UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

Commission File No. 0-10144

 

DAWSON GEOPHYSICAL COMPANY

 

 

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:

None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Title of Each Class

Common Stock, $.331/3 par value

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation 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 this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

Large Accelerated Filer o     Accelerated Filer þ     Non-Accelerated Filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

As of March 31, 2007, 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 $361,107,553.

 

On November 23, 2007, there were 7,658,744 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 2007 Annual Meeting of Shareholders to be held on January 22, 2008 are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

TABLE OF CONTENTS

 

DAWSON GEOPHYSICAL COMPANY

 

FORM 10-K
For the Fiscal Year Ended September 30, 2007

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

All statements other than statements of historical fact included in this Form 10-K, 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, are 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 this Form 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 dependence upon energy industry spending, the volatility of oil and natural gas prices, high fixed costs of operations, weather interruptions, inability to obtain land access rights of way, industry competition, managing growth, and the availability of capital resources. 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.

 

Part I

 

 

General

 

Dawson Geophysical Company (the Company) is 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. Founded in 1952, we acquire and process 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. 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 2007, substantially all of our revenues were derived from 3-D seismic data acquisition operations.

 

As of September 30, 2007, we operated fifteen 3-D seismic data acquisition crews in the lower 48 states of the United States and a seismic data processing center. We market and supplement our services from our headquarters in Midland, Texas and from additional offices in Houston, Denver, Oklahoma City, and Michigan. 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. To avoid potential conflicts of interest with our clients, we do not acquire seismic data for our own account nor do we participate in oil and gas ventures.

 

Higher commodity prices in recent years have led to a significant increase in the level of spending for domestic exploration and development of oil and natural gas reserves. This resulted in greater demand for newly-acquired seismic data by many exploration companies particularly those seeking natural gas reserves. These factors have enabled us to expand our data acquisition and processing capacity during the last few years. By increasing the number and size of our data acquisition crews and our channel count, we have fortified our position as the leading provider of onshore seismic data acquisition services in the United States, resulting in increased market share in terms of the number of active crews operating. This expansion occurred in fiscal 2004, 2005 and 2006 with the addition of a total of six 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. During fiscal 2007, we continued

our growth by fielding three additional crews. These recent expansions were in response to continued demand for our high-resolution 3-D seismic services despite fluctuations in natural gas prices during fiscal 2007.

 

Business Strategy

 

Our strategy is to maintain our leadership position in the U.S. onshore market. Key elements of our strategy include:

 

 

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 and occasionally 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 in groups of six or more and connected together as a single recording channel. We generally use multiple recording channels in our seismic surveys. Additional recording channels enhance the clarity of the seismic survey much in the same way as additional pixels add resolution to televisions and computer monitors.

 

We are able to collect seismic data using either 2-D or 3-D methods. The 2-D method involves the collection of seismic data in a linear fashion thus generating a single plane of subsurface seismic data. Recent 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 the 3-D seismic method. The 3-D method produces an immense volume of seismic data which produces more precise images of the earth’s subsurface. Geophysicists use computers to interpret 3-D seismic data volumes, generate geologic models of the earth’s subsurface, and identify subsurface features that are favorable for the accumulation of hydrocarbons.

 

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 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 and management. In order to meet the requirements necessary to fully realize the benefits of 3-D seismic data, there 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. One such technique is better survey design integrating a greater number of recording channels, more dense energy source distribution and improved seismic data processing technologies. Our geophysicists perform these design tasks.

 

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 proposed

3-D survey. If the client accepts our proposal, permit agents then obtain access rights of way from surface and mineral estate owners or lessees where the survey is to be conducted.

 

Utilizing electronic surveying equipment, survey personnel precisely locate the energy source and receiver positions from which the seismic data are collected. We primarily use vibrator energy sources which are mounted on vehicles, the majority of which weigh 62,000 pounds each, to generate seismic energy, but occasionally 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 began fiscal 2004 with an operating capacity of six land-based seismic data acquisition crews with an aggregate recording channel count of approximately 25,000 and 52 vibrator energy source units. At fiscal year-end 2007, we operated fifteen crews, 113 vibrator energy source units, and had capacity in excess of 102,000 recording channels, any of which may be configured to meet the demands of specific survey designs. Each crew consists of approximately 40 to 80 technicians, 25 or more vehicles with off-road capabilities, over 60,000 geophones, a seismic recording system, energy sources, electronic cables and a variety of other equipment.

 

During the fiscal year, we added three data acquisition crews. The first additional crew, equipped with an existing I/O System II cable-based recording system, was deployed in October 2006. The second crew, equipped with a 10,000-channel ARAM ARIES cable-based recording system, was deployed in April 2007. The third and newest crew, equipped with a 5,000-channel ARAM ARIES system, was deployed in September 2007. In July 2007, we replaced an existing I/O System II cable-based system with a 9,500-channel ARAM ARIES recording system. We purchased an additional 5,000-channel ARAM ARIES system in the last quarter of fiscal 2007 which replaced an existing I/O System II MRX system in November 2007.

 

Of the fifteen crews in operation at December 5, 2007, six are equipped with I/O System II RSR radio-based recording systems, three with I/O System II cable-based recording systems, and six with ARAM ARIES cable-based recording systems. From time to time, one crew is equipped with a WesternGeco (subsidiary of Schlumberger) Q-Land recording system under an agreement described below. 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.

