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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2003 Commission File No. 0-10144
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
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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 The NASDAQ Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 12 preceding months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock of the Registrant based upon
the mean between the closing high and low price of the Common Stock as of
November 28, 2003 (as reported by NASDAQ), held by non-affiliates was
approximately $39,801,491 (See Item 12). On that date, there were 5,487,794
shares of Dawson Geophysical Company Common Stock, $.33 1/3 par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 4, 10, 11 and 12 of Parts I and III
hereof is incorporated by reference to the Registrant's definitive proxy
statement filed or to be filed with the Commission no later than 120 days after
the end of the fiscal year covered by this Form 10-K.
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DAWSON GEOPHYSICAL COMPANY
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Part I
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 5
Item 3. Legal Proceedings................................................. 5
Item 4. Submission of Matters to a Vote of Security Holders............... 5
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................... 6
Item 6. Selected Financial Data........................................... 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 7
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk....................................................... 10
Item 8. Financial Statements and Supplementary Data....................... 10
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.............................. 10
Item 9A. Controls and Procedures........................................... 10
Part III
Item 10. Directors and Executive Officers of the Registrant................ 10
Item 11. Executive Compensation............................................ 10
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................................. 10
Item 13. Certain Relationships and Related Transactions.................... 11
Item 14. Principal Accounting Fees and Services............................ 11
Part IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................................... 11
Exhibit Index..................................................... 12
Signatures........................................................ 13
Index to Financial Statements..................................... F1
i
DAWSON GEOPHYSICAL COMPANY
2003 ANNUAL REPORT ON FORM 10-K
Part I.
ITEM 1. BUSINESS
GENERAL
Founded in 1952, Dawson Geophysical Company acquires and processes 2-D, 3-D
and multi-component seismic data used in the exploration for, and development
and field management of oil and natural gas reserves. The Company's operations
consist of six 3-D seismic data acquisition crews and a seismic data processing
center. In addition, the Company supports its data acquisition crews with
offices in Houston, Denver and Oklahoma City. As a result of an increase in
industry-wide demand for 3-D seismic surveys and the Company's competitive
position, the Company has experienced increased market share for its 3-D seismic
services. During fiscal 2003, substantially all of the Company's revenues were
derived from 3-D seismic operations. Since 1999, the Company has steadily
increased its acquisition and processing of multi-component seismic data.
The Company's land-based data acquisition crews operate throughout the
lower 48 states. Data processing is performed by Company geophysicists at the
Company's computer center located in Midland, Texas. The Company also provides
data processing services through its Houston office. The Company acquires and
processes data for its clients, ranging from major oil and gas companies to
independent oil and gas operators, who retain exclusive rights to the
information obtained.
The Company believes that it maintains a competitive advantage in the
industry by (i) acquiring equipment to expand capacity in response to client
demand, (ii) updating its equipment base to take advantage of advances in
geophysical technology, (iii) maintaining skilled and experienced personnel for
its data acquisition and processing operations, (iv) focusing its operations on
the domestic onshore seismic industry, and (v) providing integrated in-house
operations necessary to complete all phases of 3-D seismic data acquisition and
processing, including project design, permitting and surveying.
GEOPHYSICAL SERVICES
GENERAL. Technological advances in equipment and computers have allowed the
seismic industry to economically acquire and process immense volumes of seismic
data which produce more precise images of the earth's subsurface. The industry
refers to this process of data acquisition, processing and subsequent
interpretation of the processed data as the 3-D seismic method. Geophysicists
use computer workstations to interpret 3-D data volumes, identify subsurface
anomalies and generate a geologic model of subsurface features.
3-D seismic data are used in the exploration for new reserves and enable
oil and gas companies to better delineate existing fields and to augment their
reservoir management techniques. Benefits of incorporating 3-D seismic
technology into exploration and development programs include reducing drilling
risk, decreasing oil and gas finding costs and increasing the efficiencies of
reservoir location, delineation and management. In order to meet the
requirements necessary to fully recognize the benefits of 3-D seismic data,
there is an ever-increasing demand for improved data quality with greater
subsurface resolution. The Company is prepared to meet such demands with the
implementation of improved techniques and evolving technology. One such
technique is the integration of energy source distribution and an increase in
the number of recording channels with high-end data processing routines through
proper survey design. Company geophysicists perform these design tasks.
The Company is positioned to offer four-dimensional seismic surveys, which
add the element of time to 3-D surveys. By surveying the same site at successive
times, geophysicists compare data volumes and may be able to determine the
progress of enhanced recovery programs in existing petroleum reservoirs, and
thereby aid in extracting remaining reserves. Such projects could, over time,
benefit reservoir management, thereby providing future opportunities for the
Company.
The Company continues to investigate the use of even more sophisticated
technologies. The Company is involved in several projects that involve the use
of three-component (3-C) and converted wave (C-wave) seismic data. Both 3-C and
C-wave seismic data utilize shear wave information in some form. The Company's
equipment includes energy sources and geophones capable of generating and/or
recording shear waves. The Company has designed and recorded two 3-D/3-C (9-C)
surveys in the lower 48 states as well as several 3-D/C-wave surveys.
DATA ACQUISITION. The seismic survey begins at the time a client requests
the Company to formulate a proposal to acquire seismic data on its behalf. The
Company's geophysicists then assist the client in designing the specifications
of the proposed 3-D survey. If the client accepts the Company's proposal, a
Company permit agent then obtains access from the landowner to the site where
the survey is to be conducted.
Utilizing electronic surveying equipment, the Company's survey personnel
precisely locate the energy source and receiver positions from which the seismic
data are collected. The Company utilizes the satellite global positioning
system, known as GPS, to properly locate the seismic survey grid.
1
The Company owns equipment for seven land-based crews gathering 3-D seismic
data. The Company primarily uses vibrator energy sources, each of which weighs
50,000 to 62,000 pounds, but on occasion detonates dynamite charges placed in
drill holes below the earth's surface to generate seismic energy. The Company
has 53 vibrator energy source units and a capacity of 26,400 recording channels,
any of which are configured to meet the demands of specific survey designs. Each
crew consists of approximately 50 technicians, 25 associated vehicles with
off-road capabilities, 50,000 to 100,000 geophones, a seismic recording system,
energy sources, electronic cables and a variety of other equipment. The Company
operates six I/O System Two recording systems, two with RSR radio capability,
and four MRX cable recording systems.
Since 1994, the Company has grown from four seismic data acquisition crews
with an aggregate recording capacity of 4,532 channels and 22 vibrator energy
source units. Demand for more recording channels continues to increase from
client companies as the industry strives for improved data quality. The
Company's current average of 4,400 channels per crew is above the industry
average. The comparatively large number of recording channels gives the Company
a competitive edge with the versatility and productivity to improve data quality
at a lower cost per unit of data to the client.
