-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BgogTeV01sDgV95klvYxOtJqdnAG4FiMmea+GECZCOIm+JG+4AydfI7J8GxtPKym BoED+ide9FPgPuhjLVyiaA== 0000100712-96-000015.txt : 19961224 0000100712-96-000015.hdr.sgml : 19961224 ACCESSION NUMBER: 0000100712-96-000015 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961223 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRODUCTION OPERATORS CORP CENTRAL INDEX KEY: 0000100712 STANDARD INDUSTRIAL CLASSIFICATION: OIL, GAS FIELD SERVICES, NBC [1389] IRS NUMBER: 590827174 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-03919 FILM NUMBER: 96685199 BUSINESS ADDRESS: STREET 1: ONE PIEDMONT CENTER SUITE 515 CITY: ATLANTA STATE: GA ZIP: 30305 BUSINESS PHONE: 7134660980 FORMER COMPANY: FORMER CONFORMED NAME: UNICAPITAL CORP DATE OF NAME CHANGE: 19801229 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STATES FINANCE CO INC DATE OF NAME CHANGE: 19690828 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STATES SHELL HOMES INC DATE OF NAME CHANGE: 19660911 10-K405 1 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) 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. EX-10.FI 2 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" __________________________________________ EX-11 3 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 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.
EX-13 4 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. CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands except per share data) for the years ended September 30, 1996 1995 1994 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.
CONSOLIDATED BALANCE SHEETS (dollars in thousands) September 30, 1996 1995 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.
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 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.
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) for the years ended September 30, 1996 1995 1994 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. Consolidated Statements of Cash Flows for 1995 and 1994 have not been restated to remove the effect of discontinued operations.
RECONCILIATION OF NET INCOME TO CASH FLOWS FROM OPERATING ACTIVITIES (dollars in thousands) for the years ended September 30, 1996 1995 1994 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. 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. 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:
(thousands) for the years ended September 30, 1996 1995 1994 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
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: (thousands) September 30, 1996 1995 1994 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
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: percent of pretax income for years ended September 30, 1996 1995 1994 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%
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: 1996 Shares Price 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
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) (thousands except per share data) First Second Third Fourth Quarters in Fiscal Year Ended September 30, 1996 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)
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: (thousands) for the years ended September 30, 1996 1995 1994 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
10. Geographic Operating Areas Financial data by geographic operating areas is summarized as follows: 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 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
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 for the years ended September 30, 1996 1995 1994 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 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 17.3% 15.7% 9.4% Number of employees 331 332 308 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. 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. 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.
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 EX-22 5 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 EX-24.A 6 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 EX-24.B 7 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 EX-27 8
5 1000 YEAR SEP-30-1996 SEP-30-1996 1,466 201 25,136 156 8,919 41,432 274,247 100,940 222,691 22,728 23,131 0 0 10,259 145,395 222,691 90,536 91,803 39,636 39,636 23,670 0 1,965 26,532 9,036 17,496 0 0 0 17,496 1.70 1.70
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