<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended May 31, 1997
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 (IRS Employer
incorporation or organization) Identification No.)
5005 Riverway Drive, Suite 550
Houston, Texas 77056
(Address of principal executive offices, zip code)
(713)965-0653
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at June 30, 1997
---------------------------- ----------------------------
Common Stock, $.01 par value 16,891,506
<PAGE> 2
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION (Unaudited)
Item 1: Condensed Consolidated Balance Sheets as of May 31, 1997, and
August 31, 1996 3
Condensed Consolidated Statements of Operations for the Three Months and Nine
Months Ended May 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended May 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
PART II OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities 16
Item 3: Defaults Upon Senior Securities 16
Item 4: Submission of Matters to a Vote of Security Holders 16
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K 17
</TABLE>
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<PAGE> 3
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
1997 August 31,
ASSETS (Unaudited) 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 52,267 $ 397,927
Receivables, net 4,978,549 3,646,960
Other receivable 500,000 500,000
Parts and supplies 3,569,345 3,046,288
Prepaid expenses and other 119,723 514,464
------------ ------------
Total current assets 9,219,884 8,105,639
------------ ------------
PROPERTY AND EQUIPMENT 32,470,741 28,170,569
Less-Accumulated depreciation and amortization (13,865,029) (12,644,782)
------------ ------------
18,605,712 15,525,787
INVESTMENT IN JOINT VENTURE 409,996 --
OTHER ASSETS 2,202,842 2,184,435
DEFERRED ASSETS, net 733,003 853,408
GOODWILL, net 1,408,521 1,232,807
------------ ------------
4,754,362 4,270,650
------------ ------------
$ 32,579,958 $ 27,902,076
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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<PAGE> 4
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
May 31,
1997 August 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt and other $ 10,411,096 $ 1,922,814
Accounts and notes payable, trade 5,618,543 2,863,477
Accrued liabilities 1,787,955 2,122,559
------------ ------------
Total current liabilities 17,817,594 6,908,850
------------ ------------
LONG-TERM DEBT, less current maturities 826,892 4,148,207
------------ ------------
OTHER LONG-TERM LIABILITIES 795,350 449,418
------------ ------------
DEFERRED TAXES PAYABLE 883,541 233,081
------------ ------------
CONVERTIBLE DEBENTURES 7,900,000 9,150,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4 and 7)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 50,000,000 shares, issued
14,916,851 shares and 12,131,347 shares at May 31, 1997, and August 31,
1996, respectively, of which 0 and 289,873 are held as treasury shares,
respectively 149,169 121,313
Additional paid-in capital 23,100,963 21,880,361
Cumulative foreign currency translation adjustment (5,751) 23,596
Accumulated deficit (18,820,404) (13,775,188)
Note receivable for common stock (63,540) (63,540)
Deferred compensation (3,856) (146,284)
Treasury stock -- (1,027,738)
------------ ------------
Total stockholders' equity 4,356,581 7,012,520
------------ ------------
$ 32,579,958 $ 27,902,076
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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<PAGE> 5
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended May 31 Ended May 31
------------------------------ -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
TOOL RENTALS AND SALES $ 5,613,956 $ 3,002,564 $ 16,002,998 $ 7,184,421
COSTS OF SERVICE AND SALES 2,329,120 1,187,209 6,808,516 3,120,126
------------ ------------ ------------ -----------
Gross profit 3,284,836 1,815,355 9,194,482 4,064,295
------------ ------------ ------------ -----------
EXPENSES:
Operating 2,850,636 1,184,998 7,990,079 2,528,366
General and administrative 1,732,642 1,017,029 4,582,811 2,606,660
------------ ------------ ------------ -----------
4,583,278 2,202,027 12,572,890 5,135,026
------------ ------------ ------------ -----------
Operating loss (1,298,442) (386,672) (3,378,408) (1,070,731)
OTHER INCOME (EXPENSE):
Interest, net (707,176) (260,068) (1,626,482) (474,251)
Gain (loss) on disposal of assets (103,025) (5,322) (55,020) (6,576)
Other (2,687) 17,497 14,694 206,275
------------ ------------ ------------ -----------
LOSS BEFORE DISCONTINUED OPERATIONS (2,111,330) (634,565) (5,045,216) (1,345,283)
------------ ------------ ------------ -----------