DATA PROCESSING. The Company currently operates a computer center located
in Midland, Texas and provides data processing services through the Houston
office. Such processing primarily involves the enhancement of the data by
improving reflected signal resolution, removing ambient noise and establishing
proper spatial relationships of geological features. The data are then arranged
in such a manner that computer graphic technology may be employed for
examination and interpretation of the data by the user.
The processing center operates 24 hours daily utilizing high-speed
computers. The Company continues to improve data processing efficiency and
accuracy with the addition of improved processing software and highspeed
computer technology. The Company purchases, develops or leases, under
non-exclusive licensing arrangements, seismic data processing software.
The Company's computer center processes seismic data collected by its
crews, as well as by other geophysical contractors. In addition, the Company
reprocesses previously recorded seismic data using current technology to enhance
the data quality. The Company's processing contracts may be awarded jointly
with, or independently from, data acquisition services.
INTEGRATED SERVICES. The Company maintains integrated in-house operations
necessary to the development and completion of 3-D seismic surveys. Experienced
Company personnel conduct and supervise the 3-D seismic survey design,
permitting, surveying and data acquisition and processing functions for each
seismic program. In-house support operations include facilities for automotive
repair, automotive paint, electronics repair, electrical engineering and
software development, thereby enabling better quality control and improved
efficiency. The Company's clients generally undertake to provide their own
interpretation of the seismic data provided by the Company, although from time
to time the Company's geophysicists may assist its clients in this process.
EQUIPMENT ACQUISITION
The Company believes it is essential to monitor and evaluate advances in
geophysical technology and to commit capital funds to purchase equipment it
deems most promising. Purchasing new assets and continually upgrading capital
assets involves a continuing commitment to capital spending. For fiscal years
2001 through 2003, The Company made capital expenditures of $8,950,000 and has
an approved budget of $2,500,000 for fiscal 2004.
CLIENTS
The Company's services are marketed by supervisory and executive personnel
who contact clients to determine geophysical needs and respond to client
inquiries regarding the availability of crews or processing schedules. These
contacts are based principally upon professional relationships developed over a
number of years.
The Company's clients range from major oil companies to small independent
oil and gas operators. The services provided by the Company vary according to
the size and needs of the client. The Company presently believes that the loss
of any one of its clients would not have a material impact on its business.
CONTRACTS
The Company's seismic services are conducted under master contracts with
clients. Contracts are either "turnkey" contracts that provide for a fixed fee
to be paid to the Company for each unit of data acquired, or "term" contracts
that provide for a fixed hourly, daily or monthly fee during the term of the
project. Turnkey contracts generally provide more profit potential for the
Company, but involve more risks because of the potential downtime for weather
and other types of delays. The majority of the Company's contracts with its
clients are turnkey. A supplemental agreement setting forth the terms of a
specific project, which may be cancelled by either party, is entered into for
every project.
The results of the Company's services belong to the contracting party. To
avoid conflicts of interest, the Company does not acquire any data for its own
account. All of the client's information is maintained in strictest confidence.
2
COMPETITION AND MARKETS
The acquisition and processing of 3-D seismic data for the oil and gas
industry is a highly competitive business in the United States. Contracts for
such services generally are awarded on the basis of price quotations, crew
experience and availability of crews to perform in a timely manner, although
factors other than price, such as technological expertise and reputation, are
sometimes determinative. The Company's competitors include companies with
financial resources that are significantly greater than those of the Company as
well as companies of comparable and smaller size.
Historically, the demand for geophysical services has been directly related
to the level of spending by oil and gas companies for exploration, production,
development and field management activities that depend in part on the level of
oil and gas prices. Because geophysical services are among the first operations
involved in the exploration for oil and gas, the level of such services, in the
past, has declined prior to a decline in oil and gas exploration activities. In
recent years, however, the improved subsurface resolution obtainable from 3-D
seismic data has enhanced the exploration for new reserves and enabled oil and
gas companies to utilize 3-D surveys to better delineate existing fields and to
augment their reservoir management techniques. See "Industry Conditions".
EMPLOYEES
The Company employs approximately 448 persons, of which 393 are engaged in
providing energy sources and acquiring data, 9 are engaged in data processing, 8
are administrative personnel, 30 are engaged in equipment maintenance and 8 are
executive officers. Of the employees listed above, 10 are geophysicists. The
Company's employees are not represented by a labor union. The Company believes
it has good relations with its employees.
OPERATING HAZARDS AND INSURANCE
The Company's activities are often conducted in remote areas under extreme
weather and other dangerous conditions. These operations are subject to risks of
injury to personnel and equipment. The Company's crews are mobile, and the
equipment and personnel are subject to vehicular accidents. The Company uses
diesel fuel which is classified by the U.S. Department of Transportation as a
hazardous material.
The Company carries insurance in amounts which it considers adequate on the
principal items of its equipment. The Company does not carry insurance against
certain risks, including business interruption resulting from equipment losses
or weather delays. The Company obtains insurance against certain property and
personal casualty risks when such insurance is available and when management
considers it advisable to do so. Such coverage is not always available however,
and when available, is subject to unilateral cancellation by the insuring
companies on very short notice. The Company insures seismic data for amounts
considered acceptable by management. Accordingly, damage to such data should not
have a material adverse effect upon the Company.
INDUSTRY CONDITIONS
Demand for the Company's services depends upon the level of spending by oil
and gas companies for exploration, production, development and field management
activities, which activities depend in part on oil and gas prices. Beginning in
1998, a sharp decline in oil and gas prices led to a worldwide reduction in oil
and gas activities. This decline resulted in a significant reduction in the
overall demand for seismic services. Since reaching a recent high in 1998, the
number of land-based seismic crews operating worldwide and the number of
companies providing seismic services declined dramatically. Although demand for
3-D seismic data acquisition services has increased since the low of 1999, it
has not yet returned to the levels experienced prior to 1998. Overcapacity in
the industry continues to suppress pricing. Decreases in oil and gas activities
have adversely affected the demand for the Company's services and the Company's
results of operations. In addition, a decrease in oil and gas expenditures in
the United States could result from such factors as unfavorable tax and other
legislation or uncertainty concerning national energy policy. Any significant
decline in oil and gas prices could cause the Company to alter its capital
spending plans.
WEATHER
The Company's seismic data acquisition operations could be adversely
affected by inclement weather conditions. Delays associated with weather
conditions could negatively affect the Company's results of operations.
PERMITS
The Company's seismic data acquisition operations could be adversely
affected by the inability of the Company to obtain right of way usage from land
or mineral owners. Delays associated with permitting could negatively affect the
Company's results of operations.
3
OPERATING RISKS
The Company's activities are subject to general risks inherent in
land-based seismic data acquisition activities. To date, the Company has not
suffered any material losses of equipment, but there can be no assurance that it
will not experience such losses in the future. Because of the high fixed costs
associated with the Company's 3-D equipment, any significant downtime or low
productivity caused by reduced demand, weather interruptions, equipment
failures, permit delays or other causes could adversely affect its results of
operations.