 

During fiscal 2006, we entered into an agreement with WesternGeco, a subsidiary of Schlumberger, to provide Q-Land seismic data acquisition services in the lower 48 states of the United States. The Q-Land system is a unique integrated acquisition and processing system that is producing superior imaging results throughout the Middle East and North Africa. The Q-Land system uses 30,000 channels of finely spaced point-receivers to correctly sample both signal and noise. By removing noise, the resolution of the subsurface is dramatically increased. Under the terms of the agreement, the Company will provide crew personnel, energy source units, necessary vehicles, land access permitting and surveying. WesternGeco will provide survey design, the seismic recording system with operators, and all Q-Land data processing services. Both companies will share marketing services. During fiscal 2007, the Company deployed the Q-Land recording system on an existing crew and completed operations in West Texas on a multi-client data library program for WesternGeco. The Company will continue to deploy the Q-Land system on an existing crew or additional crews as demand for the technology dictates.

 

Client demand for more recording channels continues to increase as the industry strives for improved data quality with greater subsurface resolution. We believe our ability to deploy a large number of recording channels provides us with the competitive advantages of operational versatility and increased productivity, in addition to improved data quality.

 

Data Processing.  We currently operate a computer center located in Midland, Texas and provide additional processing services through our Houston and Oklahoma City offices. Such 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, under non-exclusive licensing arrangements, seismic data processing software.

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 automotive repair, automotive 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 contributes to better quality control and improved efficiency in our operations. Our clients generally provide their own interpretation of the seismic data provided by us.

 

Equipment Acquisition and Capital Expenditures

 

We monitor and evaluate advances in geophysical technology and commit capital funds to purchase equipment we deem most effective to maintain our competitive position. Purchasing new assets and upgrading existing capital assets requires a commitment to capital spending. For fiscal year 2007, we made capital expenditures of $54,591,000, in part to complete the fielding of three additional data acquisition crews, to expand channel count on existing crews, to purchase eighteen additional energy source units, and to replace two I/O System II recording systems on existing crews with ARAM ARIES recording systems. The Board of Directors approved an initial fiscal 2008 budget of $30,000,000 to add to the Company’s energy source fleet, to purchase additional recording channels, to make technical improvements in various phases of the Company’s operations, and to meet maintenance capital requirements. These additions will allow the Company to maintain its competitive position as it responds to client desire for 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 companies to small independent oil and gas operators and also include 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 2007, sales to our largest client represented 49% of our revenues and 40% of our revenue net of third-party charges. The remaining balance of our fiscal 2007 revenue was derived from varied clients and none represented 10% or more of our fiscal 2007 revenues. Although 49% of our fiscal 2007 revenues were derived from one client, our evaluation indicates that our relationship is well founded for continued contractual commitments for the foreseeable future in multiple producing basins across the lower 48 states. While still expected to be a significant client, we do anticipate a fiscal 2008 reduction in sales to this client. Because of our relatively large client base, our largest clients have historically varied from year to year. Current demand for our services indicates that while the loss of our largest client may have a material short-term negative impact, it would not have a long-term effect on our business.

 

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 participate in any oil and gas venture. All of our clients’ information is maintained in the strictest confidence.

 

Contracts

 

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 a project-by-project basis, some level of weather downtime protection within the turnkey agreements. Under the term 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 currently operate under both turnkey and term supplemental agreements.

 

Competition

 

The acquisition and processing of seismic data for the oil and 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.

 

Employees

 

As of October 20, 2007, we employed approximately 1,345 persons, of which 1,225 were engaged in providing energy sources and acquiring data. With respect to the remainder of our employees, 12 are engaged in data processing, 30 are administrative personnel, 67 are engaged in equipment maintenance and transport and 11 are officers. Of the employees listed above, 10 are geophysicists. Our employees are not represented by a labor union. We believe we have good relations with our employees.

 

Available Information

 

All of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 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 on Form 10-K. In addition, the SEC maintains an Internet site 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 at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room.

 

 

An investment in our common stock is subject to a number of risks discussed below. You should carefully consider these discussions of risk and the other information included in this Form 10-K. If any of the following risks were actually to occur, our business, financial condition or results of operations could be materially adversely affected.

 

If oil and 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 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 gas exploration activities and commodity prices have adversely affected the demand for our services and our results of operations in years past and would do so again if prices for oil and gas were to decline. In particular, we incurred losses in fiscal years 2000 through 2003 as a result of decreased demand for seismic services during these years due to the effects of lower oil and gas prices. While in recent years, the price

of oil and natural gas has been historically high and exploration activities have been strong, there can be no assurance that the current level of energy prices will be sustained or that exploration and development activities by our clients will continue to be strong. 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 would have an adverse effect on the demand for our services. Any significant decline in exploration or production-related spending by our clients 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 price of oil and natural gas include:

 

 

The markets for oil and natural gas have historically been volatile and are likely to continue to be so in the future.

 

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 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 and commencement of contracts for data acquisition, permit delays, weather delays and crew productivity. Combined with our high fixed costs, these revenue fluctuations could produce unexpected adverse results of operations in any fiscal period.

 

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 land and/or mineral owners. 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. Competition from these and other competitors could result in downward pricing pressure and the loss of market share. See “Business — Competition.”

 

If we do not manage our recent growth effectively, our results of operations could be affected.

