Item 1. Business
The Company specializes in the handling of gases for maximizing the recovery of hydrocarbon resources. These production services include (1) contract compression and contract processing or treating of gases, principally natural gas and (2) operating compression and related facilities for the handling of carbon dioxide used in enhanced oil recovery. In its contract gas compression operations, the Company designs, engineers, fabricates, transports, installs, operates and maintains compression units specifically designed to meet unique client requirements. The Company also designs, engineers and constructs the site where the gas handling equipment is installed and operated. In its contract processing or treating of gases, usually performed in conjunction with contract gas compression, the Company designs, engineers, installs and operates specialized processing or treating equipment which recovers liquid hydrocarbons from associated gas streams or removes impurities such as hydrogen sulfide and carbon dioxide. The Company operates its own equipment and contract operates client owned equipment used in the compression, gathering and processing of gases. In its enhanced oil recovery operations, which are reported in Contract Gas Handling Services, the Company gathers, compresses, transports and injects carbon dioxide gas used by the petroleum industry in enhanced oil recovery projects. The Company considers itself to be a leader in the technology of handling and compressing carbon dioxide.
As of September 30, 1995, all oil and gas production activities were classified as discontinued operations and a provision of $6.7 million, net of taxes, was recorded. No further adjustments to the fiscal 1995 fourth quarter charge were recorded during the most recent fiscal year ended September 30, 1996 and the plan for discontinuance has been completed.
Contract Gas Compression - Gas compression is the use of a mecha- nical process for compressing a volume of a gas until it reaches a desired pressure. Reciprocating compressors driven by internal combustion engines or electric motors are the most common equipment for compression, particularly when higher pressures are involved.
Contract gas compression has various applications in the production of oil and gas. The majority of the Company's contract gas compression units compress natural gas either for transmission or for reservoir injection in connection with secondary oil recovery operations. In the case of natural gas being compressed for pipeline transmission, compression becomes necessary when the natural pressure of the gas field is below the operating pressure of the pipeline system receiving and transporting the gas. Gas compression is also used to inject natural gas into an oil field for maintaining reservoir pressure or for gas lifting of fluids in producing well bores. It is expected that at some time during the life of substantially all natural gas fields the gas produced will require compression. The Company's average gas compression job historically has lasted approximately four years. In recent years average job life has exceeded five years as the Company has increasingly contracted to operate larger, longer term assignments, originating primarily from alliance and international client relationships.
Field operating performance is vital to the Company's business and the mechanical availability of its equipment for on-stream operation has consistently averaged more than 98%. The Company believes its operating efficiency significantly exceeds the field compression efficiency achieved by most producing and pipeline companies operating their own equipment. The Company's ability to achieve high operating efficiency distinguishes its services and has a significant positive impact on an oil and gas producer's revenues and profits. The market for contract compression services has been expanding as oil and gas producers and pipeline companies continue their efforts to lower operating costs and improve efficiency by outsourcing their gas handling requirements.
The Company's gas compression contracts usually provide for fixed monthly payments for an initial term of six months to three years and, thereafter, continue on a month-to-month basis. Typically, the Company's units have remained on location significantly longer than the initial term of the contract. Most compression contracts include a provision for periodically adjusting the price based on various escalation indices.
At September 30, 1996 the Company's contract gas compression fleet totaled 446,000 horsepower with units ranging in size from 25 to 3,000 horsepower. During the fiscal year 1996, net horsepower added to the contract compression fleet was 53,000. At yearend 84% of the available horsepower was installed and earning revenue or committed for reapplication. These installed units are located in more than 150 separate oil and gas fields in the states of Texas, Oklahoma, Louisiana, New Mexico, Colorado, Wyoming, Mississippi, Kansas, Utah, Arkansas, California and Alabama and in the countries of Venezuela, Argentina and Canada.
At fiscal yearend 1996, 67,000 horsepower was operating in Venezuela, Argentina and Canada as compared to 41,000 horsepower at yearend 1995. The Company is marketing its services in additional foreign countries. The contracts in Venezuela and Argentina are substantially dollar denominated and that tends to mitigate the risks from uncertain political and economic conditions.
Contract Gas Processing - Production Operators supplies gas processing services on a contract basis using skid-mounted processing equipment.
Enhanced Oil Recovery - As detailed in the 1994 Form 10-K, given the substantially reduced size of the enhanced oil recovery (EOR) area and the same business focus of operating compression equipment in both the EOR and contract gas handling areas, EOR results are now included in the contract gas handling segment for financial reporting. The Comanche Creek pipeline, located in the southern end of the Permian Basin in west Texas, was included in discontinued operations at September 30, 1995 and sold in fiscal 1996.
