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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 MARCH 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: 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 March 31, 2003
----- -----------------------------
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.
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Part I. Financial Information:
Item 1. Financial Statements
Statements of Operations --
Three Months and Six Months
Ended March 31, 2003 and 2002 3
Balance Sheets --
March 31, 2003 and September 30,
2002 4
Statements of Cash Flows --
Six Months Ended March 31,
2003 and 2002 5
Statements of Comprehensive Income (Loss)
Three Months and Six Months
Ended March 31, 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 15
About Market Risk
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 Six Months Ended
March 31 March 31
-------------------------------- ---------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Operating revenues $ 14,196,000 $ 8,962,000 $ 25,606,000 $ 17,182,000
------------ ------------ ------------ ------------
Operating costs:
Operating expenses 11,880,000 7,513,000 22,716,000 15,514,000
General and administrative 617,000 629,000 1,195,000 1,128,000
Depreciation 1,120,000 1,077,000 2,123,000 2,200,000
------------ ------------ ------------ ------------
13,617,000 9,219,000 26,034,000 18,842,000
------------ ------------ ------------ ------------
Income (loss) from operations 579,000 (257,000) (428,000) (1,660,000)
Other income (expense):
Interest income 84,000 117,000 183,000 275,000
Gain on disposal of assets 11,000 5,000 21,000 5,000
Gain on sale of short-term
Investments 52,000 -- 52,000 --
Other income 118,000 1,000 123,000 73,000
------------ ------------ ------------ ------------
Income (loss) before income tax 844,000 (134,000) (49,000) (1,307,000)
Income tax benefit -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ 844,000 $ (134,000) $ (49,000) $ (1,307,000)
============ ============ ============ ============
Net income (loss) per common share $ .15 $ (.02) $ (.01) $ (.24)
============ ============ ============ ============
Weighted average equivalent common
shares outstanding 5,487,794 5,467,272 5,481,374 5,458,555
============ ============ ============ ============
Weighted average equivalent
common shares outstanding-
assuming dilution 5,488,818 5,467,272 5,481,374 5,458,555
============ ============ ============ ============
See accompanying notes to the financial statements.
-3-
DAWSON GEOPHYSICAL COMPANY
--------------------------
BALANCE SHEETS
March 31, 2003 September 30, 2002
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,778,000 $ 1,309,000
Short-term investments 8,694,000 15,716,000
Accounts receivable, net of allowance
for doubtful accounts of $111,000 in 2003 and
71,000 in 2002 11,573,000 7,613,000
Prepaid expenses 533,000 220,000
Income taxes receivable 400,000 400,000
------------ ------------
Total current assets 22,978,000 25,258,000
------------ ------------
Property, plant and equipment 80,958,000 75,649,000
Less accumulated depreciation (58,633,000) (56,616,000)
------------ ------------
Net property, plant and equipment 22,325,000 19,033,000
------------ ------------
$ 45,303,000 $ 44,291,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,963,000 $ 2,066,000
Accrued liabilities:
Payroll costs and other taxes 492,000 342,000
Other 315,000 297,000
------------ ------------
Total current liabilities 3,770,000 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 58,000 137,000
Retained earnings 715,000 764,000
------------ ------------
Total stockholders' equity 41,533,000 41,586,000
------------ ------------
$ 45,303,000 $ 44,291,000
============ ============
See accompanying notes to the financial statements.