 

We have experienced substantial growth during the last four fiscal years, adding nine seismic data acquisition crews during this period. This growth has presented a challenge to our systems, processes, resources, personnel, management and other infrastructure and support mechanisms. If we do not manage these growth challenges effectively, our profitability and results of operations could be adversely affected, our management resources may be diverted and our future growth could be impeded.

 

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 confront significant and potentially adverse competition for these skilled and technically knowledgeable personnel, particularly during periods of increased demand for seismic services. The increased demand for seismic services during the past few years has also made it difficult for the Company to hire additional skilled persons to join the Company’s data acquisition crews. Should this trend continue, the Company’s ability to expand the number of operating data acquisition crews may be impaired. None of our employees are under employment contracts and we have no key man insurance.

 

A limited number of customers account for a significant portion of our revenues, and the loss of one of these customers could harm our results of operations.

 

Although our ten largest customers in fiscal 2007 and 2006 have varied, these customers accounted for approximately 88% and 68% of our total revenue for these respective periods. For the year ended September 30, 2007, the Company’s largest client represented approximately 49% of total revenues or 40% of revenues before third-party charges. 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.

 

Capital requirements for our operations are large. If we are unable to finance these requirements, our ability to continue our expansion and maintain our profitability could be affected.

 

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. 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 when needed, our failure could have a negative impact on our ability to pursue expansion and maintain our profitability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 

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 personal 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. These operations are subject to risks of injury to personnel and equipment. 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.

 

In addition, 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 negligence, gross negligence or intentional misconduct.

 

We do not carry insurance against certain risks that we could experience, including business interruption resulting from equipment losses or weather delays. 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.

 

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 operations by reducing the demand for our services.

 

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 us, 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 us.

 

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.

 

 

None.

 

 

Our principal facilities are summarized in the table below.

 

 

We have operating leases 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 Michigan.

 

Our operations are limited to one industry segment and the United States.

 

 

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.

 

 

No matter has been submitted during the fourth quarter of the 2007 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 22, 2008 (the “Proxy Statement”), 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

 

Set forth below are the names, ages and positions of the Company’s executive officers.

 

 

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 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 and was elected Vice President in January 2001. 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.

 

Part II

 

 

Our common stock trades on the Nasdaq Stock Market^® under the symbol “DWSN.” The table below represents the high and low sales prices for the period shown.

 

 

As of November 23, 2007, the market price for our common stock was $67.42 per share and we had 159 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 plans as of September 30, 2007.

 

Equity Compensation Plan Information

 

 

 

Performance Graph

 

The following graph compares the five-year cumulative total return of the Company’s common stock as compared with the S&P 500 Stock Index and a peer group made up of companies in the Value-Line Oilfield Services Industry Index. The Value-Line Oilfield Services Industry Index consists of far larger companies that perform a variety of services as compared to land-based acquisition and processing of seismic data performed by the Company.

 

Comparison of 5-Year Cumulative Total Return*
Among Dawson Geophysical Company, the S & P 500 Index
and the Value-Line Oilfield Services Industry Index

 

 

 

 

Copyright ^© 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm

 

 

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.”

 

 

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.

 

 

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 this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Please see “Risk Factors” and “Disclosure Regarding Forward-Looking Statements” elsewhere in this Form 10-K.

 

Overview

 

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 depend, 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 continue 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 is a function of higher prices for oil and natural gas. As a result of the increase in domestic exploration spending, we have experienced an increased demand for our seismic data acquisition and processing services, particularly from entities seeking natural gas reserves. While the markets for oil and natural gas have historically been volatile and are likely to continue to be so in the future and we can make no assurances as to future levels of domestic exploration or commodity prices, we believe opportunities exist for us to enhance our market position by responding to our clients’ continuing desire for higher resolution subsurface images. In addition, we continue to experience high demand for our services despite recent fluctuations in oil and natural gas prices. Because the majority of our current clients are focused on the exploration for and production of natural gas, a sustained significant decline in the price of natural gas would have an adverse effect on the demand for our services.

 

We continue to focus on increasing the revenues and profitability of our existing crews by upgrading our recording capacity, expanding the channel count on existing crews, adding to our energy source fleet and utilizing related technologies. While our revenues are mainly affected by the level of client demand for our services, our

revenues are also affected by the pricing for our services that we negotiate with our clients and the productivity of our data acquisition crews, including factors such as crew downtime related to inclement weather, delays in acquiring land access permits, or equipment failure. Consequently, our successful efforts to negotiate more favorable contract terms in our supplemental service agreements, to mitigate access permit delays and to improve overall crew productivity may contribute to growth in our revenues. Although our clients may cancel their supplemental service agreements with us on short notice, we believe we currently have a sufficient order book to sustain operations at full capacity well into calendar 2008 with all fifteen crews.

 

Fiscal 2007 Highlights

 

Our financial performance for fiscal 2007 significantly improved when compared to our financial performance for fiscal 2006 as a result of the continuing strong demand for our seismic services due to high levels of exploration and development activities, particularly by entities seeking natural gas reserves. As a result of continuing high demand, we:

 

 

Fiscal Year Ended September 30, 2007 Versus Fiscal Year Ended September 30, 2006

 

Operating Revenues.  Our operating revenues increased 53% from $168,550,000 in fiscal 2006 to $257,763,000 in fiscal 2007 as a result of continuing high demand for our services. Revenue growth in fiscal 2007 was primarily due to the addition of three seismic data acquisition crews along with pricing and productivity improvements realized from the expanded capabilities of existing crews. Recorded in the fourth quarter revenues are continued 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. The sustained increase in these charges during fiscal 2007 was driven by our continued geographic expansion in response to increased exploration activities in the Appalachian Basin, the Rocky Mountains, the Fayetteville Shale, and the Arkoma Basin. We are reimbursed for these charges by our clients.