Business Segments - The Company conducts its operations in one business segment, contract gas handling services. This segment consists principally of compression and other gas handling services in the oil field services industry. Prior to fiscal year 1995, the Company had operated in two business segments including contract gas handling services and enhanced oil recovery in the oil field services industry and oil and gas producing operations. As of September 30, 1995 oil and gas production operations were classified as discontinued operations. The supplemental information concerning these segments included in Notes 1 and 9 of the Consolidated Financial Statements on pages 29 and 33 of the Company's 1996 Annual Report to Stockholders and the Consolidated Balance Sheets on page 25 of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference.
During fiscal 1996 two clients accounted for a total of 42% of the Company's consolidated revenues, each of which accounted for 10% or more of the Company's consolidated revenues.
Competition - There are numerous companies that sell or lease compression equipment, but only a few that provide full-service, total responsibility contract compression. The Company believes it is the largest independent provider of contract compression services, yet it accounts for only a small percentage of all compression work performed. The vast majority of compression equipment is owned and operated by oil and gas producers and pipelines.
Employees - The Company employed 466 people at September 30, 1996 of whom 37 were administrative, 30 were in engineering and purchasing, 86 worked at the Houston plant facility, and 313 were involved in field operations. The remote location and adverse living conditions often associated with the Company's field operations restrict the number of qualified workers available and the Company trains most of its personnel.
Item 2.
Item 2. Properties
The principal offices of the Company and its subsidiary are located at 11302 Tanner Road, Houston, Texas 77041. At that location, the Company owns 27 acres of land acquired at a cost of $436,000. The office and fabrication plant are located in four buildings aggregating 124,000 square feet, of which approximately 10,000 square feet are unfinished and held in reserve for future expansion.
Additional information regarding the Company's oil and gas operations, discontinued as of September 30, 1995, is found in Note 9 of the Financial Statements on page 33 of the Company's 1996 Annual Report to Stockholders.
The Company is obligated under short-term leases for space used for administrative functions at various locations where its field operations are conducted. Additional information regarding the Company's obligations under leases, is found in Note 7 of the Financial Statements on page 32 of the Company's 1996 Annual Report to Stockholders.
Item 3.
Item 3. Legal Proceedings
The Company is not a party to any litigation that, in the judgment of management, would have a material adverse effect on its operations or financial condition if adversely determined. No material legal proceedings of the Company were terminated during the fourth quarter of the fiscal year covered by this report.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report.
Executive Officers of Registrant The executive officers of the Company and their principal occupations and other affiliations during the last five years are:
Name Age Principal Occupations and Affiliations
Carl W. Knobloch, Jr. 66 Chairman and Director effective May 1, 1961 and President from October 1986 through July 1994
D. John Ogren 53 President and Director effective July 5, 1994. Senior Vice President of E.I.duPont de Nemours and Company from April 1992 to May 1994, President and Chief Executive Officer of DuPont Canada from June 1991 to April 1992 and Senior Vice President of Conoco, Inc. from February 1989 to May 1991
Thomas R. Reinhart 54 Vice President effective February 21, 1992 and Executive Vice President of Production Operators, Inc. (subsidiary) effective April 1, 1994 - Senior Vice President from November 1991 to March 1994 - Vice President from October 1990 to October 1991 - General Manager Administration, Secretary and Treasurer from April 1988 to September 1990 and Manager MIS and Purchasing prior thereto
John B. Simmons 44 Chief Financial Officer effective October 23, 1996, Treasurer effective March 18, 1996 and Controller effective May 1995. Director of Planning and Control of The Western Company of North America from February 1994 to April 1995 and Vice President, Finance of Western Petroleum Services International Company and Western Oceanic, Inc. from December 1991 to January
Carla Knobloch 38 Secretary effective October 1, 1990 - Investor Relations effective July 1990; Vice President of Wachovia Bank - Equity Research Analyst from June 1984 to May 1990
_______________
The only family relationship among the Executive Officers of the Company is that Carla Knobloch is the daughter of Carl W. Knobloch, Jr. Officers are generally elected each year at the Board of Directors' meeting following the annual meeting of the stockholders.
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Company's common stock is traded over-the-counter and is reported in the NASDAQ National Market System under the symbol PROP. There were 765 stockholders of record at September 30, 1996.