-4-
DAWSON GEOPHYSICAL COMPANY
--------------------------
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31
---------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss $ (49,000) $ (1,307,000)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation 2,123,000 2,200,000
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 32,000 54,000
Change in current assets and liabilities:
Decrease (increase) in accounts receivable (3,960,000) 2,057,000
Decrease (increase) in prepaid expenses (313,000) (323,000)
Increase (decrease) in accounts payable 897,000 (579,000)
Increase (decrease) in accrued
liabilities 168,000 (60,000)
------------ ------------
Net cash provided (used) by operating activities (1,100,000) 2,215,000
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of assets 25,000 10,000
Capital expenditures (5,418,000) (333,000)
Proceeds from sale of short-term investments 5,964,000 --
Proceeds from maturity of short-term
investments 4,000,000 6,000,000
Investment in short-term investments (3,002,000) (11,160,000)
------------ ------------
Net cash provided (used) in investing activities 1,569,000 (5,483,000)
------------ ------------
Net increase (decrease) in cash and cash
equivalents 469,000 (3,268,000)
Cash and cash equivalents at beginning
of period 1,309,000 4,338,000
------------ ------------
Cash and cash equivalents at end of period $ 1,778,000 $ 1,070,000
============ ============
See accompanying notes to the financial statements.
-5-
DAWSON GEOPHYSICAL COMPANY
--------------------------
Statements of Comprehensive Income (Loss)
(UNAUDITED)
Three Months Ended Six Months Ended
March 31 March 31
------------------------------ -------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income $ 844,000 $ (134,000) $ (49,000) $(1,307,000)
Change in fair value of short-
term investments 11,000 (48,000) (32,000) (118,000)
----------- ----------- ----------- -----------
-----------
Comprehensive income (loss), net of tax $ 855,000 $ (182,000) $ (81,000) $(1,425,000)
=========== =========== =========== ===========
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
six months ended March 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 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. For the
six month period ended March 31, 2003, compensation expense was recognized for
the fair value of the stock awards granted; therefore, pro forma amounts are the
same as reported amounts.
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 six months ended
March 31, 2003 and 2002 is as follows:
Three Months Ended Six Months Ended
March 31 March 31
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income (loss), as reported $ 844,000 $ (134,000) $ (49,000) $ (1,307,000)
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 (82,000) (69,000) (289,000) (317,000)
------------- ------------- ------------- -------------
Net income (loss), pro forma $ 762,000 $ (203,000) $ (263,000) $ (1,446,000)
============= ============= ============= =============
Basic:
Net income (loss) per common share, as reported $ 0.15 $ (0.02) $ (0.01) $ (0.24)
============= ============= ============= =============
Net income (loss) per common share, pro forma $ 0.14 $ (0.04) $ (0.05) $ (0.26)
============= ============= ============= =============
Diluted:
Net income (loss) per common share, as reported $ 0.15 $ (0.02) $ (0.01) $ (0.24)
============= ============= ============= =============
Net income (loss) per common share, pro forma $ 0.14 $ (0.04) $ (0.05) $ (0.26)
============= ============= ============= =============
-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.
-9-
FIN No. 45 also requires disclosures abut 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.
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 Six Months Ended
March 31 March 31
--------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
NUMERATOR:
Net income and numerator for basic
and diluted net income per
common share-income available
to common stockholders $ 844,000 $ (134,000) $ (49,000) $(1,307,000)
----------- ----------- ----------- -----------
DENOMINATOR:
Denominator for basic net loss
per common share-weighted
average common shares 5,487,794 5,467,272 5,481,374 5,458,555
Effect of dilutive securities-
employee stock options 1,024 -- -- --
----------- ----------- ----------- -----------
Denominator for diluted net
income per common share-
adjusted weighted average
common shares and assumed
conversions 5,488,818 5,467,272 5,481,374 5,458,555
----------- ----------- ----------- -----------
Net income (loss) per common share $ .15 $ (.02) $ (.01) $ (.24)
=========== =========== =========== ===========
Net income (loss) per common share-
assuming dilution $ .15 $ (.02) $ (.01) $ (.24)
=========== =========== =========== ===========
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
At March 31, 2003, the Company operated all six of its crews and is currently
operating five crews. 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 six months of fiscal 2003
increased 49% from $17,182,000 to $25,606,000. For the three months ended March
31, 2003, operating revenues totaled $14,196,000 versus $8,962,000 for the same
period of fiscal 2002, a 58.4% increase. Revenues have been positively impacted
in the first six months of fiscal 2003 by continued stable pricing and the
increase in operations from five to six crews in November 2002.
