-----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, MerCD1FNcPpfwLMKF96dJlAyQHG62sKZSk8rH9AHspR52zD0wrX3I4vqbRek2uM7 SWT/YADQnwLflDT33vMRRw== 0000950129-98-001331.txt : 19980331 0000950129-98-001331.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950129-98-001331 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COOPER CAMERON CORP CENTRAL INDEX KEY: 0000941548 STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533] IRS NUMBER: 760451843 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13884 FILM NUMBER: 98577965 BUSINESS ADDRESS: STREET 1: 515 POST OAK BLVD STREET 2: STE 1200 CITY: HOUSTON STATE: TX ZIP: 77027 BUSINESS PHONE: 7135133322 MAIL ADDRESS: STREET 1: 515 POST OAK BOULEVARD CITY: HOUSTON STATE: TX ZIP: 77027 10-K 1 COOPER CAMERON CORPORATION, DATED 12/31/97 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------------- Commission File Number 1-13884 COOPER CAMERON CORPORATION (Exact name of Registrant as specified in its charter) Delaware 76-0451843 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 515 Post Oak Boulevard Suite 1200 Houston, Texas (Address of principal 77027 executive offices) (Zip Code) Registrant's telephone number, including area code (713) 513-3300 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange on Title of Each Class Which Registered ------------------- ------------------------ Common Stock, Par Value $0.01 Per Share New York Stock Exchange Junior Participating Preferred Stock New York Stock Exchange Purchase Rights Par Value $0.01 Per Share
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in a definitive proxy or information statement incorporated by reference in Part III of this Form 10-K of any amendment to this Form 10-K. [ ] The number of shares of Common Stock, par value $.01 per share, outstanding as of March 20, 1998 was 52,465,009. The aggregate market value of the Common Stock, par value $0.01 per share, held by non-affiliates of Registrant as of March 20, 1998 was approximately $3,242,993,369. For the purposes of the determination of the above statement amount only, all directors and executive officers of the Registrant are presumed to be affiliates. ------------------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Annual Report to Stockholders for 1997 are incorporated by reference into Part II. Portions of Registrant's 1998 Proxy Statement for the Annual Meeting of Stockholders to be held May 14, 1998 are incorporated by reference into Part III. ================================================================================ 2 TABLE OF CONTENTS
PAGE ---------------------------------------------------- 1997 1997 MARCH 25, 1998 ITEM FORM 10-K ANNUAL REPORT PROXY STATEMENT PART I 1. BUSINESS ................................................................. 1 - - Markets and Products ................................................. 2 - - Aftermarket Services ................................................. 8 - - Market Issues ........................................................ 9 - - New Product Development .............................................. 9 - - Competition .......................................................... 11 - - Manufacturing ........................................................ 12 - - Backlog .............................................................. 13 - - Patents, Trademarks and Other Intellectual Property .................. 13 - - Employees ............................................................ 13 - - 2. PROPERTIES ............................................................... 14 - - 3. LEGAL PROCEEDINGS ........................................................ 14 - - Environmental Matters ................................................ 14 - - 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................... 16 - - PART II 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .................................................. 16 - - 6. SELECTED FINANCIAL DATA .................................................. 17 51 - 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................................ 17 21-27 - 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .............................. 17 28-50 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ............................................. 18 - - PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ....................... 18 - 3-5,25 11. EXECUTIVE COMPENSATION ................................................... 19 - 17-20 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........................................................... 19 - 2,15-16 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................... 20 - - PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ............................................................. 20 - -
3 PART I ITEM 1. BUSINESS. Cooper Cameron Corporation ("Cooper Cameron" or the "Company") is a leading international manufacturer of oil and gas pressure control equipment, including valves, wellheads, chokes, blowout preventers and assembled systems for oil and gas drilling, production and transmission used in onshore, offshore and subsea applications. Cooper Cameron is also a leading manufacturer of gas turbines, centrifugal gas and air compressors, integral and separable reciprocating engines, compressors and turbochargers. Cooper Cameron, a Delaware corporation, was incorporated on November 10, 1994. The Company operated as a wholly-owned subsidiary of Cooper Industries, Inc. ("Cooper") until June 30, 1995, the effective date of the completion of an exchange offer with Cooper's stockholders resulting in the Company becoming a separate stand-alone company. The common stock of Cooper Cameron is trading on the New York Stock Exchange under the symbol "RON". In June 1996, Cooper Cameron purchased the assets and assumed certain operating liabilities of Ingram Cactus Company for approximately $100 million in cash. The business acquired manufactures and sells wellheads, surface systems, valves and actuators used primarily in onshore oil and gas production operations, and owned manufacturing facilities in Oklahoma City, Oklahoma and Broussard, Louisiana, as well as in the United Kingdom and Austria. The Company also acquired interests in the Ingram Cactus joint ventures in Venezuela and Malaysia. The operations have now been integrated into those of the Cameron division. In October 1996, Cooper Cameron acquired for its Cameron division certain assets and assumed certain liabilities of Tundra Valve & Wellhead Corp., a Canadian manufacturer of wellheads, trees and valves, for approximately Canadian $9.8 million. Also during October 1996, Cooper Cameron acquired for its Cooper Energy Services division, for approximately $6.1 million, certain assets of ENOX Technologies, Inc., a developer and provider of ignition systems for gas engines, particularly those used in large-scale gas transmission installations. During 1997, the Company's Petroleum Production Equipment segment made three small product line acquisitions totaling $6.3 million and, in February 1998, announced the acquisition of Orbit Valve International, Inc. ("Orbit") for approximately $100 million in cash and notes. Orbit will become part of the Cooper Cameron Valves organization upon close of the acquisition which is expected during the second quarter of 1998. Orbit manufactures and sells high-performance valves and actuators for the oil and gas and petrochemical industries. Orbit's primary manufacturing facility is located in Little Rock, Arkansas with a sales, marketing, assembly, test and warehousing base at Ashchurch, Gloucestershire in the United Kingdom. Cooper Cameron's business of manufacturing petroleum production equipment and compression and power equipment began in the mid-1800's with the manufacture of steam engines that provided power for plants and textile or rolling mills. By 1900, with the discovery of oil and gas, Cooper Cameron moved into the production of natural gas internal combustion 1 4 engines and gas compressors. The Company added to its product offering through various acquisitions, in particular the acquisitions of The Bessemer Gas Engine Company (gas engines and compressors); Pennsylvania Pump and Compressor (reciprocating air and gas compressors); Ajax Iron Works (compressors); Superior (engines and compressors); Joy Petroleum Equipment Group (valves, couplings and wellheads); Joy Industrial Compressor Group (compressors); and Cameron Iron Works (blowout preventers, ball valves, control equipment and McEvoy-Willis wellhead equipment and choke valves). BUSINESS SEGMENTS MARKETS AND PRODUCTS The Company operates in two industry segments, petroleum production equipment and compression and power equipment. For additional industry segment information for each of the three years in the three-year period ended December 31, 1997, see Note 15 of the Notes to Consolidated Financial Statements, which Notes are incorporated herein by reference in Part II, Item 8 hereof ("Notes to Consolidated Financial Statements.") Petroleum Production Equipment Segment The Company manufactures pressure control equipment used at the wellhead in the drilling for and production and transmission of oil and gas, both onshore and offshore. The primary products include wellheads, gate valves and ball valves, blowout preventers ("BOPs") and control systems and are marketed under the well-known brand names Cameron(R), W-K-M(R), McEvoy(R), Demco(R), Willis(TM), Ingram Cactus(R), Foster(R) and Thornhill Craver(TM). The equipment is manufactured in a variety of sizes and to various specifications with working pressure ratings up to 30,000 pounds per square inch ("p.s.i."). The wellhead equipment is designed to support the casing and production tubulars and includes casing head housings, casing heads and tubing heads. Valves of different sizes and design are assembled with other components into an assembly known as a "christmas tree," which is mounted on the wellhead equipment and is used to control the flow of oil and gas from a producing well. Most christmas trees are custom designed to meet individual customer requirements. The Company also manufactures subsea production systems, which consist of equipment used to complete an oil or gas well on the sea floor. Subsea systems tend to be sophisticated and generally require a high degree of technological innovation. In 1993, the Company introduced its patented SpoolTree(TM) subsea production system for use in oil and gas fields with subsea completions that require frequent retrieval of downhole equipment. With the SpoolTree(TM) system, well completion and workover activities can be performed without a workover riser and removal of the christmas tree and under conventional blowout preventer control, thereby reducing the time and equipment needed to perform such activities. 2 5 Cooper Cameron's drilling-related equipment includes ram and annular BOPs. The drilling of an oil or gas well is done through BOPs located under the rig floor and on top of the wellhead. The primary function of a BOP is to maintain well control under all conditions. Ram-type preventers have two hydraulically actuated steel rams with rubber inserts that are designed to close around the drill pipe, sealing off the space below or, in the case of blind rams, to close off the open hole. The annular-type BOP is attached above the ram BOPs and is used to close off the well-bore using a donut-shaped rubber packer with steel inserts that are compressed together by a hydraulically actuated piston. The workover-type preventer is attached to the top of completed oil or gas wells to control pressures when a variety of work is being performed through christmas trees. Cooper Cameron manufactures BOPs to meet pressure requirements of up to 25,000 p.s.i. and in diameters from 4 1/16 to 26 3/4 inches. Cooper Cameron has experienced a dramatic increase in its BOP sales over the past two years due to an increased market focus on and improving fundamentals in the drilling business. Cooper Cameron also produces other drilling-related equipment, the most important of which are choke manifolds, drilling risers and control systems. Choke manifolds are arrangements of piping, valves and special valves, called chokes, which control pressures during drilling and, in the event of BOP closure, bleed off excessive pressures. Control systems monitor well pressures and activate the chokes, valves and BOPs. Cooper Cameron also manufactures ball valves and underwater pipeline tie-in and pipeline repair equipment. A ball valve consists of a spherical plug, or ball, with a hole running axially through it to allow the passage of gas or liquids. Sealing surfaces are arranged so that a 90-degree turn of the plug will shut off the flow. Ball valve sizes range from 1/4 inch to 60 inches in diameter with working pressures of up to 5,000 p.s.i. Large diameter valves are used primarily in natural gas transmission lines. Smaller valves are used in oil and gas gathering and processing systems and in various types of industrial processes in refineries and petrochemical plants. Subsea pipeline tie-in systems are used in the connection of subsea pipelines to one another and to offshore platforms. Pipeline repair systems are used in the repair of subsea pipelines. Cooper Cameron manufactures gate valves and butterfly valves for use in oil and gas gathering and processing systems such as refineries and petrochemical plants. Sizes range from 2 to 56 inches and pressures range up to 5,000 p.s.i. Cooper Cameron recently introduced the Cameron(R) Hi-Lo Trip Mechanical Pilot for Emergency Shutdown valves that are designed for use in oil and gas production, pipelines, plants and other areas where emergency shutdown is required. The Cameron Willis Chokes business was formed in late 1997 to focus resources on the choke product line with the goal of enhancing Cameron's performance in this product line. Cooper Cameron manufactures production chokes, control valves, drilling choke systems, actuators, and pigging and production automation systems. A choke is a type of valve which restricts and regulates the flow of a product through a flowline or pipeline. Designs include a multiple orifice valve, needle and seat chokes, cage style control chokes, rotary chokes and 3 6 subsea chokes and actuators. The unique multiple orifice valve design uses two adjacent discs, each with a pair of openings. Cage style control chokes are used to solve erosion problems while improving the precision of flow control. In 1995, Cooper Cameron introduced its new Willis(TM) Stepping Linear Control Actuator, which is designed to provide remote operation of certain Willis(TM) control chokes. Cooper Cameron produces subsea chokes and actuators used on subsea production equipment, including state-of-the-art subsea retrievable chokes. Choke sizes range from 1 inch to 6 inches in diameter with working pressures of up to 20,000 p.s.i. Cooper Cameron recently introduced two new actuators, the Cameron(R) AP and Compact Modular Actuators, designed for use on its line of subsea gate valves. These valves are fail-close hydraulically activated and are manufactured for operating pressures between 1,500 p.s.i. and 3,000 p.s.i. Cooper Cameron provides complete integrated elastomer research, development and manufacturing. These products are used in pressure and flow control equipment in the Petroleum Production Equipment segment. This technology also supports the petroleum, petrochemical, rubber molding and plastics industries in the development and testing of elastomer and plastic products. The Cameron Controls business was created in late 1996 with a primary goal of expanding Cameron's role as a provider of controls equipment. Drilling and production equipment used on the ocean floor operates from a platform or other remote location through hydraulic or electronic connections that allow the operator to measure and control the pressures and throughput associated with these installations. Cooper Cameron markets in excess of 90% of its petroleum production equipment products directly to end-users through a worldwide network of sales and marketing employees, supported by agents in some international locations. Due to the extremely technical nature of many of the products, the marketing effort is further supported by a staff of engineering employees. The balance of Cooper Cameron's products are sold through established independent distributors. The Petroleum Production Equipment segment's primary customers include major oil and gas exploration and production companies, independent oil and gas exploration and production companies, foreign national oil and gas companies, engineering and construction companies, pipeline companies, drilling contractors and rental equipment companies. Some valves are sold to various types of process plants, such as refining and petrochemical, chemical and power generation. Compression and Power Equipment Segment Cooper Cameron's Compression and Power Equipment segment provides products and services to the oil and gas production and transmission, industrial, process and non-utility power generation markets. The primary products include engines, reciprocating compressors, centrifugal air and gas compressors, gas turbines, turbochargers, control systems and aftermarket parts and service. Cooper Cameron markets its products worldwide under the well-known brand 4 7 names Ajax(R), Superior(R), Cooper-Bessemer(R), Coberra(R), C-B Turbocharger(R), Pennsylvania Process(TM), Enterprise (TM), En-Tronic(R) ENOX(R), MSG(R), Service Solutions(TM), Texcentric(R), TurboAir(R) and Joy(R). Manufactured under the Cooper-Bessemer(R), Ajax(R) and Superior(R) brand names, Cooper Cameron's reciprocating products include both "integral" and "separable" units. The integral gas engine-compressor concept, pioneered by the Company in the 1930s, is a unique two-cycle design that combines the unit's engine and compressor on a single crankshaft. Integral engine-compressors can accommodate wide swings in gas transmission pressure conditions and are frequently used in single-stage transmission, multiple-stage boosting or gas injection/withdrawal applications. Cooper Cameron's Cooper-Bessemer(R) and Ajax(R) integral units range in power from 150 to 30,000 horsepower. Over the past 50 years, more than 4,400 Cooper-Bessemer(R) integral engine-compressors, totaling over 6,500,000 horsepower, have been installed in 35 countries worldwide. Cooper Cameron manufactures four-cycle reciprocating power engines ranging from small, six-cylinder "in-line" units, to large, 16-cylinder "V" configuration models. They are available in spark-ignited (gas-fueled), diesel and dual-fuel (gas and diesel-fueled) versions. Marketed under the Cooper-Bessemer(R) and Superior(R) brand names, Cooper Cameron power engines are used to drive reciprocating separable compressors in natural gas gathering, boosting, injecting, processing and storage/withdrawal applications. Cooper Cameron's four-cycle engines range in power from 500 to 3,200 horsepower. Cooper Cameron also manufactures its own lines of Superior(R) and Pennsylvania Process(TM) reciprocating separable gas compressors. In addition, Cooper Cameron power engines drive electric generators in industrial, commercial, municipal and government-operated independent power (non-utility) applications, and pumps in both oil and gas related services. In 1988, the Company acquired the Enterprise(TM) engine aftermarket product line from IMO Delaval Inc., and today provides parts, maintenance, overhaul and engineering services for previously installed Enterprise(TM) power engines in nuclear, oil and gas, marine and municipal power applications. During 1997, Cooper Cameron introduced a new line of rotary screw compressor packages. Ranging in power from 95 to 1,200 horsepower, the new packages feature a compact and portable design for quick installation and economical operation in well head gas boosting, vapor recovery, gas gathering, air drilling, fuel gas boosting, air injection storage/withdrawal and helium production services. All Cooper Cameron integral gas engine-compressors and power engines are available with state-of-the-art technology designed for reduced emissions to meet or exceed government-regulated clean air standards. The CleanBurn(TM) concept features a pre-ignition firing chamber to reduce engine exhaust emissions without sacrificing fuel economy. CleanBurn(TM) "conversion kits" are also available to enable Cooper Cameron customers to maximize their original equipment investment by incorporating these latest technological advancements into their previously installed Ajax(R), Cooper-Bessemer(R), Enterprise(TM) and Superior(R) engines. 5 8 In July 1996, Cooper Cameron announced the discontinuation of development work related to new designs of the large Cooper-Bessemer(R) reciprocating power engines and integral engine-compressors. This decision was made due to the long-term decline in demand in this market segment caused by the advent of aeroderivative gas turbines and centrifugal compressors. By February 1997, the Grove City, Pennsylvania, business unit was restructured to be a component supplier for other Cooper Energy Services products and a parts manufacturing facility focused on the profitable aftermarket business for the large installed base of Cooper-Bessemer(R) reciprocating equipment. As a result, all assembly operations were eliminated and engineering resources were reallocated to other product lines. For natural gas applications, Cooper Cameron manufactures two types of rotating gas compressors under the Cooper-Bessemer(R) brand name: pipeline centrifugal compressors, which handle pressures up to 2,250 p.s.i.; and multi-stage barrel compressors, designed for pressures to 6,500 p.s.i. The Cooper-Bessemer(R) pipeline centrifugal compressor is recognized worldwide as one of the most efficient high-flow compressors in gas transmission service. Cooper-Bessemer(R) multi-stage barrel compressors are vertically split and sized to meet a wide combination of flow and pressure requirements at continuous, full-load operation in natural gas gathering, production, storage, artificial lift and re-injection applications. Cooper Cameron provides gas turbines and gas turbine-driven compression and power generation packages to the worldwide oil and gas related markets through Cooper Rolls, its joint venture company with Rolls-Royce plc of London, England. Marketed under the Coberra(R) brand name, Cooper Rolls(TM) gas turbines combine a Rolls-Royce jet engine gas generator and a Cooper-Bessemer(R) power turbine to provide a compact, aero-derivative power source with high horsepower-to-weight ratios. With over 30,000,000 hours of operating experience, Coberra(R) gas turbines are one of the world market leaders in their size range for oil and gas related applications. They provide up to 42,600 horsepower with high, simple-cycle thermal efficiencies and are commonly installed both onshore and offshore as drivers for Cooper-Bessemer(R) rotating gas compressors, water and oil pumps and electric generators. Cooper Rolls also markets gas turbines featuring the Rolls-Royce Trent areoderivative industrial gas generator. These largest Cooper Rolls units feature horsepowers to 70,000. The newest Cooper Rolls(TM) product offering, Allison engine-powered gas turbines, extend the company's product offering to the smaller 5,500 to 11,000 horsepower range. The Allison Engine Company is owned by Rolls-Royce plc. In 1997, Cooper Cameron announced a 50/50 joint venture company with the Russian aero engine company, Lyulka-Saturn, Inc. The new company, Lyulka-Cooper, will incorporate Cooper Cameron product packaging and compressor technology, in combination with the Lyulka Rolls Royce AL31ST industrial aeroderivative gas turbine, to produce power and compression units for the global oil, gas and power generation industries. Cooper Cameron manufactures turbochargers under the Cooper-Bessemer(R) brand name for new Cooper Cameron reciprocating engines and also provides factory repair of its own and other manufacturers' turbochargers in a dedicated facility. High performance turbochargers are necessary to achieve required exhaust emissions while maintaining desired efficiency and 6 9 operations flexibility. Cooper Cameron is one of the few engine manufacturers to design, produce and repair turbochargers. Cooper Cameron manufactures En-Tronic(R) control and analysis equipment for many of its compression and power products, as well as for products produced by other manufacturers. En-Tronic(R) controls provide state-of-the-art solutions to advanced system requirements such as calculating and controlling low emissions on gas turbines and engines, and all-electronic fuel control of gas turbine and engine packages. En-Tronic(R) products use advanced, field-proven hardware and software technology, to optimize equipment reliability, safety and efficiency. Cooper Cameron also markets technology acquired from ENOX Technologies, Inc. ENOX(R) technology provides patented electrical plasma discharge ignition systems and engine management systems for large internal combustion engines used, for example, in the natural gas pipeline industry. Cooper Cameron manufactures integrally geared centrifugal air compressors from its acquisition of the Joy Industrial Compressor Group. The compressors are used by industrial plants as a source of power for the operation of hand tools, actuation of control devices and to power automatic and semi-automatic production equipment. These compressors are used in industries such as automotive, container, textile, chemical, food and beverage and general manufacturing. Cooper Cameron serves the plant air market with two product lines of compressors. The C-8 series covers the 300 to 1,250 horsepower range at discharge pressures from 50 to 125 p.s.i. The Turbo-Air(R) 2000, was introduced in 1994. This machine provides the advantages of centrifugal compressor technology at lower horsepower than ever before. These advantages include higher efficiency, minimal maintenance with reliable and unattended operation. The Turbo-Air 2000 covers the 150 to 350 horsepower range at discharge pressures from 50 to 150 p s i. The larger Turbo-Air(R) series covers a range from 350 to 6,000 horsepower and is for plant air applications above 1,250 horsepower or where the customer requires greater customization to meet particular specifications. All components of the Turbo-Air(R) and C-8 series machines, including the compressor, driver, lubrication system, control system and intercoolers, are grouped on a common base into a ready-to-install package. This configuration provides easy installation on a simple slab foundation at the customer's plant location. Cooper Cameron's Compression and Power Equipment segment manufactures integral gear centrifugal compressors for process applications where the air is used for its content of oxygen, nitrogen, argon or other elements. In these cases, the compressor is an integral part of the manufacturing process in industries such as air separation, pharmaceutical, fermentation, petrochemical, refining and synthetic fuel. Cooper Cameron services the process air market with two product lines of centrifugal compressors. The MSG(R) or Multi Stage Geared(TM) series covers a range of 700 to 25,000 horsepower, handling air or nitrogen to pressures up to 1,100 p.s.i.g. and volume flows up to 70,000 cubic feet per minute. The MSG(R) series is a flexible modular design that can be customized in aerodynamic components, materials of construction and packaging scope, thereby providing an optimized compressor to meet a customer's unique requirements. The Turbo-Air(R) series is a fully packaged unit that uses the modular and customizing concepts of the MSG(R) series in the process air market from 350 to 6,000 horsepower. 7 10 The process and plant air centrifugal compressors manufactured by Cooper Cameron deliver oil-free compressed air to the customer, thus preventing oil contamination of the manufactured products. Industrial markets worldwide increasingly prefer oil-free air for safety, operational and environmental reasons. Cooper Cameron primarily sells its compression and power equipment direct to end-users through a worldwide network of sales and marketing employees supported by agents in some international locations. Due to the extremely technical nature of many of the products, the marketing effort is further supported by a staff of engineers. In addition, Ajax(R) integral engine-compressor units are sold through independent distributors in North America and to rental companies. Superior(R) engines and compressors are sold to independent packagers and distributors in North America. Some Turbo-Air(R) industrial compressors are sold through sales representatives and independent distributors. Cooper Cameron's primary customers for compression and power equipment include the major oil and gas companies, large independent oil and gas producers, gas transmission companies, equipment leasing companies, petrochemical and refining divisions of oil companies independent power producers and chemical companies. Industrial and process compressors are sold to durable goods manufacturers and process industries. AFTERMARKET SERVICES The Petroleum Production Equipment segment has established an Aftermarket business unit with a comprehensive worldwide aftermarket organization that provides replacement parts, field service, major repairs and overhauls, unit installation assistance and Total Vendor Management contracts. Customer requirements are satisfied around the clock through a worldwide network of service and repair centers and parts warehouses. As customers have drastically reduced their staffing and shifted more responsibility to vendors, Total Vendor Management contracts have become increasingly popular and the Aftermarket business has responded. All maintenance services for a customer's equipment in a particular area are provided from one service center. Cooper Cameron also provides an inventory of repair parts, service personnel, planning services and inventory and storage of customers' idle equipment. The CES Division has established the Customer Integrated Services business group (CIS) to enhance strategic growth, product development, technical support and operational focus for all of the aftermarket product offerings related to its worldwide power and compression markets. CIS controls its own marketing and business strategy, along with the service shops, parts manufacturing facilities, warehouses, and service resources associated with aftermarket activities. The goal of this new organization is to promote the speed and agility required to satisfy customer requirements for aftermarket services while providing the quality of an original equipment manufacturer. Within CIS, the Compression Services Business Unit provides complete operations and maintenance service contracts, principally to oil and natural gas production and transmission 8 11 companies. Service contracts can include equipment installation, scheduled and unscheduled maintenance, minor and major overhauls, integration of customer personnel, assimilation of customer inventory and inventory management. To meet changing customer equipment requirements, the CIS business group offers several innovative programs. Included are remanufactured equipment and unit and parts exchange programs that provide customers with cost-effective alternatives to new equipment purchases. In 1998, the group also introduced a state-of-the-art gas turbine repair facility specifically dedicated to the overhaul and repair of Allison engine-powered gas turbines. Cooper Cameron's large population of installed equipment results in aftermarket services constituting approximately 29% of Cooper Cameron's total revenues in 1997. MARKET ISSUES Cooper Cameron is one of the market leaders in the global market for petroleum production equipment. Cooper Cameron believes that it is well positioned to serve these markets. Plant and service center facilities around the world in major oil producing regions provide a broad, global breadth of market coverage. The international market is expected to be a major source of growth for the Cooper Cameron Compression and Power Equipment segment. The desire of both the developed and the developing countries to expand their respective oil and gas transmission capacity for both economic and political reasons will be one of the primary factors affecting market demand. Additional establishment of industrial infrastructure in the developing countries will necessitate the growth of basic industries that require process compression equipment for air separation facilities. Production and service facilities in North and South America, Europe and the Far East provide this business segment with the ability to serve the global marketplace. In both of Cooper Cameron's business segments, a large population of installed engines, compression, and gas and oil production equipment exists in both the U.S. and international market segments. The rugged, long-lived nature of the equipment that exists in the field provides a predictable and profitable repair parts and service business. The Company expects that as increasing quantities of new units are sold into the international markets, there should be a continuing growth in market demand for aftermarket parts and service. NEW PRODUCT DEVELOPMENT As petroleum exploration activities have increasingly been focused on subsea locations, Cooper Cameron's Petroleum Production Equipment segment has directed much of its new product development efforts toward this market. In subsea exploration, customers are particularly concerned about safety, environmental protection and ease of installation and maintenance. Cooper Cameron's reputation for high quality and high dependability has given it a competitive advantage in the areas of safety and environmental protection. A patented subsea production system called the SpoolTree(TM), which was introduced in 1993, offers substantial cost 9 12 reduction to the customer as it is based upon a novel concept that eliminates the need for a workover riser or removal of the christmas tree during workover. Cooper Cameron has pioneered this concept and has developed similar products for land and platform applications, which significantly reduce customer costs. Cooper Cameron has also introduced the MOSAIC (Modular Subsea And Integrated Completions) system. MOSAIC includes a suite of pre-engineered elements with standard interfaces that can be combined in a fashion to allow customers to configure a system to meet their specific needs. Cooper Cameron believes that it has chosen to standardize components at a level low enough to give customers the required customization while providing engineering and manufacturing efficiencies. Cooper Cameron has realigned its engineering and marketing resources to further develop and market the MOSAIC subsea system and other stand-alone standardized subsea products, such as christmas trees and wellheads. Several new drilling products will be introduced in 1998. These include the 3.5 million-pound load capacity "LoadKing" riser system, which will set the industry standard for drilling in 10,000-foot water depths; a new lightweight and lower-cost locking mechanism for subsea BOPs; and a new generation of variable-bore ram packers. In May 1998, Cameron will open a new Research Center in Houston, Texas. The 55,000 sq. ft. Research Center will be one of the largest product development facilities in the oil service sector. The facility will have 10 specially designed test bays to test and evaluate Cameron's products under realistic conditions. These include environmental test chambers to simulate extreme pressures and temperatures, high-strength fixtures for the application of multi-million pound tensile and bending loads, high pressure gas compressors and test enclosures, a hyperbaric chamber to simulate the external pressures of deep water environments, and two circulation loops for erosion and flow testing. This Research Center will be instrumental in providing Cameron's customers with innovative and cost-effective products. In 1997, Cameron Controls successfully launched a new electro-hydraulic drilling control system that is being favorably received in the market. A new subsea production control system is also being developed and will be launched in 1998. Cooper Cameron believes that a successful product launch will significantly enhance the subsea systems offerings for the company. In the Compression and Power Equipment segment, Cooper Cameron has developed a number of new products to serve the oil and gas transmission market and the industrial air compression market. Cooper Rolls will ship its first Allison 501 and 601 power turbines in 1998. These products extend the company's gas turbine product line into a lower horsepower range suitable for small pipeline compression and power generation applications both on and offshore, and floating production storage and offloading vessels. 10 13 In 1998, the Lyulka-Cooper joint venture will finalize a demonstrator unit equipped with Dry Low Emission gas turbine combustors, a Cooper-Bessemer(R) pipeline compressor and an En-Tronics(R) engine controls management system. The unit will be installed at a gas compression station near Moscow. Manufacturing of the unit will start in mid-1998, with delivery scheduled for mid-1999. An area of increasing importance in the oil and gas transmission market is the reduction of environmentally harmful emissions from engines and turbines that drive compression equipment. Building on its experience with its CleanBurn(TM) technology, and in conjunction with Rolls-Royce plc, Cooper Cameron is marketing new Dry Low Emissions gas turbines, as well as conversion kits for existing Cooper Rolls(TM) units in the field. This technology significantly reduces the level of emissions produced by gas turbine drivers. Additionally, in 1995, a new line of En-Tronic(R) performance and monitoring control systems was introduced to aid in optimizing the performance and emission parameters of engines and turbines. Over the past three years, Cooper Cameron has also introduced new high speed reciprocating engines and compressors with improved reliability, fuel efficiency and emissions performance. These new units utilize En-Tronic(R) state-of-the-art CleanBurn(TM) III microprocessor-based control systems. Cooper Cameron added two new models, the Turbo-Air(R) 3000 and the TAS-70, to its centrifugal air compressor product line in 1997. The Turbo-Air(R) 3000 builds off of the success of the Turbo-Air(R) 2000 as a pre-engineered, neatly packaged air compressor for plant air applications. The Turbo-Air(R) 3000 will be used in 400 to 800 horsepower applications with discharge pressures from 50 to 150 p s i, while the Turbo-Air(R) 2000 serves the 150 to 350 horsepower range. The value-engineered design utilizing state-of-the-art technology delivers low energy consumption, low cost package installation and maintenance, ease of automation and environmentally friendly oil-free air. The Turbo-Air(R) 3000 should aid Cooper Cameron in continuing its share growth in the plant air market. The TAS-70 extends the standard plant air line to nearly 10,000 cfm. COMPETITION Cooper Cameron competes in all areas of its operations with a number of other companies, some of which have financial and other resources comparable to or greater than those of Cooper Cameron. Cooper Cameron believes it has a leading position in the petroleum production equipment markets, particularly with respect to its high-pressure products. In these markets, Cooper Cameron competes principally with Vetco Gray Inc. (a subsidiary of Asea Brown Boveri), Kvaerner Oil and Gas, Dril-Quip, Inc., Dresser Industries, Inc., Varco International, Inc., Hydril Company, and FMC Corp. The principal competitive factors in the petroleum production equipment markets are technology, quality, service and price. Cooper Cameron believes that several factors give it a strong competitive position in these markets. Most significant are Cooper Cameron's broad product offering, its worldwide presence and reputation, its service and repair capabilities, its expertise in high pressure technology and its experience in alliance and partnership arrangements with customers and other suppliers. 11 14 Cooper Cameron believes it also has a leading position in the compression and power equipment markets. In these markets, Cooper Cameron competes principally with Nuovo Pignone, Dresser-Rand Company, European Gas Turbines Inc., Ariel Corporation, Caterpillar Inc., Waukesha Engine Division of Dresser Industries, Atlas-Copco AB, Mannesmann Demag AG and Ingersoll-Rand Company. The principal competitive factors in the compression and power equipment markets are engineering and design capabilities, product performance, reliability and quality, service and price. Cooper Cameron believes that its competitive position is based on several factors. Cooper Cameron has a broad product offering and, unlike many of its competitors, manufactures and sells both engines and compressors (both as separate units and packaged together as a single unit). Cooper Cameron led the industry in the introduction of low engine emission technology and continues today as an industry leader in this technology. Cooper Cameron has a highly competent engineering staff and skilled technical and service representatives, with service centers located throughout the world. In all of its markets, Cooper Cameron has strong brand recognition and an established reputation for quality and service. Cooper Cameron has a significant base of previously-installed products, which provides a strong demand for aftermarket parts and service. Cooper Cameron has modern manufacturing facilities and state-of-the-art testing capabilities. MANUFACTURING Cooper Cameron has manufacturing facilities worldwide that conduct a broad variety of processes, including machining, fabrication, assembly and testing using a variety of forged and cast alloyed steels and stainless steel as the primary raw materials. In recent years, Cooper Cameron has rationalized plants and products, closed six manufacturing facilities, moved product lines to achieve economies of scale, and upgraded the remaining facilities. Manufacturing processes have been improved and significant capital expenditures have been made since 1991. Cooper Cameron maintains advanced manufacturing, quality assurance and testing equipment geared to the specific products that it manufactures and uses extensive process automation in its manufacturing operations. The manufacturing facilities utilize computer aided numerical control tools and manufacturing techniques that concentrate the equipment necessary to produce similar products in one area of the plant in a configuration commonly known as a manufacturing cell. One operator in a manufacturing cell can monitor and operate several machines, as well as assemble and test products made by such machines, thereby improving operating efficiency and product quality while reducing the amount of work-in-process and finished product inventories. Cooper Cameron believes that its test capabilities are critical to its overall process. Cooper Cameron has capabilities to test most equipment at full load, measuring all operating parameters, efficiency and emissions. All process compressors for air separation and all plant air compressors are given a mechanical and aerodynamic test in a dedicated test center prior to shipment. 12 15 All of Cooper Cameron's European manufacturing plants are ISO certified and API licensed. Most of the U.S. plants are ISO certified or, if not, such certification is in process. ISO is an internationally recognized verification system for quality management. BACKLOG Cooper Cameron's backlog was approximately $786 million at December 31, 1997, as compared to $728 million at December 31, 1996 and $588 million at December 31, 1995. Backlog consists of firm customer orders for which a purchase order has been received, satisfactory credit or financing arrangements exist and delivery is scheduled. PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY Cooper Cameron believes that the success of its business depends more on the technical competence, creativity and marketing abilities of its employees than on any individual patent, trademark or copyright. Nevertheless, as part of its ongoing research, development and manufacturing activities, Cooper Cameron has a policy of seeking patents when appropriate on inventions concerning new products and product improvements. Cooper Cameron owns 382 unexpired United States patents and 707 unexpired foreign patents. Although in the aggregate these patents and Cooper Cameron's trademarks are of considerable importance to the manufacturing and marketing of many of its products, Cooper Cameron does not consider any single patent or trademark or group of patents or trademarks to be material to its business as a whole, except the Cameron(R), Cooper-Bessemer(R), Coberra(R) and Cooper Rolls(TM) trademarks. Other important trademarks used by Cooper Cameron include Ajax(R), Superior(R), C-B Turbocharger(R), En-Tronic(R), Enterprise(TM), ENOX(R), Enterprise(TM), Texcentric(R), Service Solutions(TM), W-K-M(R), McEvoy(R), Willis(TM), Demco(R), Pennsylvania Process(TM), Thornhill Craver(TM), Ingram Cactus(R) and Foster(R). Cooper Cameron has the right to use the trademark Joy(R) on aftermarket parts until November 2027. Cooper Cameron has registered its trademarks in the countries where such registration is deemed material. Cooper Cameron also relies on trade secret protection for its confidential and proprietary information. Cooper Cameron routinely enters into confidentiality agreements with its employees and suppliers. There can be no assurance, however, that others will not independently obtain similar information or otherwise gain access to Cooper Cameron's trade secrets. EMPLOYEES As of December 31, 1997, Cooper Cameron had approximately 9,600 employees, of which approximately 2,478 were represented by labor unions. Cooper Cameron believes its current relations with employees are good. The only significant labor contracts expiring during 1998 cover employees at the Cameron plant in Brookshire, Texas (July) and the Cooper Energy Services plant in Grove City, Pennsylvania (September). 13 16 ITEM 2. PROPERTIES The Company operates manufacturing plants ranging in size from approximately 14,000 square feet to approximately 858,000 square feet of manufacturing space. The Company also owns and leases warehouses, distribution centers, aftermarket and storage facilities, and sales offices. The Company leases its corporate headquarters and Cameron division headquarters office space in Houston, Texas. The Company manufactures, markets and sells its products and provides services throughout the world, operating facilities in over 30 countries. On December 31, 1997, the significant facilities used by Cooper Cameron throughout the world for manufacturing, distribution, aftermarket services, machining, storage and warehousing contained an aggregate of approximately 6,676,100 square feet of space, of which approximately 6,022,900 square feet (90%) was owned and 653,200 (10%) was leased. Of this total, approximately 4,834,082 square feet (72%) are located in the United States and 1,395,400 square feet (21%) are located in Europe. The table below lists the significant manufacturing, warehouse and distribution facilities by industry segment and geographic area.
Asia/Pacific Western Eastern and Hemisphere Hemisphere Mideast Total ---------- ---------- ------- ----- Petroleum Production Equipment 14 9 3 26 Compression and Power Equipment 16 3 0 19
Cooper Cameron believes its facilities are suitable for their present and intended purposes and are adequate for the Company's current and anticipated level of operations. ITEM 3. LEGAL PROCEEDINGS Cooper Cameron is a party to various legal proceedings and administrative actions, including certain environmental matters discussed below, all of which are of an ordinary or routine nature incidental to the operations of Cooper Cameron. In the opinion of Cooper Cameron's management, such proceedings and actions should not, individually or in the aggregate, have a material adverse effect on Cooper Cameron's results of operations or financial condition. Environmental Matters Cooper Cameron is subject to numerous federal, state, local and foreign laws and regulations relating to the storage, handling, emission and discharge of materials into the environment, including the Comprehensive Environmental Response Compensation and 14 17 Liability Act ("CERCLA"), the Clean Water Act, the Clean Air Act (including the 1990 Amendments) and the Resource Conservation and Recovery Act. Cooper Cameron believes that its existing environmental control procedures are adequate and it has no current plans for substantial capital expenditures in this area. Cooper Cameron has an active environmental management program aimed at compliance with existing environmental regulations and elimination or significant reduction in the generation of pollutants in its manufacturing processes. Cooper Cameron management intends to continue these policies and programs. Cooper Cameron has been identified as a potentially responsible party ("PRP") with respect to five sites designated for cleanup under CERCLA or similar state laws, which impose liability for cleanup of certain waste sites and for related natural resource damages without regard to fault or the legality of waste generation or disposal. Persons liable for such costs and damages generally include the site owner or operator and persons that disposed or arranged for the disposal of hazardous substances found at those sites. Although CERCLA imposes joint and several liability on all PRPs, in application, the PRPs typically allocate the investigation and cleanup costs based upon the volume of waste contributed by each PRP. Settlements often can be achieved through negotiations with the appropriate environmental agency or the other PRPs. PRPs that contributed less than one percent of the waste are often given the opportunity to settle as a "de minimis" party, resolving liability for a particular site. Cooper Cameron does not own any of the sites with respect to which it has been identified as a PRP; in each case, Cooper Cameron is identified as a party that disposed of waste at the site. With respect to three of the sites, Cooper Cameron's share of the waste volume is estimated to be less than one percent. At one site, Cooper Cameron's share is still to be determined, but is believed to be less than ten percent. Cooper Cameron is the major PRP at one site which it operates, the Osborne Landfill in Grove City, Pennsylvania. Cooper Cameron's facility in Grove City disposed of wastes at the Osborne Landfill from the early 1950s until 1978. The EPA issued an order in 1991 and remediation is now in process. Cooper Cameron has responsibility for the remediation compliance with the EPA order. Cooper Cameron has accruals in its balance sheet to the extent costs are known for the five sites. Although estimates of the cleanup costs have not yet been made for certain of these sites, Cooper Cameron believes, based on its preliminary review and other factors, that the costs to Cooper Cameron relating to these sites will not have a material adverse effect on its results of operations, financial condition or liquidity. However, no assurance can be given that the actual costs will not exceed the estimates of the cleanup costs once determined. Cooper Cameron does not currently anticipate any material adverse effect on its results of operations, financial condition or competitive position as a result of compliance with Federal, state, local or foreign environmental laws or regulations or cleanup costs of the sites discussed above. However, some risk of environmental liability and other costs is inherent in the nature of Cooper Cameron's business, and there can be no assurance that material environmental costs will not arise. Moreover, it is possible that future developments, such as promulgation of regulations implementing the 1990 amendments to the Clean Air Act and other increasingly strict 15 18 requirements of environmental laws and enforcement policies thereunder, could lead to material costs of environmental compliance and cleanup by Cooper Cameron. The cost of environmental remediation and compliance generally has not been an item of material expense for Cooper Cameron during any of the periods presented, other than with respect to the Osborne Landfill described above. Cooper Cameron's balance sheet at December 31, 1997, includes accruals totaling approximately $4.6 million for environmental remediation activities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The common stock of Cooper Cameron, par value $.01 per share (together with the associated Rights to Purchase Series A Junior Participating Preferred Stock), is traded on The New York Stock Exchange ("NYSE"). A 2-for-1 split of the Company's common stock in the form of a stock dividend was paid effective June 13, 1997. No other dividends were paid during 1997. 16 19 The following table indicates the range of trading prices on the NYSE from January 2 through December 31, 1997.
