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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 2003 COMMISSION FILE NO. 2-71058
DAWSON GEOPHYSICAL COMPANY
INCORPORATED IN THE STATE OF TEXAS 75-0970548
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
508 WEST WALL, SUITE 800, MIDLAND, TEXAS 79701
(PRINCIPAL EXECUTIVE OFFICE)
TELEPHONE NUMBER: 915-684-3000
------------------------
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 12 preceding months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS Outstanding at December 31, 2003
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COMMON STOCK, $.33 1/3 PAR VALUE 5,487,794 SHARES
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DAWSON GEOPHYSICAL COMPANY
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INDEX
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Page No.
--------
Part I. Financial Information:
Item I. Financial Statements
Statements of Operations --
Three Months Ended December 31, 2003 and 2002 3
Balance Sheets --
December 31, 2003 and September 30, 2003 4
Statements of Cash Flows --
Three Months Ended December 31, 2003 and 2002 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 12
Part II. Other Information 13
2
DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended December 31,
---------------------------------
2003 2002
------------ ------------
Operating revenues $ 15,475,000 $ 11,410,000
Operating costs:
Operating expenses 13,311,000 10,836,000
General and administrative 618,000 578,000
Depreciation 1,108,000 1,003,000
------------ ------------
15,037,000 12,417,000
Income (loss) from operations 438,000 (1,007,000)
Other income:
Interest income 69,000 99,000
Gain (loss) on disposal of assets (3,000) 10,000
Other 2,000 5,000
------------ ------------
Income (loss) before income tax 506,000 (893,000)
Income tax (expense) benefit:
Current --
Deferred --
------------ ------------
--
Net income (loss) $ 506,000 $ (893,000)
============ ============
Net income (loss) per common share $ 0.09 $ (0.16)
============ ============
Net income ( loss) per common share-assuming dilution $ 0.09 $ (0.16)
============ ============
Weighted average equivalent common shares outstanding 5,487,794 5,475,093
============ ============
Weighted average equivalent common
shares outstanding-assuming dilution 5,521,243 5,475,093
============ ============
See accompanying notes to the financial statements.
3
Dawson Geophysical Company
Balance Sheets
December 31, September 30,
2003 2003
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,360,000 $ 3,389,000
Short-term investments 8,581,000 8,623,000
Accounts receivable, net of allowance
for doubtful accounts of $127,000 in
each period 10,473,000 9,713,000
Prepaid expenses 987,000 287,000
------------ ------------
Total current assets 25,401,000 22,012,000
PROPERTY, PLANT AND EQUIPMENT 82,163,000 81,585,000
Less accumulated depreciation (60,904,000) (60,805,000)
------------ ------------
Net property, plant and equipment 21,259,000 20,780,000
------------ ------------
$ 46,660,000 $ 42,792,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,367,000 $ 1,237,000
Accrued liabilities:
Payroll costs and other taxes 779,000 478,000
Other 404,000 415,000
------------ ------------
Total current liabilities 5,550,000 2,130,000
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock-par value $1.00 per share;
5,000,000 shares authorized, none outstanding -- --
Common stock-par value $.33 1/3 per share;
10,000,000 shares authorized, 5,487,794
and 5,487,794 shares issued and outstanding
in each period 1,829,000 1,829,000
Additional paid-in capital 38,931,000 38,931,000
Other comprehensive income, net of tax (21,000) 37,000
Retained earnings (deficit) 371,000 (135,000)
------------ ------------
Total stockholders' equity 41,110,000 40,662,000
------------ ------------
$ 46,660,000 $ 42,792,000
============ ============
See accompanying notes to the financial statements.
4
DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended December 31,
---------------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 506,000 $ (893,000)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation 1,108,000 1,003,000
Non-cash compensation -- 75,000
Other 16,000 15,000
Change in current assets and liabilities:
Increase in accounts receivable (760,000) (3,491,000)
Decrease (increase) in prepaid expenses (700,000) 12,000
Increase in accounts payable 3,130,000 491,000
Increase in accrued liabilities 290,000 303,000
------------ ------------
Net cash provided (used) by operating activities 3,590,000 (2,485,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets -- 14,000
Capital expenditures (1,602,000) (1,413,000)
Proceeds from sale of short-term investments -- 1,927,000
Proceeds from maturity of short-term investments 4,000,000 4,000,000
Acquisition of short-term investments (4,017,000) (3,002,000)
------------ ------------
Net cash provided by (used in) investing activities (1,619,000) 1,526,000
Net increase (decrease) in cash and cash equivalents 1,971,000 (959,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,389,000 1,309,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 5,360,000 350,000
============ ============
See accompanying notes to the financial statements.