 

Operating Costs.  Our operating expenses increased 51% from $125,848,000 in fiscal 2006 to $190,117,000 in fiscal 2007 primarily due to the full year of service for the twelfth crew fielded in fiscal 2006 and the start-up and

ongoing expenses of the three acquisition crews deployed in fiscal 2007. As discussed above, reimbursed charges have a similar impact on operating costs.

 

General and administrative expenses were 2.4% of revenues in fiscal 2007, as compared to 2.9% of revenues in fiscal 2006. While the ratio of general and administrative expenses to revenue declined in fiscal 2007 due to the increase in revenues, the actual dollar amount increased. The increase of $1,387,000 from fiscal 2006 to fiscal 2007 reflects ongoing expenses necessary to support expanded field operations.

 

We recognized $18,103,000 of depreciation expense in fiscal 2007 as compared to $13,338,000 in fiscal 2006, reflecting the full year of depreciation expense from our fiscal 2006 capital expenditures. Our depreciation expense is expected to continue to increase in fiscal 2008 as a result of our significant capital expenditures in fiscal 2007.

 

Our total operating costs for fiscal 2007 were $214,415,000, an increase of 49% from fiscal 2006 primarily due to the factors described above.

 

Taxes.  Our effective tax rate for fiscal 2007 and 2006 was 38.9% and 37.1%, respectively. The increase in the effective tax rate in fiscal 2007 as compared to fiscal 2006 was primarily a result of changes in tax legislation that impact the Company’s operations and changes in state tax rates as a result of the varying states in which we operate from year to year.

 

Fiscal Year Ended September 30, 2006 Versus Fiscal Year Ended September 30, 2005

 

Operating Revenues.  Our operating revenues increased 44% from $116,663,000 in fiscal 2005 to $168,550,000 in fiscal 2006 as a result of continuing high demand for our services. We were able to field an additional data acquisition crew, expand the capabilities of our existing crews, obtain price improvements in the markets for our services and negotiate favorable contract provisions. We began fiscal 2006 with eleven data acquisition crews and added our twelfth crew in June 2006. Recorded in the fourth quarter revenues are unusually 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. The increase in these charges was driven by our continued geographic expansion during the fourth quarter of fiscal 2006 in response to increased exploration activities in the Appalachian Basin, the Rocky Mountains, the Fayetteville Shale, and the Arkoma Basin. We are reimbursed for these charges by our clients.

 

Operating Costs.  Our operating expenses increased 39% from $90,465,000 in fiscal 2005 to $125,848,000 in fiscal 2006 primarily due to the full year of service for the tenth and eleventh crews fielded in fiscal 2005 and the start-up and ongoing expenses of the twelfth data acquisition crew deployed in June 2006. As discussed above, reimbursed charges have a similar impact on operating costs.

 

General and administrative expenses were 2.9% of revenues in fiscal 2006, as compared to 3.9% of revenues in fiscal 2005. While the ratio of general and administrative expenses to revenue declined in fiscal 2006 due to the increase in revenues, the actual dollar amount increased. The increase of $318,000 from fiscal 2005 to fiscal 2006 reflects ongoing expenses necessary to support expanded field operations.

 

We recognized $13,338,000 of depreciation expense in fiscal 2006 as compared to $8,179,000 in fiscal 2005, reflecting the full year of depreciation expense from our fiscal 2005 capital expenditures.

 

Our total operating costs for fiscal 2006 were $143,994,000, an increase of 40% from fiscal 2005 primarily due to the factors described above.

 

Taxes.  Our income tax expense was $9,358,000 in fiscal 2006 as compared to $4,506,000 in fiscal 2005. The increase in expense for 2006 from 2005 is primarily a result of our substantial increase in income before income taxes resulting in increased federal and state income taxes. Dawson fully utilized its federal net operating loss (“NOL”) carryforwards during 2006 and started remitting regular tax reduced by alternative minimum tax (“AMT”) credits.

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.

 

Cash Flows.  Net cash provided by operating activities was $51,427,000 for fiscal 2007 and $25,743,000 for fiscal 2006. These amounts primarily reflect an increase in total revenues resulting from our expanded business and an increase in accounts receivable without a correlating increase in accounts payable.

 

Net cash used in investing activities was $51,664,000 in fiscal 2007 and $21,031,000 in fiscal 2006. These results primarily represent capital expenditures and activity in the short-term investment portfolio. Capital expenditures were funded with cash generated from operations, short-term investments, and during fiscal 2007 with cash from our revolving line of credit agreement.

 

Net cash provided by financing activities in fiscal 2007 was $7,048,000 primarily representing the draw down of $5,000,000 from our line of credit and proceeds from the exercise of stock options.

