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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1996
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
PONDER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2268672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5005 Riverway Drive, Suite 550
Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 965-0653
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
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Common Stock, National Association of Securities
$.01 par value Dealers Automated Quotation System
Boston Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
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 .
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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 III of this Form 10-K or any
amendment to this Form 10-K. _____
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The number of shares outstanding of the Registrant's common stock as
of December 4, 1996 is 12,135,997 inclusive of 289,873 shares held as treasury
stock.
The aggregate market value of the stock held by non-affiliates of the
Registrant as of December 4, 1996 was approximately $18,242,000.
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DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K Part
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Definitive Proxy Statement for 1997 Annual Meeting Part III
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This Annual Report on Form 10-K contains certain "forward-looking"
statements as such term is defined in the Private Securities Litigation Reform
Act of 1995 and information relating to 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, onetime events and other factors described herein. 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.
PART I.
ITEM 1. BUSINESS
GENERAL
Ponder Industries, Inc. (the "Company" or "Ponder") is engaged in the
business of providing specialized oilfield services and rental equipment to the
oil and gas industry. The Company's principal executive offices are located in
Houston, Texas, at 5005 Riverway Drive, Suite 550, Houston, Texas 77056 and its
telephone number at that address is (713) 965-0653. The Company currently has
operating facilities in Texas, Louisiana, Oklahoma, Arkansas, Illinois,
Mississippi and the United Kingdom.
Ponder was founded as a Texas corporation in 1981. In 1990, Ponder
became a Delaware corporation through the merger of Ponder Industries, Inc., a
Texas corporation, into Ponder Industries, Inc., a Delaware corporation. In
July 1995, Larry D. Armstrong became President and Chief Executive Officer of
the Company, succeeding Mack Ponder, the founder of the Company. Under Mr.
Armstrong's leadership, a new business strategy was implemented in 1996 that
focused on improving Ponder's domestic and international market position by
pursuing opportunities for acquisitions in strategic oil and gas markets and
internal growth.
Ponder rents a full line of specialized equipment and tools utilized
in fishing operations. Fishing services are required by the oil and gas
industry whenever there is an obstruction in the borehole of a well. At times
during the life of a well, cable, tubulars, casing, wellbore tools or debris
may become detached and stuck in the well. Likewise, equipment can be
accidentally dropped in a well. Events such as these can create major
obstructions that impede work and raise drilling and completion costs. Ponder
provides expert "fishing" and cutting services to remove such obstructions and
return the wellsite to normal operation.
Fishing services require a variety of equipment designed to catch or
snag "fish" or "junk" in a well or to grind, cut or otherwise eliminate the
obstruction. The equipment is generally rented but may also be designed and
built by the Company. Specialized fishing tool equipment is often not owned by
drilling contractors and operators because of the high cost of owning and
maintaining the full range of equipment required for the various types of
situations encountered in the oil and gas industry throughout many geographic
areas. The items of equipment available for rental from the Company include a
full line of fishing tools, such as milling tools, casing cutters, jars,
spears, overshots and whipstocks. Ponder also provides supervisory services
relating to the operation of their fishing tool equipment and the proper
selection and assembly of the fishing string. The fishing string consists of
jars, subs, overshots (external), spears (internal) and other tools for
removing the item or the "fish" from the well.
The Company solicits orders for its services, products and incidental
equipment rentals primarily through its employee sales force. Traditionally,
most U.S. orders have been received on a well-by-well basis, while
internationally, the Company generally obtains business through contracts with
customers who commit to use the Company's services, products and equipment for
a specified period of time or for a certain number of wells in a certain
geographic area.
Upon the completion of operations by the customer, the tools are
returned to the Company where the tools are inspected and repaired as needed.
Repairs are at the cost of the customer and if the tools cannot be restored to
first class condition, the cost of the tool is charged to the customer.
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SEASONALITY
Demand for the Company's services and products is tied closely to the
seasonality of drilling activity. Higher activity is generally experienced in
the spring, summer and fall. In the United States and Europe, the lowest
drilling activity generally occurs during the early months of the year due to
inclement weather.
PATENTS AND LICENSES
The Company has followed a policy of seeking U.S. and foreign patents
and licenses for products and equipment that appear to have commercial
applications. The Company believes its patents and licenses to be adequate for
the conduct of its products and services business and, while it considers them
to be valuable in the aggregate, the Company does not believe that its business
is materially dependent upon its patents or licenses. In management's opinion,
engineering, operation skills and application experience are more responsible
for the Company's market position than are patents or licenses.
MARKETING
The Company obtains orders through its direct sales force, supervisors
and fishermen. Due to the short-term nature of the equipment rental and
service business, backlog is not meaningful. The Company's backlog for
equipment rentals is not a significant percentage of the Company's consolidated
revenues.
The Company's principal customers are major and independent national
and international oil and gas companies.
RECENT ACQUISITIONS
During the 1996 fiscal year, the Company made the following
acquisitions:
In September 1995, the Company acquired Armstrong Tool, Inc. (Fort
Smith, Arkansas) from Larry D. Armstrong, the President and Chief Executive
Officer of the Company, and his wife. The consideration for the assets of
Armstrong Tool, Inc. consisted of the issuance of a promissory note for
$400,000 to Mr. Armstrong and the assumption by the Company of approximately
$450,000 of liabilities.
The Company acquired certain real property, vehicles and rental tools
and equipment from Apex Tools, a sole proprietorship, in October 1995 for
$200,000 cash and a promissory note payable in two installments of $200,000,
due March 15, 1996 and 1997. Apex Tools is located in Healdton, Oklahoma, and
provides fishing and rental tool services in South Central Oklahoma and North
Texas.
During the third quarter of fiscal 1996, Ponder completed the
acquisitions of Runyon Oil Tools, Inc. (Olney, Illinois), DiKor, Inc. (Carmi,
Illinois) and C & F Fishing Tools, Inc. (Maysville, Oklahoma) in separate
transactions for an aggregate of $283,425 and 331,455 shares of the Company's
restricted common stock. Each of these companies was engaged in the business
of renting fishing tools throughout their geographic regions.
Effective April 1, 1996, the Company expanded its operations into the
North Sea region by acquiring Panther Oil Tools (UK), Ltd., an England
corporation ("Panther"), and substantially all of the assets of Villain, Ltd.,
a Guernsey corporation ("Villain"). Panther and Villain were engaged in the
manufacture, sales and rental of fishing tool equipment in the North Sea
region. The shareholders of Panther received 1,200,000 shares of the Company's
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restricted common stock and $250,000 cash in exchange for all of the issued and
outstanding capital stock of Panther. Additionally, $1,000,000 in cash was
paid for the acquisition of substantially all of the assets of Villain.
The assets acquired include leased property, goodwill, intellectual property
and equipment utilized in the rental of fishing tools. Ponder owns and
operates the facilities and equipment acquired through its wholly owned
subsidiary, Ponder Energy Services, Inc., a Delaware corporation.
In June 1996, Ponder acquired substantially all of the assets of
Reeled Tubular Components, Inc., a Texas corporation ("RTC"), including the
intellectual property rights to an obstruction removing device. Ponder paid
$50,000 cash and 20,000 shares of the Company's restricted common stock for
the assets of RTC.
The Company also acquired, effective as of July 1996, all of the fixed
assets of Bosco Fishing and Rental Tools, Inc. of Laurel, Mississippi. The
consideration for the acquisition consisted of an initial $200,000 cash payment
and the assumption by the Company of approximately $1,200,000 of liabilities.
In August 1996, the Company acquired all of the issued ordinary shares
of Prime Pipe Limited, a United Kingdom company, for approximately $105,000 and
an obligation to issue 4,650 shares of restricted common stock of the Company.
Prime Pipe is a supplier of drilling pipe and other equipment to oil and gas
operations in the North Sea region.
In May 1996, the Company signed a letter of intent to acquire Abilene,
Texas based G&L Fishing Tool Company for $4,000,000 and a $5,000,000 short-term
note. At August 31, 1996, approximately $1,156,000 was in other assets on the
Company's consolidated balance sheet related to this pending acquisition,
including a $1,000,000 forfeitable deposit. Management of the Company
anticipates that this acquisition will be completed by June 1997.
In November 1996, the Company entered into a joint venture formation
agreement with Drilling Tools International, Ltd., a Gibraltar corporation
("DTI") pursuant to which DTI will contribute all of its assets and liabilities
and the Company will make an equivalent contribution of assets. The joint
venture is to be based in Dubai, United Arab Emirates and be formed under the
laws and regulations of the Jebel Ali Free Zone Authority. Until such time as
the joint venture is formed, the Company intends to lease to DTI the assets it
intends to contribute to the joint venture.
Information concerning these acquisitions is contained in Note 16 of
the Notes to Consolidated Financial Statements.
INDUSTRY CONDITION
The oil and gas industry in which Ponder participates historically has
experienced significant volatility. Demand for Ponder'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 and Canada.
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 Ponder 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 the
Organization of Petroleum Exporting Countries ("OPEC") to maintain price
stability through voluntary production limits, the level of production by
non-OPEC countries,
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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 Ponder's services and products.
FOREIGN OPERATIONS
Information by geographic location for 1996 is shown below. As
discussed in Note 3 of the Notes to Consolidated Financial Statements, the
Company's former operations in Azerbaijan are shown as discontinued operations
in the consolidated financial statements:
<TABLE>
<CAPTION>
Year Ended
August 31,
1996
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<S> <C>
Net Sales-
Domestic $10,857,215
Foreign 1,103,538
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Total $11,960,753
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Loss from continuing operations-
Domestic $(5,122,718)
Foreign (147,773)
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Total $(5,270,491)
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Identifiable assets-
Domestic $21,552,446
Foreign 6,349,630
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Total $27,902,076
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</TABLE>
The Company's foreign operations relate to Panther and Villain as
discussed in Note 16 to the Notes to the Consolidated Financial Statements.
COMPETITION
The Company competes with numerous companies offering rental tool
services to the oil and gas industry. The Company experiences competition from
both small and major companies in all of its areas of operations. Many of the
Company's competitors are small, single-location companies, which offer only
specialized types of tools and services. Ponder also competes with large,
international corporations such as Weatherford Enterra, Inc. and Tri-State (a
Baker Hughes Incorporated company) in most of the markets in which it
participates. These competitors have multiple locations, larger inventories of
rental tools and access to financial resources greater than the Company. The
principal methods of competition that apply to the Company's rental tools and
fishing tool services are price, quality, availability and reputation. While
price is a major consideration to its customers, the Company believes that its
competitive position is enhanced by its experience, size, large inventory of
equipment, numerous locations in close proximity to drilling and production
sites, commitment to high quality equipment maintenance, customer service and
experienced personnel.
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GOVERNMENTAL REGULATIONS
The Company currently is not directly subject to any specific
regulatory body, either state or federal. The most significant regulations
that the Company must comply with are those imposed by the Occupational Safety
and Health Administration. The Company has not had any material fines or
penalties levied against it due to unsafe working conditions for its employees.
Safety training programs are conducted on a regular basis. There can be no
assurance that the cost of compliance with current environmental and safety
regulations or future changes in such laws and regulations will not have a
material adverse effect on the Company's operations.
ENVIRONMENTAL MATTERS
The trend in environmental regulations is to place more restrictions
on activities that may affect the environment, such as emissions of air and
water pollutants, generation and disposal of wastes, and the use and handling
of chemical substances. While the Company believes the cost of compliance with
environmental laws and regulations are not currently material, such costs have
increased over the past few years and are expected to continue to increase in
the future. Furthermore, because environmental laws and regulations are
frequently changed, and because environmental expenditures are often related to
unforeseen conditions with respect to facilities leased or acquired by the
Company and pre-acquisition activities of businesses acquired by the Company,
Ponder is unable to predict the impact that such laws and regulations may have
on its business in the future.
EMPLOYEES
As of December 4, 1996, the Company had approximately 180 full-time
employees, which does not include the supervisors who are independent
contractors. None of the Company's employees belong to any labor unions, and
the Company believes its relationship with its employees is good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company, their names, ages,
positions and tenure with the Company as of December 4, 1996 are as follows:
<TABLE>
<CAPTION>
Officer
Name Age Position Since
---- --- -------- -----
<S> <C> <C> <C>
Larry D. Armstrong 56 President and Chief 1995
Executive Officer
Eugene L. Butler 55 Executive Vice President 1996
and Chief Financial Officer
Frank J. Wall 41 Executive Vice President of 1990
Operations
O. A. "Buddy" Jackson 58 Executive Vice President of 1996
Marketing
Mark R. Paisley 43 Secretary 1995
Gerald A. Slaughter 53 Vice President and Controller 1996
</TABLE>
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There are no family relationships among the officers listed, and there
are no arrangements or understandings pursuant to which any of them were
elected as officers. Officers are elected annually by the Board of Directors
at its first meeting following the annual meeting of stockholders, each to hold
office until the corresponding meeting of the Board in the next year or until
his successor shall have been elected or shall have been qualified.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 5005 Riverway
Drive, Suite 550, Houston, Texas 77056 and its telephone number at that address
is (713) 965-0653. The Company's administrative offices are located at 511
Commerce Drive, Alice, Texas and its telephone number at that address is (512)
664-5831. The Company's other properties include 20 equipment rental and sales
facilities owned or leased in Texas, Louisiana, Mississippi, Oklahoma,
Arkansas, and Illinois. In addition, the Company has two facilities located in
the United Kingdom. Substantially all of the Company's fixed assets are pledged
as security to KBK Financial, Inc. as collateral for certain of the Company's
long term debt. See Note 6 of Notes to Consolidated Financial Statements. The
Company believes that its facilities are generally adequate for their
respective operations, and that the facilities of the Company are maintained in
good repair. The Company is lessee under a number of cancelable and
noncancelable leases for certain real properties. See Note 11 of Notes to
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
In October 1995, the Securities and Exchange Commission (the
"Commission") notified the Company that the staff of the Commission intended to
recommend that the Commission institute a cease and desist proceeding against
the Company and various former officers and directors of the Company on the
basis of alleged violations of the Securities Act of 1934 (the "Exchange Act"),
primarily related to the Company's accounting treatment with respect to revenue
recognition for the Company's former operations in Azerbaijan in the Company's
periodic reports filed with the Commission in late fiscal 1992 and fiscal 1993
and the Company's press release in August 1992 concerning the results of the
Azerbaijan operations. The Company has requested that the Commission not
follow the recommendations of the staff on the grounds that its accounting
treatment with respect to the Azerbaijan operations was appropriate under the
then existing circumstances and that the revenue was recognized in good faith.
Recently, the staff indicated it would not recommend action concerning the
Exchange Act filings but did intend to recommend that the Commission take
action with respect to the press release. That recommendation is currently
pending and at this time there has been no indication as to what action the
Commission will take.
The Company is a defendant in a lawsuit by a former employee seeking
damages for wrongful termination. The suit was filed on December 6, 1993. The
suit seeks approximately $317,000 in unpaid wages and value of $142,695 for
38,052 shares of stock he would have earned during the remainder of his
contract term. In May 1995, the former employee sought to enjoin the Company
from conducting an auction sale of certain assets; as a result of those
injunctive proceedings, the Court ordered that $200,000 of the proceeds from
the auction be tendered into the registry of the Court to satisfy any possible
adverse judgment against the Company. The Company asserts that the former
employee was properly terminated under the terms of his contract and is
vigorously contesting the claim and believes that it has meritorious defenses
regarding this matter.
In August 1996, a case was filed in the United States District Court
for the Western District of New York alleging that the Company breached an
obligation to convert certain debentures held by the plaintiff into the
Company's common stock. The plaintiff asserts damages in an amount in excess
of $50,000, attorney's fees and costs and seeks an order
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compelling the Company to convert the plaintiff's debentures into common stock.
The Company is contesting the plaintiff's claims and has responded to the
plaintiff's complaint by filing counterclaims and third-party claims against
the plaintiff, the Company's other convertible debenture holders and the
placement agent on the convertible debenture offering alleging various
violations of the Securities Exchange Act, common law fraud, civil conspiracy,
negligent misrepresentation, breach of contract, breach of fiduciary duty,
negligence, indemnification and seeking a declaration that the Company has no
obligation to convert the debentures and no liability for failure to so
convert. Also, in August 1996, an action was filed in the United States
District Court for the Northern District of Illinois, Eastern Division, by two
other convertible debenture holders of the Company who allege that the Company
breached an obligation to convert certain debentures held by the plaintiffs
into the Company's common stock. The plaintiffs seek a declaratory judgment
setting forth the rights and liabilities of the parties and an award of shares
of common stock or an undisclosed amount of money allegedly due them. The
Company is contesting plaintiffs' claims and has removed the action to federal
court and has moved to transfer it to the Western District of New York pursuant
to a forum selection clause in the agreements between the parties. The
plaintiffs have recently agreed to the transfer of the action to the Western
District of New York.
The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. Although no assurances can be
given, the Company believes it has meritorious defenses to all of the above
actions and intends to defend itself vigorously. 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. The Company has accrued $500,000 at
August 31, 1996, as its estimate of costs it expects to incur in defense of the
above actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of December 4, 1996, there were approximately 2,000 beneficial
owners of the Company's common stock which is traded on the NASDAQ Small Cap
System under the symbol "PNDR". The Company's common stock is also listed on
the Boston Stock Exchange. The following table sets forth, for the calendar
periods indicated, the range of high and low closing prices for the Company's
common stock, as reported by the NASDAQ Small Cap System:
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<TABLE>
<CAPTION>
1996 1995
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High Low High Low
------ ----- ------ -----
<S> <C> <C> <C> <C>
First Quarter $1-5/8 $3/4 $3-7/8 $1-11/16
Second Quarter 4-1/16 1 2-1/16 31/32
Third Quarter 6-1/4 3-13/16 2-1/8 23/32
Fourth Quarter 4-7/8 1-5/16 1-17/32 11/16
</TABLE>
The closing price of the Company's common stock on December 4, 1996
was $1-27/32.
The Company has not paid dividends on its common stock the past three
years and anticipates that it will not pay dividends in the foreseeable future.
The terms of the Company's new loan agreements restrict the payment of
dividends. See Note 6 of the Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Company's financial statements and related notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing elsewhere herein.
OPERATING STATEMENT DATA
<TABLE>
<CAPTION>
Years Ended August 31
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Tool rentals and sales $11,960,753 $6,756,738 $7,634,902 $8,719,352 $12,262,070
Loss from continuing operations (5,270,491) (440,532) (1,567,034) (1,279,860) (1,890,239)
Income (loss) from discontinued
operations 1,378,418 (3,790,911) (1,531,642) - -
Cumulative effect of change in
accounting principle - 1,139,780 - - -
Net loss (3,892,073) (3,091,663) (3,098,676) (1,279,860) (1,890,239)
Income (loss) per share-Continuing
operations $(.60) $(.07) $(.25) $(.20) $(.36)
Discontinued operations .16 (.59) (.24) - -
Change in accounting principle - .18 - - -
Net loss (.44) (.48) (.49) (.20) (.36)
</TABLE>
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BALANCE SHEET DATA
<TABLE>
<CAPTION>
August 31
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $1,196,789 $1,209,627 $(3,388,984) $425,140 $(1,166,915)
Total assets 27,902,076 6,815,177 10,829,276 13,554,999 15,630,746
Long-term debt 4,148,207 2,343,012 - 2,450,000 -
Stockholders' equity 7,012,520 2,311,928 5,406,665 8,508,415 9,751,153
Book value per common share $.59 $.36 $.85 $1.33 $1.46
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is included to describe the Company's
financial position and results of operations for each of the three years in the
period ended August 31, 1996. The Consolidated Financial Statements and notes
thereto contain detailed information that should be referred to in conjunction
with this discussion.
BUSINESS REVIEW
Ponder 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 and tubing used
in the drilling, completion and workover of wells. Ponder currently has 20
locations domestically and two internationally serving the North Sea area.
Since 1981, when the Company was founded, Ponder has been engaged
principally in providing fishing tool services to its customers in the United
States. In 1992, however, the Company started a major project in Azerbaijan,
formerly a state in the Soviet Union, which appeared to have great potential.
Instead, the project was a financial disaster, causing management and the Board
of Directors to seek a new direction with a new strategy. It started this new
direction by hiring Larry D. Armstrong as President and acquiring his company,
Armstrong Tool, Inc. Mr. Armstrong commenced a new strategy of growth by
acquisition and internal expansion.
Ponder's strengths were its history, reputation, quality of service
and its people. Despite this, the new strategy would prove difficult to
implement because Ponder was financially unstable and losing significant cash.
Growing the Company would require the use of equity to acquire assets and raise
much needed cash to fund its operating losses, open new locations, hire strong
management and sales teams, and buy additional equipment.
In 1996 management raised over $12 million in cash from financing
activities including the sale of convertible debentures and common stock.
Subsequent to year-end, Ponder completed a new $10 million financing agreement
to pay off existing bank debt and provide additional working capital for
continuing growth. Ponder has acquired 10 companies, including Armstrong Tool,
Inc. and has opened three new locations, two in Louisiana and one in Texas.
One of the companies acquired, Panther Oil Tools, is located in the North Sea
area. The Company also recently signed an agreement to form a joint venture
for operations in the Middle East. Revenues were nearly $12 million for the
year ended August 31, 1996 and are almost double compared to last year, with
1996 fourth quarter revenues approaching $5 million.
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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. Demand for oil and
natural gas the past year has allowed for much higher prices in 1996 than the
average prices for the past several years. World oil prices have been in the
mid to low $20's per barrel for several months and many industry analysts are
forecasting this situation to continue in 1997. These favorable market
conditions should continue and allow Ponder to continue its growth and return
to profitability.
FINANCIAL CONDITION
In November 1996, the Company completed a $10 million financing
agreement with KBK Financial, Inc. The agreement includes a $4 million
Revolving Receivable Facility, a $2.5 million Revolving Credit Note and a $3.5
million Term Note. The Receivable Facility is a two year facility that is
based on accounts receivable and will be 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 will be used to acquire capital
assets to expand the 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. The funds will be used to
pay off existing bank debt of $3 million, with the balance being used to
acquire capital equipment. This loan agreement was completed subsequent to
year end but is significant to the liquidity of the Company and its continuing
expansion program during 1997.
In April 1996, the Company raised approximately $10 million, net of
fees, by issuing eight percent Convertible Debentures. These debentures are
convertible into Common Stock, subject to defined conversion factors, and the
balance at year end was $9,150,000.
The Company acquired approximately $14 million of property and
equipment during the year. The sources used to purchase these assets were
provided primarily from securities issued and funds received on the convertible
debentures issuance.
Working capital was approximately $1.2 million at August 31, 1996 and
1995. The current ratio at year end was approximately 1.2 to 1.0 compared to
1.6 to 1.0 last year. The long-term debt (assuming the conversion of the
convertible debentures) as a percent of total capitalization was 26% at year end
compared to 56% last year. The overall liquidity of the Company has improved
significantly in 1996 compared to 1995. The Company will have approximately $5
million available under its financing agreements after paying off the bank debt
and certain payables outstanding at August 31, 1996.
Management believes the combination of working capital, the unused
portion of existing credit facilities and anticipated cash flows from
operations provide the Company with sufficient capital resources and liquidity
to manage its routine operations.
