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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
TO .
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COMMISSION FILE NUMBER 0-18656
PONDER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2268672
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
5005 RIVERWAY DRIVE, SUITE 550
HOUSTON, TEXAS 77056
(Address of principal executive offices, zip code)
(713) 965-0653
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
CLASS OUTSTANDING AT DECEMBER 31, 1998
Common Stock, $.01 par value 9,297,810
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PONDER INDUSTRIES, INC., AND SUBSIDIARIES
INDEX
PAGE
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PART I FINANCIAL INFORMATION (Unaudited)
Item 1: Condensed Consolidated Balance Sheets as of November 30,
1998, and August 31, 1998................................. 3
Condensed Consolidated Statements of Operations for the
Three Months Ended November 30, 1998 and 1997............. 4
Condensed Consolidated Statements of Comprehensive Income
(Loss) for the Three Months Ended November 30, 1998 and
1997...................................................... 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended November 30, 1998 and 1997............. 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
PART II OTHER INFORMATION
Item 1: Legal Proceedings........................................... 14
Item 2: Changes in Securities....................................... 14
Item 3: Defaults Upon Senior Securities............................. 14
Item 4: Submission of Matters to a Vote of Security Holders......... 14
Item 5: Other Information........................................... 14
Item 6: Exhibits and Reports on Form 8-K............................ 14
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3
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
NOVEMBER 30, AUGUST 31,
1998 1998
------------ ----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 168 $ 149
Receivables, net.......................................... 5,377 4,672
Parts and supplies........................................ 4,390 4,435
Available for sale securities............................. 220 560
Prepaid expenses and other................................ 578 175
-------- --------
Total current assets.............................. 10,733 9,991
-------- --------
PROPERTY AND EQUIPMENT...................................... 41,377 40,992
Less -- Accumulated depreciation and amortization......... (17,397) (16,656)
-------- --------
23,980 24,336
-------- --------
DEFERRED AND OTHER ASSETS, net.............................. 458 425
-------- --------
GOODWILL, net............................................... 1,260 1,280
-------- --------
TOTAL ASSETS...................................... $ 36,431 $ 36,032
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 8,954 $ 8,355
Accounts and notes payable, trade......................... 4,443 4,096
Accrued liabilities and other............................. 3,257 2,704
-------- --------
Total current liabilities......................... 16,654 15,155
-------- --------
LONG-TERM DEBT, less current maturities..................... 468 456
-------- --------
OTHER LONG-TERM LIABILITIES................................. 25 31
-------- --------
DEFERRED TAXES PAYABLE...................................... 892 886
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 10,000,000
shares, no shares issued as of November 30, 1998, and
August 31, 1998, respectively.......................... -- --
Common stock, $.01 par value, authorized 150,000,000
shares, issued and outstanding 9,297,810 shares and
9,260,281 shares at November 30, 1998, and August 31,
1998, respectively..................................... 93 93
Additional paid-in capital................................ 48,244 48,179
Cumulative foreign currency translation adjustment........ 192 69
Accumulated deficit....................................... (29,188) (28,228)
Note receivable for common stock.......................... (69) (69)
Unrealized loss on available for sale securities.......... (880) (540)
-------- --------
Total stockholders' equity........................ 18,392 19,504
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 36,431 $ 36,032
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS
ENDED NOVEMBER 30
-----------------------
1998 1997
---------- ----------
SERVICES AND TOOL RENTALS................................... $ 4,359 $ 4,256
SALES OF TOOLS AND PARTS.................................... 767 845
---------- ----------
Services, tool rentals and sales.................. 5,126 5,101
---------- ----------
COST OF SERVICES AND TOOL RENTALS........................... 1,852 1,548
COST OF TOOLS AND PARTS SOLD................................ 338 292
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Costs of services, tool rentals and sales......... 2,190 1,840
---------- ----------
Gross profit...................................... 2,936 3,261
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EXPENSES:
Operating................................................. 3,077 2,808
General and administrative................................ 405 400
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3,482 3,208
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Operating income (loss)........................... (546) 53
OTHER INCOME (EXPENSE):
Interest, net............................................. (421) (443)
Gain (loss) on disposal of assets......................... (4) (34)
Other..................................................... 11 --
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NET INCOME (LOSS)........................................... $ (960) $ (424)
========== ==========
BASIC AND DILUTED LOSS PER SHARE............................ $ (.10) $ (.08)
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 9,273,096 5,005,960
========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED NOVEMBER 30
