================================================================================
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 JUNE 30, 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: 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 NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, $.33 1/3 PAR VALUE NONE
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS Outstanding at June 30, 2003
----- ----------------------------
COMMON STOCK, $.33 1/3 PAR VALUE 5,487,794 SHARES
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DAWSON GEOPHYSICAL COMPANY
--------------------------
INDEX
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Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements
Statements of Operations -- Three Months and Nine Months
Ended June 30, 2003 and 2002 3
Balance Sheets -- June 30, 2003 and September 30, 2002 4
Statements of Cash Flows -- Nine Months Ended June 30,
2003 and 2002 5
Statements of Comprehensive Income (Loss) Three Months
and Nine Months Ended June 30, 2003 and 2002 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4. Controls and Procedures 15
Part II. Other Information 16
-2-
PART I. FINANCIAL INFORMATION
-----------------------------
DAWSON GEOPHYSICAL COMPANY
--------------------------
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30 June 30
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Operating revenues $11,291,000 $ 9,096,000 $36,897,000 $26,278,000
----------- ----------- ----------- -----------
Operating costs:
Operating expenses 11,046,000 8,102,000 33,762,000 23,690,000
General and administrative 580,000 496,000 1,775,000 1,550,000
Depreciation 1,148,000 1,048,000 3,271,000 3,248,000
----------- ---------- ---------- -----------
12,774,000 9,646,000 38,808,000 28,488,000
----------- ----------- ----------- -----------
Income (loss) from operations (1,483,000) (550,000) (1,911,000) (2,210,000)
Other income (expense):
Interest income 73,000 119,000 256,000 394,000
Gain on disposal of assets -- -- 21,000 5,000
Gain on sale of short-term
Investments -- -- 52,000 --
Other income 3,000 3,000 126,000 76,000
----------- ----------- ----------- -----------
Income (loss) before income tax (1,407,000) (428,000) (1,456,000) (1,735,000)
Income tax benefit -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $(1,407,000) $ (428,000) $(1,456,000) $(1,735,000)
=========== =========== =========== ===========
Net income (loss) per common share $ (.26) $ (.08) $ (.27) $ (.32)
=========== =========== =========== ===========
Weighted average equivalent common
shares outstanding 5,487,794 5,467,294 5,483,514 5,461,468
=========== =========== =========== ===========
Weighted average equivalent
common shares outstanding-
assuming dilution 5,487,794 5,467,294 5,483,514 5,461,468
=========== =========== =========== ===========
See accompanying notes to the financial statements.
-3-
DAWSON GEOPHYSICAL COMPANY
--------------------------
BALANCE SHEETS
--------------
June 30, September 30,
2003 2002
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,931,000 $ 1,309,000
Short-term investments 8,666,000 15,716,000
Accounts receivable, net of allowance
for doubtful accounts of $131,000 in 2003 and
71,000 in 2002 7,357,000 7,613,000
Prepaid expenses 381,000 220,000
Income taxes receivable -- 400,000
------------ ------------
Total current assets 22,335,000 25,258,000
------------ ------------
Property, plant and equipment 81,558,000 75,649,000
Less accumulated depreciation (59,760,000) (56,616,000)
------------ ------------
Net property, plant and equipment 21,798,000 19,033,000
------------ ------------
$ 44,133,000 $ 44,291,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,160,000 $ 2,066,000
Accrued liabilities:
Payroll costs and other taxes 577,000 342,000
Other 296,000 297,000
------------ ------------
Total current liabilities 4,033,000 2,705,000
------------ ------------
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 5,467,294 issued and outstanding,
respectively 1,829,000 1,822,000
Additional paid-in capital 38,931,000 38,863,000
Other comprehensive income, net of tax 32,000 137,000
Retained earnings (deficit) (692,000) 764,000
------------ ------------
Total stockholders' equity 40,100,000 41,586,000
------------ ------------
$ 44,133,000 $ 44,291,000
============ ============
See accompanying notes to the financial statements.
