DAWSON GEOPHYSICAL CO - Quarter Report: 2011 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2011.

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                   .

 

Commission File Number 001-32472

 

TGC INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Registrant’s telephone number, including area code: (972) 881-1099

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

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

 

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

	Page
Reference is made to the succeeding pages for the following financial information:
Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010	3
Consolidated Statements of Earnings for the three months and nine months ended September 30, 2011 and 2010 (unaudited)	5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (unaudited)	6
Notes to Consolidated Financial Statements	7

 

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TGC INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

September 30, 2011

 

		September 30,			December 31,
		2011			2010
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	21,738,571		$	13,072,503
Trade accounts receivable		17,517,930			17,166,709
Cost and estimated earnings in excess of billings on uncompleted contracts		1,994,444			4,578,580
Prepaid expenses and other		1,825,973			1,600,450
Prepaid federal income tax		—			1,219,165
Total current assets		43,076,918			37,637,407
PROPERTY AND EQUIPMENT - at cost
Machinery and equipment		132,074,219			115,252,066
Automobiles and trucks		11,961,659			10,868,295
Furniture and fixtures		422,003			418,643
Leasehold improvements		14,994			14,994
		144,472,875			126,553,998
Less accumulated depreciation and amortization		(89,598,611		)	(76,838,372		)
		54,874,264			49,715,626
Goodwill		201,530			201,530
Other assets		72,965			60,834
		274,495			262,364
Total assets		$	98,225,677		$	87,615,397

 

See Notes to Financial Statements

 

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TGC INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS - CONTINUED

September 30, 2011

 

		September 30,			December 31,
		2011			2010
		(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable		$	5,941,099		$	9,261,238
Accrued liabilities		3,783,820			1,808,149
Billings in excess of costs and estimated earnings on uncompleted contracts		5,789,887			5,486,017
Federal and state income taxes payable		1,264,827			—
Current maturities of notes payable		6,967,920			6,316,852
Current portion of capital lease obligations		1,227,519			1,071,263
Total current liabilities		24,975,072			23,943,519
NOTES PAYABLE, less current maturities		6,509,288			4,718,492
CAPITAL LEASE OBLIGATIONS, less current portion		1,547,919			1,302,963
LONG-TERM DEFERRED TAX LIABILITY		5,798,657			4,787,623
COMMITMENTS AND CONTINGENCIES		—			—
SHAREHOLDERS’ EQUITY
Preferred stock, $1.00 par value; 4,000,000 shares authorized; issued - none		—			—
Common stock, $.01 par value; 25,000,000 shares authorized; 19,295,962 and 19,242,251 in each period		192,960			192,423
Additional paid-in capital		27,845,180			27,512,709
Retained earnings		32,063,413			24,666,326
Treasury stock, at cost, 37,803 shares		(257,323		)	(257,323		)
Accumulated other comprehensive income (loss)		(449,489		)	748,665
		59,394,741			52,862,800
Total liabilities and shareholders’ equity		$	98,225,677		$	87,615,397

 

See Notes to Financial Statements

 

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TGC INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

September 30, 2011

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2011			2010			2011			2010
Revenue		$	31,013,392		$	22,843,724		$	111,476,221		$	75,618,349
Cost and expenses
Cost of services		21,718,157			18,932,507			77,938,081			60,854,197
Selling, general and administrative		2,437,866			1,579,159			7,211,319			5,008,469
Depreciation and amortization expense		4,968,140			3,863,486			14,209,566			11,520,417
		29,124,163			24,375,152			99,358,966			77,383,083
Income (loss) from operations		1,889,229			(1,531,428		)	12,117,255			(1,764,734		)
Interest expense		192,495			187,328			575,191			617,142
Income (loss) before income taxes		1,696,734			(1,718,756		)	11,542,064			(2,381,876		)
Income tax expense (benefit)		650,156			(447,949		)	4,144,977			(450,970		)
NET INCOME (LOSS)		$	1,046,578		$	(1,270,807	)	$	7,397,087		$	(1,930,906	)
Earnings per common share:
Basic		$	0.05		$	(0.07	)	$	0.38		$	(0.10	)
Diluted		$	0.05		$	(0.07	)	$	0.38		$	(0.10	)
Weighted average number of common shares outstanding:
Basic		19,249,379			19,204,448			19,232,644			19,202,250
Diluted		19,535,963			19,204,448			19,535,296			19,202,250

 

See Notes to Consolidated Financial Statements

 

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TGC INDUSTRIES, INC.

