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 client
requirements. The Company also designs, engineers and constructs
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 client 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.
As of September 30, 1995, all oil and gas production activities
were classified as discontinued operations and a provision of
$6.7 million, net of taxes, was recorded. No further adjustments
to the fiscal 1995 fourth quarter charge were recorded during the
most recent fiscal year ended September 30, 1996 and the plan for
discontinuance has been completed.
Contract Gas Compression - Gas compression is the use of a mecha-
nical 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 oil
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
historically has lasted approximately four years. In recent years
average job life has exceeded five years as the Company has
increasingly contracted to operate larger, longer term
assignments, originating primarily from alliance and international
client relationships.
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, 1996 the Company's contract gas compression fleet
totaled 446,000 horsepower with units ranging in size from 25 to
3,000 horsepower. During the fiscal year 1996, net horsepower
added to the contract compression fleet was 53,000. At yearend
84% of the available horsepower was installed and earning revenue
or committed for reapplication. These installed units are located
in more than 150 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 fiscal yearend 1996, 67,000 horsepower was operating in
Venezuela, Argentina and Canada as compared to 41,000 horsepower
at yearend 1995. The Company is marketing its services in
additional foreign countries. The contracts in Venezuela and
Argentina are substantially dollar denominated and that tends to
mitigate the risks from uncertain political and economic
conditions.
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 Comanche Creek pipeline, located in the
southern end of the Permian Basin in west Texas, was included in
discontinued operations at September 30, 1995 and sold in fiscal
1996.
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 were
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 1996 Annual Report to Stockholders and the Consolidated
Balance Sheets on page 25 of the Company's 1996 Annual Report to
Stockholders is incorporated herein by reference.
During fiscal 1996 two clients accounted for a total of 42% of the
Company's consolidated revenues, each of which accounted for 10%
or more of the Company's consolidated revenues.
Competition - 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.
Employees - The Company employed 466 people at September 30, 1996
of whom 37 were administrative, 30 were in engineering and
purchasing, 86 worked at the Houston plant facility, and 313 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 four buildings
aggregating 124,000 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 1996
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 1996 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. 66 Chairman and Director effective May 1, 1961
and President from October 1986 through
July 1994
D. John Ogren 53 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
Thomas R. Reinhart 54 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
John B. Simmons 44 Chief Financial Officer effective October
23, 1996, Treasurer effective March 18,
1996 and Controller effective May 1995.
Director of Planning and Control of The
Western Company of North America from
February 1994 to April 1995 and Vice
President, Finance of Western Petroleum
Services International Company and Western
Oceanic, Inc. from December 1991 to January
1994
Carla Knobloch 38 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 765 stockholders of record at September 30, 1996.
The information set forth in the "Market Price of Stock and Cash
Dividends" section appearing on page 20 of the Company's 1996
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 1996 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 1996 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, 1996 and 1995
and the consolidated statements of income, stockholders'
investment and cash flows for each of the three years in the
period ended September 30, 1996, together with the report of
independent public accountants, contained on pages 24 through 36
of the Company's 1996 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 1997
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
1997 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 1997 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 1997 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 1996 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, 1996 24
Consolidated Balance Sheets at September 30,
1996 and 1995 25
Consolidated Statements of Stockholders'
Investment for the three years ended
September 30, 1996 26
Consolidated Statements of Cash Flows for the
three years ended September 30, 1996 27 - 28
Notes to Consolidated Financial Statements 29 - 33
Selected Quarterly Financial Data (Unaudited) 32
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, 1996.
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 11, 1996
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. D. Ellis 12/10/96
F. E. Ellis, Director Date
Jorge E. Estrada M., Director Date
/s/ C. Rahl George 12/9/96
C. Rahl George, Director Date
/s/ John R. Huff 12/11/96
John R. Huff, Director Date
/s/ Carl W. Knobloch, Jr. 12/11/96
Carl W. Knobloch, Jr., Chairman Date
/s/ Henry E. Longley 12/6/96
Henry E. Longley, Director Date
/s/ D. John Ogren 12/11/96
D. John Ogren, Director and Date
President
/s/ Lester Varn, Jr. 12/9/96
Lester Varn, Jr., Director Date
/s/ John B. Simmons 12/5/96
John B. Simmons, Treasurer Date
(Principal Financial and
Accounting Officer) <PAGE>
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
(filed as Exhibit (10)(d)(i) to Report on Form 10-K for
the fiscal year ended September 30, 1995 and incorporated
herein by reference).
(10)(e) Target Variable Compensation Plan dated May 5, 1995.
(filed as Exhibit (10)(e) to Report on Form 10-K for the
fiscal year ended September 30, 1995 and incorporated
herein by reference).
(10)(f) 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)(f)(i) Form of Service Continuation Agreement.
(10)(g) 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) 1996 Annual Report to Stockholders.
(22) List of subsidiaries.
(24)(a) Consent of Independent Public Accountants re inclusion of
their Report dated November 20, 1996 in this Form 10-K.
(24)(b) Consent of Independent Public Accountants re inclusion of
their report dated November 20, 1996 into the Company's
previously filed Registration Statements on Form S-3 and
Forms S-8.
SERVICE CONTINUATION AGREEMENT
AGREEMENT between PRODUCTION OPERATORS CORP, a Delaware corporation
(the "Company"), and ________________________________________
("Executive"),
W I T N E S S E T H :
WHEREAS, the Company highly desires to retain certain key employee
personnel and, accordingly, the Board of Directors of the Company (the
"Board") has approved the Company entering into this Agreement with
Executive in order to assure his continued service to the Company; and
WHEREAS, Executive is prepared to commit such services in return for
specific arrangements with respect to severance compensation and other
benefits;
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the Company and Executive agree as follows:
1. Definitions.
(a) "Change in Duties" shall mean the occurrence, within
two years after the date upon which a Change of Control occurs, of any one
or more of the following:
(i) A significant reduction in the duties of
Executive from those applicable to him immediately prior to the date
on which a Change of Control occurs;
(ii) A reduction in Executive's annual salary or
bonus opportunity under any applicable bonus or incentive compensation
plan from that provided to him immediately prior to the date on
which a Change of Control occurs; or
(iii) Receipt of employee benefits (including but not
limited to medical, dental, life insurance, accidental, death, and
dismemberment, and long-term disability plans) and perquisites
by Executive that are materially inconsistent with the employee
benefits and perquisites provided by the Company to executives with
comparable duties.