LIQUIDITY AND WORKING CAPITAL REQUIREMENTS
The Company's sources of working capital are limited. The Company has
funded its working capital requirements with cash generated from operations,
cash reserves and borrowings from commercial banks. The Company's working
capital requirements increased significantly during the last ten years,
primarily due to the development of its 3-D land seismic data acquisition
infrastructure. If the Company were to expand its operations at a rate exceeding
operating cash flow, or if the current demand, or if pricing of geophysical
services were to decrease substantially, additional financing could be required.
There is no assurance that additional financing could or would occur. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
RELIANCE ON KEY SUPPLIER
The Company's primary supplier for seismic data acquisition systems is
Input/Output, Inc. Although the Company believes it will be able to obtain data
acquisition systems and/or replacement parts from Input/Output, Inc. or another
source for such systems or parts in the future, should it be unable to do so,
the Company's anticipated revenues could be reduced and the amount of cash
needed for capital expenditures could be increased. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Capital Expenditures" and "Business - Equipment
Acquisition".
DEPENDENCE ON KEY PERSONNEL
The Company's success may be dependent upon, among other things, the
services of certain key personnel. The loss of services of any one or more of
the executive officers of the Company could have a material adverse effect on or
result in a disruption of normal business operations.
COMPETITION
The acquisition and processing of 3-D geophysical data for the oil and gas
industry is a highly competitive business in the United States. The Company's
competitors include companies with financial resources that are significantly
greater than those of the Company as well as companies of comparable and smaller
size.
TECHNICAL OBSOLESCENCE
Seismic data acquisition and data processing technology have progressed
rapidly over the past several years, and the Company expects this progression to
continue. The Company's strategy is to regularly upgrade its data acquisition
and processing equipment to maintain its competitive position. However, due to
the rapid advances in technology and the related costs associated with such
technological advances, no assurance can be given that the Company will be able
to fulfill its strategy, thus possibly affecting the Company's ability to
compete.
GOVERNMENTAL REGULATIONS
The Company's operations are subject to a variety of federal, state and
local laws and regulations, including laws and regulations relating to the
protection of the environment and archeological sites. The Company is required
to expend financial and managerial resources to comply with such laws and
related permit requirements in its operations, and anticipates that it will
continue to be required to do so in the future. Although such expenditures
historically have not been material to the Company, the fact that such laws or
regulations change frequently make it impossible for the Company to predict the
cost or impact of such laws and regulations on its future operations. The
adoption of laws and regulations that have the effect of reducing or curtailing
exploration and production activities by energy companies could also adversely
affect the Company's operations by reducing the demand for its services.
NO DIVIDENDS
The Company has not paid cash dividends on its Common Stock since becoming
a public company and has no plans to do so in the foreseeable future.
4
DISCLOSURE REGARDING 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" and "Business"
regarding technological advancements and 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 and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act). When used in this Form 10-K, 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 strategies 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.
ITEM 2. PROPERTIES
The principal facilities of the Registrant are summarized in the table
below.
Fee or Building Area
Location Leased Purpose Square Feet
-------- ------ ------- -----------
Midland, TX Leased Executive offices and 18,400
data processing
Midland, TX Fee Field office 53,000
Equipment fabrication
Maintenance and repairs
The Company leases office space for operations in Houston, Denver and
Oklahoma City.
The Company's operations are limited to one industry segment and the United
States.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Registrant is a party to various legal proceedings
arising in the ordinary course of business. Although the Registrant cannot
predict the outcomes of any such legal proceedings, the Registrant's management
believes that the resolution of pending legal actions will not have a material
adverse effect on the Registrant's financial condition, results of operations or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter has been submitted during the fourth quarter of the 2003 fiscal
year to a vote of security holders, through the solicitation of proxies or
otherwise. However, please refer to the Registrant's Proxy Statement dated
November 28, 2003, filed or to be filed with the Commission no later than 120
days after the end of the fiscal year covered by this Form 10-K, notifying as to
the election of Directors, approval of the proposed Dawson Geophysical Company
2004 Incentive Stock Plan and selection of KPMG LLP as independent certified
public accountants of the Company (requiring an affirmative vote of a majority
of shares present or represented by proxy), at the Annual Meeting to be held on
January 27, 2004.
5
Part II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Common Stock Information
The Company's common stock trades on the Nasdaq Stock Market(R) under the
symbol DWSN.
The table below represents the high and low sales prices for the period
shown.
Quarter Ended High Low
--------------------------------------------------
December 31, 2001 $8.950 $6.890
March 31, 2002 $8.300 $7.160
June 30, 2002 $8.200 $7.010
September 30, 2002 $7.371 $4.800
December 31, 2002 $7.180 $4.950
March 31, 2003 $7.230 $5.200
June 30, 2003 $8.530 $6.340
September 30, 2003 $8.400 $6.560
As of November 28, 2003, the Company had 244 common stockholders of record
as reported by the Company's transfer agent.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Dawson Geophysical Company's financial statements and related
notes included in "Item 8. Financial Statements and Supplementary Data".
Years Ended September 30
(in thousands, except per share amounts) 2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------------------------
Operating revenues $ 51,592 $ 36,078 $ 37,878 $ 18,469 $ 24,198
Net loss $ (899) $ (2,292) $ (4,978) $(11,135) $ (6,430)
Net loss per common share $ (.16) $ (.42) $ (.91) $ (2.05) $ (1.19)
Weighted average equivalent common
shares outstanding 5,485 5,463 5,443 5,425 5,398
Total assets $ 42,792 $ 44,291 $ 45,381 $ 49,781 $ 61,418
Long term debt-less current maturities $ -- $ -- $ -- $ -- $ --
Stockholders' equity $ 40,662 $ 41,586 $ 43,582 $ 48,468 $ 59,468
6
ITEM 7. 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
During fiscal 2003, the Company acted on opportunities for growth and
technical depth. The Company expanded operations in its Houston and Denver
offices and added an office in Oklahoma City. The technical expertise of
additional staff in each office has coincided with increased demand for
high-resolution 3-D seismic surveys and other leading edge products such as
ExxonMobil-licensed High Fidelity Vibratory Seismic (HFVS) and 9-component 3-D
employing both compression and shear wave energy sources. The Company has been
able to satisfy client demand for increased channel count by responding to
opportunities to acquire equipment from the open market at reduced prices. In
addition, the Company has performed services in thirteen states during fiscal
2003-representing a return to some areas that the Company has not been in for
more than a decade.
Adverse weather conditions significantly impacted the Company's revenue for
the quarter ended June 30, 2003. Even though demand for the Company's services
is related to crude oil and natural gas prices, production results are enhanced
by favorable weather and timely permits for rights-of-way.
FISCAL YEAR ENDED SEPTEMBER 30, 2003 VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 2002
The Company's operating revenues increased 43% from $36,078,000 to
$51,592,000 in fiscal year 2003. The Company began fiscal 2003 with five crews
and increased to six operating crews in November. During the months of May, June
and July, the Company's production potential was severely impaired by rain and
the Company operated five crews during this time. During fiscal 2003, the
Company sustained slight price improvements for its services in addition to the
stability of pricing improvements gained in fiscal 2002.