YEAR ENDED AUGUST 31, 1996 V. 1995
A net loss of $3,892,000, or $.44 per share, was recorded in 1996
compared with a net loss of $3,092,000, or $.48 per share, in 1995. The
Company's loss from continuing operations in 1996 was $5,270,000, or $.60 per
share, as compared to a loss of $440,000, or $.07 per share, in 1995. In 1995,
the Company recognized a $3,791,000 loss, or $.59 per share, as a result of the
write-off of its operations in Azerbaijan and recognized income of $1,140,000,
or $.18 per share, due to a cumulative effect of a change in accounting
principle for its inventory of parts. In 1996 the Company disposed of its
operations in Azerbaijan. The sale resulted in a gain of $1,400,000 and income
from discontinued operations of $1,378,000, or $.16 per share.
-10-
<PAGE> 12
Revenues increases $5,204,000, or 77%, to $11,961,000 in 1996 compared
to $6,757,000 in 1995. The increase is due to a significant increase in the
domestic marketing effort and an increase in operating locations. Revenues
attributable to the four Texas stores and the machine shop operation in place
at the beginning of the year increased $1,248,000, or 18%, to $8,005,000 in
1996 as compared to $6,757,000 in 1995. During 1996 the Company added nine new
store locations in Oklahoma, Arkansas, Louisiana, Mississippi, Illinois and
Texas, and these new locations contributed approximately $2,852,000 to the
current year increase. Effective April 1, 1996, the Company acquired Panther
Oil Tools, (UK) Ltd. (an English corporation), and the assets of Villain Ltd.
(a Guernsey Corporation). These acquisitions resulted in an additional
$1,104,000 in 1996 revenues.
Cost of sales and service increased $1,959,000, or 58%, to $5,320,000
in 1996 from $3,361,000 in 1995. Operating expenses increased $2,711,000, or
122%, to $4,941,000 in 1996 as compared to $2,230,000 in 1995. Cost of sales
and operating expenses increased relative to the increase in revenues, while
operating expenses increased in a greater percentage, due to the start-up cost
incurred in establishing the new store locations and the addition of 62
operating personnel.
General and administrative expenses increased $3,875,000, or 149%, to
$6,478,000 in 1996 from $2,603,000 in 1995. During 1996, the Company
significantly increased its domestic marketing effort by adding 41 personnel in
the regional and corporate sales group and has established a marketing presence
in Oklahoma, Arkansas, Illinois and the Gulf Coast region. During the year,
the Company relocated its corporate offices to Houston, Texas with the Alice,
Texas facility remaining as the administrative office. The Company has added 15
personnel in the corporate and administrative functions as a result of the
expansion effort. The employee costs and other related expenses associated
with this expansion accounts for approximately $2,450,000, or 63% of the
current year increase. Fees for professional services increased $650,000, or
17% of the current year increase, primarily due to the Company's accrual of
legal fees of $500,000 as the estimated cost it expects to incur in defense of
certain contingencies discussed in Notes 13 and 18. Additionally, the Company
incurred increased accounting, legal and public corporation expenses associated
with the increase in business activity. Expenses of $700,000 were recognized
during the year, relating to a stock grant and consulting arrangement with the
former chairman of the Company, as discussed in Notes 18 and 19.
Interest expense, net increased $202,000, or 43%, to $673,000 in 1996
from $471,000 in 1995. The increase is due primarily to $285,000 non-cash
interest expense on the 8% Convertible Debentures issued effective April 26,
1996, as discussed in Note 7, offset by a reduction in the average interest
rate of bank debt during the year and increased interest income.
The gain (loss) on disposal of assets decreased from a gain of
$1,320,000 in 1995 to a loss of $12,000 in 1996. In 1995, the Company
conducted an auction of its excess rental tools and certain equipment with a
resultant $1,358,000 gain from disposal of assets.
YEAR ENDED AUGUST 31, 1995 V. 1994
Revenues decreased $878,164 in 1995 when compared to 1994. The
reduction is attributable to the overall lack of domestic marketing efforts.
In August 1995, the Company mounted a domestic sales effort by placing sales
personnel in major marketing areas of the Company. Early results of this
effort appear favorable and management believes the early results of the sales
effort foretell increased sales and revenues. The Company has added coverage
in a market area through an acquisition in Oklahoma and opening of two Company
stores. The Company feels these additions along with increased marketing
efforts will result
-11-
<PAGE> 13
in increased revenues for 1996. A change in the accounting procedure for
inventory to better reflect cost of sales on parts resulted in a one-time gain
of $1,139,780. A write off of all Azerbaijan assets and a one-time charge of
$400,000 for shut-down costs resulted in a one-time loss of $3,400,000.
ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
The reports of the Company's Independent Public Accountants, Financial
Statements and Notes to Financial Statements appear herein commencing on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The firm of Hairston, Kemp, Sanders & Stich, P.C., certified public
accountants ("Hairston") served as the independent auditors of the Company
until January 8, 1996 at which time the Company dismissed the firm now known as
Kemp & Stich, P.C. and engaged William B. Sanders, C.P.A. ("Sanders") as the
principle accountant of the Company (see Form 8-K dated January 8, 1996). On
April 10, 1996, Sanders was dismissed by the Company from its role as principle
accountant. The decision to change accountants was recommended by the board of
directors of the Company.
In connection with the audits of the two fiscal years ended August 31,
1995, and the subsequent interim period through April 10, 1996, there were no
disagreements with Hairston or Sanders on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused
them to make reference in connection with their opinion to the subject matter
of the disagreement.
Other than a qualification of opinion as to the Company's ability to
continue operations as a going concern due to recurring losses from continuing
operations for the past three years contained in the independent auditor's
report filed by Hairston in connection with the Company's consolidated
financial statements for the fiscal years ended August 31, 1995 and August 31,
1994 and a qualification of opinion regarding the recovery of the Company's
cost of its Azerbaijan operations contained in the 1994 independent auditor's
report, the audit reports of Hairston on the consolidated financial statements
of the Company as of and for the years ended August 31, 1994 and 1995, did not
contain any adverse opinion or disclaimer of opinion nor were they qualified or
modified as to uncertainty, audit scope, or accounting principles.
On April 10, 1996, Arthur Andersen LLP ("Andersen") was engaged to
audit the financial statements of the Company for its fiscal year ended August
31, 1996. The Company has authorized Sanders to respond fully to inquiries of
Andersen. The Company did not contact Andersen during the Company's two most
recent fiscal years, or any subsequent interim period, regarding (1) any
disagreement with Sanders or Hairston or (2) the application of accounting
principles to a specified transaction or the type of audit opinion that might
be rendered on the Company's financial statements. Prior to its agreement,
Andersen was neither asked for, nor has it expressed any opinion on any
accounting issues concerning the Company.
-12-
<PAGE> 14
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this Item will be contained in the Company's
Proxy Statement for the 1997 Annual Meeting, which is incorporated herein by
reference.
See also "Executive Officers of the Registrant" under Part I, Item 1,
herein.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in the Company's
Proxy Statement for the 1997 Annual Meeting, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item will be contained in the Company's
Proxy Statement for the 1997 Annual Meeting, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item will be contained in the Company's
Proxy Statement for the 1997 Annual Meeting, which is incorporated herein by
reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets - August 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended
August 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the years
ended August 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
</TABLE>
-13-
<PAGE> 15
2. FINANCIAL STATEMENT SCHEDULES
None
Schedules of the Company are omitted because of the absence of the
conditions under which they are required or because the required
information is included in the consolidated financial statements or
notes thereto.
3. EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Identification of Exhibit Page Number
- ------- ------------------------- -----------
<S> <C>
2.1 Agreement for Sale and Purchase of Stock of Runyon Oil Tools, Inc.
dated April 26, 1996, among Ponder Industries, Inc., Runyon Oil
Tools, Inc., Steven E. Runyon, Freda M. Runyon, as Custodian for
Stephanie Runyon under the Illinois Uniform Transfers to Minors
Act, Freda M. Runyon, as Custodian for Amanda Runyon under the
Illinois Uniform Transfers to Minors Act, Freda M. Runyon, as
Custodian for Lucas Runyon under the Illinois Uniform Transfers to
Minors Act, and Freda M. Runyon, as Custodian for Blake Runyon under
the Illinois Uniform Transfer to Minors Act. Incorporated herein by
reference to Exhibit 2.1 of the Company's Quarterly Report on
Form 10-Q filed July 15, 1996.
2.2 Stock Purchase Agreement dated May 17, 1996, between Ponder
Industries, Inc. and LJH Corporation. Incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q filed
July 15, 1996.
*2.3 Letter Agreement dated July 23, 1996 between Ponder Industries, Inc.
and LJH Corporation.
2.4 Stock Purchase Agreement dated May 23, 1996, among Ponder Energy
Services, Inc., Panther Oil Tools (UK) Ltd. and Panther Oil Tools Ltd.
Incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K filed June 7, 1996.
2.5 Asset Purchase Agreement dated May 23, 1996, among Ponder Energy
Services, Inc., Villain Ltd., John Le Seeleur, Mel Maitland and
Wayne Tynon, Incorporated by reference to Exhibit 2.2 of the Company's
Current Report on Form 8-K filed June 7, 1996.
*2.6 Asset Purchase Agreement dated December 6, 1996 to be effective as
of July 1, 1996 among Ponder Industries, Inc., Bosco Fishing and
Rental Tools, Inc. and Brooks Owens.
3 Articles of Incorporation and Bylaws of Ponder Industries, Inc.
Incorporated herein by reference to Exhibit 3 filed with Registration
Statement on Form S-1 (Commission File No. 33-33190).
4 Instruments Defining the Rights of Security Holders. Incorporated herein
by reference to Exhibit 4 filed with Registration Statement on Form S-1
(Commission File No. 33-33190).
4.1 Form of 8% Convertible Debenture of Ponder Industries, Inc. dated April 26,
1996. Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q filed July 15, 1996.
10.1 1994 Incentive Stock Option Plan. Incorporated herein by reference to
Exhibits filed with Proxy Statement for the Company's annual meeting for
1993.
10.2 1994 Directors Stock Option Plan. Incorporated herein by reference to
Exhibits filed with Proxy Statement for the Company's annual meeting
for 1993.
10.3 Regulation S Securities Subscription Agreement dated April 26, 1996,
among each Subscriber for 8% Convertible Debentures of Ponder Industries,
Inc. and Ponder Industries, Inc. Incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q filed July 15, 1996.
10.4 Offshore Securities Subscription Agreement dated December 22, 1995,
between Eagle Management Services Limited and Ponder Industries, Inc.
Incorporated herein by reference to the Company's Quarterly Report
On Form 10-Q filed July 15, 1996.
*10.5 Formation and Shareholders' Agreement of Ponder - DTI, Inc. dated
November 15, 1996 between Ponder Energy Services, Inc. and Drilling
Tools International, Ltd.
*10.6 Lease Agreement dated December 1, 1996 between Ponder Energy Services,
Inc. and Drilling Tools International, Ltd.
10.7 Offshore Securities Subscription Agreement dated December 22, 1995,
between Atlantic Holdings Limited and Ponder Industries, Inc.
Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q filed July 15, 1996.
10.8 Warrant to Purchase Common Stock, $.01 par value, of Ponder Industries,
Inc. between Eagle Management Services Limited and Ponder Industries,
Inc. Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q filed July 15, 1996.
10.9 Warrant to Purchase Common Stock, $.01 par value, of Ponder Industries,
Inc. between Atlantic Holdings Limited and Ponder Industries, Inc.
Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q filed July 15, 1996.
*11 Computation of Earnings (Loss) Per Share
21 Subsidiaries
<CAPTION>
Name Under Which
Name State of Incorporation Doing Business
---- ---------------------- ----------------
<S> <C> <C> <C>
Ponder Energy Ponder Energy
Services, Inc. Delaware Services, Inc.
*23.1 Consent of Arthur Andersen LLP
*23.2 Consent of Hairston, Kemp, Sanders & Stich, P.C.
*27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. None.
- --------------------------------
* Filed herewith
</TABLE>
-14-
<PAGE> 16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Ponder Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Ponder
Industries, Inc. (a Delaware corporation), and subsidiaries as of August 31,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ponder Industries,
Inc., and its subsidiaries as of August 31, 1996, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 14 to the financial statements, the Company changed its
method of accounting for parts used in conjunction with its rental tools for
the year ended August 31, 1995.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
December 2, 1996
F-1
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Ponder Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Ponder
Industries, Inc., and subsidiaries as of August 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended August 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Ponder Industries, Inc., and its
subsidiaries at August 31, 1995, and the results of their operations and their
cash flows for each of the two years in the period ended August 31, 1995, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
Financial Statements, the Company has suffered recurring losses from continuing
operations for the past three years, which raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 14 to the financial statements, the Company changed its
method of accounting for parts used in conjunction with its rental tools for
the year ended August 31, 1995.
/s/ HAIRSTON, KEMP, SANDERS & STICH, P.C.
San Antonio, Texas
November 20, 1995
F-2
<PAGE> 18
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - - AUGUST 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents-
Unrestricted $ 397,927 $ 180,445
Restricted, debt collateral -- 169,988
Receivables, net of allowance for doubtful accounts
of $138,491 and $81,731 in 1996 and 1995,
respectively 3,646,960 1,277,110
Other receivable 500,000 --
Parts and supplies 3,046,288 1,400,853
Prepaid expenses and other 514,464 341,468
------------ ------------
Total current assets 8,105,639 3,369,864
------------ ------------
PROPERTY AND EQUIPMENT 28,170,569 14,310,745
Less- Accumulated depreciation and amortization (12,644,782) (11,548,868)
------------ ------------
15,525,787 2,761,877
------------ ------------
OTHER ASSETS 2,184,435 108,076
DEFERRED ASSETS, net 853,408 --
GOODWILL, net of accumulated amortization of $345,587 and
$298,884 in 1996 and 1995, respectively 1,232,807 575,360
------------ ------------
4,270,650 1,487,648
------------ ------------
$ 27,902,076 $ 6,815,177
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------------------------------ ------------ ------------
CURRENT LIABILITIES:
Note payable $ -- $ 200,000
Current maturities of long-term debt 1,393,001 356,522
Bank overdraft 529,813 --
Accounts and notes payable, trade 2,863,477 666,570
Accrued liabilities-
Commissions (related parties, $4,272 and $28,019 in 1996
and 1995, respectively) 123,562 83,919
Other 1,998,997 342,836
Estimated cost, discontinued operation -- 510,390
------------ ------------
Total current liabilities 6,908,850 2,160,237
------------ ------------
LONG-TERM DEBT, less current maturities 4,148,207 2,343,012
------------ ------------
OTHER LONG-TERM LIABILITIES 449,418 --
------------ ------------
DEFERRED TAXES PAYABLE 233,081 --
------------ ------------
CONVERTIBLE DEBENTURES 9,150,000 --
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 50,000,000 shares, issued
12,131,347 and 6,667,437 shares as of August 31, 1996 and 1995,
respectively, of which 289,873 are held in treasury as of August 31, 1996
and 1995 121,313 66,674
Additional paid-in capital 21,880,361 13,216,573
Cumulative foreign currency translation adjustment 23,596 --
Accumulated deficit (13,775,188) (9,883,115)
------------ ------------
8,250,082 3,400,132
Less-
Note receivable for common stock (63,540) (60,466)
Deferred compensation (146,284) --
Treasury stock (1,027,738) (1,027,738)
------------ ------------
Total stockholders' equity 7,012,520 2,311,928
------------ ------------
$ 27,902,076 $ 6,815,177
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
<PAGE> 19
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
TOOL RENTALS AND SALES $ 11,960,753 $ 6,756,738 $ 7,634,902
COSTS OF SERVICE AND SALES 5,319,660 3,360,918 4,094,618
------------ ------------ ------------
Gross profit 6,641,093 3,395,820 3,540,284
------------ ------------ ------------
EXPENSES:
Operating 4,940,919 2,230,078 2,459,713
General and administrative 6,477,636 2,603,362 2,308,249
------------ ------------ ------------
11,418,555 4,833,440 4,767,962
------------ ------------ ------------
Operating loss (4,777,462) (1,437,620) (1,227,678)
OTHER INCOME (EXPENSE):
Interest, net (673,027) (470,903) (413,122)
Gain (loss) on disposal of assets (12,395) 1,319,637 (27,257)
Other 260,157 148,354 115,823
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (5,202,727) (440,532) (1,552,234)
INCOME TAX EXPENSE (67,764) -- (14,800)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (5,270,491) (440,532) (1,567,034)
------------ ------------ ------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Operations (21,582) (388,663) (1,531,642)
Disposal of assets including operations in disposal
period -- (3,402,248) --
Gain on sale of discontinued operations 1,400,000 -- --
------------ ------------ ------------
1,378,418 (3,790,911) (1,531,642)
------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (3,892,073) (4,231,443) (3,098,676)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE -- 1,139,780 --
------------ ------------ ------------
NET LOSS $ (3,892,073) $ (3,091,663) $ (3,098,676)
============ ============ ============
EARNINGS (LOSS) PER SHARE:
Loss from continuing operations $ (.60) $ (.07) $ (.25)
Income (loss) from discontinued operations .16 (.59) (.24)
Cumulative effect of a change in accounting principle -- .18 --
------------ ------------ ------------
NET LOSS PER SHARE $ (.44) $ (.48) $ (.49)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE EQUIVALENTS
OUTSTANDING 8,748,498 6,377,564 6,377,564
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 20
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Cumulative
Foreign
Common Stock Additional Currency
--------------------------- Paid-In Translation Accumulated
Shares Par Value Capital Adjustment Deficit
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, August 31, 1993 6,667,437 $ 66,674 $ 13,216,573 $ -- $ (3,692,776)
Interest on note receivable for common
stock -- -- -- -- --
Net loss -- -- -- -- (3,098,676)
------------ ------------ ------------ ------------ ------------
BALANCE, August 31, 1994 6,667,437 66,674 13,216,573 -- (6,791,452)
Interest on note receivable for common
stock -- -- -- -- --
Net loss -- -- -- -- (3,091,663)
------------ ------------ ------------ ------------ ------------
BALANCE, August 31, 1995 6,667,437 66,674 13,216,573 -- (9,883,115)
Shares issued under employment agreement 459,333 4,593 182,010 -- --
Compensation expense -- -- -- -- --
Shares issued in connection with acquisitions 1,551,455 15,515 3,743,105 -- --
Shares issued as employee bonus 25,000 250 13,031 -- --
Shares sold with warrants attached 1,500,000 15,000 897,000 -- --
Exercise of warrants 1,000,000 10,000 1,490,000 -- --
Shares sold 83,333 833 249,167 -- --
Shares issued under option exercise 16,500 165 37,733 -- --
Debentures converted into shares 828,289 8,283 1,651,742 -- --
Compensation accrual for stock grant -- -- 400,000 -- --
Interest on note receivable for common
stock -- -- -- -- --
Foreign currency translation adjustment -- -- -- 23,596 --
Net loss -- -- -- -- (3,892,073)
------------ ------------ ------------ ------------ ------------
BALANCE, August 31, 1996 12,131,347 $ 121,313 $ 21,880,361 $ 23,596 $(13,775,188)
============ ============ ============ ============ ============
<CAPTION>
Note
Receivable
for
Common Deferred Treasury
Stock Compensation Stock Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, August 31, 1993 $ (54,318) $ -- $ (1,027,738) $ 8,508,415
Interest on note receivable for common
stock (3,074) -- -- (3,074)
Net loss -- -- -- (3,098,676)
------------ ------------ ------------ ------------
BALANCE, August 31, 1994 (57,392) -- (1,027,738) 5,406,665
Interest on note receivable for common
stock (3,074) -- -- (3,074)
Net loss -- -- -- (3,091,663)
------------ ------------ ------------ ------------
BALANCE, August 31, 1995 (60,466) -- (1,027,738) 2,311,928
Shares issued under employment agreement -- (186,603) -- --
Compensation expense -- 40,319 -- 40,319
Shares issued in connection with acquisitions -- -- -- 3,758,620
Shares issued as employee bonus -- -- -- 13,281
Shares sold with warrants attached -- -- -- 912,000
Exercise of warrants -- -- -- 1,500,000
Shares sold -- -- -- 250,000
Shares issued under option exercise -- -- -- 37,898
Debentures converted into shares -- -- -- 1,660,025
Compensation accrual for stock grant -- -- -- 400,000
Interest on note receivable for common
stock (3,074) -- -- (3,074)
Foreign currency translation adjustment -- -- -- 23,596
Net loss -- -- -- (3,892,073)
------------ ------------ ------------ ------------
BALANCE, August 31, 1996 $ (63,540) $ (146,284) $ (1,027,738) $ 7,012,520
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 21
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,892,073) $(3,091,663) $(3,098,676)
(Income) loss from discontinued operations (1,378,418) 3,790,911 1,531,642
Cumulative effect of a change in accounting principle -- (1,139,780) --
----------- ----------- -----------
Loss from continuing operations (5,270,491) (440,532) (1,567,034)
Adjustments to reconcile loss to net cash used in operating
activities-
Depreciation and amortization 1,402,255 958,978 1,128,084
(Gain) loss on disposal of assets 12,395 (1,319,637) 27,257
Noncash compensation expense 453,600 -- --
Other noncash expenses 45,923 109,175 --
Net change in operating assets and liabilities-
Receivables (1,000,327) 326,877 119,609
Other receivable (500,000) -- --
Parts and supplies (985,160) 10,696 8,776
Prepaid expenses and other (130,822) 42,885 (255,536)
Accounts and notes payable, trade 2,190,906 (732,915) (37,518)
Accrued liabilities 1,542,833 (123,880) 192,781
----------- ----------- -----------
Net cash used in continuing operating activities (2,238,888) (1,168,353) (383,581)
----------- ----------- -----------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations 1,378,418 (3,790,911) (1,531,642)
Add (deduct)-
Depreciation expense -- 250,416 21,459
Asset additions -- (27,581) (1,121,093)
Write-down of costs -- 3,002,248 1,660,940
Accrued liabilities, estimated operating cost for disposal (510,390) 510,390 --
Gain on sale of discontinued operations (1,400,000) -- --
----------- ----------- -----------
Net cash used in discontinued operations (531,972) (55,438) (970,336)
----------- ----------- -----------
Net cash used in operating activities (2,770,860) (1,223,791) (1,353,917)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,238,533) (293,571) (195,002)
Acquisitions, net of cash acquired (2,470,845) -- --
Other asset additions (1,196,047) -- (50,384)
Proceeds from asset sales and notes receivable 18,542 2,700,115 263,291
----------- ----------- -----------
Net cash provided by (used in) investing activities (9,886,883) 2,406,544 17,905
----------- ----------- -----------
</TABLE>
F-6
<PAGE> 22
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ -------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt $ (4,051,278) $ (10,409,732) $ (8,777,998)
Financing and debt collateral payments (925,012) (224,643) --
Proceeds from long-term debt borrowings 3,671,804 9,676,824 8,954,005
Proceeds from convertible debentures 10,950,000 -- --
Bank overdraft 529,813 (44,757) 44,757
Proceeds from issuance of common stock 2,699,898 -- --
------------ -------------- ------------
Net cash provided by (used in) financing activities 12,875,225 (1,002,308) 220,764
------------ -------------- ------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) 217,482 180,445 (1,115,248)
Beginning of year 180,445 -- 1,115,248
------------ -------------- ------------
End of year $ 397,927 $ 180,445 $ --
============ ============== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for-
Interest $ 458,044 $ 472,358 $ 416,196
Income taxes -- -- 14,800
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets acquired in connection with acquisitions $ 9,635,747 $ 204,705 $ --
============ ============== ============
Liabilities assumed in connection with acquisitions $ 1,689,995 $ -- $ --
============ ============== ============
Common stock issued in connection with acquisitions $ 3,758,620 $ -- $ --
============ ============== ============
Debt incurred in connection with acquisitions $ 2,177,329 $ -- $ --
============ ============== ============
Capital lease obligations incurred $ 293,819 $ -- $ --
============ ============== ============
Common stock issued in connection with debenture conversions
$ 1,660,025 $ -- $ --
============ ============== ============
Common stock issued to officers, directors and employees $ 346,168 $ -- $ --
============ ============== ============
Sale of discontinued Azerbaijan operations in exchange for
2,000,000 shares of Titan stock $ 1,400,000 $ -- $ --
============ ============== ============
Compensation accrual for stock grant $ 400,000 $ -- $ --
============ ============== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE> 23
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Ponder Industries, Inc., and subsidiaries (Ponder or the Company). All
significant intercompany transactions have been eliminated in consolidation.