(b) "Change of Control" means the occurrence of either of the
following events:
(i) The Company (A) shall not be the surviving
entity in any merger, consolidation or other reorganization (or
survives only as a subsidiary of an entity other than a
previously wholly-owned subsidiary of the Company) or (B) is
to be dissolved and liquidated; or
(ii) Any person or entity, including a "group" as
contemplated by Section 13(d)(3) of the Securities Exchange Act of
1934, as amended, acquires or gains ownership or control
(including, without limitation, power to vote) of 25% or more of
the outstanding shares of the Company's voting stock (based
upon voting power), and as a result of or in connection with such
transaction, the persons who were directors of the Company
before such transaction shall cease to constitute a majority of the
Board.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(d) "Compensation" shall mean the greater of (i) or (ii), where:
(i) equals the greater of Executive's annual salary
immediately prior to the date on which a Change of Control occurs or
the total cash remuneration paid to such Executive during the
twelve-month period preceding such date; and
(ii) equals the greater of Executive's annual salary
at the time of his Involuntary Termination or the total cash
remuneration paid to such Executive during the twelve-month period
preceding such time.
(e) "Involuntary Termination" shall mean any termination of
Executive's employment with the Company which:
(i) does not result from a resignation by Executive
(other than a resignation pursuant to clause (ii) of this
subparagraph (e)); or
(ii) results from a resignation by Executive on or before
the date which is sixty days after the date upon which Executive
receives notice of a Change in Duties; provided, however, the
term "Involuntary Termination" shall not include a Termination for
Cause or any termination as a result of death, disability
under circumstances entitling Executive to benefits under the
Company's long-term disability plan, or Retirement.
(f) "Retirement" shall mean Executive's resignation on or after
the date he reaches age sixty-five.
(g) "Severance Amount" shall mean an amount equal to 200% of
Executive's Compensation if Involuntary Termination occurs within one year
after a Change of Control and 100% of Executive s Compensation if
Involuntary Termination occurs after one year but within two years after a
Change of Control.
(h) "Termination for Cause" shall mean termination of
Executive's employment by the Company (or its subsidiaries) by reason of
Executive's (i) gross negligence in the performance of his duties, (ii)
willful and continued failure to perform his duties, (iii) willful engagement
in conduct which is materially injurious to the Company or its
subsidiaries (monetarily or otherwise) or (iv) conviction of a felony or
a misdemeanor involving moral turpitude.
(i) "Welfare Benefit Coverages" shall mean the medical,
dental, life insurance, and accidental death and dismemberment coverages
provided by the Company to its active employees.
2. Services. Executive agrees that he will render services to the
Company (as well as any subsidiary thereof or successor thereto) during
the period of his employment to the best of his ability and in a prudent and
businesslike manner and that he will devote substantially the same time,
efforts and dedication to his duties as heretofore devoted.
3. Severance Benefits. If Executive's employment by the Company or any
subsidiary thereof or successor thereto shall be subject to an Involuntary
Termination which occurs within two years after the date upon which a
Change of Control occurs, then, in addition to the severance benefits
Executive would otherwise be entitled to receive from the Company,
Executive shall be entitled to receive, as additional compensation for
services rendered to the Company (including its subsidiaries), the following
severance benefits:
(a) A lump sum cash payment in an amount equal to Executive's
Severance Amount.
(b) Executive shall be entitled to continue the Welfare
Benefit Coverages for himself and, where applicable, his eligible
dependents following his Involuntary Termination for up to twenty-four
months, as long as Executive continues either to pay the premiums paid by
active employees of the Company for such coverages or to pay the actual
(nonsubsidized) cost of such coverages which the Company does not
subsidize for active employees. Such benefit rights shall apply only to
those Welfare Benefit Coverages which the Company has in effect from
time to time for active employees, and the applicable payments shall
adjust as premiums for active employees of the Company or actual costs,
whichever is applicable, change. Welfare Benefit Coverage(s) shall
immediately end upon Executive's obtainment of new employment and
eligibility for similar Welfare Benefit Coverage(s) (with Executive being
obligated hereunder to promptly report such eligibility to the Company).
Nothing herein shall be deemed to adversely affect in any way the
additional rights, after consideration of this extension period, of
Executive and his eligible dependents to health care continuation coverage
as required pursuant to Part 6 of Title I of the Employee Retirement Income
Security Act of 1974, as amended.
(c) Executive shall be entitled to receive out-placement
services in connection with obtaining new employment up to a maximum cost of
$10,000.
(d) The severance benefits payable under this Agreement shall
be paid to the Executive on or before the fifth day after the last day
of Executive's employment with the Company. Any severance benefits paid
pursuant to this Paragraph will be deemed to be a severance payment and not
compensation for purposes of determining benefits under the Company's
qualified retirement plans and shall be subject to any required tax
withholding.
(e) Any non-compete agreements between the Executive and
the Company shall be automatically terminated.
4. Interest on Late Benefit Payments. If any payment provided for in
Paragraph 3(a) or 3(b) hereof is not made when due, the Company shall pay to
Executive interest on the amount payable from the date that such payment
should have been made under such paragraph until such payment is made, which
interest shall be calculated at the prime or base rate of interest announced
by Texas Commerce Bank National Association (or any successor thereto) at
its principal office in Houston, Texas and shall change when and as any such
change in such prime or base rate shall be announced by such bank.
5. Certain Additional Payments by the Company. Notwithstanding
anything in this Agreement to the contrary, if the severance benefits
provided for in Paragraph 3, together with any other payments which
Executive has the right to receive from the Company, would constitute a
"parachute payment " (as defined in Section 280G(b)(2) of the Code), the
severance benefits provided hereunder shall be either (a) reduced (but
not below zero) so that the present value of such total amounts received by
Executive from the Company will be one dollar ($1.00) less than three times
Executive's base amount (as defined in Section 280G of the Code) and so
that no portion of such amounts received by Executive shall be
subject to the excise tax imposed by Section 4999 of the Code or (b)
paid in full, whichever produces the better net after-tax position to
Executive (taking into account any applicable excise tax under Section 4999
of the Code and any applicable income tax). The Company and Executive
shall make an initial determination as to whether a reduction is
required and, if so required, the amount of any such reduction.
