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 June 30, 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 June 30, 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 June 30, 2000 -------------------------------- ---------------------------- Common Stock, $.33 1/3 par value 5,428,794 shares

2 DAWSON GEOPHYSICAL COMPANY INDEX Page No. -------- Part I. Financial Information: Item 1. Financial Statements: Statements of Operations -- Three Months and Nine Months ended June 30, 2000 and 1999 3 Balance Sheets -- June 30, 2000 and September 30, 1999 4 Statements of Cash Flows -- Nine Months Ended June 30, 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 -2-

3 PART I. FINANCIAL INFORMATION DAWSON GEOPHYSICAL COMPANY Item 1. Financial Statements STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended June 30 June 30 ------------------------------ ------------------------------ 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Operating revenues $ 2,712,000 $ 4,575,000 $ 11,880,000 $ 18,646,000 ------------ ------------ ------------ ------------ Operating costs: Operating expenses 4,192,000 4,425,000 14,826,000 16,166,000 General and administrative 508,000 610,000 1,939,000 1,650,000 Depreciation 2,189,000 2,631,000 7,125,000 8,040,000 ------------ ------------ ------------ ------------ 6,889,000 7,666,000 23,890,000 25,856,000 ------------ ------------ ------------ ------------ Loss from operations (4,177,000) (3,091,000) (12,010,000) (7,210,000) Other income (expense): Interest income 291,000 242,000 754,000 640,000 Gain (loss) on disposal of assets (9,000) 2,000 (9,000) (10,000) Other income 38,000 (1,000) 41,000 41,000 ------------ ------------ ------------ ------------ Loss before income tax (3,857,000) (2,848,000) (11,224,000) (6,539,000) Income tax benefit 689,000 958,000 2,637,000 2,214,000 ------------ ------------ ------------ ------------ Net loss $ (3,168,000) $ (1,890,000) $ (8,587,000) $ (4,325,000) ============ ============ ============ ============ Net loss per common share $ (.58) $ (.35) $ (1.58) $ (.80) ============ ============ ============ ============ Weighted average equivalent common shares outstanding 5,428,794 5,406,794 5,424,008 5,393,862 ============ ============ ============ ============ See accompanying notes to the financial statements. -3-

4 DAWSON GEOPHYSICAL COMPANY BALANCE SHEETS June 30, 2000 September 30, 1999 ------------------ ------------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $ 5,793,000 $ 4,993,000 Short-term investments 13,527,000 13,547,000 Accounts receivable, net of allowance for doubtful accounts of $553,000 in 2000 and $133,000 in 1999 2,322,000 5,567,000 Income taxes receivable 2,165,000 1,668,000 Prepaid expenses 243,000 466,000 ------------ ------------ Total current assets 24,050,000 26,241,000 ------------ ------------ Property, plant and equipment 69,554,000 71,706,000 Less accumulated depreciation (41,556,000) (36,529,000) ------------ ------------ Net property, plant and equipment 27,998,000 35,177,000 ------------ ------------ $ 52,048,000 $ 61,418,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 817,000 $ 778,000 Accrued liabilities: Payroll costs and other taxes 211,000 506,000 Other 4,000 21,000 ------------ ------------ Total current liabilities 1,032,000 1,305,000 ------------ ------------ Deferred income taxes -- 645,000 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, 5,428,794 and 5,406,794 shares issued and outstanding in 2000 and 1999, respectively 1,810,000 1,802,000 Additional paid-in capital 38,624,000 38,497,000 Retained earnings 10,582,000 19,169,000 ------------ ------------ Total stockholders' equity 51,016,000 59,468,000 ------------ ------------ $ 52,048,000 $ 61,418,000 ============ ============ Contingencies (See Note 2) See accompanying notes to the financial statements. -4-

5 DAWSON GEOPHYSICAL COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended June 30 ------------------------------ 2000 1999 ------------ ------------ Cash flows from operating activities: Net loss $ (8,587,000) $ (4,325,000) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 7,125,000 8,040,000 Loss on disposal of assets 9,000 10,000 Non-cash interest income -- (35,000) Non-cash compensation 101,000 256,000 Deferred income taxes (645,000) (1,276,000) Provision for losses on trade receivables -- 120,000 Other 207,000 248,000 Change in current assets and liabilities: Decrease in accounts receivable 3,245,000 6,228,000 Decrease in prepaid expenses 223,000 42,000 Increase in income taxes receivable (497,000) (104,000) Decrease (increase) in accounts payable 39,000 (957,000) Decrease in accrued liabilities (313,000) (1,164,000) ------------ ------------ Net cash provided by operating activities 907,000 7,083,000 ------------ ------------ Cash flows from investing activities: Proceeds from disposal of assets 110,000 24,000 Capital expenditures (251,000) (147,000) Proceeds from maturity of short-term investments 2,501,000 5,500,000 Investment in short-term investments (2,499,000) (11,507,000) ------------ ------------ Net cash used in investing activities (139,000) (6,130,000) ------------ ------------ 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 800,000 953,000 Cash and cash equivalents at beginning of period 4,993,000 5,745,000 ------------ ------------ Cash and cash equivalents at end of period $ 5,793,000 $ 6,698,000 ============ ============ See accompanying notes to the financial statements. -5-