The information set forth in the "Market Price of Stock and Cash Dividends" section appearing on page 20 of the Company's 1996 Annual Report to Stockholders is incorporated in this Item by reference in response to the information required by this Item.
Item 6.
Item 6. Selected Financial Data
The information set forth under "Selected Financial Data" appearing on pages 34 - 35 of the Company's 1996 Annual Report to Stockholders is incorporated in this Item by reference in response to the information required by this Item.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information set forth under "Management's Discussion and Analysis of Results of Operations and Financial Condition" appearing on pages 21 - 23 of the Company's 1996 Annual Report to Stockholders is incorporated in this Item by reference in response to the information required by this Item.
Item 8.
Item 8. Financial Statements and Supplementary Data
The consolidated balance sheets as of September 30, 1996 and 1995 and the consolidated statements of income, stockholders' investment and cash flows for each of the three years in the period ended September 30, 1996, together with the report of independent public accountants, contained on pages 24 through 36 of the Company's 1996 Annual Report to Stockholders are incorporated in this Item by reference in response to the information required by this Item.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information that will be set forth under "Management -- Election of Directors,""Management -- Executive Compensation" and "Other Matters" in the Company's proxy statement for the 1997 Annual Meeting of Stockholders is incorporated in this Item by reference in response to the information required by this Item.
Information regarding the executive officers of the Company is furnished in a separate Item captioned "Executive Officers of Registrant" in Part I above and is incorporated by reference in this Item in response to the information required by this Item.
Item 11.
Item 11. Executive Compensation
The information that will be set forth under "Management -- The Board of Directors and its Committees," "-- Executive Compensation" and "-- Description of the Company's Compensation Plans for Key Officers" in the Company's proxy statement for the 1997 Annual Meeting of Stockholders is incorporated in this Item by reference in response to the information required by this Item.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information that will be set forth under "Management -- Election of Directors" and "Five Percent Stockholders" (regarding ownership of Production Operators stock) in the Company's proxy statement for the 1997 Annual Meeting of Stockholders is incorporated in this Item by reference in response to the information required by this Item.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information that will be set forth under "Management -- Election of Directors" and "-- Interest in Certain Transactions" in the Company's proxy statement for the 1997 Annual Meeting of Stockholders is incorporated in this Item by reference in response to the information required by this Item.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Schedules and Exhibits -
(1) The consolidated financial statements of Production Operators Corp and Consolidated Subsidiary set forth as indicated below in the Company's 1996 Annual Report to Stockholders are incorporated in this Item by reference and made a part of this Item in response to the information required by this Item:
Annual Report Page Consolidated Statements of Income for the three years ended September 30, 1996 24
Consolidated Balance Sheets at September 30, 1996 and 1995 25
Consolidated Statements of Stockholders' Investment for the three years ended September 30, 1996 26
Consolidated Statements of Cash Flows for the three years ended September 30, 1996 27 - 28
Notes to Consolidated Financial Statements 29 - 33
Selected Quarterly Financial Data (Unaudited) 32
Report of Independent Public Accountants 36
(2) All schedules are omitted because they are not applicable or not required or the required information is shown in the consolidated financial statements or notes thereto.
(3) The exhibits filed as a part of this report are listed in the Exhibits Index submitted as a separate section to this report.
(b) No report on Form 8-K was filed during the quarter ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PRODUCTION OPERATORS CORP
BY:/s/ D. John Ogren D. John Ogren, President
December 11, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, who constitute a majority of the directors, on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ F. D. Ellis 12/10/96 F. E. Ellis, Director Date
Jorge E. Estrada M., Director Date
/s/ C. Rahl George 12/9/96 C. Rahl George, Director Date
/s/ John R. Huff 12/11/96 John R. Huff, Director Date
/s/ Carl W. Knobloch, Jr. 12/11/96 Carl W. Knobloch, Jr., Chairman Date
/s/ Henry E. Longley 12/6/96 Henry E. Longley, Director Date
/s/ D. John Ogren 12/11/96 D. John Ogren, Director and Date President
/s/ Lester Varn, Jr. 12/9/96 Lester Varn, Jr., Director Date
/s/ John B. Simmons 12/5/96 John B. Simmons, Treasurer Date (Principal Financial and Accounting Officer)
EXHIBITS INDEX
The following Exhibits are filed herewith or incorporated by reference as a part of this report on Form 10-K:
(3)(a) Restated Certificate of Incorporation, together with all amendments thereto (filed as Exhibit (3)(a) to Report on Form 10-K for the year ended September 30, 1991, as amended by Form 8 filed February 24, 1992, and incorporated herein by reference).