Executive shall notify the Company immediately in writing of any claim
by the Internal Revenue Service which, if successful, would require the
Company to make a reduction (or a further reduction in excess of that, if
any, initially determined by the Company and Executive) within five days
of the receipt of such claim. The Company shall notify Executive in
writing at least five days prior to the due date of any response required
with respect to such claim if it plans to contest the claim. If the
Company decides to contest such claim, Executive shall cooperate fully
with the Company in such action; provided, however, the Company shall
bear and pay directly or indirectly all costs and expenses (including
additional interest and penalties) incurred in connection with such
action. If, as a result of the Company's action with respect to a claim,
the amount of the reduction is found to have been in excess of the correct
reduction amount, the Company shall promptly pay to Executive the
difference between such amounts with respect to such claim.
6. General.
(a) Term. The effective date of this Agreement is
__________, 1996. Within sixty days from and after the expiration of
two years after said effective date and within sixty days after each
successive two-year period of time thereafter that this Agreement is in
effect, the Company shall have the right to review this Agreement, and
in its sole discretion either continue and extend this Agreement,
terminate this Agreement, and/or offer Executive a different agreement. The
Board (excluding any member of the Board who is covered by this Agreement
or by a similar agreement with the Company) will vote on whether
to so extend, terminate, and/or offer Executive a different agreement and
will notify Executive of such action within said sixty-day time period
mentioned above. This Agreement shall remain in effect until so
terminated and/or modified by the Company. Failure of the Board to take any
action within said sixty days shall be considered as an extension of this
Agreement for an additional two-year period of time. Notwith-standing
anything to the contrary contained in this "sunset provision," it
is agreed that if a Change of Control occurs while this Agreement is in
effect, then this Agreement shall not be subject to termination or
modification under this "sunset provision," and shall remain in force for a
period of two years after such Change of Control, and if within said two
years the contingency factors occur which would entitle Executive
to the benefits as provided herein, this Agreement shall remain in effect in
accordance with its terms. If, within such two years after a Change of
Control, the contingency factors that would entitle Executive to said
benefits do not occur, thereupon this two-year "sunset provision" shall again
be applicable with the sixty-day time period for Board action to thereafter
commence at the expiration of said two years after such Change of Control
and on each two-year anniversary date thereafter.
(b) Indemnification. If Executive shall obtain any money
judgment or otherwise prevail with respect to any litigation brought by
Executive or the Company to enforce or interpret any provision contained
herein, the Company, to the fullest extent permitted by applicable law,
hereby indemnifies Executive for his reasonable attorneys' fees and
disbursements incurred in such litigation and hereby agrees (i) to pay
in full all such fees and disbursements and (ii) to pay prejudgment
interest on any money judgment obtained by Executive from the earliest date
that payment to him should have been made under this Agreement until such
judgment shall have been paid in full, which interest shall be
calculated at the prime or base rate of interest announced by Texas
Commerce Bank National Association (or any successor thereto) at its
principal office in Houston, Texas, and shall change when and as any such
change in such prime or base rate shall be announced by such bank.
(c) Payment Obligations Absolute. The Company's obligation to
pay (or cause one of its subsidiaries to pay) Executive the amounts and to
make the arrangements provided herein shall be absolute and unconditional
and shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right
which the Company (including its subsidiaries) may have against him or
anyone else. All amounts payable by the Company (including its subsidiaries
hereunder) shall be paid without notice or demand. Executive shall not be
obligated to seek other employment in mitigation of the amounts payable or
arrangements made under any provision of this Agreement, and, except as
provided in Paragraph 3(c) hereof, the obtaining of any such other
employment shall in no event effect any reduction of the Company's
obligations to make (or cause to be made) the payments and arrangements
required to be made under this Agreement.
(d) Successors. This Agreement shall be binding upon and inure
to the benefit of the Company and any successor of the Company, by merger
or otherwise. This Agreement shall also be binding upon and inure to the
benefit of Executive and his estate. If Executive shall die prior to
full payment of amounts due pursuant to this Agreement, such amounts shall
be payable pursuant to the terms of this Agreement to his estate.
(e) Severability. Any provision in this Agreement which is
prohibited or unenforceable in any jurisdiction by reason of applicable
law shall, as to such jurisdiction, be ineffective only to the
extent of such prohibition or unenforceability without invalidating or
affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
(f) Non-Alienation. Executive shall not have any right
to pledge, hypothecate, anticipate or assign this Agreement or the rights
hereunder, except by will or the laws of descent and distribution.
(g) Notices. Any notices or other communications provided for
in this Agreement shall be sufficient if in writing. In the case of
Executive, such notices or communications shall be effectively delivered if
hand delivered to Executive at his principal place of employment or if sent
by registered or certified mail to Executive at the last address he has filed
with the Company. In the case of the Company, such notices or
communications shall be effectively delivered if sent by registered or
certified mail to the Company at its principal executive offices.
(h) Controlling Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Texas. Further,
Executive agrees that any legal proceeding to enforce the provisions of
this Agreement shall be brought in Houston, Harris County, Texas, and hereby
waives his right to any pleas regarding subject matter or personal
jurisdiction and venue.
(i) Release. As a condition to the receipt of any benefit
under Paragraph 3 hereof, unless such requirement is waived by the Board
in its sole discretion, Executive shall first execute a release, in the
form established by the Company, releasing the Company, its shareholders,
partners, officers, directors, employees and agents from any and all claims
and from any and all causes of action of any kind or character, including but
not limited to all claims or causes of action arising out of Executive's
employment with the Company or the termination of such employment.
(j) Full Settlement. If Executive is entitled to and
receives the benefits provided hereunder, performance of the obligations
of the Company hereunder will constitute full settlement of all
claims that Executive might otherwise assert against the Company on account of
his termination of employment.
(k) Unfunded Obligation. The obligation to pay amounts
under this Agreement is an unfunded obligation of the Company (including
its subsidiaries), and no such obligation shall create a trust or be
deemed to be secured by any pledge or encumbrance on any property
of the Company (including its subsidiaries).