Consolidated Statement of Cash Flows (Unaudited)

September 30, 2011

 

		Nine Months Ended
		September 30,
		2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	7,397,087		$	(1,930,906	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,209,566			11,520,417
(Gain) loss on disposal of property and equipment		(126,522		)	(25,183		)
Non-cash compensation		168,652			394,230
Deferred income taxes		1,011,034			(1,419,648		)
Changes in operating assets and liabilities
Trade accounts receivable		(701,599		)	(575,271		)
Cost and estimated earnings in excess of billings on uncompleted contracts		2,586,403			(712,943		)
Prepaid expenses and other		1,942,411			970,187
Prepaid federal and state income tax		1,042,770			211,412
Other assets		(13,707		)	(23,772		)
Trade accounts payable		(1,406,656		)	104,219
Accrued liabilities		2,015,569			461,359
Billings in excess of cost and estimated earnings on uncompleted contracts		298,292			(3,056,224		)
Income taxes payable		1,544,449			—
NET CASH PROVIDED BY OPERATING ACTIVITIES		29,967,749			5,917,877
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(14,144,555		)	(5,085,358		)
Proceeds from sale of property and equipment		233,012			111,702
NET CASH USED IN INVESTING ACTIVITIES		(13,911,543		)	(4,973,656		)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable		(6,488,083		)	(6,053,353		)
Principal payments on capital lease obligations		(979,982		)	(814,472		)
Proceeds from exercise of stock options		164,356			—
Payment of dividends		—			(431		)
NET CASH USED IN FINANCING ACTIVITIES		(7,303,709		)	(6,868,256		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		8,752,497			(5,924,035		)
EFFECT OF EXCHANGE RATES ON CASH		(86,429		)	(1,514		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		13,072,503			25,504,149
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	21,738,571		$	19,578,600
Supplemental cash flow information
Interest paid		$	575,191		$	617,142
Income taxes paid		$	545,432		$	1,072,831
Noncash investing and financing activities
Capital lease obligations incurred		$	1,419,412		$	1,155,286
Financed equipment purchase		$	6,765,619		$	1,988,910
Financed insurance premiums		$	2,162,868		$	2,088,161
Restricted stock awards to employees		$	—		$	20,750

 

See Notes to Consolidated Financial Statements

 

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TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

 

NOTE A

 

BASIS OF PRESENTATION

 

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the financial information and footnotes required by generally accepted accounting principles for complete financial statements. References to “we,” “us,” “our,” “its,” or the “Company” refer to TGC Industries, Inc. and our subsidiaries.

 

In connection with the preparation of these consolidated financial statements, the Company evaluated subsequent events after the balance sheet date of September 30, 2011, through November 9, 2011, the date these consolidated financial statements were issued.

 

REVENUE RECOGNITION

 

Seismic Surveys

 

The Company provides seismic data acquisition survey services to its customers under general service agreements which define certain obligations for the Company and for its customers. A supplemental agreement setting forth the terms of a specific project, which may be cancelled by either party upon 30 days’ advance written notice, is entered into for every project. These supplemental agreements are either “turnkey” agreements providing for a fixed fee to be paid for each unit of seismic data acquired or “term” agreements providing for a fixed hourly, daily, or monthly fee during the term of the project. The duration of these projects will vary from a few days to several months. The Company recognizes revenue when services are performed under both types of agreements. Services are defined as the commencement of data acquisition. Under turnkey agreements, the total number of units of seismic data to be gathered is set forth in the agreement, and revenue is recognized as services are performed on a per unit of seismic data acquired rate. Under term agreements, revenue is recognized as services are performed based on the time worked rate provided in the term agreement. Under both turnkey and term agreements, cost of earned revenue is recognized by multiplying total estimated agreement cost by the percentage-of-completion of the agreement. The excess of that amount over the cost of earned revenue reported in prior periods is recognized as cost of earned revenue for the period. Agreements are not segmented or combined for purposes of calculating percentage of completion. The asset “Cost and estimated earnings in excess of billings on uncompleted contracts” represents cost incurred on turnkey agreements in excess of billings on those agreements. The liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings on turnkey agreements in excess of cost on those agreements.

 

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TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2011

 

NOTE A - continued

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2010-20, Receivables — Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 amends Topic 310 to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide new disclosures about certain financing receivables and related allowance for credit losses. These provisions are effective for interim and annual reporting periods ending on or after December 15, 2010. The adoption of this standard did not have a significant impact on our financial statements or disclosures.

 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income (ASU 2011-05), which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. ASU 2011-05 is effective for the Company in the first quarter of fiscal year 2012 and should be applied retrospectively. The implementation of this guidance is not expected to have an impact on our consolidated financial position or results of operations.

 

In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other-Topic 350: Testing for Impairment.  ASU 2011-08 amends the guidance in FASB Accounting Standards Codification Topic (“ASC”) 350-20, Intangibles-Goodwill and Other-Goodwill. The intent of this ASU is to simplify how entities test goodwill for impairment by allowing an entity to use a qualitative approach to test goodwill for impairment. The amendments in the ASU permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC 350-20. The amendments do not change the current guidance for testing other indefinite-lived assets for impairment. ASU 2011-08 is effective for goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt this standard on January 1, 2012. The adoption of this standard is not expected to have a significant impact on our financial statements or disclosures.