Operating expenses for the six months ended March 31, 2003 totaled $22,716,000
versus $15,514,000 for the same period of fiscal 2002. For the quarter ended
March 31, 2003, operating expenses totaled $11,880,000 versus $7,513,000. The
Company began fiscal 2002 with five crews operating and reduced to four during
the quarter ended December 31, 2001. 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 operate six crews and the increasing costs of insurance
inherent in the insurance industry.
-11-
General and administrative expenses for the six months ended March 31, 2003
totaled $1,195,000, an increase of $67,000 from the same period of fiscal 2002.
For the quarter ended March 31, 2003 general and administrative expenses totaled
$617,000, a slight decrease compared to the same quarter of fiscal 2002. The
increase for the six months period reflects advertising costs associated with
website and trade show booth enhancements as well as accrual of property taxes.
Depreciation for the six months ended March 31, 2003 totaled $2,123,000 as
compared to $2,200,000 for the six months ended March 31, 2002. For the quarter
ended March 31, 2003 depreciation of $1,120,000 is $43,000 more than the quarter
ended March 31, 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 six months of fiscal 2003 were $26,034,000,
an increase of 38.2%, from the same period of fiscal 2002 due to the factors
described above. For the quarter ended March 31, 2003, total operating costs of
$13,617,000 represent a 47.7% 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 six 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 used by operating activities of $1,100,000 for the six months ended
March 31, 2003 primarily reflects changes in accounts receivable. The increase
in accounts receivable of $3,960,000 for the first six months of fiscal 2003 is
a direct result of the increase in revenues. The Company considers its accounts
receivable collectible.
Net cash provided by investing activities in the first six months of fiscal 2003
represents management of short-term investments and use of proceeds for capital
expenditures and working capital.
There are no cash flows resulting from financing activities for the first
quarters 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 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.
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. For the
six month period ended March 31, 2003, compensation expense was recognized for
the fair value of the stock awards granted; therefore, pro forma amounts are the
same as reported amounts.
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
-13-
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 ABP 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 abut
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.
-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 December 31, 2002 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, 2002, 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 March 31, 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: April 29, 2003
-17-
CERTIFICATION
I, L. Decker Dawson, certify that:
1. I have reviewed this periodic report on Form 10-Q of Dawson Geophysical
Company;
2. Based on my knowledge, this periodic report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this periodic report;
3. Based on my knowledge, the financial statements, and other financial
information included in this periodic report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
periodic report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this periodic report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this periodic report (the "Evaluation Date"); and
c) presented in this periodic report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
periodic report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: April 29, 2003 Signature: /s/ L. Decker Dawson
-----------------------------------
L. Decker Dawson
Chairman of the Board
Chief Executive Officer
-18-
CERTIFICATION
I, Christina W. Hagan, certify that:
1. I have reviewed this periodic report on Form 10-Q of Dawson Geophysical
Company;
2. Based on my knowledge, this periodic report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this periodic report;
3. Based on my knowledge, the financial statements, and other financial
information included in this periodic report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
periodic report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this periodic report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this periodic report (the "Evaluation Date"); and
c) presented in this periodic report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
periodic report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: April 29, 2003 Signature: /s/ Christina W. Hagan
-----------------------------------
Christina W. Hagan
Senior Vice President
Chief Financial Officer
-19-
EXHIBIT 99.1
------------
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the periodic report of Dawson Geophysical Company (the
"Company") Form 10-Q for the period ending March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, L.
Decker Dawson, Chairman and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d);
and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: April 29, 2003 /s/ L. Decker Dawson
------------------------------------
Chairman and Chief Executive Officer
EXHIBIT 99.2
------------
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the periodic report of Dawson Geophysical Company (the
"Company") Form 10-Q for the period ending March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Christina W. Hagan, Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d);
and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: April 29, 2003 /s/ Christina W. Hagan
----------------------------------
Vice President and Chief Financial
Officer