5
DAWSON GEOPHYSICAL COMPANY
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NOTES TO FINANCIAL STATEMENTS
1. OPINION OF MANAGEMENT
Although the information furnished is unaudited, in the opinion of
management of the Registrant, the accompanying financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the financial condition and results of operations necessary for
the periods presented. The results of operations for the three months ended
December 31, 2003, are not necessarily indicative of the results to be expected
for the fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q report pursuant to certain
rules and regulations of the Securities and Exchange Commission. These financial
statements should be read with the financial statements and notes included in
the Company's 2003 Form 10-K.
CRITICAL ACCOUNTING POLICIES
The following accounting policies require management assumptions and estimates
which could result in materially different amounts to be reported if conditions
or underlying circumstances were to change.
Revenue Recognition
-------------------
The Company recognizes revenues when services are performed. The Company also
receives reimbursements for certain out-of-pocket expenses under the terms of
its master contracts. Amounts billed to clients are recorded in revenue at the
gross amount including out-of-pocket expenses which will be reimbursed by the
client.
Allowance for Doubtful Accounts
-------------------------------
Management prepares its allowance for doubtful accounts receivable based on its
past experience of historical write-offs and review of past due accounts. The
inherent volatility of the energy industry's business cycle can cause swift and
unpredictable changes in the financial stability of the Company's customers.
Impairment of Long-lived Assets
-------------------------------
Long-lived assets are reviewed for impairment when triggering events occur
suggesting a deterioration in the asset's recoverability or fair value.
Recognition of an impairment is required if future expected net cash flows are
insufficient to recover the carrying value of the amounts. Management's forecast
of future cash flow used to perform impairment analysis includes estimates of
future revenues and future gross margins. If the Company is unable to achieve
these cash flows, management's estimates would be revised, potentially resulting
in an impairment charge in the period of revision.
6
Depreciable Lives of Property, Plant and Equipment
--------------------------------------------------
Property, Plant and Equipment is 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.
Stock-Based Compensation
------------------------
In accordance with the Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", no compensation is recorded for stock options or
other stock-based awards that are granted to employees or non-employee directors
with an exercise price equal to or above the common stock price on the grant
date. There were no stock-based awards granted in the current quarter.
The Company accounts for stock-based compensation utilizing the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations. The following
pro forma information, as required by Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), as
amended by Statement of Financial Accounting Standards 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 three months ended December 31, 2003
and 2002 is as follows:
Three Months Ended
December 31,
--------------------------------
2003 2002
------------ ------------
Net income (loss), as reported $ 506,000 $ (893,000)
Add: Stock-based employee compensation expense
included in net income (loss), net of tax -- (75,000)
Deduct: Stock-based employee compensation expense
determined under fair value based method (SFAS 123),
net of tax (78,000) (117,000)
------------ ------------
Net income (loss), pro forma $ 428,000 $ (1,085,000)
============ ============
Basic:
Net income (loss) per common share, as reported $ 0.09 $ (0.16)
============ ============
Net income (loss) per common share, pro forma $ 0.08 $ (0.20)
============ ============
Diluted:
Net income (loss) per common share, as reported $ 0.09 $ (0.16)
============ ============
Net income (loss) per common share, pro forma $ 0.08 $ (0.20)
============ ============
7
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On April 22, 2003, the FASB announced its decision to require all
companies to expense the value of employee stock options. Companies will be
required to measure the cost according to the fair value of the options. The new
guidelines have not been released but are expected to be finalized and to become
effective in 2004. When final rules are announced, the Company will assess the
impact to its financial statements.
2. NET INCOME PER COMMON SHARE
The Company accounts for earnings per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(Statement 128"). Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
when appropriate, restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
net income per common share:
Three Months Ended
December 31,
--------------------------------
2003 2002
------------ ------------
NUMERATOR:
Net income and numerator for basic
and diluted net income per
common share-income available
to common stockholders $ 506,000 $ (893,000)
------------ ------------
DENOMINATOR:
Denominator for basic net loss
per common share-weighted
average common shares 5,487,794 5,475,093
Effect of dilutive securities-
employee stock options 33,449 --
------------ ------------
Denominator for diluted net
income per common share-
adjusted weighted average
common shares and assumed
conversions 5,521,243 5,475,093
------------ ------------
Net income (loss) per common share $ .09 $ (.16)
============ ============
Net income (loss) per common share-
assuming dilution $ .09 $ (.16)
============ ============
Employee stock options to purchase shares of common stock were
outstanding during fiscal year 2003 and 2002 but were not included in the
computation of diluted net loss per share because either (i) the employee stock
options' exercise price was greater than the average market price of the common
stock of the Company, or (ii) the Company had a net loss from continuing
operations and, therefore, the effect would be antidilutive.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements. In addition, in reviewing the Company's financial
statements it should be noted that the Company's revenues fluctuate in response
to activity levels in the oil and gas exploration and production sector and
additionally fluctuations in the Company's results of operations may occur due
to commodity prices, weather, land use permitting and other factors.
FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact included in this report,
including without limitation, statements under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position, business strategy and plans and objectives of
management of the Company for future operations, are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. When used in this report, words such as
"anticipate", "believe", "estimate", "expect", "intend", and similar
expressions, as they relate to the Company or its management, identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's 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, weather problems, inability to obtain
land use permits, the volatility of oil and gas prices, and the availability of
capital resources. Such statements reflect the current views of the Company with
respect to future events and are subject to these and other risks, uncertainties
and assumptions relating to the operations, results of operations, growth
strategy and liquidity of the Company. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this paragraph. The Company
assumes no obligation to update any such forward-looking statements.
OVERVIEW
The Company's improved performance was due to increased petroleum industry
demand for the Company's high resolution 3-D seismic surveys, exploration for
reserves of crude oil and natural gas, more favorable weather conditions than in
most recent quarters along with modest price increases. The Company has been and
is currently involved in the application of high resolution techniques over
previously surveyed areas.
The Company's order book continues on an increasing trend and now stands at
approximately six months of operations. The increase in the order book is the
result of improving market conditions, the Company's reputation throughout the
industry as a quality provider of leading edge technology, technical expertise
and experience in the field of geophysics, and an industry model Health, Safety
and Environmental program. All six data acquisition crews operated continuously
throughout the fiscal first quarter, employing all the Company's data channels
and supporting equipment. In response to this demand, the Company will field a
seventh acquisition crew during the current quarter.
By responding to opportunities to acquire equipment from the open market at
reduced prices, the Company's capital expenditures increased in fiscal 2003 and
are on a comparable track in fiscal 2004 to satisfy client demand for increased
channel count. The Company has increased its data channel capacity more than 50
percent in the last five years. Even though demand for the Company's services is
related to crude oil and natural gas prices, production results are enhanced by
favorable weather and timely permits for rights-of-way.
9
RESULTS OF OPERATIONS
The Company's operating revenues for the first quarter of fiscal 2004 increased
35.6% to $15,475,000 from $11,410,000 in fiscal 2003. Revenues have been
positively impacted in fiscal 2004 by continued stable pricing and favorable
weather as compared to the same period of fiscal 2003. The Company estimated
last year that it had lost revenues in excess of $2,000,000 due to weather
during the quarter.
Operating expenses increased 22.8% in the first quarter of fiscal 2004 as
compared to the same period of fiscal 2003 as a result of increased demand for
the Company's services. In fiscal 2003 the Company began with five crews in
operation and expanded to six in November 2002. By comparison, the Company has
fully utilized its six crews throughout the first quarter of fiscal 2004. The
increase in operating expenses consists primarily of costs associated with the
increase in personnel necessary to operate six crews.
General and administrative expenses for the quarter ended December 31, 2003
totaled $618,000, an increase of $40,000 from the same period of fiscal 2003.
The increase primarily reflects compliance with the Sarbanes-Oxley Act of 2002.
General and administrative expenses represent four percent of the revenues of
the quarter ended December 31, 2003 and five percent of the revenues for the
same period of the prior fiscal year.
Depreciation for the quarter ended December 31, 2003 totaled $1,108,000, as
compared to $1,003,000 for the same period of fiscal 2003. The increase is due
to capital expenditures of fiscal 2003 and to date in fiscal 2004.
Total operating costs for the first quarter of fiscal 2004 totaled $15,037,000,
an increase of 21.1% from the same period of fiscal 2003 due to the factors
described above. There is a high proportion of relatively fixed total operating
costs (including personnel costs of active crews and depreciation costs)
inherent in the Company's business.
No income tax expense was recorded for the first quarter of fiscal 2004 or 2003.
The Company has no income tax benefit remaining due to the establishment of a
valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Net cash provided by operating activities of $3,590,000 in the quarter ended
December 31, 2003 reflects the net income for the quarter and changes in working
capital components, primarily the increase in accounts payable. An increase in
reimburseable expenses combined with prebilled and collected contracts existed
at December 31, 2003. The Company considers the net value of its accounts
receivable collectible.
