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. Revenues in
fiscal 1996 from the Williams Companies accounted for
approximately 32% of the Company's revenues, the majority of which
is under ten-year operating agreements. Petroleos de Venezuela
and its affiliates accounted for approximately 10% of the
Company's revenues in fiscal 1996, the majority of which is under
long-term contracts with one or more of their operating
affiliates.
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 among the largest independent providers 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.
<TABLE>
Item 6. Selected Financial Data - unaudited (dollars in thousands except per share
data)<F1>
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 <F4> -- -- 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<F3> 11.9% 10.3% 9.3%
Number of employees 466 437 414
for the years ended September 30, 1993 1992 1991
<S> <C> <C> <C>
Operations
Revenues
Contract gas handling services $ 48,676 $ 49,487 $ 43,136
Enhanced oil recovery<F4> 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<F3> 9.6% 15.2% 17.1%
Number of employees 387 383 388
for the years ended September 30, 1990 1989 1988
<S> <C> <C> <C>
Operations
Revenues
Contract gas handling services $ 32,945 $ 30,210 $ 26,361
Enhanced oil recovery<F4> 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<F2>
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<F3> 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.
</FN>
<FN>
<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 due to the provision made for discontinued operations.
<F4>Effective as of the beginning of fiscal 1995, the Company discontinued separate
segment reporting for enhanced oil recovery. Contract gas handling services revenues
in fiscal 1995 and 1996 included enhanced oil recovery revenues of $2.6 million and
$0, respectively.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 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 and have a maturity date as agreed to between the Company
and the banks at the time of advance of funds. Such maturities
are typically between one and ninety days and are generally repaid
from the unsecured revolving credit facility. Accordingly, these
lines of credit have been classified as long-term obligations in
the accompanying consolidated financial statements. At September
30, 1996 the Company had borrowings of $3,631,000 under these
agreements.
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 (from available borrowings
under the unsecured revolving credit facility of $30,500,000 and
from available borrowings under the unsecured lines of credit of
$26,369,000 at September 30, 1996).
Item 8. Financial Statements and Supplementary Data
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
<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.
</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 -- -- (2,417) -- -- (2,417)
share
Exercise of options to purchase
17,992 shares (182 shares -- 81 -- -- 150 231
surrendered in payment)
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 -- -- (2,627) -- -- (2,627)
share
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 -- -- (2,846) -- -- (2,846)
share
Exercise of options to purchase
55,661 shares (4,602 shares -- 830 -- -- 343 1,173
surrendered in payment)
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.
</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.
</FN>
</TABLE>
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. Revenues from the Williams
Companies accounted for approximately 32% of the Company's revenues,
the majority of which is under ten-year operating agreements. Petroleos
de Venezuela and its affiliates accounted for approximately 10% of the
Company's revenues, the majority of which is under long-term contracts
with one or more of their operating affiliates. 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>
(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 $21,096 $16,828 $15,191
amortizable basis
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 and have a maturity date
as agreed to between the Company and the banks at the time of advance of
funds. Such maturities are typically between one and ninety days and are
generally repaid from the unsecured revolving credit facility. Accordingly,
these lines of credit have been classified as long-term obligations in the
accompanying consolidated financial statements. 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>
1996 1995 1994
(thousands) for the years ended September 30,
<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>
North America $73,347 $63,515 $21,753 $18,479 $175,500 $180,413
South America 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>
North America consists primarily of the United States, but also includes
Canada, which represents 2% or less of the total amounts shown for each
period. Prior to 1995 the Company did not have significant operations in
geographic areas other than North America.
