##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From _________ to __________
 Commission File No. 0-10144
 DAWSON GEOPHYSICAL COMPANY
 Texas
    
    75-0970548(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 508 West Wall, Suite 800, Midland, Texas 79701
 (Principal Executive Office)
 Telephone Number: 432-684-3000
 þ o
  o þ o
 o þ
  Title of Each Class
    
    Outstanding at April 23,2006Common Stock, $.33 1/3 par value
    
    7,527,744 shares




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DAWSON GEOPHYSICAL COMPANY
  PageNumberPart I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Statements of Operations for the Three Months and the Six Months Ended March 31, 2006 and 2005 (unaudited)
    
    
    1Balance Sheets at March 31, 2006 (unaudited) and September 30, 2005
    
    
    2Statements of Cash Flows for the Six Months Ended March 31, 2006 and 2005 (unaudited)
    
    
    3Notes to Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    14Item 4. Controls and Procedures
    
    
    14Part II. OTHER INFORMATION
    
    
    15Item 1. Legal Proceedings
    
    
    15Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15Item 6. Exhibits
    
    
    16Signatures
    
    
    17Index to Exhibits
    
    
    18First Amendment to Loan AgreementCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Rule 13a-14(b)Certification of CFO Pursuant to Rule 13a-14(b)




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 DAWSON GEOPHYSICAL COMPANY
 
 STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three Months Ended March 31,
    
    Six Months Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenues
    
    $
    40,042,000
    
    
    $
    26,515,000
    
    
    $
    75,535,000
    
    
    $
    48,074,000Operating costs:Operating expenses
    
    
    29,109,000
    
    
    
    21,378,000
    
    
    
    57,247,000
    
    
    
    38,222,000General and administrative
    
    
    1,314,000
    
    
    
    989,000
    
    
    
    2,441,000
    
    
    
    1,783,000Depreciation
    
    
    3,188,000
    
    
    
    1,662,000
    
    
    
    6,164,000
    
    
    
    3,132,00033,611,000
    
    
    
    24,029,000
    
    
    
    65,852,000
    
    
    
    43,137,000Income from operations
    
    
    6,431,000
    
    
    
    2,486,000
    
    
    
    9,683,000
    
    
    
    4,937,000Other income:Interest income
    
    
    167,000
    
    
    
    99,000
    
    
    
    328,000
    
    
    
    123,000Interest expense
    
    
    
    
    
    
    (65,000
    )
    
    
    
    
    
    
    (65,000
    )Gain on disposal of assets
    
    
    142,000
    
    
    
    
    
    
    
    136,000
    
    
    
    Loss on sale of marketable securities
    
    
    (6,000
    )
    
    
    
    
    
    
    (17,000
    )
    
    
    Other
    
    
    (23,000
    )
    
    
    233,000
    
    
    
    17,000
    
    
    
    239,000Income before income tax
    
    
    6,711,000
    
    
    
    2,753,000
    
    
    
    10,147,000
    
    
    
    5,234,000Income tax (expense) benefit:Current
    
    
    (1,307,000
    )
    
    
    (733,000
    )
    
    
    (1,842,000
    )
    
    
    (733,000
    )Deferred
    
    
    (1,053,000
    )
    
    
    307,000
    
    
    
    (1,654,000
    )
    
    
    (574,000
    )(2,360,000
    )
    
    
    (426,000
    )
    
    
    (3,496,000
    )
    
    
    (1,307,000
    )Net income
    
    $
    4,351,000
    
    
    $
    2,327,000
    
    
    $
    6,651,000
    
    
    $
    3,927,000Net income per common share
    
    $
    0.58
    
    
    $
    0.37
    
    
    $
    0.89
    
    
    $
    0.66Net income per common share-assuming dilution
    
    $
    0.57
    
    
    $
    0.37
    
    
    $
    0.88
    
    
    $
    0.65Weighted average equivalent common shares outstanding
    
    
    7,504,811
    
    
    
    6,262,794
    
    
    
    7,495,499
    
    
    
    5,947,148Weighted average equivalent common
shares outstanding-assuming dilution
    
    
    7,593,193
    
    
    
    6,360,345
    
    
    
    7,583,611
    
    
    
    6,051,413
 See accompanying notes to the financial statements.
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DAWSON GEOPHYSICAL COMPANY
 
