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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year
Ended September 30, 2004 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 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 RegisteredCommon Stock, $.33 1/3 par value
    
    Nasdaq
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.   Yes þ  No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K 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 I11 of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2).   Yes o  No þ As of March 31, 2004, the aggregate market value of Dawson Geophysical
Company common stock, par value $0.33 1/3 per share, held by non-affiliates (based upon the closing
transaction price on Nasdaq) was approximately $60,472,798. On November 26,2004, there were 5,638,044 shares of Dawson Geophysical Company Common stock,
$.33 113 par value, outstanding. As used in this report, the terms we, our, us, Dawson and the Company refer to
Dawson Geophysical Company unless the context indicates otherwise. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants Proxy Statement for its 2004 Annual Meeting of Shareholders to be
held January 25, 2005, are incorporated by reference into
Part III of Form 10-K.




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TABLE OF CONTENTS Part IItem 1.
    
    Business
    
    
    1Item 2.
    
    Properties
    
    
    5Item 3.
    
    Legal Proceedings
    
    
    6Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    6Part IIItem 5.
    
    Market for Our Common Equity and Related Stockholder Matters
    
    
    6Item 6.
    
    Selected Financial Data
    
    
    7Item 7.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    7Item 7A.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    10Item 8.
    
    Financial Statements and Supplementary Data
    
    
    10Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
    
    
    10Item 9A.
    
    Controls and Procedures
    
    
    10Part IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    11Item 11.
    
    Executive Compensation
    
    
    11Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    11Item 13.
    
    Certain Relationships and Related Transactions
    
    
    11Item 14.
    
    Principal Accounting Fees and Services
    
    
    11Part IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    12Signatures
    
    
    13Index to Exhibits
    
    
    14Index to Financial Statements
    
    
    F-1Restated Articles of IncorporationConsent of KPMG LLPCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer
  i




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DAWSON GEOPHYSICAL COMPANY
2004 ANNUAL REPORT ON FORM 10-K DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS All
statements other than statements of historical fact included in this Form 10-K, including
without limitation statements under Managements Discussion and Analysis of Financial Condition and
Results of Operations and Business regarding technological advancements and our financial
position, business strategy and plans and objectives of our management 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 us or our management, identify forward-looking statements. Such
forward-looking statements are based on the beliefs of our management as well as assumptions made
by and information currently available to 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 interruptions, inability to obtain
land access right of ways, the volatility of oil and gas prices, and
the availability of capital
resources. See Risks Related to Our Business for more information on these and
other factors. These forward-looking statements reflect our current views of with respect to future
events and are subject to these and other risks, uncertainties and assumptions relating to our
operations, results of operations, growth strategies and liquidity. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this paragraph. We assume no obligation to update any such
forward-looking statements. 
 Part I. 
 Item 1. BUSINESS General Dawson Geophysical Company is the leading provider of onshore seismic data acquisition
services in the United States.
Founded in 1952, we acquire and process 2-D, 3-D, and multi-component seismic data for our clients,
ranging from major oil and gas companies to independent oil and gas operators. Our
clients rely on seismic data to identify new areas where subsurface conditions are favorable
for the accumulation of hydrocarbons, as well as to optimize the development and production of
hydrocarbon reservoirs. During fiscal 2004, substantially all of our revenues were derived from 3-D
seismic operations. We operate nine 3-D seismic data acquisition crews in the lower 48 states of
the United States, and a seismic data processing center. We market and supplement our services from
our headquarters in Midland, Texas and from additional offices in Houston, Denver and Oklahoma
City. Our geophysicists perform data processing in our Midland and Houston offices and our field
operations are supported from our field office facility in Midland. The results of a seismic survey
conducted for a client belong to that client. To avoid potential conflicts of interest with our
clients, we do not acquire any data for our own account nor do we participate in oil and gas
ventures. In
fiscal year 2003, higher commodity prices led to a significant increase in the level of
spending for domestic exploration and development of oil and natural gas reserves by many oil and
gas companies. This increase in demand for seismic data acquisition services and a change in the
competitive landscape enabled us to increase our level of seismic data acquisition and
processing and expand our technical and operational expertise with the addition of experienced
personnel to our existing highly skilled workforce. We believe these additions fortified our
position as the leading provider of onshore seismic data acquisition services in the United States
and results in increased market share in terms of the number of active crews operating in the lower
48 states. We accelerated this expansion during fiscal 2004 with the addition of three data
acquisition crews, increased recording capacity company-wide, and
improvements to our data processing center. We anticipate further growth in fiscal 2005 and plan to
add our tenth data acquisition crew in January 2005. These expansions are in response to continued
demand for our high-resolution 3-D seismic services as well as our
clients recognition of our
technical and operational expertise. Business Strategy Our strategy is to maintain our leadership position in the U.S. onshore
market. Key elements of our strategy include:  Attracting and retaining skilled and experienced
personnel for our data acquisition and processing operations; Providing integrated in-house
services necessary in each phase of seismic data acquisition and processing, including project
design, land access permitting, surveying and related support functions as well as continuing
the enhancement of our in-house health, safety and environmental program; Maintaining the
focus of our operations solely on the domestic onshore seismic market; Continuing to operate
with conservative financial management; Updating our capabilities to incorporate advances in
geophysical and non-geophysical technologies; and Acquiring equipment to expand the recording
capacity on each of our existing crews and equipping additional crews
as customer demand dictates. 1




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Business Description Geophysical Services Overview.Technological advances in seismic equipment and computing allow
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 high resolution 3-D seismic surveys 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 increasing demand for
improved data quality with greater subsurface resolution. We are 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. Our geophysicists perform these
design tasks. We continue to pursue the use of more sophisticated technologies. We have been involved in the
acquisition and processing of 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. Shear waves are another type of seismic energy propagation, analysis of
which may allow for a more detailed picture of the earths subsurface. Our equipment
includes energy sources and geophones capable of generating and recording shear waves. Data
Acquisition.The seismic survey begins at the time a client requests that we formulate a
proposal to acquire seismic data on its behalf. Geophysicists then assist the client in designing
the specifications of the proposed 3-D survey. If the client accepts our proposal, a permit agent
then obtains access right of ways from the landowners where the survey is to be conducted. Utilizing electronic surveying equipment, our survey personnel precisely locate the energy
source and receiver positions from which the seismic data are collected. We utilize the satellite
global positioning system, known as GPS, to properly locate the seismic survey grid. We primarily
use vibrator energy sources, each of which weighs 50,000 to 62,000 pounds, but occasionally we
detonate dynamite charges placed in drill holes below the earths surface to generate seismic
energy. We use third party contractors for the drilling of holes, handling and placement of
dynamite charges. In 2000, we had an operating capacity of six land-based seismic data acquisition crews with an
aggregate recording channel count of approximately 20,000, and 52 vibrator energy source units. We
currently own equipment for nine crews and 70 vibrator energy source units and have capacity in
excess of 38,000 recording channels, any of which may be configured to meet the demands of specific
survey designs. Each crew consists of approximately 60 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. We operate nine
Input/Output System Two®
recording systems, four with radio capability, and five cable-based systems. Client demand for more recording channels continues to increase as the industry strives for
improved data quality. We believe our ability to provide a large number of recording channels gives
us a competitive edge with operational versatility, increased productivity, and improved data
quality. Data Processing.We currently operate a computer center located in Midland, Texas and provide
additional processing services through our Houston office. Such data processing primarily involves
the enhancement of seismic data by improving reflected signal resolution, removing ambient noise
and establishing proper spatial relationships of geological features. The data are then formatted in
such a manner that computer graphic technology may be employed for examination and interpretation
of the data by the user. We continue to improve data processing efficiency and accuracy with the addition of improved
processing software and high-speed computer technology. We purchase, develop or lease, under
non-exclusive licensing arrangements, seismic data processing software. Our computer center processes seismic data collected by our crews, as well as by
other geophysical contractors. In addition, we reprocess previously recorded seismic
data using current technology to enhance the data quality. Our processing contracts may be awarded
jointly with, or independently from, data acquisition services. Data processing services comprise a
small portion of our overall revenues. Integrated Services.We maintain integrated in-house operations necessary to the development
and completion of seismic surveys. Our experienced personnel have the
capability to conduct or
supervise the seismic survey design, permitting, surveying, data acquisition and processing
functions for each seismic program. In-house support operations include a health, safety and
environmental program as well as facilities for automotive repair, automotive paint and body
repair, electronics repair, electrical engineering and software development. In addition, we
maintain a fleet of tractor trailers to transport our seismic acquisition equipment to our survey
sites. We believe that maintaining these functions in-house contribute to better quality control
and improved efficiency in our operations. Our clients generally undertake to provide their own
interpretation of the seismic data provided by us. 2