-4-
DAWSON GEOPHYSICAL COMPANY
--------------------------
STATEMENTS OF CASH FLOWS
------------------------
(UNAUDITED)
Nine Months Ended
June 30
------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss $ (1,456,000) $ (1,735,000)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation 3,271,000 3,248,000
Gain on disposal of assets (21,000) (5,000)
Gain on sale of short-term investments (52,000) --
Non-cash compensation 75,000 178,000
Other 34,000 101,000
Change in current assets and liabilities:
Decrease (increase) in accounts receivable 256,000 2,419,000
Decrease (increase) in prepaid expenses (161,000) (312,000)
Decrease in income taxes receivable 400,000 --
Increase (decrease) in accounts payable 1,094,000 (343,000)
Increase (decrease) in accrued
liabilities 234,000 65,000
------------ ------------
Net cash provided (used) by operating activities 3,674,000 3,616,000
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of assets 25,000 10,000
Capital expenditures (6,039,000) (939,000)
Proceeds from sale of short-term investments 5,964,000 --
Proceeds from maturity of short-term
investments 4,000,000 10,059,000
Investment in short-term investments (3,002,000) (13,179,000)
------------ ------------
Net cash provided (used) in investing activities 948,000 (4,049,000)
------------ ------------
Net increase (decrease) in cash and cash
equivalents 4,622,000 (433,000)
Cash and cash equivalents at beginning
of period 1,309,000 4,338,000
------------ ------------
Cash and cash equivalents at end of period $ 5,931,000 $ 3,905,000
============ ============
See accompanying notes to the financial statements.
-5-
DAWSON GEOPHYSICAL COMPANY
--------------------------
Statements of Comprehensive Income (Loss)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30 NINE MONTHS ENDED JUNE 30
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income $ (1,407,000) $ (428,000) $ (1,456,000) $ (1,738,000)
Change in fair value of short-term investments (26,000) 126,000 (57,000) 8,000
------------ ------------ ------------ ------------
Comprehensive income (loss), net of tax $ (1,433,000) $ (182,000) $ (1,513,000) $ (1,727,000)
============ ============ ============ ============
See accompanying notes to the financial statements.
6
DAWSON GEOPHYSICAL COMPANY
--------------------------
NOTES TO FINANCIAL STATEMENTS
1. OPINION OF MANAGEMENT
Although the information furnished is unaudited, in the opinion of
management of the Registrant, the accompanying financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the financial condition and results of operations necessary for
the periods presented. The results of operations for the three months and the
nine months ended June 30, 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 2002 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.
7
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 and the nine months
ended June 30, 2003 and 2002 is as follows:
Three Months Ended Nine Months Ended
June 30 June 30
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss), as reported $ (1,407,000) $ (428,000) $ (1,456,000) $ (1,735,000)
Add: Stock-based employee compensation expense
included in net income (loss), net of tax -- -- 75,000 178,000
Deduct: Stock-based employee compensation expense
determined under fair value based method (SFAS 123),
net of tax (76,000) (109,000) (358,000) (426,000)
------------ ------------ ------------ ------------
Net income (loss), pro forma $ (1,483,000) $ (537,000) $ (1,739,000) $ (1,983,000)
============ ============ ============ ============
Basic:
Net income (loss) per common share, as reported $ (0.26) $ (0.08) $ (0.27) $ (0.32)
============ ============ ============ ============
Net income (loss) per common share, pro forma $ (0.27) $ (0.10) $ (0.32) $ (0.36)
============ ============ ============ ============
Diluted:
Net income (loss) per common share, as reported $ (0.26) $ (0.08) $ (0.27) $ (0.32)
============ ============ ============ ============
Net income (loss) per common share, pro forma $ (0.27) $ (0.10) $ (0.32) $ (0.36)
============ ============ ============ ============
8
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The FASB has issued Statement No. 143 "Accounting for Asset Retirement
Obligations" which establishes requirements for the accounting of removal-type
costs associated with asset retirements. The standard is effective for fiscal
years beginning after June 15, 2002. The Company has adopted Statement 143 and
there is no impact to the Company.