 

Capital Expenditures.  For fiscal year 2007, we made capital expenditures of $54,591,000, in part to complete the fielding of three additional data acquisition crews, to expand channel count on existing crews, to purchase eighteen additional energy source units, and to replace two I/O System II recording systems on existing crews with ARAM ARIES recording systems. The Board of Directors approved an initial fiscal 2008 budget of $30,000,000 to add to the Company’s energy source fleet, to purchase additional recording channels, to make technical improvements in various phases of the Company’s operations, and to meet maintenance capital requirements. These additions will allow the Company to maintain its competitive position as it responds to client desire for higher resolution subsurface images.

 

We continually strive to supply our clients with technologically advanced 3-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 through public equity offerings.

 

Our revolving line of credit loan agreement is with Western National Bank. In January, we renewed the agreement for an additional year and increased the size of the facility from $10.0 million to $20.0 million. The agreement permits us to borrow, repay and reborrow, from time to time until January 18, 2008, up to $20.0 million. Our obligations under this agreement are secured by a security interest in our accounts receivable and related collateral. Interest on the outstanding amount under the line of credit loan agreement is payable monthly at a rate equal to the Prime Rate. The loan agreement contains customary covenants for credit facilities of this type, including limitations on distributions and dividends, disposition of assets and mergers and acquisitions. We are also obligated to meet certain financial covenants under the loan agreement, including maintaining a minimum tangible net worth (as defined in the loan agreement) of $40.0 million and maintaining specified ratios with respect to cash flow coverage, current assets and liabilities, and debt to tangible net worth. On July 5, 2007, we borrowed $5.0 million under this credit loan agreement for working capital purposes. We were in compliance with all covenants as of September 30, 2007 and December 5, 2007. We expect to renew this revolving line of credit loan agreement for an additional year through January 2009 on the same terms and conditions.

 

On August 5, 2005, we filed a shelf registration statement with the Securities and Exchange Commission covering the periodic offer and sale from time to time of up to $75.0 million in debt securities, preferred and common stock, and warrants. The registration statement allows us to sell securities, after the registration statement has been declared effective by the SEC, in one or more separate offerings with the size, price and terms to be

determined at the time of sale. The terms of any securities offered would be described in a related prospectus to be separately filed with the SEC at the time of the offering. The filing of the shelf registration statement enables us to act quickly as 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, 2007:

 

 

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 including the continued expansion of our capital equipment through cash flow from operations, through borrowings under our revolving line of credit and, if necessary, from capital markets offerings. However, our ability to satisfy our working capital requirements and to fund future capital requirements will depend principally upon our future operating performance, which is subject to the risks inherent in our business.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2007, we had no off-balance sheet arrangements.

 

Effect of Inflation

 

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 period. Because of the use of assumptions and estimates inherent in the reporting process, actual results could differ from those estimates.

 

Revenue Recognition.  Our services are provided under cancelable service contracts. These contracts are either “turnkey” or “term” agreements. 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 certain out-of-pocket expenses under the terms of our service contracts. We record amounts billed to clients in revenue at the gross amount, including out-of-pocket expenses that are reimbursed by the client.

 

In some instances, we bill clients in advance of the services performed. In those cases, we recognize the liability as deferred revenue.

 

Allowance for Doubtful Accounts.  We prepare our allowance for doubtful accounts receivable based on our review of past-due accounts, our past experience of historical write-offs and our current customer base. The inherent volatility of the energy industry’s business cycle can cause swift and unpredictable changes in the financial stability of our customers.

 

Impairment of Long-Lived Assets.  We review long-lived assets for impairment when triggering events occur suggesting deterioration in the assets recoverability or fair value. Recognition of an impairment charge is required if future expected net cash flows are insufficient to recover the carrying value of the asset. Our forecast of future cash

flows used to perform impairment analysis includes estimates of future revenues and future gross margins based on our historical results and analysis of future oil and gas prices which is fundamental in assessing demand for our services. If we are unable to achieve these cash flows, an impairment charge would be recorded.

 

Depreciable Lives of Property, Plant and Equipment.  Our property, plant and equipment are capitalized at historical cost and depreciated over the useful life of the asset. Our estimation of 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. We amortize these capitalized items using the straight-line method.

 

Tax Accounting.  We account for our income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes,” which requires the recognition of amounts of taxes payable or refundable for the current year and an asset and liability approach in recognizing the amount of deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. We determine deferred taxes by identifying the types and amounts of existing temporary differences, measuring the total deferred tax asset or liability using the applicable tax rate and reducing the deferred tax asset by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our methodology for recording income taxes requires judgment regarding assumptions and the use of estimates, including determining our annual effective tax rate and the valuation of deferred tax assets, which can create 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 account for stock based compensation awards in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). We measure all employee stock-based compensation awards using a fair value method and recognize compensation cost in our financial statements. We adopted SFAS 123(R) beginning October 1, 2005 for stock-based compensation awards granted after that date and for nonvested awards outstanding at that date using the modified prospective application method. 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.

 

Recently Issued Accounting Pronouncements

 

In July 2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 and we will adopt these new requirements as of the beginning of fiscal 2008. We are currently evaluating the impact that FIN 48 may have on our statements of operations and statements of financial position. Thus far, our evaluation does not reflect any material adjustments.

 

In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157 clarifies that fair value is 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 accounting principles and expands certain disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS 157 to have a material impact on our financial statements.

 

In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are evaluating the impact of SFAS 159 on our financial statements.