Operating expenses increased 39% in fiscal 2003 as compared to fiscal 2002
due to the start up expenses associated with activating a crew, the Company's
expanded operations geographically within the contiguous United States, an
increased demand for shot-hole energy sources which require an expensive
drilling component, and an increase in the use of helicopters to achieve
efficient operations. Certain reimbursed out-of-pocket expenses relating to
drilling, surveying and the use of helicopters are reported in revenue and
expense.
General and administrative expenses were 4.7% of revenues in fiscal 2003 as
compared to 5.6% in fiscal 2002. The Company made a $60,000 provision for bad
debts in fiscal 2003 as a conservative measure in response to working for new
clients in new areas. However, relatively favorable prices for crude oil and
natural gas have correlated to collectibility of accounts receivable.
Depreciation for fiscal 2003 totaled $4,404,000, an increase of 4% from
fiscal 2002. The increase is the effect of the increase in capital expenditures
during fiscal 2003 and 2002. The increase reflects depreciation attributable to
the recording equipment purchased in 2003 and in 2002 that had become available
on the used market.
Total operating costs for fiscal 2003 totaled $52,976,000, an increase of
34.3% from fiscal 2002 primarily due to the factors described above. The
increase in revenues of 43% as compared to the increase of operating expenses of
39% in fiscal year 2003 as compared to fiscal 2002 reflects the high proportion
of relatively fixed total operating expenses, including personnel costs of
active crews, inherent in the Company's business.
The Company recorded a deferred tax expense due to an increase in the
income tax valuation allowance, and the tax expense is related to the tax effect
of the unrealized loss on investments recorded in other comprehensive income.
7
FISCAL YEAR ENDED SEPTEMBER 30, 2002 VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 2001
The Company's operating revenues decreased 4.7% from $37,878,000 to
$36,078,000 in fiscal year 2002 as compared to fiscal 2001. The Company began
fiscal 2002 with five crews operating and operated four or five crews throughout
most of the year depending on weather conditions and the ability to obtain
permits for rights-of-way. There was a brief period when three crews were
operating due to these conditions. During fiscal 2002, the Company sustained
slight price improvements for its services despite idle capacity in the
industry.
Operating expenses in fiscal 2002 remained relatively flat as compared to
fiscal 2001 as the Company maintained staffing for five crews throughout the
year.
General and administrative expenses for fiscal 2002 totaled $2,006,000, an
increase of $187,000 from fiscal 2001. Insurance premiums, salary
reclassification as compared to fiscal 2001, and additional promotional expense
in celebration of the Company's 50th anniversary primarily account for this
increase. The Company did not make a provision for bad debts in fiscal 2002 as
relatively favorable prices for crude oil and natural gas have correlated to
collectibility of accounts receivable.
Depreciation for fiscal 2002 totaled $4,233,000, a decrease of 52% from
fiscal 2001. The Company revised the estimated lives of two classes of seismic
equipment in October 2001. The effect of the change is a reduction in
depreciation expense and net loss of approximately $3,283,000. The decrease in
depreciation expense includes a modest effect resulting from a suspension of
capital expansion beginning in fiscal 1999 due to industry conditions.
Total operating costs for fiscal 2002 totaled $39,444,000, a decrease of
9.6% from fiscal 2001 primarily due to the decrease in depreciation expense and
the other factors described above. The decrease in revenues as compared to the
slight increase of operating expenses, which excludes depreciation, for fiscal
2002 reflects the high proportion of relatively fixed total operating expenses,
including personnel costs of active crews, inherent in the Company's business.
The Company recorded an income tax benefit in the current year of
approximately $471,000. Due to income tax law changes in 2002, the Company filed
for a refund of alternative minimum tax paid in prior years of approximately
$400,000 which was recorded in receivables at September 30, 2002. The remaining
benefit was due to a decrease in the income tax valuation allowance and is
related to the tax effect of the unrealized gain on investments recorded in
other comprehensive income.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS. Net cash provided by operating activities of $1,244,000 for the
fiscal year ended September 30, 2003 primarily reflects the net loss offset by
depreciation and changes in working capital components.
Net cash provided by investing activities in 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 any of the
fiscal years presented.
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 2003
primarily consisted of data acquisition channels that became available as a
result of idle capacity in our industry. 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 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.
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.
8
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. There has been 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 adoption of FIN No. 45 has had no impact on the Company's
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 adoption of FIN No. 46 has had no impact on the Company's 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 adoption of FAS 150 has
had no impact on the Company's financial statements.
9
ITEM 7A. 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 September 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 September 30, 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages F-1 through F-13
hereof and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
ITEM 9a. CONTROLS AND PROCEDURES
Within the 90 day period prior to the filing date of this report on Form
10-K, 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 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.
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 with respect to Directors and
Executive Officers is hereby incorporated by reference to the Registrant's Proxy
Statement dated November 28, 2003 (page 2), filed or to be filed by the
Registrant with the Securities and Exchange Commission pursuant to Regulation
14A of the Securities and Exchange Act of 1934 within 120 days after the end of
the fiscal year covered by this Form 10-K. The Registrant's Code of Ethics as
defined in Item 406 of SEC Regulation S-K is expected to be adopted by the Board
of Directors at their next meeting to be held January 27, 2004.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by
reference to the Registrant's Proxy Statement (page 4) referred to above in Item
10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item 12 with respect to security ownership
of certain beneficial owners is hereby incorporated by reference to the
Registrant's Proxy Statement (page 7, "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT") referred to above in Item 10.
On July 13, 1999, the Board of Directors of the Company authorized and
declared a dividend to the holders of record on July 23, 1999 of one Right (a
"Right") for each outstanding share of the Company's common stock. When
exercisable, each Right will entitle the holder to purchase one one-hundredth of
a share of Series A Junior Participating Preferred Stock, par value $1.00 per
share, of the Company (the "Preferred Shares") at an exercise price of $50.00
per Right. The rights are not currently exercisable and will become exercisable
only if a person or group acquires beneficial ownership of 20% or more of the
Company's outstanding common stock or announces a tender offer or exchange
offer, the consummating of which would result in attaining the triggering
percentage. The Rights are subject to redemption by the Company for $.01 per
Right at any time prior to the tenth day after the first public announcement of
a triggering acquisition.
10
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accountant fees and services appears in
the proxy statement under the heading "Report of Audit Committee" and is
incorporated herein by reference.
Part IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
See Index to Financial Statements on Page F-1.
(a) Exhibits
The exhibits and financial statement schedules filed as a part of this
report are listed below according to the number assigned to it in the exhibit
table of Item 601 of Regulation S-K:
(3) Restated Articles of Incorporation and Bylaws.
(4) Instruments defining the rights of security holders, including
indentures.
(9) Voting Trust Agreement -- None; consequently, omitted.
(10) Material Contracts.
(11) Statement re: computation of per share earnings -- Not Applicable.