Net cash used by investing activities in the first quarter of fiscal 2004
represents management of short-term investments and capital expenditures. The
Company purchased additional data acquisition recording equipment with working
capital.
There are no cash flows resulting from financing activities for the first
quarters of fiscal 2004 or 2003.
CAPITAL EXPENDITURES
The Company continually strives to supply market demand with technologically
advanced 3-D data acquisition recording systems and leading edge data processing
capabilities. The Company maintains equipment in and out of service in
anticipation of increased future demand of the Company's services. In addition,
the Company continues to monitor the development of the three-component seismic
approach. The Company believes that it is in position to respond to demand for
this technological advancement of the seismic industry.
10
CAPITAL RESOURCES
The Company believes that its capital resources, including its short-term
investments and cash flow from operations are adequate to meet its current
operational needs and finance capital needs as determined by market demand and
technological developments. The Company is currently not subject to any
financing arrangements; however, it believes that financing through traditional
sources is available.
CRITICAL ACCOUNTING POLICIES
The following accounting policies require management assumptions and estimates
which could result in materially different amounts to be reported if conditions
or underlying circumstances were to change.
Revenue Recognition
-------------------
The Company recognizes revenues when services are performed. The Company also
receives reimbursements for certain out-of-pocket expenses under the terms of
its master contracts. Amounts billed to clients are recorded in revenue at the
gross amount including out-of-pocket expenses which will be reimbursed by the
client.
Allowance for Doubtful Accounts
-------------------------------
Management prepares its allowance for doubtful accounts receivable based on its
past experience of historical write-offs and review of past due accounts. The
inherent volatility of the energy industry's business cycle can cause swift and
unpredictable changes in the financial stability of the Company's customers.
Impairment of Long-lived Assets
-------------------------------
Long-lived assets are reviewed for impairment when triggering events occur
suggesting a deterioration in the asset's recoverability or fair value.
Recognition of an impairment is required if future expected net cash flows are
insufficient to recover the carrying value of the amounts. Management's forecast
of future cash flow used to perform impairment analysis includes estimates of
future revenues and future gross margins. If the Company is unable to achieve
these cash flows, management's estimates would be revised resulting in an
impairment charge in the period of revision.
Depreciable Lives of Property, Plant and Equipment
--------------------------------------------------
Property, Plant and Equipment is 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.
Stock-Based Compensation
------------------------
In accordance with the Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, no compensation is recorded for stock options or
other stock-based awards that are granted to employees or non-employee directors
with an exercise price equal to or above the common stock price on the grant
date.
11
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued Statement No. 150 "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." This statement establishes standards for how an issuer classified and
measures certain financial instruments with characteristics of both liabilities
and equity. This statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The Company does not
expect the adoption of FAS 150 to have a material impact on its financial
statements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The primary sources of market risk include fluctuations in commodity prices
which effect demand for and pricing of the Company's services and interest rate
fluctuations. At December 31, 2003 the Company had no indebtedness. The
Company's short-term investments were fixed-rate and the Company does not
necessarily intend to hold them to maturity, and therefore, the short-term
investments expose the Company to the risk of earnings or cash flow loss due to
changes in market interest rates. As of December 31, 2003, the carrying value of
the investments approximate fair value. The Company has not entered into any
hedge arrangements, commodity swap agreements, commodity futures, options or
other derivative financial instruments. The Company does not currently conduct
business internationally so it is generally not subject to foreign currency
exchange rate risk.
Item 4. CONTROLS AND PROCEDURES
Within the 90 day period prior to the filing date of this Quarterly Report on
Form 10-Q, the Company, under the supervision, and with the participation, of
its management, including its principal executive officer and principal
financial officer, performed an evaluation of the design and operation of the
Company's disclosure controls and procedures (as defined in Securities and
Exchange Act Rule 13a-14(c)). Based on that evaluation, the Company's principal
executive officer and principal financial officer concluded that such disclosure
controls and procedures are effective to ensure that material information
relating to the Company is accumulated and communicated to the Company's
management and made known to the principal executive officer and principal
financial officer, particularly during the period for which this periodic report
was being prepared.
No significant changes were made in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date
the controls were evaluated as discussed above.
12
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed by the Company during
the quarter ended December 31, 2003.
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DAWSON GEOPHYSICAL COMPANY
(REGISTRANT)
By: /s/ L. Decker Dawson
--------------------------------------
L. Decker Dawson
Chairman of the Board of Directors and
Chief Executive Officer
By: /s/ Christina W. Hagan
--------------------------------------
Christina W. Hagan
Senior Vice President, Treasurer,
Secretary and Chief Financial Officer
DATE: January 23, 2004
14