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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] For fiscal year ended December 31,
1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________.
Commission File No. 1-3071
Hanover Compressor Company
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(Exact name of registrant as specified in its charter)
Delaware 75-2344249
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
12001 North Houston Rosslyn, Houston, Texas 77086
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(Address of principal executive offices)
(281) 447-8787
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Common Stock, $.001 par value
Name of each exchange in which registered:
New York Stock Exchange, Inc.
Securities registered pursuant to 12(g) of the Act:
Title of class: None
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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 the
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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock of the registrant held
by nonaffiliates as of March 26, 1998: $ 288,776,690. This calculation does
not reflect a determination that such persons are affiliates for any other
purpose.
Number of shares of the Common Stock of the registrant outstanding as
of March 26, 1998: 28,510,570 shares.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 20, 1998 (to be filed on or before April 30,
1998) are incorporated by reference into Part II, as indicated herein.
The Index to Exhibits is on page 30.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Annual Report on Form 10-K are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward- looking statements can generally be identified as such because
the context of the statement will include words such as the Company "believes",
"anticipates", "expects", "estimates" or words of similar import. Similarly,
statements that describe the Company's future plans, objectives or goals are
also forward-looking statements. Such forward-looking statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from those anticipated as of the date of this report. The risks and
uncertainties include (1) the loss of market share through competition, (2) the
introduction of competing technologies by other companies, (3) a prolonged
substantial reduction in natural gas prices which would cause a decline in the
demand for the Company's compression and oil and gas production equipment
services, (4) new governmental safety, health and environmental regulations
which could require significant capital expenditures by the Company and (5)
changes in economic or political conditions in the countries in which the
Company operates. The forward-looking statements included herein are only
made as of the date of this report and the Company undertakes no obligation
to publicly update such forward-looking statements to reflect subsequent
events or circumstances.
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Item 1. BUSINESS
GENERAL
Hanover Compressor Company (the "Company") was incorporated in
Delaware in 1990 and is a leading provider of a broad array of natural gas
compression rental, operations and maintenance services in the United States
and select international markets. As of December 31, 1997, the Company had a
fleet of 2,128 compression rental units with an aggregate capacity of
approximately 781,000 horsepower. The Company's compression services are
complemented by its compressor and oil and gas production equipment fabrication
operations.
The Company believes it is the largest operator of rental compression
horsepower capacity in the United States controlling an estimated 20% of the
domestic rental market with 2,033 rental units having an aggregate capacity of
approximately 668,000 horsepower at December 31, 1997. Internationally, the
Company estimates it is one of the largest providers of compression services in
the South American market, primarily in Argentina and Venezuela, operating 95
units with approximately 113,000 horsepower at December 31, 1997. In order to
continue its international expansion, in 1997, the Company entered into a
series of agreements with Wartsila Diesel International Ltd., OY ("Wartsila"),
a leading global manufacturer of large horsepower engines, providing for, among
other things, the fabrication and the right to exclusively market in select
regions worldwide, Wartsila powered gas compression packages ranging from 1,400
to 7,850 horsepower.
The Company's products and services are important for the production,
transportation, processing and storage of natural gas and are provided
primarily to energy producers and processors. The Company's decentralized
operating structure, technically experienced personnel and high quality
compressor fleet, allow the Company to successfully provide reliable and timely
customer service. As a result, the Company has experienced substantial growth
over the past five years and has developed and maintained a number of long-term
customer relationships. This has enabled the Company to maintain an average
horsepower utilization rate of approximately 95% over the last five years in
comparison to an industry average estimated by the Company to be approximately
83%.
The Company currently competes primarily in the transportable natural
gas compression market for units of up to 4,450
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horsepower. This market, which includes rental and owner operated units,
accounts for over 13 million horsepower in the United States and is believed to
have grown by approximately 9% compounded rate per annum over the last five
years. The Company believes that the growth in the domestic gas compression
market will continue due to the increased consumption of natural gas, the
continued aging of the natural gas reserve base and the attendant decline of
wellhead pressures, and the discovery of new reserves.
The rental portion of the domestic gas compression market is currently
estimated to comprise approximately 26% of the aggregate U.S. horsepower,
having grown at an estimated 14% compounded rate per annum since 1992. Growth
of rental compression capacity in the U.S. market is primarily driven by the
increasing trend toward outsourcing by energy producers and processors. The
Company believes that outsourcing provides the customer greater financial and
operating flexibility by minimizing the customer's investment in equipment and
enabling the customer to more efficiently resize compression units to meet the
changing needs of the well, pipeline or processing plant. In addition, the
Company also believes that outsourcing typically provides the customer with
more timely and technically proficient service and necessary maintenance which
often reduces operating costs. Internationally, the Company believes similar
growth opportunities for compressor rental and sales exist due to (i) increased
worldwide energy consumption, (ii) implementation of international
environmental and conservation laws preventing the flaring of natural gas, and
(iii) increased outsourcing by energy producers and processors.
COMPRESSOR RENTAL FLEET
The size and horsepower of the Company's compressor rental fleet on
December 31, 1997 is summarized in the following table.
<TABLE>
<CAPTION>
Range of
Horsepower Number Aggregate
per Unit of Units Horsepower % of Horsepower
-------- -------- ---------- ---------------
<S> <C> <C> <C>
0-99 767 48,049 6.15%
100-199 493 66,356 8.49%
200-499 365 109,329 13.99%
500-799 137 85,969 11.00%
800-1199 199 196,487 25.15%
1200-2699 156 234,784 30.05%
2700-UP 11 40,367 5.17%
-- ------ ----
Total 2,128 781,341 100.00%
</TABLE>
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INDUSTRY OVERVIEW
GAS COMPRESSION
Over the life of an oil or gas well, natural reservoir pressure
typically declines as reserves are produced. As the natural reservoir pressure
of the well declines below the line pressure of the gas gathering or pipeline
system used to transport the gas to market, gas no longer naturally flows into
the pipeline. It is at this time that compression equipment is applied to
economically boost the well's production levels and allow gas to be brought to
market.
In addition to such gas field gathering activities, natural gas
compressors are utilized in a number of other applications, all of which are
intended to enhance the productivity of oil and gas wells, gas transportation
lines and processing plants. Compressors are used to increase the efficiency of
a low capacity gas field by providing a central compression point from which
the gas can be removed and injected into a pipeline for transmission to
facilities for further processing. As gas is transported through a pipeline,
compression equipment is applied to allow the gas to continue to flow in the
pipeline to its destination. Additionally, compressors are utilized to
re-inject associated gas to artificially lift liquid hydrocarbons which
increases the rate of crude oil production from oil and gas wells.
Furthermore, compression enables gas to be stored in underground storage
reservoirs for subsequent extraction during periods of peak demand. Finally,
in combination with oil and gas production equipment, compressors are often
utilized to process and refine oil and gas into higher value added and more
marketable energy sources.
Changing well and pipeline pressures and conditions over the life of a
well often require producers to reconfigure their compressor units to optimize
the well production or pipeline efficiency. Due to the technical nature of the
equipment, a highly trained staff of field service personnel, parts inventory
and a diversified fleet of natural gas compressors are often necessary to
perform such functions in the most economic manner. These requirements,
however, have typically proven to be an extremely inefficient use of capital
for independent natural gas producers and have caused such firms as well as
natural gas processors and transporters to increasingly outsource their
non-core compression activities to specialists such as the Company.
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The advent of rental and contract compression roughly 40 years ago
made it possible for natural gas producers, transporters and processors to
improve the efficiency and financial performance of their operations.
Compressors leased from specialists generally have a higher rate of mechanical
reliability and typically generate greater productivity than those owned by oil
and gas operators. Furthermore, because compression needs of a well change
over time, outsourcing of compression equipment enables an oil and gas operator
to better match compression to the production needs throughout the life of the
well. Also, certain major domestic oil companies are seeking to streamline
their operations and reduce their capital expenditures and other costs. To
this end, they have sold certain domestic energy reserves to independent energy
producers and are outsourcing facets of their operations. Such initiatives, in
the opinion of the Company, are likely to contribute to increased rental of
compressor equipment.
Natural gas compressor fabrication involves the design, fabrication
and sale of compressors to meet the unique specifications dictated by the well
pressure, production characteristics and the particular applications for which
compression is sought. Compressor fabrication is essentially an assembly
operation in which an engine, compressor, control panel, cooler and necessary
piping are attached to a frame called a "skid". A fabricator typically
purchases the various compressor components from third party manufacturers but
employs its own engineers and design and labor force.
In order to meet customers' needs, gas compressor fabricators
typically offer a variety of services to their customers including: (i)
engineering, fabrication and assembly of the compressor unit; (ii) installation
and testing of the units; (iii) ongoing performance review to assess the need
for a change in compression; and (iv) periodic maintenance and replacement
parts supply.
PRODUCTION EQUIPMENT
Oil and gas reserves are generally not commercially sellable as
produced at the wellhead. Typically, such reserves must be refined before they
can be transported to market. Oil and gas production equipment is utilized to
separate and treat such oil and gas immediately after it is produced in order
to facilitate further processing, transportation and sale of such fuels and
derivative energy sources. Oil and gas production equipment is
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typically installed at the wellhead immediately prior to commencing the large
scale production phase of a well and remains at the site through the life of
the well.
MARKET CONDITIONS
The Company believes that the most fundamental force driving the
demand for gas compression and production equipment is the growing consumption
of natural gas. As more gas is consumed, the demand for compression and
production equipment increases.
Additionally, although natural gas has historically been a more
significant source of energy in the United States than in the rest of the
world, the Company believes that foreign natural gas consumption (excluding the
former Soviet Union) has recently grown. Despite significant growth in energy
demand, until recently, most non-U.S. energy markets have typically lacked the
infrastructure to transport natural gas to local markets, and natural gas
historically has been flared at the wellhead. Given recent environmental
legislation and the construction of numerous natural gas-fueled power plants
built to meet international energy demand, the Company believes that
international compression markets are experiencing growth.
Demand for natural gas compression is expected to continue to rise as
a result of: (i) the increasing demand for energy, both domestically and
abroad, (ii) environmental considerations which provide strong incentives to
use natural gas in place of other carbon fuels, (iii) implementation of
international environmental and conservation laws preventing the flaring of
natural gas, (iv) the aging of producing natural gas reserves worldwide, and
(v) the extensive supply of natural gas.
While gas compression and production equipment typically must be
highly engineered to meet demanding and unique customer specifications, the
fundamental technology of such equipment has been stable and not subject to
rapid technological change.
BUSINESS SEGMENTS
The Company revenues and income are derived from its three business
segments (comprising three operating divisions) -- compression rental and
maintenance, compressor fabrication and production equipment fabrication. The
compression rental and maintenance segment has operations primarily in the
United States and South America. For financial data relating to the Company's
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divisions, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 15 to the Notes to the Consolidated Financial
Statements.
COMPRESSION SERVICES AND FABRICATION
The Company provides its customers with a full range of compressor
rental, maintenance and contract compression services. As of December 31, 1997,
the Company's gas compressor fleet consisted of 2,128 units, ranging from 25 to
4,200 horsepower. The Company experienced aggregate compression fleet unit
utilization and horsepower utilization rates of approximately 93% during 1997.
The size, type and geographic diversity of this rental fleet enables the
Company to provide its customers with a range of compression units that can
serve a wide variety of applications, and to select the correct equipment for
the job, rather than trying to "fit" the job to its fleet of equipment.
The Company bases its gas compressor rental rates on several factors,
including the cost and size of the equipment, the type and complexity of
service desired by the customer, the length of the contract, and the inclusion
of any other services desired, such as installation, transportation and daily
operation. Substantially all of the Company's units are operated pursuant to
"contract compression" or "rental with full maintenance" contracts pursuant to
which the Company performs all maintenance and repairs on such units while
under contract. In the United States onshore market, compression rental fleet
units are generally leased on minimum terms of 6 to 12 months, which convert to
month-to month at the end of the stipulated minimum period. Historically, the
majority of the Company's customers have extended the length of their
contracts, on a month-to-month basis, well beyond the initial term. In the
aggregate, over the last five years, the length of the Company's domestic
onshore rental contracts, including extensions, averaged 24 months in duration.
Typically, the Company's compression rental units utilized in offshore and
international applications carry substantially longer lease terms than those
for onshore domestic applications.
An essential element to the Company's success is its ability to
provide its compression services to customers with contractually committed
compressor run-times of at least 97%. Historically, run time credits have been
insignificant, due largely to the Company's rigorous preventive maintenance
program and extensive field service network which permits the Company to
promptly address maintenance requirements. The Company's rental
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compressor maintenance activities are conducted at eight Company facilities
staffed by approximately 400 experienced and factory trained maintenance
personnel. Such maintenance facilities are situated in close proximity to
actual rental fleet deployment to permit superior service response times.
All rental fleet units are serviced at manufacturers' recommended
maintenance intervals, modified as required by the peculiar characteristics of
each individual job, and the actual operating experience of each compressor
unit. Prior to the conclusion of any rental job, the Company field management
evaluates the condition of the equipment and, where practical, corrects any
problems before the equipment is shipped out from the job site. Although
natural gas compressors generally do not suffer significant technological
obsolescence, they do require routine maintenance and periodic refurbishing to
prolong their useful life. Routine maintenance includes alignment, compression
checks, and other parametric checks which indicate a change in the condition of
the equipment. In addition, oil and wear-particle analysis is performed on all
units prior to their redeployment at specific compression rental jobs.
Overhauls are done on a condition-based interval instead of a time-based
schedule. In the Company's experience, these rigorous procedures maximize
component life and unit availability and minimize avoidable downtime.
Typically, the Company overhauls each rental compressor unit for general
refurbishment every 36-48 months and anticipates performing a comprehensive
overhaul of each rental compressor unit every 60 to 72 months. This
maintenance program has provided the Company with a highly reliable fleet of
compressors in excellent condition.
The Company's field service mechanics provide all operating and
maintenance services for each of the Company's compression units leased on a
contract compression or full maintenance basis and are on-call 24 hours a day.
Such field personnel receive regular mechanical and safety training both from
the Company and its vendors. Each of the Company's field mechanics is
responsible for specific compressor unit installations and has at his disposal
a dedicated, local parts inventory. Additionally, each field mechanic operates
from a fully-equipped service vehicle. Each mechanic's field service vehicle
is radio or cellular telephone equipped which allows that individual to be the
Company's primary contact with the customer's field operations staff and to be
contacted at either his residence or mobile phone 24 hours a day.
Accordingly, the Company's field service mechanics are given
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the responsibility to promptly respond to customer service needs as they arise
based on the mechanic's trained judgment and field expertise.
The Company considers itself to be unique in its industry in that its
sales and field service organizations enjoy managerial parity within the
Company, enabling these two vital organizations to work together in a highly
coordinated fashion in order to deliver maximum customer service,
responsiveness and reliability. The foundation for Hanover's successful field
operations effort is the experience and responsiveness of its approximately 400
member compressor rental field service and shop staff of factory-trained and
field-tested compressor mechanics. The Company's field service mechanics are
coordinated and supported by regional operations managers who have supervisory
responsibility for specific geographic areas.
The Company's compressor fabrication subsidiary doing business as
Hanover Maintech, designs, engineers and assembles compression units for sale
to third parties as well as for placement in its compressor fleet. As of
December 31, 1997, the Company had a compressor unit fabrication backlog for
sale to third parties of $20.9 million. All backlog is expected to be produced
within a six month period. In general, units to be sold to third parties are
assembled according to each customer's specifications and sold on a turnkey
basis. Components for such compressor units are acquired from third party
suppliers.
OIL AND GAS PRODUCTION EQUIPMENT
The Company, through its wholly-owned subsidiary doing business as
Hanover Smith designs, engineers, fabricates and either sells or occasionally
rents a broad range of oil and gas production equipment designed to heat,
separate, dehydrate and measure crude oil and natural gas. The product line
includes line heaters, oil and gas separators, glycol dehydration units and
skid mounted production packages designed for both onshore and offshore
production facilities. The Company generally maintains standard product
inventories in excess of $3 million and is therefore able to meet most rush
orders and minimize customer downtime. As of December 31, 1997, the Company
had a production equipment fabrication backlog of $10.9 million. All backlog is
expected to be produced within a 90-120 day period. The Company also purchases
and reconditions used production equipment which is then sold or rented.
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MARKET AND CUSTOMERS
The Company's customer base consists of over 500 U.S. and
international companies engaged in all aspects of the oil and gas industry,
including major integrated oil and gas companies, large and small independent
producers, natural gas processors, gatherers and pipelines. Additionally, the
Company has negotiated with more than 15 strategic alliances or preferred
vendor relationships with key customers pursuant to which the Company receives
preferential consideration in customer compressor and oil and gas production
equipment procurement decisions in exchange for enhanced product availability,
product support, automated procurement practices and limited pricing
concessions. No individual customer accounted for more than 10% of the
Company's consolidated revenues during 1996 or 1997.
The Company's domestic compressor leasing activities are currently
located in Texas, Oklahoma, Arkansas, Louisiana, New Mexico, Mississippi,
Alabama, Kansas, Colorado, Montana, Utah, Wyoming and offshore Gulf of Mexico.
International locations include Argentina, Venezuela, Colombia, Trinidad, and
Canada. As of December 31, 1997, approximately 13% and 14% of the Company's
compressor horsepower was being used in offshore and international
applications, respectively.
SALES AND MARKETING
The Company's 33 salespeople are organized into eight sales regions
reporting to three sales vice presidents. The sales vice presidents report to
the Company's Senior Vice President of Sales. The Company's sales
representatives aggressively pursue the rental and sale market in their
respective territories for compressors and production equipment. Each Company
salesperson is assigned a customer list on the basis of the experience and
personal relationships of the salesperson and the individual service
requirements of the customer. This customer and relationship-focused strategy
is communicated through frequent direct contact, technical presentations, print
literature, print advertising and direct mail. The Company's advertising and
promotion strategy is a "concentrated" approach, tailoring specific messages
into a very focused presentation methodology.
Additionally, the Company's salespeople coordinate with each other to
effectively pursue customers who operate in multiple regions. The salespeople
maintain intensive contact with the Company's operations personnel in order to
promptly respond to and
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satisfy customer needs. The Company's sales efforts concentrate on
demonstrating the Company's commitment to enhancing the customer's cash flow
through superior product design, fabrication, installation, customer service and
after-market support.
Upon its receipt of a request for proposal or bid by a customer, the
Company assigns a team of sales, operations and engineering personnel to
analyze the application and prepare a quotation, including selection of the
equipment, pricing and delivery date. The quotation is then delivered to the
customer, and if the Company is selected as the vendor, final terms are agreed
upon and a contract or purchase order is executed. The Company's engineering
and operations personnel also often provide assistance on complex compressor
applications, field operations issues or equipment modifications.
COMPETITION
The natural gas compression services and fabrication business is
highly competitive. Overall, the Company experiences considerable competition
from companies with significantly greater financial resources and, on a
regional basis, from several smaller companies which compete directly with the
Company. The Company believes it is currently the largest natural gas
compression company in the United States on the basis of aggregate rental
horsepower.
Compressor industry participants can achieve significant advantages
through increased size and geographic breadth. As the number of rental units
increases in a rental fleet, the number of sales, engineering, administrative
and maintenance personnel required does not increase proportionately. As a
result, companies such as Hanover with larger rental fleets have relatively
lower operating costs and higher margins due to economies of scale than smaller
companies.
One of the significant cost items in the compressor rental business is
the amount of inventory required to service rental units. Each rental company
must maintain a minimum amount of inventory to stay competitive. As the size
of the rental fleet increases, the required amount of inventory does not
increase in the same proportion. The larger rental fleet companies can
generate cost of capital savings through reduced percentage of inventory.
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The Company believes that it competes effectively on the basis of
price, customer service, including the availability of personnel in remote
locations, flexibility in meeting customer needs and quality and reliability of
its compressors and related services.
The Company's compressor fabrication business competes with other
fabricators of compressor units. The compressor fabrication business is
dominated by a few major competitors, several of which also compete with the
Company in the compressor rental business. Although sufficient information is
not available to definitively estimate the Company's relative position in the
compressor fabrication market, management believes that the Company is among
the largest compressor fabrication companies in the U.S.
The production equipment business is a highly fragmented business with
approximately eight substantial U.S. competitors. Although sufficient
information is not available to definitively estimate the Company's relative
position in this market, the Company believes that it is among the top three
oil and gas production equipment fabricators in the United States.
GOVERNMENT REGULATION
The Company is subject to various federal and state laws and
regulations relating to environmental protection, including regulations
regarding emission controls. These laws and regulations may affect the costs
of the Company's operations. As with any owner of property, the Company is
also subject to clean-up costs and liability for hazardous materials, asbestos,
or any other toxic or hazardous substance that may exist on or under any of its
properties.
The Company believes that it is in substantial compliance with
environmental laws and regulations and that the phasing in of emission controls
and other known regulatory requirements at the rate currently contemplated by
such laws and regulations will not have a material adverse effect on the
Company's financial condition or results of operations. Notwithstanding, in
part because of the Company's rapid growth through several recent acquisitions,
the Company may not be in compliance with certain environmental requirements.
For example, some of the Company's facilities may not possess proper waste
generation identification numbers, may not be in compliance with underground
storage tank ("UST") registration requirements, and may require the
installation of secondary containment around various material
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storage areas. In addition, the Company has not yet determined whether it
needs certain permits (such as stormwater discharge permits, air emission
permits, and National Pollutant Discharge Elimination System ("NPDES") permits)
or certain plans (such as Spill Prevention Control and Countermeasure Plans) at
several of its facilities. The Company is investigating these issues and is
planning to take action where appropriate.
The Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons who are considered to be responsible for the release of a "hazardous
substance" into the environment. These persons include the owner or operator
of the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances. Under
CERCLA, such persons may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been released into the
environment, for damages to natural resources, and for the costs of certain
health studies. Furthermore, it is not uncommon for neighboring landowners and
other third parties to file claims for personal injury and property damage
allegedly caused by hazardous substances or other pollutants released into the
environment.
The Resource Conservation and Recovery Act ("RCRA") and regulations
promulgated thereunder govern the generation, storage, transfer and disposal of
hazardous wastes. The Company must comply with RCRA regulations for any of its
operations that involve the generation, management, or disposal of hazardous
wastes (such as painting activities or the use of solvents).
Stricter standards in environmental legislation that may affect the
Company may be imposed in the future, such as proposals to make hazardous
wastes subject to more stringent and costly handling, disposal and clean-up
requirements. While the Company may be able to pass on the additional costs of
complying with such laws to its customers, there can be no assurance that
attempts to do so will be successful. Accordingly, new laws or regulations or
amendments to existing laws or regulations could require the Company to
undertake significant capital expenditures and could otherwise have a material
adverse effect on the Company's business, results of operations and financial
condition.
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EXECUTIVE OFFICERS
The following sets forth, as of March 26, 1998, the name, age and
business experience for the last five years of each of the executive officers
of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Michael A. O'Connor 62 Chairman of the Board; Director
Michael J. McGhan 43 President and Chief Executive Officer; Director
Curtis Bedrich 55 Chief Financial Officer and Treasurer
William S. Goldberg 39 Executive Vice President; Director
Richard S. Meller 40 Corporate Secretary, member of the Company's
outside legal counsel
</TABLE>
MICHAEL A. O'CONNOR has served as Chairman of the Board and a director
of the Company since January 1992. Mr. O'Connor also serves as an officer and
a director of certain subsidiaries of the Company.
MICHAEL J. MCGHAN has served as President and Chief Executive Officer
of the Company since October 1991. Mr. McGhan has served as a director of the
Company since March 1992. Mr. McGhan also serves as an officer and as a
director of certain subsidiaries of the Company.
CURTIS BEDRICH has served as Chief Financial Officer and Treasurer of
the Company since November 1991. Mr. Bedrich also serves as an officer of
certain subsidiaries of the Company.
WILLIAM S. GOLDBERG has served as Executive Vice President and
director of the Company since May 1991. Mr. Goldberg has been employed by GKH
Investments, L.P., a Delaware limited partnership (the "Fund") and GKH Private
Limited (collectively with the Fund,
RICHARD S. MELLER has served as Secretary of the Company since 1991
and has been a partner in the law firm of Neal, Gerber & Eisenberg, the
Company's legal counsel, since 1989.
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"GKH") since 1988 and has served as Managing Director of GKH since June 1990.
The Fund is the Company's largest stockholder. Mr. Goldberg also serves as an
officer and a director of certain affiliates of the Company. Mr. Goldberg is
also a director of DVI, Inc.
EMPLOYEES
As of December 31, 1997, the Company had approximately 950 employees.
No employees are represented by labor unions and the Company believes that its
relations with its employees are satisfactory.
ITEM 2. PROPERTIES
The Company owns its corporate offices in Houston, Texas, which are
housed in a combination corporate office and compressor fabrication complex,
including a 192,000 square foot plant located on approximately 28 acres. The
Company also owns (i) an 11,700 square foot combination office and maintenance
facility located on 6.5 acres in Yukon, Oklahoma, (ii) an 8,000 square foot
combination office and maintenance facility situated on six acres in Pocola,
Oklahoma, (iii) 12,000 square feet of maintenance facilities situated on 3.5
acres in Midland, Texas, (iv) a 5,000 square foot sales and service facility
situated on one acre located in Corpus Christi, Texas, (v) a 13,000 square foot
facility on 17 acres in East Bernard, Texas which is being utilized as an engine
remanufacturing and training facility, (vi) an 8,000 square foot facility
situated on 9.2 acres in Kilgore, Texas and, (vii) a 210,000 square foot
production equipment manufacturing facility located on 82 acres in Columbus,
Texas. The Company also leases maintenance facilities aggregating 23,000 square
feet in Victoria, Texas and Lafayette, Louisiana under a five year lease and a
ten year lease, respectively.
The Company's executive offices are located at 12001 North Houston Rosslyn,
Houston, Texas 77086 and its telephone number is (281) 447-8787.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation or
proceeding and is not aware of any such litigation or proceeding threatened
against it.
-17-
<PAGE> 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of its fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock began trading on the New York Stock Exchange on July
1, 1997 under the symbol "HC." The following table sets forth the range of the
high and low on market prices for the Common Stock, for the fiscal quarter
indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Third Quarter 1997 $ 25-1/2 $ 20-5/16
Fourth Quarter 1997 $ 26 $ 17-1/8
</TABLE>
As of December 31, 1997, there were 28,335,822 shares of Common Stock
outstanding, held by approximately 230 stockholders of record.
The Company has not paid any cash dividends on its Common Stock since
its formation and does not anticipate paying such dividends in the foreseeable
future. The Board of Directors anticipates that all cash flow generated from
operations in the foreseeable future will be retained and used to develop and
expand the Company's business. The Company's $200 million credit facility with
The Chase Manhattan Bank, as agent (the "Bank Credit Agreement") limits the
amount of dividends payable by the Company (without the lender's prior
approval) on its Common Stock to no more than 25% of the Company's net income
for the period from January 1, 1998 until December 15, 2002. In addition, the
Company's 7% Subordinated Notes due 2000 (the "Subordinated Notes") prohibit
the payment of cash dividends on the Company's capital stock without the
lenders' prior written consent. Any future determinations to pay cash
dividends on the Common Stock will be at the discretion of the Company's Board
of Directors and will be dependent upon the Company's results of operations and
financial condition, credit and loan agreements in effect at that time and
other factors deemed relevant by the Board of Directors.
-18-
<PAGE> 19
Set forth below is certain information with respect to all securities
of the Company sold by the Company in 1997 which were not registered under the
Securities Act of 1933, as amended.
<TABLE>
<CAPTION>
Title and Amount
Date of of Exemption
Sale Securities Purchasers Consideration Claimed
------ ---------- ---------- ------------- --------
<S> <C> <C> <C> <C>
2/19/97 5,152 shares of Accredited $14.55 per share. Sec. 4(2) and/or
Common Stock Investor Rule 506
6/30/97 264,785 shares of 21 employees $19.50 per share. (a portion Rule 701
Common Stock of which may be paid by full
recourse promissory notes and
the balance in cash).
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA (HISTORICAL)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents certain selected financial data for the
Company for each of the five years in the period ended December 31, 1997. The
selected financial data have been derived from the audited consolidated
financial statements of the Company. The following information should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of the
Company.
-19-
<PAGE> 20
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995 (1) 1994 1993
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Revenues:
Rentals and maintenance $110,939 $79,355 $48,354 $32,025 $25,723
Compressor fabrication 49,764 28,764 29,593 16,202 14,034
Production equipment fabrication 37,052 26,903 16,960 7,272 3,178
Other 1,043 989 1,057 581 411
----- --- ----- --- ---
Total revenues 198,798 136,011 95,964 56,080 43,346
------- ------- ------ ------ ------
Expenses:
Rentals and maintenance 41,473 30,800 17,813 11,008 9,739
Compressor fabrication 41,584 24,657 25,265 13,733 12,131
Production equipment fabrication 26,375 19,574 13,178 5,798 2,671
Selling, general and administrative 20,782 16,439 12,542 8,427 7,413
Depreciation and amortization 28,439 20,722(2) 13,494 8,109 5,758
Interest expense 10,728 6,594 4,560 2,027 1,366
------ ----- ----- ----- -----
Total costs and expenses 169,381 118,786 86,852 49,102 39,078
------- ------- ------ ------ ------
Income before income taxes 29,417 17,225 9,112 6,978 4,268
Provision for income taxes 11,314 6,844 3,498 2,590 1,597
------ ----- ----- ----- -----
Net income $18,103 $10,381 $5,614 $4,388 $2,671
======= ======= ====== ====== ======
Net income available to common
stockholders:
Net income $18,103 $10,381 $5,614 $4,388 $2,671
Dividends on Series A and Series B
preferred stock (1,773) (832)
Series A preferred stock exchange (3,794)
Series B preferred stock conversion (1,400)
------ ------- ------- ----- -------
Net income available to common
stockholders 18,103 3,414 4,782 4,388 2,671
Weighted average common and common
equivalent shares(3):
Basic 25,623 20,498 14,373 13,069 10,877
------ ------ ------ ------ ------
Diluted 27,345 22,023 15,358 13,606 10,980
------ ------ ------ ------ ------
Earnings per common share(3):
Basic $.71 $.17 $.33 $.34 $.25
==== ==== ==== ==== ====
Diluted $.66 $.16(4) $.31 $.32 $.24
==== ==== ==== ==== ====
OTHER DATA:
EBITDA (5) $68,584 $44,541 $27,166 $17,114 $11,392
======= ======= ======= ======= =======
BALANCE SHEET DATA(end of period):
Working capital $58,027 $41,513 $23,270 $995 $962
Net property, plant and equipment 394,070 266,406 198,074 88,391 61,722
Total assets 506,452 341,387 252,313 114,614 76,779
Long-term debt 158,838 122,756 50,451 36,878 14,279
Preferred stockholders' equity 26,894
Common stockholders' equity 288,271 176,895 139,302 51,333 46,945
</TABLE>
(1) The selected historical financial information includes the results of
operations of the Company and its wholly-owned subsidiaries. During
1995, the Company acquired Astra Resources Compression, Inc.,
a significant subsidiary. See Note 2 of the Notes to the
Company's Consolidated Financial Statements for further information.
(2) In order to more accurately reflect the estimated useful lives of
natural gas compressor units in the rental fleet; effective January 1,
1996 the Company changed the lives over which these units are
depreciated from 12 to 15 years. The effect of this change was a
decrease in depreciation expense of $2.6 million and an increase in
net income of $1.5 million ($.07 per diluted common share) for the
year ended December 31, 1996.
-20-
<PAGE> 21
(3) The Company adopted Statement of Financial Accounting Standard No. 128
(SFAS 128), "Earnings Per Share," beginning with the Company's fourth
quarter of 1997. All prior period earnings per share data have been
restated to conform to the provisions of this statement. Basic
earnings per common share is computed using the weighted average number
of shares outstanding for the period. Diluted earnings per common
share is computed using the weighted average number of shares
outstanding adjusted for the incremental shares attributed to
outstanding options and warrants to purchase common stock.