(l) Not a Contract of Employment. This Agreement shall not be
deemed to constitute a contract of employment, nor shall any provision
hereof affect (i) the right of the Company (or its subsidiaries) to
discharge Executive at will or (ii) the terms and conditions of any other
agreement between the Company and Executive except as provided herein.
(m) Number and Gender. Wherever appropriate herein, words
used in the singular shall include the plural and the plural shall include
the singular. The masculine gender where appearing herein shall be deemed
to include the feminine gender.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the ______ day of __________________, 1996.
"COMPANY"
PRODUCTION OPERATORS CORP
By:
Name:
Title:
"EXECUTIVE"
__________________________________________
<TABLE>
PRODUCTION OPERATORS CORP AND CONSOLIDATED SUBSIDIARY
COMPUTATION OF NET INCOME PER SHARE OF COMMON STOCK
FOR THE FIVE YEARS ENDED SEPTEMBER 30, 1996
Year Ended September 30,
1992 1993
Fully Fully
Primary Diluted Primary Diluted
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding during year 8,997,000 8,997,000 10,024,000 10,024,000
Shares of common stock assumed
issued upon exercise of options
using the "treasury stock method"-
(a) Average market price during year 263,000 -- 139,000 --
(b) Market price at end of year -- 264,000 -- 151,000
Shares of common stock outstanding assuming
conversion of 9.25% convertible debentures -- 337,000 --
Adjusted weighted average shares of
common stock outstanding during year 9,260,000 9,598,000 10,163,000 10,175,000
Income from continuing operations $10,671,000 $10,671,000 $ 8,677,000 $ 8,677,000
Reduction in interest expense, net of tax
effect, from assumed conversion of
9.25% convertible debentures -- 386,000 -- --
Adjusted income from continuing operations 10,671,000 11,057,000 8,677,000 8,677,000
Income (loss) from discontinued operations 2,010,000 2,010,000 2,796,000 2,796,000
Cumulative effect of change in accounting
principle (SFAS No. 109) -- -- -- --
Adjusted net income $12,681,000 $13,067,000 $11,473,000 $11,473,000
Per share data:
Primary and fully diluted:
Income from continuing operations $1.15 $1.15 $ .85 $ .85
Income (loss) from discontinued
operations .22 .22 .28 .28
Cumulative effect of change in accounting
principle (SFAS No. 109) -- -- -- --
Total $1.37 $1.37(A) $1.13 $1.13
Year Ended September 30,
1994 1995
Fully Fully
Primary Diluted Primary Diluted
Weighted average common shares
outstanding during year 10,069,000 10,069,000 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 111,000 -- 106,000 --
(b) Market price at end of year -- 109,000 -- 139,000
Shares of common stock outstanding assuming
conversion of 9.25% convertible debentures -- -- -- --
Adjusted weighted average shares of
common stock outstanding during year 10,180,000 10,178,000 10,203,000 10,236,000
Income from continuing operations $10,992,000 $10,992,000 $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 10,992,000 10,992,000 13,977,000 13,977,000
Income (loss) from discontinued operations 1,005,000 1,005,000 (7,151,000) (7,151,000)
Cumulative effect of change in accounting
principle (SFAS No. 109) 200,000 200,000 -- --
Adjusted net income $12,197,000 $12,197,000 $ 6,826,000 $ 6,826,000
Per share data:
Primary and fully diluted:
Income from continuing operations $1.08 $1.08 $1.37 $1.37
Income (loss) from discontinued
operations .10 .10 (.70) (.70)
Cumulative effect of change in accounting
principle (SFAS No. 109) .02 .02 -- --
Total $1.20 $1.20 $ .67 $ .67
Year Ended September 30,
1996
Fully
Primary Diluted
Weighted average common shares
outstanding during year 10,160,000 10,160,000
Shares of common stock assumed
issued upon exercise of options
using the "treasury stock method"-
(a) Average market price during year 131,000 --
(b) Market price at end of year -- 158,000
Shares of common stock outstanding assuming
conversion of 9.25% convertible debentures -- --
Adjusted weighted average shares of
common stock outstanding during year 10,291,000 10,318,000
Income from continuing operations $17,496,000 $17,496,000
Reduction in interest expense, net of tax
effect, from assumed conversion of
9.25% convertible debentures -- --
Adjusted income from continuing operations 17,496,000 17,496,000
Income (loss) from discontinued operations -- --
Cumulative effect of change in accounting
principle (SFAS No. 109) -- --
Adjusted net income $17,496,000 $17,496,000
Per share data:
Primary and fully diluted:
Income from continuing operations $1.70 $1.70
Income (loss) from discontinued
operations -- --
Cumulative effect of change in accounting
principle (SFAS No. 109) -- --
Total $1.70 $1.70
NOTES:
(A) Conversion of the debentures would have an anti-dilutive effect,
therefore, primary share data is repeated.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Revenues from contract gas handling services were $90,536,000 in fiscal 1996
representing an increase of $19,291,000 (27%) as compared to $71,245,000 in
the prior year. The Company's revenue producing compression fleet, including
client owned units, averaged 406,000 horsepower during the year ended
September 30, 1996, a 23% increase as compared to the previous year's average
of 330,000 horsepower. Fiscal year 1996 ended with an all-time high 445,000
horsepower in service as compared to 377,000 at the end of fiscal 1995.
Average realized prices increased 4% during fiscal 1996 primarily due to an
increase in international operations where the revenue per horsepower is
higher. At yearend 1996 the order backlog for compression equipment,
including client owned units, totaled 74,000 horsepower as compared to 41,000
horsepower at yearend 1995. Revenues from installation, demobilization,
revamp, construction and equipment sales increased because of growth in the
Company's client owned equipment operations.
The significant improvement in the level of applied horsepower is principally
attributed to expansion of the Company's domestic alliance relationships,
growth in contract operation of client owned equipment and continued
international expansion. In management's view, this growth is continued
evidence of the outsourcing of specialized production services by the larger
oil and gas producers, pipeline companies and international oil companies who
are implementing programs to reduce operating expenses and increase
efficiency. Management believes that the demand for such total
responsibility, high-performance services should remain very strong with
existing alliances as well as other clients.