DISCONTINUED OPERATIONS -- -- -- 1,400,000
------------ ------------ ------------ -----------
NET INCOME (LOSS) $ (2,111,330) $ (634,565) $ (5,045,216) $ 54,717
============ ============ ============ ===========
EARNINGS (LOSS) PER SHARE:
Continuing operations $ (.16) $ (.07) $ (.40) $ (.17)
Discontinued operations -- -- -- .18
============ ============ ============ ===========
NET INCOME (LOSS) $ (.16) $ (.07) $ (.40) $ .01
============ ============ ============ ===========
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE
EQUIVALENTS OUTSTANDING
13,427,304 9,063,125 12,674,559 8,009,458
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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<PAGE> 6
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended May 31
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,045,216) $ 54,717
Adjustments to reconcile net income (loss) to net cash used in operating
activities-
Depreciation and amortization 1,247,235 520,329
Allowance for doubtful accounts 195,000 --
Loss on disposal of assets 55,020 6,576
Gain from discontinued operations -- (1,400,000)
Deferred compensation expense 98,366 --
Noncash interest expense 739,561 96,117
Accrued severance agreement 409,015 --
Accrued operating lease expense on closed stores 84,000 --
Net change in operating assets and liabilities-
Receivables (1,526,589) (1,351,150)
Parts and supplies (523,057) (272,851)
Prepaid expenses and other 394,741 113,298
Accounts and notes payable, trade 2,755,066 611,075
Accrued and other liabilities (835,665) 20,839
------------ ------------
Net cash used in continuing operating activities (1,952,523) (1,601,050)
------------ ------------
CASH USED IN DISCONTINUED OPERATIONS -- (510,390)
------------ ------------
Net cash used in operating activities (1,952,523) (2,111,440)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,847,699) (3,893,001)
Proceeds from asset sales 205,024 --
Acquisition of business -- (1,600,000)
Investment in joint venture (215,431) --
------------ ------------
Net cash used in investing activities (3,858,106) (5,493,001)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (13,213,418) (4,472,777)
Financing and debt collateral payments (233,245) --
Reduction of restricted cash -- 5,152,276
Proceeds from long-term debt borrowings 18,035,979 5,102,482
Proceeds from 8 percent debentures, net of discount -- 9,885,000
Proceeds from issuance of common stock 905,000 2,412,000
------------ ------------
Net cash provided by financing activities 5,494,316 18,078,981
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (29,347) --
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (345,660) 10,474,540
CASH AND CASH EQUIVALENTS, beginning of period 397,927 --
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 52,267 $ 10,474,540
============ ============
</TABLE>
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<PAGE> 7
<TABLE>
<CAPTION>
Nine Months
Ended May 31
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid for interest $ 880,575 $ 255,874
============== ==============
Cash paid for income taxes $ -- $ --
============== ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Debt incurred in connection with acquisitions $ -- $ 1,527,329
============== ==============
Assets acquired in connection with acquisitions $ 845,021 $ 8,135,087
============== ==============
Liabilities assumed in connection with acquisitions $ 845,021 $ 1,139,995
============== ==============
Assets contributed in connection with joint venture $ 194,565 $ --
============== ==============
Capital lease obligation incurred $ 136,121 $ 293,819
============== ==============
Common stock issued in connection with acquisitions $ -- $ 3,698,620
============== ==============
Common stock issued in connection with debenture conversions $ 1,235,972 $ --
============== ==============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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<PAGE> 8
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements included herein have been
prepared by Ponder Industries, Inc., and subsidiaries (collectively referred to
as the Company), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. However, all adjustments have been made to
the accompanying financial statements which are, in the opinion of the
Company's management, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows for the periods
covered. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented herein not misleading. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's latest
Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain reclassifications have been made to prior period balances to conform
with current period presentation.