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Equipment Acquisition and Capital Expenditures We monitor and evaluate advances in geophysical technology and commit capital funds to
purchase equipment we deem most promising in order to maintain our competitive position. Purchasing
new assets and continually upgrading capital assets require a continuing commitment to capital
spending. For fiscal year 2004, we made capital expenditures of $13,889,000 to fund the deployment
of three new data acquisition crews, expand the capacity of existing crews, improve our data
processing center and meet other necessary operational capital expenses. We have an approved budget
of $20,000,000 for fiscal 2005 to fund the remainder of the fiscal 2004 expansions, add a tenth
data acquisition crew in January 2005, and meet other necessary operational capital requirements. Clients Our 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. Our clients range from major oil companies to small independent oil and gas operators and also
include providers of multi-client data libraries. The services we provide to our clients vary
according to the size and needs of each client. We believe that the loss of any one of our clients
would not have a material impact on our business. During 2004, sales to our two largest clients
represented 17% and 12% of our revenues, respectively. The largest client acts as an agent for
other entities that are the actual purchasers of our services. Sales to each of the actual
purchasers represented less than 10% of our total revenues. Because of our relatively large client base, our largest clients have
varied from year to year. In order to avoid potential conflicts of interest with our clients, we do not acquire data for
our own account or for future sale, maintain any multi-client data library or participate in oil
and gas ventures. The results of a seismic survey conducted for a client belong to that client. It
is also our policy that none of our officers, directors or employees participate in any oil and gas
venture. All of our clients information is maintained in strictest confidence. Contracts Our services are conducted under master service contracts with our clients. These master
service contracts define certain obligations for us and for our clients. A supplemental agreement
setting forth the terms of a specific project, which may be cancelled by either party on short
notice, is entered into for every project. The supplemental agreements are either turnkey
agreements that provide for a fixed fee to be paid to us for each unit of data acquired, or term
agreements that provide for a fixed hourly, daily or monthly fee during the term of the project or
projects. Turnkey agreements generally provide us more profit potential, but involve more risks
because of the potential of crew downtime or operational delays. We attempt to negotiate on a
project by project basis, some level of weather downtime protection within the turnkey agreements.
Under the term agreements, we forego an increased profit potential in exchange for a more
consistent revenue stream with improved protection from crew downtime or operational delays. We
currently operate under both turnkey and term supplemental agreements. Currently, the majority of
our supplemental agreements are turnkey agreements. Competition The acquisition and processing of 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 crew safety performance history, technological and
operational expertise are often determinative. Our competitors include companies with financial
resources that are significantly greater than our own as well as companies of comparable and
smaller size. Our primary competitors are Veritas DGC, Petroleum Geo Services,Trace Energy
Services, Quantum Geophysical, and Tidelands Geophysical. Employees We employ approximately 567 persons, of which 508 are engaged in providing energy sources and
acquiring data, 9 are engaged in data processing, 11 are administrative personnel, 30 are engaged
in equipment maintenance and transport and 9 are executive officers. Of the employees listed above,
10 are geophysicists. Our employees are not represented by a labor union. We believe we
have good relations with our employees. Risks Related to our Business An investment in our common stock is subject to a number of risks discussed below.
You should carefully consider these discussions of risk and the other information
included in thisForm 10-K. Our business is dependent on prices for oil and gas and the level of capital
expenditures by oil and gas companies.Demand for our 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, including the US. market in which we operate. This
decline resulted in a 3




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significant reduction in the overall demand for seismic services. Since
reaching a recent high in 1998, the number of land-based seismic crews operating in the United
States and the number of companies providing seismic services have 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 in the United States prior to 1998. While overall
industry-wide demand has not reached the level of 1998,we have experienced an increased demand for
our services since fiscal year 2003. Fluctuations in oil and gas exploration activities and
commodity prices have adversely affected the demand for our services and our results of operations
in years past and would do so again if prices for oil and gas were to decline. In particular, we
incurred losses in fiscal years 2000 through 2003 as a result of decreased demand for seismic
services during these years due to the effects of lower oil and gas prices. Any significant decline
in oil and gas related spending on behalf of our clients could cause us to alter our capital
spending plans and would have a material adverse effect on our results of operations. Additionally,
we cannot assure you that increases in oil and gas prices will increase demand for our products and
services or otherwise have a positive effect on our results of operations or financial condition. Factors affecting the price of oil and gas include:  
    
    level of demand for oil and gas;
    
    worldwide political, military and economic conditions, including the ability of the Organization of Petroleum Exporting Countries (OPEC) to set and
maintain production levels and prices for oil;
    
    level of oil and gas production;
    
    government policies regarding the exploration for, and production and development of, oil and
gas reserves;
    
    level of taxation relating to the energy industry, including taxation of consumption of energy
sources; and
    
    weather conditions. The
markets for oil and gas have historically been volatile and are likely to continue to be so
in the future. The
high fixed costs of our operations could result in operating losses.Our
business has high fixed costs. As a result, any significant downtime or low productivity
caused by reduced demand, weather interruptions, equipment failures, permit delays or other causes
could adversely affect our results of operations. Our revenues are subject to fluctuations that are beyond our control and which could adversely
affect our results of operations in any financial period.Our operating results vary in
material respects from quarter to quarter and will continue to do so in the future. Factors that
cause variations include the timing of the receipt and commencement of contracts for data
acquisition, permit delays, weather delays and crew productivity. Combined with our high fixed
costs, these revenue fluctuations could produce unexpected adverse results of operations in any
fiscal period. Our operations are subject to weather conditions which could adversely affect our results of
operations.Our seismic data acquisition operations could be adversely affected by inclement
weather conditions. Delays associated with weather conditions could adversely affect our results of
operations. However, we have attempted to reduce these effects through the negotiation of weather
protection agreements. See Contracts. Our operations are subject to delays related to obtaining land access right of ways from
third parties which could affect our results of operations.Our seismic data acquisition operations
could be adversely affected by our inability to obtain timely right of way usage from both public
and private land and/or mineral owners. Delays associated with obtaining such rights of way could
negatively affect our results of operations. We face intense competition in our business.The acquisition and processing of seismic data for
the oil and gas industry is a highly competitive business in the United States. Our competitors
include companies with financial resources that are significantly greater than our own as well as
companies of comparable and smaller size. See Competition. We may be unable to attract and retain key employees, which could adversely affect our
business.Our success depends upon attracting and retaining highly skilled professionals and other
technical personnel. A number of our employees are highly skilled scientists and highly trained
technicians, and our failure to continue to attract and retain such individuals could adversely
affect our ability to compete in the seismic services industry. We may confront significant and
potentially adverse competition for key personnel, particularly during periods of increased demand
for seismic services. Capital requirements for our operations are large and our ability to finance these requirements
could be affected.Our sources of working capital are limited. We have historically funded our
working capital requirements with cash generated from operations, cash reserves and short term
borrowings from commercial banks. Our working capital requirements continue to increase, primarily
due to the expansion of our infrastructure. If we were to expand our operations at a rate exceeding
operating cash flow, or if current demand or 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. 4