(12) Statement re: Computation of ratios -- Not Applicable.
(18) Letter re: change in accounting principles -- Not Applicable.
(19) Previously unfiled documents -- No documents have been executed or in
effect during the reporting period which should have been filed;
consequently, this exhibit has been omitted.
(22) Subsidiaries of the Registrant -- There are no subsidiaries of the
Registrant; consequently, this exhibit has been omitted.
(23) Published report regarding matters submitted to vote of security
holders -- None; consequently, omitted.
(24) Consent of experts and counsel -- Not applicable.
(25) Power of Attorney -- There are no signatures contained within this
report pursuant to a power of attorney; consequently, this exhibit has
been omitted.
(b) Reports on Form 8-K -- None.
(28) Additional Exhibits -- None.
(29) Information from reports furnished to state insurance regulatory
authorities -- None.
(31.1) Certification of Chief Executive Officer pursuant to Section 302.
(31.2) Certification of Chief Financial Officer pursuant to Section 302.
(32.1) Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(32.2) Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
11
EXHIBIT INDEX
Number Exhibit Page
--------------------------------------------------------------------------------
(1) *
(2) *
(3) Articles of Incorporation and Bylaws E-2
(4) Instruments defining the rights of security
holders, including indentures--Shareholder Rights Plan E-3
(5) *
(6) *
(7) *
(8) *
(9) Voting Trust Agreement Omit
(10) Material Contracts E-4
(11) Statement re: computation of per share earnings Omit
(12) Statement re: computation of ratios Omit
(13) 2003 Annual Report to Stockholders-Cover Page to
Form 10-K Annual Report E-1
(14) *
(15) *
(16) *
(17) *
(18) Letter re: change in accounting principles Omit
(19) Previously unfiled documents Omit
(20) *
(21) *
(22) Subsidiaries of the Registrant Omit
(23) Published report regarding matters submitted
to vote of security holders Omit
(24) Consent of experts Omit
(25) Power of Attorney Omit
(26) *
(27) *
(28) Additional Exhibits Omit
(29) Information from reports furnished to state
insurance regulatory authorities Omit
(31.1) Certification of Chief Executive Officer pursuant
to Section 302.
(31.2) Certification of Chief Financial Officer pursuant
to Section 302.
(32.1) Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2) Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* This exhibit is not required to be filed in accordance with Item 601 of
Regulation S-K.
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Midland, and the State of Texas, on the 28th day of November, 2003.
DAWSON GEOPHYSICAL COMPANY
By: /s/ L. Decker Dawson
----------------------------------------
L. Decker Dawson, Chairman of the Board
Of Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the date indicated.
Signature Title Date
--------------------------------------------------------------------------------
/s/ L. Decker Dawson Chairman of the Board 11-28-03
---------------------------- of Directors and Chief Executive
L. Decker Dawson Officer
/s/ Stephen C. Jumper President, Chief Operating 11-28-03
---------------------------- Officer and Director
Stephen C. Jumper
/s/ Howell W. Pardue Executive Vice President 11-28-03
---------------------------- and Director
Howell W. Pardue
/s/ C. Ray Tobias Executive Vice President 11-28-03
---------------------------- and Director
C. Ray Tobias
/s/ Paul H. Brown Director 11-28-03
----------------------------
Paul H. Brown
/s/ Calvin J. Clements Director 11-28-03
----------------------------
Calvin J. Clements
/s/ Matthew P. Murphy Director 11-28-03
----------------------------
Matthew P. Murphy
/s/ Tim C. Thompson Director 11-28-03
----------------------------
Tim C. Thompson
/s/ Christina W. Hagan Senior Vice President, 11-28-03
---------------------------- Secretary and
Christina W. Hagan Chief Financial Officer
13
INDEX TO FINANCIAL STATEMENTS
Financial Statements of Dawson Geophysical Company Page
--------------------------------------------------------------------------------
Independent Auditors' Report F-2
Balance Sheets as of September 30, 2003 and 2002 F-3
Statements of Operations for the years ended
September 30, 2003, 2002 and 2001 F-4
Statements of Changes in Stockholders' Equity for the years
ended September 30, 2003, 2002 and 2001 F-5
Statements of Cash Flows for the years ended
September 30, 2003, 2002 and 2001 F-6
Notes to Financial Statements F-7
--------------------------------------------------------------------------------
All schedules are omitted, as the required information is inapplicable or the
information is presented in the financial statements or related notes.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Dawson Geophysical Company:
We have audited the accompanying balance sheets of Dawson Geophysical
Company as of September 30, 2003 and 2002, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dawson Geophysical Company
as of September 30, 2003 and 2002, and the results of its operations and its
cash flows for each of the years in the three-year period ended September 30,
2003, in conformity with accounting principles generally accepted in the United
States of America.
KPMG LLP
Midland, Texas
November 3, 2003
F-2
DAWSON GEOPHYSICAL COMPANY
BALANCE SHEETS
September 30,
---------------------------------
2003 2002
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,389,000 $ 1,309,000
Short-term investments 8,623,000 15,716,000
Accounts receivable, net of allowance
for doubtful accounts of $127,000 in
2003 and $71,000 in 2002 9,713,000 7,613,000
Income taxes receivable - 400,000
Prepaid expenses 287,000 220,000
------------ ------------
Total current assets 22,012,000 25,258,000
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 81,585,000 75,649,000
Less accumulated depreciation (60,805,000) (56,616,000)
------------ ------------
Net property, plant and equipment 20,780,000 19,033,000
------------ ------------
$ 42,792,000 $ 44,291,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,237,000 $ 2,066,000
Accrued liabilities:
Payroll costs and other taxes 478,000 342,000
Other 415,000 297,000
------------ ------------
Total current liabilities 2,130,000 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 shares issued and outstanding
in 2003 and 2002, respectively 1,829,000 1,822,000
Additional paid-in capital 38,931,000 38,863,000
Other comprehensive income, net of tax 37,000 137,000
Retained earnings (deficit) (135,000) 764,000
------------ ------------
Total stockholders' equity 40,662,000 41,586,000
------------ ------------
$ 42,792,000 $ 44,291,000
============ ============
See accompanying notes to the financial statements.
F-3
DAWSON GEOPHYSICAL COMAPNY
STATEMENTS OF OPERATIONS
Years Ended September 30,
------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Operating revenues $ 51,592,000 $ 36,078,000 $ 37,878,000
Operating costs:
Operating expenses 46,151,000 33,205,000 33,033,000
General and administrative 2,421,000 2,006,000 1,819,000
Depreciation 4,404,000 4,233,000 8,802,000
------------ ------------ ------------
52,976,000 39,444,000 43,654,000
------------ ------------ ------------
Loss from operations (1,384,000) (3,366,000) (5,776,000)
Other income:
Interest income 328,000 507,000 754,000
Other 209,000 96,000 44,000
------------ ------------ ------------
Loss before income tax (847,000) (2,763,000) (4,978,000)
Income tax benefit (expense):
Current -- 400,000 --
Deferred (52,000) 71,000 --
------------ ------------ ------------
(52,000) 471,000 --
------------ ------------ ------------
Net loss $ (899,000) $ (2,292,000) $ (4,978,000)
============ ============ ============
Net loss per common share $ (.16) $ (.42) $ (.91)
============ ============ ============
Net loss per common share-assuming dilution $ (.16) $ (.42) $ (.91)
============ ============ ============
Weighted average equivalent common shares outstanding 5,484,593 5,462,936 5,442,627
============ ============ ============
Weighted average equivalent common
shares outstanding-assuming dilution 5,484,593 5,462,936 5,442,627
============ ============ ============
See accompanying notes to the financial statements.