2. NEW ACCOUNTING PRONOUNCEMENTS:
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," in June 1996. This
statement provides accounting and reporting standards for, among other things,
the transfer and servicing of financial assets. This statement is effective for
transactions occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. In December
1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of SFAS No. 125." SFAS No. 127 postpones some, but not all, of the
provisions of SFAS No. 125 to December 31, 1997. The Company believes the
adoption of these statements will not have an impact on the financial condition
or results of operations of the Company.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No.
128 replaces the presentation of Primary Earnings Per Share (EPS) with Basic
EPS and requires dual presentation of Basic and Diluted EPS on the face of the
statements of operations and requires a reconciliation of the numerator and
denominator of the Basic EPS computation to the numerator and denominator of
the Diluted EPS computation. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the
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<PAGE> 9
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
earnings of the Company. Diluted EPS is computed similarly to Fully Diluted EPS
pursuant to Accounting Principles Board Opinion No. 15, "Earnings Per Share."
SFAS No. 128 is effective for financial statements issued after December 15,
1997, and earlier application is not permitted. SFAS No. 128 requires
restatement of all prior period EPS data presented. Management has determined
that SFAS No. 128 will not impact EPS for the three and nine months ended May
31, 1997, because dilutive per share amounts are not applicable for loss
periods.
3. LONG-TERM DEBT:
In December 1996, the Company entered into a revolving account transfer and
purchase agreement (Receivable Revolver) with a financial institution which
allows the Company to factor up to $4 million of its eligible accounts
receivable at a discount rate equal to the higher of 7 percent or the Base
Rate, as defined, plus 5.5 percent (14 percent at May 31, 1997). This financing
is with the same financial institution which provided a $2.5 million Inventory
Revolver and $3.5 million Term Loan in November 1996 as discussed in the notes
included in the Company's latest Annual Report on Form 10-K. The Company's
obligations under this agreement are secured by the Company's accounts
receivable not factored, its inventory and by 1,000 shares of one of its
subsidiaries, a limited guarantor. The agreement requires compliance with the
same covenants as those under the Inventory Revolver and Term Loan. The
agreement expires in December 1998. At May 31, 1997, $1,830,259 was outstanding
under this agreement. During the three months ended May 31, 1997, the Company's
minimum tangible net worth requirement under these agreements was redefined and
was reduced to $10.5 million from $13.5 million. As a result of continuing
operating losses during the three months ended May 31, 1997, and as a result of
the matter discussed in Note 5 below, the Company's tangible net worth at May
31, 1997, fell below the required minimum and, accordingly, all amounts due
this financial institution have been classified as current on the accompanying
balance sheet at May 31, 1997. Management of the Company is currently
discussing this covenant violation with the financial institution and believes
that it will be able to obtain a waiver or further amendments to the agreement
to permit long-term classification. There can be no assurance that such waiver
or amendments will be obtained.
4. 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 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 had been a defendant in a lawsuit by a former employee seeking
damages for a wrongful termination. The suit was filed in December 1993. The
suit sought 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
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<PAGE> 10
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. On
April 7, 1997, a final judgment was issued whereby the former employee will
recover the sum of $200,000 out of the funds held in the registry of the Court
and 77,922 shares of Rule 144 common stock of the Company was issued to the
former employee. Included in general and administrative expenses for the nine
months ended May 31, 1997, is $265,000 of accrued settlement costs relating to
disposition of this suit.
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 transferred it to the Western
District of New York. The Company and certain plaintiffs holding an aggregate
of $1,250,000 of debentures have settled their claims against each other. In
connection with such settlement, the Company has issued 1,177,173 shares of
common stock during the nine months ended May 31, 1997. Subsequent to May 31,
1997, an additional $500,000 of debentures were converted into 460,000 shares
of common stock as described in Note 9 below.