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Technological change in our business creates risks of technological obsolescence and
requirements for future capital expenditures which we may not be able to meet.Seismic data
acquisition and data processing technology have historically progressed rather rapidly and we
expect this progression to continue. Our strategy is to regularly upgrade our data acquisition and
processing equipment to maintain our competitive position. However, due to potential advances in
technology and the related costs associated with such technological advances, no assurance can be
given that we will be able to fulfill this strategy, thus possibly affecting our ability to
compete. We operate under hazardous conditions that subject us to risk of damage to property or
personal injuries and may interrupt our business. Our business is subject to the general risks
inherent in land-based seismic data acquisition activities. Our 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. Our crews are mobile, and the equipment
and personnel are subject to vehicular accidents. We use diesel fuel which is classified by the
U.S. Department of Transportation as a hazardous material. To date, we have not suffered any
material losses of equipment, but there can be no assurance that we will not experience such losses
in the future. In addition, we could be subject to personal injury or real property damage claims
in the normal operation of our business. Such claims may not be covered under the indemnification
provisions in our master service agreements to the extent that the damage was due to our negligence
or intentional misconduct. We have not experienced any material loss from these types of claims to
date. We carry insurance in amounts which we consider adequate on the principal items of our
equipment.We do not carry insurance against certain risks, including business interruption
resulting from equipment losses or weather delays. We obtain insurance against certain property and
personal casualty risks when such insurance is available and when our 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. Our business is subject to governmental regulation, which may adversely affect
our future operations.Our 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. We are required to expend financial and managerial resources to comply with
such laws and related permit requirements in our operations, and we anticipate that we will
continue to be required to do so in the future. Although such
expenditures historically have not
been material to us, the fact that such laws or regulations change frequently makes it impossible
for us to predict the cost or impact of such laws and regulations on our 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 our operations by reducing
the demand for our services. Certain provisions of our charter and bylaws and our shareholder rights plan may make it
difficult for a third party to acquire us, even in situations that may be viewed as desirable by
shareholders.Our articles of incorporation and bylaws contain provisions that authorize the
issuance of preferred stock and establish advance notice requirements for director nominations and
actions to be taken at shareholder meetings. These provisions could discourage or impede a tender
offer, proxy contest or other similar transaction involving control of us, even if viewed favorably
by shareholders. In addition, we have adopted a shareholder rights plan that would likely
discourage a hostile attempt to acquire control of us. 
 Item 2. PROPERTIES Our principal facilities are summarized in the table below. Owned or
    
    
    
    Building AreaLocation
    
    Leased
    
    Purpose
    
    Square FeetMidland, TX
    
    Leased
    
    Executive offices and
    
    18,400data processingMidland, TX
    
    Owned
    
    Field office
    
    53,000Equipment fabricationMaintenance and repairs
 We lease office space for operations in Houston, Denver and Oklahoma City. Our operations are limited to one industry segment and the United States. 5




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Item 3. LEGAL PROCEEDINGS From time to time we are a party to various legal proceedings arising in the ordinary course of
business. Although we cannot predict the outcomes of any such legal proceedings, our management
believes that the resolution of pending legal actions will not have a material adverse effect on
our 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 2004 fiscal year to a vote of our
security holders, through the solicitation of proxies or otherwise. However, please refer to our
Proxy Statement for the Annual Meeting to be held on January 25, 2005 (the Proxy Statement),
filed with the Securities and Exchange Commission, notifying security holders as to the election of
Directors and selection of KPMG LLP as our independent registered public accounting firm. 
 Part II. 
 Item 5. MARKET FOR OUR COMMON EQUITYANDRELATED STOCKHOLDER MATTERS Our common stock trades on the Nasdaq Stock Market® under the symbol DWSN. The
table below represents the high and low sales prices for the period shown. Quarter Ended
    
    High
    
    LowDecember 31, 2002
    
    $
    7.18
    
    
    $
    4.95March 31, 2003
    
    $
    7.23
    
    
    $
    5.20June 30, 2003
    
    $
    8.53
    
    
    $
    6.34September 30, 2003
    
    $
    8.40
    
    
    $
    6.56December 31, 2003
    
    $
    8.54
    
    
    $
    6.46March 31, 2004
    
    $
    12.47
    
    
    $
    7.62June 30, 2004
    
    $
    22.39
    
    
    $
    12.00September 30, 2004
    
    $
    26.24
    
    
    $
    16.82
 As
of November 26, 2004, we had 200 common stockholders of record as reported by our transfer agent. We have not paid cash dividends on our Common Stock since becoming a public company and
have no plans to do so in the foreseeable future. The following table summarizes certain information regarding securities authorized for issuance
under our equity compensation plans as of September 30, 2004. Equity Compensation Plan Information Number of securitiesremaining available forfuture issuance under equityNumber of securities to be
    
    
    
    
    
    compensation plansissued upon exercise of
    
    Weighted-average exercise
    
    (excluding securitiesPlan Category
    
    outstanding options
    
    price of outstanding options
    
    reflected in column (a))(a)
    
    (b)
    
    (c)Equity compensation plans
approved by security holders
    
    
    227,000
    
    
    $
    6.75
    
    
    
    367,500Equity compensation plans not
approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    227,000
    
    
    $
    6.75
    
    
    
    367,500
 6




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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)
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000Operating revenues
    
    $
    69,346
    
    
    $
    51,592
    
    
    $
    36,078
    
    
    $
    37,878
    
    
    $
    18,469Net income (loss)
    
    $
    8,618
    
    
    $
    (899
    )
    
    $
    (2,292
    )
    
    $
    (4,978
    )
    
    $
    (11,135
    )Net income (loss) per common share
    
    $
    1.55
    
    
    $
    (.16
    )
    
    $
    (.42
    )
    
    $
    (.91
    )
    
    $
    (2.05
    )Weighted average equivalent common
shares outstanding
    
    
    5,559
    
    
    
    5,485
    
    
    
    5,463
    
    
    
    5,443
    
    
    
    5,425Total assets
    
    $
    56,759
    
    
    $
    42,792
    
    
    $
    44,291
    
    
    $
    45,381
    
    
    $
    49,781Long term debt-less current maturities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Stockholders equity
    
    $
    50,282
    
    
    $
    40,662
    
    
    $
    41,586
    
    
    $
    43,582
    
    
    $
    48,468
 
 Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in
conjunction with the financial statements and notes to those statements included elsewhere in this
Form 10-K. This discussion contains forward-looking statements that involve risks and
uncertainties. Please see Risks Related to our Business and Disclosure Regarding Forward
Looking Statements elsewhere in this Form 10-K. Overview Our return to profitability in fiscal 2004 after several years of losses is directly related to an
increase in the level of exploration for domestic oil and natural gas reserves by the petroleum
industry since 2003. The increased level of exploration is a function of higher prices for oil and
natural gas. As a result of the increase in domestic exploration spending, we have experienced an
increased demand for our seismic data acquisition and processing services. While we can make no
assurances as to future levels of domestic exploration or commodity prices, we believe
opportunities exist for us to expand our position as the leading provider of seismic data
acquisition services in the lower 48 states of the United States. We continue to focus on
increasing revenues and profitability. Our revenues are affected by the level of client
demand for our services, the pricing for our services that we negotiate with our clients, and the
productivity of our data acquisition crews, including crew downtime related to inclement weather or
delays in acquiring land access permits. Consequently, our successful efforts to negotiate more
favorable weather protection provisions in our master service contracts, to mitigate access permit
delays, and to improve overall crew productivity, may contribute to growth in our revenues.
Although our clients may cancel their supplemental service agreement with us on short notice, we
believe we currently have a sufficient order book to sustain operations at full capacity well into
fiscal 2005. Fiscal 2004 Highlights Our financial performance for fiscal 2004 significantly improved when compared to our financial
performance for fiscal 2003 due to the following principal factors:  
    
    In response to increased utilization, we added capacity to existing crews and fielded three
additional data acquisition crews. These additions were funded primarily from cash flow and cash
reserves and helped to increase our revenues during fiscal 2004.
    
    As result of increased demand for
our services, we saw price improvements and more favorable contract terms in our agreements with
clients. These
factors helped improve our revenues during fiscal 2004.
    