(4) Diluted earnings per share in 1996 was $.46 per share before the
effects of charging retained earnings for $1.8 million relating to
dividends on redeemable preferred stock and one time charges to
retained earnings for (i) $3.8 million related to the exchange of all
Series A preferred stock for subordinated notes and (ii) $1.4 million
related to the conversion of all Series B preferred stock to Common
Stock. See Note 8 of the Notes to Consolidated Financial Statements.
(5) EBITDA consists of the sum of consolidated net income, interest
expense, income tax, and depreciation and amortization. The Company
believes that EBITDA is a meaningful measure of its operating
performance and is also used to measure the Company's ability to meet
debt service requirements. EBITDA should not be considered as an
alternative performance measure prescribed by generally accepted
accounting principles.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto.
GENERAL
The Company's operations consist of providing gas compression services
through renting, maintaining and operating natural gas compressors and
engineering, fabricating and selling gas compression and oil and gas production
equipment. See "Business".
-21-
<PAGE> 22
The following table summarizes the revenues, expenses and gross profit
percentages for each of the Company's business segments:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rentals and maintenance - Domestic $88.2 $68.2 $45.3
Rentals and maintenance - International 22.7 11.2 3.1
Compressor fabrication 49.8 28.8 29.6
Production equipment fabrication 37.1 26.9 17.0
---- ---- ----
Total $197.8 $135.1 $95.0
====== ====== =====
Expenses:
Rentals and maintenance - Domestic $33.7 $25.9 $16.6
Rentals and maintenance - International 7.8 4.9 1.2
Compressor fabrication 41.6 24.7 25.3
Production equipment fabrication 26.4 19.6 13.2
---- ---- ----
Total $109.5 $75.1 $56.3
====== ===== =====
Gross profit percentage:
Rentals and maintenance - Domestic 61.9% 61.6% 63.3%
Rentals and maintenance - International 65.6% 56.3% 61.3%
Compressor fabrication 16.4% 14.3% 14.6%
Production equipment fabrication 28.8% 27.2% 22.3%
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
REVENUES
Revenues from rentals and maintenance increased by $31.6 million, or
40% to $110.9 million due to growth in the rental fleet. At December 31, 1997
the compressor rental fleet consisted of 781,341 horsepower, a 37% increase
over the 569,557 horsepower in the rental fleet at December 31, 1996.
Domestically, the rental fleet increased by 160,348 horsepower, or 32%, during
1997 and internationally by 51,436 horsepower, or 83%. Revenues from
compressor fabrication amounted to $49.8 million, increasing by 73% over 1996.
An aggregate of 110,000 horsepower was sold during 1997. In addition, 93,000
horsepower was fabricated and placed in the rental fleet during 1997. Revenues
from the fabrication of production equipment increased by $10.1 million, or 38%
to $37.1 million during 1997 as a result of the continued strength in the
market for oil and gas production equipment.
-22-
<PAGE> 23
EXPENSES
Operating expenses of the rental and maintenance segment increased by
$10.7 million, or 35% to $41.5 million during 1997. The gross profit
percentage from rentals and maintenance increased to 62.6% during 1997 from
61.2% in 1996. The increase in the gross profit percentage results from
successful cost control measures as well as the continued addition of newly
fabricated higher horsepower units to the rental fleet. Operating expenses of
compressor fabrication increased by $16.9 million, or 69%, which relates to the
73% increase in compression fabrication revenue achieved during 1997. In
addition, the gross profit margin on compression fabrication increased to 16.4%
during 1997, from 14.3% during 1996. Production equipment fabrication
operating expenses increased by $6.8 million, or 35%, during 1997 to $26.4
million. The increase in operating expenses is reflective of the corresponding
38% increase in production equipment fabrication revenues during 1997. The
gross profit margin attributable to production equipment fabrication also
increased to 28.8% during 1997, up from 27.2% during 1996.
Selling, general and administrative expenses increased by $4.3
million, or 26% to $20.8 million during 1997. The increase is attributable to
increased personnel and other administrative and selling expenses associated
with the dramatic increase in operating activity in each of the Company's
operating segments as well as increased administrative costs relating to being
a publicly-owned entity. Depreciation and amortization expense increased by
$7.7 million, or 37% during 1997 to $28.4 million. Indicative of the Company's
continued growth, the amount invested in property, plant and equipment amounted
to $470.3 million at year end which is 49% greater than the December 31, 1996
investment in fixed assets. The amount invested in the compressor rental fleet
increased by $142.3 million during 1997 as evidenced by the addition of 211,784
horsepower to the rental feet. Interest expense increased by $4.1 million, or
63%, during 1997 and amounted to $10.7 million for the year. As described in
the liquidity section, a significant portion of the Company's growth is funded
with a revolving credit facility. During 1997, an additional $63.7 million was
borrowed under the Bank Credit Agreement.
INCOME TAXES
The Company's effective income tax rate was approximately 39% during
1997 and 40% during 1996. Accordingly, the provision for income taxes
increased by $4.5 million, or 65%, during 1997 to
-23-
<PAGE> 24
$11.3 million as a result of income before income taxes increasing by 71%
during 1997 over 1996.
NET INCOME AND EARNINGS PER SHARE
Net income increased $7.7 million, or 74%, to 18.1 million for 1997
from $10.4 million in 1996 for the reasons discussed above. Weighted average
shares outstanding was affected by the additional shares issued in conjunction
with the Company's initial public offering.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES
Revenues from rentals and maintenance increased by $31.0 million, or
64% to $79.4 million during 1996. Domestically, revenues from rentals and
maintenance increased by $22.9 million (51%), and internationally by $8.1
million (261%). The increase in revenues resulted primarily from two factors:
(i) an acquisition in December 1995, which resulted in 82,447 domestic
horsepower and 21,252 international horsepower being added to the rental fleet
(a 33% increase compared to the Company's fleet before the acquisition), and
(ii) a 36% increase in the size of the total compressor rental fleet during
1996, represented by the addition of 151,077 horsepower. During 1996, Hanover
fabricated compression units aggregating 129,000 horsepower, 44% of which was
sold to third parties and 56% of which was placed in the rental fleet.
Revenues from the fabrication and sale of compression equipment to third
parties amounted to $28.8 million compared to $29.6 million in 1995. By
comparison, compression units fabricated and placed in the rental fleet
increased 175%, to $36.9 million in 1996 which amounts were eliminated from
revenue in consolidation and the cost of which was included in compression
equipment. See Note 15 of Notes to the Consolidated Financial Statements
included elsewhere herein. Revenues from the fabrication and sale of
production equipment increased by $9.9 million, or 58% to $26.9 million during
1996. The increase in revenue reflects the full year of operation and
successful integration of a production equipment business acquired in 1995
which substantially expanded the Company's production capacity and customer
base.
EXPENSES
Operating expenses attributable to rentals and maintenance increased
by $13.0 million, or 73% to $30.8 million during 1996. The increase results
primarily from the growth in the compression
-24-
<PAGE> 25
rental feet as reflected by the corresponding 64% growth in rental and
maintenance revenues during 1996. Operating expenses attributable to
compressor fabrication decreased by $0.6 million 2% to $24.7 million during
1996 as a result of the corresponding decrease in revenue. Operating expenses
from production equipment fabrication increased by $6.4 million, or 49% to
$19.6 million during 1996 as a result of the corresponding increase in
production equipment fabrication activity. The gross profit percentage from
production equipment fabrication increased to 27.2% in 1996 from 22.3% in 1995,
largely resulting from improved margins in the production equipment market and
the integration of a production equipment fabrication operation acquired in
1995.
Selling, general and administrative expenses increased by $3.9
million, or 31% to $16.4 million. The increase results from the expansion of
the Company's overall level of activity as evidenced by a corresponding 42%
increase in total revenues over 1995. Depreciation and amortization increased
$7.2 million, or 54% to $20.7 million in 1996. Aggregate expenditures for the
expansion of the rental fleet and other capital expenditures amounted to $90.1
million. In addition, in order to more accurately reflect the estimated useful
lives of natural gas compression units in the rental fleet, the Company changed
the lives over which these units are depreciated from 12 to 15 years effective
January 1, 1996. The effect of this change was a decrease in depreciation
expense of approximately $2.6 million for 1996. Interest expense increased
$2.0 million, or 45% to $6.6 million in 1996 as a result of borrowings under
the Company's revolving credit facility which was used primarily to finance
additions to the compression rental fleet.
INCOME TAXES
The Company's effective income tax rate was approximately 40% during
1996 and 38% during 1995. Accordingly, the $3.3 million increase in the
provision for income taxes to $6.8 million resulted from a comparable increase
in income before income taxes in 1996 over 1995.
NET INCOME AND EARNING PER SHARE
Net income increased $4.8 million, or 86%, to $10.4 million in 1996
from $5.6 million in 1995 for the reasons discussed above. Earnings per share
in 1996 were $.46 per share before the effect of charging retained earnings for
$1.8 million relating to dividends on redeemable preferred stock and one time
charges to retained earnings for (i) $3.8 million related to the exchange of
all Series A preferred stock for subordinated notes and (ii) 1.4
-25-
<PAGE> 26
million related to the conversion of all Series B preferred stock to common
stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance amounted to $4.6 million at December 31,
1997 compared to $7.3 million at December 31, 1996. Primary sources of cash
during 1997 were cash provided by internal operations of $32.2 million, net
proceeds from debt borrowings of $68.7 million and $92.1 million net proceeds
of issuance of common stock, substantially all of which resulted from the
Company's July, 1997 initial public offering. Principal uses of cash during
the year ended December 31, 1997 were capital expenditures of $151.0 million,
business combinations and investments in unconsolidated entities of $16.4
million and $31.8 million repayment of long-term debt.
Total current assets increased from $66.6 million at December 31, 1996
to $94.8 million at December 31, 1997 primarily as a result of increases in
accounts receivable and inventories. Accounts receivable at December 31, 1997
increased by $13.0 million to $41.0 million. The increase corresponds with the
46% increase in total revenue realized by the Company during 1997. In
addition, inventories increased by $14.7 million to $32.9 million at December
31, 1997. The increase in inventories reflects increases in parts and
supplies, work in progress and finished goods as the level of activity in each
of the Company's three industry segments increased dramatically over 1996.
Working capital at December 31, 1997 was also affected by an $11.6 million
increase in total current liabilities at December 31, 1997 to $36.8 million.
The 46% increase results largely from the increase in vendor accounts payable
caused by the expansion of the Company's operating activities.
The amounts invested in property, plant and equipment and business
combinations during 1997 was $157.3 million which resulted in the addition of
approximately 212,000 horsepower to the rental fleet. At December 31, 1997, the
rental fleet consisted of 668,000 horsepower domestically and 113,000 in the
international rental fleet. Current plans are to spend approximately $150
million during 1998, exclusive of any major
-26-
<PAGE> 27
acquisition, in continued expansion of the rental fleet. Historically, the
Company has financed capital expenditures with a combination of internally
generated cash flow, borrowings under the revolving credit facility and raising
additional equity. The Company has Subordinated Notes in the aggregate
principal amount of $23.5 million, bearing interest at 7%, payable
semi-annually, with principal due on December 31, 2000. As of December 31,
1997, the Company has approximately $69 million of credit capacity ($45
million as of March 26, 1998) remaining on its $200 million Bank Credit
Agreement (6.7% rate at December 31, 1997). In order to fund the anticipated
level of capital expenditures, the Company anticipates arranging additional
sources of debt and/or equity during 1998.
IMPACT OF THE YEAR 2000
The Company plans to install various modifications to existing
computer software during 1998 to include, among other things, an accommodation
of the problems associated with computer programs reflecting the year 2000. The
costs associated with the software modifications are not expected to be
material in relation to either future operating results or financial condition.
The Company has not initiated formal communications with all of its
significant suppliers and vendors to ensure that those parties have appropriate
plans to address year 2000 issues where they may otherwise impact the operations
of the Company; however, the Company does not have any significant suppliers or
vendors that directly interface with the Company's information technology
systems. There is no guarantee that the systems of other companies on which the
Company relies will be converted timely and will not have an adverse effect on
the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, foreign currency gains and losses) in a full set
of general purpose financial statements. The Company will implement the
statement in 1998 and will, as required, reclassify financial statements for
earlier periods presented for comparative purposes. Adoption of the statement
is not anticipated to have a material effect on the Company's financial
statement presentation.
-27-
<PAGE> 28
Also in June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS 131 establishes standards for the way
that public companies report information about operating segments in both annual
and interim financial statements, as well as establishes standards for
disclosures about products and services, geographic areas and major customers.
The Company will adopt SFAS 131 in 1998. The Company is currently evaluating
the impact of the statement on its financial reporting.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
In this report, the consolidated financial statements and supplementary
data appearing on pages F-1 through F-25 are incorporated in this item 8 by
reference. See Index to the Financial Statements at page 33.
-28-
<PAGE> 29
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Price Waterhouse LLP, independent accountants . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statement of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4, F-5
Consolidated Statement of Common Stockholders' Equity . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Selected Quarterly Financial Data (unaudited) . . . . . . . . . . . . . . . . . . . . . . . F-25
</TABLE>
33
<PAGE> 30
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 included or to be included in the Company's definitive
proxy statement for its 1998 Annual Meeting of Stockholders under the captions
"Nominees for Election as Directors," and "Section 16(a) Beneficial Ownership
Reporting Compliance" is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information included or to be included under the caption
"Executive Compensation" in the Company's definitive proxy statement for its
1998 Annual Meeting of Stockholders is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information included or to be included under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's
definitive proxy statement for its 1998 Annual Meeting of Stockholders is
incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information included or to be included under the caption "Certain
Relationships and Related Transactions" in the Company's definitive proxy
statement for its 1998 Annual Meeting of Stockholders is incorporated by
reference herein.
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 - The financial statements listed in
the accompanying Index to Consolidated
29
<PAGE> 31
Financial Statements are filed as part of this annual report
and such Index to Consolidated Financial Statements is
incorporated herein by reference.
2. FINANCIAL STATEMENT SCHEDULES - All schedules are
omitted because the required information is inapplicable or
the information is presented in the Consolidated Financial
Statements or related notes.
3. EXHIBITS - The exhibits listed on the accompanying
Index to Exhibits set for below are filed as part of this
annual report.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* Amended and Restated By-laws of the Company
3.3* Certificate of Amendment of Certificate of Incorporation of the Company filed March 8, 1996
3.4* Second Certificate of Amendment of Certificate of Incorporation of the Company filed June 24, 1997
4.1* Third Amended and Restated Registration Rights Agreement, dated as of December 5, 1995, among
the Company, GKH Partners, L.P., GKH Investments, L.P., Astra Resources, Inc. and other
stockholders of the Company party thereto
4.10* Form of Warrant Agreement
4.11* Specimen Stock Certificate
4.12* Form of Second Amended and Restated Stockholders Agreement of Hanover Compressor Company dated
as of June, 1997
4.13* Form of Amended and Restated Stockholders Agreement (JEDI) dated as of May, 1997
4.14* Form of Amended and Restated Stockholders Agreement (Westar Capital, Inc.) dated as of May, 1997
4.15* Form of Amended and Restated Stockholders Agreement (HEHC) dated as of May, 1997
10.1* Second Amended and Restated Credit Agreement, dated as of December 19, 1995, by and between
Hanover, The Chase Manhattan Bank (formerly known as Chemical Bank), a New York banking
corporation as Agent and several banks that are parties thereto.
10.2* Loan Agreement, dated as of December 19, 1995, by and between Hanover, Joint Energy Development
Investment Partnership as Agent and several banks that are parties thereto
10.3* Management Fee Letter, dated November 14, 1995 between GKH Partners, L.P. and the Company
10.4*(1) Hanover Compressor Company Senior Executive Stock Option Plan
10.5*(1) 1993 Hanover Compressor Company Management Stock Option Plan
10.6*(1) Hanover Compressor Company Incentive Option Plan
10.7*(1) Amendment and Restatement of Hanover Compressor Company Incentive Option Plan
10.8*(1) Hanover Compressor Company 1995 Employee Stock Option Plan
10.9*(1) Hanover Compressor Company 1995 Management Stock Option Plan
10.10*(1) Hanover Compressor Company 1996 Employee Stock Option Plan
10.11* OEM Sales and Purchase Agreement, between Hanover Compressor Company and the Waukesha Engine
Division of Dresser Industries, Inc.
10.12* Distribution Agreement, dated February 23, 1995, between Ariel Corporation and Maintech
Enterprises, Inc.
10.13* Exclusive Distribution Agreement, dated as of February 23, 1995 by and between Hanover/Smith,
Inc. and Uniglam Resources, Ltd.
10.14* Lease Agreement with Option to Purchase dated as of February 24, 1995 between Smith Industries,
Incorporated and Hanover/Smith, Inc.
10.15* Lease Agreement, dated December 4, 1990, between Hanover Compressor Company and Ricardo J.
Guerra and Luis J. Guerra as amended
10.16* Lease Agreement, dated as of March 31, 1995 between Hanover Compressor Company and Smith
Industries, Incorporated
10.17* Lease Agreement with Option to Purchase, dated June 8, 1993 between C&M Land Account and
Hanover Compressor Company
10.18* Indemnification Agreement, dated as of December 5, 1995, between Hanover Compressor Company and
Western Resources (formerly Astra Resources, Inc.)
10.19* Put Agreement, dated December 5th, 1995, by and between Western Resources, Inc. (formerly Astra
Resources, Inc.) an Hanover Compressor Company and Hanover Acquisition Corporation (formerly
Astra Resources Compression, Inc.)
10.20* Exchange and Subordinated Loan Agreement dated as of December 23, 1996, among the Company and
GKH Partners, L.P., GK December 23, 1996, among the Company and GKH Partners, L.P., GK
Investments, L.P., IPP95, L.P., Hanna Investment Group, Ott Candies, Inc., Phyllis S. Hojel,
Ted Collins, Jr. and L.O. Ward
10.21* Cooperation Agreement dated January 16, 1997 among the Company, Wartsila and Wartsila
Compression Services, GMBH
10.22* Distributorship Agreement dated January 16, 1997 between the Company and Wartsila Compression
Services
10.23*(1) 1997 Stock Option Plan, as amended
10.24*(1) 1997 Stock Purchase Plan
10.27* Exchange Agreement by and between Hanover Compressor Company and JEDI, dated December 23, 1996
10.30 Credit Agreement, dated as of December 15, 1997, by and between the Company, The Chase Manhattan
Bank, a New York banking corporation as Administrative Agent and several banks and other
financial institutions that are parties thereto
10.31 Subsidiaries'Guarantee, dated as of December 15, 1997, by certain of the Company's subsidiaries
in favor of The Chase Manhattan Bank, as agent
21.1* List of Subsidiaries
27.1 Financial Data Schedule
</TABLE>
- -----------------
* Incorporated by reference to [the corresponding numbered
Exhibit] to the Registration Statement (File No. 333-27953)
on Form S-1, as amended, filed by Hanover Compressor Company
under the Securities Act of 1933, as amended.
(1) Compensatory plan or arrangement required to be filed.
-30-
<PAGE> 32
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.
HANOVER COMPRESSOR COMPANY
BY: /s/ Michael J. McGhan
-----------------------------------------------
Michael J. McGhan, President
and Chief Executive Officer
Date: March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Michael J. McGhan President and Chief March 26, 1998
- -------------------------- Executive Officer
Michael J. McGhan (Principal Executive
Officer and Director)
/s/ Curtis Bedrich Chief Financial March 26, 1998
- -------------------------- Officer and Treasurer
Curtis Bedrich (Principal Financial and
Accounting Officer)
/s/ Ted Collins, Jr. Director March 26, 1998
- --------------------------
Ted Collins, Jr.
/s/ Robert R. Furgason Director March 26, 1998
- --------------------------
Robert R. Furgason
</TABLE>
-31-
<PAGE> 33
<TABLE>
<S> <C> <C>
/s/ William S. Goldberg Director March 26, 1998
- --------------------------
William S. Goldberg
/s/ Melvyn N. Klein Director March 26, 1998
- --------------------------
Melvyn N. Klein
/s/ Carl M.Koupal, Jr. Director March 26, 1998
- --------------------------
Carl M. Koupal, Jr.
/s/ Michael A. O'Connor Director March 26, 1998
- --------------------------
Michael A. O'Connor
/s/ Alvin V. Shoemaker Director March 26, 1998
- --------------------------
Alvin V. Shoemaker
/s/ William E. Simon, Jr. Director March 26, 1998
- --------------------------
William E. Simon, Jr.
</TABLE>
-32-
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Hanover Compressor Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of common stockholders'
equity present fairly, in all material respects, the financial position of
Hanover Compressor Company and its subsidiaries at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
February 12, 1998
F-1
<PAGE> 35
HANOVER COMPRESSOR COMPANY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands of dollars) 1997 1996
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,561 $ 7,322
Accounts receivable, net 41,041 28,012
Inventory 32,860 18,134
Costs and estimated earnings in excess
of billings on uncompleted contracts 6,658 7,774
Prepaid taxes 6,919 4,372
Other current assets 2,750 1,025
---------- ---------
Total current assets 94,789 66,639
---------- ---------
Property, plant and equipment:
Compression equipment 438,351 296,060
Land and buildings 10,544 5,236
Transportation and shop equipment 14,589 10,788
Other 6,824 3,892
---------- ---------
470,308 315,976
Accumulated depreciation (76,238) (49,570)
---------- ---------
Net property, plant and equipment 394,070 266,406
---------- ---------
Intangible and other assets 17,593 8,342
---------- ---------
$ 506,452 $ 341,387
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 2,222 $ 492
Accounts payable, trade 16,219 9,051
Accrued liabilities 9,088 8,214
Advance billings 6,752 6,701
Billings on uncompleted contracts in
excess of costs and estimated earnings 2,481 668
---------- ---------
Total current liabilities 36,762 25,126
Long-term debt 158,838 122,756
Other liabilities 899 1,161
Deferred income taxes 21,682 15,449
---------- ---------
Total liabilities 218,181 164,492
---------- ---------
Commitments and contingencies (Note 14)
Common stockholders' equity:
Common stock, $.001 par value;
100 million shares authorized;
28,367,169 and 22,938,541 shares
issued and outstanding, respectively 28 23
Additional paid-in capital 268,588 171,342
Notes receivable - employee stockholders (10,748) (6,770)
Retained earnings 30,621 12,518
Treasury stock - 31,347 common shares,
at cost (218) (218)
Total common stockholders' equity ---------- ---------
288,271 176,895
---------- ---------
$ 506,452 $ 341,387
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 36
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands of dollars, except per share amounts) 1997 1996 1995
<S> <C> <C> <C>
Revenues:
Rentals and maintenance $ 110,939 $ 79,355 $48,354
Compressor fabrication 49,764 28,764 29,593
Production equipment fabrication 37,052 26,903 16,960
Other 1,043 989 1,057
--------- -------- -------
198,798 136,011 95,964
--------- -------- -------
Expenses:
Rentals and maintenance 41,473 30,800 17,813
Compressor fabrication 41,584 24,657 25,265
Production equipment fabrication 26,375 19,574 13,178
Selling, general and administrative 20,782 16,439 12,542
Depreciation and amortization 28,439 20,722 13,494
Interest expense 10,728 6,594 4,560
--------- -------- -------
169,381 118,786 86,852
--------- -------- -------
Income before income taxes 29,417 17,225 9,112
Provision for income taxes 11,314 6,844 3,498
--------- -------- -------
Net income $ 18,103 $ 10,381 $ 5,614
========= ======== =======
Net income available to common stockholders:
Net income $ 18,103 $ 10,381 $ 5,614
Dividends on Series A and Series B
preferred stock (1,773) (832)
Fair value of subordinated notes in
excess of carrying amount of Series
A preferred stock (3,794)
Cash paid as an incentive to convert
Series B preferred stock into common
stock (1,400)
--------- -------- -------
Net income available to common stockholders $ 18,103 $ 3,414 $ 4,782
========= ======== =======
Weighted average common and common equivalent
shares outstanding:
Basic 25,623 20,498 14,373
========= ======== =======
Diluted 27,345 22,023 15,358
========= ======== =======
Earnings per common share:
Basic $ 0.71 $ 0.17 $ 0.33
========= ======== =======
Diluted $ 0.66 $ 0.16 $ 0.31
========= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 37
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands of dollars) 1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:-
Net income $ 18,103 $ 10,381 $ 5,614
Adjustments:
Depreciation and amortization 28,439 20,722 13,494
Amortization of debt issuance costs
and debt discount 892 547 405
Gain on sale of assets (148) (352) (412)
Deferred income taxes 6,233 2,263 638
Changes in assets and liabilities, net
of effects of business combinations:
Accounts receivable (13,010) (8,522) (8,307)
Inventory (14,726) (4,552) (5,230)
Costs and estimated earnings versus
billings on uncompleted contracts 2,929 (1,301) 671
Accounts payable and other liabilities 7,728 3,309 424
Advance billings 51 435 1,376
Other (4,272) (2,654) 415
--------- --------- -------
Net cash provided by operating
activities 32,219 20,276 9,088
--------- --------- -------
Cash flows from investing activities:
Capital expenditures (150,995) (83,598) (42,447)
Proceeds from sale of fixed assets 2,887 2,404 1,322
Cash used for business acquisitions, net (6,287) (6,489) (27,349)
Cash used to acquire investments in
unconsolidated subsidiaries (10,095)
--------- --------- -------
Net cash used in investing activities (164,490) (87,683) (68,474)
--------- --------- -------
Cash flows from financing activities:
Net borrowings on revolving credit facility 63,681 50,700 (5,519)
Proceeds from issuance of long-term debt 5,000 16,500
Issuance of common stock, net 92,088 23,317 21,585
Debt issuance costs (687) (498) (796)
Repayment of long-term debt (31,757) (379) (923)
Purchase of treasury stock (218)
Issuance of preferred stock and warrants 19,577
Repayments of shareholder notes 1,185
Issuance of notes payable to stockholders 12,000
Conversion of Series B preferred stock (1,400)
--------- --------- -------
Net cash provided by financing
activities 129,510 71,740 62,206
--------- --------- -------
Net increase (decrease) in cash and cash
equivalents (2,761) 4,333 2,820
Cash and cash equivalents at beginning
of year 7,322 2,989 169
--------- --------- -------
Cash and cash equivalents at end of year $ 4,561 $ 7,322 $ 2,989
========= ========= =======
</TABLE>
F-4
<PAGE> 38
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands of dollars) 1997 1996 1995
<S> <C> <C> <C>
Supplemental disclosure of cash flow
information:
Interest paid $ 10,069 $ 5,831 $ 4,161
--------- --------- --------
Income taxes paid $ 5,857 $ 2,541 $ 4,790
--------- --------- --------
Supplemental disclosure of noncash
transactions:
Debt issued for property, plant
and equipment $ 379 $ 428
--------- --------
Conversion of notes payable to
Series A preferred stock $ 12,000
--------
Common stock issued in exchange for
notes receivable $ 5,163 $ 2,101 $ 2,574
--------- --------- --------
Acquisitions of businesses:
Property, plant and equipment acquired $ 6,714 $ 80,325
--------- -------
Other noncash assets acquired $ 14,152
--------
Liabilities assumed $(10,246)
--------
Common stock issued $ (225) $(56,882)
--------- --------
Exchange of Series A preferred stock
for subordinated notes:
Amount assigned to subordinated notes $ 21,792
---------
Amount charged to retained earnings $ (3,794)
---------
Conversion of Series B preferred stock
into common stock $ 10,637
---------
Preferred stock dividend $ 1,741 $ 832
========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 39
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(amount in thousands, except share data) Notes
receivable -
Common stock Additional employee
-------------------------- paid-in Treasury stock- Retained
Shares Amount capital stock holders earnings
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 13,068,500 $ 13 $ 49,093 $ (2,095) $ 4,322
Acquisition of Gale Force 181,700 1,725
Exercise of stock options 6,636 46
Purchase of 31,347 common
shares as treasury stock $ (218)
Issuance of common stock 2,195,094 2 23,509 (2,574)
Issuance of warrants to
purchase common stock 5,540
Acquisition of PGN 16,590 157
Acquisition of Astra 4,827,848 5 54,995
Net income 5,614
Accrual of dividends on
redeemable preferred stock (832)
---------- ----- -------- -------- -------- -------
Balance at December 31, 1995 20,296,368 20 135,065 (218) (4,669) 9,104
Issuance of common stock
to employees 251,220 2,885 (2,101)
Acquisition of New Prospect
and Oxley 19,734 225
Accrual of dividends on
redeemable preferred stock (1,773)
Fair value of subordinated notes
in excess of carrying amount of
Series A preferred stock (3,794)
Stock issuance for conversion
of Series B preferred stock 800,308 1 10,636 (1,400)
Issuance of common stock 1,570,911 2 22,531
Net income 10,381
------------ ----- -------- -------- -------- -------
Balance at December 31, 1996 22,938,541 23 171,342 (218) (6,770) 12,518
Issuance of common stock 5,163,843 5 92,083
Issuance of common stock to
employees 264,785 5,163 (5,163)
Repayment of employee
shareholder notes 1,185
Net income 18,103
---------- ----- -------- -------- -------- -------
Balance at December 31, 1997 28,367,169 $ 28 $268,588 $ (218) $(10,748) $30,621
========== ===== ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 40
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. THE COMPANY, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Hanover Compressor Company is a leading provider of a broad array of
natural gas compression rental, operations and maintenance services in
the United States and select international markets. Hanover's
compression services are complemented by its compressor and oil and gas
production equipment fabrication operations.
The accompanying consolidated financial statements include the accounts
of Hanover Compressor Company and its subsidiaries ("Hanover" or the
"Company"). Hanover is a Delaware corporation formed on October 17,
1990.
On June 6, 1997, the Board of Directors approved an increase of
authorized shares of preferred stock and common stock to 3,000,000 and
100,000,000 shares, respectively. In addition, the Board of Directors
approved a 158-for-1 stock split of the Company's common stock. The
stock split has been effected in the form of a stock dividend. All
share and per share information included herein reflects the stock
split.
On June 30, 1997, Hanover issued 5,158,691 shares of common stock for
cash of $92,020,000 (net of approximately $1,771,000 of equity issuance
costs) in connection with the Company's initial public offering (the
Offering).
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include Hanover and
its wholly-owned subsidiaries. Operating results of businesses acquired
are included after the acquisition dates. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Investments in affiliated corporations in which the Company does not
have a controlling interest are accounted for using the equity method.
USE OF ESTIMATES IN THE 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 amount of assets, liabilities,
revenues and expenses, as well as the disclosures of contingent assets
and liabilities. Because of the inherent uncertainties in this process,
actual future results could differ from those expected at the reporting
date. Management believes that the estimates are reasonable.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION
Revenue from equipment rentals is recorded when earned over the period
of rental contracts which generally range from one month to five years.
Compressor and production equipment fabrication revenue is recognized
using the percentage-of-completion method. The Company estimates
percentage-of-completion for compressor fabrication on a direct labor
hour-to-total labor hour basis. Production equipment fabrication
percentage-of-completion is estimated using the cost-to-cost basis.
F-7
<PAGE> 41
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 ANF 1995
- --------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK
Trade accounts receivable are due from companies of varying size
engaged principally in oil and gas activities in the United States and
South America. The Company reviews the financial condition of customers
prior to extending credit and periodically updates customer credit
information. Payment terms are on a short-term basis and in accordance
with industry standards. Trade accounts receivable are recorded net of
estimated doubtful accounts of $838,000 and $494,000 at December 31,
1997 and 1996, respectively.
INVENTORY
Inventory consists of parts used for fabrication or maintenance of
natural gas compression units and production equipment, and also
includes compression units and production equipment which are held for
sale. Inventory is stated at the lower of cost or market using the
average-cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are depreciated
using the straight-line method over their estimated useful lives as
follows:
Compression equipment 4 to 25 years
Buildings 30 years
Transportation, shop equipment and other 3 to 12 years
Effective January 1, 1996, the Company changed its estimate of the
useful life of compression units from 12 years to 15 years. Prior to
1996, natural gas compression units in the rental fleet were
depreciated using the straight-line method over an estimated useful
life of 12 years. The effect of this change in estimate was a decrease
in 1996 depreciation expense of $2,565,000 and an increase in net
income of $1,546,000 ($.07 per common share). Major improvements that
extend the useful life of an asset are capitalized. Repairs and
maintenance are expensed as incurred. Depreciation expense was
$27,789,000, $19,887,000 and $12,615,000 in 1997, 1996 and 1995,
respectively.