Price Range --------------------------------------- High Low Last ---- --- ---- First Quarter....................................$37 15/16 30 1/4 34 1/4 Second Quarter...................................$48 31 13/16 46 3/4 Third Quarter....................................$72 5/8 44 1/4 71 13/16 Fourth Quarter...................................$81 3/4 52 1/8 61
The approximate number of holders of Cooper Cameron common stock was 35,000 as of March 20, 1998. The number of record holders as of the same date was 1,903. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Consolidated Historical Financial Data of Cooper Cameron Corporation" on page 51 in the 1997 Annual Report to Stockholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition of Cooper Cameron Corporation" on pages 21-27 in the 1997 Annual Report to Stockholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following consolidated financial statements of the Company and the independent auditors' report set forth on pages 28-50 in the 1997 Annual Report to Stockholders are incorporated herein by reference: Report of Independent Auditors. Consolidated Results of Operations for each of the three years in the period ended December 31, 1997. Consolidated Balance Sheets as of December 31, 1997 and 1996. Consolidated Cash Flows for each of the three years in the period ended December 31, 1997. 17 20 Consolidated Changes in Stockholders' Equity for the period from June 30, 1995 to December 31, 1995, and the two years ended December 31, 1997. Notes to Consolidated Financial Statements. 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 on Directors of the Company is set forth in the section entitled "Election of Directors" on pages 3-5 in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held May 14, 1998, which section is incorporated herein by reference. Information regarding executive officers of the Company is set forth below. There was no failure by an insider to file a report required by Section 16 of the Exchange Act. There are no family relationships among the officers listed, and there are no arrangements or understandings pursuant to which any of them were elected as officers. Officers are appointed or elected annually by the Board of Directors at its first meeting following the Annual Meeting of Stockholders, each to hold office until the corresponding meeting of the Board in the next year or until a successor shall have been elected, appointed or shall have qualified. Section 16(a) Beneficial Ownership Reporting Compliance The information concerning compliance with Section 16(a) is set forth in the section entitled "Compliance with Section 16 of the Exchange Act" on page 25 in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held on May 14, 1998, which section is incorporated herein by reference. CURRENT EXECUTIVE OFFICERS OF THE REGISTRANT
Present Principal Position and Other Material Positions Name and Age Held During Last Five Years - ------------ ------------------------------------------------------- Sheldon R. Erikson (56) President and Chief Executive Officer since January 1995. Chairman of the Board from 1988 to 1995 and President and Chief Executive Officer from 1987 to 1995 of The Western Company of North America.
18 21 Thomas R. Hix (50) Senior Vice President of Finance and Chief Financial Officer since January 1995. Senior Vice President of Finance, Treasurer and Chief Financial Officer of The Western Company of North America from 1993 to 1995. Executive Vice President and Chief Financial Officer from 1992 to 1993 and Vice President, Finance and Chief Financial Officer from 1986 to 1992 of Oceaneering International. Franklin Myers (45) Senior Vice President, General Counsel and Secretary since April 1995. Vice President and General Counsel from 1988 to 1994, Secretary from 1988 to 1992, and Senior Vice President and General Counsel from 1994 to April 1995 of Baker Hughes Incorporated. Joseph D. Chamberlain (51) Vice President and Corporate Controller since April 1995. Controller - Financial Reporting from 1994 to 1995, Assistant Controller and Manager-Financial Reporting from 1979 to 1994 of Cooper Industries, Inc. Michael L. Grimes (47) Vice President since November 1996. President, Cooper Energy Services Division since April 1996. General Manager, Quality and Information Management of GE Power Systems from 1995 to 1996, General Manager, Apparatus Service Department from 1994 to 1995, General Manager, Power Generation Services Department from 1993 to 1994 and General Manager of Marketing, GE Power Generation from 1992 to 1993 of General Electric Company. E. Fred Minter (62) Vice President since November 1996. President, Cooper Turbocompressor since 1988.
ITEM 11. EXECUTIVE COMPENSATION. The information for this item is set forth in the section entitled "Director and Executive Management Compensation" on pages 17-20 in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held May 14, 1998, which section is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information concerning security ownership of certain beneficial owners and management is set forth in the sections entitled "Voting Securities and Principal Holders Thereof" on page 2 and "Security Ownership of Management" on pages 15-16 in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held May 14, 1998, which sections are incorporated herein by reference. 19 22 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: (1) FINANCIAL STATEMENTS: All financial statements of the Registrant as set forth under Item 8 of this Annual Report on Form 10-K. (2) FINANCIAL STATEMENT SCHEDULES: Financial statement schedules are omitted because of the absence of conditions under which they are required or because all material information required to be reported is included in the consolidated financial statements and notes thereto. (3) EXHIBITS: 3.1 Amended and Restated Certificate of Incorporation of Cooper Cameron Corporation, dated June 30, 1995, filed as Exhibit 4.2 to the Registration Statement on Form S-8 of Cooper Cameron Corporation (Commission File No. 33-94948), and incorporated herein by reference. 3.2 First Amended and Restated Bylaws of Cooper Cameron Corporation, as amended December 12, 1996, filed as Exhibit 3.2 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 4.1 Form of Rights Agreement, dated as of May 1, 1995, between Cooper Cameron Corporation and First Chicago Trust Company of New York, as Rights Agent, filed as Exhibit 4.1 to the Registration Statement on Form S-8 of Cooper Cameron Corporation (Commission File No. 33-94948), and incorporated herein by reference. 4.2 First Amendment to Rights Agreement between Cooper Cameron Corporation and First Chicago Trust Company of New York, as Rights Agent, dated November 1, 1997. 20 23 10.1 Cooper Cameron Corporation Long-Term Incentive Plan (Registration Statement No. 33-95004), incorporated herein by reference. 10.2 Amended and Restated Cooper Cameron Corporation Long-Term Incentive Plan, as amended, incorporated herein by reference to the Cooper Cameron Corporation Proxy Statement for the Annual Meeting of Stockholders held on May 8, 1997. 10.3 Cooper Cameron Corporation Amended and Restated 1995 Stock Option Plan for Non-Employee Directors (Registration Statement No. 33-95000), incorporated herein by reference. 10.4 First Amendment to the Cooper Cameron Corporation Amended and Restated 1995 Stock Option Plan for Non-Employee Directors, incorporated herein by reference to the Cooper Cameron Corporation Proxy Statement for the Annual Meeting of Stockholders held on May 8, 1997. 10.5 Second Amendment to the Cooper Cameron Corporation Amended and Restated 1995 Stock Option Plan for Non-Employee Directors, filed as Exhibit 10.3 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.6 Third Amendment to the Cooper Cameron Corporation Amended and Restated 1995 Stock Option Plan for Non-Employee Directors. 10.7 Fourth Amendment to the Cooper Cameron Corporation Amended and Restated 1995 Stock Option Plan for Non-Employee Directors. 10.8 Fifth Amendment to the Cooper Cameron Corporation Amended and Restated 1995 Stock Option Plan for Non-Employee Directors. 10.9 Cooper Cameron Corporation Retirement Savings Plan (Registration Statement No. 33-95002), incorporated herein by reference. 10.10 Cooper Cameron Corporation Retirement Savings Plan, as Amended and Restated, effective April 1, 1996. 10.11 Cooper Cameron Corporation Employee Stock Purchase Plan (Registration Statement No. 33-94948), incorporated herein by reference. 10.12 Cooper Cameron Corporation Supplemental Excess Defined Benefit Plan, filed as Exhibit 10.4 to the Registration Statement on Form S-4 of Cooper Cameron Corporation (Commission File No. 33-90288), and incorporated herein by reference. 21 24 10.13 First Amendment to Cooper Cameron Corporation Supplemental Excess Defined Benefit Plan, effective as of January 1, 1996, filed as Exhibit 10.7 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.14 Cooper Cameron Corporation Supplemental Excess Defined Contribution Plan, filed as Exhibit 10.5 to the Registration Statement on Form S-4 of Cooper Cameron Corporation (Commission File No. 33-90288), and incorporated herein by reference. 10.15 First Amendment to Cooper Cameron Corporation Supplemental Excess Defined Contribution Plan, effective April 1, 1996, filed as Exhibit 10.9 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.16 Cooper Cameron Corporation Compensation Deferral Plan (formerly the Cooper Cameron Corporation Management Incentive Compensation Deferral Plan), effective January 1, 1996, filed as Exhibit 10.10 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.17 Cooper Cameron Corporation Directors Deferred Compensation Plan, filed as Exhibit 10.7 to the Registration Statement on Form S-4 of Cooper Cameron Corporation (Commission File No. 33-90288), and incorporated herein by reference. 10.18 Employment Agreement by and between Sheldon R. Erikson and Cooper Cameron Corporation, effective as of November 30, 1995, filed as Exhibit 10.9 to the Annual Report on Form 10-K for 1995 of Cooper Cameron Corporation, and incorporated herein by reference. 10.19 Employment Agreement by and between Thomas R. Hix and Cooper Cameron Corporation, effective as of November 30, 1995, filed as Exhibit 10.10 to the Annual Report on Form 10-K for 1995 of Cooper Cameron Corporation, and incorporated herein by reference. 10.20 Employment Agreement by and between Franklin Myers and Cooper Cameron Corporation, effective as of November 30, 1995, filed as Exhibit 10.11 to the Annual Report on Form 10-K for 1995 of Cooper Cameron Corporation, and incorporated herein by reference. 10.21 1995 Management Incentive Compensation Plan of Cooper Cameron Corporation, dated as of November 14, 1995, as amended, filed as Exhibit 10.15 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 22 25 10.22 1996 Management Incentive Compensation Plan of Cooper Cameron Corporation, dated as of February 19, 1996, filed as Exhibit 10.16 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.23 1997 Management Incentive Compensation Plan of Cooper Cameron Corporation, dated as of December 9, 1996, filed as Exhibit 10.17 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.24 Cooper Cameron Corporation Management Incentive Compensation Plan, as amended, incorporated herein by reference to the Cooper Cameron Corporation Proxy Statement for the Annual Meeting of Stockholders held on May 8, 1997. 10.25 1998 Management Incentive Compensation Plan for Cooper Cameron Corporation, dated as of January 1, 1998. 10.26 Change in Control Policy of Cooper Cameron Corporation, approved February 19, 1996, filed as Exhibit 10.18 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.27 Executive Severance Program of Cooper Cameron Corporation, approved February 19, 1996, filed as Exhibit 10.19 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.28 Credit Agreement, dated as of June 30, 1995, among Cooper Cameron Corporation and certain of its subsidiaries and the banks named therein and First National Bank of Chicago, as agent, filed as Exhibit 4.5 to the Registration Statement on Form S-8 of Cooper Cameron Corporation (Commission File No. 33-94948), and incorporated herein by reference. 10.29 Amended and Restated Credit Agreement dated as of March 20, 1997, among Cooper Cameron Corporation and certain of its subsidiaries and the banks named therein and First National Bank of Chicago, as agent, filed as Exhibit 10.21 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 23 26 13.1 Portions of the 1997 Annual Report to Stockholders are included as an exhibit to this report and have been specifically incorporated by reference elsewhere herein. 21 Subsidiaries of registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule. 27.l Restated Financial Data Schedule for the three months ended March 31, 1997. 27.2 Restated Financial Data Schedule for the six months ended June 30, 1997. 27.3 Restated Financial Data Schedule for the nine months ended September 30, 1997. 27.4 Restated Financial Data Schedule for the year ended December 31, 1996. 27.5 Restated Financial Data Schedule for the three months ended March 31, 1996. 27.6 Restated Financial Data Schedule for the six months ended June 30, 1996. 27.7 Restated Financial Data Schedule for the nine months ended September 30, 1996. (b) REPORTS ON FORM 8-K The Company filed no reports on Form 8-K during the fourth quarter of 1997 and through March 20, 1998. 24 27 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, ON THIS 27TH DAY OF MARCH, 1998. COOPER CAMERON CORPORATION REGISTRANT BY: /s/ JOSEPH D. CHAMBERLAIN ---------------------------------------- (JOSEPH D. CHAMBERLAIN) Vice President and Corporate Controller (Principal Accounting Officer) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED ON THIS 27TH DAY OF MARCH, 1998, BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
SIGNATURE TITLE --------- ----- /s/ C. BAKER CUNNINGHAM Director - ---------------------------------------- (C. Baker Cunningham) /s/ GRANT A. DOVE Director - ---------------------------------------- (Grant A. Dove) /s/ SHELDON R. ERIKSON Chairman, President and Chief Executive - ---------------------------------------- Officer (principal executive officer) (Sheldon R. Erikson) /s/ MICHAEL E. PATRICK Director - ---------------------------------------- (Michael E. Patrick) /s/ DAVID ROSS III Director - ---------------------------------------- (David Ross III) /s/ MICHAEL J. SEBASTIAN Director - ---------------------------------------- (Michael J. Sebastian) /s/ THOMAS R. HIX Senior Vice President of Finance and - ---------------------------------------- Chief Financial Officer (Thomas R. Hix) (principal financial officer)
25 28 EXHIBIT INDEX
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NO. - ------ ---------------------------------------------------------------------------------------- -------- 3.1 Amended and Restated Certificate of Incorporation of Cooper Cameron Corporation, dated June 30, 1995, filed as Exhibit 4.2 to the Registration Statement on Form S-8 of Cooper Cameron Corporation (Commission File No. 33-94948), and incorporated herein by reference. 3.2 First Amended and Restated Bylaws of Cooper Cameron Corporation, as amended December 12, 1996, filed as Exhibit 3.2 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 4.1 Form of Rights Agreement, dated as of May 1, 1995, between Cooper Cameron Corporation and First Chicago Trust Company of New York, as Rights Agent, filed as Exhibit 4.1 to the Registration Statement on Form S-8 of Cooper Cameron Corporation (Commission File No. 33-94948), and incorporated herein by reference. 4.2 First Amendment to Rights Agreement between Cooper Cameron Corporation and First Chicago Trust Company of New York, as Rights Agent, dated November 1, 1997. 10.1 Cooper Cameron Corporation Long-Term Incentive Plan (Registration Statement No. 33-95004), incorporated herein by reference. 10.2 Amended and Restated Cooper Cameron Corporation Long-Term Incentive Plan, as amended, incorporated herein by reference to the Cooper Cameron Corporation Proxy Statement for the Annual Meeting of Stockholders held on May 8, 1997. 10.3 Cooper Cameron Corporation Amended and Restated Stock Option Plan for Non-Employee Directors (Registration Statement No. 33-95000), incorporated herein by reference. 10.4 First Amendment to the Cooper Cameron Corporation Amended and Restated 1995 Stock Option Plan for Non-Employee Directors, incorporated herein by reference to the Cooper Cameron Corporation Proxy Statement for the Annual Meeting of Stockholders held on May 8, 1997. 10.5 Second Amendment to the Cooper Cameron Corporation Amended and Restated 1995 Stock Option Plan for Non-Employee Directors, filed as Exhibit 10.3 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference.
29 10.6 Third Amendment to the Cooper Cameron Corporation Amended and Restated 1995 Stock Option Plan for Non-Employee Directors. 10.7 Fourth Amendment to the Cooper Cameron Corporation Amended and Restated 1995 Stock Option Plan for Non-Employee Directors. 10.8 Fifth Amendment to the Cooper Cameron Corporation Amended and Restated 1995 Stock Option Plan for Non-Employee Directors. 10.9 Cooper Cameron Corporation Retirement Savings Plan (Registration Statement No. 33-95002), incorporated herein by reference. 10.10 Cooper Cameron Corporation Retirement Savings Plan, as Amended and Restated, effective April 1, 1996. 10.11 Cooper Cameron Corporation Employee Stock Purchase Plan (Registration Statement No. 33-94948), incorporated herein by reference. 10.12 Cooper Cameron Corporation Supplemental Excess Defined Benefit Plan, filed as Exhibit 10.4 to the Registration Statement on Form S-4 of Cooper Cameron Corporation (Commission File No. 33-90288), and incorporated herein by reference. 10.13 First Amendment to Cooper Cameron Corporation Supplemental Excess Defined Benefit Plan, effective as of January 1, 1996, filed as Exhibit 10.7 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.14 Cooper Cameron Corporation Supplemental Excess Defined Contribution Plan, filed as Exhibit 10.5 to the Registration Statement on Form S-4 of Cooper Cameron Corporation (Commission File No. 33-90288), and incorporated herein by reference. 10.15 First Amendment to Cooper Cameron Corporation Supplemental Excess Defined Contribution Plan, effective April 1, 1996, filed as Exhibit 10.9 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference.
30 10.16 Cooper Cameron Corporation Compensation Deferral Plan (formerly the Cooper Cameron Corporation Management Incentive Compensation Deferral Plan), effective January 1, 1996, filed as Exhibit 10.10 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.17 Cooper Cameron Corporation Directors Deferred Compensation Plan, filed as Exhibit 10.7 to the Registration Statement on Form S-4 of Cooper Cameron Corporation (Commission File No. 33-90288), and incorporated herein by reference. 10.18 Employment Agreement by and between Sheldon R. Erikson and Cooper Cameron Corporation, effective as of November 30, 1995, filed as Exhibit 10.9 to the Annual Report on Form 10-K for 1995 of Cooper Cameron Corporation, and incorporated herein by reference. 10.19 Employment Agreement by and between Thomas R. Hix and Cooper Cameron Corporation, effective as of November 30, 1995, filed as Exhibit 10.10 to the Annual Report on Form 10-K for 1995 of Cooper Cameron Corporation, and incorporated herein by reference. 10.20 Employment Agreement by and between Franklin Myers and Cooper Cameron Corporation, effective as of November 30, 1995, filed as Exhibit 10.11 to the Annual Report on Form 10-K for 1995 of Cooper Cameron Corporation, and incorporated herein by reference. 10.21 1995 Management Incentive Compensation Plan of Cooper Cameron Corporation, dated as of November 14, 1995, as amended, filed as Exhibit 10.15 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.22 1996 Management Incentive Compensation Plan of Cooper Cameron Corporation, dated as of February 19, 1996, filed as Exhibit 10.16 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.23 1997 Management Incentive Compensation Plan of Cooper Cameron Corporation, dated as of December 9, 1996, filed as Exhibit 10.17 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference.
31 10.24 Cooper Cameron Corporation Management Incentive Compensation Plan, as amended, incorporated herein by reference to the Cooper Cameron Corporation Proxy Statement for the Annual Meeting of Stockholders held on May 8, 1997. 10.25 1998 Management Incentive Compensation Plan for Cooper Cameron Corporation, dated as of January 1, 1998. 10.26 Change in Control Policy of Cooper Cameron Corporation, approved February 19, 1996, filed as Exhibit 10.18 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.27 Executive Severance Program of Cooper Cameron Corporation, approved February 19, 1996, filed as Exhibit 10.19 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 10.28 Credit Agreement, dated as of June 30, 1995, among Cooper Cameron Corporation and certain of its subsidiaries and the banks named therein and First National Bank of Chicago, as agent, filed as Exhibit 4.5 to the Registration Statement on Form S-8 of Cooper Cameron Corporation (Commission File No. 33-94948), and incorporated herein by reference. 10.29 Amended and Restated Credit Agreement dated as of March 20, 1997, among Cooper Cameron Corporation and certain of its subsidiaries and the banks named therein and First National Bank of Chicago, as agent, filed as Exhibit 10.21 to the Annual Report on Form 10-K for 1996 of Cooper Cameron Corporation, and incorporated herein by reference. 13.1 Portions of the 1997 Annual Report to Stockholders are included as an exhibit to this report and have been specifically incorporated by reference elsewhere herein. 21 Subsidiaries of registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule.
32 27.l Restated Financial Data Schedule for the three months ended March 31, 1997. 27.2 Restated Financial Data Schedule for the six months ended June 30, 1997. 27.3 Restated Financial Data Schedule for the nine months ended September 30, 1997. 27.4 Restated Financial Data Schedule for the year ended December 31, 1996. 27.5 Restated Financial Data Schedule for the three months ended March 31, 1996. 27.6 Restated Financial Data Schedule for the six months ended June 30, 1996. 27.7 Restated Financial Data Schedule for the nine months ended September 30, 1996.
EX-4.2 2 1ST AMEND TO RIGHTS AGREEMENT - DATED 11/1/97 1 EXHIBIT 4.2 FIRST AMENDMENT TO RIGHTS AGREEMENT This First Amendment to Rights Agreement (this "Amendment") is executed to be effective as of November 1, 1997, between Cooper Cameron Corporation, a Delaware corporation (the "Company") and First Chicago Trust Company of New York, a New York company (the "Rights Agent"). WITNESSETH WHEREAS, the Company and the Rights Agent entered into the Rights Agreement dated as of May 1, 1995 (the "Agreement"), and the parties desire to amend the Agreement in the manner authorized in Section 26 thereof. NOW THEREFORE, in consideration of the premises, and other valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Company and the Rights Agent hereby agree as follows: 1. DEFINITIONS. All terms used in this Amendment which are not defined in this Amendment have the meaning given those terms in the Agreement. 2. AMENDMENTS TO THE AGREEMENT. The Agreement is hereby amended as follows: (a) Section 1.(a) "Acquiring Person" shall be amended to read in its entirety as follows: (a) "Acquiring Person" shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 20% or more of the shares of Common Stock then outstanding, but shall not (i) include the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan, (ii) any Person who becomes an Acquiring Person solely as a result of a reduction in the number of shares of Common Stock outstanding due to the repurchase of shares of Common Stock by the Company. (b) Section 7. (a) shall be amended to change the Final Expiration Date from April 30, 2005 to October 31, 2007. (c) Section 7.(b) shall be amended to change the Purchase Price from $75 to $300. 2 (d) Section 11. (a) (ii) (A) shall be amended to read in its entirety as follows: (A) (1) any Acquiring Person or any Associate or Affiliate of any Acquiring Person, at any time after the date of this Agreement, directly or indirectly, shall merge into the Company or otherwise combine with the Company and the Company shall be the continuing or surviving corporation of such merger or combination and the Common Stock of the Company shall remain outstanding and unchanged, or (2) subject to the right of redemption granted in Section 23 hereof, any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan), alone or together with its Affiliates and Associates, shall, at any time after the Rights Dividend Declaration Date, become the Beneficial Owner of more than 20% of the shares of Common Stock then outstanding, other than (x) pursuant to any transaction set forth in Section 13(a) hereof, or (y) pursuant to an offer for all outstanding shares of Common Stock at a price and upon such terms and conditions as a majority of the Continuing Directors determines to be in the best interests of the Company and its stockholders, other than such Acquiring Person, its Affiliates and its Associates, or (e) Exhibit A to the Agreement [Form of Rights Certificate] shall be amended to change the Final Expiration Date in the first line of the opening legend and the seventh line of the first paragraph following the opening legend from April 30, 2005 to October 31, 2007, and to change the Purchase Price and the as of date related to the Purchase Price in the tenth and sixteenth line, respectively, of the first paragraph following the opening legend from $75 to $300 and from May 23, 1995 to November 1, 1997, respectively. 3. HEADINGS. The headings of Sections in this Amendment have been included for convenience only and should not be construed in interpreting this Amendment. 4. SEVERABILITY. If any part of this Amendment is for any reason found to be unenforceable, all other portions nevertheless remain enforceable. 5. SUCCESSORS. This Amendment binds and inures to the benefit of the parties in respect of successors and assigns. 6. COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute the same instrument. 7. GOVERNING LAW. This Amendment must be construed--and its performance enforced--under Delaware law. 2 3 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. Attest: COOPER CAMERON CORPORATION By: /s/ Grace L. Hughes By: /s/ Franklin Myers -------------------------------- ----------------------------- Name: Grace L. Hughes Name: Franklin Myers ------------------------------- ----------------------------- Title: Assistant Secretary Title: Senior Vice President, ------------------------------ ----------------------------- General Counsel and ----------------------------- Secretary ----------------------------- (SEAL) Attest: FIRST CHICAGO TRUST COMPANY OF NEW YORK By: /s/ George Dalton By: /s/ James Kurmich ---------------------------------- -------------------------------- Name: George Dalton Name: James Kurmich ------------------------------- ------------------------------ Title: Assistant Vice President Title: Assistant Vice President ------------------------------ ----------------------------- (SEAL) 3 EX-10.6 3 3RD AMEND TO COOPER CAMERON 1995 STOCK OPTION PLAN 1 EXHIBIT 10.6 THIRD AMENDMENT TO COOPER CAMERON CORPORATION AMENDED AND RESTATED 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS WHEREAS, COOPER CAMERON CORPORATION (THE "Company") has hereto fore adopted the COOPER CAMERON CORPORATION AMENDED AND RESTATED 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS (THE "Plan"); and WHEREAS, The Company desires to amend the Plan in certain respects; NOW, THEREFORE, THE Plan shall be amended as follows, effective as of May 8, 1997: 1. The following sentences shall be added to Section 8 of the Plan: (c) If the Optionee ceases to be an Eligible Director for any reason other than death or disability, (i) with respect to Automatic Options, the Optionee shall have the right to exercise the Option for a period of three (3) years from the date the Optionee ceases to be an Eligible Director or for the remaining term of the Option, if a shorter period of time, and (ii) with respect to Elective Options, the Optionee shall have the right to exercise the Option for the remaining term of the Option. 2. As amended hereby, the Plan is specifically ratified and reaffirmed. EX-10.7 4 4TH AMEND TO COOPER CAMERON 1995 STOCK OPTION PLAN 1 EXHIBIT 10.7 FOURTH AMENDMENT TO COOPER CAMERON CORPORATION AMENDED AND RESTATED 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS WHEREAS, COOPER CAMERON CORPORATION (the "Company") has heretofore adopted the COOPER CAMERON CORPORATION AMENDED AND RESTATED 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS (the "Plan"); and WHEREAS, the Company desires to amend the Plan in certain respects; NOW, THEREFORE, the Plan shall be amended as follows, effective as of November 6, 1997: 1. Sections 5 and 6 of the Plan shall be deleted and the following shall be substituted therefor: "5. Automatic Options. An Eligible Director shall receive Options in accordance with the provisions of this Section 5. An initial Option grant for 6,000 shares of Common Stock shall be made to an Eligible Director on the first trading date on which such individual becomes an Eligible Director. An additional Option for 6,000 shares of Common Stock shall be granted to Eligible Directors in each subsequent year during the term of the Plan on the first trading date following the Annual Meeting of Company stockholders. Notwithstanding the foregoing, if the Company has a non-executive (non-full time employed) Chairman of the Board of Directors, in lieu of the Option grants set forth above, such Chairman shall receive an initial Option grant for 20,000 shares of Common Stock on the first trading date such individual becomes Chairman and an additional Option grant for 6,000 shares of Common Stock in each subsequent year during the term of the Plan on the first trading date following the Annual Meeting of Company stockholders. Except as provided in Sections 7 and 8 below with respect to the exercisability of an Option, no adjustment shall be made to such Option to reflect a termination of service as an Eligible Director. "6. Elective Options. In addition to the Options granted under Section 5 above, an Eligible Director may make an annual election to receive either the Eligible Director's annual cash retainer or one of (a) an Option for 8,700 shares of Common Stock under this Section 6 (on the same dates as the Options granted under Section 5) in lieu of all of the Eligible Director's annual cash retainer, (b) an Option for 5,800 shares in lieu of two-thirds of the Eligible Director's annual cash retainer, or (c) an Option for 2,900 shares in lieu of one-third of the Eligible Director's annual cash retainer, otherwise payable during the period beginning on the Option grant date and ending on the next subsequent Option grant date. Each such annual election under this Section 6 shall be in writing and filed with the Secretary of the Company, shall be irrevocable, and shall be made at least six months prior to the date as of which it is to become effective. No such Option shall be granted if the Eligible Director ceases to be an Eligible Director after the date of his or her annual Option election but prior to the date as of which the Option is granted." 2. As amended hereby, the Plan is specifically ratified and reaffirmed. EX-10.8 5 5TH AMEND TO COOPER CAMERON 1995 STOCK OPTION PLAN 1 EXHIBIT 10.8 FIFTH AMENDMENT TO COOPER CAMERON CORPORATION AMENDED AND RESTATED 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS WHEREAS, COOPER CAMERON CORPORATION (the "Company") has heretofore adopted the COOPER CAMERON CORPORATION 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS (the "Plan"); and WHEREAS, the Company desires to amend the Plan in certain respects; NOW, THEREFORE, the Plan shall be amended as follows, effective as of February 12, 1998: 1. The phrase "for more than six months" shall be deleted from the second sentence of Section 7(f) of the Plan. 2. The following shall be added to Section 4 of the Plan: "Shares of Common Stock related to Options that are forfeited or terminated, expire unexercised, are settled in cash in lieu of shares of Common Stock or in a manner such that all or some of the shares of Common Stock covered by an Option are not issued to an Eligible Director, shall immediately become available for Options hereunder." 3. The following shall be added at the end of Section 7(f) of the Plan: "The Committee may provide in an Option Agreement that, if an Eligible Director pays the Option exercise price in shares of Company Common Stock, upon the date of such payment a new option shall be granted and the number of shares of Common Stock subject to such new option shall be equal to the number of shares of Common Stock tendered in payment; provided that such new option shall not be exercisable in any event after the original term of the exercised option." 4. As amended hereby, the Plan is specifically ratified and reaffirmed. EX-10.10 6 COOPER CAMERON CORP. RETIREMENT SAVINGS PLAN 1 Exhibit 10.10 COOPER CAMERON CORPORATION RETIREMENT SAVINGS PLAN AS AMENDED AND RESTATED EFFECTIVE APRIL 1, 1996 2 ii COOPER CAMERON CORPORATION RETIREMENT SAVINGS PLAN TABLE OF CONTENTS
Section Page No. - ------- -------- ARTICLE I DEFINITIONS AND CONSTRUCTION 1.1 Definitions 2 1.2 Construction 11 ARTICLE II ELIGIBILITY TO PARTICIPATE 2.1 Commencement of Participation 12 2.2 Changes in Employment Status 12 2.3 Election Form 12 ARTICLE III CONTRIBUTIONS 3.1 Basic Contributions 13 3.2 Matching Contributions 13 3.3 Rollover Contributions 13 3.4 Transferred Contributions 13 3.5 Company Retirement Contributions 14 3.6 Effect of Plan Termination or Withdrawal 14 ARTICLE IV ADMINISTRATION OF CONTRIBUTIONS 4.1 Limitations on Basic Contributions 15 4.2 Excess Elective Deferrals 17 4.3 Limitation on Matching Contributions 18 4.4 Delivery of Contributions 18 4.5 Allocation of Matching Contributions 19 4.6 Allocation of Company Retirement Contributions 19 4.7 Crediting of Contributions 19 4.8 Changes in Reduction and Deduction Authorizations 19 ARTICLE V DEPOSIT AND INVESTMENT OF CONTRIBUTIONS 5.1 Deposit of Contributions 20 5.2 Investment of Basic, Supplemental, IAR, and Rollover/Transfer Accounts 20 5.3 Election to Transfer Matching Contributions 20 5.4 Elimination of Funds 21
(i) 3 ARTICLE VI ESTABLISHMENT OF FUNDS AND MEMBERS' ACCOUNTS 6.1 Investment Responsibility 22 6.2 Establishment and Maintenance of Funds 22 6.3 Company Stock Fund 22 6.4 Cooper Stock Fund 22 6.5 Income on Trust Funds 22 6.6 Separate Accounts 23 6.7 Voting of Company Stock in the Company Stock Fund 23 ARTICLE VII VESTING 7.1 Vesting in Basic, Supplemental, Matching, and Rollover/Transfer Accounts 24 7.2 Vesting in Company Retirement Contributions 24 7.3 Forfeitures 24 7.4 Election of Former Vesting Schedule 25 7.5 Vesting Service 26 7.6 Transfers 26 7.7 Loss and Reinstatement of Years of Vesting Service 26 7.8 Finality of Determinations 27 ARTICLE VIII WITHDRAWALS WHILE EMPLOYED 8.1 Withdrawals Prior to Age 59 1/2 28 8.2 Withdrawals After Age 59 1/2 28 8.3 Form of Withdrawals 29 ARTICLE IX LOANS 9.1 Eligibility for Loan 30 9.2 Maximum Loan 30 9.3 Restrictions 30 9.4 Operation of Article 30 ARTICLE X DISTRIBUTION ON RETIREMENT OR OTHER TERMINATION OF EMPLOYMENT 10.1 Eligibility for Distribution 31 10.2 Distribution of Separate Accounts 31 10.3 Form of Distribution 34 10.4 Limitation on Commencement of Distribution 34 10.5 Restriction on Alienation 36 10.6 Payments to Incompetents or Minors 36 10.7 Commercial Annuities 36 10.8 Actuarial Equivalency 37 10.9 Eligible Rollover Distributions 37 10.10 Transfer to Cooper Cameron Salaried Plan 37 10.11 Deferral of Payments 37
(ii) 4 ARTICLE XI BENEFICIARIES AND DEATH BENEFITS 11.1 Designation of Beneficiary 38 11.2 Beneficiary in the Absence of Designated Beneficiary 38 11.3 Spousal Consent to Beneficiary Designation 38 11.4 Death Benefits From Basic, Supplemental, Matching, and Rollover/Transfer Accounts 38 11.5 Death Benefits From IAR Accounts 38 11.6 Commencement of Death Benefits 40 ARTICLE XII ADMINISTRATION 12.1 Plan Administrator 41 12.2 Authority of the Company 41 12.3 Action of the Company 41 12.4 Claims Review Procedure 42 12.5 Qualified Domestic Relations Orders 42 12.6 Indemnification 42 ARTICLE XIII AMENDMENT AND TERMINATION 13.1 Amendment 44 13.2 Limitation of Amendment 44 13.3 Termination 44 13.4 Withdrawal of an Employer 45 13.5 Corporate Reorganization 45 ARTICLE XIV ADOPTION BY SUBSIDIARIES: EXTENSION TO NEW BUSINESS OPERATIONS ARTICLE XV ESOP 15.1 Purpose 47 15.2 Suspense Fund 47 15.3 Exempt Loans 47 15.4 Limitation on Allocations of Matching Contributions 47 15.5 Allocations of Matching Contributions from the ESOP 48 15.6 Dividends on Company Stock 48 15.7 Restrictions on Company Stock 48
(iii) 5 ARTICLE XVI MISCELLANEOUS PROVISIONS 16.1 No Commitment as to Employment 49 16.2 Benefits 49 16.3 No Guarantees 49 16.4 Exclusive Benefit 49 16.5 Duty to Furnish Information 49 16.6 Merger, Consolidation, or Transfer of Plan Assets 49 16.7 Return of Contributions to Employers 49 16.8 Addenda 50 16.9 Validity of Agreement 50 ARTICLE XVII SECTION 415 LIMITATIONS 17.1 Compliance with TRA `86 51 17.2 Section 415 Definitions 51 17.3 Limitations on Allocations for Single Plan Participation 55 17.4 Limitations on Allocations for Multiple Plan Participation 55 17.5 Grandfathered Defined Benefit Plan Limitation 56 17.6 Limitations on Allocations for Defined Contribution Plan 56 17.7 Limitation for Multiple Defined Contribution Plan Participation 57 17.8 Limitation for Multiple Defined Benefit Plan Participation 58 17.9 Multiple Plans; Overall Limitations 58 ARTICLE XVIII TOP-HEAVY PLAN RULES 18.1 Application 60 18.2 Top-Heavy Definitions 60 18.3 Top-Heavy Minimum Allocation Rules 63 18.4 Top-Heavy Compensation Limitation 63 18.5 Top-Heavy Vesting Provisions 63 18.6 Top-Heavy Plan/Benefit Limitations 64 Appendix A Covered Employment Classifications of IAR Members A-1 Addenda Liberty Texas Plant AD-1 Patterson, Louisiana Plant AD-2 Ville Platte, Louisiana Plant AD-4 Houston, Texas Plant AD-5 Oklahoma City, Oklahoma (Demco) Plant AD-7 Oklahoma City, Oklahoma (Carson Machine) AD-10 Pine Bluff, Arkansas Plant AD-11
(iv) 6 COOPER CAMERON CORPORATION RETIREMENT SAVINGS PLAN WHEREAS, Cooper Cameron Corporation (the "Company") has heretofore adopted the Cooper Cameron Corporation Retirement Savings Plan, hereinafter referred to as the "Plan," for the benefit of certain of its employees; and WHEREAS, the Company desires to restate the Plan and to amend the Plan in several respects, intending thereby to provide an uninterrupted and continuing program of benefits; NOW, THEREFORE, the Plan is hereby restated in its entirety as follows with no interruption in time, effective as of April 1, 1996, except as otherwise indicated herein. ARTICLE I DEFINITIONS AND CONSTRUCTION 1.1 DEFINITIONS. The following words and phrases as used herein shall have the meanings hereinafter set forth, unless a different meaning is plainly required by the context: (1) The term "ADDENDUM" shall mean the overriding provisions which are applicable to certain Employees in accordance with the provisions of Section 16.8 and which shall constitute for all purposes a part of the Plan and in the event of conflict with any other provision of the Plan shall control. (2) The term "AFFILIATE" shall mean any member of a controlled group of corporations (as determined under Section 414(b) of the Code) of which the Company is a member; any member of a group of trades or businesses under common control (as determined under Section 414(c) of the Code) with the Company; and any member of an affiliated service group (as determined under Section 414(m) of the Code) of which the Company is a member. (3) The term "ALLOCATION MONTH" shall mean each calendar month for which an Employer makes Company Retirement Contributions in accordance with the provisions of Section 3.5. (4) The term "ALLOCATION YEAR" shall mean each Plan Year. -1- 7 (5) The term "BASIC ACCOUNT" shall mean the Separate Account of a Member to which Basic Contributions are credited in accordance with the provisions of Section 4.7. (6) The term "BASIC CONTRIBUTION" shall mean any cash or deferred arrangement contribution made to the Plan by an Employer on behalf of a Member in accordance with the provisions of Sections 2.3 and 3.1. (7) The term "BENEFICIARY" shall mean the person or persons who, in accordance with the provisions of Article XI hereof, shall be entitled to receive distribution hereunder in the event a Member or Inactive Member dies before his interest shall have been distributed to him in full. (8) The term "BREAK IN SERVICE" shall mean any Plan Year during which an Employee completes not more than 500 Hours of Service; provided, however, that for purposes of Section 7.7(b), no Employee shall incur a Break in Service solely by reason of an absence due to (i) the birth of a child of the Employee, (ii) the pregnancy of the Employee, (iii) the placement of a child with the Employee on account of the adoption of such child by such Employee, or (iv) the caring for a child of an Employee for a period beginning following the birth or placement of such child, with respect to the Plan Year in which such absence begins, if the Employee otherwise would have incurred a Break in Service or, in any other case, in the immediately following Plan Year; and provided further, that although an Employee may not receive credit for vesting or benefit accrual purposes, a Break in Service shall not be deemed to occur with respect to any layoff or sick leave not in excess of the period of time during which his seniority is retained. (9) The term "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. Reference to a section of the Code shall include such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. (10) The term "COMPANY" shall mean Cooper Cameron Corporation, its successors, and the surviving corporation resulting from any merger or consolidation of Cooper Cameron Corporation with any other corporation or corporations. (11) The term "COMPANY RETIREMENT CONTRIBUTIONS" shall mean the contributions made to the Plan by an Employer in accordance with the provisions of Section 3.5. (12) The term "COMPANY STOCK" shall mean the common stock of Cooper Cameron Corporation. (13) The term "COMPANY STOCK FUND" shall mean the investment fund established to invest in Company Stock and maintained pursuant to the provisions of Section 6.3. -2- 8 (14) The term "COMPENSATION" shall mean the compensation within the meaning of Section 415(c)(3) of the Code, subject to the provisions of Section 414(q)(6), paid during a Plan Year by the Employer to a Member while a Member, including all wages and salary, commissions and bonuses, and overtime pay and any Basic Contributions contributed under the Plan with respect to such Member during such Plan Year and elective Employer Contributions made on behalf of a Member that are not includable in gross income under Sections 125, 402(a)(8), 402(h), and 403(b) of the Code, but excluding relocation expense reimbursements (including mortgage interest differentials) or other expense allowances, fringe benefits, accrued or unused vacation pay which is paid with respect to a period following termination of employment, automobile allowance income and foreign service premiums, deferred compensation (other than Before-Tax Contributions), and allowances or any other extraordinary income, and welfare benefits. Further, notwithstanding the foregoing, in no event shall the annual Compensation of a Member taken into account under the Plan exceed the OBRA `93 annual compensation limit of $150,000, as adjusted for increases in the cost of living in accordance with the provisions of Section 401(a)(17)(B) of the Code. The cost of living in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (a "determination period") beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA `93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period and the denominator of which is 12. Compensation of a Member's "family members" shall be treated as Compensation of the Member in accordance with Section 414(q)(6) of the Code, as modified by Section 401(a)(17) of the Code. If, as a result of the application of such rules, the adjusted Compensation limitation is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this paragraph prior to the application of this limitation. (15) The term "CONTRIBUTION HOUR" shall mean an hour of active employment while an IAR Member in an employment classification listed on Appendix A for which such IAR Member is credited pursuant to an applicable Addendum for purposes of determining his Company Retirement Contributions. (16) The term "CONTRIBUTION RATE" shall mean the contribution rate set forth in each Addendum with respect to Company Retirement Contributions for the applicable Participating Unit with respect to IAR Members. (17) The term "CONTROLLED ENTITY" shall mean each corporation that is a member of a controlled group of corporations, within the meaning of Section 1563(a) of the Code determined without regard to Section 1563(a)(4) and Section 1563(e)(3)(C), of which the Company is a member, each trade or business (whether or not incorporated) with which the Company is under common control and each corporation that is a member of an affiliated service group, within the meaning of Section 414(m) of the Code, of which the Company is a member. -3- 9 (18) The term "COOPER SAVINGS PLAN" shall mean the Cooper Industries, Inc. Retirement and Savings Plan, the Cooper Industries, Inc. Savings Plan, and Cooper Industries, Inc. Stock Ownership Plan. (19) The term "COOPER STOCK FUND" shall mean the investment fund established to invest in the common stock of Cooper Industries, Inc. and maintained pursuant to the provisions of Section 6.4. (20) The term "EFFECTIVE DATE" shall mean April 1, 1996. (21) The term "ELIGIBLE EMPLOYEE" shall mean any salaried or hourly Employee of the Employer who is (i) a common law employee who is paid in United States dollars from a payroll maintained in the United States, (ii) a non-United States citizen who is a lawful, permanent resident of the United States and who is subject to United States federal income taxes on his worldwide income, or (iii) an Eligible Foreign Employee. In no event shall the term "Eligible Employee" mean (i) any person who is rendering service to an Employer solely as a director or an independent contractor, (ii) any person who is covered by a collective bargaining agreement unless such agreement specifically provides for coverage by the Plan, or (iii) any person who is a nonresident alien and who receives no earned income within the meaning of Section 911(b) of the Code from an Employer which constitutes income from sources within the United States as defined in Section 861(a)(3) of the Code, or (iv) an Employee who is a Leased Employee or who is designated, compensated, or otherwise classified by the Employer as a Leased Employee. Notwithstanding any provision of the Plan to the contrary, no individual who is designated, compensated, or otherwise classified or treated by the Employer as an independent contractor shall be eligible to become a Member of the Plan. (22) The term "ELIGIBLE FOREIGN EMPLOYEE" shall mean any individual who (i) is a citizen of the United States or a permanent, lawful resident of the United States, (ii) is an employee of an Included Foreign Affiliate, and (iii) is not covered by any other funded plan of deferred compensation under which contributions are provided by any other person, firm, or corporation with respect to the remuneration paid to such individual by the Included Foreign Affiliate. (23) The term "ELIGIBLE RETIREMENT PLAN" shall mean: (a) any individual retirement account described in Section 408(a) of the Code; (b) any individual retirement annuity described in Section 408(b) of the Code; (c) any trust maintained pursuant to a plan described in Section 414(i) of the Code that meets the requirements of Section 401(a) of the Code; and -4- 10 (d) any annuity plan described in Section 403(a) of the Code. In the case of an Eligible Rollover distribution to a beneficiary who is the Member's surviving spouse, an Eligible Retirement Plan is only an individual retirement account or individual retirement annuity described in (a) or (b) above. (24) The term "ELIGIBLE ROLLOVER DISTRIBUTION" shall mean all or any portion of a Plan distribution to a Member or a Beneficiary who is a deceased Member's surviving spouse or an alternate payee under a qualified domestic relations order who is a Member's spouse or former spouse; provided, however, that such distribution is not (i) one of a series of substantially equal periodic payments made at least annually for over a specified period of ten or more years or the life of the Member or Beneficiary or the joint lives of the Member and a designated beneficiary, (ii) a distribution to the extent such distribution is required under Section 401(a)(9) of the Code; or (iii) the portion of any distribution which is not includable in gross income (determined without regard to any exclusion of net unrealized appreciation with respect to employer securities). (25) The term "EMPLOYEE" shall mean each (A) individual employed by the Employer or a Controlled Entity and (B) Leased Worker. (26) The term "EMPLOYER" shall mean the Company or any Affiliate of the Company which adopts the Plan as herein provided so long as the Affiliate has not withdrawn from the Plan. (27) The term "EMPLOYMENT COMMENCEMENT DATE" shall mean the first date on which an Employee completes an Hour of Service. (28) The term "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. Reference to a section of ERISA shall include such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. (29) The term "FOREIGN AFFILIATE" shall mean a "foreign affiliate" as defined in Section 3121(1)(8) of the Code. (30) The term "FUND" shall mean any of the investment funds established and maintained in accordance with the provisions of Section 6.2. (31) The term "HIGHLY-COMPENSATED EMPLOYEE" prior to January 1, 1997 shall mean any Employee who during such Plan Year or during the immediately preceding Plan Year: (a) received compensation (as defined in Article XVII of the Plan without regard to Sections 125, 402(e)(3), and 402(h)(1)(B) of the Code, and in the case of contributions made pursuant to a salary reduction agreement, without regard to Section 403(b) of the -5- 11 Code), in excess of $75,000 (such dollar limitation shall be adjusted automatically in accordance with the maximum amount permitted under Code Section 414(q)); or (b) received compensation (as defined in Article XVII of the Plan without regard to Sections 125, 402(e)(3), and 402(h)(1)(B) of the Code, and in the case of contributions made pursuant to a salary reduction agreement, without regard to Section 403(b) of the Code), in excess of $50,000 (such dollar limitation shall be adjusted automatically in accordance with the maximum amount permitted under Section 414(q) of the Code) and was in the Top-Paid Group which is the group consisting of the top 20 percent of the employees when ranked by compensation paid during such year; or (c) was at any time an officer of an Affiliate and received compensation in excess of 50 percent of the amount in effect under Section 415(b)(1)(A) of the Code, except as otherwise hereinafter provided; or (d) owned directly or indirectly 5% or more of an Affiliate (so that he is a "5% owner" as defined in Section 416(i)(1) of the Code); provided, however, if an Employee was not a "Highly-Compensated Employee" during the immediately preceding Plan Year, he shall not be a Highly Compensated Employee pursuant to subparagraph (a), (b), or (c) unless he is one of the 100 Employees with the highest compensation (as defined in Article XVII of the Plan without regard to Sections 125, 402(e)(3), and 402(h)(1)(B) of the Code, and in the case of contributions made pursuant to a salary reduction agreement, without regard to Section 403(b) of the Code) for such Plan Year. For purposes of subparagraph (c) the number of employees who shall be counted as officers shall be limited as follows:
Total Number of Employees of Maximum Number of Officers the Affiliated Group to be Counted ---------------------------- -------------------------- 30 or less 3 30 - 500 10% of total number of Employees (fractions to be rounded to next highest whole number) Over 500 50
-6- 12 If the number of officers for any Plan Year exceeds the maximum number that may be counted, the officers shall be ranked in order of compensation (as defined in Article XVII of the Plan without regard to Sections 125, 402(e)(3), and 402(h)(1)(B) of the Code, and in the case of contributions made pursuant to a salary reduction agreement, without regard to Section 403(b) of the Code) for the Plan Year, and only the maximum number with the highest such compensation shall be counted as officers. If for any Plan Year no Affiliate has an officer with compensation greater than the compensation specified in subparagraph (c) above, the highest-paid officer among the Affiliates shall nevertheless be treated as a Highly-Compensated Employee. If during any Plan Year an Employee is a "family member" of a Highly-Compensated Employee described above in subparagraph (d) or of a Highly-Compensated Employee in the group consisting of the ten Highly-Compensated Employees paid the greatest compensation during the Plan Year, then such "family member" shall not be considered to be a separate Employee and the compensation paid to such "family member" and any applicable employer contribution under the Plan paid to or on behalf of such "family member" shall be treated as if it were paid to (or on behalf of) the related Highly-Compensated Employee. As used herein, the term "family member" means with respect to any Employee, the Employee's spouse, grandparent (and spouse), great grandparent (and spouse), child (and spouse), great grandchild (and spouse) and any other lineal ascendants or descendants and their spouses and for purposes of applying the limitation of Section 401(a)(17) to paragraph (14) of this Section 1.1 shall mean the spouse of any Employee and any lineal descendant thereof who has not attained age 19 before the close of the Plan Year. In addition, a former Employee shall be considered a Highly-Compensated Employee if he was a Highly-Compensated Employee at the time his employment terminated or at any time after attaining age 55. Notwithstanding the foregoing provisions of this paragraph (31), the sole purpose of this paragraph (31) is to define and apply the term Highly-Compensated Employee strictly (and only) to the extent necessary to satisfy the minimum requirements of Section 414(q) of the Code relating to "highly-compensated employees." This paragraph shall be interpreted, applied and, if and to the extent necessary, deemed modified without formal amendments of language, so as to satisfy solely the minimum requirements of Section 414(q) of the Code. From and after January 1, 1997, the term "HIGHLY-COMPENSATED EMPLOYEE" shall mean each Employee who performs services during the Plan Year for which the determination of who is highly compensated is being made (the "Determination Year") and who: (A) is a five-percent owner of the Employer (within the meaning of section 416(i)(1)(A)(iii) of the Code) at any time during the Determination Year or the twelve-month period immediately preceding the Determination Year (the "Look-Back Year"); or (B) For the Look-Back Year -7- 13 (i) receives compensation (within the meaning of section 414(q)(4) of the Code; "compensation" for purposes of this Paragraph) in excess of $80,000 (with such amount to be adjusted automatically to reflect any cost-of-living adjustments authorized by section 414(q)(1) of the Code) during the Look-Back Year; and (ii) if the Committee elects the application of this clause in such Look-Back Year, is a member of the top 20% of Employees for the Look-Back Year (other than Employees described in section 414(q)(5) of the Code) ranked on the basis of compensation received during the year. For purposes of the preceding sentence, (i) all employers aggregated with the Employer under section 414(b), (c), (m), or (o) of the Code shall be treated as a single employer, (ii) a former Employee who had a separation year (generally, the Determination Year such Employee separates from service) prior to the Determination Year and who was an active Highly Compensated Employee for either such separation year or any Determination Year ending on or after such Employee's fifty-fifth birthday shall be deemed to be a Highly Compensated Employee, and (iii) the Committee may elect, in accordance with the provisions of applicable Treasury regulations, rulings and notices, to make the Look-Back Year calculation for a Determination Year on the basis of the calendar year ending with or within the applicable Determination Year (or, in the case of a Determination Year that is shorter than twelve months, the calendar year ending with or within the twelve-month period ending with the end of the applicable Determination Year). To the extent that the provisions of this Paragraph are inconsistent or conflict with the definition of a "highly compensated employee" set forth in section 414(q) of the Code and the Treasury regulations thereunder, the relevant terms and provisions of section 414(q) of the Code and the Treasury regulations thereunder shall govern and control. (32) The term "HOUR OF SERVICE" shall mean an hour for which an employee is paid, or entitled to be paid, with respect to the performance of duties for an Employer or a Controlled Entity either as regular wages, salary or commissions, or pursuant to an award or agreement requiring an Employer or a Controlled Entity to pay back wages. Hours under this paragraph shall be calculated and credited pursuant to Section 2530.200b-2(b) and (c) of the Department of Labor regulations which are incorporated herein by reference. (33) The term "IAR ACCOUNT" shall mean the Separate Account of a Member to which the Company Retirement Contributions are credited in accordance with the provisions of Section 4.7. (34) The term "IAR MEMBER" shall mean an Employee who is employed in an employment classification and facility listed on Appendix D and to whom Company Retirement Contributions are allocated pursuant to the provisions of Section 3.5. -8- 14 (35) The term "INACTIVE MEMBER" shall mean any Member who ceases to be an Employee and whose Separate Accounts have not been distributed in accordance with the provisions of the Plan. (36) The term "INCLUDED FOREIGN AFFILIATE" means a "Foreign Affiliate" with respect to which there shall be in effect between the Company and the Secretary of the Treasury or his delegate an agreement pursuant to Section 3121(1) of the Code, whereby coverage under Title II of the federal Social Security Act has been extended to service performed outside the United States by United States citizens employed by such "Foreign Affiliate." (37) The term "LEASED WORKER" shall be a person (other than a person who is an employee without regard to this paragraph (37)) engaged in performing services for a Controlled Entity (the "recipient") pursuant to an agreement between the recipient and any other person ("Leasing Organization") who meets the following requirements: (a) he has performed services for one or more Controlled Entities (or for any other "related persons" determined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least one year; (b) such services are of a type historically performed in the business field of the recipient, in the United States, by employees (or, from and after January 1, 1997, such services are performed under primary direction or control by the Employer or a Controlled Entity); and (c) he is not participating in a "safe harbor plan" of the Leasing Organization. (For this purpose, a "safe harbor plan" is a plan that satisfies the requirements of Section 414(n)(5) of the Code, which will generally be a money purchase pension plan with a non-integrated employer contribution rate of at least ten percent of compensation and which provides for immediate participation and full and immediate vesting). A person who is a Leased Worker during any taxable year beginning after December 31, 1983, shall also be considered an employee of a Controlled Entity during such period (and solely for the purpose of determining length of service for participation and vesting purposes, and shall also be considered to have been an employee for any earlier period in which he was a Leased Worker) but shall not be a Member and shall not otherwise be eligible to become covered by the Plan during any period in which he is a Leased Worker. Notwithstanding the foregoing, the sole purpose of this paragraph (37) is to define and apply the term "Leased Worker" strictly (and only) to the extent necessary to satisfy the minimum requirements of Section 414(n) of the Code relating to "leased employees." This paragraph (37) shall be interpreted, applied and, if and to the extent -9- 15 necessary, deemed modified without formal amendment of language, so as to satisfy solely the minimum requirements of Section 414(n) of the Code. (38) The term "MATCHING ACCOUNT" shall mean the Separate Account of a Member to which Matching Contributions are credited in accordance with the provisions of Section 4.7. (39) The term "MATCHING CONTRIBUTION" shall mean the contributions which an Employer contributes to the Plan in accordance with the provisions of Section 3.2. (40) The term "MEMBER" shall mean an Eligible Employee who participates in the Plan in accordance with the provisions of Article II. (41) The term "PARTICIPATING UNIT" shall mean an employment unit or a location of an Employer to which the Plan is extended. (42) The term "PAY PERIOD" shall mean the periodic payroll period for which a Member receives compensation from an Employer. (43) The term "PERMANENT AND TOTAL DISABILITY" shall mean a physical or mental condition which has resulted in an Employee being eligible for benefits under the Employer's long-term disability income plan. An Employee shall cease to be Permanently and Totally Disabled for purposes of the Plan as of the date he ceases to be eligible for benefits under the Employer's long-term disability income plan. (44) The term "PLAN" shall mean the profit-sharing plan set forth herein, which is called the "Cooper Cameron Corporation Retirement Savings Plan," with all amendments, modifications, and supplements hereafter made. (45) The term "PLAN YEAR" shall mean the period from January 1, 1996 to December 30, 1996, and thereafter each twelve-month period beginning each December 31 and terminating each subsequent December 30. (46) The term "REEMPLOYMENT DATE" shall mean the first date on which an Employee completes an Hour of Service after a Severance Date. (47) The term "RETIREMENT AGE" shall mean age 65 unless otherwise specified in an Addendum. (48) The term "ROLLOVER/TRANSFER ACCOUNT" shall mean the Separate Account of a Member to which Rollover Contributions or Transfer Contributions are credited in accordance with the provisions of Section 3.3 or 3.4. (49) The term "ROLLOVER CONTRIBUTION" shall mean any contribution made to the Plan by a Member in accordance with the provisions of Section 3.3 and described in Section 402(c), 403(a)(4), 403(b)(8), or 408(d)(3)(A) of the Code. -10- 16 (50) The term "SEPARATE ACCOUNT" shall mean any of the accounts established and maintained in accordance with the provisions of Section 6.6 by the Company which reflects the interest of the Basic Account, Supplemental Account, Matching Account, IAR Account, and Rollover/Transfer Account of a Member. (51) The term "SEVERANCE DATE" shall mean the later of (a) the date on which contributions to the Plan on behalf of a person cease, or (b) the date on which an Employee retires, becomes totally and permanently disabled, dies, or otherwise terminates employment; provided, however, that if an Employee is absent from employment while in active service in the Armed Forces of the United States, his Severance Date shall be the date on which he terminated his employment, unless he returns to employment with an Employer or a Controlled Entity during the time period prescribed by federal law; and provided further, that no Employee shall incur a Severance Date until the second anniversary of the first date on which such Employee is absent from employment with an Employer or a Controlled Entity for maternity or paternity reasons. For purposes of this paragraph, an absence for maternity or paternity reasons means an absence due to the pregnancy of the Employee, the birth of a child of the Employee, the placement of a child with the Employee in connection with the adoption of such child by the Employee, or the caring of such child for a period beginning immediately following such birth or placement. Notwithstanding the foregoing, if an Employee retires or dies, or his employment otherwise is terminated during a period of absence from employment for any reason other than retirement or termination, his Severance Date shall be the date of such retirement, death, or other termination of employment. In any case where an Employee receives severance pay upon his termination of active employment as an Employee, the Employee's Severance Date shall be the date after his termination of active employment as an Employee and prior to any resumption of such active employment on which the earlier occurs: (i) his death, or (ii) the date on which he is last paid severance pay. (52) The term "SUPPLEMENTAL ACCOUNT" shall mean the Separate Account for each Member which is credited with his Supplemental Contributions, if any. (53) The term "SUPPLEMENTAL CONTRIBUTION" shall mean any contribution made to the Plan prior to April 1, 1996, by a Member as a "Supplemental Contribution" in accordance with the provisions of the Plan in effect prior to April 1, 1996. (54) The term "TRANSFERRED CONTRIBUTIONS" shall mean any assets which are transferred to the Trustee of the Plan in accordance with the provisions of Section 3.4. (55) The term "TRUST" shall mean the trust established under the Trust Agreement to hold and invest contributions made under the Plan. (56) The term "TRUST AGREEMENT" shall mean the agreement between the Company and the Trustee establishing the Trust. -11- 17 (57) The term "TRUSTEE" shall mean the trustee or trustees qualified and acting under the Trust Agreement at any time. (58) The term "VALUATION DATE" shall mean each business day for purposes of the New York Stock Exchange of each year. (59) The term "VESTING SERVICE" shall mean the period of employment used in determining a Member's vested interest in his IAR Account in accordance with the provisions of Sections 7.5, 7.6, and 7.7. 1.2 CONSTRUCTION. Where necessary or appropriate to the meaning hereof, the singular shall be deemed to include the plural and the masculine pronoun to include the feminine. ARTICLE II ELIGIBILITY TO PARTICIPATE 2.1 COMMENCEMENT OF PARTICIPATION. Except as specified otherwise in an applicable Addendum, each Eligible Employee shall become a Member and, if applicable, an IAR Member and participate in the Plan as of his Employment Commencement Date. 2.2 CHANGES IN EMPLOYMENT STATUS. If a Member ceases to be an Eligible Employee but continues in the employment of an Employer as an Employee he shall continue as a Member until his participation is otherwise terminated in accordance with the provisions of the Plan; provided, however, that such Member shall share in Matching Contributions for any month of such continued participation only to the extent and on the basis of his Basic Contributions made during such month; and provided further that each Member who is an IAR Member shall share in Company Retirement Contributions for any month of such continued participation only to the extent and on the basis of his Contribution Hours during such month. If a Member ceases to be an Eligible Employee and ceases to be an Employee but continues in the employment of an Employer or a Controlled Entity, he shall become an Inactive Member until his participation in the Plan is otherwise terminated in accordance with the provisions of the Plan or he again becomes an Employee and an active Member. 2.3 ELECTION FORM. Each Member shall file with his Employer a written election in accordance with procedures established by the Company with respect to his participation in the Plan which shall contain his authorization for his Employer to reduce his Compensation in order to make Basic Contributions on his behalf pursuant to the provisions of Section 3.1 -12- 18 and his election as to the investment of his Basic Contributions pursuant to the provisions of Section 5.2; provided, however, that such election must be filed with his Employer at least 20 days prior to the first day of the payroll period as of which he is eligible to make Basic Contributions unless a shorter period of time is acceptable to the Company. ARTICLE III CONTRIBUTIONS 3.1 BASIC CONTRIBUTIONS. Commencing with the date as of which he becomes a Member, each Member may elect to defer an integral percentage of from 1% to 16% (or such lesser percentage as may be prescribed from time to time by the Company) of his Compensation for a Plan Year by having his Employer contribute the amount so deferred to the Plan; provided, however, that in no event shall such Basic Contributions when added to the elective deferrals (within the meaning of Section 402(g) of the Code) under all other plans, contracts, and arrangements of the Company or any Controlled Entity on behalf of any Member for any calendar year exceed $9,500 (or such higher dollar limit as shall be in effect for such calendar year in accordance with the adjusted factor prescribed under Section 402(g)(5) and 415(d) of the Code). If a Member elects to have such Basic Contributions made on his behalf, his Compensation shall be reduced by the percentage he elects pursuant to the terms of the Compensation reduction authorization described in Section 2.3 or 4.8. Unless specifically provided otherwise in the Plan, each Member who is an Eligible Employee may elect to have Basic Contributions made on his behalf to the Plan. Notwithstanding the foregoing provisions of this Section 3.1, Basic Contributions made with respect to a Plan Year on behalf of Highly Compensated Employees shall not exceed the limitations set forth in Section 4.1. 3.2 MATCHING CONTRIBUTIONS. Each Employer shall cause to be paid to the Trustee as its Matching Contribution hereunder for each month an amount which equals the sum of (i) 100 percent of the Basic Contributions for such month which are attributable to the first three percent of the Compensation of each Member, and (ii) 50 percent of the Basic Contributions for such month which are attributable to amounts in excess of three percent, but not in excess of six percent, of the Compensation of each Member. -13- 19 3.3 ROLLOVER CONTRIBUTIONS. With the approval of the Company and in accordance with procedures established by the Company, a Member may elect to make a Rollover Contribution to the Plan by delivering, or causing to be delivered, to the Trustee the assets in cash which constitute such Rollover Contribution at such time or times and in such manner as shall be specified by the Company. Upon receipt by the Trustee, such assets shall be credited to a Rollover/Transfer Account established on behalf of such Member and shall be deposited in the Fund or Funds selected by the Member as indicated on his investment election filed with the Company by the Member. Such election shall specify a combination of investment selections among such Funds, in increments of integral percentages which, in the aggregate, equal 100 percent. A Rollover Contribution by a Member pursuant to this Section 3.3 shall not be deemed to be a contribution of such Member for any purpose of the Plan and shall be fully vested in the Member at all times. 3.4 TRANSFERRED CONTRIBUTIONS. The Company may cause the transfer to the Trustee of funds representing the vested account balances (hereinafter referred to as "Transferred Contributions") of Members held by a funding agent of a tax-qualified plan (hereinafter referred to as a "transferor plan") in which such Members previously participated; provided, however, that (i) such transfer shall be made at such time or times and in such manner as shall be specified by the Company in accordance with procedures established by the Company; (ii) no such transfer shall be permitted from a transferor plan on behalf of a Member who was at any time a five percent owner of the employer maintaining such transferor plan; and (iii) no portion of such transfer shall be composed of assets attributable to deductible employee contributions. The Trustee shall credit the Rollover/Transfer Account of any Member on whose behalf such funds were transferred and shall deposit such funds in the Fund or Funds selected by the Member as indicated on his investment election filed with his Employer by such Member. Such election shall specify a combination of investment selections among the Funds, in increments of integral percentages which, in the aggregate, equal 100 percent. The portion of the Rollover/Transfer Account of a Member attributable to Transferred Contributions shall be fully vested in such Member at all times. 3.5 COMPANY RETIREMENT CONTRIBUTIONS. Each Employer shall cause to be paid to the Trustee as its Company Retirement Contribution hereunder for each month an amount equal to the sum of the product of each Participating Unit IAR Member's Contribution Hours during each Pay Period that ends within such month multiplied by the applicable Contribution Rate minus the forfeitures applicable to such Participating Unit pursuant to Section 7.3. -14- 20 3.6 EFFECT OF PLAN TERMINATION OR WITHDRAWAL. Notwithstanding any other provision of the Plan to the contrary, the termination of the Plan or the withdrawal of an Employer from the Plan shall terminate the liability of the Employers or such Employer, respectively, to make further Matching Contributions and Company Retirement Contributions hereunder. ARTICLE IV ADMINISTRATION OF CONTRIBUTIONS 4.1 LIMITATIONS ON BASIC CONTRIBUTIONS. Notwithstanding any other provision of the Plan to the contrary, the Company shall take such action as it deems appropriate to limit the amount of Basic Contributions under the Plan made on behalf of each Highly Compensated Employee for each Plan Year to the extent necessary to insure that the actual deferral percentage requirement under Section 401(k) of the Code is not exceeded. This Section 4.1 shall be interpreted, applied, and to the extent necessary, deemed modified without formal amendment thereto so as to satisfy solely the minimum requirements of Section 401(k) of the Code. Consequently, in the event during any Plan Year the Basic Contributions made on behalf of Highly Compensated Employees exceed the greater of the following (calculated to the nearest 1/100th of one percent), calculating the actual deferral ratio separately for each Member who is a participant in the Plan as follows: (i) the actual deferral percentage of the non-Highly Compensated Employees multiplied by 1.25, or (ii) the actual deferral percentage of the non-Highly Compensated Employees multiplied by 2.0; provided, however, that the actual deferral percentage for Highly Compensated Employees does not exceed the actual deferral percentage of the non-Highly Compensated Employees by more than 2 percent (hereinafter referred to as the "401(k) test"), the following steps shall be taken by the Company to meet the requirements of said Section 401(k). For any Highly Compensated Employee who has a family member aggregated with him, any amount reduced shall be prorated in direct proportion to the Basic Contributions. (a) The Company shall reduce or suspend all Basic Contributions of each Highly Compensated Employee for the remainder of the Plan Year, in such amount as is required for the 401(k) test to be met. Any such reduction shall be made by reducing uniformly the Basic Contributions for those Highly Compensated Employees who elected the highest contribution percentage for the Plan Year in 1/100ths of one percentage point until their contribution percentage equals the contribution percentage of Highly Compensated Employees with the next highest contribution -15- 21 percentage and the 401(k) test is met. If the 401(k) test still is not met, such procedure shall be repeated and the contribution percentages of the Highly Compensated Employees shall be reduced uniformly in order of actual contribution percentages beginning with the highest of such percentages, until the 401(k) test is met. (b) To the extent that the 401(k) test is not met after the application of paragraph (a) above, the Company shall distribute from the Basic Contribution Account of each Member who is a Highly Compensated Employee and who made Basic Contributions during the Plan Year to such Participant such amount (plus income allocable thereto) as is required for the 401(k) test to be met; provided, however, that any previous distribution of Basic Contributions with respect to a Highly Compensated Employee for his taxable year ending with or within the Plan Year shall be deemed to have been a distribution of excess Basic Contributions for the purpose of this Section (and will therefore reduce the amount distributable under this Section). If such Basic Contributions are distributed more than 2 1/2 months after the end of such Plan Year, an excise tax equal to 10 percent of such excess Basic Contributions will be imposed on the Employer. Notwithstanding the foregoing, Basic Contributions will be treated as Annual Additions for purposes of Article XVII of the Plan. Excess Basic Contributions shall be allocated to Highly Compensated Employees who are subject to the family member aggregation rules of Section 414(q)(6) of the Code in accordance with regulations under such Section and Section 401(k) of the Code. Such amounts shall be distributed to all affected Highly Compensated Employees by no later than the March 15th following the Plan Year in which such contributions were made, under the following method (which method may be modified by the Company to comply with Treasury Regulations prescribed under Section 401(k)(8) of the Code): An amount of Basic Contributions for those Highly Compensated Employees who elected the highest actual deferral percentage for the Plan Year shall be distributed to such Employees in 1/100ths of one percentage point until the 401(k) test is met. If the 401(k) test still is not met, such procedure shall be repeated and the Basic Contributions of the Highly Compensated Employees shall be distributed so as to reduce the actual deferred percentage of such Highly Compensated Employees in order of actual contribution percentages beginning with the highest of such percentages, until the 401(k) test is met. As used herein, "actual deferral percentage" means for each specified group of Members, the average percentage for the group that is derived by calculating separately for each Member who is a participant in the Plan: (1) Basic Contributions allocated to his Separate Account for the Plan Year, divided by -16- 22 (2) Such Member's compensation as defined in Paragraph 1.1(14) of Section 1.1 for the Plan Year, as determined before giving effect to any Eligible Compensation reduction agreement. Notwithstanding any other provision to the contrary, any excess Basic Contributions distributed to any Member shall be included in the 401(k) test. (iii) For purposes of the 401(k) test, the following rules shall apply: (a) The Plan will take into account the actual deferral ratios of all Eligible Employees for purposes of the actual deferral percentage (ADP) test in Section 401(k). For this purpose, an Eligible Employee is any Employee who is directly or indirectly eligible to make a cash or deferred election under the Plan for all or a portion of a Plan Year and includes: an Employee who would be a Member but for the failure to make required contributions; an Employee whose eligibility to make elective contributions has been suspended because of an election (other than certain one-time elections) not to participate, a distribution, or a loan; and an Employee who cannot defer because of the Section 415 limits on annual additions. In the case of an Eligible Employee who makes no elective contributions, the deferral ratio that is to be included in determining the ADP is zero. (b) A Basic Contribution will be taken into account under the actual deferral percentage test of Section 401(k)(3)(A) of the Code for a Plan Year only if it relates to compensation that either would have been received by the Member in the Plan Year (but for the deferral election) or is attributable to services performed by the Member in the Plan Year and would have been received by the Member within 2 1/2 months after the close of the Plan Year (but for the deferral election). (c) A Basic Contribution will be taken into account under the actual deferral percentage test of Section 401(k)(3)(A) of the Code for a Plan Year only if it is allocated to the Member as of a date within the Plan Year. For this purpose, a Basic Contribution is considered allocated as of a date within a Plan Year if the allocation is not contingent on participation or performance of services after such date and the Basic Contribution is actually paid to the trust no later than 12 months after the Plan Year to which the contribution relates. (d) For purposes of determining whether the Plan satisfies the actual deferral percentage test of Section 401(k), all elective contributions -17- 23 that are made under two or more plans that are aggregated for purposes of Section 401(a)(4) or 410(b) (other than Section 410(b)(12)(A)(ii) are to be treated as made under a single plan and that if two or more plans are permissively aggregated for purposes of Section 401(k), the aggregated plans must also satisfy Sections 401(a)(4) and 410(b) as though they were a single plan. Plus, however, a plan that benefits a unit of Employment covered by a collective bargaining agreement is treated as comprising a separate plan (i.e., not aggregated). (e) In calculating the actual deferral percentage for purposes of Section 401(k), the actual deferral ratio of a Highly Compensated Employee will be determined by treating all cash or deferred arrangements under which the Highly Compensated Employee is eligible (other than those that may not be permissively aggregated as a single arrangement). However, allocations made to a collective bargaining plan and made to plan (not collective bargained) will be treated as two separate arrangements. However, allocations made to an ESOP and non-ESOP plan will be treated as two separate arrangements. (f) The amount of excess contributions to be distributed shall be reduced by excess deferrals previously distributed for the taxable year ending in the same Plan Year and excess deferrals to be distributed for a taxable year will be reduced by excess contributions previously distributed for the plan beginning in such taxable year. 4.2 EXCESS ELECTIVE DEFERRALS. If a Member who had Basic Contributions made on his behalf for a Plan Year files with the Company, within the time limit prescribed by the Company after the end of such Plan Year, a written statement, on a form acceptable to the Company, that he has elective deferrals within the meaning of Section 402(g) of the Code for the taxable year in excess of the dollar limitation on elective deferrals in effect for such taxable year, and specifying the amount of such excess the Member claims as allocable to the Plan, the amount of such excess, adjusted for income or loss attributable to such excess elective deferral, shall be distributed to the Member by April 15 of the year following the year of the excess elective deferral and Matching Contributions thereon shall be forfeited. Distributions pursuant to this Section 4.2 shall be made proportionately from the Separate Accounts to which Basic Contributions were made for such Plan Year. -18- 24 4.3 LIMITATION ON MATCHING CONTRIBUTIONS. Notwithstanding any other provision of the Plan to the contrary, the Company shall take such action as it deems appropriate to limit the amount of Matching Contributions and qualified nonelective contributions made by or on behalf of each Highly Compensated Employee each Plan Year to the Plan to the extent necessary to insure that the contribution percentage requirement under Section 401(m) of the Code is not exceeded. Such Code Section and regulations relating thereto, including the regulation regarding the Multiple Use Test, are hereby incorporated in the Plan by reference. If the aggregate amount of Matching Contributions and qualified nonelective contributions for the Plan Year made by or on behalf of Members who are Highly Compensated Employees exceeds the maximum amount permitted under the limits of this Section 4.3 (determined by reducing contributions on behalf of Highly Compensated Employees in order of contribution percentages as defined in Section 401(m)(3) of the Code beginning with the highest of such percentages) then the amount of such excess (hereinafter referred to as "Excess Aggregate Contributions"), plus any income or minus any loss allocable thereto, shall be forfeited to the extent not vested or, if vested, distributed no later than the last day of the succeeding Plan Year to the Members on whose behalf such Excess Aggregate Contributions were made. Corrections to the maximum amount shall be made by (i) reducing the actual contribution ratio (ACR) of the Highly Compensated Employee with the highest ACR to the extent necessary to cause such ratio to equal the ACR of the Highly Compensated Employee with the next highest ratio; and (ii) by repeating this process until the ACP test is satisfied. If a Highly Compensated Employee's ACR ratio is determined under the family aggregation rules, the amount of excess aggregate contributions shall be made as follows: the ACR is reduced in accordance with the "leveling" method described in Section 1.401(m)-1(e)(2) of the regulations and the excess aggregate contributions are allocated among the family members in proportion to the contributions of each family member that have been combined. The amount of Excess Aggregate Contributions to be distributed to each such Member shall be determined on the basis of the portion, if any, of the Excess Aggregate Contributions attributable to each of such Members. Distribution of the portion of Excess Aggregate Contributions allocable to a Member under the Cooper Savings Plan shall be made from contributions for the Plan Year allocated to the Member's Matching Account. The amount of any income or loss allocable to Excess Aggregate Contributions shall be determined by the Company in accordance with applicable rules and regulations. Notwithstanding any distributions pursuant to the foregoing provisions, Excess Aggregate Contributions shall be treated as Annual Additions for purposes of Article XVII. Distributions pursuant to this Section 4.3 shall be made proportionately from Separate Accounts to which Excess Aggregate Contributions were made for such Plan Year. -19- 25 4.4 DELIVERY OF CONTRIBUTIONS. Each Employer shall cause to be delivered to the Trustee all Basic, Matching, Company Retirement, Rollover Contributions, and Transferred Contributions made in accordance with the provisions of Article III as soon as reasonably practicable; provided, however, that Basic Contributions elected by each Member shall be deducted from his Compensation for each payroll period and shall be paid by the Employer to the Trust as of the earliest date on which such contributions can reasonably be segregated from the Employer's general assets; and further provided, however, that in no event shall such date occur later than the fifteenth (15th) business day of the month following the month in which such contribution amounts would otherwise have been payable to the Member in cash. 4.5 ALLOCATION OF MATCHING CONTRIBUTIONS. The Matching Contribution of an Employer for any month shall be allocated as of the date such contribution is received by the Trust to the Matching Accounts of the Members for whom such contribution is made. 4.6 ALLOCATION OF COMPANY RETIREMENT CONTRIBUTIONS. The Company Retirement Contributions of an Employer for any month shall be allocated as of the date such contribution is received by the Trust to the IAR Accounts of the Members for whom such contribution is made. 4.7 CREDITING OF CONTRIBUTIONS. Subject to the provisions of Article VII, contributions made to the Plan shall be credited to the Separate Accounts of a Member in the following manner: (a) The amount of Basic Contributions made on behalf of a Member shall be credited to such Member's Basic Account as of the date such contribution is received by the Trust and shall be invested in the Fund or Funds selected by the Member in accordance with the provisions of Section 5.2. (b) The amount of Matching Contributions allocated to a Member shall be credited to such Member's Matching Account as of the date such contribution is received by the Trust and shall be invested in the Company Stock Fund subject to the provisions of Section 5.3. (c) The amount of Company Retirement Contributions allocated to an IAR Member shall be credited to such Member's IAR Account as of the date such contribution is received by the Trust and shall be invested in the Fund or Funds selected by the Member in accordance with the provisions of Section 5.2. -20- 26 4.8 CHANGES IN REDUCTION AND DEDUCTION AUTHORIZATIONS. Effective as of any payroll period, any Member may suspend his Basic Contributions or change the percentage of his Compensation which is contributed as Basic Contributions by filing with his Employer an amended Compensation reduction authorization, or an amended payroll deduction authorization, at least 20 days prior to the first day of such payroll period, unless a shorter period of time is acceptable to the Company. Notwithstanding the foregoing, any Member who changes the percentage of his contributions shall be limited in the following manner: (a) he may only select a percentage of his Compensation which does not exceed the applicable limitations set forth in Section 3.1; and (b) he may only change the percentage of his Basic Contributions once in any three-month period. ARTICLE V DEPOSIT AND INVESTMENT OF CONTRIBUTIONS 5.1 DEPOSIT OF CONTRIBUTIONS. Any Basic Contributions of a Member which are credited to such Member's Basic Account and any Company Retirement Contributions which are credited to an IAR Member's IAR Account shall be deposited by the Trustee in such Fund or Funds selected by each Member in accordance with the provisions of Section 5.2. Any Matching Contributions which are credited to a Member's Matching Account shall be deposited by the Trustee in the Company Stock Fund. The Trustee shall have no duty to collect or enforce payment of contributions or inquire into the amount or method used in determining the amount of contributions, and shall be accountable only for contributions received by it. 5.2 INVESTMENT OF BASIC, SUPPLEMENTAL, IAR, AND ROLLOVER/TRANSFER ACCOUNTS. (a) Each Member shall designate, in accordance with the procedures established by the Company, the manner in the amounts allocated to his Basic, IAR, and Rollover/Transfer Accounts shall be invested from among the Funds made available from time to time by the Company pursuant to Section 6.2; provided, however, that no such designation may be made to the Cooper Stock Fund or the Cooper Debenture Fund. A Member may designate one of such Funds for all of the contributions to his Basic, IAR, and Rollover/Transfer Accounts, or he may split the investment of the amounts allocated to such Accounts among such Funds in such increments as the Company may prescribe. If a Member fails to make a designation of 100% of the contributions to his Basic, IAR, and Rollover/Transfer Accounts, such nondesignated contributions shall be invested in the Fund or Funds designated by the Company from time to time in a uniform and nondiscriminatory manner. -21- 27 (b) A Member may change his investment designation for future contributions to be allocated to his Basic, IAR, and Rollover/Transfer Accounts; provided, however, that no such designation may be made to the Cooper Stock Fund or the Cooper Debenture Fund. Any such change shall be made in accordance with the procedures established by the Company, and the frequency of such changes may be limited by the Company. (c) A Member or Inactive Member may convert his investment designation with respect to amounts already allocated to his (i) Basic, Supplemental, IAR, and Rollover/Transfer Accounts that are invested in one of the Funds or (ii) Matching Account that are invested in one of the Funds, if the provisions of Section 5.3 are applicable; provided, however, that such conversion may be made only to one or more of those Funds made available by the Company pursuant to Section 6.2; and, provided further that no such conversion may be made to the Cooper Stock Fund or the Cooper Debenture Fund. Any such conversion shall be made in accordance with the procedures established by the Company, and the frequency of such conversions may be limited by the Company. 5.3 ELECTION TO TRANSFER MATCHING CONTRIBUTIONS. A Member or Inactive Member who has attained age 55 may elect, in accordance with procedures established by the Company, to irrevocably transfer any integral percentage of the amounts in his Matching Account that are invested in the Company Stock Fund (or in the Cooper Stock Fund prior to its liquidation as of November 29, 1996, pursuant to Section 6.4 of the Plan), as applicable, to one or more of the Funds made available by the Company pursuant to Section 6.2; provided that no such transfer may be made to the Cooper Stock Fund or the Cooper Debenture Fund. 5.4 ELIMINATION OF FUNDS. Notwithstanding any provision in this Article V to the contrary, in the event any one or more of the Funds is eliminated as an investment fund by the Company, each Member and Inactive Member who has an investment election in effect which designates such investment fund for the investment of amounts allocated to such individual's Separate Accounts, shall designate a continuing Fund or Funds made available by the Company pursuant to Section 6.2 for the investment of such amounts; provided, however, that in the event such individual fails to make such a designation, such contributions or amounts shall be invested in a the Fund or Funds designated by the Company in a uniform and nondiscriminatory manner. -22- 28 ARTICLE VI ESTABLISHMENT OF FUNDS AND MEMBERS' ACCOUNTS 6.1 INVESTMENT RESPONSIBILITY. The Plan is intended to constitute a plan described in Section 404(c) of ERISA and DOL Regs. Section 2550.404c-1 and insofar as the Plan complies with said Section 404(c), Plan fiduciaries shall be relieved of liability for any losses which are the direct result of investment instructions given by Members, Inactive Members, and Beneficiaries. 6.2 ESTABLISHMENT AND MAINTENANCE OF FUNDS. The Company shall cause at least three Funds, other than the Company Stock Fund and the Cooper Stock Fund, to be established and maintained at all times. Each such Fund shall be diversified and shall have different risk and return characteristics from the other Funds. Any Fund which invests primarily in investments with restrictions regarding Funds to which investment transfers may be made or to which a minimum investment period is applicable shall not be considered as one of such requisite three Funds. Effective November 29, 1996, the Cooper Stock Fund was liquidated pursuant to Section 6.4. 6.3 COMPANY STOCK FUND. Except as specifically provided otherwise, the assets of the Company Stock Fund shall be invested by the Trustee primarily in Company Stock. The Trustee shall receive Company Stock from the Company or purchase Company Stock in the market; provided, however, that any such purchase shall be made only in exchange for fair market value as determined by the Trustee. The Company Stock Fund may, from time to time, be invested in a short-term investment fund managed by the Trustee. 6.4 COOPER STOCK FUND. The assets of the Cooper Stock Fund shall remain invested by the Trustee in the common stock of Cooper Industries, Inc. until the Cooper Stock Fund is liquidated by the Trustee in accordance with the directions of the Company. The Cooper Stock Fund may, from time to time, be invested in a short-term investment fund managed by the Trustee. The Company may direct the Trustee to, and upon such direction, the Trustee shall, liquidate the Cooper Stock Fund in an orderly and nondiscriminatory manner. Upon such liquidation, assets of each Member's Separate Accounts that are invested in the Cooper Stock Fund shall be invested in accordance with the provisions of Section 5.4. The Company directed that effective November 29, 1996, the Cooper Stock Fund be liquidated in an orderly and nondiscriminatory manner. Upon such liquidation, assets of each Member's Separate Accounts that were invested in the Cooper Stock Fund were invested in accordance with the provisions of Section 5.4. 6.5 INCOME ON TRUST FUNDS. Unless specifically provided otherwise in the Plan or the Trust Agreement, any dividends, interest, distributions, or other income received by the Trustee in respect of a Fund shall be reinvested by the Trustee in the Fund with respect to which such income was received by it. -23- 29 6.6 SEPARATE ACCOUNTS. Each Member shall have established in his name Separate Accounts which shall be dependent upon the manner in which the assets of his Basic, Supplemental, Matching, IAR, and Rollover/Transfer Accounts are invested. 6.7 VOTING OF COMPANY STOCK IN THE COMPANY STOCK FUND. Each Member or Beneficiary who has shares of Company Stock allocated to his Matching Account shall be a named fiduciary with respect to the voting of Company Stock held thereunder and shall have the following powers and responsibilities: (a) Prior to each annual or special meeting of the shareholders of the Company, the Company shall cause to be sent to each Member and Beneficiary who has Company Stock allocated to his Matching Account and invested in the Company Stock Fund under the Plan a copy of the proxy solicitation material therefor, together with a form requesting confidential voting instructions, with respect to the voting of such Company Stock as well as the voting of Company Stock for which the Trustee does not receive instructions. Each such Member and/or Beneficiary shall instruct the Trustee to vote the number of such uninstructed shares of Company Stock equal to the proportion that the number of shares of Company Stock allocated to his Matching Account and invested in the Company Stock Fund bears to the total number of shares of Company Stock in the Plan for which instructions are received. Upon receipt of such a Member's or Beneficiary's instructions, the Trustee shall then vote in person, or by proxy, such shares of Company Stock as so instructed. (b) The Company shall cause the Trustee to furnish to each Member and Beneficiary who has Company Stock allocated to his Matching Account and invested in the Company Stock Fund under the Plan notice of any tender or exchange offer for, or a request or invitation for tenders or exchanges of, Company Stock made to the Trustee. The Trustee shall request from each such Member and Beneficiary instructions as to the tendering or exchanging of Company Stock allocated to his Matching Account and invested in the Company Stock Fund and the tendering or exchanging of Company Stock for which the Trustee does not receive instructions. Each such Member shall instruct the Trustee with respect to the tendering or exchanging of Company Stock for which the Trustee does not receive instructions. Each such Member shall instruct the Trustee with respect to the tendering or exchanging of the number of such uninstructed shares of Company Stock equal to the proportion that the number of the shares of Company Stock allocated to his Matching Account and invested in the Company Stock Fund bears to the total number of shares of Company Stock in the Plan for which instructions are received. The Trustee shall provide Members and Beneficiaries with a reasonable period of time in which they may consider any such tender or exchange offer for, or request or invitation for tenders or exchanges of, Company Stock made to the Trustee. Within the time specified by the Trustee, the Trustee shall tender or exchange such Company Stock as to -24- 30 which the Trustee has received instructions to tender or exchange from Members and Beneficiaries. (c) Instructions received from Members and Beneficiaries by the Trustee regarding the voting, tendering, or exchanging of Company Stock shall be held in strictest confidence and shall not be divulged to any other person, including officers or employees of the Company, except as otherwise required by law, regulation or lawful process. -25- 31 ARTICLE VII VESTING 7.1 VESTING IN BASIC, SUPPLEMENTAL, MATCHING, AND ROLLOVER/TRANSFER ACCOUNTS. A Member shall be 100 percent vested in the balance of his Basic, Supplemental, Matching, and Rollover/Transfer Accounts. 7.2 VESTING IN COMPANY RETIREMENT CONTRIBUTIONS. Except as specified otherwise in an applicable Addendum, an IAR Member shall be vested in the balance of his IAR Account in accordance with the following schedule:
