments. The Company's sales are to customers whose activities relate to oil
and gas exploration and production. However, accounts receivable are well
diversified among many customers, and a significant portion of the receivables
are from major oil companies, which management believes minimizes potential
credit risk. The Company generally extends unsecured credit to these customers;
therefore, collection of receivables may be affected by the economy surrounding
the oil and gas industry. However, the Company closely monitors extensions of
credit and has not experienced significant credit losses in recent years. The
Company invests primarily in U.S. Treasury Securities which are a low risk
investment.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. 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
accounts, and any resulting gain or loss is reflected in the results of
operations for the period.
Impairment of Long-Lived Assets
The Company accounts for its long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(Statement 121) which requires companies to assess their long-lived assets for
impairment. Statement 121 requires companies to review for impairment whenever
events or changes in circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable. No provision was recorded in the
Statement of Operations for the years ended September 30, 1998, 1997 and 1996.
Income Taxes
The Company accounts for state and federal income taxes in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (Statement 109). Under the asset and liability method of Statement 109,
deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
20
10
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Net Income (Loss) per Common Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" (Statement 128). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and when appropriate, restated to conform to the Statement 128
requirements.
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. Actual results could differ from those estimates.
Stock-Based Compensation
Effective October 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting For Stock-Based Compensation"
(Statement 123). Statement 123 allows a company to adopt a fair value based
method of accounting for a stock-based employee compensation plan or to continue
to use the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting For Stock Issued To Employees" (APB
No. 25). The Company has chosen to continue to account for stock-based
compensation under APB No. 25 using the intrinsic value method.
2. SHORT-TERM INVESTMENTS
Investment in securities, consisting entirely of U. S. Treasury Securities,
had a cost and market value of approximately $6,515,000 at September 30, 1998
and $3,968,000 at September 30, 1997.
Short-term investments held at September 30, 1998, consisting of U.S.
Treasury securities, have contractual maturities from December 1998 through
September 1999.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, together with annual depreciation rates,
consist of the following:
September 30
----------------------------
1998 1997 Rates
- ----------------------------------------------------------------------------------------
Land, building and improvements $ 2,545,000 $ 2,056,000 3 to 12.5 percent
Machinery and equipment 70,249,000 58,811,000 10 to 20 percent
Equipment in process (a) 790,000 2,400,000 --
- ----------------------------------------------------------------------------------------
$73,584,000 $63,267,000 --
============================
- -------------------
(a) Equipment in process has not been placed into service and accordingly has
not been subject to depreciation.
4. SHORT-TERM AND LONG-TERM DEBT
In April 1997, the Company entered into a loan agreement, as amended (the
"Loan Agreement"), with Norwest Bank Texas, N.A. ("Norwest"). 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 Norwest's prime rate and which matures on March 15, 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.
21
11
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS
The Company's 1991 Incentive Stock Option Plan, which extends the 1981
Plan, provides options to purchase 150,000 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 date of grant.
The transactions under the 1991 Plan are summarized as follows:
Option Number of
Price Per Share Optioned Shares
- ------------------------------------------------------------------------
Balance as of September 30, 1996 $4.25 to 11.25 100,250
Granted $24.125 30,000
Exercised $4.25 to 8.875 (36,500)
Cancelled or expired $4.25 (4,000)
- ------------------------------------------------------------------------
Balance as of September 30, 1997 $7.25 to $24.125 89,750
Exercised $7.25 to $8.875 (10,650)
Cancelled or expired $8.875 to $11.25 (27,100)
- ------------------------------------------------------------------------
Balance as of September 30, 1998 $7.25 to $24.125 52,000
========================================================================
Options for 24,000, 47,500 and 73,000 shares were exercisable as of
September 30, 1998, 1997 and 1996, respectively.
Outstanding options at September 30, 1998 expire between January 1999 and
September 2002.
Options for 30,000 shares were granted in fiscal year 1997 and none were
granted in 1998. The expected life of the options granted is five years. The
weighted average fair value of options granted during 1997 is $10.64. The fair
value of each option grant is estimated on the date of grant, using the
Black-Scholes options-pricing model.
The model assumed expected volatility of 42% and risk-free interest rate
of 6.4% for grants in 1997. As the Company has not declared dividends since it
became a public entity, no dividend yield was used. 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.