Assets under construction of $16,638,000 and $5,026,000 are included in
compression equipment at December 31, 1997 and 1996, respectively.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and
identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
An impairment loss is recognized when estimated cash flows expected to
result from the use of the asset and its eventual disposition is less
than its carrying amount.
INTANGIBLE ASSETS
Effective January 1, 1996, the Company changed its estimate of the
useful life of goodwill to 15 years. Prior to 1996, goodwill was
amortized on a straight-line basis over an estimated useful life of 12
years. The effect of this change was immaterial in 1996.
F-8
<PAGE> 42
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 ANF 1995
- --------------------------------------------------------------------------------
At each balance sheet date, the Company evaluates the realizability of
goodwill based upon expectations of undiscounted cash flows from
operations and operating income for subsidiaries having material
goodwill balances.
Included in intangibles and other assets are debt issuance costs, net
of accumulated amortization, totaling $1,492,000 and $1,272,000 at
December 31, 1997 and 1996, respectively. Such costs are generally
amortized over the period of the respective debt agreements.
STOCK-BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards No. 123
(FAS 123) "Accounting for Stock-Based Compensation," the Company
measures compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed in APB Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees," and has provided
in Note 10, pro forma disclosures of the effect on net income and
earnings per share as if the fair value-based method prescribed by FAS
123 had been applied in measuring compensation expense.
INCOME TAXES
The Company accounts for income taxes using an asset and liability
approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, all expected future
events are considered other than enactments of changes in the tax law
or rates.
FOREIGN CURRENCY TRANSACTIONS
The financial statements of subsidiaries outside the U.S., except those
located in highly inflationary economies, are measured using the local
currency as the functional currency. Assets, including goodwill, and
liabilities of these subsidiaries are translated at the rates of
exchange at the balance sheet date. Income and expense items are
translated at average monthly rates of exchange. The resultant
translation adjustments for the years ended December 31, 1997, 1996 and
1995 were not significant.
EARNINGS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standard No. 128
(FAS 128), "Earnings Per Share," beginning with the Company's fourth
quarter of 1997. All prior period earnings per share data have been
restated to conform to the provisions of this statement. Basic earnings
per common share is computed using the weighted average number of
shares outstanding for the period. Diluted earnings per common share is
computed using the weighted average number of shares outstanding
adjusted for the incremental shares attributed to outstanding options
and warrants to purchase common stock.
F-9
<PAGE> 43
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 ANF 1995
- --------------------------------------------------------------------------------
The reconciliation between the computations is as follows (table
amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Net income
available
to common Basic Basic Diluted Diluted
shareholders shares EPS shares EPS
<S> <C> <C> <C> <C> <C>
1997 $ 18,103 25,623 .71 27,345 .66
1996 3,414 20,498 .17 22,023 .16
1995 4,782 14,373 .33 15,358 .31
</TABLE>
Included in diluted shares are common stock equivalents relating to
options of 1,153,000, 956,000 and 416,000 in 1997, 1996 and 1995,
respectively, and warrants of 569,000 in 1997, 1996 and 1995. The
potential shares to be issued upon conversion of preferred stock in
1996 and 1995 are excluded from the computation of diluted EPS as the
effect would be anti-dilutive.
Diluted earnings per share in 1996 was $.46 per share before the
effects of charging retained earnings for (i) $1,773,000 relating to
dividends on redeemable preferred stock, (ii) $3,794,000 related to the
exchange of all Series A preferred stock for subordinated notes and
(iii) $1,400,000 related to the conversion of all Series B preferred
stock to common stock.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for all financial
instruments approximate fair value.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 Statement of Cash Flows have been
reclassified to conform to the 1997 presentation.
2. ACQUISITIONS
YEAR ENDED DECEMBER 31, 1997
Effective September 29, 1997, the Company purchased certain compressors
and buildings totaling $26,000,000 from an affiliate in a
sale-leaseback transaction. The affiliate has the option to repurchase
the assets ten years from the purchase date at the prevailing fair
market value.
Effective September 23, 1997, Hanover purchased Wagner Equipment, Inc.
and Gas Tech Compression Services, Inc. for approximately $6,287,000
in cash. The acquisition was accounted for as a purchase; therefore,
Hanover recorded the acquired assets at their estimated fair market
value as of the acquisition date. Results of operations for 1997 were
not materially impacted by the acquisition.
Effective November 20, 1997, Hanover acquired 35% of the common stock
of Collicutt Mechanical Services, Ltd. for approximately $5,608,000 in
cash. The investment is accounted for using the equity method of
accounting.
F-10
<PAGE> 44
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 ANF 1995
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Effective February 1, 1996, Hanover acquired certain compressor rental
assets of New Prospect Drilling Company and Oxley Petroleum for
approximately $4,500,000 in cash and 19,734 shares of Hanover common
stock valued at $225,000.
Effective May 1, 1996, Hanover acquired certain compressor rental
assets of Cactus Compression for $1,989,000 in cash.
The 1996 acquisitions were accounted for using the purchase method of
accounting; therefore, Hanover recorded the acquired assets and
liabilities at their estimated fair market value.
Net cash paid for the 1996 business acquisitions is as follows
(unaudited, in thousands):
<TABLE>
<S> <C>
Fair value of noncash assets acquired $ 6,714
Common stock issued (225)
----------
Net cash paid for acquisitions $ 6,489
==========
</TABLE>
Hanover's results of operations for 1996 were not materially impacted
by the 1996 business acquisitions.
YEAR ENDED DECEMBER 31, 1995
Effective January 12, 1995, Hanover acquired certain compressor rental
assets of CBC Compression for $2,775,000 in cash.
Effective February 1, 1995, Hanover acquired the compressor rental
assets of Gale Force Compression Services, Inc. for $9,655,000 in cash
and 181,700 shares of Hanover common stock valued at $1,725,000.
Effective February 24, 1995, Hanover acquired the production equipment
fabrication assets of Smith Industries, Inc. for $2,683,000 in cash.
Effective September 8, 1995, Hanover purchased Proyecto Gas Natural,
C.A. ("PGN") for $6,333,000 in cash and 16,590 shares of Hanover
common stock valued at $157,000.
Effective December 5, 1995, Hanover purchased Astra Resources
Compression, Inc. and subsidiaries ("Astra") in exchange for cash of
$6,432,000 and 4,827,848 shares of Hanover common stock valued at
$55,000,000.
The 1995 acquisitions were accounted for using the purchase method of
accounting; therefore, Hanover recorded the acquired assets and
liabilities at their estimated fair market value.
F-11
<PAGE> 45
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 ANF 1995
- --------------------------------------------------------------------------------
Net cash paid for the 1995 acquisitions is as follows (in thousands):
<TABLE>
<S> <C>
Fair value of noncash assets acquired $ 94,477
Liabilities assumed (10,246)
Common stock issued (56,882)
----------
Net cash paid for acquisitions $ 27,349
==========
</TABLE>
The following unaudited pro forma information assumes that the 1995
acquisitions described above were consummated at the beginning of the
periods presented. The pro forma information is for illustrative
information only and is not necessarily indicative of results which
would have been achieved or results which may be achieved in the future
(unaudited, in thousands):
<TABLE>
<CAPTION>
Pro forma
year ended
December 31,
1995
<S> <C>
Revenue $ 112,894
Net income 6,867
Earnings per common share - diluted $ .30
</TABLE>
3. INVENTORY
Inventory consisted of the following amounts (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
<S> <C> <C>
Parts and supplies $ 20,141 $ 11,582
Work in progress 8,766 6,219
Finished goods 3,953 333
---------- ----------
$ 32,860 $ 18,134
========== ==========
</TABLE>
F-12
<PAGE> 46
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
4. COMPRESSOR AND PRODUCTION EQUIPMENT FABRICATION CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
<S> <C> <C>
Costs incurred on uncompleted contracts $ 16,999 $ 9,009
Estimated earnings 3,850 2,598
---------- -----------
20,849 11,607
Less - billings to date (16,672) (4,501)
---------- -----------
$ 4,177 $ 7,106
---------- -----------
</TABLE>
Presented in the accompanying financial statements as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 6,658 $ 7,774
Billings on uncompleted contracts in excess
of costs and estimated earnings (2,481) (668)
--------- ---------
$ 4,177 $ 7,106
========= =========
</TABLE>
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
<S> <C> <C>
Goodwill $ 6,006 $ 6,006
Investments in unconsolidated subsidiaries 9,190
Other 6,800 8,330
----------- -----------
21,996 14,336
Accumulated amortization (4,403) (5,994)
----------- -----------
$ 17,593 $ 8,342
=========== ===========
</TABLE>
Amortization of goodwill and other intangible assets totaled $650,000,
$835,000 and $879,000 in 1997, 1996 and 1995, respectively.
F-13
<PAGE> 47
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
The excess of the Company's investment in an unconsolidated subsidiary
over the underlying net equity of $703,000 is being amortized on a
straight-line basis over ten years and is included in other assets at
December 31, 1997.
Results of operations of the Company's investments in unconsolidated
subsidiaries from the date of acquisition are not significant for 1997.
6. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
<S> <C> <C>
Revolving credit facility $ 131,200 $ 67,519
Subordinated promissory notes, net of unamortized
discount of $1,283 and $1,711 22,220 21,792
Real estate mortgage, interest at 7.5%, secured by
certain land and buildings, payable through 2002 4,917
Term loan facility 30,000
Other, interest at various rates, secured by equipment
and other assets, net of unamortized discount 2,723 3,937
----------- ----------
161,060 123,248
Less - current maturities (2,222) (492)
----------- ----------
$ 158,838 $ 122,756
=========== ==========
</TABLE>
The Company's primary credit agreement provides for a $200,000,000
revolving credit facility which matures on December 17, 2002. Advances
bear interest at the bank's prime or a negotiated rate (6.7% at
December 31, 1997 and 1996). A commitment fee of 0.35% per annum on the
average available commitment is payable quarterly.
The credit agreement contains certain financial covenants and
limitations on, among other things, indebtedness, liens, leases and
sales of assets. The credit agreement also limits the payment of cash
dividends on the Company's common stock to 25% of net income for the
respective period.
During 1997, the Company repaid its term loan facility prior to its
scheduled maturity.
During 1996, the Company exchanged subordinated notes for Series A
preferred stock (Note 8). The subordinated notes mature on December 31,
2000. The notes bear interest at 7%, payable semi-annually.
Maturities of long-term debt at December 31, 1997 are (in thousands):
1998 - $2,222; 1999 - $373; 2000 - $22,595; 2001 - $380; 2002 -
$134,835; and $655 thereafter.
F-14
<PAGE> 48
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------
In January 1998 and in connection with the revolving credit facility,
the Company entered into a two-year interest rate swap agreement to
manage interest rate exposure with a notional amount of $75,000,000 and
a strike rate of 5.43%. The principal objective of such contracts is to
minimize the risks and/or costs associated with financial and global
operating activities. The Company does not utilize financial
instruments for trading or other speculative purposes. The counterparty
to this contractual arrangement is a major financial institution with
which the Company also has other financial relationships. The Company
is exposed to credit loss in the event of nonperformance by this
counterparty. However, the Company does not anticipate nonperformance
by this party and no material loss would be expected from their
nonperformance.
7. INCOME TAXES
The components of income before income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Domestic $ 23,596 $ 15,780 $ 9,267
Foreign 5,821 1,445 (155)
-------- ---------- ---------
$ 29,417 $ 17,225 $ 9,112
======== ========== =========
</TABLE>
The provision for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Current tax expense:
Federal $ 3,308 $ 3,625 $ 2,640
State 1,281 720 220
Foreign 492 236
--------- --------- ---------
Total current 5,081 4,581 2,860
--------- --------- ---------
Deferred tax expense:
Federal 4,543 1,822 369
State (23) 441 269
Foreign 1,713
--------- --------- ---------
Total deferred 6,233 2,263 638
--------- --------- ---------
Total provision $ 11,314 $ 6,844 $ 3,498
========= ========= =========
</TABLE>
F-15
<PAGE> 49
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
The income tax expense for 1997, 1996 and 1995 resulted in effective
tax rates of 38.5%, 39.7% and 38.4%, respectively. The reasons for the
differences between these effective tax rates and the U.S.
statutory rate of 35% are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Federal income tax at statutory rates $ 10,296 $ 6,028 $ 3,189
State income taxes, net of federal income
tax benefit 817 755 318
Foreign income taxes 226 (222)
Other, net (25) 283 (9)
-------- --------- ---------
$ 11,314 $ 6,844 $ 3,498
======== ========= =========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 1,308 $ 1,308
Alternative minimum tax carryforward 9,473 7,109
Other 1,343 2,210
----------- -----------
Gross deferred tax assets 12,124 10,627
----------- -----------
Deferred tax liabilities:
Property, plant and equipment (31,091) (24,146)
Other (2,715) (1,930)
----------- -----------
Gross deferred tax liabilities (33,806) (26,076)
----------- -----------
$ (21,682) $ (15,449)
----------- -----------
</TABLE>
The Company has net operating loss carryforwards at December 31, 1997
of $3,535,000 expiring in 2005 to 2009. Utilization of the net
operating loss carryforward is limited to the taxable income generated
by the parent company in each year. In addition, the Company has an
alternative minimum tax credit carryforward of $9,473,000 which does
not expire.
The Company has not recorded a deferred income tax liability for
additional income taxes that would result from the distribution of
earnings of its foreign subsidiaries if they were actually repatriated.
The Company intends to indefinitely reinvest the undistributed earnings
of its foreign subsidiaries.
F-16
<PAGE> 50
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
8. REDEEMABLE PREFERRED STOCK
On August 7, 1995, Hanover issued, primarily to a major common
stockholder, 21,602 shares of Series A preferred stock and warrants to
purchase the Company's common stock for $21,602,000, of which
$12,000,000 was a conversion of notes payable to stockholders. On the
same date, Hanover issued 10,000 shares of Series B preferred stock for
$10,000,000. Based upon an independent valuation, proceeds allocated to
Series A preferred stock and warrants were $16,062,000 and $5,540,000,
respectively.
The Series A and Series B preferred stock had cumulative 6.5% dividend
rates and certain liquidation and redemption preferences. Each share of
Series A preferred stock was issued with a detachable warrant to
purchase 26 shares of common stock at $.01 per common share. The Series
B preferred stock was convertible to common stock at specified rates.
The shares were convertible at the earlier of three years after the
issuance of the shares, the sale or merger of the Company where Hanover
was not the surviving corporation, or a person or group (as defined)
controlled at least 50% of the total voting power. The Company has
reserved 568,950 common shares for issuance upon exercise of the
warrants.
Accrued dividends on Series A and Series B preferred stock in 1995 of
$568,000 and $264,000, respectively, were paid in shares of Series A
and Series B preferred stock. Accrued dividends in 1996 were $1,368,000
on Series A and $373,000 on Series B preferred stock.
In December 1996, the Company exchanged all of the issued and
outstanding shares of the Series A preferred stock for subordinated
notes. At the exchange date, the fair market value of the subordinated
notes was $21,792,000 and a debt issuance discount of $1,711,000 was
recorded by the Company. The $3,794,000 excess of the fair value of the
subordinated notes over the $17,998,000 recorded for the Series A
preferred stock has been charged to retained earnings.
In December 1996, the Company converted all of the issued and
outstanding shares of the Series B preferred stock into 800,308 shares
of the Company's common stock and paid a conversion premium of
$1,400,000.
F-17
<PAGE> 51
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
Redeemable preferred stock activity is as follows (in thousands):
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED PREFERRED
STOCK STOCK
<S> <C> <C>
Issuance of preferred stock 16,062 10,000
Accrued dividends 568 264
----------- -----------
Balance at December 31, 1995 16,630 10,264
Accrued dividends 1,368 373
Exchange of Series A preferred stock for
subordinated notes (17,998)
Conversion of Series B preferred stock to
common stock (10,637)
----------- -----------
Balance at December 31, 1996 -- --
=========== ===========
</TABLE>
9. COMMON STOCKHOLDERS' EQUITY
NOTES RECEIVABLE-EMPLOYEE STOCKHOLDERS
Under various stock purchase plans, the Company's employees are
eligible to purchase shares of Hanover stock at fair market value in
exchange for cash and/or notes receivable. The notes are secured by the
common stock and the general credit of the employee, bear interest at a
prime rate, and are generally payable on demand or at the end of a
four-year period. The notes have been recorded as a reduction of common
stockholders' equity.
In addition and in connection with the Offering, the Company issued
264,785 shares of common stock to employees at the Offering price of
$19.50 in exchange for employee notes receivable. The notes bear
interest at a prime rate, are secured by the common stock and the
general credit of the employee, and mature in June 2001.
OTHER
As of December 31, 1997, warrants to purchase 568,950 shares of common
stock at $.01 per share were outstanding. The warrants were issued in
connection with the Series A preferred stock and provide for vesting
20% at the time of issuance and, thereafter, increasing incrementally
on a monthly basis over the subsequent three years. At December 31,
1997, 455,160 warrants were vested and expire in August 2005.
In February 1997, Hanover issued 5,152 shares of common stock for cash
to a trust for the benefit of a member of the Company's outside legal
counsel.
See Notes 1, 2, 8 and 10 for a description of other common stock
transactions.
F-18
<PAGE> 52
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
10. STOCK OPTIONS
The Company has employee stock option plans which provide for the
granting of options to purchase common shares. The options are
generally issued at fair market value on the date of grant and are
exercisable over a ten-year period. Vesting of stock options issued
prior to June 1997 was accelerated as a result of completion of the
initial public offering. Accordingly, during 1997 the Company
recognized a charge of $269,000 related to unamortized compensation
expense on options issued at less than fair market value on the date of
grant. During 1996 and 1995, compensation expense of $109,000 and
$47,000 was recognized on options granted at less than fair market
value.
Effective June 30, 1997, 1,015,323 options to purchase common stock
were issued to employees at the Offering price ($19.50). The options
vest over the following schedule, which may be accelerated upon a
change in control.
Year 1 10%
Year 2 30%
Year 3 60%
Year 4 100%
The following is a summary of stock option activity for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES PRICE PER SHARE
<S> <C> <C>
Options outstanding, December 31, 1994 2,133,154 4.65
Options granted 168,270 8.57
Options canceled
Options exercised (6,636) 0.01
---------
Options outstanding, December 31, 1995 2,294,788 4.93
Options granted 105,386 9.03
Options canceled
Options exercised
---------
Options outstanding, December 31, 1996 2,400,174 5.11
---------
Options granted 1,015,323 19.50
Options canceled (1,138) 10.55
Options exercised
---------
Options outstanding, December 31, 1997 3,414,359 9.39
=========
</TABLE>
F-19
<PAGE> 53
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
OPTIONS OUTSTANDING DECEMBER 31, 1997
All options granted prior to December 31, 1996 were exercisable at
December 31, 1997. No options granted under the 1997 plan were
exercisable at December 31, 1997.
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICES SHARES LIFE IN YEARS PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C>
$0.01 - $4.59 1,776,074 5.4 $ 4.46 1,776,074 $ 4.46
$4.60 - $6.96 421,386 5.6 5.33 421,386 5.33
$6.97 - $10.13 130,476 7.6 9.54 130,476 9.54
$10.14 - $13.92 71,100 8.5 11.86 71,100 11.86
$13.93 - $19.50 1,015,323 9.5 19.50
</TABLE>
The weighted average fair value at date of grant for options where the
exercise price equals the market price of the stock on the grant date
was $8.58, $5.54 and $4.03, per option during 1997, 1996 and 1995,
respectively. The weighted average fair values at date of grant for
options where the exercise price does not equal the market price of the
stock on the grant date were $10.54 and $3.98 per option during 1996
and 1995, respectively. The fair value of options at date of grant was
estimated using the Black-Scholes model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Expected life 6 years 10 years 10 years
Interest rate 6.7% 6.3% 5.7%
Volatility 30% 0% 0%
Dividend yield 0% 0% 0%
</TABLE>
Stock-based compensation costs computed in accordance with FAS 123,
would have reduced pretax income by $1,369,000, $237,000 and $52,000 in
1997, 1996 and 1995, respectively. The after-tax impact for 1997, 1996
and 1995, respectively, was $842,000, $156,000 and $34,000 if the fair
value of the options granted in that year had been recognized as
compensation expense on a straight-line basis over the vesting period
of the grant. The pro forma impact on net income would have reduced
basic and diluted earnings per share by $.03 per share in 1997 and by
less than $.01 per share during 1996 and 1995. The pro forma effect on
net income for 1997, 1996 and 1995 is not representative of the pro
forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants
made prior to 1995.
F-20
<PAGE> 54
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
11. BENEFIT PLANS
The Company's 401(k) retirement plan provides for optional employee
contributions up to the IRS limitation and discretionary employer
matching contributions. The Company did not make a matching
contribution for the years ended December 31, 1997, 1996 or 1995.
12. OTHER FINANCIAL INFORMATION
Accrued liabilities comprised the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Accrued salaries and wages $ 801 $ 1,196
Accrued bonuses 1,151 873
Accrued taxes 749 1,010
Accrued other 6,387 5,135
---------- ---------
$ 9,088 $ 8,214
========== =========
</TABLE>
13. RELATED PARTY TRANSACTIONS
Hanover and GKH Partners, L.P., a major stockholder of the Company,
have entered into an agreement whereby in exchange for investment
banking and financial advisory services rendered and to be rendered by
the major stockholder, the Company has agreed to pay a fee to GKH
Partners, L.P. equal to .75% of the equity value of the Company
determined and payable at such time as (1) a disposition of shares of
the Company's common stock resulting in GKH Partners, L.P. owning less
than 25% of the outstanding common stock or (2) any other transaction
occurs resulting in the effective sale of the Company or its business
by the current owners.
In June 1995, several common stockholders of the Company loaned the
Company $12,000,000 at an interest rate of prime plus 5% per annum with
a maturity of March 31, 2002. These loans were repaid in August 1995
through the issuance of Series A preferred stock. This Series A
preferred stock was exchanged in December 1996 for subordinated
promissory notes.
In connection with stock offerings to management, the Company has
received notes from employees for shares purchased. The total amounts
owed to the Company at December 31, 1997 and 1996 are $10,748,000 and
$6,770,000, respectively. Total interest accrued on the loans is
$585,000 and $399,000 as of December 31, 1997 and 1996, respectively.
The Company had a credit agreement with Joint Energy Development
Investments Limited Partnership, a common stockholder, that was repaid
in 1997. Interest expense in 1997, 1996 and 1995 was $1,388,000,
$2,548,000 and $81,900, respectively. The Company also leases
compressors to affiliates of Enron Capital and Trade Resources Corp.,
an affiliate of Joint Energy Development Investments Limited
Partnership. Rentals of $1,034,000, $701,000 and $375,000 were paid by
affiliates of Enron in 1997, 1996 and 1995, respectively.
F-21
<PAGE> 55
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
The Company leases compressors to other companies owned or controlled
by or affiliated with related parties. Rental and maintenance revenues
billed to these related parties totaled $1,035,000, $3,429,000 and
$1,071,000 during 1997, 1996 and 1995, respectively.
See Note 2 for a description of a sale-leaseback transaction with a
related party, Note 8 for a description of redeemable preferred stock
transactions with related parties and Note 9 for a description of
common stock transactions with related parties.
14. COMMITMENTS AND CONTINGENCIES
Rent expense for 1997, 1996 and 1995 was approximately $376,000,
$440,000 and $332,000, respectively. Commitments for future minimum
lease payments are not significant at December 31, 1997.
In the ordinary course of business the Company is involved in various
pending or threatened legal actions. While management is unable to
predict the ultimate outcome of these actions, it believes that any
ultimate liability arising from these actions will not have a material
adverse effect on the Company's consolidated financial position or
operating results.
The Company has no commitments or contingent liabilities which, in the
judgment of management, would result in losses that would materially
affect the Company's consolidated financial position or operating
results.
15. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
The Company has three principal industry segments: Rentals and
Maintenance, Compressor Fabrication and Production Equipment
Fabrication. The Rentals and Maintenance Segment provides natural gas
compression rental and maintenance services to meet specific customer
requirements. The Compressor Fabrication Segment involves the design,
fabrication and sale of natural gas compression units to meet unique
customer specifications. The Production Equipment Fabrication Segment
designs, fabricates and sells equipment utilized in the production of
crude oil and natural gas.
F-22
<PAGE> 56
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------
The following tables present sales and other financial information by
industry segment and geographic region for the years ended December 31,
1997, 1996 and 1995.
INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
(in thousands of dollars) RENTALS PRODUCTION
AND COMPRESSOR EQUIPMENT ELIMINA- CONSOLI-
MAINTENANCE FABRICATION FABRICATION CORPORATE TIONS DATED
<S> <C> <C> <C> <C> <C> <C>
1997:
Sales to unaffiliated
customers $ 110,939 $ 49,764 $ 37,052 $ 1,043 $ 198,798
Intersegment sales 8,975 48,072 462 $ (57,509)
---------- --------- --------- ----------- ----------- ----------
Total revenues 119,914 97,836 37,514 1,043 (57,509) 198,798
Operating income (loss) 30,630 6,351 6,621 (3,457) 40,145
Identifiable assets 458,783 30,088 13,020 4,561 506,452
Capital expenditures 146,085 993 3,917 150,995
Depreciation and
amortization 27,173 554 712 28,439
1996:
Sales to unaffiliated
customers $ 79,355 $ 28,764 $ 26,903 $ 989 $ 136,011
Intersegment sales 3,071 36,851 526 $ (40,448)
---------- --------- --------- ----------- ----------- ----------
Total revenues 82,426 65,615 27,429 989 (40,448) 136,011
Operating income (loss) 21,192 2,300 3,342 (3,015) 23,819
Identifiable assets 299,760 14,550 19,755 7,322 341,387
Capital expenditures 82,156 578 864 83,598
Depreciation and
amortization 19,654 490 578 20,722
1995:
Sales to unaffiliated
customers $ 48,354 $ 29,593 $ 16,960 $ 1,057 $ 95,964
Intersegment sales 3,500 13,384 269 $ (17,153)
---------- --------- --------- ----------- ----------- ----------
Total revenues 51,854 42,977 17,229 1,057 (17,153) 95,964
Operating income (loss) 12,318 2,449 773 (1,868) 13,672
Identifiable assets 224,934 8,927 15,463 2,989 252,313
Capital expenditures 39,423 499 2,525 42,447
Depreciation and
amortization 13,056 291 147 13,494
</TABLE>
F-23
<PAGE> 57
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------
GEOGRAPHIC DATA
<TABLE>
<CAPTION>
(in thousands of dollars) UNITED SOUTH ELIMINA-
STATES AMERICA(1) TIONS CONSOLIDATED
<S> <C> <C> <C> <C>
1997:
Sales to unaffiliated customers $ 176,045 $ 22,753 $ 198,798
Transfers between geographic
areas 22,792 1,200 $ (23,992)
--------- --------- --------- ----------
Total revenue 198,837 23,953 (23,992) 198,798
Operating income (loss) 31,969 8,176 40,145
Identifiable assets 406,602 99,850 506,452
Capital expenditures 114,450 36,545 150,995
Depreciation and amortization 24,527 3,912 28,439
1996:
Sales to unaffiliated customers 124,324 11,687 136,011
Transfers between geographic
areas 6,629 1,200 (7,829)
--------- --------- --------- ----------
Total revenue 130,953 12,887 (7,829) 136,011
Operating income (loss) 20,970 2,849 23,819
Identifiable assets 262,175 79,212 341,387
Capital expenditures 76,996 6,602 83,598
Depreciation and amortization 18,280 2,442 20,722
</TABLE>
Foreign operations for 1995 were not significant.
(1) Primarily consists of operations in Argentina and Venezuela.
Revenues include sales to unaffiliated customers and intersegment
sales. Intersegment sales are accounted for at cost and are eliminated
in consolidation. Operating income represents revenues less operating
expenses and does not include the effect of interest expense and income
taxes. Identifiable assets are those tangible and intangible assets
that are identified with the operations of a particular industry
segment or geographic region, or which are allocated when used jointly.
Corporate assets consist of cash and cash equivalents. Capital
expenditures include fixed asset purchases and assets acquired in
business acquisitions.
No single customer accounts for 10% or more of the Company's revenues.
F-24
<PAGE> 58
HANOVER COMPRESSOR COMPANY
SELECTED QUARTERLY UNAUDITED FINANCIAL DATA
- -------------------------------------------------------------------------------
The table below sets forth selected unaudited financial information for each
quarter of the last two years:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
1996
Revenue $ 25,469 $ 30,434 $ 35,246 $ 44,862
Gross margin 13,029 14,229 15,842 17,880
Net income 2,192 2,195 2,969 3,025
Earnings per common and common
equivalent share: (1)
Basic $ 0.08 $ 0.08 $ 0.12 $ (0.11)
Diluted $ 0.08 $ 0.08 $ 0.11 $ (0.11)
1997
Revenue $ 40,924 $ 49,197 $ 51,467 $ 57,210
Gross margin 19,120 20,617 23,205 26,424
Net income 3,394 3,476 5,137 6,096
Earnings per common and common
equivalent share: (1)
Basic $ 0.15 $ 0.15 $ 0.18 $ 0.22
Diluted $ 0.14 $ 0.14 $ 0.17 $ 0.20
</TABLE>
(1) Earnings per common share reflect adoption of Statement of Financial
Accounting Standard No. 128, "Earnings Per Share."
F-25
<PAGE> 59
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* Amended and Restated By-laws of the Company
3.3* Certificate of Amendment of Certificate of Incorporation of the Company filed March 8, 1996
3.4* Second Certificate of Amendment of Certificate of Incorporation of the Company filed June 24, 1997
4.1* Third Amended and Restated Registration Rights Agreement, dated as of December 5, 1995, among
the Company, GKH Partners, L.P., GKH Investments, L.P., Astra Resources, Inc. and other
stockholders of the Company party thereto
4.10* Form of Warrant Agreement
4.11* Specimen Stock Certificate
4.12* Form of Second Amended and Restated Stockholders Agreement of Hanover Compressor Company dated
as of June, 1997
4.13* Form of Amended and Restated Stockholders Agreement (JEDI) dated as of May, 1997
4.14* Form of Amended and Restated Stockholders Agreement (Westar Capital, Inc.) dated as of May, 1997
4.15* Form of Amended and Restated Stockholders Agreement (HEHC) dated as of May, 1997
10.1* Second Amended and Restated Credit Agreement, dated as of December 19, 1995, by and between
Hanover, The Chase Manhattan Bank (formerly known as Chemical Bank), a New York banking
corporation as Agent and several banks that are parties thereto.
10.2* Loan Agreement, dated as of December 19, 1995, by and between Hanover, Joint Energy Development
Investment Partnership as Agent and several banks that are parties thereto
10.3* Management Fee Letter, dated November 14, 1995 between GKH Partners, L.P. and the Company
10.4*(1) Hanover Compressor Company Senior Executive Stock Option Plan
10.5*(1) 1993 Hanover Compressor Company Management Stock Option Plan
10.6*(1) Hanover Compressor Company Incentive Option Plan
10.7*(1) Amendment and Restatement of Hanover Compressor Company Incentive Option Plan
10.8*(1) Hanover Compressor Company 1995 Employee Stock Option Plan
10.9*(1) Hanover Compressor Company 1995 Management Stock Option Plan
10.10*(1) Hanover Compressor Company 1996 Employee Stock Option Plan
10.11* OEM Sales and Purchase Agreement, between Hanover Compressor Company and the Waukesha Engine
Division of Dresser Industries, Inc.
10.12* Distribution Agreement, dated February 23, 1995, between Ariel Corporation and Maintech
Enterprises, Inc.
10.13* Exclusive Distribution Agreement, dated as of February 23, 1995 by and between Hanover/Smith,
Inc. and Uniglam Resources, Ltd.
</TABLE>
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<TABLE>
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10.14* Lease Agreement with Option to Purchase dated as of February 24, 1995 between Smith Industries,
Incorporated and Hanover/Smith, Inc.
10.15* Lease Agreement, dated December 4, 1990, between Hanover Compressor Company and Ricardo J.