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 year balances to conform to
current year financial statement presentation.
Business
The Company specializes in the downhole recovery of unwanted obstructions in
the bore holes of oil and gas wells through the utilization of specifically
designed tools, known as "fishing tools." The Company is engaged in the
business of renting fishing tools as well as providing supervisory personnel
for fishing operations. As of August 31, 1996, the Company operated out of its
administrative headquarters in Alice, Texas, and "stores" located in Texas,
Oklahoma, Arkansas, Illinois, Louisiana and Mississippi. The Company also
operates in the UK through certain acquisitions during fiscal 1996 as discussed
in Note 16.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity
of three months or less to be cash equivalents.
Parts and Supplies
Parts and supplies for the manufacturing and repair of rental tools and parts
used in conjunction with the rental of tools are stated at the lower of average
cost or market with cost determined by the first-in, first-out method. These
parts and supplies have been classified as a current asset on the accompanying
consolidated balance sheets consistent with industry practice.
(See Note 14.)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method at rates based on estimated lives of the respective
assets. When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in income for the period. The cost of maintenance and
repairs is charged to income as incurred; significant renewals and betterments
are capitalized. (See Note 4.)
F-8
<PAGE> 24
Goodwill
Goodwill consists of cost in excess of net assets acquired related to the
acquisition of businesses and assets. Goodwill is being amortized on a
straight-line basis over periods ranging from 15 to 40 years.
Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments have been
determined by the Company using appropriate valuation methodologies and
approximate their recorded book values at August 31, 1996. The carrying values
of the Company's cash and cash equivalents, receivables, accounts payable, debt
and all other financial instruments approximate their fair values without
consideration for the convertibility of the debentures (Notes 7 and 13).
Revenue Recognition
Revenues are recorded when services have been provided or products have been
delivered.
Concentration of Credit Risk
The Company provides equipment and services to the oil and gas industries.
Concentration of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base.
Ongoing credit evaluations of customers' financial condition are performed and,
generally, no collateral is required. The Company maintains reserves for
potential credit losses and such losses have not exceeded management's
expectations.
Income Taxes
The Company accounts for income taxes using the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (FAS No. 109), which requires the establishment of a deferred tax
asset or liability for the recognition of future deductible or taxable amounts
and operating loss and tax credit carryforwards. Deferred tax expense or
benefit is recognized as a result of the changes in the assets and liabilities
during the year. Management adopted FAS No. 109 for the first quarter of the
year ended August 31, 1994. The Company has chosen to treat the adoption as a
cumulative effect of a change in accounting principle. However, the accounting
change had no material effect on the financial statements. The Company has
established a valuation allowance equal to its net deferred tax asset.
Earnings (Loss) Per Share
Earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares and common share equivalents
outstanding during each year. Any warrants or options outstanding are
considered common stock equivalents provided they have a dilutive effect on
earnings (loss) per share. For the 1995 and 1994 fiscal years presented, such
items were antidilutive and have not been included in the per share
calculation.
New Accounting Pronouncements
In March 1995, Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" (FAS 121), was issued. Under FAS 121, an impairment loss must be
recognized for long-lived assets and certain identifiable intangibles to be
held and used by an entity whenever events or changes in circumstances indicate
that the carrying amounts of an asset may not be recoverable. FAS 121 is
effective for financial statements issued for fiscal years beginning after
F-9
<PAGE> 25
December 15, 1995, and must be adopted on a prospective basis. Restatement of
previously issued financial statements is not permitted. Management of the
Company does not anticipate that the adoption of FAS 121 will have a material
effect on the financial position or results of operations of the Company.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), was issued. FAS 123
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on
the value of the award and is recognized over the service period of the award,
which is usually the vesting period. However, FAS 123 also allows entities to
continue to measure compensation costs for employee stock compensation plans
using the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25). Entities electing to remain with the accounting prescribed by APB 25
must make pro forma disclosures of net income and earnings per share as if the
fair value based method recommended by FAS 123 had been applied. The accounting
and disclosure requirements of FAS 123 are effective for transactions entered
into in fiscal years that begin after December 15, 1995. The Company intends to
measure compensation costs in accordance with APB 25 and to provide pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting under FAS 123 had been applied. Therefore, FAS 123 will
not have a material effect on the financial position or results of operations
of the Company.
2. OPERATIONS, LIQUIDITY, CAPITAL RESOURCES AND
VULNERABILITY DUE TO CERTAIN CONCENTRATIONS:
During the years ended August 31, 1996, 1995 and 1994, the Company incurred net
losses from continuing operations of $5,270,491, $440,532 and $1,567,034,
respectively. These losses have been funded primarily through issuances of
common stock and convertible debentures and debt financing. As discussed in
Note 6, the Company was not in compliance with certain covenants of its note
payable to a bank. The note was refinanced subsequent to August 31, 1996, with
a new lender on a long-term basis. The Company has also taken steps to improve
its 1997 fiscal year operating results, which include anticipated improvements
relating to the Company's 1996 acquisitions described in Note 16. The Company's
management believes that it is likely the Company's operating results for
fiscal 1997 will significantly improve over fiscal 1996 and will generate
sufficient working capital to sustain its operations throughout the year.
However, there are no assurances that the Company can achieve such operating
improvements. If the Company is unable to significantly improve operations, the
Company will require additional capital infusions to maintain continuing
operations. There are no assurances that any additional capital infusions would
be available.
Also, the Company's products and services are marketed under highly competitive
conditions. Products and services similar to those provided by the Company are
available from competitors in the U.S. and foreign markets, many with greater
financial resources than those of the Company. Approximately 9 percent of the
Company's net sales for the year ended August 31, 1996, and 23 percent of its
identifiable assets at August 31, 1996, are attributable to foreign operations
as described in Note 17.
Approximately 5 percent of the Company's total assets and 20 percent of its
total stockholders' equity at August 31, 1996, relate to the Company's
investment in and other receivable related to Titan Resources, Inc. (Titan), as
described in Note 3. While management of the Company believes such amounts are
recorded at their fair market values at August 31, 1996, there can be no
assurance that the Company will realize the book value of its Titan related
investments. The inability of the Company to realize its Titan related
investments could have a material adverse effect on the Company's future
results of operations and its financial position. At December 2, 1996, the last
quoted sales price for Titan was $.50 per share.
F-10
<PAGE> 26
3. DISCONTINUED - AZERBAIJAN OPERATIONS:
The Company commenced the establishment of operations in Azerbaijan and other
former republics of the Soviet Union in April of 1992. Such operations were
started based on a purported agreement between MegaOil USA/Vista Joint Venture
(Mega) and Azerbaijan Oil Company, an arm of the Government of Azerbaijan. It
was subsequently determined that such agreement was not valid and management
actions were taken to protect the Company's assets and costs incurred in this
area by forming a new joint venture "Baku-Ponder Services JV." This entity was
registered to do business in Azerbaijan. Also, Ponder International Services,
Inc. (PISI), a wholly owned subsidiary, was formed. PISI contracted with the
State Oil Company of Azerbaijan (SOCAR) to perform services and rent and sell
equipment for the workover of onshore and offshore oil and gas wells. PISI
performed jobs for SOCAR during fiscal 1995 but was unsuccessful in obtaining
full payment for services. Consequently, the service work was terminated and
future work was questionable under the contract. Work for other entities in the
region was not sufficient to result in profitable operations for this segment
of the Company for the year ended August 31, 1995.
A provision in the Company's loan agreement required management to determine if
its Azerbaijan operation would achieve financial stability by December 31,
1995. Management's evaluation of the operation was that it was in the Company's
best interest to discontinue operations in this region. Attempts were made to
dispose of or enter into joint arrangements with third parties with greater
financial resources to obtain value for these operations. By November 1995,
none of these attempts resulted in any reasonable expectation of being able to
complete a disposition or arrangement with a third party. Accordingly,
management concluded to write off all cost of assets in Azerbaijan as of August
31, 1995 ($3,002,248), and to provide an additional $510,390 to cover
operations through August 31, 1995, and during the estimated period to complete
their discontinuance.
In February of 1996, the Company sold its operations in Azerbaijan to Titan for
2,000,000 shares of Titan stock. The Company then sold 500,000 shares of Titan
stock to an investment company for $500,000. This amount is shown as an other
receivable on the consolidated balance sheet at August 31, 1996. The remaining
1,500,000 shares of Titan stock were valued at an estimated fair market value
of $900,000 (60 cents per share). This investment is a component of other
assets on the consolidated balance sheet at August 31, 1996. This resulted in a
gain of $1.4 million on the discontinued operations that were previously
written off. The Titan stock was valued at a discount to its trading price when
acquired in recognition of its restricted status, the thinly traded nature of
this security and related price volatility. The Titan stock is classified as an
available-for-sale security in accordance with the guidelines of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." At August 31, 1996, the estimated fair market
value of Titan was $.60 per share and, thus, no unrealized holding gain or loss
is reported as a separate component of stockholders' equity.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
August 31
--------------------------
1996 1995 Asset Life
----------- ------------ --------------
<S> <C> <C> <C>
Land $ 205,495 $ 180,495
Buildings and improvements 1,847,789 1,621,749 20 years
Rental tools and equipment 21,732,740 9,956,706 5 - 10 years
Shop equipment and tools 1,893,937 1,785,579 5 years
Transportation equipment 1,693,586 349,159 3 - 5 years
Furniture and fixtures 533,755 417,057 5 years
Capital leases 263,267 -- 3 - 5 years
----------- ------------
$28,170,569 $ 14,310,745
=========== ============
</TABLE>
F-11
<PAGE> 27
During May of 1995, the Company conducted an auction of its excess rental tools
and certain equipment. Such sale resulted in $2,657,656 proceeds and $1,357,887
gain from disposal of assets.
5. NOTES PAYABLE, ACCOUNTS PAYABLE
AND ACCRUED LIABILITIES:
On July 27, 1995, the Company signed a revolving loan agreement with a bank.
The revolving line of credit bears interest at 2.5 percent above a defined
reference lending rate. At August 31, 1996 and 1995, the Company had $0 and
$200,000, respectively, borrowed against this line of credit that provides a
maximum borrowing limit of $500,000. Borrowings are further limited to 80
percent of certain defined accounts receivable, up to the maximum limit. The
note is secured under the same agreement as a long-term note payable to the
same lender as described in Note 6. Also, as discussed in Note 6, the Company
was not in compliance with certain of the lender's required covenants at August
31, 1996. The weighted average interest rates on short-term borrowings were 9.3
percent and 11.5 percent for the respective years ended August 31, 1996 and
1995.
Included in accounts and notes payable-trade on the accompanying balance sheets
as of August 31, 1996 and 1995, are $501,599 and $229,367 notes payable,
respectively. These notes are for insurance and are due in equal monthly
installments during the succeeding fiscal year.
Included in other accrued liabilities at August 31, 1996, are $350,000 of
accrued bonuses, $850,000 of accrued legal and professional fees, $27,000 of
accrued interest expense, $190,000 of accrued taxes and $150,000 of accrued
insurance expenses. Included in other long-term liabilities at August 31, 1996
is $254,000 of accrued interest expense related to the convertible debentures
described in Note 7.
6. LONG-TERM DEBT, INCLUDING CAPITAL
LEASE OBLIGATIONS:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
August 31
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Notes payable-
Bank term note $ 2,174,254 $ 2,500,000
Bank note to fund Apex Tool acquisition 176,362 --
Real estate 71,485 74,317
Bank note assumed in Bosco acquisition 650,000 --
Bosco 550,000 --
Capital lease obligations 540,370 125,217
Apex Tool 200,000 --
Vehicles 851,866 --
Related-party promissory note 326,871 --
----------- -----------
5,541,208 2,699,534
Less- Current maturities (1,393,001) (356,522)
----------- -----------
Long-term debt, excluding current maturities $ 4,148,207 $ 2,343,012
=========== ===========
</TABLE>
F-12
<PAGE> 28
Maturities of long-term debt as of August 31, 1996, were as follows:
<TABLE>
<S> <C> <C>
1997 $ 1,393,001
1998 1,026,628
1999 952,342
2000 734,589
2001 847,832
Thereafter 586,816
------------
$ 5,541,208
============
</TABLE>
On July 27, 1995, the Company entered into a loan agreement with a bank that
provides both a revolving line of credit and a term facility. See Note 5 for a
description of the revolving credit line. The term note bears interest at 2.5
percent above a reference rate (8.25 percent at August 31, 1996) and is payable
in monthly installments of $54,668 commencing December of 1995. The agreement
was to remain in force for a three-year period. Both the revolving and term
notes are secured by the Company's assets, not otherwise pledged as collateral
under other debt agreements and are guaranteed by the Company's former chairman
of the board and chief executive officer, the Company's current president and
one of the Company's subsidiaries. Under the terms of this loan agreement, the
Company was required to establish a collateral reserve account of $300,000 by
December 31, 1995. Such funds are restricted and are to be used for payment of
any current obligation under this bank loan agreement. As of August 31, 1996
and 1995, $0 and approximately $170,000, respectively, of funds were deposited
in said account and included in restricted assets on the accompanying
consolidated balance sheets. Additionally, the agreement contains covenants for
compliance with reporting and prompt payment of certain items and obtaining
prior approval from the lender before entering into certain transactions. At
August 31, 1996, and subsequent thereto, the Company was not in compliance with
certain of the agreement's covenants and, thus, was in technical default on the
term note. In November 1996, the Company obtained new financing from a lender
and paid off the term note. Accordingly, the term note described above has been
classified in accordance with the terms of the new financing on the
accompanying balance sheet at August 31, 1996. The new financing provides for a
$2.5 million inventory based line of credit (Inventory Revolver) and a $3.5
million term loan (Term Loan) (collectively "Notes"). The Inventory Revolver
allows for periodic borrowings, repayments and reborrowings up to the lesser of
$2.5 million or an inventory and rental tools supported Borrowing Base, as
defined, provides for monthly interest payments at a variable rate (15.25
percent at November 30, 1996) and matures in full in November 2001. The Term
Loan allows for borrowings up to the lesser of $3.5 million or the Borrowing
Base less the outstanding principal balance of the Inventory Revolver. The Term
Loan bears interest at a variable rate (15.25 percent at November 30, 1996) and
requires monthly payments of interest only through May 1997. Beginning in June
1997, the Term Loan requires monthly principal and interest payments of $82,806
through May 2002 with a final payment of all unpaid principal and interest due
in June 2002. The Notes are secured by substantially all of the assets of the
Company and prohibit the payment of dividends on the Company's common stock.
The loan agreement under the Notes requires compliance with various covenants
including maintenance of a debt service coverage ratio, as defined, of 1.15:1
as of the fiscal quarter ending August 31, 1997, and increasing to 1.25:1 for
each quarter ending November 30, 1997, through May 31, 1998, and 1.5:1 for the
quarters ending August 31, 1998, and thereafter. Additionally, the Company must
maintain a tangible net worth, as defined, of not less than $13.5 million at
all times. The tangible net worth requirement allows subordinated indebtedness,
as defined, to be treated as a component of net worth. For purposes of this
requirement, the convertible debentures as described in Note 7 are treated as
tangible net worth.
The bank note to fund the Apex Tool acquisition (see Note 16) bears interest at
2.5 percent above a reference rate (8.25 percent at August 31, 1996), is
secured by certain real estate in Oklahoma and is payable monthly through
August 1998.
F-13
<PAGE> 29
The real estate note is to an individual, bears interest at 8.5 percent and is
payable in monthly installments of $753, including interest, through October of
2009. The note is secured by land and a building.
The bank note assumed in the Bosco acquisition (see Note 16) bears interest at
8.25 percent and matures in December 1996. The Bosco note represents amounts
due certain creditors of Bosco. The Company intends to pay both of these
amounts with borrowings under the new financing obtained in November 1996 as
described above and, accordingly, both of the Bosco notes have been classified
in accordance with the terms of the new financing on the accompanying balance
sheet at August 31, 1996.
The Company leases vehicles and equipment under capital lease obligations that
have varying terms from 24 to 47 months. Minimum lease payments were
capitalized at the Company's estimated weighted average incremental borrowing
rate of approximately 11 percent.
The Apex Tool note was assumed in an acquisition (see Note 16).
The vehicle notes payable have varying terms from 12 to 48 months and bear
interest at rates ranging from 4.8 percent to 11.75 percent.
The related-party promissory note was issued by the Company in the Armstrong
acquisition (see Note 16), is noninterest bearing and has no stated maturity
date.
7. CONVERTIBLE DEBENTURES:
Effective April 26, 1996, the Company completed a $10,950,000 placement of
eight percent convertible debentures. The debenture issue resulted in proceeds
of $9,855,000, net of issuance costs. Issuance costs are a component of
deferred assets on the consolidated balance sheet at August 31, 1996, and are
being amortized over a three-year period. The debentures may be converted into
common stock of the Company as of specified dates. The debentures generally
convert at a defined conversion price formula, based on the lesser of $5.0625
per share or at a variable conversion rate relative to the market price at date
of conversion. If the conversion price is less than $5.0625 per share, the
Company shall have the right, in its sole discretion, to redeem any debentures
in lieu of conversion based upon the principal and interest due multiplied by
the market price, as defined, and divided by 85 percent of the market price.
The Company may also, at its election, redeem the debentures prior to April 26,
1999, at the following call prices:
<TABLE>
<CAPTION>
Date of Redemption Call Price
------------------ ----------
<C> <C>
12 months - 18 months following placement 130 percent of principal and unpaid interest
18 months - 24 months following placement 125 percent of principal and unpaid interest
24 months - 30 months following placement 120 percent of principal and unpaid interest
30 months - 36 months following placement 115 percent of principal and unpaid interest
April 26, 1999 (maturity date) 100 percent of principal and unpaid interest
</TABLE>
At April 26, 1999, the Company may satisfy amounts due the convertible
debenture holders by converting the debentures into shares of the Company's
common stock. The new financing obtained in November 1996, as described in Note
6, effectively precludes the Company from redeeming the convertible debentures
without the lender's consent. As of August 31, 1996, debentures in the
aggregate principal amount of $1,800,000 had been converted into 828,289 shares
of common stock. As discussed in Note 13, claims and counterclaims have been
filed between certain of the convertible debenture holders and the Company. The
Company has ceased conversion of the debentures pending resolution of these
matters.
F-14
<PAGE> 30
8. EMPLOYEE STOCK PLANS:
In June 1992, the Company filed Form S-8 registering 859,740 shares of common
stock for various stock option plans. The shares have been registered as
follows: 200,000 shares to Incentive Stock Option Plan; 200,000 shares to
Non-Qualified Stock Option Plan; 200,000 shares to Stock Bonus Plan; and
259,740 shares to the 1989 Keyman Stock Option Plan.
On March 1, 1994, shareholders approved the 1994 Incentive Stock Option Plan
and 1994 Directors' Stock Option Plan. In August 1995, the Company filed Form
S-8 registering 500,000 shares of common stock as follows: 250,000 shares to
Incentive Stock Option Plan and 250,000 shares to Directors' Stock Option Plan.
The Incentive Plan provides that options may be granted to employees for up to
250,000 shares. Any one employee is limited to $100,000 of fair market value of
stock at the time the option is granted. The purchase price of each option
shall not be less than 100 percent of the fair value of the stock at the time
the option is granted. The Directors' Plan provides that an option to acquire
5,500 shares be granted to each director serving on the board as of the annual
stockholders' meeting date in the years 1994 through 1998. The option price is
the fair value of the stock at the time of the grant. The aggregate number of
shares that may be granted under this plan is limited to 250,000 shares.
A summary of activity in the 1994 Directors' Stock Option Plan is set forth
below:
<TABLE>
<CAPTION>
Total
Shares Exercise
Reserved Activity Price
-------- -------- -----
<S> <C> <C> <C>
Balances, August 31, 1993 250,000 --
Granted (38,500) 38,500 $ 2.1875
Canceled 5,500 (5,500) $ 2.1875
-------- --------
Balances, August 31, 1994 217,000 33,000
Granted (44,000) 44,000 $ 1.0156
-------- --------
Balances, August 31, 1995 173,000 77,000
Granted (49,500) 49,500 $ 3.6875
Exercised -- (5,500) $ 2.1875
Exercised -- (5,500) $ 1.0156
Exercised -- (5,500) $ 3.6875
-------- --------
Balances, August 31, 1996 123,500 110,000
======== ========
Issued and exercisable, August 31, 1996-
1994 grants 27,500 $ 2.1875
1995 grants 38,500 $ 1.0156
1996 grants 44,000 $ 3.6875
--------
110,000
========
</TABLE>
There has been no activity with respect to the other option plans.
During the year ended August 31, 1995, the board of directors rescinded
warrants issued to the Company's former chairman of the board and chief
executive officer to purchase 2,000,000 shares at $5.25 per share. During the
year ended August 31, 1996, 500,000 shares of the Company's restricted common
stock was granted to the former chairman and officer in consideration of his
years of service to the Company, continued personal guarantees of Company
indebtedness and his return to the Company of the warrants referred to above as
well as his return of options to purchase up to 2,000,000 shares of the
Company's common stock at an exercise price of $5.25 per share. These options
were granted in December 1995. As discussed in Note 19, the 500,000 shares of
restricted stock were issued in September of 1996.
F-15
<PAGE> 31
9. INCOME TAXES:
Effective September 1, 1993, the Company changed its method of accounting for
income taxes to conform to the requirements of FAS 109. Under the provision of
FAS 109, an entity recognizes deferred tax assets and liabilities for future
tax consequences of events that have already been recognized in the Company's
financial statements or tax returns. The measurement of deferred tax assets and
liabilities is based on provisions of the enacted tax law; the effect of future
changes in the tax laws or rates are not anticipated.
The net deferred tax assets (liabilities) include the following components:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets-
Net operating loss carryforwards $ 4,315,000 $ 3,700,000
Tax credit carryforwards 624,000 624,000
Property and equipment 145,000 174,000
Allowance for receivables 75,000 28,000
Liabilities 464,000 --
----------- -----------
Gross deferred tax assets 5,623,000 4,526,000
Deferred tax liabilities-
Property and equipment (foreign) (233,081) --
----------- -----------
5,389,919 4,526,000
Total valuation allowance (5,623,000) (4,526,000)
----------- -----------
Net deferred tax liabilities $ (233,081) $ --
=========== ===========
</TABLE>
Income tax expense (all foreign) for the fiscal year ended August 31, 1996, was
$67,764 and relates to taxes on the Company's UK operations related to 1996
acquisitions as discussed in Note 16. The remaining increase in deferred taxes
payable is the result of book and tax basis differentials existing at the date
of the UK acquisitions. Income tax expense (all foreign) for the fiscal year
ended August 31, 1994, was $14,800. The foreign taxes relate to taxes assessed
on approximately $72,000 in the year ended August 31, 1994, of domestic exports
to Petroleos Mexicanos of Mexico. The Company did not have any operations in
Mexico during the 1996 and 1995 fiscal years.
