1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 ----------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________. For Quarter Ended December 31, 2000 Commission File number 2-71058 ----------------- ------- DAWSON GEOPHYSICAL COMPANY . ------------------------------------------------------ (Exact name of Registrant as specified in its Charter) TEXAS 75-0970548 . ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 508 West Wall, Suite 800, Midland, Texas 79701 . ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) 915/684-3000 ------------ NONE ---- (Former Name, Former Address & Former Fiscal Year if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- 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, 2000 . -------------------------------- ---------------------------------- Common Stock, $.33 1/3 par value 5,445,794 shares 2 DAWSON GEOPHYSICAL COMPANY INDEX -2-
Page No. -------- Part I. Financial Information: Item I. Financial Statements Statements of Operations -- Three Months Ended December 31, 2000 and 1999 3 Balance Sheets -- December 31, 2000 and September 30, 2000 4 Statements of Cash Flows -- Three Months Ended December 31, 2000 and 1999 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 10 Part II. Other Information 11 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements DAWSON GEOPHYSICAL COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) -3-
Three Months Ended December 31 ------------------------------ 2000 1999 ------------ ------------ Operating revenues $ 6,349,000 $ 4,893,000 Operating costs: Operating expenses 7,056,000 5,530,000 General and administrative 447,000 763,000 Depreciation 2,331,000 2,463,000 ------------ ------------ 9,834,000 8,756,000 ------------ ------------ Loss from operations (3,485,000) (3,863,000) Other income (expense): Interest income 188,000 228,000 Other 4,000 -- Gain on disposal of assets 1,000 -- ------------ ------------ Loss before income tax (3,292,000) (3,635,000) Income tax benefit -- 1,236,000 ------------ ------------ Net loss $ (3,292,000) $ (2,399,000) ============ ============ Net loss per common share $ (.61) $ (.44) ============ ============ Weighted average equivalent common shares outstanding 5,433,229 5,414,560 ============ ============ 4 DAWSON GEOPHYSICAL COMPANY BALANCE SHEETS See accompanying notes to the financial statements. -4-
December 31, 2000 September 30, 2000 ----------------- ------------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,208,000 $ 509,000 Short-term investments 11,018,000 11,025,000 Accounts receivable, net of allowance for doubtful accounts of $226,000 and $300,000 respectively 5,293,000 6,567,000 Income taxes receivable 2,165,000 2,165,000 Prepaid expenses 203,000 200,000 ------------ ------------ Total current assets 19,887,000 20,466,000 ------------ ------------ Property, plant and equipment 73,194,000 73,132,000 Less accumulated depreciation (46,121,000) (43,817,000) ------------ ------------ Net property, plant and equipment 27,073,000 29,315,000 ------------ ------------ $ 46,960,000 $ 49,781,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,297,000 $ 1,038,000 Accrued liabilities: Payroll costs and other taxes 395,000 253,000 Other -- 22,000 ------------ ------------ Total current liabilities 1,692,000 1,313,000 ------------ ------------ 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, 5,445,794 and 5,428,794 issued and outstanding respectively 1,815,000 1,810,000 Additional paid-in capital 38,711,000 38,624,000 Retained earnings 4,742,000 8,034,000 ------------ ------------ Total stockholders' equity 45,268,000 48,468,000 ------------ ------------ Contingencies (see note 2) $ 46,960,000 $ 49,781,000 ============ ============ 5 DAWSON GEOPHYSICAL COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED) See accompanying notes to the financial statements. -5-
Three Months Ended December 31 ------------------------------ 2000 1999 ------------ ------------ Cash flows from operating activities: Net loss $ (3,292,000) $ (2,399,000) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 2,331,000 2,463,000 Gain on disposal of assets (1,000) -- Non-cash compensation 92,000 99,000 Deferred income taxes -- (509,000) Other 8,000 103,000 Change in current assets and liabilities: Decrease in accounts receivable 1,274,000 1,000 Increase in income taxes receivable -- (727,000) Increase in prepaid expenses (3,000) (122,000) Increase in accounts payable 259,000 190,000 Increase (decrease) in accrued liabilities 120,000 (254,000) ------------ ------------ Net cash provided by (used in) operating activities 788,000 (1,155,000) ------------ ------------ Cash flows from investing activities: Proceeds from disposal of assets (1,000) -- Capital expenditures (88,000) (25,000) Proceeds from maturity of short-term investments 2,000,000 1,000,000 Investment in short-term investments (2,000,000) (998,000) ------------ ------------ Net cash used in investing activities (89,000) (23,000) ------------ ------------ Cash flows from financing activities: Proceeds from exercise of stock options -- 32,000 ------------ ------------ Net cash provided by financing activities -- 32,000 ------------ ------------ Net increase in cash and cash equivalents 699,000 (1,146,000) Cash and cash equivalents at beginning of period 509,000 4,993,000 ------------ ------------ Cash