 

NOTE B — MANAGEMENT PRESENTATION

 

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations, and changes in financial position have been included. The results of the interim periods are not necessarily indicative of results to be expected for the entire year. For further information, refer to the financial statements and the footnotes thereto included in the Company’s Annual Report for the year ended December 31, 2010, filed on Form 10-K.

 

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TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2011

 

NOTE C — EARNINGS PER SHARE

 

Basic earnings per common share are based upon the weighted average number of shares of common stock (“common shares”) outstanding. Diluted earnings per share are based upon the weighted average number of common shares outstanding and, when dilutive, common shares issuable for stock options, warrants, and convertible securities. All earnings per common share for the three-month and nine-month periods ended September 30, 2011, and 2010, have been adjusted for the 5% stock dividend paid on May 14, 2010, to shareholders of record as of April 30, 2010.

 

The following is a reconciliation of net income (loss) and weighted average common shares outstanding for purposes of calculating basic and diluted net income (loss) per share:

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		(Unaudited)						(Unaudited)
		2011			2010			2011			2010
Basic:
Numerator:
Net income (loss)		$	1,046,578		$	(1,270,807	)	$	7,397,087		$	(1,930,906	)
Denominator:
Basic - weighted average common shares outstanding		19,249,379			19,204,448			19,232,644			19,202,250
Basic EPS		$	0.05		$	(0.07	)	$	0.38		$	(0.10	)
Diluted:
Numerator:
Net income (loss)		$	1,046,578		$	(1,270,807	)	$	7,397,087		$	(1,930,906	)
Denominator:
Weighted average common shares outstanding		19,249,379			19,204,448			19,232,644			19,202,250
Effect of Dilutive Securities:
Stock options		286,584			—			302,652			—
		19,535,963			19,204,448			19,535,296			19,202,250
Diluted EPS		$	0.05		$	(0.07	)	$	0.38		$	(0.10	)

 

Outstanding and exercisable options to purchase 64,867 and 88,249 common shares were not included in the computation of diluted earnings per share as the effect would have been anti-dilutive for the three and nine months ended September 30, 2010 due to net losses in those periods.

 

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TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2011

 

NOTE D — DIVIDENDS

 

On April 20, 2010, the Company declared a five percent (5%) stock dividend on its outstanding common shares. The 5% stock dividend was paid on May 14, 2010, to shareholders of record as of April 30, 2010. Cash in lieu of fractional shares in the total amount of $431 was paid to shareholders based on the last sales price of the common shares on the record date. No dividends have been declared or paid in 2011.

 

NOTE E — INCOME TAXES

 

Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. In addition, the Company paid, during the first nine months of 2011, federal and various state estimated income taxes for tax year 2011, as well as various state income taxes for tax year 2010.

 

NOTE F — SHARE-BASED COMPENSATION

 

The Company accounts for share-based compensation awards and for unvested awards outstanding using the modified prospective application method. Accordingly, we recognized the fair value of the share-based compensation awards as wages in the Consolidated Statements of Earnings on a straight-line basis over the vesting period. We have recognized compensation expense, relative to share-based awards, in wages in the Consolidated Statements of Earnings of approximately $107,000 and $120,000, less than $0.01 per share, for the three months ended September 30, 2011, and 2010, and approximately $334,000 and $394,000, or approximately $0.02 per share, for the nine months ended September 30, 2011, and 2010, respectively.

 

As of September 30, 2011, there was approximately $125,000 of unrecognized compensation expense related to our two share-based compensation plans which the Company expects to recognize over a period of three years.

 

NOTE G — ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT

 

On March 21, 2011, we disclosed that on March 20, 2011, the Company and Dawson Geophysical Company, a Texas corporation, and 6446 Acquisition Corp., a Texas corporation and a wholly-owned subsidiary of Dawson, entered into an Agreement and Plan of Merger pursuant to which 6446 Acquisition would merge with and into the Company, with the Company continuing after the merger as the surviving entity and a wholly-owned subsidiary of Dawson.

 

Under the terms of the merger agreement, so long as, two business days prior to the earlier of (1) a meeting of the Company’s shareholders or (2) a special meeting of Dawson’s shareholders, the Average Price (as described below) of Dawson’s common stock is equal to or greater than $32.54 but less than or equal to $52.54, at the effective time of the merger each issued and outstanding common share of the Company (other than common shares owned by the Company, any wholly-owned subsidiary of the Company, Dawson, or 6446 Acquisition) would be automatically converted into the right to receive 0.188 shares of Dawson common stock.  If the Average Price was not within the parameters outlined above, the Company and Dawson would seek, in good faith to negotiate a new exchange ratio acceptable to both parties, but subject to each party’s right to terminate the merger agreement if the Company and Dawson were not able to agree on a new exchange ratio within two business days after the second business day prior to the earlier of (1) a meeting of the Company’s shareholders or (2) a special meeting of Dawson’s shareholders.  The “Average Price” means the average of the volume weighted average of the trading price of Dawson common stock for the 10 consecutive trading days ending on the trading day that is two business days prior to the earlier of (1) a meeting of the Company’s shareholders or (2) a special meeting of Dawson’s shareholders.