At August 31, 1996, the Company had net operating loss (NOL) carryforwards of
approximately $12,689,000 for income tax purposes. Such losses will expire in
the years ending August 31, 2007 ($2,404,000), 2008 ($1,796,000), 2009
($3,668,000), 2010 ($2,704,000) and 2011 ($2,117,000). The Company has
approximately $347,000 of unused foreign income tax credits for federal income
tax which expire in 1997 ($38,000), 1998 ($72,000), 1999 ($141,000) and 2000
($96,000). Also, the Company has unused investment tax credit carryforwards of
approximately $277,000 to reduce future income taxes payable which expire in
1997 ($150,000), 1998 ($30,000), 1999 ($52,000), 2000 ($41,000) and 2001
($4,000). The Company must first use its available NOL carryforwards to offset
future taxable income before utilizing its available tax credits.
The Company's ability to use its NOL and tax credit carryforwards to offset
future taxable income is subject to the restrictions of Section 382 of the
Internal Revenue Code (Code). Section 382 restricts the utilization of the NOL
and tax credit carryforwards when the beneficial stock ownership of a
corporation changes by more than 50 percentage points within a three-year
period (an Ownership Change). As of August 31, 1996, the Company had incurred
at least a 45 percent Ownership Change during the applicable three-year period.
If an Ownership Change had occurred as of August 31, 1996, the Section 382
annual limitation would have been approximately $1,550,000.
F-16
<PAGE> 32
10. RELATED-PARTY TRANSACTIONS:
Certain stockholders of the Company are also independent fishing tool operators
who provide services to the Company on a commission basis. The Company incurred
$1,175,609, $1,482,545 and $1,867,420 of commission expense in 1996, 1995 and
1994, respectively, of which $38,437, $593,855 and $723,439, respectively, were
related to these individuals. Management of the Company believes these services
were performed on an arm's-length basis. Included in this amount are accrued
commissions of $4,272, $28,019 and $67,478 at August 31, 1996, 1995 and 1994,
respectively. In fiscal 1997, management of the Company intends to conduct
substantially all of its fishing tool operations with salaried operators.
The Company has a note receivable from an employee totaling $63,540 and $60,466
at August 31, 1996 and 1995, respectively. The note relates to the purchase of
shares of the Company's stock, earns interest at a rate of 6 percent annually
and matures August 31, 1997. Interest earned on the note has been added to the
principal balance on an annual basis.
11. OPERATING LEASES:
The Company leases certain property and equipment under operating leases.
Minimum payments for operating leases having initial or remaining noncancelable
terms in excess of one year are as follows:
<TABLE>
<C> <C>
1997 $ 187,208
1998 173,458
1999 149,622
2000 25,462
2001 1,190
----------
Total minimum lease payments $ 536,940
==========
</TABLE>
Total rent expense for all operating leases amounted to $81,033, $61,950 and
$86,200 for the years ended August 31, 1996, 1995 and 1994, respectively.
12. 401(k) EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) Employee Benefit Plan for employees that meet certain
criteria. Company contributions to the plan are at the discretion of the board
of directors. Employees may make voluntary contributions to the plan on their
own behalf and direct how their accounts are invested. While the Company had
accrued discretionary contributions in prior fiscal years, management of the
Company determined during fiscal 1996 that such amounts would not be
contributed to the 401(k) plan. Accordingly, approximately $105,000 relating to
prior years' accruals was reversed into income during 1996. No amounts have
been accrued as of August 31, 1996.
13. CONTINGENCIES:
In October 1995, the Securities and Exchange Commission (the Commission)
notified the Company that the staff of the Commission intended to recommend
that the Commission institute a cease and desist proceeding against the Company
and various former officers and directors of the Company on the basis of
alleged violations of the Securities Act of 1934 (the Exchange Act), primarily
related to the Company's accounting treatment with respect to revenue
recognition for the Company's former operations in Azerbaijan in the Company's
periodic reports filed with the Commission in late fiscal 1992 and fiscal 1993
and the Company's press release in August 1992 concerning the results of the
Azerbaijan operations. The Company has requested that the Commission not follow
the recommendations of the staff on the grounds that its
F-17
<PAGE> 33
accounting treatment with respect to the Azerbaijan operations was appropriate
under the then existing circumstances and that the revenue was recognized in
good faith. Recently, the staff indicated it would not recommend action
concerning the Exchange Act filings but did intend to recommend that the
Commission take action with respect to the press release. That recommendation
is currently pending and at this time there has been no indication as to what
action the Commission will take.
The Company is a defendant in a lawsuit by a former employee seeking damages
for a wrongful termination. The suit was filed in December 1993. The suit seeks
approximately $317,000 in unpaid wages and value of $142,695 for 38,052 shares
of stock he would have earned during the remainder of his contract term. In May
of 1995, the former employee sought to enjoin the Company from conducting an
auction sale of certain assets; as a result of those injunctive proceedings,
the Court ordered that $200,000 of the proceeds from the auction be tendered
into the registry of the Court to satisfy any possible adverse judgment against
the Company. The Company asserts that the former employee was properly
terminated under the terms of his contract and is vigorously contesting the
claim and believes that it has meritorious defenses regarding this matter.
In August 1996, a case was filed in the United States District Court for the
Western District of New York alleging that the Company breached an obligation
to convert certain debentures held by the plaintiff into the Company's common
stock. The plaintiff asserts damages in an amount in excess of $50,000,
attorney's fees and costs and seeks an order compelling the Company to convert
the plaintiff's debentures into common stock. The Company is contesting the
plaintiff's claims and has responded to the plaintiff's complaint by filing
counterclaims and third-party claims against the plaintiff, the Company's other
convertible debenture holders and the placement agent on the convertible
debenture offering alleging various violations of the Securities Exchange Act,
common law fraud, civil conspiracy, negligent misrepresentation, breach of
contract, breach of fiduciary duty, negligence, indemnification and seeking a
declaration that the Company has no obligation to convert the debentures and no
liability for failure to so convert. Also, in August 1996, an action was filed
in the United States District Court for the Northern District of Illinois,
Eastern Division, by two other convertible debenture holders of the Company who
allege that the Company breached an obligation to convert certain debentures
held by the plaintiffs into the Company's common stock. The plaintiffs seek a
declaratory judgment setting forth the rights and liabilities of the parties
and an award of shares of common stock or an undisclosed amount of money
allegedly due them. The Company is contesting plaintiffs' claims and has
removed the action to federal court and has moved to transfer it to the Western
District of New York pursuant to a forum selection clause in the agreements
between the parties. The plaintiffs have recently agreed to the transfer of the
action to the Western District of New York.
The Company is also a party to additional claims and legal proceedings arising
in the ordinary course of business. Although no assurances can be given, the
Company believes it has meritorious defenses to all of the above actions and
intends to defend itself vigorously. 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. The Company has accrued $500,000 at August 31, 1996,
as its estimate of costs it expects to incur in defense of the above actions.
14. CHANGE IN ACCOUNTING PRINCIPLE -
PARTS AND SUPPLIES INVENTORY:
During fiscal 1995, the Company's management concluded that a more appropriate
accounting principle for parts and supplies is to recognize the cost of such
items as an asset. The usage of these items are such that they are normally
consumed in the performance of services on a one-time basis and are charged to
the
F-18
<PAGE> 34
customer. As of August 31, 1995, the physical quantity of these items were
valued at cost, determined by a method approximating average cost with
appropriate allowance for excess, obsolescence and market value declines.
Previously, these items were accounted for as equipment and amortized to
operations over a 24-month period. The difference between parts and supplies
determined as previously described and the unamortized cost as of August 31,
1995, was $1,139,780. This amount is shown in the accompanying statement of
operations as the cumulative effect of a change in accounting principle. The
effect on retained earnings (deficit) at the beginning of the 1995 fiscal year
and pro forma amounts on operating results of the prior years presented was not
determinable. Management does not believe that the change had a significant
effect on the operations for the year ended August 31, 1995. Management
believes the new accounting principle provides a better matching of cost
against revenue in future years and better reflects the assets of the Company.
15. EMPLOYMENT AGREEMENTS:
Effective September 1, 1995, the Company entered into an employment agreement
with the Company's new president and chief operating officer. Since July 1995,
he had served the Company in such capacity without a contractual agreement. The
agreement provides for an annual salary of $100,000 payable in monthly
increments for four years. In addition, he received 459,333 shares of Rule 144
stock of Ponder for services to be provided to the Company. This was recorded
as deferred compensation and is shown as a separate component of stockholders'
equity. Unearned compensation is being amortized to expense over a four-year
period. He is to also receive stock options based on the Company's meeting
defined cash flow and stock price performance levels in each of the years. The
Company's attainment of these performance levels will result in the options
being granted to him to purchase $100,000 of stock at the listed price at the
beginning of each fiscal year. The options are to remain in effect for a period
of three years subsequent to award date.
In connection with certain of the acquisitions described in Note 16, the
Company entered into various employment agreements which provide for combined
future compensation of approximately $228,000, $164,000 and $54,000 in fiscal
years 1997, 1998 and 1999, respectively.
16. ACQUISITIONS:
The following describes acquisitions by the Company during the year ended
August 31, 1996.
Effective September 1995, the Company acquired certain assets and assumed
certain liabilities of Armstrong Tool, Inc. (Armstrong). Armstrong was wholly
owned by the Company's president and his wife. Consideration given for
Armstrong was the issuance of a $400,000 promissory note to the Company's
president plus assumption of various notes payable of approximately $450,000.
The $450,000 in notes payable were paid during the year ended August 31, 1996.
Armstrong is located in Fort Smith, Arkansas, and is in the business of buying
and reselling oilfield rental tools and equipment.
Effective October 1995, the Company acquired certain real property, vehicles
and rental tools and equipment from Apex Tool (Apex), a proprietorship. Apex is
located in Healdton, Oklahoma, and provides fishing and rental tool services in
the South Central Oklahoma and North Texas areas. The assets were acquired for
$600,000, of which $200,000 was paid at closing. The amount paid at closing was
funded through borrowings from a commercial bank as described in Note 6. A
$400,000 note payable, bearing interest at 9 percent per annum and payable in
two installments of $200,000, due March 15, 1996 and 1997, was issued to the
owner of Apex.
Effective April 1996, the Company completed the acquisition of Panther Oil
Tools, (UK) Ltd. (Panther) (an England company), and the assets of Villain Ltd.
(Villain) (a Guernsey, UK company) for $1,250,000 and 1,200,000 shares of the
Company's restricted common stock which were valued at $3,060,000.
F-19
<PAGE> 35
Effective May 1996, the Company acquired Runyon Oil Tools, Inc. (Olney,
Illinois), and DiKor, Inc. (Carmi, Illinois), and effective March 1996, the
Company acquired C&F Fishing Tools, Inc. (Maysville, Oklahoma), in separate
transactions in consideration for an aggregate of $283,425 and 331,455 shares
of the Company's restricted common stock which were valued at approximately
$640,000.
Effective June 1996, the Company acquired substantially all of the assets of
Reeled Tubular Components, Inc. (RTC) (Houston, Texas), including the
intellectual property rights to an obstruction removing device, for a cash
payment of $50,000 and 20,000 shares of the Company's restricted common stock
which were valued at $60,000.
Effective July 1996, the Company acquired all of the fixed assets of Brooks Oil
Service Co., L.P., and Bosco Fishing and Rental Tools (Bosco) (Laurel,
Mississippi) for an initial cash payment of $200,000, an additional $550,000 to
be paid to certain creditors of Bosco and assumption of a $650,000 note payable
bearing interest at 8.25 percent and maturing December 1996.
In August 1996, the Company acquired all of the issued ordinary shares of Prime
Pipe Limited (a UK company) for approximately $105,000 and an obligation to
issue 4,650 shares of Ponder Industries, Inc., common stock.
The results of operations of all acquisitions after the respective acquisition
dates are included in the 1996 consolidated statement of operations. All
acquisitions were recorded using the purchase method of accounting. The
following unaudited pro forma information has been prepared assuming that the
Panther, Villain, Bosco and Armstrong acquisitions had taken place at the
beginning of the periods presented. The remaining acquisitions were not
considered to have a significant effect on the unaudited pro forma information.
The cash portion of the Panther and Villain purchase price and acquisition
related costs were funded by a portion of the net proceeds from the placement
of convertible debentures as discussed in Note 7. The unaudited pro forma
information includes adjustments to reflect the effect on depreciation expense
of recording the fair value of property and equipment acquired and the pro rata
portion of interest expense on the convertible debentures and debt assumed
related to the acquisitions:
<TABLE>
<CAPTION>
Years Ended August 31
-----------------------------
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Sales $ 14,709,747 $ 10,646,778
Cost of sales (6,344,132) (4,927,620)
------------ ------------
Gross profit $ 8,365,615 $ 5,719,158
============ ============
Loss from continuing operations $ (5,017,786) $ (692,164)
============ ============
Loss per share from continuing operations $ (.52) $ (.09)
============ ============
</TABLE>
The unaudited pro forma information is based upon available information and
certain estimates and assumptions related to the accounting for the Panther,
Villain, Bosco and Armstrong acquisitions that is subject to final
determination. The unaudited pro forma information is not necessarily
indicative of the results that would have occurred had such transactions
actually taken place at the beginning of the periods specified nor does such
information purport to project the results of operations for any future date or
period.
In May 1996, the Company signed a letter of intent to acquire Abilene, Texas
based G&L Fishing Tool Company (G&L) for consideration of $4,000,000 and
issuance of a $5,000,000 short-term note. In July 1996, the Company entered
into an agreement with G&L which gives the Company a one-year option to acquire
F-20
<PAGE> 36
G&L under the same terms as the letter of intent. In connection with this
agreement, the Company issued to G&L a $1 million forfeitable deposit. At
August 31, 1996, approximately $1,156,000 was in other assets on the
consolidated balance sheet related to this pending acquisition, including the
forfeitable deposit. Management of the Company anticipates that this
acquisition will be completed by June 1997.
17. GEOGRAPHIC INFORMATION:
Information by geographic location for 1996 is shown below. As discussed in
Note 3, the Company's former operations in Azerbaijan are shown as discontinued
operations in the consolidated financial statements:
<TABLE>
<CAPTION>
Year Ended
August 31,
1996
--------------
<S> <C>
Net sales-
Domestic $ 10,857,215
Foreign 1,103,538
--------------
Total $ 11,960,753
=============
Loss from continuing operations-
Domestic $ (5,122,718)
Foreign (147,773)
--------------
Total $ (5,270,491)
=============
Identifiable assets-
Domestic $ 21,552,446
Foreign 6,349,630
--------------
Total $27,902,076
=============
</TABLE>
The Company's foreign operations relate to Panther and Villain as discussed in
Note 16.
18. QUARTERLY RESULTS OF
OPERATIONS (UNAUDITED):
The results of operations by quarter for the fiscal years ended August 31, 1996
and 1995, were as follows:
<TABLE>
<CAPTION>
Income (Loss)
Income (Loss) Per Share
From From
Net Gross Continuing Continuing
Sales Profit Operations Operations
----- ------ ---------- ----------
<S> <C> <C> <C> <C>
1996 - quarter ended-
November 30 $ 2,145,851 $ 1,298,886 $ 12,315 $ -
February 29 2,036,006 950,054 (723,032) (.08)
May 31 3,002,564 1,815,355 (634,565) (.07)
August 31 4,776,332 2,576,798 (3,925,209) (.34)
------------ ------------ ------------
Total $ 11,960,753 $ 6,641,093 $ (5,270,491)
============ ============ ============
1995 - quarter ended-
November 30 $ 2,027,198 $ 1,045,150 $ (15,751) $ -
February 28 1,817,811 911,561 (113,185) (.01)
May 31 1,331,963 616,945 904,899 .14
August 31 1,579,766 822,164 (1,216,495) (.19)
------------ ------------ ------------
Total $ 6,756,738 $ 3,395,820 $ (440,532)
============ ============ ============
</TABLE>
F-21
<PAGE> 37
During the fourth quarter of 1996, the Company accrued $500,000 as its estimate
of costs it expects to incur in defense of certain contingencies as discussed
in Note 13. Also, in the fourth quarter of 1996, the Company recognized
$400,000 in compensation expense related to a stock grant to a former officer
and director of the Company as discussed in Note 19. Additional compensation
expense of $350,000 related to employee bonuses and approximately $300,000
related to a consulting arrangement with the Company's former chairman of the
board and chief executive officer was recognized in the fourth quarter of 1996.
During the second quarter of 1996, the Company recognized a gain of $1.4
million on the sale of its former operations in Azerbaijan as discussed in Note
3. During the third quarter of 1995, the Company recognized a gain of
$1,357,887 from the disposal of assets as discussed in Note 4. As discussed in
Note 3, $3,512,638 was recognized in the fourth quarter of 1995 related to the
discontinuance of operations in Azerbaijan. Additionally, in the fourth quarter
of 1995, the Company recognized income of $1,139,780 related to the cumulative
effect of a change in accounting principle as discussed in Note 14.
19. SUBSEQUENT EVENTS:
In September of 1996, the Company's former chairman of the board and chief
executive officer received 500,000 shares of the Company's restricted common
stock. At August 31, 1996, the Company had recognized $400,000 in compensation
expense and additional paid-in capital associated with this stock grant.
In November 1996, the Company entered into a joint venture formation agreement
with Drilling Tools International, Ltd., a Gibraltar corporation (DTI),
pursuant to which DTI will contribute all of its assets and liabilities and the
Company will make an equivalent contribution of assets. The joint venture is to
be based in Dubai, United Arab Emirates, and be formed under the laws and
regulations of the Jebel Ali Free Zone Authority. Until such time as the joint
venture is formed, the Company intends to lease its assets to DTI.
In November 1996, the Company obtained new financing from a lender as described
in Note 6.
F-22
<PAGE> 38
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 Houston, Texas,
on December 11, 1996.
PONDER INDUSTRIES, INC.
By /s/ LARRY D. ARMSTRONG
-------------------------------------
Larry D. Armstrong, President, Chief
Executive Officer And Chairman of the
Board of Directors
By /s/ EUGENE L. BUTLER
-------------------------------------
Eugene L. Butler, Executive Vice
President, Chief Financial Officer and
Director
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, this report has been signed below by the following persons in the
capacities indicated on December 11, 1996.
Signature Title
--------- -----
President, Chief Executive Officer and
/s/ LARRY D. ARMSTRONG Chairman of the Board of Directors
- ------------------------------------
LARRY D. ARMSTRONG
Executive Vice President, Chief
/s/ EUGENE L. BUTLER Financial Officer and Director
- ------------------------------------
EUGENE L. BUTLER
Executive Vice President of Operations
/s/ FRANK J. WALL and Director
- ------------------------------------
FRANK J. WALL
/s/ JOE R. NEMEC Director
- ------------------------------------
JOE R. NEMEC
/s/ JOHN ROANE Director
- ------------------------------------
JOHN ROANE
-15-
<PAGE> 39
/s/ RITTIE W. MILLIMAN, SR. Director
- ------------------------------------
RITTIE W. MILLIMAN, SR.
/s/ JOHN LE SEELLEUR Director
- ------------------------------------
JOHN LE SEELLEUR
/s/ BILL M. VAN METER Director
- ------------------------------------
BILL M. VAN METER
-16-
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Identification of Exhibit Page Number
- ------- ------------------------- -----------
<S> <C>
2.1 Agreement for Sale and Purchase of Stock of Runyon Oil Tools, Inc.
dated April 26, 1996, among Ponder Industries, Inc., Runyon Oil
Tools, Inc., Steven E. Runyon, Freda M. Runyon, as Custodian for
Stephanie Runyon under the Illinois Uniform Transfers to Minors
Act, Freda M. Runyon, as Custodian for Amanda Runyon under the
Illinois Uniform Transfers to Minors Act, Freda M. Runyon, as
Custodian for Lucas Runyon under the Illinois Uniform Transfers to
Minors Act, and Freda M. Runyon, as Custodian for Blake Runyon under
the Illinois Uniform Transfer to Minors Act. Incorporated herein by
reference to Exhibit 2.1 of the Company's Quarterly Report on
Form 10-Q filed July 15, 1996.
2.2 Stock Purchase Agreement dated May 17, 1996, between Ponder
Industries, Inc. and LJH Corporation. Incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q filed
July 15, 1996.
*2.3 Letter Agreement dated July 23, 1996 between Ponder Industries, Inc.
and LJH Corporation.
2.4 Stock Purchase Agreement dated May 23, 1996, among Ponder Energy
Services, Inc., Panther Oil Tools (UK) Ltd. and Panther Oil Tools Ltd.
Incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K filed June 7, 1996.
2.5 Asset Purchase Agreement dated May 23, 1996, among Ponder Energy
Services, Inc., Villain Ltd., John Le Seeleur, Mel Maitland and
Wayne Tynon, Incorporated by reference to Exhibit 2.2 of the Company's
Current Report on Form 8-K filed June 7, 1996.
*2.6 Asset Purchase Agreement dated December 6, 1996 to be effective as
of July 1, 1996 among Ponder Industries, Inc., Bosco Fishing and
Rental Tools, Inc. and Brooks Owens.
3 Articles of Incorporation and Bylaws of Ponder Industries, Inc.
Incorporated herein by reference to Exhibit 3 filed with Registration
Statement on Form S-1 (Commission File No. 33-33190).
4 Instruments Defining the Rights of Security Holders. Incorporated herein
by reference to Exhibit 4 filed with Registration Statement on Form S-1
(Commission File No. 33-33190).
4.1 Form of 8% Convertible Debenture of Ponder Industries, Inc. dated April 26,
1996. Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q filed July 15, 1996.
10.1 1994 Incentive Stock Option Plan. Incorporated herein by reference to
Exhibits filed with Proxy Statement for the Company's annual meeting for
1993.
10.2 1994 Directors Stock Option Plan. Incorporated herein by reference to
Exhibits filed with Proxy Statement for the Company's annual meeting
for 1993.
10.3 Regulation S Securities Subscription Agreement dated April 26, 1996,
among each Subscriber for 8% Convertible Debentures of Ponder Industries,
Inc. and Ponder Industries, Inc. Incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q filed July 15, 1996.
10.4 Offshore Securities Subscription Agreement dated December 22, 1995,
between Eagle Management Services Limited and Ponder Industries, Inc.
Incorporated herein by reference to the Company's Quarterly Report
On Form 10-Q filed July 15, 1996.
10.5 Formation and Shareholders' Agreement of Ponder - DTI, Inc. dated
November 15, 1996 between Ponder Energy Services, Inc. and Drilling
Tools International, Ltd.
10.6 Lease Agreement dated December 1, 1996 between Ponder Energy Services,
Inc. and Drilling Tools International, Ltd.
10.7 Offshore Securities Subscription Agreement dated December 22, 1995,
between Atlantic Holdings Limited and Ponder Industries, Inc.
Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q filed July 15, 1996.
10.8 Warrant to Purchase Common Stock, $.01 par value, of Ponder Industries,
Inc. between Eagle Management Services Limited and Ponder Industries,
Inc. Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q filed July 15, 1996.
10.9 Warrant to Purchase Common Stock, $.01 par value, of Ponder Industries,
Inc. between Atlantic Holdings Limited and Ponder Industries, Inc.
Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q filed July 15, 1996.
11 Computation of Earnings (Loss) Per Share
*21 Subsidiaries
<CAPTION>
Name Under Which
Name State of Incorporation Doing Business
---- ---------------------- ----------------
<S> <C> <C> <C>
Ponder Energy Ponder Energy
Services, Inc. Delaware Services, Inc.
*23.1 Consent of Arthur Andersen LLP
*23.2 Consent of Hairston, Kemp, Sanders & Stich, P.C.
*27 Financial Data Schedule
- --------------------------------
* Filed herewith
</TABLE>
-17-
<PAGE> 1
EXHIBIT 2.3
July 23, 1996
Ponder Industries, Inc. has the right to purchase all the stock of G & L
Tool Company, per the agreement signed on May 17, 1996, less $1,000,000 which
has been paid for an option to purchase G & L Tool Company stock any time
during the next year commencing on this date (July 23, 1996).
Agreed:
- -------------------------- -----------------------------------
Larry Armstrong Lacy J. Harber
President & CEO President
Ponder Industries, Inc. LJH Corporation
Witness:
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Eugene L. Butler
<PAGE> 1
EXHIBIT 2.6
ASSET PURCHASE AGREEMENT
DATED DECEMBER 6, 1996
to be effective as of July 1, 1996
BY AND AMONG
PONDER INDUSTRIES, INC.,
BOSCO FISHING AND RENTAL TOOLS, INC.
AND
THE SOLE SHAREHOLDER OF
BOSCO FISHING AND RENTAL TOOLS, INC.
COVERING THE PURCHASE OF
ALL OF THE ASSETS OF
BOSCO FISHING AND RENTAL TOOLS, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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1. GENERAL DEFINITIONS
1.1 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . 1
---------
1.2 Best Knowledge . . . . . . . . . . . . . . . . . . . . . . . 1
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1.3 Governmental Authority . . . . . . . . . . . . . . . . . . . 1
----------------------
1.4 Governmental Requirement . . . . . . . . . . . . . . . . . . 1
------------------------
1.5 Material Adverse Effect . . . . . . . . . . . . . . . . . . 2
-----------------------
1.6 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
------
1.7 Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . 2
--------
1.8 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
-----
2. PURCHASE AND SALE OF THE ASSETS; CLOSING DATE
2.1 Purchase and Sale . . . . . . . . . . . . . . . . . . . . . 2
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2.2 Delivery and Endorsement of Certificates . . . . . . . . . . 2
----------------------------------------
2.3 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . 2
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3. PURCHASE PRICE
4. REPRESENTATIONS AND WARRANTIES BY SELLER
4.1 Incorporation . . . . . . . . . . . . . . . . . . . . . . . 3
-------------
4.2 Properties, Assets and Leasehold Estates . . . . . . . . . . 3
----------------------------------------
4.3 Financial Statements . . . . . . . . . . . . . . . . . . . . 4
--------------------
4.4 Events Since Balance Sheet Date . . . . . . . . . . . . . . 4
-------------------------------
4.5 Inventories . . . . . . . . . . . . . . . . . . . . . . . . 4
-----------
4.6 Accounts Receivable . . . . . . . . . . . . . . . . . . . . 4
-------------------
4.7 Taxes and Governmental Returns . . . . . . . . . . . . . . . 5
------------------------------
4.8 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . 5
----------------------
4.9 Contracts and Agreements . . . . . . . . . . . . . . . . . . 5
------------------------
4.10 Intangible Property . . . . . . . . . . . . . . . . . . . . 5
-------------------
4.11 Suits, Actions and Claims . . . . . . . . . . . . . . . . . 6
-------------------------
4.12 Insurance Policies . . . . . . . . . . . . . . . . . . . . . 6
------------------
4.13 Licenses and Permits; Compliance with Governmental
--------------------------------------------------
Requirements . . . . . . . . . . . . . . . . . . . . . . . . 6
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4.14 Authorization . . . . . . . . . . . . . . . . . . . . . . . 6
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4.15 Environmental Protection Laws . . . . . . . . . . . . . . . 6
-----------------------------
4.16 Brokers and Finders . . . . . . . . . . . . . . . . . . . . 6
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4.17 Customer List . . . . . . . . . . . . . . . . . . . . . . . 7
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4.18 Adverse Facts . . . . . . . . . . . . . . . . . . . . . . . 7
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4.19 Liabilities, Debts and Obligations . . . . . . . . . . . . . 7
----------------------------------
5. REPRESENTATIONS AND WARRANTIES OF PURCHASER
5.1 Incorporation . . . . . . . . . . . . . . . . . . . . . . . 7
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5.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . 7
-------------
5.3 Brokers and Finders . . . . . . . . . . . . . . . . . . . . 7
-------------------
6. NATURE OF STATEMENTS AND SURVIVAL OF INDEMNITIES, GUARANTEES,
REPRESENTATIONS AND WARRANTIES OF SELLER
7. COVENANTS OF SELLER PRIOR TO CLOSING DATE
7.1 Access to Information . . . . . . . . . . . . . . . . . . . 8
---------------------
7.2 General Affirmative Covenants . . . . . . . . . . . . . . . 8
-----------------------------
7.3 General Negative Covenants . . . . . . . . . . . . . . . . . 8
--------------------------
7.4 No Transfer of the Assets . . . . . . . . . . . . . . . . . 9
-------------------------
7.5 Approvals and Consents . . . . . . . . . . . . . . . . . . . 9
----------------------
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<TABLE>
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8. CONDITIONS TO OBLIGATIONS OF PURCHASER
8.1 Accuracy of Representations and Warranties and Fulfillment
----------------------------------------------------------
of Covenants . . . . . . . . . . . . . . . . . . . . . . . . 9
------------
8.2 No Governmental Actions . . . . . . . . . . . . . . . . . . 10
-----------------------
8.3 No Material Adverse Effect . . . . . . . . . . . . . . . . . 10
--------------------------
8.4 Board of Directors Approval . . . . . . . . . . . . . . . . 10
---------------------------
8.5 Corporate Approval . . . . . . . . . . . . . . . . . . . . . 10
------------------
8.6 Employment Agreement . . . . . . . . . . . . . . . . . . . . 10
--------------------
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
9.1 Accuracy of Representations and Warranties and Fulfillment
----------------------------------------------------------
of Covenants . . . . . . . . . . . . . . . . . . . . . . . . 10
------------
10. INDEMNITY BY SELLER
10.1 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . 10
---------
10.2 Notice of Claim . . . . . . . . . . . . . . . . . . . . . . 11
---------------
10.3 Right of Seller to Participate in Defense . . . . . . . . . 11
-----------------------------------------
10.4 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-------
11. NON-COMPETITION AGREEMENT
12. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
13. EXPENSES
14. NOTICES
15. REMEDIES FOR BREACH
15.1 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . 13
-----------
16. GENERAL PROVISIONS
16.1 Governing Law; Interpretation; Section Headings . . . . . . 13
-----------------------------------------------
16.2 Severability . . . . . . . . . . . . . . . . . . . . . . . . 13
------------
16.3 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . 14
----------------
16.4 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . 14
--------------
16.5 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . 14
----------
16.6 Amendment; Waiver . . . . . . . . . . . . . . . . . . . . . 14
-----------------
16.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . 14
------------
16.8 Telecopy Execution and Delivery . . . . . . . . . . . . . . 14
-------------------------------
17. TERMINATION
17.1 Mutual Consent . . . . . . . . . . . . . . . . . . . . . . . 14
--------------
17.2 Failure of Conditions . . . . . . . . . . . . . . . . . . . 15
---------------------
17.3 Failure to Close . . . . . . . . . . . . . . . . . . . . . . 15
----------------
</TABLE>
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LIST OF SCHEDULES
SCHEDULE 2.1 - Purchase and Sale being substantially all of the
assets of Target to be transferred
to the Purchaser at the Closing.
SCHEDULE 4.1 - Incorporation being copies of the Articles of
Incorporation and bylaws of Target.
SCHEDULE 4.3 - Financial Statements being copies of financial statements
for Target.
SCHEDULE 4.5 - Inventories being a true and complete list of
the current inventory of Target as
reflected on the Reference Balance
Sheet
SCHEDULE 4.6 - Accounts Receivable being a true and complete list of
the accounts receivable written off
in the past 2 years and an aging of
accounts receivable.
SCHEDULE 4.8 - Employee Benefit Plans employee benefit plans (including,
but not limited to, pension plans
and health or welfare plans).
SCHEDULE 4.9 - Contracts and Agreements being a true and complete list of
all of the material contracts,
agreements, leases, licenses, plans,
arrangements or commitments, written
or oral, to which Target is a party
SCHEDULE 4.10 - Intangible Property being a true and complete list of
all intangible assets being patents
now owned or to be acquired by
Target prior to the Closing Date and
to include inventions, trademarks,
trade names, brand names or
copyrights.
SCHEDULE 4.11 - Suits, Actions and Claims being a complete list of all suits,
actions, claims, inquiries or
investigations by any Person, or any
legal, administrative or arbitration
proceedings in which Target is
engaged or which are pending.
SCHEDULE 4.12 - Insurance Policies being a list of all insurance
policies (specifying the insurer,
the amount of coverage, the type of
insurance and the policy number)
maintained by Target on its
properties, assets, business and
personnel.
SCHEDULE 4.13 - Licenses and Permits;
Compliance with Governmental Requirements being a complete list of all
licenses and permits necessary for
the conduct of Target's business.
SCHEDULE 4.17 - Customer List being a complete list of all
customers of Target to which Target
has sold or provided products or
services during the past two years.
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered
into this 6th day of December, 1996, to be effective as of July 1, 1996 by and
among Bosco Fishing and Rental Tools, Inc., a Mississippi corporation
("Target"), Brooks Owens, being the sole shareholder of Target ("Seller"), and
Ponder Industries, Inc., a Delaware corporation ("Purchaser").
W I T N E S S E T H :
WHEREAS, Target desires to sell substantially all of its assets to
Purchaser pursuant to this Agreement as hereinafter provided; and
WHEREAS, Purchaser desires to acquire substantially all of the assets of
Target pursuant to this Agreement as hereinafter provided;
NOW, THEREFORE, for and in consideration of the premises, the mutual
representations, warranties and covenants herein contained and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. GENERAL DEFINITIONS. For purposes of this Agreement, the
following terms shall have the respective meanings set forth below:
1.1 Affiliate. "Affiliate" of any Person shall mean any Person
controlling, controlled by or under common control with such Person.
1.2 Best Knowledge. "Best Knowledge" shall mean both what a Person
knew as well as what the Person should have known had the person exercised
reasonable diligence. When used with respect to a Person other than a natural
person, the term "Best Knowledge" shall include matters that are reasonably
known to the directors, officers, partners, trustees, administrators,
executors, managers, employees, consultants and agents of the Person.
1.3 Governmental Authority. "Governmental Authority" shall mean any
and all foreign, federal, state or local governments, governmental
institutions, public authorities and governmental entities of any nature
whatsoever, and any subdivisions or instrumentalities thereof, including, but
not limited to, departments, boards, bureaus, commissions, agencies, courts,
administrations and panels, and any divisions or instrumentalities thereof,
whether permanent or ad hoc and whether now or hereafter constituted and/or
existing.
1.4 Governmental Requirement. "Governmental Requirement" shall mean
any and all laws (including, but not limited to, applicable common law
principles), statutes, ordinances, codes, rules, regulations, interpretations,
guidelines, directions, orders,
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judgments, writs, injunctions, decrees, decisions or similar items or
pronouncements, promulgated, issued, passed or set forth by any Governmental
Authority.
1.5 Material Adverse Effect. "Material Adverse Effect" shall mean a
material adverse effect on the business, financial condition, operation,
performance or prospects of the Target.
1.6 Person. "Person" shall mean any natural person, any Governmental
Authority and any entity, the separate existence of which is recognized by any
Governmental Authority or Governmental Requirement, including, but not limited
to, corporations, partnerships, joint ventures, joint stock companies, trusts,
estates, companies and associations, whether organized for profit or otherwise.
1.7 Schedule. "Schedule" shall mean Schedules to this Agreement,
unless otherwise stated, and the Schedule may be attached to the Agreement or
set forth in a separate document denoted as the Schedule to this Agreement.
1.8 Taxes. "Tax" and "Taxes" shall mean any and all income, excise,
franchise or other taxes and all other charges or fees imposed or collected by
any Governmental Authority or pursuant to any Governmental Requirement, and
shall also include any and all penalties, interest, deficiencies, assessments
and other charges with respect thereto.
2. PURCHASE AND SALE OF THE ASSETS; CLOSING DATE.
2.1 Purchase and Sale. Subject to the terms and conditions herein
contained, Target agrees to sell, assign, transfer and deliver to Purchaser at
the Closing (as hereinafter defined) all of the assets, rights and properties
set forth and described on Schedule 2.1, being substantially all of the assets
of Target (all such assets, rights and properties being collectively referred
to herein as the "Assets"), free and clear of any liens or encumbrances (except
for liens, encumbrances or obligations, if any, expressly assumed by Purchaser
hereunder). Subject to the terms and conditions herein contained, Purchaser
agrees to purchase from Target the Assets and to pay at the Closing the
Purchase Price (as hereinafter defined) pursuant to the provisions of Section 3
below.
2.2 Delivery and Endorsement of Certificates. At the Closing, Target
shall deliver to Purchaser such deeds, bills of sale, endorsements, assignments
and other documents of transfer, conveyance and assignment valid as necessary
to transfer the Assets to Purchaser and to vest in Purchaser good and
indefeasible title to the Assets, free and clear of any liens or encumbrances
(except for liens, encumbrances or obligations, if any, expressly assumed by
Purchaser hereunder), in form and substance satisfactory to Purchaser and
Purchaser's counsel.
2.3 Closing Date. Subject to the terms and conditions herein
contained, the consummation of the transactions referred to above shall take
place (the "Closing") on
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or before December 31, 1996, at 10:00 a.m. local time, at the offices of
Purchaser in Houston, Texas, or at such other time, date and place as Purchaser
and Seller shall in writing designate (the "Closing Date").
3. PURCHASE PRICE. The consideration for the Assets shall be paid
as follows:
(a) $400,000 cash previously advanced to Seller by Purchaser;
(b) payment by Purchaser of the liabilities set forth on
Schedule 3, less $50,000 to be paid by Seller to the
limited partners of Brooks Oil Service, L.P., but in no
event shall such payments by the Purchaser exceed
$500,000; and
(c) assumption by Purchaser of that certain Promissory Note
dated September 27, 1996 in the stated principal amount of
$650,000.00 between Brooks Oil Service Company, L.P. and
First National Bank, Brewton, Alabama (the "Bank") to be
paid $550,000 on or before December 31, 1996 and $100,000
pursuant to a promissory note to be entered into between
Purchaser and the Bank to be due on or before December 31,
1997;
(such consideration collectively referred to herein as the "Purchase Price").
4. REPRESENTATIONS AND WARRANTIES BY SELLER. Seller represents and
warrants to Purchaser as follows:
4.1 Incorporation. Target is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, and is duly authorized, qualified and licensed under all
applicable Governmental Requirements to carry on its business in the places and
in the manner as now conducted. Target has full corporate power and lawful
authority to carry on its business as it is now being conducted and to own and
operate its assets, properties and business. The copies of the Articles of
Incorporation and bylaws of Target and all amendments thereto to date, each of
which are included in Schedule 4.1 hereto, are true, complete and correct.
4.2 Properties, Assets and Leasehold Estates. Target owns or has the
right to use all property, real or personal, tangible or intangible, utilized
in or necessary for the operation of its business with all of such property
comprising the Assets. Schedule 2.1 hereto sets forth a true and complete list
of all such property constituting the Assets as of the date hereof. Target has
good and marketable title to all the Assets, free and clear of all mortgages,
liens, pledges, conditional sales agreements, charges, easements, covenants,
assessments, restrictions and encumbrances of any nature whatsoever. The
plants, structures, equipment, vehicles and other tangible properties included
in the Assets and the tangible property leased by Target under leases included
in the Assets are in good operating condition and repair, normal wear and tear
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excepted, and are capable of being used for their intended purpose in the
business as now conducted. The Assets include all existing warranties and
service contracts with respect to any of the Assets to the extent the same are
capable of being assigned to Purchaser. During the past two years, there has
not been any significant interruption of the operation of the business due to
the breakdown or inadequate maintenance of any of the Assets. All plants,
structures, equipment, vehicles and other tangible properties included in the
Assets, and the present use of all such items, conform to any applicable
Governmental Requirement, and no notice of any violation of any such
Governmental Requirement relating to such assets or their use has been received
by Target. The Assets include all easements, rights of ingress and egress, and
utilities and services necessary for the conduct of the Business. Neither the
whole nor any portion of any real property, if any, to be conveyed to Purchaser
hereunder has been condemned or otherwise taken by any public authority, nor,
to the Best Knowledge of Seller and the Shareholders, is any such condemnation
or taking threatened or planned.
4.3 Financial Statements. Seller has delivered to Purchaser copies
of the following financial statements for Target, all of which financial
statements are included in Schedule 4.3 hereto:
(a) Unaudited Balance Sheet (the "Reference Balance Sheet") as
of April 30, 1996 (the "Balance Sheet Date"); and
(b) Statement of Income as of April 30, 1996.
All financial statements supplied to Purchaser by Seller are true and accurate
in all material respects, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods indicated, and present fairly the financial condition and the results
of the operations of Target as of the dates and for the periods indicated
thereon. The Reference Balance Sheet reflects, as of the Balance Sheet Date,
all liabilities, debts and obligations of any nature of Target, whether
accrued, absolute, contingent or otherwise, and whether due, or to become due,
including, but not limited to, liabilities, debts or obligations on account of
Taxes to the extent such items are required to be reflected on such balance
sheet under generally accepted accounting principles consistently applied.
4.4 Events Since Balance Sheet Date. Since the Balance Sheet Date
there has not been:
(a) any material change in the financial condition or in the
properties, assets or business of Target, except normal and usual
changes in the ordinary course of business;
(b) any declaration, setting aside, or payment of any dividend
or other distribution on or in respect of the capital stock of Target,
or any direct or indirect redemption, purchase or other acquisition of
any of such stock or any
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issuance of any shares of such stock or any granting or entering into of
any option or commitment relating to any of such stock;
(c) any transaction entered into or engaged in by Target other
than transactions in the ordinary course of business; or
(d) to the Best Knowledge of Seller, any other occurrence, event
or condition that has resulted in a Material Adverse Effect (or can
reasonably be expected to result in a Material Adverse Effect) or the
properties, assets or business of Target.
4.5 Inventories. Schedule 4.5 hereto sets forth a true and complete
list of the current inventory of Target. Such inventories consist of items of
a quality and quantity usable and saleable in the normal course of business of
Target at an aggregate value at least equal to the value at which such
inventories are reflected on the Reference Balance Sheet.
4.6 Accounts Receivable. All notes and accounts receivable of Target
that are reflected on the Reference Balance Sheet or that have arisen since the
Balance Sheet Date ("Accounts Receivable") have arisen in the ordinary course
of business. All Accounts Receivable either (i) have been collected or (ii)
are collectible on the respective due dates thereof, or, if no due date is
stated with respect thereto, within 90 days of their creation in the ordinary
course of business, in each case in the aggregate recorded amounts thereof,
less the applicable reserves with respect thereto reflected on the Reference
Balance Sheet. Target has not factored or discounted or agreed to factor or
discount any Account Receivable. The values at which the Accounts Receivable
are carried reflect the accounts receivable valuation policy of Target which is
consistent with Target's past practice and in accordance with generally
accepted accounting principles consistently applied. Schedule 4.6 sets forth a
true, correct and complete list of all Accounts Receivable written off by
Seller, in whole or in part, as uncollectible during the 2 years preceding the
date hereof. Schedule 4.6 also sets forth a true, correct and complete aging
of the Accounts Receivable of Seller as of the most recent practicable date,
and, except as specifically noted on Schedule 4.6, all of such Accounts
Receivable are included in the Assets.
4.7 Taxes and Governmental Returns. Except as set forth on Schedule
3 hereto, as of the date hereof, all Tax returns, information returns and
governmental reports of every nature required by any Governmental Authority or
Governmental Requirement to be filed by Target or which include or should
include Target, ("Governmental Returns") have been filed for all periods ending
on or before the date hereof, and all Taxes shown to be due and payable on such
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Governmental Returns or on any assessments related to such Governmental Returns
have been paid, except for taxes or assessments reasonably contested by Target.
All Governmental Returns and reports and the information and data contained
therein have been properly and accurately compiled and completed, fairly
present the information purported to be shown therein, and reflect all Tax
liabilities of Target for the periods covered by such Governmental Returns and
reports. Target has no unpaid liability for any Taxes of any nature whatsoever
for any period prior to the date hereof, except for taxes or assessments
reasonably contested by Target. The charges, accruals and reserves on the
Reference Balance Sheet in respect of all accrued Taxes are adequate to provide
fully for all Taxes, if any, payable by Target with respect to periods ended on
or before the date of this Agreement.
4.8 Employee Benefit Plans. Except as set forth on Schedule 4.8
hereto, Target has no employee benefit plans (including, but not limited to,
pension plans and health or welfare plans), arrangements or understandings,
whether formal or informal.
4.9 Contracts and Agreements. Schedule 4.9 hereto sets forth a true
and complete list of all of the material contracts, agreements, leases,
licenses, plans, arrangements or commitments, written or oral, to which Target
is a party and by which any of the assets or properties of Target are in any
way bound or obligated (including all amendments, supplements and modifications
thereto) (the "Contracts").
All of the Contracts are valid, binding and in full force and effect in
accordance with their terms and conditions and there is no existing default
thereunder or breach thereof by Target, or, to the Best Knowledge of Seller, by
any other party to the Contracts. Copies of all of the documents (or in the
case of oral commitments, descriptions of the material terms thereof) relevant
to the Contracts have been delivered by Seller to Purchaser.
4.10 Intangible Property. Schedule 4.10 hereto sets forth a true and
complete list of all patents now owned or to be acquired by Target prior to the
Closing Date. Except as set forth on Schedule 4.10 hereto, the operation of
the business of Target as now conducted does not require the use of or consist
of any rights under any patents, inventions, trademarks, trade names, brand
names or copyrights, and the operation of the business of Target as presently
conducted does not violate or infringe upon any such items owned by others.
4.11 Suits, Actions and Claims. Except as set forth in Schedule 4.11
hereto, (i) there are no suits, actions, claims, inquiries or investigations by
any Person, or any legal, administrative or arbitration proceedings in which
Target is engaged or which are pending or, to the Best Knowledge of Seller,
threatened against or affecting Target or any of its properties, assets or
business, or to which Target is or might become a party, or which question the
validity or legality of the transactions contemplated hereby, (ii) no basis or
grounds for any such suit, action, claim, inquiry, investigation or proceeding
exists, and (iii) there is no outstanding order, writ, injunction or decree of
any Governmental Authority against or affecting Target or any of its
properties, assets or business. Without limiting the foregoing, neither Seller
nor any officer of Target has any knowledge of any state of facts or the
occurrence of any event forming the basis of any present claim against Target.
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4.12 Insurance Policies. Schedule 4.12 hereto contains a list of all
insurance policies (specifying the insurer, the amount of coverage, the type of
insurance and the policy number) maintained by Target on its properties,
assets, business and personnel.