Guerra and Luis J. Guerra as amended
10.16* Lease Agreement, dated as of March 31, 1995 between Hanover Compressor Company and Smith
Industries, Incorporated
10.17* Lease Agreement with Option to Purchase, dated June 8, 1993 between C&M Land Account and
Hanover Compressor Company
10.18* Indemnification Agreement, dated as of December 5, 1995, between Hanover Compressor Company and
Western Resources (formerly Astra Resources, Inc.)
10.19* Put Agreement, dated December 5th, 1995, by and between Western Resources, Inc. (formerly Astra
Resources, Inc.) an Hanover Compressor Company and Hanover Acquisition Corporation (formerly
Astra Resources Compression, Inc.)
10.20* Exchange and Subordinated Loan Agreement dated as of December 23, 1996, among the Company and
GKH Partners, L.P., GK December 23, 1996, among the Company and GKH Partners, L.P., GK
Investments, L.P., IPP95, L.P., Hanna Investment Group, Ott Candies, Inc., Phyllis S. Hojel,
Ted Collins, Jr. and L.O. Ward
10.21* Cooperation Agreement dated January 16, 1997 among the Company, Wartsila and Wartsila
Compression Services, GMBH
10.22* Distributorship Agreement dated January 16, 1997 between the Company and Wartsila Compression
Services
10.23*(1) 1997 Stock Option Plan, as amended
10.24*(1) 1997 Stock Purchase Plan
10.27* Exchange Agreement by and between Hanover Compressor Company and JEDI, dated December 23, 1996
10.30 Credit Agreement, dated as of December 15, 1997, by and between the Company, The Chase Manhattan
Bank, a New York banking corporation as Administrative Agent and several banks and other
financial institutions that are parties thereto
10.31 Subsidiaries'Guarantee, dated as of December 15, 1997, by certain of the Company's subsidiaries
in favor of The Chase Manhattan Bank, as agent
21.1* List of Subsidiaries
27.1 Financial Data Schedule
</TABLE>
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* Incorporated by reference to [the corresponding numbered
Exhibit] to the Registration Statement (File No. 333-27953)
on Form S-1, as amended, filed by Hanover Compressor Company
under the Securities Act of 1933, as amended.
(1) Compensatory plan or arrangement required to be filed.
<PAGE> 1
EXECUTION COPY
--------------
EXHIBIT 10.30
================================================================================
$200,000,000
CREDIT AGREEMENT
among
HANOVER COMPRESSOR COMPANY,
THE CHASE MANHATTAN BANK
as ADMINISTRATIVE AGENT,
and
THE SEVERAL LENDERS PARTIES HERETO
Dated as of December 15, 1997
================================================================================
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TABLE OF CONTENTS
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SECTION 1. DEFINITIONS......................................................................................... 1
1.1 Defined Terms..................................................................................... 1
1.2 Other Definitional Provisions..................................................................... 17
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS..................................................................... 17
2.1 Revolving Credit Commitments...................................................................... 17
2.2 Revolving Credit Notes............................................................................ 17
2.3 Procedure for Revolving Credit Borrowing.......................................................... 18
SECTION 3. INTEREST RATE PROVISIONS, FEES,
3.1 Interest Rates and Payments Dates................................................................. 19
3.2 Commitment Fee; Other Fees and Compensation....................................................... 19
3.3 Termination or Reduction of the Commitments....................................................... 19
3.4 Optional Prepayments and other Repayments......................................................... 20
3.5 Conversion and Continuation Options............................................................... 20
3.6 Minimum Amounts................................................................................... 21
3.7 Computation of Interest and Fees.................................................................. 21
3.8 Inability to Determine Interest Rate.............................................................. 21
3.9 Pro Rata Treatment and Payments................................................................... 22
3.10 Illegality........................................................................................ 23
3.11 Requirements of Law............................................................................... 23
3.12 Taxes............................................................................................. 24
3.13 Indemnity......................................................................................... 25
3.14 Replacement of Lenders............................................................................ 26
SECTION 4. LETTERS OF CREDIT................................................................................... 26
4.1. L/C Commitment.................................................................................... 26
4.2. Procedure for Issuance of Letters of Credit....................................................... 27
4.3. Fees, Commissions and Other Charges............................................................... 27
4.4. L/C Participations................................................................................ 28
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4.5. Reimbursement Obligation of HCC.................................................................. 29
4.6. Obligations Absolute............................................................................. 29
4.7. Letter of Credit Payments........................................................................ 30
4.8. Application...................................................................................... 30
SECTION 5. REPRESENTATIONS AND WARRANTIES..................................................................... 30
5.1 Financial Condition.............................................................................. 30
5.2 No Change........................................................................................ 31
5.3 Corporate Existence; Compliance with Law......................................................... 31
5.4 Corporate Power; Authorization; Enforceable Obligations.......................................... 31
5.5 No Legal Bar..................................................................................... 32
5.6 No Material Litigation........................................................................... 32
5.7 No Default....................................................................................... 32
5.8 Ownership of Property; Liens; Leases of Equipment................................................ 32
5.9 Intellectual Property............................................................................ 33
5.10 Taxes............................................................................................ 33
5.11 Federal Regulations.............................................................................. 33
5.12 ERISA............................................................................................ 33
5.13 Investment Company Act; Other Regulations........................................................ 34
5.14 Subsidiaries..................................................................................... 34
5.15 Purpose of Loans................................................................................. 34
5.16 Environmental Matters............................................................................ 34
5.17 Accuracy and Completeness of Information......................................................... 35
SECTION 6. CONDITIONS PRECEDENT............................................................................... 35
6.1 Conditions to the Initial Extensions of Credit................................................... 35
6.2 Conditions to Each Extension of Credit........................................................... 38
SECTION 7. AFFIRMATIVE COVENANTS.............................................................................. 39
7.1 Financial Statements............................................................................. 39
7.2 Certificates; Other Information.................................................................. 40
7.3 Payment of Obligations........................................................................... 41
7.4 Conduct of Business and Maintenance of Existence................................................. 41
7.5 Maintenance of Property; Insurance............................................................... 41
7.6 Inspection of Property; Books and Records; Discussions........................................... 41
7.7 Notices.......................................................................................... 41
7.8 Environmental Laws............................................................................... 42
7.9 Subsequent Guarantees............................................................................ 43
SECTION 8. NEGATIVE COVENANTS................................................................................. 43
8.1 Financial Condition Covenants.................................................................... 43
8.2 Limitation on Indebtedness....................................................................... 44
8.3 Limitation on Liens.............................................................................. 45
8.4 Limitation on Guarantee Obligations.............................................................. 47
8.5 Limitations on Fundamental Changes............................................................... 47
8.6 Limitation on Sale or Lease of Assets............................................................ 48
8.7 Limitation on Leases............................................................................. 49
8.8 Limitation on Dividends.......................................................................... 49
</TABLE>
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8.9 Limitation on Derivatives........................................................................ 49
8.10 Limitation on Investments, Loans and Advances.................................................... 49
8.11 Limitation on Optional Payments and Modifications of Debt Instruments............................ 50
8.12 Transactions with Affiliates..................................................................... 51
8.13 Sale and Leaseback............................................................................... 51
8.14 Corporate Documents.............................................................................. 51
8.15 Fiscal Year...................................................................................... 51
8.16 Nature of Business............................................................................... 51
8.17 Unqualified Subsidiaries......................................................................... 51
SECTION 9. EVENTS OF DEFAULT................................................................................... 51
SECTION 10. THE ADMINISTRATIVE AGENT............................................................................ 54
10.1 Appointment...................................................................................... 54
10.2 Delegation of Duties............................................................................. 55
10.3 Exculpatory Provisions........................................................................... 55
10.4 Reliance by Administrative Agent................................................................. 55
10.5 Notice of Default................................................................................ 55
10.6 Non-Reliance on Administrative Agent and Other Lenders........................................... 56
10.7 Indemnification.................................................................................. 56
10.8 Administrative Agent in Its Individual Capacity.................................................. 57
10.9 Successor Administrative Agent................................................................... 57
SECTION 11. MISCELLANEOUS...................................................................................... 57
11.1 Amendments and Waivers........................................................................... 57
11.2 Notices 58
11.3 No Waiver; Cumulative Remedies................................................................... 59
11.4 Survival of Representations and Warranties....................................................... 59
11.5 Payment of Expenses and Taxes.................................................................... 59
11.6 Successors and Assigns; Participations; Purchasing Lenders....................................... 60
11.7 Adjustments; Set-off............................................................................. 63
11.8 Counterparts..................................................................................... 64
11.9 Severability..................................................................................... 64
11.10 Integration...................................................................................... 64
11.11 GOVERNING LAW.................................................................................... 64
11.12 Submission To Jurisdiction; Waivers.............................................................. 64
11.13 Acknowledgements................................................................................. 65
11.14 WAIVERS OF JURY TRIAL............................................................................ 65
11.15 Usury............................................................................................ 65
</TABLE>
<PAGE> 5
Schedules
Schedule I Lenders and Commitments
Schedule II Subsidiaries
Schedule III Material Transactions
Schedule IV Material Changes
Schedule V Required Consents
Schedule VI Sale and Leaseback Transactions
Schedule VII Forms of Compressor and Production
Equipment Leases
Schedule VIII Intentionally Left Blank
Schedule IX Environmental
Schedule X Existing Indebtedness
Schedule XI Existing Liens
Schedule XII Additional Existing Liens
Schedule XIII Affiliate Transactions
Exhibits
Exhibit A Form of Revolving Credit Note
Exhibit B Subsidiaries' Guarantee
Exhibit C-1 Opinion of Neal, Gerber & Eisenberg
Exhibit C-2 Opinion of Vinson & Elkins
Exhibit D Form of Assignment and Acceptance
-iv-
<PAGE> 6
CREDIT AGREEMENT, dated as of December 15, 1997 (this
"Agreement") among Hanover Compressor Company, a Delaware corporation ("HCC"),
the several banks and other financial institutions from time to time parties to
this Agreement (the "Lenders") and The Chase Manhattan Bank, a New York banking
corporation (formerly known as Chemical Bank), as agent for the Lenders
hereunder (in such capacity, the "Administrative Agent").
The parties hereto agree as follows:
1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following
terms shall have the following meanings:
"ABR": for any day, a rate per annum (rounded upwards, if
necessary, to the next 1/16 of 1%) equal to the greatest of (a) the
Prime Rate in effect on such day, (b) the Base CD Rate in effect on
such day plus 1% and (c) the Federal Funds Effective Rate in effect on
such day plus 1/2 of 1%. For purposes hereof: "Prime Rate" shall mean
the rate of interest per annum publicly announced from time to time by
Chase as its prime rate in effect at its principal office in New York
City (the Prime Rate not being intended to be the lowest rate of
interest charged by Chase in connection with extensions of credit to
debtors); "Base CD Rate" shall mean the sum of (a) the product of (i)
the Three-Month Secondary CD Rate and (ii) a fraction, the numerator of
which is one and the denominator of which is one minus the C/D Reserve
Percentage and (b) the C/D Assessment Rate; "Three-Month Secondary CD
Rate" shall mean, for any day, the secondary market rate for
three-month certificates of deposit reported as being in effect on such
day (or, if such day shall not be a Business Day, the next preceding
Business Day) by the Board of Governors of the Federal Reserve System
(the "Board") through the public information telephone line of the
Federal Reserve Lender of New York (which rate will, under the current
practices of the Board, be published in Federal Reserve Statistical
Release H.15(519) during the week following such day), or, if such rate
shall not be so reported on such day or such next preceding Business
Day, the average of the secondary market quotations for three-month
certificates of deposit of major money center banks in New York City
received at approximately 10:00 A.M., New York City time, on such day
(or, if such day shall not be a Business Day, on the next preceding
Business Day) by the Administrative Agent from three New York City
negotiable certificate of deposit dealers of recognized standing
selected by it; and "Federal Funds Effective Rate" shall mean, for any
day, the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by
federal funds brokers, as published on the next succeeding Business Day
by the Federal Reserve Lender of New York, or, if such rate is not so
published for any day which is a Business Day, the average of the
quotations for the day of such transactions received by the
Administrative Agent from three federal funds brokers of recognized
standing selected by it. If for any reason the Administrative Agent
shall have determined (which determination shall be conclusive absent
manifest error) that it is unable to ascertain the Base CD Rate or the
Federal Funds
<PAGE> 7
2
Effective Rate, or both, for any reason, including the inability or
failure of the Administrative Agent to obtain sufficient quotations in
accordance with the terms thereof, the ABR shall be determined without
regard to clause (b) or (c), or both, of the first sentence of this
definition, as appropriate, until the circumstances giving rise to such
inability no longer exist. Any change in the ABR due to a change in the
Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds
Effective Rate shall be effective as of the opening of business on the
effective day of such change in the Prime Rate, the Three-Month
Secondary CD Rate or the Federal Funds Effective Rate, respectively.
"ABR Loans": Loans the rate of interest applicable to which is
based upon the ABR.
"Affiliate": as to any Person, any other Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is
controlled by, or is under common control with, such Person. For
purposes of this definition, "control" of a Person means the power,
directly or indirectly, either to (a) vote 30% or more of the
securities having ordinary voting power for the election of directors
of such Person or (b) direct or cause the direction of the management
and policies of such Person, whether by contract or otherwise.
"Aggregate Outstanding Extensions of Credit": as to any Lender
at any time, an amount equal to the sum of (a) the aggregate principal
amount of all Loans made by such Lender then outstanding and (b) such
Lender's Commitment Percentage of the L/C Obligations then outstanding.
"Agreement": this Credit Agreement, as amended, supplemented
or otherwise modified from time to time.
"Applicable Commitment Fee Rate": for each day, the rate per
annum set forth below:
(a) if the Applicable Margin Certificate required pursuant to
subsection 7.2(f) for any fiscal quarter of HCC shows that the
Consolidated Indebtedness Ratio on the last day of such fiscal quarter
was less than or equal to 1.0 to 1, then the Commitment Fee for the
fiscal quarter of HCC immediately preceding the date such certificate
is delivered shall be .1875%;
(b) if the Applicable Margin Certificate required pursuant to
subsection 7.2(f) for any fiscal quarter of HCC shows that the
Consolidated Indebtedness Ratio on the last day of such fiscal quarter
was greater than 1.0 to 1 and less than or equal to 2.0 to 1, then the
Commitment Fee for the fiscal quarter of HCC immediately preceding the
date such certificate is delivered shall be .250%;
<PAGE> 8
3
(c) if the Applicable Margin Certificate required pursuant to
subsection 7.2(f) for any fiscal quarter of HCC shows that the
Consolidated Indebtedness Ratio on the last day of such fiscal quarter
was greater than 2.0 to 1 and less than or equal to 4.0 to 1, then the
Commitment Fee for the fiscal quarter of HCC immediately preceding the
date such certificate is delivered shall be .300%; and
(d) if the Applicable Margin Certificate required pursuant to
subsection 7.2(f) for any fiscal quarter of HCC shows that the
Consolidated Indebtedness Ratio on the last day of such fiscal quarter
was greater than 4.0 to 1 then the Applicable Margin for the fiscal
quarter of HCC immediately preceding the date such certificate is
delivered shall be .375%;
provided, that if HCC shall fail to deliver the Applicable Margin
Certificate by the end of the fiscal quarter in which it is required,
the Applicable Commitment Fee Rate for the next fiscal quarter shall be
as provided in clause (d) above.
"Applicable Margin": for each Loan, the rate per annum set
forth below:
(a) if the Applicable Margin Certificate required pursuant to
subsection 7.2(f) for any fiscal quarter of HCC shows that the
Consolidated Indebtedness Ratio on the last day of such fiscal quarter
was less than or equal to 1.0 to 1, then the Applicable Margin for the
fiscal quarter of HCC immediately succeeding the date such certificate
is delivered shall be (i) with respect to ABR Loans, 0% and (ii) with
respect to Eurodollar Loans, .500%; and
(b) if the Applicable Margin Certificate required pursuant to
subsection 7.2(f) for any fiscal quarter of HCC shows that the
Consolidated Indebtedness Ratio on the last day of such fiscal quarter
was greater than 1.0 to 1 and less than or equal to 2.0 to 1, then the
Applicable Margin for the fiscal quarter of HCC immediately succeeding
the date such certificate is delivered shall be (i) with respect to ABR
Loans, 0% and (ii) with respect to Eurodollar Loans, .750%;
(c) if the Applicable Margin Certificate required pursuant to
subsection 7.2(f) for any fiscal quarter of HCC shows that the
Consolidated Indebtedness Ratio on the last day of such fiscal quarter
was greater than 2.0 to 1 and less than or equal to 3.0 to 1, then the
Applicable Margin for the fiscal quarter of HCC immediately succeeding
the date such certificate is delivered shall be (i) with respect to ABR
Loans, .250% and (ii) with respect to Eurodollar Loans, 1.000%;
(d) if the Applicable Margin Certificate required pursuant to
subsection 7.2(f) for any fiscal quarter of HCC shows that the
Consolidated Indebtedness Ratio on the last day of such fiscal quarter
was greater than 3.0 to 1 and less than or equal to 4.0 to 1, then the
Applicable Margin for the fiscal quarter of HCC immediately succeeding
the date such
<PAGE> 9
4
certificate is delivered shall be (i) with respect to ABR Loans,
.250% and (ii) with respect to Eurodollar Loans, 1.250%; and
(e) if the Applicable Margin Certificate required pursuant to
subsection 7.2(f) for any fiscal quarter of HCC shows that the
Consolidated Indebtedness Ratio on the last day of such fiscal quarter
was greater than 4.0 to 1, then the Applicable Margin for the fiscal
quarter of HCC immediately succeeding the date such certificate is
delivered shall be (i) with respect to ABR Loans, .500% and (ii) with
respect to Eurodollar Loans, 1.500%;
provided, that if HCC shall fail to deliver the Applicable Margin
Certificate by the end of the fiscal quarter in which it is required,
the Applicable Margin for the next fiscal quarter shall be as provided
in clause (e) above.
"Applicable Margin Certificate": as defined in subsection
7.2(f).
"Application": an application, in such form as the Issuing
Lender may specify from time to time, requesting the Issuing Lender to
open a Letter of Credit.
"Available Commitment": as to any Lender, at any time, an
amount equal to the excess, if any, of (a) such Lender's Commitment
over (b) such Lender's Aggregate Outstanding Extensions of Credit.
"benefitted Lender": as defined in subsection 11.7(a).
"Borrowing Date": any Business Day specified in a notice
pursuant to subsection 2.3, as a date on which HCC requests the Lenders
to make Loans hereunder.
"Business Day": a day other than a Saturday, Sunday or other
day on which commercial banks in New York City are authorized or
required by law to close.
"Capital Stock": any and all shares, interests, participations
or other equivalents (however designated) of capital stock of a
corporation, any and all equivalent ownership interests in a Person
(other than a corporation) and any and all warrants or options to
purchase any of the foregoing.
"Cash Equivalents": (a) securities with maturities of one year
or less from the date of acquisition issued or fully guaranteed or
insured by the United States Government or any agency thereof, (b)
certificates of deposit and eurodollar time deposits with maturities of
one year or less from the date of acquisition and overnight bank
deposits of any Lender or of any commercial bank having capital and
surplus in excess of $500,000,000, (c) repurchase obligations of any
Lender or of any commercial bank satisfying the requirements of clause
(b) of this definition, having a term of not more than 30 days with
respect to securities issued or fully guaranteed or insured by the
United States Government, (d) commercial paper of a domestic issuer
rated at least A-2 by
<PAGE> 10
5
Standard and Poor's Rating Group ("S&P") or P-2 by Moody's Investors
Services, Inc. ("Moody's"), (e) securities with maturities of one year
or less from the date of acquisition issued or fully guaranteed by any
state, commonwealth or territory of the United States, by any political
subdivision or taxing authority of any political subdivision or taxing
authority of any such state, commonwealth or territory or any foreign
government, the securities of which state, commonwealth, territory,
political subdivision, taxing authority or foreign government (as the
case may be) are rated at least A by S&P or A by Moody's, (f)
securities with maturities of one year or less from the date of
acquisition backed by standby letters of credit issued by any Lender or
any commercial bank satisfying the requirements of clause (b) of this
definition or (g) shares of money market mutual or similar funds which
invest exclusively in assets satisfying the requirements of clauses (a)
through (f) of this definition.
"C/D Assessment Rate": for any day the net annual assessment
rate (rounded upwards, if necessary, to the next 1/100 of 1%)
determined by Chase to be payable on such day to the Federal Deposit
Insurance Corporation or any successor ("FDIC") for FDIC's insuring
time deposits made in Dollars at offices of Chase in the United States.
"C/D Reserve Percentage": for any day as applied to any
calculation of the Base CD Rate, that percentage (expressed as a
decimal) which is in effect on such day, as prescribed by the Board for
determining the maximum reserve requirement for a Depositary
Institution (as defined in Regulation D of the Board) in respect of new
non-personal time deposits in Dollars having a maturity of 30 days or
more.
"Chase": The Chase Manhattan Bank, a New York banking
corporation.
"Closing Date": the date on which all of the conditions
precedent specified in Section 6 shall have been first satisfied.
"Code": the Internal Revenue Code of 1986, as amended from
time to time.
"Commercial Letter of Credit": as defined in subsection
4.1(b)(i)(2).
"Commitment": as to any Lender, the obligation of such Lender
to make Loans to and/or issue or participate in Letters of Credit
issued on behalf of HCC hereunder in an aggregate principal and/or face
amount at any one time outstanding not to exceed the amount set forth
opposite such Lender's name on Schedule I, as such amount may be
reduced from time to time in accordance with the terms of this
Agreement; collectively, as to all of the Lenders, the "Commitments".
"Commitment Percentage": as to any Lender at any time, the
percentage of the aggregate Commitments then constituted by such
Lender's Commitment.
<PAGE> 11
6
"Commitment Period": the period from and including the date
hereof to but not including the Final Maturity Date or such earlier
date on which the Commitments shall terminate as provided herein.
"Commonly Controlled Entity": an entity, whether or not
incorporated, which is under common control with HCC within the meaning
of Section 4001(a)(14) of ERISA or is part of a group which includes
HCC and which is treated as a single employer under Section 414 of the
Code.
"Consolidated Capitalization": at a particular date, as to any
Person, the sum of (a) Consolidated Net Worth and (b) the amount of
Consolidated Indebtedness at such date.
"Consolidated Earnings Before Interest and Taxes": for any
period, with respect to any Person, the sum of (a) Consolidated Net
Income for such period, (b) all amounts attributable to provision for
taxes measured by income (to the extent that such amounts have been
deducted in determining Consolidated Net Income for such period) and
(c) Consolidated Interest Expense for such period.
"Consolidated EBITDA": for any period, with respect to any
Person, the sum of (a) Consolidated Earnings Before Interest and Taxes
for such Person for such period plus, (b) all amounts attributable to
depreciation and amortization, determined in accordance with GAAP (to
the extent such amounts have been deducted in determining Consolidated
Earnings Before Interest and Taxes for such period) plus, (c) all
amounts classified as extraordinary charges for such period (to the
extent such amounts have been deducted in determining Consolidated
Earnings Before Interest and Taxes for such period) minus, (d) all
amounts classified as extraordinary income for such period (to the
extent such amounts have been included in determining Consolidated
Earnings Before Interest and Taxes for such period).
"Consolidated Fixed Charges": for any period as to any Person,
such Person's scheduled principal payments on Indebtedness during such
period (other than scheduled principal payments under revolving credit
facilities of such Person during such period resulting from the
maturity of such revolving credit facilities to the extent such
scheduled principal payments have been extended, renewed, rearranged,
or refinanced under revolving credit facilities maturing beyond such
period) plus Consolidated Interest Expense during such period, plus
Consolidated Mandatory Capital Expenditures during such period, plus
scheduled preferred stock dividend payments during such period, if any,
determined on a consolidated basis in accordance with GAAP.
"Consolidated Indebtedness": at a particular date, as to any
Person, all Indebtedness of such Person and its Subsidiaries other than
Indebtedness in respect of Financing Leases, determined on a
consolidated basis in accordance with GAAP at such date.
<PAGE> 12
7
"Consolidated Indebtedness Ratio": for any fiscal quarter of
HCC and its Subsidiaries, the ratio of (a) Consolidated Indebtedness
for HCC and its Subsidiaries as of the last day of such fiscal quarter
to (b) Consolidated EBITDA for HCC and its Subsidiaries for the
12-month period ended on the last day of such fiscal quarter as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense": for any period, with respect
to any Person, the amount which, in conformity with GAAP, would be set
forth opposite the caption "interest expense" or any like caption
(including, without limitation, imputed interest included in Financing
Lease payments) on a consolidated income statement of such Person and
its Subsidiaries for such period.
"Consolidated Lease Expense": for any period as to any Person,
the aggregate rental obligations of such Person and its Subsidiaries
determined on a consolidated basis payable in respect of such period
under leases of real and/or personal property (net of income from
sub-leases thereof, but including taxes, insurance, maintenance and
similar expenses which the lessee is obligated to pay under the terms
of said leases), whether or not such obligations are reflected as
liabilities or commitments on a consolidated balance sheet of such
Person and its Subsidiaries or in the notes thereto, and whether or not
such leases constitute Financing Leases.
"Consolidated Mandatory Capital Expenditures": for any period
as to any Person, the capital expenditures of such Person made in the
ordinary course of business for the maintenance of equipment which
extends the useful life of such equipment (other than expenditures made
in connection with the initial refurbishing of used equipment acquired
by HCC or its Subsidiaries) and are or should be capitalized on the
balance sheet of such Person determined on a consistent basis in
accordance with GAAP.
"Consolidated Net Income": for any period as to any Person,
the consolidated net income (or loss) of such Person and its
Subsidiaries, determined on a consolidated basis in accordance with
GAAP.
"Consolidated Net Worth": at a particular date, as to any
Person, the amount which would be included under stockholders' equity
on a consolidated balance sheet of such Person and its Subsidiaries
determined on a consolidated basis in accordance with GAAP.
"Consolidated U.S. EBITDA": for any period, with respect to
the U.S. EBITDA Companies, the sum of (a) Consolidated Earnings Before
Interest and Taxes for the U.S. EBITDA Companies for such period, plus,
(b) all amounts attributable to depreciation and amortization,
determined in accordance with GAAP (to the extent such amounts have
been deducted in determining Consolidated Earnings Before Interest and
Taxes of the U.S. EBITDA Companies for such period) plus, (c) all
amounts classified as
<PAGE> 13
8
extraordinary charges for such period (to the extent such amounts have
been deducted in determining Consolidated Earnings Before Interest and
Taxes of the U.S. EBITDA Companies for such period) minus, (d) all
amounts classified as extraordinary income for such period (to the
extent such amounts have been included in determining Consolidated
Earnings Before Interest and Taxes of the U.S. EBITDA Companies for
such period).
"Contractual Obligation": as to any Person, any provision of
any security issued by such Person or of any agreement, instrument or
other undertaking to which such Person is a party or by which it or any
of its property is bound.
"Credit Parties": the collective reference to (i) HCC, HMI,
Hanover/Smith and the Real Estate Subsidiary and (ii) from time to time
any other Subsidiary of HCC upon and for so long as such Subsidiary
guarantees the Loans and other obligations of HCC hereunder and under
the Notes, and which guarantees shall be under documents substantially
similar to the Guarantees executed on the Closing Date.
"Current Ratio": at a particular date, for HCC and its
Subsidiaries the quotient of the consolidated current assets of HCC and
its Subsidiaries at such time, to the consolidated current liabilities
of HCC and its Subsidiaries at such time less the current portion of
long-term debt (all determined in accordance with GAAP at such time).
"Default": any of the events specified in Section 9, whether
or not any requirement for the giving of notice, the lapse of time, or
both, or any other condition, has been satisfied.
"Derivatives": any swap, hedge, cap, collar, or similar
arrangement providing for the exchange of risks related to price
changes in any commodity, including money.
"Dollars" and "$": dollars in lawful currency of the United
States of America.
"Environmental Laws": any and all Federal, state, local or
municipal laws, rules, orders, regulations, statutes, ordinances,
codes, decrees or requirements of any Governmental Authority
regulating, relating to or imposing liability or standards of conduct
concerning environmental protection matters, including without
limitation, Hazardous Materials, as now or may at any time hereafter be
in effect.
"ERISA": the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"Eurocurrency Reserve Requirements": for any day as applied to
a Eurodollar Loan, the aggregate (without duplication) of the rates
(expressed as a decimal fraction) of reserve requirements in effect on
such day (including, without limitation, basic, supplemental, marginal
and emergency reserves under any regulations of the Board of Governors
of the Federal Reserve System or other Governmental Authority having
<PAGE> 14
9
jurisdiction with respect thereto) dealing with reserve requirements
prescribed for eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of such Board) maintained by
a member bank of such System.
"Eurodollar Base Rate": with respect to each day during each
Interest Period pertaining to a Eurodollar Loan, the rate per annum
equal to the rate at which Chase is offered Dollar deposits at or about
10:00 A.M., New York City time, two Business Days prior to the
beginning of such Interest Period in the interbank eurodollar market
where the eurodollar and foreign currency and exchange operations in
respect of its Eurodollar Loans are then being conducted for delivery
on the first day of such Interest Period for the number of days
comprised therein and in an amount comparable to the amount of its
Eurodollar Loan to be outstanding during such Interest Period.
"Eurodollar Loans": Loans the rate of interest applicable to
which is based upon the Eurodollar Rate.
"Eurodollar Rate": with respect to each day during each
Interest Period pertaining to a Eurodollar Loan, a rate per annum
determined for such day in accordance with the following formula
(rounded upward to the nearest 1/100th of 1%):
Eurodollar Base Rate
------------------------
1.00 - Eurocurrency Reserve Requirements
"Event of Default": any of the events specified in Section 9,
provided that any requirement for the giving of notice, the lapse of
time, or both, or any other condition, has been satisfied.
"Existing Agreement": the Second Amended and Restated Credit
Agreement, dated as of December 19, 1995, as amended prior to the date
hereof, among HCC, the banks party thereto and The Chase Manhattan
Bank, as Agent.
"Final Maturity Date": December 15, 2002.
"Financing Lease": any lease of property, real or personal,
the obligations of the lessee in respect of which are required in
accordance with GAAP to be capitalized on a balance sheet of the
lessee.
"GAAP": generally accepted accounting principles in the United
States of America consistent with those utilized in preparing the
audited financial statements referred to in subsection 6.1.
<PAGE> 15
10
"Governmental Authority": any nation or government, any state
or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Guarantee Obligation": as to any Person (the "guaranteeing
person"), any obligation of (a) the guaranteeing person or (b) another
Person (including without limitation, any bank under any letter of
credit) to induce the creation of which the guaranteeing person has
issued a reimbursement, counter indemnity or similar obligation, in
either case guaranteeing or in effect guaranteeing any Indebtedness,
leases, dividends or other obligations (the "primary obligations") of
any other third Person (the "primary obligor") in any manner, whether
directly or indirectly, including, without limitation, any obligation
of the guaranteeing Person, whether or not contingent, (a) to purchase
any such primary obligation or any property constituting direct or
indirect security therefor, (b) to advance or supply funds (i) for the
purchase or payment of any such primary obligation or (ii) to maintain
working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency of the primary obligor, (c) to
purchase property, securities or services primarily for the purpose of
assuring the owner of any such primary obligation of the ability of the
primary obligor to make payment of such primary obligation or (d)
otherwise to assure or hold harmless the owner of any such primary
obligation against loss in respect thereof; provided, however, that the
term Guarantee Obligation shall not include endorsements of instruments
for deposit or collection in the ordinary course of business. The
amount of any Guarantee Obligation of any guaranteeing person shall be
deemed to be the lower of (a) an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Guarantee Obligation is made and (b) the maximum amount for which such
guaranteeing person may be liable pursuant to the terms of the
instrument embodying such Guarantee Obligation, unless such primary
obligation and the maximum amount for which such guaranteeing person
may be liable are not stated or determinable, in which case the amount
of such Guarantee Obligation shall be such guaranteeing person's
maximum reasonably anticipated liability in respect thereof as
determined by HCC, as the case may be, in good faith.
"Guarantees": collectively, the Subsidiaries' Guarantee and
such other guarantees of the Loans and the other obligations of HCC
hereunder.
"Hanover Acquisition": Hanover Acquisition Corp., a Texas
corporation.
"Hanover/Smith": Hanover/Smith, Inc., a Delaware corporation.