The Company announced late in the 1996 fiscal third quarter the acquisition of
24,000 horsepower from a privately held compressor packaging and rental
company, consisting of thirty-four units with an average unit size of 706
horsepower. One-half of this fleet was revenue producing at the time of
acquisition and the remainder was added to the existing fleet for
reapplication. This acquisition was made at a cost significantly below
replacement cost for new horsepower.
As disclosed in the Company's annual report for the prior fiscal year ended
September 30, 1995, oil and gas producing activities were classified as
discontinued operations. In connection with that discontinuance, the Company
adopted a plan for exiting the oil and gas production business and recorded a
fiscal 1995 fourth quarter charge that included a writedown of oil and gas
properties for disposing of these operations, less applicable tax benefits.
No further adjustments to the fiscal 1995 fourth quarter charge were recorded
during the most recent fiscal year ended September 30, 1996 and the plan for
discontinuance has been completed.
Other income, consisting principally of rents, interest and sales of
miscellaneous assets, was $1,267,000 in the 1996 fiscal year as compared to
$1,556,000 in fiscal 1995. The decline in fiscal 1996 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, amortization and depreciation) increased $7,771,000 (29%) to
$34,951,000 for fiscal year 1996 as compared to $27,180,000 in the preceding
year. The substantial improvement in operating income is attributable to the
significant increase in revenue producing compression horsepower as previously
discussed as well as the expansion of the Company's operations in South
America and a very positive improvement in operating expense margins.
General and administrative expenses increased $1,070,000 (16%) to $7,721,000
for the year ended September 30, 1996 versus $6,651,000 last year. This
increase is reflective of growth in the Company's infrastructure to meet the
demands resulting from the rapid business growth during the fiscal year just
ended, certain one-time organization redesign expenses and the high level of
bidding activity, especially in the international markets.
Interest expense increased $865,000 (79%) to $1,965,000 for the year ended
September 30, 1996 versus $1,100,000 last year. The increase was attributable
to higher average debt levels in fiscal 1996 and a fiscal 1995 benefit for
interest allocated to discontinued operations. As previously noted, the
Company recorded a fiscal 1995 fourth quarter charge for discontinued
operations which included provision for interest associated with the
discontinuance of the Company's oil and gas production business. Please refer
to the Liquidity and Capital Resources section in this report for further
discussion.
The provision for depreciation and amortization increased $5,094,000 (47%) to
$15,949,000 for the year ended September 30, 1996 versus $10,855,000 last
year. The growth in depreciation is indicative of the growth in the Company's
revenue producing horsepower in the last two fiscal years, certain capital
equipment being depreciated substantially more rapidly than typical due to
contract terms that include a purchase option and investment in the
fabrication facility and systems development.
Income tax expense for fiscal 1996 was $9,036,000 at an average effective tax
rate of 34.1%, as compared to $7,008,000 at an average effective tax rate of
33.4% in the preceding fiscal year.
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 client 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 3%
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
client 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 income, consisting principally of rents, interest, dividends and sales
of assets, was $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 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, start-up 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 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.
Liquidity and Capital Resources
As of September 30, 1996 the Company's cash position was $1,466,000 versus
$985,000 at the close of the prior fiscal year. The principal sources of cash
during the year were internally generated funds from operating activities of
$43,008,000 and proceeds from the sales of property and equipment of
$12,197,000. The primary uses of cash during the year were capital
expenditures of $28,315,000, repayments of long-term bank debt of $22,874,000
and payment of dividends of $2,846,000.
Accounts receivable for sales and services increased $3,896,000 to $20,388,000
at September 30, 1996 as compared to $16,492,000 at the prior yearend
principally due to the increased revenue previously noted. Construction
receivables decreased $2,243,000 to $4,592,000 as compared to $6,835,000 at
the prior yearend due to a lower level of construction activity at yearend
1996. Current tax benefits of $2,785,000 at yearend 1995, the majority of
which were related to the discontinuance of the Company's oil and gas
operations and related asset writedowns, were utilized during the current
fiscal year. Inventories of compressor parts and supplies increased
$1,634,000 to $6,486,000 as compared to $4,852,000 at the prior yearend
primarily due to growth in inventories in international locations to support
growth in revenue producing horsepower. Prepaid expenses increased by
$910,000 from the prior year to a September 30, 1996 balance of $5,866,000
primarily related to international operations. Net assets of discontinued
operations declined as the sales of remaining oil and gas properties were
concluded during the fiscal year.
Accounts payable decreased $1,606,000 to $8,361,000 as compared to $9,967,000
at the prior yearend. Accrued liabilities increased $5,255,000 to $13,084,000
as compared to $7,829,000 at the prior yearend primarily due to prepayments of
certain contractual arrangements for the fabrication of client owned units.
Senior term notes decreased $22,874,000 during fiscal 1996 to $23,131,000 at
September 30, 1996 as compared to $46,005,000 at the prior yearend as a result
of the proceeds from the sales of remaining oil and gas properties, lower
capital expenditures during fiscal 1996 as compared to the prior fiscal year
and the prepayment of certain contractual arrangements for the fabrication of
client owned units. Capital expenditures were $28,315,000 as compared to
$63,272,000 in the prior fiscal year due to the increase in operations of
client owned equipment during the current fiscal year.