4.13 Licenses and Permits; Compliance with Governmental Requirements.
Schedule 4.13 hereto sets forth a true and complete list of all licenses and
permits necessary for the conduct of Target's business. Target has complied
with all material Governmental Requirements applicable to its business and all
Governmental Requirements with respect to the distribution and sale of products
and services by it.
4.14 Authorization. Target and Seller have full legal right, power
and authority to enter into and deliver this Agreement and to consummate the
transactions set forth herein and to perform all the terms and conditions
hereof to be performed by it or him. The execution and delivery of this
Agreement by Target and the performance of the transactions contemplated herein
have been duly and validly authorized by all requisite action of Target, and
this Agreement has been duly and validly executed and delivered by Target and
Seller and is the legal, valid and binding obligation of Target and Seller,
enforceable against Seller in accordance with its terms, except as limited by
applicable bankruptcy, moratorium, insolvency or other similar laws affecting
generally the rights of creditors or by principles of equity.
4.15 Environmental Protection Laws. None of Target, its business or
its assets are now, nor have any of Target, its business or its assets been in
the past, in violation of any applicable Governmental Requirement related to
environmental protection, air pollution, hazardous materials or other similar
matters.
4.16 Brokers and Finders. No broker or finder has acted for Target or
Seller in connection with this Agreement or the transactions contemplated by
this Agreement and no broker or finder is entitled to any brokerage or finder's
fee or to any commission in respect thereof based in any way on agreements,
arrangements or understandings made by or on behalf of Target or Seller.
4.17 Customer List. Schedule 4.17 hereto sets forth a true, correct
and complete list of all customers of Target to which Target has sold or
provided products or services during the two years immediately preceding the
date hereof.
4.18 Adverse Facts. Seller is not aware (after having made all
reasonable inquiries) of any material fact or matter not disclosed in this
Agreement or in the Schedules hereto which might reasonably affect the
willingness of a purchaser to acquire the Assets on the terms (including price)
contained herein or that might be expected to adversely affect the assets or
the business of Target after Closing.
4.19 Liabilities, Debts and Obligations. Except as set forth on
Schedule 3 attached hereto, Target has no liabilities, debts or obligations of
any nature whatsoever, whether due or to become due, and whether accrued,
absolute, contingent or otherwise, that are not disclosed on Schedule 3, the
Reference Balance Sheet or in this Agreement.
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There are no outstanding claims against Target by any person who is now or has
been an officer or employee of Target nor any dispute between Target and a
material number or class of its employees.
5. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser
represents and warrants to Seller as follows:
5.1 Incorporation. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
5.2 Authorization. Purchaser has full legal right and corporate
power and authority to enter into and deliver this Agreement and to consummate
the transactions set forth herein and to perform all the terms and conditions
hereof to be performed by it. This Agreement has been duly executed and
delivered by Purchaser and is a legal, valid and binding obligation of
Purchaser enforceable in accordance with its terms, except as limited by
applicable bankruptcy, moratorium, insolvency or other laws affecting generally
the rights of creditors or by principles of equity.
5.3 Brokers and Finders. No broker or finder has acted for Purchaser
in connection with this Agreement or the transactions contemplated by this
Agreement and no broker or finder is entitled to any brokerage or finder's fee
or to any commission in respect thereof based in any way on agreements,
arrangements or understandings made by or on behalf of Purchaser.
6. NATURE OF STATEMENTS AND SURVIVAL OF INDEMNITIES, GUARANTEES,
REPRESENTATIONS AND WARRANTIES OF SELLER. All statements of fact contained in
this Agreement or in any written statement (including financial statements),
certificate, schedule or other document delivered by or on behalf of Seller
pursuant to this Agreement or in connection with the transactions contemplated
hereby shall be deemed representations and warranties of Seller hereunder. All
indemnities, guarantees, covenants, agreements, representations and warranties
made by Seller hereunder or pursuant hereto or in connection with the
transactions contemplated hereby shall survive the Closing, regardless of any
investigation at any time made by or on behalf of Purchaser.
7. COVENANTS OF SELLER PRIOR TO CLOSING DATE. Seller hereby
covenants and agrees that between the date of this Agreement and the Closing
Date:
7.1 Access to Information. Target and Seller shall, and Seller shall
cause Target to, afford to the officers and authorized representatives of
Purchaser access to the plants, properties, books and records of Target and
furnish Purchaser with such financial and operating data and other information
regarding the business, assets and properties of Target as Purchaser may from
time to time reasonably request, including, but not limited to, true and
correct unaudited monthly financial statements for all months ending after the
Balance Sheet Date and prior to the Closing Date.
-8-
<PAGE> 13
7.2 General Affirmative Covenants. At all times prior to the Closing
Date, Target shall, and Seller shall cause Target to:
(a) conduct its business only in the ordinary course;
(b) maintain the Assets in good working order and condition,
ordinary wear and tear excepted;
(c) perform all its obligations under agreements relating to or
affecting its business, assets, properties and rights;
(d) keep in full force and effect present insurance policies or
other comparable insurance coverage acceptable to and approved in
writing by Purchaser;
(e) duly and timely file all reports or returns required to be
filed with any Governmental Authority, and promptly pay all Taxes levied
or assessed upon it or its properties or upon any part thereof subject
to the right to contest such taxes and assessments;
(f) duly observe and conform to all laws and requirements of any
Governmental Authority relating to its assets or properties or to the
operation and conduct of its business and all covenants, terms and
conditions upon or under which any of its properties are held; and
(g) duly and timely take all actions necessary to carry out the
transactions contemplated hereby.
7.3 General Negative Covenants. At all times prior to the Closing
Date, Target shall not take, and Seller shall prohibit and prevent Target from
taking, any of the following actions without the prior written consent of
Purchaser (except with respect to subparagraph (e) below):
(a) making or approving any changes in Target's Articles of
Incorporation or other charter documents or bylaws;
(b) issuing any shares of stock or securities or any rights with
respect thereto;
(c) declaring or paying any dividend or making any distribution
in respect of Target's stock, whether now or hereafter outstanding, or
purchasing, redeeming or otherwise acquiring or retiring, directly or
indirectly, for value any shares of stock or securities of Target;
(d) without the prior written consent of Purchaser, entering
into or assuming any contract, agreement, obligation, lease, license or
commitment
-9-
<PAGE> 14
related to assets of Target, not in the ordinary course of business,
that can be expected to generate gross revenues or expenses in excess of
US $5,000;
(e) except under existing credit facilities and in the ordinary
course of business, entering into or assuming any mortgage, pledge,
conditional sale or other title retention agreement, lien, encumbrance
or charge of any kind upon any of the Assets, whether now owned or
hereafter acquired, or creating or assuming any obligation for borrowed
money, or making any loans or advances to or assuming, guaranteeing,
endorsing or otherwise becoming liable with respect to the obligations,
stock or dividends of any person, firm, association or corporation, or
purchasing or otherwise acquiring any stocks, bonds or other securities
of any person, firm, association or corporation, or selling, leasing,
abandoning or otherwise disposing of any of the Assets;
(f) engaging in any activities or transactions that might result
in a Material Adverse Effect; or
(g) merging or consolidating with any other corporation or
acquiring all or substantially all of the business or assets of any
other person, firm, association or corporation.
7.4 No Transfer of the Assets. Target shall not sell, transfer,
assign, pledge or otherwise dispose of or encumber any right, title or interest
in or to any of the Assets or enter into any agreement, trust or commitment
relating to any of the Assets.
7.5 Approvals and Consents. Seller shall, and shall cause Target to,
obtain, in writing and without penalty to Purchaser, all necessary approvals
and consents required in order to authorize, approve and consummate this
Agreement.
8. CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligations of
Purchaser hereunder are, at the option of Purchaser, subject to the
satisfaction, on or prior to the Closing Date, of the following conditions (any
of which may be waived by Purchaser in its sole discretion):
8.1 Accuracy of Representations and Warranties and Fulfillment of
Covenants. The representations and warranties of Seller contained in this
Agreement shall be true and correct in all material respects on and as of the
Closing Date with the same effect as though such representations and warranties
had been made on and as of such date. Each and all of the agreements and
covenants of Target and Seller to be performed on or before the Closing Date
pursuant to the terms hereof shall have been performed. Seller shall have
delivered to Purchaser a certificate dated the Closing Date and executed by
Seller to all such effects.
8.2 No Governmental Actions. No action or proceeding before a
Governmental Authority shall have been instituted or threatened to restrain or
prohibit the transactions contemplated by this Agreement. No Governmental
Authority shall
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<PAGE> 15
have taken any other action as a result of which the management of Purchaser
reasonably deems it inadvisable to proceed with the transactions contemplated
by this Agreement.
8.3 No Material Adverse Effect. No Material Adverse Effect shall
have occurred and no material loss or damage to any of the Assets, whether or
not covered by insurance, shall have occurred since the Balance Sheet Date, and
Seller shall have delivered to Purchaser a certificate dated the Closing Date
and executed by Seller to all such effects.
8.4 Board of Directors Approval. The board of directors of
Purchaser, in its sole discretion, shall have approved this Agreement and the
consummation by Purchaser of the transactions contemplated hereby.
8.5 Corporate Approval. Seller shall have taken or caused to be
taken all necessary or desirable actions, steps and corporate proceedings
(whether by directors, shareholders or otherwise) to approve and authorize the
transfer of the Assets to Purchaser and to consummate the transactions
contemplated hereby.
8.6 Employment Agreement. Brooks Owens shall have executed and
delivered to Purchaser the Employment Agreement in the form attached hereto as
Exhibit A.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER. The obligations
of Seller hereunder are, at his option, subject to the satisfaction, on or
prior to the Closing Date, of the following condition (which may be waived by
Seller, in his sole discretion):
9.1 Accuracy of Representations and Warranties and Fulfillment of
Covenants. The representations and warranties of Purchaser contained in this
Agreement shall be true and correct in all material respects on and as of the
Closing Date with the same effect as though such representations and warranties
had been made on and as of such date. Each of the agreements and covenants of
Purchaser to be performed on or before the Closing Date shall have been
performed. Purchaser shall have delivered to Seller a certificate dated the
Closing Date and executed by Purchaser to all such effects.
10. INDEMNITY BY SELLER.
10.1 Indemnity. Seller covenants and agrees that he will indemnify,
hold harmless and defend Purchaser and Target and their respective officers,
directors, employees, agents, consultants, representatives and Affiliates
(collectively, the "Indemnified Parties"), at all times from and after the date
of this Agreement, from and against any and all penalties, demands, damages,
punitive damages, losses, liabilities, suits, costs, costs of any settlement or
judgment, claims of any and every kind whatsoever (including, without
limitation, interest and penalties thereon), and expenses (including, without
limitation, reasonable attorneys' fees) of or to any of the Indemnified Parties
("Damages"), which may now or in the future be paid, incurred or
-11-
<PAGE> 16
suffered by or asserted against the Indemnified Parties by any Person resulting
or arising from or incurred in connection with any one or more of the
following:
(a) any misrepresentation, breach of warranty or nonfulfillment
of any covenant or agreement on the part of Target or Seller under this
Agreement or from any misrepresentation in or omission from any list,
schedule, certificate or other instrument furnished or to be furnished
to Purchaser pursuant to the terms of this Agreement; and
(b) all actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses (including costs of court and reasonable
attorneys' fees) incident to any of the foregoing.
10.2 Notice of Claim. Purchaser agrees that upon its discovery of
facts giving rise to a claim for indemnity under the provisions of this
Agreement, including receipt by it or any Indemnified Party of notice of any
demand, assertion, claim, action or proceeding, judicial or otherwise, by any
Person with respect to any matter as to which any of the Indemnified Parties
are entitled to indemnity under the provisions of this Agreement (such actions
being collectively referred to herein as the "Claim"), Purchaser will give
prompt notice thereof in writing to Seller together with a statement of such
information respecting any of the foregoing as it shall then have; provided
that any delay in giving or failure to give such notice shall not limit
Purchaser's or Target's rights to indemnity hereunder except to the extent that
Seller is shown to have been damaged by such delay or failure.
10.3 Right of Seller to Participate in Defense. With respect to any
Claim as to which Purchaser seeks indemnity hereunder, Seller shall assume the
defense of any such proceeding, and shall have the sole discretion to settle or
defend any proceeding; provided that Purchaser shall have the right to approve
any such settlement, which approval shall not be unreasonably withheld and
Seller shall pay the fees of one firm of defense counsel unless such counsel
determines a conflict exists in which case Purchaser shall have the right to
engage separate counsel.
10.4 Payment. Seller shall promptly pay to Purchaser or such other
Indemnified Parties as may be entitled to indemnity hereunder in cash the
amount of any Damages to which Purchaser or such Indemnified Parties may become
entitled by reason of the provisions of this Agreement.
11. NON-COMPETITION AGREEMENT. For a period of two years from the
date hereof, neither Seller nor any Affiliate of Seller shall, within the State
of Mississippi, (i) compete directly or indirectly with the business engaged in
by Target as of the Closing Date, (ii) solicit directly or indirectly any of
the accounts of Target or (iii) become the employee or consultant of or
otherwise render services to, or own any interest in, any enterprise that
directly or indirectly competes with the business engaged in by Target as of
the Closing Date. For purposes of this Section 11, the term "accounts" shall
mean any Person for which Target has performed or does perform
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<PAGE> 17
services or to which Target has sold or rented or does sell or rent merchandise
during the period beginning two years immediately prior to the date of this
Agreement and ending one year after the date of this Agreement.
12. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Seller recognizes and
acknowledges that they have and will have access to certain confidential
information of Target, such as lists of customers and costs and financial
information, that is valuable, special and unique property of Target. Seller
agrees that they will not disclose, and Seller will use his best efforts to
prevent disclosure by any other Person of, any such confidential information to
any Person or for any purpose or reason whatsoever, except to authorized
representatives of Purchaser.
13. EXPENSES. Whether or not the transactions contemplated hereby
are consummated, each of the parties will pay all costs and expenses of its
performance of and compliance with this Agreement.
14. NOTICES. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally, given by prepaid telex
or telegram or by facsimile or other similar instantaneous electronic
transmission device or mailed first class, postage prepaid, certified United
States mail, return receipt requested, as follows:
(a) If to Purchaser, at:
Ponder Industries, Inc.
5005 Riverway Drive, Suite 550
Houston, Texas 77056
Attention: Larry Armstrong
Facsimile No.: 713-965-0047
With a copy to:
Phillip M. Renfro
Fulbright & Jaworski L.L.P.
300 Convent Street, Suite 2200
San Antonio, Texas 78205
Facsimile No.: 210-270-7205
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<PAGE> 18
(b) If to Seller, at:
Bosco Fishing & Rental Tools, Inc.
P. O. Box 1121
Laurel, Mississippi 39441
Attention: Brooks Owens
Facsimile No.: 601-649-0350
provided that any party may change its address for notice by giving to the
other party written notice of such change. Any notice given under this Section
14 shall be effective (i) if delivered personally, when delivered, (ii) if sent
by telex or telegram or by facsimile or other similar instantaneous electronic
transmission device, 24 hours after sending and (iii) if mailed, 48 hours after
mailing.
15. REMEDIES FOR BREACH.
15.1 Arbitration. The parties agree that any dispute or controversy
arising out of or in connection with this Agreement or any alleged breach
hereof shall be settled by arbitration in Houston, Texas pursuant to the rules
of the American Arbitration Association. If Purchaser on the one hand and
Seller, on the other hand, cannot jointly select a single arbitrator to
determine the matter, one arbitrator shall be chosen by Purchaser on the one
hand and Seller, on the other hand (or, if either fails to make a choice, by
the American Arbitration Association on behalf of such party), and the two
arbitrators so chosen will select a third. The decisions of the single
arbitrator jointly selected by the parties, or, if three arbitrators are
selected, the decision of any two of them, will be final and binding upon the
parties and the judgment of a court of competent jurisdiction may be entered
thereon. Fees of the arbitrators and costs of arbitration shall be borne by
the parties in such manner as shall be determined by the arbitrator or
arbitrators.
16. GENERAL PROVISIONS.
16.1 Governing Law; Interpretation; Section Headings. This Agreement
shall be governed by and construed and enforced in accordance with the laws of
the State of Texas. The section headings contained herein are for purposes of
convenience only, and shall not be deemed to constitute a part of this
Agreement or to affect the meaning or interpretation of this Agreement in any
way.
16.2 Severability. Should any provision of this Agreement be held
unenforceable or invalid under the laws of the United States of America or the
State of Texas, or under any other applicable laws of any other jurisdiction,
then the parties hereto agree that such provision shall be deemed modified for
purposes of performance of this Agreement in such jurisdiction to the extent
necessary to render it lawful and enforceable, or if such a modification is not
possible without materially altering the intentions of the parties hereto, then
such provision shall be severed herefrom for purposes of performance of this
Agreement in such jurisdiction. The validity of the
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<PAGE> 19
remaining provisions of this Agreement shall not be affected by any such
modification or severance, except that if any severance materially alters the
intentions of the parties hereto as expressed herein (a modification being
permitted only if there is no material alteration), then the parties hereto
shall use commercially reasonable effort to agree to appropriate equitable
amendments to this Agreement in light of such severance, and if no such
agreement can be reached within a reasonable time, any party hereto may
initiate arbitration under the then current rules of the American Arbitration
Association to determine and effect such appropriate equitable amendments.
16.3 Entire Agreement. This Agreement sets forth the entire agreement
and understanding of the parties hereto with respect to the transactions
contemplated hereby, and supersedes all prior agreements, arrangements and
understandings related to the subject matter hereof. No representation,
promise, inducement or statement of intention has been made by any party hereto
which is not embodied in this Agreement, and no party hereto shall be bound by
or liable for any alleged representation, promise, inducement or statement of
intention not so set forth.
16.4 Binding Effect. All the terms, provisions, covenants and
conditions of this Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors and
assigns.
16.5 Assignment. Except as specifically permitted herein, this
Agreement and the rights and obligations of the parties hereto shall not be
assigned or delegated by either party hereto without the prior written consent
of the other party hereto.
16.6 Amendment; Waiver. This Agreement may be amended, modified,
superseded or canceled, and any of the terms, provisions, representations,
warranties, covenants or conditions hereof may be waived, only by a written
instrument executed by all parties hereto, or, in the case of a waiver, by the
party waiving compliance.
16.7 Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. This Agreement
shall be binding when one or more counterparts hereof, individually or taken
together, shall bear the signatures of the parties reflected hereon as
signatories.
16.8 Telecopy Execution and Delivery. A facsimile, telecopy or other
reproduction of this Agreement may be executed by one or more parties hereto,
and an executed copy of this Agreement may be delivered by one or more parties
hereto by facsimile or similar instantaneous electronic transmission device
pursuant to which the signature of or on behalf of such party can be seen, and
such execution and delivery shall be considered valid, binding and effective
for all purposes.
17. TERMINATION. This Agreement may be terminated without further
obligation of the parties, as follows:
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<PAGE> 20
17.1 Mutual Consent. This Agreement may be terminated at any time
prior to Closing by mutual written consent of the parties hereto.
17.2 Failure of Conditions. This Agreement may be terminated by
either party hereto if the conditions to such party's obligations under this
Agreement are not fulfilled on or prior to the Closing Date; provided that any
such termination shall not limit the remedies otherwise available to such party
as a result of misrepresentations of or breaches by the other party.
17.3 Failure to Close. This Agreement will automatically terminate at
the end of the day on December 31, 1996, if the Closing shall not have occurred
on or before such date, unless the parties shall have otherwise agreed in
writing prior to such date. No party will be liable in damages to any other
party as a result of termination pursuant to this Section 17.3 unless the
failure of the Closing was due to the failure of such party to comply with the
terms of this Agreement or the failure of a party to close the transaction if
all conditions had otherwise been satisfied.
[signatures on next page]
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<PAGE> 21
IN WITNESS WHEREOF, the parties have executed this Asset Purchase
Agreement as of the date first above written.
PURCHASER:
PONDER INDUSTRIES, INC.
By: /s/ LARRY ARMSTRONG
--------------------------
Larry Armstrong,
President and Chief
Executive Officer
TARGET:
BOSCO FISHING & RENTAL TOOLS,
INC.
By: /s/ BROOKS OWENS
--------------------------
Name: Brooks Owens
------------------------
Title: President
-----------------------
SELLER:
BROOKS OWENS
------------------------------
Brooks Owens
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<PAGE> 1
EXHIBIT 10.5
FORMATION & SHAREHOLDERS' AGREEMENT
OF
PONDER - DTI, LTD.,
A JABEL ALI FREE TRADE ZONE CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
CONSTRUCTION AND DEFINITIONS . . . . . . . . . . 1
1.1 Construction . . . . . . . . . . . . . . . . . . . . 1
------------
1.2 References . . . . . . . . . . . . . . . . . . . . . 1
----------
1.3 Headings . . . . . . . . . . . . . . . . . . . . . . 1
--------
1.4 Definitions . . . . . . . . . . . . . . . . . . . . . 1
-----------
ARTICLE II
ORGANIZATION . . . . . . . . . . . . . . 3
2.1 Formation . . . . . . . . . . . . . . . . . . . . . . 3
---------
2.2 Qualification in Other Jurisdictions . . . . . . . . 3
------------------------------------
ARTICLE III
NAME . . . . . . . . . . . . . . . . 4
ARTICLE IV
PURPOSE AND POWERS . . . . . . . . . . . . 4
ARTICLE V
REGISTERED OFFICE; REGISTERED AGENT; OTHER OFFICES . . . . 4
ARTICLE VI
TERM . . . . . . . . . . . . . . . . 4
ARTICLE VII
CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS . . . . . . . 5
7.1 Capital Contributions . . . . . . . . . . . . . . . . 5
---------------------
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF PONDER . . . . . . . 5
8.1 Incorporation . . . . . . . . . . . . . . . . . . . . 5
-------------
8.2 Authorization . . . . . . . . . . . . . . . . . . . . 5
-------------
8.3 Properties, Assets and Leasehold Estates . . . . . . 6
----------------------------------------
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE IX
Representations and Warranties of DTI . . . . . . . . 6
9.1 Incorporation . . . . . . . . . . . . . . . . . . . . 6
-------------
9.2 Authorization . . . . . . . . . . . . . . . . . . . . 6
-------------
9.3 Properties, Assets and Leasehold Estates . . . . . . 6
----------------------------------------
ARTICLE X
BOOKS OF ACCOUNT, RECORDS AND FINANCIAL INFORMATION . . . . 6
10.1 Books and Records . . . . . . . . . . . . . . . . . . 6
-----------------
10.2 Financial Information . . . . . . . . . . . . . . . . 7
---------------------
10.3 1997 Operating Budget . . . . . . . . . . . . . . . . 7
---------------------
ARTICLE XI
FISCAL YEAR . . . . . . . . . . . . . . 7
ARTICLE XII
COMPANY FUNDS . . . . . . . . . . . . . . 8
ARTICLE XIII
MANAGEMENT; BOARD OF DIRECTORS . . . . . . . . . 8
13.1 Management by Shareholders . . . . . . . . . . . . . 8
--------------------------
13.2 Organization of Board . . . . . . . . . . . . . . . . 8
---------------------
13.3 Matters Requiring Consent . . . . . . . . . . . . . . 8
-------------------------
13.4 Executive Committee . . . . . . . . . . . . . . . . . 9
-------------------
ARTICLE XIV
OFFICERS . . . . . . . . . . . . . . . 10
14.1 Officers . . . . . . . . . . . . . . . . . . . . . . 10
--------
14.2 Managing Director. The Company agrees to execute
-----------------
an employment agreement with Ed Abernathy as
Managing Director of the Company containing
substantially the terms set forth on Exhibit C
---------
hereto.
