1
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 February 28, 1999
-----------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period From ____________ to ____________.
Commission File Number 0-18656
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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 March 31, 1999
---------------------------- -----------------------------
Common Stock, $.01 par value 9,423,316
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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 February 28, 1999, and August 31, 1998
3
Condensed Consolidated Statements of Operations for the Three Months and Six Months
Ended February 28, 1999 and 1998 5
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three
Months and Six Months Ended February 28, 1999 and 1998 6
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended February 28, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 9
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
PART II OTHER INFORMATION
Item 1: Legal Proceedings 18
Item 2: Changes in Securities 18
Item 3: Defaults Upon Senior Securities 18
Item 4: Submission of Matters to a Vote of Security Holders 18
Item 5: Other Information 18
Item 6: Exhibits and Reports on Form 8-K 18
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PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Information)
February 28, August 31,
ASSETS 1999 1998
------ ------------ ----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 198 $ 149
Receivables, net 6,164 4,672
Parts and supplies 4,421 4,435
Available for sale securities 240 560
Prepaid expenses and other 434 175
-------- --------
Total current assets 11,457 9,991
-------- --------
PROPERTY AND EQUIPMENT 39,773 40,992
Less- Accumulated depreciation and amortization (17,577) (16,656)
-------- --------
22,196 24,336
-------- --------
DEFERRED AND OTHER ASSETS, net 394 425
-------- --------
GOODWILL, net 1,239 1,280
-------- --------
TOTAL ASSETS $ 35,286 $ 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 BALANCE SHEETS
(In Thousands, Except Share Information)
February 28, August 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------ ----------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 9,163 $ 8,355
Accounts and notes payable, trade 4,808 4,096
Accrued liabilities and other 3,267 2,704
-------- --------
Total current liabilities 17,238 15,155
-------- --------
LONG-TERM DEBT, less current maturities 363 456
-------- --------
OTHER LONG-TERM LIABILITIES 6 31
-------- --------
DEFERRED TAXES PAYABLE 889 886
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 10,000,000 shares, no shares
issued as of February 28, 1999, and August 31, 1998, respectively -- --
Common stock, $.01 par value, authorized 150,000,000 shares, issued
9,423,316 shares and 9,260,281 shares at February 28, 1999, and
August 31, 1998, respectively 94 93
Additional paid-in capital 48,309 48,179
Cumulative foreign currency translation adjustment 72 69
Accumulated deficit (30,756) (28,228)
Note receivable for common stock (69) (69)
Unrealized loss on available for sale securities (860) (540)
-------- --------
Total stockholders' equity 16,790 19,504
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,286 $ 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 Share Information)
Three Months Six Months
Ended February 28 Ended February 28
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
SERVICES AND TOOL RENTALS $ 3,631 $ 4,191 $ 7,990 $ 8,261
SALES OF TOOLS AND PARTS 717 785 1,483 1,816
----------- ----------- ----------- -----------
Services, tool rentals and sales 4,348 4,976 9,473 10,077
----------- ----------- ----------- -----------
COST OF SERVICES AND TOOL RENTALS 1,457 1,650 3,310 3,156
COST OF TOOLS AND PARTS SOLD 389 375 726 683
----------- ----------- ----------- -----------
Costs of service and sales 1,846 2,025 4,036 3,839
----------- ----------- ----------- -----------
Gross profit 2,502 2,951 5,437 6,238
----------- ----------- ----------- -----------
EXPENSES:
Operating 2,888 3,093 5,964 5,927
General and administrative 301 378 706 778
----------- ----------- ----------- -----------
3,189 3,471 6,670 6,705
----------- ----------- ----------- -----------
Operating income (loss) (687) (520) (1,233) (467)
OTHER INCOME (EXPENSE):
Interest, net (498) (470) (919) (913)
Gain (loss) on disposal of assets (392) (12) (396) (47)
Other 9 41 20 42
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (1,568) $ (961) $ (2,528) $ (1,385)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (.17) $ (.15) $ (.27) $ (.23)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 9,324,395 6,509,883 9,298,604 6,116,923
=========== =========== =========== ===========
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 Six Months
Ended February 28 Ended February 28
-------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
NET INCOME (LOSS) $(1,568) $ (961) $(2,528) $(1,385)
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gain (loss) on available-for-sale securities 20 200 (320) 200
Foreign currency translation gain (loss) (120) 32 3 66
------- ------- ------- -------
COMPREHENSIVE INCOME (LOSS) $(1,668) $ (729) $(2,845) $(1,119)
======= ======= ======= =======
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)
Six Months
Ended February 28
----------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,528) $ (1,385)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 1,399 1,099
Loss on disposal of assets 396 47
Deferred compensation expense -- 1
Noncash interest expense -- 48
Net change in operating assets and liabilities-
Receivables, net (1,492) 352
Parts and supplies 14 (388)
Prepaid expenses and other (259) (403)
Accounts and notes payable, trade 1,218 (2,154)
Accrued liabilities and other 537 (1,132)
-------- --------
Net cash used in operating activities (715) (3,915)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (691) (684)
Acquisition of businesses, net of cash acquired -- (7,567)
Proceeds from asset sales 1,850 28
-------- --------
Net cash provided by (used in) investing activities 1,159 (8,223)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (8,040) (10,051)
Proceeds from long-term debt borrowings 8,615 8,804
Bank overdraft (970) --
Sale of common stock -- 11,000
Proceeds from Senior Convertible Notes -- 2,500
-------- --------
Net cash (used in) provided by financing activities (395) 12,253
-------- --------
CASH AND CASH EQUIVALENTS:
Increase 49 115
Beginning of period 149 4
-------- --------
End of period $ 198 $ 119
======== ========
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Six Months
Ended February 28
--------------------------------
1999 1998
---------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 816 $ 915