 

 

Our primary sources of market risk include fluctuations in commodity prices which affect demand for and pricing of our services and interest rate fluctuations. At September 30, 2006, we had no indebtedness; however, on July 5, 2007, we borrowed $5.0 million under the terms of the revolving line of credit loan agreement with Western National Bank for working capital purposes. Interest payable under the revolving line of credit is variable based upon the then current prime rate. At September 30, 2007, we did not have any short-term investments. 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.

 

 

The information required by this item appears on pages F-1 through F-19 hereof and are incorporated herein by reference.

 

 

None.

 

 

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 procedures pursuant to Rule 13a-15 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, 2007, 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 as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal controls over financial reporting as of September 30, 2007 using the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, we have concluded that, as of September 30, 2007, our internal control over financial reporting was effective. Our assessment of the effectiveness of our internal control over financial reporting as of September 30, 2007, has been audited by KPMG LLP, the independent registered public accounting firm who also audited our financial statements. Their attestation report appears on page 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 Act Rule 13a-15(f) of the Securities Exchange Act of 1934) during the quarter ending September 30, 2007 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

 

None.

 

Part III

 

 

The information required by Item 10 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on January 22, 2008, which we expect to file with the Securities and Exchange Commission within 120 days after September 30, 2007. 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. Our code of ethics (as defined in Item 406 of Regulation 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, principal financial officer and principal accounting officer. Our Code of Business Conduct and Ethics is posted on our website at http://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.

 

 

The information required by Item 11 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on January 22, 2008, which we expect to file with the Securities and Exchange Commission within 120 days after September 30, 2007.

 

 

The information required with respect to our equity compensation plans is set forth in Item 5 of this Form 10-K. The information required by Item 12 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on January 22, 2008, which we expect to file with the Securities and Exchange Commission within 120 days after September 30, 2007.

 

 

The information required by Item 13 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on January 22, 2008, which we expect to file with the Securities and Exchange Commission within 120 days after September 30, 2007.

 

 

The information required by Item 14 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on January 22, 2008, which we expect to file with the Securities and Exchange Commission within 120 days after September 30, 2007.

 

Part IV

 

 

(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-19 and are incorporated by reference into Part II, Item 8:

 

Reports of Independent Registered Public Accounting Firm

Balance Sheets

Statements of Operations

Statements of Stockholders’ Equity and Other Comprehensive Income

Statements of Cash Flows

Notes to Financial Statements

 

(2) Financial Statement Schedules.

 

The following financial statement schedule appears on page F-19 and is hereby incorporated by reference:

 

Schedule II — Valuation and Qualifying Accounts for the three years ended September 30, 2007, 2006 and 2005.

 

All other schedules are omitted because they are either not applicable or the required information is shown in the financial statements or notes thereto.

 

(3) Exhibits.

 

The information required by this item 15(a)(3) is set forth in the Index to Exhibits accompanying this Annual Report of Form 10-K and is hereby incorporated by reference.

 

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 7th day of December, 2007.

 

DAWSON GEOPHYSICAL COMPANY

 

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.

 

 

INDEX TO FINANCIAL STATEMENTS

 

 

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, 2007 and 2006, and the related statements of operations, stockholders’ equity and other comprehensive income, and cash flows for each of the years in the three-year period ended September 30, 2007. 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, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2007, 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, present 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, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 5, 2007 expressed an unqualified opinion on the effective operation of internal control over financial reporting.

 

As discussed in Note 1 to the Financial Statements, the Company adopted the provisions of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” in fiscal year 2006.

 

KPMG LLP

 

Dallas, Texas
December 5, 2007

REPORT 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, 2007, based on criteria established in Internal Control — Integrated Framework issued 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, 2007, based on criteria established in Internal Control — Integrated Framework issued 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, 2007 and 2006, and the related statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended September 30, 2007, and our report dated December 5, 2007 expressed an unqualified opinion on those financial statements.

 

KPMG LLP

 

Dallas, Texas
December 5, 2007

DAWSON GEOPHYSICAL COMPANY

 

BALANCE SHEETS

 

 

See accompanying notes to the financial statements.

DAWSON GEOPHYSICAL COMPANY

 

STATEMENTS OF OPERATIONS

 

 

See accompanying notes to the financial statements.

DAWSON GEOPHYSICAL COMPANY

 

STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME

 

 

See accompanying notes to the financial statements.

DAWSON GEOPHYSICAL COMPANY

 

STATEMENTS OF CASH FLOWS

 

 

See accompanying notes to the financial statements.

DAWSON GEOPHYSICAL COMPANY

 

NOTES TO FINANCIAL STATEMENTS

 

 

Organization and Nature of Operations

 

Founded in 1952, the Company acquires and processes 2-D, 3-D and multi-component seismic data for its clients, ranging from major oil and gas companies to independent oil and gas operators as well as providers of multi-client data libraries.

 

Cash Equivalents

 

For purposes of the financial statements, the Company considers demand deposits, certificates of deposit and all highly liquid debt instruments purchased with an initial 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 (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS No. 115). In accordance with SFAS No. 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 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, accounts receivable, other current assets, accounts payable and other current liabilities approximate their fair values based on their short-term nature. The fair value of investments is based on quoted market prices.