 

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TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2011

 

NOTE G — continued

 

The Company’s Articles of Incorporation provide that a merger transaction must be approved by the holders of at least 80% of the Company’s outstanding common stock.

 

The Company held a meeting of its shareholders on October 27, 2011. However, two business days prior to October 27, 2011, the Average Price of Dawson’s common stock was below $32.54. As required by the merger agreement, the Company and Dawson negotiated in good faith on October 26 and October 27, 2011, to try to agree to a new exchange ratio acceptable to both parties. However, those negotiations were not successful and, on October 27, 2011, the Company provided Dawson with a written notification of termination of the merger agreement based on both of the following: (1) the inability of the parties to negotiate a new exchange ratio acceptable to both parties; and (2) holders of 80% of the Company’s outstanding common stock on August 29, 2011, the record date, did not approve the merger agreement.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Form 10-Q. Portions of this document that are not statements of historical or current fact are forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. The cautionary statements made in this Form 10-Q should be read as applying to all related forward-looking statements wherever they appear in this Form 10-Q. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause our actual results to differ materially from anticipated results include those discussed in Part II, Item 1A. “RISK FACTORS.”

 

Forward Looking Statements

 

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this report regarding the Company’s strategies and plans for growth are forward-looking statements. These forward-looking statements are often characterized by the terms “may,” “will,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” and other words and terms of similar meanings and do not reflect historical facts. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from such expectations are disclosed in the Company’s Securities and Exchange Commission filings, and include, but are not limited to, the dependence upon energy industry spending for seismic services, the unpredictable nature of forecasting weather, the potential for contract delay or cancellation, the potential for fluctuations in oil and gas prices, the availability of capital resources, and the current economic downturn which could adversely affect our revenues and cash flow if our customers, and/or potential customers, become unable to pay, or must delay payment of, amounts owing to the Company because such customers are not successful in generating revenues or are precluded from securing necessary financing. The forward-looking statements contained herein reflect the current views of the Company’s management, and the Company assumes no obligation to update the forward-looking statements or to update the reasons actual results could differ from those contemplated by such forward-looking statements.

 

Executive Overview

 

TGC Industries, Inc. is a Texas corporation, and with its wholly-owned subsidiary, Eagle Canada, Inc., a Delaware corporation, (collectively “TGC” or the “Company”), is primarily engaged in the geophysical service business of conducting three-dimensional (“3-D”) surveys for clients in the oil and gas business. TGC’s principal business office is located at 101 E. Park Blvd., Suite 955, Plano, Texas 75074 (Telephone: 972-881-1099). TGC’s internet address is www.tgcseismic.com. TGC makes available free of charge on its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K as soon as reasonably practicable after filing with, or furnishing such information to, the Securities and Exchange Commission.

 

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The Company is a leading provider of seismic data acquisition services throughout the continental United States and Canada. We supply seismic data to companies engaged in the domestic exploration and development of oil and natural gas on land and in land-to-water transition areas. Our customers rely on seismic data to identify areas where subsurface conditions are favorable for the accumulation of existing hydrocarbons, to optimize the development and production of hydrocarbon reservoirs, to better delineate existing oil and natural gas fields, and to augment reservoir management techniques. We operated eight seismic crews in the lower 48 states during the third quarter of 2011. We operated two crews in Canada during the third quarter. Due to the seasonality of the Canadian market, the second and third quarters are usually weak quarters for activity in Canada, and we expect increasing levels of seismic activity in that region for the next two quarters starting with the fourth quarter of 2011.

 

We acquire geophysical data using the latest in 3-D survey techniques. We introduce acoustic energy into the ground by using vibration equipment or dynamite detonation, depending on the surface terrain and subsurface requirements. The reflected energy, or echoes, is received through geophones, converted into a digital signal at a multi-channel recording unit, and then transmitted to a central recording vehicle. Subsurface requirements dictate the number of channels necessary to perform our services. With our state-of-the-art seismic equipment, including computer technology and multiple channels, we acquire, on a cost effective basis, immense volumes of seismic data that when processed and interpreted produce more precise images of the earth’s subsurface. Our customers then use our seismic data to generate 3-D geologic models that help reduce finding costs and improve recovery rates from existing wells.

 

We provide our seismic data acquisition services primarily to major and independent domestic onshore oil and natural gas exploration and development companies for use in the onshore drilling and production of oil and natural gas in the continental United States and Canada. The main factors influencing demand for seismic data acquisition services in our industry are the level of drilling activity by oil and natural gas companies and the sizes of such companies’ exploration and development budgets, which, in turn, depend largely on current and anticipated future crude oil and natural gas prices and depletion rates.