 BALANCE SHEETS
 March 31,
    
    
    September 30,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    505,000
    
    
    $
    2,803,000Short-term investments
    
    
    13,840,000
    
    
    
    20,326,000Accounts receivable, net of allowance
for doubtful accounts of $51,000 in March 2006
and $331,000 in September 2005
    
    
    34,572,000
    
    
    
    28,696,000Prepaid expenses and other assets
    
    
    644,000
    
    
    
    1,127,000Current deferred tax asset
    
    
    18,000
    
    
    
    1,229,000Total current assets
    
    
    49,579,000
    
    
    
    54,181,000Property, plant and equipment
    
    
    143,388,000
    
    
    
    124,478,000Less accumulated depreciation
    
    
    (70,045,000
    )
    
    
    (64,532,000
    )Net property, plant and equipment
    
    
    73,343,000
    
    
    
    59,946,000$
    122,922,000
    
    
    $
    114,127,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,230,000
    
    
    $
    6,601,000Accrued liabilities:Payroll costs and other taxes
    
    
    1,300,000
    
    
    
    1,198,000Other
    
    
    3,288,000
    
    
    
    2,182,000Deferred revenue
    
    
    245,000
    
    
    
    190,000Total current liabilities
    
    
    11,063,000
    
    
    
    10,171,000Deferred tax liability
    
    
    2,495,000
    
    
    
    2,052,000Stockholders 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;
50,000,000 and 10,000,000 shares authorized in each
period; 7,493,544 and 7,484,044 shares issued
and outstanding in each period
    
    
    2,508,000
    
    
    
    2,495,000Additional paid-in capital
    
    
    81,786,000
    
    
    
    80,987,000Other comprehensive income, net of tax
    
    
    (80,000
    )
    
    
    (77,000
    )Retained earnings
    
    
    25,150,000
    
    
    
    18,499,000Total stockholders equity
    
    
    109,364,000
    
    
    
    101,904,000$
    122,922,000
    
    
    $
    114,127,000
 See accompanying notes to the financial statements.
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DAWSON GEOPHYSICAL COMPANY
 
 STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six Months Ended March 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    6,651,000
    
    
    $
    3,927,000Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation
    
    
    6,164,000
    
    
    
    3,132,000Gain on disposal of assets
    
    
    (136,000
    )
    
    
    Realized loss on sale of marketable securities
    
    
    17,000
    
    
    
    Deferred income tax expense
    
    
    1,654,000
    
    
    
    574,000Non-cash compensation
    
    
    536,000
    
    
    
    45,000Excess tax benefit from share based payment arrangement
    
    
    (46,000
    )
    
    
    Other
    
    
    (30,000
    )
    
    
    27,000Change in current assets and liabilities:Decrease (increase) in accounts receivable
    
    
    (5,876,000
    )
    
    
    1,755,000Decrease (increase) in prepaid expenses
    
    
    483,000
    
    
    
    (130,000
    )Increase (decrease) in accounts payable
    
    
    (371,000
    )
    
    
    255,000Increase in deferred revenue
    
    
    55,000
    
    
    
    367,000Increase (decrease) in accrued liabilities
    
    
    1,208,000
    
    
    
    (217,000
    )Net cash provided by operating activities
    
    
    10,309,000
    
    
    
    9,735,000CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (19,713,000
    )
    
    
    (21,408,000
    )Proceeds from maturity of short-term investments
    
    
    6,510,000
    
    
    
    Proceeds from disposal of assets
    
    
    320,000
    
    
    
    Acquisition of short-term investments
    
    
    
    
    
    
    (21,309,000
    )Net cash used in investing activities
    
    
    (12,883,000
    )
    
    
    (42,717,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    230,000
    
    
    
    35,000Proceeds from line of credit
    
    
    
    
    
    
    10,000,000Repayment on line of credit
    
    
    
    
    
    
    (10,000,000
    )Proceeds from stock offering
    
    
    
    
    
    
    41,004,000Excess tax benefit from share based payment arrangement
    
    
    46,000
    
    
    
    Net cash provided by financing activities
    
    
    276,000
    
    
    
    41,039,000Net increase (decrease) in cash and cash equivalents
    
    
    (2,298,000
    )
    
    
    8,057,000CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    2,803,000
    
    
    