    Approximately $0.29 per share of our
earnings for fiscal 2004 were due to a deferred income tax benefit resulting from our elimination
of a valuation allowance on a deferred tax asset generated from net operating loss
carryforwards. We believe that our past five profitable quarters and a continued favorable
environment for our services will now enable us to use the deferred tax asset. 7




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Fiscal Year Ended
September 30, 2004 Versus Fiscal Year Ended September 30, 2003 Operating Revenues.Our operating revenues increased 34% from $51,592,000 in fiscal 2003 to
$69,346,000 in fiscal 2004 as a result of increased demand for our services, price improvements in
the markets for our services and the negotiation of favorable contract provisions. We began fiscal
2004 with six data acquisition crews. The seventh crew was added in March and the eighth and ninth
crews were fielded in the fourth quarter of fiscal 2004. Approximately $375,000 of our revenue is
related to a negotiated release from contract performance by one customer. The release was at the
request of the client, and did not involve any performance issues. Operating Costs.Our operating expenses increased 21% from $46,151,000 in fiscal 2003 to
$55,618,000 in fiscal 2004 due to the start-up and ongoing expenses of the three new crews added
during the year. General and administrative expenses were 3.9% of revenues in fiscal 2004 as compared to 4.7%
in fiscal 2003. The reduction in the percentage of general and administrative expenses to revenues
in fiscal 2004 reflects our relatively fixed operating costs and the increase in our revenues
during this period. General and administrative expenses are expected to increase to support
expanded field operations and to assimilate Sarbanes-Oxley reporting requirements. In fiscal 2004,
we increased our allowance for doubtful accounts by $100,000 in response to the increase in
business activity and accounts receivable. Historically,we have had no significant write-offs of
trade accounts receivable; however, we believe that it is prudent to increase the allowance for
doubtful accounts in response to the business from new customers that the increases in the prices
of oil and natural gas have generated. We recognized $4,653,000 of depreciation expense in fiscal 2004 as compared to $4,404,000 in
fiscal 2003. Our depreciation expense is expected to increase in fiscal 2005 as a result of our
significant capital expenditures in fiscal 2004. Approximately 39% of the fiscal 2004 capital
expenditures occurred in the fourth quarter. During fiscal 2005 we will reflect a full year of
depreciation expense for these fourth quarter 2004 capital expenditures. Our total operating costs for fiscal 2004 were $62,946,000, an increase of 19% from fiscal
2003 primarily due to the factors described above. Taxes.Because of our past five profitable quarters and the continued favorable environment
for our services, we believe that we will now be able to fully use our net operating loss
carryforwards. Approximately $0.29 per share of our reported earnings for fiscal 2004 resulted from
a deferred income tax benefit resulting from the elimination of a valuation allowance
on our deferred tax asset generated from these net operating loss carryforwards.
Current tax expense reflects alternative minimum tax (AMT) calculated on net income
not eligible for offset by AMT loss carryforwards. Fiscal Year Ended
September 30, 2003 Versus Fiscal Year Ended September 30, 2002 Operating Revenues.Our operating revenues increased 43% from $36,078,000 in fiscal 2002 to
$51,592,000 in fiscal 2003 principally as a result of increased demand for our services. We began
fiscal 2003 with five crews and increased to six operating crews in November. During the months of
May, June and July, our production was severely impaired by rain and we operated five crews during
this time. During fiscal 2003, we saw slight price improvements for our services and were able to
maintain the price improvements gained in fiscal 2002. Operating Costs.Our operating expenses increased 39% in fiscal 2003 as compared to fiscal
2002 due to the start up expenses associated with activating a crew, our expanded
operations geographically within the contiguous United States, and an increased demand for dynamite
energy
sources, which require an expensive drilling component, and for the use of helicopters to
achieve efficient operations. The last two factors are reimbursable out-of-pocket expenses and are
reported in both our revenue and expense lines. Our general and administrative expenses were 4.7% of revenues in fiscal 2003 as compared to
5.5% in fiscal 2002. We increased our allowance for doubtful accounts by $60,000 in fiscal 2003 in
response to working for new clients in new areas. However, relatively favorable prices for crude
oil and natural gas benefited our clients and, therefore, helped us in the collection of accounts
receivable. We recognized $4,404,000 of depreciation expense in fiscal 2003, an increase of 4% from fiscal
2002. The increase in depreciation expense reflects our increase in capital expenditures during
fiscal 2003 and 2002, principally for recording equipment. Our total operating costs for fiscal 2003 were $52,976,000, an increase of 34.3% from fiscal
2002 primarily due to the factors described above. The year over year increase in our revenues of
43% as compared to the year over year increase in our operating expenses of 39% reflects the high
proportion of relatively fixed total operating expenses, including personnel costs of active crews,
inherent in our business. Taxes.We recorded a deferred tax expense due to an increase in the income tax
valuation allowance. The tax expense is related to the tax effect of the unrealized
loss on investments recorded in other comprehensive income. 8




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##### Table of Contents



Liquidity and Capital Resources Cash Flows.Net cash provided by operating activities was $8,813,000 for fiscal 2004,
$1,244,000 for fiscal 2003 and $3,628,000 for fiscal 2002. These amounts primarily reflect results
of operations offset by changes in working capital components. The increase in cash provided by
operating activities in fiscal 2004 resulted primarily from the increase in net income. Net cash used in investing activities was $9,571,000 in fiscal 2004 and $6,657,000 in fiscal
2002. Net cash provided from investing activities was $836,000 in fiscal 2003. These results
primarily represent capital expenditures and activity in the short-term investment portfolio.
Capital expenditures were made with cash generated from operations and short-term investments. Net cash provided by financing activities in fiscal 2004 was $957,000 and reflects proceeds
from the exercise of stock options by officers and other key employees. Capital Expenditures.Capital expenditures during fiscal 2004 were $13,889,000, which was used
to acquire additional recording channels, energy source units, three new seismic acquisition crews
and maintenance capital requirements. We have budgeted capital expenditures of approximately $20,000,000 in fiscal year 2005, of
which approximately 40% will be used to complete the fiscal 2004 crew expansions, approximately 45%
will be used to add a tenth seismic acquisition crew in January 2005 and the remainder will be used
for maintenance capital requirements. We continually strive to supply market demand with technologically advanced 3-D data
acquisition recording systems and leading edge data processing capabilities. We maintain equipment
in and out of service in anticipation of increased future demand for our services. Capital Resources.Historically,we have relied on cash generated from operations, cash
reserves and short term borrowings from commercial banks to fund our working capital requirements
and, to some extent, capital expenditures. We believe that our capital resources, including our short-term investments and cash flow from
operations are adequate to meet our current operational needs. We believe we will be able to
finance our fiscal 2004 capital requirements through these same sources and by securing a line of
credit from a commercial bank. On November 18, 2004, we received a commitment letter
from a bank for a revolving line of credit of up to $10,000,000 to be secured by our accounts
receivable. The commitment letter is subject to conditions, including that we negotiate a loan
agreement acceptable to the bank and to us. We cannot assure you that we will be able to satisfy
these conditions or obtain the line of credit. We are also evaluating other financing sources.
Other than the commitment letter discussed above, we do not currently have any financing
arrangements. Off-Balance Sheet Arrangements As
of September 30, 2004, we had no off-balance sheet arrangements. Effect of Inflation We do not believe that inflation has had a material effect on our business, results of
operations or financial condition during the past three years. Critical Accounting Policies The preparation of our financial statements in conformity with generally accepted accounting
principles requires us to make certain assumptions and estimates that affect the reported amounts
of assets and liabilities at the date of our financial statements and the reported amounts of
revenues and expenses during the reporting period. Because of the use of assumptions and estimates
inherent in the reporting process, actual results could differ from those estimates. Revenue Recognition.Our services are provided under cancelable service contracts. In the case
of a cancelled service contract, we recognize revenue and bill our client for services performed up
to the date of cancellation. We also receive reimbursements for certain out-of-pocket expenses
under the terms of our master service contracts. We record amounts billed to clients in revenue at
the gross mount including out-of-pocket expenses that are reimbursed by the client. In some instances, we bill clients in advance of the services performed. In those cases, we
recognize the liability as deferred revenue. Allowance for Doubtful Accounts.We prepare our allowance for doubtful accounts receivable
based on our past experience of historical write-offs, our current customer base and our 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 our customers. 9