ARTICLE XV
INDEMNIFICATION . . . . . . . . . . . . . 10
15.1 Indemnification . . . . . . . . . . . . . . . . . . . 10
---------------
15.2 Expenses . . . . . . . . . . . . . . . . . . . . . . 10
--------
15.3 Insurance . . . . . . . . . . . . . . . . . . . . . . 10
---------
ARTICLE XVI
TRANSFER OF INTERESTS BY SHAREHOLDERS . . . . . . . . 11
16.1 Restrictions on Transfers . . . . . . . . . . . . . . 11
-------------------------
16.2 Buy-Sell Procedure . . . . . . . . . . . . . . . . . 12
------------------
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE XVII
NOTICES . . . . . . . . . . . . . . . 13
ARTICLE XVIII
AMENDMENT OF AGREEMENT . . . . . . . . . . . 15
ARTICLE XIX
MISCELLANEOUS . . . . . . . . . . . . . . 15
19.1 Entire Agreement . . . . . . . . . . . . . . . . . . 15
----------------
19.2 Governing Law . . . . . . . . . . . . . . . . . . . . 15
-------------
19.3 Binding Effect . . . . . . . . . . . . . . . . . . . 15
--------------
19.4 Effect of Invalid Provision . . . . . . . . . . . . . 15
---------------------------
19.5 Counterparts . . . . . . . . . . . . . . . . . . . . 16
------------
19.6 Negotiated Transaction . . . . . . . . . . . . . . . 16
----------------------
SCHEDULES
Schedule 11.3 Approved 1997 Operating Budget
Schedule 13.2 Representatives and Alternate
Representatives
EXHIBITS
Exhibit A General Indenture of Conveyance, Assignment on Transfer
by and between the Company and Ponder
Exhibit B General Indenture of Conveyance, Assignment on Transfer of
Assets and Assumption of Liabilities by and between the
Company and DTI
Exhibit C Abernathy Employment Agreement
</TABLE>
-iii-
<PAGE> 5
FORMATION & SHAREHOLDERS' AGREEMENT
OF
PONDER - DTI, LTD.
This Formation & Shareholders' Agreement of PONDER - DTI, LTD., a
Jabel Ali free trade zone company (the "Company"), effective as of 12:01 a.m.
on November __, 1996 (this "Agreement"), is entered into by and between Ponder
Energy Services, Inc., a Delaware corporation ("Ponder"), and Drilling Tools
International, Ltd., a Gibraltar corporation ("DTI").
WHEREAS, Ponder and DTI shall be the shareholders of the Company;
WHEREAS, pursuant to a General Indenture of Conveyance, Assignment and
Transfer of Assets and Assumption, DTI shall transfer certain assets to the
Company, and the Company shall assume certain liabilities of DTI;
WHEREAS, pursuant to a General Indenture of Conveyance, Assignment and
Transfer of Assets, Ponder shall transfer certain assets to the Company;
NOW, THEREFORE, in consideration of the premises and mutual
undertakings contained herein, the parties hereby agree as follows:
ARTICLE I
CONSTRUCTION AND DEFINITIONS
1.1 Construction. Words used in this Agreement, regardless of the
number or gender specifically used, shall be deemed and construed to include
any other number, singular or plural, and any other gender, masculine, feminine
or neuter, as the context shall require.
1.2 References. As used in this Agreement, unless expressly
stated otherwise, references to "including" mean "including, without
limitation." Unless otherwise specified, all references in this Agreement to
Articles, Sections, Exhibits, Schedules or paragraphs are deemed references to
the corresponding Articles, Sections, Exhibits, Schedules or paragraphs in this
Agreement.
1.3 Headings. The headings of the Articles, Sections, Schedules
and Exhibits of this Agreement are included for convenience only and shall not
be deemed to constitute part of this Agreement or to affect the construction or
interpretation hereof.
1.4 Definitions. The following definitions shall be applicable to
the terms set forth below as used in this Agreement.
-1-
<PAGE> 6
"Act" means the [LAW APPLICABLE TO JABEL ALI FREE TRADE ZONE ENTITY],
and any successor statute, as amended from time to time.
"Affiliates" means, when used with respect to a specified Person, any
other Person directly or indirectly controlling or controlled by or under
direct or indirect common control with the specified Person, provided that the
Company shall not be deemed to be an Affiliate of any Shareholder. For
purposes of this definition "control", when used with respect to any specified
Person, means the power to direct the management and policies of the Person,
directly or indirectly, whether through the ownership of voting securities, by
contract, by family relationship or otherwise; and the terms "controlling" and
"controlled" have the meanings correlative to the foregoing.
"Agreement" means this Formation & Shareholders' Agreement of Ponder -
DTI, Ltd. as the same may be amended or modified from time to time in
accordance with Article XVIII hereof.
"Board" means the Board of Directors of the Company.
"Business Day" means any day on which federal commercial banks are
open for business for the purpose of sending and receiving wire transfers in
Houston, Texas.
"Capital Stock" means the shares of common, preferred or other capital
stock of the Company.
"Certificate" shall have the meaning given that term in Section 2.1.
"Company" means Ponder - DTI, Ltd., a Jabel Ali free trade zone
corporation.
"Conveyance Agreements" means those certain General Indentures of
Conveyance, Assignment and Transfer, to be dated as of the date of organization
of the Company, between the Company and DTI, and between the Company and
Ponder.
"Covered Person" means any Shareholder, an Affiliate of a Shareholder
or any officer, director or shareholder of the Company or of a Shareholder or
their respective Affiliates.
"DTI" means Drilling Tools International, Ltd., a Gibraltar
corporation.
"DTI Assets" shall have the meaning given that term in Section 7.1(a).
"Executive Committee" means the committee described in Section 13.1.
"Governmental Authority" means any entity of or pertaining to
government, including any federal, state, local, other governmental or
administrative authority, agency, court, tribunal, arbitrator, commission,
board or bureau.
"Nonwithdrawing Shareholder" shall have the meaning given that term in
Section 16.1(c).
"Notice" shall have the meaning given that term in Section 16.1(d).
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<PAGE> 7
"Offer" shall have the meaning given that term in Section 16.2(b).
"Operating Budget" shall have the meaning given that term in Section
11.2(d).
"Originating Party" shall have the meaning given that term in Section
16.2(b).
"Parent" shall have the meaning given that term in Section 16.1(b).
"Person" means any individual, corporation, partnership, joint
venture, association, limited liability company, joint stock company, trust,
unincorporated organization, Governmental Authority or government (or agency or
political subdivision thereof).
"Ponder" means Ponder Energy Services, Inc., a Delaware corporation.
"Ponder Assets" shall have the meaning given that term in Section
16.2(b).
"Receiving Party" shall have the meaning given that term in Section
16.2(b).
"Remaining Shareholder" shall have the meaning given that term in
Section 16.1(c).
"Representative" and "Representatives" shall have the meaning given
those terms in Section 13.2(b).
"Shareholder" means each of Ponder and DTI and any Person hereafter
acquiring shares in the Company as provided in this Agreement, but does not
include any Person who has ceased to be a shareholder in the Company.
"Shareholder Interest" means the interest of a Shareholder in the
Company, including the Shareholder's rights to a share of the profits and
losses of the Company, to receive distributions (liquidating or otherwise), to
obtain information and to consent to or approve actions by the Company.
"Transferor Shareholder" shall have the meaning given that term in
Section 16.1(c).
ARTICLE II
ORGANIZATION
2.1 Formation. The Company shall be organized as a Jabel Ali free
trade zone corporation by the filing of a [CERTIFICATE OF ____________________]
(the "Certificate") under and pursuant to the Act on or before February 1,
1997. The Shareholders hereby agree to operate the Company as a Jabel Ali free
trade zone corporation under and pursuant to the Act and agree that the rights,
duties and liabilities of the Shareholders shall be as provided in the Act,
except as otherwise provided herein.
2.2 Qualification in Other Jurisdictions. The Shareholders shall
cause the Company to be qualified, formed or registered under assumed or
fictitious name statutes or similar laws in any jurisdiction in which the
Company transacts business in which such qualification,
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<PAGE> 8
formation or registration is required or desirable. The Shareholders shall
execute, deliver and file, or cause the execution, delivery or filing of, any
certificates (and any amendments or restatements thereof) necessary for the
Company to qualify to do business in a jurisdiction in which the Company may
wish to conduct business.
ARTICLE III
NAME
The name of the Company shall be "Ponder - DTI, Ltd.", and all Company
business may be conducted in that name or any other name that complies with
applicable law as the Board may select from time to time.
ARTICLE IV
PURPOSE AND POWERS
The purpose of the Company is to engage in the oil field fishing and
rental tools business in the Middle East and Africa.
ARTICLE V
REGISTERED OFFICE; REGISTERED AGENT; OTHER OFFICES
The registered office of the Company required by the Act shall be
____________________________________________________________, or any other
office (which need not be a place of business of the Company) as the Board may
designate from time to time in the manner provided by law. The name and
address of the registered agent of the Company in the free trade zone of Jabel
Ali shall be ____________________________________________________________. The
principal office of the Company shall be at such place as the Board may
designate from time to time, which need not be in the free trade zone of Jabel
Ali and the Company shall maintain records there as required by the Act. The
Company may have such other offices as the Board may designate from time to
time.
ARTICLE VI
TERM
The duration for which the Company shall exist shall be perpetual,
unless sooner liquidated or dissolved in accordance with the provisions of the
Act.
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<PAGE> 9
ARTICLE VII
CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS
7.1 Capital Contributions.
Ponder and DTI agree that, upon the formation of the Company
pursuant to the terms of this Agreement:
(a) DTI shall execute a General Indenture of Conveyance,
Assignment and Transfer of Assets and Assumption of Liabilities
contributing all of the assets (the "DTI Assets") and liabilities set
forth on Exhibit A hereto to the Company;
(b) Ponder shall execute a General Indenture of
Conveyance, Assignment and Transfer of Assets contributing all of the
assets set forth on Exhibit B hereto, (the "Ponder Assets"); and
(c) Ponder Industries, Inc. shall deliver to DTI a number
of shares of its common stock, $.01 par value ("Common Stock")
determined by dividing $1.4 million by the average of the closing bid
price for the Common Stock as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System over the last 20
trading days prior to the date of the capital contributions, but in no
event by less than $3.00 per share or more than $4.00 per share;
provided, however, that such issuance of shares shall be subject to
receipt by Ponder Industries, Inc. of appropriate documentation
establishing compliance with the Securities Act of 1933, as amended
("Securities Act"). DTI acknowledges that the shares will not be
registered under the Securities Act or the securities laws of any
state of the United States, and that the transfer of such shares will
be restricted under such laws.
Upon execution of the Conveyance Agreements by Ponder and DTI
respectively, the Company shall issue 50% of its outstanding capital
stock to Ponder and 50% of its outstanding capital stock to DTI.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF PONDER
Ponder represents and warrants to DTI as follows:
8.1 Incorporation. Ponder is a Delaware corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. Ponder has full corporate power and lawful
authority to carry on its business as it is now being conducted and to own and
operate its assets, properties and business.
8.2 Authorization. Ponder has full legal right and corporate
power and authority to enter into and deliver this Agreement and to consummate
the transactions set forth herein and to perform all the terms and conditions
hereof to be performed by it. This Agreement has been
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<PAGE> 10
duly executed and delivered by Ponder and is a legal, valid and binding
obligation of Ponder enforceable in accordance with its terms, except as
limited by applicable bankruptcy, moratorium, insolvency or other laws
affecting generally the rights of creditors or by principles of equity.
8.3 Properties, Assets and Leasehold Estates. Ponder owns or has
the right to use all of the Ponder Assets. Ponder has good and marketable
title to all the Ponder Assets, free and clear of all mortgages, liens,
pledges, conditional sales agreements, charges, easements, covenants,
assessments, restrictions and encumbrances of any nature whatsoever.
ARTICLE IX
Representations and Warranties of DTI
9.1 Incorporation. DTI is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. DTI has full corporate power and lawful authority to carry on
its business as it is now being conducted and to own and operate its assets,
properties and business.
9.2 Authorization. DTI has full legal right and corporate power
and authority to enter into and deliver this Agreement and to consummate the
transactions set forth herein and to perform all the terms and conditions
hereof to be performed by it. This Agreement has been duly executed and
delivered by DTI and is a legal, valid and binding obligation of DTI
enforceable in accordance with its terms, except as limited by applicable
bankruptcy, moratorium, insolvency or other laws affecting generally the rights
of creditors or by principles of equity.
9.3 Properties, Assets and Leasehold Estates. DTI owns or has the
right to use all of the DTI Assets. DTI has good and marketable title to all
the DTI Assets, free and clear of all mortgages, liens, pledges, conditional
sales agreements, charges, easements, covenants, assessments, restrictions and
encumbrances of any nature whatsoever.
ARTICLE X
BOOKS OF ACCOUNT, RECORDS AND FINANCIAL INFORMATION
10.1 Books and Records. The Shareholders shall cause the Company
to keep proper and complete records and books of account (including those
required by the Act) in which shall be entered all transactions and other
matters relative to the Company's business as are usually entered into records
and books of account maintained by persons engaged in businesses of like
character. The Company books and records shall be maintained in accordance
with U.S. generally accepted accounting principles and shall be kept on the
accrual basis. The books and records shall at all times be made available and
shall be open to the reasonable inspection and examination of the Shareholders
or their duly authorized representatives during the business hours of the
Company for any purpose reasonably related to the interest of such Shareholder
as a Shareholder in the Company.
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<PAGE> 11
10.2 Financial Information. The Board shall cause the Company to
transmit the following financial information to each Shareholder:
(a) as soon as available, but in any event within 60 days
after the end of each fiscal year of the Company, a copy of the
balance sheet of the Company as at the end of such fiscal year and the
related statements of income and Shareholders' capital and changes in
Shareholders' capital and cash flow for such fiscal year, setting
forth, after fiscal year 1997, in each case in comparative form the
figures for the previous year, reported on, without a qualification or
exception as to the scope of the audit, by the Company's auditors;
(b) as soon as available, but in any event not later than
30 days after the end of each of the first three fiscal quarters of
each fiscal year of the Company, the unaudited balance sheet of the
Company as at the end of each such quarter and the related unaudited
statements of income and Shareholders' capital and changes in
Shareholders' capital and cash flow of the Company for such quarter
and the portion of the fiscal year through such date, setting forth,
after fiscal year 1997, in each case in comparative form, the figures
for the previous year;
(c) not later than 100 days prior to the end of each
fiscal year of the Company, a copy of the annual operating plan (the
"Operating Budget") for the next fiscal year. Such plan shall
contain, but not be limited to, a complete set of financial statements
by month in appropriate detail for Shareholder review, a summary of
capital expenditures, a human resources discussion summarizing
staffing level assumptions and an overall management summary
addressing the business operations and related strategic business
assumptions;
(d) promptly after becoming available, but in any event
within 15 days after the end of each calendar month, a report setting
forth the year-to-date revenues, operating expenses, general and
administrative expenses and capital expenditures of the Company,
together with a comparison of the Operating Budget for such period,
and a projection of revenues and expenses for the remainder of the
Company's fiscal year; and
(e) within a reasonable time, any other financial
information that may be reasonably requested from time to time by a
Shareholder.
10.3 1997 Operating Budget. The Operating Budget for the Company's
1997 fiscal year is attached as Schedule 10.3.
ARTICLE XI
FISCAL YEAR
The fiscal year of the Company shall end on the 31st day of December
in each calendar year.
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ARTICLE XII
COMPANY FUNDS
The Shareholders will cause the Company to deposit its funds in such
bank accounts, or invest in such interest-bearing or non-interest-bearing
accounts, as shall be designated by the Board. All withdrawals from any such
bank accounts shall be made by the officers or other agent or agents duly
authorized by the Board. Company funds shall not be commingled with those of
any other person.
ARTICLE XIII
MANAGEMENT; BOARD OF DIRECTORS
13.1 Management by Shareholders. The Board shall have full,
exclusive and complete discretion to manage and control the business and
affairs of the Company in accordance with the terms and provisions of this
Agreement. The Shareholders shall act by and through their respective
Representatives as elected pursuant to this Agreement. Each Shareholder agrees
that neither it nor its Representatives will bind the Company or otherwise act
on its behalf without the prior authorization of the Board or the Executive
Committee as required by Sections 13.3 or 13.5 to take such action. If any
Shareholder breaches or threatens to breach the covenant provided in the
preceding sentence, the Company and the other Shareholder may exercise any
remedies available to them in law or in equity, including seeking an injunction
restraining such Shareholder from breaching such covenant.
13.2 Organization of Board.
(a) The Board shall be composed of six directors.
(b) Each Shareholder shall designate three individuals to
represent it on the Board (individually, such Shareholder's
"Representative" and collectively, such Shareholder's
"Representatives"). No individual may serve as the Representative of
more than one Shareholder. As of the date hereof, each Shareholder's
Representatives are those individuals listed on Schedule 13.2. Each
Shareholder reserves the right to remove any one or more of its
Representatives and to appoint successors and substitutes therefor,
from time to time, and any such change shall be effective upon such
Shareholder's delivering a written notice of such change to the other
Shareholder. Each Shareholder agrees to vote all of its shares of
Capital Stock in favor of the Representatives designated by the other
Shareholder herewith and from time to time.
13.3 Matters Requiring Consent. The Shareholders of the Company
shall cause the bylaws of the Company to require that, except as set forth in
the Operating Budget for each fiscal year, the following decisions must be
unanimously approved by the Board:
a) acquiring or disposing of any real property
or interest therein by the Company or entering into any
agreement for the purchase or sale of any real property or
interest therein;
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<PAGE> 13
b) acquiring financing for the Company or
incurring any indebtedness whatsoever in excess of $25,000;
c) declaring or paying any dividend or making
any distribution in respect of the Company's Capital Stock;
d) except for transactions in the ordinary
course of business, selling or otherwise transferring any
property or asset of the Company or any interest therein;
e) making any capital expenditures (including,
without limitation, payments with respect to capitalized
leases) exceeding $25,000 for any single expenditure or
$100,000 in the aggregate during any fiscal year of the
Company;
f) creating, assuming or permitting any lien to
be taken upon any properties or assets of the Company, whether
now owned or hereafter acquired;
g) making any loan or advance to any person,
including, without limitation, any employee of the Company,
excluding advances for travel and entertainment expenses and
similar expenditures in the ordinary course of business;
h) determining the annual aggregate cash or non-
cash compensation payable to any executive officer of the
Company;
i) entering into any agreements, including
leases or other rental agreements, under which the amount of
the aggregate payments for all such agreements exceeds $25,000
in the aggregate for any 12-month period;
j) authorizing or declaring any distribution of
cash or property of the Company;
k) entering into any transaction in the name of
the Company not permitted by this Agreement;
l) selecting or varying depreciation and
accounting methods of the Company or changing the fiscal year
of the Company; and
m) except for transactions in the ordinary
course of business, adjusting, settling or compromising any
claim, obligation, debt, demand, suit or judgment against the
Company.
13.4 Executive Committee. Each Shareholder shall appoint one of
its three Representatives to serve on the Executive Committee of the Board. As
of the date hereof, each Shareholder's Representative on the Executive
Committee is the individual so identified on Schedule 13.2. Except for those
actions set forth in Section 13.3, the Executive Committee shall be responsible
for the day-to-day operations of the Company and shall have the same power and
authority as the Board.
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ARTICLE XIV
OFFICERS
14.1 Officers. The following persons shall be designated to serve
in the respective capacities set forth beside each of their names:
<TABLE>
<S> <C>
Ed Abernathy - Managing Director and Chief Executive Officer
Najum Hanif - Chief Financial Officer
Charles A. Sebek - Operations Manager
</TABLE>
Any subsequent modifications to the above listed designations shall be
unanimously approved by the Board.
14.2 Managing Director. The Company agrees to execute an
employment agreement with Ed Abernathy as Managing Director of the Company
containing substantially the terms set forth on Exhibit C hereto.
ARTICLE XV
INDEMNIFICATION
15.1 Indemnification. To the fullest extent permitted by
applicable law, a Covered Person shall be entitled to indemnification from the
Company for any loss, damage or claim incurred by such Covered Person (a) by
reason of any act or omission performed or omitted by such Covered Person in
good faith on behalf of the Company and in a manner reasonably believed to be
within the scope of authority conferred on such Covered Person by this
Agreement or (b) by reason of being a Shareholder, an Affiliate of a
Shareholder or an officer, director, shareholder, partner, representative,
advisor or agent of the Company or a Shareholder or its Affiliate, except that
no Covered Person shall be entitled to be indemnified in respect of any loss,
damage or claim incurred by such Covered Person by reason of gross negligence
or willful misconduct with respect to such acts or omissions; provided,
however, that any indemnity under this Article XV shall be provided out of and
to the extent of Company assets only, and no Covered Person shall have any
personal liability on account thereof.
15.2 Expenses. To the fullest extent permitted by applicable law,
expenses (including legal fees) incurred by a Covered Person in defending any
claim, demand, action, suit or proceeding for which indemnity is sought under
this Agreement shall, from time to time, be advanced by the Company prior to
the final disposition of such claim, demand, action, suit or proceeding upon
receipt by the Company of an undertaking by or on behalf of the Covered Person
to repay such amount if it shall be determined that the Covered Person is not
entitled to be indemnified as authorized under this Article XV.
15.3 Insurance. The Company may purchase and maintain insurance,
to the extent and in such amounts as the Board shall deem reasonable, on behalf
of Covered Persons and such
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<PAGE> 15
other Persons as the Board shall determine, against any liability that may be
asserted against or expenses that may be incurred by any such Person in
connection with the activities of the Company or such indemnities, regardless
of whether the Company would have the power to indemnify such Person against
such liability under the provisions of this Agreement. The Company may enter
into indemnity contracts with Covered Persons and adopt written procedures
pursuant to which arrangements are made for the advancement of expenses and the
funding of obligations under Section 15.2 hereof and containing such other
procedures regarding indemnification as are appropriate.
ARTICLE XVI
TRANSFER OF INTERESTS BY SHAREHOLDERS
16.1 Restrictions on Transfers.
(a) No Shareholder shall have the right, directly or
indirectly, to sell, assign, mortgage, pledge, encumber, exchange,
transfer or otherwise dispose of its interest in the Company, or any
portion thereof, without the prior written consent of all Shareholders
except as specifically provided in this Article XVI. Any attempted
transfer or assignment of any interest in the Company in violation of
the provisions of this Article XVI shall be void and of no force and
effect. Any permitted transferee of shares of Capital Stock must
agree, prior to any sale, transfer, assignment or conveyance, to
become a party to this Agreement and agree to be bound by all
applicable terms and conditions, including this Article XVI. Upon
becoming a party to this Agreement, each such purchaser or transferee
shall be substituted fully for, and shall enjoy the same rights and be
subject to the same duties and obligations as its predecessor
hereunder.
(b) Either Shareholder may sell, assign or transfer all,
but not less than all, of its Capital Stock or the Person(s) owning
all the issued and outstanding capital stock of such Shareholder (the
"Parent(s)") may sell, assign or transfer all but not less than all of
the capital stock of such Shareholder or its Parent, to an Affiliate
of such Shareholder or its Parent(s) provided that (i) all the capital
stock or other equity interest of such Affiliate is owned, directly or
indirectly, by such Shareholders' Ultimate Parent (as defined below),
and (ii) each such purchaser or transferee, prior to such sale,
assignment or transfer, becomes a party to this Agreement and agrees
to be bound by all applicable terms and conditions, including this
Article XVI.