F-4
DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ACCUMULATED
---------------------------- ADDITIONAL OTHER RETAINED
NUMBER PAID-IN COMPREHENSIVE EARNINGS
OF SHARES AMOUNT CAPITAL INCOME (DEFICIT) TOTAL
------------ ------------ ------------ ------------ ------------ ------------
BALANCE,
SEPTEMBER 30, 2000 5,428,794 $ 1,810,000 $ 38,624,000 $ 8,034,000 $ 48,468,000
Net loss (4,978,000) (4,978,000)
Issuance of common
stock as compensation 17,000 5,000 87,000 92,000
------------ ------------ ------------ ------------ ------------
BALANCE,
SEPTEMBER 30, 2001 5,445,794 1,815,000 38,711,000 3,056,000 43,582,000
Net loss (2,292,000) (2,292,000) (2,292,000)
------------
Other comprehensive income net of tax:
Unrealized gain on securities:
Unrealized holding gains
arising during period 208,000
Income tax benefit (71,000)
------------
Other comprehensive income 137,000 137,000
------------
Comprehensive income 41,427,000
------------
Issuance of common
stock as compensation 21,500 7,000 152,000 159,000
------------ ------------ ------------ ------------ ------------
BALANCE,
SEPTEMBER 30, 2002 5,467,294 1,822,000 38,863,000 764,000 41,586,000
Net loss (899,000) (899,000) (899,000)
------------
Other comprehensive income net of tax:
Unrealized loss on securities:
Unrealized holding losses
arising during period (145,000)
Less: Reclassification
adjustment for gain included
in net income (7,000)
------------
(152,000)
Income tax expense 52,000
------------
Other comprehensive income (100,000) (100,000)
------------
Comprehensive income 40,587,000
------------
Issuance of common
stock as compensation 20,500 7,000 68,000 75,000
------------ ------------ ------------ ------------ ------------ ------------
BALANCE,
SEPTEMBER 30, 2003 5,487,794 $ 1,829,000 $ 38,931,000 $ 37,000 $ (135,000) $ 40,662,000
============ ============ ============ ============ ============ ============
See accompanying notes to the financial statements.
F-5
DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF CASH FLOWS
Years Ended September 30,
------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (899,000) $ (2,292,000) $ (4,978,000)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation 4,404,000 4,233,000 8,802,000
Non-cash compensation 75,000 159,000 92,000
Deferred income tax expense (benefit) 52,000 (71,000) --
Other (46,000) 58,000 38,000
Change in current assets and liabilities:
Decrease (increase) in accounts receivable (2,100,000) 1,082,000 (2,128,000)
Decrease (increase) in prepaid expenses (67,000) (47,000) 27,000
Decrease (increase) in income taxes receivable 400,000 (400,000) 2,165,000
Increase (decrease) in accounts payable (829,000) 885,000 143,000
Increase in accrued liabilities 254,000 21,000 343,000
------------ ------------ ------------
Net cash provided by operating activities 1,244,000 3,628,000 4,504,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets 27,000 10,000 49,000
Capital expenditures (6,153,000) (2,047,000) (750,000)
Proceeds from sale of short-term investments 5,964,000 -- --
Proceeds from maturity of short-term investments 4,000,000 10,598,000 5,500,000
Acquisition of short-term investments (3,002,000) (15,218,000) (5,474,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities 836,000 (675,000)
Net increase (decrease) in cash and cash equivalents 2,080,000 (3,029,000) 3,829,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,309,000 4,338,000 509,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,389,000 $ 1,309,000 $ 4,338,000
============ ============ ============
NON CASH INVESTING ACTIVITIES:
UNREALIZED GAIN (LOSS) ON INVESTMENTS $ (145,000) $ 208,000 $ --
============ ============ ============
See accompanying notes to the financial statements.
F-6
DAWSON GEOPHYSICAL COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Dawson Geophysical Company (the "Company"), which was incorporated in Texas
in 1952, has been listed and traded on the NASDAQ National Market System ("NMS")
under the symbol "DWSN" since 1981.
The Company acquires and processes 3-D seismic data for major and
intermediate-sized oil and gas companies and independent oil operators who
retain exclusive rights to the information obtained. The Company's land-based
acquisition crews operate throughout the lower 48 states, and data processing is
performed by geophysicists in Midland and Houston, Texas.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers demand
deposits, certificates of deposit and all highly liquid debt instruments
purchased with an initial maturity of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENTS
The Company accounts for its short-term investments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (Statement 115). In accordance with
Statement 115, the Company has classified its investment portfolio consisting of
U.S. Treasury Securities as "available-for-sale" and records the net unrealized
holding gains and losses as accumulated comprehensive income in stockholders'
equity. The cost of short-term investments sold is based on the specific
identification method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, accounts receivable,
other current assets, accounts payable and other current liabilities approximate
their fair values based on their short-term nature. The fair value of
investments are based on quoted market prices.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial Accounting
Standards No. 105, consist primarily of trade accounts receivable and short-term
investments. The Company's sales are to clients whose activities relate to oil
and gas exploration and production. However, accounts receivable are well
diversified among many clients, and a significant portion of the receivables are
from major oil companies, which management believes minimizes potential credit
risk. The Company generally extends unsecured credit to these clients;
therefore, collection of receivables may be affected by the economy surrounding
the oil and gas industry. The Company closely monitors extensions of credit and
initiated an allowance for doubtful accounts in fiscal 1999 as a result of the
downturn in oil prices which occurred during the year and negatively impacted
the Company's clients. The Company invests primarily in short-term U.S. Treasury
Securities which are a low risk investment.
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.
Depreciation is computed using the straight-line method. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is reflected in
the results of operations for the period.
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. No provision was recorded in
the Statement of Operations for the years ended September 30, 2003, 2002 and
2001.
REVENUE RECOGNITION
Contracts for service are provided for under cancelable contracts. The
Company recognizes revenues when services are performed. In the case of a
cancelled contract, revenue is recognized and the customer is billed for
services performed up to the date of cancellation. 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.
F-7
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 clients.
INCOME TAXES
The Company accounts for state and federal income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (Statement 109). Under the asset and liability method of Statement 109,
deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
In accordance with the Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), 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.