    3,587,000CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    505,000
    
    
    $
    11,644,000SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid during the period for income taxes
    
    $
    604,000
    
    
    $
    376,000NON CASH INVESTING ACTIVITIES:Unrealized gain (loss) on investments
    
    $
    (29,000
    )
    
    $
    (144,000
    )
 See accompanying notes to the financial statements.
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DAWSON GEOPHYSICAL COMPANY
 
 NOTES TO FINANCIAL STATEMENTS
 1. ORGANIZATION AND NATURE OF OPERATIONS
  2. OPINION OF MANAGEMENT
   Critical Accounting Policies
  Revenue Recognition.
  Allowance for Doubtful Accounts.
 Impairment of Long-lived Assets.
 Depreciable Lives of Property, Plant and Equipment.
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Tax Accounting.
 Stock Based Compensation.
   Three Months Ended
    
    
    Six Months EndedMarch 31, 2005
    
    
    March 31, 2005Net income, as reported
    
    $
    2,327,000
    
    
    $
    3,927,000Add: Stock-based employee compensation expense
included in net income, net of tax
    
    
    
    
    
    
    45,000Deduct: Stock-based employee compensation expense
determined under fair value based method (SFAS 123), net of tax
    
    
    (106,000
    )
    
    
    (251,000
    )Net income, pro forma
    
    $
    2,221,000
    
    
    $
    3,721,000Basic:Net income per common share, as reported
    
    $
    0.37
    
    
    $
    0.66Net income per common share, pro forma
    
    $
    0.35
    
    
    $
    0.63Diluted:Net income per common share, as reported
    
    $
    0.37
    
    
    $
    0.65Net income per common share, pro forma
    
    $
    0.35
    
    
    $
    0.61
  5




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Weighted
    
    
    Number of OptionedAverage Price
    
    
    SharesBalance as of December 31, 2005
    
    $
    8.94
    
    
    
    218,000Exercised
    
    $
    8.57
    
    
    
    (21,750
    )Balance as of March 31, 2006
    
    $
    8.98
    
    
    
    196,250Balance as of September 30, 2005
    
    $
    8.87
    
    
    
    224,500Exercised
    
    $
    8.10
    
    
    
    (28,250
    )Balance as of March 31, 2006
    
    $
    8.98
    
    
    
    196,250
  6




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Recently Issued Accounting Pronouncements
  3. NET INCOME PER COMMON SHARE
   Three Months Ended
    
    
    Six Months EndedMarch 31
    
    
    March 312006
    
    
    2005
    
    
    2006
    
    
    2005NUMERATOR:Net income and numerator for basic and diluted
net income per common share-income
available to common shareholders
    
    $
    4,351,000
    
    
    $
    2,327,000
    
    
    $
    6,651,000
    
    
    $
    3,927,000DENOMINATOR:Denominator for basic net income per common
share-weighted average common shares
    
    
    7,504,811
    
    
    
    6,262,794
    
    
    
    7,495,499
    
    
    
    5,947,148Effect of dilutive securities-employee stock options
    
    
    88,382
    
    
    
    97,551
    
    
    
    88,112
    
    
    
    104,265Denominator for diluted net income per common
share-adjusted weighted average common shares
and assumed conversions
    
    
    7,593,193
    
    
    
    6,360,345
    
    
    
    7,583,611
    
    
    
    6,051,413Net income per common share
    
    $
    0.58
    
    
    $
    0.37
    
    
    $
    0.89
    
    
    $
    0.66Net income per common share-assuming dilution
    
    $
    0.57
    
    
    $
    0.37
    
    
    $
    0.88
    
    
    $
    0.65
 4. DEBT
  7




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5. CONTINGENCY
  8




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward Looking Statements
  Overview
     9




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Highlights of the Quarter Ended March 31, 2006
  
    
    We operated eleven acquisition crews during the second fiscal quarter of 2006, as
compared to ten crews in the second fiscal quarter of 2005.
    
    We experienced the price improvements and more favorable contract terms in our
agreements with clients that we negotiated in calendar 2005. These factors helped improve
our revenues during the second quarter of fiscal 2006.
    
    We experienced favorable weather and operating conditions during the second quarter of
fiscal 2006 which increased crew productivity.
    