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in connection with debenture conversions $ -- $ 6,713
=========== ===========
Common stock issued in connection with conversion of Senior Notes $ -- $ 2,298
=========== ===========
Common stock contributed to 401(k) plan $ 67 $ 123
=========== ===========
Assets acquired in connection with acquisitions $ -- $ 2,470
=========== ===========
Liabilities assumed in connection with acquisitions $ -- $ 1,470
=========== ===========
Common stock issued in connection with acquisitions $ -- $ 1,000
=========== ===========
Capital lease obligation incurred $ 35 $ --
=========== ===========
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 February 28, 1999, and August 31, 1998, the Company had deficit
working capital of $5,781 and $5,164, respectively, and an accumulated deficit
of $30,756 and $28,228, respectively. During the three and six months ended
February 28, 1999, the Company incurred a net loss of $1,568 and $2,528,
respectively. 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 February 28, 1999, 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 these
uncertainties.
New Accounting Pronouncements
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 and six months ended February 28, 1999 and 1998.
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.
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PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. LONG-TERM DEBT:
As of February 28, 1999, and August 31, 1998, the Company was in technical
default with various affirmative debt covenants of its primary lender, KBK
Financial, Inc. (KBK). Consequently, all amounts due KBK have been classified
as a current liability at February 28, 1999, and August 31, 1998. There are no
assurances that the 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 was subsequently extended to
December 24, 1998. In December 1998, the due date of this note was extended to
March 24, 1999. In January 1999, accrued interest on this note was added to the
original principal balance. At the same time, a third party guaranteed $500 of
the revised principal balance. As of April 1999, no amounts had been paid on
this note.
During the three months ended February 28, 1999, the Company entered into three
separate note agreements, aggregating approximately $260,000, with various
shareholders of the Company. The notes mature at various dates between March
and July of 1999 and, as such, have been classified and reflected in the
condensed consolidated financial statements as current maturities of long-term
debt.
3. CONTINGENCIES:
On July 17, 1998, 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 September 1998, the Company received notice from the Internal Revenue
Service (IRS) that it was delinquent in the remittance of payroll taxes. At
February 28, 1999, the Company had accrued approximately $1,131 in unpaid
payroll taxes and an additional $211 in penalties and interest relating to
these delinquent taxes. Until such amounts are paid, the IRS could file tax
liens or seize Company assets which would have a material adverse effect on the
Company's operations.
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PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 November 1998, the Company effected 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 fell below $1 per share. On February 12,
1999, NASDAQ removed the Company's listing due to failure to maintain the $1
minimum bid price. The Company's stock is currently traded on the
over-the-counter Bulletin Board with the ticker symbol PNDR.
4. EQUITY TRANSACTIONS:
As discussed in Note 3, in November 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.
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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., and its
subsidiaries (the Company) 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- and six-month periods ended
February 28, 1999 and 1998. 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.
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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 and the impact of the economic downturn in
Southeast Asia and other factors over which the Company had 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. By
February 28, 1999, the activity of domestic drilling and workover rig
utilization had reduced to approximately 530 and 700, 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 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.
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. 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 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
At February 28, 1999, the Company had an accumulated deficit of approximately
$30.8 million. During the quarter ended February 28, 1999, the Company incurred
a net loss of approximately $1.6 million. As a result of continuing losses,
available cash resources are critical. The Company is currently in default under
its loan agreements with its primary lender, and such lender could foreclose on
the Company's assets at any time. The Company is currently attempting to obtain
a merger partner, equity funding or debt refinancing. There can be no assurance
that they will be successful in these efforts. If the Company is not successful
in these efforts, the Company would likely be unable to continue operating as a
going concern and would likely be required to seek protection under the United
States Bankruptcy laws. Included as a component of the Company's working capital
at February 28, 1999 and 1998, is $240,000 and $1,000,000, 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
Note 3 of notes to consolidated financial statements.
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.
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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 February 28, 1999, and August
31, 1998, the Company had borrowed approximately $8.1 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 six months ended February 28, 1999, the Company is not
in compliance with such covenants and, accordingly, all amounts due this lender
have been classified as a current liability at February 28, 1999, 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 was subsequently extended to December
1998 and then 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.
During the three months ended February 28, 1999, the Company entered into three
separate note agreements, aggregating approximately $260,000, with various
shareholders of the Company. The notes mature at various dates between March
and July and, as such, have been classified and reflected in the condensed
consolidated financial statements as current maturities of long-term debt.