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##### Table of Contents



Impairment of Long-lived Assets.We review long-lived assets for impairment when triggering
events occur suggesting deterioration in the assets recoverability or fair value. Recognition of an
impairment charge is required if future expected net cash flows are insufficient to recover the
carrying value of the asset. Our forecast of future cash flows used to perform impairment analysis
includes estimates of future revenues and future gross margins. If we are unable to achieve these
cash flows, our estimates would be revised potentially resulting in an impairment charge in the
period of revision. Depreciable Lives of Property, Plant and Equipments.Our Property, Plant and Equipment is
capitalized at historical cost and depreciated over the useful life of the asset. Our 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. We amortize these capitalized items using the
straight-line method. Stock Based Compensation.In accordance with the Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, we do not record compensation 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 market price on the grant date. Recently Issued Accounting Pronouncements The Financial Accounting Standards Board (FASB) has announced it will require all public
companies to expense the fair value of employee stock awards. The final requirements will be
effective for fiscal years beginning after December 31 , 2004. The impact to our
financial statements will be in the form of additional compensation expense upon the award of any
stock options. The amount of the compensation expense we will recognize is dependent on the value
of our common stock and the number of options we award. 
 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 our services and interest rate
fluctuations. At September 30, 2004, we had
no indebtedness. Our short-term investments were fixed-rate and we do not necessarily intend to
hold them to maturity, and therefore, the short-term investments expose us to the risk of earnings
or cash flow loss due to changes in market interest rates. As of
September 30, 2004, the carrying
value of our investments approximates fair value. We have not entered into any hedge arrangements,
commodity swap agreements, commodity futures, options or other derivative financial instruments. We
do not currently conduct business internationally so we are 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 Under the supervision, and with the participation of our management, including our principal
executive officer and principal financial officer, we have performed an evaluation of the design,
operation and effectiveness of our disclosure controls and procedures (as defined in Rule 13a-l5(e)
of the Securities Exchange Act) as of September 30, 2004. Based on that evaluation, our principal
executive officer and principal financial officer concluded that such disclosure controls and
procedures were operating effectively as of September 30, 2004. There have not been any changes in
our internal controls over financial reporting (as defined in Rule 13a-l5(f) of the Securities
Exchange Act) during the quarter and year ended September 30, 2004 that have materially affected or
are reasonably likely to materially affect our internal control over financial reporting. 10




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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 sections entitled Election of Directors, Directors and
Executive Officers, Section 16(a) Beneficial Ownership Reporting Compliance, Stockholder
Proposals for Next Annual Meeting, and Other Matters in our Proxy Statement, filed or to be
filed by us with the Securities and Exchange Commission pursuant to
Regulation 14A of
the Securities Exchange Act of 1934 within 120 days after the end of the fiscal year covered by
this Form 10-K. Our code of ethics (as defined in Item 406 of Regulation S-K) was
adopted by our Board of Directors May 25, 2004. The Code of Business Conduct and Ethics applies our
directors, officers and employees, including our principal executive officer, principal financial
officer and principal accounting officer. Our Code of Business Conduct and Ethics is posted on our
website at http://www.dawson3d.com in the Corporate Governance area. Changes to and waivers
granted with respect to our Code of Business Conduct and Ethics related to officers identified
above, and our other executive officers and directors that we are required to disclose pursuant to
applicable rules and regulations of the SEC will also be posted on our website. 
 Item 11. EXECUTIVE COMPENSATION The information required by this Item 11 is hereby incorporated by reference to the section of
the Proxy Statement entitled Management Compensation. 
 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 section of the Proxy Statement
entitled Security Ownership of Certain Beneficial Owners and Management. The information required
with respect to our equity compensation plans is set forth in
Item 5 of this Form 10-K. On July 13, 1999, our Board of Directors authorized and declared a dividend to the holders of
record on July 23, 1999 of one Right (a Right) for each outstanding share of our common stock.
When exercisable, each Right will entitle the holder to purchase one one-hundredth of a share of
our Series A Junior Participating Preferred Stock, par value $1.00 per share, (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
our outstanding common stock or announces a tender offer or exchange offer, the consummating of
which would result in attaining the triggering percentage. We may redeem the Rights for $.01 per
Right at any time prior to the tenth day after the first public announcement of a triggering
acquisition. 
 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 Fees Paid to the Independent Registered Accounting Firm and is incorporated
herein by reference. 11




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##### Table of Contents



Part IV 
 Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K  (a)
    
    The following documents are filed as part of this report:  (1)
    
    Financial Statements. The following financial statements of Dawson Geophysical Company appear on pages F-1
through F-13 and are incorporated by reference into Part 11, Item 8: Report of Independent Registered Accounting Firm 
Balance Sheets 
Statements of Operations 
Statements of Changes in Stockholders Equity
Statements of Cash Flows
Notes to Financial Statements  (2)
    
    Financial Statement Schedules. All schedules are omitted because they are either not applicable or the required information
is shown in the financial statements or notes thereto.  (3)
    
    Exhibits. The information required by this item 15(a)(3) is set forth in the Index to Exhibits
accompanying this Annual Report of Form 10-K and is hereby incorporated by reference.  (b)
    
    Reports on Form 8-K:  1)
    
    On July 28, 2004, the Company filed a Current Report on Form 8-K (dated
as of July 27, 2004) for the purpose of furnishing the press release announcing the
Companys operating results for the third quarter ended June 30, 2004.2)
    
    On August 24, 2004, the Company filed a Current Report on Form 8-K
(dated as of August 23, 2004) for the purpose of furnishing a press release announcing the
Companys intention to field an additional seismic data acquisition crew.3)
    
    On November 15, 2004, the Company filed a Current Report on Form 8-K
(dated as of November 12, 2004) for the purpose of furnishing a press release announcing
the Companys operating results for its fiscal year ended September 30, 2004. 12




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##### Table of Contents



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 8th day of
December, 2004. DAWSON GEOPHYSICAL COMPANYBy:
    
    /s/ L. Decker DawsonL. 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 on behalf of the Registrant and in the capacities and on the
dates indicated. Signature
    
    Title
    
    Date/s/ L. Decker Dawson

L. Decker Dawson
    
    Chairman of the Board
of Directors and Chief Executive Officer
    
    12-8-04/s/ Stephen C. Jumper

Stephen C. Jumper
    
    President, Chief Operating
Officer and Director
    
    12-8-04/s/ Howell W. Pardue

Howell W. Pardue
    
    Executive Vice President
and Director
    
    12-8-04/s/ C. Ray Tobias

C. Ray Tobias
    
    Executive Vice President
and Director
    
    12-8-04/s/ Paul H. Brown

Paul H. Brown
    
    Director
    
    12-8-04/s/ Calvin J. Clements

Calvin J. Clements
    
    Director
    
    12-8-04/s/ Gary M. Hoover

Gary M. Hoover, Ph.D.
    