Years of Vesting Service Vested Percentage ------------------------ ----------------- Less than 3 years 0% 3 years but less than 4 years 33% 4 years but less than 5 years 67% 5 or more years 100%
Notwithstanding the foregoing, upon the occurrence of one of the events hereinafter listed, an IAR Member shall be 100% vested in the balance of his IAR Account: (i) attainment of Retirement Age; (ii) death; or (iii) Permanent and Total Disability. 7.3 FORFEITURES. At the time a Member or Inactive Member terminates employment with the Company and its Controlled Entities prior to attaining Retirement Age for any reason other than Total and Permanent Disability, only his vested interest in his IAR Account shall be distributable pursuant to the provisions of Sections 10.2, 10.3, and 10.4 and his unvested interest shall be governed by the following provisions. (a) The unvested portion of such a Member's IAR Account shall be forfeited at the earlier of the following: (i) the date on which the Member's entire vested interest in his IAR Account is distributed in a single sum or is considered distributed under paragraph (c) below; or (ii) the end of the fifth consecutive Break in Service. -26- 32 (b) Forfeitures shall be applied against the Company's next contribution obligation with respect to Company Retirement Contributions under the Plan applicable to the Participating Unit of such Member. (c) A zero invested balance of a Member or Inactive Member shall be treated as though it were distributed immediately when employment terminates. (d) If a Member or Inactive Member is reemployed prior to five consecutive Breaks in Service but after a forfeiture under paragraph (a) above because of an imputed or full distribution, the forfeited amount, unadjusted for interim gains or losses, shall be subject to restoration under paragraphs (f) and (g). No restoration shall occur, if reemployment occurs after five consecutive Breaks in Service or repayment does not occur under paragraph (g). (e) If a Member or Inactive Member who is not 100% vested in his IAR Account, receives a distribution of the vested portion of his IAR Account prior to incurring five consecutive Breaks in Service with the exception of distributions under paragraph (a)(i) or (c) above, the vested portion of his IAR Account at any time prior to five consecutive Breaks in Service shall not be less than an amount (X) determined in the following manner: X = P(AB + D) - D. For purposes hereof, P is the vested percentage at the relevant time; AB is the IAR Account balance at the relevant time; and D is the amount of distributions. (f) An amount subject to restoration under paragraph (d) shall be credited to the Member's IAR Account upon reemployment and shall be made from the assets of a special contribution of the Company which shall not constitute an "annual addition" within the meaning of Section 415 of the Code. (g) A reemployed Member who is rehired under the conditions set forth in paragraph (d) may repay the full amount previously distributed from his partially vested IAR Account as follows: (1) Repayment shall be made in a single sum. (2) Repayment may only be made while the Member remains employed and may not be made later than five years after reemployment. (3) Repayment cannot be made in whole or in part by rollover from another plan or individual retirement account. -27- 33 7.4 ELECTION OF FORMER VESTING SCHEDULE. In the event the Company adopts an amendment to the Plan that directly or indirectly affects the computation of a Member's nonforfeitable interest in his Matching Account, any Member who is credited with three or more years of Vesting Service shall have a right to have his nonforfeitable interest in such account as of the effective date of the amendment continue to be determined under the vesting schedule in effect prior to such amendment rather than under the new vesting schedule, unless the nonforfeitable interest of such Member in such account under the Plan, as amended, at any time is not less than such account interest determined without regard to such amendment. A Member shall exercise such right by giving written notice of his exercise thereof to the Company within 60 days after the latest of (i) the date he received notice of such amendment from the Company, (ii) the effective date of the amendment, or (iii) the date the amendment is adopted. Notwithstanding the foregoing provisions of this Section 7.5, the vested interest of each Member on the effective date of such amendment shall not be less than his vested interest under the Plan through the later of the effective date or the date the Plan amendment is adopted. 7.5 VESTING SERVICE. Vesting Service shall be credited to a Member in accordance with the following provisions: (a) Vesting Service prior to April 1, 1995. Each Eligible Employee shall be credited with years of Vesting Service for purposes of the Plan with respect to any periods of employment prior to April 1, 1995 in an amount equal to the years of Vesting Service, with which he had been credited in accordance with the Cooper Savings Plan with respect to his IAR Account in effect on April 1, 1995. (b) Vesting Service on and after April 1, 1995. Subject to the provisions of Sections 7.7 and 7.8, each person who is an Eligible Employee on or after April 1, 1995, shall be credited with a year of Vesting Service for each Plan Year on and after such date for which he is credited with at least 1,000 Hours of Service; provided, however, that if he is credited with less than 1,000 Hours of Service for any Plan Year, he shall not be credited with a partial year of Vesting Service. 7.6 TRANSFERS. Notwithstanding the provisions of Section 7.1, years of Vesting Service credited to a person shall be subject to the following: (a) Any person who transfers or re-transfers to employment with an Employer as an Eligible Employee directly from other employment (i) with the Employer in a capacity other than as an Employee or (ii) with a Controlled Entity, shall be credited with years of Vesting Service, for such other employment as if such other -28- 34 employment were employment with an Employer as an Eligible Employee for the entire period of employment. (b) Any person who transfers from employment with an Employer as an Eligible Employee directly to other employment (i) with an Employer in a capacity other than as an Eligible Employee or (ii) with a Controlled Entity, shall be deemed by such transfer not to lose his credited years of Vesting Service, and shall be deemed not to retire or otherwise terminate his employment until such time as he is no longer in the employment of a Controlled Entity, at which time he shall become entitled to benefits, if he is otherwise eligible therefor under the provisions of the Plan; provided, however, that up to such time he shall receive credit for years of Vesting Service for such other employment as if such other employment were employment with the Employer as an Eligible Employee. (c) Any person who transfers to employment with an Employer as an Eligible Employee directly from employment with Cooper Industries, Inc. in a capacity covered by the Cooper Savings Plan shall be credited with the Hours of Service with which he was credited under the Cooper Savings Plan for the period from January 1, 1995 through March 31, 1995 with respect to his IAR Account for the 1995 Plan Year under the Plan with respect to his IAR Account. 7.7 LOSS AND REINSTATEMENT OF YEARS OF VESTING SERVICE. Except as otherwise specifically provided in this Section 7.8, an IAR Member's years of Vesting Service shall be lost if he retires or if his employment with an Employer and its Controlled Entities terminates for any other reason and, if he thereafter returns to employment as an Eligible Employee, he shall be treated for Plan purposes as a new Eligible Employee. Notwithstanding the foregoing provisions, a retired or former IAR Member who returns to employment with an Employer or a Controlled Entity shall be reinstated with the years of Vesting Service with which he was credited at the time of his prior retirement or other termination of employment if: (a) he was eligible for a benefit from his IAR Account at the time of his previous retirement or other termination of employment, or (b) he terminated his employment before satisfying the conditions of eligibility for a benefit from his IAR Account and the number of his consecutive one-year Breaks in Service is less than five or the aggregate number of his years of Vesting Service at the time of such prior termination of employment was greater than the number of his consecutive one-year Breaks in Service (the aggregate number of years of Vesting Service not to include any years of Vesting Service not required to be taken into account due to previous Breaks in Service); provided, however, that if he should return to employment with an Employer or a Controlled Entity in a capacity other than as an Eligible Employee, his period of employment shall be treated for purposes of the Plan in accordance with the provisions of Section 7.6(b). -29- 35 Years of Vesting Service which are reinstated under this Section 7.7 shall be reinstated in accordance with and subject to all applicable provisions of the Plan with respect to reemployment. 7.8 FINALITY OF DETERMINATIONS. Notwithstanding anything to the contrary contained in this Article VII, there shall be no duplication of years of Vesting Service credited to an Employee for any one period of his employment with an Employer or a Controlled Entity. All determinations with respect to the crediting of years of Vesting Service under the Plan shall be made on the basis of the records of the Employers, and all determinations so made shall be final and conclusive upon Eligible Employees, former Eligible Employees, and all other persons claiming a benefit interest under the Plan. In addition, the Company shall have the exclusive responsibility with respect to determining the amount of Basic or Matching Contributions, and any adjustment thereto to comply with the terms of the Plan or the Code. A determination so made shall be final and conclusive upon the Employer, all Members, and Beneficiaries. ARTICLE VIII WITHDRAWALS WHILE EMPLOYED 8.1 WITHDRAWALS PRIOR TO AGE 59 1/2. Subject to the provisions of this Section 8.1, a Member or an Inactive Member who is receiving compensation from a Controlled Entity and who has not attained age 59 1/2, may file a written request with the Company in the form and within the time period prescribed by the Company for a withdrawal of an amount credited to his Separate Accounts attributable to Basic, Supplemental, Rollover, and Transferred Contributions. Such withdrawal shall be permitted only if (i) the reason for the withdrawal is to enable the Member to meet an immediate and heavy financial need which cannot be met from other sources, including but not limited to sources outside the Plan and all other accounts and available loans under the Plan, and which meet the requirements of Section 401(k) of the Code and regulations thereunder, and (ii) would not exceed the lesser of the balance of such Separate Accounts or the amount required to meet the need for which the withdrawal is requested. The amount required to meet the immediate and heavy financial need may include any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution. If the Company approves such request, such withdrawal shall be made from a Member's Separate Accounts in accordance with procedures established by the Company. A withdrawal shall be deemed to be made on account of an immediate and heavy financial need of a Member if the withdrawal is for: (1) Expenses for medical care described in section 213(d) of the Code previously incurred by the Member, the Member's spouse, or any dependents of the Member (as defined in section 152 of the Code) or necessary for those persons to obtain -30- 36 medical care described in section 213(d) of the Code and not reimbursed or reimbursable by insurance; (2) Costs directly related to the purchase of a principal residence of the Member (excluding mortgage payments); (3) Payment of tuition and related educational fees, and room and board expenses, for the next twelve months of post-secondary education for the Member or the Member's spouse, children, or dependents (as defined in section 152 of the Code); (4) Payments necessary to prevent the eviction of the Member from his principal residence or foreclosure on the mortgage of the Member's principal residence; or (5) Such other financial needs that the Commissioner of Internal Revenue may deem to be immediate and heavy financial needs through the publication of revenue rulings, notices, and other documents of general applicability. The above notwithstanding, (1) withdrawals under this Paragraph from a Member's Basic Account shall be limited to the sum of the Member's Basic Contributions to the Plan, plus income allocable thereto and credited to the Member's Basic Account as of the Valuation Date coincident with or next preceding December 31, 1988, less any previous withdrawals of such amounts. 8.2 WITHDRAWALS AFTER AGE 59 1/2. Subject to the provisions of this Section 8.2, a Member or an Inactive Member who is receiving compensation from a Controlled Entity and who has attained at least age 59 1/2, may file a written request with his Employer in the form and within the time period prescribed by the Company for a withdrawal of an amount credited to his Separate Accounts. A withdrawal made pursuant to this Section 8.2 must be at least $500.00 (unless the aggregate value of the Member's Separate Accounts is less) and may only be made once in a calendar year, and shall be made from a Member's or Inactive Member's Separate Accounts as elected by such Member or Inactive Member. 8.3 FORM OF WITHDRAWALS. All withdrawals made from Separate Accounts invested in the Funds, other than the Company Stock Fund, shall be in the form of cash. All withdrawals made from Separate Accounts invested in the Company Stock Fund shall be in the form of Company Stock or cash, as elected by the Member; provided, however, that the value of any fractional shares of Company Stock shall be distributed in the form of cash. -31- 37 ARTICLE IX LOANS 9.1 ELIGIBILITY FOR LOAN. Upon application by (1) any Member who (a) is on the United States payroll of the Employer, (b) is receiving compensation other than severance pay from a Controlled Entity, (c) has been participating in the Plan for at least one year (provided, however, that the participation requirement of this Clause (c) shall apply only for loans granted prior to January 1, 1998), and (d) has not had an outstanding loan from the Plan for at least one month (an individual who is eligible to apply for a loan under this Article being hereinafter referred to as a "Member" for purposes of this Article), the Company may in its discretion direct the Trustee to make a loan or loans to such Member. Such loans shall be made pursuant to the provisions of the Company's written loan procedure, which procedure is hereby incorporated by reference as a part of the Plan. 9.2 MAXIMUM LOAN. (a) A loan to a Member may not exceed 50% of the nonforfeitable balance of such Member's Separate Accounts (excluding his IAR Account). (b) Paragraph (a) above to the contrary notwithstanding, the amount of a loan made to a Member under this Article shall not exceed an amount equal to the difference between: (i) The lesser of $50,000 (reduced by the excess, if any, of (A) the highest outstanding balance of loans from the Plan during the one-year period ending on the day before the date on which the loan is made over (B) the outstanding balance of loans from the Plan on the date on which the loan is made) or one-half of the present value of the Member's total nonforfeitable accrued benefit under all qualified plans of the Employer or a Controlled Entity; minus (ii) The total outstanding loan balance of the Member under all other loans from all qualified plans of the Employer or a Controlled Entity. 9.3 RESTRICTIONS. Any loan application shall be subject to the time of payment requirements of Section 10.2(b) and to the election and consent requirements of Section 10.2(b)(5) respecting repayment from the pledged Separate Accounts of the Member upon default of the loan. Such requirements shall be contained in the loan application and must be made and obtained within the ninety-day period prior to making the loan. 9.4 OPERATION OF ARTICLE. The provisions of this Article shall be applicable to loans granted on or renewed on or after April 1, 1996. Loans granted or renewed on or prior to such date shall be governed by the provisions of the Plan as in effect prior to this amendment and restatement of the Plan. -32- 38 ARTICLE X DISTRIBUTION ON RETIREMENT OR OTHER TERMINATION OF EMPLOYMENT 10.1 ELIGIBILITY FOR DISTRIBUTION. Upon termination of employment with the Controlled Entities, each Member and Inactive Member shall be entitled to receive the entire interest of his Basic, Supplemental, Matching, and Rollover/Transfer Accounts and the vested interest of his IAR Account, if any, in accordance with his provisions of Sections 10.2 and 10.3. 10.2 DISTRIBUTION OF SEPARATE ACCOUNTS. Subject to the provisions of Section 10.3, the Company shall direct the Trustee to make distribution to a Member or Inactive Member, who becomes eligible to receive the vested interest of his Separate Accounts pursuant to the provisions of Section 10.1 in the manner hereinafter set forth. a. Distributions of $3500 or Less. If the value of the vested interest of a Member, Inactive Member, or IAR Member, as the case may be, in his Basic, Supplemental, Matching, IAR, and Rollover/Transfer Accounts is $3500 ($5000 from and after January 1, 1998) or less, distribution thereof shall be made to such a Member as soon as practicable in a single sum payment. b. Distributions of Over $3500. If the value of the vested interest of a Member, Inactive Member, or IAR Member, as the case may be, in his Basic, Supplemental, Matching, IAR, and Rollover/Transfer Accounts is in excess of $3500 ($5000 from and after January 1, 1998), such Member may elect to receive distribution of his Basic, Supplemental, Matching, and Rollover/Transfer Accounts in a single sum payment at any time prior to attainment of age 70 1/2. Notwithstanding the foregoing, no such distribution may be made to a Member, Inactive Member, or IAR Member prior to Retirement Age, unless such an IAR Member and his spouse consent in writing to such distribution. In the event that the vested interest of an IAR Member in his IAR Account is in excess of $3500 ($5000 from and after January 1, 1998), such IAR Member may elect to receive distribution of his IAR Account in a single sum payment at any time prior to attainment of age 70 1/2; provided, however, that such IAR Member waives distribution of the standard form of benefit set forth below in paragraphs (1) and (2) of this Section 10.2(b) and if such Member is married, his spouse consents in writing to such election and waiver and such consent acknowledges the effect of such action and is witnessed by a notary public or a Plan representative, unless a Plan representative finds that such consent cannot be obtained because the spouse cannot be located or because of other circumstances set forth in Section 401(a)(11) of the Code and regulations issued thereunder. If the Basic, Supplemental, Matching, IAR and Rollover/Transfer Accounts -33- 39 of such a Member are not distributed pursuant to the foregoing provisions, such Separate Accounts shall be distributed with his IAR Account in the following manner: (1) Married IAR Members. The standard form of benefit payment of an IAR Account for any IAR Member who is married on the date his Plan interest is to be distributable to him under the provisions of Section 10.1 and the foregoing provisions of Section 10.2(b) shall be a 50 percent joint and survivor annuity. Such joint and survivor annuity shall be a commercial annuity which is payable for the life of the IAR Member with a survivor annuity for the life of the IAR Member's surviving spouse equal to 50 percent of the amount of the annuity payable during the joint lives of the IAR Member and such IAR Member's surviving spouse. The standard joint and survivor annuity shall be paid automatically as provided hereunder unless the IAR Member elects to receive his benefit payments in another form during the election period described in Section 10.2(b)(4)(iii); provided, however, that if distribution is to be made prior to Retirement Age, it shall be made only with the consent of the IAR Member and his spouse, if any; provided further that the IAR Member's spouse consents in writing to such election and the time of benefit commencement thereof pursuant to the provisions of Section 10.2(b)(5). Any such election may be revoked and subsequent elections may be made, or revoked, at any time during such election period. If the IAR Member has elected not to receive the standard joint and survivor annuity as provided herein, such IAR Member's benefit shall be paid in one of the benefit payment forms under Section 10.2(b)(3), as selected by such IAR Member. (2) Unmarried IAR Members. The standard form of benefit payment of an IAR Account for any IAR Member who is not married on the date his Plan interest is to be distributable to him under the provisions of Section 10.1 and the foregoing provisions of Section 10.2(b), shall be a single life annuity under Section 10.2(b)(3)(i), unless such IAR Member selects another benefit payment form provided in Section 10.2(b)(3); provided, however, that if distribution is to be made prior to Retirement Age, it shall be made only with the consent of the IAR Member. (3) Optional Forms. Subject to the provisions of paragraphs (a) and (b) of this Section 10.2(b), an IAR Member may elect to receive his Separate Account in one of the following forms: (i) A commercial annuity in the form of a single life annuity for the life of such IAR Member; (ii) A commercial annuity in the form of a single life cash refund annuity; (iii) A commercial annuity for a term certain of ten years and continuous for the life of the IAR Member if he survives such term certain; -34- 40 (iv) A commercial annuity payable for the life of such Member with a survivor annuity for the life of his Beneficiary which shall be equal to 50 percent, 75 percent, or 100 percent of the annuity payable during the joint lives of the IAR Member and such IAR Member's Beneficiary; (v) A lump sum payment regardless of age; or (vi) A single life annuity commencing prior to the earliest age as of which such IAR Member will become eligible for an "old-age insurance benefit" under the federal Social Security Act, adjusted so that an increased amount will be paid prior to such age and a reduced amount thereafter; the purpose of this adjustment is to enable the IAR Member to receive, from this Plan and under the federal Social Security Act, an aggregate income in approximately a level amount for life. Moreover, in the event the IAR Member so elects, if such IAR Member dies before receiving payments aggregating the vested amount of his Separate Accounts at his benefit commencement date, the difference shall be paid in a single lump sum to his Beneficiary or if there is none, to the executor or administrator of his estate. (4) Notwithstanding the foregoing provisions of this Section 10.2(b), the following additional requirements must be satisfied in order for a benefit to be paid pursuant to Section 10.2(b)(3): (i) The benefit payment form described in Section 10.2(b)(3) above shall only be available if the present value of the total payments actuarially expected to be made to the IAR Member shall be more than 50 percent of the present value of the total payments actuarially expected to be made to the IAR Member and his Beneficiary. (ii) The form of payment to the IAR Member or to the IAR Member and his Beneficiary must be payable over a period of time which does not exceed the longer of the life expectancy of the IAR Member, or the joint and last survivor life expectancy of the IAR Member and his Beneficiary. (iii) Subject to the provisions of Section 10.2(b)(5) with respect to any election described in Section 10.2(b)(3), the Company shall furnish certain information, pertinent to such election, to each IRA Member no less than thirty days (unless such thirty-day period is waived by an affirmative election in accordance with applicable Treasury regulations) and no more than ninety days before his Annuity Starting Date. The furnished information shall include an explanation of (1) the terms and conditions of the joint and survivor annuity, (2) the IAR Member's right to waive the standard joint and survivor annuity and the effect of such election, (3) the rights of the IAR Member's spouse, if any, (4) the right to revoke such election and the effect of such revocation, (5) a general -35- 41 description of the eligibility conditions and other material features of the alternative forms of benefit available pursuant to Section 10.2(b)(3), and (6) sufficient additional information to explain the relative values of such alternative forms of benefit. The period during which an IAR Member may make or revoke such election shall be the ninety day period ending on such IAR Member's Annuity Starting Date provided that such Election may also be revoked at any time prior to the expiration of the seven-day period that begins the day after the information required to be furnished to the IAR Member. (5) In the event a benefit is subject to payment under the standard joint and survivor annuity form set forth in Section 10.2(b)(1) and such IAR Member elects another form of benefit payment which will not provide his spouse with a lifetime survivor annuity which is at least 50 percent of the amount of the annuity payable during the joint lives of the IAR Member and the spouse, such benefit shall be paid in such form only if such IAR Member's spouse consents the form and time thereof in writing. Any spousal consent given pursuant to this provision shall acknowledge the effect of such form and time of payment and shall be witnessed by a Plan representative or a notary public, unless a Plan representative finds that such consent cannot be obtained because the spouse cannot be located or because of other circumstances set forth in Section 401(a)(11) of the Code and regulations issued thereunder. (6) A Member who has elected to have his benefit under the Cooper Cameron Corporation Salaried Employees' Retirement Plan (the "Salaried Plan") distributed in an annuity form or an IAR Member may elect to have his entire Plan interest or his IAR Account, if any, transferred to the Salaried Plan as of the date benefits are payable thereunder to be held and distributed in accordance with the terms thereof. 10.3 FORM OF DISTRIBUTION. Unless the Member or Inactive Member otherwise elects (or is deemed to elect otherwise because the present value of such Member's nonforfeitable benefit exceeds $3,500 and he fails to consent to a distribution while his benefit is immediately distributable within the meaning of Treasury Regulations), the payment of benefits under the Plan to such Member shall begin no later than the 60th day after the close of the Plan Year in which the latest of the following events occurs: (i) The date on which such Member attains age 65; (ii) The tenth anniversary of the date on which such Member commenced participation in the Plan; and -36- 42 (iii) The date on which such Member terminates service with the Controlled entities. All single sum distributions shall be made in cash other than distributions from Company Stock Fund Accounts and Cooper Stock Fund Accounts which shall be made in the form of Company Stock or Cooper common stock with respect to whole shares and cash with respect to partial shares. Effective November 29, 1996, the Cooper Stock Fund Accounts of all Members were liquidated pursuant to Section 6.4. 10.4 LIMITATION ON COMMENCEMENT OF DISTRIBUTION. Notwithstanding any provision in the Plan to the contrary, all distributions required under this Article X shall be determined and made in accordance with the proposed regulations under Section 401(a)(9) of the Code, including the minimum distribution incidental benefit requirements of Section 1.401(a)(9)-2 of the proposed regulations. Accordingly, the entire interest of a Member or Inactive Member in his Separate Accounts must be distributed, or must begin to be distributed, no later than such Member's Mandatory Distribution Date. The Mandatory Distribution Date of a Member or Inactive Member shall be determined as follows: (i) The Mandatory Distribution Date of such a Member who attains age 70 1/2 on or after January 1, 1988, but prior to January 1, 1999, shall be April 1, 1990, or the first day of April following the calendar year in which such Member attains age 70 1/2, whichever is later. (ii) The Mandatory Distribution Date of such a Member who attains age 70 1/2 on or after January 1, 1999, shall be the first day of April of the calendar year following the later of (A) the calendar year in which such Member attains age 70 1/2 or (B) the calendar year in which such Member terminates his employment with the Employer (provided, however, that Clause (B) of this sentence shall not apply in the case of a Member who is a "five-percent Owner" (as defined in section 416 of the Code) with respect to the Plan Year ending in the calendar year in which such Member attains age 70 1/2). (iii) The Mandatory Distribution Date of such a Member who has attained age 70 1/2 before January 1, 1988, shall be the first day of April of the calendar year following the calendar year in which the later of such Member's termination of employment or attainment of age 70 1/2 occurs. Distributions to a Member or Inactive Member who has attained age 70 1/2 and who has not terminated employment with the Controlled Entities shall be made as of his Mandatory Distribution Date and shall be subject to the following minimum distribution rules: (1) If the value of the Member's Separate Accounts are to be distributed in installments while such Member is still employed by the Controlled -37- 43 Entities it must be paid over (i) a period not extending beyond the life expectancy of the Member or the joint life and last survivor expectancy of the Member and his Beneficiary, or (ii) a period not extending beyond the life expectancy of his Beneficiary, and the amount of the Required Minimum Distribution for each calendar year beginning with distributions for the first distribution calendar year, must at least equal the quotient obtained by dividing the Mandatory Distribution Value of the Member's Separate Accounts by the lesser of (1) the applicable life expectancy or (2) if the Member's spouse is not the Beneficiary, the applicable divisor determined from the table set forth in Q&A-4 of Section 1.401(a)(9)-2 of the proposed regulations (as in effect on the Effective Date). Distributions after the death of the Member shall be distributed using the applicable life expectancy referred to in clause (1), above as the relevant divisor without regard to clause (2). (2) The Required Minimum Distribution for the Member's first distribution calendar year must be made on or before the Member's Mandatory Distribution Date. The Required Minimum Distribution for other calendar years, including the Required Minimum Distribution for the calendar year in which the Member's Mandatory Distribution Date occurs, must be made on or before December 31 of such calendar year. (3) Payments under an annuity option must be made in accordance with the requirements of Section 401(a)(9) of the Code, and payments commence not later than one year after the date of the Member's death. If the Members dies on or after the Member's Mandatory Distribution Date, the remaining portion of the Member's Separate Accounts must continue to be distributed at least as rapidly as under the method of distribution in effect at the Member's death. If, however, the Member dies before the Member's Mandatory Distribution Date, distribution of the Member's Account must be completed by December 31 of the calendar year containing the fifth anniversary of the Member's death. For purposes of this Section 11.4, the words and phrases hereinafter set forth shall have the following meanings: (a) Distribution Calendar Year; First Distribution Calendar Year. A distribution calendar year is a calendar year for which a minimum distribution is required. For distributions beginning before the Member's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Member's Mandatory Distribution Date. For distributions beginning after the Member's death, the first distribution calendar year is the calendar year in which distributions are required to begin. (b) Life Expectancy. Life expectancy and joint and last survivor expectancy shall be computed by use of the expected return multiples in Tables V and -38- 44 VI of Treas. Reg. Section 1.72-9. Except as may be required pursuant to regulations under Section 401(a)(9) of the Code in the case where a new Beneficiary is designated, life expectancies shall not be recalculated after the first distribution calendar year. (c) Mandatory Distribution Values of a Member's Separate Accounts. (i) The balance of the Member's Separate Accounts as of the last Valuation Date in the calendar year immediately preceding the distribution calendar year (the "valuation calendar year") increased by the amount of any contributions or forfeitures allocated to the Separate Accounts as of dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the valuation calendar year after the Valuation Date. (ii) For purposes of subparagraph (i), above, if any portion of the minimum distribution for the first distribution calendar year is made in the second distribution calendar year on or before the Mandatory Distribution Date, the amount of such minimum distribution made in the second distribution calendar year shall be treated as if it had been made in the immediately preceding distribution calendar year. 10.5 RESTRICTION ON ALIENATION. Except as provided in Sections 401(a)(13)(B) and 414 (p) of the Code relating to qualified domestic relations orders, no benefit under the Plan at any time shall be subject in any manner to anticipation, alienation, assignment (either at law or in equity), encumbrance, garnishment, levy, execution, or other legal or equitable process. No person shall have power in any manner to anticipate, transfer, assign (either at law or in equity), alienate, or subject to attachment, garnishment, levy, execution, or other legal or equitable process, or in any way encumber his benefits under the Plan, or any part thereof, and any attempt to do so shall be void. 10.6 PAYMENTS TO INCOMPETENTS OR MINORS. In the event that it shall be found that any individual to whom an amount is payable hereunder is incapable of attending to his financial affairs because of any mental or physical condition, including the infirmities of advanced age, or is a minor, such amount (unless prior claim therefor shall have been made a duly qualified guardian or other legal representative) may, in the discretion of the Company, be paid to a duly appointed guardian or to another person for the use or benefit of the individual found incapable of attending to his financial affairs or in satisfaction of legal obligations incurred by or on behalf of such individual. The Trustee shall make such payment only upon receipt of written instructions to such effect from the Company. Any such payment shall be charged to the Separate Accounts from which any such payment would otherwise have -39- 45 been paid to the individual found to be a minor or incapable of attending to his financial affairs and shall be a complete discharge or any liability therefor under the Plan. 10.7 COMMERCIAL ANNUITIES. In any case where a benefit payable under the Plan is to be paid in the form of a commercial annuity, a commercial annuity contract shall be purchased and distributed to the Member, Inactive Member, or Beneficiary, as the case may be. Upon the distribution of any such contract, the Plan shall have no further liability with respect to the amount used to purchase the annuity contract and the company issuing such contract shall be solely responsible to the recipient of the contract for the annuity payments thereunder. All certificates for commercial annuity benefits shall be non-transferable, and no benefit thereunder may be sold, assigned, discounted, or pledged. Any commercial annuity purchased under the Plan shall contain such terms and provisions as may be necessary to satisfy the requirements under the Plan. 10.8 ACTUARIAL EQUIVALENCY. With respect to any benefit payment pursuant to the Plan, whichever form of payment is selected, the value of such benefit shall be the actuarial equivalent of the value of the vested balance of the Separate Accounts to which the particular Member, Inactive Member, or Beneficiary, as the case may be, is entitled. 10.9 ELIGIBLE ROLLOVER DISTRIBUTIONS. Each Member and Beneficiary who receives an Eligible Rollover Distribution may elect in the time and in a manner prescribed by the Company to have all or any portion of such Eligible Rollover Distribution transferred to an Eligible Retirement Plan; provided, however, that only one such transfer may be made with respect to an Eligible Rollover distribution to an Eligible Retirement Plan. Notwithstanding the foregoing, the Member may elect, after receiving the notice required under Section 402(f) of the Code, to receive such Eligible Rollover Distribution prior to the expiration of the 30-day period beginning on the date such Member is issued such notice; provided that the Member or Beneficiary is permitted to consider his decision for at least 30 days and is advised of such right in writing. 10.10 TRANSFER TO COOPER CAMERON SALARIED PLAN. In accordance with procedures established by the Company, any Member who wishes to receive distribution of the vested balance of his Separate Accounts in the form of an annuity, may elect to transfer such balance to the Cooper Cameron Corporation Salaried Employees' Retirement Plan (the "Cooper Cameron Salaried Plan") as of his benefit commencement date to be held and distributed in accordance with the terms thereof. -40- 46 10.11 DEFERRAL OF PAYMENTS. Subject to the provisions of Section 10.4, but notwithstanding the provisions of any other Section of the Plan to the contrary, a Member whose Plan interest is determined to have a present value of $3,500 or more shall not receive payment of such interest prior to the later of normal retirement age or age 62, unless consented to by the Member in writing. ARTICLE XI BENEFICIARIES AND DEATH BENEFITS 11.1 DESIGNATION OF BENEFICIARY. In the event of the death of a Member or Inactive Member prior to distribution in full of his interest under the Plan, the spouse, if any, of such Member shall be his Beneficiary and receive distribution of his remaining interest in accordance with the provisions of Section 11.4; provided, however, that a Member or Inactive Member, may designate a person or persons other than his spouse as his Beneficiary if the requirements of Section 11.3 are met. 11.2 BENEFICIARY IN THE ABSENCE OF DESIGNATED BENEFICIARY. If a Member or Inactive Member who dies does not have a surviving spouse and if no Beneficiary has been designated pursuant to the provisions of Section 11.1, or if no Beneficiary survives such Member, then the Beneficiary shall be the estate of such Member. If any Beneficiary designated pursuant to Section 11.1 dies after becoming entitled to receive distribution hereunder and before such distributions are made in full, and if no other person or persons have been designated to receive the balance of such distributions upon the happening of such contingency, the estate of such deceased Beneficiary shall become the Beneficiary as to such balance. 11.3 SPOUSAL CONSENT TO BENEFICIARY DESIGNATION. An election to designate a Beneficiary other than the spouse of such Member or Inactive Member shall not be effective unless (A) such spouse has consented thereto in writing and such consent (i) acknowledges the effect of such election, (ii) either consents to the specific designated beneficiary (which designation may not be subsequently changed by the Member or Inactive Member without spousal consent) or expressly permits such designation by the Member or Inactive Member without the requirement of further consent by the spouse, and (iii) is witnessed by a Plan representative (other than the Member, or Inactive Member, as applicable) or a notary public, or (B) the consent of such spouse cannot be obtained because the spouse cannot be located or because of other circumstances described by applicable Treasury regulations. Any such consent by such spouse shall be irrevocable. -41- 47 11.4 DEATH BENEFITS FROM BASIC, SUPPLEMENTAL, MATCHING, AND ROLLOVER/TRANSFER ACCOUNTS. In the event of the death of a Member or Inactive Member prior to distribution in full of his interest in the Plan, the Beneficiary of such Member shall receive distribution of such Member's remaining interest in his Basic, Supplemental, Matching, and Rollover/Transfer Accounts in a single sum to such Member's Beneficiary, unless such Beneficiary elects to receive such interest with his IAR Account interest, if any, in the form of a single life annuity. 11.5 DEATH BENEFITS FROM IAR ACCOUNTS. (a) The interest in the IAR Account of any deceased IAR Member or Inactive Member whose surviving spouse is his Beneficiary shall be a survivor annuity. Such survivor annuity shall be a commercial annuity which is payable for the life of such surviving spouse. (b) Any Member or Inactive Member who would otherwise have his death benefit from his IAR Account paid in the form of a survivor annuity payable to his surviving spouse may elect not to have his benefit paid in such form by electing to receive such death benefit in a single sum or by designating a person other than his spouse as his Beneficiary. Any election may be revoked and subsequent elections may be made or revoked at any time prior to the death of the Member or Inactive Member. (c) Paragraph (b) above to the contrary notwithstanding, an election not to have the death benefit paid in the form of a survivor annuity payable to the surviving spouse may be made before the first day of the Plan Year in which a Member or Inactive Member attains the age of thirty-five only (A) after the Member or Inactive Member separated from service and only with respect to benefits accrued under the Plan before the date of such separation or (B) in the case of a Member who has not separated from service, if the Member has been furnished the information in Paragraph (c) below, with such election to become invalid upon the first day of the Plan Year in which the Member attains the age of thirty-five, whereupon a new election may be made by such Member. (d) The Company shall furnish certain information, pertinent to the Paragraph (b) election to each Member within the period beginning with the first day of the Plan Year in which he attains the age of thirty-two (but not earlier than the date such Member begins participation in the Plan) and ending with the later of (1) the last day of the Plan Year preceding the Plan Year in which the Member attains the age of thirty-five, or (2) a reasonable time after the Employee becomes a Member. If a Member separated from service before attaining the age of thirty-five, such information shall be furnished to such Member within the period beginning one year before the Member separates from service and ending one year after such separation. Such information shall also be furnished to a Member who has not attained the age of thrifty-five or terminated employment, within a reasonable time after written request by such Member. The furnished information shall -42- 48 include an explanation of (1) the terms and conditions of the survivor annuity, (2) the Member's right to elect to waive the survivor annuity and the effect of such election, (3) the rights of the Member's surviving spouse, (4) the right to revoke such election and the effect of such revocation, (5) a general description of the eligibility conditions and other material features of the alternative forms of benefit available pursuant to Paragraph (f) below, and (6) sufficient additional information to explain the relative value of such alternative forms of benefit. (f) For purposes of this Section 11.5 the IAR Account death benefit of a deceased Member or Inactive Member who is not survived by his spouse or who has elected not to have his IAR Account death benefit paid in the survivor annuity form set forth in Section 11.5(a) shall be paid to his Beneficiary in one of the following alternative forms to be selected by such Member or Inactive Member (or his Beneficiary if authorized by such Member or Inactive Member) or, in the absence of such selection, in a single sum payment; provided, however, that the period and the methods of payment of any such form shall be in compliance with the provisions of section 401(a)(9) of the Code and applicable Treasury regulations thereunder: (i) A single lump payment; or (ii) A commercial annuity in the form of a single life annuity. (g) Notwithstanding any other provisions of the Plan to the contrary, payment of a survivor annuity pursuant to this Section 11.5 shall not be made without the consent of the surviving spouse prior to the time the deceased Member or Inactive Member would have attained Retirement Age except that if the entire interest payable hereunder to a Beneficiary is $3,500 or less, such interest shall be paid in a single lump-sum payment form within a reasonable period of time after the death of the Member or Inactive Member. 