 

The services we provide to our customers vary according to the size and needs of each customer. Our services are marketed by supervisory and executive personnel who contact customers to determine their needs and respond to customer inquiries regarding the availability of crews. Contacts are based principally upon professional relationships developed over a number of years. There are a number of consultants in the oil and natural gas industry who process and interpret seismic data for oil and natural gas companies. These consultants can have an influence in determining which company their customers use to acquire seismic data.

 

The acquisition of seismic data for the oil and natural gas industry is a highly competitive business. There are approximately 65 seismic crews currently operating in the continental United States and Canada. Contracts for such services generally are awarded on the basis of price quotations, crew experience, and the 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 Dawson Geophysical Company, Geo Kinetics, Inc., and CGG-Veritas. These competitors are publicly-traded companies with long operating histories which field numerous crews and work in a number of different regions and terrain. In addition to the previously named companies, we also compete for projects from time to time with smaller seismic companies which operate in local markets with only one or two crews and often specialize in specific regions or type of operations.  We believe that our long-term industry expertise, the customer relationships developed over our history, and our financial stability give us an advantage over most of our competitors in the industry.

 

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Results of Operations

 

The Company’s business is subject to seasonal variations; thus the results of operations for the three and nine months ended September 30, 2011, are not necessarily indicative of a full year’s results.

 

Nine Months Ended September 30, 2011, Compared to Nine Months Ended September 30, 2010 (Unaudited)

 

Revenues. Our revenues were $111,476,221 for the nine months ended September 30, 2011, compared to $75,618,349 for the same period of 2010, an increase of 47.4%. This increase in revenues was attributable to continued improvement in the North American land seismic acquisition market, increased efficiencies of new wireless recording technology, and our operation of additional seismic crews. We operated seven seismic crews in the U.S. during the first quarter, added an eighth crew in the second quarter, and continued operating eight crews during the third quarter of 2011, as compared to six seismic crews during each of the three quarters in the nine months ended September 30, 2010. Revenues from Eagle Canada also contributed to the increase.

 

Cost of services. Our cost of services was $77,938,081 for the nine months ended September 30, 2011, compared to $60,854,197 for the same period of 2010, an increase of 28.1%. This increase was primarily attributable to strong revenue growth during the first three quarters of 2011, partially offset by increased efficiencies of new wireless recording technology, our operation of seven seismic crews, the addition during the second quarter of 2011 of our eighth seismic crew, and the continued operation of eight crews during the third quarter of 2011, as compared to six seismic crews in the U.S. during the nine months ended September 30, 2010. As a percentage of revenues, cost of services was 69.9% for the nine months ended September 30, 2011, compared to 80.5% for the same period of 2010.

 

Selling, general, and administrative expenses. SG&A expenses were $7,211,319 for the nine months ended September 30, 2011, compared to $5,008,469 for the same period of 2010, an increase of 44.0%. This increase was primarily attributable to $1,683,074 of transaction costs related to the recently terminated merger transaction with Dawson Geophysical Company. SG&A expense as a percentage of revenues was 6.5% for the nine months ended September 30, 2011, compared with 6.6% for the same period of 2010.

 

Depreciation and amortization expense. Depreciation and amortization expense was $14,209,566 for the nine months ended September 30, 2011, compared to $11,520,417 for the same period of 2010, an increase of 23.3%. This increase was primarily attributable to capital expenditures of approximately $22,330,000 for the nine months ended September 30, 2011. Depreciation and amortization expense as a percentage of revenues was 12.7% for the nine months ended September 30, 2011, compared to 15.2% for the same period of 2010.

 

Income and loss from operations. Income from operations was $12,117,255 for the nine months ended September 30, 2011, compared to a loss from operations of $1,764,734 for the same period of 2010. The increase was attributable to several factors including strengthening demand, better contract terms with the improvement in the North American land seismic acquisition market, efficiencies in operations gained through the utilization of wireless seismic recording systems, our operation of seven seismic crews, the addition during the second quarter of 2011 of our eighth seismic crew, and the continued operation of eight crews during the third quarter of 2011, as compared to six seismic crews in the U.S. during the nine months ended September 30, 2010. EBITDA increased $16,571,138 to $26,326,821 for the nine months ended September 30, 2011, from $9,755,683 for the same period of 2010, an increase of 169.9%. This increase was a result of factors discussed above. For a definition of EBITDA, a reconciliation of EBITDA to net income, and discussion of EBITDA, refer to the section entitled “EBITDA” found below.

 

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Interest expense. Interest expense was $575,191 for the nine months ended September 30, 2011, compared to $617,142 for the same period of 2010, a decrease of 6.8%. This decrease was primarily attributable to our continuing principal payments on notes payable and capital lease obligations.

 

Income tax expense. Income tax expense was $4,144,977 for the nine months ended September 30, 2011, compared to income tax benefit of $450,970 for the same period of 2010. The effective tax rate was 35.9% for the nine months ended September 30, 2011, compared to an effective tax benefit rate of 18.9% for the nine months ended September 30, 2010, primarily due to state margin taxes and permanent tax differences. See Note E of Notes to Financial Statements in Item 1.

