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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, 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)
<TABLE>
<C> <C>
DELAWARE 75-2268672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5005 RIVERWAY DRIVE, SUITE 550 77056
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (713) 965-0653
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS: NAME OF EXCHANGE ON WHICH REGISTERED:
-------------------- -------------------------------------
<C> <C>
Common Stock, National Association of Securities
$.01 par value Dealers Automated Quotation System
</TABLE>
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 ____.
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 X.
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The number of shares outstanding of the Registrant's common stock as of
November 24, 1997 is 28,681,620.
The aggregate market value of the stock held by non-affiliates of the
Registrant as of November 24, 1997 was approximately $37,110,587.
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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 April
1997, Eugene L. Butler became Chairman and Chief Executive Officer of the
Company. Under Mr. Butler's leadership, a business strategy was implemented in
1997 that focused on reducing the Company's expenses and improving Ponder's
domestic and international market position by pursuing opportunities in
strategic oil and gas markets and through 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 borehole of the well. Likewise, equipment can
accidentally be dropped into 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. Such equipment is generally leased by Ponder, but it 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 its 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 also rents specialized oilfield equipment such as pressure
control equipment, tools, pipe, tubing and whipstocks used in the drilling,
completion and workover of wells.
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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, and 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.
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 and workover activity generally occurs during the early months of the
year due to inclement weather. Purchases of the Company's products and services
are also to a substantial extent deferrable in the event oil and gas companies
reduce capital expenditures as a result of conditions existing in the oil and
gas industry or general economic downturns. Fluctuations in the Company's
revenues and costs may have a material adverse effect on the Company's business
and operations. Accordingly, the Company's operating results may vary from
quarter to quarter, depending upon factors outside of its control.
PATENTS AND LICENSES
The Company has followed a policy of seeking 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
The following describes acquisitions by the Company during the year ended
August 31, 1996. The Company had no significant acquisitions during the years
ended August 31, 1997 and 1995.
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 former president and his spouse. Consideration given for
Armstrong was the issuance of a $400,000 promissory note to the Company's former
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.
Effective October 1995, the Company acquired certain real property,
vehicles and rental tools and equipment from Apex Tool ("Apex"), a sole
proprietorship. Apex is located in Healdton, Oklahoma, and provides fishing and
rental tool services in the South Central Oklahoma and North Texas region. The
assets of Apex were acquired for $600,000 of which $200,000 was paid at closing.
The amount paid at closing was funded through borrowing from a commercial bank
as described in Note 6 of the Notes to Consolidated
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Financial Statements. A $400,000 note payable, bearing interest at 9 percent per
annum was paid in two installments of $200,000 March 15, 1996 and 1997, to the
owner of Apex.
Effective April 1996, the Company completed the acquisition of Panther Oil
Tools, (UK) Ltd. ("Panther"), an English company, and substantially all of the
assets of Villain Ltd. ("Villain"), a Guernsey company, for $1,250,000 and
1,200,000 shares of the Company's restricted common stock which were valued on
the date of issuance at $3,060,000.
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 $283,000 and 331,455 shares of
the Company's restricted common stock which were valued on the date of issuance
at approximately $640,000.
Effective June 1996, the Company acquired substantially all of the assets
of Reeled Tubular Components, Inc., of 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 on the date of issuance.
Effective July 1996, the Company acquired all of the fixed assets of Brooks
Oil Service Co., L.P., and Bosco Fishing and Rental Tools, of Laurel,
Mississippi, for an initial cash payment of $200,000, and the assumption of
$1,200,000 in liabilities.
In August 1996, the Company acquired all of the issued ordinary shares of
Prime Pipe Limited, a UK company, for approximately $105,000 and the issuance of
4,650 shares of the Company's common stock.
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 to acquire
G&L under the same terms as the letter of intent. In connection with this
agreement, the Company paid to G&L a $1,000,000 forfeitable deposit. At August
31, 1996, approximately $1,172,000 related to this pending acquisition,
including the forfeitable deposit, was included in other assets in the Company's
consolidated balance sheet. In July 1997, the Company had not acquired G&L and
the option expired, requiring the Company to write-off $1,172,000 as an expense.
Management of the Company anticipates that it will continue to hold discussions
with management of G&L with regards to a potential acquisition of G&L by the
Company.
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,
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.
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FOREIGN OPERATIONS
Information by geographic location for the fiscal years 1997 and 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 (expressed in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1997 1996
---------- ----------
<S> <C> <C>
Net Sales --
Domestic.................................................... $16,598 $10,857
Foreign..................................................... 5,277 1,104
------- -------
Total............................................. $21,875 $11,961
======= =======
Loss from continuing operations --
Domestic.................................................... $(9,584) $(5,123)
Foreign..................................................... ( 337) (147)
------- -------
Total............................................. $(9,921) $(5,270)
======= =======
Identifiable assets --
Domestic.................................................... $17,585 $21,552
Foreign..................................................... 9,032 6,350
------- -------
Total............................................. $26,617 $27,902
======= =======
</TABLE>
The Company's foreign operations relate to Panther and Villain as discussed
in Note 15 of 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 those available to 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.
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. The Company
conducts safety training programs 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
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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 November 24, 1997, the Company had approximately 153 full-time
employees. The Company has no contracts or collective bargaining agreements with
labor unions and considers its relations with its employees to be satisfactory.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company, their names, ages, positions
and tenure with the Company as of November 24, 1997 are as follows:
<TABLE>
<CAPTION>
OFFICER
NAME AGE POSITION SINCE
---- --- -------- -------
<S> <C> <C> <C>
Eugene L. Butler........................ 56 Chairman, President and Chief 1996
Executive Officer
Gerald A. Slaughter..................... 54 Senior Vice President and 1996
Chief Financial Officer
Frank J. Wall........................... 42 Senior Vice President of 1990
Operations
Shirley Meyer........................... 57 Vice President Human 1997
Resources and Investor
Relations and Secretary
</TABLE>
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 or her
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 18 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 a financial institution 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
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proceeding against the Company and various former officers and directors of the
Company on the basis of alleged violations of the Securities Exchange 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. In July
1997, the Commission accepted the Company's and the various former officers' and
directors' offer of a non-cash settlement whereby the Commission ordered that
the Company and the various former officers and directors cease and desist from
committing or causing any violations of the Exchange Act.
The Company had been a defendant in a lawsuit filed by a former employee in
December 1993 seeking damages for wrongful termination. The suit sought
approximately $317,000 in unpaid wages and value of $143,000 for 38,052 shares
of stock he would have earned during the remainder of his contract term. In
April 1997, a final judgment was issued whereby the former employee recovered
the sum of $200,000 and 77,922 shares of restricted common stock of the Company
was issued to the former employee. Included in general and administrative
expenses for the year ended August 31, 1997, is $265,000 of 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. In September 1997, the Company reached a settlement with
those convertible debenture holders who had not previously converted their
debentures whereby the Company agreed to convert all of such debenture holders'
then outstanding debenture debt of approximately $7,060,000, including accrued
interest, into 10,633,333 shares of the Company's common stock. The Company also
agreed to issue to such debenture holders five-year warrants to purchase an
additional 957,000 shares of the Company's common stock at $1 per share. At
August 31, 1997, the Company had accrued approximately $100,000 as its estimate
of the fair value of the warrants issued in settlement of this matter.
In September 1997, a case was filed against the Company in the United
States District Court for the Northern District of Georgia, Atlanta Division, by
the placement agent in the above mentioned debenture offering, alleging that, in
connection with such offering, the Company tortiously interfered with its
business relationships, breached a Proprietary Information, Non-Circumvention
and Indemnification Agreement between the Company and the placement agent,
defamed the placement agent and engaged in conduct giving rise to an
indemnification in favor of the placement agent. The plaintiff seeks actual
damages in an amount not less than $1,000,000 per breach, exemplary damages in
an amount not less than $2,500,000, interest, costs and attorney's fees. The
Company has removed the case to federal court and filed counterclaims against
the plaintiff. Although no assurances can be given, the Company believes it has
meritorious defenses to the above action and intends to defend itself
vigorously.
The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is unlikely
that the final outcome of any of the claims or proceedings to which the Company
is a party, including those described above, would have a material adverse
effect on the Company's financial statements; however, due to the inherent
uncertainty of litigation, the range of possible loss, if any, cannot be
estimated with a reasonable degree of precision and there can be no assurance
that the resolution of any particular claim or proceeding would not have an
adverse effect on the Company's results of operations for the interim period in
which such resolution occurred. The Company had accrued $500,000 at August 31,
1996 as its estimate of costs it expected to incur in defense of the above
actions. At August 31, 1997, approximately $170,000 of the accrued amount was
remaining.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of November 24, 1997, there were approximately 1,900 beneficial owners
of the Company's common stock which is traded on the NASDAQ SmallCap System
under the symbol "PNDR". The following table sets forth, for the calendar
periods indicated, the range of high and low bid closing prices for the
Company's common stock, as reported by the NASDAQ Small Cap System:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter................................ $2 1/16 $1 3/8 $1 5/8 $ 3/4
Second Quarter............................... 2 1 1/4 4 1/16 1
Third Quarter................................ 1 5/16 25/32 6 1/4 3 13/16
Fourth Quarter............................... 1 3/32 7/16 4 7/8 1 5/16
</TABLE>
The closing price of the Company's common stock on November 24, 1997 was
$1 29/32.