No compensation expense has been recorded in 1997 for the Company's stock
options under the intrinsic value method. Had compensation cost for the 1991
Plan been determined based on the fair value at the grant dates for awards made
after September 30, 1995 under the 1991 Plan, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
Year Ended
September 30, 1997
- ---------------------------------------------------------
Net income As reported $4,570,000
Pro forma $4,352,000
- ---------------------------------------------------------
Earnings per share As reported $ 1.09
Pro forma $ 1.04
- ---------------------------------------------------------
Under the provisions of Statement No. 123, the pro forma disclosures
above indicate only the effects of stock options granted by the Company
subsequent to September 30, 1995. During this initial phase-in period, the pro
forma disclosures as required by Statement No. 123 are not representative of the
effects on reported net income for future years as options vest over several
years.
6. EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan to invest in the
Company's common stock for the benefit of eligible employees. Participants are
entitled to contribute a percentage, not to exceed 5%, of their bi-weekly salary
to the plan. On a bi-weekly basis, the Company matches the participants'
contributions and directs the purchase of shares of the Company's common stock.
There are no vesting requirements for the participants. The Company contributed
$254,582, $217,723 and $198,863 to the plan during 1998, 1997 and 1996,
respectively.
22
12
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Income tax expense (benefit) attributable to income before extraordinary
item consists of:
Year Ended September 30,
----------------------------------------
1998 1997 1996
----------------------------------------
Current:
U.S. federal $2,349,000 $1,585,000 $596,000
State 258,000 153,000 3,000
- ---------------------------------------------------------------------
2,607,000 1,738,000 599,000
Deferred: U. S. Federal 1,190,000 808,000 273,000
- ---------------------------------------------------------------------
Total $3,797,000 $2,546,000 $872,000
=====================================================================
Income tax expense varies from the amount computed by multiplying income
before taxes by the statutory income tax rate. The reason for these differences
and the related tax effects are as follows:
Year Ended September 30,
-----------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------
Expense computed at statutory rates $3,545,000 $2,420,000 $ 938,000
- ----------------------------------------------------------------------------------------
Effect of:
State income taxes, net of federal
income tax benefit 170,000 101,000 10,000
Other 82,000 25,000 (76,000)
- ----------------------------------------------------------------------------------------
Income tax expense $3,797,000 $2,546,000 $ 872,000
- ----------------------------------------------------------------------------------------
The net deferred tax liability as of September 30, 1998 is the result of
tax depreciation in excess of book depreciation by $8,208,000, offset by an AMT
credit carryforward of $184,000.
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized.
8. STATEMENT OF CASH FLOWS
The Company paid current and estimated tax payments of $3,533,000,
$1,553,000 and $619,000 in 1998, 1997 and 1996, respectively. Payments of
interest were $125,000, $486,000 and $144,000 in 1998, 1997 and 1996,
respectively.
9. MAJOR CUSTOMERS
The Company operates in only one business segment, contract seismic data
acquisition and processing services. During each of 1998 and 1996, sales to only
one customer, which was not the same customer each year, exceeded 10% of
operating revenue. The percentage of sales to these customers in 1998 and 1996
were 16.7% and 11.02%, respectively. During 1997, sales to no customers exceeded
10% of operating revenue.
10. EQUITY OFFERING
During the first quarter of fiscal 1997, the Company completed a public
offering of 1,150,000 shares with net proceeds of approximately $21,371,000 used
to acquire seismic equipment, retire debt and create working capital funds for
general corporate purposes.
11. 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 Orona, 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
23
13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, pre-judgment 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 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. 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. A trial date of Februray 22, 1999
has been set for these cases. 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 affect 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.
On February 18, 1998 the Company entered into a five-year,
non-cancellable operating lease for office space. Future minimum lease
commitments under the lease at September 30, 1998 are as follows:
1999 $142,716
2000 $142,716
2001 $142,716
2002 $142,716
2003 $107,037
Rent expense for this lease totaled $23,931 for the year ended September
30, 1998.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended
- --------------------------------------------------------------------------------------------------------
December 31 March 31 June 31 September 30
- --------------------------------------------------------------------------------------------------------
1998:
Operating revenues $13,787,000 $13,557,000 $18,647,000 $15,409,000
Income from operations $ 2,101,000 $ 1,022,000 $ 4,515,000 $ 2,033,000
Net income $ 1,483,000 $ 817,000 $ 3,087,000 $ 1,241,000
Net income per common share $ .31 $ .15 $ .58 $ .23
Net income per common share --
assuming dilution $ .31 $ .15 $ .57 $ .23
1997:
Operating revenues $10,063,000 $11,721,000 $12,520,000 $13,923,000
Income from operations $ 1,078,000 $ 1,566,000 $ 2,322,000 $ 2,180,000
Net income $ 657,000 $ 1,090,000 $ 1,501,000 $ 1,322,000
Net Income per common share -- $ .16 $ .26 $ .36 $ .31
24