-----------------
1998 1997
-------- ------
NET INCOME (LOSS)........................................... $ (960) $(424)
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized loss on available-for-sale securities.......... (340) --
Foreign currency translation gain (loss).................. 123 34
------- -----
Comprehensive income (loss)....................... $(1,177) $(390)
======= =====
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED NOVEMBER 30
-----------------
1998 1997
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (960) $ (424)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities --
Depreciation and amortization.......................... 729 549
(Gain) loss on disposal of assets...................... 4 34
Deferred compensation expense.......................... -- 1
Net change in operating assets and liabilities --
Receivables, net....................................... (655) (454)
Parts and supplies..................................... 45 (130)
Prepaid expenses and other............................. (403) (500)
Accounts and notes payable, trade...................... 347 (977)
Accrued liabilities and other.......................... 1,035 (460)
------- -------
Net cash provided by (used in) operating
activities....................................... 142 (2,361)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (314) (422)
Proceeds from asset sales................................. 89 --
------- -------
Net cash used in investing activities............. (225) (422)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt...................... (4,086) (4,198)
Bank overdraft............................................ (482) 133
Proceeds from long-term debt borrowings................... 4,670 4,347
Proceeds from Senior Convertible Notes.................... -- 2,500
------- -------
Net cash provided by financing activities......... 102 2,782
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CASH AND CASH EQUIVALENTS:
Increase (decrease)....................................... 19 (1)
Beginning of period....................................... 149 4
------- -------
End of period............................................. $ 168 $ 3
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for --
Interest............................................... $ 417 $ 437
======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued in connection with debenture
conversions............................................ $ -- $ 6,713
======= =======
Common stock contributed to 401(k) plan................... $ 65 $ 66
======= =======
Capital lease obligation incurred......................... $ 27 $ --
======= =======
Unrealized loss on available for sale securities.......... $ 340 $ --
======= =======
Trade note payable incurred for insurance premiums........ $ 490 $ --
======= =======
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by Ponder Industries, Inc., and subsidiaries (collectively referred to
as the Company), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. However, all adjustments have been made to
the accompanying financial statements which are, in the opinion of the Company's
management, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows for the periods covered. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented herein not misleading. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's latest Annual Report on Form 10-K.
The accompanying condensed consolidated financial statements of the Company
have been prepared on the basis of accounting principles applicable to a going
concern. At November 30, 1998, and August 31, 1998, the Company had deficit
working capital of $5,921 and $5,164, respectively, and an accumulated deficit
of $29,188 and $28,228, respectively. During the three months ended November 30,
1998, the Company incurred a net loss of $960. As discussed in Note 2, the
Company was not in compliance with certain of its debt covenants and,
accordingly, all amounts due this lender have been classified as a current
liability at November 30, 1998, and August 31, 1998. There is no assurance the
Company will be able to achieve future positive cash flows to support
operations. These matters, as well as additional matters discussed in the notes
to the Company's consolidated financial statements in its latest Annual Report
on Form 10-K, raise substantial doubt about the Company's ability to continue as
a going concern. The ability of the Company to continue as a going concern is
dependent upon the ongoing support of its customers, its ability to obtain
capital resources to support operations and its ability to successfully market
its products and services. If the Company is unable to obtain additional capital
resources, or if the funds obtained in such efforts are not adequate to support
the Company until a successful level of operations is attained, the Company
would likely be unable to continue operations as a going concern. The Company's
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in a full set of financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, and, accordingly,
the Company has presented a Statement of Comprehensive Income (Loss) for the
three months ended November 30, 1998 and 1997.
The preparation of 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. Certain
reclassifications have been made to prior period balances to conform with
current period presentation.
2. LONG-TERM DEBT
As of November 30, 1998, and August 31, 1998, the Company was in technical
default with various affirmative debt covenants of KBK Financial, Inc. (KBK).
Consequently, all amounts due KBK have been classified as a current liability at
November 30, 1998, and August 31, 1998. There are no assurances that the
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PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company will be able to obtain modifications or waivers to the covenants or
terms governing the financing agreement.