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 certain of the Company's 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
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31
-----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Tool rentals and sales............... $ 21,875 $ 11,961 $ 6,757 $ 7,635 $ 8,719
======== ======== ======= ======= =======
Loss from continuing operations...... $ (9,921) $ (5,270) $ (440) $(1,567) $(1,280)
Income (loss) from discontinued
operations......................... -- 1,378 (3,791) (1,532) --
Cumulative effect of change in
accounting principle............... -- -- 1,139 -- --
-------- -------- ------- ------- -------
Net loss............................. $ (9,921) $ (3,892) $(3,092) $(3,099) $(1,280)
======== ======== ======= ======= =======
Income (loss) per share --
Continuing operations................ $ (.73) $ (.61) $ (.07) $ (.25) $ (.20)
Discontinued operations.............. -- .16 (.59) (.24) --
Change in accounting principle....... -- -- .18 -- --
-------- -------- ------- ------- -------
Net loss............................. $ (.73) $ (.45) $ (.48) $ (.49) $ (.20)
======== ======== ======= ======= =======
</TABLE>
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BALANCE SHEET DATA
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
AUGUST 31
--------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Working capital (deficit)............... $(8,846) $ (273) $1,210 $(3,389) $ 425
Total assets............................ 26,617 27,902 6,815 10,829 13,555
Long-term debt.......................... 670 4,148 2,343 -- 2,450
Stockholders' equity.................... 1,469 7,013 2,312 5,407 8,508
Book value per common share............. $ .08 $ .59 $ .36 $ .85 $ 1.33
</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, 1997. 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 oilfield 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 oilfield
equipment such as pressure control equipment, tools, pipe, tubing and whipstocks
used in the drilling, completion and workover of wells. Ponder currently has 18
locations domestically and two international locations 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.
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 fiscal 1996 management raised over $12 million in cash from financing
activities including the sale of convertible debentures and common stock.
Subsequent to the 1996 fiscal year-end, Ponder completed a $10 million financing
agreement to pay off existing bank debt and provide additional working capital
for continuing growth. Ponder acquired 10 companies in fiscal 1996 and 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. Revenues
increased to $21,900,000 in 1997, from $12,000,000 in 1996 and $6,800,000 in
1995, reflecting the Company's expansion program; however, the Company continued
to incur substantial losses and cash flow deficiencies. Effective April 26,
1997, Mr. Larry D. Armstrong resigned as Chairman, President and Chief Executive
Officer. Eugene L. Butler was named as his successor. Mr. Butler has
approximately 28 years industry experience. From 1974 through 1991, he served in
various executive capacities for Weatherford/Enterra, Inc., a multinational
energy corporation, including director, president, chief executive officer and
chief operating officer.
In April 1997, the Company commenced a major cost reduction program which
included a 10% reduction in personnel, closing two of its unsuccessful operating
locations in North Louisiana, the sale of certain non-productive equipment to
reduce debt, resolving the litigation involving its convertible debenture
holders and substantially reducing general and administrative expenses. This
cost reduction program had a positive impact on the quarter ended August 31,
1997.
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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 has allowed for higher prices in 1997 and 1996 than the average
prices for the past several years. World oil prices have been near $20 per
barrel for several months and many industry analysts are forecasting this
situation to continue in 1998. These favorable market conditions are expected to
continue and allow Ponder to continue its growth and return to profitability.
FINANCIAL CONDITION AND LIQUIDITY
In November 1996, the Company completed a $10 million financing agreement
with a financial institution. The agreement includes a $4 million Revolving
Receivable Facility, a $2.5 million Revolving Credit Note and a $3.5 million
Term Note (the "Notes"). The Receivable Facility is a two year facility that 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 were used to acquire capital assets to
expand the Company's business. The $3.5 million Term Note is a five and one-half
year note, interest only for the first six months, and amortizes over the
remaining five years, collateralized by equipment. The funds were used to pay
off existing bank debt of $3 million with the balance being used to fund
operations and acquire capital equipment. At August 31, 1997, the Company had
borrowed approximately $7.3 million under the Notes. The Notes require
compliance with various covenants, including the maintenance of a defined debt
service coverage ratio and a defined tangible net worth. As a result of
continued losses primarily relating to the Company's expansion program, the
Company was not in compliance with certain covenants and the total amount of
approximately $7.3 million due the financial institution has been classified as
current in the Company's balance sheet at August 31, 1997.
In April 1996, the Company raised approximately $10 million, net of fees,
by issuing eight percent Convertible Debentures. As discussed in Note 13 to the
Financial Statements, claims and counterclaims were filed between certain
convertible debenture holders and the Company. During the period of litigation,
the Company incurred substantial legal expenses in defense of the litigation. In
September 1997, the Company reached a settlement whereby those convertible
debenture holders who had not previously converted their debentures with the
Company agreed to convert the then outstanding debenture debt of approximately
$7,060,000, including accrued interest, into 10,633,333 shares of the Company's
common stock. The conversion of the debentures will increase the Company's
equity by approximately $6.7 million.
The Company acquired approximately $3.6 million of property and equipment
during the 1997 fiscal year. The funds used to purchase these assets were
provided primarily from securities issued and additional borrowings.
At August 31, 1997, the Company had a working capital deficit of
approximately $8.8 million, as compared to a working capital deficit of $.3
million at August 31, 1996. The current ratio was approximately .46 to 1.0 at
August 31, 1997, compared to .96 to 1.0 for the previous year end. Included as a
component of the Company's working capital at August 31, 1997 is $800,000
representing the Company's investment in 2 million shares of Titan Resources,
Inc. ("Titan") common stock. The Titan common stock is a thinly traded and
volatile security. See also Notes 2 and 3 of Notes to Consolidated Financial
Statements. As previously discussed, the Company's total debt of approximately
$7.3 million with a financial institution has been classified as current in the
Company's balance sheet as of August 31, 1997 and is included as a component of
the $8.8 million working capital deficit. The Company is in discussions with its
financial institution lender to modify or amend its debt agreements with such
lender, which would put the Company back in compliance with the above mentioned
covenants. This would allow the Company to reclassify substantially all of such
lender's debt as long-term rather than current. The Company is also negotiating
to increase the Company's borrowing capacity in connection with its pending
acquisition and private placement discussed below.
A $2,500,000 bridge loan was recently obtained from a financial partner
with the intention of providing additional capital for acquisitions and
expansion of the Company's business. The Company, in October 1997, signed a
letter of intent to purchase Fishing Tools, Inc. for $6,500,000 cash and
$1,000,000 in stock. The closing of this transaction is subject to normal due
diligence being completed, as well as the Company's ability to obtain capital at
an adequate cost. The Company has entered into a letter of intent with the
financial
10
<PAGE> 11
partner, which includes providing $8,000,000 in equity capital, as well as
converting the bridge loan into equity. The closing of these transactions will
increase the Company's equity to approximately $20,000,000 with stronger
liquidity ratios. Fishing Tools, Inc.'s (FTI) revenues were $6,200,000 in 1996.
FTI has historically been a profitable company with strong cash flow and is
anticipated to have a positive impact on the Company's future net income and
cash flow.
FISCAL YEAR ENDED AUGUST 31, 1997 AS COMPARED WITH FISCAL YEAR ENDED AUGUST 31,
1996
A net loss of $9,921,000, or $.73 per share, was recorded in 1997 compared
with a net loss of $3,892,000, or $.45 per share, in 1996. The Company's loss
from continuing operations in 1997 was $9,921,000, or $.73 per share, as
compared to a loss of $5,270,000, or $.61 per share, in 1996. 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. 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.
Revenues increased $9,914,000, or 83%, to $21,875,000 in 1997 compared to
$11,961,000 in 1996. The increase is due primarily to the Company's expansion
program initiated during fiscal 1996. During 1996 the Company added nine new
store locations in Oklahoma, Arkansas, Louisiana, Mississippi, Illinois and
Texas. During 1997, a location was added in Texas. Effective April 1, 1996, the
Company acquired Panther Oil Tools, (UK) Ltd., an English corporation, and
substantially all of the assets of Villain Ltd., a Guernsey corporation.
Substantially all of the revenue increase over the prior year resulted from the
expansion effort.
Cost of service and sales increased $4,235,000, or 80%, to $9,555,000 in
1997 from $5,320,000 in 1996. Cost of sales increased relative to the increase
in revenues. The Company's gross profit margin was 56% in each of the years 1997
and 1996. Operating expenses, as a percentage of sales increased to 50% in 1997
from 41% in 1996. The increase is due to the Company's increase in operating
locations and personnel. In the fourth quarter of 1997, the Company closed two
of its unsuccessful North Louisiana expansion locations and reduced operating
personnel and related expenses.
General and administrative expenses decreased $228,000, or 4%, to
$6,250,000 in 1997 as compared to $6,478,000 in 1996. General and administrative
expenses as a percentage of revenues, decreased to 29% in 1997 from 54% in 1996,
as a result of reduced fees for professional services and a reduction in
corporate sales and administrative personnel and related expenses.
Net interest expense increased $1,729,000 or 257%, to $2,402,000 in 1997
from $673,000 in 1996. The increase is due to an increase in debt and interest
rates. Additionally, interest expense increased approximately $652,000 due to
non-cash interest expense on the 8% Convertible Debentures issued effective
April 26, 1996, as discussed in Note 7 of the Notes to Consolidated Financial
Statements.
During 1997, the Company recorded a loss on write-down of assets in the
amount of $2,178,000. During 1996, the Company signed a letter of intent to
acquire Abilene, Texas, based G&L Fishing Tool Company and during fiscal 1997
recorded $1,172,000 as a forfeited deposit and related acquisition expense. The
option expired in July 1997, resulting in a write-off of the balance.
Additionally, the Company wrote-off approximately $446,000 relating to a Dubai
joint venture, $300,000 relating to a write-down of available for sale
securities and an approximate $260,000 write-down of the value of certain used
equipment inventory.
FISCAL YEAR ENDED AUGUST 31, 1996 AS COMPARED WITH FISCAL YEAR ENDED AUGUST 31,
1995
A net loss of $3,892,000, or $.45 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 $.61 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 $1,139,000, 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.
11
<PAGE> 12
Revenues increased $5,204,000, or 77%, to $11,961,000 in 1996 compared to
$6,757,000 in 1995. The increase was 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 1996 revenue.
The acquisition of Villain and Panther resulted in an additional $1,104,000 in
1996 revenues.
Cost of service and sales 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 expected 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 Note 18.
Net interest expense 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.
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 replaced the firm now known as Kemp &
Stich, P.C. with 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 replaced by Arthur Andersen LLP ("Andersen"). 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.
12
<PAGE> 13
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, 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.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by item 10 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by item 11 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by item 12 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by item 13 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders.
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, 1997 and 1996..... F-3
Consolidated Statements of Operations for the years ended
August 31, 1997, 1996 and 1995............................ F-4
Consolidated Statements of Stockholders' Equity for the
years ended August 31, 1997, 1996 and 1995................ F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1997, 1996 and 1995............................ F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
13
<PAGE> 14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Ponder Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Ponder
Industries, Inc. (a Delaware corporation), and subsidiaries as of August 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ponder Industries, Inc., and
subsidiaries as of August 31, 1997 and 1996, and the results of their operations
and their cash flows for the years then ended 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
consolidated financial statements, the Company has suffered recurring losses
from operations, has negative cash flows from operations, has negative working
capital at August 31, 1997, primarily as the result of the current
classification of its debt with a lender resulting from noncompliance with
certain of its debt covenants, has an accumulated deficit and has limited access
to capital resources. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The Company's management believes that
it is likely the Company's operating results for fiscal 1998 will significantly
improve over fiscal 1997 and will generate sufficient working capital to sustain
its operations throughout the year. There are no assurances that the Company can
achieve such operating improvements or that the Company will be able to achieve
future cash flows sufficient to support operations. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
October 17, 1997
F-1
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Ponder Industries, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Ponder Industries, Inc., and subsidiaries
for the year 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 results of operations and cash flows of Ponder
Industries, Inc., and subsidiaries for the year 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, 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 17 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> 16
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- AUGUST 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4 $ 398
Receivables, net of allowance for doubtful accounts of
$657 and $138 in 1997 and 1996, respectively............ 4,134 3,647
Parts and supplies........................................ 2,622 2,077
Available for sale securities............................. 800 --
Prepaid expenses and other................................ 46 514
------- -------
Total current assets............................... 7,606 6,636
------- -------
AVAILABLE FOR SALE SECURITIES............................... -- 1,400
------- -------
PROPERTY AND EQUIPMENT...................................... 31,383 29,140
Less -- Accumulated depreciation and amortization......... (14,278) (12,645)
------- -------
17,105 16,495
------- -------
OTHER ASSETS................................................ 122 1,284
DEFERRED ASSETS, net........................................ 423 854
GOODWILL, net of accumulated amortization of $393 and $346
in 1997 and 1996, respectively............................ 1,361 1,233
------- -------
1,906 3,371
------- -------
TOTAL ASSETS................................................ $26,617 $27,902
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 8,687 $ 1,393
Accounts and notes payable, trade......................... 5,562 2,863
Accrued liabilities and other............................. 2,203 2,653
------- -------
Total current liabilities.......................... 16,452 6,909
------- -------
LONG-TERM DEBT, less current maturities..................... 670 4,148
------- -------
OTHER LONG-TERM LIABILITIES................................. 765 449
------- -------
DEFERRED TAXES PAYABLE...................................... 881 233
------- -------
CONVERTIBLE DEBENTURES...................................... 6,380 9,150
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 50,000,000
shares, issued 17,571,021 and 12,131,347 shares as of
August 31, 1997 and 1996, respectively, of which 0 and
289,873 are held in treasury as of August 31, 1997 and
1996, respectively...................................... 176 121
Additional paid-in capital................................ 25,307 21,880
Cumulative foreign currency translation adjustment........ 49 24
Accumulated deficit....................................... (23,696) (13,775)
Note receivable for common stock.......................... (66) (63)
Deferred compensation..................................... (1) (146)
Unrealized loss on available for sale securities.......... (300) --
Treasury stock............................................ -- (1,028)
------- -------
Total stockholders' equity......................... 1,469 7,013
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $26,617 $27,902
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 17
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
TOOL RENTALS AND SALES.................................. $ 21,875 $ 11,961 $ 6,757
COSTS OF SERVICE AND SALES.............................. 9,555 5,320 3,361
----------- ---------- ----------
Gross profit.................................. 12,320 6,641 3,396
----------- ---------- ----------
EXPENSES:
Operating............................................. 10,900 4,941 2,230
General and administrative............................ 6,250 6,478 2,603
----------- ---------- ----------
17,150 11,419 4,833
----------- ---------- ----------
Operating loss................................ (4,830) (4,778) (1,437)
OTHER INCOME (EXPENSE):
Interest, net......................................... (2,402) (673) (471)
Gain (loss) on sale of assets......................... (534) (12) 1,320
Loss on write-down of assets.......................... (2,178) -- --
Other................................................. 23 260 148
----------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................................... (9,921) (5,203) (440)
INCOME TAX EXPENSE...................................... -- (67) --
----------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS......................... (9,921) (5,270) (440)
----------- ---------- ----------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Operations............................................ -- (22) (389)
Disposal of assets including operations in disposal
period............................................. -- -- (3,402)
Gain on sale of discontinued operations............... -- 1,400 --
----------- ---------- ----------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS............................................ -- 1,378 (3,791)
----------- ---------- ----------
LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE............................................. (9,921) (3,892) (4,231)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE... -- -- 1,139
----------- ---------- ----------
NET LOSS................................................ $ (9,921) $ (3,892) $ (3,092)
=========== ========== ==========
EARNINGS (LOSS) PER SHARE:
Loss from continuing operations....................... $ (.73) $ (.61) $ (.07)
Income (loss) from discontinued operations............ -- .16 (.59)
Cumulative effect of a change in accounting
principle.......................................... -- -- .18
----------- ---------- ----------
NET LOSS PER SHARE...................................... $ (.73) $ (.45) $ (.48)
=========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE
EQUIVALENTS OUTSTANDING............................... 13,641,558 8,717,912 6,377,564
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 18
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
CUMULATIVE NOTE
FOREIGN RECEIVABLE
COMMON STOCK ADDITIONAL CURRENCY FOR
---------------------- PAID-IN TRANSLATION ACCUMULATED COMMON
SHARES PAR VALUE CAPITAL ADJUSTMENT DEFICIT STOCK
---------- --------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, August 31, 1994............... 6,667,437 $ 67 $13,217 $-- $ (6,791) $(57)
Interest on note receivable for common
stock............................... -- -- -- -- -- (3)
Net loss.............................. -- -- -- -- (3,092) --
---------- --- ------- -- -------- ---
BALANCE, August 31, 1995............... 6,667,437 67 13,217 -- (9,883) (60)
Shares issued under employment
agreement........................... 459,333 4 182 -- -- --
Compensation expense.................. -- -- -- -- -- --
Shares issued in connection with
acquisitions........................ 1,551,455 16 3,743 -- -- --
Shares issued as employee bonus....... 25,000 -- 13 -- -- --
Shares sold with warrants attached.... 1,500,000 15 897 -- -- --
Exercise of warrants.................. 1,000,000 10 1,490 -- -- --
Shares sold........................... 83,333 1 249 -- -- --
Shares issued under option exercise... 16,500 -- 37 -- -- --
Debentures converted into shares...... 828,289 8 1,652 -- -- --
Compensation accrual for stock
grant............................... -- -- 400 -- -- --
Interest on note receivable for common
stock............................... -- -- -- -- -- (3)
Foreign currency translation
adjustment.......................... -- -- -- 24 -- --
Net loss.............................. -- -- -- -- (3,892) --
---------- --- ------- -- -------- ---
BALANCE, August 31, 1996............... 12,131,347 121 21,880 24 (13,775) (63)
Compensation expense, net............. -- -- 47 -- -- --
Shares issued in connection with
acquisitions........................ 4,650 -- 18 -- -- --
Shares issued in settlement of
lawsuit............................. 77,922 1 41 -- -- --
Shares issued in settlement of
payables............................ 429,570 4 367 -- -- --
Shares sold, including 289,873
treasury shares..................... 1,543,231 16 151 -- -- --
Shares issued under stock grant....... 500,000 5 (5) -- -- --
Debentures converted into shares...... 2,841,773 28 2,770 -- -- --
Shares contributed to 401(k) plan..... 42,528 1 38 -- -- --
Interest on note receivable for common
stock............................... -- -- -- -- -- (3)
Foreign currency translation
adjustment.......................... -- -- -- 25 -- --
Unrealized loss on available for sale
securities.......................... -- -- -- -- -- --
Net loss.............................. -- -- -- -- (9,921) --
---------- --- ------- -- -------- ---
BALANCE, August 31, 1997............... 17,571,021 $176 $25,307 $49 $(23,696) $(66)
========== === ======= == ======== ===
<CAPTION>
UNREALIZED
LOSS ON
AVAILABLE
DEFERRED FOR SALE TREASURY
COMPENSATION SECURITIES STOCK TOTAL
------------ ---------- -------- -------
<S> <C> <C> <C> <C>
BALANCE, August 31, 1994............... $ -- $ -- $(1,028) $ 5,408
Interest on note receivable for common
stock............................... -- -- -- (3)
Net loss.............................. -- -- -- (3,092)
----- ----- ------- -------
BALANCE, August 31, 1995............... -- -- (1,028) 2,313
Shares issued under employment
agreement........................... (186) -- -- --
Compensation expense.................. 40 -- -- 40
Shares issued in connection with
acquisitions........................ -- -- -- 3,759
Shares issued as employee bonus....... -- -- -- 13
Shares sold with warrants attached.... -- -- -- 912
Exercise of warrants.................. -- -- -- 1,500
Shares sold........................... -- -- -- 250
Shares issued under option exercise... -- -- -- 37
Debentures converted into shares...... -- -- -- 1,660
Compensation accrual for stock
grant............................... -- -- -- 400
Interest on note receivable for common
stock............................... -- -- -- (3)
Foreign currency translation
adjustment.......................... -- -- -- 24
Net loss.............................. -- -- -- (3,892)
----- ----- ------- -------
BALANCE, August 31, 1996............... (146) -- (1,028) 7,013
Compensation expense, net............. 145 -- -- 192
Shares issued in connection with
acquisitions........................ -- -- -- 18
Shares issued in settlement of
lawsuit............................. -- -- -- 42
Shares issued in settlement of
payables............................ -- -- -- 371
Shares sold, including 289,873
treasury shares..................... -- -- 1,028 1,195
Shares issued under stock grant....... -- -- -- --
Debentures converted into shares...... -- -- -- 2,798
Shares contributed to 401(k) plan..... -- -- -- 39
Interest on note receivable for common
stock............................... -- -- -- (3)
Foreign currency translation
adjustment.......................... -- -- -- 25
Unrealized loss on available for sale
securities.......................... -- (300) -- (300)
Net loss.............................. -- -- -- (9,921)
----- ----- ------- -------
BALANCE, August 31, 1997............... $ (1) $(300) $ -- $ 1,469
===== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 19
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $ (9,921) $ (3,892) $ (3,092)
(Income) loss from discontinued operations............... -- (1,378) 3,791
Cumulative effect of a change in accounting principle.... -- -- (1,139)
-------- -------- --------
Loss from continuing operations.................. (9,921) (5,270) (440)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization......................... 2,384 1,401 959
(Gain) loss on sale of assets......................... 534 12 (1,320)
Noncash compensation expense.......................... 145 454 --
Loss on write-down of assets.......................... 2,178 -- --
Other noncash expenses................................ 421 46 109
Net change in operating assets and liabilities --
Receivables, net...................................... (487) (1,000) 327
Parts and supplies.................................... (545) (985) 11
Prepaid expenses and other............................ 468 (131) 43
Accounts and notes payable, trade..................... 2,699 2,191 (733)
Accrued liabilities and other......................... (612) 1,734 (124)
-------- -------- --------
Net cash used in continuing operating
activities..................................... (2,736) (1,548) (1,168)
-------- -------- --------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations............... -- 1,378 (3,791)
Add (deduct) --
Depreciation expense.................................. -- -- 250
Asset additions....................................... -- -- (27)
Write-down of costs................................... -- -- 3,002
Accrued liabilities, estimated operating cost for
disposal............................................ -- (510) 510
Gain on sale of discontinued operations............... -- (1,400) --
-------- -------- --------
Net cash used in discontinued operations......... -- (532) (56)
-------- -------- --------
Net cash used in operating activities............ (2,736) (2,080) (1,224)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...................... (3,595) (6,430) (293)
Acquisitions, net of cash acquired....................... -- (2,471) --
Other asset additions.................................... 10 (1,696) --
Proceeds from asset sales and notes receivable........... 965 19 2,700
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... (2,620) (10,578) 2,407
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt..................... (18,159) (4,051) (10,410)
Financing and debt collateral payments................... -- (926) (225)
Proceeds from long-term debt borrowings.................. 21,764 3,673 9,677
Proceeds from convertible debentures..................... -- 10,950 --
Bank overdraft........................................... 162 530 (45)
Proceeds from issuance of common stock................... 1,195 2,700 --
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... 4,962 12,876 (1,003)
-------- -------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease)...................................... (394) 218 180
Beginning of year........................................ 398 180 --
-------- -------- --------
End of year.............................................. $ 4 $ 398 $ 180
======== ======== ========
</TABLE>
F-6
<PAGE> 20
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for --
Interest.............................................. $ 1,762 $ 458 $ 472
======== ======== ========
Income taxes.......................................... $ -- $ -- $ --
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Assets acquired in connection with acquisitions.......... $ 845 $ 9,636 $ 205
======== ======== ========
Liabilities assumed in connection with acquisitions...... $ 845 $ 1,690 $ --
======== ======== ========
Common stock issued in connection with acquisitions...... $ 18 $ 3,759 $ --
======== ======== ========
Debt incurred in connection with acquisitions............ $ -- $ 2,177 $ --
======== ======== ========
Capital lease obligations incurred....................... $ 36 $ 294 $ --
======== ======== ========
Common stock issued in connection with debenture
conversions........................................... $ 2,798 $ 1,660 $ --
======== ======== ========
Common stock issued to officers, directors and
employees............................................. $ 400 $ 346 $ --
======== ======== ========
Common stock issued in settlement of lawsuit............. $ 42 $ -- $ --
======== ======== ========
Common stock issued in settlement of payables............ $ 371 $ -- $ --
======== ======== ========
Common stock contributed to 401(k) plan.................. $ 39 $ -- $ --
======== ======== ========
Sale of discontinued operations in exchange for shares of
Titan stock........................................... $ -- $ 1,400 $ --
======== ======== ========
Compensation accrual for stock grant..................... $ -- $ 400 $ --
======== ======== ========
Unrealized loss on available for sale securities......... $ 300 $ -- $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 21
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
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. The Company also rents specialized oilfield equipment such as
pressure control equipment, tools, pipe, tubing and whipstocks used in the
drilling, completion and workover of wells. As of August 31, 1997, the Company
operated out of its principal executive offices in Houston, Texas, its
administrative headquarters in Alice, Texas, and "stores" located in Texas,
Louisiana, Oklahoma, Arkansas, Illinois and Mississippi. The Company also
operates in the United Kingdom (UK) through certain acquisitions during fiscal
1996 as discussed in Note 15.
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 17.)
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.)
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.
F-8
<PAGE> 22
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets
Effective for the fiscal year beginning September 1, 1996, the Company has
adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires an assessment of the recoverability of the Company's
investment in long-lived assets to be held and used in operations whenever
events or circumstances indicate that their carrying amounts may not be
recoverable. Such assessment requires that the future cash flows associated with
the long-lived assets be estimated over their remaining useful lives and an
impairment loss be recognized when the future cash flows are less than the
carrying value of such assets. As of August 31, 1997, the Company has determined
that the estimated future cash flows associated with its long-lived assets used
in operations are greater than the carrying value of such assets and that no
impairment loss is required.
Property not in service (Note 4) is recorded at the lower of cost or
estimated market value. During the year ended August 31, 1997, the Company
determined that its property not in service required an impairment loss of
approximately $260 to reflect its estimated market value. Property not in
service is comprised primarily of oilfield service equipment.
Foreign Currency Translation
Foreign subsidiaries translate monetary assets and liabilities at year-end
exchange rates and nonmonetary items are translated at historical rates. Income
and expense accounts are translated at the average rates in effect during the
year. Gains or losses from changes in exchange rates are recognized in income in
the year of occurrence. Adjustments resulting from these translations are
reflected in stockholders' equity as foreign currency translation adjustments.
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. The carrying values of the Company's
cash and cash equivalents, receivables, available for sale securities, accounts
payable, debt and other financial instruments approximate their fair values.
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 is 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 SFAS No. 109, "Accounting for
Income Taxes," 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. The Company has established a valuation allowance equal to its net
domestic deferred tax asset.
F-9
<PAGE> 23
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loss Per Share
Loss per share is computed by dividing net loss by the weighted-average
number of common shares outstanding during each year. Common stock equivalents,
which consist of options and warrants, were excluded from the computation of the
weighted average number of common shares outstanding because their effect was
antidilutive.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued 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" (EPS).
SFAS No. 128 replaces the presentation of Primary 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 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 years ended August
31, 1997, 1996 and 1995, because common stock equivalents were excluded from the
computation as their effect was antidilutive.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components in a full set of financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, and requires
reclassification of comparative financial statements for earlier periods.
Management of the Company believes that the adoption of SFAS No. 130 will result
in the presentation of comprehensive income (loss) that differs from net income
(loss) as presented in the accompanying financial statements to the extent of
foreign currency translation adjustments and unrealized gains (losses) on
available for sale securities as shown in the accompanying consolidated
statements of stockholders' equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
reporting information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. In the initial year of application,
comparative information for earlier periods is to be restated.
F-10
<PAGE> 24
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. FUTURE OPERATIONS, LIQUIDITY, CAPITAL RESOURCES AND VULNERABILITY DUE TO
CERTAIN CONCENTRATIONS:
The accompanying consolidated financial statements of the Company have been
prepared on the basis of accounting principles applicable to a going concern.
During the years ended August 31, 1997, 1996 and 1995, the Company incurred net
losses from continuing operations of $9,921, $5,270 and $440, respectively, and
had negative cash flows from continuing operating activities of $2,736, $1,548
and $1,168, 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 of its debt
covenants. At August 31, 1997, the Company had negative working capital,
primarily as a result of the current classification of its debt with the lender
discussed in Note 6. Subsequent to August 31, 1997, the Company was able to
obtain certain additional capital resources (see Note 19); however, these
resources are limited and may not be sufficient to support its ongoing
operations until such time as the Company is able to generate positive cash
flows from operations. There is no assurance the Company will be able to achieve
future positive cash flows sufficient to support operations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon the
ongoing support of its customers, its ability to obtain capital resources to
support operations and its ability to successfully market its products and
services. If the Company is unable to obtain additional capital resources, or if
the funds obtained in such efforts are not adequate to support the Company until
a successful level of operations is attained, the Company would likely be unable
to continue operating as a going concern.
The Company has taken steps to improve its 1998 fiscal year operating
results. In April 1997, the Company commenced a major cost reduction program
which included a 10 percent reduction in personnel, closing two of its
unsuccessful operating locations in North Louisiana, the sale of certain
nonproductive equipment to reduce debt, resolving the litigation involving its
convertible debenture holders and substantially reducing general and
administrative expenses. This cost reduction program had a positive impact on
the quarter ended August 31, 1997.
Subsequent to August 31, 1997, a $2,500 bridge loan (Note 19) was obtained
from a financial partner with the intention of providing additional capital for
acquisitions and expansion of the Company's business. The Company, in October
1997, signed a letter of intent to purchase Fishing Tools, Inc. (FTI) (Note 19),
for $6,500 cash and $1,000 in stock. The closing of this transaction is subject
to normal due diligence being completed, as well as the Company's ability to
obtain capital at an adequate cost. The Company has entered into a letter of
intent with the financial partner, which includes providing $8,000 in equity
capital, as well as converting the bridge loan into equity. The closing of these
transactions will increase the Company's equity to approximately $20,000 with
stronger liquidity ratios. FTI's revenues were $6,200 in 1996. FTI has
historically been a profitable company with strong cash flow and is anticipated
to have a positive impact on the Company's future net income and cash flow.
The Company is also in discussions with its financial institution lender to
modify or amend its debt agreements with such lender, which would put the
Company back in compliance with certain of the financial covenants contained in
the lending agreements (Note 6). This would allow the Company to reclassify
substantially all of such lender's debt as long term rather than current. The
Company is also negotiating to increase the Company's borrowing capacity in
connection with its pending acquisition and private placement.
The Company's management believes that it is likely the Company's operating
results for fiscal 1998 will significantly improve over fiscal 1997 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.
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 24
percent and
F-11
<PAGE> 25
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9 percent of the Company's net sales for the years ended August 31, 1997 and
1996, respectively, and 34 percent and 23 percent of its total assets at August
31, 1997 and 1996, respectively, are attributable to foreign operations as
described in Note 16.
Approximately 3 percent and 5 percent of the Company's total assets and 54
percent and 20 percent of its total stockholders' equity at August 31, 1997 and
1996, respectively, relate to the Company's available for sale securities
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 based upon quoted sales prices for Titan at August 31, 1997 and
1996, due to the thinly traded nature and volatility of this security, 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 October 17, 1997, the last quoted
sales price for Titan was $.47 per share.
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.
A provision in one of the Company's loan agreements 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), and to provide an additional $510 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 and recognized a gain of $1,400. The Company
sold 500,000 shares of Titan stock to an investment company for a $500
receivable. The remaining 1,500,000 shares of Titan stock were valued at an
estimated fair market value of $900 ($.60 per share). During the year ended
August 31, 1997, the investment company returned the 500,000 shares of Titan
stock in settlement of its receivable. The Titan stock was estimated to have a
fair market value of $200 when returned resulting in a loss of $300. The Titan
stock is shown as available for sale securities on the accompanying consolidated
balance sheets at August 31, 1997 and 1996, in accordance with the guidelines of
SFAS 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 was reported as a
separate component of stockholders' equity. At August 31, 1997, the estimated
fair market value of Titan was $.40 per share and an unrealized holding loss of
$300 is reported as a separate component of stockholders' equity.
F-12
<PAGE> 26
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AUGUST 31
-----------------
1997 1996 ASSET LIFE
------- ------- ------------
<S> <C> <C> <C>
Property not in service............................... $ 641 $ 969
Land.................................................. 188 205
Buildings and improvements............................ 1,645 1,848 20 years
Rental tools and equipment............................ 24,468 21,733 5 - 10 years
Shop equipment and tools.............................. 1,954 1,894 5 years
Transportation equipment.............................. 1,742 1,694 3 - 5 years
Furniture and fixtures................................ 621 534 5 years
Capital leases........................................ 124 263 3 - 5 years
------- -------
$31,383 $29,140
======= =======
</TABLE>
During May of 1995, the Company conducted an auction of certain rental
tools and equipment. Such sale resulted in proceeds of approximately $2,658 and
a gain on disposition of assets of approximately $1,358. During June of 1997,
the Company conducted an auction of certain rental tools and equipment. Such
sale resulted in proceeds of approximately $750 and a loss on disposition of
assets of approximately $274, including $150 resulting from the issuance of
approximately 150,000 shares of the Company's common stock in settlement of a
payable owed to the auction company. The common stock was valued at the carrying
value of the payable which approximated the fair market value of the common
stock.
5. ACCOUNTS AND NOTES PAYABLE, ACCRUED LIABILITIES AND OTHER:
Included in accounts and notes payable-trade on the accompanying balance
sheet at August 31, 1996, is a $502 note payable. This note was for insurance
and was due in equal monthly installments during the 1997 fiscal year.
Accrued liabilities and other consist of the following:
<TABLE>
<CAPTION>
AUGUST 31
---------------
1997 1996
------ ------
<S> <C> <C>
Accrued bonuses............................................. $ 9 $ 350
Accrued legal and professional fees......................... 476 850
Accrued interest expense.................................... 31 27
Accrued taxes............................................... 355 190
Accrued insurance expense................................... 201 150
Accrued consulting fees..................................... 107 107
Accrued commissions......................................... -- 124
Bank overdraft.............................................. 692 530
Other....................................................... 332 325
------ ------
$2,203 $2,653
====== ======
</TABLE>
Included in other long-term liabilities at August 31, 1997 and 1996, is
$676 and $254, respectively, of accrued interest expense related to the
convertible debentures described in Note 7.
F-13
<PAGE> 27
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AUGUST 31
-----------------
1997 1996
------- -------
<S> <C> <C>
Notes payable --
Term loan with financial institution...................... $ 3,384 $ --
Inventory revolver with financial institution............. 2,500 --
Receivable revolver with financial institution............ 1,425 --
Bank term note............................................ -- 2,174
Real estate............................................... 68 72
Bank note assumed in Bosco acquisition.................... -- 650
Bosco..................................................... 330 550
Bank note to fund Apex Tool acquisition................... -- 176
Apex Tool................................................. -- 200
Capital lease obligations and vehicle notes............... 1,478 1,392
Related-party promissory note............................. -- 327
Former officer............................................ 172 --
------- -------
9,357 5,541
Less -- Current maturities................................ (8,687) (1,393)
------- -------
Long-term debt, excluding current maturities................ $ 670 $ 4,148
======= =======
</TABLE>
Maturities of long-term debt as of August 31, 1997, were as follows:
<TABLE>
<CAPTION>
<S> <C>
1998............................................... $8,687
1999............................................... 569
2000............................................... 39
2001............................................... 9
2002............................................... 5
Thereafter......................................... 48
------
$9,357
======
</TABLE>
On July 27, 1995, the Company signed a revolving loan agreement with a
bank. The revolving line of credit bore interest at 2.5 percent above a defined
reference lending rate. At August 31, 1996 and 1995, the Company had $0 and
$200, respectively, borrowed against this line of credit that provided a maximum
borrowing limit of $500. Borrowings were further limited to 80 percent of
certain defined accounts receivable, up to the maximum limit. The line of credit
was secured under the same agreement as the long-term note payable to the same
lender as described below. Also as discussed below, the Company was not in
compliance with certain of the lender's required covenants at August 31, 1996.
Subsequent to August 31, 1996, the line of credit and the note payable were
replaced with new financing. The weighted average interest rates on these
short-term borrowings were 9.3 percent and 11.5 percent, respectively, for the
years ended August 31, 1996 and 1995.
On July 27, 1995, the Company entered into a loan agreement with this bank
that provided both a revolving line of credit and a term facility. See above for
a description of the revolving credit line. The term note bore interest at 2.5
percent above a reference rate (8.25 percent at August 31, 1996) and was payable
in monthly installments of $55 commencing December of 1995. The agreement was to
remain in force for a
F-14
<PAGE> 28
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
three-year period. Both the revolving and term notes were secured by the
Company's assets, not otherwise pledged as collateral under other debt
agreements and were guaranteed by the Company's former chairman of the board and
chief executive officer, the Company's former president and one of the Company's
subsidiaries. The agreement contained covenants for compliance with reporting
and prompt payment of certain items and required 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. During the year
ended August 31, 1997, 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), a $4 million receivable based revolver (Receivable
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 percent at August 31, 1997) and matures in full in November 2001. The
Receivable Revolver allows the Company to borrow 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 August 31, 1997).
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 percent at August 31, 1997)
and required monthly payments of interest only through May 1997. Beginning in
June 1997, the Term Loan requires monthly principal and interest payments of $83
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 ended 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 and amended, of not less than $10.5
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. As a result of continuing operating losses
during the year ended August 31, 1997, certain of the Company's covenants were
not met at August 31, 1997, and, accordingly, all amounts due this financial
institution have been classified as current on the accompanying balance sheet at
August 31, 1997. Management of the Company is currently discussing these
covenant violations with the financial institution and believes that it may 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.
The real estate note is to an individual, bears interest at 6.5 percent and
is payable in monthly installments of $0.8, 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 15) bore interest
at 8.25 percent and matured in December 1996. The Bosco note represents amounts
due certain creditors of Bosco.
The bank note to fund the Apex Tool acquisition (see Note 15) bore interest
at 2.5 percent above a reference rate (8.25 percent at August 31, 1996) and was
secured by certain real estate in Oklahoma. This note was paid in full during
the fiscal year ended August 31, 1997. The Apex Tool note was assumed in the
acquisition (see Note 15).
The Company leases vehicles and equipment under capital lease obligations
that have varying terms from 24 to 59 months. Minimum lease payments are
capitalized at implicit rates ranging from 9.8 percent to
F-15
<PAGE> 29
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11.5 percent. The vehicle notes payable have varying terms from 12 to 48 months
and bear interest at rates ranging from 4.8 percent to 15.8 percent.
The related-party promissory note was issued by the Company in the
Armstrong acquisition (see Note 15), is noninterest bearing and has no stated
maturity date. During the year ended August 31, 1997, the Company entered into
an agreement for a final payment under this note as discussed below.
During the year ended August 31, 1997, the Company's president and chief
executive officer resigned. The Company and the former officer entered into an
agreement in May 1997 whereby the Company agreed to a final payment schedule for
its September 1995 purchase of Armstrong Tool, Inc. (see Note 15), which was
previously wholly owned by the former officer and his spouse. 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 final payment schedule for the purchase of Armstrong Tool, Inc.,
requiring monthly payments of approximately $12 through August 1998
(subsequently settled through the issuance of common stock as described below),
and the severance agreement payments of approximately $8 per month through
August 1999, are both noninterest bearing. The Company has imputed interest on
the severance agreement payments 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 fiscal 1996, the Company was required to accrue for and recognize
approximately $450 in compensation expense during the year ended August 31,
1997. In August 1997, indebtedness to the former officer of $219, including
interest, related to the purchase of Armstrong Tool, Inc., was settled through
the issuance of approximately 280,000 shares of the Company's common stock. The
common stock was valued at the carrying value of the indebtedness which
approximated the fair market value of the common stock.
7. CONVERTIBLE DEBENTURES:
Effective April 26, 1996, the Company completed a $10,950 placement of
eight percent convertible debentures. The debenture issue resulted in proceeds
of $9,855, net of issuance costs. Issuance costs are a component of deferred
assets on the consolidated balance sheet and are being amortized over a
three-year period. As of August 31, 1997 and 1996, debentures in the aggregate
principal amount of $4,570 and $1,800, respectively, had been converted into
3,670,062 and 828,289 shares of common stock, respectively. As discussed in Note
13, claims and counterclaims were filed between certain convertible debenture
holders and the Company. In September 1997, the Company and the holders of the
then outstanding convertible debentures entered into a settlement agreement
whereby all of the then outstanding convertible debentures were converted into
shares of the Company's common stock as further described in Note 13.
8. EMPLOYEE STOCK PLANS:
In June 1992, the Company filed with the Securities and Exchange Commission
a Registration Statement on 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 (Incentive Plan) and 1994 Directors' Stock Option Plan (Directors' Plan).
In August 1995, the Company filed with the Securities and Exchange Commission a
Registration Statement on Form S-8 registering 500,000 shares of common stock as
follows: 250,000 shares to the Incentive Plan and 250,000 shares to the
Directors' Plan. The Incentive Plan provides that options may be granted to
employees for up to 250,000 shares. Any one employee is limited
F-16
<PAGE> 30
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to $100 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
market value of the Company's 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 of the Company as of the annual stockholders' meeting date in the
years 1994 through 1998. The option price is the fair market value of the
Company's stock at the time of the grant. The options are exercisable when
granted. 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' Plan is set forth below:
<TABLE>
<CAPTION>
TOTAL EXERCISE
SHARES PRICE
RESERVED ACTIVITY PER SHARE
-------- -------- ---------
<S> <C> <C> <C>
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
Granted................................................ (44,000) 44,000 $1.0938
------- -------
Balances, August 31, 1997................................ 79,500 154,000
======= =======
Issued and exercisable, August 31, 1997
1994 grants............................................ 27,500 $2.1875
1995 grants............................................ 38,500 $1.0156
1996 grants............................................ 44,000 $3.6875
1997 grants............................................ 44,000 $1.0938
-------
154,000
=======
</TABLE>
In October 1996, options to acquire 455,000 shares of the Company's common
stock at an exercise price of $1.75 per share were granted to certain key
employees of the Company. The options vest at the rate of 20 percent per year
and expire 10 years from date of grant. During the year ended August 31, 1997,
160,000 of these options were forfeited. At August 31, 1997, 295,000 of these
options were outstanding with none exercisable.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation,"
was issued. SFAS No. 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, SFAS No. 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 No. 25). Entities electing to remain with the
accounting prescribed by APB No. 25, as the Company has, must make pro forma
disclosures of net income (loss) and earnings (loss) per share as if the fair
value based method recommended by SFAS No. 123 had been applied. The impact of
SFAS No. 123 on the Company's pro forma disclosures of net loss and net loss per
share as if the fair value based method of accounting under SFAS No. 123 had
been applied were not significant.
F-17
<PAGE> 31
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
During the year ended August 31, 1997, stockholders of the Company approved
the adoption of the 1997 Long-Term Incentive Plan (1997 Incentive Plan). The
1997 Incentive Plan is intended to advance the best interests of the Company,
its subsidiaries and its stockholders by attracting, retaining and motivating
key employees. The 1997 Incentive Plan provides for the grant of stock options
(which may be nonqualified stock options or incentive stock options for tax
purposes), stock appreciation rights issued independent of or in tandem with
such options, restricted stock awards and performance awards to certain key
employees of the Company and its subsidiaries.
9. INCOME TAXES:
The Company accounts for income taxes in accordance with the requirements
of SFAS No. 109. Under the provisions of SFAS No. 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>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets --
Net operating loss carryforwards.......................... $ 8,126 $ 4,315
Tax credit carryforwards.................................. 211 624
Property and equipment.................................... -- 145
Allowance for receivables................................. 278 75
Liabilities............................................... 216 464
------- -------
Gross deferred tax assets......................... 8,831 5,623
Deferred tax liabilities --
Property and equipment (domestic)......................... (114) --
Property and equipment (foreign).......................... (881) (233)
------- -------
7,836 5,390
Total valuation allowance................................... (8,717) (5,623)
------- -------
Net deferred tax liabilities................................ $ (881) $ (233)
======= =======
</TABLE>
Income tax expense (all foreign) for the fiscal years ended August 31, 1997
and 1996, was $0 and $67, respectively, and relates to taxes on the Company's UK
operations related to 1996 acquisitions as discussed in Note 15. The deferred
taxes payable are the result of book and tax basis differentials existing at the
date of the UK acquisitions.
At August 31, 1997, the Company had net operating loss (NOL) carryforwards
of approximately $23,900 for income tax purposes. Such losses will expire in the
years ending August 31, 2007 ($2,404), 2008 ($1,796), 2009 ($3,668), 2010
($2,704), 2011 ($5,149) and 2012 ($8,179). The Company has approximately $86 of
unused foreign income tax credits and unused investment tax credit carryforwards
of approximately $125 to
F-18
<PAGE> 32
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reduce future income taxes payable. 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 of the Code provides for annual
limitations on 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, 1997,
the Company had incurred an Ownership Change. Additionally, because U.S. tax
laws limit the time during which NOL and tax credit carryforwards may be applied
against future taxable income and tax liabilities, the Company may not be able
to take full advantage of its NOL and tax credits for federal income tax
purposes.
10. RELATED-PARTY TRANSACTIONS:
Certain stockholders of the Company are also independent fishing tool
operators who provided services to the Company on a commission basis. The
Company incurred $1,176 and $1,483 of commission expense in 1996 and 1995,
respectively, of which $38 and $594, respectively, were related to these
individuals. Management of the Company believes these services were performed at
rates consistent with those charged by independent third parties. In fiscal
1997, the Company conducted substantially all of its fishing tool operations
with noncommissioned operators.
The Company has debt with a former officer as discussed in Note 6.
The Company has a note receivable from an employee totaling $66 and $63 at
August 31, 1997 and 1996, 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, 1998. 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 as of August 31, 1997, are as follows:
<TABLE>
<S> <C>
1998................................................ $210
1999................................................ 158
2000................................................ 16
2001................................................ 1
2002................................................ --
----
Total minimum lease payments........................ $385
====
</TABLE>
Total rent expense for all operating leases amounted to $329, $81 and $62
for the years ended August 31, 1997, 1996 and 1995, 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
F-19
<PAGE> 33
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
relating to prior years' accruals was reversed into income during 1996. During
the year ended August 31, 1997, the Company began contributing common stock to
the 401(k) plan as discretionary contributions. For the year ended August 31,
1997, the Company recognized approximately $50 in expense associated with the
401(k) plan.
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. In July 1997, the Commission accepted the Company's and the various
former officers' and directors' offer of a noncash settlement whereby the
Commission ordered that the Company and the various former officers and
directors cease and desist from committing or causing any violations of the
Exchange Act.
The Company had been a defendant in a lawsuit filed by a former employee in
December 1993 seeking damages for a wrongful termination. The suit sought
approximately $317 in unpaid wages and value of $143 for 38,052 shares of stock
he would have earned during the remainder of his contract term. In April 1997, a
final judgment was issued whereby the former employee recovered the sum of $200
and 77,922 shares of restricted common stock of the Company was issued to the
former employee. Included in general and administrative expenses for the year
ended August 31, 1997, is $265 of 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. In September 1997, the Company reached a settlement with
those convertible debenture holders who had not previously converted their
debentures whereby the Company agreed to convert all of such debenture holders'
then outstanding debenture debt of approximately $7,060, including accrued
interest, into 10,633,333 shares of the Company's common stock. The Company also
agreed to issue to such debenture holders five-year warrants to purchase an
additional 957,000 shares of the Company's common stock at $1 per share. At
August 31, 1997, the Company had accrued approximately $100 as its estimate of
the fair value of the warrants issued in settlement of this matter.
In September 1997, a case was filed against the Company in the United
States District Court for the Northern District of Georgia, Atlanta Division by
the placement agent in the above-mentioned debenture offering, alleging that, in
connection with such offering, the Company tortiously interfered with its
business relationships, breached a Proprietary Information, Non-Circumvention
and Indemnification Agreement between the Company and the placement agent,
defamed the placement agent and engaged in conduct giving rise to an
indemnification in favor of the placement agent. The plaintiff seeks actual
damages in an amount not less than $1,000 per breach, exemplary damages in an
amount not less than $2,500, interest, costs and attorney's fees. The Company
has removed the case to federal court and filed counterclaims against the
plaintiff. Although no assurances can be given, the Company believes it has
meritorious defenses to the above action and intends to defend itself
vigorously.
The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is unlikely
that the final outcome of any of the claims or proceedings to which the Company
is a party, including those described above, would have a material adverse
effect on the Company's financial statements; however, due to the inherent
uncertainty of litigation, the range of possible loss, if any, cannot be
estimated with a reasonable degree of precision and there can be no assurance
that the
F-20
<PAGE> 34
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 had accrued $500 at August 31, 1996, as
its estimate of costs it expected to incur in defense of the above actions. At
August 31, 1997, approximately $170 of the accrued amount was remaining.
14. EMPLOYMENT AGREEMENTS:
Effective September 1, 1995, the Company entered into an employment
agreement with the Company's former president and chief operating officer. Since
July 1995, he had served the Company in such capacity without a contractual
agreement. The agreement provided for an annual salary of $100 payable in
monthly increments for four years. In addition, he received 459,333 shares of
the Company's stock 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 was being amortized to expense over
a four-year period. As discussed in Note 6, the former officer resigned, and the
Company was required to accelerate the recognition of the deferred compensation.
In April 1996, the Company's former chairman of the board and chief
executive officer was granted 500,000 shares of the Company's restricted common
stock. At August 31, 1996, the Company had recognized $400 in compensation
expense and additional paid-in capital associated with this stock grant.
In connection with certain of the acquisitions described in Note 15, the
Company entered into various employment agreements which provide for combined
future compensation of approximately $164 and $54 in fiscal years 1998 and 1999,
respectively.
15. ACQUISITIONS:
The following describes acquisitions by the Company during the year ended
August 31, 1996. The Company had no significant acquisitions during the years
ended August 31, 1997 and 1995.
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 former president and his spouse. Consideration given for
Armstrong was the issuance of a $400 promissory note to the Company's former
president plus assumption of various notes payable of approximately $450. The
$450 in notes payable were paid during the year ended August 31, 1996. Armstrong
is located in Fort Smith, Arkansas.
Effective October 1995, the Company acquired certain real property,
vehicles and rental tools and equipment from Apex Tool (Apex), a sole
proprietorship. Apex is located in Healdton, Oklahoma, and provides fishing and
rental tool services in the South Central Oklahoma and North Texas region. The
assets were acquired for $600, of which $200 was paid at closing. The amount
paid at closing was funded through borrowings from a commercial bank as
described in Note 6. A $400 note payable, bearing interest at 9 percent per
annum was paid in two installments of $200, due March 15, 1996 and 1997, to the
owner of Apex.
Effective April 1996, the Company completed the acquisition of Panther Oil
Tools, (UK) Ltd. (Panther) (an English company), and substantially all of the
assets of Villain Ltd. (Villain) (a Guernsey company) for $1,250 and 1,200,000
shares of the Company's restricted common stock which were valued on the date of
issuance at $3,060.
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 and 331,455 shares of the
Company's restricted common stock which were valued on the date of issuance at
approximately $640.
Effective June 1996, the Company acquired substantially all of the assets
of Reeled Tubular Components, Inc. (Houston, Texas), including the intellectual
property rights to an obstruction removing device, for
F-21
<PAGE> 35
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a cash payment of $50 and 20,000 shares of the Company's restricted common stock
which were valued at $60 on the date of issuance.
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 and the assumption of $1,200 in
liabilities.
In August 1996, the Company acquired all of the issued ordinary shares of
Prime Pipe Limited (a UK company) for approximately $105 and the issuance of
4,650 shares of the Company's common stock.
The results of operations of all acquisitions after the respective
acquisition dates are included in the consolidated statements 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 period 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>
YEAR ENDED
AUGUST 31, 1996
---------------
(UNAUDITED)
<S> <C>
Sales....................................................... $ 14,710
Cost of sales............................................... (6,344)
--------
Gross profit................................................ $ 8,366
--------
Loss from continuing operations............................. $ (5,018)
========
Loss per share from continuing operations................... $ (.58)
========
</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 period 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). In July 1996, the Company entered
into an agreement with G&L which gave the Company a one-year option to acquire
G&L under the same terms as the letter of intent. In connection with this
agreement, the Company paid to G&L a $1,000 forfeitable deposit. At August 31,
1996, approximately $1,172 related to this pending acquisition, including the
forfeitable deposit, was included in other assets in the Company's consolidated
balance sheet .In July 1997, the Company had not acquired G&L and the option
expired, requiring the Company to write-off $1,172 as an expense. Management of
the Company anticipates that it will continue to hold discussions with
management of G&L with regards to a potential acquisition of G&L by the Company.
F-22
<PAGE> 36
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. GEOGRAPHIC INFORMATION:
Information by geographic location for 1997 and 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
-----------------
1997 1996
------- -------
<S> <C> <C>
Net sales --
Domestic.................................................. $16,598 $10,857
Foreign................................................... 5,277 1,104
------- -------
Total............................................. $21,875 $11,961
======= =======
Loss from continuing operations --
Domestic.................................................. $(9,584) $(5,123)
Foreign................................................... (337) (147)
------- -------
Total............................................. $(9,921) $(5,270)
======= =======
Identifiable assets --
Domestic.................................................. $17,585 $21,552
Foreign................................................... 9,032 6,350
------- -------
Total............................................. $26,617 $27,902
======= =======
</TABLE>
The Company's foreign operations relate to Panther and Villain as discussed
in Note 15.
17. 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 customer. As of August 31, 1995, the physical quantity of these
items was 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. 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.
F-23
<PAGE> 37
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The results of operations by quarter for the fiscal years ended August 31,
1997 and 1996, 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>
1997 -- quarter ended --
November 30........................... $ 5,141 $ 2,939 $ (882) $(.07)
February 28........................... 5,248 2,971 (2,053) (.17)
May 31................................ 5,614 3,285 (2,111) (.16)
August 31............................. 5,872 3,125 (4,875) (.29)
------- ------- -------
Total......................... $21,875 $12,320 $(9,921)
======= ======= =======
1996 -- quarter ended --
November 30........................... $ 2,146 $ 1,299 $ 12 $ --
February 29........................... 2,036 950 (723) (.08)
May 31................................ 3,003 1,815 (635) (.07)
August 31............................. 4,776 2,577 (3,924) (.34)
------- ------- -------
Total.............................. $11,961 $ 6,641 $(5,270)
======= ======= =======
</TABLE>
During the second quarter of 1997, the Company recognized $265 in general
and administrative costs in connection with a court ordered judgment in a
lawsuit brought by a former employee as discussed in Note 13. During the third
quarter of 1997, an expense of $150 was recognized relating to an increase in
the allowance for doubtful accounts. The Company recognized $450 in compensation
expense in the third quarter of 1997 related to acceleration of deferred
compensation and other matters with a former office as described in Note 6. The
Company realized a loss on disposition of assets sold at auction of $274 in the
fourth quarter of 1997 as discussed in Note 4. During the fourth quarter of
1997, the Company recognized a loss of $446 related to its investment in a joint
venture and an additional $260 related to a write-down of property not in
service. Additionally, the Company recognized approximately $100 in general and
administrative expense in the 1997 fourth quarter related to a settlement with
the Company's convertible debenture holders as discussed in Note 13 and a loss
of $300 on the return of Titan stock as discussed in Note 3. As discussed in
Note 15, the Company recognized a loss of $1,172 in the fourth quarter of 1997
as a result of the write-off of a forfeitable deposit and other assets relating
to a proposed acquisition. In the fourth quarter of 1997, approximately $751 was
recognized as an expense relating to the write-off of receivables and an
increase in the allowance for doubtful accounts.
During the second quarter of 1996, the Company recognized a gain of $1,400
on the sale of its former operations in Azerbaijan as discussed in Note 3.
During the fourth quarter of 1996, the Company accrued $500 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 in
compensation expense related to a stock grant to a former officer and director
of the Company as discussed in Note 14. Additional compensation expense of $350
related to employee bonuses and approximately $300 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.
F-24
<PAGE> 38
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUBSEQUENT EVENTS (UNAUDITED):
In October 1997, the Company completed a private placement of $2,500 Senior
Convertible Notes (Senior Notes) and warrants to purchase 4,000,000 shares of
the Company's common stock at a purchase price of $.625 per share. The warrants
expire on January 1, 2001. The Senior Notes mature on January 1, 1999, are
interest free until June 30, 1998, and then bear interest at the prime rate, as
defined, plus 2 percent. The Senior Notes are convertible at the option of the
holder, at any time prior to the maturity date, into an aggregate of 4,000,000
shares of the Company's common stock.
In November 1997, the Company announced its intention of acquiring all of
the outstanding stock of FTI, for $6,500 in cash and $1,000 in the Company's
common stock. The Company anticipates that it will be able to fund the FTI
acquisition through the sale of additional shares of the Company's common stock.
FTI is a full-service fishing and rental tool company which operates three
locations in Louisiana and one in Texas producing revenues exceeding $6,000
annually. There can be no assurances that this transaction will be consummated.
F-25
<PAGE> 39
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
------- -------------------------
<C> <S> <C> <C> <C>
3.1(i) -- Certificate of Incorporation of Ponder Industries, Inc. (incorporated herein
by reference to Exhibit 3 filed to Registration Statement on Form S-1
[Commission File No. 33-33190]).
3.1(ii) -- Bylaws of Ponder Industries, Inc. (incorporated herein by reference to
Exhibit 3 filed to Registration Statement on Form S-1 [Commission File No.
33-33190]).
10.1 -- Loan Agreement with KBK Financial, Inc. (incorporated herein by reference to
Form 10-Q for quarter ending February 28, 1997).
10.2 -- Collateral Security Agreement with KBK Financial, Inc. Dated November 27,
1996 (incorporated herein by reference to Form 10-Q for quarter ending
February 28, 1997).
10.3 -- Security Agreement -- Pledge with KBK Financial, Inc. (incorporated herein by
reference to Form 10-Q for quarter ending February 28, 1997).
10.4 -- Revolving Account Transfer and Purchase Agreement with KBK Financial, Inc.
(incorporated herein by reference to Form 10-Q for quarter ending February
28, 1997).
10.5 -- Regulation S Subscription Agreement dated March 31, 1997 between Ponder
Industries, Inc. and Optimum fund (incorporated herein by reference to Form
8-K filed April 15, 1997).
10.6 -- Regulation S Subscription Agreement dated April 23, 1997 between Ponder
Industries, Inc. and Orez Ltd. (incorporated herein by reference to Form 8-K
filed May 7, 1997).
10.7 -- Regulation S Subscription Agreement dated June 19, 1997 between Ponder
Industries, Inc. and Charles Kucey (incorporated herein by reference to Form
8-K filed June 26, 1997).
*11 -- Computation of Earnings (Loss) Per Share
21 -- Subsidiaries
STATE OF NAME UNDER WHICH
NAME INCORPORATION DOING BUSINESS
----------------------------------------- -------- -------------
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
</TABLE>
- - ---------------
* Filed herewith
F-26
<PAGE> 40
(b) REPORTS ON FORM 8-K.
Form 8-K filed April 15, 1997, reporting Regulation S Subscription
Agreement dated March 31, 1997 between Ponder Industries, Inc. and Optimum Fund.
Form 8-K filed May 7, 1997, reporting Regulation S Subscription Agreement
dated April 23, 1997 between Ponder Industries, Inc. and Orez Ltd.
Form 8-K filed June 26, 1997, reporting Regulation S Subscription Agreement
dated June 19, 1997 between Ponder Industries, Inc. and Charles Kucey.
F-27
<PAGE> 41
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
November 24, 1997.
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, Chief
Financial Officer (Chief
Financial and Accounting Officer)
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 November 24, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ EUGENE L. BUTLER
- - ----------------------------------------------------- President, Chief Executive Officer and
Eugene L. Butler Chairman of the Board of Directors
/s/ FRANK J. WALL
- - ----------------------------------------------------- Senior Vice President of Operations and
Frank J. Wall Director
/s/ JOE R. NEMEC
- - -----------------------------------------------------
Joe R. Nemec Director
/s/ JOHN ROANE
- - -----------------------------------------------------
John Roane Director
/s/ RITTIE W. MILLIMAN, SR.
- - -----------------------------------------------------
Rittie W. Milliman, Sr. Director
/s/ JOHN LE SEELLEUR
- - -----------------------------------------------------
John Le Seelleur Director
</TABLE>
<PAGE> 42
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
------- -------------------------
<C> <S> <C> <C> <C>
3.1(i) -- Certificate of Incorporation of Ponder Industries, Inc. (incorporated herein
by reference to Exhibit 3 filed to Registration Statement on Form S-1
[Commission File No. 33-33190]).
3.1(ii) -- Bylaws of Ponder Industries, Inc. (incorporated herein by reference to
Exhibit 3 filed to Registration Statement on Form S-1 [Commission File No.
33-33190]).
10.1 -- Loan Agreement with KBK Financial, Inc. (incorporated herein by reference to
Form 10-Q for quarter ending February 28, 1997).
10.2 -- Collateral Security Agreement with KBK Financial, Inc. Dated November 27,
1996 (incorporated herein by reference to Form 10-Q for quarter ending
February 28, 1997).
10.3 -- Security Agreement -- Pledge with KBK Financial, Inc. (incorporated herein by
reference to Form 10-Q for quarter ending February 28, 1997).
10.4 -- Revolving Account Transfer and Purchase Agreement with KBK Financial, Inc.
(incorporated herein by reference to Form 10-Q for quarter ending February
28, 1997).
10.5 -- Regulation S Subscription Agreement dated March 31, 1997 between Ponder
Industries, Inc. and Optimum fund (incorporated herein by reference to Form
8-K filed April 15, 1997).
10.6 -- Regulation S Subscription Agreement dated April 23, 1997 between Ponder
Industries, Inc. and Orez Ltd. (incorporated herein by reference to Form 8-K
filed May 7, 1997).
10.7 -- Regulation S Subscription Agreement dated June 19, 1997 between Ponder
Industries, Inc. and Charles Kucey (incorporated herein by reference to Form
8-K filed June 26, 1997).
*11 -- Computation of Earnings (Loss) Per Share
21 -- Subsidiaries
STATE OF NAME UNDER WHICH
NAME INCORPORATION DOING BUSINESS
----------------------------------------- -------- -------------
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
</TABLE>
- - ---------------
* Filed herewith
<PAGE> 1
EXHIBIT 11
PONDER INDUSTRIES, INC., AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31
-----------------------------------------
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
COMPUTATION OF PRIMARY LOSS PER SHARE:
Net loss........................................... $ (9,921) $ (3,892) $ (3,092)
========== =========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING........................................ 13,641,558 8,717,912 6,377,564
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON
ASSUMED CONVERSION OF OPTIONS...................... -- -- --
---------- ----------- ----------
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE
EQUIVALENTS USED FOR COMPUTATION................... 13,641,558 8,717,912 6,377,564
========== =========== ==========
PRIMARY LOSS PER COMMON SHARE AND COMMON SHARE
EQUIVALENT......................................... $ (.73) $ (.45) $ (.48)
========== =========== ==========
COMPUTATION OF FULLY DILUTED LOSS PER SHARE:
Net loss........................................... $ (9,921) $ (3,892) $ (3,092)
Interest not incurred upon assumed conversion of
convertible debentures.......................... 422 254 --
---------- ----------- ----------
Net loss available to common stockholders used for
computation..................................... $ (9,499) $ (3,638) $ (3,092)
========== =========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING........................................ 13,641,558 8,717,912 6,377,564
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON
ASSUMED CONVERSION OF OPTIONS...................... 12,740 30,586 --
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON
ASSUMED CONVERSION OF CONVERTIBLE DEBENTURES....... 9,609,159 2,790,506 --
---------- ----------- ----------
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE
EQUIVALENTS USED FOR COMPUTATION................... 23,263,457 11,539,004 6,377,564
========== =========== ==========
LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENT
ASSUMING FULL DILUTION............................. $ (.41)(a) $ (.32)(a) $ (.48)
========== =========== ==========
</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
November 28, 1997
<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
November 28, 1997
<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, 1997, AND ITS
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 4
<SECURITIES> 800
<RECEIVABLES> 4,791
<ALLOWANCES> 657
<INVENTORY> 2,622
<CURRENT-ASSETS> 7,606
<PP&E> 31,383
<DEPRECIATION> 14,278
<TOTAL-ASSETS> 26,617
<CURRENT-LIABILITIES> 16,452
<BONDS> 7,050
0
0
<COMMON> 176
<OTHER-SE> 1,293
<TOTAL-LIABILITY-AND-EQUITY> 26,617
<SALES> 21,875
<TOTAL-REVENUES> 21,875
<CGS> 9,555
<TOTAL-COSTS> 9,555
<OTHER-EXPENSES> 17,150
<LOSS-PROVISION> 519
<INTEREST-EXPENSE> 2,402
<INCOME-PRETAX> (9,921)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,921)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,921)
<EPS-PRIMARY> (.73)
<EPS-DILUTED> (.73)
</TABLE>