On October 3, 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This pronouncement supercedes FAS
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed" and eliminates the requirement of Statement 121 to
allocate goodwill to long-lived assets to be tested for impairment. Statement
144 also describes a probability-weighted cash flow estimation approach to deal
with situations in which alternative courses of action to recover the carrying
amount of a long-lived asset are under consideration or a range is estimated for
the amount of possible future cash flows. The statement also establishes a
"primary-asset" approach to determine the cash flow estimation period for a
group of assets and liabilities that represents the unit of accounting for a
long-lived asset to be held and used. The provisions of this Statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. Implementation
of this had no impact on the Company's financial statement.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company expects no impact to its
financial statements as the Company does not anticipate exiting or disposing of
any of its activities.
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure, amends SFAS No. 123, Accounting for Stock-Based Compensation". SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. The
statement also amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The statement is required to be adopted for
fiscal years ending after December 15, 2002.
The Company currently accounts for stock-based compensation in accordance
with APB Opinion No. 25 which allows the Company to recognize compensation
expense only to the extent that the fair market value is greater than the option
price.
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.
FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN No. 45
requires that a liability be recorded in the guarantor's balance sheet upon
issuance of certain guarantees. Initial recognition and measurement of the
liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002.
FIN No. 45 also requires disclosures about guarantees in financial
statements for interim or annual periods ending after December 15, 2002. The
Company does not expect the adoption of FIN No. 45 to have a material impact on
its financial statements.
FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51". FIN No. 46 requires certain variable
interest entities to be consolidated by the primary
9
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without financial
support from other parties. The Company does not expect the adoption of FIN No.
46 to have a material impact on its financial statements.
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.
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 Nine Months Ended
June 30 June 30
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
NUMERATOR:
Net income and numerator for basic
and diluted net income per
common share-income available
to common stockholders $(1,407,000) $ (428,000) $(1,456,000) $(1,735,000)
----------- ----------- ----------- -----------
DENOMINATOR:
Denominator for basic net loss
per common share-weighted
average common shares 5,487,794 5,467,294 5,483,514 5,461,468
Effect of dilutive securities-
employee stock options -- -- -- --
----------- ----------- ----------- -----------
Denominator for diluted net
income per common share-
adjusted weighted average
common shares and assumed
conversions 5,487,794 5,467,294 5,483,514 5,461,468
----------- ----------- ----------- -----------
Net income (loss) per common share $ (.26) $ (.08) $ (.27) $ (.32)
=========== =========== =========== ===========
Net income (loss) per common share-
assuming dilution $ (.26) $ (.08) $ (.27) $ (.32)
=========== =========== =========== ===========
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.
10
Item 2. 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
For the quarter ended June 30, 2003, the Company operated five crews. Adverse
weather conditions significantly impacted the Company's revenue for the quarter
ended June 30, 2003. Capital expenditures have increased in fiscal 2003
primarily to satisfy client demand for increased channel count and in response
to opportunities to acquire the equipment from the open market at reduced
prices. Demand for the Company's services is related to crude oil and natural
gas prices.
RESULTS OF OPERATIONS
The Company's operating revenues for the first nine months of fiscal 2003
increased 40.4% from $26,278,000 to $36,897,000 as compared to the first nine
months of fiscal 2002. For the three months ended June 30, 2003, operating
revenues totaled $11,291,000 versus $9,096,000 for the same period of fiscal
2002, a 24.1% increase. Revenues have been positively impacted in the first nine
months of fiscal 2003 by continued stable pricing. In addition the Company
operated all of its six crews from November 2002 through March 2003. During the
quarter ended June 30, 2003, the Company's production potential was
significantly cut back due to rain.
Operating expenses for the nine months ended June 30, 2003 totaled $33,762,000
versus $23,690,000 for the same period of fiscal 2002. For the quarter ended
June 30, 2003, operating expenses totaled $11,046,000 versus $8,102,000. In
fiscal 2003 the Company began with five crews in operation and expanded to six
in November 2002. The increase in operating expenses consists primarily of costs
associated with the increase in personnel necessary to have the ability to
operate six crews and the increasing costs of insurance inherent in the
insurance industry. During the quarter ended June 30, 2003, the Company
continued to incur personnel costs waiting for the opportunity to work when the
rains stopped.