The Company accounts for stock-based compensation utilizing the intrinsic
value method prescribed by "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
or other stock-based awards issued since September 30, 1997 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 fiscal years ended September 30,
2003, 2002 and 2001 is as follows:
September 30,
------------------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Net loss, as reported $ (899,000) $ (2,292,000) $ (4,978,000)
Add: Stock-based employee compensation expense
included in net loss, net of tax 75,000 159,000 92,000
Deduct: Stock-based employee compensation expense
determined under fair value based method (SFAS 123),
net of tax (434,000) (516,000) (402,000)
-------------- -------------- --------------
Net loss, pro forma $ (1,258,000) $ (2,649,000) $ (5,288,000)
-------------- -------------- --------------
Basic:
Net loss per common share, as reported $ (0.16) $ (0.42) $ (0.91)
============== ============== ==============
Net loss per common share, pro forma $ (0.23) $ (0.48) $ (0.97)
============== ============== ==============
Diluted;
Net loss per common share, as reported $ (0.16) $ (0.42) $ (0.91)
============== ============== ==============
Net loss per common share, pro forma $ (0.23) $ (0.48) $ (0.97)
============== ============== ==============
2. SHORT-TERM INVESTMENTS
Investment in securities consists primarily of U.S. Treasury Securities. At
September 30, 2003, the Company reported an unrealized loss on short-term
investments of $145,000, which was $93,000 net of the tax effect of $52,000. The
$93,000 net unrealized loss is included in "Other comprehensive income, net of
tax"of $37,000.
Short-term investments held at September 30, 2003 consisting of U.S.
Treasury Securities have contractual maturities from December, 2003 through
September, 2004.
F-8
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, together with annual depreciation rates,
consist of the following:
September 30,
---------------------------------
2003 2002 Rates
------------ ------------ -----------------
Land, building and improvements $ 1,334,000 $ 1,303,000 3 to 12.5 percent
Machinery and equipment 79,213,000 73,583,000 7 to 20 percent
Equipment in process (a) 1,038,000 763,000 --
------------ ------------
$ 81,585,000 $ 75,649,000
============ ============
(a) Equipment in process has not been placed into service and accordingly has not been subject to depreciation.
Effective October 1, 2001, the Company revised the estimated lives of
certain assets based on the technology of certain seismic data recording
equipment consisting of the central electronic components and of energy source
units. Management believes that the central electronics components contained in
the field recording units of the Company's six crews remain state of the art.
The Company believes that advancements in the foreseeable future will consist of
upgrades that may require replacements of modules of the central electronics.
The Company does not believe that the current systems will become obsolete at
the end of the original estimate and has revised the estimated life of these
assets.
The Company believes that the current fleet of energy source units will
provide service beyond the life originally estimated due to actual performance
of units in the past and to the redesign of the unit. Accordingly, the estimated
life of this class of asset has been revised.
The change of estimate was made as of October 1, 2001. The effect on
depreciation and the net loss for the fiscal years ended September 30, 2003 and
2002 is:
Year Ended September 30,
-----------------------------------------------------------------------
2003 2002
------------------------------- -------------------------------
As Reported Pro Forma As Reported Pro Forma
----------- ----------- ----------- -----------
Depreciation $ 4,404,000 $ 6,672,000 $ 4,233,000 $ 7,516,000
=========== =========== =========== ===========
Net loss $ (889,000) $(3,157,000) $(2,292,000) $(5,575,000)
=========== =========== =========== ===========
Net loss per share $ (.16) $ (.58) $ (.42) $ (1.02)
=========== =========== =========== ===========
4. STOCK OPTIONS
The Company adopted the 2000 Incentive Stock Plan during fiscal 1999, which
provides options to purchase 500,000 shares of authorized but unissued common
stock of the Company. The option price is the market value of the Company's
common stock at date of grant. Options are exercisable 25% annually from the
date of the grant and the options expire five years from date of grant. The 2000
Plan provides that 50,000 of the 500,000 shares of authorized but unissued
common stock may be awarded to officers, directors and employees of the Company
for the purpose of additional compensation.
The transactions under the Plans are summarized as follows:
Weighted Number of
Average Optioned
Price Shares
-------- --------
Balance as of September 30, 2001 $ 8.86 251,000
Granted $ 7.41 98,000
Cancelled or expired $ 21.19 (30,000)
-------- --------
Balance as of September 30, 2002 $ 7.25 319,000
Granted $ 5.21 105,000
Cancelled or expired $ 7.02 (17,000)
-------- --------
Balance as of September 30, 2003 $ 6.72 407,000
======== ========
Options for 204,750, 130,750 and 103,000 shares were exercisable with
weighted average exercise prices of $6.94, $6.79 and $10.78 as of September 30,
2003, 2002 and 2001, respectively.
Outstanding options at September 30, 2003 expire between February, 2004 and
November, 2007 and have exercise prices ranging from $5.21 to $8.65.
F-9
Options for 105,000 shares were granted in fiscal year 2003. The expected
life of the options granted is five years. The weighted average fair value of
options granted during 2003 is $3.48. The fair value of each option grant is
estimated on the date of grant, using the Black-Scholes options-pricing model.
The model assumed expected volatility of .5% and risk-free interest rate of
3.14% for grants in 2003. As the Company has not declared dividends since it
became a public entity, no dividend yield was used. Actual value realized, if
any, is dependent on the future performance of the Company's common stock and
overall stock market conditions. There is no assurance the value realized by an
optionee will be at or near the value estimated by the Black-Scholes model.
5. EMPLOYEE BENEFIT PLANS
The Company had an employee stock purchase plan to invest in the Company's
common stock for the benefit of eligible employees. Participants were entitled
to contribute a percentage, not to exceed 5%, of their bi-weekly salary to the
plan. On a bi-weekly basis, the Company matched the participants' contributions
and directed the purchase of shares of the Company's common stock. There were no
vesting requirements for the participants. The Company contributed $56,116 and
$223,360 to the plan during 2002 and 2001, respectively. The Company
discontinued the Plan effective January 1, 2002.
Effective January 1, 2002, the Company initiated a 401(k) plan as part of
its employee benefits package in order to retain quality personnel. During 2003
and 2002, the Company elected to match 100% of employee contributions up to a
maximum of 5% of the participant's gross salary. The Company's matching
contributions for fiscal 2003 and 2002 were approximately $373,000 and $259,000,
respectively.
6. INCOME TAXES
The Company recorded an income tax expense in the current year of
approximately $52,000. The expense is due to an increase in the income tax
valuation allowance and is related to the tax effect of the unrealized loss on
investments recorded in other comprehensive income.