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.
5. OFFICER RESIGNATION:
During the three months ended May 31, 1997, the Company's president and chief
executive officer resigned. The Company and the former officer entered into an
agreement whereby the Company agreed to a final payment for its September 1995
purchase of Armstrong Tool, Inc., which was previously wholly owned by the
former officer and his wife. Additionally, the agreement stipulated the payout
provisions under the former officer's employment agreement entered into in
September of 1995 and the cancellation of an option held by the former officer
to purchase 145,455 shares of the Company's common stock. The payment for the
purchase of Armstrong Tool, Inc., which requires monthly payments of
approximately $12,000 through August 1998, and the employment agreement
payments of approximately $8,300 per month through August
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<PAGE> 11
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1999, are both noninterest bearing. The Company has imputed interest on both of
these obligations at 15 percent per annum, its estimated incremental borrowing
rate. As a result of the agreement entered into with the former officer, as
well as the acceleration of deferred compensation associated with an award of
459,333 shares of the Company's common stock to the former officer in 1995, the
Company was required to accrue for and recognize approximately $450,000 in
compensation expense during the three months ended May 31, 1997. Other than
interest expense on the associated obligations, this current recognition of
compensation expense should result in no future expense to the Company
associated with this matter.
6. EQUITY TRANSACTIONS:
During the three months and nine months ended May 31, 1997, $1,150,000 and
$1,250,000 of convertible debentures, plus accrued and unpaid interest, were
converted into 1,113,173 and 1,177,173 shares of common stock, respectively.
During the three months ended May 31, 1997, 1,273,104 restricted shares of the
Company's common stock were sold, resulting in net proceeds to the Company of
approximately $905,000. Warrants to purchase 389,952 shares of the Company's
common stock, expiring April 23, 1999, were granted in connection with the sale
of common stock referred to above. Management of the Company has assigned a
value of approximately $125,000 to these warrants, based upon an option pricing
model, which is reflected as a component of additional paid-in capital. For the
three months ended May 31, 1997, all 289,873 treasury shares held by the
Company were issued in connection with the transactions described above.
7. PURCHASE OPTION:
In May 1996, the Company signed a letter of intent to acquire Abilene, Texas,
based G&L Fishing Tool Company (G&L). In July 1996, the Company entered into an
agreement with G&L which gave the Company a one-year option, expiring July 23,
1997, to acquire 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 May 31, 1997, the Company had not exercised this
option. Management of the Company is seeking to extend the expiration of the
option as it does not anticipate consummating the proposed acquisition of G&L
during the fiscal year ending August 31, 1997. Management of the Company
believes that it will be able to obtain an extension of the option. There can
be no assurances that the purchase option will be extended beyond its
originally scheduled expiration date which would result in an immediate charge
to expense for the $1 million forfeitable deposit.
8. STORE CLOSURES:
During the three months ended May 31, 1997, the Company closed two of its
recently established operating locations. In connection with these closures,
the present value of future minimum payments required under noncancelable
operating leases of approximately $84,000 was accrued and recorded as a
component of operating expenses.
9. SUBSEQUENT EVENTS:
In May 1997, the Company entered into a commitment to convert $500,000 of
convertible debentures into 460,000 shares of the Company's common stock. The
shares were issued in June 1997. In June 1997, an additional $770,000 in
convertible debentures were converted into 954,640 shares of the Company's
common stock.
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<PAGE> 12
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In May 1997, the Company received an advance of $750,000 for certain equipment
to be sold. The proceeds are recorded as a component of accrued liabilities on
the accompanying condensed consolidated balance sheet at May 31, 1997. In June
1997, the Company sold such equipment. The Company has not yet determined the
gain or loss, if any, to be recorded in the fourth quarter of the fiscal year
ending August 31, 1997, associated with this disposition.
In June 1997, the Company sold 560,015 shares of restricted common stock and
received net proceeds of approximately $300,000.