    Director
    
    12-8-04/s/ Matthew P. Murphy

Matthew P. Murphy
    
    Director
    
    12-8-04/s/ Tim C. Thompson

Tim C. Thompson
    
    Director
    
    12-8-04/s/ Christina W. Hagan

Christina W. Hagan
    
    Executive Vice President,
Secretary, Treasurer and
Chief Financial Officer
    
    12-8-04
 13




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INDEX TO FINANCIAL STATEMENTS Financial Statements of Dawson Geophysical Company
    
    PageReport of Independent Registered Public Accounting Firm
    
    F-2Balance Sheets as of September 30, 2004 and 2003
    
    F-3Statements of Operations for the years ended
September 30, 2004, 2003 and 2002
    
    F-4Statements of Changes in StockholdersEquity for the years
ended September 30, 2004, 2003 and 2002
    
    F-5Statements of Cash Flows for the years ended
September 30, 2004, 2003 and 2002
    
    F-6Notes 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




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and
Stockholders Dawson Geophysical Company: We have audited the accompanying balance sheets of Dawson Geophysical Company (the Company)
as of September 30, 2004 and 2003, and the related statements of operations,
stockholders equity and comprehensive income, and cash flows for each of the years in the
three-year period ended September 30, 2004. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit 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, 2004 and 2003,
and the results of its operations and its cash flows for each of the years in the three-year period
ended September 30, 2004, in conformity with U.S. generally accepted accounting principles. KPMG LLP Midland, Texas
November 11, 2004 F-2




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##### Table of Contents



DAWSON GEOPHYSICAL COMPANY
BALANCE SHEETS September 30,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,587,000
    
    
    $
    3,389,000Short-term investments
    
    
    4,130,000
    
    
    
    8,623,000Accounts receivable, net of allowance
for doubtful accounts of $199,000 in
2004 and $127,000 in 2003
    
    
    16,979,000
    
    
    
    9,713,000Prepaid expenses and other assets
    
    
    440,000
    
    
    
    287,000Total current assets
    
    
    25,136,000
    
    
    
    22,012,000Deferred tax asset
    
    
    1,648,000
    
    
    
    Property, plant and equipment
    
    
    94,050,000
    
    
    
    81,585,000Less accumulated depreciation
    
    
    (64,075,000
    )
    
    
    (60,805,000
    )Net property, plant and equipment
    
    
    29,975,000
    
    
    
    20,780,000$
    56,759,000
    
    
    $
    42,792,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,357,000
    
    
    $
    931,000Accrued liabilities:Payroll costs and other taxes
    
    
    742,000
    
    
    
    478,000Other
    
    
    971,000
    
    
    
    415,000Deferred revenue
    
    
    1,407,000
    
    
    
    306,000Total current liabilities
    
    
    6,477,000
    
    
    
    2,130,000Stockholders 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;
10,000,000 shares authorized, 5,633,794
and 5,487,794 shares issued and outstanding
in 2004 and 2003, respectively
    
    
    1,878,000
    
    
    
    1,829,000Additional paid-in capital
    
    
    39,949,000
    
    
    
    38,931,000Other comprehensive income, net of tax
    
    
    (28,000
    )
    
    
    37,000Retained earnings (deficit)
    
    
    8,483,000
    
    
    
    (135,000
    )Total stockholders equity
    
    
    50,282,000
    
    
    
    40,662,000$
    56,759,000
    
    
    $
    42,792,000
 See accompanying notes to the financial statements. F-3




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DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF OPERATIONS Years Ended September 30,2004
    
    2003
    
    2002Operating revenues
    
    $
    69,346,000
    
    
    $
    51,592,000
    
    
    $
    36,078,000Operating costs:Operating expenses
    
    
    55,618,000
    
    
    
    46,151,000
    
    
    
    33,205,000General and administrative
    
    
    2,675,000
    
    
    
    2,421,000
    
    
    
    2,006,000Depreciation
    
    
    4,653,000
    
    
    
    4,404,000
    
    
    
    4,233,00062,946,000
    
    
    
    52,976,000
    
    
    
    39,444,000Income (loss) from operations
    
    
    6,400,000
    
    
    
    (1,384,000
    )
    
    
    (3,366,000
    )Other income:Interest income
    
    
    177,000
    
    
    
    328,000
    
    
    
    507,000Other
    
    
    505,000
    
    
    
    209,000
    
    
    
    96,000Income (loss) before income tax
    
    
    7,082,000
    
    
    
    (847,000
    )
    
    
    (2,763,000
    )Income tax benefit (expense):Current
    
    
    (96,000
    )
    
    
    
    
    
    
    400,000Deferred
    
    
    1,632,000
    
    
    
    (52,000
    )
    
    
    71,0001,536,000
    
    
    
    (52,000
    )
    
    
    471,000Net income (loss)
    
    $
    8,618,000
    
    
    $
    (899,000
    )
    
    $
    (2,292,000
    )Net income (loss) per common share
    
    $
    1.55
    
    
    $
    (.16
    )
    
    $
    (.42
    )Net income (loss) per common share-assuming dilution
    
    $
    1.53
    
    
    $
    (.16
    )
    
    $
    (.42
    )Weighted average equivalent common shares outstanding
    
    
    5,558,646
    
    
    
    5,484,593
    
    
    
    5,462,936Weighted average equivalent common
shares outstanding-assuming dilution
    
    
    5,631,397
    
    
    
    5,484,593
    
    
    
    5,462,936
 See accompanying notes to the financial statements. F-4




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DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY Common Stock
    
    
    
    
    
    AccumulatedAdditional
    
    Other
    
    RetainedNumber
    
    
    
    
    
    Paid-in
    
    Comprehensive
    
    EarningsOf Shares
    
    Amount
    
    Capital
    
    Income
    
    (deficit)
    
    TotalBalance,
September 30, 2001
    
    
    5,445,794
    
    
    $
    1,815,000
    
    
    $
    438,711,000
    
    
    
    
    
    
    $
    3,056,000
    
    
    $
    43,582,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,292,000
    )
    
    
    (2,292,000
    )Other comprehensive income net of tax:Unrealized gain on securities:Unrealized holding gains
arising during period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    208,000Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71,000
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137,000Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,427,000Issuance of common
stock as compensation
    
    
    21,500
    
    
    
    7,000
    
    
    
    152,000
    
    
    
    
    
    
    
    
    
    
    
    159,000Balance,
September 30, 2002
    
    
    5,467,294
    
    
    
    1,822,000
    
    
    
    38,863,000
    
    
    
    137,000
    
    
    
    764,000
    
    
    
    41,586,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (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
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,000Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,000
    )
    
    
    
    
    
    
    (100,000
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,587,000Issuance of common
stock as compensation
    
    
    20,500
    
    
    
    7,000
    
    
    
    68,000
    
    
    
    
    
    
    
    
    
    
    
    75,000Balance,
September 30, 2003
    
    
    5,487,794
    
    
    
    1,829,000
    
    
    
    38,931,000
    
    
    
    37,000
    
    
    
    (135,000
    )
    
    
    40,662,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,618,000
    
    
    
    8,618,000Other comprehensive income net of tax:Unrealized loss on securities:Unrealized holding losses
arising during period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (126,000
    )Less: Reclassification
adjustment for gain included
in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,000Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,000Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,000
    )
    
    
    
    
    
    
    (65,000
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,215,000Issuance of common
stock as compensation
    
    
    8,500
    
    
    
    3,000
    
    
    
    107,000
    
    
    
    
    
    
    
    
    
    
    
    110,000Exercise of stock options
    
    
    137,500
    
    
    
    46,000
    
    
    
    911,000
    
    
    
    
    
    
    
    
    
    
    
    957,000Balance,
September 30, 2004
    
    
    5,633,794
    
    
    $
    1,878,000
    
    
    $
    39,949,000
    
    
    $
    (28,000
    )
    
    $
    8,483,000
    
    
    $
    50,282,000
 See accompanying notes to the financial statements. F-5




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##### Table of Contents



DAWSON GEOPHYSICAL COMPANY
STATEMENTS OF CASH FLOWS Years Ended September 30.2004
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    8,618,000
    
    
    $
    (899,000
    )
    
    $
    (2,292,000
    )Adjustments to reconcile net income (loss) to
net cash provided by operating activities:Depreciation
    
    
    4,653,000
    
    
    
    4,404,000
    
    
    
    4,233,000Non-cash compensation
    
    
    110,000
    
    
    
    75,000
    
    
    
    159,000Deferred income tax (benefit) expense
    
    
    (1,632,000
    )
    
    
    52,000
    
    
    
    (71,000
    )Other
    
    
    135,000
    
    
    