Income tax expense (benefit) attributable to income before extraordinary
item consists of:
Year Ended September 30,
-----------------------------------------
2003 2002 2001
---------- ---------- ----------
Current: U.S. Federal $ -- $ (400,000) $ --
Deferred: U. S. Federal 52,000 (71,000) --
---------- ---------- ----------
Total $ 52,000 $ (471,000) $ --
========== ========== ==========
Income tax expense varies from the amount computed by multiplying income
before taxes by the statutory income tax rate. The reason for these differences
and the related tax effects are as follows:
Year Ended September 30,
-----------------------------------------
2003 2002 2001
---------- ---------- ----------
Expense computed at statutory rates $ (287,000) $ (939,000) $(1,690,000)
Effect of:
Change in valuation allowance 297,000 428,000 1,659,000
Other 42,000 40,000 31,000
---------- ---------- ----------
Income tax expense (benefit) $ 52,000 $ (471,000) $ --
========== ========== ==========
F-10
September 30,
---------------------------------
2003 2002
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 6,687,000 $ 5,997,000
Alternative minimum tax credit carryforwards 413,000 413,000
Receivables 45,000 24,000
Other 116,000 109,000
------------ ------------
Total deferred tax assets 7,261,000 6,543,000
Less valuation allowance (4,232,000) (3,935,000)
------------ ------------
Total gross deferred tax assets 3,029,000 2,608,000
Deferred tax liabilities:
Other property and equipment (2,938,000) (2,533,000)
Investments (21,000) (71,000)
Other (70,000) (4,000)
------------ ------------
Total gross deferred tax liabilities (3,029,000) (2,608,000)
------------ ------------
Net deferred tax asset (liability) $ -- $ --
============ ============
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Based on expectations
for the future, management has determined that taxable income of the Company
will likely not be sufficient to fully utilize available carryforwards prior to
their ultimate expiration. As such, the Company has recorded a valuation
allowance of $4,232,000 to reflect the realizability of its net deferred tax
assets. The amount of the valuation allowance could be reduced if estimates of
future taxable income during the carryforward period are increased.
As of September 30, 2003, the Company had a net operating loss carryforward
for U.S. federal income tax purposes of approximately $19,090,000, which is
available to offset future regular taxable income, if any. Net operating loss
carryforward will begin to expire in 2022. The Company has alternative minimum
tax credit carryforwards totaling $413,000 to offset regular income tax, which
have no scheduled expiration date.
7. NET LOSS 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").
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities
The following table sets forth the computation of basic and diluted net
income per common share:
2003 2002 2001
------------ ------------ ------------
Numerator:
Net loss and numerator for basic and diluted
net loss per common share-income
available to common stockholders $ (899,000) $ (2,292,000) $ (4,978,000)
============ ============ ============
Denominator:
Denominator for basic net loss per common
share-weighted average common shares 5,484,593 5,462,936 5,442,627
Effect of dilutive securities-employee stock options -- -- --
------------ ------------ ------------
Denominator for diluted net loss per common
share-adjusted weighted average common shares
and assumed conversions 5,484,593 5,462,936 5,442,627
============ ============ ============
Net loss per common share $ (.16) $ (.42) $ (.91)
============ ============ ============
Net loss per common share-assuming dilution $ (.16) $ (.42) $ (.91)
============ ============ ============
Employee stock options to purchase shares of common stock were outstanding
during fiscal year 2003 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.
F-11
8. MAJOR CUSTOMERS
The Company operates in only one business segment, contract seismic data
acquisition and processing services. During 2003 and 2002, sales to only one
client, which was not the same client in each year, exceeded 10% of operating
revenue. During 2001, sales to no client exceeded 10% of operating revenue.
9. CONTINGENCIES
The Company is party to various 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.
On February 18, 1998 the Company entered into a five year, non-cancellable
operating lease for office space. On June 30, 2003, the lease was amended to
extend the term of the lease for five years beginning July 1, 2003 and ending
June 30, 2008. Future minimum lease commitments under the lease at September 30
of each year are $142,716 through 2007, and $107,037 in fiscal year 2008.
10. RIGHTS AGREEMENT
On July 13, 1999, the Board of Directors of the Company authorized and
declared a dividend to the holders of record on July 23, 1999 of one Right (a
"Right") for each outstanding share of the Company's common stock. When
exercisable, each Right will entitle the holder to purchase one one-hundredth of
a share of a Series A Junior Participating Preferred Stock, par value $1.00 per
share, of the Company (the "Preferred Shares") at an exercise price of $50.00
per Right. The rights are not currently exercisable and will become exercisable
only if a person or group acquires beneficial ownership of 20% or more of the
Company's outstanding common stock or announces a tender offer or exchange
offer, the consummating of which would result in attaining the triggering
percentage. The Rights are subject to redemption by the Company for $.01 per
Right at any time prior to the tenth day after the first public announcement of
a triggering acquisition.
If the Company is acquired in a merger or other business combination
transaction after a person has acquired beneficial ownership of 20% or more of
the Company's common stock, each Right will entitle its holder to purchase, at
the Right's then current exercise price, a number of the acquired Company's
shares of common stock having a market value of two times such price. In
addition, if a person or group acquires beneficial ownership of 20% or more of
the Company's common stock, each Right will entitle its holder (other than the
acquiring person or group) to purchase, at the Right's then current exercise
price, a number of the Company's shares of common stock having a market value of
two times the exercise price.
Subsequent to the acquisition by a person or group of beneficial ownership
of 20% or more of the Company's common stock and prior to the acquisition of
beneficial ownership of 50% or more of the Company's common stock, the Board of
Directors of the Company may exchange the Rights (other than Rights owned by
such acquiring person or group, which will have become null and void and
nontransferable), in whole or in part, at an exchange ratio of one share of the
Company's common stock (or one one-hundredth of a Preferred Share) per Right.
The Rights dividend distribution was made on July 23, 1999, payable to
shareholders of record at the close of business on that date. The Rights will
expire on July 23, 2009.
11. RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
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. There has been no impact on the Company's
financial statements.
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.
F-12
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 adoption of FIN No. 45 has had no impact on the Company's
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 adoption of FIN No. 46 has had no impact on the Company's 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 adoption of FAS 150 has
had no impact on the Company's financial statements.
12. Quarterly Financial Data (Unaudited)
Quarter Ended
------------------------------------------------------------------
December 31 March 31 June 30 September 30
------------------------------------------------------------------
Fiscal 2003:
Operating revenues $ 11,410,000 $ 14,196,000 $ 11,291,000 $ 14,695,000
Income (loss) from operations $ (1,007,000) $ 579,000 $ (1,483,000) $ 527,000
Net income (loss) $ (893,000) $ 844,000 $ (1,407,000) $ 557,000
Net income (loss) per common
share $ (.16) $ .15 $ ( .26) $ .10
Net income (loss) per common
share assuming dilution $ (.16) $ .15 $ (.26) $ .10
Fiscal 2002:
Operating revenues $ 8,220,000 $ 8,962,000 $ 9,096,000 $ 9,800,000
Loss from operations $ (1,403,000) $ (257,000) $ (550,000) $ (1,156,000)
Net loss $ (1,173,000) $ (134,000) $ (428,000) $ (557,000)
Net loss per common share $ (.22) $ (.02) $ (.08) $ (.10)
Net loss per common share
assuming dilution $ (.22) $ (.02) $ (.08) $ (.10)
F-13
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F-14