In September 1998, the Company obtained $500 from KBK under a short-term
promissory note. The proceeds were used for working capital requirements. The
promissory note bears interest at 15 percent with the principal and accrued
interest originally due November 9, 1998, which maturity date was subsequently
extended to December 24, 1998. In December 1998, the due date of this note was
further extended (Note 5).
3. CONTINGENCIES
On July 17, 1998, Titan Resources, Inc. (Titan) sued the Company in the
District Court of Harris County, Texas. The suit alleges that in 1996, the
Company made misrepresentations in connection with the sale of all of the
Company's outstanding shares in Ponder International Services, Inc. (its former
Azerbaijan subsidiary), to Titan in return for 2,000,000 shares of Titan's
common stock. The suit alleges breach of contract, breach of warranty, negligent
misrepresentation and fraudulent misrepresentation. Titan seeks unspecified
damages. The Company is defending the case vigorously and has counterclaimed for
unspecified sums that Titan owes it pursuant to one of the contracts executed in
connection with this transaction.
The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is unlikely
that the final outcome of any of the claims or proceedings to which the Company
is a party, including those described above, would have a material adverse
effect on the Company's financial statements; however, due to the inherent
uncertainty of litigation, the range of possible loss, if any, cannot be
estimated with a reasonable degree of precision and there can be no assurance
that the resolution of any particular claim or proceeding would not have an
adverse effect on the Company's results of operations for the interim period in
which such resolution occurred.
In July 1998, the Company received notification that it was subject to
delisting on the NASDAQ stock market as its minimum bid price for its common
stock had fallen below $1 per share. In October 1998, the Company gave notice of
a special stockholders' meeting to be held November 11, 1998, to effect a
one-for-five reverse common stock split in order to meet NASDAQ listing
requirements. Subsequent to the reverse common stock split, the minimum bid
price for the Company's common stock has again fallen below $1 per share. There
can be no assurance that the Company will be able to retain its current listing
or meet future listing requirements which could have an adverse effect on the
Company's ability to access additional capital resources.
4. EQUITY TRANSACTIONS
As discussed in Note 3, on November 11, 1998, the Company's stockholders
approved a one-for-five reverse common stock split. On November 13, 1998, the
Company filed appropriate documentation with the Delaware Secretary of State
affecting such common stock split. Accordingly, all common stock and share
information has been adjusted to reflect the reverse stock split. The authorized
capital stock and par value of the Company (10,000,000 shares of preferred
stock, $.01 par value, and 150,000,000 shares of common stock, $.01 par value)
was not reduced or otherwise affected by the reverse stock split.
5. SUBSEQUENT EVENT
In December 1998, the due dates on the Company's $500 short-term promissory
note with KBK (Note 2) and its receivable based revolver with KBK were extended
to March 24, 1999.
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PONDER INDUSTRIES, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain "forward-looking"
statements as such term is defined in the Private Securities Litigation Reform
Act of 1995 and information relating to Ponder Industries, Inc. (the Company),
and its subsidiaries that are based on the beliefs of the Company's management
as well as assumptions made by and information currently available to the
Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect" and "intend" and words or phrases of similar
import, as they relate to the Company or its subsidiaries or Company management,
are intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors
including, without limitations, competitive factors, general economic
conditions, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, seasonality, distribution
networks, product introductions and acceptance, technological change, changes in
industry practices, one-time events and other factors described herein and in
the Company's other filings with the Securities and Exchange Commission. Based
upon changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.
The following discussion is included to describe the Company's financial
position and results of operations for the three-month periods ended November
30, 1998 and 1997. The condensed consolidated financial statements and notes
thereto contain detailed information that should be referred to in conjunction
with this discussion.
BUSINESS REVIEW
The Company is an international oil field service and rental tool company
that specializes in the use of fishing tools for the recovery of unwanted
obstructions in oil and gas wells. The Company also rents specialized oil field
equipment such as pressure control equipment, tools, pipe, tubing and whipstocks
used in the drilling, completion and workover of wells. The Company currently
has 19 locations domestically and 2 locations in the United Kingdom serving the
North Sea area.
The oil and gas industry has historically experienced significant
volatility. Demand for the Company's services and products depends primarily
upon the number of oil and gas wells being drilled, the depth and drilling
conditions of such wells, the volume of production, the number of well
completions and the level of workover activity. Drilling and workover activity
can fluctuate significantly in a short period of time, particularly in the
United States.