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<PAGE> 13
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain "forward-looking"
statements as such term is defined in the Private Securities Litigation Reform
Act of 1995 and information relating to Ponder Industries, Inc. (the Company),
and its subsidiaries that are based on the beliefs of the Company's management
as well as assumptions made by and information currently available to the
Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect" and "intend" and words or phrases of similar
import, as they relate to the Company or its subsidiaries or Company
management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions related to
certain factors including, without limitations, competitive factors, general
economic conditions, customer relations, relationships with vendors, the
interest rate environment governmental regulation and supervision, seasonality,
distribution networks, product introductions and acceptance, technological
change, changes in industry practices, one-time events and other factors
described herein. Based upon changing conditions, should any one or more of
these risks or uncertainties materialize, or should any underlying assumptions
prove incorrect, actual results may vary materially from those described herein
as anticipated, believed, estimated, expected or intended. The Company does not
intend to update these forward-looking statements.
The following discussion is included to describe the Company's financial
position and results of operations for the three-month and nine-month periods
ended May 31, 1997 and 1996. The condensed 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
approximately 20 locations domestically and 2 internationally serving the North
Sea area.
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 near $20s per barrel for several months and many industry analysts are
forecasting this situation to continue throughout 1997. These favorable market
conditions should continue and provide Ponder with the business environment
necessary to return to profitability.
Effective April 26, 1997, Larry D. Armstrong resigned as Chairman, President
and Chief Executive Officer. Eugene L. Butler was named as his successor.
LIQUIDITY AND CAPITAL RESOURCES
In November 1996, the Company completed a financing agreement with a financial
institution. The agreement includes a $2.5 million revolving credit note and a
$3.5 million term note. In December 1996, the Company borrowed the balance of
these notes and applied the net proceeds to pay off its existing bank debt of
approximately $3 million with the remaining $3 million applied to fund the
Company's expansion
-13-
<PAGE> 14
activities. In December 1996, the Company entered into a revolving account
transfer and purchase agreement with the same financial institution which
allows the Company to factor up to $4 million of its eligible accounts
receivable. The receivable facility is being utilized for short-term liquidity
needs and at May 31, 1997, has an outstanding balance of approximately $1.8
million. The terms of the respective financing agreements are more fully
described in Note 3 to the accompanying financial statements.
The financing agreements contain certain covenants, including a required
minimum tangible net worth, as defined, of $10.5 million. As a result of
continuing operating losses and as a result of the Company being required to
accrue for and recognize approximately $450,000 in compensation expense
relating to an agreement between the Company and the Company's former president
and chief executive officer upon his April 1997, resignation (see Note 5), the
Company's tangible net worth fell below the required minimum. Therefore, the
Company is in default of the required covenant and, accordingly, the Company is
required to classify all amounts due the financial institution as current on
the accompanying balance sheet at May 31, 1997. The financial institution has
agreed to review the Company's plans to remedy the covenant violation.
Management believes that the Company has initiated cost reduction actions and
has available certain equity transactions (as subsequently discussed) which may
assist the Company in complying with the minimum tangible net worth
requirement.
As a result of the previously described causes, the Company's working capital
was an approximate negative $8.6 million at May 31, 1997, compared to a
positive $1.2 million at August 31, 1996. The current ratio at May 31, 1997,
was .52 to 1.0 as compared to 1.17 to 1.0 at August 31, 1996.
In April 1997, the Company completed a review of the Company's aggressive
expansion program during the previous 18 months. As a result, the Company has
taken initial steps to reduce costs and establish positive cash flow and
profitability. The Company has closed two of its unsuccessful north Louisiana
expansion locations and has reduced its overall operating, sales and
administrative staff costs and related expenses. Management believes these cost
reductions will approximate 15 percent. These initial cost reductions should be
reflected in the fourth quarter of fiscal 1997 and management believes that
these reductions will not have a negative impact on the Company's operations.