"Hazardous Materials": any hazardous materials, hazardous
waste, hazardous constituents, hazardous or toxic substances, petroleum
products (including crude oil or any fraction thereof), defined or
regulated as such in or under any Environmental Law, including, without
limitation, polychlorinated biphenyls.
<PAGE> 16
11
"HMI": Hanover Maintech, Inc. (f/k/a Maintech Enterprises,
Inc.), a Texas corporation.
"Indebtedness": of any Person at any date, (a) all
indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services (other than current liabilities
incurred in the ordinary course of business and payable in accordance
with customary trade practices) or which is evidenced by a note, bond,
debenture or similar instrument, (b) all obligations of such Person
under Financing Leases, (c) all obligations of such Person in respect
of acceptances issued or created for the account of such Person, and
(d) all liabilities secured by any Lien (other than any lien of a type
described in subsection 8.3(a) through (j) on any property owned by
such Person even though such Person has not assumed or otherwise become
liable for the payment thereof.
"indemnified liabilities": as defined in subsection 11.5.
"Insolvency": with respect to any Multiemployer Plan, the
condition that such Plan is insolvent within the meaning of Section
4245 of ERISA.
"Insolvent": pertaining to a condition of Insolvency.
"Intellectual Property": as defined in subsection 5.9.
"Interest Payment Date": (a) as to any ABR Loan, the last day
of each March, June, September and December to occur while such Loan is
outstanding, (b) as to any Eurodollar Loan having an Interest Period of
three months or less the last day of such Interest Period, and (c) as
to any Eurodollar Loan having an Interest Period longer than three
months, each day which is three months or a whole multiple thereof,
after the first day of such Interest Period and the last day of such
Interest Period.
"Interest Period": with respect to any Eurodollar Loan:
(a) initially, the period commencing on the borrowing
or conversion date, as the case may be, with respect to such
Eurodollar Loan and ending one, two, three or six months
thereafter, as selected by HCC in its notice of borrowing or
notice of conversion, as the case may be, given with respect
thereto; and
(b) thereafter, each period commencing on the last
day of the next preceding Interest Period applicable to such
Eurodollar Loan and ending one, two, three or six months
thereafter, as selected by HCC by irrevocable notice to the
Administrative Agent not less than three Working Days prior to
the last day of the then current Interest Period with respect
thereto;
provided that, all of the foregoing provisions relating to the
Interest Periods are subject to the following:
<PAGE> 17
12
(i) if an Interest Period pertaining to a
Eurodollar Loan would otherwise end on a day that is
not a Working Day, such Interest Period shall be
extended to the next succeeding Working Day unless
the result of such extension would be to carry such
Interest Period into another calendar month in which
event such Interest Period shall end on the
immediately preceding Working Day;
(ii) any Interest Period that would
otherwise extend beyond the Final Maturity Date shall
end on the Final Maturity Date;
(iii) any Interest Period pertaining to a
Eurodollar Loan that begins on the last Working Day
of a calendar month (or on a day for which there is
no numerically corresponding day in the calendar
month at the end of such Interest Period) shall end
on the last Working Day of a calendar month; and
(iv) HCC shall select Interest Periods so as
not to require a payment or prepayment of any
Eurodollar Loan during an Interest Period for such
Loan.
"Investments": as defined in subsection 8.10.
"Issuing Lender": Chase, in its capacity as issuer of any
Letter of Credit.
"L/C Commitment": $25,000,000.
"L/C Fee Payment Date": the last day of each March, June,
September and December.
"L/C Obligations": at any time, an amount equal to the sum of
(a) the aggregate then undrawn and unexpired amount of the then
outstanding Letters of Credit and (b) the aggregate amount of drawings
under Letters of Credit which have not then been reimbursed pursuant to
subsection 4.5(a).
"L/C Participants": the collective reference to all the
Lenders other than the Issuing Lender.
"Letters of Credit": as defined in paragraph 4.1(a).t
"Lien": any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), or
preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including, without
limitation, any conditional sale or other title retention agreement,
any Financing Lease
<PAGE> 18
13
having substantially the same economic effect as any of the foregoing,
and the filing of any financing statement under the Uniform Commercial
Code or comparable law of any jurisdiction in respect of any of the
foregoing).
"Loan": any loan made by any Lender pursuant to this
Agreement.
"Loan Documents": this Agreement, the Revolving Credit Notes,
the Applications and the Guarantees.
"Majority Lenders": at any time, Lenders the Commitment
Percentages of which aggregate more than 50%.
"Material Adverse Effect": a material adverse effect on (a)
the business, operations, property or condition (financial or
otherwise) of HCC and its Subsidiaries taken as a whole, (b) the
ability of HCC or any of the Subsidiaries of HCC to perform their
respective obligations under this Agreement, the Notes, or the
Guarantees, or (c) the validity or enforceability of this Agreement or
any of the Notes or any Application or the rights or remedies of the
Administrative Agent or the Lenders hereunder or thereunder.
"Material Subsidiary": at any particular date, each Subsidiary
of HCC for which the aggregate value of all assets owned by such
Subsidiary is greater than $5,000,000.
"Multiemployer Plan": a Plan which is a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
"Non-Recourse Indebtedness": Indebtedness (i) as to which
neither HCC nor any of its Qualified Subsidiaries (a) provides any
guarantee or credit support of any kind (including any undertaking,
guarantee, indemnity, agreement or instrument that would constitute
Indebtedness), or (b) is directly or indirectly liable (as guarantor or
otherwise) and (ii) the explicit terms of which provide that there is
no recourse against any of the assets of HCC or its Qualified
Subsidiaries (other than the Capital Stock of an Unqualified
Subsidiary) or that recourse is limited to assets which do not include
the assets of HCC or its Qualified Subsidiaries (other than the Capital
Stock of an Unqualified Subsidiary).
"Note": any note made by HCC to any Lender pursuant to this
Agreement; collectively the "Notes".
"Participant": as defined in subsection 11.6(b).
"PBGC": the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA.
<PAGE> 19
14
"Permitted Business Acquisition": the formation of a new
Subsidiary or any acquisition of all or substantially all the assets
of, or 50% or more of the shares of capital stock, partnership
interests, joint venture interests, limited liability company interests
or other similar equity interests in, or the acquisition of any
compression and/or oil and gas production equipment assets of, a Person
or division or line of business of a Person (or any subsequent
investment made in a Person previously acquired in a Permitted Business
Acquisition), if immediately after giving effect thereto: (a) no
Default or Event of Default shall have occurred and be continuing or
would result therefrom, (b) all transactions related thereto shall be
consummated in accordance with applicable laws, (c) such acquired or
newly formed corporation, partnership, association or other business
entity shall be a Subsidiary and all actions required to be taken, if
any, with respect to such acquired or newly formed Subsidiary under
subsection 7.9 shall have been taken, (d)(i) HCC shall be in
compliance, on a pro forma basis after giving effect to such
acquisition or formation, with the covenants contained in subsection
8.1 recomputed as at the last day of the most recently ended fiscal
quarter of HCC as if such acquisition had occurred on the first day of
each relevant period for testing such compliance, and HCC shall have
delivered to the Administrative Agent an officers' certificate to such
effect, together with all relevant financial information for such
Person or assets and (ii) any acquired or newly formed Subsidiary shall
not be liable for any Indebtedness or Guarantee Obligations (except for
Indebtedness and Guarantee Obligations permitted by subsections 8.2 and
8.4), (e) any acquired or newly formed Subsidiary (including
Subsidiaries thereof) shall not have (except for Indebtedness and
Guarantee Obligations permitted by subsections 8.2 and 8.4) any
material liabilities (contingent or otherwise), including, without
limitation, liabilities under Environmental Laws and liabilities with
respect to any Plan, and the Borrower shall have delivered to the
Administrative Agent a certificate, signed by a Responsible Officer,
that to the best of such officer's knowledge, no such material
liabilities exist.
"Person": an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust,
unincorporated association, joint venture, Governmental Authority or
other entity of whatever nature.
"Plan": at a particular time, any employee benefit plan which
is covered by ERISA and in respect of which HCC, or a Commonly
Controlled Entity is (or, if such plan were terminated at such time,
would under Section 4069 of ERISA be deemed to be) an "employer" as
defined in Section 3(5) of ERISA.
"Properties": as defined in subsection 5.16.
"Purchasing Lenders": as defined in subsection 11.6(c).
"Qualified Subsidiary": each Subsidiary of HCC organized under
a jurisdiction of the United States and having assets located primarily
in the United States.
<PAGE> 20
15
"Real Estate Subsidiary": Hanover Land Company, a Texas
corporation.
"Register": as defined in subsection 11.6(d).
"Regulation U": Regulation U of the Board of Governors of the
Federal Reserve System.
"Reimbursement Obligations": the obligation of HCC to
reimburse the Issuing Lender pursuant to subsection 4.5(a) for amounts
drawn under Letters of Credit.
"Reorganization": with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of
Section 4241 of ERISA.
"Reportable Event": any of the events set forth in Section
4043(b) of ERISA, other than those events as to which the thirty day
notice period is waived by the PBGC.
"Required Lenders": at any time, Lenders the Commitment
Percentages of which aggregate at least 60%.
"Requirement of Law": as to any Person, the Certificate of
Incorporation and By-laws or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or
any of its property or to which such Person or any of its property is
subject.
"Responsible Officer": the chief executive officer, president,
the executive vice president, treasurer or secretary of the applicable
Credit Party, or, with respect to financial matters, the chief
financial officer or treasurer of the applicable Credit Party.
"Revolving Credit Loans": as defined in subsection 2.1.
"Revolving Credit Notes": as defined in subsection 2.2.
"Shareholder Subordinated Debt": shall mean all Subordinated
Debt of HCC under the Shareholder Subordinated Loan Agreement.
"Shareholder Subordinated Loan Agreement": shall mean the
Exchange and Subordinated Loan Agreement, dated as of December 23,
1996, between HCC and the lenders parties thereto, as amended,
supplemented or otherwise modified from time to time.
"Single Employer Plan": any Plan which is covered by Title IV
of ERISA, but which is not a Multiemployer Plan.
<PAGE> 21
16
"Standby Letter of Credit": as defined in paragraph
4.1(b)(i)(A).
"Subordinated Debt": shall mean, with respect to HCC, the
Shareholder Subordinated Debt and any other unsecured Indebtedness the
terms of which provide that such Indebtedness is subordinate and junior
in right of payment to the payment of all obligations and liabilities
of HCC to the Administrative Agent and the Lenders hereunder; provided,
that prior to an Event of Default, HCC may make regularly scheduled
interest payments in respect of such Indebtedness.
"Subsidiaries' Guarantee": the Subsidiaries' Guarantee made by
Hanover/Smith, HMI and the Real Estate Subsidiary in favor of the
Administrative Agent for the benefit of the Lenders, substantially in
the form of Exhibit B, as amended, supplemented or otherwise modified
from time to time.
"Subsidiary": as to any Person, a corporation, partnership or
other entity of which shares of stock or other ownership interests
having ordinary voting power (other than stock or such other ownership
interests having such power only by reason of the happening of a
contingency) to elect a majority of the board of directors or other
managers of such corporation, partnership of other entity are at the
time owned, or the management of which is otherwise controlled,
directly or indirectly through one or more intermediaries, or both, by
such Person. Unless otherwise qualified, all references to a
"Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a
Subsidiary or Subsidiaries of HCC.
"Tranche": the collective reference to Eurodollar Loans the
Interest Periods with respect to all of which begin on the same date
and end on the same later date (whether or not such Loans shall
originally have been made on the same day).
"Transferee": as defined in subsection 11.6(f).
"Type": as to any Loan, its nature as an ABR Loan or a
Eurodollar Loan.
"Uniform Customs": the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500, as the same may be amended, revised or replaced
from time to time.
"Unqualified Subsidiary": any Subsidiary of HCC other than
Qualified Subsidiaries.
"U.S. EBITDA Companies": shall mean HCC and each of its
wholly-owned Subsidiaries which (i) is organized under a jurisdiction
of the United States and (ii) has at least 90% of its assets located in
the United States or which derives at least 90% of its revenues from
the United States, in each case, at the time the applicable calculation
is being made for purposes of subsection 8.1(c).
<PAGE> 22
17
"Wartsilla Guaranty Obligation": the obligation of HCC to (i)
guaranty or (ii) participate in the guaranty obligations of Wartsilla
Diesel International, Ltd., OY, and the obligations of Wartsilla
Compression Systems, GmbH.
"Working Day": any Business Day on which dealings in foreign
currencies and exchange between banks may be carried on in London,
England.
1.2 Other Definitional Provisions. (a) Unless otherwise
specified therein, all terms defined in this Agreement shall have the defined
meanings when used in the Notes or any certificate or other document made or
delivered pursuant hereto.
(a) As used herein and in the Notes, and any certificate or
other document made or delivered pursuant hereto, accounting terms relating to
HCC and its Subsidiaries not defined in subsection 1.1 and accounting terms
partly defined in subsection 1.1, to the extent not defined, shall have the
respective meanings given to them under GAAP.
(b) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and Section,
subsection, Schedule and Exhibit references are to this Agreement unless
otherwise specified.
(c) The meanings given to terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.
2. AMOUNT AND TERMS OF
COMMITMENTS
2.1 Revolving Credit Commitments. (a) Subject to the terms and
conditions hereof, each Lender severally agrees to make revolving credit loans
("Revolving Credit Loans") to HCC from time to time during the Commitment Period
in an aggregate principal amount at any one time outstanding which, when added
to such Lender's Commitment Percentage of the then outstanding L/C Obligations,
does not exceed the amount of such Lender's Commitment. During the Commitment
Period, HCC may use the Commitments by borrowing, prepaying the Revolving Credit
Loans in whole or in part, and reborrowing, all in accordance with the terms and
conditions hereof.
(b) The Revolving Credit Loans may from time to time be (i)
Eurodollar Loans, (ii) ABR Loans or (iii) a combination thereof, as determined
by HCC and notified to the Administrative Agent in accordance with subsections
2.3 and 3.5, provided that no Revolving Credit Loan shall be made as a
Eurodollar Loan after the day that is one month prior to the Final Maturity
Date.
<PAGE> 23
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2.2 Revolving Credit Notes. The Revolving Credit Loans made by
each Lender shall be evidenced by a promissory note of HCC, substantially in the
form of Exhibit A with appropriate insertions as to payee, date and principal
amount (each, a "Revolving Credit Note"), payable to the order of such Lender
and in a principal amount equal to the lesser of (a) the amount of the initial
Commitment of such Lender and (b) the aggregate unpaid principal amount of all
Revolving Credit Loans made by such Lender. Each Lender is hereby authorized to
record the date, Type and amount of each Revolving Credit Loan made by such
Lender, each continuation thereof, each conversion of all or a portion thereof
to another Type, the date and amount of each payment or prepayment of principal
thereof and, in the case of Eurodollar Loans, the length of each Interest Period
with respect thereto, on the schedule annexed to and constituting a part of its
Revolving Credit Note and any such recordation shall constitute prima facie
evidence of the accuracy of the information so recorded, absent manifest error,
provided that the failure to make any such recordation (or any error in such
recordation) shall not affect the obligations of HCC hereunder and under such
Revolving Credit Note. Each Revolving Credit Note shall (i) be dated the Closing
Date, (ii) be stated to mature on the Final Maturity Date and (iii) provide for
the payment of interest in accordance with subsection 3.1.
2.3 Procedure for Revolving Credit Borrowing. HCC may borrow
under the Commitments during the Commitment Period on any Working Day, if all or
any part of the requested Revolving Credit Loans are to be initially Eurodollar
Loans, or on any Business Day, otherwise, provided that HCC shall give the
Administrative Agent irrevocable notice (which notice must be received by the
Administrative Agent prior to 11:00 A.M., New York City time, (a) three Working
Days prior to the requested Borrowing Date, if all or any part of the requested
Revolving Credit Loans are to be initially Eurodollar Loans, or (b) one Business
Day prior to the requested Borrowing Date, otherwise), specifying (i) the amount
to be borrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing
is to be of Eurodollar Loans, ABR Loans, or a combination thereof and (iv) if
the borrowing is to be entirely or partly of Eurodollar Loans, the amount of
such Type of Loan and the length of the initial Interest Period therefor. Each
borrowing under the Commitments shall be in an amount equal to (x) in the case
of ABR Loans, $200,000 or a whole multiple of $100,000 in excess thereof (or, if
the then Available Commitments are less than $200,000, such lesser amount) and
(y) in the case of Eurodollar Loans, $500,000 or a whole multiple of $100,000 in
excess thereof. Upon receipt of any such notice from HCC, the Administrative
Agent shall promptly notify each Lender thereof. Each Lender will make the
amount of its pro rata share of each borrowing available to the Administrative
Agent for the account of HCC at the office of the Administrative Agent specified
in subsection 11.2 prior to 12:00 noon, New York City time, on the Borrowing
Date requested by HCC in funds immediately available to the Administrative
Agent. Such borrowing will then be made available to HCC by the Administrative
Agent crediting the account of HCC on the books of such office with the
aggregate of the amounts made available to the Administrative Agent by the
Lenders and in like funds as received by the Administrative Agent.
<PAGE> 24
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3. INTEREST RATE PROVISIONS, FEES,
CONVERSIONS AND PAYMENTS
3.1 Interest Rates and Payments Dates. (a) Each Eurodollar
Loan shall bear interest for each day during each Interest Period with respect
thereto at a rate per annum equal to the Eurodollar Rate determined for such day
plus the Applicable Margin.
(a) Each ABR Loan shall bear interest at a rate per annum
equal to ABR plus the Applicable Margin.
(b) If all or a portion of (i) the principal amount of any
Loan or (ii) any interest payable thereon shall not be paid when due (whether at
the stated maturity, by acceleration or otherwise), such overdue amount shall
bear interest at a rate per annum which is (x) in the case of overdue principal,
2% above the rate that would otherwise be applicable thereto pursuant to the
foregoing provisions of this subsection or (y) in the case of overdue interest,
to the extent permitted by law, 2% above the rate described in paragraph (b) of
this subsection, in each case from the date of such non-payment until such
amount is paid in full (as well after as before judgment).
(c) Interest shall be payable in arrears on each Interest
Payment Date, provided that interest accruing pursuant to paragraph (c) of this
subsection shall be payable on demand.
3.2 Commitment Fee; Other Fees and Compensation. (a) HCC
agrees to pay to the Administrative Agent for the account of each Lender a
commitment fee for the period from and including the first day of the Commitment
Period to the Final Maturity Date, computed at the rate per annum equal to the
Applicable Commitment Fee Rate on the average daily amount of the Available
Commitment of such Lender during the period for which payment is made. Such
commitment fee shall be payable quarterly in arrears on the last day of each
March, June, September and December and on the Final Maturity Date or such
earlier date as the Commitments shall terminate as provided herein, commencing
on December 31, 1997.
(a) HCC agrees to pay to the Administrative Agent the fees and
other compensation, in the amounts and on the dates specified in the fee letter
separately agreed to between HCC and the Administrative Agent.
3.3 Termination or Reduction of the Commitments. HCC shall
have the right during the Commitment Period, upon not less than five Business
Days' notice to the Administrative Agent by HCC to terminate the Commitments or,
from time to time, to reduce the amount of the Commitments, provided that no
such termination or reduction shall be permitted if, after giving effect thereto
and to any prepayments of the Revolving Credit Loans made on the effective date
thereof, the aggregate principal amount of the Revolving Credit Loans then
outstanding, when added to the then outstanding L/C Obligations, would exceed
the
<PAGE> 25
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Commitments then in effect. Any such reduction shall be in an amount equal to
$100,000 or a whole multiple thereof and shall reduce permanently the
Commitments then in effect.
3.4 Optional Prepayments and other Repayments. (a) HCC may at
any time and from time to time, prepay the Loans, in whole or in part, without
premium or penalty, upon at least three Working Days' irrevocable notice, in the
case of Eurodollar Loans, and one Business Day's irrevocable notice, in the case
of ABR Loans, by HCC to the Administrative Agent, specifying the date and amount
of prepayment and whether the prepayment is of Eurodollar Loans, ABR Loans or a
combination thereof, and if of a combination thereof, the amount allocable to
each. If any such prepayment with respect to a Eurodollar Loan is made on a day
other than the last day of an Interest Period, such prepayment shall be
accompanied by any amounts required to be paid pursuant to subsection 3.13. Upon
receipt of any such notice the Administrative Agent shall promptly notify each
Lender thereof. If any such notice is given, the amount specified in such notice
shall be due and payable on the date specified therein. Partial prepayments
shall be in an aggregate principal amount of $200,000 or a whole multiple of
$100,000 in excess thereof.
(a) HCC shall repay at any time, and there shall be due and
payable at such time, such principal amount (together with accrued interest
thereon), if any, of outstanding Revolving Credit Loans as may be necessary so
that, after such repayment, the aggregate unpaid principal amount of Revolving
Credit Loans does not exceed the Commitments in effect at such time after giving
effect to any reduction in the Commitments pursuant to subsection 3.3.
3.5 Conversion and Continuation Options. (a) HCC may elect
from time to time to convert Eurodollar Loans to ABR Loans by giving the
Administrative Agent at least two Business Days' prior irrevocable notice of
such election, provided that any such conversion of Eurodollar Loans may only be
made on the last day of an Interest Period with respect thereto. HCC may elect
from time to time to convert ABR Loans to Eurodollar Loans by giving the
Administrative Agent at least three Working Days' prior irrevocable notice of
such election. Any such notice of conversion to Eurodollar Loans shall specify
the length of the initial Interest Period or Interest Periods therefor. Upon
receipt of any such notice the Administrative Agent shall promptly notify each
Lender thereof. All or any part of outstanding Eurodollar Loans and ABR Rate
Loans may be converted as provided herein, provided that (i) no Loan may be
converted into a Eurodollar Loan when any Event of Default has occurred and is
continuing and the Administrative Agent has determined that such a conversion is
not appropriate, (ii) any such conversion may only be made if, after giving
effect thereof, subsection 3.6 shall not have been contravened and (iii) no Loan
may be converted into a Eurodollar Loan after the date that is one month prior
to the Final Maturity Date.
(a) Any Eurodollar Loans may be continued as such upon the
expiration of the then current Interest Period with respect thereto by HCC
giving notice to the Administrative Agent, in accordance with the applicable
provisions of the term "Interest Period" set forth in subsection 1.1, of the
length of the next Interest Period to be applicable to such Loans, provided that
no Eurodollar Loan may be continued as such (i) when any Event of Default has
occurred
<PAGE> 26
21
and is continuing and the Administrative Agent has determined that such a
continuation is not appropriate, (ii) if, after giving effect thereto,
subsection 3.6 would be contravened or (iii) after the date that is one month
prior to the Final Maturity Date and provided, further, that if HCC shall fail
to give any required notice as described above in this paragraph or if such
continuation is not permitted pursuant to the preceding proviso such Loans shall
be automatically converted to ABR Loans on the last day of such then expiring
Interest Period.
3.6 Minimum Amounts. All borrowings, conversions and
continuations of Loans hereunder and all selections of Interest Periods
hereunder shall be in such amounts and be made pursuant to such elections so
that, after giving effect thereto, the aggregate principal amount of the Loans
comprising each Eurodollar Tranche shall be equal to $500,000 or a whole
multiple of $100,000 in excess thereof.
3.7 Computation of Interest and Fees. (a) Commitment fees and
interest on ABR Loans shall be calculated on the basis of a 365- (or 366-, as
the case may be) day year for the actual days elapsed, and interest on
Eurodollar Loans shall be calculated on the basis of a 360 day year for the
actual days elapsed. The Administrative Agent shall as soon as practicable
notify HCC and the Lenders of each determination of a Eurodollar Rate. Any
change in the interest rate on a Loan resulting from a change in the ABR, the
Eurocurrency Reserve Requirements, the C/D Assessment Rate or the C/D Reserve
Percentage shall become effective as of the opening of business on the day on
which such change becomes effective. The Administrative Agent shall as soon as
practicable notify HCC and the Lenders of the effective date and the amount of
each such change in interest rate.
(a) Each determination of an interest rate by the
Administrative Agent pursuant to any provision of this Agreement shall be
conclusive and binding on HCC and the Lenders in the absence of manifest error.
The Administrative Agent shall, at the request of the HCC, deliver to HCC a
statement showing the quotations used by the Administrative Agent in determining
any interest rate pursuant to subsection 3.1(a).
3.8 Inability to Determine Interest Rate. In the event that
prior to the first day of any Interest Period:
(a) the Administrative Agent shall have determined (which
determination shall be conclusive and binding upon HCC absent manifest
error) that, by reason of circumstances affecting the relevant market,
adequate and reasonable means do not exist for ascertaining the
Eurodollar Rate for such Interest Period, or
(b) the Administrative Agent shall have received notice from
the Majority Lenders that the Eurodollar Rate determined or to be
determined for such Interest Period will not adequately and fairly
reflect the costs to such Lenders (as conclusively certified by such
Lenders) of making or maintaining their affected Loans during such
Interest Period,
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22
the Administrative Agent shall give telex, telecopy or telephonic notice thereof
to HCC and the Lenders as soon as practicable thereafter. If such notice is
given (x) any Eurodollar Loans requested to be made on the first day of such
Interest Period shall be made as ABR Loans, (y) any Loans that were to have been
converted on the first day of such Interest Period to Eurodollar Loans shall be
converted to or continued as ABR Loans and (z) any outstanding Eurodollar Loans
shall be converted, on the first day of such Interest Period, to ABR Loans.
Until such notice has been withdrawn by the Administrative Agent, no further
Eurodollar Loans shall be made or continued as such, nor shall HCC have the
right to convert Loans to Eurodollar Loans.
3.9 Pro Rata Treatment and Payments. (a) Each borrowing by HCC
from the Lenders hereunder, each payment by HCC on account of any commitment fee
hereunder and any reduction of the Commitments of the Lenders shall be made pro
rata according to the respective Commitment Percentages of the Lenders. Each
payment (including each prepayment) by HCC on account of principal of and
interest on the Loans shall be made pro rata according to the respective
outstanding principal amounts of the Loans then held by the Lenders. All
payments (including prepayments) to be made by HCC hereunder and under the
Notes, whether on account of principal, interest, fees or otherwise, shall be
made without set off or counterclaim and shall be made prior to 12:00 Noon, New
York City time, on the due date thereof to the Administrative Agent, for the
account of the Lenders, at the Administrative Agent's office specified in
subsection 11.2 in Dollars and in immediately available funds. The
Administrative Agent shall distribute such payments to the Lenders promptly upon
receipt in like funds as received. If any payment hereunder (other than payments
on the Eurodollar Loans) becomes due and payable on a day other than a Business
Day, such payment shall be extended to the next succeeding Business Day, and,
with respect to payments of principal, interest thereon shall be payable at the
then applicable rate during such extension. If any payment on a Eurodollar Loan
becomes due and payable on a day other than a Working Day, the maturity thereof
shall be extended to the next succeeding Working Day unless the result of such
extension would be to extend such payment into another calendar month, in which
event such payment shall be made on the immediately preceding Working Day.
(a) Unless the Administrative Agent shall have been notified
in writing by any Lender prior to a Borrowing Date that such Lender will not
make the amount that would constitute its Commitment Percentage of the borrowing
on such date available to the Administrative Agent, the Administrative Agent may
assume that such Lender has made such amount available to the Administrative
Agent on such Borrowing Date, and the Administrative Agent may, in reliance upon
such assumption, make available to HCC a corresponding amount. If such amount is
made available to the Administrative Agent on a date after such Borrowing Date,
such Lender shall pay to the Administrative Agent on demand an amount equal to
the product of (i) the daily average Federal funds rate during such period as
quoted by the Administrative Agent, times (ii) the amount of such Lender's
Commitment Percentage of such borrowing, times (iii) a fraction the numerator of
which is the number of days that elapse from and including such Borrowing Date
to the date on which such Lender's Commitment Percentage of such borrowing shall
have become immediately available to the Administrative Agent and the
denominator of which is 360. A certificate of the Administrative Agent submitted
to any Lender
<PAGE> 28
23
with respect to any amounts owing under this subsection shall be
conclusive in the absence of manifest error. If such Lender's Commitment
Percentage of such borrowing is not in fact made available to the Administrative
Agent by such Lender within three Business Days of such Borrowing Date, the
Administrative Agent shall be entitled to recover such amount with interest
thereon at the rate per annum applicable to such Loan, on demand, from HCC and
any such payment by HCC shall not constitute a waiver of any right or remedy HCC
may have with respect to any such Lender.
3.10 Illegality. Notwithstanding any other provision herein,
if any change in any Requirement of Law or in the interpretation or application
thereof shall make it unlawful for any Lender to make or maintain Eurodollar
Loans as contemplated by this Agreement, (a) the commitment of such Lender
hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and
convert ABR Loans to Eurodollar Loans shall forthwith be canceled and (b) such
Lender's Loans then outstanding as Eurodollar Loans, if any, shall be converted
automatically to ABR Loans on the respective last days of the then current
Interest Periods with respect to such Loans or within such earlier period as
required by law. If any such conversion of a Eurodollar Loan occurs on a day
which is not the last day of the then current Interest Period with respect
thereto, HCC shall pay to such Lender such amounts, if any, as may be required
pursuant to subsection 3.13.
3.11 Requirements of Law. (a) In the event that any change in
any Requirement of Law as in existence on the date hereof or in the
interpretation or application thereof or compliance by any Lender with any
request or directive (whether or not having the force of law) from any central
bank or other Governmental Authority made subsequent to the date hereof:
(i) shall subject any Lender to any tax of any kind whatsoever
with respect to this Agreement, any Note, any Letter of Credit, any
Application or any Eurodollar Loan made by it, or change the basis of
taxation of payments to such Lender in respect thereof (except for
taxes covered by subsection 3.12 and changes in the rate of tax on the
overall net income of such Lender or tax imposed in lieu of net income
taxes);
(ii) shall impose, modify or hold applicable any reserve,
special deposit, compulsory loan or similar requirement against assets
held by, deposits or other liabilities in or for the account of,
advances, loans or other extensions of credit by, or any other
acquisition of funds by, any office of such Lender which is not
otherwise included in the determination of the Eurodollar Rate
hereunder; or
(iii) shall impose on such Lender any other condition;
and the result of any of the foregoing is to increase the cost to such Lender,
by an amount which such Lender deems to be material, of making, converting into,
continuing or maintaining Eurodollar Loans or issuing or participating in
Letters of Credit or to reduce any amount receivable hereunder in respect
thereof, then, in any such case, HCC shall promptly pay such Lender, upon its
demand, any additional amounts necessary to compensate such Lender for such
<PAGE> 29
24
increased cost or reduced amount receivable. If any Lender becomes entitled to
claim any additional amounts pursuant to this subsection, it shall promptly
notify HCC, through the Administrative Agent, by delivery of a certificate
setting forth the amounts due and a description of the event by reason of which
it has become so entitled. A certificate as to any additional amounts payable
pursuant to this subsection submitted by such Lender, through the Administrative
Agent, to HCC shall be conclusive in the absence of manifest error. This
covenant shall survive the termination of this Agreement and the payment of the
Notes and all other amounts payable hereunder.
(b) In the event that any Lender shall have determined that
any change in any Requirement of Law as in existence on the date hereof
regarding capital adequacy or in the interpretation or application thereof or
compliance by such Lender or any corporation controlling such Lender with any
request or directive regarding capital adequacy (whether or not having the force
of law) from any Governmental Authority made subsequent to the date hereof does
or shall have the effect of reducing the rate of return on such Lender's or such
corporation's capital as a consequence of its obligations hereunder or under any
Letter of Credit to a level below that which such Lender or such corporation
could have achieved but for such change or compliance (taking into consideration
such Lender's or such corporation's policies with respect to capital adequacy)
by an amount deemed by such Lender to be material, then from time to time, after
submission by such Lender to HCC (with a copy to the Administrative Agent) of a
written request therefore, HCC shall pay to such Lender such additional amount
or amounts as will compensate such Lender for such reduction.