The Company's liquidity needs for the next fiscal year are expected to be
satisfied by cash flows from 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, 1996 1995 1994
<S> <C> <C> <C>
REVENUES
Sales and services $90,536 $71,245 $59,338
Other income 1,267 1,556 2,073
91,803 72,801 61,411
COSTS AND EXPENSES
Cost of sales and services 39,636 33,210 29,250
Depreciation and amortization 15,949 10,855 8,686
General and administrative expenses 7,721 6,651 6,659
Interest and debt expenses 1,965 1,100 --
65,271 51,816 44,595
Income before income taxes 26,532 20,985 16,816
Provision for income taxes 9,036 7,008 5,824
Income from continuing operations 17,496 13,977 10,992
Discontinued Operations
Operating income (loss), net of income taxes -- (449) 1,005
Provision for disposal, net of income taxes -- (6,702) --
Income (loss) from discontinued operations -- (7,151) 1,005
Income before cumulative effect of change in
accounting principle 17,496 6,826 11,997
Cumulative effect of change in accounting
principle (SFAS No. 109) -- -- 200
Net income $17,496 $ 6,826 $12,197
NET INCOME PER SHARE
Primary and fully diluted
Income from continuing operations $ 1.70 $ 1.37 $ 1.08
Income (loss) from discontinued operations -- (.70) .10
Cumulative effect of change in accounting
principle (SFAS No. 109) -- -- .02
Net income $ 1.70 $ .67 $ 1.20
Weighted average shares outstanding 10,291 10,203 10,180
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
CONSOLIDATED BALANCE SHEETS (dollars in thousands)
September 30, 1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,466 $ 985
Marketable securities 201 202
Receivables, net:
Sales and services 20,388 16,492
Construction - work in progress 4,592 6,835
Inventories - at cost:
Compressor parts and supplies 6,486 4,852
Construction - work in progress 2,433 2,452
Prepaid expenses and other 5,866 4,956
Current tax benefit -- 2,785
Net assets of discontinued operations -- 8,981
Total current assets 41,432 48,540
Property and equipment:
Land and buildings 8,374 8,244
Compression and processing equipment 257,700 232,908
Pipelines 154 6,164
Other equipment 8,019 7,065
274,247 254,381
Less accumulated depreciation
and amortization (100,940) (91,386)
173,307 162,995
Long-term receivable and other assets 7,952 8,697
$ 222,691 $ 220,232
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable $ 8,361 $ 9,967
Accrued liabilities 13,084 7,829
Income taxes payable 1,283 --
Total current liabilities 22,728 17,796
Senior term notes 23,131 46,005
Deferred income taxes 21,178 17,781
Stockholders' investment 155,654 138,650
$ 222,691 $ 220,232
The accompanying notes are an integral part of these consolidated financial statements.<PAGE>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (dollars in thousands)
$1 Par Additional Deferred
Common Paid-In Retained Compensation Treasury
three years ended September 30,1996 Stock Capital Earnings ESOP Stock Total
<S> <C> <C> <C> <C> <C> <C>
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
Net income -- -- 17,496 -- -- 17,496
Cash dividends of $.28 per share -- -- (2,846) -- -- (2,846)
Exercise of options to purchase
55,661 shares (4,602 shares
surrendered in payment) -- 830 -- -- 343 1,173
Deferred compensation
relating to ESOP Plan -- -- -- 862 -- 862
Tax benefits from dividends
on ESOP shares -- -- 43 -- -- 43
Stock awards - 9,224 shares -- 237 -- -- 39 276
BALANCE, SEPTEMBER 30, 1996
10,258,901 shares
(71,368 in treasury) $10,259 $72,223 $76,294 $ (2,340) $ (782) $155,654
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, 1996 1995<F1> 1994<F1>
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from clients $ 96,061 $ 73,772 $ 70,755
Cash paid to suppliers and employees (51,070) (45,114) (48,804)
Interest paid (1,945) (1,620) (259)
Income tax paid (2,039) (4,138) (3,177)
Interest and dividends received 531 717 938
Net refund of federal, state and local taxes 786 -- --
Cash received on claims and other income 684 721 533
43,008 24,338 19,986
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment (28,315) (63,272) (41,217)
Proceeds from sale of property, equipment
and marketable securities 12,197 6,440 16,299
Purchase of securities -- (677) (640)
Other (2,390) (4,503) (690)
(18,508) (62,012) (26,248)
CASH FLOWS FROM FINANCING ACTIVITIES
Additions to (reductions of) net borrowings
on long-term senior notes (22,874) 40,005 6,000
Dividends paid (2,846) (2,627) (2,417)
Reduction of ESOP bank loan -- -- (435)
Decrease in deferred compensation
under Company's ESOP Plan 862 87 628
Cash received upon exercise of stock options 1,012 491 204
Cash bonus paid upon exercise of stock options (114) (315) (113)
Repurchases of stock awards (59) (19) (21)
(24,019) 37,622 3,846
Net increase (decrease) in cash and cash equivalents 481 (52) (2,416)
Cash and cash equivalents at beginning of year 985 1,037 3,453
Cash and cash equivalents at end of year $ 1,466 $ 985 $ 1,037
The accompanying notes are an integral part of these consolidated financial statements.
<FN>
<F1>Consolidated Statements of Cash Flows for 1995 and 1994 have not
been restated to remove the effect of discontinued operations.
</FN>
</TABLE>
<TABLE>
RECONCILIATION OF NET INCOME TO CASH FLOWS
FROM OPERATING ACTIVITIES (dollars in thousands)
for the years ended September 30, 1996 1995<F1> 1994<F1>
<S> <C> <C> <C>
Net income $ 17,496 $ 6,826 $12,197
ADJUSTMENTS
Depreciation, depletion and amortization 15,949 14,216 13,710
Provision for deferred income taxes 3,397 3,963 2,305
Provision for tax benefits on stock option
exercises and ESOP dividends 318 427 178
Gain on sale of property, equipment and
marketable securities (2,462) (1,434) (1,723)
Increase in receivables (481) (6,920) (2,753)
Increase in prepaid expenses and other (910) (3,259) (706)
(Increase) decrease in inventories (1,615) (65) 1,309
(Increase) decrease in long-term receivable
and other assets 3,295 1,913 (4,854)
Increase (decrease) in accounts payable (1,606) 3,640 (2,921)
Increase (decrease) in accrued liabilities 5,255 (38) 2,684
(Increase) decrease in current tax benefit 2,785 (1,452) --
Increase (decrease) in income taxes payable 1,283 (279) 675
Cumulative effect of change in accounting principle -- -- (200)
Issuance of stock awards 335 74 85
Other (31) 24 --
Loss on disposal of discontinued operations -- 6,702 --
25,512 17,512 7,789
Net cash provided by operating activities $ 43,008 $ 24,338 $19,986
The accompanying notes are an integral part of these consolidated financial statements.
<FN>
<F1>Reconciliation of Net Income to Cash Flows from Operating Activities for 1995 and 1994
has not been restated to remove the effect of discontinued operations.<PAGE>
</FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
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. As of September 30, 1995, the Company
announced that a plan was adopted to exit the oil and gas producing
business and to dispose of all existing oil and gas producing properties.