The willingness of oil and gas operators to make capital expenditures for
the exploration and production of oil and natural gas will continue to be
influenced by numerous factors over which the Company has no control, including
the prevailing and expected market prices for oil and natural gas. Such prices
are impacted by, among other factors, the ability of the members of OPEC to
maintain price stability through voluntary production limits, the level of
production by non-OPEC countries, worldwide demand for oil and gas, general
economic and political conditions, costs of exploration and production,
availability of new leases and concessions and governmental regulations
regarding, among other things, environmental protection, taxation, price
controls and product allocations. No assurance can be given as to the level of
future oil and gas industry activity or demand for the Company's services and
products.
During 1996 and much of 1997, the oil field service industry experienced a
general improvement in product demand and pricing as relatively stable and
improved oil and natural gas prices combined with a strong world economy to
increase exploration and development activity worldwide. Beginning in late 1997,
worldwide oil prices began to decline significantly and natural gas prices
weakened slightly on a year-to-year basis. These declines have been attributed
to, among other things, an excess supply of oil in world markets, reduced
domestic demand associated with an unseasonably warm winter, high inventory
levels of oil and gas
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and the impact of the economic downturn in Southeast Asia and other factors over
which the Company has no control.
During the Company's fiscal years ended August 31, 1996 and 1997, and until
December 1997, world oil prices ranged in the mid to near $20's per barrel while
natural gas prices ranged from approximately $2.00 to as high as $3.50 per
thousand cubic feet. At the beginning of the Company's fiscal 1998 year,
approximately 1,030 drilling rigs and approximately 1,400 workover rigs were
operating domestically. During late 1997, oil prices began to decline
significantly, dropping from near $20 to below $10 per barrel for certain posted
prices. Natural gas prices maintained a range of $2.00 to $2.50 per thousand
cubic feet. By November 30, 1998, the activity of domestic drilling and workover
rig utilization had reduced to approximately 690 and 980, respectively. As crude
oil prices continued to stay below the $13 per barrel range, industry activity
continued to decline, especially in the Company's onshore operations. In January
1998, the Company acquired Fishing Tools, Inc. (FTI). FTI has historically been
a profitable company with significant offshore operations, which are generally
less impacted by oil price fluctuations. With the Company's expansion into the
offshore market, the Company has aggressively marketed its operations to merge
the customer base of the Company and FTI with a focus on the major and large
independents with onshore and offshore operations.
While the Company anticipates continued long-term growth in the worldwide
demand for hydrocarbons and a related return to higher activity levels for oil
and gas companies over the next 12 to 18 months, the Company intends to actively
monitor current industry market conditions and to continue to react, if
necessary, through consolidation or elimination of operating locations, further
reduction in personnel and related costs and to continue to aggressively market
its products and services.
The Company has substantially reduced costs by a reduction in operating and
administrative personnel and related expenses, the sale of certain nonproductive
equipment to reduce debt, resolving the litigation involving its convertible
debenture holders and substantially reducing other general and administrative
expenses. The Company is continuing to review its operations for further cost
reductions.
Demand for the Company's services and rentals depends primarily on the
number of oil and gas wells being drilled, the depth and drilling conditions of
such wells and the level of workover activity. Drilling and workover activity is
largely dependent on the prices for oil and natural gas. The Company is unable
to predict the duration of the crude oil price declines and, to a lesser extent,
natural gas price declines or the extent of the impact that such declines may
have on the Company's future results of operations.
LIQUIDITY AND CAPITAL RESOURCES
In April 1996, the Company raised approximately $10 million, net of fees,
by issuing 8 percent convertible debentures. In August 1996, a case was filed in
U.S. District Court alleging that the Company breached an obligation to convert
certain of the debentures. In September 1997, the Company reached a settlement
whereby those convertible debenture holders who had not previously converted
their debentures with the Company agreed to convert the then outstanding
debenture debt of approximately $7,060,000, including accrued interest, into
2,205,217 shares of the Company's common stock. The conversion of the debentures
increased the Company's equity by approximately $6.7 million.