3.12 Taxes. (a) All payments made by HCC under this Agreement
and the Notes shall be made free and clear of, and without deduction or
withholding for or on account of, any present or future income, stamp or other
taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now
or hereafter imposed, levied, collected, withheld or assessed by any
Governmental Authority, excluding, in the case of the Administrative Agent and
each Lender, net income taxes and franchise taxes (imposed in lieu of net income
taxes) imposed on the Administrative Agent or such Lender, as the case may be,
as a result of a present or former connection between the jurisdiction of the
government or taxing authority imposing such tax and the Administrative Agent or
such Lender (excluding a connection arising solely from the Administrative Agent
or such Lender having executed, delivered, performed its obligations or received
a payment under, or enforced, this Agreement or the Notes) or any political
subdivision or taxing authority thereof or therein (all such non-excluded taxes,
levies, imposts, duties, charges, fees, deductions and withholdings being
hereinafter called "Taxes"). If any Taxes are required to be withheld from any
amounts payable to the Administrative Agent or any Lender hereunder or under the
Notes, the amounts so payable to the Administrative Agent or such Lender shall
be increased to the extent necessary to yield to the Administrative Agent or
such Lender (after payment of all Taxes) interest or any such other amounts
payable hereunder at the rates or in the amounts specified in this Agreement and
the Notes. Whenever any Taxes are payable by HCC, as promptly as possible
thereafter HCC shall send to the Administrative Agent for its own account or for
the account of such Lender, as the case may be, a certified copy of an original
official receipt received by HCC showing payment thereof. If HCC fails to pay
any
<PAGE> 30
25
Taxes when due to the appropriate taxing authority or fails to remit to the
Administrative Agent the required receipts or other required documentary
evidence, HCC shall indemnify the Administrative Agent and the Lenders for any
incremental taxes, interest or penalties that may become payable by the
Administrative Agent or any Lender as a result of any such failure. The
agreements in this subsection shall survive the termination of this Agreement
and the payment of the Notes and all other amounts payable hereunder.
Notwithstanding the foregoing, before making any demand for payment under this
Section 3.12(a) each Lender agrees to use commercially reasonable efforts
(consistent with its internal policy and legal and regulatory restrictions) to
designate a different lender office if the making of such a designation would
avoid the need for, or reduce the amount of, such payments required under this
Section 3.12(a).
(a) Each Lender, including, without limitation, each
Purchasing Lender, that is not incorporated under the laws of the United States
of America or a state thereof agrees that prior to the first Interest Payment
Date or, in the case of a Purchasing Lender, the first Interest Payment Date to
occur subsequent to the date it becomes a party hereto it will deliver to HCC
and the Administrative Agent (i) two duly completed copies of United States
Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the
case may be, and (ii) an Internal Revenue Service Form W-8 or W-9 or successor
applicable form. Each such Lender also agrees to deliver to HCC and the
Administrative Agent two further copies of the said Form 1001 or 4224 and Form
W-8 or W-9, or successor applicable forms or other manner of certification, as
the case may be, on or before the date that any such form expires or becomes
obsolete or after the occurrence of any event requiring a change in the most
recent form previously delivered by it to HCC and such extensions or renewals
thereof as may reasonably be requested by HCC or the Administrative Agent,
unless in any such case an event (including, without limitation, any change in
treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Lender from duly completing and delivering any such
form with respect to it and such Lender so advises HCC and the Administrative
Agent. Such Lender shall certify (i) in the case of a Form 1001 or 4224, that it
is entitled to receive payments under this Agreement without deduction or
withholding of any United States federal income taxes and (ii) in the case of a
Form W-8 or W-9, that it is entitled to an exemption from United States backup
withholding tax. Each Lender which fails to provide to HCC in a timely manner
such forms shall reimburse HCC upon demand for any penalties paid by HCC as a
result of any failure of HCC to withhold the required amounts, that are caused
by such Lender's failure to provide the required forms in a timely manner.
3.13 Indemnity. HCC agrees to indemnify each Lender and to
hold each Lender harmless from any reasonable loss or expenses which such Lender
may sustain or incur as a consequence of (a) default by HCC in payment when due
of the principal amount of or interest on any Eurodollar Loan, (b) default by
HCC in making a borrowing of, conversion into or continuation of Eurodollar
Loans after HCC has given a notice requesting the same in accordance with the
provisions of this Agreement, (c) default by HCC in making any prepayment after
HCC has given a notice thereof in accordance with the provisions of this
Agreement or (d) the making of a prepayment of Eurodollar Loans on a day which
is not the last day of an
<PAGE> 31
26
Interest Period with respect thereto, including, without limitation, in each
case, any such loss or expense arising from the reemployment of funds obtained
by it or from fees payable to terminate the deposits from which such funds were
obtained. This covenant shall survive the termination of this Agreement and the
payment of the Notes and all other amounts payable hereunder.
3.14 Replacement of Lenders. If any Lender requests
compensation under subsection 3.11, or if HCC is required to pay any additional
amount to any Lender or any Governmental Authority for the account of any Lender
pursuant to subsection 3.12, or if any Lender defaults in its obligation to fund
Loans hereunder, then HCC may, at its sole expense and effort, upon notice to
such Lender and the Administrative Agent, require such Lender to assign and
delegate, without recourse (in accordance with and subject to the restrictions
contained in Section 11.6), all its interests, rights and obligations under this
Agreement to an assignee that shall assume such obligations (which assignee may
be another Lender, if a Lender accepts such assignment); provided that (i) HCC
shall have received the prior written consent of the Administrative Agent, which
consent shall not unreasonably be withheld, (ii) such Lender shall have received
payment of an amount equal to the outstanding principal of its Loans and
participations in Letters of Credit, accrued interest thereon, accrued fees and
all other amounts payable to it hereunder, from the assignee (to the extent of
such outstanding principal and accrued interest and fees) or HCC (in the case of
all other amounts) and (iii) in the case of any such assignment resulting from a
claim for compensation under subsection 3.11 or payments required to be made
pursuant to subsection 3.12, such assignment will result in a reduction in such
compensation or payments. A Lender shall not be required to make any such
assignment and delegation if, prior thereto, as a result of a waiver by such
Lender or otherwise, the circumstances entitling HCC to require such assignment
and delegation cease to apply.
4. LETTERS OF CREDIT
4.1 L/C Commitment.
(a) Subject to the terms and conditions hereof, the Issuing
Lender, in reliance on the agreements of the other Lenders set forth in
subsection 4.4(a), agrees to issue letters of credit ("Letters of Credit") for
the account of HCC on any Business Day during the Commitment Period in such form
as may be approved from time to time by the Issuing Lender; provided that the
Issuing Lender shall have no obligation to issue any Letter of Credit if, after
giving effect to such issuance, the L/C Obligations would exceed the L/C
Commitment or the Available Commitment.
(b) Each Letter of Credit shall:
(i) be denominated in Dollars and shall be either (A) a
standby letter of credit issued to support obligations of HCC or its
Subsidiaries (a "Standby Letter of Credit"), or (B) a commercial letter
of credit issued in respect of the purchase of goods or services by
<PAGE> 32
27
HCC and its Subsidiaries in the ordinary course of business (a
"Commercial Letter of Credit") and
(ii) expire at or prior to the close of business on the
earlier of (i) the date one year after the date of the issuance of such
Letter of Credit (or, in the case of any renewal or extension thereof,
one year after such renewal or extension) and (ii) the date that is
five Business Days prior to the Termination Date.
(c) Each Letter of Credit shall be subject to the Uniform
Customs and, to the extent not inconsistent therewith, the laws of the State of
New York.
(d) The Issuing Lender shall not at any time be obligated to
issue any Letter of Credit hereunder if such issuance would conflict with, or
cause the Issuing Lender or any L/C Participant to exceed any limits imposed by,
any applicable Requirement of Law.
4.2. Procedure for Issuance of Letters of Credit.
HCC may from time to time request that the Issuing Lender
issue a Letter of Credit by delivering to the Issuing Lender at its address for
notices specified herein an Application therefor, completed to the satisfaction
of the Issuing Lender, and such other certificates, documents and other papers
and information as the Issuing Lender may reasonably request. Upon receipt of
any Application, the Issuing Lender will process such Application and the
certificates, documents and other papers and information delivered to it in
connection therewith in accordance with its customary procedures and shall
promptly issue the Letter of Credit requested thereby (but in no event shall the
Issuing Lender be required to issue any Letter of Credit earlier than three
Business Days after its receipt of the Application therefor and all such other
certificates, documents and other papers and information relating thereto) by
issuing the original of such Letter of Credit to the beneficiary thereof or as
otherwise may be agreed by the Issuing Lender and HCC. The Issuing Lender shall
furnish a copy of such Letter of Credit to HCC promptly following the issuance
thereof.
4.3. Fees, Commissions and Other Charges.
(a) HCC shall pay to the Administrative Agent, for the account
of the Issuing Lender and the L/C Participants, a letter of credit commission
with respect to each Letter of Credit, computed for the period from the date
such Letter of Credit is issued to the date upon which the next such payment is
due hereunder at the rate per annum equal to the Applicable Margin in effect
from time to time for Eurodollar Loans, calculated on the basis of a 365 (or
366-, as the case may be) day year, of the daily aggregate amount available to
be drawn under such Letter of Credit for the period covered by such payment. In
addition, HCC shall pay to the Issuer a fronting fee in the amount equal to
.125% of the face amount of such Letter of Credit. Such commissions shall be
payable in arrears on each L/C Fee Payment Date (and the Termination Date) and
shall be nonrefundable.
<PAGE> 33
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(b) In addition to the foregoing fees and commissions, HCC
shall pay or reimburse the Issuing Lender for such reasonable, normal and
customary costs and expenses as are actually incurred or charged by the Issuing
Lender in issuing, effecting payment under, amending or otherwise administering
any Letter of Credit.
(c) The Administrative Agent shall, promptly following its
receipt thereof, distribute to the Issuing Lender and the L/C Participants all
fees and commissions received by the Administrative Agent for their respective
accounts pursuant to this subsection.
4.4. L/C Participations.
(a) The Issuing Lender irrevocably agrees to grant and hereby
grants to each L/C Participant, and, to induce the Issuing Lender to issue
Letters of Credit hereunder, each L/C Participant irrevocably agrees to accept
and purchase and hereby accepts and purchases from the Issuing Lender, on the
terms and conditions hereinafter stated, for such L/C Participant's own account
and risk an undivided interest equal to such L/C Participant's Commitment
Percentage in the Issuing Lender's obligations and rights under each Letter of
Credit issued hereunder and the amount of each draft paid by the Issuing Lender
thereunder. Each L/C Participant unconditionally and irrevocably agrees with the
Issuing Lender that, if a draft is paid under any Letter of Credit for which the
Issuing Lender is not reimbursed in full by HCC in accordance with the terms of
this Agreement, such L/C Participant shall pay to the Issuing Lender upon demand
at the Issuing Lender's address for notices specified herein an amount equal to
such L/C Participant's Commitment Percentage of the amount of such draft, or any
part thereof, which is not so reimbursed.
(b) If any amount required to be paid by any L/C Participant
to the Issuing Lender pursuant to paragraph 4.4(a) in respect of any
unreimbursed portion of any payment made by the Issuing Lender under any Letter
of Credit is paid to the Issuing Lender within three Business Days after the
date such payment is due, such L/C Participant shall pay to the Issuing Lender
on demand an amount equal to the product of (1) such amount, times (2) the daily
average Federal funds rate, as quoted by the Issuing Lender, during the period
from and including the date such payment is required to the date on which such
payment is immediately available to the Issuing Lender, times (3) a fraction the
numerator of which is the number of days that elapse during such period and the
denominator of which is 360. If any such amount required to be paid by any L/C
Participant pursuant to paragraph 4.4(a) is not in fact made available to the
Issuing Lender by such L/C Participant within three Business Days after the date
such payment is due, the Issuing Lender shall be entitled to recover from such
L/C Participant, on demand, such amount with interest thereon calculated from
such due date at the rate per annum applicable to ABR Loans hereunder. A
certificate of the Issuing Lender submitted to any L/C Participant with respect
to any amounts owing under this subsection shall be conclusive in the absence of
manifest error.
(c) Whenever, at any time after the Issuing Lender has made
payment under any Letter of Credit and has received from any L/C Participant its
pro rata share of such payment in
<PAGE> 34
29
accordance with subsection 4.4(a), the Issuing Lender receives any payment
related to such Letter of Credit (whether directly from HCC or otherwise), or
any payment of interest on account thereof, the Issuing Lender will distribute
to such L/C Participant its pro rata share thereof; provided, however, that in
the event that any such payment received by the Issuing Lender shall be required
to be returned by the Issuing Lender, such L/C Participant shall return to the
Issuing Lender the portion thereof previously distributed by the Issuing Lender
to it.
4.5. Reimbursement Obligation of HCC.
(a) HCC agrees to reimburse the Issuing Lender on each date on
which the Issuing Lender notifies HCC of the date and amount of a draft
presented under any Letter of Credit and paid by the Issuing Lender for the
amount of (i) such draft so paid and (ii) any taxes, fees, charges or other
costs or expenses reasonably incurred by the Issuing Lender in connection with
such payment. Each such payment shall be made to the Issuing Lender at its
address for notices specified herein in Dollars and in immediately available
funds.
(b) Interest shall be payable on any and all amounts remaining
unpaid by HCC under this subsection from the date such amounts become payable
(whether at stated maturity, by acceleration or otherwise) until payment in full
at the rate which would be payable on any outstanding ABR Loans which were then
overdue.
(c) Each drawing under any Letter of Credit shall constitute a
request by HCC to the Administrative Agent for a borrowing pursuant to
subsection 2.4 (Procedure for Revolving Credit Borrowing) of ABR Loans in the
amount of such drawing. The Borrowing Date with respect to such borrowing shall
be the date of such drawing.
4.6. Obligations Absolute.
(a) HCC's obligations under this Section 4 shall be absolute
and unconditional under any and all circumstances and irrespective of any
set-off, counterclaim or defense to payment which HCC may have or have had
against the Issuing Lender or any beneficiary of a Letter of Credit.
(b) HCC also agrees with the Issuing Lender that the Issuing
Lender shall not be responsible for, and HCC's Reimbursement Obligations under
subsection 4.5(a) shall not be affected by, among other things, (i) the validity
or genuineness of documents or of any endorsements thereon, even though such
documents shall in fact prove to be invalid, fraudulent or forged, or (ii) any
dispute between or among HCC and any beneficiary of any Letter of Credit or any
other party to which such Letter of Credit may be transferred or (iii) any
claims whatsoever of HCC against any beneficiary of such Letter of Credit or any
such transferee.
(c) The Issuing Lender shall not be liable for any error,
omission, interruption or delay in transmission, dispatch or delivery of any
message or advice, however transmitted, in
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30
connection with any Letter of Credit, except for errors or omissions caused by
the Issuing Lender's gross negligence or willful misconduct.
(d) HCC agrees that any action taken or omitted by the Issuing
Lender under or in connection with any Letter of Credit or the related drafts or
documents, if done in the absence of gross negligence or willful misconduct and
in accordance with the standards of care specified in the Uniform Commercial
Code of the State of New York, shall be binding on HCC and shall not result in
any liability of the Issuing Lender to HCC.
4.7. Letter of Credit Payments.
If any draft shall be presented for payment under any Letter
of Credit, the Issuing Lender shall promptly notify HCC of the date and amount
thereof. The responsibility of the Issuing Lender to HCC in connection with any
draft presented for payment under any Letter of Credit shall, in addition to any
payment obligation expressly provided for in such Letter of Credit, be limited
to determining that the documents (including each draft) delivered under such
Letter of Credit in connection with such presentment are in conformity with such
Letter of Credit.
4.8. Application.
To the extent that any provision of any Application related to
any Letter of Credit is inconsistent with the provisions of this Section 4, the
provisions of this Section 4 shall apply.
5. REPRESENTATIONS AND
WARRANTIES
To induce the Lenders to enter into this Agreement and to make
the Loans and issue or participate in the Letters of Credit, HCC hereby
represents and warrants to the Administrative Agent and each Lender that:
5.1 Financial Condition. (a) The consolidated balance sheets
of HCC and its consolidated Subsidiaries as at December 31, 1996 and December
31, 1995 and the related consolidated statements of income and of cash flows for
the fiscal year ended on such date, reported on by Price Waterhouse copies of
which have heretofore been furnished to each Lender, present fairly, in all
material respects, the consolidated financial condition of HCC and its
consolidated Subsidiaries as at such dates, and the consolidated results of
their operations and their consolidated cash flows for the fiscal year then
ended. The unaudited consolidated balance sheets of HCC and its consolidated
Subsidiaries as at March 31, 1997 and June 30, 1997, the related unaudited
consolidated statements of income and of cash flows for the three and six month
periods ended on such dates, certified by a Responsible Officer of HCC, copies
of which have heretofore been furnished to each Lender, present fairly, in all
material respects, the consolidated financial condition of HCC, and its
consolidated Subsidiaries as at such dates, and
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31
the consolidated results of its operations and consolidated cash flows for the
three and six month periods then ended (subject to normal year-end audit
adjustments).
(a) All such financial statements, including the related
schedules and notes thereto, have been prepared in accordance with GAAP applied
consistently throughout the periods involved (except as approved by such
accountants or Responsible Officer, as the case may be, and as disclosed
therein). Other than the Guarantee Obligations permitted under Section 8.4
below, neither HCC nor any of its consolidated Subsidiaries had, at the date of
the most recent balance sheet referred to above, any material Guarantee
Obligation, reasonably foreseeable contingent liability or liability for taxes,
or any long-term lease or unusual forward or long-term commitment, including,
without limitation, any interest rate or foreign currency swap or exchange
transaction, which is not reflected in the foregoing statements or in the notes
thereto. Except as disclosed on Schedule III to this Agreement, during the
period from June 30, 1997 to and including the date hereof there has been no
sale, transfer or other disposition by HCC or any of its consolidated
Subsidiaries of any material part of its business or property and no purchase or
other acquisition of any business or property (including any capital stock of
any other Person) material in relation to the consolidated financial condition
of HCC and its consolidated Subsidiaries at June 30, 1997.
5.2 No Change. Since December 31, 1996 (a) there has been no
development or event nor any prospective development or event, which has had or
would reasonably be expected to have a Material Adverse Effect and (b) except as
disclosed on Schedule IV to this Agreement, as of the date of this Agreement, no
dividends or other distributions have been declared, paid or made upon the
Capital Stock of HCC nor has any of the Capital Stock of HCC been redeemed,
retired, purchased or otherwise acquired for value by HCC or any of its
respective Subsidiaries.
5.3 Corporate Existence; Compliance with Law. Each Credit
Party (a) is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization, (b) has the corporate power and
authority, and the legal right, to own and operate its property, to lease the
property it operates as lessee and to conduct the business in which it is
currently engaged, (c) is duly qualified as a foreign corporation and in good
standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such
qualification, except where the failure to be so qualified would not reasonably
be expected to have a Material Adverse Effect, and (d) is in compliance with all
Requirements of Law except to the extent that the failure to comply therewith
would not, in the aggregate, reasonably be expected to have a Material Adverse
Effect.
5.4 Corporate Power; Authorization; Enforceable Obligations.
Each Credit Party has the corporate power and authority, and the legal right, to
make, deliver and perform the Loan Documents to which it is a party. HCC has the
corporate power and authority, and the legal right, to borrow hereunder and has
taken all necessary corporate action to authorize the borrowings on the terms
and conditions of this Agreement, the Notes and the Applications. Each Credit
Party has taken all necessary corporate action to authorize the execution,
delivery and performance of the Loan Documents to which it is a party. No
consent or authorization of, filing
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with or other act by or in respect of, any Governmental Authority or any other
Person (other than consents or authorizations the failure to obtain would not,
in the aggregate, reasonably be expected to have a Material Adverse Effect) is
required in connection with the borrowings hereunder or with the execution,
delivery, performance, validity or enforceability of this Agreement, the Notes,
the Applications or any of the other Loan Documents. This Agreement has been,
and each Note, each Application and each other Loan Document will be, duly
executed and delivered on behalf of the Credit Parties party thereto. This
Agreement constitutes, and each Note, each Application and each other Loan
Document when executed and delivered will constitute, a legal, valid and binding
obligation of the Credit Parties party thereto enforceable against such Credit
Parties in accordance with their respective terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles (whether enforcement is sought by proceedings in
equity or at law).
5.5 No Legal Bar. The execution, delivery and performance of
this Agreement, the Applications, the Notes and the other Loan Documents, the
borrowings hereunder and the use of the proceeds thereof will not violate any
Requirement of Law or Contractual Obligation of any Credit Party thereto and
will not result in, or require, the creation or imposition of any Lien on any of
their respective properties or revenues pursuant to any such Requirement of Law
or Contractual Obligation, except as contemplated hereby or thereby and except
to the extent any such violation or creation or imposition of a Lien would not
reasonably be expected to have a Material Adverse Effect.
5.6 No Material Litigation. Except as set forth in HCC's Form
10-Q, filed with respect to the period ending June 30, 1997, no litigation,
investigation or proceeding of or before any arbitrator or Governmental
Authority is pending or, to the knowledge of HCC, threatened by or against any
Credit Party or against any of their respective properties or revenues (a) with
respect to this Agreement, the Notes or the other Loan Documents or any of the
transactions contemplated hereby, or (b) which would reasonably be expected to
have a Material Adverse Effect.
5.7 No Default. None of the Credit Parties nor any of their
respective Subsidiaries is in default under or with respect to any of their
respective Contractual Obligations in any respect which if not cured would
reasonably be expected to have a Material Adverse Effect. No Default or Event of
Default has occurred and is continuing.
5.8 Ownership of Property; Liens; Leases of Equipment. Each of
the Credit Parties has good record and marketable title in fee simple (except
for exceptions to title as will not in the aggregate materially interfere with
the present or contemplated use of the property affected thereby) to, or a valid
leasehold interest in, all its real property, and good title to all its other
property, and none of such property is subject to any Lien except as permitted
by subsection 8.3. None of the Equipment or Inventory (as defined in the Uniform
Commercial Code) owned by any Credit Party has been leased by such Credit Party
as lessor, except pursuant to operating leases (which do not constitute
Financing Leases). As used herein, Equipment or
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Inventory leased by a Credit Party under a Financing Lease shall be deemed
"owned" by such Credit Party.
5.9 Intellectual Property. Each Credit Party owns, or is
licensed to use, all trademarks, tradenames, trade secrets, copyrights,
technology, know-how and processes necessary for the conduct of its business as
currently conducted except for those the failure to own or license which would
not reasonably be expected to have a Material Adverse Effect (the "Intellectual
Property"). To the knowledge of HCC, no claim has been asserted and is pending
by any Person challenging or questioning the use of any such Intellectual
Property or the validity or effectiveness of any such Intellectual Property, nor
does HCC know of any valid basis for any such claim, which would reasonably be
expected to have a Material Adverse Effect. The use of such Intellectual
Property by the Credit Parties does not infringe on the rights of any Person,
except for such claims and infringements that, in the aggregate, would not
reasonably be expected to have a Material Adverse Effect.
5.10 Taxes. Each of the Credit Parties has filed or caused to
be filed all tax returns which, to the knowledge of HCC, are required to be
filed and has paid all taxes shown to be due and payable on said returns or on
any assessments made against it or any of its property and all other taxes, fees
or other charges imposed on it or any of its property by any Governmental
Authority (other than any the amount or validity of which are currently being
contested in good faith by appropriate proceedings and with respect to which
reserves in conformity with GAAP have been provided on the books of any of the
Credit Parties, as the case may be); no tax Lien has been filed against the
property of any Credit Party, and, to the knowledge of HCC, no claim is being
asserted, with respect to any such tax, fee or other charge.
5.11 Federal Regulations. No part of the proceeds of any Loans
will be used for "purchasing" or "carrying" any "margin stock" within the
respective meanings of each of the quoted terms under Regulation U of the Board
of Governors of the Federal Reserve System as now and from time to time
hereafter in effect or for any purpose which violates the provisions of the
Regulations of such Board of Governors. If requested by any Lender or the
Administrative Agent, HCC will furnish to the Administrative Agent and each
Lender a statement to the foregoing effect in conformity with the requirements
of FR Form U-1 referred to in said Regulation U.
5.12 ERISA. Neither a Reportable Event nor an "accumulated
funding deficiency" (within the meaning of Section 412 of the Code or Section
302 of ERISA) has occurred during the five-year period prior to the date on
which this representation is made or deemed made with respect to any Plan, and
each Plan has complied in all material respects with the applicable provisions
of ERISA and the Code. No termination of a Single Employer Plan has occurred and
no lien in favor of the PBGC or a Plan has arisen during the five-year period
prior to the date as of which this representation is deemed made. The present
value of all accrued benefits under each Single Employer Plan maintained by HCC,
or any Commonly Controlled Entity (based on those assumptions used to fund the
Plans) did not, as of the last annual valuation date prior to the date on which
this representation is made or deemed made, exceed the value of
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34
the assets of such Plan allocable to such accrued benefits. Neither HCC nor any
Commonly Controlled Entity has had a complete or partial withdrawal from any
Multiemployer Plan, and neither HCC nor any Commonly Controlled Entity would
become subject to any liability under ERISA if HCC or any such Commonly
Controlled Entity were to withdraw completely from all Multiemployer Plans as of
the valuation date most closely preceding the date on which this representation
is made or deemed made. No such Multiemployer Plan is in Reorganization or
Insolvent. The present value (determined using actuarial and other assumptions
which are reasonable in respect of the benefits provided and the employees
participating) of the liability of HCC and each Commonly Controlled Entity for
post retirement benefits to be provided to their current and former employees
under Plans which are welfare benefit plans (as defined in Section 3(1) of
ERISA) does not, in the aggregate, exceed the assets under all such Plans
allocable to such benefits.
5.13 Investment Company Act; Other Regulations. None of the
Credit Parties is an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended. None of the Credit Parties is subject to regulation under any
Federal or State statute or regulation which limits its ability to incur
Indebtedness or change rates or change tariffs. None of the Credit Parties are
"holding companies" or "subsidiary companies" of a "holding company" or a
"subsidiary company" of a "holding company" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
5.14 Subsidiaries. As of the Closing Date, HCC has no
Subsidiaries other than as set forth on Schedule II. Except if a Credit Party,
other than cash or Cash Equivalents located in bank accounts at Chase, none of
the assets owned by any Unqualified Subsidiary as of the date hereof are located
within the United States of America or any territory thereof.
5.15 Purpose of Loans. The proceeds of the Loans shall be used
for the working capital and general corporate purposes of HCC and its
Subsidiaries.
5.43 Environmental Matters. Each of the representations and
warranties set forth in paragraphs (a) through (f) of this subsection is true
and correct with respect to each parcel of real property owned or operated by
any of the Credit Parties (the "Properties"), except to the extent that the
facts and circumstances giving rise to any such failure to be so true and
correct would not reasonably be expected to have a Material Adverse Effect:
(a) Except as set forth on Schedule IX, the Properties do not
contain, and have not previously contained, in, on, or under,
including, without limitation, the soil and groundwater thereunder, any
Hazardous Materials in concentrations which violate Environmental Laws.
(b) Except as set forth on Schedule IX, the Properties and all
operations and facilities at the Properties are in compliance with all
Environmental Laws, and there is no Hazardous Materials contamination
or violation of any Environmental Law which would
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35
reasonably be expected to interfere with the continued operation of any
of the Properties or impair the fair saleable value of any thereof.
(c) Except as set forth on Schedule IX, none of the Credit
Parties has received any complaint, notice of violation, alleged
violation, investigation or advisory action or of potential liability
or of potential responsibility regarding environmental protection
matters or environmental permit compliance with regard to the
Properties, nor is HCC aware that any Governmental Authority is
contemplating delivering to any Credit Party any such notice.
(d) Hazardous Materials have not been generated, treated,
stored, disposed of, at, on or under any of the Properties, nor have
any Hazardous Materials been transferred to any other location, in
violation of any Environmental Laws from the Properties or as a result
of the sale or lease of any equipment or inventory of any Credit Party.
(e) There are no governmental, administrative actions or
judicial proceedings pending or contemplated under any Environmental
Laws to which any Credit Party is or to HCC's knowledge will be named
as a party with respect to the Properties, nor to HCC's knowledge are
there any consent decrees or other decrees, consent orders,
administrative orders or other orders, or other administrative or
judicial requirements outstanding under any Environmental Law with
respect to any of the Properties.
5.17 Accuracy and Completeness of Information. The factual
statements contained in the Loan Documents and each other agreement, instrument,
certificate and document related thereto and any other certificates or documents
furnished or to be furnished to the Administrative Agent or the Lenders by any
Credit Party from time to time in connection with this Agreement (in any case
excluding any of the financial statements referred to in Section 5.1(a) hereof),
taken as a whole, and taking into consideration all corrections or substituted
documents, do not and will not, as of the date when made, contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements contained therein not misleading in light of the
circumstances in which the same were made, all except as otherwise qualified
herein.
6. CONDITIONS PRECEDENT
6.1 Conditions to the Initial Extensions of Credit. The
agreement of each Lender to abide by its obligations under subsection 2.1 and to
make the initial extension of credit requested to be made by it is subject to
the satisfaction, immediately prior to or concurrently therewith on the Closing
Date, of the following conditions precedent:
(a) Agreement, Notes. The Administrative Agent shall have
received (i) this Agreement, executed and delivered by a duly
authorized officer of HCC and duly acknowledged and agreed to by each
of HMI, Hanover/Smith and Hanover Acquisition
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36
with a counterpart for each Lender and (ii) for the account of each
Lender, a Note conforming to the requirements hereof and executed by a
duly authorized officer of HCC.
(b) Collateral Trust Agreement. The Administrative Agent shall
have received (i) a letter from a Responsible Officer of Joint Energy
Development Investments Limited Partnership, a Delaware limited
partnership ("JEDI"), certifying that the loan agreement, dated as of
December 19, 1995, between HCC, as borrower, JEDI, as agent for the
lenders thereunder and the financial institutions which were lenders
thereunder, shall have been terminated, and all amounts owed thereunder
shall have been paid in full and all collateral shall have been
released and (ii) a letter, pursuant to section 22.2(a)(ii) of the
Collateral Trust Agreement, dated as of December 19, 1995 (the
"Collateral Trust Agreement"), among HCC, Hanover/Smith, HMI, the Real
Estate Subsidiary, Hanover Acquisition and Chase, as collateral trustee
(in such capacity, the "Collateral Trustee"), addressed to HCC and the
Collateral Trustee from the Required Percentage (as defined in the
Collateral Trust Agreement) of Master Debt (as defined in the
Collateral Trust Agreement) authorizing the Collateral Trustee to
release the Collateral (as defined in the Collateral Trust Agreement)
secured under the Collateral Trust Agreement.
(c) Guarantees. The Administrative Agent shall have received,
with a copy for each Lender, the Subsidiaries' Guarantee, executed and
delivered by a duly authorized officer of HMI, Hanover/Smith and the
Real Estate Subsidiary.
(d) Corporate Proceedings of the Credit Parties. The
Administrative Agent shall have received, with a counterpart for each
Lender, a copy of the resolutions, in form and substance satisfactory
to the Administrative Agent, of the Board of Directors of each of the
Credit Parties authorizing (i) the execution, delivery and performance
of the Loan Documents to which it is a party, and (ii) in the case of
HCC, the borrowings contemplated hereunder, certified by the Secretary
or an Assistant Secretary of each such Credit Party as of the Closing
Date, which certificate shall state that the resolutions thereby
certified have not been amended, modified, revoked or rescinded and
shall be in form and substance satisfactory to the Administrative
Agent.
(e) Incumbency Certificates. The Administrative Agent shall
have received, with a copy for each Lender, a certificate of the
Secretary or Assistant Secretary of each Credit Party, dated the
Closing Date, as to the incumbency and signature of each of the
officers signing each of the Loan Documents to which it is a party and
any other certificates or other documents delivered in connection
therewith, together with evidence of the incumbency of such Secretary
or Assistant Secretary.
(f) Corporate Documents. The Administrative Agent shall have
received, with a counterpart for each Lender, true and complete copies
of the certificate of incorporation and by-laws of each of the Credit
Parties, certified as of the Closing Date as complete and correct
copies thereof by the Secretary or an Assistant Secretary of each such
Credit Party.
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(g) No Violation. The consummation of the transactions
contemplated hereby shall not contravene, violate or conflict with, nor
involve the Administrative Agent or any Lender in any violation of, any
Requirement of Law.