    (46,000
    )
    
    
    58,000Change in current assets and liabilities:Decrease (increase) in accounts receivable
    
    
    (7,266,000
    )
    
    
    (2,100,000
    )
    
    
    1,082,000Increase in prepaid expenses
    
    
    (153,000
    )
    
    
    (67,000
    )
    
    
    (47,000
    )Decrease (increase) in income taxes receivable
    
    
    
    
    
    
    400,000
    
    
    
    (400,000
    )Increase (decrease) in accounts payable
    
    
    2,426,000
    
    
    
    (747,000
    )
    
    
    784,000Increase in accrued liabilities
    
    
    820,000
    
    
    
    254,000
    
    
    
    21,000Increase (decrease) in deferred revenue
    
    
    1,101,000
    
    
    
    (82,000
    )
    
    
    101,000Net cash provided by operating activities
    
    
    8,812,000
    
    
    
    1,244,000
    
    
    
    3,628,000CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from disposal of assets
    
    
    40,000
    
    
    
    27,000
    
    
    
    10,000Capital expenditures
    
    
    (13,889,000
    )
    
    
    (6,153,000
    )
    
    
    (2,047,000
    )Proceeds from sale of short-term investments
    
    
    2,973,000
    
    
    
    5,964,000
    
    
    
    Proceeds from maturity of short-term investments
    
    
    7,550,000
    
    
    
    4,000,000
    
    
    
    10,598,000Acquisition of short-term investments
    
    
    (6,245,000
    )
    
    
    (3,002,000
    )
    
    
    (15,218,000
    )Net cash provided by (used in) investing activities
    
    
    (9,571,000
    )
    
    
    836,000
    
    
    
    (6,657,000
    )CASH FLOW FROM FINANCING ACTIVITIESProceeds from exercise of stock options
    
    
    957,000
    
    
    
    
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    198,000
    
    
    
    2,080,000
    
    
    
    (3,029,000
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    3,389,000
    
    
    
    1,309,000
    
    
    
    4,338,000CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    3,587,000
    
    
    $
    3,389,000
    
    
    $
    1,309,000NON CASH INVESTING ACTIVITIES:UNREALIZED GAIN (LOSS) ON INVESTMENTS
    
    $
    (42,000
    )
    
    $
    (145,000
    )
    
    $
    208,000
 See accompanying notes to the financial statements. F-6




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##### Table of Contents



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 founded 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 2-D, 3-D seismic and multi-component seismic data for
major and intermediate-sized oil and gas companies and independent oil operators. The Company
operates nine seismic data acquisition crews in the lower 48 states of the United States, and a
seismic data processing center. 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 it believes 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 balance sheet, 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 assets 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 impairment charges were recognized in the Statement of Operations for the
years ended September 30, 2004, 2003 and 2002. F-7




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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. In the current year, approximately $375,000 of the Companys revenue is related to a
negotiated release from one contract. 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 are reimbursed by the client. In some instances, customers are billed in advance of services performed, and the
Company recognizes the liability as deferred revenue. Allowance for Doubtful Accounts Management prepares its allowance for doubtful accounts receivable based on its past
experience of historical write-offs, its current customer base 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. Reclassifications Certain prior year numbers have been reclassified in the current year in order to be
consistent with the current year presentation. 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. F-8




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##### Table of Contents



The SFAS 123 pro forma information for the fiscal years ended
September 30, 2004, 2003 and 2002 is as
follows: September 30,2004
    
    2003
    
    2002Net income (loss), as reported
    
    $
    8,618,000
    
    
    $
    (899,000
    )
    
    $
    (2,292,000
    )Add Stock-based employee compensation expense
included in net income (loss), net of tax
    
    
    110,000
    
    
    
    75,000
    
    
    
    159,000Deduct: Stock-based employee compensation expense
determined under fair value based method (SFAS 123),
net of tax
    
    
    (426,000
    )
    
    
    (434,000
    )
    
    
    (516,000
    )Net income (loss), pro forma
    
    $
    8,302,000
    
    
    $
    (1,258,000
    )
    
    $
    (2,649,000
    )Basic:Net income (loss) per common share, as reported
    
    $
    1.55
    
    
    $
    (0.16
    )
    
    $
    (0.42
    )Net income (loss) per common share, pro forma
    
    $
    1.49
    
    
    $
    (0.23
    )
    
    $
    (0.48
    )Diluted:Net income (loss) per common share, as reported
    
    $
    1.53
    
    
    $
    (0.16
    )
    
    $
    (0.42
    )Net income (loss) per common share, pro forma
    
    $
    1.47
    
    
    $
    (0.23
    )
    
    $
    (0.48
    )
 2. Short-Term Investments Investment in securities consists of U.S. Treasury Securities. At
September 30, 2004, the
Company reported an unrealized loss on short-term investments of $28,000, which was $42,000 net of
the tax effect of $14,000 and is in Other comprehensive income, net of tax. Short-term investments held at September 30, 2004 consisting of U.S. Treasury Securities have
contractual maturities from December, 2005 through May, 2006. 3. Property, Plant and Equipment Property, plant and equipment, together with annual depreciation rates, consist of the
following: September 30
    
    Useful Lives2004
    
    2003Land, building and other
    
    $
    3,213,000
    
    
    $
    2,975,000
    
    
    
    5 to 40 yearsRecording equipment
    
    
    65,269,000
    
    
    
    55,885,000
    
    
    
    6 to 10 yearsEnergy sources
    
    
    15,312,000
    
    
    
    13,730,000
    
    
    
    10 to 15 yearsVehicles
    
    
    9,427,000
    
    
    
    7,957,000
    
    
    
    5 to 10 yearsEquipment in process (a)
    
    
    829,000
    
    
    
    1,038,00094,050,000
    
    
    
    81,585,000Less accumulated depreciation
    
    
    (64,075,000
    )
    
    
    (60,805,000
    )Net property, plant and equipment
    
    $
    29,975,000
    
    
    $
    20,780,000
   (a)
    
    Equipment in process has not been placed into service and accordingly is not yet subject to
depreciation. F-9




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##### Table of Contents



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. In fiscal 2004, the Company adopted the 2004 Incentive Stock Plan which provides 375,000
shares of authorized but unissued common stock of the Company. The 2004 Incentive Stock Plan
operates like the 2000 Incentive Stock Plan except that of the 375,000 shares, up to 125,000 shares
may be awarded to officers, directors, and employees of the Company for the purpose of additional
compensation and up to 125,000 shares may be awarded with restrictions. The transactions under the Plans are summarized as follows: Weighted
    
    Number ofAverage Price
    
    Optioned SharesBalance as
of September 30, 2002
    
    $
    7.25
    
    
    
    319,000Granted
    
    $
    5.21
    
    
    
    105,000Cancelled or expired
    
    $
    7.02
    
    
    
    (17,000
    )Balance as
of September 30, 2003
    
    $
    6.72
    
    
    
    407,000Granted
    
    $
    7.06
    
    
    
    40,000Cancelled or expired
    
    $
    6.48
    
    
    
    (82,500
    )Exercised
    
    $
    6.96
    
    
    
    (137,500
    )Balance as
of September 30, 2004
    
    $
    6.75
    
    
    
    227,000
 Options
for 55,500, 204,750 and 130,750 shares were exercisable with weighted average exercise
prices of $7.42, $6.94 and $6.79 as of September 30, 2004, 2003 and 2002, respectively. Outstanding options at September 30,2004 expire between April, 2006 and October, 2008 and have
exercise prices ranging from $5.21 to $8.65. Options for 40,000 shares were granted in fiscal year 2004. The expected life of the options
granted is five years. The weighted average fair value of options granted during 2004 is $1.24. 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 2004. 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 to the
plan during the fiscal first quarter of 2002. 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 2004, 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 2004, 2003 and 2002 were approximately $438,000,
$373,000 and $259,000, respectively. F-10