11
General and administrative expenses for the nine months ended June 30, 2003
totaled $1,775,000, an increase of $225,000 from the same period of fiscal 2002.
For the quarter ended June 30, 2003 general and administrative expenses totaled
$580,000, an increase of $84,000 compared to the same quarter of fiscal 2002.
The increase for the nine months period reflects advertising costs associated
with website and trade show booth enhancements as well as accrual of property
taxes. In addition the Company expanded operations in the Houston and Denver
offices during the quarter ended June 30, 2003.
Depreciation for the nine months ended June 30, 2003 totaled $3,271,000 as
compared to $3,248,000 for the nine months ended June 30, 2002. For the quarter
ended June 30, 2003 depreciation of $1,148,000 is $100,000 more than the quarter
ended June 30, 2002. Assets purchased during the years with relatively large
capital expenditures before the restricted budgets beginning in fiscal 1999 are
becoming fully depreciated. Conversely, capital expenditures purchased in fiscal
2003 are beginning to impact current year depreciation.
Total operating costs for the first nine months of fiscal 2003 were $38,808,000,
an increase of 36.2%, from the same period of fiscal 2002 due to the factors
described above. For the quarter ended June 30, 2003, total operating costs of
$12,774,000 represent a 32.4% increase from the same period of the prior fiscal
year. 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 nine months of fiscal 2003 or
2002 due to a pretax loss. The Company has not recognized a net income tax
benefit due to the establishment of a valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Net cash provided by operating activities of $3,674,000 for the nine months
ended June 30, 2003 primarily reflects the net loss offset by depreciation and
changes in working capital components.
Net cash provided by investing activities in the first nine months of fiscal
2003 represents management of short-term investments and use of proceeds for
capital expenditures and working capital.
There were no financing activities impacting cash flows for the nine months of
fiscal 2003 or 2002.
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.
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.
12
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 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.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The FASB has issued Statement No. 143 "Accounting for Asset Retirement
Obligations" which establishes requirements for the accounting of removal-type
costs associated with asset retirements. The standard is effective for fiscal
years beginning after June 15, 2002. The Company has adopted Statement 143 and
there is no impact to the Company.
On October 3, 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This pronouncement supercedes FAS
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed" and eliminates the requirement of Statement 121 to
allocate goodwill to long-lived assets to be tested for impairment. Statement
144 also describes a probability-weighted cash flow estimation approach to deal
with situations in which alternative courses of action to recover the carrying
amount of a
13
long-lived asset are under consideration or a range is estimated for the amount
of possible future cash flows. The statement also establishes a "primary-asset"
approach to determine the cash flow estimation period for a group of assets and
liabilities that represents the unit of accounting for a long-lived asset to be
held and used. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. Implementation of this had no impact
on the Company's financial statement.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company expects no impact to its
financial statements as the Company does not anticipate exiting or disposing of
any of its activities.
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure, amends SFAS No. 123, Accounting for Stock-Based Compensation". SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. The
statement also amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The statement is required to be adopted for
fiscal years ending after December 15, 2002.
The Company currently accounts for stock-based compensation in accordance
with APB Opinion No. 25 which allows the Company to recognize compensation
expense only to the extent that the fair market value is greater than the option
price.
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.
FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN No. 45
requires that a liability be recorded in the guarantor's balance sheet upon
issuance of certain guarantees. Initial recognition and measurement of the
liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. FIN No. 45 also requires disclosures about
guarantees in financial statements for interim or annual periods ending after
December 15, 2002. The Company does not expect the adoption of FIN No. 45 to
have a material impact on its financial statements.
FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51". FIN No. 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without financial support from other parties.
The Company does not expect the adoption of FIN No. 46 to have a material impact
on its financial statements.
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.
14
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 June 30, 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 June30, 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.
15
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 June 30, 2003.
16
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
/s/ Christina W. Hagan
-----------------------------------
Christina W. Hagan
Chief Financial Officer
DATE: July 18, 2003