and cash equivalents at end of period $ 1,208,000 $ 3,847,000 ============ ============ 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 for the periods presented. The results of operations for the three months ended December 31, 2000, are not necessarily indicative of the results to be expected for the fiscal year. 2. CONTINGENCIES The Company is a defendant in two lawsuits pending in the 112th and 83rd District Courts of Pecos County, Texas (respectively, Cause No. 8812, Ernestine Bernal, et al. vs. Javier Antonio Orona, et al.; and Cause No. P5565-83-CV, Carla Jaquez, et al. vs. Javier Antonio Orona, et al.) relating to a July 1995 accident involving a van owned by the Company which was used to transport employees to various job sites and a non-Company owned vehicle. The accident resulted in the deaths of four Company employees who were passengers in such van. The Company is one of several named defendants in such suits. Other named defendants include the estate of the deceased driver of such van, who was an employee of the Company, the driver of such non-Company owned vehicle, who was then an employee of the Company, the owner of such vehicle, and Ford Motor Company, the manufacturer of the Company van involved in such accident. In general, the claims against the Company include allegations of negligence, gross negligence and/or intentional tort as a result of, among other things, the Company's alleged failure to provide safe transportation for its employees and to properly select, train and supervise the deceased driver of such van. The plaintiffs in such suits are seeking actual damages from the defendants of $15.5 million, additional unspecified actual damages, prejudgment and post-judgment interest and costs of suit as well as exemplary and punitive damages in an amount not to exceed four times the amount of actual damages. The Company believes that it has meritorious defenses to the claims asserted against it in such suits and it intends to continue to vigorously defend itself against such claims. In addition, the Company believes that it has approximately $11 million of liability insurance coverage to provide against an unfavorable outcome. Such suits are currently pending trial, and the Company's motion for summary judgment in Cause No. 8812 has been denied. A trial date has been set both in Cause No. 8812 and consolidated Cause No. P5565-83-CV for March 26, 2001. Due to the uncertainties inherent in litigation, no assurance can be given as to the ultimate outcome of such suits or the adequacy or availability of the Company's liability insurance to cover the damages, if any, which may be assessed against the Company in such suits. A judgment awarding plaintiffs an amount significantly exceeding the Company's available insurance coverage could have a material adverse effect on the Company's financial condition, results of operations and liquidity. The Company is party to other legal actions arising in the ordinary course of its business, none of which management believes will result in a material adverse effect on the Company's financial position or results of operation, as the Company believes it is adequately insured. -6- 7 3. NET INCOME PER COMMON SHARE The following table sets forth the computation of basic and diluted net income per common share: Employee stock options to purchase shares of common stock were outstanding during fiscal year 2001 and 2000 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. -7-
Three Months Ended December 31 ------------------------------ 2000 1999 ------------ ------------ Numerator: Net loss and numerator for basic and diluted net income per common share-income available to common stockholders $ (3,292,000) $ (2,399,000) ------------ ------------ Denominator: Denominator for basic net loss per common share-weighted average common shares 5,433,229 5,414,560 Effect of dilutive securities- employee stock options -- -- ------------ ------------ Denominator for diluted net loss per common share- adjusted weighted average common shares and assumed conversions 5,433,229 5,414,560 ------------ ------------ Net loss per common share $ (.61) $ (.44) ============ ============ Net loss per common share- assuming dilution $ (.61) $ (.44) ============ ============ 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 relate to oil and gas exploration and production activity and 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 Although crude oil and natural gas prices have led to increased exploration budgets among our petroleum industry clients, the Company's revenues were negatively impacted during the quarter ended December 31, 2000 due to unfavorable weather. Demand for the Company's services is related to crude oil and natural gas prices; however, there has been a prolonged delay in demand for geophysical services which has had a negative impact on price recovery. Accordingly the Company is experiencing some improvement in pricing; however, during the quarter ended December 31,2000, the Company was completing some projects that were bid at last year's low rates. RESULTS OF OPERATIONS The Company's operating revenues for the first quarter of fiscal 2001 increased 29.8% from $4,893,000 to $6,349,000. Demand for the Company's services has improved as -8- 9 compared to the same quarter of the prior year due to the continuing high