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##### Table of Contents



6. Income Taxes The Company recorded an income tax benefit in the current year of approximately $1,536,000.
The benefit is due to the elimination of the income tax valuation allowance. Current US. federal
tax is related to the tax effect of the unrealized loss on investments recorded in other
comprehensive income and alternative minimum tax. 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 the Companys return to profitability and
budgeted expectations, management has determined that taxable income of the Company will more
likely than not be sufficient to fully utilize available net operating loss carryforwards prior to
their ultimate expiration. As such, the Company has eliminated the valuation allowance of
$4,232,000 to reflect the realizability of its net deferred tax assets. Income tax expense (benefit) attributable to income before extraordinary item consists of: Year Ended September 30,2004
    
    2003
    
    2002Current:U.S. federal
    
    $
    96,000
    
    
    $
    
    
    
    $
    (400,000
    )State
    
    
    
    
    
    
    
    
    
    
    96,000
    
    
    
    
    
    
    
    (400,000
    )Deferred: U.S. Federal
    
    
    (1,632,000
    )
    
    
    52,000
    
    
    
    (71,000
    )Total
    
    $
    (1,536,000
    )
    
    $
    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 30,2004
    
    2003
    
    2002Expense (benefit) computed at statutory rates
    
    $
    2,585,000
    
    
    $
    (287,000
    )
    
    $
    (939,000
    )Effect of:Change in valuation allowance
    
    
    (4,232,000
    )
    
    
    297,000
    
    
    
    428,000Other
    
    
    111.000
    
    
    
    42,000
    
    
    
    40,000Income tax expense (benefit)
    
    $
    (1,536,000
    )
    
    $
    52,000
    
    
    $
    (471,000
    )
 September 30,2004
    
    2003Deferred tax assets:Net operating loss carryforwards
    
    $
    4,555,000
    
    
    $
    6,687,000Alternative minimum tax credit carryforwards
    
    
    509,000
    
    
    
    413,000Receivables
    
    
    71,000
    
    
    
    45,000Other
    
    
    209,000
    
    
    
    116,000Total deferred tax assets
    
    
    5,344,000
    
    
    
    7,261,000Less valuation allowance
    
    
    
    
    
    
    (4,232,000
    )Total gross deferred tax assets
    
    
    5,344,000
    
    
    
    3,029,000Deferred tax liabilities:Other property and equipment
    
    
    (3,645,000
    )
    
    
    (2,938,000
    )Investments
    
    
    (23,000
    )
    
    
    (21,000
    )Other
    
    
    (28,000
    )
    
    
    (70,000
    )Total gross deferred tax liabilities
    
    
    (3,696,000
    )
    
    
    (3,029,000
    )Net deferred tax asset (liability)
    
    $
    1,648,000
    
    
    $
    
 As
of September 30, 2004, the Company had a net operating loss carryforward for US.
federal income tax purposes of approximately $13,277,000, 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 $509,000 to offset regular income
tax, which have no scheduled expiration date. F-11




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##### Table of Contents



7. Net Income (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: 2004
    
    2003
    
    2002Numerator:Net income (loss) and numerator for basic and diluted
net income (loss) per common share-income
available to common stockholders
    
    $
    8,618,000
    
    
    $
    (899,000
    )
    
    $
    (2,292,000
    )Denominator:Denominator for basic net income (loss) per common
share-weighted average common shares
    
    
    5,558,646
    
    
    
    5,484,593
    
    
    
    5,462,936Effect of dilutive securities-employee stock options
    
    
    72,751
    
    
    
    
    
    
    
    Denominator for diluted net income (loss) per common
share-adjusted weighted average common shares
and assumed conversions
    
    
    5,631,397
    
    
    
    5,484,593
    
    
    
    5,462,936Net income (loss) per common share
    
    $
    1.55
    
    
    $
    (.16
    )
    
    $
    (.42
    )Net income (loss) per common share-assuming
dilution
    
    $
    1.53
    
    
    $
    (.16
    )
    
    $
    (.42
    )
 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. 8. Major Customers The Company operates in only one business segment, contract seismic data acquisition and
processing services. During 2004 sales exceeded 10% to each of two clients. During 2003 and 2002,
sales to only one client, which was not the same client in each year or in 2004, exceeded 10% of
operating revenues. 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. F-12




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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 Issued Accounting Pronouncements The Financial Accounting Standards Board (FASB) has announced it will require all public
companies to expense the fair value of employee stock awards. The final requirements will be
effective for fiscal years beginning after December 31, 2004. The impact to the Companys financial
statements will be in the form of additional compensation expense upon the award of any stock
options. The amount of the compensation expense recognized by the Company is dependent on the value
of the Companys common stock and the number of options awarded. 12. Subsequent Events In November of 2004, the Company received a commitment letter from a bank for a revolving line
of credit to be secured by eligible accounts receivable up to $10,000,000 to be used for capital
expenditures and working capital. 13. Quarterly Financial Data (Unaudited) Quarter EndedDecember 31
    
    March 31
    
    June 30
    
    September 30Fiscal 2004:Operating revenues
    
    $
    15,475,000
    
    
    $
    15,203,000
    
    
    $
    17,112,000
    
    
    $
    21,556,000Income from operations
    
    $
    438,000
    
    
    $
    1,843,000
    
    
    $
    1,804,000
    
    
    $
    2,315,000Net income
    
    $
    506,000
    
    
    $
    1,999,000
    
    
    $
    1,989,000
    
    
    $
    4,124,000Net income per common
share
    
    $
    .09
    
    
    $
    .36
    
    
    $
    .36
    
    
    $
    .73Net income per common
share assuming dilution
    
    $
    .09
    
    
    $
    .36
    
    
    $
    .35
    
    
    $
    .72Fiscal 2003:Operating revenues
    
    $
    11,410,000
    
    
    $
    14,196,000
    
    
    $
    11,291,000
    
    
    $
    14,695,000Income (loss) from operations
    
    $
    (1,007,000
    )
    
    $
    579,000
    
    
    $
    (1,483,000
    )
    
    $
    527,000Net income (loss)
    
    $
    (893,000
    )
    
    $
    844,000
    
    
    $
    (1,407,000
    )
    
    $
    557,000Net income (loss) per common
share
    
    $
    (.16
    )
    
    $
    .15
    
    
    $
    (.26
    )
    
    $
    .10Net income (loss) per common
share assuming dilution
    
    $
    (.16
    )
    
    $
    .15
    
    
    $
    (.26
    )
    
    $
    .10
 F-13




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##### Table of Contents



INDEX TO EXHIBITS Number
    
    Exhibit3.1*
    
    Restated Articles of Incorporation of the Company.3.2
    
    Bylaws of the Company, as amended (filed as Exhibit 3 to the Companys Annual Report on Form
10-K for the fiscal year ended September 30, 2003 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 as Exhibit 4
to the Registrants Annual Report on Form 10-K for the
fiscal year ended September 30, 2003 and
incorporated herein by reference).10.1+
    
    Dawson Geophysical Company 2004 Incentive Stock Plan (filed as Exhibit 10.1 to the Companys
Registration Statement on Form S-8 filed March 12, 2004 (File No. 333-113576) and incorporated
herein by reference.10.2+
    
    Dawson Geophysical Company 2000 Incentive Stock Plan (filed as Exhibit 10.1 to the Companys
Registration Statement on Form S-8 filed August 3, 2001 (File No. 333-66666) and incorporated herein
by reference).10.3
    
    Form of Master Geophysical Data Acquisition Agreement (filed as Exhibit 10 to the Registrants
Annual Report on Form 10-K for the fiscal year ended
September 30, 2003 and incorporated herein by
reference).23.1*
    
    Consent of KPMG LLP.31.1*
    
    Certification of Chief Executive Officer of Dawson Geophysical Company pursuant to Rule
13a-l4(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-l4(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-l4(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section
1350 of Charter 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-l4(b) promulgated under the Securities Exchange Act of 1934,
as amended, and Section 1350
of Charter 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.+
    
    Identifies Exhibit that consists of or includes a management contract or
compensatory plan or arrangement. 14