 

Three Months Ended September 30, 2011, Compared to Three Months Ended September 30, 2010 (Unaudited)

 

Revenues. Our revenues were $31,013,392 for the three months ended September 30, 2011, compared to $22,843,724 for the same period of 2010, an increase of 35.8% reflecting the continuing strength in the U.S. land seismic market. We operated eight crews in the U.S. during the third quarter of 2011 compared with six crews in the U.S. during the third quarter of 2010. The Company’s Canadian operations did not contribute materially to the overall results of this year’s or last year’s third quarter.

 

Cost of services. Our cost of services was $21,718,157 for the three months ended September 30, 2011, compared to $18,932,507 for the same period of 2010, an increase of 14.7%. This increase was primarily attributable to increased revenues, and our operation of additional seismic acquisition crews as discussed above. As a percentage of revenues, cost of services was 70.0% for the three months ended September 30, 2011, compared to 82.9% for the same period of 2010.

 

Selling, general, and administrative expenses. SG&A expenses were $2,437,866 for the three months ended September 30, 2011, compared to $1,579,159 for the same period of 2010, an increase of 54.4%. This increase was primarily due to $572,000 of transaction costs related to the recently terminated merger transaction with Dawson Geophysical Company. SG&A expense as a percentage of revenues was 7.9% for the three months ended September 30, 2011, compared with 6.9% for the same period of 2010.

 

Depreciation and amortization expense. Depreciation and amortization expense was $4,968,140 for the three months ended September 30, 2011, compared to $3,863,486 for the same period of 2010, an increase of 28.6%. This increase was primarily attributable to additions of seismic recording equipment, vibration vehicles, and other equipment and vehicles. Depreciation and amortization expense as a percentage of revenues was 16.0% for the three months ended September 30, 2011, compared to 16.9% for the same period of 2010.

 

Income and loss from operations. Income from operations was $1,889,229 for the three months ended September 30, 2011, compared to a loss of $1,531,428 for the same period of 2010. This increase was primarily attributable to the significant increase in revenues, partially offset by increases in SG&A expenses, cost of services, and depreciation and amortization expenses discussed above. EBITDA increased $4,525,311 to $6,857,369 for the three months ended September 30, 2011, from $2,332,058 for the same period of 2010, an increase of 194.0%. This increase was a result of those factors mentioned above. For a definition of EBITDA, a reconciliation of EBITDA to net income, and discussion of EBITDA, please refer to the section entitled “EBITDA” found below.

 

Interest expense. Interest expense was $192,495 for the three months ended September 30, 2011, compared to $187,328 for the same period of 2010, an increase of 2.8%.

 

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Income tax expense. Income tax expense was $650,156 for the three months ended September 30, 2011, compared to income tax benefit of $447,949 for the same period of 2010. The effective tax rate was 38.3% for the three months ended September 30, 2011, compared to a tax benefit rate of 26.1% for the same period of 2010. See Note E of Notes to Financial Statements in Item 1.

 

EBITDA

 

We define EBITDA as net income plus interest expense, income taxes, and depreciation and amortization expense. We use EBITDA as a supplemental financial measure to assess:

 

·                  the financial performance of our assets without regard to financing methods, capital structures, taxes, or historical cost basis;

 

·                  our liquidity and operating performance over time and in relation to other companies that own similar assets and that we believe calculate EBITDA in a manner similar to us; and

 

·                  the ability of our assets to generate cash sufficient for us to pay potential interest costs.

 

We also understand that such data is used by investors to assess our performance. However, EBITDA is not a measure of operating income, operating performance, or liquidity presented in accordance with generally accepted accounting principles. When assessing our operating performance or our liquidity, you should not consider this data in isolation or as a substitute for our net income, cash flow from operating activities, or other cash flow data calculated in accordance with generally accepted accounting principles. EBITDA excludes some, but not all, items that affect net income and operating income, and these measures may vary among other companies. Therefore, EBITDA as presented below may not be comparable to similarly titled measures of other companies. Further, the results presented by EBITDA cannot be achieved without incurring the costs that the measure excludes: interest expense, income taxes, and depreciation and amortization.

 

The following table reconciles our EBITDA to our net income:

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2011			2010			2011			2010
		(unaudited)						(unaudited)
Net income (loss)		$	1,046,578		$	(1,270,807	)	$	7,397,087		$	(1,930,906	)
Depreciation and amortization		4,968,140			3,863,486			14,209,566			11,520,417
Interest expense		192,495			187,328			575,191			617,142
Income tax expense (benefit)		650,156			(447,949		)	4,144,977			(450,970		)
EBITDA		$	6,857,369		$	2,332,058		$	26,326,821		$	9,755,683

 

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Liquidity and Capital Resources

 

Cash Flows

 

Cash flows from operating activities.