Management is continuing to review the potential of each operating location and
is further evaluating the Company's operating and administrative costs. The
Company plans to initiate further cost reduction actions during the fourth
quarter of fiscal 1997.
In June 1997, the Company sold 560,015 shares of restricted common stock and
received net proceeds of approximately $300,000. Management believes that
additional funds may be available to the Company in similar transactions.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED
MAY 31, 1997, AND MAY 31, 1996
A net loss of $2,111,330, or $.16 per share, was recorded for the three months
ended May 31, 1997, as compared to a net loss of $634,565, or $.07 per share,
for the same period of the prior year. The Company's operating loss was
$1,298,442, or $.10 per share, compared to an operating loss of $386,672, or
$.04 per share, for the same period of the prior year.
Revenues increased $2,611,392, or 87 percent, to $5,613,956 for the three
months ended May 31, 1997, compared to $3,002,564 for the same period of the
prior year. The increase is due to a significant increase in the Company's
marketing effort and an increase in operating locations.
-14-
<PAGE> 15
Cost of sales and services increased $1,141,911, or 96 percent, to $2,329,120
for the three months ended May 31, 1997, from $1,187,209 for the same period of
the prior year. The Company's gross profit margin was 59 percent and 60 percent
for the respective reporting periods. Operating expenses increased $1,665,638,
or 141 percent, to $2,850,636 from $1,184,998. These increases are due to the
increase in sales activity and an increase in new store locations and operating
personnel.
General and administrative expenses increased $715,613, or 70 percent, to
$1,732,642 as compared to $1,017,029 for the prior period. The Company has
significantly increased its regional and corporate sales group and has
increased its corporate and administrative staff as a result of the expansion
effort. Additionally, the Company has incurred increased accounting, legal and
public corporation expenses associated with the increase in business activity.
Net interest expense increased $447,108 to $707,176 as compared to $260,068
for the comparable prior period. The increase is due primarily to $264,406
noncash interest and debt issue cost amortization on the 8 percent convertible
debentures issued effective April 26, 1996. The company's increase in bank debt
and other financing arrangements and an increase in the average interest rate
of bank debt has resulted in an approximate $182,700 increase in interest
expense.
COMPARISON OF THE NINE MONTHS ENDED
MAY 31, 1997, AND MAY 31, 1996
A net loss of $5,045,216, or $.40 per share, was recorded for the nine months
ended May 31, 1997, compared to net income of $54,717, or $.01 per share, for
the same period of the prior year. In February 1996, the Company disposed of
its operations in Azerbaijan and recorded a gain of $1,400,000, or $.18 per
share, on the discontinued operations that were previously written off. The
Company's operating loss was $3,378,408, or $.27 per share, compared to an
operating loss of $1,070,731, or $.13 per share, for the same period of the
prior year.
Revenues increased $8,818,577, or 123 percent, to $16,002,998 for the nine
months ended May 31, 1997, compared to $7,184,421 for the same period of the
prior year. The increase is due to the Company's expansion effort and related
increase in operating locations and marketing effort.
Cost of sales and services increased $3,688,390, or 118 percent, to $6,808,516
for the nine months ended May 31, 1997, as compared to $3,120,126 for the same
period of the prior year. The Company's gross profit margin was 57 percent for
each of the reporting periods. Operating expenses increased $5,461,713, or 216
percent, to $7,990,079 from $2,528,366. These increases are due to the increase
in store locations and the addition of operating and sales personnel.
General and administrative expenses increased $1,976,151, or 76 percent, to
$4,582,811 as compared to $2,606,660 for the prior period. The Company has
significantly increased its regional and corporate sales group and has
increased its corporate and administrative staff as a result of its expansion
effort. Additionally, the Company has incurred increased accounting, legal and
public corporation expenses associated with the increase in business activity.