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
May 2, 1997
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 5/2/97
F. E. Ellis, Director Date
/s/ Jorge E. Estrada M. 5/5/97
Jorge E. Estrada M., Director Date
C. Rahl George, Director Date
/s/ Carl W. Knobloch, Jr. 5/2/97
Carl W. Knobloch, Jr., Chairman Date
/s/ Henry E. Longley 5/2/97
Henry E. Longley, Director Date
/s/ D. John Ogren 5/2/97
D. John Ogren, Director and Date
President
/s/ Lester Varn, Jr. 5/5/97
Lester Varn, Jr., Director Date <PAGE>
/s/ John B. Simmons 5/2/97
John B. Simmons, Treasurer Date
(Principal Financial and
Accounting Officer)
EXHIBITS INDEX
The following Exhibits are filed herewith or incorporated by reference
as a part of this report on Form 10-K:
(3)(a) Restated Certificate of Incorporation, together with all
amendments thereto (filed as Exhibit (3)(a) to Report on
Form 10-K for the year ended September 30, 1991, as
amended by Form 8 filed February 24, 1992, and
incorporated herein by reference).
(3)(b) Copy of By-Laws, together with all amendments thereto
(filed as Exhibit 4.1 to Report on Form 8 filed February
24, 1992 and incorporated herein by reference).
(4)(a) For the definition of the rights of holders of equity
securities see the Articles Fourth, Seventh and Eighth of
the Company's Certificate of Incorporation and the
Certificate of Designation, Preferences and Rights of the
Company's Series A Junior Participating Preference Stock
(filed as Exhibit (3)(a) to Report on Form 10-K for the
year ended September 30, 1991, as amended by Form 8 filed
February 24, 1992 and incorporated herein by reference).
(4)(b) For the relative By-laws provisions concerning the rights
of holders of equity securities see Articles II and VI of
the Company's By-Laws (filed as Exhibit 4.1 to Report on
Form 8 filed February 24, 1992 and incorporated herein by
reference).
(4)(c) Loan Agreement dated June 2, 1995 and the Second Amended
and Restated Credit Agreement with the Bank of New York
individually and as agent for the First National Bank of
Chicago (filed as Exhibit (4)(d) to Report on Form 10-Q
for the quarter ended June 30, 1995 and incorporated
herein by reference).
(4)(c)(i) Subordination Agreement among Production Operators Corp,
Production Operators, Inc. and the Bank of New York as
agent (filed as Exhibit (4)(b) to Report on Form 10-Q for
the quarter ended December 31, 1990 and incorporated
herein by reference).
(10)(a) Employment Agreement between the Company and D. John Ogren
dated June 7, 1994 (filed as Exhibit 10(b) to Report on
Form 10-Q for the quarter ended June 30, 1994 and
incorporated herein by reference).
(10)(b)(i) Consulting and Deferred Compensation Agreement between the
Company and C. Rahl George dated June 1, 1981 (filed as
Exhibit (10)(f)(i) to Report on Form 10-K for the fiscal
year ended September 30, 1981 and incorporated herein by
reference).
(10)(b)(ii) Amended Deferred Compensation Agreement between the
Company and C. Rahl George dated October 24, 1984 (filed
as Exhibit (10)(f)(ii) to Report on Form 10-K for the
fiscal year ended September 30, 1984 and incorporated
herein by reference).
(10)(c)(i) Employee Stock Ownership Plan and Trust dated June 9, 1989
(filed as Exhibit (10)(c)(i) to Report on Form 10-K for
the fiscal year ended September 30, 1989 and incorporated
herein by reference).
(10)(c)(ii) First Amendment to Employee Stock Ownership Plan and Trust
dated December 18, 1989 (filed as Exhibit (10)(c)(ii) to
Report on Form 10-K for the fiscal year ended September
30, 1989 and incorporated herein by reference).
(10)(c)(iii) Second Amendment to Employee Stock Ownership Plan and
Trust dated September 30, 1994 (filed as Exhibit
(10)(d)(iii) to Report on Form 10-K for the fiscal year
ended September 30, 1994 and incorporated herein by
reference).
(10)(d) 1980 Long-Term Incentive Plan approved by stockholders
January 30, 1981, as amended through February 27, 1991
(filed as Exhibit (10)(d) to Report on Form 10-K for the
fiscal year ended September 30, 1991 and incorporated
herein by reference).
(10)(d)(i) 1992 Long-Term Incentive Plan approved by stockholders
February 24, 1993, as amended through October 24, 1995
(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.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
this Form 10-K of our report dated November 20, 1996. 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
May 12, 1997
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
May 12, 1997