In November 1996, the Company completed a $10 million financing agreement
with KBK Financial, Inc. (KBK). The agreement includes a $4 million Revolving
Receivable Facility, a $2.5 million Revolving Credit Note and a $3.5 million
Term Note (the Notes). The Receivable Facility is a two-year facility that was
scheduled to mature in December 1998, now scheduled to mature in March 1999,
that is based on accounts receivable and is utilized for short-term liquidity
needs. The $2.5 million Revolving Credit Note is a five-year facility, based on
inventory and equipment, and these funds were used to acquire capital assets to
expand the Company's business. The $3.5 million Term Note is a five and one-half
year note, interest only for the first six months and amortizes over the
remaining five years, collateralized by equipment. In June 1998, the Company
increased from $3.5 million to $4.0 million the Term Note payable to KBK. The
Term Note, as amended, requires monthly principal and interest payments of
$98,000 commencing July 1998 with a final payment of all principal and interest
due in June 2002. The proceeds from the note were used to pay off existing bank
debt of approximately $3 million with the balance being used to fund operations
and acquire capital equipment. At
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November 30, 1998, and August 31, 1998, the Company had borrowed approximately
$7.9 million and $7.2 million, respectively, under the Notes. The Notes require
compliance with various covenants, including the maintenance of a defined debt
service coverage ratio and a defined tangible net worth. As a result of
continued losses primarily relating to the Company's aggressive expansion
commenced in fiscal year 1996 and the rapid decline in industry activity during
the 1998 fiscal year and continuing through the three months ended November 30,
1998, the Company is not in compliance with such covenants and, accordingly, all
amounts due this lender have been classified as a current liability at November
30, 1998, and August 31, 1998. In September 1998, the Company obtained $500,000
from KBK under a short-term promissory note. The proceeds were used for working
capital requirements. The promissory note principal and accrued interest were
originally due in November 1998 which maturity date was subsequently extended to
December 1998 and then further extended to March 1999. The promissory note has
cross-default provisions with the Notes. See Note 2 of notes to condensed
consolidated financial statements.
A $2,500,000 bridge loan (the Bridge Loan) was obtained in October 1997
from White Owl Capital Partners (White Owl) and certain others with the
intention of providing additional capital for acquisitions and expansion of the
Company's business.
In January 1998, the Company purchased all of the outstanding capital stock
of FTI for $6.5 million cash and the issuance of approximately 129,000 shares of
the Company's common stock valued at $1 million. The Company also paid
approximately $1 million of acquired indebtedness of FTI. FTI has historically
been a profitable company with positive cash flow. FTI has significant offshore
operations which are less effected by temporary oil price fluctuations and the
acquisition has had a positive impact on the Company's operations. The cash
consideration for the acquisition was provided through an equity placement with
affiliates of White Owl. The equity placement consisted of the sale of 2.2
million shares of the Company's common stock at $5 per share. Concurrent with
this equity placement, the Bridge Loan was converted into 800,000 shares of the
Company's common stock. These transactions had increased the Company's equity to
approximately $22 million and provided stronger liquidity ratios.
At November 30, 1998, and August 31, 1998, the Company had a deficit
working capital of approximately $5.9 million and $5.2 million, respectively.
The current ratio was approximately .64 to 1.0 at November 30, 1998, compared to
.66 to 1.0 at August 31, 1998. As previously discussed, the Company is in
default of certain covenants of the Notes and, as a result, all the amounts due
this lender, approximately $7.9 million, have been classified as a current
liability and are a component of the approximately $5.9 million working capital
deficit at November 30, 1998. The Company is currently discussing potential debt
refinancing with other lenders to increase its available facilities, decrease
interest rates and establish debt covenants which more appropriately reflect the
Company's current financial and market conditions. There are no assurances that
the Company will be able to refinance its current indebtedness nor that it will
be able to obtain an increase in available facilities, achieve a reduction in
interest rates or improve its debt covenants. Included as a component of the
Company's working capital at November 30, 1998 and 1997, is $220,000 and
$560,000, respectively, representing the Company's investment in 2,000,000
shares of Titan's common stock. The Titan common stock is a thinly traded and
volatile security. See also Notes 1 and 3 of notes to condensed consolidated
financial statements.
In December 1998, an affiliate of White Owl and an employee each advanced
the Company $100,000 for working capital. It is anticipated that the Company
will provide certain real property as collateral to such loans, and that
definitive agreements with respect to each advance will be prepared and
executed.