Net interest expense increased $1,152,231 to $1,626,482 as compared to $474,251
for the comparable prior period. The increase is due primarily to $739,561
noncash interest and debt issue cost amortization on the 8 percent convertible
debentures issued effective April 26, 1996. The Company's increase in bank debt
and other financing arrangements and an increase in the average interest rate
of bank debt has resulted in an approximate $412,700 increase in interest
expense.
-15-
<PAGE> 16
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - For a description of legal proceedings against
the Company, see Note 4 of the notes to condensed consolidated
financial statements included herein.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on the 12th of
March 1997 and, at such meeting, certain proposals were submitted to a
vote of the stockholders. The proposals and the results are listed
below:
Proposal No. 1.* To amend the Certificate of Incorporation of the
Company to provide for the classification of the Board of Directors
into three classes of directors with staggered terms of office.
Proposal No. 2.* To amend the Certificate of Incorporation of the
Company to provide that any vacancy on the Board of Directors may be
filled only by the affirmative vote of two thirds of the remaining
directors.
Proposal No. 3.* To amend the Certificate of Incorporation of the
Company to provide that the number of directors will be between
three and twelve, but any increase in the number of directors shall
require the approval of two thirds of the current directors.
Proposal No. 4.* To amend the Certificate of Incorporation of the
Company to provide that the stockholder vote required to amend or
repeal any of the provisions contained in the Amendments to the
Certificate of Incorporation of the Company in Proposals No. 1, No.
2 and No. 3 be increased from a majority to two thirds of the
Company's Common Stock.
Proposal No. 5. To amend the Certificate of Incorporation of the
Company to authorize 5,000,000 shares of Preferred Stock.
Proposal No. 6. To amend the Certificate of Incorporation of the
Company to provide for the limitation of liability of the directors
of the Company to the fullest extent permitted by the Delaware
General Corporation Law.
Proposal No. 8 To approve the Company's 1997 Long-Term Incentive
Plan.
Proposal No. 9 To ratify the appointment of Arthur Andersen LLP
as the Company's independent public accountants for the fiscal year
ending August 31, 1997.
-16-
<PAGE> 17
<TABLE>
<CAPTION>
Broker Total Shares
Proposals For Against Abstain Nonvote Results Represented
- --------- --------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
No. 1* 3,013,940 1,475,646 27,687 4,206,664 *Failed 8,723,937
No. 2* 5,081,199 1,575,788 22,850 2,044,100 * 8,723,937
No. 3* 5,093,603 1,570,533 23,244 2,036,557 * 8,723,937
No. 4* 5,069,351 1,590,585 27,444 2,036,557 * 8,723,937
No. 5 2,760,965 1,680,921 67,844 4,214,207 Failed 8,723,937
No. 6 3,819,126 1,572,717 52,950 3,279,144 Failed 8,723,937
No. 7 See Below
No. 8 4,405,801 296,116 48,450 3,973,570 Passed 8,723,937
No. 9 8,665,284 13,822 43,831 1,000 Passed 8,723,937
</TABLE>
* These four items were inextricably tied together, therefore, if any
one failed to pass, none could pass.
Proposal No. 7 The following persons were nominated for election as
directors of the Company, and all nominees were elected. The shares
voted for, and those withheld from, each nominee are set forth below
opposite such nominee's name:
<TABLE>
<CAPTION>
Shares Shares
Director Nominees Voted For Withheld
--------- --------
<S> <C> <C>
Eugene L. Butler 7,421,121 1,302,816
Frank J. Wall 7,422,121 1,301,816
Joe R. Nemec 7,421,121 1,302,816
John Roane 7,421,121 1,302,816
Rittie W. Milliman, Sr. 7,421,121 1,302,816
John M. LeSeelleur 7,421,121 1,302,816
Larry D. Armstrong 7,422,121 1,301,816
Bill M. Van Meter 7,421,121 1,302,816
</TABLE>
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*11 - Computation of Earnings (Loss) Per Share.
*27 - Financial Data Schedule.
(b) Reports on Form 8-K
(1) A Form 8-K (Item 9. Sales of Equity Securities Pursuant to
Regulation S) was filed on April 15, 1997, reporting the
sale of 511,200 shares of common stock to Optimum Fund.