(3)(b) Copy of By-Laws, together with all amendments thereto (filed as Exhibit 4.1 to Report on Form 8 filed February 24, 1992 and incorporated herein by reference).
(4)(a) For the definition of the rights of holders of equity securities see the Articles Fourth, Seventh and Eighth of the Company's Certificate of Incorporation and the Certificate of Designation, Preferences and Rights of the Company's Series A Junior Participating Preference Stock (filed as Exhibit (3)(a) to Report on Form 10-K for the year ended September 30, 1991, as amended by Form 8 filed February 24, 1992 and incorporated herein by reference).
(4)(b) For the relative By-laws provisions concerning the rights of holders of equity securities see Articles II and VI of the Company's By-Laws (filed as Exhibit 4.1 to Report on Form 8 filed February 24, 1992 and incorporated herein by reference).
(4)(c) Loan Agreement dated June 2, 1995 and the Second Amended and Restated Credit Agreement with the Bank of New York individually and as agent for the First National Bank of Chicago (filed as Exhibit (4)(d) to Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference).
(4)(c)(i) Subordination Agreement among Production Operators Corp, Production Operators, Inc. and the Bank of New York as agent (filed as Exhibit (4)(b) to Report on Form 10-Q for the quarter ended December 31, 1990 and incorporated herein by reference).
(10)(a) Employment Agreement between the Company and D. John Ogren dated June 7, 1994 (filed as Exhibit 10(b) to Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference).
(10)(b)(i) Consulting and Deferred Compensation Agreement between the Company and C. Rahl George dated June 1, 1981 (filed as Exhibit (10)(f)(i) to Report on Form 10-K for the fiscal year ended September 30, 1981 and incorporated herein by reference).
(10)(b)(ii) Amended Deferred Compensation Agreement between the Company and C. Rahl George dated October 24, 1984 (filed as Exhibit (10)(f)(ii) to Report on Form 10-K for the fiscal year ended September 30, 1984 and incorporated herein by reference).
(10)(c)(i) Employee Stock Ownership Plan and Trust dated June 9, 1989 (filed as Exhibit (10)(c)(i) to Report on Form 10-K for the fiscal year ended September 30, 1989 and incorporated herein by reference).
(10)(c)(ii) First Amendment to Employee Stock Ownership Plan and Trust dated December 18, 1989 (filed as Exhibit (10)(c)(ii) to Report on Form 10-K for the fiscal year ended September 30, 1989 and incorporated herein by reference).
(10)(c)(iii) Second Amendment to Employee Stock Ownership Plan and Trust dated September 30, 1994 (filed as Exhibit (10)(d)(iii) to Report on Form 10-K for the fiscal year ended September 30, 1994 and incorporated herein by reference).
(10)(d) 1980 Long-Term Incentive Plan approved by stockholders January 30, 1981, as amended through February 27, 1991 (filed as Exhibit (10)(d) to Report on Form 10-K for the fiscal year ended September 30, 1991 and incorporated herein by reference).
(10)(d)(i) 1992 Long-Term Incentive Plan approved by stockholders February 24, 1993, as amended through October 24, 1995 (filed as Exhibit (10)(d)(i) to Report on Form 10-K for the fiscal year ended September 30, 1995 and incorporated herein by reference).
(10)(e) Target Variable Compensation Plan dated May 5, 1995. (filed as Exhibit (10)(e) to Report on Form 10-K for the fiscal year ended September 30, 1995 and incorporated herein by reference).
(10)(f) Production Operators, Inc. Supplemental Benefit Plan (filed as Exhibit 28.2 to Report on Form 8-K, filed February 24, 1992 and incorporated herein by reference).
(10)(f)(i) Form of Service Continuation Agreement.
(10)(g) Form of Purchase Agreement dated June 20, 1991 between Production Operators Corp and each purchaser in connection with the private placement of 590,000 shares of Common Stock (filed as Exhibit 1.1 to Registration Statement on Form S-3, File No. 33-41254, filed June 26, 1991 and incorporated herein by reference).
(11) Statement regarding Computation of Net Income per Share of Common Stock.
(13) 1996 Annual Report to Stockholders.
(22) List of subsidiaries.
(24)(a) Consent of Independent Public Accountants re inclusion of their Report dated November 20, 1996 in this Form 10-K.
(24)(b) Consent of Independent Public Accountants re inclusion of their report dated November 20, 1996 into the Company's previously filed Registration Statements on Form S-3 and Forms S-8.