In July 1998, the Company received notification that it was subject to
delisting on the NASDAQ stock market as its minimum bid price for its common
stock had fallen below $1 per share. In October 1998, the Company gave notice of
a special stockholders' meeting to be held November 11, 1998, to effect a
one-for-five reverse common stock split in order to meet NASDAQ listing
requirements. Subsequent to the reverse common stock split, the minimum bid
price for the Company's common stock has again fallen below $1 per share. There
can be no assurance that the Company will be able to retain its current listing
or meet future listing requirements which could have an adverse effect on the
Company's ability to access additional capital resources.
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RESULTS OF OPERATIONS
Comparison of the Three Months Ended November 30, 1998 and 1997
A net loss of $960,000, or $.10 per share, was recorded for the three
months ended November 30, 1998, as compared to a net loss of $424,000, or $.08
per share, for the same period of the prior year.
Revenues were approximately $5.1 million for the three months ended
November 30, 1998 and 1997. Revenues for the quarter ended November 30, 1998
reflected the acquisition of FTI in January 1998, however, declining oil and gas
drilling and workover activity resulted in revenue decreases which offset the
acquisition's positive impact.
Costs of services, tool rentals and sales increased $350,000, or 19
percent, to $2,190,000 for the three months ended November 30, 1998, as compared
to $1,840,000 for the same period of the prior year. The net increase resulted
from an increase attributable to the costs of FTI, partially offset by the
closing of two marginal operating locations and the Company's cost reduction
actions. The Company's gross profit margin was 57 percent for the three months
ended November 30, 1998, as compared to 64 percent for the same period of the
prior year.
Operating expenses increased $269,000, or 10 percent, to $3,077,000 for the
three months ended November 30, 1998, as compared to $2,808,000 for the same
period of the prior year. The net increase resulted from the expenses of FTI
offset partially by the Company's reduction in operating personnel and related
expenses and closing two marginal operating locations. Operating expenses, as a
percentage of sales, were 60 percent for the three months ended November 30,
1998, as compared to 55 percent for the same period of the prior year.
General and administrative expenses were relatively stable at $405,000 for
the three months ended November 30, 1998, as compared to $400,000 for the three
months ended November 30, 1997. The cost reduction programs instituted in
mid-1997 have continued through the three months ended November 30, 1998.
General and administrative expenses as a percentage of revenues also remained
stable at 8 percent in the fiscal quarters ended November 30, 1998 and 1997.
Interest expense, net, decreased $22,000, or 5 percent, to $421,000 for the
three months ended November 30, 1998, from $443,000 for the three months ended
November 30, 1997. The decrease is due primarily to a reduction of debt
associated with the Company's primary lender.
Year 2000 Compliance
The efficient operation of the Company's business is dependent on its
computer software programs and operating systems (collectively, Programs and
Systems). These Programs and Systems are used in several key areas of the
Company's business, including information management services and financial
reporting, as well as in various administrative functions. The Company has been
evaluating its Programs and Systems to identify potential Year 2000 compliance
problems, as well as manual processes, external interfaces with customers and
services supplied by vendors to coordinate Year 2000 compliance and conversion.
The Year 2000 problem refers to the limitations of the programming code in
certain existing software programs to recognize date sensitive information for
the Year 2000 and beyond. Unless modified prior to the Year 2000, such systems
may not properly recognize such information and could generate erroneous data or
cause a system to fail to operate properly. Based on current information, the
Company believes its Programs and Systems are Year 2000 compliant.
The Company's integrated accounting software is upgraded on a regular
basis, including testing and modification for Year 2000 compliance. During 1998,
the Company purchased additional new hardware and software. The Company believes
that the Year 2000 problem will not pose a significant operational problem.
However, because most computer systems are, by their very nature,
interdependent, it is possible that noncompliant third-party computers may not
interface properly with the Company's computer systems. The Company could be
adversely affected by the Year 2000 problem if it or unrelated parties fail to
successfully address this issue. Management of the Company currently anticipates
that the expenses and capital
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expenditures associated with its Year 2000 compliance project, including any
costs associated with modifying the Programs and Systems as well as the cost of
purchasing or leasing certain additional hardware and software, will not have a
material effect on its business, financial condition or results of operations
and are expenses and capital expenditures the Company anticipated incurring in
the ordinary course of business regardless of the Year 2000 problem. Purchased
hardware and software has been and will continue to be capitalized in accordance
with normal policy. Personnel and other costs related to this process are being
expensed as incurred.