(2) A Form 8-K (Item 9. Sales of Equity Securities Pursuant to
Regulation S) was filed on May 7, 1997, reporting the sale
of 761,904 shares of common stock to OREZ Ltd.
- ---------------
* Filed herewith
-17-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PONDER INDUSTRIES, INC.
By /s/ Eugene L. Butler
-------------------------
Eugene L. Butler
President, Chief Executive
Officer and Chairman of the
Board of Directors
By /s/ Gerald A. Slaughter
-------------------------
Gerald A. Slaughter
Senior Vice President and
Controller
Dated: July 14, 1997
<PAGE> 19
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
*11 Computation of Earnings (Loss) Per Share.
*27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 11
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Ended May 31 Nine Months Ended May 31
--------------------------- --------------------------
1997 1996 1997 1996
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
COMPUTATION OF PRIMARY EARNINGS (LOSS) PER
SHARE:
Net income (loss) $ (2,111,330) $ (634,565) $ (5,045,216) $ 54,717
============ =========== ============ ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK OUTSTANDING 13,427,304 9,063,125 12,674,559 7,961,125
WEIGHTED AVERAGE INCREMENTAL SHARES
OUTSTANDING UPON ASSUMED CONVERSION OF
OPTIONS (b) -- -- -- 48,333
------------ ----------- ------------ ----------
WEIGHTED AVERAGE COMMON SHARES
AND COMMON SHARE EQUIVALENTS USED FOR
COMPUTATION 13,427,304 9,063,125 12,674,559 8,009,458
============ =========== ============ ==========
PRIMARY EARNINGS (LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ (.16) $ (.07) $ (.40) $ .01
============ =========== ============ ==========
COMPUTATION OF FULLY DILUTED
EARNINGS (LOSS) PER SHARE:
Net income (loss) $ (2,111,330) $ (634,565) $ (5,045,216) $ 54,717
============ =========== ============ ==========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 13,427,304 9,063,125 12,674,559 7,961,125
WEIGHTED AVERAGE INCREMENTAL SHARES
OUTSTANDING UPON ASSUMED CONVERSION OF
OPTIONS (b) -- -- -- 48,333
WEIGHTED AVERAGE INCREMENTAL SHARES
OUTSTANDING UPON ASSUMED CONVERSION OF
CONVERTIBLE DEBENTURES (b) -- -- -- --
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS USED FOR
COMPUTATION 13,427,304 9,063,125 12,674,559 8,009,458
============ =========== ============ ==========
EARNINGS (LOSS) PER COMMON SHARE AND
COMMON SHARE EQUIVALENT ASSUMING FULL
DILUTION $ (.16) $ (.07) $ (.40) $ .01(a)
============ =========== ============ ==========
</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 or results in dilution of less than 3 percent.
(b) The options and convertible debentures have an antidilutive effect in
periods with losses and are, therefore, excluded from the computation.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PONDER
INDUSTRIES, INC.'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF MAY 31, 1997, AND
ITS CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 52,567
<SECURITIES> 0
<RECEIVABLES> 5,792,897
<ALLOWANCES> 314,348
<INVENTORY> 3,569,345
<CURRENT-ASSETS> 9,219,884
<PP&E> 32,470,741
<DEPRECIATION> (13,865,029)
<TOTAL-ASSETS> 32,579,958
<CURRENT-LIABILITIES> 17,817,594
<BONDS> 8,726,892
0
0
<COMMON> 149,169
<OTHER-SE> 4,207,412
<TOTAL-LIABILITY-AND-EQUITY> 32,579,958
<SALES> 16,002,998
<TOTAL-REVENUES> 16,002,998
<CGS> 6,808,516
<TOTAL-COSTS> 19,381,406
<OTHER-EXPENSES> 14,694
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,626,482
<INCOME-PRETAX> (5,045,216)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,045,216)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,045,216)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