(h) Licenses, Permits, etc. All licenses, permits, exemptions,
certificates and other governmental and third party approvals and
consents (including landlords' and other consents) necessary or
advisable in connection with (i) the participation by HCC and its
Subsidiaries in the transactions contemplated by this Agreement or any
of the Loan Documents, (ii) the execution, delivery or performance by
HCC and its Subsidiaries or the validity and enforceability against HCC
and its Subsidiaries of the Loan Documents to which it or they is or
are a party, and (iii) the continuing operations of HCC and its
Subsidiaries shall have been obtained and be in full force and effect
except to the extent that the failure to obtain or maintain in full
force and effect any such license, permit, exemption, certificate,
approval or consent would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on any of the
matters set forth in clauses (i) through (iii) of this subsection
6.1(h), and all applicable waiting periods shall have expired without
any action being taken or to HCC's knowledge threatened by any
competent authority which would restrain, prevent or otherwise
reasonably be expected to impose adverse conditions on the financing
thereof.
(i) Insurance. The Administrative Agent shall have received
evidence satisfactory to it that each Credit Party has obtained the
insurance policies required by subsection 7.5.
(j) Fees and Other Compensation. The Lenders and the
Administrative Agent shall have received the fees and other
compensation to be received on the Closing Date referred to in
subsection 3.2.
(k) Existing Agreement. The Administrative Agent shall have
received evidence, in form and substance satisfactory to it, that no
Loans (as defined in the Existing Agreement) are outstanding on the
Closing Date and all interest, fees, breakage costs and dollar amounts
owing thereunder have been paid in full and the commitments under the
Existing Agreement have been terminated.
(l) Legal Opinions. The Administrative Agent shall have
received, with a counterpart for each Lender, the following executed
legal opinions:
(i) the executed legal opinion of Neal,
Gerber & Eisenberg, counsel to the Credit Parties,
substantially in the form of Exhibit C-1; and
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(ii) the executed legal opinion of Vinson &
Elkins, L.L.P., special counsel to the Credit Parties in the
State of Texas, substantially in the form of Exhibit C-2;
(m) Financial Statements. The Administrative Agent shall have
received, with a copy for each Lender, (i) audited consolidated
financial statements of HCC and its consolidated Subsidiaries for the
two most recent fiscal years ended prior to the Closing Date as to
which such financial statements are available and (ii) unaudited
interim consolidated financial statements of HCC and its consolidated
Subsidiaries for each fiscal month and quarterly period ended
subsequent to the date of the latest financial statements delivered
pursuant to clause (i) of this paragraph as to which such financial
statements are available, in each case, in form and substance
reasonably satisfactory to the Administrative Agent.
6.2 Conditions to Each Extension of Credit. The agreement of
each Lender to make any extension of credit requested to be made by it on any
date (including, without limitation, its initial extension of credit) is subject
to the satisfaction of the following conditions precedent:
(a) Representations and Warranties. Each of the
representations and warranties made by the Credit Parties in or
pursuant to the Loan Documents shall be true and correct in all
material respects on and as of such date as if made on and as of such
date (unless any such representations and warranties specifically refer
to another date).
(b) No Default. No Default or Event of Default shall have
occurred and be continuing on such date or after giving effect to the
extensions of credit requested to be made on such date.
(c) Additional Documents. The Administrative Agent shall have
received each additional document, instrument or item of information
reasonably requested by it to further effect the purposes of this
Agreement, including, without limitation, a copy of any debt
instrument, security agreement or other material contract to which any
Credit Party may be a party.
(d) Additional Matters. All corporate and other proceedings,
and all documents, instruments and other legal matters in connection
with the transactions contemplated by this Agreement shall be
reasonably satisfactory in form and substance to the Administrative
Agent, and the Administrative Agent shall have received such other
documents in respect of any aspect or consequence of the transactions
contemplated hereby or thereby as it shall reasonably request to
further effect the purposes of this Agreement.
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39
Each borrowing by and Letter of Credit issued on behalf of HCC hereunder shall
constitute a representation and warranty by HCC as of the date of such Loan that
the conditions contained in this subsection 6.2 have been satisfied.
7. AFFIRMATIVE COVENANTS
HCC hereby agrees that, so long as the Commitments remain in
effect, any Note or any Letter of Credit remains outstanding and unpaid or any
other amount is owing to any Lender or the Administrative Agent hereunder, HCC
shall and HCC (except in the case of delivery of financial information, reports
and notices) shall cause each of its Subsidiaries to:
7.1 Financial Statements Furnish to each Lender:
(a) as soon as available for distribution to shareholders and
creditors generally, but in any event within 120 days after the end of
each fiscal year of HCC, a copy of the consolidated balance sheet of
HCC and its consolidated Subsidiaries, as at the end of such year and
the related consolidated statements of income and retained earnings and
of cash flows for such year, setting forth in each case in comparative
form the figures for the previous year, reported on without a "going
concern" or like qualification or exception, or qualification arising
out of the scope of the audit, by Price Waterhouse or other independent
certified public accountants of nationally recognized standing not
unacceptable to the Required Lenders;
(b) as soon as available for distribution to shareholders and
creditors generally, but in any event within 90 days after the end of
each fiscal year of HCC, a copy of the unaudited consolidated balance
sheet of HCC and its consolidated Subsidiaries, as at the end of such
year, and the related unaudited consolidated statements of income and
retained earnings and of cash flows for such year, in each case setting
forth in comparative form the figures for the corresponding period of
the previous year and the figures for such period as shown on the
budgets of HCC for such year; and
(c) as soon as available, but in any event not later than 45
days after the end of each of the first three quarterly periods of each
fiscal year of HCC, the unaudited consolidated balance sheet of HCC and
its consolidated Subsidiaries, as at the end of such quarter, and the
related unaudited consolidated statements of income and retained
earnings and of cash flows of HCC and its consolidated Subsidiaries,
for such quarter and the portion of the fiscal year through the end of
such quarter, setting forth in each case in comparative form the
figures for the corresponding period of the previous year, certified by
a Responsible Officer as being fairly stated in all material respects
when considered in relation to the consolidated financial statements of
HCC and its consolidated Subsidiaries, (subject to normal year-end
audit adjustments), and in each case setting forth in comparative form
the figures for such periods as shown on the budgets of such Person for
such year;
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all such financial statements to be complete and correct in all material
respects and to be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods (except as approved by such accountants or officer, as the case may be,
and disclosed therein).
7.2 Certificates; Other Information. Furnish to each Lender:
(a) concurrently with the delivery of the financial statements
referred to in subsection 7.1(a), a certificate of the independent
certified public accountants reporting on such financial statements
stating that in making the examination necessary therefor no knowledge
was obtained of any Default or Event of Default, except as specified in
such certificate;
(b) concurrently with the delivery of the financial statements
referred to in subsections 7.1(a) and 7.1(c), a certificate of a
Responsible Officer stating that, to the best of such Officer's
knowledge, HCC during such period has observed or performed all of its
covenants and other agreements, and satisfied every material condition,
contained in this Agreement, in the Notes and the other Loan Documents
to which it is a party to be observed, performed or satisfied by it,
and that such Officer has obtained no knowledge of any Default or Event
of Default except as specified in such certificate;
(c) not later than 45 days following the end of each fiscal
year of HCC, a copy of the projections by HCC of the operating budget
and cash flow budget of HCC and its Subsidiaries for the succeeding
fiscal year, such projections to be accompanied by a certificate of a
Responsible Officer to the effect that such projections have been
prepared on the basis of reasonable assumptions and that such Officer
has no reason to believe they are incorrect or misleading in any
material respect;
(d) (i) within five days after the same are sent, copies of
all financial statements and reports which HCC, if at such time any
class of such Person's securities are held by the public, sends to its
stockholders generally, or, if otherwise, such financial statements and
reports as are made generally available to the public, and (ii) within
five days after the same are filed, copies of all financial statements
and reports which HCC may make to, or file with, the Securities and
Exchange Commission or any successor or analogous Governmental
Authority;
(e) concurrently with the delivery of the financial statements
referred to in subsections 7.1(b) and (c), a management summary
describing and analyzing the performance of HCC and its Subsidiaries
during the periods covered by such financial statements;
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(f) within 45 days after the end of each quarter in each
fiscal year of HCC, a certificate of the principal financial officer of
HCC showing in detail the computations necessary to calculate the
Applicable Margin (an "Applicable Margin Certificate"); and
(g) promptly, such additional financial and other information
as any Lender may from time to time reasonably request.
7.3 Payment of Obligations. Pay, discharge or otherwise
satisfy at or before maturity or before they become delinquent, as the case may
be, all its obligations of whatever nature, except where the amount or validity
thereof is currently being contested in good faith by appropriate proceedings
and reserves in conformity with GAAP with respect thereto have been provided on
the books of HCC or any Subsidiary of HCC, as the case may be.
7.4 Conduct of Business and Maintenance of Existence. Continue
to engage in business of the same general type as now conducted by it and
preserve, renew and keep in full force and effect its corporate existence and
take all reasonable action to maintain all rights, privileges and franchises
necessary or desirable in the normal conduct of its business except as otherwise
permitted pursuant to subsection 8.5; comply with all Contractual Obligations
and Requirements of Law except to the extent that failure to comply therewith
would not, in the aggregate, reasonably be expected to have a Material Adverse
Effect.
7.5 Maintenance of Property; Insurance. HCC will, and will
cause each of its Subsidiaries to, (a) keep and maintain all property material
to the conduct of its business in good working order and condition, ordinary
wear and tear excepted, and (b) maintain, with financially sound and reputable
insurance companies, insurance in such amounts and against such risks as are
customarily maintained by companies engaged in the same or similar businesses
operating in the same or similar locations.
7.6 Inspection of Property; Books and Records; Discussions.
Keep proper books of records and account in which full, true and correct entries
in conformity with GAAP and all Requirements of Law shall be made of all
dealings and transactions in relation to its business and activities; and permit
representatives of any Lender to visit and inspect any of its properties and
examine and make abstracts from any of its books and records at any reasonable
time and as often as may reasonably be desired and to discuss the business,
operations, properties and financial and other condition of HCC and Subsidiaries
of HCC with officers and employees of HCC and Subsidiaries of HCC and with its
independent certified public accountants; provided, however, that no such visit,
inspection or examination or discussion shall unreasonably disrupt or interfere
with normal operations of HCC or any of its Subsidiaries and any such
representatives of the Administrative Agent and the Lenders shall be accompanied
by a Responsible Officer of HCC. No failure to comply with any request for the
exercise of rights hereunder shall be cause for any Event of Default unless such
request is submitted in writing to HCC with reference to this Section 7.6.
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7.7 Notices. Promptly give notice to the Administrative Agent
and each Lender of:
(a) the occurrence of any Default or Event of Default of which
HCC has actual knowledge;
(b) any (i) default or event of default by HCC or any of its
Subsidiaries under or with respect to any of their respective
Contractual Obligations in any respect which, if not cured, would
reasonably be expected to have a Material Adverse Effect, or to HCC's
knowledge any default or event of default by any third party under or
with respect to any Contractual Obligation of said third party with HCC
or any of its Subsidiaries in a respect which, if not cured, would
reasonably be expected to have a Material Adverse Effect (ii)
litigation, investigation or proceeding of which HCC has actual
knowledge which may exist at any time between HCC or any Subsidiary of
HCC and any Governmental Authority, which in either case, if not cured
or if adversely determined, as the case may be, would reasonably be
expected to have a Material Adverse Effect;
(c) any litigation or proceeding affecting HCC or any
Subsidiary of HCC of which HCC has actual knowledge in which the amount
involved is $5,000,000 or more and not covered by insurance or in which
injunctive or similar relief is sought and which if adversely
determined would reasonably be expected to have a Material Adverse
Effect;
(d) the following events, as soon as possible and in any event
within 30 days after HCC has actual knowledge thereof: (i) the
occurrence or expected occurrence of any Reportable Event with respect
to any Plan, or any withdrawal from, or the termination, Reorganization
or Insolvency of any Multiemployer Plan or (ii) the institution of
proceedings or the taking of any other action by the PBGC or HCC, any
Commonly Controlled Entity with respect to the termination of any
Single Employer Plan; and
(e) a development or event which has had or would reasonably
be expected to have a Material Adverse Effect.
Each notice pursuant to this subsection shall be accompanied by a statement of a
Responsible Officer setting forth details of the occurrence referred to therein
and stating what action HCC proposes to take with respect thereto.
7.8 Environmental Laws.
(a) Comply in all material respects with, and undertake all
reasonable efforts to ensure compliance by all tenants and subtenants,
if any, with, all Environmental Laws and obtain and comply in all
material respects with and maintain, and undertake all reasonable
efforts to ensure that all tenants and subtenants obtain and comply
with and maintain, any and all licenses, approvals, registrations or
permits required by
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Environmental Laws, and upon discovery of any non-compliance or
suspected non-compliance, undertake all reasonable efforts to attain
full compliance;
(b) Conduct and complete all investigations, studies, sampling
and testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply in all material respects with
all lawful orders and directives of all Governmental Authorities
respecting Environmental Laws, except to the extent that the failure to
so conduct, complete or take such actions, or to comply with such
orders and directives, would not in the aggregate reasonably be
expected to have a Material Adverse Effect; and
(c) Defend, indemnify and hold harmless the Administrative
Agent and the Lenders, and their respective employees, agents, officers
and directors, from and against any claims, demands, penalties, fines,
liabilities, settlements, damages, costs and expenses of whatever kind
or nature known or unknown, contingent or otherwise, arising out of, or
in any way relating to the violation of or noncompliance with any
Environmental Laws applicable to the real property owned or operated by
HCC or any Subsidiary of HCC, or any orders, requirements or demands of
Governmental Authorities related thereto, including, without
limitation, reasonable attorney's and consultant's fees, investigation
and laboratory fees, court costs and litigation expenses, except to the
extent that any of the foregoing arise out of the gross negligence or
willful misconduct of the party seeking indemnification therefor.
(d) Maintain a program to identify and promote substantial
compliance with and to minimize prudently any liabilities or potential
liabilities under any Environmental Law that may affect HCC or any of
its Qualified Subsidiaries.
7.9 Subsequent Guarantees. HCC shall cause each Qualified
Subsidiary of HCC for which the aggregate value of all assets owned by such
Qualified Subsidiary is or becomes greater than $5,000,000, to execute an
amendment to the Subsidiaries' Guarantee, substantially in the form of Exhibit A
to the Subsidiaries' Guarantee within 90 days after the date on which such
Qualified Subsidiary's assets attain an aggregate value in excess of $5,000,000;
provided, however, that if during such 90-day period the aggregate value of such
Qualified Subsidiary's assets is or becomes $5,000,000 or less, such Qualified
Subsidiary shall not be required to become a party to the Subsidiaries'
Guarantee.
8. NEGATIVE COVENANTS
HCC hereby agrees that, so long as the Commitments remain in
effect, any Note or any Letter of Credit remains outstanding and unpaid or any
other amount is owing to any Lender or the Administrative Agent hereunder, HCC
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly:
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8.1 Financial Condition Covenants. (a) Maintenance of
Consolidated Indebtedness to Consolidated Capitalization. Permit the ratio
(expressed as a percentage) of Consolidated Indebtedness to Consolidated
Capitalization of HCC and its Subsidiaries as at the end of any of HCC's fiscal
quarters to be greater than .65 to 1.0.
(a) Current Ratio. Permit the Current Ratio of HCC and its
Subsidiaries at the end of any of HCC's fiscal quarters to be less than 1.0 to
1.0.
(b) Consolidated U.S. EBITDA to Consolidated Indebtedness.
Permit the ratio of Consolidated U.S. EBITDA to Consolidated Indebtedness for
the four consecutive fiscal quarters of HCC most recently ended to be less than
1.0 to 4.5.
(c) Interest Coverage Ratio. Permit the ratio of Consolidated
EBITDA to Consolidated Interest Expense for the period of four consecutive
fiscal quarters of HCC most recently ended to be less than 2.5 to 1.0.
8.2 Limitation on Indebtedness. Create, incur, assume or
suffer to exist any Indebtedness, except:
(a) Indebtedness in respect of the Loans, the Notes and other
obligations of the Credit Parties under this Agreement and the other
Loan Documents;
(b) Indebtedness of HCC to any of its Subsidiaries and of any
such Subsidiary which is a Credit Party to HCC or any other Subsidiary
of HCC;
(c) Indebtedness outstanding on the Closing Date and listed on
Schedule X and all extensions, renewals, replacements, refinancings and
modifications thereof permitted hereunder;
(d) Indebtedness of HCC or any of its Subsidiaries in an
aggregate amount not to exceed $10,000,000 at any time outstanding
which is recourse only to the assets of HCC or any Subsidiaries
acquired or financed with the proceeds of such Indebtedness;
(e) Indebtedness in respect of Financing Leases provided that,
after giving effect thereto, subsection 8.7 is not contravened;
(f) Indebtedness in respect of Subordinated Debt, the terms
and conditions of which have been approved in writing by the Required
Lenders and all extensions, renewals, replacements, refinancings and
modifications thereof permitted hereunder;
(g) Indebtedness of Unqualified Subsidiaries of HCC; provided
that any such Indebtedness is Non-Recourse Indebtedness;
<PAGE> 50
45
(h) Indebtedness of a Person which becomes a Subsidiary after
the date hereof in an aggregate principal amount not exceeding as to
HCC and its Subsidiaries $10,000,000 at any time outstanding, provided
that (i) such indebtedness existed at the time such Person became a
Subsidiary and was not created in anticipation thereof and (ii)
immediately after giving effect to the acquisition of such Person by
HCC or any of its Subsidiaries no Default or Event of Default shall
have occurred and be continuing; and
(i) Indebtedness not contemplated by clauses (a)-(h) above not
exceeding $5,000,000 in the aggregate at any time outstanding.
8.3 Limitation on Liens. Create, incur, assume or suffer to
exist any Lien upon any of its property, assets or revenues, whether now owned
or hereafter acquired, except for:
(a) Liens for taxes not yet due or which are being contested
in good faith by appropriate proceedings, provided that adequate
reserves with respect thereto are maintained on the books of HCC or any
Subsidiary of HCC, as the case may be, in conformity with GAAP;
(b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of
business which are not overdue for a period of more than 60 days or
which are being contested in good faith by appropriate proceedings;
(c) pledges or deposits in connection with workers'
compensation, unemployment insurance and other social security
legislation and deposits securing liability to insurance carriers under
insurance or self insurance arrangements;
(d) deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of
business;
(e) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and which do not in any case
materially detract from the value of the property subject thereto or
materially interfere with the ordinary conduct of the business of HCC
or any of its Subsidiaries;
(f) leases or subleases granted to third Persons not
interfering in any material respect with the business of HCC or any of
its Subsidiaries;
(g) Liens arising from UCC financing statements regarding
leases permitted by this Agreement;
(h) any interest or title of a lessor or sublessor under any
lease permitted by this Agreement;
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46
(i) Liens in favor of customs and revenue authorities arising
as a matter of law to secure payment of custom duties in connection
with the importation of goods so long as such Liens attach only to the
imported goods;
(j) Liens arising out of consignment or similar arrangements
for the sale of goods entered into by HCC or any of its Subsidiaries in
the ordinary course of business;
(k) Liens created pursuant to Financing Leases permitted
pursuant to Section 8.2(e);
(l) Liens in existence on the Closing Date listed on Schedule
XI, securing Indebtedness permitted by subsection 8.2(c), provided that
no such Lien is spread to cover any additional property after the
Closing Date and that the amount of Indebtedness secured thereby is not
increased;
(m) Liens on (i) natural gas compressors and related
equipment, and usual accessories and improvements and proceeds thereof,
and (ii) oil and gas production equipment, in each case, the
acquisition of which were financed with the proceeds of the
Indebtedness permitted by subsection 8.2(e) and which secures only such
Indebtedness, provided that any such Lien is placed upon such natural
gas compressor or related equipment or such oil and gas production
equipment at the time of the acquisition of such natural gas
compressors or related equipment or such oil and gas production
equipment by HCC or any of its Subsidiaries and the Lien extends to no
other property, and provided, further, that no such Lien is spread to
cover any additional property after the date such Lien attaches and
that the amount of Indebtedness secured thereby is not increased;
(n) Liens on assets of HCC, HMI, Hanover/Smith and the Real
Estate Subsidiary listed on Schedule XII, provided that no such Lien is
spread to cover any additional property after the Closing Date and that
the amount of Indebtedness secured thereby is not increased;
(o) Liens on the assets of Unqualified Subsidiaries of HCC
securing Indebtedness of such Unqualified Subsidiaries permitted under
Section 8.2(g);
(p) Liens securing Derivatives entered into by HCC and its
Subsidiaries which are permitted hereunder;
(q) Liens securing Indebtedness of HCC or any Subsidiary
permitted under subsection 8.2(d) so long as such Liens attach only to
the assets acquired or financed pursuant to such subsection;
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(r) Liens on the property or assets of a Person which becomes
a Subsidiary after the date hereof securing Indebtedness permitted by
subsection 8.2(h), provided that (i) such Liens existed at the time
such Person became a Subsidiary and were not created in anticipation
thereof, (ii) any such Lien is not spread to cover any property or
assets of such Person after the time such Person becomes a Subsidiary,
and (iii) the amount of Indebtedness secured thereby is not increased;
and
(s) Liens not otherwise permitted in clauses (a)-(r) above
securing Indebtedness not exceeding $2,500,000 in the aggregate.
8.4 Limitation on Guarantee Obligations. Create, incur, assume
or suffer to exist any Guarantee Obligation except:
(a) the Guarantees;
(b) the Wartsilla Guaranty Obligation;
(c) up to $5,000,000 in the aggregate of Guarantee Obligations
of HCC or any of its Subsidiaries in connection with indebtedness
incurred by customers of HCC or any of its Subsidiaries; provided, that
the proceeds of any such indebtedness shall be used by such customers
to purchase natural gas compressors or oil and gas production equipment
from HCC or any of its Subsidiaries; and
(d) Guarantee Obligations (in respect of obligations not
constituting Indebtedness) arising under agreements entered into by HCC
or any Subsidiary in the ordinary course of business; and
(e) guarantees in respect of Indebtedness (other than
Subordinated Debt) permitted under this Agreement.
8.5 Limitations on Fundamental Changes. Enter into any merger,
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer
or otherwise dispose of, all or substantially all of its property, business or
assets, or make any material change in its present method of conducting
business, except:
(a) any Qualified Subsidiary may be merged or consolidated
with or into HCC or any other Qualified Subsidiary; provided, that HCC
or a Qualified Subsidiary shall be the continuing or surviving
corporation;
(b) HCC or any Qualified Subsidiary may be merged or
consolidated with any other Person organized under a jurisdiction of
the United States with assets held primarily in the United States;
provided, that HCC or such Qualified Subsidiary shall be the continuing
or surviving corporation; the Administrative Agent is provided with
written
<PAGE> 53
48
notice, and after giving effect thereto no Default or Event of Default
would exist or reasonably be expected to be caused thereby;
(c) any Qualified Subsidiary may sell, lease, assign, transfer
or otherwise dispose of any or all of its assets to HCC or any
Qualified Subsidiary; and
(d) any Unqualified Subsidiary may be merged or consolidated
with or into any other Person and/or may sell, lease, assign, transfer
or otherwise dispose of any of its assets (upon voluntary liquidation
or otherwise) to any other Person provided that, if merged or
consolidated with or into a Qualified Subsidiary, the Qualified
Subsidiary will remain as a "Qualified Subsidiary" after the merger.
8.6 Limitation on Sale or Lease of Assets. Convey, sell,
lease, assign, transfer or otherwise dispose of any of its property, business or
assets (including, without limitation, receivables and leasehold interests),
whether now owned or hereafter acquired, except:
(a) obsolete or worn out property disposed of in the ordinary
course of business, provided that the aggregate value of obsolete or
worn out natural gas compressors and oil and gas production equipment
disposed of in the ordinary course of business does not exceed
$5,000,000 during any fiscal year of HCC;
(b) the sale of inventory in the ordinary course of business,
provided that if such inventory is comprised of natural gas compressors
or oil and gas production equipment, such natural gas compressors or
oil and gas production equipment were never part of the natural gas
compressors or oil and gas production equipment leased or held for
lease by HCC or any of its Subsidiaries;
(c) the lease by HCC or any of its Subsidiaries as lessor of
natural gas compressors and oil and gas production equipment in the
ordinary course of business under operating leases (which do not
constitute Financing Leases);
(d) the sale or discount without recourse of defaulted
accounts receivable arising in the ordinary course of business in
connection with the compromise or collection thereof;
(e) as permitted by subsection 8.5;
(f) the sale of natural gas compressors and oil and gas
production equipment, other than disposals and sales covered by clauses
(a) and (b) above, provided that the fair market value of natural gas
compressors and oil and gas production equipment sold during the term
of this Agreement does not exceed ten percent of the aggregate fair
market value of all natural gas compressors and oil and gas production
equipment owned
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49
by HCC and its Qualified Subsidiaries; provided further that if the
proceeds are reinvested in natural gas compressors or oil and gas
production equipment to be owned by HCC or its Qualified Subsidiaries
within nine months after the sale of the assets which produced such
proceeds, such proceeds shall not be included for purposes of this
covenant; and
(g) the lease by the Real Estate Subsidiary as lessor of real
estate properties to HCC or any Qualified Subsidiary of HCC for use by
HCC or such Qualified Subsidiary as the site of its offices and
facilities.
8.7 Limitation on Leases. Permit Consolidated Lease Expense
for any fiscal year of HCC to exceed $10,000,000.
8.8 Limitation on Dividends. Declare or pay any dividend
(other than dividends payable solely in common stock of such Person) on, or make
any payment on account of, or set apart assets for a sinking or other analogous
fund for, the purchase, redemption, defeasance, retirement or other acquisition
of, any shares of any class of Capital Stock of such Person or any warrants or
options to purchase any such Stock, whether now or hereafter outstanding, or
make any other distribution in respect thereof, either directly or indirectly,
whether in cash or property or in obligations of HCC or any Subsidiary of HCC,
except that if no Default or Event of Default exists or would reasonably be
expected to be caused thereby (i) Subsidiaries of HCC may declare and pay
dividends to HCC and other shareholders of such Subsidiaries, (ii) HCC may
repurchase or redeem shares of HCC common stock from its employees and former
employees so long as the aggregate amount of all such repurchases since the date
of this Agreement does not exceed $2,500,000, (iii) HCC may make open market
repurchases of shares of HCC common stock so long as the aggregate amount of all
such repurchases during the term of this Agreement does not exceed $25,000,000,
(iv) HCC may declare or pay dividends on and make mandatory stock repurchases
(pursuant to the terms of the applicable certificate of designation) of its
preferred stock, if any, and (v) HCC may declare or pay dividends on shares of
HCC common stock, provided that the aggregate amount of such declarations or
payments pursuant to this clause (v) above does not exceed 25% of the
Consolidated Net Income of HCC for the period (taken as one accounting period)
from the beginning of the first fiscal quarter commencing after the Closing Date
to the end of HCC's most recently ended fiscal quarter for which financial
statements have been delivered to the Administrative Agent and the Lenders
pursuant to subsection 7.1 at or prior to the time of such declaration or
payment.
8.9 Limitation on Derivatives. Enter into or assume any
obligations with respect to any Derivatives except for Derivatives used by HCC
or any of its Subsidiaries in reducing the interest rate risk exposure of HCC
and its Subsidiaries which have been provided by a Lender under this Agreement;
provided, that the aggregate notional amounts of such Derivatives shall not
exceed the aggregate amount of loans outstanding hereunder.
8.10 Limitation on Investments, Loans and Advances. Make any
advance, loan, extension of credit or capital contribution to, or purchase any
stock, bonds, notes, debentures or other securities of or any assets
constituting a business unit of, or make any other investment in (all of the
foregoing being herein collectively referred to as "Investments"), any Person,
except:
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50
(a) extensions of trade credit in the ordinary course of
business;
(b) Investments in Cash Equivalents;
(c) loans and advances to employees of such Person or its
Subsidiaries for travel, entertainment and relocation expenses in the
ordinary course of business in an aggregate amount for HCC and its
Subsidiaries not to exceed $250,000 at any one time outstanding;
(d) Investments by HCC in its Subsidiaries which are or become
Credit Parties and investments by such Subsidiaries which are or become
Credit Parties in HCC and in other Subsidiaries of HCC which are or
become Credit Parties;
(e) Investments by HCC in the Real Estate Subsidiary in an
aggregate amount not to exceed $5,000,000 plus amounts necessary to
maintain and operate the real property and improvements thereon owned
by the Real Estate Subsidiary;
(f) Investments in Unqualified Subsidiaries of HCC;
(g) Investments constituting Permitted Business Acquisitions
so long as, after giving effect to the consummation of the transactions
contemplated by each Permitted Business Acquisition and the Loans to be
made and the Letters of Credit to be issued hereunder in connection
therewith, the sum of (i) the cash and Cash Equivalents then held by
HCC and (ii) an amount equal to the difference between (A) the
aggregate Commitments in effect at such time and (B) the Aggregate
Outstanding extensions of Credit of all the Lenders at such time,
equals at least $20,000,000;
(h) Investments or acquisitions by HCC or its Subsidiaries in
up to 50% of the shares of capital stock, partnership interests, joint
venture interests, limited liability company interests or other similar
equity interests in, a Person (other than a Subsidiary), provided that
the aggregate amount of all such investments or acquisitions does not
exceed $25,000,000 in any fiscal year; and
(i) Loans to employees, officers and directors of HCC and its
Subsidiaries to acquire shares of capital stock of HCC not to exceed
$11,000,000 with respect to such loans made on or prior to the date
hereof and not to exceed an additional $5,000,000 with respect to such
loans made after the date hereof.
8.11 Limitation on Optional Payments and Modifications of Debt
Instruments. (i) Make any optional payment or prepayment on or redemption of any
portion of the Shareholder Subordinated Debt or (ii) with respect to any
Indebtedness other than the Shareholder Subordinated Debt, (a) make any optional
payment or prepayment in excess of $10,000,000 during any calendar year (other
than prepayments covered by the proviso below) on or redemption of any
Indebtedness (other than Indebtedness pursuant to this Agreement and as
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provided for in the proviso below) or (b) amend, modify or change, or consent or
agree to any amendment, modification or change to any of the terms of any such
Indebtedness (other than any such amendment, modification or change which would
extend the maturity or reduce the amount of any payment of principal thereof or
which would reduce the rate or extend the date for payment of interest thereon,
or any amendment or waiver which would render the terms of such Indebtedness
less restrictive).
8.12 Transactions with Affiliates. Except for transactions of
a type set forth on Schedule XIII, enter into any transaction, including,
without limitation, any purchase, sale, lease or exchange of property or the
rendering of any service, with any Affiliate unless such transaction is
otherwise permitted under this Agreement, is in the ordinary course of HCC's or
such Subsidiary's business and is upon fair and reasonable terms no less
favorable to HCC or such Subsidiary, as the case may be, than it would obtain in
a comparable arm's length transaction with a Person not an Affiliate.
8.13 Sale and Leaseback. Except for the transactions of a type
set forth on Schedule VI, enter into any arrangement with any Person where HCC
or any of the Subsidiaries of HCC is the lessee of real or personal property
which has been or is to be sold or transferred by HCC or such Subsidiary to such
Person or to any other Person to whom funds have been or are to be advanced by
such Person on the security of such property or rental obligations of HCC or
such Subsidiary, except that HCC and its Subsidiaries may enter into Financing
Leases as lessee for natural gas compressors and oil and gas production
equipment if after giving effect thereto subsection 8.2 is not contravened.
8.14 Corporate Documents. Amend its Certificate of
Incorporation in any way adverse to the interests of the Administrative Agent
and the Lenders.
8.15 Fiscal Year. Permit the fiscal year of HCC to end on a
day other than December 31.
8.16 Nature of Business. Engage in any business other than (a)
the leasing, maintenance, purchase, sale and operation of natural gas compressor
units and oil and gas production equipment, (b) the design, engineering and
fabrication of natural gas compressor units, (c) the design, engineering and
fabrication of oil and gas production equipment, (d) the provision of contract
compression and related services and (e) any activities related thereto which
are consistent with past practice and conducted in the ordinary course of
business.