The costs of Year 2000 compliance and the expected completion dates are the
best estimates of Company management and are believed to be reasonably accurate.
In the event the Company's plan to address the Year 2000 problem is not
successfully or timely implemented, the Company may need to devote more
resources to the process and additional costs may be incurred, which could have
a material adverse effect on the Company's financial condition and results of
operations. Problems encountered by the Company's vendors, customers and other
third parties also may have a material adverse effect on the Company's financial
condition and results of operations.
In the event the Company determines following the Year 2000 date change
that its Programs and Systems are not Year 2000 compliant, the Company will
likely experience considerable delays in processing customer orders and
invoices, compiling information required for financial reporting and performing
various administrative functions. In the event of such occurrence, the Company's
contingency plans call for it to switch vendors to obtain hardware and/or
software that is Year 2000 compliant, and until such hardware and/or software
can be obtained, the Company will plan to use noncomputer systems for its
business, including information management services and financial reporting, as
well as its various administrative functions.
The above Year 2000 disclosure constitutes a "Year 2000 Readiness
Disclosure" as defined in The Year 2000 Information and Readiness Disclosure Act
(the Act), which was signed into law on October 19, 1998. The Act provides added
protection from liability for certain public and private statements concerning a
company's Year 2000 readiness. The Act also potentially provides added
protection from liability for certain types of Year 2000 disclosures made after
January 1, 1996, and before October 19, 1998. As such, to the extent permitted
by applicable law, previously disclosed statements of or by the Company or its
management concerning the Company's Year 2000 readiness are intended to
constitute "Year 2000 Readiness Disclosures," as defined in the Act.
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PONDER INDUSTRIES, INC., AND SUBSIDIARIES
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings -- For a discussion of material developments in
material legal proceedings involving the Company, see Note 3 of the
notes to condensed consolidated financial statements included herein.
Item 2. Changes in Securities -- See response to Item 4 below.
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders --
(a) A special meeting of stockholders was held on November 11, 1998.
(b) Not applicable.
(c) With respect to a proposal to amend the Certificate of Incorporation
of the Company to effectuate a one-for-five stock split of the
Company's common stock, 8,116,832 shares of common stock were voted
"For," 208,410 shares were voted "Against," 14,391 shares abstained
from voting and 25,740 shares constituted broker non-votes.
All common stock share information has been adjusted to reflect the
reverse stock split.
Item 5. The deadline for submission of stockholder proposals pursuant to Rule
14a-8 under the Securities Exchange Act of 1934, as amended ("Rule
14a-8"), for inclusion in the Company's proxy statement for its 1999
annual meeting of stockholders was December 10, 1998. After February 23,
1999, notice to the Company of a stockholder proposal submitted
otherwise than pursuant to Rule 14a-8 will be considered untimely, and
the person named in proxies solicited by the Board of Directors of the
Company for its 1999 Annual Meeting of Stockholders may exercise
discretionary authority voting power with respect to any such proposal
as to which the Company does not receive timely notice.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*10.1 Employment contract with Eugene L. Butler, dated December 1,
1998.
*10.2 Employment contract with Gerald A. Slaughter, dated December
1, 1998.
*11 Computation of Earnings (Loss) Per Share.
*27 Financial Data Schedule.
(b) Reports on Form 8-K
None
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* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PONDER INDUSTRIES, INC.
By /s/ EUGENE L. BUTLER
-----------------------------------
Eugene L. Butler
President, Chief Executive
Officer and Chairman of
the Board of Directors
By /s/ GERALD A. SLAUGHTER
-----------------------------------
Gerald A. Slaughter
Senior Vice President and
Chief Financial Officer
Dated: January 14, 1999
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EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
*10.1 Employment contract with Eugene L. Butler, dated December 1,
1998.
*10.2 Employment contract with Gerald A. Slaughter, dated December
1, 1998.
*11 Computation of Earnings (Loss) Per Share.
*27 Financial Data Schedule.
- ------------------
* Filed herewith