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.
In September 1998, the Company received notice from the Internal Revenue
Service (IRS) that it was delinquent in the remittance of payroll taxes. At
February 28, 1999, the Company had accrued approximately $1,131 in unpaid
payroll taxes and an additional $211 in penalties and interest relating to
these delinquent taxes. Until such amounts are paid, the IRS could file tax
liens or seize Company assets which would have a material adverse effect on the
Company's operations.
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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 November 1998, the Company effected 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 fell below $1 per share. On February 12,
1999, NASDAQ removed the Company's listing due to failure to maintain the $1
minimum bid price. The Company's stock is currently traded on the
over-the-counter Bulletin Board with the ticker symbol PNDR.
At February 28, 1999, and August 31, 1998, the Company had a deficit working
capital of approximately $5.8 million and $5.2 million, respectively. The
current ratio was approximately .66 to 1.0 at both February 28, 1999, and
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 $8.1 million, have been classified as a current liability and are
a component of the approximately $5.8 million working capital deficit at
February 28, 1999.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS
ENDED FEBRUARY 28, 1999 AND 1998
A net loss of $1,568,000, or $.17 per share, was recorded for the three months
ended February 28, 1999, as compared to a net loss of $961,000, or $.15 per
share, for the same period of the prior year.
Revenues were approximately $4.3 million and $5.0 million for the three months
ended February 28, 1999 and 1998, respectively. The approximate $700,000, or 14
percent, decrease in revenues reflect the continued decline in oil and gas
drilling and workover activity, partially offset by the acquisition of FTI in
mid-January 1998. Costs of service and sales decreased $179,000, or 9 percent,
to $1,846,000 for the three months ended February 28, 1999, from $2,025,000 for
the same period of the prior year and operating expenses decreased $205,000, or
7 percent, to $2,888,000 from $3,093,000. The net decrease resulted from the
closing of two marginal operating locations and the Company's cost reduction
actions. The Company's gross profit margin was 58 percent for the three months
ended February 28, 1999, as compared to 59 percent for the same period of the
prior year. Operating expenses, as a percentage of sales, were 66 percent for
the three months ended February 28, 1999, as compared to 62 percent for the
same period of the prior year.
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General and administrative expenses decreased $77,000, or 20 percent, to
$301,000 for the three months ended February 28, 1999, as compared to $378,000
for the same period of the prior year. The cost reduction programs instituted
in mid-1997 and fiscal 1998 have continued through the three and six months
ended February 28, 1999.
Interest expense, net, increased $28,000 to $498,000 for the three months ended
February 28, 1999, as compared to $470,000 for the same period of the prior
year. The increase is due primarily to additional debt incurred in association
with the Company's primary lender and related-party borrowings.
COMPARISON OF THE SIX MONTHS
ENDED FEBRUARY 28, 1999 AND 1998
A net loss of $2,528,000, or $.27 per share, was recorded for the six months
ended February 28, 1999, as compared to a net loss of $1,385,000, or $.23 per
share, for the same period of the prior year.
Revenues were approximately $9.5 million and $10.1 million for the six months
ended February 28, 1999 and 1998, respectively. The approximate $600,000, or 6
percent, decrease in revenues reflect the continued decline in oil and gas
drilling and workover activity, partially offset by the revenue attributable to
acquisition of FTI in mid-January 1998. Costs of service and sales increased
$197,000, or 5 percent, to $4,036,000 for the six months ended February 28,
1999, from $3,839,000 for the same period of the prior year. Operating expenses
remained relatively unchanged at $5,964,000 for the six months ended February
28, 1999, as compared to $5,927,000 for the same period of the prior year. The
Company's gross profit margin was 57 percent for the six months ended February
28, 1999, as compared to 62 percent for the same period of the prior year.
Operating expenses, as a percentage of sales, were 63 percent for the six
months ended February 28, 1999, as compared to 59 percent for the same period
of the prior year.
General and administrative expenses decreased $72,000, or 9 percent, to
$706,000 for the six months ended February 28, 1999, as compared to $778,000
for the same period of the prior year. The cost reduction programs instituted
in mid-1997 and fiscal 1998 have continued through the six months ended
February 28, 1999.
Interest expense, net, remained relatively unchanged at $919,000 for the six
months ended February 28, 1999, as compared to $913,000 for the same period of
the prior year.
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.
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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 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 description of legal proceedings against
the Company, see Note 3 of the notes to condensed consolidated
financial statements included herein.
Item 2. Changes in Securities
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*10.1 Promissory Note made by Ponder Industries, Inc., to White
Owl Investors L.L.C. dated December 15, 1998.
*10.2 Promissory Note made by Ponder Industries, Inc., to Brian
Sokol dated December 30, 1998.
*10.3 Promissory Note made by Ponder Industries, Inc., to White
Owl Investors L.L.C. dated February 24, 1999.
*10.4 Mortgage by Fishing Tools, Inc., dated February 17, 1999.
*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: April 16, 1999
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