 

Concentrations of Credit Risk

 

Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by SFAS No. 105, “Disclosure of Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk,” consist primarily of cash and cash equivalents, short-term investments and trade accounts receivable. At September 30, 2007 and 2006, the Company had deposits in domestic banks in excess of federally insured limits. We believe the credit risks associated with these deposits is minimal. The Company invests primarily in short-term U.S. Treasury Securities which it believes are a low risk investment. 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. The Company closely monitors extensions of credit and may negotiate payment terms that mitigate risk. At September 30, 2007, sales to one customer represented 49% of its revenue while no other customer accounted for more than 10% of its revenue. Sales to this customer in 2006 and 2005 represented 24% and 10% of operating revenues, respectively.

 

Property, Plant and Equipment

 

Property, plant and equipment are 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.

 

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.

 

DAWSON GEOPHYSICAL COMPANY

 

NOTES TO FINANCIAL STATEMENTS — (Continued)

 

Impairment of Long-Lived Assets

 

Long-lived assets are reviewed for impairment when triggering events occur suggesting a deterioration in the assets’ recoverability or fair value. Recognition of an impairment charge is required if future expected net cash flows are insufficient to recover the carrying value of the asset. Management’s forecast of future cash flow used to perform impairment analysis includes estimates of future revenues and future gross margins based on the Company’s historical results and analysis of future oil and natural gas prices which is fundamental in assessing demand for the Company’s services. No impairment charges were recognized in the statements of operations for the years ended September 30, 2007, 2006 or 2005.

 

Revenue Recognition

 

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 certain out-of-pocket expenses under the terms of the service contracts. Amounts billed to clients are recorded in revenue at the gross amount including out-of-pocket expenses that are reimbursed by the client.

 

In some instances, customers are billed in advance of services performed. In those cases, the Company recognizes the liability as deferred revenue.

 

Allowance for Doubtful Accounts

 

Management prepares its allowance for doubtful accounts receivable based on its review of past-due accounts, its past experience of historical write-offs and its current customer base. 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.

 

Tax Accounting

 

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of amounts of taxes payable or refundable for the current year and an asset and liability approach in recognizing the amount of deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Management determines deferred taxes by identifying the types and amounts of existing temporary differences, measuring the total deferred tax asset or liability using the applicable tax rate and reducing the deferred tax asset by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management’s methodology for recording income taxes requires judgment regarding assumptions and the use of estimates, including determining the annual effective tax rate and the valuation of deferred tax assets, which can create 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. Actual results could differ from those estimates.

 

DAWSON GEOPHYSICAL COMPANY

 

NOTES TO FINANCIAL STATEMENTS — (Continued)

 

Reclassifications

 

Certain prior year numbers have been reclassified in the current year in order to be consistent with the current year presentation.

 

Stock-Based Compensation

 

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), (“SFAS 123(R)”), “Share-Based Payment.” SFAS 123(R) requires companies to measure all employee stock-based compensation awards using a fair value method and recognize compensation cost in its financial statements. The Company adopted SFAS 123(R) beginning October 1, 2005 for stock-based compensation awards granted after that date and for nonvested awards outstanding at that date using the modified prospective application method. The Company recognizes the fair value of stock-based compensation awards as operating or general and administrative expense as appropriate in the statements of operations on a straight-line basis over the vesting period.

 

Prior to October 1, 2005, the Company accounted for stock-based compensation utilizing the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees” and related interpretations. Under APB 25, no compensation expense was recognized for stock-based compensation. The following pro forma information, as required by SFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148 (“SFAS 148”), presents net income and earnings per share information as if the stock options issued since February 2, 1999 were accounted for using the fair value method. The fair value of stock options issued for each year was estimated at the date of grant using the Black-Scholes option pricing model.

 

The SFAS 123 pro forma information for the fiscal year ended September 30, 2005 is as follows:

 

 

The Company adopted the 2000 Incentive Stock Plan during fiscal 1999 (the “2000 Plan”), which provides options to purchase 500,000 shares of authorized but unissued common stock of the Company. The option price is the market value of the 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 2000 Plan provides that 50,000 of the 500,000 shares of authorized but unissued common stock may be awarded to officers, directors and employees of the Company for the purpose of additional compensation.

 

In fiscal 2004, the Company adopted the 2004 Incentive Stock Plan (the “2004 Plan”) which provides 375,000 shares of authorized but unissued common stock of the Company. The 2004 Plan operates like the

 

DAWSON GEOPHYSICAL COMPANY

 

NOTES TO FINANCIAL STATEMENTS — (Continued)

 

2000 Plan except 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 2000 and 2004 Plans, the Company does not intend to issue options from these plans 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 and no awards have been issued under the Plan as of September 30, 2007.

 

Incentive Stock Options:

 

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 over the expected vesting term of 48 months. As the Company has not historically declared dividends, 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. For stock options granted in fiscal 2005, the model assumed expected volatility of 44% and a risk-free interest rate of 5.25%. Options vest 25% annually from the date of the grant and the options expire five years from the date of grant. Compensation cost is recognized as the options vest.

 

A summary of the activity of the Company’s stock options plans as of September 30, 2007 and changes during the period ended is presented below:

 

 

DAWSON GEOPHYSICAL COMPANY

 

NOTES TO FINANCIAL STATEMENTS — (Continued)

 

No options were granted during fiscal years 2007 and 2006. The weighted average grant date fair value of options granted during fiscal year 2005 was $10.18. The total intrinsic value of options exercised during fiscal 2007, 2006 and 2005 was $4,650,000, $1,029,000 and $838,000, respectively. The total fair value of options vested during fiscal 2007, 2006 and 2005 was $367,000, $549,000 and $497,000, respectively.