Accordingly, the results of operations and net assets for oil and gas
producing activities have been reclassified in the consolidated financial
statements, except for the Consolidated Statements of Cash Flows, 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 42% of the Company's revenues from sales and services during
the year ended September 30, 1996 were from two clients, each of which
accounted for 10% or more of total revenues. The Company has long-term
contracts with both of these clients. During the two previous fiscal years
ended September 30, 1995 and 1994, approximately 34% and 27%, 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 comprised of U.S. Treasury obligations which are
stated at the lower of cost or market.
RECEIVABLES
Receivables are stated net of allowance for doubtful accounts of $156,000
at September 30, 1996 and $159,000 at September 30, 1995.
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.
ACCRUED LIABILITIES
Accrued liabilities include $6.1 million of prepayments of certain
contractual arrangements for the fabrication of client owned units and
related services as of September 30, 1996. As of September 30, 1995,
accrued liabilities include $2.2 million of reserve for discontinued
operations. No other single component of accrued liabilities in either
period exceeded 5% of total current liabilities.
RETAIL STORE PROPERTIES
The Company owns five retail store properties, which are leased under
agreements that provided rental income of $562,000, $559,000 and $545,000
for the fiscal years ended September 30, 1996, 1995 and 1994, 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, 1996 and
1995, the ESOP had borrowings outstanding under the note in the amount of
$2,340,000 and $3,202,000, 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 and fully diluted 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 outstanding stock
options.
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>
<TABLE>
(thousands) for the years ended September 30, 1996 1995 1994
<S> <C> <C> <C>
Currently payable
International $ -- $ -- $ --
U.S. 5,321 2,618 3,600
5,321 2,618 3,600
Deferred
International 1,966 834 --
U.S. 1,749 3,556 2,224
3,715 4,390 2,224
Total provision $9,036 $7,008 $5,824
</TABLE>
Deferred income taxes result from temporary differences in the recognition
of revenues and expenses for tax and financial statement purposes. The
primary components of the Company's deferred tax liability are as follows:
<TABLE>
(thousands) September 30, 1996 1995 1994
<S> <C> <C> <C>
Differences in depreciable and
amortizable basis $21,096 $16,828 $15,191
Income accrued for financial reporting, not
yet reported for tax 752 891 1,027
Other (670) 62 (125)
Total deferred tax liability $21,178 $17,781 $16,093
</TABLE>
The tax provisions of $9,036,000, $7,008,000 and $5,824,000 for the years
ended September 30, 1996, 1995 and 1994, 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, 1996 1995 1994
<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
State taxes, net of federal benefit 2.2 1.5 2.4
International rate differential (.1) (.1) (1.4)
Reduction in International deferred tax rates (2.9) -- --
Other items, net .9 (.5) (.7)
Effective tax rate 34.1% 33.4% 34.6%
</TABLE>
At September 30, 1996 the Company had no investment tax credit carryovers.
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.
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, 1996
the Company had borrowings of $19,500,000 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, 1996 the Company was in compliance with
these requirements.
At September 30, 1996 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, 1996
the Company had borrowings of $3,631,000 under these agreements.
4. Common Stock and Related Matters
At September 30, 1996 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,
1996, 1995 and 1994 were $323,000, $327,000 and $306,000, respectively.
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, 1996, 1995 and
1994 amounted to $891,000, $818,000 and $785,000, respectively. Dividends
received by the ESOP Trust and applied to reduction of the ESOP term loan
amounted to $126,000, $119,000 and $113,000 for the years ended September
30, 1996, 1995 and 1994, 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, 1996 the ESOP had borrowings
outstanding in the amount of $2,340,000.
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 and related tax benefit are 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, 1996 stock options and restricted stock were held by 27
employees.
The following is a summary of stock options and restricted stock:
<TABLE>
1996 Shares Price
<S> <C> <C>
Options outstanding October 1, 1995 385,540 $ 4.375-$31.50
Options and restricted stock granted 51,477 31.375- 35.00
Options canceled -- -- - --
Restricted stock vested (622)
Options exercised (55,661) 6.25 - 28.25
Options outstanding
September 30, 1996 380,734 4.375- 35.00
Shares reserved for future grants 331,383
1995 Shares Price
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
</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.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 ("SFAS No. 123"), a new standard on accounting for stock based
compensation. This standard establishes a fair value based method of
accounting for stock compensation plans and encourages companies to adopt
SFAS No. 123 in place of the existing accounting method which requires
expense recognition only in situations where stock compensation plans award
intrinsic value to recipients at the date of grant. Companies that do not
follow SFAS No. 123 for accounting purposes must make annual proforma
disclosures of its effects. Adoption of the standard by the Company is
required in fiscal 1997, although earlier implementation is permitted. The
Company plans to continue its current accounting for stock based
compensation and only adopt SFAS No. 123 proforma disclosures. The Company
does not believe that when adopted SFAS No. 123 will have a material impact
on its financial position and results of operations.
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 1996. Aggregate future rentals
subject to noncancelable leases are as follows: 1997 - $1,017,000; 1998 -
$532,000 and 1999 - $365,000.
8. Quarterly Financial Data (Unaudited)
<TABLE>
(thousands except per share data) First Second Third Fourth
Quarters in Fiscal Year Ended
September 30, 1996
<S> <C> <C> <C> <C>
Revenues $22,124 $21,743 $22,868 $25,068
Income before income taxes 6,234 6,098 6,874 7,326
Net income 4,057 4,113 4,534 4,792
Net income per share $ .40 $ .40 $ .44 $ .46
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)
</TABLE>
9. Discontinued Operations
As of September 30, 1995, oil and gas production activities were 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 and expected future operating losses of $3.6 million.
This provision included 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 was 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. In fiscal 1996 all property sales were
concluded with no further adjustments required. Proceeds from these sales
(cash and other consideration) were $8.9 million in fiscal 1996 and $.7
million in fiscal 1995.