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 pre- sented. The results of operations for the three months and the nine months ended June 30, 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, 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. The court has heard a motion for summary judgment in both cases, requesting that the Company be dismissed from such suit based upon various legal theories. Such motion has not yet been ruled on by the court. 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: Three Months Ended Nine Months Ended June 30 June 30 ---------------------------- ---------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Numerator: Net loss and numerator for basic and diluted net income per common share-income available to common stockholders $(3,168,000) $(1,890,000) $(8,587,000) $(4,325,000) ----------- ----------- ----------- ----------- Denominator: Denominator for basic net loss per common share-weighted average common shares 5,428,794 5,406,794 5,424,008 5,393,862 Effect of dilutive securities- employee stock options -- -- -- -- ----------- ----------- ----------- ----------- Denominator for diluted net loss per common share- adjusted weighted average common shares and assumed conversions 5,428,794 5,406,794 5,424,008 5,393,862 ----------- ----------- ----------- ----------- Net loss per common share $ (.58) $ (.35) $ (1.58) $ (.80) =========== =========== =========== =========== Net loss per common share--assuming dilution $ (.58) $ (.35) $ (1.58) $ (.80) =========== =========== =========== =========== Employee stock options to purchase shares of common stock were outstanding during fiscal year 2000 and 1999 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-

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. RESULTS OF OPERATIONS The Company's operating revenues for the first nine months of fiscal 2000 totaled $11,880,000 versus $18,646,000 for the same period of fiscal 1999, a decrease of 36%. For the three months ended June 30, 2000, operating revenues totaled $2,712,000 versus $4,575,000 for the same period of fiscal 1999, a decrease of 41%. Demand for the Company's services continues to be negatively impacted by reduced activity in the petroleum exploration industry. With a capacity to operate six crews, the Company operated four crews in the first quarter of fiscal 2000 and reduced the number of operating crews to two in March 2000. The Company returned to four operating crews in July 2000. In addition to the decreased number of crews operating during the quarter ended June 30, 2000, the decrease in revenues reflects continuing severe price competition. -8-

9 Operating expenses for the nine months ended June 30, 2000 totaled $14,826,000, a decrease of 8% from the same period of fiscal 1999. For the quarter ended June 30, 2000, operating expenses totaled $4,192,000 versus $4,425,000 for the same period of fiscal 1999. In January 1999 the Company enacted employee layoffs and salary reductions; however, the Company has retained key technical and professional personnel. General and administrative expenses for the nine months ended June 30, 2000 totaled $1,939,000 as compared to $1,650,000 for the same period of fiscal 1999. For the quarter ended June 30, 2000, general and administrative expenses totaled $508,000, a decrease of $102,000 over the same period of fiscal 1999. The decrease primarily represents a suspension of a provision for doubtful accounts in May 2000, as the Company believes the allowance for doubtful accounts is adequate. A provision for doubtful accounts was not recognized in the prior fiscal year until May 1999. Depreciation for the nine months ended June 30, 2000 totaled $7,125,000, a decrease of 11% from the same period of fiscal 1999. For the quarter ended June 30, 2000, depreciation decreased $442,000, or 17%. Depreciation decreased as a result of a suspension of capital expenditures during fiscal 1999 due to industry conditions. Total operating costs for the first nine months of fiscal 2000 were $23,890,000, a decrease of 8%, from the same period of fiscal 1999 due to the factors described above. For the quarter ended June 30, 2000, total operating costs decreased 10% from the same period of the prior fiscal year. The 36% decrease of revenues as compared to the 8% decrease of total operating costs for the nine months ended June 30, 2000 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 fierce price competition in the bidding process for geophysical services. The Company currently anticipates an annual effective tax benefit rate of 21% primarily as a result of establishing a deferred tax valuation allowance in the current year. LIQUIDITY AND CAPITAL RESOURCES Cash Flows Net cash provided by operating activities of $907,000 for the nine months ended June 30, 2000 primarily reflects the net loss offset by depreciation and changes in working capital components. The decreases in deferred income taxes are a result of the reversal of temporary differences due to depreciation and recognition of net operating loss carryback. Net cash used in investing activities for the nine months ended June 30, 2000 represents management of short-term investments and severely limited capital expenditures. The cash flows provided by financing activities for the nine months ended June 30, 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. Capital expenditures for fiscal 1999 were minimal in comparison to the capital expansion effort in fiscal 1998 and the five prior fiscal years. 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 equipment has been placed into service each year for the past several years. Depreciation for fiscal 2000 is expected to be less than in fiscal 1999 due to the restricted capital expenditures of fiscal 1999. During the fourth quarter of fiscal 2000, the Company will purchase additional channel capacity that has become available at a significant discount. The Company maintains equipment in and out of service in anticipation of increased future demand of the Company's services. 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. 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 cover- age of the damages, if any, which may be assessed against the Company in such litiga- tion. 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 signifi- cantly 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 June 30, 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 June 30, 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 President /s/ Christina W. Hagan ---------------------------- Christina W. Hagan Chief Financial Officer DATE: July 28, 2000 ------------- -12-

13 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule

  

5 3-MOS SEP-30-2000 JUN-30-2000 5,793,000 13,527,000 2,875,000 (553,000) 0 24,050,000 69,554,000 (41,556,000) 52,048,000 1,032,000 0 0 0 1,810,000 49,206,000 52,048,000 11,880,000 11,880,000 23,890,000 23,890,000 0 420,000 0 (11,224,000) 2,637,000 (8,587,000) 0 0 0 (8,587,000) (1.58) (1.58)