11.6 COMMENCEMENT OF DEATH BENEFITS. A survivor benefit shall be paid to the surviving spouse of a deceased Member or deceased former Member upon termination of employment thereafter regardless of the age at which such Member's death occurs, and shall be payable monthly thereafter during the life of the surviving spouse, the last payment being for the month in which the death of the surviving spouse occurs. Notwithstanding the foregoing, in no event shall a survivor benefit be paid to the surviving spouse of a deceased Member or deceased former Member prior to the later of the date on which such deceased Member or deceased former Member would have attained normal retirement age or age 62, unless such surviving spouse consents thereto not more than 90 days before the annuity starting date of such survivor benefit. In the event of the death of the surviving spouse prior to the commencement of the payment of the survivor benefit, no survivor benefit shall be payable pursuant to the provisions of this Article IX with respect to such deceased Member or deceased former Member. -43- 49 ARTICLE XII ADMINISTRATION 12.1 PLAN ADMINISTRATOR. For purposes of ERISA, the Company shall be the Plan Administrator and, as such, shall be responsible for the compliance of the Plan with the reporting and disclosure provisions of ERISA. 12.2 AUTHORITY OF THE COMPANY. The Company shall have all the powers and authority expressly conferred upon it herein and, further, shall have the sole right to interpret and construe the Plan, and to determine any disputes arising thereunder, subject to the provisions of Section 7.9. In exercising such powers and authority, the Company at all times shall exercise good faith, apply standards of uniform application, and refrain from arbitrary action. Any decision of the Company in such exercise of its powers, authorities and duties shall be final and binding upon all affected parties. The Company may employ such attorneys, agents, and accountants as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The Company shall be a "named fiduciary" as that term is defined in Section 402(a)(2) of ERISA. The Company may: (a) allocate any of the powers, authorities, or responsibilities for the operation and administration of the Plan, which are retained by it or granted to it by this Article III, to the Trustee; and (b) designate a person or persons other than itself to carry out any of such powers, authorities, or responsibilities; provided, however, that no powers, authorities, or responsibilities of the Trustee shall be subject to the provisions of paragraph (b) of this Section 12.2; and provided further, that no allocation or delegation by the Company of any of its powers, authorities, or responsibilities to the Trustee shall become effective unless such allocation or delegation first shall be accepted by the Trustee in a writing signed by it and delivered to the Company. 12.3 ACTION OF THE COMPANY. Any act authorized, permitted, or required to be taken by the Company under the Plan, which has not been delegated in accordance with Section 12.2, may be taken by a majority of the members of the Board of Directors of the Company, either by vote at a meeting, or in writing without a meeting. All notices, advices, directions, certifications, approvals, and instructions required or authorized to be given by the Company under the Plan shall be in writing and signed by either (i) a majority of the members of the Board of Directors of the Company, or by such member or members as may be designated by an -44- 50 instrument in writing, signed by all the members thereof, as having authority to execute such documents on its behalf, or (ii) a person who becomes authorized to act for the Company in accordance with the provisions of paragraph (b) of Section 12.2. Subject to the provisions of Section 12.4, any action taken by the Company which is authorized, permitted, or required under the Plan shall be final and binding upon the Company and the Trustees, all persons who have or who claim an interest under the Plan, and all third parties dealing with any Trustee or the Company. 12.4 CLAIMS REVIEW PROCEDURE. Whenever the Company decides for whatever reason to deny, whether in whole or in part, a claim for benefits filed by any person (hereinafter referred to as the "Claimant"), the Company shall transmit to the Claimant a written notice of its decision, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Claimant that, within 60 days of the date on which he receives such notice, he may obtain review of the decision of the Company in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or his authorized representative may request that the claim denial be reviewed by filing with the Company a written request therefor, which request shall contain the following information: (a) the date on which the Claimant's request was filed with the Company; provided that the date on which the Claimant's request for review was in fact filed with the Company shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (a); (b) the specific portions of the denial of his claim which the Claimant requests the Company to review; (c) a statement of the Claimant setting forth the basis upon which he believes the Company should reverse its previous denial of his claim for benefits and accept his claim as made; and (d) any written material (offered as exhibits) which the Claimant desires the Company to examine in its consideration of his position as stated pursuant to paragraph (c) of this Section 12.4. Within 60 days of the date determined pursuant to paragraph (a) of this Section 12.4, the Company shall conduct a full and fair review of its decision denying the Claimant's claim for benefits. Within 60 days of the date of such hearing, the Company shall render its written decision on review, written in a manner calculated to be understood by the Claimant, specifying the reasons and Plan provisions upon which its decision was based. -45- 51 12.5 QUALIFIED DOMESTIC RELATIONS ORDERS. The Company shall establish reasonable procedures to determine the status of domestic relations orders and to administer distributions under domestic relations orders which are deemed to be qualified orders. Such procedures shall be in writing and shall comply with the provisions of Section 414(p) of the Code and regulations issued thereunder. 12.6 INDEMNIFICATION. In addition to whatever rights of indemnification the members of the Board of Directors of the Company, or any other person or persons (other than the Trustees) to whom any power, authority, or responsibility of the Company is allocated or delegated pursuant to paragraph (b) of Section 12.2, may be entitled under the articles of incorporation, regulations, or bylaws of the Company, under any provision of law, or under any other agreement, the Company shall satisfy such liability actually and reasonably incurred by any such member or such other person or persons, including expenses, attorneys' fees, judgments, fines, and amounts paid in settlement, in connection with any threatened, pending, or completed action, suit, or proceeding which is related to the exercise, or failure to exercise, by such member or such other person or persons of any of the powers, authorities, responsibilities, or discretion of the Company as provided under the Plan and the Trust Agreement, or reasonably believed by such member or such other person or persons to be provided thereunder, and any action taken by such member or such other person or persons in connection therewith. ARTICLE XIII AMENDMENT AND TERMINATION 13.1 AMENDMENT. Subject to the provisions of Section 13.2, the Company may at any time and from time to time, amend the Plan. 13.2 LIMITATION OF AMENDMENT. The Company shall make no amendment to the Plan which shall result in the forfeiture or reduction of the interest of any Member, Inactive Member, Beneficiary, or person claiming under or through any one or more of them pursuant to the Plan; provided, however, that nothing herein contained shall restrict the right to amend the provisions hereof relating to the administration of the Plan and Trust. Moreover, no amendment shall be made hereunder which shall permit any part of the Trust property to revert to any Employer or be used for or be diverted to purposes other than the exclusive benefit of Members, Inactive Members, Beneficiaries, and persons claiming under or through them pursuant to the Plan. 13.3 TERMINATION. The Company reserves the right, by action of its Board of Directors, to terminate the Plan as to all Employers at any time. The Plan shall terminate automatically if there shall be a -46- 52 complete discontinuance of contributions hereunder by all Employers. In the event of the termination of the Plan, written notice thereof shall be given to all Members and Beneficiaries having an interest under the Plan, and to the Trustee. Upon any such termination of the Plan, the Trustee and the Company shall take the following actions for the benefit of Members and Beneficiaries: (a) As of the termination date, the Trustee shall value the Funds hereunder and the Company shall adjust all accounts accordingly. The termination date shall become a Valuation Date. In determining the net worth of the Funds hereunder, the Trustee shall include as a liability such amounts as in its judgment shall be necessary to pay all expenses in connection with the termination of the Trust and the liquidation and distribution of the Trust property, as well as other expenses, whether or not accrued, and shall include as an asset all accrued income. (b) The Trustee, upon instructions from the Company, shall then segregate and distribute an amount equal to the entire interest of each Member, Inactive Member, and Beneficiary in the Funds to or for the benefit of each Member, Inactive Member, or Beneficiary in accordance with the provisions of Sections 10.2 and 10.3. Notwithstanding anything to the contrary contained in the Plan, upon any such Plan termination or discontinuance of contributions by the Employers, the interest of each Member, Inactive Member, and Beneficiary shall become fully vested and nonforfeitable; and, if there is a partial termination of the Plan, the interest of each Member, Inactive Member, and Beneficiary who is affected by such partial termination shall become fully vested and nonforfeitable. 13.4 WITHDRAWAL OF AN EMPLOYER. An Employer other than the Company may, by action of its Board of Directors, withdraw from the Plan, such withdrawal to be effective upon notice in writing to the Company (the effective date of such withdrawal being hereinafter referred to as the "withdrawal date"), and shall thereupon cease to be an Employer for all purposes of the Plan. An Employer shall be deemed automatically to withdraw from the Plan in the event of its complete discontinuance of contributions, or in the event it ceases to be a Subsidiary. 13.5 CORPORATE REORGANIZATION. The merger, consolidation, or liquidation of the Company or any Employer with or into the Company or any other Employer shall not constitute a termination of the Plan as to the Company or such Employer. -47- 53 ARTICLE XIV ADOPTION BY SUBSIDIARIES: EXTENSION TO NEW BUSINESS OPERATIONS Any Subsidiary of the Company which at the time is not an Employer may, with the consent of the Board of Directors of the Company, adopt the Plan and become an Employer hereunder by causing an appropriate written instrument evidencing such adoption to be executed pursuant to the authority of its Board of Directors and to be filed with the Company. -48- 54 ARTICLE XV ESOP 15.1 PURPOSE. The Company Stock Fund portion of the Plan constitutes an employee stock ownership plan under Section 4975(e)(7) of the Code and Section 407(a)(6) of ERISA (the "ESOP"). Such ESOP is established and maintained to enable Members to share in the growth and prosperity of the Company and to provide such Members with an additional opportunity to accumulate capital for their future economic security. 15.2 SUSPENSE FUND. The Trustee shall establish a subfund, herein referred to as the Suspense Fund, to hold and administer any Company Stock which is pledged or held as collateral for any Exempt Loan made to the Trustee for purposes of the ESOP. In the event more than one class of Company Stock is held in the Suspense Fund, any release thereof shall be made on a pro rata basis as shall allocations thereof to the Separate Accounts of Members. 15.3 EXEMPT LOANS. The Trustee may finance or refinance the acquisition of Company Stock for purposes of the ESOP through one or more Exempt Loans. An installment obligation incurred in connection with the purchase of Company Stock shall constitute an Exempt Loan and shall be for a specific term, bear a reasonable rate of interest, and shall not be payable on demand except in the event of default. An Exempt Loan may be secured by a collateral pledge of the shares of Company Stock so acquired. Any such pledged Company Stock shall be placed in the Suspense Fund. No other Plan assets may be pledged as collateral for an Exempt Loan, and no lender shall have recourse against the Plan other than the Company Stock subject to pledge. All Exempt Loans which are made or guaranteed by a disqualified person must satisfy all requirements applicable to exempt loans set forth in Treas. Reg. Section 54.4975-7(b)(8) and Department of Labor Reg. Section 2550.408b-3. Any pledge of Company Stock must provide for the release of shares so pledged on a pro rata basis as the Exempt Loan is repaid by the Trustee and such shares of Company Stock are allocated to Members' Separate Accounts as provided in the Plan. Repayments of principal and interest on any Exempt Loan shall be made by the Trustee only from Matching Contributions to enable the Trustee to repay such Exempt Loan, from earnings attributable to such Matching Contributions, and from any cash dividends received by the Trustee on Company Stock held in the Suspense Fund. 15.4 LIMITATION ON ALLOCATIONS OF MATCHING CONTRIBUTIONS. Notwithstanding any other provision of the Plan to the contrary, Company Stock held in the Suspense Fund shall be allocated to the Separate Accounts of Members only as Matching Contributions to pay principal and interest with respect to an Exempt Loan are made to the Trustee. As of each Valuation Date, Company Stock which is released from -49- 55 the Suspense Fund shall be allocated to the Company Stock Fund Account of each eligible Member as needed to provide Matching Contributions pursuant to Section 3.3. The number of shares of Company Stock to be released from the Suspense Fund for allocation to Separate Accounts shall be calculated in accordance with Treas. Reg. 54.4975-7(b)(8). Principal and interest payable under an Exempt Loan shall be satisfied out of (i) Matching Contributions (other than contributions of Company Stock) that are made hereunder for purposes of being applied by the Trustee to satisfy its obligations under the Exempt Loan; (ii) earnings attributable to the investment of such contributions; and (iii) earnings attributable to Company Stock purchased with the proceeds of the Exempt Loan; provided, however, that the payments made under the Exempt Loan by the Trustee during any Plan Year shall not exceed an amount equal to the sum of such contributions and earnings received during the Plan Year and Prior Plan Years minus payments made under the Exempt Loan in such Plan Years. Matching Contributions and earnings that may be used by the Trustee to make payments under the Exempt Loan shall be accounted for separately in the books and records of the Trustee until the Exempt Loan is repaid in full. Notwithstanding any provision contained herein to the contrary, all Matching Contributions (except contributions of Company Stock) made hereunder during the term of an Exempt Loan shall be deemed to be made for purposes of being used by the Trustee to satisfy its obligations under the Exempt Loan. Furthermore, all payments made by the Trustee under the Exempt Loan shall be first charged against Matching Contributions available for making such payments. Earnings that may be used to make payments under the Exempt Loan shall be deemed to have been used for that purpose only to the extent that payments made under the Exempt Loan during any Plan Year are in excess of the total Matching Contributions which are not utilized by the Trustee to pay principal and interest of an Exempt Loan shall be allocated to the Separate Accounts of eligible Members. 15.5 ALLOCATIONS OF MATCHING CONTRIBUTIONS FROM THE ESOP. Matching Contributions allocated and credited to Members' Separate Accounts pursuant to Section 4.5 in the form of Company Stock which is released from the Suspense Fund, contributed by the Employer, or purchased by the Trustee, shall be valued for such allocation purposes on the basis of the average closing price of such Company Stock on the New York Stock Exchange with respect to the month for which the Matching Contributions are made. 15.6 DIVIDENDS ON COMPANY STOCK. Except as specified in the Trust Agreement, cash dividends received with respect to the shares of Company Stock acquired with the proceeds of an Exempt Loan and held in the Suspense Fund shall be applied to the payment of principal and/or interest on any outstanding Exempt Loan and any other dividends received with respect to any other shares of Company Stock held in the ESOP shall be applied, invested, or distributed in accordance with the directions of the Company, including the payment thereof to Members either currently or in periodic payments. -50- 56 15.7 RESTRICTIONS ON COMPANY STOCK. No Company Stock shall be subject to a put, call, or other option, or any buy-sell arrangement while held by and when distributed from the ESOP, whether or not such plan is an ESOP at such time. ARTICLE XVI MISCELLANEOUS PROVISIONS 16.1 NO COMMITMENT AS TO EMPLOYMENT. Nothing herein contained shall be construed as a commitment or agreement upon the part of any Employee hereunder to continue his employment with an Employer, and nothing herein contained shall be construed as a commitment on the part of any Employer to continue the employment or rate of compensation of any Employee hereunder for any period. 16.2 BENEFITS. Nothing in the Plan shall be construed to confer any right or claim upon any person other than the parties hereto, Members and Beneficiaries. 16.3 NO GUARANTEES. Neither any Employer, including the Company, nor the Trustee guarantees the Trust from loss or depreciation, nor the payment of any amount which may become due to any person hereunder. All benefits payable under the Plan shall be paid or provided for solely from the Plan assets and neither the Company nor the Trustee assumes any liability or responsibility for the adequacy thereof. 16.4 EXCLUSIVE BENEFIT. No part of the Plan assets shall be used for any purpose other than the exclusive purpose of providing benefits which Members and Beneficiaries are entitled to under the Plan, and for the purpose of defraying the reasonable expenses of administering the Plan. 16.5 DUTY TO FURNISH INFORMATION. Each of the Employers, the Company, or the Trustee shall furnish to any of the others any documents, reports, returns, statements, or other information that any other reasonably deems necessary to perform its duties imposed hereunder or otherwise imposed by law. -51- 57 16.6 MERGER, CONSOLIDATION, OR TRANSFER OF PLAN ASSETS. The Plan shall not be merged or consolidated with any other plan, nor shall any of its assets or liabilities be transferred to another plan, unless, immediately after such merger, consolidation, or transfer of assets or liabilities, each Member, Inactive Member, and Beneficiary in the Plan would receive a benefit under the Plan which is at least equal to the benefit he would have received immediately prior to such merger, consolidation, or transfer of assets or liabilities (assuming in each instance that the Plan had then terminated). 16.7 RETURN OF CONTRIBUTIONS TO EMPLOYERS. Notwithstanding any other provision of the Plan to the contrary, Basic, Matching and Company Retirement Contributions are contingent upon the deductibility of such contributions under Section 404 of the Code. In the event a Basic, Matching or Company Retirement Contribution (or any portion thereof) is made under a mistake of fact, such a contribution shall be returned to the Employers within one year after the payment of the contribution. Since Basic, Matching, and Company Retirement Contribution (or any portion thereof) are conditioned upon the deductibility of the contribution under Section 404 of the Code as set forth above, in the event such deduction is disallowed, any such contribution shall be returned to the Employers within one year after the disallowance of the deduction. 16.8 ADDENDA. In the event that it is deemed necessary to accommodate any transition of coverage under other benefit plans to coverage under the Plan with respect to certain groups of Employees, an Addendum setting forth special overriding provisions applicable to such Employees may be added to the Plan. Each Addendum shall for all purposes constitute a part of the Plan and in the event of conflict with any other provision of the Plan, shall control. 16.9 VALIDITY OF AGREEMENT. Except as provided under federal law, the provisions of the Plan shall be governed by and construed in accordance with the laws of the State of Texas. ARTICLE XVII SECTION 415 LIMITATIONS 17.1 COMPLIANCE WITH TRA `86. The provisions set forth in this Article XVII are intended solely to comply with the requirements of Section 415 of the Code, as amended by the Tax Reform Act of 1986, and shall be interpreted, applied, and if and to the extent necessary, deemed modified without further formal language so as to satisfy solely the minimum requirements of said -52- 58 Section, subject, however, to the provisions of Section 1106(i)(3) of the Tax Reform Act of 1986. For such purpose, the limitations of Section 415 of the Code, as amended by the Tax Reform Act of 1986, are hereby incorporated, effective as of July 1, 1989, by reference and made part hereof as though fully set forth herein, but shall be applied only to particular Plan benefits in accordance with the provisions of this Article XVII to the extent such provisions are not consistent with said Article. 17.2 SECTION 415 DEFINITIONS. The following definitions shall be applicable to this Article XVII: (a) The term "ANNUAL ADDITIONS" shall mean the sum of the following amounts credited to a Member's Separate Accounts for a Limitation Year: (i) Employer contributions; (ii) for Limitation Years beginning prior to January, 1987, the lesser of (i) one-half of the non-deductible employee contributions, or (ii) the non-deductible employee contributions in excess of six percent of the Member's compensation for the Limitation Year (excluding any rollover contributions), and for Limitation Years beginning on and after January 1, 1987, the amount of such Member's contributions (excluding any rollover contributions) for such year; (iii) the amount, if any, of Employer contributions and forfeitures which are credited to the Member under any other defined contribution plan (whether or not terminated) maintained by the Employer concurrently with the Plan; (iv) reallocated forfeitures; (v) contributions to an individual medical account established pursuant to the requirements of Section 401(h) of the Code under the Plan or any other defined contribution plan or under any defined benefit plan maintained by the Employer on behalf of a participant who is a key employee within the meaning of Article XVIII of the Plan. (vi) any amount derived from contributions paid after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to a separate account of a key employee (as defined in Article XVIII of the Plan) under a welfare benefit fund (as defined in Section 419A of the Code) maintained by the Employer. -53- 59 For purposes of this Paragraph (a) any excess amount applied under Section 17.4 in the Limitation Year to reduce Employer contributions will be considered Annual Additions for such Limitation Year. (b) The term "ANNUAL BENEFIT" shall mean a retirement benefit under the plan which is payable annually in the form of a straight-life annuity. Except as provided below, a benefit payable in a form other than a straight-life annuity must be adjusted to an actuarially equivalent straight-life annuity before applying the limitations in this Article XVII. The interest rate assumption used to determine actuarial equivalence will be the greater of the interest rate specified in the Plan or five percent. The Annual Benefit does not include any benefits attributable to employee contributions or rollover contributions, or the assets transferred from a qualified plan that was not maintained by the Employer. No actuarial adjustment to the benefit is required for (i) the value of a qualified joint and survivor annuity, (ii) the value of benefits that are not directly related to retirement benefits (such as disability benefits, pre-retirement death benefits and post-retirement medical benefits), and (iii) the value of post-retirement cost-of-living increases made in accordance with Code regulations. (c) The term "COMPENSATION" shall mean compensation as defined in Code regulations Section 1.415-2(d). Compensation for any Limitation Year is the compensation actually paid or includable in gross income during such year. Notwithstanding the preceding sentence, Compensation for a Member in a profit-sharing plan who is permanently and totally disabled (as defined in Section 37(e)(3) of the Code) is the compensation such Member would have received for the Limitation Year if the Member had been paid at the rate of compensation paid immediately before becoming permanently and totally disabled; such imputed compensation for the disabled Member may be taken into account only if the Member is not an officer, an owner, or highly compensated, and contributions made on behalf of such Member are nonforfeitable when made. (d) The term "DEFINED BENEFIT FRACTION" shall mean a fraction, the numerator of which is the sum of the Member's Projected Annual Benefit under all defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation in effect for the Limitation Year under Section 415(b)(1)(A) of the Code, or 140 percent of the Member's Highest Average Compensation. Notwithstanding the preceding sentence, if the Member was a participant in one or more defined benefit plans maintained by the Employer which were in existence on July 1, 1982, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Member had accrued as of the later of September 30, 1983 or the end of the last Limitation Year beginning before January 1, 1983. The preceding sentence applies only if the defined -54- 60 benefit plans individually and in the aggregate satisfied the requirements of Section 415 of the Code as in effect at the end of the 1982 Limitation Year. (e) The term "DEFINED CONTRIBUTION FRACTION" shall mean a fraction, the numerator of which is the sum of the Annual Additions to the Member's Accounts under all defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation Years (including the Annual Additions attributable to the Member's non-deductible employee contributions to all defined benefit plans, whether or not terminated, maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior Limitation Years of service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any Limitation Year is the lesser of 125 percent of the dollar limitation in effect under Section 415(c)(1)(A) of the Code, or 25 percent of the Member's compensation for such year. If the Member was a participant in one or more defined contribution plans maintained by the Employer which were in existence on July 1, 1982, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of the Plan. Under the adjustment, an amount equal to the product of (i) the excess of the sum of the fractions over 1.0 times (ii) the denominator of this fraction, which will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the later of September 30, 1983, or the end of the last limitation year beginning before January 1, 1983. This adjustment will also be made if at the end of the last Limitation Year beginning before January 1, 1984, the sum of the fractions exceeds 1.0 because of accruals or additions that were made before the limitations of this Article XVII became effective to any plans of the Employer in existence on July 1, 1982. (f) The term "EMPLOYER" shall mean the Company and all members of a controlled group of corporations (as defined in Section 414(b) of the Code, as modified by Section 415(h) of the Code), commonly controlled trades or businesses (as defined in Section 414(c) of the Code, as modified by Section 415(h) of the Code), or affiliated service groups (as defined in Section 414(m) of the Code) of which the Company is a part. (g) The term "EXCESS AMOUNT" shall mean the excess of the Member's Annual Additions for the Limitation Year over the Defined Contribution Maximum Permissible Amount. (h) The term "HIGHEST AVERAGE COMPENSATION" shall mean the average compensation for-the three consecutive years of service with the Employer -55- 61 that produces the highest average. A year of service with the Employer shall be any 12-consecutive month period of service. (i) The term "LIMITATION YEAR" shall mean the 12-consecutive month period corresponding with the calendar year. If the Limitation Year is amended to a different 12-consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. (j) "DEFINED CONTRIBUTION MAXIMUM PERMISSIBLE AMOUNT" shall mean the lessor of (i) $30,000 (adjusted in accordance with regulations prescribed by the Secretary of the Treasury for increases in the cost of living) or if greater,1/4 of the dollar limitation in effect under Section 415(b)(1)(A) of the Code, or (ii) 25 percent of such Participant's Compensation paid for such Limitation Year. If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12-month consecutive period, such Annual Additions shall not exceed $30,000 multiplied by a fraction, the numerator of which is the number of months in the short Limitation Year and the denominator of which is 12. (k) The term "DEFINED BENEFIT MAXIMUM PERMISSIBLE AMOUNT" shall mean the lesser of $90,000 or 100 percent of the Member's Highest Average Compensation. If the annual benefit commences before age 62 (on and after January 1, 1987, the Social Security Retirement Age), the Defined Benefit Maximum Permissible Amount may not exceed the lessor of the actuarial equivalent of a $90,000 annual benefit beginning at age 62 (on and after January 1, 1987, the Social Security Retirement Age), or the Member's Highest Average Compensation. This actuarial adjustment will not reduce the $90,000 limitation below (a) for Limitation Years beginning prior to January 1, 1987, $75,000, if the benefit begins at or after age 55 or if the annual benefit commences before age 55, the greater of (i) the actuarial equivalent of a $75,000 annual benefit commencing at age 55, or (ii) the actuarial equivalent of a $90,000 annual benefit beginning at age 62, or (b) for Limitation Years beginning on and after January 1, 1987, the equivalent of a $90,000 Annual Benefit commencing at the Social Security Retirement Age. To determine actuarial equivalence, prior to January 1, 1987, the interest rate assumption shall be the greater of the rate specified in the Plan or five percent and on and after January 1, 1987, the manner prescribed by the Secretary of the Treasury. If the annual benefit commences after age 65, the benefit may not exceed the lesser of the actuarial equivalent of a $90,000 annual benefit beginning at age 65 or the Member's highest average compensation. To determine actuarial equivalence after age 65, the interest rate assumption shall not exceed the greater of the rate specified in the Plan or five percent. Effective on January 1, 1988, and each January 1 thereafter, the $90,000 limitation above will be automatically adjusted to the new dollar limitation -56- 62 for that calendar year, determined under applicable Code provisions. The new limitation will apply to Limitation Years beginning within the calendar year of the date of adjustment. Notwithstanding the foregoing provisions, if the Member was a participant in a plan in existence on July 1, 1982, the defined benefit maximum permissible amount shall not be less than the Member's current accrued benefit. If the Annual Benefit commences when the Member has participated in the Plan less than ten years, the defined benefit maximum permissible amount otherwise defined herein shall be reduced by l/10th for each year his participation is less than ten. (1) The term "CURRENT ACCRUED BENEFIT" shall mean a Member's Annual Benefit (including optional benefit forms) accrued as of the later of the end of the last Limitation Year beginning before January 1, 1983, or September 30, 1983, but determined without regard to changes in the Plan or the cost-of-living increases occurring after July 1, 1982. (m) The term "PROJECTED ANNUAL BENEFIT" shall mean the Annual Benefit, as defined in Paragraph (b), to which the Member would be entitled under the terms of the Plan assuming: (i) the Member continued employment until normal retirement age under the Plan (or current age, if later); and (ii) the Member's compensation for the current Limitation Year and all relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years. (n) The term "SOCIAL SECURITY RETIREMENT AGE" shall mean the age used as the retirement age under Section 216(1) of the Social Security Act, without regard to any age increase factor and as if the early retirement age under said Section 216(1)(2) were 62. 17.3 LIMITATIONS ON ALLOCATIONS FOR SINGLE PLAN PARTICIPATION. The provisions of this Section 17.3 shall apply for each Limitation Year, if the Member is not covered, and never has been covered, by another qualified plan maintained by the Employer. (a) If the Member does not participate in, and has never participated in another qualified plan maintained by the Employer, the amount of Annual Additions which may be credited to the Member's Separate Accounts for any Limitation Year shall not exceed the lesser of the Defined -57- 63 Contribution Maximum Permissible Amount or any other limitation contained in the Plan. If the Employer contributions that would otherwise be contributed or allocated to the Member's Separate Accounts would cause the Annual Additions for the Limitation Year to exceed the Defined Contribution Maximum Permissible Amount, the amount contributed or allocated shall be reduced so that the Annual Additions for the Limitation Year will equal the Defined Contribution Maximum Permissible Amount. (b) If a Member makes non-deductible employee contribution under the terms of the plan, for Limitation Years beginning prior to January 1, 1987, the lesser of (i) the amount of such contributions in excess of six percent of the Member's Compensation, or (ii) one-half of such contributions, which are credited for the Limitation Year, and for Limitation Years beginning on and after January 1, 1987, the amount of such Member's contributions (excluding any rollover contributions) for such year, shall be treated as an Annual Addition to a qualified defined contribution plan, for purposes of Paragraph (a) above of this Section 17.3 and Paragraph (b) of Section 17.4. (c) The limitation in Paragraph (a) above shall be deemed satisfied if the Annual Benefit payable to a Member is not more than $1,000.00 multiplied by the participant's number of years of service (not to exceed 10) with the Employer, and the Employer has not at any time maintained a defined contribution plan in which such Member participated. 17.4 LIMITATIONS ON ALLOCATIONS FOR MULTIPLE PLAN PARTICIPATION. This Section 17.4 shall apply if the Member is covered, or has been covered at any time, by another qualified plan maintained by the Employer. (a) If the Member is, or has ever been, covered under more than one defined benefit plan maintained by the Employer, the sum of the Member's Annual Benefits from all such plans may not exceed the Defined Benefit Maximum Permissible Amount; and, the provisions of Paragraph (c) of Section 17.9 shall apply. (b) If the Employer maintains, or at any time maintained, one or more qualified defined contribution plans covering any Member, the sum of the Member's Defined Contribution Fraction and Defined Benefit Fraction shall not exceed 1.0 in any Limitation Year, and the Annual Benefit otherwise payable to the Member under the Plan shall be limited in accordance with the provisions of Paragraph (d) of Section 17.9. -58- 64 17.5 GRANDFATHERED DEFINED BENEFIT PLAN LIMITATION. In the case of an individual who was a participant in one or more defined benefit plans of the Employer before September 30, 1983, the application of the limitations in Sections 17.3 and 17.4 shall not cause the Defined Benefit Maximum Permissible Amount for such individual under all such defined benefit plans to be less than the individual's accrued benefit under all such defined benefit plans as of September 30, 1983. The preceding sentence applies only if all such defined benefit plans met the requirements of Section 415 of the Code, as in effect on July 1, 1982, for all Limitation Years beginning before September 30, 1983. 17.6 LIMITATIONS ON ALLOCATIONS FOR DEFINED CONTRIBUTION PLAN. Since the Plan is a defined contribution plan, the following provisions shall apply: (a) If the Member does not participate in, and has never participated in another qualified plan maintained by the Employer, the amount of Annual Additions which may be credited to the Member's account for any Limitation Year shall not exceed the lesser of the Defined Contribution Maximum Permissible Amount or any other limitation contained in the Plan. If the Employer contributions that would otherwise be contributed or allocated to the Member's Separate Account would cause the Annual Additions for the Limitation Year to exceed the Defined Contribution Maximum Permissible Amount, the amount contributed or allocated shall be reduced so that the Annual Additions for the Limitation Year will equal the Defined Contribution Maximum Permissible Amount. (b) Prior to determining the Member's actual compensation for the Limitation Year, the Employer may determine the Defined Contribution Maximum Permissible Amount for a Member on the basis of a reasonable estimation of the Member's Compensation for the Limitation Year, uniformly determined for all Members similarly situated. As soon as is administratively feasible after the end of the Limitation Year, the Defined Contribution Maximum Permissible Amount for the Limitation Year shall be determined on the basis of the Member's actual Compensation for the Limitation Year. (c) If there is an Excess Amount, the excess shall be disposed of as follows: (1) Any non-deductible voluntary employee contributions, to the extent they would reduce the excess amount, shall be returned to the Member; (2) If after the application of subparagraph (1) above, an Excess Amount still exists, and the Member is covered by the Plan at the end of the Limitation Year, the excess amount in the Member's Separate Accounts shall be used to reduce Employer contributions -59- 65 (including any allocations of forfeitures) for such Member in the next Limitation Year, and each succeeding year, if necessary; (3) If after the application of subparagraph (1) above, an Excess Amount still exists, and the Member is not covered by the Plan at the end of the Limitation Year, the Excess Amount shall be held unallocated in a suspense account. The suspense account shall be applied to reduce future Employer contributions (including allocation of any forfeitures) for all remaining Members in the next Limitation Year, and each succeeding Limitation Year, if necessary. (4) If a suspense account is in existence at any time during the Limitation Year pursuant to this Section 17.6, it will not participate in the allocation of the investment gains and losses on the Plan's assets. (5) In applying the provisions in the preceding paragraphs of this Paragraph (c), whenever it is necessary to reduce contributions to eliminate an Excess Amount, such reduction shall be made (i) first, from the contributions as provided in subparagraph (1) above, (ii) second, from any non-deductible employee contributions other than those in (i) and any matching Employer contribution associated therewith, to the extent they would reduce the excess amount, (iii) third, from any Employer contributions other than those described in the following (iv), (v) and (vi), (iv) fourth, from any Employer contributions to an employee stock ownership plan maintained by the Employer, (v) fifth, from any Employer contributions which are matching contributions for contributions described in the following (vi), and (vi) sixth, from any Employer contributions which are pay-deferral contributions elected by the participant under a cash or deferred plan described in Section 401(k) of the Code. 17.7 LIMITATION FOR MULTIPLE DEFINED CONTRIBUTION PLAN PARTICIPATION. This Section 17.7 applies if, in addition to the Plan, the Member is covered under another defined contribution plan maintained by the Employer during any Limitation Year. The Annual Additions which may be credited to a Member's Separate Accounts under the Plan for any such Limitation Year shall not exceed the Defined Contribution Maximum Permissible Amount reduced by the Annual Additions credited to a Member's accounts under the other plans for the same Limitation Year. If the Annual Additions with respect to the Member under other defined contribution plans maintained by the Employer are less than the Defined Contribution Maximum Permissible Amount, and the Employer contribution that would otherwise be contributed or allocated to the Member's Separate Accounts under the Plan would cause the Annual Additions for the Limitation Year to -60- 66 exceed this limitation, the amount contributed or allocated shall be reduced so that the Annual Additions under all such plans for the Limitation Year shall equal the Defined Contribution Maximum Permissible Amount. If the Annual Additions with respect to the Member under such other defined contribution plans in the aggregate are equal to or greater than the Defined Contribution Maximum Permissible Amount, no amount shall be contributed or allocated to the Member's Separate Accounts under the Plan for the limitation year. (a) Prior to determining the Member's actual Compensation for the Limitation Year, the Employer may determine the Defined Contribution Maximum Permissible Amount for a Member in the manner described in Paragraph (b) of Section 17.6. As soon as is administratively feasible after the end of the Limitation Year, the Defined Contribution Maximum Permissible Amount for the Limitation Year shall be determined on the basis of the Member's actual Compensation for the Limitation Year. (b) If, pursuant to Paragraph (a) above, a Member's Annual Additions under the Plan and such other plans will result in an Excess Amount for a Limitation Year, the Excess Amount shall be deemed to consist of the Annual Additions last allocated. (c) If an Excess Amount was allocated to a Member on an allocation date of the Plan which coincides with an allocation date of another plan, the Excess Amount attributable to the Plan shall be the product of: (1) The total Excess Amount allocated as of such date, times (2) The ratio of (i) the Annual Additions allocated to the Member for the Limitation Year as of such date under the Plan to (ii) the total Annual Additions allocated to the Member for the Limitation Year as of such date under this and all other qualified defined contribution plans. (d) Any excess amount attributable to the Plan shall be disposed of in the manner described in Paragraph (c) of Section 17.6. 