    We continued to grow by upgrading our recording capacity, expanding the channel count
of existing crews, adding to our energy source fleet and making technical improvements in
all phases of our operations.
 Results of Operations
 Operating Revenues
 Operating Costs
  10




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Taxes
 Liquidity and Capital Resources
 Introduction.
 Cash Flows.
   Capital Expenditures.
  11




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Capital Resources.
    Payments Due by PeriodWithin
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 Years(In thousands)Operating lease obligations
    
    $
    339
    
    
    $
    151
    
    
    $
    188
    
    
    
    0
    
    
    
    0
  Off-Balance Sheet Arrangements
  Critical Accounting Policies
  Revenue Recognition.
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Allowance for Doubtful Accounts.
 Impairment of Long-lived Assets.
 Depreciable Lives of Property, Plant and Equipment.
 Tax Accounting.
 Stock Based Compensation.
  13




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
    
    Expected volatility of our stock price on historical volatility over the expected term
of the option.
    
    Expected term of the option based on historical employee stock option exercise behavior,
the vesting term of the respective option and the contractual term.
    
    Risk-free interest rate for periods within the expected term
of the option.
    
    Dividend yield.
   Recently Issued Accounting Pronouncements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Internal Control  Integrated Framework
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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    Number of SharesFor
    
    WithheldPaul H. Brown
    
    
    6,154,505
    
    
    
    193,380L. Decker Dawson
    
    
    6,302,993
    
    
    
    44,892Gary M. Hoover
    
    
    6,081,589
    
    
    
    266,296Stephen C. Jumper
    
    
    6,230,677
    
    
    
    117,208Tim C. Thompson
    
    
    6,154,305
    
    
    
    193,580
  For
    
    
    5,543,199Against
    
    
    1,321,950Abstain
    
    
    9243Broker Non-Votes
    
    
    0
  For
    
    
    6,383,070Against
    
    
    50,136Abstain
    
    
    282,578Broker Non-Votes
    
    
    0
   For
    
    
    2,688,113Against
    
    
    747,599Abstain
    
    
    282,578Broker Non-Votes
    
    
    0
 15




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ITEM 6. EXHIBITS
  16




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SIGNATURES
  DAWSON GEOPHYSICAL COMPANYDATE: May 9, 2006
    
    By:
    
    /s/ Stephen C. JumperStephen C. JumperPresident and
Chief Executive OfficerDATE: May 9, 2006
    
    By:
    
    /s/ Christina W. HaganChristina W. HaganExecutive Vice President, Treasurer,Secretary and Chief Financial Officer
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INDEX TO EXHIBITS
 Number
    
    Exhibit3.1
    
    Restated Articles of Incorporation of the Company (filed on December 10, 2004 as Exhibit 3.1 to the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2004 (File No. 000-10144) and incorporated herein by reference).3.2
    
    Bylaws of the Company, as amended (filed on December 11, 2003 as Exhibit 3 to the Companys Annual
Report on Form 10-K for the fiscal year ended September 30, 2003 (File No. 000-10144) and incorporated
herein by reference).4.1
    
    Rights Agreement by and between the Company and Mellon Investor Services, LLC (f/k/a Chasemellon
Shareholder Services, L.L.C.), as Rights Agent, dated July 13, 1999 (filed on December 11, 2003 as
Exhibit 4 to the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2003 (File
No. 000-10144) and incorporated herein by reference).10.1*
    
    First Amendment to Loan Agreement, dated January 18, 2006, between the Company and Western National Bank.31.1*
    
    Certification of Chief Executive Officer of Dawson Geophysical Company pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.31.2*
    
    Certification of Chief Financial Officer of Dawson Geophysical Company pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.32.1*
    
    Certification of Chief Executive Officer of Dawson Geophysical Company pursuant to Rule 13a-14(b)
promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of
Title 18 of the United States Code. Pursuant to SEC Release 34-47551, this Exhibit is furnished to
the SEC and shall not be deemed to be filed.32.2*
    
    Certification of Chief Financial Officer of Dawson Geophysical Company pursuant to Rule 13a-14(b)
promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of
Title 18 of the United States Code. Pursuant to SEC Release 34-47551, this Exhibit is furnished to the
SEC and shall not be deemed to be filed.
 
 *
    
    Filed herewith. 18