Operating results of the discontinued operations were as follows:
<TABLE>
(thousands) for the years ended September 30, 1996 1995 1994
<S> <C> <C> <C>
Operating revenues $ 2,482 $ 9,198 $14,055
Income (loss) from operations (65) (690) 1,516
Income tax expense (benefit) (22) (241) 511
Income (loss) after income taxes $ (43) $ (449) $ 1,005
</TABLE>
10. Geographic Operating Areas
Financial data by geographic operating areas is summarized as follows:
<TABLE>
Revenues Income before tax Identifiable Assets
Years Ended September 30, Years Ended September 30, Years Ended September 30,
(thousands) 1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
North America $73,347 $63,515 $21,753 $18,479 $175,500 $180,413
International 18,456 9,286 4,779 2,506 47,191 39,819
Totals $91,803 $72,801 $26,532 $20,985 $222,691 $220,232
</TABLE>
Prior to 1995 the Company did not have significant operations in geographic
areas other than North America.
Selected Financial Data - unaudited (dollars in thousands except per share data
<F1>
<TABLE>
for the years ended September 30, 1996 1995 1994
<S> <C> <C> <C>
Operations
Revenues
Contract gas handling services $ 90,536 $ 71,245 $ 55,923
Enhanced oil recovery -- -- 3,415
90,536 71,245 59,338
Other income 1,267 1,556 2,073
Total 91,803 72,801 61,411
Costs & Expenses
Cost of sales & services 39,636 33,210 29,250
Depreciation & amortization 15,949 10,855 8,686
General & administrative 7,721 6,651 6,659
Interest & debt 1,965 1,100 --
Income from continuing operations
before income taxes 26,532 20,985 16,816
Income tax provision 9,036 7,008 5,824
Income from continuing operations $ 17,496 $ 13,977 $ 10,992
Net income $ 17,496 $ 6,826 $ 12,197
Weighted average shares outstanding 10,291 10,203 10,180
Shares outstanding at yearend 10,188 10,127 10,074
Capital expenditures $28,315 $63,272 $41,217
Per Common Share Data
Stockholders' investment $15.28 $13.69 $13.27
Cash dividends .28 .26 .24
Income from continuing operations 1.70 1.37 1.08
Net income 1.70 .67 1.20
Financial Position
Total assets $222,691 $220,232 $168,117
Senior long-term debt 23,131 46,005 6,000
Convertible subordinated debentures -- -- --
Stockholders' investment 155,654 138,650 133,706
Other Data
Yearend revenue producing horsepower 445,000 377,000 296,000
Return on equity*** 11.9% 10.3% 9.3%
Number of employees 466 437 414
for the years ended September 30, 1993 1992 1991
Operations
Revenues
Contract gas handling services $ 48,676 $ 49,487 $ 43,136
Enhanced oil recovery 3,618 4,733 5,383
52,294 54,220 48,519
Other income 1,524 2,048 775
Total 53,818 56,268 49,294
Costs & Expenses
Cost of sales & services 27,484 27,141 26,371
Depreciation & amortization 7,511 6,985 6,426
General & administrative 6,389 6,106 5,079
Interest & debt -- 776 2,954
Income from continuing operations
before income taxes 12,434 15,260 8,464
Income tax provision 3,757 4,589 2,893
Income from continuing operations $ 8,677 $ 10,671 $ 5,571
Net income $ 11,473 $ 12,681 $ 7,268
Weighted average shares outstanding 10,163 9,260 7,328
Shares outstanding at yearend 10,054 9,904 7,569
Capital expenditures $19,176 $15,589 $39,657
Per Common Share Data
Stockholders' investment $12.23 $11.67 $6.71
Cash dividends .22 .20 .16
Income from continuing operations .85 1.15 .76
Net income 1.13 1.37 .99
Financial Position
Total assets $149,829 $138,650 $120,162
Senior long-term debt 435 1,305 27,870
Convertible subordinated debentures -- -- 21,245
Stockholders' investment 122,965 115,545 50,777
Other Data
Yearend revenue producing horsepower 254,000 227,000 220,000
Return on equity*** 9.6% 15.2% 17.1%
Number of employees 387 383 388
for the years ended September 30, 1990 1989 1988
Operations
Revenues
Contract gas handling services $ 32,945 $ 30,210 $ 26,361
Enhanced oil recovery 5,833 9,845 9,166
38,778 40,055 35,527
Other income 968 1,145 1,003
Total 39,746 41,200 36,530
Costs & Expenses
Cost of sales & services 22,778 24,757 23,639
Depreciation & amortization 5,544 6,196 5,720
General & administrative 4,976 4,560 3,956
Interest & debt 1,913 1,742 1,507
Income from continuing operations
before income taxes 4,535 3,945 1,708<FN2>
Income tax provision 1,538 1,334 589
Income from continuing operations $ 2,997 $ 2,611 $ 1,119
Net income $ 5,457 $ 4,522 $ 2,680
Weighted average shares outstanding 7,151 6,977 6,941
Shares outstanding at yearend 6,900 6,848 6,839
Capital expenditures $21,195 $16,485 $8,362
Per Common Share Data
Stockholders' investment $4.93 $4.25 $4.16
Cash dividends .16 .16 .16
Income from continuing operations .42 .37 .16
Net income .76 .65 .39
Financial Position
Total assets $83,506 $73,298 $65,941
Senior long-term debt 13,090 11,059 5,800
Convertible subordinated debentures 21,245 21,245 21,245
Stockholders' investment 33,987 29,086 28,469
Other Data
Yearend revenue producing horsepower 175,000 162,000 146,700
Return on equity<FN3> 17.3% 15.7% 9.4%
Number of employees 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,
1996 and 1995, and the related consolidated statements of income,
stockholders' investment and cash flows for each of the three years in the
period ended September 30, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended September 30, 1996 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Houston, Texas
November 20, 1996
SIGNIFICANT SUBSIDIARIES OF PRODUCTION OPERATORS CORP
JURISDICTION
OF
NAME ORGANIZATION
Production Operators, Inc. Florida
Servicios Production Operators, C.A. Venezuela
Production Operators Argentina, S.A. Argentina
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 20, 1996 included in Production Operators Corp's 1996
Annual Report to Stockholders. It should be noted that we have not
audited any financial statements of the Company subsequent to
September 30, 1996, or performed any audit procedures subsequent to
the date of our report.
ARTHUR ANDERSEN LLP
Houston, Texas
December 20, 1996
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated November 20, 1996, 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, 1996, or performed any
audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Houston, Texas
December 20, 1996
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