17.8 LIMITATION FOR MULTIPLE DEFINED BENEFIT PLAN PARTICIPATION. If the Employer maintains or at any time maintained one or more qualified defined benefit plans covering any Member in the Plan, the sum of the Member's Defined Benefit Plan Fraction and Defined Contribution Fraction shall not exceed 1.0 in any Limitation Year. The Annual Additions which may be credited to the Member's Separate Accounts under the Plan for any Limitation Year shall be limited in accordance with Paragraph (d) of Section 17.9. -61- 67 17.9 MULTIPLE PLANS; OVERALL LIMITATIONS. For any Member who is covered by the Plan and who is also covered, or has ever been covered, by another qualified plan maintained by the Employer, the following provisions shall apply in addition to the otherwise applicable provisions in Sections 17.3 and 17.4: (a) For purposes of the benefit limitations in this Article XVII all defined benefit plans maintained by the Employer, whether or not terminated, shall be treated as one defined benefit plan, and all defined contribution plans maintained by the Employer, whether or not terminated, are to be treated as one defined contribution plan. (b) If a Member is covered by more than one defined contribution plan maintained by the Employer, the contribution allocation provisions under Section 17.7 and Paragraph (c) of Section 17.6 shall be applied, where applicable, so as to satisfy the contribution allocation limitations stated therein. In any case where it is necessary to reduce an Excess Amount for a Limitation Year, reduction shall be made as among the defined contribution plans in the manner as provided in such Section 17.7 and Paragraph (c) of Section 17.6. (c) If a Member is, or has ever been, covered under more than one defined benefit plan maintained by the Employer, the provisions of Sections 17.3 and Paragraph (a) of Section 17.4 shall apply to his Annual Benefit. The reduction in the rate of benefit accrual that is necessary to reduce the Member's Annual Benefit, as provided in Section Paragraph (a) of Section 17.3 and Paragraph (a) of Section 17.4 or Paragraph (d) below, shall be made as among the defined benefit plans in a manner as determined by the Employer so as to satisfy the benefit limitations in this Article XVII and maximize the benefit payable to the Member. (d) In any case where it is necessary to limit a benefit or allocation as provided in Paragraph (b) of Section 17.4 or Section 17.8, such limitations shall be satisfied by reducing the rate of benefit accruals under the defined benefit plan or plans to the extent necessary to satisfy the applicable limitation. ARTICLE XVIII TOP-HEAVY PLAN RULES 18.1 APPLICATION. For any Plan Year in which the Plan is a Top-Heavy Plan (as defined in Section 2), the provisions set forth in this Article XVIII shall be applied in accordance with Section 416 of the Code. -62- 68 18.2 TOP-HEAVY DEFINITIONS. The following definitions shall be applicable to this Article XVIII: (a) The term "COMPENSATION" shall mean the annual Compensation to be taken into account under the Plan during any Plan Year in which the Plan is determined to be a top-heavy plan; provided, however, that such Compensation shall not exceed $150,000, or such adjusted amount determined by the Secretary of the Treasury pursuant to Section 416(d)(2) of the Code. (b) The term "DETERMINATION DATE" shall mean for any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year and for the first Plan Year of the Plan, the last day of that Year. (c) The term "EMPLOYER" shall mean the Company and each Controlled Entity. (d) The term "KEV EMPLOYEE" shall mean any Employee or former Employee (and the beneficiaries of such Employer) who at any time during the Plan Year containing the determination period or the four preceding Plan Years is or was (i) an officer of the Employer having annual compensation in excess of 50 percent of the dollar limitation under Section 415(b)(1)(A) of the Code for the calendar year in which such Plan Year ends; (ii) one of the ten employees having annual compensation from the Employer of more than the limitation in effect under Section 415(c)(1)(A) of the Code and owning (or considered as owning within the meaning of Section 318 of the Code) the largest interests of the Employer; (iii) a 5 percent owner of the Employer; or (iv) a 1 percent owner of the Employer who has an annual compensation of more than $150,00. (e) The term "PERMISSIVE AGGREGATION GROUP" shall mean the Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Section 401(a)(4) and 410 of the Code. (f) The term "PRESENT VALUE" shall mean for purposes of computing present value calculations in determining the Top-Heavy Ratio, present value calculations based on the actuarial assumptions as stated in the applicable plan. (g) The term "REQUIRED AGGREGATION GROUP" shall mean (a) each tax qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the plan terminated), and (b) any other tax qualified -63- 69 plan of the Employer which enables a plan described in clause (a) to meet the requirements of Section 401(a)(4) or 410 of the Code. (h) The term "SUPER TOP-HEAVY GROUP" with respect to a particular Plan Year shall mean a Required or Permissive Aggregation Group that, as of the Determination Date, would qualify as a Top-Heavy Group under the definition in Paragraph (j) of this Article XVIII with "90 percent" substituted for "60 percent" each place where "60 percent" appears in such definition. (i) The term "SUPER TOP-HEAVY PLAN" with respect to a particular Plan Year shall mean a plan that, as of the Determination Date, would qualify as a Top-Heavy Plan under the definition in Paragraph (k) of this Article XVIII with "90 percent" substituted for "60 percent" each place where "60 percent" appears in such definition. A plan is also a "Super Top-Heavy Plan" if it is part of a Super Top-Heavy Group. (j) The term "TOP-HEAVY GROUP" with respect to a particular Plan Year shall mean a Required or Permissive Aggregation Group if the sum, as of the Determination Date, of the present value of the cumulative accrued benefits for Key Employees under all defined benefit plans included in such group and the aggregate of the account balances of Key Employees under all defined contribution plans included in such group exceeds 60 percent of a similar sum determined for all employees covered by the plans included in such group. (k) The term "TOP-HEAVY PLAN" for any Plan Year beginning after December 31, 1983, the Plan shall be a Top-Heavy Plan if any of the following conditions exist: (i) If the Top-Heavy Ratio for the Plan exceeds 60 percent and the Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of plans. (ii) If the Plan is a part of a Required Aggregation Group of plans but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the group of plans exceeds 60 percent. (iii) If the Plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60 percent. (1) The term "TOP-HEAVY RATIO" shall mean: (i) While the Employer maintains one or more defined contribution plans (including any simplified employee pension plan) and the -64- 70 Employer has not maintained any defined benefit plan which during the 5-year period ending on the Determination Date(s) has or has had accrued benefits, the Top-Heavy Ratio for the Plan alone or for the Required or Permissive Aggregation Group, as appropriate, is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date(s) (including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)), both computed in accordance with Section 416 of the Code. Both the numerator and denominator of the Top-Heavy Ratio are adjusted to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under Section 416 of the Code. (ii) While the Employer maintains one or more defined contribution plans (including any simplified employee pension plans) and the Employer maintains or has maintained one or more defined benefit plans which during the 5-year period ending on the Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of account balances under the aggregated defined contribution plan or plans for all Key Employees, determined in accordance with Subparagraph (i) above, and the present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all participants, determined in accordance with Subparagraph (i) above, and the present value of accrued benefits under the defined benefit plan or plans for all participants as of the Determination Date(s), all determined in accordance with Section 416 of the Code. The accrued benefits under a defined benefit plan in both the numerator and denominator of the Top-Heavy Ratio are adjusted for any distribution of an accrued benefit made in the five-year period ending on the Determination Date. (iii) For purposes of subparagraphs (i) and (ii) above, the value of account balances and the present value of accrued benefits will be determined as of the most recent valuation date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in Section 416 of the Code for the first and second plan years of a defined benefit plan. The account balances -65- 71 and accrued benefits of a participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (2) who has not performed services for the Employer maintaining the Plan at any time during the 5-year period ending on the Determination Date will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers and transfers are taken into account will be made in accordance with Section 416 of the Code. Deductible employee contributions shall not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans the value of account balances and accrued benefits will be calculated with reference to the Determination Date that falls within the same calendar year. (m) The term "VALUATION DATE" shall mean for purposes of computing the Top-Heavy Ratio, the Determination Date. (n) The term "NON-KEV EMPLOYEE" shall mean any Employee who is not a Key Employee. 18.3 TOP-HEAVY MINIMUM ALLOCATION RULES. The following Top-Heavy Plan minimum allocation rules shall apply: (a) Except as otherwise provided in Paragraphs (b) and (c) below, the Employer contributions and forfeitures allocated on behalf of any Member who is not a Key Employee shall be the lesser of three percent of the non-Key Employee's compensation or in the case where the Employer has no defined benefit plan which designates the Plan to satisfy Section 401 of the Code, the largest percentage of the first $150,000 of the Key Employee's compensation, allocated on behalf of any Key Employee for the Plan Year. Basic Contributions cannot be used to satisfy the minimum Section 416 contributions for non-key employees. Further, in making the determination of the percentage at which contributions are made for the Key Employee with the highest percentage, Basic Contributions on behalf of Key Employees are taken into account. (b) The provisions in Paragraph (a) shall not apply to any Member who is not actively employed as an Eligible Employee by the Employer on the last day of the Plan Year for which the minimum allocation is to be made. (c) The provisions in Paragraph (a) shall not apply to any Member to the extent the Member is covered under any other plan or plans of the Employer, and by the terms of such plan or plans it is provided that the minimum allocation or benefit requirements applicable to Top-Heavy Plans shall be met in such other plan or plans. If such other plan is, or if one of such other plans is, a defined benefit plan maintained by the -66- 72 Employer, and such plan is a Top-Heavy Plan, the minimum benefit requirements applicable to Top-Heavy Plans shall be met under such defined benefit plan as provided therein, to the extent such benefit can be provided under such plan or plans. If such other plan is, or if one of such other plans is, a defined contribution plan maintained by the Employer, and such plan is a Top-Heavy Plan, the minimum allocation requirements shall be met under such plan, except as may be otherwise provided in such other plan. The application and administration of the minimum allocation or benefit requirements for Top-Heavy Plans shall be satisfied in a manner so as to only satisfy the minimum allocation/benefit requirements as permissible and so as to avoid any duplication of minimum allocation/benefits for non-Key Employees, as provided under Section 416 of the Code. 18.4 TOP-HEAVY COMPENSATION LIMITATION. The annual compensation of any Member to be taken into account under the Plan during any Plan Year in which the Plan is determined to be a Top-Heavy Plan shall not exceed $150,000 (or such adjusted amount determined by the Secretary of the Treasury pursuant to Section 416(d)(2) of the Code). 18.5 TOP-HEAVY VESTING PROVISIONS. In the event that the Plan is determined to be a Top-Heavy Plan with respect to any Plan Year, a Member who is eligible to receive the vested interest of his IAR Account in accordance with the provisions of Section 7.2 shall be vested in a portion of IAR Account which shall be no less than it would be under following vesting schedule:
Years of Service Vested Percentage ---------------- ----------------- Less than two years 0% Two but less than three years 20% Three but less than four years 40% Four but less than five years 60% Five but less than six years 80% Six or more years 100%
18.6 TOP-HEAVY PLAN/BENEFIT LIMITATIONS. In any Plan Year in which the Plan is a Top-Heavy Plan, the denominators of the defined benefit fraction and the defined contribution fraction (as such terms are used in applying the benefit limitation provisions of Section 415 of the Code) shall be computed using 100 percent of the dollar limitation instead of 125 percent. Executed at Houston, Texas, this 31st day of July, 1997. -67- 73 COOPER CAMERON CORPORATION By /s/ FRANKLIN MYERS ---------------------------- Title: Senior Vice President ----------------------- -68- EX-10.25 7 1998 MANAGEMENT INCENTIVE COMPENSATION PLAN 1 EXHIBIT 10.25 COOPER CAMERON CORPORATION 1998 MANAGEMENT INCENTIVE COMPENSATION PLAN I. PURPOSE The Cooper Cameron Management Incentive Compensation Plan (the "Plan"), has been designed to motivate and reward key management employees whose efforts impact the performance of Cooper Cameron Corporation (the "Company") and its subsidiaries through the achievement of pre-established financial and individual objectives. Performance under the Plan is measured on the fiscal (calendar) year and payments under the Plan are made annually. II. ELIGIBILITY Officers and key management employees may be eligible to participate in the plan, upon the recommendation of their manager and approval by the Chief Executive Officer of the Company. An employee who is eligible to participate in any other cash incentive plan of the company is not eligible to participate in this Plan. III. AWARD CRITERIA The Compensation Committee of the Board of Directors is responsible for approving the Company performance objectives that are used to determine awards paid for Company objectives under this plan. Performance objectives for operating units below the corporate level will be established by the appropriate manager subject to overall approval of the Chief Executive Officer. For 1998, performance under the Plan will be determined based on: Earnings Before Interest, Taxes and Depreciation (EBITDA) Return on Equity (ROE) The basic measure of financial performance under this Plan will be EBITDA. In addition, ROE will be used as an attainment hurdle, which must be reached before bonuses are paid in full. For 1998, the Board has established a 15% ROE hurdle. If this ROE target is not achieved for the year, bonuses, to the extent earned, will be reduced by 50%. The Chief Executive Officer may also implement additional division specific payout hurdles from time to time. In addition, up to 25% of an individual's award may, at the discretion of the individual's immediate manager, be based on individual objectives established at the beginning of the calendar year. IV. TARGET AWARDS A target award percentage is established for each position eligible to participate in the Plan. Target awards (TA's) may range from 10% to 75%, depending on position, of each participant's January 1 base pay (or pay at the time of becoming a participant, if later). Generally, the participating employee receives the Target Award when performance under the plan meets, but does not exceed, the pre-established performance objectives. 2 V. AWARD CATEGORIES A participant may have Company Objectives, Division Objectives, Operating Unit Objectives and/or Individual Objectives, each of which is assigned by the immediate manager and provided a weighting in determining the Target Award. VI. PERFORMANCE MEASUREMENT Minimum This is the lowest level of performance at which an award will be generated for this particular objective of the plan. The award paid for performance at the minimum level is 50% of Target Award. There will be no payment for performance below the minimum level. Target Performance This is the expected level of performance based on the current year's financial plan. Maximum This is the performance level for which the maximum award under the plan will be paid. The maximum award under the plan is limited to 200% of the Target Award. VII. AWARD CALCULATION Attainment on the financial objectives of the Plan is measured based on actual results versus Plan targets, with performance above or below Plan targets prorated up/down to the maximum/minimum levels established for each financial objective. For example, assume the following hypothetical objectives: Minimum Level $180 million Company EBITDA Target $200 million Maximum Level $230 million At EBITDA performance of $220 million, attainment = 166.6% (Prorated between $200 million objective and $230 million maximum). At EBITDA performance of $185 million, attainment = 62.5% (Prorated between $200 million objective and $180 million minimum objective). Following are examples of how payouts are determined under the Plan once attainment has been calculated: A. Corporate Participant:
- ----------------------------------------------------------------------------------------------------------- EBITDA ATTAINMENT ROE HURDLE ACHIEVED PARTICIPANT AWARD - ----------------------------------------------------------------------------------------------------------- 110% YES 110.0% - ----------------------------------------------------------------------------------------------------------- 110% NO 55.0% - ----------------------------------------------------------------------------------------------------------- 85% YES 85.0% - ----------------------------------------------------------------------------------------------------------- 85% NO 42.5% - ----------------------------------------------------------------------------------------------------------- 180% YES 180.0% - -----------------------------------------------------------------------------------------------------------
3 B. Division Operating Unit Participant without Individual Objectives: Assume ROE hurdle is achieved
- --------------------------------------------------------------------------------------------------- ATTAINMENT WEIGHT PERFORMANCE LEVEL - --------------------------------------------------------------------------------------------------- Division EBITDA 110% 30% 33.0% - --------------------------------------------------------------------------------------------------- Operating Unit EBITDA 85% 50% 42.5% - --------------------------------------------------------------------------------------------------- Individual Objective 100% 20% 20.0% - --------------------------------------------------------------------------------------------------- PARTICIPANT AWARD 95.5% - ---------------------------------------------------------------------------------------------------
C. Division Operating Unit Participant with Individual Objectives: Assume ROE hurdle is achieved
- ------------------------------------------------------------------------------------------------------- EBITDA ATTAINMENT WEIGHT PERFORMANCE LEVEL - ------------------------------------------------------------------------------------------------------- Division 110% 40% 44.0% - ------------------------------------------------------------------------------------------------------- Operating Unit 85% 40% 34.0% - ------------------------------------------------------------------------------------------------------- INDIVIDUAL OBJECTIVE ATTAINMENT - ------------------------------------------------------------------------------------------------------- Working Capital 40% 10% 4.0% - ------------------------------------------------------------------------------------------------------- Bookings 100% 10% 10.0% - ------------------------------------------------------------------------------------------------------- PARTICIPANT AWARD 92.0% - -------------------------------------------------------------------------------------------------------
For example, if the participant's salary is $80,000, target award is 20% ($16,000) = payout of $16,000 x 92% = $14,720. VIII. DISCRETIONARY AWARDS There may be unusual situations where a manager feels that the reward generated under this plan does not properly reflect the contribution of the participant. In this situation, the participant's immediate manager has the right to recommend an adjustment, either up or down, of up to 25% of the participant's Target Award. IX. INDIVIDUAL OBJECTIVES A participant's immediate manager has the discretion to set individual objectives as part of the employee's performance criteria under the incentive plan. The use of individual objectives is subject to the following requirements: The manager must specify the weighting of the individual objectives in the overall Target Award, not to exceed 25% of the total award Individual objectives must be specifically identified at the beginning of the plan year and must be quantifiable in terms of both the targeted achievement and the time frame in which the objective is to be completed. The portion of the award payment generated from individual objectives may be adjusted up or down based on the manager's assessment of the individual's results on the established objectives. 4 X. ALTERNATIVE CALCULATIONS There may be circumstances under which the financial performance of the Company does not generate an award under this program. The nature and scope of the Company's operations are such that at times unanticipated economic and market conditions may render pre-established financial objectives unattainable in any given plan year. If, in the opinion of the Committee, such circumstances should arise, an alternative bonus calculation may be performed. Such calculation will rank the Company's EBITDA against a pre-established peer group of companies. If the Company's performance is at or above 60th percentile, then a bonus payment equal to 50% of target award may be paid. XI. MODIFICATIONS If, during a Plan Year, there has occurred or should occur, in the opinion of the Company, a significant beneficial or adverse change in economic conditions, the indicators of growth or recession in the Company's business segments, the nature of the operations of the Company, or applicable laws, regulations or accounting practices, or other matters which were not anticipated by the Company when it approved Company and Division Objectives for the Plan Year and which, in the Company's judgment, had, have, or are expected to have a substantial positive or negative effect on the performance of the Company as a whole, the Compensation Committee, subject to ratification by the Board, may modify or revise the Performance Objectives for the Plan Year in such manner as it may deem appropriate in its sole judgment. By way of illustration, and not limitation, such significant changes might result from sales of assets, or mergers, acquisitions, divestitures, or spin-offs. XII. PAYMENT Any awards generated under the 1998 MICP must be approved by the Compensation Committee of the Board of Directors. It is anticipated that any MICP awards generated in 1998 will be paid during February 1999. Employees terminating prior to the end of the fiscal year are not eligible for payment of any award under this plan unless termination is due to retirement or economic reduction in force. In such cases, any bonus payments will be prorated to the date of termination and determined on the basis of bonuses actually paid to similarly situated employees. EX-13.1 8 PORTIONS OF THE 1997 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF COOPER CAMERON CORPORATION The following discussion of the Company's historical results of operations and financial condition should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere in this Annual Report. All per share amounts included in this discussion are based on "diluted" shares outstanding. OVERVIEW The Company's operations are organized into two separate and distinct business segments -- Petroleum Production Equipment and Compression and Power Equipment. Petroleum Production Equipment, which includes the Cameron division and Wheeling Machine (through November 1995), manufactures and markets a wide variety of equipment for use in oil and natural gas production, transmission and drilling including valves, wellhead equipment, blowout preventers ("BOPs") and control systems for land, platform and subsea applications. Compression and Power Equipment, which includes Cooper Energy Services and Cooper Turbocompressor, manufactures and markets engines, gas turbines and centrifugal gas and air compressors for use in oil and natural gas production and transmission as well as a wide variety of other industrial applications. The following table sets forth the percentage relationship to revenues of certain income statement items for the periods presented.
YEARS ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Revenues 100.0% 100.0% 100.0% - ----------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales (exclusive of depreciation and amortization) 71.8 72.8 77.1 Depreciation and amortization 3.7 4.5 6.3 Selling and administrative expenses 11.9 14.1 15.8 Interest expense 1.6 1.5 2.0 Provision for impairment of goodwill -- -- 38.6 Nonrecurring/unusual charges -- 0.5 3.6 - ----------------------------------------------------------------------------------------------------- Total costs and expenses 89.0 93.4 143.4 - ----------------------------------------------------------------------------------------------------- Income (loss) before income taxes 11.0 6.6 (43.4) Income tax provision (3.2) (2.0) (0.3) - ----------------------------------------------------------------------------------------------------- Net income (loss) 7.8% 4.6% (43.7)% =====================================================================================================
1997 COMPARED TO 1996 Cooper Cameron Corporation had net income of $140.6 million, or $2.53 per share, for the twelve months ended December 31, 1997. This compares to $64.2 million, or $1.21 per share (adjusted for a 2-for-1 stock split), for the same period in 1996. The improvement was largely the result of strong performance in the Petroleum Production Equipment segment, where operating income increased by 123%. Full year 1997 pre-tax income includes a $5.7 million charge, or $.07 per share, for a settlement with a customer and a $2.6 million charge, or $.03 per share, for cost rationalization, both in the Compression and Power Equipment segment. The settlement with a customer related to a commercial R&D compression project undertaken by Cooper Energy Services. The charge was for an order taken during the fourth quarter of 1995, which called for the development of a new high-performance barrel compressor for use on an offshore platform. Since the newly designed compressor did not meet the customer's specifications, the Company agreed to provide a replacement compressor from another source to be used with the Cooper Rolls turbine, and to absorb the costs related to the delay in delivery of the equipment. The Company has no other orders of this type. The $2.6 million covers further cost rationalization efforts at Cooper Energy Services, including approximately $1.1 million of severance or relocation costs for a total of 23 people and $1.5 million related to the closure of certain sales and distribution facilities as well as one small manufacturing facility. The full year 1996 pre-tax income includes nonrecurring or unusual charges totaling $7.3 million, or $.10 per share (see Note 3 of the Notes to Consolidated Financial Statements). REVENUES Revenues for 1997 totaled $1.81 billion, an increase of 30% from the $1.39 billion in 1996. The June 1996 Ingram Cactus acquisition, which is included for twelve months in 1997 and six months in 1996, and strong market fundamentals, driven largely by increasing worldwide demand for oil and natural gas, were the primary factors in this improvement. Although periodic fluctuations were experienced, particularly in the fourth quarter of 1997, oil and natural gas prices remained at levels acceptable to the 21 2 marketplace, and continued to provide the impetus for increased spending by national oil companies and major and independent producers. While the economic and financial unrest in Southeast Asia and uncertainty regarding the quantity and timing of oil shipments from Iraq have affected the short-term price of oil, there has been no indication to date that the Company's oil and gas customers have reduced their spending plans. Further declines in oil prices, however, particularly if viewed by the market as being a long-term trend, or declines in the price of natural gas, depending on severity and perceived duration, could result in either a reduction in the market growth which the Company currently anticipates or even a reduction in current activity levels. Approximately 77% of the improvement in total revenues was from the Petroleum Production Equipment segment and 23% from the Compression and Power Equipment segment. The effect of the favorable market conditions was also reflected in the Company's backlog, defined as firm customer orders for which a purchase order has been received, satisfactory credit or financing arrangements exist and delivery is scheduled. Backlog at December 31, 1997 was $786.1 million, an increase of 8% from year-end 1996. The Petroleum Production Equipment segment's revenues totaled $1.11 billion, an increase of 39% over 1996 revenues of $798.6 million. The segment's revenue growth was across all geographic areas and product lines. This increase was primarily due to the improved market conditions discussed above, which resulted in volume growth as well as favorable pricing, and the Ingram Cactus acquisition. Revenues from several small product line acquisitions were minimal. Of particular note were higher levels of shipments associated with large drilling projects in the Gulf of Mexico and generally stronger activity in Canada, the North Sea, and the Asia Pacific region. Order activity for the segment exceeded $300 million in each quarter of 1997 and totaled $1.28 billion for the year, an increase of 36% from the 1996 level. This improvement was across all product lines, with significant growth in drilling, subsea and surface, which increased by 80% (from $126.5 million to $227.2 million), 34% (from $172.0 million to $230.0 million), and 33% (from $434.8 million to $576.8 million), respectively. Backlog for the segment ended the year at $576.9 million, an increase of 31% from year-end 1996. Revenues for the Compression and Power Equipment segment of $686.2 million improved by 17% from the $588.5 million in 1996. Improvements of 16% and 17%, respectively, were reflected in the natural gas compression equipment and centrifugal air compressor businesses. The most significant increases in the natural gas compression equipment business were in large international gas turbine and compressor project revenues and parts and service activity. Of particular note was the improvement in parts and service, which increased by 12% from the 1996 level, including benefits derived from various marketing and pricing programs that were initiated in late 1996 and during 1997. Reflecting these factors, as well as normal seasonality, the most dramatic increase was in the fourth quarter of 1997, where parts and service revenues increased by 35% from the fourth quarter of 1996 and by 28% from the next largest quarter of 1997. Centrifugal air compressor shipments reflected year-to-year improvement in each quarter of 1997 from strong demand in both industrial and air separation applications, particularly in international markets. Order activity for the Compression and Power Equipment segment increased by 11% from 1996 primarily due to the effect of large gas turbine and compressor project orders received in the first half of 1997 and improved natural gas compression equipment parts and service activity. Due to the size and complex nature of major turbine and compressor projects, the specific timing of an order is very difficult to predict and can cause significant fluctuations in the year-to-year revenue, order, and backlog comparisons for this segment. Centrifugal air compressor orders continued at a historically high level and were virtually unchanged from prior year. While orders slowed from Southeast Asia during the fourth quarter of 1997 and have continued to be soft in early 1998, no significant cancellations have been received, and the effect is not currently expected to be material. Backlog for the segment ended 1997 at $209.2 million, a decline of 27% from year-end 1996, due primarily to the timing of major gas turbine and compressor projects and the addition of manufacturing capacity for centrifugal air compressors during the past two years, which increased throughput and shortened lead times to customers. COSTS AND EXPENSES Cost of sales (exclusive of depreciation and amortization) of $1.30 billion in 1997 increased by $286.4 million, or 28%, compared with $1.01 billion in 1996. This increase was largely the result of the previously discussed 30% revenue growth and the two 1997 charges. As discussed above, revenues increased by 39% in the Petroleum Production Equipment segment and 17% in the Compression and Power Equipment segment, while cost of sales increased by 37% and 18%, respectively. This resulted in a gross margin percentage (defined as revenues less cost of sales as a percentage of revenues) of 30.0% in the Petroleum Production Equipment segment, compared to 28.6% in 1996. This increase resulted from improved pricing, the leveraging of various manufacturing support costs that are relatively fixed in the short-term, and cost reductions including benefits from capital expenditures. For the Compression and Power Equipment segment, the gross margin percentage declined from 25.2% in 1996 to 24.4% in 1997. Contributing to the deterioration from the prior year were the charges discussed previously as well as very competitive pricing in the gas turbine and compressor project business and in the aftermarket for gas compression equipment replacement parts. Additionally, the significant increase in the lower margin gas turbine and compressor project revenues, partially offset by higher parts sales, resulted in an unfavorable mix effect on the gross margin percentage. Providing a partial offset were higher production levels, which allowed for the leveraging of manufacturing support costs, and the effect of the cost rationalization program in late 1996 at the Grove City, Pennsylvania facility. 22 3 Depreciation and amortization expense increased by $3.4 million, from $62.5 million in 1996 to $65.9 million in 1997, primarily in the Petroleum Production Equipment segment. This increase was due to the mid-year 1996 Ingram Cactus acquisition and higher capital spending levels beginning in the second half of 1996 in response to improved market conditions. Selling and administrative expenses increased by $20.3 million, or 10%, from $195.0 million in 1996 to $215.3 million in 1997, primarily in the Petroleum Production Equipment segment. This increase was due to the Ingram Cactus acquisition, higher revenues, and the Company's conscious effort to improve its market presence. As an example, Cameron has established separate management teams and focused additional marketing resources on the controls and choke businesses, where there is believed to be significant growth potential. Despite conscious increases in selling and marketing costs, as a percentage of revenues, these costs for the Company decreased from 14.1% in 1996 to 11.9% in 1997 due to the leveraging effect of the increased volume, with both segments showing improvements in this relationship. Reflecting the various factors discussed above, operating income (defined as earnings before nonrecurring/unusual charges, corporate expenses, interest, and taxes) totaled $234.4 million for the Company, an increase of $105.2 million from 1996. The Petroleum Production Equipment segment improved from $71.6 million in 1996 to $159.8 million in 1997, while the Compression and Power Equipment segment increased from $57.6 million in 1996 to $74.6 million in 1997. Interest expense increased from $20.9 million in 1996 to $28.6 million in 1997 primarily due to an increase in the average debt level related to acquisitions and higher working capital requirements in support of the revenue and backlog growth. Average interest rates in 1997 were 6.6% compared to 6.4% in 1996. Income taxes were $58.8 million in 1997, an increase of $31.0 million from 1996. This increase was due to the year-to-year improvement in earnings. The Company's effective tax rate declined from 30.2% in 1996 to 29.5% in 1997 mainly due to a change in the mix of domestic and foreign earnings for 1997 versus 1996. 1996 COMPARED TO 1995 Cooper Cameron Corporation had net income of $64.2 million, or $1.21 per share (adjusted for a 2-for-1 stock split), for the twelve months ended December 31, 1996, compared to a net loss of $500.1 million, or $9.98 per share on a pro forma basis (adjusted for a 2-for-1 stock split), for the same period in 1995. The full year 1996 income includes nonrecurring or unusual charges totaling $7.3 million ($5.1 million after tax), or $.10 per share (see Note 3 of the Notes to Consolidated Financial Statements). Included in the 1995 net loss were nonrecurring or unusual charges totaling $482.5 million pre-tax (also see Note 3), and several unusual items affecting the tax provision as explained in Note 13. Excluding these items, the net income for 1996 would have been $69.3 million, or $1.31 per share, compared to a 1995 net loss of $13.5 million, or $.27 per share. The remainder of this discussion is based on the Company's results exclusive of these nonrecurring or unusual items. REVENUES Revenues for 1996 totaled $1,388.2 million, an increase of 21% from the $1,144.0 million in 1995. This increase was due to generally improved market fundamentals, driven largely by increasing worldwide demand for oil and natural gas, and the June 1996 acquisition of Ingram Cactus Company. Although some fluctuations were experienced, oil and natural gas prices improved during the period, providing the impetus for increased exploration and production spending by major and independent producers. Approximately 61% of the improvement in revenues was in the Petroleum Production Equipment segment and 39% in the Compression and Power Equipment segment. The favorable market conditions continued throughout the year and the Company's backlog, defined as firm customer orders for which a purchase order has been received, satisfactory credit or financing arrangements exist and delivery is scheduled, ended 1996 at $728.3 million, an increase of 24% from the $588.1 million at year-end 1995. The Petroleum Production Equipment segment's revenues of $798.6 million increased 23% over 1995 revenues of $648.1 million. (Full year 1995 revenues included $14.0 million related to the Wheeling Machine Products Division, which was sold during the fourth quarter of 1995.) Because the acquired Ingram Cactus operations have been substantially integrated into the Cameron business, separate data on the revenues and earnings attributable to the acquisition are not available. Management estimates, however, that the revenues would have been approximately $65 million for the six-month period following the acquisition date with a resulting impact on earnings essentially proportionate to the remainder of the Cameron business. The effect of the fourth quarter Tundra Valve & Wellhead acquisition on revenues was minimal. The remainder of the revenue increase was due to the generally improved market conditions discussed previously and shipments associated with large subsea projects in the North Sea. Order activity for the segment increased by 42% from the 1995 level, with the second half of 1996 up by 48% over the first half of 1996. This improvement was across all lines of the business and not the result of large subsea projects that can cause significant fluctuations from period to period. Year-end 1996 backlog was $440.4 million, an increase of 67% from year-end 1995. Revenues for the Compression and Power Equipment segment of $588.5 million improved by 19% from $493.6 million in 1995. This improvement resulted from increased international gas turbine and compressor project revenues and strong centrifugal air compressor activity. The increased international gas turbine and compressor project revenues were the result of several large orders received in the second half of 1995, which, due to the lead time for this equipment, did not generate revenues until the second half of 1996. Revenues from reciprocating natural gas compression equipment were virtually unchanged from 23 4 1995, as the Company's new high-speed products were slow to be accepted by the market. This began to improve in the third quarter of 1996 and orders for this product line increased sharply during the second half of the year. The majority of this equipment was not shipped until 1997 due to the lead time for these products. Gas compression equipment parts and service revenues declined somewhat in 1996 as customers experiencing record demand levels delayed preventive maintenance, outsourced inventory management, and purchased non-OEM or refurbished parts. These changes placed additional pressure on price and lead times. In response, several programs were initiated during 1996, including the cost rationalization reflected in the nonrecurring/unusual charges. On a favorable note, centrifugal air compressor revenues increased by 24% from 1995. Continued strong demand in both industrial and air separation applications was driven by economic growth, particularly in Southeast Asia and the Pacific Rim. Order activity for the Compression and Power Equipment segment declined by 7% from 1995 primarily due to the effect of large gas turbine and compressor projects discussed previously. Due to the size and complex nature of these projects, the specific timing of an order is very difficult to predict and can cause significant fluctuations in the year-to-year order level for this segment. Year-end backlog was $287.9 million, down 11% from year-end 1995. COSTS AND EXPENSES Cost of sales (exclusive of depreciation and amortization) of $1,010.6 million in 1996 increased by $128.8 million, or 15%, compared with $881.8 million in 1995. This increase was primarily the result of the previously discussed revenue growth, partially offset by several factors. As discussed above, revenues increased by 23% in the Petroleum Production Equipment segment and 19% in the Compression and Power Equipment segment, while cost of sales increased 11% and 20%, respectively. This resulted in a gross margin percentage (defined as revenues less cost of sales as a percentage of revenues) of 28.6% for the Petroleum Production Equipment segment, compared to 20.6% in 1995. This increase resulted from improved pricing, several very low margin projects shipped during the first half of 1995 that did not recur in 1996, the leveraging of various manufacturing support costs that are relatively fixed in the short-term, and cost reduction programs. For the Compression and Power Equipment segment, the gross margin percentage remained essentially flat at 25.2% in 1996 versus 25.6% in 1995. This was the result of several offsetting factors. Pricing pressure in the very competitive gas turbine and compressor project business and in the aftermarket for gas compression equipment replacement parts was only partially offset by modest price increases in the centrifugal air compressor business. Also contributing to the decline was the year-to-year decrease in higher margin gas compression equipment aftermarket parts and service revenues. Providing an offset were increased production levels during 1996 which allowed the leveraging of various manufacturing support costs and the fourth quarter effect of the cost rationalization program that will fully benefit 1997. Depreciation and amortization decreased by $9.3 million, from $71.8 million in 1995 to $62.5 million in 1996, primarily in the Petroleum Production Equipment segment. This decline was largely due to the effect on amortization of the $441.0 million goodwill write-off recorded in 1995, as discussed in Note 3 of the Notes to Consolidated Financial Statements, and relatively low capital expenditures during the second half of 1995 and the first three quarters of 1996. Providing a partial offset is the additional depreciation and amortization related to the Ingram Cactus acquisition. Selling and administrative expenses increased by $13.9 million, or 8%, from $181.1 million in 1995 to $195.0 million in 1996. This increase was in the Petroleum Production Equipment segment and related to the higher revenue levels, the Ingram Cactus acquisition and the Company's conscious effort to improve its market presence. Providing a partial offset were ongoing cost control programs, including lower employment levels, in the Compression and Power Equipment segment. General corporate expenses declined slightly from 1995 to 1996. As a percentage of revenues, selling and administrative costs for the Company decreased from 15.8% in 1995 to 14.1% in 1996. The Petroleum Production Equipment segment decreased from 15.3% to 14.9%, while the Compression and Power Equipment segment declined from 14.4% to 11.3%. Reflecting the various factors discussed above, operating income (defined as earnings before nonrecurring/unusual items, corporate expenses, interest and taxes) totaled $129.2 million for the Company, an increase of $111.8 million from 1995. The Petroleum Production Equipment segment improved from a loss of $12.6 million in 1995 to income of $71.6 million in 1996, while the Compression and Power Equipment segment improved from $30.0 million in 1995 to $57.6 million in 1996. Interest expense decreased from $23.3 million in 1995 to $20.9 million in 1996 due to a reduction in the average debt level and lower interest rates. During 1995 debt declined from a fixed $375.0 million allocation from Cooper for the first half of the year to $264.5 million at year-end. Debt increased to $394.6 million at year-end 1996 due to acquisitions totaling $113.9 million for various assets of Ingram Cactus Company, Tundra Valve & Wellhead, and ENOX Technologies, Inc., and additional working capital requirements in support of the revenue growth. Average interest rates in 1996 were 6.4% compared to 6.7% in 1995. Income taxes, excluding the effect on taxes of the nonrecurring/unusual pre-tax charges, was an expense of $30.0 million in 1996. This compares to a credit of $0.4 million in 1995, which excludes both the effect on taxes of the nonrecurring or unusual charges as well as the unusual provision adjustments which are discussed in Note 13 of the Notes to Consolidated Financial Statements. The Company's effective tax rate for 1996 was 30.2% compared with overall U.S., including state and local, and foreign statutory rates of approximately 38%. The Company's favorable rate primarily reflects the absence of tax expense on the 1996 earnings of several international operations. In years prior to 1996, these same operations had taxable losses which were not tax-benefited. The recognition of these benefits in 1996 then eliminated the tax expense that would otherwise have occurred. 24 5 PRICING AND VOLUME The Company believes that during 1997 and 1996 unit volumes increased in both the Petroleum Production Equipment and the Compression and Power Equipment segments. In the Petroleum Production Equipment segment, moderate price increases in excess of cost increases were implemented during 1997, while price increases slightly in excess of cost increases were realized in 1996. In the Compression and Power Equipment segment, prices declined slightly during 1997 and 1996 due to the competitive condition of the natural gas compression equipment markets in both years. LIQUIDITY AND CAPITAL RESOURCES During 1997, the Company reduced total indebtedness by $17.7 million. The significant improvement in earnings discussed previously and activity under the Company's stock option and other employee benefit plans was largely offset by increases in working capital, capital expenditures, and the purchase of treasury stock. The increase in working capital was associated with improved revenues and the significantly higher year-end backlog in the Petroleum Production Equipment segment. At December 31, 1997, the Compression and Power Equipment segment had $43.2 million of receivables recognized under the percentage of completion method, of which $34.6 million had not yet been billed to customers. The Company's liquidity can be susceptible to fairly large swings in relatively short periods of time. This is largely because of the cyclical nature of the industry in which the Company competes and the long time period from when the Company first receives a large equipment order until the product can be manufactured, delivered, and the receivable collected. As a result, while the Company believes that its operating results will again improve during 1998 and that this should allow for year-over-year debt reductions, the Company has substantially increased its planned 1998 capital spending, may continue to buy back stock, and continues to actively seek opportunities to grow the business through acquisitions. As a consequence, unanticipated growth in large orders with long lead times, further overall market expansion, additional stock repurchases, or acquisitions could change the timing and magnitude of the reductions that are currently expected. As described in Note 11 of the Notes to Consolidated Financial Statements, effective March 20, 1997 the Company amended and restated its $475 million long-term credit agreement with various banks (the Credit Agreement). Management believes these changes have increased the Company's flexibility in the conduct and financing of its worldwide operations. Prior to June 30, 1995, the Company's operations participated in the consolidated worldwide debt and cash management system of Cooper Industries, Inc. (Cooper). As a result, the Company's financial statements reflected up through June 30, 1995 the transfer to Cooper of all funds not otherwise utilized in the business and a constant $375 million of allocated indebtedness. At the time of the Exchange Offer with Cooper stockholders, the Company entered into a third party Credit Agreement which is described in Note 11 of the Notes to Consolidated Financial Statements. Subsequent to June 30, 1995, the Company's liquidity and capital resources reflect its stand-alone operations. During its first six months of stand-alone operations, the Company was able to substantially improve its overall liquidity by reducing total indebtedness from $375 million to $264.5 million. Aided by improving earnings, and prior to the mid-June 1996 acquisition of Ingram Cactus, the Company continued to generate excess cash flows and reduced debt by a further $15 million. In the balance of 1996, in addition to the $100 million cost of the Ingram Cactus acquisition and in spite of continued earnings growth, the company's total debt increased by approximately $45 million. This increase is primarily attributable to working capital requirements associated with long lead time equipment orders within the Compression and Power Equipment segment. At December 31, 1996, this segment had over $65 million of receivables recognized under the percentage of completion method, of which $37 million had not yet been billed to customers. WORKING CAPITAL Operating working capital is defined as receivables and inventories less accounts payable and accrued liabilities, excluding the effect of foreign currency translation, acquisitions and divestitures, and the effect of the nonrecurring/unusual charges discussed above. During 1997, operating working capital increased $88.7 million. Receivables increased as a result of higher revenues. Receivables recognized under the percentage of completion method of accounting declined from $65.4 million at year-end 1996 to $43.2 million at year-end 1997. This relates to the timing of orders received for large gas turbine and compressor projects in the Compression and Power Equipment segment. Inventories increased largely in the Petroleum Production Equipment segment in support of the significantly higher year-end backlog level and general improvement in activity. The increase in accounts payable and accrued liabilities reflected the higher business levels, an increase in cash advances and progress payments received from customers on orders in backlog, as well as continuing focus on managing the Company's payments to vendors. During 1996, operating working capital increased $121.8 million. Receivables increased as a result of higher revenues, including $65.4 million recognized under the percentage of completion method of accounting at year-end 1996. This relates to large gas turbine and compressor projects in the Compression and Power Equipment segment. At year-end 1995, there was no revenue recognized under percentage of completion accounting. Inventories increased largely in the Petroleum Production Equipment segment as a result of the Ingram Cactus acquisition and in support of the significantly higher year-end backlog level. The increase in accounts payable and accrued liabilities reflected the higher business levels, as well as continuing focus on managing the Company's payments to vendors. 25 6 During 1995, operating working capital decreased $99.4 million. Because of various reclassifications during the year, including the large increase in excess, obsolete and slow-moving inventory reserves discussed in Note 3 of the Notes to Consolidated Financial Statements, only a portion of the year-to-year decrease reflects actual cash flows. A $21.2 million receivable decline, exclusive of a reclassification of $10.3 million of receivables from customers in Iran as long-term, resulted from lower revenues in December of 1995 than in 1994 and improved collections during the year. The decrease in inventories largely resulted from the reclassifications noted above, while the increase in accounts payable and accrued liabilities reflected increased cash advances and progress payments received from customers against orders in backlog as well as increases in certain normal trade payables and operating accruals. CASH FLOWS During 1997, cash flows from operating activities totaled $115.7 million, proceeds from the sales of plant and equipment totaled $4.9 million, and funds received from the exercise of stock options and other employee benefit plans totaled $23.5 million. The Company expended $6.3 million on several small product line acquisitions, $72.3 million on capital projects, $2.3 million for principal payments on capital leases, and $33.7 million on the purchase of treasury stock. This resulted in a decrease in outstanding debt of $26.7 million, and an increase in cash of $2.5 million. During 1996, cash flows from operating activities totaled $13.2 million, proceeds from the sales of plant and equipment totaled $2.6 million, and funds received from the exercise of stock options and other employee benefit plans totaled $6.0 million. The Company expended $113.9 million on the acquisition of certain assets of Ingram Cactus Company, Tundra Valve & Wellhead and ENOX Technologies, Inc., $37.1 million on capital projects, and $1.2 million on the purchase of treasury stock. This resulted in an increase in outstanding debt of $130.1 million and a decrease in cash of $3.0 million. During 1995, cash flows from operating activities totaled $142.3 million, proceeds from sales of plant and equipment totaled $5.5 million, and proceeds from the sale of Wheeling were $14.2 million. The Company expended $39.5 million on capital projects and reduced outstanding debt by $110.5 million, leaving a cash residual of approximately $12.1 million. CAPITAL EXPENDITURES AND COMMITMENTS Capital projects to reduce product costs, improve product quality, increase manufacturing efficiency and operating flexibility, or expand production capacity resulted in expenditures of $72.3 million in 1997 compared to $37.1 million in 1996 and $39.5 million in 1995. At December 31, 1997, internal commitments for capital expenditures amounted to approximately $100.0 million compared to $58.2 million at year-end 1996. The commitments for 1998 include approximately $53.8 million for capacity expansion, $32.1 million for machinery and equipment modernization and enhancement, $8.6 million for various computer hardware and software projects, $1.7 million for environmental projects, and $3.8 million for other items. Expenditures in 1997 and commitments for 1998 are focused on generating near-term returns by increasing factory throughput and improving delivery times for customers. EFFECT OF INFLATION During each year, inflation has had a relatively minor effect on the Company's reported results of operations. This is true for three reasons. First, in recent years, the rate of inflation in the Company's primary markets has been fairly low. Second, the Company makes extensive use of the LIFO method of accounting for inventories. The LIFO method results in current inventory costs being matched against current sales dollars, such that inflation affects earnings on a current basis. Finally, many of the assets and liabilities included in the Company's Consolidated Balance Sheets were recorded in business combinations that were accounted for as purchases. At the time of such acquisitions, the assets and liabilities were adjusted to a fair market value and, therefore, the cumulative long-term effect of inflation is reduced. ENVIRONMENTAL REMEDIATION The cost of environmental remediation and compliance has not been an item of material expense for the Company during any of the periods presented, other than with respect to the Osborne Landfill in Grove City, Pennsylvania. The Company's facility in Grove City disposed of wastes at the Osborne Landfill from the early 1950s until 1978. Cooper, on behalf of the Company, developed a remediation plan, which was accepted by the U. S. Environmental Protection Agency as the preferred remedy for the site. Substantial amounts were expended for this cleanup during 1996 in compliance with the remediation plan and the order issued by the EPA in 1991. The construction phase of the cleanup was completed during 1997 and the remaining costs relate to ground water treatment and monitoring. The Company's balance sheet at December 31, 1997 includes accruals totaling $4.6 million for environmental matters ($5.6 million at December 31, 1996). Cooper Cameron has been identified as a potentially responsible party with respect to five sites designated for cleanup under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") or similar state laws. Although estimated cleanup costs have not yet been determined for certain of these sites, the Company believes, based on its review and other factors, that the costs related to these sites will not have a material adverse effect on the Company's results of operations, financial condition or liquidity. However, no assurance can be given that the actual cost will not exceed the estimates of the cleanup costs once determined. 26 7 YEAR 2000 During 1997, and continuing in 1998, the Company began an evaluation of its internal processes, including data processing systems, for issues that could arise as a result of what is commonly known as the Year 2000 problem. The Company is also working with its primary customers and vendors to ensure they have addressed these issues as well. Costs to be incurred as a result of these efforts, including the cost of any changes that may be required in either processes or systems, are not expected to be material. OTHER In various places in this Annual Report, including the information set forth above in the Company's Management Discussion and Analysis, there may be indications of management's current expectations regarding the future results of operations or financial condition of the Company. Such information, if any, is based on current expectations regarding the markets affecting the Company and other matters that can affect the Company's results of operations, liquidity or financial condition. Because such information is based solely on data currently available, it is subject to change as a result of changes in conditions and should not therefore be viewed as assurance regarding the Company's future performance. Additionally, the reader of this information should be aware that the Company is not obligated to inform the reader of such changes as they occur or make public indication of changes unless obliged under applicable disclosure rules and regulations. 27 8 REPORT OF INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS COOPER CAMERON CORPORATION We have audited the accompanying consolidated balance sheets of Cooper Cameron Corporation as of December 31, 1997 and 1996, the related statements of consolidated results of operations, and consolidated cash flows for each of the three years in the period ended December 31, 1997 and the statement of consolidated changes in stockholders' equity for the period from June 30, 1995 to December 31, 1995 and for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cooper Cameron Corporation at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 3 of the Notes to Consolidated Financial Statements, upon separating from its former parent in 1995, the Company adopted a new method of evaluating goodwill for impairment. /s/ ERNST & YOUNG LLP Houston, Texas January 29, 1998 28 9 CONSOLIDATED RESULTS OF OPERATIONS (dollars in thousands, except per share data)
YEARS ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------- Revenues $ 1,806,109 $ 1,388,187 $ 1,144,035 - ----------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales (exclusive of depreciation and amortization) 1,296,947 1,010,558 881,798 Depreciation and amortization 65,862 62,480 71,754 Selling and administrative expenses 215,331 194,983 181,097 Interest expense 28,591 20,878 23,273 Provision for impairment of goodwill -- -- 441,000 Nonrecurring/unusual charges -- 7,274 41,509 - ----------------------------------------------------------------------------------------------- 1,606,731 1,296,173 1,640,431 - ----------------------------------------------------------------------------------------------- Income (loss) before income taxes 199,378 92,014 (496,396) Income tax provision (58,796) (27,830) (3,657) - ----------------------------------------------------------------------------------------------- Net income (loss) $ 140,582 $ 64,184 $ (500,053) =============================================================================================== Earnings (loss) per share (pro forma prior to June 30, 1995): Basic $ 2.70 $ 1.27 $ (9.98) Diluted $ 2.53 $ 1.21 $ (9.98) ===============================================================================================
The Notes to Consolidated Financial Statements are an integral part of these statements. 29 10 CONSOLIDATED BALANCE SHEETS (dollars in thousands, except shares and per share data)
DECEMBER 31, - -------------------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 11,599 $ 9,057 Receivables, net 428,630 360,814 Inventories, net 495,539 404,268 Other 25,021 24,092 - -------------------------------------------------------------------------------------------- Total current assets 960,789 798,231 - -------------------------------------------------------------------------------------------- Plant and equipment, at cost less accumulated depreciation 395,545 369,528 Intangibles, less accumulated amortization 240,420 259,317 Other assets 46,476 41,846 - -------------------------------------------------------------------------------------------- Total assets $ 1,643,230 $ 1,468,922 - -------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current maturities of long-term debt $ 48,131 $ 47,100 Accounts payable and accrued liabilities 470,927 391,294 Accrued income taxes 9,737 6,447 - -------------------------------------------------------------------------------------------- Total current liabilities 528,795 444,841 - -------------------------------------------------------------------------------------------- Long-term debt 328,824 347,548 Postretirement benefits other than pensions 85,465 97,232 Deferred income taxes 34,965 31,268 Other long-term liabilities 23,130 31,905 - -------------------------------------------------------------------------------------------- Total liabilities 1,001,179 952,794 - -------------------------------------------------------------------------------------------- Stockholders' equity: Common stock, par value $.01 per share, 75,000,000 shares authorized, 53,235,292 shares issued (25,617,727, pre 2-for-1 split, at December 31, 1996) 532 256 Preferred stock, par value $.01 per share, 10,000,000 shares authorized, no shares issued or outstanding -- -- Capital in excess of par value 922,975 873,933 Minimum pension liability (293) (2,642) Translation component 8,092 43,274 Retained deficit (including $441,000 charge on June 30, 1995 related to goodwill impairment) (257,485) (398,067) Less: Treasury stock - 477,149 shares at cost (11,349, pre 2-for-1 split, at December 31, 1996) (31,770) (626) - -------------------------------------------------------------------------------------------- Total stockholders' equity 642,051 516,128 - -------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,643,230 $ 1,468,922 ============================================================================================
The Notes to Consolidated Financial Statements are an integral part of these statements. 30 11 CONSOLIDATED CASH FLOWS (dollars in thousands)
YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 140,582 $ 64,184 $(500,053) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 50,234 48,129 51,120 Amortization 15,628 14,351 20,634 Provision for impairment of goodwill -- -- 441,000 Nonrecurring/unusual charges -- 7,274 38,634 Allocation of interest and general and administrative expenses from Cooper Industries, Inc. through June 30, 1995 (net of tax) -- -- 9,539 Deferred income taxes 15,077 17,449 2,338 Changes in assets and liabilities, net of translation and effects of acquisitions: Receivables (77,216) (131,423) 31,473 Inventories (100,485) (45,458) 36,994 Accounts payable and accrued liabilities 89,013 55,073 29,617 Other assets and liabilities, net (17,127) (16,365) (18,949) - ------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 115,706 13,214 142,347 - ------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures and proceeds from sales of plant and equipment, net (67,396) (34,459) (33,996) Acquisitions (6,278) (113,942) -- Net proceeds from the sale of Wheeling Machine Products -- -- 14,191 - ------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (73,674) (148,401) (19,805) - ------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Long-term borrowings -- 100,000 334,062 Loan repaid to Cooper Industries, Inc. -- -- (334,062) Loan borrowings (repayments), net (26,712) 30,107 (110,459) Activity under stock option plans and other 21,131 5,989 -- Purchase of treasury stock (33,723) (1,240) -- Transferred from Cooper Industries, Inc. -- -- 971 - ------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (39,304) 134,856 (109,488) - ------------------------------------------------------------------------------------------------------------- Effect of translation on cash (186) (2,686) (980) - ------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 2,542 (3,017) 12,074 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, beginning of year 9,057 12,074 -- - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 11,599 $ 9,057 $ 12,074 =============================================================================================================
The Notes to Consolidated Financial Statements are an integral part of these statements. 31 12 CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY For the period from June 30, 1995 to December 31, 1995 and the two years ended December 31, 1997 (dollars in thousands)
CAPITAL IN MINIMUM COMMON EXCESS OF PENSION TRANSLATION RETAINED TREASURY STOCK PAR VALUE LIABILITY COMPONENT DEFICIT STOCK - --------------------------------------------------------------------------------------------------------------------------------- Opening equity balances following split-off on June 30, 1995(1) $ 250 $ 856,713 $ (3,683) $ 37,901 $ -- $ -- Charge to operations on June 30, 1995 related to goodwill impairment (441,000) Operating loss from July 1, 1995 through December 31, 1995 (21,251) Common stock issued for employee retirement savings plan 1 2,958 Adjustment for minimum pension liability (1,917) Translation loss (6,384) - --------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 1995 251 859,671 (5,600) 31,517 (462,251) -- Net income 64,184 Purchase of treasury stock (1,240) Common stock issued under stock option and other employee benefit plans 5 12,397 614 Tax benefit of employee stock benefit plan transactions 1,865 Adjustment for minimum pension liability 2,958 Translation gain 11,757 - --------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 1996 256 873,933 (2,642) 43,274 (398,067) (626) Net income 140,582 Purchase of treasury stock (33,723) Common stock issued under stock option and other employee benefit plans 16 26,935 2,579 Tax benefit of employee stock benefit plan transactions 22,367 Effect of stock split on equity balances 260 (260) Adjustment for minimum pension liability 2,349 Translation loss (35,182) - --------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 1997 $ 532 $ 922,975 $ (293) $ 8,092 $(257,485) $ (31,770) =================================================================================================================================
(1) Reflects the effect of the final settlement reached with Cooper during the fourth quarter of 1995. See Note 19 of the Notes to Consolidated Financial Statements for additional information related to periods prior to July 1, 1995. The Notes to Consolidated Financial Statements are an integral part of these statements. 32 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: COOPER CAMERON CORPORATION Cooper Cameron Corporation, hereinafter referred to as "the Company", became a separate public company effective June 30, 1995 when Cooper Industries, Inc. ("Cooper") completed an exchange offer, pursuant to which 21,375,000 shares (pre-split) of the Company's Common stock were issued to those holders of Cooper Common stock who had elected to participate in the exchange offer. Cooper retained 3,625,000 shares (pre-split) of the Company's Common stock and was one of the Company's principal stockholders until the third quarter of 1996 when Cooper sold essentially all shares it retained. The Company's operations are comprised of two segments -- the Petroleum Production Equipment segment and the Compression and Power Equipment segment (see Note 15 of the Notes to Consolidated Financial Statements for further segment information). Although the Company was not a separate public company prior to June 30, 1995, the financial statements for periods prior to this date are presented as if the Company had existed as an entity separate from its parent, Cooper, and include the assets, liabilities, revenues and expenses that were directly related to the Company's operations. Because the majority of the Company's domestic results and, in certain cases, foreign results were included in the consolidated financial statements of Cooper on a divisional basis, there are no separate meaningful historical equity accounts for the Company prior to June 30, 1995. Additionally, for periods prior to June 30, 1995, amounts of Cooper's general corporate, accounting, tax, legal and other administrative costs that were not directly attributable to the operations of the Company were allocated to the Company. Management believes the allocation method used provided the Company with a reasonable amount of such expenses. For periods prior to June 30, 1995, because the Company was fully integrated into Cooper's worldwide cash management system, all of its cash requirements were provided by Cooper and any excess cash generated by the Company was transferred to Cooper. As a result, $375,000,000 of total indebtedness was held constant from year-to-year in the Company's consolidated financial statements. The financial information included herein for periods prior to June 30, 1995 may not necessarily be indicative of the results of operations or cash flows of the Company in the future or what the results of operations or cash flows of the Company would have been if it had been a separate, stand-alone company during all periods presented. NOTE 2: SUMMARY OF MAJOR ACCOUNTING POLICIES Estimates in Financial Statements -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation -- The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. Investments of 50% or less in affiliated companies are accounted for on the equity method. Revenue Recognition -- Revenue is recognized at the time of shipment or the performance of services except in the case of certain larger, long lead time orders in the Compression and Power Equipment segment which are accounted for using the percentage of completion method. Under this method, revenue is recognized as work progresses in the ratio that costs incurred bear to estimated total costs. Expected losses on contracts in progress are charged to operations currently. The aggregate of costs incurred reduces net inventories while the revenue recognized is shown as a receivable. Inventories -- Inventories are carried at cost or, if lower, net realizable value. On the basis of current costs, 67% of inventories in 1997 and 65% in 1996 are carried on the last-in, first-out (LIFO) method. The remaining inventories are carried on the first-in, first-out (FIFO) method. Plant and Equipment -- Depreciation is provided over the estimated useful lives of the related assets, or in the case of assets under capital lease, over the related lease term, if less, using primarily the straight-line method. This method is applied to group asset accounts which in general have the following lives: buildings - 10 to 40 years; machinery and equipment - 3 to 18 years; and tooling, dies, patterns, etc. - 5 to 10 years. 33 14 Intangibles -- Intangibles consist primarily of goodwill related to purchase acquisitions. With minor exceptions, the goodwill is being amortized over 40 years from respective acquisition dates. The carrying value of the Company's goodwill is reviewed by division at least annually or whenever there are indications that the goodwill may be impaired. See Note 3 for information regarding a change during 1995 in the Company's method of calculating goodwill for impairment. Income Taxes -- Income taxes for 1995 were provided as if the Company was a stand-alone business filing a separate tax return during the period prior to June 30, 1995. Income tax expense includes U.S. and foreign income taxes, including U.S. federal taxes on undistributed earnings of foreign subsidiaries to the extent such earnings are planned to be remitted. Environmental Remediation and Compliance -- Environmental remediation and postremediation monitoring costs are accrued when such obligations become probable and reasonably estimable. Such future expenditures are not discounted to their present value. Environmental costs that are capitalizable are depreciated generally utilizing a 15-year life. Product Warranty -- Estimated warranty expense is accrued either at the time of sale or in certain cases where specific warranty problems are encountered. Adjustments to the accruals are made periodically to reflect actual experience. Stock Options -- Options to purchase Common stock are granted to certain executive officers and key management personnel at 100% of the market value of the Company's stock at the date of grant. As permitted, the Company is continuing to follow Accounting Principles Board Opinion No. 25 and, as a result, no compensation expense is recognized under its stock option plans or the Employee Stock Purchase Plan. Earnings (Loss) Per Share -- As required by Statement of Financial Accounting Standards (SFAS) No. 128 (Earnings per Share), the financial statements now disclose both basic and diluted earnings per share for all periods presented. Additionally, on May 8, 1997, the Company's Board of Directors declared a 2-for-1 split of the Company's common stock which was effected in the form of a dividend paid to stockholders on June 13, 1997. As a result, earnings (loss) per share amounts for each period presented prior to June 30, 1997 have also been adjusted to reflect the stock split. Derivative Financial Instruments -- The Company uses interest rate swap agreements to modify the interest characteristics of its outstanding debt. Interest rate differentials to be paid or received as a result of interest rate swap agreements are recognized over the lives of the swaps as an adjustment to interest expense. Gains and losses on early terminations of these agreements are deferred and amortized as an adjustment to interest expense over the remaining term of the original life of the swap agreement. The fair value of swap agreements and changes in fair value as a result of changes in market interest rates are not recognized in the financial statements. Additionally, Treasury Locks, or forward rate agreements, are utilized to hedge the interest rate on prospective long-term debt issuances. Such agreements are accounted for on a deferral basis in which the realized gain or loss upon termination of the agreement is reported as an adjustment to the carrying amount of long-term debt and amortized to interest expense over the term of the related debt. The Company also uses foreign currency forward contracts to hedge its cash flow exposure on significant transactions denominated in currencies other than the U.S. dollar. These contracts are entered into for periods consistent with the terms of the underlying transactions. The Company does not engage in speculation. Unrealized gains and losses on foreign currency forward contracts are deferred and recognized as an adjustment to the basis of the underlying transaction at the time the foreign currency transaction is completed. Cash Equivalents -- For purposes of the Consolidated Cash Flows statement, the Company considers all investments purchased with original maturities of three months or less to be cash equivalents. New Accounting Pronouncements -- In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 (Reporting Comprehensive Income) and SFAS No. 131 (Disclosures About Segments of an Enterprise and Related Information). Both statements will be adopted by the Company, as required, beginning in 1998. The only items of significance that are expected to result in differences between comprehensive income and reported net income for each period presented are gains and losses resulting from translation of foreign currency financial statements currently included in the Translation Component of Stockholders' Equity and adjustments to the Minimum Pension Liability component of Stockholders' Equity. The Company has not yet completed its analysis of the impact of SFAS No. 131 on its segment reporting but anticipates certain additional disclosures may be required beginning in 1998 upon adoption of the new standard. 34 15 NOTE 3: NONRECURRING/UNUSUAL CHARGES During the year ended December 31, 1996, the Cooper Energy Services division of the Compression and Power Equipment segment recorded restructuring charges covering severance, relocation and other costs associated with changes both at the division's manufacturing facility in Grove City, Pennsylvania and the division's headquarters in Mt. Vernon, Ohio. Additionally, the Petroleum Production Equipment segment incurred during 1996 certain one-time costs of integrating newly acquired operations with the operations of the Cameron division. Although the Cooper Energy Services division incurred charges related to cost rationalization during 1997, the size and nature of these charges was such that recognition of them as "nonrecurring/unusual charges" was not considered to be appropriate. During 1995, the Company recorded approximately $482,509,000 of unusual charges including a $441,000,000 write-down of goodwill and $41,509,000 of other items. The goodwill write-down, which was recorded concurrent with the Company becoming a separate stand-alone entity on June 30, 1995, resulted from a change in the Company's accounting method of evaluating long-lived assets, including goodwill, for impairment. Prior to that date, long-lived assets were evaluated utilizing undiscounted cash flows in accordance with the practice followed by the Company's former parent. Upon becoming a separate entity, the Company began evaluating its long-lived assets for impairment based on discounted cash flows. This write-down was related entirely to the Cameron division of the Petroleum Production Equipment segment. Recorded goodwill with respect to the other divisions and the remaining goodwill with respect to the Cameron division is not impaired. Nonrecurring/unusual charges other than the goodwill write-down consist of the following:
YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------------------------------- (dollars in thousands) 1996 1995 - -------------------------------------------------------------------------------------------------------- Reorganization and restructuring of various operations $ 4,169 $ 10,109 Acquisition integration costs 3,105 -- Receivable reserve related to customers in Iran -- 16,890 Loss on sale of Richmond foundry -- 7,310 Translation loss from currency devaluation in Venezuela -- 5,709 Loss on sale of Wheeling Machine Products -- 1,491 - -------------------------------------------------------------------------------------------------------- Total $ 7,274 $ 41,509 ========================================================================================================
The 1995 reorganization and restructuring charge includes $4,823,000 of severance, $4,026,000 of reduction in the carrying value of various fixed assets which will no longer be utilized in the Company's operations and $1,260,000 of various other costs. The receivable reserve, which was established in May 1995, reflected the Company's desire to conservatively value these receivables in light of the Clinton Administration's May 8, 1995 implementation of an economic embargo against Iran. Although the Company has received payments from customers in Iran, the political and economic environment continues to be unstable and, as a result, a large portion of the uninsured receivables outstanding at December 31, 1997 continue to be fully reserved. In late December 1995, the Company entered into a definitive agreement regarding the sale of the Cameron division's Richmond, Texas, foundry. In contemplation of this sale, which was consummated during the first quarter of 1996, the Company wrote-down the assets covered by the sale agreement and recorded other costs associated with the sale. During 1995, the foundry had an operating loss of approximately $2,700,000. The 1995 currency devaluation loss resulted from the December 1995 government-announced devaluation of the Bolivar. Further declines in the value of the Bolivar during 1997 and 1996 were not material and were charged against operations. In November 1995, the Company consummated the sale of its Wheeling Machine Products division. This business, which was included in the Company's Petroleum Production Equipment segment, had 1995 sales of approximately $14,000,000 and a small operating profit. The $14,191,000 of net cash sales proceeds were utilized to reduce outstanding indebtedness. Of the $41,509,000 charge described above for 1995, only approximately $7,796,000 required the utilization of cash, of which approximately $2,875,000 was expended during 1995 and the balance in 1996. In addition to the above items, the Company also reviewed all reserves and accruals that were recorded as of June 30, 1995 in accordance with Cooper's various policies, procedures and practices. This review identified a number of accruals related to plant or other facility shutdowns, reorganizations or restructurings which the Company will not be undertaking, a severance accrual recorded in connection with the Company's adoption of SFAS No. 112 which was no longer appropriate, an excess pension accrual and various other items which were no longer appropriate. The Company also reviewed all of its inventories on a worldwide basis and determined that, while the inventories net of LIFO reserves were appropriately stated at the lower of cost or market, a significant amount of inventories existed which were in excess of levels which current management believed to be appropriate. As a result, the various excess reserves and accruals described above, plus an additional charge of approximately $4,000,000 against the Company's fourth quarter 1995 results, were utilized to establish approximately $34,500,000 of additional obsolete, excess and slow-moving inventory reserves at December 31, 1995. During 1997 and 1996, the Company disposed of a large portion of this inventory either by sale at reduced prices or, in certain instances, physical scrapping. None of this reserve was credited back to earnings in either year. 35 16 NOTE 4: ACQUISITIONS During the year ended December 31, 1997, the Company made three small product line acquisitions totaling $6.3 million, all of which pertain to the Petroleum Production Equipment segment and have been accounted for under the purchase method of accounting. Additional goodwill added as a result of these acquisitions was approximately $1.6 million. On June 14, 1996, the Company purchased the assets of Ingram Cactus Company for approximately $100,511,000 in cash, including acquisition costs, and the assumption of certain operating liabilities. The acquired operations, which have been integrated into Cameron, manufacture and sell wellheads, surface systems, valves and actuators used primarily in onshore oil and gas production operations. The acquisition, funded primarily by long-term borrowings, has been accounted for under the purchase method and, therefore, the results of the acquired business are combined with the Company's results only from the acquisition date forward. Goodwill of approximately $26,196,000 was recorded in connection with the acquisition. During 1995, Ingram Cactus had revenues and earnings before taxes of approximately $105,000,000 and $7,500,000, respectively. During October 1996, the Company made two acquisitions for a combined cost of approximately $13,431,000. In the first, the Company acquired various assets of ENOX Technologies, Inc., a Boston-based manufacturer of ignition systems, which has been combined into the existing operations of the Compression and Power Equipment segment. The second acquisition, which is part of the Petroleum Production Equipment segment, involved certain assets and liabilities of Tundra Valve & Wellhead Corp., a Canadian manufacturer of wellheads, trees and valves. Both acquisitions were accounted for under the purchase method and resulted in additional goodwill of $8,763,000. NOTE 5: RECEIVABLES
DECEMBER 31, - ------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------- Trade receivables $387,817 $294,519 Receivables under the percentage of completion method ($8,614 and $28,770 billed at December 31, 1997 and 1996, respectively) 43,219 65,370 Other receivables 11,240 12,666 Allowance for doubtful accounts (13,646) (11,741) - ------------------------------------------------------------------------------------------------------------- $428,630 $360,814 =============================================================================================================
Trade receivables include $39,015,000 and $819,000 at December 31, 1997 and 1996, respectively, of amounts which have not as yet been billed because of contractual provisions providing for a delay in the billing until various post-delivery conditions have been met. All of these amounts should be billed and collected in less than one year. Additions to the allowance for doubtful accounts of $4,079,000, $373,000 and $18,511,000 have been charged to earnings for the years ended December 31, 1997, 1996 and 1995, respectively. A total of $16,890,000 of the expense charged during 1995 is reflected on the Consolidated Results of Operations statement as a nonrecurring/unusual charge (see Note 3 of the Notes to Consolidated Financial Statements). NOTE 6: INVENTORIES
DECEMBER 31, - ---------------------------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------- Raw materials $ 60,258 $ 64,384 Work-in-process 203,336 192,889 Finished goods, including parts and subassemblies 327,280 261,315 Other 3,064 2,739 - ---------------------------------------------------------------------------------------------------------- 593,938 521,327 Excess of current standard costs over LIFO costs (85,969) (92,114) Allowance for obsolete and slow-moving inventory (12,430) (24,945) - ---------------------------------------------------------------------------------------------------------- $495,539 $404,268 ==========================================================================================================
36 17 NOTE 7: PLANT AND EQUIPMENT AND INTANGIBLES
DECEMBER 31, - -------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 - -------------------------------------------------------------------------------- Plant and equipment: Land and land improvements $ 31,748 $ 30,408 Buildings 172,593 163,118 Machinery and equipment 393,204 387,339 Tooling, dies, patterns, etc. 44,825 41,547 Assets under capital leases 14,984 -- All other 122,684 99,095 Construction in progress 11,254 21,478 - -------------------------------------------------------------------------------- 791,292 742,985 Accumulated depreciation (395,747) (373,457) - -------------------------------------------------------------------------------- $ 395,545 $ 369,528 ================================================================================ Intangibles: Goodwill $ 388,983 $ 402,013 Assets related to pension plans 498 585 Other 56,314 52,262 - -------------------------------------------------------------------------------- 445,795 454,860 Accumulated amortization (205,375) (195,543) - -------------------------------------------------------------------------------- $ 240,420 $ 259,317 ================================================================================
NOTE 8: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
DECEMBER 31, - -------------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996(1) - -------------------------------------------------------------------------------------------- Trade accounts and accruals $329,420 $265,640 Salaries, wages and related fringe benefits 48,937 29,358 Deferred taxes 30,601 25,137 Other (individual items less than 5% of total current liabilities) 61,969 71,159 - -------------------------------------------------------------------------------------------- $470,927 $391,294 ============================================================================================
(1) Revised for comparability with 1997. 37 18 NOTE 9: EMPLOYEE BENEFIT PLANS
COMPONENTS OF DEFINED BENEFIT PLAN PENSION (INCOME) EXPENSE - -------------------------------------------------------------------------------------- (dollars in thousands) 1996 1995 1997 - -------------------------------------------------------------------------------------- Service cost-benefits earned during the year $ 7,835 $ 8,462 $ 7,728 Interest cost on projected benefit obligation 17,838 16,613 15,587 Actual return on assets (41,366) (34,597) (45,321) Net amortization and deferral 11,772 11,770 26,745 - -------------------------------------------------------------------------------------- Net pension (income) expense $ (3,921) $ 2,248 $ 4,739 ======================================================================================
FUNDED STATUS OF DEFINED BENEFIT PLANS PLANS WITH PLANS WITH ASSETS IN EXCESS ACCUMULATED BENEFITS OF ACCUMULATED BENEFITS IN EXCESS OF ASSETS - -------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------------- Actuarial present value of: Vested benefit obligation $(228,883) $(189,742) $ (7,531) $ (26,973) ============================================================================================================== Accumulated benefit obligation $(241,799) $(201,767) $ (7,672) $ (27,236) ============================================================================================================== Projected benefit obligation $(253,255) $(210,645) $ (8,666) $ (28,465) Plan assets at fair value 309,952 262,656 3,109 21,980 - -------------------------------------------------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation 56,697 52,011 (5,557) (6,485) Unrecognized net (gain) loss (15,905) (24,113) 1,255 5,455 Unrecognized net (asset) obligation from adoption date (1,021) (951) 306 138 Unrecognized prior service cost (4,974) (1,216) 228 270 Other -- (194) -- (41) Adjustment required to recognize minimum liability -- -- (973) (4,864) - -------------------------------------------------------------------------------------------------------------- Pension asset (liability) at end of year $ 34,797 $ 25,537 $ (4,741) $ (5,527) ==============================================================================================================
COMPUTATIONAL ASSUMPTIONS PROJECTED BENEFIT NET PENSION COST OBLIGATION - ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Discount rate: Domestic 7.75% 7.25% 8% 7.25 - 7.75% 7.75% International 6.5 - 8.25 6.5 - 8.25 7.5 -9 6 - 7.25 6.5 - 8.25 Rate of increase in compensation levels: Domestic 4.5 4.5 - 5 5 4.5 - 4.75 4.5 International 4 - 6 4 - 6 4 - 6 4 - 6 4 - 6 Expected long-term rate of return on assets: Domestic 9.25 8.5 8.5 -- -- International 6.5 - 10 6.5 - 10 6.5 - 10 -- -- Benefit basis: Salaried plans - earnings during career Hourly plans - dollar units, multiplied by years of service Funding policy: 5-30 years
38 19 The Company sponsors the Cooper Cameron Corporation Retirement Plan (Retirement Plan) for all salaried U.S. employees as well as separate defined benefit pension plans for employees of its U.K. and German subsidiaries and several unfunded defined benefit arrangements for various other employee groups. During 1997, four funded defined benefit pension plans covering various hourly collective bargaining employees were merged into the Retirement Plan. Aggregate pension expense amounted to $7,002,000 in 1997, $12,167,000 in 1996 and $13,572,000 in 1995. The Company's (income) expense with respect to the defined benefit pension plans is set forth in the table above. Expense with respect to various defined contribution plans for the years ended December 31, 1997, 1996 and 1995 amounted to $10,923,000, $9,919,000 and $8,833,000, respectively. Gains and losses on curtailments and settlements were not material in any of the last three years. The assets of the domestic and foreign plans are maintained in various trusts and consist primarily of equity and fixed income securities. The Company's minimum liability for pension plans with accumulated benefits in excess of assets totaled $973,000 in 1997 ($4,864,000 in 1996) and has been recorded in the Company's Consolidated Balance Sheets as a long-term liability with a $498,000 offsetting intangible asset ($585,000 in 1996) and a $293,000 reduction in stockholders' equity, net of taxes ($2,642,000 in 1996). The Company's full-time domestic employees who are not covered by a bargaining unit are also eligible to participate in the Cooper Cameron Corporation Retirement Savings Plan. Under this plan, which is essentially the same as the Cooper plan in which employees participated prior to April 1, 1995, employees' savings deferrals are partially matched with shares of the Company's Common stock. Through March 1995, contributions were partially matched with Cooper Common stock. The Company's expense under this plan since April 1995 equals the matching contribution under the Plan's formula, while the expense prior to April 1995 equalled such matching expense adjusted to reflect the Company's proportionate participation in Cooper's Employee Stock Ownership Plan (ESOP). No assets or liabilities with respect to Cooper's ESOP were included in the Company's financial statements for 1995. Expense for the years ended December 31, 1997, 1996 and 1995 amounted to $7,683,000, $6,393,000 and $5,753,000, respectively. For 1997, the Company issued or sold 92,218 shares of Common stock to the Trustee of the Retirement Savings Plan to meet matching and other obligations under the plan. NOTE 10: STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
NUMBER OF SHARES(1) ----------------------------- LONG-TERM NON-EMPLOYEE WEIGHTED INCENTIVE DIRECTOR AVERAGE PLAN PLAN EXERCISE PRICES(1) - -------------------------------------------------------------------------------------------------------------- Stock options outstanding at January 1, 1995 -- -- -- Options granted 3,178,370 104,842 $ 8.47 Options cancelled (84,044) -- $ 8.329 - -------------------------------------------------------------------------------------------------------------- Stock options outstanding at December 31, 1995 3,094,326 104,842 $ 8.47 Options granted 2,105,292 146,000 $ 25.635 Options cancelled (70,040) -- $ 8.329 Options exercised (209,148) (4,000) $ 8.42 - -------------------------------------------------------------------------------------------------------------- Stock options outstanding at December 31, 1996 4,920,430 246,842 $ 15.955 Options granted 2,865,982 144,000 $ 34.98 Options cancelled (146,795) -- $ 11.70 Options exercised (1,592,970) (147,250) $ 12.84 - -------------------------------------------------------------------------------------------------------------- Stock options outstanding at December 31, 1997(2) 6,046,647 243,592 $ 26.02 ============================================================================================================== Stock options exercisable at December 31, 1997(3) 1,247,827 99,592 $ 17.13 ==============================================================================================================
(1) Amounts adjusted to reflect the 2-for-1 stock split described in Note 2. (2) Exercise prices range from $8.329 to $79.41 per share. (3) Exercise prices range from $8.329 to $35.25 per share. Options are granted to key employees under the Long-term Incentive Plan and generally become exercisable on the first anniversary date following the date of grant in one-third increments each year or in annual increments of one-sixth, one-third, one-third and one-sixth. These options generally expire ten years after the date of grant. Certain key executives also elected to receive options in lieu of salary for periods that extend through December 31, 1998. The options granted under the Options in Lieu of Salary Program generally become exercisable at the end of the related salary period and expire five years after the beginning of the salary period. 39 20 Under an amendment to the Company's Non-employee Director Stock Option Plan approved by the Board of Directors on November 6, 1997, non-employee directors receive a grant of 6,000 stock options annually. In addition directors are permitted to take either a portion of or their full annual retainer in cash ($30,000) or receive, in lieu of cash, additional stock options for up to 8,700 shares of stock. All directors elected to receive the additional stock options for 1997 and 1996. The exercise price of each option is based on the fair market value of the Company's stock at the date of grant. The options expire five years and one day after the date of grant and become exercisable one year following the date of grant. As of December 31, 1997, shares reserved for future grants under the Long-term Incentive and Non-employee Director Stock Option Plans were 462,464 and 105,158, respectively. The weighted average remaining contractual life of all options at December 31, 1997 is approximately 7 years. Pro forma information is required by SFAS No. 123 to reflect the estimated effect on net income and earnings per share as if the Company had accounted for the stock option grants and the Employee Stock Purchase Plan (ESPP) using the fair value method described in that Statement. The fair value was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 5.9%, 5.9% and 5.3%; dividend yields of 0.8%, 1% and 0.7%; volatility factors of the expected market price of the Company's common stock of .349, .302 and .221; and a weighted-average expected life of the options of 3.5, 2.2 and 3.5 years. These assumptions resulted in a weighted average grant date fair value for options and the ESPP of $10.83 and $14.49, respectively for 1997, $5.51 and $5.46, respectively for 1996 and $1.89 and $2.34, respectively for 1995. For purposes of the pro forma disclosures, the estimated fair value is amortized to expense over the vesting period. Reflecting the amortization of this hypothetical expense for 1997, 1996 and 1995 results in pro forma net income and diluted earnings per share of $128,875,000 and $2.32, respectively, for 1997, $59,147,000 and $1.12, respectively, for 1996 and pro forma net loss and diluted loss per share of $501,212,000 and $10.00, respectively, for 1995. EMPLOYEE STOCK PURCHASE PLAN Under the Cooper Cameron Employee Stock Purchase Plan, the Company is authorized to sell up to 1,000,000 shares of Common stock to its full-time domestic, U.K. and Canadian employees, nearly all of whom are eligible to participate. Under the terms of the Plan, employees may elect each year to have up to 10% of their annual compensation withheld to purchase the Company's Common stock. The purchase price of the stock is 85% of the lower of the beginning-of-plan year or end-of-plan year market price of the Company's Common stock. Under the 1997/1998 plan, nearly 2,900 employees have elected to purchase approximately 171,000 shares of the Company's Common stock at $50.15 per share, or 85% of the market price of the Company's Common stock on July 31, 1998, if lower. A total of 230,931 shares were purchased at post-split prices of $20.00 per share on July 31, 1997 under the 1996/1997 plan. NOTE 11: LONG-TERM DEBT