(c) If, at any time following the third anniversary of
the effective date of this Agreement and so long as an Offer has not
been delivered pursuant to the provisions of Section 16.2, either
Shareholder other than a Departing Shareholder (the "Transferor
Shareholder") desires to sell, assign or transfer its entire Capital
Stock for a purchase price payable in cash, other than pursuant to the
provisions of Sections 16.1(b) hereof, the Transferor Shareholder
shall give notice thereof to the other Shareholder (the "Notice").
The Notice shall specify the price and other material terms of the
sale. The other Shareholder shall have a period of 30 days during
which it may elect to acquire the Capital Stock of the Transferor
Shareholder for the price and under the same terms and conditions
included in the Notice. If the other Shareholder elects to acquire
the Capital
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<PAGE> 16
Stock of the Transferor Shareholder, the Transferor Shareholder and
the other Shareholder shall be bound to consummate the transaction in
accordance with the Notice, as promptly as practicable. If the other
Shareholder fails to respond to the Notice within such 30-day period,
elects not to purchase the Capital Stock or elects to purchase the
Capital Stock and the transaction is not consummated through no fault
of the Transferor Shareholder within 30 days of the delivery of the
acceptance of the other Shareholder, the Transferor Shareholder shall,
for a period of 90 days thereafter, be free to transfer its Capital
Stock, subject only to the requirements of Sections 16.1(d) and 16.3
to any Person, pursuant to the terms described in the Notice. After
such 90-day period, the Transferor Shareholder shall not transfer its
Capital Stock pursuant to a third party offer without again complying
with the provisions of this Section 16.1. In the event an Offer has
been delivered pursuant to Section 16.2, no Shareholder may offer to
sell, assign or transfer its Capital Stock other than in accordance
with the provisions of Section 16.2 during the pendency of the
procedures required by Sections 16.2(b) and (c) as a result of the
delivery of the Offer.
(d) The Company shall not recognize for any purpose any
purported sale, assignment or other disposition of all or part of the
shares of Capital Stock unless and until the other applicable
provisions of this Section 16.1 and Section 16.3 have been satisfied
and the Board has received, on behalf of the Company, a document that:
(i) is executed by both the Shareholder effecting
the disposition and the Person to whom the Capital Stock or
part thereof is transferred;
(ii) includes the notice address of any Person to
be admitted to the Company as a Shareholder and its agreement
to be bound by this Agreement; and
(iii) contains a representation and warranty in
favor of the other Shareholder that the disposition was made
in accordance with all applicable laws and regulations.
16.2 Buy-Sell Procedure. Either Shareholder desiring to terminate
its relationship with the other Shareholder with respect to the Company (the
"Originating Party"), may at any time following the third anniversary of the
effective date of this Agreement so long as a Transaction Notice or a Notice
has not been delivered pursuant to the provisions of Section 16.1(c), give
written notice to the other Shareholder that it is invoking the procedures of
this Section 16.2. In such event:
(a) The Shareholders shall negotiate in good faith for a
period of 60 days following such notice in an effort to avoid the
necessity of proceeding with the provisions of this Section 16.2.
(b) Within 10 days after the end of such 60-day period
and so long as a Transaction Notice or a Notice has not been delivered
pursuant to the provisions of Section 16.1(c) within such 60-day
period, the Originating Party may deliver to the other Shareholder
(the "Receiving Party") an offer ("Offer") in writing, stating the
price payable in cash and other material terms on which the
Originating Party is willing to purchase the Capital Stock held by the
Receiving Party. The Receiving Party shall then
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<PAGE> 17
be obligated to either (i) purchase the Capital Stock of the
Originating Party at a price equal to the purchase price set forth in
the Offer or (ii) sell to the Originating Party the Capital Stock held
by it at a price equal to the purchase price set forth in the Offer.
The Receiving Party shall give written notice of such election to the
Originating Party within 120 days after receipt of the Offer. Failure
of the Receiving Party to give the Originating Party notice of its
election within said 120-day period shall be conclusively deemed to be
an election to sell its Capital Stock to the Originating Party.
(c) The closing of a purchase pursuant to this Section
16.2 shall be held at the principal executive offices of the Company on
a mutually acceptable date not more than 30 days after the effective
date of the Receiving Party's notice or deemed election under Section
16.2(b) unless a longer period is necessary to secure any necessary
third party or governmental consents or approvals. At such closing
the selling Shareholder shall assign or cause to be assigned to the
purchasing Shareholder, or its designee, all right, title and interest
in and to the selling Shareholder's Capital Stock free and clear of
all liens, claims and encumbrances.
(d) In the event that a Transaction Notice or a Notice
has been delivered pursuant to Section 16.1(c), no Shareholder may
invoke the procedures of this Section 16.2 during the pendency of the
procedures required by Section 16.1(c) as a result of the delivery of
the Notice.
ARTICLE XVII
NOTICES
All notices, requests, demands and other communications required or
permitted to be given under this Agreement shall be deemed to have been duly
given if in writing and delivered personally or sent via first-class, postage
prepaid, registered or certified mail (return receipt requested), or by
overnight delivery service or facsimile transmission addressed as follows:
If to Ponder:
Ponder Energy Services, Inc.
5005 Riverway, Suite 550
Houston, Texas 77056
Attention: President
Facsimile Number: (713) 965-0047
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<PAGE> 18
and copy to:
Fulbright & Jaworski L.L.P.
300 Convent Street, Suite 2200
San Antonio, Texas 78205-3792
Attention: Phillip M. Renfro
Facsimile Number: (210) 270-7205
If to DTI:
Drilling Tools International, Ltd.
P. O. Box 26073
Dubai, UAE
Attention: President
Facsimile Number: (___) ___-____
and copy to:
Porter & Hedges, L.L.P.
700 Louisiana, 35th Floor
Houston, Texas 77002-2764
Attention: James M. Harbison, Jr.
Facsimile Number: (713) 228-1331
Any Person may change the address to which the communications are to
be directed by giving notice to the other Persons listed above in the manner
provided in this Article XVII. Notice by mail shall be deemed to have been
given and received on the third calendar day after posting. Notice by
overnight delivery service, facsimile transmission or personal delivery shall
be deemed given on the date of actual delivery.
ARTICLE XVIII
AMENDMENT OF AGREEMENT
This Agreement may be modified or amended from time to time by the
written agreement of all Shareholders.
ARTICLE XIX
MISCELLANEOUS
19.1 Entire Agreement. This Agreement and the additional documents
and agreements referred to herein constitute the entire agreement among the
parties. It supersedes any prior agreement or understandings among them, and
it may not be modified or amended in any manner other than as set forth herein.
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<PAGE> 19
19.2 Governing Law. This Agreement and the rights of the parties
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Texas.
19.3 Binding Effect. Except as herein otherwise specifically
provided, this Agreement shall be binding upon and inure to the benefit of the
parties and their legal representatives, heirs, administrators, executors,
successors and assigns.
19.4 Effect of Invalid Provision. If any provision of this
Agreement, or the application of such provision to any person or circumstance,
shall be held invalid, the remainder of this Agreement, or the application of
such provision to persons or circumstances other than those to which it is held
invalid, shall not be affected thereby.
19.5 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
19.6 Negotiated Transaction. The provisions of this Agreement were
negotiated by the parties hereto, and this Agreement shall be deemed to have
been drafted by all of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
November 15, 1996, to be effective as of the time, day and in the year first
above written.
PONDER ENERGY SERVICES, INC.
By: /s/ LARRY ARMSTRONG
--------------------------------
President/CEO
DRILLING TOOLS INTERNATIONAL, LTD.
By: /s/ ED ABERNATHY
--------------------------------
Managing Director
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<PAGE> 20
SCHEDULE 10.3
Approved 1997 Operating Budget
1997 Operating Budget to be Attached Upon Execution
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<PAGE> 21
SCHEDULE 13.2
REPRESENTATIVES
PONDER:
REPRESENTATIVES:
Larry Armstrong*
Eugene L. Butler
Wayne Tynan
DTI:
REPRESENTATIVES:
Ed Abernathy*
Mohsen Hekmat
William C. Jaeger
__________________________________
* Executive Committee Member
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<PAGE> 22
EXHIBIT C
ABERNATHY EMPLOYMENT AGREEMENT
Upon formation of the Company, the Company and Ed Abernathy shall
enter into an Employment Agreement (the "Employment Agreement") containing the
following terms among others:
(i) The Employment Agreement shall provide that Mr.
Abernathy shall serve as the Managing Director and Chief Executive
Officer of the Company for an initial term of three years, subject to
automatic renewal for successive one-year periods unless one party
gives notice to the other, at least 120 days before the expiration of
the three-year initial term or any one-year renewal term, as the case
may be, of its or his intent to terminate the Employment Agreement, in
which case the Employment Agreement shall terminate at the expiration
of such three-year or one-year period, as the case may be.
(ii) If at any time during the term of the Employment
Agreement, Mr. Abernathy shall not be elected to serve as the Managing
Director and Chief Executive Officer of the Company, the Company shall
be deemed to be in default under the Employment Agreement.
(iii) If the Company defaults under the Employment
Agreement, Mr. Abernathy shall be relieved of any further obligation
under the Employment Agreement, and the Company shall pay to Mr.
Abernathy, upon such default, a lump sum equal to the total amount of
salary and other compensation that would have been payable to Mr.
Abernathy had he continued to be employed by the Company for the
balance of the then current term of Employment Agreement.
(iv) Notwithstanding the foregoing, the Company upon 90
days written notice to Mr. Abernathy, may terminate the Employment
Agreement "for cause." "For cause" shall mean:
(a) Mr. Abernathy is voluntarily absent from his
employment with the Company for more than 30 days, in the
aggregate, in any period of six consecutive months, exclusive
of any authorized vacation or other authorized leave of
absence and not due to his illness; or
(b) Mr. Abernathy is convicted of a felony crime
involving moral turpitude; or
(c) The repeated neglect, malfeasance or
nonfeasance of Mr. Abernathy in the performance of his
services contemplated by the Employment Agreement, which in
the reasonable and justifiable business judgment of the Board
(acting by vote of at least four directors of the Company, but
without regard to any vote by Mr. Abernathy), is detrimental
to the best interests of the Company and notice of which and
reasonable opportunity to cure has previously been given to
Mr. Abernathy at least twice in writing by the Board of
Directors at intervals at least three months apart.
<PAGE> 23
(v) Upon any termination of his employment by the
Company, the Company may elect to require Mr. Abernathy not to
compete with the Company within 100 miles of any Company store
in operation at the date of termination, for a period of one
year following such termination, provided that during such
one-year period the Company shall pay to Mr. Abernathy, as
consideration for his agreement not to complete, an amount
equal to the amount of his salary in effect at the time of
termination, in the same installments as his salary would have
been paid had he continued in the Company's employ.
<PAGE> 1
EXHIBIT 10.6
LEASE AGREEMENT
This Lease Agreement dated December 1, 1996 is entered into by and
between Ponder Energy Services, Inc., a Delaware corporation ("Lessor"), whose
notice address is 5005 Riverway, Suite 550, Houston, Texas 77056 and Drilling
Tools International, Ltd., a Gibraltar corporation ("Lessee"), whose notice
address is P.O. Box 26073, Dubai, United Arab Emirates.
1. LEASE. Lessor leases to Lessee, and Lessee leases from Lessor, the
Equipment described on the attached SCHEDULE A, including all replacement
parts, repairs, additions, and accessories ("Equipment"), on the terms and
conditions set forth in this Lease.
2. TERM. The Equipment is leased for a term ("Lease Term"), commencing
December 1, 1996 ("Lease Commencement Date"), and ending on the sooner of June
1, 1997 or the date on which Ponder - DTI, Ltd., a Jabel Ali free trade zone
corporation (the "Joint Venture"), is qualified to do business ("Lease
Termination Date").
3. RENT. Lessee shall pay to Lessor, in lawful money of the United States
of America, as rent ("Lease Payment") 50% of the cumulative net income of
Lessee's Oil Field Rental Tools Division (the "Division") during the Lease
Term, which shall be accrued and contributed to the Joint Venture upon its
formation. In the event of a cumulative net loss by the Division during the
Lease Term, Lessor shall pay 50% of such cumulative net loss to Lessee.
4. SELECTION OF EQUIPMENT; DISCLAIMER OF WARRANTY. Lessor has selected the
Equipment at Lessee's request. Lessor agrees to provide the equipment in
serviceable operating condition. EXCEPT AS SET FORTH IN THE PRECEDING
SENTENCE, LESSEE AGREES THAT THE EQUIPMENT IS LEASED "AS-IS" AND IS AS
SPECIFIED BY LESSEE, THAT IT IS SUITABLE FOR LESSEE'S PURPOSE, AND THAT LESSOR
HAS MADE NO REPRESENTATION OR WARRANTY ABOUT THE SUITABILITY OR DURABILITY OF
THE EQUIPMENT FOR THE PURPOSES AND USES OF LESSEE, OR ANY OTHER REPRESENTATION
OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. LESSOR FURTHER DISCLAIMS
ANY LIABILITY FOR LOSS, DAMAGE, OR INJURY TO LESSEE OR THIRD PARTIES AS A
RESULT OF ANY DEFECTS, LATENT OR OTHERWISE, IN THE EQUIPMENT, WHETHER ARISING
FROM THE APPLICATION OF THE LAWS OF STRICT LIABILITY OR OTHERWISE.
5. TITLE, PERSONAL PROPERTY, LOCATION, AND INSPECTION. Lessor holds title
to the Equipment, and title shall not pass to Lessee. Lessee has the right to
maintain possession and use the Equipment for the full Lease Term, provided
Lessee complies with the terms and conditions of this Lease. Lessee agrees not
to assign or permit a lien to be placed upon the Equipment. Lessor shall have
the right to enter upon the premises where the Equipment is located to confirm
the existence, condition, and proper maintenance of the Equipment.
<PAGE> 2
6. USE, MAINTENANCE, AND REPAIR. Lessee, at its own cost and expense, is
required to keep the Equipment in good repair, condition, and working order,
except for ordinary wear and tear, and shall supply all parts and servicing
required. All replacement parts used or installed and repairs made to the
Equipment will become the property of Lessor.
7. ASSIGNMENT. LESSEE AGREES NOT TO TRANSFER, SELL, ASSIGN, PLEDGE, OR
ENCUMBER EITHER THE EQUIPMENT OR ANY RIGHTS UNDER THIS LEASE WITHOUT THE PRIOR
WRITTEN CONSENT OF LESSOR.
8. RETURN OF EQUIPMENT. In the event that the Joint Venture has not been
formed on or before June 1, 1997, or upon demand of Lessor if this Lease is in
default, Lessee, at its own risk and expense, will immediately crate, insure,
and return the Equipment to Lessor in the same condition as when delivered,
except ordinary wear and tear, to a location designated by Lessor. If a
default exists, return of the Equipment shall not relieve Lessee from continued
liability under this Lease.
9. LOSS OR DAMAGE. In the event the Joint Venture is not formed on or
before June 1, 1997, Lessee assumes the entire risk of damage to or loss or
destruction of the Equipment from any and every cause whatsoever, whether or
not insured, until the Equipment is returned to Lessor or subsequently
transferred to the Joint Venture. No such loss or damage shall relieve Lessee
from any obligation under this Lease. In the event of damage to or loss or
destruction of the Equipment, Lessee shall promptly notify Lessor in writing of
such fact and shall, at the option of Lessor, (a) repair the Equipment to good
condition and working order or (b) replace the Equipment with like equipment in
good repair, condition, and working order, acceptable to Lessor and transfer
clear title to such replacement equipment to Lessor, such equipment shall be
subject to this Lease and be deemed the Equipment. All proceeds of insurance
received by Lessor as a result of such loss or damage will be applied, where
applicable, toward the replacement or repair of the Equipment or the payment of
the obligations of Lessee. If the Joint Venture is formed on or before June 1,
1997, Lessor shall receive a credit for 100% of any damage to or loss of the
Equipment toward its capital contribution to the Joint Venture.
10. INSURANCE. Lessee shall obtain and maintain transit insurance, keeping
the Equipment insured against marine and transit hazards, in an amount not less
than the replacement cost of the Equipment without deductible and without co-
insurance. Lessee shall obtain and maintain, for the term of this Lease,
property insurance, keeping the Equipment insured against all risks of loss or
damage, in an amount not less than the replacement cost of the Equipment
without deductible and without co-insurance. The property insurance shall
contain a breach of warranty clause in favor of Lessor. Lessee shall also
obtain and maintain, for the term of this Lease, comprehensive public liability
insurance covering both personal injury and property damage of at least
$100,000.00 per person and $300,000.00 per occurrence for bodily injury and
$50,000.00 for property damage. Lessee agrees if Lessee fails to procure,
maintain, and pay for such insurance, Lessor has the right, but not the
obligation, to obtain such insurance on behalf of and at the expense of Lessee.
In the event Lessor does obtain such insurance, Lessee agrees to pay all costs
thereof.
-2-
<PAGE> 3
11. INDEMNITY. Lessee agrees to assume the risk of liability arising from
the possession or use of the Equipment. Lessee further agrees to defend and
hold Lessor harmless from all claims and liabilities arising from the
possession or use of the Equipment and to indemnify and hold Lessor harmless
from and against any loss or damage arising from the loss, disallowance, or
recapture of any tax benefits anticipated to be realized by Lessor from the
ownership of the Equipment. The obligations contained in this paragraph
continue beyond the termination of this Lease if the liability occurred during
the term of this Lease.
12. TAXES. Lessee agrees to pay all license and registration fees, sale and
use taxes, personal property taxes, and all other taxes, assessments, levies,
fees, and charges, relating to the ownership, leasing, rental, sale, purchase,
possession, or use of the Equipment, as part of the Lease Payment or as billed
by Lessor. Lessee is not responsible for any taxes based upon income or
receipt of Lessor.
13. NOTICE. Written notices will be deemed to have been given when
delivered personally or deposited in the United States mails or with an
international courier for two day delivery, postage prepaid, addressed to such
party at its address set forth above or at such other address as such party may
have subsequently provided in writing.
14. CHOICE OF LAW. THIS LEASE WAS MADE IN THE STATE OF TEXAS, UNITED STATES
OF AMERICA (BY LESSOR HAVING COUNTERSIGNED IT IN HOUSTON, TEXAS) AND IT IS TO
BE PERFORMED IN THE STATE OF TEXAS BY REASON OF THE LEASE PAYMENTS REQUIRED TO
BE MADE TO LESSOR IN TEXAS. LESSEE CONSENTS TO AND AGREES THAT PERSONAL
JURISDICTION OVER LESSEE AND SUBJECT MATTER JURISDICTION OVER THE EQUIPMENT
SHALL BE WITH THE COURTS OF THE STATE OF TEXAS, OR THE UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF TEXAS, SOLELY AT LESSOR'S OPTION, WITH
RESPECT TO ANY PROVISION OF THIS LEASE.
15. ENTIRE AGREEMENT; NON-WAIVER; SEVERABILITY. This Lease together with
the Formation and Shareholders' Agreement of even date herewith concerning the
Joint Venture contains the entire agreement and understanding between Lessee
and Lessor. No agreements or understandings are binding on the parties unless
set forth in writing and signed by the parties. Time is of the essence in this
Lease. No waiver by Lessor of any breach or default constitutes a waiver of
any additional or subsequent breach or default by Lessee nor is it a waiver of
any of Lessor's rights. Any provision of this Lease which for any reason may
be held unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such unenforceability without invalidating the
remaining provisions of this Lease, and any such unenforceability in any
jurisdiction shall not render unenforceable such provision in any other
jurisdiction.
This Lease may be executed in multiple counterparts, each of which, when
taken together, shall constitute a fully executed original.
[signatures on next page]
-3-
<PAGE> 4
Executed by Lessor this 15th day of November, 1996.
PONDER ENERGY SERVICES, INC.
By: /s/ LARRY ARMSTRONG
------------------------------
Name:Larry Armstrong
Title: President/CEO
Executed by Lessee this 15th day of November, 1996.
DRILLING TOOLS INTERNATIONAL, LTD
By: /s/ ED ABERNATHY
------------------------------
Name: Ed Abernathy
Title: Managing Director
-4-
<PAGE> 5
SCHEDULE A
EQUIPMENT
-5-
<PAGE> 1
EXHIBIT 11
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Years Ended August 31
-----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
COMPUTATION OF PRIMARY LOSS PER SHARE:
Net loss $ (3,892,073) $ (3,091,663) $ (3,098,676)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 8,717,912 6,377,564 6,377,564
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON ASSUMED CONVERSION
OF OPTIONS 30,586 -- --
------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE EQUIVALENTS USED FOR
COMPUTATION 8,748,498 6,377,564 6,377,564
============ ============ ============
PRIMARY LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENT $ (.44) $ (.48) $ (.49)
============ ============ ============
COMPUTATION OF FULLY DILUTED LOSS PER SHARE:
Net loss $ (3,892,073) $ (3,091,663) $ (3,098,676)
Interest not incurred upon assumed conversion of convertible
debentures 254,004 -- --
------------ ------------ ------------
Net loss available to common stockholders used for computation $ (3,638,069) $ (3,091,663) $ (3,098,676)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 8,717,912 6,377,564 6,377,564
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON ASSUMED CONVERSION
OF OPTIONS 30,586 -- --
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON ASSUMED CONVERSION
OF CONVERTIBLE DEBENTURES 2,790,506 -- --
------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE EQUIVALENTS USED FOR
COMPUTATION 11,539,004 6,377,564 6,377,564
============ ============ ============
LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENT ASSUMING FULL DILUTION $ (.32)(a) $ (.48) $ (.49)
============ ============ ============
</TABLE>
(a) This calculation is submitted in accordance with Item 601(b)(11) of
Regulation S-K although it is not required by APB Opinion No. 15 because
it is antidilutive.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 (SEC File No. 33-48270 and SEC File No.
33-33190).
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
December 10, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 (SEC File No. 33-48270 and SEC File No.
33-33190).
/s/ HAIRSTON, KEMP, SANDERS & STICH, P.C.
San Antonio, Texas
December 10, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PONDER
INDUSTRIES, INC.'S CONSOLIDATED BALANCE SHEET AS OF AUGUST 31, 1996, AND ITS
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<CASH> 397,927
<SECURITIES> 0
<RECEIVABLES> 4,285,451
<ALLOWANCES> 138,491
<INVENTORY> 3,046,288
<CURRENT-ASSETS> 8,105,639
<PP&E> 28,170,569
<DEPRECIATION> 12,644,782
<TOTAL-ASSETS> 27,902,076
<CURRENT-LIABILITIES> 6,908,850
<BONDS> 13,298,207
0
0
<COMMON> 121,313
<OTHER-SE> 6,891,207
<TOTAL-LIABILITY-AND-EQUITY> 27,902,076
<SALES> 11,960,753
<TOTAL-REVENUES> 11,960,753
<CGS> 5,319,660
<TOTAL-COSTS> 5,319,660
<OTHER-EXPENSES> 11,418,555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 673,027
<INCOME-PRETAX> (5,202,727)
<INCOME-TAX> 67,764
<INCOME-CONTINUING> (5,270,491)
<DISCONTINUED> 1,378,418
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,892,073)
<EPS-PRIMARY> (.44)
<EPS-DILUTED> (.44)
</TABLE>