 

A summary of the status of the Company’s nonvested shares as of September 30, 2007 and changes during the fiscal year ended September 30, 2007 is presented below:

 

 

Outstanding options at September 30, 2007 expire between November 2007 and November 2009 and have exercise prices ranging from $5.21 to $17.91. As of September 30, 2007 there was approximately $64,000 of unrecognized compensation cost related to nonvested stock option awards. This cost is expected to be recognized over a weighted average period of 1.1 years.

 

Stock options issued under the Company’s 2000 and 2004 plans 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, 2007 and 2006 excess tax benefits from disqualifying dispositions of options of $1,312,000 and $180,000, respectively, were reflected in both cash flows from operating activities and cash flows from financing activities on the statements of cash flows. Prior to October 1, 2005, the income tax benefits from the exercise of stock options were classified as net cash provided by operating activities pursuant to Emerging Issues Task Force Issue No. 00-15.

 

Cash received from option exercises under all share-based payment arrangements during the years ended September 30, 2007 and September 30, 2006 was $736,000 and $369,000, respectively.

 

The Company recognized compensation expense of $83,000 and $289,000, respectively, associated with stock option awards. This amount is included in wages in the statements of operations. In accordance with the modified prospective application method of SFAS 123(R), prior period amounts have not been restated to reflect the recognition of stock-based compensation costs.

 

Stock Awards:

 

The Company granted 59,000 restricted shares during the first quarter fiscal 2007 under the 2004 Plan. The fair value of the restricted stock granted equals the market price on the grant date and vests after three years.

 

 

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) were made for the restricted stock awards granted

 

DAWSON GEOPHYSICAL COMPANY

 

NOTES TO FINANCIAL STATEMENTS — (Continued)

 

during the first quarter fiscal 2007. 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 $505,000 in fiscal 2007 related to restricted stock awards. This amount is included in wages in the statements of operations. As of September 30, 2007 there was approximately $1,010,000 of unrecognized compensation cost related to nonvested restricted stock awards granted under the 2004 Plan. The cost is expected to be recognized over 2 years.

 

The Company granted 3,000 shares with immediate vesting to outside directors in both the first quarters of fiscal 2007 and 2006 as compensation. The grant date fair value equaled $39.77 and $31.65 in each quarter, respectively. The Company granted 8,200 shares with immediate vesting to employees in the second quarter fiscal 2006 as compensation. The weighted average grant date fair value was $31.54. No stock awards were granted during the remaining periods of fiscal 2007 or 2006. The Company recognized expense of $119,000 and $353,000, respectively, as well as the related tax benefit associated with these awards in fiscal years ended September 30, 2007 and 2006.

 

 

Investments in securities have historically consisted of U.S. Treasury Securities. At September 30, 2007, the Company did not have any short-term investments.

 

 

Property, plant and equipment, together with annual depreciation rates, consist of the following:

 

 

 

 

Other current liabilities consist of the following at September 30, 2007 and 2006:

 

 

DAWSON GEOPHYSICAL COMPANY

 

NOTES TO FINANCIAL STATEMENTS — (Continued)

 

 

The Company’s revolving line of credit loan agreement is with Western National Bank. In January, the Company renewed the agreement for an additional year and increased the size of the facility from $10.0 million to $20.0 million. The agreement permits the Company to borrow, repay and reborrow, from time to time until January 18, 2008, up to $20.0 million. The Company’s obligations under this agreement are secured by a security interest in the Company’s accounts receivable and related collateral. Interest on the outstanding amount under the line of credit loan agreement is payable monthly at a rate equal to the Prime Rate. The loan agreement contains customary covenants for credit facilities of this type, including limitations on distributions and dividends, disposition of assets and mergers and acquisitions. The Company is also obligated to meet certain financial covenants under the loan agreement, including maintaining a minimum tangible net worth (as defined in the loan agreement) of $40.0 million and maintaining specified ratios with respect to cash flow coverage, current assets and liabilities, and debt to tangible net worth. On July 5, 2007, the Company borrowed $5.0 million under this credit loan agreement for working capital purposes. The Company was in compliance with all covenants as of September 30, 2007 and December 5, 2007. The Company expects to renew this revolving line of credit loan agreement for an additional year through January 2009 on the same terms and conditions.

 

 

The Company provides a 401(k) plan as part of its employee benefits package in order to retain quality personnel. During 2007, the Company elected to match 100% of the employee contributions up to a maximum of 6% of the participant’s gross salary. During 2006 and 2005, the Company elected to match 100% of employee contributions up to a maximum of 5% of the participant’s gross salary. The Company’s matching contributions for fiscal 2007, 2006 and 2005 were approximately $912,000, $724,000 and $555,000, respectively.

 

 

Advertising costs are charged to expense as incurred. Advertising costs totaled $292,000, $136,000 and $125,000 during the fiscal years ended September 30, 2007, 2006 and 2005, respectively.

 

 

The Company recorded income tax expense in the current year of $17,300,000 as compared to $9,358,000 in 2006. The increase in the provision for 2007 from 2006 is primarily a result of a substantial increase in income before income taxes resulting in increased federal and state income taxes. The Company fully utilized its federal net operating loss (“NOL”) carryforwards during 2006 and fully utilized its federal alternative minimum tax (“AMT”) credits during 2007.

 

Income tax expense from continuing operations: