PRODUCTION OPERATORS CORP
PART I
Production Operators Corp (the "Company") is engaged in compression and other
gas handling services in the oil field services industry. The Company, a
Delaware corporation organized in 1969, is the successor to a business
established in 1961. The term "Company" as used herein refers to Production
Operators Corp and its operating subsidiary, Production Operators, Inc.,
together with its subsidiaries, unless the context otherwise indicates.
Item 1. Business
The Company specializes in the handling of gases for maximizing the
recovery of hydrocarbon resources. These production services include
(1) contract compression and contract processing or treating of
gases, principally natural gas and (2) operating compression and
related facilities for the handling of carbon dioxide used in
enhanced oil recovery. In its contract gas compression operations,
the Company designs, engineers, fabricates, transports, installs,
operates and maintains compression units specifically designed to
meet unique customer requirements. The Company can also design,
engineer and construct the site where the gas handling equipment is
installed and operated. In its contract processing or treating of
gases, usually performed in conjunction with contract gas
compression, the Company designs, engineers, installs and operates
specialized processing or treating equipment which recovers liquid
hydrocarbons from associated gas streams or removes impurities such
as hydrogen sulfide and carbon dioxide. The Company operates its own
equipment and contract operates customer owned equipment used in the
compression, gathering and processing of gases. In its enhanced oil
recovery operations, which are reported in Contract Gas Handling
Services, the Company gathers, compresses, transports and injects
carbon dioxide gas used by the petroleum industry in enhanced oil
recovery projects. The Company considers itself to be a leader in
the technology of handling and compressing carbon dioxide.
In the fourth quarter of fiscal 1995, the Company announced its
intention to exit its oil and gas production activities. As of
September 30, 1995 all oil and gas production activities have been
classified as discontinued operations and a provision of $6.7
million, net of taxes, has been recorded. This provision reflects
management's best estimate of the actual final outcome of terminating
these operations. The Company's strategy of buying and upgrading
compression intensive, mature fields is no longer competitive with
the prevailing market strategy of exploiting discovery potential
through 3-D seismic and intensive drilling techniques. With the
decision to discontinue oil and gas production activities, the
Company's exclusive focus will be its core business capability of
providing total responsibility, value-added gas handling solutions
where it has historically maintained a position of industry
leadership.
Contract Gas Compression - Gas compression is the use of a mechanical
process for compressing a volume of a gas until it reaches a desired
pressure. Reciprocating compressors driven by internal combustion
engines or electric motors are the most common equipment for
compression, particularly when higher pressures are involved.
Contract gas compression has various applications in the production
of oil and gas. The majority of the Company's contract gas
compression units compress natural gas either for transmission or for
reservoir injection in connection with secondary recovery operations.
In the case of natural gas being compressed for pipeline
transmission, compression becomes necessary when the natural pressure
of the gas field is below the operating pressure of the pipeline
system receiving and transporting the gas. Gas compression is also
used to inject natural gas into an oil field for maintaining
reservoir pressure or for gas lifting of fluids in producing well
bores. It is expected that at some time during the life of
substantially all natural gas fields the gas produced will require
compression. The Company's average gas compression job lasts
approximately four years.
Field operating performance is vital to the Company's business and
the mechanical availability of its equipment for on-stream operation
has consistently averaged more than 98%. The Company believes its
operating efficiency significantly exceeds the field compression
efficiency achieved by most producing and pipeline companies
operating their own equipment. The Company's ability to achieve high
operating efficiency distinguishes its services and has a significant
positive impact on an oil and gas producer's revenues and profits.
The market for contract compression services has been expanding as
oil and gas producers and pipeline companies continue their efforts
to lower operating costs and improve efficiency by outsourcing their
gas handling requirements.
The Company's gas compression contracts usually provide for fixed
monthly payments for an initial term of six months to three years
and, thereafter, continue on a month-to-month basis. Typically, the
Company's units have remained on location significantly longer than
the initial term of the contract. Most compression contracts include
a provision for periodically adjusting the price based on various
escalation indices.
At September 30, 1995 the Company's contract gas compression fleet
totaled 393,000 horsepower with units ranging in size from 13 to
2,600 horsepower. During the fiscal year 1995, net horsepower added
to the contract compression fleet was 80,000. At yearend 86% of the
available horsepower was installed and earning revenue or committed
for reapplication. These installed units are located in more than
200 separate oil and gas fields in the states of Texas, Oklahoma,
Louisiana, New Mexico, Colorado, Wyoming, Mississippi, Kansas, Utah,
Arkansas, California and Alabama and in the countries of Venezuela,
Argentina and Canada.
At yearend 1995 41,000 horsepower was operating in Venezuela,
Argentina and Canada. The Company is marketing its services in
additional foreign countries. The contracts in Venezuela and
Argentina are substantially dollar denominated, mitigating the risks
from uncertain political and economic conditions.
There are numerous companies that sell or lease compression
equipment, but only a few that provide full-service, total
responsibility contract compression. The Company believes it is the
largest independent provider of contract compression services, yet it
accounts for only a small percentage of all compression work
performed. The vast majority of compression equipment is owned and
operated by oil and gas producers and pipelines.
Contract Gas Processing - Production Operators supplies gas
processing services on a contract basis using skid-mounted processing
equipment.
Enhanced Oil Recovery - As detailed in the 1994 Form 10-K, given the
substantially reduced size of the enhanced oil recovery (EOR) area
and the same business focus of operating compression equipment in
both the EOR and contract gas handling areas, EOR results are now
included in the contract gas handling segment for financial
reporting. The contract to operate SACROC expired December 31, 1994.
The Comanche Creek pipeline, located in the southern end of the
Permian Basin in west Texas, continues to operate at very low volumes
and was included in discontinued operations at September 30, 1995.
Business Segments - The Company conducts its operations in one
business segment, contract gas handling services. This segment
consists principally of compression and other gas handling services
in the oil field services industry. Prior to fiscal year 1995, the
Company had operated in two business segments including contract gas
handling services and enhanced oil recovery in the oil field services
industry and oil and gas producing operations. As of September 30,
1995 oil and gas production operations have been classified as
discontinued operations. The supplemental information concerning
these segments included in Notes 1 and 9 of the Consolidated
Financial Statements on pages 29 and 33 of the Company's 1995 Annual
Report to Stockholders and the Consolidated Balance Sheets on page 25
of the Company's 1995 Annual Report to Stockholders is incorporated
herein by reference. The Company's revenues and operating income by
category for the five most recent fiscal years are shown on page 20
in the 1995 Annual Report to Stockholders.
During fiscal 1995 two customers accounted for a total of 34% of the
Company's consolidated revenues, one of whom accounted for more than
10% of the Company's consolidated revenues.
Competition - The Company believes that prior to 1969 it was the only
independent service company providing full-service, total
responsibility contract gas compression. Today, a number of other
companies are offering some form of such services; however, the
Company believes that it is the largest independent provider
specializing in complete full-service contract gas compression.
Employees - The Company employed 437 people at September 30, 1995 of
whom 36 were administrative, 28 were in engineering and purchasing,
84 worked at the Houston plant facility, and 289 were involved in
field operations. The remote location and adverse living conditions
often associated with the Company's field operations restrict the
number of qualified workers available and the Company trains most of
its personnel.
Item 2. Properties
The principal offices of the Company and its subsidiary are located
at 11302 Tanner Road, Houston, Texas 77041. At that location, the
Company owns 27 acres of land acquired at a cost of $436,000. The
office and fabrication plant are located in three buildings
aggregating 94,000 square feet, of which approximately 10,000 square
feet are unfinished and held in reserve for future expansion.
Additional information regarding the Company's oil and gas
operations, discontinued as of September 30, 1995, is found in Note 9
of the Financial Statements on page 33 of the Company's 1995 Annual
Report to Stockholders.
The Company is obligated under short-term leases for space used for
administrative functions at various locations where its field
operations are conducted. Additional information regarding the
Company's obligations under leases, is found in Note 7 of the
Financial Statements on page 32 of the Company's 1995 Annual Report
to Stockholders.
Item 3. Legal Proceedings
The Company is not a party to any litigation that, in the judgment of
management, would have a material adverse effect on its operations or
financial condition if adversely determined. No material legal
proceedings of the Company were terminated during the fourth quarter
of the fiscal year covered by this report.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year covered by this report.
Executive Officers of Registrant
The executive officers of the Company and their principal occupations and
other affiliations during the last five years are:
Name Age Principal Occupations and Affiliations
Carl W. Knobloch, Jr. 65 Chairman and Director effective May 1, 1961
and President from October 1986 through July
1994
D. John Ogren 52 President and Director effective July 5, 1994.
Senior Vice President of E.I.duPont de Nemours
and Company from April 1992 to May 1994,
President and Chief Executive Officer of
DuPont Canada from June 1991 to April 1992 and
Senior Vice President of Conoco, Inc. from
February 1989 to May 1991
C. Richard Clark 57 Vice President effective April 1, 1994, Senior
Vice President of Production Operators, Inc.
(subsidiary) effective October 1, 1990 and
President of Kamlok Oil & Gas, Inc.
(subsidiary of Production Operators, Inc.)
effective January 2, 1992 - Vice President of
Production Operators, Inc. (subsidiary) from
June 1987 to September 1990; Division
Production Manager of Williams Exploration
Company from September 1982 through January
1987
Thomas R. Reinhart 53 Vice President effective February 21, 1992 and
Executive Vice President of Production
Operators, Inc. (subsidiary) effective April
1, 1994 - Senior Vice President from November
1991 to March 1994 - Vice President from
October 1990 to October 1991 - General Manager
Administration, Secretary and Treasurer from
April 1988 to September 1990 and Manager MIS
and Purchasing prior thereto
William S. Robinson, Jr. 45 Treasurer effective July 1, 1991 and Treasurer
of Production Operators, Inc. (subsidiary)
effective October 1990 - Controller of
Production Operators, Inc. from April 1988 to
September 1990 and Corporate Accounting
Manager prior thereto
Carla Knobloch 37 Secretary effective October 1, 1990 - Investor
Relations effective July 1990; Vice President
of Wachovia Bank - Equity Research Analyst
from June 1984 to May 1990
_______________
The only family relationship among the Executive Officers of the Company is
that Carla Knobloch is the daughter of Carl W. Knobloch, Jr. Officers are
generally elected each year at the Board of Directors' meeting following the
annual meeting of the stockholders.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Company's common stock is traded over-the-counter and is reported in
the NASDAQ National Market System under the symbol PROP. There were
817 stockholders of record at September 30, 1995.
The information set forth in the "Market Price of Stock and Cash
Dividends" section appearing on page 20 of the Company's 1995 Annual
Report to Stockholders is incorporated in this Item by reference in
response to the information required by this Item.
Item 6. Selected Financial Data
The information set forth under "Selected Financial Data" appearing
on pages 34 - 35 of the Company's 1995 Annual Report to Stockholders
is incorporated in this Item by reference in response to the
information required by this Item.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information set forth under "Management's Discussion and Analysis
of Results of Operations and Financial Condition" appearing on pages
21 - 23 of the Company's 1995 Annual Report to Stockholders is
incorporated in this Item by reference in response to the information
required by this Item.
Item 8. Financial Statements and Supplementary Data
The consolidated balance sheets as of September 30, 1995 and 1994 and
the consolidated statements of income, stockholders' investment and
cash flows for each of the three years in the period ended September
30, 1995, together with the report of independent public accountants,
contained on pages 24 through 36 of the Company's 1995 Annual Report
to Stockholders are incorporated in this Item by reference in
response to the information required by this Item.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information that will be set forth under "Management -- Election
of Directors,""Management -- Executive Compensation" and "Other
Matters" in the Company's proxy statement for the 1996 Annual Meeting
of Stockholders is incorporated in this Item by reference in response
to the information required by this Item.
Information regarding the executive officers of the Company is
furnished in a separate Item captioned "Executive Officers of
Registrant" in Part I above and is incorporated by reference in this
Item in response to the information required by this Item.
Item 11. Executive Compensation
The information that will be set forth under "Management -- The Board
of Directors and its Committees," "-- Executive Compensation" and "--
Description of the Company's Compensation Plans for Key Officers" in
the Company's proxy statement for the 1996 Annual Meeting of
Stockholders is incorporated in this Item by reference in response to
the information required by this Item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information that will be set forth under "Management -- Election
of Directors" and "Five Percent Stockholders" (regarding ownership of
Production Operators stock) in the Company's proxy statement for the
1996 Annual Meeting of Stockholders is incorporated in this Item by
reference in response to the information required by this Item.
Item 13. Certain Relationships and Related Transactions
The information that will be set forth under "Management -- Election
of Directors" and "-- Interest in Certain Transactions" in the
Company's proxy statement for the 1996 Annual Meeting of Stockholders
is incorporated in this Item by reference in response to the
information required by this Item.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Schedules and Exhibits -
(1) The consolidated financial statements of Production
Operators Corp and Consolidated Subsidiary set forth as
indicated below in the Company's 1995 Annual Report to
Stockholders are incorporated in this Item by reference
and made a part of this Item in response to the
information required by this Item:
Annual
Report Page
Consolidated Statements of Income for the
three years ended September 30, 1995 24
Consolidated Balance Sheets at September 30,
1995 and 1994 25
Consolidated Statements of Cash Flows for the
three years ended September 30, 1995 27 - 28
Consolidated Statements of Stockholders'
Investment for the three years ended
September 30, 1995 26
Notes to Consolidated Financial Statements 29 - 33
Selected Quarterly Financial Data (Unaudited) 33
Report of Independent Public Accountants 36
(2) All schedules are omitted because they are not applicable
or not required or the required information is shown in
the consolidated financial statements or notes thereto.
(3) The exhibits filed as a part of this report are listed in
the Exhibits Index submitted as a separate section to
this report.
(b) No report on Form 8-K was filed during the quarter ended
September 30, 1995.
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.
PRODUCTION OPERATORS CORP
BY:/s/ D. John Ogren
D. John Ogren, President
December 4, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, who constitute a majority of the
directors, on behalf of the Registrant and in the capacities and on the dates
indicated.
/s/ F. E. Ellis 12/6/95
F. E. Ellis, Director Date
Jorge E. Estrada M., Director Date
/s/ C. Rahl George 12/11/95
C. Rahl George, Director Date
/s/ John R. Huff 12/6/95
John R. Huff, Director Date
/s/ Carl W. Knobloch, Jr. 12/14/95
Carl W. Knobloch, Jr., Chairman Date
/s/ Henry E. Longley 12/8/95
Henry E. Longley, Director Date
/s/ D. John Ogren 12/4/95
D. John Ogren, Director and President Date
/s/ Lester Varn, Jr. 12/11/95
Lester Varn, Jr., Director Date
/s/ William S. Robinson, Jr. 12/4/95
William S. Robinson, Jr., Treasurer Date
(Principal Financial and Accounting Officer)
EXHIBITS INDEX
The following Exhibits are filed herewith or incorporated by reference as a
part of this report on Form 10-K:
(3)(a) Restated Certificate of Incorporation, together with
all amendments thereto (filed as Exhibit (3)(a) to
Report on Form 10-K for the year ended September 30,
1991, as amended by Form 8 filed February 24, 1992, and
incorporated herein by reference).
(3)(b) Copy of By-Laws, together with all amendments thereto
(filed as Exhibit 4.1 to Report on Form 8 filed
February 24, 1992 and incorporated herein by
reference).
(4)(a) For the definition of the rights of holders of equity
securities see the Articles Fourth, Seventh and Eighth
of the Company's Certificate of Incorporation and the
Certificate of Designation, Preferences and Rights of
the Company's Series A Junior Participating Preference
Stock (filed as Exhibit (3)(a) to Report on Form 10-K
for the year ended September 30, 1991, as amended by
Form 8 filed February 24, 1992 and incorporated herein
by reference).
(4)(b) For the relative By-laws provisions concerning the
rights of holders of equity securities see Articles II
and VI of the Company's By-Laws (filed as Exhibit 4.1
to Report on Form 8 filed February 24, 1992 and
incorporated herein by reference).
(4)(c) Loan Agreement dated June 2, 1995 and the Second
Amended and Restated Credit Agreement with the Bank of
New York individually and as agent for the First
National Bank of Chicago (filed as Exhibit (4)(d) to
Report on Form 10-Q for the quarter ended June 30, 1995
and incorporated herein by reference).
(4)(c)(i) Subordination Agreement among Production Operators
Corp, Production Operators, Inc. and the Bank of New
York as agent (filed as Exhibit (4)(b) to Report on
Form 10-Q for the quarter ended December 31, 1990 and
incorporated herein by reference).
(10)(a) Employment Agreement between the Company and D. John
Ogren dated June 7, 1994 (filed as Exhibit 10(b) to
Report on Form 10-Q for the quarter ended June 30, 1994
and incorporated herein by reference).
(10)(b)(i) Consulting and Deferred Compensation Agreement between
the Company and C. Rahl George dated June 1, 1981
(filed as Exhibit (10)(f)(i) to Report on Form 10-K for
the fiscal year ended September 30, 1981 and
incorporated herein by reference).
(10)(b)(ii) Amended Deferred Compensation Agreement between the
Company and C. Rahl George dated October 24, 1984
(filed as Exhibit (10)(f)(ii) to Report on Form 10-K
for the fiscal year ended September 30, 1984 and
incorporated herein by reference).
(10)(c)(i) Employee Stock Ownership Plan and Trust dated June 9,
1989 (filed as Exhibit (10)(c)(i) to Report on Form
10-K for the fiscal year ended September 30, 1989 and
incorporated herein by reference).
(10)(c)(ii) First Amendment to Employee Stock Ownership Plan and
Trust dated December 18, 1989 (filed as Exhibit
(10)(c)(ii) to Report on Form 10-K for the fiscal year
ended September 30, 1989 and incorporated herein by
reference).
(10)(c)(iii) Second Amendment to Employee Stock Ownership Plan and
Trust dated September 30, 1994 (filed as Exhibit
(10)(d)(iii) to Report on Form 10-K for the fiscal year
ended September 30, 1994 and incorporated herein by
reference).
(10)(d) 1980 Long-Term Incentive Plan approved by stockholders
January 30, 1981, as amended through February 27, 1991
(filed as Exhibit (10)(d) to Report on Form 10-K for
the fiscal year ended September 30, 1991 and
incorporated herein by reference).
(10)(d)(i) 1992 Long-Term Incentive Plan approved by stockholders
February 24, 1993, as amended through October 24, 1995.
(10)(e) Target Variable Compensation Plan dated May 5, 1995.
(10)(f)(i) Profit Sharing Plan dated October 1, 1985 (filed as
Exhibit (10)(k) to Report on Form 10-K for the fiscal
year ended September 30, 1986 and incorporated herein
by reference).
(10)(f)(ii) First Amendment to Production Operators, Inc. Profit
Sharing Plan (as restated, effective as of October 1,
1985) (filed as Exhibit (10)(f)(ii) to Report on Form
10-K for the fiscal year ended September 30, 1987 and
incorporated herein by reference).
(10)(f)(iii) Adoption of Production Operators, Inc. Profit Sharing
Plan by Production Operators Corp effective October 1,
1986 (filed as Exhibit (10)(f)(iii) to Report on Form
10-K for the fiscal year ended September 30, 1987 and
incorporated herein by reference).
(10)(f)(iv) Production Operators, Inc. Profit Sharing Plan restated
effective October 1, 1994 (filed as Exhibit (10)(g)(iv)
to Report on Form 10-K for the fiscal year ended
September 30, 1994 and incorporated herein by
reference).
(10)(g)(i) Production Operators, Inc. Thrift Plan restated and
amended effective October 1, 1989 (January 1, 1990 as
to the cash or deferred arrangements) (filed as Exhibit
(10)(g) to Report on Form 10-K for the fiscal year
ended September 30, 1989 and incorporated herein by
reference).
(10)(g)(ii) First Amendment to Production Operators, Inc. Thrift
Plan dated September 20, 1994 (filed as Exhibit
(10)(h)(ii) to Report on Form 10-K for the fiscal year
ended September 30, 1994 and incorporated herein by
reference).
(10)(h) Production Operators, Inc. Supplemental Benefit Plan
(filed as Exhibit 28.2 to Report on Form 8-K, filed
February 24, 1992 and incorporated herein by
reference).
(10)(i) Carbon Dioxide Purchase and Sales Contract dated April
11, 1979 between Lone Star Gas Company, a Division of
Enserch Corporation, and Ben W. Wiseman, Jr. d/b/a CO2
Services, and Sale and Sharing Agreement dated November
29, 1979, whereby a joint venture consisting of
Production Operators, Inc., L. D. Sipes, Jr. and Roy C.
Williamson, Jr., acquired an interest in said contract
from Ben W. Wiseman, Jr., pursuant to which Production
Operators, Inc. purchases carbon dioxide (filed as
Exhibit (10)(j) to Report on Form 10-K for the fiscal
year ended September 30, 1980 and incorporated herein
by reference).
(10)(j)(i) First Amendment and Restatement of Agreement and
Certificate of Limited Partnership in Wilmington
Tertiary Venture, Ltd., dated May 3, 1982 (filed as
Exhibit (10)(n)(i) to Report on Form 10-K for the
fiscal year ended September 30, 1982 and incorporated
herein by reference).
(10)(j)(ii) Agreement for Purchase and Sale of Carbon Dioxide Gas
Stream by and between Xtra Energy Corporation, as
Seller, and Wilmington Tertiary Venture, Ltd., as
Buyer, dated May 3, 1982 (filed as Exhibit (10)(n)(ii)
to Report on Form 10-K for the fiscal year ended
September 30, 1982 and incorporated herein by
reference).
(10)(j)(iii) Support Agreement by Production Operators Corp
regarding Wilmington Tertiary Venture, Ltd., dated May
3, 1982, extended to cover second Amendment to
Agreement and Certificate of Limited Partnership (filed
as Exhibit (10)(l)(iii) to Report on Form 10-K for the
fiscal year ended September 30, 1983 and incorporated
herein by reference).
(10)(j)(iv) Second Amendment to Agreement and Certificate of
Limited Partnership in Wilmington Tertiary Venture,
Ltd., dated July 1, 1983 (filed as Exhibit (10)(l)(iv)
to Report on Form 10-K for the fiscal year ended
September 30, 1983 and incorporated herein by
reference).
(10)(j)(v) Third Amendment to Agreement and Certificate of Limited
Partnership in Wilmington Tertiary Venture, Ltd., dated
December 31, 1985 (filed as Exhibit (10)(n)(v) to
Report on Form 10-K for the fiscal year ended September
30, 1986 and incorporated herein by reference).
(10)(j)(vi) Fourth Amendment to Agreement and Certificate of
Limited Partnership in Wilmington Tertiary Venture,
Ltd., dated May 1, 1988 (filed as Exhibit (10)(i)(v) to
Report on Form 10-K for the fiscal year ended September
30, 1989 and incorporated herein by reference).
(10)(k) Form of Purchase Agreement dated June 20, 1991 between
Production Operators Corp and each purchaser in
connection with the private placement of 590,000 shares
of Common Stock (filed as Exhibit 1.1 to Registration
Statement on Form S-3, File No. 33-41254, filed June
26, 1991 and incorporated herein by reference).
(11) Statement regarding Computation of Net Income per Share
of Common Stock.
(13) Pages 20 - 36 of the Company's 1995 Annual Report to
Stockholders.
(22) List of subsidiaries.
(24)(a) Consent of Independent Public Accountants re inclusion
of their Report dated November 15, 1995 in this Form
10-K.
(24)(b) Consent of Independent Public Accountants re inclusion
of their report dated November 15, 1995 into the
Company's previously filed Registration Statements on
Form S-3 and Forms S-8.
PRODUCTION OPERATORS CORP
1992 LONG-TERM INCENTIVE PLAN
Approved by the Stockholders February 24, 1993,
amended June 2, 1993 and October 24, 1995
1. Purpose. The purpose of the Production Operators Corp 1992
Long-Term Incentive Plan is to promote the interests of the Company
and its shareholders by enabling selected key employees of the
Company and its subsidiaries to participate in the long-term growth
of the Company by receiving the opportunity to acquire shares of the
Company's Stock and to provide for additional compensation based on
appreciation in the Company's Stock. The Plan will thereby
facilitate securing, retaining and motivating key employees, thus
contributing to the long-term growth and profitability of the
Company.
2. Defined Terms. The following defined terms have the meanings
set forth below:
(a) "Act" means the Securities Exchange Act of 1934, as
amended from time to time.
(b) "Award" or "Awards," except where referring to a
particular category of grant under the Plan, shall
include Incentive Stock Options, Non-Qualified Stock
Options, Stock Appreciation Rights, Restricted Stock
Awards, Unrestricted Stock Awards, Deferred Stock Awards,
Performance Unit Awards and Other Stock-Based Awards.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as
amended, and any successor code and related rules,
regulations and interpretations.
(e) "Committee" means the Stock Option and Executive
Compensation Committee of the Board (or such other
committee as described in Section 5 below); such
Committee shall consist of at least three members of the
Board, each of whom shall be a Disinterested Person.
(f) "Company" means Production Operators Corp
(g) "Deferred Stock Award" is defined in Section 11(a)
below.
(h) "Disability" means permanent and total disability as
determined under procedures established by the Committee
for purposes of the Plan.
(i) "Disinterested Person" shall have the meaning set
forth in Rule 16b-3, or any successor definition
promulgated by the Securities and Exchange Commission
under the Act.
(j) "Fair Market Value" on a specified date shall be the
closing price of the Stock on the NASDAQ National Market
System on that date or, if no prices are reported on that
date, on the last preceding date on which such price of
the Stock was so reported.
(k) "Incentive Stock Option" means any Stock Option
intended to be and designated as an "incentive stock
option" within the meaning of Section 422 of the Code.
(l) "Non-Qualified Stock Option" means any Stock Option
that is not an Incentive Stock Option.
(m) "Other Stock-Based Award" is defined in Section
13(a) below.
(n) "Performance Unit Award" is defined in Section 12(a)
below.
(o) "Plan" means the Production Operators Corp 1992
Long-Term Incentive Plan, as amended from time to time.
(p) "Restricted Stock Award" is defined in Section 9(a)
below.
(q) "Retirement" means a severance from the active
employment of the Company or its Subsidiaries by reason
of retirement pursuant to the provisions of the Company's
Policy Manual, or any contract between the Company or any
of its Subsidiaries and the Plan participant. The
Committee reserves the final authority to determine the
definition of retirement.
(r) "Rule 16b-3" means Rule 16b-3, as promulgated by the
Securities and Exchange Commission under Section 16(b) of
the Act, as amended from time to time.
(s) "Stock" means the Common Stock, $1.00 par value, of
the Company.
(t) "Stock Appreciation Right" means a right described
in Section 8(a) below.
(u) "Stock Option" means any option to purchase shares
of Stock granted pursuant to Section 7 below.
(v) "Stock Surrender Withholding Election" shall have the
meaning set forth in Section 15 below.
(w) "Subsidiary" shall mean any subsidiary corporation
(as defined in Section 424 of the Code) of the Company.
(x) "Unrestricted Stock Award" is defined in Section 10
below.
(y) "Tax Date" shall have the meaning set forth in
Section 15 below.
3. Stock Subject to the Plan.
(a) Shares Issuable. The maximum number of shares of
Stock reserved and available for distribution pursuant to
Awards under the Plan shall be 700,000 shares. Such
shares may consist, in whole or in part, of authorized
and unissued shares or treasury shares. If an Award
expires or terminates for any reason without being
exercised in full or is satisfied without the
distribution of Stock, the Stock subject to such expired
or terminated Award or an Award satisfied without the
distribution of Stock shall again be available for
distribution for purposes of the Plan.
(b) Changes in Capitalization. In the event of a
stock dividend, stock split or any increase or decrease
in the number of issued shares of Stock resulting from a
subdivision or combination of shares effected without
receipt of consideration by the Company, the Committee
shall make appropriate adjustments in (i) the number and
kind of shares of Stock or other securities with respect
to which Awards may thereafter be granted, (ii) the
number and kind of shares remaining subject to
outstanding Awards and (iii) the option or purchase price
in respect of such shares. In the event of any such
change in capitalization of the Company, the Committee
may make such additional adjustments in the number and
kind of shares of Stock or other securities with respect
to which outstanding Awards are exercisable and with
respect to which future Awards may be granted as the
Committee in its sole discretion shall deem equitable or
appropriate, subject to the provisions of Section 18
below. In the event the Stock is changed into the same
number of shares with a different par value or without
par value, the shares resulting from any such change
shall be deemed to be the Stock within the meaning of the
Plan. Except (i) as expressly provided in the preceding
sentences or (ii) for any distribution or adjustment made
with respect to outstanding shares of Restricted Stock
in connection with a distribution or adjustment made
with respect to all other outstanding shares of Stock,
any issue by the Company of shares of stock of any class,
or securities convertible into shares of stock of any
class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or
price of shares of Stock subject to any Award. The
existence of the Plan and the Awards granted pursuant to
the Plan shall not affect in any way the right or power
of the Company to make or authorize any adjustment,
reclassification, reorganization or other change in its
capital or business structure, any merger or
consolidation of the Company, any issue of debt or equity
securities having preferences or priorities as to the
Stock or the rights thereof, the dissolution or
liquidation of the Company, any sale or transfer of all
or any part of its business or assets, or any other
corporate act or proceeding.
(c) Substitute Awards. The Company may grant Awards
under the Plan in substitution for stock and stock-based
awards held by employees. Also the Company may grant
Awards under the Plan in substitution for stock and
stock-based awards held by employees of another
corporation who concurrently become employees of the
Company or a Subsidiary as the result of a merger or
consolidation of the employing corporation with the
Company or a Subsidiary or the acquisition by the Company
or a Subsidiary of property or stock of the employing
corporation. The Committee may direct that the
substitute Awards be granted on such terms and conditions
as the Committee considers appropriate in the
circumstances. The shares which may be delivered under
such substitute Awards shall be subject to and applied
against the maximum number of shares provided for in
paragraph (a) above.
4. Eligibility. Participants in the Plan will be such officers
and other senior key employees of the Company and its
Subsidiaries (but excluding any person who serves only as a
director) who are responsible for or contribute to the
management, growth, or profitability of the Company and its
Subsidiaries and who are selected from time to time by the
Committee, in its sole discretion.
5. Administration of the Plan. The Plan shall be administered
by the Committee or such other committee of the Board, composed
of not less than three Disinterested Persons, who shall be
appointed by the Board and who shall serve at the pleasure of the
Board. The Committee shall have the power and authority to grant
Awards consistent with the terms of the Plan, including the power
and authority:
(i) to select the officers and other key employees of
the Company and its Subsidiaries to whom Awards may from
time to time be granted;
(ii) to determine the time or times of grant, and the
amount, if any, of Incentive Stock Options, Non-Qualified
Stock Options, Stock Appreciation Rights, Restricted
Stock Awards, Unrestricted Stock Awards, Deferred Stock
Awards, Performance Units Awards, and any Other
Stock-Based Awards, or any combination of the foregoing,
granted to any one or more Plan participants;
(iii) to determine the number of shares of Stock to be
covered by any Award;
(iv) to determine the terms and conditions of any Award
(including, but not limited to, the share price, any
restriction or limitation, and any waiver of vesting,
acceleration or forfeiture provisions regarding any Stock
Option or other Award and the Stock relating thereto,
based on such factors as the Committee shall determine);
and
(v) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with
respect to an Award shall be deferred either
automatically or at the election of the Participant, and
whether and to what extent the Company shall pay or
credit amounts equal to interest (at rates determined by
the Committee), dividends or deemed dividends on such
deferrals.
Subject to the provisions of the Plan, the
Committee shall have full and conclusive authority to
interpret the Plan; to prescribe, amend and rescind rules
and regulations relating to the Plan; to determine the
terms and provisions of the respective Award agreements
and to make all other determinations necessary or
advisable for the proper administration of the Plan. The
Committee's determinations under the Plan need not be
uniform and may be made by it selectively among persons
who receive, or are eligible to receive, Awards under the
Plan (whether or not such persons are similarly
situated). Any determination made by the Committee
pursuant to the provisions of the Plan with respect to
any Award shall be made in its sole discretion at the
time of the grant of the Award or, unless in
contravention of any express term of the Plan, at any
time thereafter. All decisions by the Committee made
pursuant to the provisions of the Plan shall be final and
binding on all persons, including the Company and Plan
participants.
6. Limitations on Term and Date of Awards.
(a) Duration of Awards. Subject to Section 19(c)
below, no restrictions or limitations on any Award shall
extend beyond ten years from the grant date, except that
deferrals of the receipt of Stock or other benefits under
the Plan elected by participants may extend beyond such
date.
(b) Term. No Award shall be granted more than ten
years after the effective date of the Plan as specified
in Section 20 below, but then outstanding Awards may
extend beyond such date.
7. Stock Options. Stock Options may be granted alone or in
addition to other Awards and may be of two types: Incentive
Stock Options and Non-Qualified Stock Options. Each Stock Option
shall be clearly identified as to its status as an Incentive
Stock Option or a Non-Qualified Stock Option at the date of
grant. To the extent that any Stock Option denominated as an
Incentive Stock Option does not qualify as an "incentive stock
option" within the meaning of Section 422 of the Code, it shall
constitute a separate Non-Qualified Stock Option. Stock Options
granted under the Plan shall be subject to the following terms
and conditions and shall be evidenced by option agreements, which
shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall
deem desirable:
(a) Option Price. The option price per share of Stock
purchasable under a Stock Option shall be determined by
the Committee at the time of grant and set forth in the
option agreement but shall be (i) in the case of
Incentive Stock Options, not less than 100% of the Fair
Market Value on the date of grant and (ii) in the case of
Non-Qualified Stock Options, unless expressly authorized
otherwise by the Committee, not less than 100% of the
Fair Market Value on the date of grant; provided,
however, that the option price per share of Stock
purchasable under a Non-Qualified Stock Option may not be
less than 50% of the Fair Market Value on the date of
grant nor less than the par value of such stock. If an
officer or key employee owns or is deemed to own (by
reason of the attribution rules applicable under Section
424(d) of the Code) more than 10% of the combined voting
power of all classes of stock of the Company or any
Subsidiary or parent corporation, and an Incentive Stock
Option is granted to such officer or key employee, the
option price shall be no less than 110% of the Fair
Market Value on the date of grant. The grant of a Stock
Option shall occur on the date the Committee by
resolution selects an officer or employee as a Plan
participant in any grant of Stock Options, determines the
number of shares of Stock covered by the Stock Option and
specifies the terms and provisions of the option
agreement.
(b) Option Term. Unless an option agreement provides
for a shorter exercise period, any Stock Option shall be
exercisable not later than ten years after the Stock
Option is granted; provided, however, that if an
Incentive Stock Option is granted to an employee who owns
or is deemed to own (by reason of the attribution rules
of Section 424(d) of the Code) more than 10% of the
combined voting power of all classes of stock of the
Company or any Subsidiary or parent corporation, the term
of such Incentive Stock Option shall be no more than five
years from the date of grant.
(c) Exercisability. Stock Options shall be exercisable
at such time or times and subject to such terms and
conditions, and in such amounts, as the Committee shall
specify in the option agreement, except that no Stock
Option when initially granted shall provide that it may
be exercisable to any extent during the first six months
following the date of grant. Notwithstanding the
foregoing, subsequent to the grant of a Stock Option, the
Committee, at any time before the complete expiration of
such Stock Option, may accelerate the time or times at
which such Stock Option may be exercised in whole or in
part; provided, however, that if any Stock Option is
exercised within the first six months following the date
of grant, the shares of Stock received upon such exercise
may not be sold within the first six months following the
date of grant. Except as provided in subsections (f),
(g), (h) and (i) below, a Stock Option may not be
exercised by the holder unless the holder is then, and
continually after the grant of the Stock Option has been,
an employee of the Company or one of its Subsidiaries.
(d) Method of Exercise. Stock Options may be exercised
at any time during the option period by giving written
notice of exercise to the Company specifying the number
of shares to be purchased. Except as provided in
subsection (l) below, such notice shall be accompanied by
payment in full of the purchase price, either by
certified or bank check or other instrument acceptable to
the Committee, or by delivery of shares of Stock as
provided in this subsection. As determined by the
Committee, in its discretion at (or, in the case of
Non-Qualified Stock Options, at or after) the time of
grant, payment in full or part may also be made in the
form of shares of Stock not then subject to restrictions
under any Company plan (but which may include shares the
disposition of which constitutes a disqualifying
disposition for purposes of obtaining incentive stock
option treatment under the Code). Shares of Stock so
surrendered shall be valued at Fair Market Value on the
exercise date. Except as provided in subsection (l)
below, no shares of Stock shall be issued until full
payment therefor has been made. An optionee shall have
all of the rights of a shareholder of the Company,
including the right to vote the shares and the right to
receive dividends, with respect to shares subject to a
Stock Option when the optionee has given written notice
of exercise, has paid in full for such shares and, if
requested, has given the representation described in
Section 19(c) below.
(e) Nontransferability. No Stock Option shall be
transferable by the optionee other than by will or by the
laws of descent and distribution, and all Stock Options
shall be exercisable, during the optionee's lifetime,
only by the optionee or the guardian or legal
representative of the optionee.
(f) Termination by Death. If an optionee's employment
with the Company or any Subsidiary terminates by reason
of death, any Stock Option held by such optionee may
thereafter be exercised, to the extent exercisable at the
time of death by the legal representative or legatee of
the optionee, for a period of one year from the date of
death or until the expiration of the stated term of the
Stock Option, whichever period is the shorter.
(g) Termination by Disability. If an optionee's
employment with the Company or any Subsidiary terminates
by reason of Disability, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to
the extent it was exercisable at the time of termination,
for a period of one year from the date of such
termination or until the expiration of the stated term of
the Stock Option, whichever period is the shorter.
Except as otherwise provided by the Committee at the time
of grant, the death of an optionee during such exercise
period shall extend such period for one year following
death, or until the expiration of the stated term of the
Stock Option, whichever period is the shorter.
(h) Termination by Retirement. If an optionee's
employment with the Company or any Subsidiary terminates
by reason of Retirement, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to
the extent it was exercisable at the time of Retirement,
for a period of (i) in the case of Incentive Stock
Options, three months, and (ii) in the case of
Non-Qualified Stock Options, one year from the date of
Retirement or until the expiration of the stated term of
the Stock Option, whichever period is the shorter.
Except as otherwise provided by the Committee at the time
of grant, the death of an optionee during such exercise
period shall extend such period for one year following
death, or until the expiration of the stated term of the
Stock Option, whichever period is the shorter.
(i) Other Termination. Unless otherwise determined by
the Committee, if an employee's employment with the
Company or any Subsidiary terminates for any reason other
than death, Disability or Retirement, the Stock Option
shall thereupon terminate.
(j) Form of Settlement. The Committee may provide in
the option agreement that upon receipt of written notice
of exercise, the Committee may elect to settle all or a
part of the portion of any Stock Option so exercised by
paying the optionee an amount, in cash or Stock, equal to
the excess of the Fair Market Value of the Stock over the
exercise price (the "Spread Value") (determined on the
date the Stock Option is exercised). Any such settlement
relating to Stock Options held by optionees who are
actually or potentially subject to Section 16(b) of the
Act shall comply with the "window period" provisions of
Rule 16b-3(e), to the extent applicable, and, in the case
of settlements of Non-Qualified Stock Options held by
such optionees, the Committee may determine Fair Market
Value under the pricing rule set forth in Section 8(e)
below.
(k) Accelerated Right of Exercise in Certain
Circumstances. Notwithstanding the vesting provisions
established pursuant to subparagraph (c) above, but
subject to the provisions of subparagraph (b) above and
the last sentence of this subparagraph (k), a Stock
Option may be exercised as to the full number of shares
covered by the Stock Option without regard to the date of
grant of the Stock Option if: (i) a tender offer or
exchange offer has been made for at least 25% of the
outstanding shares of Stock, other than one made by the
Corporation or any entity as to which Carl W. Knobloch,
Jr. is an "affiliate" as defined in Rule 12b-2
promulgated under the Act provided that the corporation,
person or other entity making such offer purchases or
otherwise acquires shares of Stock pursuant to such
offer; or (ii) any person, entity or "group," within the
meaning of section 13(d)(3) or 14(d)(2) of the Act
(excluding, for this purpose, any employee benefit plan
of the Corporation or its Subsidiaries and any group
including Carl W. Knobloch, Jr. or any affiliate of Carl
W. Knobloch, Jr.) acquires (other than from the
Corporation or in a transaction approved by the
"Incumbent Board" as defined below) beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the
Act) of 25% or more of either the then outstanding shares
of Stock or the combined voting power of the
Corporation's then outstanding voting securities entitled
to vote generally in the election of directors; or (iii)
the individuals who constitute the Incumbent Board fail
for any reason to continue to constitute at least a
majority of the Board of Directors. The "Incumbent
Board" shall mean the members of the Board of Directors
as of April 8, 1992 and any person becoming a member of
the Board of Directors thereafter whose election, or
nomination for election by the Corporation's
shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent
Board (other than an election or nomination of an
individual whose initial assumption of office is in
connection with an actual or threatened election contest
relating to the election of the directors of the
Corporation, as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Act). If any of the
events specified in this subparagraph (k) have occurred,
the Stock Option shall be fully exercisable: (x) in the
event of (i) above, on or after the date on which shares
are purchased or otherwise acquired pursuant to such
tender offer or exchange offer; or (y) in the event of
(ii) above, at any time after the date upon which the
Corporation is provided a copy of a Schedule 13D (filed
pursuant to Section 13(d) of the Act and the rules and
regulations promulgated thereunder) or other notice
indicating that any person, entity or group has become
the holder of 25% or more of the outstanding shares of
Stock, or, if the Corporation is not subject to Section
13(d) of the Act, at any time after the date upon which
the Corporation receives written notice that any person,
entity or group has become the holder of 25% or more of
the outstanding shares of Stock; or (z) in the event of
(iii) above, on or after the occurrence of such failure.
(l) Certain Procedure for Certain Credit Assisted
Transactions. To the extent not inconsistent with the
provisions of Section 422 of the Code or Rule 16b-3, any
optionee desiring to obtain credit from a broker, dealer
or other "creditor" as defined in Regulation T issued by
the Board of Governors of the Federal Reserve System
(provided such broker, dealer or creditor has been
approved by the Committee) to assist in exercising a
Stock Option may deliver to such creditor an exercise
notice properly executed by such optionee with respect to
such Stock Option, together with instructions to the
Company to deliver the resulting Stock to the creditor
for deposit into a designated account. Upon receipt of
such exercise notice and related instructions in a form
acceptable to the Company, the Company shall confirm to
the creditor that it will deliver to the creditor the
Stock covered by such exercise notice and instructions
promptly following receipt of the exercise price from the
creditor. To the extent not inconsistent with the
provisions of Section 422 of the Code or Rule 16b-3, upon
request the Company may in its discretion, but shall not
be obligated to, deliver to the creditor shares of Stock
resulting from an assisted exercise prior to receipt of
the option exercise price for such shares if the creditor
has delivered to the Company, in addition to the other
documents contemplated hereby, the creditor's agreement
to pay the Company such exercise price in cash within
five days after delivery of such shares. The credit
assistance contemplated hereby may include a margin loan
by the creditor secured by the Stock purchased upon
exercise of a Stock Option or an immediate sale of some
or all of such Stock by the creditor to obtain or recover
the option exercise price which the creditor has
committed to pay to the Company.
(m) Special Provisions Relating to Incentive Stock
Options. At the time any Incentive Stock Option granted
under the Plan is exercised, the Company shall be
entitled to legend the certificates representing the
shares of Stock purchased pursuant to such Incentive
Stock Option to clearly identify them as representing
shares purchased upon exercise of an Incentive Stock
Option that may be subject to income tax withholding
requirements as set forth in Section 15 below. Anything
in the Plan to the contrary notwithstanding, no term of
the Plan relating to Incentive Stock Options shall be
interpreted, amended or altered, nor shall any discretion
or authority granted under the Plan be exercised so as to
disqualify the Plan under Section 422 of the Code or,
without the consent of the affected optionee, to
disqualify any Incentive Stock Option under Section 422
of the Code (except to the extent provided in Section 16
below).
8. Stock Appreciation Rights.
(a) General. A Stock Appreciation Right is an Award
entitling the recipient to receive an amount in cash or
shares of Stock (or forms of payment permitted under
subsection (d) below) or a combination thereof having a
value equal to (or, if the Committee shall so determine
at time of grant, less than) the excess of the Fair
Market Value of a share of Stock on the date of exercise
over the Fair Market Value of a share of Stock on the
date of grant (or over the option exercise price, if the
Stock Appreciation Right was granted in tandem with a
Stock Option) multiplied by the number of shares with
respect to which the Stock Appreciation Right shall have
been exercised, with the Committee having the right to
determine the form of payment.
(b) Grant and Exercise. Stock Appreciation Rights may
be granted in tandem with, or independently of, any Stock
Option granted under the Plan. In the case of a Stock
Appreciation Right granted in tandem with a Non-Qualified
Stock Option, such Stock Appreciation Right may be
granted either at or after the time of grant of such
option. In the case of a Stock Appreciation Right
granted in tandem with an Incentive Stock Option, such
Stock Appreciation Right may be granted only at the time
of the grant of such option. A Stock Appreciation Right
or applicable portion thereof granted in tandem with a
Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock
Option, except that a Stock Appreciation Right granted
with respect to less than the full number of shares
covered by a related Stock Option shall not be reduced
until the exercise or termination of the related Stock
Option exceeds the number of shares not covered by the
Stock Appreciation Right.
(c) Terms and Conditions. Stock Appreciation Rights
shall be subject to such terms and conditions as shall be
determined from time to time by the Committee, including
the following:
(i) No Stock Appreciation Right shall be
exercisable in whole or in part during the first six
months of its term.
(ii) Stock Appreciation Rights granted in tandem
with Stock Options shall be exercisable only at such
time or times and to the extent that the related
Stock Option shall be exercisable. Upon the
exercise of a Stock Appreciation Right, the
applicable portion of any related Stock Option shall
be surrendered.
(iii) Stock Appreciation Rights granted in tandem
with a Stock Option shall be transferable only with
such Stock Option. Stock Appreciation Rights shall
not be transferable otherwise than by will or the
laws of descent and distribution. All Stock
Appreciation Rights shall be exercisable during the
participant's lifetime only by the participant or by
the participant's legal representative or guardian.
(iv) A Stock Appreciation Right granted in tandem
with an Incentive Stock Option may be exercised only
when the market price of the Stock subject to the
Incentive Stock Option exceeds the exercise price of
such option.
(d) Form of Settlement. Subject to Section 19(c)
below, shares of Stock issued upon exercise of a Stock
Appreciation Right shall be free of all restrictions
under the Plan, except as otherwise provided in this
subsection (d). The Committee may provide at time of
grant of a Stock Appreciation Right that such shares
shall be in the form of Restricted Stock or rights to
acquire Deferred Stock, or may reserve the right to
provide so at any time after the date of grant. Any such
shares and any shares subject to rights to acquire
Deferred Stock issued upon exercise of a Stock
Appreciation Right shall be valued at Fair Market Value
on the date of exercise of the Stock Appreciation Right
without regard to any restrictions or deferral
limitations.
(e) Rules Relating to Exercise. In the case of a
participant subject to the restrictions of Section 16(b)
of the Act, no Stock Appreciation Right shall be
exercised except in compliance with any applicable
requirements of Rule 16b-3(e) or any successor rule.
Notwithstanding paragraph (a) above, in the event of such
exercise during an exercise period currently prescribed
by such rule, the Committee may prescribe, by rule of
general application, such other measure of value as it
may determine but not in excess of the highest per share
closing sale price of the Stock reported on the Nasdaq
National Market System or such other exchange as the
stock trades on during such period and, where a Stock
Appreciation Right relates to an Incentive Stock Option,
not in excess of an amount consistent with the
qualification of such Stock Option as an "incentive stock
option" under Section 422 of the Code.
9. Restricted Stock.
(a) General. A Restricted Stock Award is an Award
entitling the recipient to acquire shares of Stock,
subject to such conditions, including the right of the
Company during a specified period or periods to
repurchase such shares at the purchase price paid by the
Award recipient or to require forfeiture of such shares
(if no cash consideration was paid) upon the
participant's termination of employment, as the Committee
may determine at the time of grant. The Committee may
award shares of Restricted Stock (i) at no cost to the
recipient (or for a purchase price not in excess of the
par value of the shares) or (ii) for a purchase price
equal to at least 50% of the Fair Market Value of the
Stock (without regard to any restrictions) on the date of
grant. Shares of Restricted Stock may be granted or sold
in respect of past services or other valid consideration.
(b) Award Agreement and Certificates. A participant
who is granted a Restricted Stock Award shall have no
rights with respect to such Award unless the participant
shall have accepted the Award within sixty days (or
such shorter period as the Committee may specify)
following the Award date by executing and delivering to
the Company a Restricted Stock Award agreement in such
form as the Committee shall determine and by making
payment to the Company, by certified or bank check or
other instrument acceptable to the Committee, of any cash
consideration required to be paid in connection with such
Restricted Stock Award. For each participant receiving a
Restricted Stock Award, the Restricted Stock will be
registered in the name of the participant in an
uncertificated account with the Company's transfer agent
and evidence of such registration will be furnished by
the said transfer agent to the participant. Such account
shall include an appropriate legend referring to the
terms, conditions and restrictions applicable to such
Award, substantially in the following form:
"This uncertificated account and the shares of stock
represented hereby are subject to the terms and
conditions (including forfeiture and restrictions against
transfer) contained in the Production Operators Corp 1992
Long-Term Incentive Plan and an agreement entered into
between the registered owner and Production Operators
Corp. Release from such terms and conditions shall be
obtained only in accordance with the provisions of the
Plan and the agreement, copies of which are on file in
the office of the Secretary of Production Operators Corp,
11302 Tanner Road, Houston, Texas 77041."
The Committee may require that, as a condition of
any Restricted Stock Award, the participant shall have
delivered to the Company a stock power, endorsed in
blank, relating to the Stock covered by such Award.
(c) Rights as a Shareholder. Upon complying with
subsection (b) above, a participant shall have all the
rights of a shareholder with respect to the Restricted
Stock including voting and dividend rights, subject to
nontransferability restrictions, Company repurchase or
forfeiture rights and any other condition described in
this Section 9 or contained in the Restricted Stock Award
agreement. The Restricted Stock Award agreement may
require or permit the immediate payment, waiver,
deferral, or investment of dividends paid on the
Restricted Stock.
(d) Restrictions. Shares of Restricted Stock may not
be sold, assigned, transferred, pledged, or otherwise
encumbered or disposed of except as specifically provided
herein and in the Restricted Stock Award agreement.
Unless the Committee in its discretion provides
otherwise, all shares of Restricted Stock shall be
subject to the restrictions against transfer and the
Company's right to repurchase or require forfeiture set
forth in this subsection (d) for a minimum period of six
months from the date of grant. The Committee shall
specify the date or dates (which may depend upon or be
related to the attainment of performance goals or such
other factors or criteria as the Committee shall
determine) on which the restrictions against transfer and
the Company's right to repurchase or require forfeiture
of such shares shall lapse. The Committee may provide
for the lapse of such restrictions in installments and at
any time may accelerate such date or dates and otherwise
waive or, subject to Section 18 below, amend any terms
and conditions of the Award. Except as otherwise may be
provided in the Award agreement or determined by the
Committee at any time after the date of grant, in the
event of termination of employment of a participant with
the Company and its Subsidiaries for any reason
(including death), the participant or the participant's
legal representative shall resell to the Company, at the
cash consideration paid therefor, all Restricted Stock,
and the Company shall purchase such shares at that price
or, if no cash consideration was paid, all shares of
Restricted Stock awarded to the participant shall
automatically be forfeited to the Company. Any shares of
Stock or other securities of the Company or any other
entity which are issued as a distribution on, or in
exchange for, Restricted Stock or into which Restricted
Stock is converted as a result of a recapitalization,
stock dividend, distribution of securities, stock split
or combination of shares or a merger, consolidation or
sale of substantially all of the assets of the Company
shall be subject to the restrictions set forth in the
Restricted Stock Award agreement, which shall inure to
the benefit of any surviving or successor corporation
which is the issuer of such securities. Upon the lapse
of the forfeiture restrictions applicable to a
participant's Restricted Stock, the participant may
request, by providing written notice to the Company at
its principal executive office addressed to the attention
of its Secretary, a certificate evidencing the stock
whose Forfeiture Restrictions have lapsed be issued by
the Company in the participant's name to the participant
or such participant's legal representative or guardian.
(e) Section 83(b) Election. Any Restricted Stock Award
agreement may provide that the participant may not elect
to be taxed with respect to such Award in accordance with
Section 83(b) of the Code.
10. Unrestricted Stock. The Committee may, in its sole
discretion, grant (or sell at a purchase price not to exceed the
par value of the shares of Stock at the time of sale) to any
participant shares of Stock free of restrictions under the Plan
("Unrestricted Stock"). Shares of Unrestricted Stock may be
granted or sold as described in the preceding sentence in respect
of past services or other valid consideration. Any purchase of
Unrestricted Stock by a recipient must take place within sixty
days after the time of grant of the right to purchase such
shares. Notwithstanding the foregoing, any shares of
Unrestricted Stock granted to a participant who is subject to
Section 16(b) of the Act may not be sold or otherwise disposed of
for value for a period of six months from the date of grant.
11. Deferred Stock Awards.
(a) General. A Deferred Stock Award is an Award
entitling the recipient to acquire shares of Stock
without payment in one or more installments at a future
date or dates, all as determined by the Committee. The
Committee may condition such acquisition on the
attainment of specified performance goals or such other
factors or criteria as the Committee shall determine.
Unless the Committee in its discretion provides
otherwise, the deferral period with respect to any
Deferred Stock Award shall be no less than six months
from the date of grant.
(b) Award Agreement. A participant who is granted a
Deferred Stock Award shall have no rights with respect to
such Award unless within sixty days of the grant of such
Award (or such shorter period as the Committee may
specify) the participant shall have accepted the Award by
executing and delivering to the Company a Deferred Stock
Award agreement.
(c) Restriction on Transfer. Deferred Stock Awards and
rights with respect to such Awards may not be sold,
assigned, transferred, pledged or otherwise encumbered.
Rights with respect to such Awards shall be exercisable
during the participant's lifetime only by the participant
or by the participant's legal representative or guardian.
(d) Rights as a Shareholder. A participant receiving a
Deferred Stock Award will have rights of a shareholder
only as to shares actually received by the participant
under the Plan and not with respect to shares subject to
the Award but not actually received by the participant.
A participant shall be entitled to receive a certificate
for shares of Stock only upon satisfaction of all
conditions specified in the Deferred Stock Award
agreement.
(e) Elective Deferral. A participant may elect to
further defer receipt of the Stock payable under a
Deferred Stock Award (or an installment of the Award) for
a specified period or until a specified event, subject in
each case to the Committee's approval and under such
terms as determined by the Committee. Subject to any
exceptions adopted by the Committee, such election must
generally be made at least 12 months prior to completion
of the deferral period for the Award (or for such
installment of the Award).
(f) Termination. Except as may otherwise be provided
in the Deferred Stock Award agreement, a participant's
rights in all Deferred Stock Awards shall automatically
terminate upon the participant's termination of
employment with the Company and its Subsidiaries for any
reason (including death). At any time prior to the
participant's termination of employment, the Committee
may in its discretion accelerate, waive, or, subject to
Section 18 below, amend any or all of the restrictions or
conditions imposed under any Deferred Stock Award.
(g) Payments in Respect of Deferred Stock. Without
limiting the right of the Committee to specify different
terms, the Deferred Stock Award agreement may require or
permit the immediate payment, deferral, or investment of
amounts equal to, or less than, any cash dividends which
would have been payable on the Deferred Stock had such
Stock been outstanding, all as determined by the
Committee in its sole discretion.
12. Performance Unit Awards.
(a) General. A Performance Unit Award is an Award
entitling the recipient to acquire cash or shares of
Stock, or a combination of cash and Stock, upon the
attainment of specified performance goals. The Committee
in its sole discretion shall determine whether and to
whom Performance Unit Awards shall be made, the
performance goals applicable under each such Award, the
periods during which performance is to be measured, and
all other limitations and conditions applicable to a
Performance Unit Award. Notwithstanding the foregoing,
no Performance Unit Award shall be exercisable in whole
or in part during the first six months following the date
of grant. Performance goals may vary from participant to
participant and between groups of participants and shall
be based upon such Company, business unit or individual
performance factors or criteria as the Committee may
deem appropriate. Performance periods applicable to
Performance Unit Award recipients may overlap and
participants may participate simultaneously with respect
to Performance Unit Awards that are subject to different
performance periods and different performance goals. The
Committee may adjust the performance goals and periods
applicable to a Performance Unit Award to take into
account changes in law and accounting and tax rules, and
to make such adjustments as the Committee deems necessary
or appropriate to reflect the inclusion or exclusion of
the impact of extraordinary or unusual items, events or
circumstances in order to avoid windfalls or hardships.
Performance Units may be awarded independent of or in
connection with the grant of any other Award under the
Plan.
(b) Award Agreement. A participant shall have no
rights with respect to a Performance Unit Award unless
within sixty days of the grant of such Award (or such
shorter period as the Committee may specify) the
participant shall have accepted the Award by executing
and delivering to the Company a Performance Unit Award
agreement.
(c) Restrictions on Transfer. Performance Unit Awards
and all rights with respect to such Awards may not be
sold, assigned, transferred, pledged or otherwise
encumbered, and if exercisable over a specified period,
shall be exercisable during the participant's lifetime only
by the participant or the participant's legal
representative or guardian.
(d) Rights as a Shareholder. A participant receiving a
Performance Unit Award will have rights of a shareholder
only as to shares of Stock actually received by the
participant under the Plan and not with respect to shares
subject to the Award but not actually received by the
participant. A participant shall be entitled to receive
a certificate evidencing the acquisition of shares of
Stock under a Performance Unit Award only upon
satisfaction of all conditions specified in the
Performance Unit Award agreement.
(e) Termination. Except as may otherwise be provided
by the Committee at any time prior to the termination of
employment, a participant's rights and all Performance
Unit Awards shall automatically terminate upon the
participant's termination of employment by the Company
and its Subsidiaries for any reason (including death).
(f) Acceleration; Waiver. At any time prior to the
participant's termination of employment with the Company
and its Subsidiaries, the Committee may in its sole
discretion accelerate, waive, or, subject to Section 18
below, amend any or all of the goals, restrictions or
conditions imposed under any Performance Unit Award.
(g) Exercise. The Committee in its sole discretion
shall establish procedures to be followed in exercising
any Performance Unit Award, which procedure shall be set
forth in the Performance Unit Award agreement. The
Committee may at any time provide that payment under a
Performance Unit Award shall be made, upon satisfaction
of the applicable performance goals, without any exercise
by the participant. Except as otherwise specified by the
Committee, (i) a Performance Unit granted in tandem with
a Stock Option may be exercised only while the Stock
Option is exercisable, and (ii) the exercise of a
Performance Unit granted in tandem with any Award shall
reduce the number of shares of Stock subject to the
related Award on such basis as is specified in the
Performance Unit Award agreement.
13. Other Stock-Based Awards.
(a) General. The Committee may grant other Awards
under which Stock is or may in the future be acquired
("Other Stock-Based Awards"). Such Awards may include,
without limitation, debt securities convertible into or
exchangeable for shares of Stock upon such conditions,
including attainment of performance goals, as the
Committee shall determine. No Other Stock-Based Award
shall be exercisable in whole or in part during the first
six months following the date of grant or, if shares of
Stock are awarded to a participant on the date of grant,
such Stock shall be subject to restrictions against
transfer for a period of no less than six months from the
date of grant. Subject to the purchase price limitations
in subsection (b) below, such convertible or exchangeable
securities may have such terms and conditions as the
Committee may determine at the time of grant. However,
no convertible or exchangeable debt shall be issued
unless the Committee shall have provided (by the
Company's right of repurchase, right to require
conversion or exchange, or other means deemed appropriate
by the Committee) a means of avoiding any right of the
holders of such debt to prevent a Company transaction by
reason of covenants in such debt.
(b) Purchase Price; Form of Payment. The Committee may
determine the consideration, if any, payable upon the
issuance or exercise of an Other Stock-Based Award.
However, no shares of Stock (whether acquired by
purchase, conversion, or exchange or otherwise) shall be
issued unless (i) issued at no cost to the recipient (or
for a purchase price not in excess of the par value of
the shares), or (ii) sold, exchanged, or converted by the
Company, and the Company shall have received payment for
such Stock or securities so sold, exchanged, or converted
equal to at least 50% of Fair Market Value of the Stock
on the grant or effective date, or the exchange or
conversion date, under the Award, as specified by the
Committee. The Committee may permit payment by certified
check or bank check or other instrument acceptable to the
Committee or by surrender of other shares of Stock
(excluding shares then subject to restrictions under the
Plan).
(c) Forfeiture of Awards; Repurchase of Stock;
Acceleration or Waiver of Restrictions. The Committee
may determine the conditions under which an Other
Stock-Based Award shall be forfeited or, in the case of
an Award involving a payment by the recipient, the
conditions under which the Company may or must
repurchase such Award or related Stock. At any time the
Committee may in its sole discretion accelerate, waive,
or, subject to Section 18 below, amend any or all of the
limitations or conditions imposed under any Other
Stock-Based Award.
(d) Award Agreements. A participant shall have no
rights with respect to any Other Stock-Based Award unless
within sixty days after the grant of such Award (or such
shorter period as the Committee may specify) the
participant shall have accepted the Award by executing
and delivering to the Company an Other Stock-Based Award
agreement.
(e) Restrictions on Transfer. Other Stock-Based Awards
may not be sold, assigned, transferred, pledged, or
encumbered except as may be provided in the Other
Stock-Based Award agreement. However, in no event shall
any Other Stock-Based Award be transferred other than by
will or by the laws of descent and distribution or be
exercisable during the participant's lifetime by other
than the participant or the participant's legal
representative or guardian.
(f) Rights as a Shareholder. A recipient of any Other
Stock-Based Award will have rights of a shareholder only
at the time and to the extent, if any, specified by the
Committee in the Other Stock-Based Award agreement.
(g) Deemed Dividend Payments; Deferrals. Without
limiting the right of the Committee to specify different
terms, an Other Stock-Based Award agreement may require
or permit the immediate payment, waiver, deferral, or
investment of dividends or deemed dividends payable or
deemed payable on Stock subject to the Award.
14. Supplemental Grants.
(a) Loans. The Company may in its sole discretion make
a loan to the recipient of an Award hereunder, either on
or after the date of grant of such Award. Such loans may
be either in connection with exercise of a Stock Option,
a Stock Appreciation Right or an Other Stock-Based Award,
in connection with the purchase of shares under any
Award, or in connection with the payment of any federal,
state and local income taxes in respect of income
recognized under an Award. The Committee shall have full
authority to decide whether to make a loan hereunder and
to determine the amount, term, and provisions of any such
loan, including the interest rate (which may be zero)
charged in respect of any such loan, whether the loan is
to be secured or unsecured, the terms on which the loan
is to be repaid and the conditions, if any, under which
it may be forgiven. However, no loan hereunder shall
provide or reimburse to the borrower the amount used by
him for the payment of the par value of any shares of
Stock issued, have a term (including extensions)
exceeding ten years in duration, or be in an amount
exceeding (i) the total exercise or purchase price paid
by the borrower under an Award or for related Stock under
the Plan plus (ii) an amount equal to any cash payment
made as permitted in subsection (b) below.
(b) Cash Payments. The Committee may, at any time and
in its discretion, authorize a cash payment, in respect
of the grant or exercise of an Award under the Plan or
the lapse or waiver of restrictions under an Award, which
shall not exceed the amount which would be required in
order to pay in full the federal, state and local income
taxes due as a result of income recognized by the
recipient as a consequence of (i) the receipt of an Award
or the exercise of rights thereunder and (ii) the receipt
of such cash payment. The Committee shall have complete
authority to decide whether to make such cash payments in
any case, to make provisions for such payments either
simultaneously with or after the grant of the associated
Award, and to determine the amount of any such payment.
15. Withholding. Whenever the Company proposes or is required
to issue or transfer shares of Stock under the Plan, the Company
shall have the right to require the recipient to remit to the
Company an amount sufficient to satisfy any federal, state and
local withholding tax requirements prior to the delivery of any
certificate or certificates for such shares. If a participant
surrenders shares of Stock acquired pursuant to the exercise of
an Incentive Stock Option in payment of the option exercise price
of a Stock Option or the purchase price under another Award, and
such surrender constitutes a disqualifying disposition for
purposes of obtaining incentive stock option treatment under the
Code, the Company shall have the right to require the participant
to remit to the Company an amount sufficient to satisfy any
federal, state and local withholding tax requirements prior to
the delivery of any certificate or certificates for such shares.
Whenever under the Plan payments are to be made in cash, such
payments shall be net of an amount sufficient to satisfy any
federal, state and local withholding tax requirements. A
recipient may elect with respect to any Non-Qualified Stock
Option, Stock Appreciation Right, Restricted Stock Award,
Unrestricted Stock Award, Deferred Stock Award, Performance Unit
Award or Other Stock-Based Award to surrender or authorize the
Corporation to withhold shares of Stock (valued at Fair Market
Value on the date of surrender or withholding of the shares) in
satisfaction of all such withholding requirements (the "Stock
Surrender Withholding Election") in accordance with the
following:
(i) Any Stock Surrender Withholding Election shall be
made by written notice to the Company and thereafter
shall be irrevocable by the recipient.
(ii) Any Stock Surrender Withholding Election shall be
subject to the consent or disapproval of the Committee in
accordance with rules established from time to time by
the Committee.
(iii) Any Stock Surrender Withholding Election must be
made prior to the date on which the recipient recognizes
taxable income with respect to the receipt of such shares
(the "Tax Date").
(iv) If a recipient is subject to Section 16 of the Act,
or any successor law, (A) the date of the actual
surrender or withholding of shares of Stock (the
"Withholding Date") must be more than six months after
the date of grant of the Award with respect to which such
surrender or withholding is made (except whenever such
surrender or withholding is made by a disabled recipient
or the estate or personal representative of a deceased
recipient); and (B) the Stock Surrender Withholding
Election (i) must be made six months prior to the
Withholding Date, or (ii) must be made, and the
Withholding Date occur, during a period beginning on the
third business day following the date of release by the
Company for publication of quarterly or annual summary
statements of sales and earnings and ending on the
twelfth business day following such date, or (iii) must
be made in connection with a delivery to the Company of
shares of Stock owned by the recipient for at least six
months prior to the Withholding Date to satisfy the
portion of the tax required to be withheld with respect
to those shares of Stock received by the recipient,
pursuant to the grant of an Award for which payment of
the purchase price was made to the Company in shares of
Stock owned by the recipient for at least six months
prior to the Withholding Date.
(v) When the Tax Date falls after the exercise of a
Non- Qualified Stock Option or issuance of shares
pursuant to any other Award and the recipient makes a
Stock Surrender Withholding Election, the full number of
shares of Stock subject to the Non-Qualified Stock Option
being exercised or issuable pursuant to the Award will be
issued, but the recipient will be unconditionally
obligated to deliver to the Company on the Tax Date the
number of shares of Stock having a value on the Tax Date
equal to the recipient's federal, state and local
withholding tax requirements.
(vi) For purposes of this Section 15, the Committee
shall have the discretion to provide (by general rule or
a provision in the specific Award agreement) that, at the
election of the recipient, "federal, state and local
withholding tax requirements" shall be deemed to be any
amount designated by the recipient which does not exceed
his estimated federal, state and local tax obligations
associated with the transaction, including FICA taxes to
the extent applicable.
16. Merger; Liquidation. If the Company shall be the surviving
corporation in any merger, recapitalization or similar
reorganization, the optionee of each outstanding Stock Option
shall be entitled to purchase, at the same times and upon the
same terms and conditions as are then provided in the Stock
Option, the number and class of shares of Stock or other
securities to which a holder of the number of shares of Stock
subject to the Stock Option at the time of such transaction would
have been entitled to receive as a result of such transaction,
and a corresponding adjustment shall be made in connection with
determining the value of any related Stock Appreciation Right.
In the event of any such change in capitalization of the Company,
the Committee may make such additional adjustments in the number
and class of shares of stock or other securities with respect to
which outstanding Awards are exercisable and with respect to
which future Awards may be granted as the Committee in its sole
discretion shall deem equitable or appropriate, subject to the
provisions of Section 18 below. In the event of dissolution or
liquidation of the Company or a merger in which the Company is
not the surviving corporation, the Committee in its sole
discretion may, as to any outstanding Awards, make such
substitution or adjustment in the aggregate number of shares
reserved for issuance under the Plan and in the number or
purchase price (if any) of shares subject to such Awards as it
may determine, or accelerate, amend, or terminate such Awards
upon such terms and conditions as it shall provide, which, in the
case of the termination of the vested portion of any Award, shall
require payment or other consideration which the Committee deems
equitable in the circumstances.
17. Unfunded Status of Plan. With respect to the portion of any
Award which has not been exercised and any payments in cash,
Stock or other consideration not received by a participant, a
participant shall have no rights greater than those of a general
creditor of the Company unless the Committee shall otherwise
expressly determine in connection with any Award or Awards. In
its sole discretion, the Committee may authorize the creation of
trusts or other arrangements to meet the Company's obligations to
deliver Stock or make payments with respect to Awards, provided
that the existence of such trusts or other arrangements is
consistent with the "unfunded" status of the Plan.
18. Amendments and Termination. The Board may amend, alter or
discontinue the Plan, but no amendment, alteration or
discontinuance shall be made which would impair the rights of an
optionee under a Stock Option or a recipient of another Award
theretofore granted without the optionee's or recipient's
consent; provided, however, that any alteration or amendment
which would (i) increase the aggregate number of shares of Stock
which may be issued under the Plan (other than an increase merely
reflecting a change in capitalization such as a stock dividend or
stock split), (ii) modify the designation of employees eligible
to receive Awards under the Plan, or (iii) materially increase
the benefits accruing to holders of Awards granted or to be
granted under the Plan, within the meaning the Rule 16b-3, shall
be effective only if it is approved by the shareholders of the
Company at the next annual meeting of shareholders after the date
of adoption by the Board of such alteration or amendment. The
Committee may at any time amend or cancel any outstanding Award
(or provide substitute Awards at the same or a reduced exercise
or purchase price or with no exercise or purchase price, but such
price, if any, must satisfy the requirements which would apply to
the substitute or amended Award if it were then initially
granted under the Plan) for the purpose of satisfying changes in
law or for any other lawful purpose, but no such action shall
adversely affect rights under any outstanding Award without the
recipient's consent (except to the extent provided in Section 16
above).
19. General Provisions.
(a) Transfers. For purposes of the Plan, the transfer
to the employment by the Company from a Subsidiary or
from the Company to a Subsidiary, or from one Subsidiary
to another, shall not be deemed a termination of
employment.
(b) Leaves of Absence. The Committee may in its
discretion determine whether a leave of absence
constitutes a termination of employment for purposes of
the Plan and the impact, if any, of such leave of absence
on Awards previously granted to a holder who takes a
leave of absence.
(c) Restrictions on Delivery and Sale of Shares. Each
Award granted under the Plan is subject to the condition
that if at any time the Committee, in its discretion,
shall determine that the listing, registration or
qualification of the Stock covered by such Award upon any
securities exchange or under any state or federal law is
necessary or desirable as a condition of or in connection
with the granting of such Award or the purchase or
delivery of Stock thereunder, the delivery of any or all
shares pursuant to such Award may be withheld unless and
until such listing, registration or qualification shall
have been effected. If a registration statement is not
in effect under the Securities Act of 1933 and any
applicable state securities laws with respect to the
shares of Stock covered by Awards then outstanding, the
Committee may require, as a condition to any delivery of
Stock pursuant to an Award, that the recipient of Stock
represent, in writing, that the shares received pursuant
to the Award are being acquired for investment and not
with a view to distribution and agree that the Stock
will not be disposed of except pursuant to an effective
registration statement, unless the Company shall have
received an opinion of counsel that such disposition is
exempt from such requirement under the Securities Act of
1933 and any applicable state securities laws. The
Company may endorse on certificates representing shares
delivered pursuant to an Award such legends referring to
the foregoing representations or restrictions or any
applicable restrictions on resale as the Company, in its
discretion, shall deem appropriate.
(d) Other Compensation Arrangements; No Employment
Rights. Nothing contained in this Plan shall prevent the
Board from adopting other or additional compensation
arrangements, subject to shareholder approval if such
approval is required; and such arrangements may be either
generally applicable or applicable only in specific
cases. The adoption of the Plan does not confer upon any
employee any right to continued employment with the
Company or a Subsidiary, or affect the right of the
Company or any Subsidiary to terminate the employment of
any of its employees at any time.
(e) Governing Law. The Plan and all Awards made and
actions taken thereunder shall be governed by and
construed in accordance with laws of the State of Texas.
20. Effective Date. The Plan shall become effective as of April
8, 1992, the date of its adoption by the Board, upon the approval
of the Plan by the shareholders of the Company at their next
Annual Meeting. Subject to approval by the shareholders, and to
the requirement that no Stock may be issued hereunder prior to
such approval, Awards may be granted hereunder on and after
adoption of the Plan by the Board. Unless shareholder approval
is obtained by February 25, 1993, this Plan and any Award granted
hereunder shall become void thereafter.
Production Operators, Inc.
May, 1995
TARGET VARIABLE COMPENSATION PLAN
AND
STOCK OWNERSHIP GUIDELINES
<PAGE>2
TABLE OF CONTENTS
Objectives of Plan ................................................... 3
Characteristics of Plan .............................................. 3
Generation of Incentive Pool ......................................... 4
Type of Plan ...................................................... 4
Eligibility ....................................................... 4
Incentive Plan Group Assignments ................................. 4
Corporate, Business Unit, Individual - Split of Awards ............ 4
Performance Measures .............................................. 5
Incentive Plan Opportunities ......................................... 6
Distribution of Incentive Pool ....................................... 6
Financial Analysis ................................................... 7
Administrative and Operational Provisions ............................ 8
Appendix
A. Participant Incentive Plan Group Assignments
B. Example Calculations
C. Recommended Stock Ownership Guidelines
Business Unit Participant
Corporate Participant
<PAGE> 3
Target Variable Compensation Plan
The following are the key provisions for the Proposed 1995 Target Variable
Compensation Plan at Production Operators, Inc.:
OBJECTIVES OF THE PLAN
General:
- - Link and reflect corporate, business unit, individual performance.
- - Concentrate attention and effort on achieving high levels of Return on Equity
at Corporate Level.
- - Focus on achieving targeted Net Income Before Taxes performance at business
unit level.
- - Regard for achieving personal, individual objectives.
Specific:
- - Assist Production Operators in achieving and exceeding corporate
profitability projects, expressed as Return on Equity versus peer group
performance.
- - Provide an incentive compensation program that is fully competitive.
- - As appropriate, integrate business unit performance awards.
- - Provide increasing awards to participants for performance above targeted
levels.
- - Permit progressively greater awards in relation to the level of
responsibility and potential impact of individuals on Production Operators
performance.
- - Define threshold, target, and maximum award levels, expressed as percentage
of salary, by organizational responsibility.
- - Define threshold, target, and optimistic performance objectives.
- - Define threshold, target, and maximum cost exposures.
CHARACTERISTICS OF THE PLAN
- - Total actual awards are variable from year to year, depending upon
corporate, business unit and individual performance.
- - Specific performance objectives are determined in advance as part of the
profit objective process as approved by the Board, management and the
individuals covered by the Plan.
- - Awards for meeting objectives are also known in advance.
- - In addition to target bonus opportunities, threshold and maximum performance
levels are defined.
- - The plan is easily understood and administered.
- - Awards are "material" and competitive.
<PAGE> 4
- - The plan differentiates between superior and substandard performance on a
total corporate, business unit and individual participant basis.
- - The plan is "salary sensitive". Plan payoffs are based on prescribed
percentages of actual salaries on the final day of the fiscal year.
- - Performance Threshold measure used as "trigger" for plan. Go/No Go feature.
Must be satisfied before any bonus is paid.
CHARACTERISTICS OF THE PLAN CONTINUED
- - Return on Equity versus a peer group is used as a prime performance measure
for measuring Corporate performance.
- - Part of the award is deferred and distributed in company stock, either in
form of Restricted Stock Grants for officers and unrestricted stock awards
for other participants.
- - Corporate performance is targeted to achieve the 75th percentile Return On
Equity performance versus a peer group of companies with a payment threshold
at the lesser of the 50th percentile Return On Equity or 80% of profit plan.
- - Business unit performance is measured on achieving profit plan Net Income
Before Taxes.
- - The plan focuses on performance improvement.
- - Individual performance is measured on achieving predetermined personal
objectives.
- - In addition to targeted objectives, threshold and optimistic performance
levels are defined.
- - The plan is to be implemented effective retroactive to October 1, 1994.
GENERATION OF INCENTIVE POOL
- - Two activities are involved in incentive plan design - generation of the
incentive pool and distribution of the incentive pool.
Type of Plan
- - Target performance.
Eligibility
- - All exempt employees will be eligible to participate in this plan or the
Gainsharing Plan.
- - Employees must be on the payroll at the beginning of each fiscal year to
participate.
- - Employees must be on the payroll at the time the bonus is distributed to
receive an incentive award.
Incentive Plan Group Assignments and Variable Compensation Opportunities (% of
Salary)
Incentive Plan Groups are defined and are used to establish incentive pool
parameters. Each participant is assigned to an Incentive Plan Group based on
responsibility. Target awards vary from 5% to 30% of salary. Each group has
defined threshold, target, and maximum bonus potentials, expressed as a
percentage of salary which are interpolated on a linear basis.
- - Appendix A Displays Incentive Plan Groups/Participants and Bonus
Opportunities.
Corporate, Business Unit, Individual-Split of Awards
- - Award opportunities are based on assigned Incentive Group.
- - All participants rewarded, in part or whole, on Corporate Return on Equity
performance.
- - All participants earn a portion of award based on achieving personal,
individual objectives.
<PAGE> 5
GENERATION OF INCENTIVE POOL CONTINUED
- - Participants assigned to specific business units are rewarded, in part, on
achieving business unit performance goals, expressed as Net Income Before
Taxes.
All bonus awards are based on corporate performance. For the Corporate group of
employees, 50% of their award will be adjusted for individual performance. For
Business Unit employees, 33 1/3% will be adjusted for business unit performance
versus profit plan and 33 1/3% adjusted for individual performance.
- Business Units Include:
- CGHS
- District Operating Managers (five separate business Net Income unit
objectives)
- COUNTRY MANAGEMENT
- SPOCA
- Production Operators Corp
- Production Operators Argentina
- KAMLOK Oil and Gas
PERFORMANCE MEASURES
"THRESHOLD" OBJECTIVE - FIXED CRITERIA
"Threshold" minimum performance level must be reached before any bonus is paid
to any incentive plan participant. "GO/NO GO" feature of plan. Threshold
based on achieving 12% ROE or 80% of profit plan whichever is lower.
Applies to all plan participants.
PERFORMANCE CRITERIA
- - Corporate, Business Unit goals established by October 1, of each year.
- - Targeted goals approved as part of Profit Plan at October Board Meeting.
- - Individual objectives established by December 1, of each year.
GENERATION OF AWARD LEVEL
- - Performance Measure: Return on Equity (ROE)
- - Performance Levels:
- Threshold/Minimum performance Level: The lessor of 12% ROE or 80% of
profit plan.
- Target Performance Level: ROE 16%
- Optimistic Performance Level: ROE 20%
- Performance goals reviewed annually, but anticipated to remain stable
from year to year.
- Results between Threshold, Target, and Maximum bonus opportunities are
interpolated on a linear basis.
<PAGE> 6
DETERMINATION OF INDIVIDUAL AWARDS
(1) Corporate:
- One-third or one-half of salaried bonus is based on Corporate
performance.
(2) Business Unit - (One-third of standard bonus for participant's business unit
performance).
- Performance Measure: Business Unit Profit Plan Net Income Before Taxes.
- Performance Levels - Targeted Level: Achieve 100% of business unit
profit plan.
- Targeted Award: Achieve 100% of business of Profit Plan.
- Minimum Award level: Achieve 80% of targeted level.
- Optimistic Award Level: Achieve 120% of targeted profit plan.
(3) Individual Performance (one-third or one-half of standard bonus)
- Performance Measure: Specific, individual, personal objectives.
- Performance Level: Performance appraisal determines individual rating.
Appraisal results reviewed for equity and consistency by two
management levels.
(4) Combination of performance elements generates final bonus for individual
participants.
SUMMARY
INCENTIVE PLAN OPPORTUNITIES/PERFORMANCE OBJECTIVES
INTERPOLATION SCHEDULE
Incentive Plan Group Number % of Salary
Threshold Target Maximum/Optimistic
I. Chairman 15% 30% 45%
II. President 12.5% 25% 37.5%
III. Top Management 10% 20% 30%
IV. Senior Officers 10% 20% 30%
V. Senior Managers 7.5% 15% 22.5%
VI. District Operating Managers 5% 10% 15%
VII. Senior Staff 4% 7.5% 11%
VIII. Staff 2.5% 5% 7.5%
Performance Objectives
Corporate: ROE % 12%* 16% 20%
Business Unit: Net Income Before Tax 80% of plan 100% of plan 120% of plan
Individual Performance: Performance Appraisal Results
*Lessor of 12% ROE or 80% of profit plan.
DISTRIBUTION OF INCENTIVE POOL
Stock/Cash Split
- - For Chairman, President, and Executive Vice President, Vice President and CFO
positions, 50% in cash immediately, 50% awarded as Restricted Stock Grants.
<PAGE> 7
DISTRIBUTION OF INCENTIVE POOL CONTINUED
- - For all other participants, 50% of award distributed in cash, 50% of award in
stock.
- - The Restricted Stock Grant alternative is included in Production Operators
1992 Long Term Incentive Plan.
- - Stock for Restricted Grants taken from 1992 Long Term Incentive Pool.
- - Restricted Stock Grants vest one-third each year.
- - Restricted Stock Grants require plan document and signed agreement, subject
to Legal Counsel review.
FINANCIAL ANALYSIS
- - Costing of Plan
- Estimated plan costs based on actual salaries, February 1, 1995.
- The following are estimated costs at threshold, target, and maximum bonus
award levels.
1995 ESTIMATED COST
BY PERFORMANCE LEVEL
Threshold Target Maximum
$297,157 $594,314 $891,471
- - Restricted Stock Grants
- For selected Top Management, 50% of award distributed as Restricted Stock
Grants. Costs prorated through life of restriction (two years vesting).
- The following are estimated number of shares for 1995 based on a share
price of $22.00.
1995 ESTIMATED
RESTRICTED STOCK GRANTS
# of Shares
Threshold Target Maximum
2,556 shares 5,112 shares 7,667 shares
- - Financial Impact
- Following is estimated financial impact.
SUMMARY - FINANCIAL IMPACT
1995
Threshold Profit Plan Target Maximum
Plan Range - Estimate 80% Profit Plan 10.7% ROE 16% ROE 20% ROE
Required Net Income, $MM
($Million Net Income After Tax) $11.9 $14.9 $22.3 $27.9mm
Bonus Award Costs $294.0 $379.0 $589.0 $883.0
% of Net Income 1.6% 1.6% 1.7% 2.0%
<PAGE> 8
Return on Equity/Incentive Award Plan
1984 - 1994
*********graph goes in here***************
ADMINISTRATIVE AND OPERATIONAL PROVISIONS
ADOPTION OF PLAN
- - Board of Directors, by resolution should adopt this report.
- - Legal counsel prepares restricted stock agreement for approval by Board.
ADMINISTRATION OF PLAN
- - Compensation Committee of Board of Directors has power and authority to
administer Plan. Committee will approve any extraordinary financial gains or
losses for inclusion or exclusion in calculating awards from the plan.
PARTICIPATION
- - Participants must be on payroll October 1 to be eligible.
- - Participants must be on payroll to receive actual bonus awards.
- - Participants will receive awards as soon as practical, but in no event more
than 2 1/2 months after close of each fiscal year.
SALARY FOR BONUS CALCULATION/INCENTIVE PLAN DESIGNATION
- - The participant's actual salary at September 30, at the end of the
performance period serves as the basis for the incentive calculation.
TERMINATION OF EMPLOYMENT - CASH DISTRIBUTION AND SHARES
- - Death, Retirement, Disability, Reduction in Force: Participant or his or her
beneficiary is fully vested and granted discretionary bonus when awards are
distributed to other participants but on a cash basis only.
TERMINATION OF EMPLOYMENT - RESTRICTED STOCK GRANTS
- - Include provisions in plan agreement. Prepared by Legal Counsel.
- - Disability and Retirement: Any shares of Restricted Stock previously
credited shall be distributed free of restrictions as of final date of
employment.
<PAGE> 9
ADMINISTRATIVE AND OPERATIONAL PROVISIONS CONTINUED
TERMINATION FOR REASONS OTHER THAN REDUCTION IN FORCE, DEATH, RETIREMENT OR
DISABILITY
- - If a participant terminates for any reason other than reduction in force,
death, retirement, or disability, the participant forfeits all rights under
the plan.
PARTICIPANTS TRANSFERRED BETWEEN CORPORATE UNITS
- - If a participant is transferred to new group for more than six months,total
award level is based on new group performance. If less than six months in
year end business unit, award is prorated.
RIGHT TO CONTINUED EMPLOYMENT
- - Nothing in the incentive plan confers any participant any right to continued
employment or in any way affects Production Operators' right to terminate a
participant's employment.
WITHHOLDING TAXES
- - The company retains the right to withhold from any payment the amount of
taxes required by any government agency.
PARTICIPATION
- - No employee has the right to be selected, or having been selected to be
selected again to remain, as a participant.
AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN
- - Production Operators board of Directors may terminate, and from time to time,
amend or modify any provisions of the Plan.
APPENDIX
- - Participant Incentive Plan Group Assignments
- - Example Calculations
- - Recommended Stock Ownership Guidelines
<PAGE> 10
<TABLE>
APPENDIX A
INCENTIVE PLAN GROUP ASSIGNMENTS
Incentive Plan Group/Participants Annual Bonus Opportunity - % of Salary
Threshold Target Maximum
<S> <C> <C> <C>
I. Chairman 15% 30% 45%
II. President 12.5% 25% 37.5%
III. Top Management 10% 20% 30%
-Executive Vice President
-President KAMLOK Oil & Gas
IV. Senior Officers 10% 20% 30%
-Vice President, Operations & Engineering
-Vice President, Sales & Marketing
-Vice President, Business Development
-Chief Financial Officer
V. Senior Managers 7.5% 15% 22.5%
-Vice President, Canada
-Manager, Field Services
-General Manager, Engineering
-Vice President, Venezuela
-Region Manager
-Manager, Manufacturing & Purchasing
-Manager, Investor Relations
-Manager, MIS
-Controller
VI Middle Managers 5% 10% 15%
-District Operating Managers
-Tax Manager
-Manager, Electrical Engineering
-Manager, Processing Engineering
-Senior Exp. Engineer
-Safety & Environmental Engineer
VII. Senior Staff 4% 7.5% 11%
VIII. Staff 2.5% 5% 7.5%
</TABLE>
<PAGE> 11
APPENDIX B
EXAMPLE CALCULATION
20% Group
Based on 1995 Profit Plan
Example Individual -Salary $100,000 on September 30, 1995
10% at Threshold - $10,000
20% at Target - $20,000
30% at Maximum - $30,000
Actual Award - 1995 Profit Plan, 10.7% ROE, $12,900 (interpolated) Standard
Bonus Award
Corporate Group Adjusted Award Business Unit Group Adjusted Award
Threshold Satisfied (80% of profit plan) Threshold Satisfied (80% of profit
plan)
50% or $6,450 awarded directly 33 1/3% or $4,300 awarded directly
50% or $6,450 at risk based on 33 1/3% or $4,300 at risk based on
individual performance business unit performance
33 1/3% or $4,300 at risk based on
individual performance
<PAGE> 12
APPENDIX C
RECOMMENDED STOCK OWNERSHIP GUIDELINES
OBJECTIVES:
Promote and reinforce corporate policy of increasing stock ownership.
Encourage growth in shareholder value.
Align top management interests with those of shareholders.
Support the view that management risk and rewards should have a direct
relationship to shareholder returns.
Ensure that Production Operators is managed in the best long-term interests
of its shareholders.
PARTICIPANTS:
Limited to senior executives and top management.
Specifically those top managers who are to receive Restricted Stock Grants
under the recommended Annual Incentive Plan, including:
President
President, KAMLOK Oil & Gas
Executive Vice President, Operations
Vice President, Operations and Engineering
Vice President, Sales and Marketing
Vice President, Business Development
Chief Financial Officer
SHARES INCLUDED IN OWNERSHIP GUIDELINES:
Shares purchased in open market (in personal name or street name.
Shares, vested and unvested, awarded as Restricted Stock Grants.
Shares acquired under stock option exercise.
Shares, vested and unvested, allocated to Production Operators ESOP plans.
Shares, vested and unvested, employee and company contributions, under 401(k)
plan (future).
Does not include unexercised stock options.
AMOUNT OF STOCK
Generally accepted criteria is market value of Shares Owned as Percent of
Base Salary.
Recommended Salary Multiple:
President - 5 times (500% of salary)
Executive Vice President - 3 times
President, KAMLOK Oil & Gas - 3 times
Vice President, Operations and Engineering - 2 times
Vice President, Sales & Marketing - 2 times
Vice President, Business Development - 2 times
Chief Financial Officer - 2 times
<PAGE> 13
RECOMMENDED STOCK OWNERSHIP GUIDELINES CONTINUED
TIME FRAME FOR REQUIRED ACCUMULATION
Five years for incumbents.
For new hires and employees promoted to participant level, add two years,
seven years total.
MAINTENANCE OF OWNERSHIP
Participants maintain ownership.
Adjusts to stock price charges, salary increases, increased responsibility.
ENFORCEMENT/COMPLIANCE
Counsel with executive on importance of complying with ownership requirement.
<TABLE>
PRODUCTION OPERATORS CORP AND CONSOLIDATED SUBSIDIARY
COMPUTATION OF NET INCOME PER SHARE OF COMMON STOCK
FOR THE FIVE YEARS ENDED SEPTEMBER 30, 1995
Year Ended September 30,
1991 1992
--------------------------- ---------------------------
Fully Fully
Primary Diluted Primary Diluted
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding during year 7,085,000 7,085,000 8,997,000 8,997,000
Shares of common stock assumed
issued upon exercise of options
using the "treasury stock method"-
(a) Average market price during year 243,000 -- 263,000 --
(b) Market price at end of year -- 268,000 -- 264,000
Shares of common stock outstanding assuming
conversion of 9.25% convertible debentures -- 1,152,000 -- 337,000
Adjusted weighted average shares of
common stock outstanding during year 7,328,000 8,505,000 9,260,000 9,598,000
Income from continuing operations $ 5,571,000 $ 5,571,000 $10,671,000 $10,671,000
Reduction in interest expense, net of tax
effect, from assumed conversion of
9.25% convertible debentures -- 1,297,000 -- 386,000
Adjusted income from continuing operations 5,571,000 6,868,000 10,671,000 11,057,000
Income (loss) from discontinued operations 1,697,000 1,697,000 2,010,000 2,010,000
Cumulative effect of change in accounting
principle (SFAS No. 109) -- -- -- --
Adjusted net income $ 7,268,000 $ 8,565,000 $12,681,000 $13,067,000
Per share data:
Primary and fully diluted:
Income from continuing operations $ .76 $ .76 $1.15 $1.15
Income (loss) from discontinued
operations .23 .23 .22 .22
Cumulative effect of change in accounting
principle (SFAS No. 109) -- -- -- --
Total $ .99 $ .99(A) $1.37 $1.37(A) <PAGE>
Year Ended September 30,
1993 1994
Fully Fully
Primary Diluted Primary Diluted
Weighted average common shares
outstanding during year 10,024,000 10,024,000 10,069,000 10,069,000
Shares of common stock assumed
issued upon exercise of options
using the "treasury stock method"-
(a) Average market price during year 139,000 -- 111,000 --
(b) Market price at end of year -- 151,000 -- 109,000
Shares of common stock outstanding assuming
conversion of 9.25% convertible debentures -- -- --
Adjusted weighted average shares of
common stock outstanding during year 10,163,000 10,175,000 10,180,000 10,178,000
Income from continuing operations $ 8,677,000 $ 8,677,000 $10,992,000 $10,992,000
Reduction in interest expense, net of tax
effect, from assumed conversion of
9.25% convertible debentures -- -- -- --
Adjusted income from continuing operations 8,677,000 8,677,000 10,992,000 10,992,000
Income (loss) from discontinued operations 2,796,000 2,796,000 1,005,000 1,005,000
Cumulative effect of change in accounting
principle (SFAS No. 109) -- -- 200,000 200,000
Adjusted net income $11,473,000 $11,473,000 $12,197,000 $12,197,000
Per share data:
Primary and fully diluted:
Income from continuing operations $ .85 $ .85 $1.08 $1.08
Income (loss) from discontinued
operations .28 .28 .10 .10
Cumulative effect of change in accounting
principle (SFAS No. 109) -- -- .02 .02
Total $1.13 $1.13 $1.20 $1.20 <PAGE>
Year Ended September 30,
1995
Fully
Primary Diluted
Weighted average common shares
outstanding during year 10,097,000 10,097,000
Shares of common stock assumed
issued upon exercise of options
using the "treasury stock method"-
(a) Average market price during year 106,000 --
(b) Market price at end of year -- 139,000
Shares of common stock outstanding assuming
conversion of 9.25% convertible debentures -- --
Adjusted weighted average shares of
common stock outstanding during year 10,203,000 10,236,000
Income from continuing operations $13,977,000 $13,977,000
Reduction in interest expense, net of tax
effect, from assumed conversion of
9.25% convertible debentures -- --
Adjusted income from continuing operations 13,977,000 13,977,000
Income (loss) from discontinued operations (7,151,000) (7,151,000)
Cumulative effect of change in accounting
principle (SFAS No. 109) -- --
Adjusted net income $ 6,826,000 $ 6,826,000
Per share data:
Primary and fully diluted:
Income from continuing operations $1.37 $1.37
Income (loss) from discontinued
operations (.70) (.70)
Cumulative effect of change in accounting
principle (SFAS No. 109) -- --
Total $ .67 $ .67
NOTES:
(A) Conversion of the debentures would have an anti-dilutive effect, therefore, primary share data
is repeated.
</TABLE>
<TABLE>
REVENUES AND OPERATING INCOME BY CATEGORY (dollars in thousands)
<CAPTION>
for the years ended September 30, 1995 1994 1993 1992 1991
REVENUES FROM SALES AND SERVICES
<S> <C> <C> <C> <C> <C>
Contract gas handling services $71,245 $55,923 $48,676 $49,487 $43,136
Enhanced oil recovery -- 3,415 3,618 4,733 5,383
Total sales and services $71,245 $59,338 $52,294 $54,220 $48,519
OPERATING INCOME BEFORE CORPORATE
OVERHEAD AND INTEREST EXPENSE
Contract gas handling services $27,180 $19,973 $15,525 $18,055 $13,421
Enhanced oil recovery -- 1,429 1,774 2,039 2,301
Total operating income $27,180 $21,402 $17,299 $20,094 $15,722
</TABLE>
<TABLE>
MARKET PRICE OF STOCK AND
CASH DIVIDENDS
Market Price Dividends
High Low Declared
<S> <C> <C> <C>
FOR THE YEAR ENDED SEPTEMBER 30, 1995
quarter ended:
December 31 26-1/4 21-1/4 $.06
March 31 26-3/4 22 .06
June 30 31-1/2 25-3/4 .07
September 30 33 28 .07
FOR THE YEAR ENDED SEPTEMBER 30, 1994
quarter ended:
December 31 31-3/4 23-3/8 .06
March 31 28-3/4 24-3/8 .06
June 30 28-1/4 24-1/8 .06
September 30 26-3/4 22-1/2 .06
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Revenues from contract gas handling services were $71,245,000 in fiscal 1995
representing an increase of $11,907,000 (20%) as compared to $59,338,000 in
the prior year. These results include enhanced oil recovery (EOR) revenues
which were reported separately prior to fiscal 1995 (see Note 9 to the
consolidated financial statements). The Company's fleet of revenue producing
compression equipment, including customer owned units, averaged a record
330,000 horsepower during the year ended September 30, 1995, a 20% increase as
compared to the previous year's average of 276,000 horsepower. Fiscal year
1995 ended with an all time high 377,000 horsepower in service as compared to
296,000 at the end of fiscal 1994. Average realized prices increased three
percent during fiscal 1995 primarily due to an increase in international
operations where the revenue per horsepower is higher. As of the most recent
yearend, the order backlog for owned compression equipment amounted to 39,000
horsepower. Revenues from engineering design, construction and installation
were unchanged from the prior year. The significant improvement in the level
of applied horsepower is, in management's view, evidence of the secular trend
toward outsourcing critical noncore production services, of the type provided
by Production Operators, by the larger oil and gas producers and pipeline
companies. Management believes that the demand for such total responsibility,
high-performance services should remain very strong as the larger oil and gas
producers and pipeline companies form strategic alliance relationships with
service providers having a proven track record of superior quality, value-
added service.
Results of operations for oil and gas producing activities are reported as
discontinued operations for fiscal years 1995 and 1994 as further described in
Note 9 to the consolidated financial statements. Revenues from oil and gas
producing activities were $8,559,000 in fiscal 1995 as compared to $13,021,000
in the prior fiscal year, a decline of 34%. Production of oil and gas in
fiscal 1995 was 396,000 barrels of oil and 1,439,000 mcf of gas as compared to
576,000 barrels of oil and 2,379,000 mcf of gas in the prior fiscal year.
Average realized prices in the most recent year were $16.11 per barrel of oil
and $1.51 per mcf of gas as compared to $14.33 and $2.00, respectively, a year
ago.
As previously noted the Company discontinued separate segment reporting for
enhanced oil recovery services, effective as of the beginning of fiscal 1995,
due to the decline in EOR operations and its same basic business focus of
operating compression equipment. Prior thereto EOR was comprised of the
operation of two carbon dioxide pipelines in west Texas, the SACROC and
Comanche Creek systems. At December 31, 1994 the contract to operate the
customer owned SACROC pipeline expired. Given the negligible income generated
from the remaining Comanche Creek pipeline, management included it in the plan
of disposal as indicated in Note 9 to the consolidated financial statements.
Other revenues, consisting principally of rents, interest, dividends and sales
of assets, were $1,556,000 in the 1995 fiscal year as compared to $2,073,000
in fiscal 1994. The decline in fiscal 1995 was caused by a reduction in the
Company's holdings of marketable securities as compared to the previous fiscal
year.
Total operating income from contract gas handling services (revenues less cost
of services, depreciation, depletion and amortization) increased $5,778,000
(27%) to $27,180,000 for fiscal year 1995 as compared to $21,402,000 in the
preceding year. The significant improvement is attributable to the record
level of applied compression horsepower as previously discussed as well as the
expansion of the Company's operations in South America.
In October 1994 the Company was awarded its first job in Argentina, a turnkey
contract for 10,500 horsepower. Construction of the jobsite, startup of the
compressor units and commencement of a second larger project occurred in
fiscal 1995. Additionally, during the fiscal 1995 third quarter, the
Company's wholly owned Venezuelan subsidiary completed construction of a
large-scale water injection facility which is being operated for an affiliate
of Petroleos de Venezuela, S.A.
In April 1995 the Company announced that Production Operators, Inc. and Amoco
Production Company's U.S. Operating Group had agreed to form an alliance
whereby the Company would gradually assume operating responsibilities for
Amoco's field compression fleet, within the lower 48 states, constituting
units up to 2,500 horsepower. The objective of the alliance is to lower
Amoco's field compression and related gas handling costs by leveraging
Production Operators' specialized operating skills thereby enhancing both
companies' profitability and competitive position within their respective
industries. Both companies are actively coordinating their capital and human
resources to build a uniquely compatible infrastructure and working
relationship to realize those goals.
During fiscal 1995 general and administrative expenses were essentially the
same as in the preceding year. Interest expense, net of amounts allocated to
discontinued operations, in fiscal year 1995 was $1,100,000 compared to none
in the prior year as a result of higher bank borrowings in the year just
ended. Reference is made to the Liquidity and Capital Resources section later
in this report for further discussion.
The provision for depreciation, depletion and amortization increased
$2,169,000 (25%) to $10,855,000 for the year ended September 30, 1995 versus
$8,686,000 last year. The change is indicative of the strong growth in the
Company's applied fleet horsepower. The increase in depreciation was slightly
mitigated by the adoption of a longer depreciable life for certain compressor
components primarily as related to the additional investment associated with
lean burn, low emission compressor packages. This adjustment was consistent
with the Company's depreciation policy, as disclosed in Note 1 to the
consolidated financial statements, and did not materially affect results of
operations for the year.
Income tax expense for fiscal 1995 was $7,008,000 at an average effective tax
rate of 33.4%, as compared to $5,824,000 (34.6%) in the preceding fiscal year.
The 1995 rate was reduced principally by foreign tax credits. During fiscal
1994 the Company adopted Statement of Financial Accounting Standards No. 109
(SFAS No. 109) which mandated a change in the method used to measure and
recognize deferred income taxes. This standard requires that a deferred tax
liability or asset be recorded to reflect the income tax expense or benefit
that results from the recognition of temporary differences. Temporary
differences arise from the variations in the timing of the recognition of
income and expenses for financial reporting and tax purposes. Adoption of
SFAS No. 109 in fiscal 1994 resulted in a cumulative positive adjustment of
$200,000 in the restatement of deferred federal and state taxes.
RESULTS OF OPERATIONS
1994 COMPARED TO 1993
Revenues from contract gas handling services were $59,338,000 representing an
increase of $7,044,000 (13%) in fiscal 1994 as compared to $52,294,000 the
prior year. This core business segment includes the operating results of
enhanced oil recovery (EOR) services excluding the discontinued Comanche Creek
pipeline results, which were previously reported separately (see Note 9 to the
consolidated financial statements). The Company's fleet of revenue producing
compression equipment, including customer owned units, averaged 276,000
horsepower during the year ended September 30, 1994 as compared to the
previous year's average of 227,000 horsepower, a 22% increase. Fiscal year
1994 ended with 296,000 horsepower in service as compared to 254,000 at the
end of fiscal 1993. Average realized prices decreased five percent during
fiscal 1994 as a result of change in mix due both to an increase in the
average unit size, as measured in horsepower, and a higher proportion of
contract operated, customer owned units where revenue per horsepower is lower.
The increase in the average horsepower per unit impacts pricing because
capital cost and revenue per horsepower both decrease as average unit size
increases. Installation, demobilization and revamp revenues increased in 1994
because of a large number of new horsepower starts while revenues for design,
engineering and construction of compressor sites and related facilities
declined principally due to lower construction activity. The considerable
improvement in the level of applied horsepower is, in management's view,
further evidence of the trend towards outsourcing specialized production
services, of the kind provided by Production Operators, by the larger oil and
gas producers and pipeline companies. Management believes that the strong
demand for such total responsibility, high-performance services should
continue as the Company's customers develop alliances with service providers
having a demonstrated track record of superior quality, value-added service.
The Company's yearend backlog of equipment committed under contract was 75,000
horsepower, the largest as well as the longest (through June 1995) backlog in
the Company's 33 year history. In the EOR operating area, revenues were
approximately the same in fiscal 1994 as compared to the prior year. EOR
service operations continue to be adversely impacted by low oil prices and
thus have become increasingly less significant to the Company's overall
business. The SACROC pipeline continues to operate at significantly reduced
volumes and the current contract to operate the pipeline expires December 31,
1994. As discussed in prior public reports, the market for inert gas
injectants, including CO2, for tertiary oil recovery will remain depressed
while the current low oil price environment persists.
Results of operations from oil and gas producing activities are reported as
discontinued operations in the Company's financial statements for fiscal years
1994 and 1993 as further described in the notes thereto. Revenues from oil
and gas producing activities were $13,021,000 in fiscal 1994 as compared to
$14,917,000 in the prior fiscal year, a decline of 13%. Production on a
barrel of oil equivalent (BOE) basis was flat in fiscal 1994 as compared to
1993 but prices declined substantially. Production of oil and gas in fiscal
1994 was 576,000 barrels of oil and 2,379,000 mcf of gas as compared to
658,000 barrels of oil and 1,896,000 mcf of gas in the prior fiscal year.
Average realized prices in the most recent year were $14.33 per barrel of oil
and $2.00 per mcf of gas as compared to $16.50 and $2.14, respectively, a year
ago.
Other revenues, consisting of rents, interest, dividends and sales of assets,
were $2,073,000 in the 1994 fiscal year as compared to $1,524,000 in fiscal
1993. The improvement primarily related to the sale of an oil and gas
producing property and capital gains realized on sales of marketable
securities.
Total operating income from contract gas handling services (revenues less cost
of services, depreciation, depletion and amortization) increased $4,103,000
(24%) in fiscal year 1994 as compared to fiscal 1993. The increased
profitability is attributable to the significant gain in applied horsepower as
described in the preceding discussion of revenues. Repair, overhaul and
mobilization expenses have remained at high levels related to the continued
deployment of the additional horsepower. Management anticipates that this
favorable trend in earnings should continue based on the record equipment
backlog and a strong customer inquiry rate.
In October 1994 the Company was awarded a turnkey contract for 10,500
horsepower, its first job in Argentina. Construction of the jobsite will
commence in the fiscal 1995 first quarter with installation and startup of the
compressor units to occur in the following quarter. We also were awarded our
first operating contract in Canada during fiscal 1994 and the unit started in
November 1994. Management is optimistic regarding the prospect for continued
growth in both of these countries as well as further expansion of its
operations in Venezuela where the Company has been engaged in contract gas
compression services for approximately four years.
During fiscal 1994 general and administrative expenses increased $270,000 (4%)
compared to the preceding year. Interest expense for both fiscal 1994 and
1993 has been fully allocated to discontinued operations as described in Note
9 to the consolidated financial statements.
The provision for depreciation, depletion and amortization increased to
$8,686,000 for fiscal 1994 from $7,511,000 in the prior year due to the
additions to the Company's compression fleet in 1994. The growth in
depreciation was slightly mitigated by the adoption of a longer depreciation
life for the Company's lean burn, low emission engines which have been
developed to meet the requirements of the Federal Clean Air Act. The impact
of this change on earnings was not significant.
Income tax expense for fiscal 1994 was $5,824,000, an average effective tax
rate of 34.6%, as compared to $3,757,000 (30.2%) in the preceding fiscal year.
During the fiscal year, the Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109) which mandated a change in the method used to
measure and recognize deferred income taxes. This new standard requires that
a deferred tax liability or asset be recorded to reflect the income tax
expense or benefit that results from the recognition of temporary differences.
Temporary differences arise from the differences in the timing of the
recognition of income and expenses for financial reporting and tax purposes.
Adoption of SFAS No. 109 in fiscal 1994 resulted in a cumulative positive
adjustment of $200,000 in the restatement of deferred federal and state taxes.
Liquidity and Capital Resources
As of September 30, 1995 the Company's cash position was $985,000 versus
$1,037,000 at the close of the prior fiscal year. The principal sources of
cash during the year were internally generated funds from operating activities
of $24,338,000, proceeds from the sales of marketable securities and property
and equipment of $6,440,000 and additional bank borrowings totaling
$40,005,000. The primary uses of cash during the year were capital
expenditures of $63,272,000 and payment of dividends amounting to $2,627,000.
Accounts receivable for sales and services and construction increased
$8,745,000 to $23,327,000 at September 30, 1995 as compared to $14,582,000 at
the prior yearend principally due to outstanding progress billings on
construction work in Argentina where the Company began operations during
fiscal 1995. Current tax benefits totalled $2,785,000, the majority of which
is related to the discontinuance of the Company's oil and gas operations and
related asset writedowns. Prepaid expenses increased by $3,259,000 from the
prior year to a September 30, 1995 balance of $4,956,000 primarily related to
value-added tax prepayments in Argentina. Net assets of discontinued
operations at September 30, 1995 and 1994 were $8,981,000 and $18,981,000,
respectively, and are shown on the accompanying consolidated balance sheets
for both years as current assets. The 1995 balance has been reduced by a
pretax provision as further described in Note 9 to the consolidated financial
statements. Long-term receivables and other assets reflect a $2,646,000
increase from the prior yearend primarily due to expansion of international
operations. Senior term notes increased $40,005,000 during fiscal 1995 to
$46,005,000 at September 30, 1995 as increased demand for turnkey compression
services resulted in capital expenditures at record levels.
In response to increased capital spending, the Company amended its revolving
credit agreement with two banks, in the fiscal 1995 third quarter, to increase
the available borrowing capacity from $20,000,000 to $50,000,000. In
addition, the available line under a second short-term credit facility was
increased from $5,000,000 to $10,000,000. Specific additional information
concerning these and other existing credit facilities is set forth in Note 3
to the consolidated financial statements. The Company's liquidity needs for
the next fiscal year are expected to be satisfied principally by cash flows
from operations, proceeds on the sale of assets from discontinued operations
and additional bank borrowings as needed.
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands except per share data)
for the years ended September 30, 1995 1994 1993
<S> <C> <C> <C>
REVENUES
Sales and services $71,245 $59,338 $52,294
Other income 1,556 2,073 1,524
72,801 61,411 53,818
COSTS AND EXPENSES
Cost of sales and services 33,210 29,250 27,484
Depreciation, depletion and amortization 10,855 8,686 7,511
General and administrative expenses 6,651 6,659 6,389
Interest and debt expenses 1,100 -- --
51,816 44,595 41,384
Income before income taxes 20,985 16,816 12,434
Provision for income taxes 7,008 5,824 3,757
Income from continuing operations 13,977 10,992 8,677
Discontinued Operations
Operating income (loss), net of income taxes (449) 1,005 2,796
Provision for disposal, net of income taxes (6,702) -- --
Income (loss) from discontinued operations (7,151) 1,005 2,796
Income before cumulative effect of change in
accounting principle 6,826 11,997 11,473
Cumulative effect of change in accounting
principle (SFAS No. 109) -- 200 --
Net income $ 6,826 $12,197 $11,473
NET INCOME PER SHARE
Primary and fully diluted
Income from continuing operations $ 1.37 $ 1.08 $ .85
Income (loss) from discontinued operations (.70) .10 .28
Cumulative effect of change in accounting
principle (SFAS No. 109) -- .02 --
Net income $ .67 $ 1.20 $1.13 <PAGE>
</TABLE>
<TABLE>
CONSOLIDATED BALANCE SHEETS (dollars in thousands)
September 30, 1995 1994
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 985 $ 1,037
Marketable securities 202 2,589
Receivables, net:
Sales and services 16,492 13,440
Construction - work in progress 6,835 1,142
Inventories - at cost:
Compressor parts and supplies 4,852 4,171
Construction - work in progress 2,452 3,524
Prepaid expenses & other 4,956 1,697
Current tax benefit 2,785 --
Net assets of discontinued operations 8,981 18,981
Total current assets 48,540 46,581
Property and equipment:
Land and buildings 8,244 7,756
Compression and processing equipment 232,908 182,094
Pipelines 6,164 6,164
Other equipment 7,065 6,044
254,381 202,058
Less accumulated depreciation, depletion
and amortization (91,386) (86,573)
162,995 115,485
Long-term receivable and other assets 8,697 6,051
$ 220,232 $ 168,117
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable $ 9,967 $ 6,327
Accrued liabilities 7,829 5,712
Income taxes payable -- 279
Total current liabilities 17,796 12,318
Senior term notes 46,005 6,000
Deferred income taxes 17,781 16,093
Stockholders' investment 138,650 133,706
$ 220,232 $ 168,117
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (dollars in thousands)
$1 Par Additional Deferred
Common Paid-In Retained Compensation Treasury
three years ended September 30,1995 Stock Capital Earnings ESOP Stock Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1992
10,258,901 shares
(354,733 in treasury) $10,259 $70,228 $38,257 $(1,305) $(1,894) $115,545
Net income -- -- 11,473 -- -- 11,473
Cash dividends of $.22 per share -- -- (2,212) -- -- (2,212)
Exercise of options to purchase
169,500 shares (27,500 shares
surrendered in payment) -- 399 -- -- 147 546
Deferred compensation
relating to ESOP Plan -- -- -- (2,612) -- (2,612)
Tax benefits from dividends
on ESOP shares -- -- 26 -- -- 26
Stock awards - 8,151 shares -- 222 -- -- (23) 199
BALANCE, SEPTEMBER 30, 1993
10,258,901 shares
(204,582 in treasury) 10,259 70,849 47,544 (3,917) (1,770) 122,965
Net income -- -- 12,197 -- -- 12,197
Cash dividends of $.24 per share -- -- (2,417) -- -- (2,417)
Exercise of options to purchase
17,992 shares (182 shares
surrendered in payment) -- 81 -- -- 150 231
Deferred compensation
relating to ESOP Plan -- -- -- 628 -- 628
Tax benefits from dividends
on ESOP shares -- -- 38 -- -- 38
Stock awards - 2,325 shares -- 58 -- -- 6 64
BALANCE, SEPTEMBER 30, 1994
10,258,901 shares
(184,447 in treasury) 10,259 70,988 57,362 (3,289) (1,614) 133,706
Net income -- -- 6,826 -- -- 6,826
Cash dividends of $.26 per share -- -- (2,627) -- -- (2,627)
Exercise of options to purchase
50,358 shares -- 123 -- -- 441 564
Deferred compensation
relating to ESOP Plan -- -- -- 87 -- 87
Tax benefits from dividends
on ESOP shares -- -- 40 -- -- 40
Stock awards - 2,438 shares -- 45 -- -- 9 54
BALANCE, SEPTEMBER 30, 1995
10,258,901 shares
(131,651 in treasury) $10,259 $71,156 $61,601 $(3,202) $(1,164) $138,650
The accompanying notes are an integral part of these consolidated financial statements. <PAGE>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
for the years ended September 30, 1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 73,772 $ 70,755 $ 69,939
Cash paid to suppliers and employees (45,114) (48,804) (42,672)
Interest paid (1,620) (259) (37)
Income tax paid (4,138) (3,177) (2,799)
Interest and dividends received 717 938 988
Net refund of federal, state and local taxes -- -- 480
Cash received on claims and other income 721 533 556
24,338 19,986 26,455
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment (63,272) (41,217) (19,176)
Proceeds from sale of property and equipment 3,245 4,533 952
Proceeds from sale of securities 3,195 11,766 14,450
Purchase of securities (677) (640) (13,743)
Other (4,503) (690) (343)
(62,012) (26,248) (17,860)
CASH FLOWS FROM FINANCING ACTIVITIES
Additions to net borrowings
on long-term senior notes 40,005 6,000 --
Dividends paid (2,627) (2,417) (2,212)
Reduction of ESOP bank loan -- (435) (870)
(Increase) decrease in deferred compensation
under Company's ESOP Plan 87 628 (2,612)
Cash received upon exercise of stock options 491 204 147
Cash bonus paid upon exercise of stock options (315) (113) (1,364)
Repurchases of stock awards (19) (21) (86)
37,622 3,846 (6,997)
Net increase (decrease) in cash and cash equivalents (52) (2,416) 1,598
Cash and cash equivalents at beginning of year 1,037 3,453 1,855
Cash and cash equivalents at end of year $ 985 $ 1,037 $ 3,453
The accompanying notes are an integral part of these consolidated financial statements. <PAGE>
</TABLE>
<TABLE>
RECONCILIATION OF NET INCOME TO CASH FLOWS
FROM OPERATING ACTIVITIES (dollars in thousands)
for the years ended September 30, 1995 1994 1993
<S> <C> <C> <C>
Net income $ 6,826 $12,197 $11,473
ADJUSTMENTS
Depreciation, depletion and amortization 14,216 13,710 12,718
Provision for deferred income taxes 3,963 2,305 1,882
Provision for tax benefits on stock option
exercises and ESOP dividends 427 178 1,787
(Gain)loss on sale of marketable securities (131) (186) 159
Gain on sale of property and equipment (1,303) (1,537) (254)
(Increase) decrease in receivables (6,920) (2,753) 1,959
Increase in prepaid expenses & other (3,259) (706) (187)
(Increase) decrease in inventories (65) 1,309 (6,064)
(Increase) decrease in long-term receivable
and other assets 1,913 (4,854) (55)
Increase (decrease) in accounts payable 3,640 (2,921) 3,646
Increase (decrease) in accrued liabilities (38) 2,684 (46)
(Increase) decrease in current tax benefit (1,452) -- 480
Increase (decrease) in income taxes payable (279) 675 (1,413)
Cumulative effect of change in accounting principle -- (200) --
Issuance of stock awards 74 85 286
Other 24 -- 84
Loss on disposal of discontinued operations 6,702 -- --
17,512 7,789 14,982
Net cash provided by operating activities $ 24,338 $19,986 $26,455
The accompanying notes are an integral part of these consolidated financial statements. <PAGE>
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995, 1994 and 1993
1. Statement of Significant Accounting Policies and
Other Matters
PRINCIPLES OF CONSOLIDATION
Consolidated financial statements include the accounts of Production
Operators Corp (the Company) and its operating subsidiary, Production
Operators, Inc., together with its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
BUSINESS SEGMENTS
The Company presently conducts its operations in a single business segment,
contract gas handling services. Prior to fiscal year 1995, the Company
had operated in two business segments consisting of contract gas handling
services, including enhanced oil recovery (EOR), in the oil field services
industry and oil and gas producing operations. Due to the decline in the
size of the EOR area and the same basic business focus of operating
compression equipment, EOR results are included in contract gas handling
services beginning in fiscal 1995. During the fourth fiscal 1995
quarter, the Company announced that management was evaluating plans to
exit the oil and gas producing business and to focus its resources
exclusively on its core business segment of contract gas handling services.
Consequently, a plan of disposal was adopted, as of September 30, 1995, to
sell off or otherwise dispose of all existing oil and gas producing
properties. Also included in the plan of disposal is the Comanche Creek
pipeline whose results, prior to fiscal 1995, were reported in EOR.
Accordingly, the results of operations and net assets for oil and gas
producing activities and discontinued Comanche Creek pipeline results
have been reclassified in the consolidated financial statements as
discontinued operations for all periods presented. Reference is made
to "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 9 for additional information.
Approximately 34% of the Company's revenues from sales and services
during the year ended September 30, 1995 were from two clients,
one of which accounted for 10% or more of total revenues. The Company
does not believe that the loss of either of these two clients, or the
loss of any other individual client, would have a material adverse impact on
its operations. During the two previous fiscal years ended September 30,
1994 and 1993, approximately 27% and 26%, respectively, of the Company's
revenues were from its two largest clients.
The Company's revenues are derived principally from sales to clients in the
oil and gas industry, including sales to state-owned foreign operating
entities. This industry concentration has the potential to impact the
Company's exposure to credit risk, either positively or negatively, because
clients may be similarly affected by changes in economic or other
conditions. The creditworthiness of this client base is strong and
the Company has not experienced significant credit losses on its receivables.
The Company may be exposed to the risk of foreign currency exchange losses
in connection with its operations. These losses would be the result of
holding net monetary assets denominated in the foreign currency during
periods when it is devaluing compared to the U.S. dollar. Such
exchange rate losses have not been and are not expected to be
material principally because substantially all contracts require payments
from clients in U.S. dollars. Additionally, only minimal foreign currency
balances are maintained.
REVENUE RECOGNITION
Revenues from sales and services are recognized as the products are delivered
and services are performed.
INCOME TAXES
Effective October 1, 1993 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under
SFAS No. 109 entities are required to measure and report deferred income
taxes to reflect the tax consequences on future years of temporary
differences between net carrying values and tax bases of assets and
liabilities as of the end of each reporting period. The adoption of
the new standard resulted in a cumulative positive adjustment to income
of $200,000 in the first quarter of fiscal 1994.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased having a
maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities are principally comprised of U.S. Treasury
obligations, short-term, high-grade municipal bond funds, preferred stocks
and common stocks, which are stated at the lower of cost or market. The
securities were stated at cost as of September 30, 1995 and net of a
valuation reserve for unrealized losses of $220,000 at September 30, 1994 at
which time the aggregate market value was $2,589,000.
RECEIVABLES
Receivables are stated net of allowance for doubtful accounts of $159,000 at
September 30, 1995 and $135,000 at September 30, 1994.
INVENTORIES
Inventories consist of (1) parts and supplies recorded at the lower of average
cost or market and (2) work in progress which reflects the cost of
materials and services related to construction activities. Cost is
determined using the average cost method.
RETAIL STORE PROPERTIES
The Company owns five retail store properties, which are leased under
agreements that provided rental income of $559,000, $545,000 and $527,000
for the fiscal years ended September 30, 1995, 1994 and 1993, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
In July 1993 the Company's Board of Directors authorized a loan to the
Employee Stock Ownership Plan (ESOP) for the purchase by the ESOP of up
to 200,000 shares of Production Operators Corp common stock. The loan is
collateralized during its seven year term by the shares acquired with the
proceeds under a promissory note dated August 1, 1993 executed by the
trustees of the ESOP in favor of the Company. At September 30, 1995 and
1994, the ESOP had borrowings outstanding under the note in the amount of
$3,202,000 and $3,289,000, respectively. Under the terms of the ESOP, the
Company is obligated to make contributions to the ESOP which are used to
repay the loan to the Company. Therefore, during the term of the loan, the
Company holds a note receivable from the ESOP and, concurrently, is required to
make future payments to the ESOP for deferred compensation obligations in
the same amount. Since the Company has not refinanced the note through a
bank, neither the note receivable nor the corresponding liability is
reflected in the consolidated balance sheets.
DEPRECIATION
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives. The ranges of annual
depreciation percentages are as follows: buildings, 3% to 4%;
compressor units, 8% to 10%; and other equipment, 10% to 50%.
Maintenance and repair costs are expensed as incurred.
NET INCOME PER SHARE
Primary net income per share amounts are computed based on the weighted
average number of shares of common stock outstanding during the year and
include the effect of shares issuable under a stock option plan.
2. Income Taxes
The Company and its subsidiary file a consolidated federal income tax
return. The consolidated provision for federal and state income taxes on
continuing operations consists of the following:
<TABLE>
(thousands) for the years ended September 30, 1995 1994 1993
<S> <C> <C> <C>
Currently payable $2,618 $3,600 $ 104
Noncurrent deferred 4,390 2,224 3,653
Total provision $7,008 $5,824 $3,757
</TABLE>
Deferred income taxes result from temporary differences in the recognition
of revenues and expenses for tax and financial statement purposes. For
fiscal year 1993, which preceded the adoption of SFAS No. 109 as further
described in this Note 2, the sources of these differences and the tax effect
of each are as follows:
<TABLE>
(thousands) for the year ended September 30, 1993
<S> <C>
Excess of tax over book depletion
and depreciation $ 265
Excess of tax (gain) loss over book
gain or loss on sales of property (347)
Costs deferred on books deducted
for tax purposes 1,149
Revenues recognized on books
deferred for tax purposes 910
Investment tax credit utilization 179
Tax benefit from stock option
exercises and ESOP dividends 1,787
Other temporary differences, net (290)
Total temporary differences $3,653
</TABLE>
The primary components of the Company's deferred tax liability for fiscal
years including or subsequent to the adoption of SFAS No. 109 are as follows:
<TABLE>
(thousands) for the years ended September 30, 1995 1994
<S> <C> <C>
Differences in depreciable, depletable and
amortizable basis $16,828 $15,191
Income accrued for financial reporting, not yet
reported for tax 891 1,027
Other 62 (125)
Total deferred tax liability $17,781 $16,093
</TABLE>
The tax provisions of $7,008,000, $5,824,000 and $3,757,000 for the years ended
September 30, 1995, 1994 and 1993, respectively, were different from the
amounts resulting from multiplying income before income taxes by the
applicable statutory tax rates. The reasons for these differences are as
follows:
<TABLE>
percent of pretax income for years
ended September 30, 1995 1994 1993
<S> <C> <C> <C>
Federal income tax at statutory rates 34.0% 34.0% 34.0%
Investment tax credits, net of recapture (1.5) .3 (2.8)
State taxes, net of federal benefit 1.5 2.4 --
Foreign rate differential (.1) (1.4) --
Other items, net (.5) (.7) (1.0)
Effective tax rate 33.4% 34.6% 30.2%
</TABLE>
At September 30, 1995 the Company had investment tax credit carryovers of
$262,000, which are available to reduce future income taxes payable. In
fiscal 1994 the Company adopted SFAS 109 which required a change in the
method used to compute deferred income taxes. Such adoption did not have
a material effect on the Company's financial position or results of
operations. In conjunction with this adoption, the Company beginning in
fiscal 1994 has included in its effective income tax rate the liability
for state income taxes. Previously the effect of state income taxes was
included in cost of goods sold.
3. Indebtedness
The Company has an unsecured revolving credit facility with two banks
totaling $50,000,000. The credit agreement is scheduled to expire
on December 31, 1999, at which time any outstanding borrowings would
become due and payable. Borrowings under the facility bear interest at
either the prime rate or 43.75 basis points above the London Interbank
Offering Rate (LIBOR). The Company is required to pay an annual commitment
fee of 17.5 basis points on the unused portion of the facility. At
September 30, 1995 the Company had borrowings of $33,000,000 under the
agreement.
The agreement contains provisions which, among other things, limit total
borrowings to a multiple of cash flow and require the maintenance of a minimum
financial ratio of debt to tangible net worth. The agreement also contains
restrictions on additional indebtedness, creation of liens and sale of assets.
At September 30, 1995 the Company was in compliance with these requirements.
At September 30, 1995 the Company had unsecured lines of credit with three
banks totaling $30,000,000. These facilities bear interest generally at the
lesser of the prime or commercial paper rates. At September 30, 1995 the
Company had borrowings of $13,005,000 under these agreements.
4. Common Stock and Related Matters
At September 30, 1995 there were 15,000,000 shares of $1.00 par value common
stock and 500,000 shares of no par value preference stock authorized. No
shares of preference stock have been issued.
5. Employee Thrift, Stock Ownership and Profit Sharing Plans
The Company has a contributory thrift plan (401(k) savings plan) under which
the contributions of participating employees are matched by the Company to the
extent of 50% of the employee's qualified savings. The Company's
contributions to this plan for the years ended September 30, 1995, 1994 and
1993 were $327,000, $306,000 and $297,000, respectively. <PAGE>
The Company's ESOP, established in 1989, covers all full-time employees of the
Company's domestic subsidiaries. ESOP contributions are made at the
discretion of the Company's Board of Directors. The amounts contributed to
the ESOP by the Company for the years ended September 30, 1995, 1994 and 1993
amounted to $818,000, $785,000, and $792,000, respectively. Dividends
received by the ESOP Trust and applied to reduction of the ESOP term loan
amounted to $119,000, $113,000 and $72,000 for the years ended September 30,
1995, 1994 and 1993, respectively.
The Company has a noncontributory profit sharing plan covering all full-time
employees of the Company's domestic subsidiaries. Concurrent with the
establishment of the ESOP in fiscal 1989, contributions to the profit sharing
plan were suspended until all indebtedness related to the ESOP has been paid.
At September 30, 1995 the ESOP had borrowings outstanding in the amount of
$3,202,000.
6. Stock Options
Under the Company's long-term incentive plan, the option price or restricted
stock value is the fair market value of its shares on the date of grant.
Stock options generally are exercisable at the rate of 25% per year beginning
one year after the date of grant and expire ten years after grant date.
Restricted stock vests beginning one year after grant date and is fully vested
three years after grant date. No accounting recognition is given to stock
options until they are exercised, at which time the option price received is
credited to the equity account and shares are issued. The fair market value
of restricted stock at the time of grant is charged to reported earnings over
the vesting period. At September 30, 1995 stock options and restricted stock
were held by 28 employees.
The following is a summary of stock options and restricted stock:
<TABLE>
1995 Shares Price
<S> <C> <C>
Options outstanding October 1, 1994 350,346 $ 4.375-$31.50
Options and restricted stock granted 85,552 23.875- 31.50
Options canceled -- -- - --
Options exercised (50,358) 4.375- 17.00
Options outstanding
September 30, 1995 385,540 4.375- 31.50
Shares reserved for future grants 382,860
1994 Shares Price
Options outstanding October 1, 1993 289,575 $ 4.375-$28.25
Options granted 93,288 24.25 - 25.00
Options canceled (14,525) 15.50 - 28.25
Options exercised (17,992) 4.375- 17.00
Options outstanding
September 30, 1994 350,346 4.375- 28.25
Shares reserved for future grants 468,412
</TABLE>
Options are granted under the 1992 Long-Term Incentive Plan which received
shareholder approval at the Company's February 1993 annual meeting. The 1992
Plan has a 10 year term and authorizes 700,000 shares for future grants.
7. Commitments and Contingencies
The oil and gas industry has experienced increased scrutiny by federal and
state agencies regarding various environmental issues. Management is of the
opinion that the Company has no material exposure at this time.
The Company leases vehicles under operating leases. Total operating lease
rental expense was $1,083,000 for fiscal 1995. Aggregate future rentals
subject to noncancelable leases are as follows: 1996 - $1,263,000; 1997 -
$715,000 and 1998 - $266,000.
8. Quarterly Financial Data (Unaudited)
<TABLE>
(thousands except per share data) First Second Third Fourth
<S> <C> <C> <C> <C>
Quarters in Fiscal Year Ended
September 30, 1995
Revenues $16,810 $17,465 $18,658 $19,868
Income (loss) after tax
Continuing operations 3,167 3,152 3,576 4,082
Discontinued operations (89) (115) (42) (6,905)
Net income (loss) 3,078 3,037 3,534 (2,823)
Income (loss) per share after tax
Continuing operations $ .31 $ .31 $ .35 $.40
Discontinued operations (.01) (.01) -- (.67)
Total .30 .30 .35 (.27)
Quarters in Fiscal Year Ended
September 30, 1994
Revenues $15,224 $15,311 $15,454 $15,422
Income before cumulative
effect of change in accounting
principle
Continuing operations 2,774 2,547 2,593 3,078
Discontinued operations 77 295 436 197
Net income 3,051 2,842 3,029 3,275
Income per share before
cumulative effect of change in
accounting principle
Continuing operations $ .27 $ .25 $ .26 $ .30
Discontinued operations .01 .03 .04 .02
Cumulative effect of change in
accounting principle (SFAS 109) .02 -- -- --
Net income per share .30 .28 .30 .32
</TABLE>
9. Discontinued Operations
In the fourth quarter of fiscal 1995, the Company decided to sell or
otherwise dispose of its oil and gas producing operations and management
initiated negotiations with interested parties. As of September 30, 1995, oil
and gas production activities have been classified as discontinued operations.
In connection with this discontinuance, the Company recorded a fourth quarter
charge of $6.7 million, net of related income tax benefits of $3.6 million.
This provision includes a writedown of oil and gas properties to net
realizable value and the estimated costs of disposing of these operations,
less the expected applicable tax benefits. Also included in the
discontinuation is a plan to dispose of or reapply the Comanche Creek
pipeline which, prior to fiscal 1995, had been reported in the Company's
enhanced oil recovery operations. The operating results for each period
presented include the effect of allocating interest expense to discontinued
operations.
Operating results of the discontinued operations were as follows:
<TABLE>
(thousands) for the years ended September 30, 1995 1994 1993
<S> <C> <C> <C>
Operating revenues $ 9,198 $14,055 $18,334
Income (loss) from operations $ (690) $ 1,516 $ 4,094
Income tax expense (benefit) (241) 511 1,298
Income (loss) after income taxes $ (449) $ 1,005 $ 2,796
</TABLE>
The fiscal 1995 provision for estimated loss on disposal is set forth below:
<TABLE>
(thousands) for the year ended September 30, 1995
<S> <C>
Estimated loss on sale or other disposition $10,252
Expected future operating loss 59
Income tax benefit (3,609)
Loss after income tax benefit $ 6,702
</TABLE>
<TABLE>
Selected Financial Data - unaudited (dollars in thousands except per share data)<F1>
for the years ended September 30, 1995 1994 1993 1992
<S> <C> <C> <C> <C>
Operations
Revenues
Contract gas handling services $ 71,245 $ 55,923 $ 48,676 $ 49,487
Enhanced oil recovery -- 3,415 3,618 4,733
71,245 59,338 52,294 54,220
Other income 1,556 2,073 1,524 2,048
Total 72,801 61,411 53,818 56,268
Costs & Expenses
Cost of sales & services 33,210 29,250 27,484 27,141
Depreciation, depletion & amortization 10,855 8,686 7,511 6,985
General & administrative 6,651 6,659 6,389 6,106
Interest & debt 1,100 -- -- 776
Income from continuing operations
before income taxes 20,985 16,816 12,434 15,260
Income tax provision 7,008 5,824 3,757 4,589
Income from continuing operations $ 13,977 $ 10,992 $ 8,677 $ 10,671
Net income $ 6,826 $ 12,197 $ 11,473 $ 12,681
Weighted average shares outstanding 10,203 10,180 10,163 9,260
Shares outstanding at yearend 10,127 10,074 10,054 9,904
Capital expenditures $63,272 $41,217 $19,176 $15,589
Per Common Share Data
Stockholders' investment $13.69 $13.27 $12.23 $11.67
Cash dividends .26 .24 .22 .20
Income from continuing operations 1.37 1.08 .85 1.15
Net income .67 1.20 1.13 1.37
Financial Position
Total assets $220,232 $168,117 $149,829 $138,650
Senior long-term debt 46,005 6,000 435 1,305
Convertible subordinated debentures -- -- -- --
Stockholders' investment 138,650 133,706 122,965 115,545 <PAGE>
Other Data
Yearend revenue producing horsepower 377,000 296,000 254,000 227,000
Return on equity<F3> 10.3% 9.3% 9.6% 15.2%
Number of employees 437 414 387 383
for the years ended September 30, 1991 1990 1989 1988
Operations
Revenues
Contract gas handling services $ 43,136 $ 32,945 $ 30,210 $ 26,361
Enhanced oil recovery 5,383 5,833 9,845 9,166
48,519 38,778 40,055 35,527
Other income 775 968 1,145 1,003
Total 49,294 39,746 41,200 36,530
Costs & Expenses
Cost of sales & services 26,371 22,778 24,757 23,639
Depreciation, depletion & amortization 6,426 5,544 6,196 5,720
General & administrative 5,079 4,976 4,560 3,956
Interest & debt 2,954 1,913 1,742 1,507
Income from continuing operations
before income taxes 8,464 4,535 3,945 1,708<F2>
Income tax provision 2,893 1,538 1,334 589
Income from continuing operations $ 5,571 $ 2,997 $ 2,611 $ 1,119
Net income $ 7,268 $ 5,457 $ 4,522 $ 2,680
Weighted average shares outstanding 7,328 7,151 6,977 6,941
Shares outstanding at yearend 7,569 6,900 6,848 6,839
Capital expenditures $39,657 $21,195 $16,485 $8,362
Per Common Share Data
Stockholders' investment $6.71 $4.93 $4.25 $4.16
Cash dividends .16 .16 .16 .16
Income from continuing operations .76 .42 .37 .16
Net income .99 .76 .65 .39
Financial Position
Total assets $120,162 $83,506 $73,298 $65,941
Senior long-term debt 27,870 13,090 11,059 5,800
Convertible subordinated debentures 21,245 21,245 21,245 21,245
Stockholders' investment 50,777 33,987 29,086 28,469
Other Data
Yearend revenue producing horsepower 220,000 175,000 162,000 146,700 <PAGE>
Return on equity<F3> 17.1% 17.3% 15.7% 9.4%
Number of employees 388 331 332 308
<FN>
<F1>Operating results for years presented prior to 1995 have been restated to remove the effect of
discontinued operations except for net income and net income per share.
<F2>The 1988 income from operations before income taxes is affected by a fourth quarter provision of
$1,700,000 to reduce the carrying amount of the receivable from joint venture.
<F3>Return on equity is calculated by dividing net income by average stockholders' investment except for 1995
where income from continuing operations is used instead of net income.
</FN>
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF PRODUCTION OPERATORS CORP:
We have audited the accompanying consolidated balance sheets of Production
Operators Corp (a Delaware Corporation) and subsidiary as of September 30,
1995 and 1994, and the related consolidated statements of income,
stockholders' investment and cash flows for each of the three years in the
period ended September 30, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Production
Operators Corp and subsidiary as of September 30, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years
in the period ended September 30, 1995 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Houston, Texas
November 15, 1995
SIGNIFICANT SUBSIDIARIES OF PRODUCTION OPERATORS CORP
JURISDICTION
OF
NAME ORGANIZATION
Production Operators, Inc. Florida
Kamlok Oil & Gas, Inc. Delaware
Transmission Systems, Inc. Delaware
Servicios Production Operators, C.A. Venezuela
Production Operators Argentina, S.A. Argentina
Production Operators Canada, Ltd. Canada
Wilmington Tertiary Venture, Ltd. Texas
Texas Tertiary Joint Venture Texas
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Form 10-K of our report dated
November 15, 1995 included in Production Operators Corp's 1995
Annual Report to Stockholders. It should be noted that we have not
audited any financial statements of the Company subsequent to
September 30, 1995, or performed any audit procedures subsequent to
the date of our report.
ARTHUR ANDERSEN LLP
Houston, Texas
December 21, 1995
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated November 15, 1995, included or
incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8, file numbers
33-65612, 33-20467 and 2-77862, and the Company's previously filed
Registration Statement on Form S-3, file number 33-41254. It
should be noted that we have not audited any financial statements
of the Company subsequent to September 30, 1995, or performed any
audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Houston, Texas
December 21, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 985
<SECURITIES> 202
<RECEIVABLES> 23,486
<ALLOWANCES> 159
<INVENTORY> 7,304
<CURRENT-ASSETS> 48,540
<PP&E> 254,381
<DEPRECIATION> 91,386
<TOTAL-ASSETS> 220,232
<CURRENT-LIABILITIES> 17,796
<BONDS> 46,005
0
0
<COMMON> 10,259
<OTHER-SE> 128,391
<TOTAL-LIABILITY-AND-EQUITY> 220,232
<SALES> 71,245
<TOTAL-REVENUES> 72,801
<CGS> 33,210
<TOTAL-COSTS> 33,210
<OTHER-EXPENSES> 17,506
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,100
<INCOME-PRETAX> 20,985
<INCOME-TAX> 7,008
<INCOME-CONTINUING> 13,977
<DISCONTINUED> (7,151)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,826
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
</TABLE>