prices for crude oil and natural gas. The Company is beginning to experience some success in securing improved bid prices; however, revenues for the quarter ended December 31, 2000, were negatively impacted by unfavorable weather and the completion of projects that were bid at last year's low rates. Operating expenses increased 27.6% in the first quarter of fiscal 2001 as compared to the same period of fiscal 2000 as a result of increased demand for the Company's services. The Company was operating five crews throughout the first quarter of fiscal 2001 as compared to four crews throughout the same quarter of the prior year. While the unfavorable weather experienced in the quarter ended December 31, 2000 had a negative impact on revenues, the impact was minimal to operating expenses. General and administrative expenses for the quarter ended December 31, 2000 totaled $447,000, a decrease of $316,000 from the same period of fiscal 2000. The decrease primarily consists of a provision for doubtful accounts recognized during the quarter ended December 31, 1999. Depreciation for the quarter ended December 31, 2000 totaled $2,331,000, a decrease of $132,000 from the same period of fiscal 2000. Depreciation decreased as a result of a suspension of capital expansion during fiscal 1999 and fiscal 2000 due to industry conditions. Total operating costs for the first quarter of fiscal 2001 totaled $9,834,000, an increase of 12.3% from the same period of fiscal 2000 due to the factors described above. The 29.8% increase of revenues as compared to the 12.3% increase of total operating costs for the first quarter of fiscal 2001 reflects the high proportion of relatively fixed total operating costs (including personnel costs of active crews and depreciation costs) inherent in the Company's business and continued price competition in the bidding process for geophysical services due to the remaining over capacity in our industry. The Company has no income tax benefit due to the establishment of a valuation allowance offset by an increase in pretax loss. LIQUIDITY AND CAPITAL RESOURCES Cash Flows Net cash provided by operating activities of $788,000 in the quarter ended December 31, 2000 primarily reflects the net loss for the quarter offset by changes in working capital components. The decrease in deferred income taxes in fiscal 2000 is a result of the reversal of temporary differences due to depreciation and recognition of net operating loss carryback. Net cash used in investing activities in the first quarter of fiscal 2001 is consistent with the same period of the prior year representing management of short-term investments and limited capital expenditures. The cash flows provided by financing activities for the first quarter of fiscal 2000 represent the proceeds from the exercise of a stock option. -9- 10 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. Depreciation increased each fiscal year through 1999 as a new crew as well as additions and replacements of cables and geophones, vehicles, and other data acquisition peripheral equipment had been placed into service each year for the past several years. Depreciation for fiscal 2001 is expected to be less than in fiscal 2000. The Company will maintain 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, cash flow from operations, and relationships with financial entities, are adequate to meet its current operational needs and finance capital needs as determined by market demand and technological developments. LITIGATION The Company is a defendant in two lawsuits relating to a July 1995 accident involving a van owned by the Company in which four Company employees died. The Company believes that it has meritorious defenses to the claims asserted against it in such suits. Further, while the plaintiffs seek damages in excess of the Company's liability insurance policies, the Company believes that its liability insurance should provide adequate coverage of the damages, if any, which may be assessed against the Company in such litigation. Due to the uncertainties inherent in litigation, no assurance can be given as to the ultimate outcome of such suits or the adequacy or availability of the Company's liability insurance to cover any such damages. A judgment awarding plaintiffs an amount significantly exceeding the Company's available insurance coverage could have a material adverse effect on the Company's financial condition, results of operations and liquidity. 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, 2000 the Company had no indebtedness and in addition the Company's short-term investments were fixed-rate and, therefore, do not expose the Company to significant risk of earnings or cash flow loss due to changes in market interest rate. 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. -10- 11 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The information required by this Item 6(a) is set forth in the Index to Exhibits accompanying this quarterly report and is incorporated herein by reference. (b) No reports on Form 8-K were filed by the Company during the quarter ended December 31, 2000. -11- 12 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 Chief Executive Officer /s/ Christina W. Hagan ----------------------------------- Christina W. Hagan Chief Financial Officer DATE: January 24, 2001 . -------------------------