 

Net cash provided by operating activities was $29,967,749 for the nine months ended September 30, 2011, compared to $5,917,877 for the same period of 2010.  The $24,049,872 increase during the first nine months of 2011 from the same period of 2010 was primarily attributable to net income of $7,397,087 compared to a net loss of $1,930,906 for the same period of 2010, the timing of billings and revenue recognition, the collections of accounts receivable, the timing of receipt and payment of invoices, federal and state income taxes payable, and the mix of contracts.

 

Working capital increased $4,407,958 to $18,101,846 as of September 30, 2011, from the December 31, 2010 working capital of $13,693,888.  This increase was primarily due to an $8,666,068 increase in cash and cash equivalents and a $3,320,139 decrease in trade accounts payable, partially offset by a decrease in costs and estimated earnings in excess of billings on uncompleted contracts of $2,584,136, a decrease in prepaid federal income taxes of $1,219,165, an increase in accrued liabilities of $1,975,671, and an increase in federal and state income taxes payable of $1,264,827.

 

Cash flows used in investing activities.

 

Net cash used in investing activities was $13,911,543 for the nine months ended September 30, 2011, and $4,973,656 for the nine months ended September 30, 2010.  This increase was due to an increase in capital expenditures of $9,059,197 and an increase in proceeds from the sale of property and equipment of $121,310.

 

Cash flows used in financing activities.

 

Net cash used in financing activities was $7,303,709 for the nine months ended September 30, 2011, and $6,868,256 for the nine months ended September 30, 2010.  The increase was due primarily to principal payments on notes payable and capital lease obligations.

 

Capital expenditures.

 

During the nine months ended September 30, 2011, the Company purchased:  (i) $22,329,586 of vehicles and equipment, primarily to add to and replace similar vehicles and equipment, (ii) additional ARAM ARIES seismic equipment, (iii) 2,500 additional GSR wireless channels, (iv) our third GSR system with 5,000 wireless channels, and (v) five new vibration vehicles.  Cash of $14,144,555, a three-year $6,765,619 note payable from a commercial bank, and capital lease obligations from a vehicle leasing company of $1,419,412 were used to finance these acquisitions.  Although we do not budget for our capital expenditures, we may purchase additional equipment during 2011 should the demand for our services increase.

 

Liquidity

 

Our primary source of liquidity is cash generated from operations and short-term borrowings from commercial banks and equipment lenders.  Based on current forecasts, we believe that we have sufficient available cash and borrowing capacity to fund our working capital needs over the next 12 months.

 

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Capital Resources

 

We have relied on cash generated from operations, short-term borrowings from commercial banks and equipment lenders, and proceeds from a public offering of our common shares to fund our working capital requirements and capital expenditures.

 

The Company has a revolving credit agreement with a commercial bank.  The borrowing limit under the revolving line of credit agreement is $5,000,000 and was renewed on September 16, 2010, and again on September 16, 2011.  The revolving line of credit agreement will expire on September 16, 2012.  Our obligations under this agreement are secured by a security interest in our accounts receivable.  Interest on the outstanding amount under the revolving credit agreement is payable monthly at the greater of the prime rate of interest or five percent.  As of September 30, 2011, we had no borrowings outstanding under the revolving credit agreement.

 

In December of 2007, we completed a $4,120,254 loan transaction with a commercial lender for the purpose of providing funds for the purchase of our seventh new ARAM ARIES recording system. This loan is repayable over a period of 48 months at a fixed per annum interest rate of 6.38%. This loan is collateralized by the recording system equipment and the recording vehicles and two semi-trailers that transport the newly purchased equipment between jobs.  In January of 2008, the Company entered into a $2,463,101 loan agreement with a bank to provide financing for the purchase of new vibration vehicles.  The loan is repayable over a period of 57 months at a fixed per annum interest rate of 6.35% and is collateralized by the vibration vehicles.  In February of 2008, the Company exercised its purchase option for seismic recording equipment it had been renting.  In March of 2008, the Company entered into a $2,975,844 loan agreement with a commercial lender to provide financing for the purchase of this rented equipment and to replace an existing loan the Company had with the lender.  This loan is repayable over a period of 48 months at a fixed per annum interest rate of 5.75% and is collateralized by the equipment.  In September of 2008, the Company entered into a $2,690,402 loan agreement with a commercial lender to provide financing for our eighth new ARAM ARIES recording system. This loan is repayable over a period of 48 months at a fixed per annum interest rate of 6.00% and is collateralized by the recording system.  Also in September of 2008, the Company entered into a $1,092,053 loan agreement with the same commercial lender to provide financing for recording equipment that goes with the eighth ARAM ARIES recording system.  This loan is co-terminus with the loan for the recording system, carries a fixed per annum interest rate of 6.00%, and is collateralized by the recording equipment.  In June of 2010, we purchased a 3,000 channel Geospace seismic recording system for approximately $3,598,000.  This system was paid for in July of 2010 with existing cash.  In September of 2010, the Company entered into a $1,988,910 loan agreement with a commercial lender to purchase 2,000 additional recording channels that were added to the 3,000 channel Geospace seismic recording system purchased in June 2010.  This loan carries a fixed per annum interest rate of 5.00%, and is collateralized by the 2,000 channels of recording equipment.  This loan matures in September of 2013.  In December of 2010, the Company entered into a $2,986,200 loan agreement with a commercial lender to purchase our second 3,000 channel Geospace seismic recording system.  This loan carries a fixed per annum interest rate of 5.00%, and is collateralized by the recording equipment.  This loan matures in December of 2013.  In April of 2011, the Company purchased an additional 2,500 channels of wireless recording equipment for approximately $2,771,000 to go with our second Geospace seismic recording system.  This equipment was paid for in April of 2011 with existing cash.  In August of 2011, the Company entered into a $6,765,619 loan agreement with a commercial lender to purchase our third Geospace seismic recording system with 5,000 channels.  This loan carries a fixed per annum interest rate of 4.50%, and is collateralized by the recording equipment.  This loan matures in August of 2014.