DECEMBER 31, - ----------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 - ----------------------------------------------------------------------------------------- Floating-rate term loans $ -- $ 168,700 Floating-rate revolving credit advances 322,559 190,068 Other long-term debt 43,418 35,880 Obligations under capital leases 10,978 -- - ----------------------------------------------------------------------------------------- 376,955 394,648 Current maturities (48,131) (47,100) - ----------------------------------------------------------------------------------------- Long-term portion $ 328,824 $ 347,548 =========================================================================================
On June 30, 1995, the Company entered into a $475,000,000 Credit Agreement with various lenders to repay the $375,000,000 of outstanding bank indebtedness guaranteed by Cooper and to provide for the Company's general borrowing requirements. The Credit Agreement, which was amended effective March 20, 1997, provides the Company with an aggregate unsecured borrowing capacity consisting of $475,000,000 of floating rate revolving credit advances maturing March 31, 2002. The 1997 amendment provided for, among other things, the conversion of all previously outstanding term loans into revolving credit advances, lower interest rates on the remaining outstanding debt and the modification of certain financial covenants. At December 31, 1997, the weighted average interest rate on the revolving credit advances was 6.24%. The weighted average interest rates on the term loans and revolving credit advances were 6.125% and 6.08%, respectively, at December 31, 1996 (6.51% and 5.93%, respectively, at December 31, 1995). As described further in Note 17, the Company has entered into interest rate swaps with a notional value of $100,000,000 at December 31, 1997, resulting in an effective fixed rate of 5.64% plus a variable margin of 0.225% to 0.65% on that portion of the Company's outstanding debt through December 31, 1998 and $75,000,000 at a similar rate thereafter until the expiration of all outstanding agreements on June 30, 2000. The Company is also required to pay a facility fee, which at December 31, 1997 equalled 0.11% annually, on the committed amount under the Credit Agreement. 40 21 Up through and including January 31, 1998, the Company was also a party to various Treasury Locks, or forward rate agreements, which have the effect of locking in a weighted average interest rate of 5.71% on the "Treasury component" of a $150,000,000 prospective debt issuance through June 15, 1998. (See Note 17 of the Notes to Consolidated Financial Statements for further information). In addition to the Credit Agreement, the Company has $43,418,000 of unsecured debt outstanding at the end of 1997 under other credit facilities which are available both domestically and to its foreign subsidiaries. The average interest rate on the majority of this debt at December 31, 1997 was 5.9% (5.55% and 6.59% at December 31, 1996 and 1995, respectively). At December 31, 1996, the Company had reclassified as long term $35,880,000 (none at December 31, 1997) of indebtedness which by its terms represent a current liability reflecting the Company's intention and ability to refinance such amounts under its long-term Credit Agreement. At December 31, 1997, the Company had $152,441,000 of committed borrowing capacity available under its long-term Credit Agreement plus additional uncommitted amounts available under various other borrowing arrangements. Under the terms of the Credit Agreement, the Company is required to maintain certain financial ratios including a debt to capitalization ratio of not more than 50%, except in certain instances involving a specified acquisition, and a coverage ratio of earnings before interest, taxes, depreciation and amortization (EBITDA) less capital expenditures equal to at least 2.5 times interest expense. The Credit Agreement also specifies certain limitations regarding additional indebtedness outside the Credit Agreement and the amounts invested in the Company's foreign subsidiaries. The Company has been, throughout all periods reported, and was, at December 31, 1997, in compliance with all loan covenants. For the years 1997, 1996 and 1995, total interest expense was $28,591,000, $20,878,000 and $23,273,000, respectively, including $11,858,000 of interest allocated to the Company by Cooper for the six-month period ended June 30, 1995. Interest paid by the Company and paid on the Company's behalf by Cooper is not materially different from the amounts expensed. At December 31, 1997, the Company had two long-term leases extending out 14 and 19 years and involving annual rentals of approximately $4,240,000. The Company also leases certain facilities, office space, vehicles, and office, data processing and other equipment under capital and operating leases. The obligations with respect to these leases are generally for five years or less and are not considered to be material individually or in the aggregate. NOTE 12: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company's salaried employees participate in various domestic employee welfare benefit plans, including medical, dental and prescriptions among other benefits for active employees. These plans are essentially the same as the plans which employees participated in as part of Cooper prior to June 30, 1995. Salaried employees who retired prior to 1989, as well as certain other employees who were near retirement and elected to receive certain benefits, have retiree medical, prescription and life insurance benefits, while active salaried employees will not have postretirement health care benefits. The hourly employees have separate plans with varying benefit formulas. In all cases, however, currently active employees, except for certain employees who are near retirement and previously elected to receive certain benefits, will not receive health care benefits after retirement. All of these plans were and continue to be unfunded. The amounts reflected in the table that follows represent the effect on the Company's earnings and the liability as actuarially determined under SFAS No. 106. The Company has recorded income during each of the last three years due to accumulated actuarial gains in excess of benefits costs which have resulted primarily from the Company's actual medical claims experience being less than expected at the time of the Company's adoption of SFAS No. 106 in 1992. 41 22
AMOUNTS PER CONSOLIDATED ACCUMULATED ITEMS NOT YET RECORDED FINANCIAL STATEMENTS POST- IN CONSOLIDATED LIABILITY FOR NET RETIREMENT BENEFIT FINANCIAL STATEMENTS POSTRETIREMENT ANNUAL OBLIGATION PRIOR ACTUARIAL BENEFITS OTHER EXPENSE (dollars in thousands) (APBO) SERVICE COST NET GAIN THAN PENSIONS (INCOME) - --------------------------------------------------------------------------------------------------------------------- Balance - December 31, 1994 $(64,199) $(2,900) $(40,618) $(107,717) Benefit payments 4,035 4,035 Actuarial net gains 6,500 (6,500) Plan expense: Service cost (200) $ 200 Interest cost (5,200) 5,200 Amortization of prior service cost 600 (600) Amortization of actuarial net gain 5,100 (5,100) -------- Net annual income 300 $ (300) - -----------------------------------------------------------------------------------------------------------======== Balance - December 31, 1995 (59,064) (2,300) (42,018) (103,382) Plan amendments 800 (800) Benefit payments 3,850 3,850 Actuarial net gains 9,300 (9,300) Plan expense: Service cost (200) $ 200 Interest cost (4,000) 4,000 Amortization of prior service cost 600 (600) Amortization of actuarial net gain 5,900 (5,900) ------- Net annual income 2,300 $ (2,300) - -----------------------------------------------------------------------------------------------------------========= Balance - December 31, 1996 (49,314) (2,500) (45,418) (97,232) Benefit payments 4,634 4,634 Actuarial net loss (1,074) 1,074 Plan expense: Service cost (225) $ 225 Interest cost (3,442) 3,442 Amortization of prior service cost 700 (700) Amortization of actuarial net gain 10,100 (10,100) -------- Net annual income 7,133 $ (7,133) - -----------------------------------------------------------------------------------------------------------======== Balance - December 31, 1997 $(49,421) $(1,800) $(34,244) $ (85,465) ======================================================================================================
DECEMBER 31, - ------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------- Amount of APBO related to: Retired employees $(44,778) $(43,714) Employees eligible to retire (2,765) (2,900) Other employees (1,878) (2,700) Actuarial assumptions: Discount rate 7.03% 7.59% Ensuing year to 2002-healthcare cost trend rate 7.0% 8.5% ratable to ratable to 5.0% 5.0% Effect of 1% change in healthcare cost trend rate: Increase in year-end APBO $ 4,100 $ 3,600 Increase in expense $ 300 $ 300
42 23 NOTE 13: INCOME TAXES
YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes: U.S. operations $ 97,024 $ 53,267 $(181,285) Foreign operations 102,354 38,747 (315,111) - ------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes $ 199,378 $ 92,014 $(496,396) ============================================================================================================================== Income taxes: Current: U.S. federal $ 23,914 $ 2,084 $ (2,111) U.S. state and local and franchise 3,905 2,054 1,170 Foreign 15,900 6,243 2,260 - ------------------------------------------------------------------------------------------------------------------------------ 43,719 10,381 1,319 - ------------------------------------------------------------------------------------------------------------------------------ Deferred: U.S. federal 9,558 13,697 (6,168) U.S. state and local 1,567 1,519 (927) Foreign 3,952 2,233 1,051 - ------------------------------------------------------------------------------------------------------------------------------ 15,077 17,449 (6,044) - ------------------------------------------------------------------------------------------------------------------------------ Other: Reserve for prior year deferred tax assets -- -- 8,382 - ------------------------------------------------------------------------------------------------------------------------------ -- -- 8,382 - ------------------------------------------------------------------------------------------------------------------------------ Income tax provision $ 58,796 $ 27,830 $ 3,657 ============================================================================================================================== Items giving rise to deferred income taxes: Reserves and accruals $ (4,266) $ 7,813 $ (2,309) Inventory allowances, full absorption and LIFO 15,196 1,913 (8,111) Percentage of completion income (recognized) not recognized for tax (808) 5,703 -- Prepaid medical and dental expenses (4,511) 3,158 1,529 Postretirement benefits other than pensions 4,501 2,352(2) 1,658(2) U.S. tax deductions in excess of amounts currently deductible (1,694) (8,123) -- Other 6,659 4,633(2) 1,189(2) - ------------------------------------------------------------------------------------------------------------------------------ Deferred income taxes $ 15,077 $ 17,449 $ (6,044) ============================================================================================================================== The differences between the provision for income taxes and income taxes using the U.S. federal income tax rate were as follows: U.S. federal statutory rate 35.00% 35.00% 35.00% Nondeductible goodwill 1.43 2.85 (0.97) Provision for impairment of goodwill -- -- (31.09) State and local income taxes 1.69 0.76 (0.23) Tax exempt income (0.88) (1.90) 0.34 Foreign statutory rate differential (1.14) (0.82) 0.02 Change in valuation of prior year tax assets (7.10) (8.90) (1.69) Losses not receiving a tax benefit 0.59 2.36 (2.18) All other (0.10) 0.90 0.06 - ------------------------------------------------------------------------------------------------------------------------------ Total 29.49% 30.25% (0.74)% ============================================================================================================================== Total income taxes paid(1) $ 12,929 $ 9,366 $ 4,248 ==============================================================================================================================
(1) For periods prior to June 30, 1995, the Company paid taxes to Cooper, who in turn paid the taxes to the various taxing authorities. The amount shown for 1995 represents tax actually paid by the Company since June 30, 1995 and foreign taxes paid by Cooper on the Company's behalf through June 30, 1995. Information regarding U.S. taxes paid or refunds received by Cooper on the Company's behalf during the first half of 1995 is not available. (2) Revised for comparability with 1997. 43 24
DECEMBER 31, - ---------------------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------- Components of deferred tax balances: Deferred tax liabilities: Plant and equipment $ (43,080) $ (41,912) Inventory (47,947) (33,105) Pensions (8,817) (8,817) Percentage of completion (4,895) (5,703) Other (15,121) (12,854) - ---------------------------------------------------------------------------------------------------- Total deferred tax liabilities (119,860) (102,391) - ---------------------------------------------------------------------------------------------------- Deferred tax assets: Postretirement benefits other than pensions 32,690 37,191 Reserves and accruals 32,495 24,290 Net operating losses and related deferred tax assets 19,761 30,430 Other 708 3,959 - ---------------------------------------------------------------------------------------------------- Total deferred tax assets 85,654 95,870 - ---------------------------------------------------------------------------------------------------- Valuation allowance (24,321) (37,307) - ---------------------------------------------------------------------------------------------------- Net deferred tax liabilities $ (58,527) $ (43,828) ====================================================================================================
During 1997 and 1996, certain of the Company's international operations, which had incurred losses for several years, generated earnings which exceeded the losses related to several other operations. As a result, the valuation allowance established during 1995 was reduced in 1997 and 1996 by $12,986,000 and $6,017,000, respectively, with a corresponding reduction in the Company's income tax expense. In addition, while the Company was profitable on a book basis domestically during 1996, it had tax deductions in excess of those which could be utilized currently as a reduction of the actual taxes payable. The result was the recognition of an $8,123,000 current deferred tax asset. During 1997 the Company's taxable income, including return to provision adjustments related to 1996, was such that the $8,123,000 recorded in 1996 was increased by an additional $1,694,000. While the Company presently anticipates that this asset will be utilized during 1998, under present U.S. tax rules the Company has until the year 2010-2011 to utilize these excess deductions. The primary item giving rise to the difference between taxes currently payable with respect to 1997 and income taxes paid in 1997 is the tax deduction which the Company receives with respect to certain employee stock benefit plan transactions. This benefit, which is credited to capital in excess of par value, amounted to $22,367,000 in 1997. The Company's tax provision includes U.S. tax expected to be payable on the foreign portion of the Company's income before income taxes when such earnings are remitted. The Company's accruals are sufficient to cover the additional U.S. taxes estimated to be payable on the earnings that the Company anticipates will be remitted. Through December 31, 1997, this amounted to essentially all unremitted earnings of the Company's foreign subsidiaries except certain unremitted earnings in the U.K. and Ireland which are considered to be permanently reinvested. Although prior to June 30, 1995 the Company's operations were included in the consolidated U.S. federal and certain combined state income tax returns of Cooper, the tax provisions and tax liabilities through that date were determined as if the Company was a stand-alone business filing a separate tax return. Under the agreement between Cooper and the Company pursuant to which the Company's assets and liabilities were legally transferred, the U.S. federal and state and local income and franchise tax liability for periods prior to June 30, 1995 was retained by Cooper and accordingly, the Company does not have any non-deferred tax accruals with respect to these liabilities. For periods after June 30, 1995, the Company has responsibility and has provided for its tax liabilities on a worldwide basis. As described in Note 3, the Company had a $441,000,000 non-deductible goodwill write-off as well as $41,509,000 of nonrecurring/unusual charges during 1995. Of the $41,509,000, approximately $18,600,000 was treated as a non-deductible expense because it related to the Company's international operations in countries where the operations had experienced losses over several years. In addition to the nonrecurring/unusual charges, these same international operations also had operating losses during 1995 which aggregated $12,300,000 that were treated as non-deductible. Lastly, in 1994 and prior years, deferred tax assets totaling $17,518,000 had been recorded with respect to these operations and the Company established a valuation allowance against these deferred tax assets during 1995. Of this last amount, approximately $9,136,000 was recorded through a reclassification of long-term tax accruals covering pre-1987 unremitted earnings with respect to the Company's operations in the U.K. The Company has determined that these earnings are permanently invested and that, therefore, these long-term accruals are no longer required. The remainder, or $8,382,000, was charged against 1995's tax expense. In total, these items resulted in a $28,324,000 increase in the Company's valuation allowance with respect to deferred tax assets during 1995. 44 25 NOTE 14: COMMON STOCK, PREFERRED STOCK AND RETAINED DEFICIT COMMON STOCK At December 31, 1997, 75,000,000 shares of Common stock, par value $.01 per share, were authorized of which 53,235,292 were issued (25,617,727, pre-split, at December 31, 1996). In November 1996, the Company's board of directors approved the repurchase of up to 5,000,000 shares of Common stock for use in the Company's various employee stock ownership, option and benefit plans. During the fourth quarter of 1997, the Company purchased approximately 503,000 shares with another 709,700 shares acquired during January 1998. As of year-end, a total of 477,149 shares were held in treasury, net of shares re-issued during 1997 to satisfy stock option exercises. Additionally, at December 31, 1997, 8,616,237 shares of unissued Common stock were reserved for future issuance under various employee benefit plans. PREFERRED STOCK The Company is authorized to issue up to 10,000,000 shares of preferred stock, par value of $.01 per share. At December 31, 1997, no preferred shares were issued or outstanding. Shares of preferred stock may be issued in one or more series of classes, each of which series or class shall have such distinctive designation or title as shall be fixed by the Board of Directors of the Company prior to issuance of any shares. Each such series or class shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issuance of such series or class of preferred stock as may be adopted by the Board of Directors prior to the issuance of any shares thereof. A total of 750,000 shares of Series A Junior Participating Preferred Stock has been reserved for issuance upon exercise of the Stockholder Rights described below. STOCKHOLDER RIGHTS PLAN On May 23, 1995, the Company's Board of Directors declared a dividend distribution of one Right for each outstanding share of Common stock. Each Right entitles the registered holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company, par value $.01 per share, for an exercise price of $300. The Rights were attached to all outstanding shares of the Company's Common stock immediately following completion of the exchange offer with Cooper (see Note 1). Unless earlier redeemed by the Company at a price of $.01 each, the Rights become exercisable only in certain circumstances constituting a potential change in control of the Company and will expire on October 31, 2007. Each share of Series A Junior Participating Preferred Stock purchased upon exercise of the Rights will be entitled to certain minimum preferential quarterly dividend payments as well as a specified minimum preferential liquidation payment in the event of a merger, consolidation or other similar transaction. Each share will also be entitled to 100 votes to be voted together with the Common stockholders and will be junior to any other series of Preferred Stock authorized or issued by the Company, unless the terms of such other series provides otherwise. In the event of a potential change in control, each holder of a Right, other than Rights beneficially owned by the acquiring party (which will have become void), will have the right to receive upon exercise of a Right that number of shares of Common stock of the Company, or, in certain instances, Common stock of the acquiring party having a market value equal to two times the current exercise price of the Right. RETAINED DEFICIT The Company's retained deficit as of December 31, 1997 and 1996 includes a $441,000,000 charge related to the goodwill write-down described in Note 3 of the Notes to Consolidated Financial Statements. Delaware law, under which the Company is incorporated, provides that dividends may be declared by the Company's board of directors from a current year's earnings as well as from the net of capital in excess of par value less the retained deficit. Accordingly, at December 31, 1997, the Company had approximately $665,490,000 from which dividends could be paid. 45 26 NOTE 15: INDUSTRY SEGMENTS
REVENUES OPERATING EARNINGS IDENTIFIABLE ASSETS YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 1995 1997 1996 1995 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Petroleum Production Equipment $1,112,556 $ 798,607 $ 648,141 $159,800 $ 71,590 $ (12,557) $1,132,543 $ 991,726 $ 775,353 Compression and Power Equipment 686,185 588,536 493,602 74,554 57,629 30,010 490,091 450,408 348,295 - ----------------------------------------------------------------------------------------------------------------------------------- 1,798,741 1,387,143 1,141,743 234,354 129,219 17,453 1,622,634 1,442,134 1,123,648 Other income 7,368 1,044 2,292 7,368 1,044 2,292 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues $1,806,109 $1,388,187 $1,144,035 =================================================================================================================================== Goodwill write-down -- -- (441,000) Nonrecurring/ unusual charges -- (7,274) (41,509) Interest expense (28,591) (20,878) (23,273) General corporate (13,753) (10,097) (10,359) 12,044 21,159 10,027 - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated income (loss) before income taxes $199,378 $ 92,014 $(496,396) =================================================================================================================================== Investment in uncon- solidated subsidiaries 8,552 5,629 1,730 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $1,643,230 $1,468,922 $1,135,405 ===================================================================================================================================
REVENUES OPERATING EARNINGS IDENTIFIABLE ASSETS YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 1995 1997 1996 1995 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Domestic $1,177,197 $ 897,533 $ 736,079 $130,953 $ 92,440 $ 8,566 $ 966,976 $ 823,461 $ 638,245 - ----------------------------------------------------------------------------------------------------------------------------------- International: Europe 581,203 443,957 336,133 86,694 42,719 4,988 586,287 562,425 449,508 Canada 135,586 64,326 60,250 3,743 2,203 94 54,788 43,995 26,585 Other 137,632 100,246 108,423 17,555 538 2,207 132,675 102,431 83,284 - ----------------------------------------------------------------------------------------------------------------------------------- Sub-total International 854,421 608,529 504,806 107,992 45,460 7,289 773,750 708,851 559,377 - ----------------------------------------------------------------------------------------------------------------------------------- Eliminations: Transfers to International (183,552) (93,364) (82,061) (23,465) (23,816) (16,265) Transfers to Domestic (49,325) (25,555) (17,081) (73,216) (49,540) (49,569) Other (4,591) (8,681) 1,598 (21,411) (16,822) (8,140) - ----------------------------------------------------------------------------------------------------------------------------------- 1,798,741 1,387,143 1,141,743 234,354 129,219 17,453 1,622,634 1,442,134 1,123,648 Other income 7,368 1,044 2,292 7,368 1,044 2,292 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues $1,806,109 $1,388,187 $1,144,035 =================================================================================================================================== Goodwill write-down -- -- (441,000) Nonrecurring/ unusual charges -- (7,274) (41,509) Interest expense (28,591) (20,878) (23,273) General corporate (13,753) (10,097) (10,359) 12,044 21,159 10,027 - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated income (loss) before income taxes $199,378 $ 92,014 $(496,396) =================================================================================================================================== Investment in uncon- solidated subsidiaries 8,552 5,629 1,730 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $1,643,230 $1,468,922 $1,135,405 ===================================================================================================================================
46 27
YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Research and development expense: Petroleum Production Equipment $ 3,878 $ 1,944 $ 1,347 Compression and Power Equipment 5,985 5,192 7,201 - -------------------------------------------------------------------------------- Total $ 9,863 $ 7,136 $ 8,548 ================================================================================ Depreciation and amortization: Petroleum Production Equipment $ 40,810 $ 37,467 $ 46,615 Compression and Power Equipment 24,346 24,518 25,071 Corporate 706 495 68 - -------------------------------------------------------------------------------- Total $ 65,862 $ 62,480 $ 71,754 ================================================================================ Capital expenditures: Petroleum Production Equipment $ 51,420 $ 16,373 $ 23,132 Compression and Power Equipment 19,572 18,939 14,603 Corporate 1,305 1,833 1,791 - -------------------------------------------------------------------------------- Total $ 72,297 $ 37,145 $ 39,526 ================================================================================ Goodwill write-down: Domestic $ -- $ -- $ 144,719 Europe -- -- 259,879 Canada -- -- 7,330 Other -- -- 29,072 - -------------------------------------------------------------------------------- Total $ -- $ -- $ 441,000(1) ================================================================================ Nonrecurring/unusual charges: Domestic $ -- $ 4,724 $ 15,584 Europe -- 1,926 19,494 Canada -- 359 720 Other -- 265 5,711 - -------------------------------------------------------------------------------- Total $ -- $ 7,274(2) $ 41,509(3) ================================================================================
(1) All related to Petroleum Production Equipment. (2) $4,169 related to Compression and Power Equipment and the balance to Petroleum Production Equipment. (3) $2,242 related to Compression and Power Equipment and the balance to Petroleum Production Equipment. The Company's operations are organized into two segments, Petroleum Production Equipment and Compression and Power Equipment. The Petroleum Production Equipment segment manufactures, markets and services valves, wellhead equipment, blowout preventers, chokes and control systems, and other components for oil and gas drilling, production and transmission activities. The Compression and Power Equipment segment manufactures, markets and services engines and centrifugal gas and air compressors used in the production, transmission, storage and processing of natural gas and oil as well as a variety of other industrial applications. Intersegment sales and related receivables for each of the years shown were immaterial and have been eliminated. Export sales to unaffiliated companies were $308,960,000 in 1997, $277,426,000 in 1996 and $184,390,000 in 1995. Of total export sales, approximately 49% in 1997, 60% in 1996 and 60% in 1995 were to Asia, Africa, Australia and the Middle East; 12% in 1997, 17% in 1996 and 13% in 1995 were to Canada and Europe; and 39% in 1997, 23% in 1996 and 27% in 1995 were to Latin America. Foreign currency transaction gains and losses were insignificant for all of the years shown. See Note 3 of the Notes to Consolidated Financial Statements for information regarding 1995 translation losses related to the Company's operations in Venezuela. 47 28 NOTE 16: RELATED PARTY TRANSACTIONS The Company received services provided by Cooper including employee benefits administration, cash management, risk management, certain legal services, public relations, domestic tax reporting and internal and domestic external audit through June 30, 1995. The costs associated with these services allocated to the Company amounted to $4,042,000 for the six-month period in 1995. For purposes of the Company's consolidated financial statements, the intercompany account between the Company and Cooper was included as an element of the Company's net assets for periods prior to June 30, 1995. All free cash flows and cash requirements of the Company through June 30, 1995 were considered to be transferred to or provided by Cooper and have been included in this intercompany account. Transactions with other related parties, are not material to the Company. NOTE 17: OFF-BALANCE SHEET RISK, CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS OFF-BALANCE SHEET RISK The table below summarizes the contractual amounts of the Company's forward foreign currency exchange contracts to (buy) sell the following currencies at December 31, 1997 and 1996. These contracts generally have maturities that do not exceed one to two years.
DECEMBER 31, - ----------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996(1) - ----------------------------------------------------------------------- Pound Sterling: - Buy $ (8,004) $ -- Canadian Dollar: - Sell 4,767 44,695 - Buy (4,559) -- Deutsche Marks: - Sell -- 487 - Buy (1,695) -- Italian Lira: - Sell 747 5,526 - Buy (106) -- Japanese Yen: - Buy -- (166) - ----------------------------------------------------------------------- Net (purchase) selling position $ (8,850) $ 50,542 =======================================================================
(1) Revised for comparability with 1997. Counterparties to the forward foreign currency exchange contracts are typically large, stable financial institutions. Accordingly, the Company's exposure to credit loss in the event of nonperformance by these counterparties is considered to be minimal. Deferred gains and losses on forward foreign currency exchange contracts based upon anticipated transactions were not material at December 31, 1997 and 1996. At December 31, 1997, the Company was contingently liable with respect to approximately $55,926,000, ($74,079,000 at December 31, 1996) of standby letters of credit ("letters") issued in connection with the delivery, installation and performance of the Company's products under contracts with customers throughout the world. Of the outstanding total, approximately 46% relates to the Petroleum Production Equipment segment and the balance, or 54%, to the Compression and Power Equipment segment. The Company was also liable for approximately $9,806,000 of bank guarantees and letters of credit used to secure certain financial obligations of the Company ($8,770,000 at December 31, 1996). While certain of the letters do not have a fixed expiration date, the majority expire within the next one to two years and the Company would expect to issue new or extend existing letters in the normal course of business. The Company's other off-balance sheet risks are not material. CONCENTRATIONS OF CREDIT RISK See Note 3 for a discussion of the Company's receivables and related reserves with respect to customers in the country of Iran. The Company's other concentrations of credit risk are not significant. 48 29 FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, debt instruments, interest rate swap contracts, forward rate agreements and foreign currency forward contracts. The book values of cash and cash equivalents, trade receivables and trade payables and floating-rate debt instruments are considered to be representative of their respective fair values. Based on the spread between the contract forward rate and the spot rate as of year-end on contracts with similar terms to existing contracts, the fair value of the Company's foreign currency forward contracts was not material at December 31, 1997 and 1996. As described in Note 11 of the Notes to Consolidated Financial Statements, the Company has entered into various interest rate swap agreements. Additionally, during 1997, and continuing in January 1998, the Company entered into Treasury Locks, or forward rate agreements, to hedge its interest rate exposure on $150,000,000 of a prospective long-term debt issuance. These agreements, which lock in a weighted average interest rate of 5.71% on the "Treasury component" of any such issuance, expire June 15, 1998. If marked-to-market at December 31, 1997 the interest rate swaps and Treasury Locks would have resulted in a small pre-tax gain. NOTE 18: SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES Increase in net assets:
YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 - --------------------------------------------------------------------------------------- Common stock issued for employee stock ownership and retirement savings plans $ 6,058 $7,027 Adjustment of minimum pension liability 2,349 2,958 Tax benefit of certain employee stock benefit plan transactions 22,367 1,865
NOTE 19: NET ASSETS Prior to June 30, 1995, the Company was not a separate stand-alone entity and, therefore, it did not have any meaningful amounts of Common stock, capital in excess of par value or retained earnings. Accordingly, the equity was reflected as a single amount titled "Net Assets." The table below shows the items which have resulted in increases or decreases to this Net Asset total for the period from December 31, 1994 through June 30, 1995. The Company's stockholders' equity activity for the period from July 1, 1995 through December 31, 1997 is shown in the Consolidated Changes in Stockholders' Equity statement.
(DOLLARS IN THOUSANDS) NET ASSETS - ----------------------------------------------------------------------------------------- Balance at December 31, 1994 $878,129 Translation adjustment 27,106 Allocation of interest and general and administrative expenses, net of tax, from Cooper 9,539 Net loss from January 1, 1995 through June 30, 1995 (37,802) Adjustment of equity balances to reflect split-off from Cooper at June 30, 1995(1) 14,209 - ----------------------------------------------------------------------------------------- Balance on June 30, 1995 at time of split-off $891,181 =========================================================================================
(1) Includes the effect of the final settlement with Cooper reached during the fourth quarter of 1995. Intercompany transactions are principally cash transfers between the Company and Cooper. 49 30 NOTE 20: EARNINGS (LOSS) PER SHARE The weighted average number of common shares (utilized for basic earnings per share presentation) and common stock equivalents outstanding for each period presented was as follows:
YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------- (amounts in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------- Average shares outstanding 52,145 50,690 50,098 Common stock equivalents 3,461 2,289 -- - ---------------------------------------------------------------------------------------- Shares utilized in diluted earnings per share presentation 55,606 52,979 50,098 ========================================================================================
For periods prior to June 30, 1995, earnings (loss) per share amounts have been computed on a pro forma basis based on the assumption that 50,000,000 (post-split) shares of Common stock were outstanding during each period presented. NOTE 21: UNAUDITED QUARTERLY OPERATING RESULTS
1997 (BY QUARTER) - ----------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) 1 2 3 4 - ----------------------------------------------------------------------------------------------- Revenues $376,045 $441,344 $474,451 $514,269 Gross margin(1) 100,798 123,893 134,067 150,404 Net income 19,419 34,063 39,799 47,301 Earnings per share: Basic 0.38 0.66 0.76 0.89 Diluted 0.36 0.62 0.70 0.83
1996 (BY QUARTER) - ----------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) 1 2(2) 3(2) 4(2) - ----------------------------------------------------------------------------------------------- Revenues $280,648 $312,444 $378,793 $416,302 Gross margin(1) 74,782 85,399 101,094 116,354 Net income 7,664 12,869 19,253 24,398 Earnings per share: Basic 0.15 0.26 0.38 0.48 Diluted 0.15 0.24 0.36 0.45
1 Gross margin equals revenues less cost of sales before depreciation and amortization. 2 See Note 3 of the Notes to Consolidated Financial Statements for further information relating to nonrecurring/unusual charges incurred during 1996. 50 31 SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF COOPER CAMERON CORPORATION The following table sets forth selected historical financial data for the Company for each of the five years in the period ended December 31, 1997. The financial information included herein may not necessarily be indicative of the financial position or results of operations of the Company in the future or of the financial position or results of operations of the Company that would have been obtained if the Company had been a separate, stand-alone entity during the periods presented. This information should be read in conjunction with the consolidated financial statements of the Company and notes thereto included elsewhere in this Annual Report.
YEARS ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Income Statement Data(1): Revenues $ 1,806,109 $ 1,388,187 $ 1,144,035 $ 1,110,076 $ 1,340,778 - ----------------------------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales (exclusive of depreciation and amortization) 1,296,947 1,010,558 881,798 838,575 970,944 Depreciation and amortization 65,862 62,480 71,754 70,233 70,413 Selling and administrative expenses 215,331 194,983 181,097 177,902 194,242 Interest expense 28,591 20,878 23,273 20,023 15,852 Provision for impairment of goodwill -- -- 441,000 -- -- Nonrecurring/unusual charges(2) -- 7,274 41,509 -- -- - ----------------------------------------------------------------------------------------------------------------------------- 1,606,731 1,296,173 1,640,431 1,106,733 1,251,451 - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 199,378 92,014 (496,396) 3,343 89,327 Income tax provision (58,796) (27,830) (3,657) (7,089) (38,138) - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 140,582 $ 64,184 $ (500,053) $ (3,746) $ 51,189 ============================================================================================================================= Earnings (loss) per share (pro forma prior to June 30, 1995)(3): Basic $ 2.70 $ 1.27 $ (9.98) $ (0.07) $ 1.02 Diluted $ 2.53 $ 1.21 $ (9.98) $ (0.07) $ 1.02 ============================================================================================================================= Balance Sheet Data (at the end of period)(1): Total assets $ 1,643,230 $ 1,468,922 $ 1,135,405 $ 1,710,380(4) $ 1,713,668 Stockholders' equity/net assets 642,051 516,128 423,588 878,129(4) 841,955 Long-term debt 328,824 347,548 234,841 374,800 374,815 Other long-term obligations 143,560 160,405 160,267 181,043 193,666
1 For the historical periods presented prior to June 30, 1995, all of the excess cash generated by the Company's operations was regularly remitted to Cooper pursuant to Cooper's centralized cash management program. As a result, total indebtedness has been held constant from year-to-year for such periods. See Note 11 of the Notes to Consolidated Financial Statements of the Company for further information regarding long-term debt. 2 See Note 3 of the Notes to Consolidated Financial Statements for further information relating to the nonrecurring/unusual charges incurred during 1996 and 1995. 3 See Note 20 of the Notes to the Consolidated Financial Statements for further information relating to the calculation of earnings (loss) per share amounts for periods prior to June 30, 1995. 4 Includes a $36,607,000 receivable from Cooper at December 31, 1994. 51 EX-21 9 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 COOPER CAMERON CORPORATION -- SUBSIDIARIES (AS OF MARCH 26, 1998)
COOPER CAMERON CORPORATION (DELAWARE) - PARENT % OWNED % OWNED BY SUBSIDIARY BY CCC ------------- ------- Cameron Algerie (Algeria)(1) 100% Cameron Argentina S.A.I.C. (Argentina)(1) 100% Cameron Australasia Pty. Ltd. (Australia) 100% Cooper Cameron Pensions Australia. Pty. Ltd. (Australia) 100% 100% Cameron France, S.A. (France) 100% Cameron France E.U.R.L. 100% Cameron France S.N.C. 100% Cameron Gabon, S.A. (Gabon) 100% Cameron GmbH (Germany) 100% Cameron Inchcape Middle LLC (Oman Joint Venture) 24% Cameron Ireland Limited (Ireland)(1) 100% Cameron Norge AS (Norway) 100% Cameron Venezolana, S.A. (Venezuela) 49% Cameron Cactus Cayman Ltd. (Grand Cayman) 100% Servicious Cameron, C.A. (Venezuela) 100% Camercay, Ltd. (Grand Cayman) 100% Compression Services Company (Ohio) 100% Cooper Cameron do Brasil Ltda. (Brazil)(1) 100% Cooper Cameron Foreign Sales Company Ltd. (Barbados) 100% Cooper Cameron (U.K.) Limited (United Kingdom) 100% Cameron Offshore Engineering Limited (United Kingdom) 100% Cooper Cameron Pensions Limited (United Kingdom) 100% Cameron Integrated Services Limited (United Kingdom) 100% Cooper Cameron (Malaysia) Sdn Bhd (Malaysia Joint Venture) 49% Cooper Cameron Holding B.V. (Netherlands) 100% Cooper Energy Services B.V. (Netherlands) 100% Cameron B.V. (Netherlands) 100% Cooper Cameron Limited (Canada) 100% Cooper, Rolls Corporation (Canada)(3) 50% Cooper Cameron Corporation Nigeria Limited (Nigeria) 60% Cooper Energy Services de Venezuela, S.A. (Venezuela) 100% Cooper Energy Services International, Inc. (Ohio) 100% Canada Tiefbohrgerate und Maschinenfabrik GmbH (Austria) 100% Cooper Cameron (Singapore) Pte. Ltd. (Singapore) 39% Cooper Flow Control Australia Pty. Ltd. (Australia)(1) 50% Cooper Cameron de Mexico S.A. de C.V. (Mexico)(1) 100% Cooper Cameron (Singapore) Pte. Ltd. (Singapore)(4) 61% Cameron-Excel Sdn Bhd (Malaysia - Joint Venture) 49% Cameron (B) Sendirian Berhad (Brunei) 100% Cooper Cameron Petroleum Equipment Group, Inc. (Delaware) 100% Cooper Flow Control Australia Pty. Ltd. (Australia) 50% Cooper Rolls Incorporated (Ohio)(2) 50% Cooper Rolls Limited (United Kingdom) 100% Cooper Turbocompressor, Inc. (Delaware) 100% Ingram Cactus (Malaysia) Sdn. Bhd. 49% Ingram Cactus de Venezuela, S.A. (Venezuela Joint Venture) 49% Lyulka-Cooper (Russian Federation Joint Venture) 50% SamaraVolgomash (Russia) 50% Wellhead Holdings Malaysia, Inc. (Malaysia) 100%
- ------------------------ (1) Also partially owned by Cooper Cameron Petroleum Equipment Group, Inc. (2) Joint Venture Interest with Rolls-Royce Plc (3) Joint Venture Interest with Rolls-Royce Industries Canada Inc. (4) Also partially owned by Cooper Energy Services International, Inc. EX-23 10 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Cooper Cameron Corporation of our report dated January 29, 1998, included in the 1997 Annual Report to Stockholders of Cooper Cameron Corporation. We also consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-26923 and 33-95004) pertaining to the Amended and Restated Cooper Cameron Corporation Long-Term Incentive Plan, the Registration Statement (Form S-8 No. 33-94948) pertaining to the Cooper Cameron Corporation Employee Stock Purchase Plan, the Registration Statement (Form S-8 No. 33-95000) pertaining to the Cooper Cameron Corporation Amended and Restated 1995 Stock Option Plan for Non-Employee Directors, and the Registration Statement (Form S-8 No. 33-95002) pertaining to the Cooper Cameron Corporation Retirement Savings Plan of Cooper Cameron Corporation of our report dated January 29, 1998, with respect to the consolidated financial statements of Cooper Cameron Corporation incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1997. ERNST & YOUNG LLP Houston, Texas March 26, 1998 EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 11,599 0 387,817 13,646 495,539 960,789 791,292 395,747 1,643,230 528,795 328,824 0 0 532 641,519 1,643,230 1,806,109 1,806,109 1,296,947 1,296,947 0 4,079 28,591 199,378 58,796 140,582 0 0 0 140,582 2.70 2.53
EX-27.1 12 FINANCIAL DATA SCHEDUEL - RESTATED
5 1,000,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 8 0 362 0 453 839 739 376 1,492 652 371 0 0 1 511 1,492 376 376 275 275 0 0 7 27 8 19 0 0 0 19 .38 .36 EPS HAS BEEN RESTATED TO REFLECT THE ADOPTION OF SFAS NO. 128 (EARNINGS PER SHARE) DURING 1997.
EX-27.2 13 FINANCIAL DATA SCHEDULE - RESTATED
5 1,000,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 10 0 371 0 500 894 752 385 1,551 472 364 0 0 1 562 1,551 817 817 593 593 0 0 14 76 22 54 0 0 0 54 1.04 .98 EPS HAS BEEN RESTATED TO REFLECT THE ADOPTION OF SFNS NO. 128 (EARNINGS PER SHARE) DURING 1997.
EX-27.3 14 FINANCIAL DATA SCHEDULE - RESTATED
5 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 7 0 391 0 499 918 766 394 1,578 447 356 0 0 0 625 1,578 1,292 1,292 933 933 0 0 21 132 39 93 0 0 0 93 1.80 1.69 EPS HAS BEEN RESTATED TO REFLECT THE ADOPTION OF SFAS NO. 128 (EARNINGS PER SHARE) DURING 1997.
EX-27.4 15 FINANCIAL DATA SCHEDULE - RESTATED
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 9,057 0 294,519 11,741 404,268 798,231 742,985 373,457 1,468,922 444,841 347,548 0 0 256 515,872 1,468,922 1,388,187 1,388,187 1,010,558 1,010,558 0 373 20,878 92,014 27,830 64,184 0 0 0 64,184 1.27 1.21 EPS HAS BEEN RESTATED FOR 2-FOR-1 STOCK SPLIT, EFFECTIVE JUNE 13, 1997 AND THE ADOPTION OF SFAS NO. 128 (EARNINGS PER SHARE) DURING 1997.
EX-27.5 16 FINANCIAL DATA SCHEDULE - RESTATED
5 1,000,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 11 0 203 0 318 547 683 345 1,140 341 217 0 0 0 421 1,140 281 281 206 206 0 0 4 11 3 8 0 0 0 8 0.15 0.15 EPS HAS BEEN RESTATED FOR A 2-FOR-1 STOCK SPLIT, EFFECTIVE JUNE 13, 1997 AND THE ADOPTION OF SFAS NO. 128 (EARNINGS PER SHARE) DURING 1997.
EX-27.6 17 FINANCIAL DATA SCHEDULE - RESTATED
5 1,000,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 3 0 258 0 378 665 716 353 1,309 399 307 0 0 0 440 1,309 593 593 433 433 0 0 9 29 9 20 0 0 0 20 0.41 0.39 EPS HAS BEEN RESTATED FOR A 2-FOR-1 STOCK SPLIT, EFFECTIVE JUNE 13, 1997 AND THE ADOPTION OF SFAS NO. 128 (EARNINGS PER SHARE) DURING 1997.
EX-27.7 18 FINANCIAL DATA SCHEDULE - RESTATED
5 1,000,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 8 0 281 0 394 709 723 365 1,346 391 323 0 0 0 470 1,346 972 972 711 711 0 0 14 57 17 40 0 0 0 40 0.79 0.76 EPS HAS BEEN RESTATED FOR A 2-FOR-1 STOCK SPLIT, EFFECTIVE JUNE 13, 1997 AND THE ADOPTION OF SFAS NO. 128 (EARNINGS PER SHARE) DURING 1997.
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