 

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Contractual Obligations

 

We believe that our capital resources, including our short-term investments, funds available under our revolving credit agreement, and cash flow from operations, will be adequate to meet our current operational needs. We believe that we will be able to finance our 2011 capital expenditures through cash flow from operations, borrowings from commercial lenders, and the funds available under our line of credit loan agreement.  However, our ability to satisfy working capital requirements, meet debt repayment obligations, and fund future capital requirements will depend principally upon our future operating performance which is subject to the risks inherent in our business, and will also depend on the extent to which the current recession adversely affects the ability of our customers, and/or potential customers, to pay promptly amounts owing to the Company under their service contracts with us.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2011, we had no off-balance sheet arrangements.

 

Critical Accounting Policies

 

A discussion of our critical accounting policies can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.  There have been no material changes to these policies (including critical accounting estimates and assumptions or judgments affecting the application of those estimates and assumptions) during the first nine months of 2011.

 

Recently Issued Accounting Pronouncements

 

A discussion of recently issued accounting pronouncements can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We have not entered into any hedging agreements or swap agreements.  Our principal market risks include fluctuations in commodity prices which affect demand for and pricing of our services and the risk related to the concentration of our customers in the oil and natural gas industry.  Since all of our customers are involved in the oil and natural gas industry, there may be a positive or negative effect on our exposure to credit risk because our customers may be similarly affected by changes in economic and industry conditions.  For the year ended December 31, 2010, our largest customer accounted for approximately 15% of our revenues.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

The Company maintains controls and procedures to ensure that it is able to collect the information it is required to disclose in the reports it files with the Securities and Exchange Commission and to process, summarize, and disclose this information within the time periods specified in the rules of the Securities and Exchange Commission.  Based on an evaluation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report conducted by the Company’s management, with the participation of the Chief Executive and Chief Financial Officers, the Chief Executive and Chief Financial Officers believe that these controls and procedures are effective to ensure that the Company is able to record, process, summarize, and report information required to be included in reports filed or submitted under the Exchange Act within the required time period.  There were no changes in the Company’s internal controls over financial reporting or in other factors during the quarter ended September 30, 2011, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

The Company is a defendant in various legal actions that arose or may arise out of the normal course of business.  In our opinion, none of these actions has resulted, or will result, in any significant loss to us.

 

ITEM 1A. RISK FACTORS.

 

For a discussion of those “Risk Factors” affecting the Company, you should carefully consider the “Risk Factors” discussed in Part I, under “Item 1A. Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2010, and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, which are herein incorporated by reference.  There have been no material changes from those risk factors previously disclosed in such Annual Report and Quarterly Report.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. - None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES. — None.

 

ITEM 4. RESERVED.

 

ITEM 5. OTHER INFORMATION.- None.

 

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ITEM 6. EXHIBITS.

 

The following exhibits are included herein:

 

EXHIBITS INDEX

 

EXHIBIT NO.		DESCRIPTION
3.1		Restated Articles of Incorporation (with amendment) as filed with the Secretary of State of Texas on June 20, 2003, filed as Exhibit 3.4 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003, and incorporated herein by reference.
3.2		Bylaws, as amended and restated March 25, 2009, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 31, 2009, and incorporated herein by reference.
*31.1		Certification of Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2		Certification of Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1		Certification of Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2		Certification of Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	TGC INDUSTRIES, INC.
Date: November 9, 2011	/s/ Wayne A. Whitener
	Wayne A. Whitener
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: November 9, 2011	/s/ James K. Brata
	James K. Brata
	Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

 

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EXHIBITS INDEX

 

EXHIBIT NO.		DESCRIPTION
3.1		Restated Articles of Incorporation (with amendment) as filed with the Secretary of State of Texas on June 20, 2003, filed as Exhibit 3.4 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003, and incorporated herein by reference.
3.2		Bylaws, as amended and restated March 25, 2009, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 31, 2009, and incorporated herein by reference.
*31.1		Certification of Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2		Certification of Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1		Certification of Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2		Certification of Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.

 

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