8.17 Unqualified Subsidiaries. Permit any Unqualified
Subsidiary to directly or indirectly own any assets (other than cash or Cash
Equivalents located in bank accounts at Chase) which are located in the United
States of America or any territory thereof.
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9. EVENTS OF DEFAULT
If any of the following events shall occur and be continuing:
(a) HCC shall fail to pay any principal of any Note or any
Reimbursement Obligation when due in accordance with the terms thereof
or hereof; or HCC shall fail to pay any interest on any Note, or any
other amount payable hereunder, within five days after any such
interest or other amount becomes due in accordance with the terms
thereof or hereof; or
(b) Any representation or warranty made or deemed made by any
Credit Party herein or in any other Loan Document or which is contained
in any certificate, document or financial or other statement furnished
at any time under or in connection with this Agreement or any other
Loan Document shall prove to have been incorrect in any material
respect on or as of the date made or deemed made; or
(c) HCC shall default in the observance or performance of any
agreement contained in Section 8 of this Agreement; or
(d) HCC shall default in the observance or performance of any
other agreement contained in this Agreement (other than as provided in
paragraphs (a) through (c) of this Section 9) and such default shall
continue unremedied for a period of 30 days; or
(e) The Subsidiaries' Guarantee shall, at any time, cease to
be in full force and effect (unless released by the Administrative
Agent) or shall be declared null and void, or the validity or
enforceability thereof shall be contested by any Credit Party; or
(f) HCC or any of the Subsidiaries of HCC shall (i) default in
any payment of principal of or interest of any Indebtedness (other than
the Notes) or in the payment of any Guarantee Obligation, in excess of
$5,000,000 in the aggregate, beyond the period of grace (not to exceed
30 days), if any, provided in the instrument or agreement under which
such Indebtedness or Guarantee Obligation was created; or (ii) default
in the observance or performance of any other agreement or condition
relating to any such Indebtedness or Guarantee Obligation in excess of
$5,000,000 or contained in any instrument or agreement evidencing,
securing or relating thereto, or any other event shall occur or
condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such
Indebtedness or beneficiary or beneficiaries of such Guarantee
Obligation (or a trustee or agent on behalf of such holder or holders
or beneficiary or beneficiaries) to cause, with the giving of notice if
required, such Indebtedness to become due prior to its stated maturity
or such Guarantee Obligation to become payable; or
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(g) (i) HCC or any Material Subsidiary shall commence any
case, proceeding or other action (A) under any existing or future law
of any jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, reorganization or relief of debtors, seeking to have an
order for relief entered with respect to it, or seeking to adjudicate
it a bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment, winding-up, liquidation, dissolution, composition or other
relief with respect to it or its debts, or (B) seeking appointment of a
receiver, trustee, custodian or other similar official for it or for
all or any substantial part of its assets, or any of HCC or any
Material Subsidiary shall make a general assignment for the benefit of
its creditors; or (ii) there shall be commenced against any of HCC or
any Material Subsidiary any case, proceeding or other action of a
nature referred to in clause (i) above which (A) results in the entry
of an order for relief or any such adjudication or appointment or (B)
remains undismissed, undischarged or unbonded for a period of 60 days;
or (iii) there shall be commenced against any of HCC or any Material
Subsidiary any case, proceeding or other action seeking issuance of a
warrant of attachment, execution, distraint or similar process against
all or any substantial part of its assets which results in the entry of
an order for any such relief which shall not have been vacated,
discharged, or stayed or bonded pending appeal within 60 days from the
entry thereof; or (iv) any of HCC or any Material Subsidiary shall take
any action for the purpose of effecting its consent to, approval of, or
acquiescence in, any of the acts set forth in clause (i), (ii), or
(iii) above; or (v) any of HCC or any Material Subsidiary shall
generally not, or shall admit in writing its inability to, pay its
debts as they become due;
(h) (i) Any Person shall engage in any non-exempt "prohibited
transaction" (as defined in Section 406 of ERISA or Section 4975 of the
Code) involving any Plan, (ii) any "accumulated funding deficiency" (as
defined in Section 302 of ERISA), whether or not waived, shall exist
with respect to any Plan or any lien shall arise on the assets of HCC
or any Commonly Controlled Entity in favor of PBGC or a Plan, (iii) a
Reportable Event shall occur with respect to, or proceedings shall
commence to have a trustee appointed, or a trustee shall be appointed,
to administer or to terminate, any Single Employer Plan, which
Reportable Event or commencement of proceedings or appointment of a
trustee is, in the reasonable opinion of the Required Lenders, likely
to result in the termination of such Plan for purposes of Title IV of
ERISA, (iv) any Single Employer Plan shall terminate for purposes of
Title IV of ERISA, (v) HCC or any Commonly Controlled Entity shall, or
in the reasonable opinion of the Required Lenders is likely to, incur
any liability in connection with a withdrawal from, or the Insolvency
or Reorganization of, a Multiemployer Plan or (vi) any other event or
condition shall occur or exist, with respect to a Plan; and in each
case in clauses (i) through (vi) above, such event or condition,
together with all other such events or conditions, if any, could
subject HCC or any of its Subsidiaries to any tax, penalty or other
liabilities in the aggregate material in relation to the business,
operations, property or financial or other condition of HCC and its
Subsidiaries taken as a whole; or
(i) One or more judgments or decrees shall be entered against
HCC or any of the Subsidiaries of HCC involving in the aggregate a
liability (not paid or fully covered by
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insurance) of $5,000,000 or more and all such judgments or decrees
shall not have been vacated, discharged, stayed or bonded pending
appeal within 60 days from the entry thereof; or
(j) If at any time, HCC or any of the Subsidiaries of HCC
shall become liable for remediation and/or environmental compliance
expenses and/or fines, penalties or other charges which, in the
aggregate, are in excess of $5,000,000;
then, and in any such event, (A) if such event is an Event of Default specified
in clause (i) or (ii) of paragraph (g) above with respect to HCC the Commitments
shall immediately terminate automatically and the Loans hereunder (with accrued
interest thereon) and all other amounts owing under this Agreement (including,
without limitation, all amounts of L/C Obligations, whether or not the
beneficiaries of the then outstanding Letters of Credit shall have presented the
documents required thereunder) and the Notes shall immediately become due and
payable, and (B) if such event is any other Event of Default, either or both of
the following actions may be taken: (i) with the consent of the Required
Lenders, the Administrative Agent may, or upon the request of the Required
Lenders, the Administrative Agent shall, by notice to HCC declare the
Commitments to be terminated forthwith, whereupon the Commitments shall
immediately terminate; and (ii) with the consent of the Required Lenders, the
Administrative Agent may, or upon the request of the Required Lenders, the
Administrative Agent shall, by notice of default to HCC declare the Loans
hereunder (with accrued interest thereon) and all other amounts owing under this
Agreement (including, without limitation, all amounts of L/C Obligations,
whether or not the beneficiaries of the then outstanding Letters of Credit shall
have presented the documents required thereunder) and the Notes to be due and
payable forthwith, whereupon the same shall immediately become due and payable.
With respect to all Letters of Credit with respect to which presentment for
honor shall not have occurred at the time of an acceleration pursuant to the
preceding sentence, HCC shall at such time deposit in a cash collateral account
opened by the Administrative Agent an amount equal to the aggregate then undrawn
and unexpired amount of such Letters of Credit. HCC hereby grants to the
Administrative Agent, for the benefit of the Issuing Lender and the L/C
Participants, a security interest in such cash collateral to secure all
obligations of HCC under this Agreement and the other Loan Documents. Amounts
held in such cash collateral account shall be applied by the Administrative
Agent first to the payment of drafts drawn under such Letters of Credit. HCC
shall execute and deliver to the Administrative Agent, for the account of the
Issuing Lender and the L/C Participants, such further documents and instruments
as the Administrative Agent may request to evidence the creation and perfection
of the within security interest in such cash collateral account. Except as
expressly provided above in this Section, presentment, demand, protest and all
other notices of any kind are hereby expressly waived.
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10. THE ADMINISTRATIVE AGENT
10.1 Appointment. Each Lender hereby irrevocably designates
and appoints Chase as the Administrative Agent of such Lender under this
Agreement and the other Loan Documents, and each such Lender irrevocably
authorizes Chase, as the Administrative Agent for such Lender, to take such
action on its behalf under the provisions of this Agreement and the other Loan
Documents and to exercise such powers and perform such duties as are expressly
delegated to the Administrative Agent by the terms of this Agreement and the
other Loan Documents, together with such other powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary elsewhere in
this Agreement, the Administrative Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against the
Administrative Agent.
10.2 Delegation of Duties. The Administrative Agent may
execute any of its duties under this Agreement and the other Loan Documents by
or through agents or attorneys-in-fact and shall be entitled to advice of
counsel concerning all matters pertaining to such duties. The Administrative
Agent shall not be responsible for the negligence or misconduct of any agents or
attorneys in-fact selected by it with reasonable care.
10.3 Exculpatory Provisions. Neither the Administrative Agent
nor any of its officers, directors, employees, agents, attorneys-in-fact or
Affiliates shall be (i) liable for any action lawfully taken or omitted to be
taken by it or such Person under or in connection with this Agreement or any
other Loan Document (except for its or such Person's own gross negligence or
willful misconduct) or (ii) responsible in any manner to any of the Lenders for
any recitals, statements, representations or warranties made by any Credit Party
or any officer thereof contained in this Agreement or any other Loan Document or
in any certificate, report, statement or other document referred to or provided
for in, or received by the Administrative Agent under or in connection with,
this Agreement or any other Loan Document or for the value, validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
the Notes or any other Loan Document or for any failure of any Credit Party to
perform its obligations hereunder or thereunder. The Administrative Agent shall
not be under any obligation to any Lender to ascertain or to inquire as to the
observance or performance of any of the agreements contained in, or conditions
of, this Agreement or any other Loan Document, or to inspect the properties,
books or records of any Credit Party.
10.4 Reliance by Administrative Agent. The Administrative
Agent shall be entitled to rely, and shall be fully protected in relying, upon
any Note, writing, resolution, notice, consent, certificate, affidavit, letter,
cablegram, telegram, telecopy, telex or teletype message, statement, order or
other document or conversation believed by it to be genuine and correct and to
have been signed, sent or made by the proper Person or Persons and upon advice
and statements of legal counsel (including, without limitation, counsel to any
Credit Party), independent accountants and other experts selected by the
Administrative Agent. The
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Administrative Agent may deem and treat the payee of any Note as the owner
thereof for all purposes unless a written notice of assignment, negotiation or
transfer thereof shall have been filed with the Administrative Agent. The
Administrative Agent shall be fully justified in failing or refusing to take any
action under this Agreement or any other Loan Document unless it shall first
receive such advice or concurrence of the Required Lenders as it deems
appropriate or it shall first be indemnified to its satisfaction by the Lenders
against any and all liability and expense which may be incurred by it by reason
of taking or continuing to take any such action. The Administrative Agent shall
in all cases be fully protected in acting, or in refraining from acting, under
this Agreement and the Notes and the other Loan Documents in accordance with a
request of the Required Lenders, and such request and any action taken or
failure to act pursuant thereto shall be binding upon all the Lenders and all
future holders of the Notes.
10.5 Notice of Default. The Administrative Agent shall not be
deemed to have knowledge or notice of the occurrence of any Default or Event of
Default hereunder unless the Administrative Agent has received notice from a
Lender or HCC referring to this Agreement, describing such Default or Event of
Default and stating that such notice is a "notice of default". In the event that
the Administrative Agent receives such a notice, the Administrative Agent shall
give notice thereof to the Lenders. The Administrative Agent shall take such
action with respect to such Default or Event of Default as shall be reasonably
directed by the Required Lenders; provided that unless and until the
Administrative Agent shall have received such directions, the Administrative
Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default or Event of Default as it shall
deem advisable in the best interests of the Lenders.
10.6 Non-Reliance on Administrative Agent and Other Lenders.
Each Lender expressly acknowledges that neither the Administrative Agent nor any
of its officers, directors, employees, agents, attorneys-in-fact or Affiliates
has made any representations or warranties to it and that no act by the
Administrative Agent hereinafter taken, including any review of the affairs of
any Credit Party shall be deemed to constitute any representation or warranty by
the Administrative Agent to any Lender. Each Lender represents to the
Administrative Agent that it has, independently and without reliance upon the
Administrative Agent or any other Lender, and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, operations, property, financial and other
condition and creditworthiness of HCC and each other Credit Party and made its
own decision to make its Loans hereunder and enter into this Agreement. Each
Lender also represents that it will, independently and without reliance upon the
Administrative Agent or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit analysis, appraisals and decisions in taking or not taking action under
this Agreement and the other Loan Documents, and to make such investigation as
it deems necessary to inform itself as to the business, operations, property,
financial and other condition and creditworthiness of HCC and each other Credit
Party. Except for notices, reports and other documents expressly required to be
furnished to the Lenders by the Administrative Agent hereunder, the
Administrative Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the business, operations,
property,
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57
condition (financial or otherwise), prospects or creditworthiness of any Credit
Party which may come into the possession of the Administrative Agent or any of
its officers, directors, employees, agents, attorneys-in-fact or Affiliates.
10.7 Indemnification. The Lenders agree to indemnify the
Administrative Agent in its capacity as such (to the extent not reimbursed by
HCC, or the other Credit Parties and without limiting the obligation of HCC, and
each other Credit Party to do so), ratably according to the respective amounts
of their original Commitments, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind whatsoever which may at any time
(including, without limitation, at any time following the payment of the Notes)
be imposed on, incurred by or asserted against the Administrative Agent in any
way relating to or arising out of this Agreement, any of the other Loan
Documents or any documents contemplated by or referred to herein or therein or
the transactions contemplated hereby or thereby or any action taken or omitted
by the Administrative Agent under or in connection with any of the foregoing;
provided that no Lender shall be liable for the payment of any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting solely from the Administrative
Agent's gross negligence or willful misconduct. The agreements in this
subsection shall survive the payment of the Notes and all other amounts payable
hereunder.
10.8 Administrative Agent in Its Individual Capacity. The
Administrative Agent and its Affiliates may make loans to, accept deposits from,
hold equity securities of, and generally engage in any kind of business with any
Credit Party as though the Administrative Agent were not the Administrative
Agent hereunder and under the other Loan Documents. With respect to its Loans
made or renewed by it and any Note issued to it and with respect to any Letter
of Credit issued or participated in by it, the Administrative Agent shall have
the same rights and powers under this Agreement and the other Loan Documents as
any Lender and may exercise the same as though it were not the Administrative
Agent, and the terms "Lender" and "Lenders" shall include the Administrative
Agent in its individual capacity.
10.9 Successor Administrative Agent. The Administrative Agent
may resign as Administrative Agent upon 10 days' notice to the Lenders. If the
Administrative Agent shall resign as Administrative Agent under this Agreement
and the other Loan Documents, then the Required Lenders shall appoint from among
the Lenders a successor agent for the Lenders, which successor agent shall be
subject to the approval of HCC. Upon receipt of such approval from HCC, such
successor agent shall succeed to the rights, powers and duties of the
Administrative Agent, and the term "Administrative Agent" shall mean such
successor agent effective upon its appointment, and the former Administrative
Agent's rights, powers and duties as Administrative Agent shall be terminated,
without any other or further act or deed on the part of such former
Administrative Agent or any of the parties to this Agreement or any holders of
the Notes. After any retiring Administrative Agent's resignation as
Administrative Agent, the provisions of this subsection shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent under this Agreement and the other Loan Documents.
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11. MISCELLANEOUS
11.1 Amendments and Waivers. Neither this Agreement, any Note,
any other Loan Document, nor any terms hereof or thereof may be amended,
supplemented or modified except in accordance with the provisions of this
subsection. With the written consent of the Required Lenders, the Administrative
Agent, HCC and any other Credit Party thereto, may, from time to time, enter
into written amendments, supplements or modifications hereto and to the Notes
and the other Loan Documents for the purpose of adding any provisions to this
Agreement or the Notes or the other Loan Documents or changing in any manner the
rights of the Lenders or of the Credit Parties party thereto hereunder or
thereunder or waiving, on such terms and conditions as the Administrative Agent
may specify in such instrument, any of the requirements of this Agreement or the
Notes or the other Loan Documents or any Default or Event of Default and its
consequences; provided, however, that no such waiver and no such amendment,
supplement or modification shall (a) reduce the amount or extend the maturity of
any Note or any installment thereof, or reduce the rate or extend the time of
payment of interest thereon, or reduce any fee payable to any Lender hereunder,
or change the amount of any Lender's Commitments, in each case without the
consent of the Lender affected thereby, or (b) amend, modify or waive any
provision of this subsection or reduce the percentage specified in the
definition of Required Lenders or Majority Lenders, or consent to the assignment
or transfer by any Credit Party of any of its rights and obligations under this
Agreement and the other Loan Documents, in each case without the written consent
of all the Lenders (except as contemplated by this Agreement), or (c) amend,
modify or waive any provision of Section 10 without the written consent of the
then Administrative Agent. Any such waiver and any such amendment, supplement or
modification shall apply equally to each of the Lenders and shall be binding
upon each of the Credit Parties, the Lenders, the Administrative Agent and all
future holders of the Notes. In the case of any waiver, each of the Credit
Parties, the Lenders and the Administrative Agent shall be restored to their
former position and rights hereunder and under the outstanding Notes and any
other Loan Documents, and any Default or Event of Default waived shall be deemed
to be cured and not continuing; but no such waiver shall extend to any
subsequent or other Default or Event of Default, or impair any right consequent
thereon.
11.2 Notices. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing (including by
telecopy, telegraph or telex), and, unless otherwise expressly provided herein,
shall be deemed to have been duly given or made when delivered by hand, or three
days after being deposited in the mail, postage prepaid, or, in the case of
telecopy notice or overnight courier service, when received, or, in the case of
telegraphic notice, when delivered to the telegraph company, or, in the case of
telex notice, when sent, answerback received, addressed as follows in the case
of HCC and the Administrative Agent, and as set forth in Schedule I in the case
of the other parties hereto, or to such other address as may be hereafter
notified by the respective parties hereto and any future holders of the Notes:
HCC: Hanover Compressor Company
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12001 North Houston-Rosslyn
Houston, Texas 77086
Attention: Chief Financial Officer
Telecopy: (713) 447-8781
The Administrative Agent: The Chase Manhattan Bank
One Chase Manhattan Plaza, Eighth Floor
New York, New York 10081
Attention: Agency Services
Telecopy: 212-552-5777
with a copy to: The Chase Manhattan Bank
270 Park Avenue, 32nd Floor
New York, New York 10017
Attention: Carlos Morales and Mary Jo Woodford
Telecopy: 212-270-3897
provided that any notice, request or demand to or upon the Administrative Agent
or the Lenders pursuant to subsection 2.4, 3.3, 3.4, 3.5 or 3.9 shall not be
effective until received. A copy of any notice, request or demand to or upon any
Credit Party pursuant to this Agreement or any other Loan Document (other than
any such requests made in the ordinary course of administering this Agreement
and the other Loan Documents) shall also be delivered to Neal, Gerber &
Eisenberg, Two North LaSalle Street, Suite 2100, Chicago, Illinois 60602,
attention: Richard S. Meller, Esq. (telecopy: (312) 269-1747).
11.3 No Waiver; Cumulative Remedies. No failure to exercise
and no delay in exercising, on the part of the Administrative Agent or any
Lender, any right, remedy, power or privilege hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, remedy,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, remedy, power or privilege. The rights,
remedies, powers and privileges herein provided are cumulative and not exclusive
of any rights, remedies, powers and privileges provided by law.
11.4 Survival of Representations and Warranties. All
representations and warranties made hereunder and in any document, certificate
or statement delivered pursuant hereto or in connection herewith shall survive
the execution and delivery of this Agreement and the Notes.
11.5 Payment of Expenses and Taxes. HCC agrees (a) to pay or
reimburse the Administrative Agent for all its reasonable out-of-pocket costs
and expenses incurred in connection with the development, preparation and
execution of, and any amendment, supplement or modification to, this Agreement,
the Notes and the other Loan Documents and any other documents prepared in
connection herewith or therewith, and the consummation of the
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transactions contemplated hereby and thereby, including, without limitation, the
reasonable fees and disbursements of counsel to the Administrative Agent, (b) to
pay or reimburse each Lender and the Administrative Agent for all its reasonable
costs and expenses incurred in connection with the enforcement or preservation
of any rights under this Agreement, the Notes, the other Loan Documents and any
such other documents, including, without limitation, reasonable fees and
disbursements of counsel to the Administrative Agent and to the several Lenders,
and (c) to pay, indemnify, and hold each Lender and the Administrative Agent
harmless from, any and all recording and filing fees and any and all liabilities
with respect to, or resulting from any delay in paying, stamp, excise and other
taxes, if any, which may be payable or determined to be payable in connection
with the execution and delivery of, or consummation of any of the transactions
contemplated by, or any amendment, supplement or modification of, or any waiver
or consent under or in respect of, this Agreement, the Notes, the other Loan
Documents and any such other documents, and (d) to pay, indemnify, and hold each
Lender and the Administrative Agent and their respective directors, officers,
employees and agents harmless from and against any and all other liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever with respect to the
execution, delivery, enforcement, performance and administration of this
Agreement, the Notes, the other Loan Documents and any such other documents or
the use or the proposed use of proceeds thereof (all the foregoing,
collectively, the "indemnified liabilities"), provided, that HCC shall not have
any obligation hereunder to the Administrative Agent or any Lender with respect
to indemnified liabilities arising from (i) the gross negligence or willful
misconduct of the Administrative Agent or any such Lender, (ii) legal
proceedings commenced against the Administrative Agent or any such Lender by any
security holder or creditor thereof arising out of and based upon rights
afforded any such security holder or creditor solely in its capacity as such, or
(iii) legal proceedings commenced against the Administrative Agent or any such
Lender by any other Lender or by any Transferee (as defined in subsection 11.6).
The agreements in this subsection shall survive repayment of the Notes and all
other amounts payable hereunder and under the other Loan Documents.
11.6 Successors and Assigns; Participations; Purchasing
Lenders.
(a) This Agreement shall be binding upon and inure to the
benefit of HCC, the Lenders, the Administrative Agent, all future
holders of the Notes and their respective successors and assigns,
except that HCC may not assign or transfer any of its rights or
obligations under this Agreement without the prior written consent of
each Lender.
(b) Any Lender may, in the ordinary course of its commercial
banking business and in accordance with applicable law, at any time
sell to one or more banks or other entities ("Participants")
participating interests in any Loan owing to such Lender, any Note held
by such Lender, any Commitment of such Lender or any other interest of
such Lender hereunder and under the other Loan Documents, provided that
each such sale shall be of Loans and Commitments in an aggregate amount
of at least $5,000,000, and provided, further, that no Lender may so
sell its Commitments so that less than $10,000,000 of such Commitments
are held by such Lender without participating
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interests therein, unless such Lender (excluding Chase) so sells 100%
of its Commitments. In the event of any such sale by a Lender of
participating interests to a Participant, such Lender's obligations
under this Agreement to the other parties to this Agreement shall
remain unchanged, such Lender shall remain solely responsible for the
performance thereof, such Lender shall remain the holder of any such
Note for all purposes under this Agreement and the other Loan
Documents, and the Credit Parties and the Administrative Agent shall
continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under this Agreement and the
other Loan Documents. HCC agrees that if amounts outstanding under this
Agreement and the Notes are due or unpaid, or shall have been declared
or shall have become due and payable upon the occurrence of an Event of
Default, each Participant shall be deemed to have the right of setoff
in respect of its participating interest in amounts owing under this
Agreement and any Note to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under this
Agreement or any Note, provided that such Participant shall only be
entitled to such right of setoff if it shall have agreed in the
agreement pursuant to which it shall have acquired its participating
interest to share with the Lenders the proceeds thereof as provided in
subsection 11.7. HCC also agrees that each Participant shall be
entitled to the benefits of subsections 3.9, 3.11, 3.12 and 11.5 with
respect to its participation in the Commitments and the Loans
outstanding from time to time; provided, that no Participant shall be
entitled to receive any greater amount pursuant to such subsections
than the transferor Lender would have been entitled to receive in
respect of the amount of the participation transferred by such
transferor Lender to such Participant had no such transfer occurred.
(c) Any Lender, in the ordinary course of its commercial
banking business and in accordance with applicable law, at any time may
sell to any Lender or any Affiliate thereof and, with the consent of
HCC and the Administrative Agent (which in each case shall not be
unreasonably withheld), to one or more additional banks or financial
institutions ("Purchasing Lenders") all or any part of the assigning
Lender's rights and obligations under this Agreement, the Notes and the
other Loan Documents pursuant to an Assignment and Acceptance,
substantially in the form of Exhibit D, executed by such Purchasing
Lender, such assigning Lender (and, in the case of a Purchasing Lender
that is not then a Lender or an Affiliate thereof, by HCC and the
Administrative Agent) and delivered to the Administrative Agent for its
acceptance and recording in the Register, provided that each such sale
shall be of Loans and Commitments of an aggregate amount of at least
$5,000,000 and provided, further, that no Lender party to this
Agreement on the date hereof may so sell any of its initial Commitments
hereunder such that such Lender holds directly less than $10,000,000 of
such Commitments unless such Lender (excluding Chase) so sells 100% of
its Commitments. Such Assignment and Acceptance shall specify an
Effective Date which is not less than five Business Days after the date
of execution thereof. Upon such execution, delivery, acceptance and
recording, from and after the Effective Date determined pursuant to
such Assignment and Acceptance, (x) the Purchasing Lender thereunder
shall be a party hereto and, to the extent provided in such Assignment
and Acceptance, have the rights and obligations of a Lender hereunder
with a
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Commitment as set forth therein, and (y) the assigning Lender
thereunder shall, to the extent provided in such Assignment and
Acceptance, be released from its obligations under this Agreement (and,
in the case of an Assignment and Acceptance covering all or the
remaining portion of an assigning Lender's rights and obligations under
this Agreement, such assigning Lender shall cease to be a party
hereto). Such Assignment and Acceptance shall be deemed to amend this
Agreement to the extent, and only to the extent, necessary to reflect
the addition of such Purchasing Lender and the resulting adjustment of
Commitment Percentages arising from the purchase by such Purchasing
Lender of all or a portion of the rights and obligations of such
assigning Lender under this Agreement and the Notes. On or prior to the
Effective Date determined pursuant to such Assignment and Acceptance,
HCC, at its own expense, shall execute and deliver to the
Administrative Agent in exchange for the surrendered Note or Notes a
new Note or Notes to the order of such Purchasing Lender in amounts
equal to the Commitment assumed by it pursuant to such Assignment and
Acceptance and, if the assigning Lender has retained a Commitment
hereunder, a new Note or Notes to the order of the assigning Lender in
an amount equal to the Commitment retained by it hereunder. Such new
Note or Notes shall be dated the Closing Date and shall otherwise be in
the form of the Note or Notes replaced thereby. The Note or Notes
surrendered by the assigning Lender shall be returned by the
Administrative Agent to HCC marked "canceled".
(d) The Administrative Agent shall maintain at its address
referred to in subsection 12.2 a copy of each Assignment and Acceptance
delivered to it and a register (the "Register") for the recordation of
the names and addresses of the Lenders and the Commitments of, and
principal amount of the Loans owing to, each Lender from time to time.
The entries in the Register shall be conclusive, in the absence of
manifest error, and HCC, the Administrative Agent and the Lenders may
treat each Person whose name is recorded in the Register as the owner
of the Loan recorded therein for all purposes of this Agreement. The
Register shall be available for inspection by HCC or any Lender at any
reasonable time and from time to time upon reasonable prior notice.
(e) Upon its receipt of an Assignment and Acceptance executed
by a transferor Lender and Purchasing Lender (and, in the case of a
Purchasing Lender that is not then a Lender or an affiliate thereof, by
HCC and the Administrative Agent) together with payment to the
Administrative Agent of a registration and processing fee of $2,500,
the Administrative Agent shall (i) promptly accept such Assignment and
Acceptance (ii) on the Effective Date determined pursuant thereto
record the information contained therein in the Register and give
notice of such acceptance and recordation to the Lenders and HCC.
(f) HCC authorizes each Lender to disclose to any Participant
or Purchasing Lender (each, a "Transferee") and any prospective
Transferee any and all financial information in such Lender's
possession concerning any Credit Party and its affiliates which has
been delivered to such Lender by or on behalf of HCC pursuant to this
Agreement or which has been delivered to such Lender by or on behalf of
HCC in
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connection with such Lender's credit evaluation of the Credit Parties
and their affiliates prior to becoming a party to this Agreement.
(g) If, pursuant to this subsection, any interest in this
Agreement or any Note is transferred to any Transferee which is
organized under the laws of any jurisdiction other than the United
States or any state thereof, the transferor Lender shall cause such
Transferee, concurrently with the effectiveness of such transfer, (i)
to represent to the transferor Lender (for the benefit of the
transferor Lender, the Administrative Agent and HCC) that under
applicable law and treaties no taxes will be required to be withheld by
the Administrative Agent, HCC or the transferor Lender with respect to
any payments to be made to such Transferee in respect of the Loans,
(ii) to furnish to the transferor Lender (and, in the case of any
Purchasing Lender registered in the Register, the Administrative Agent
and HCC) either U.S. Internal Revenue Service Form 4224 or U.S.
Internal Revenue Service Form 1001 (wherein such Transferee claims
entitlement to complete exemption from U.S. federal withholding tax on
all interest payments hereunder) and (iii) to agree (for the benefit of
the transferor Lender, the Administrative Agent and HCC) to provide the
transferor Lender (and, in the case of any Purchasing Lender registered
in the Register, the Administrative Agent and HCC) a new Form 4224 or
Form 1001 upon the expiration or obsolescence of any previously
delivered form and comparable statements in accordance with applicable
U.S. laws and regulations and amendments duly executed and completed by
such Transferee, and to comply from time to time with all applicable
U.S. laws and regulations with regard to such withholding tax
exemption.
(h) Nothing herein shall prohibit any Lender from pledging or
assigning any Note to any Federal Reserve Lender in accordance with
applicable law.
11.7 Adjustments; Set-off.
(a) If any Lender (a "benefitted Lender") shall at any time
receive any payment of all or part of its Loans or the Reimbursement
Obligations owing to it, or interest thereon, or receive any collateral
in respect thereof (whether voluntarily or involuntarily, by set-off,
pursuant to events or proceedings of the nature referred to in Section
9(g), or otherwise), in a greater proportion than any such payment to
or collateral received by any other Lender, if any, in respect of such
other Lender's Loans, or interest thereon, such benefitted Lender shall
purchase for cash from the other Lenders such portion of each such
other Lender's Loans or the Reimbursement Obligations owing to it, or
shall provide such other Lenders with the benefits of any such
collateral, or the proceeds thereof, as shall be necessary to cause
such benefitted Lender to share the excess payment or benefits of such
collateral or proceeds ratably with each of the Lenders; provided,
however, that if all or any portion of such excess payment or benefits
is thereafter recovered from such benefitted Lender, such purchase
shall be rescinded, and the purchase price and benefits returned, to
the extent of such recovery, but without interest. HCC agrees that each
Lender so purchasing a portion of another Lender's Loans
<PAGE> 69
64
may exercise all rights of payment (including, without limitation,
rights of set-off) with respect to such portion as fully as if such
Lender were the direct holder of such portion.
(b) In addition to any rights and remedies of the Lenders
provided by law, each Lender shall have the right, without prior notice
to HCC, any such notice being expressly waived by HCC to the extent
permitted by applicable law, upon any amount becoming due and payable
by HCC hereunder or under the Notes (whether at the stated maturity, by
acceleration or otherwise) to set-off and appropriate and apply against
such amount any and all deposits (general or special, time or demand,
provisional or final), in any currency, and any other credits,
indebtedness or claims, in any currency, in each case whether direct or
indirect, absolute or contingent, matured or unmatured, at any time
held or owing by such Lender to or for the credit or the account of
HCC. Each Lender agrees promptly to notify HCC, the Administrative
Agent after any such set-off and application made by such Lender,
provided that the failure to give such notice shall not affect the
validity of such set-off and application.
11.8 Counterparts. This Agreement may be executed by one or
more of the parties to this Agreement on any number of separate counterparts,
and all of said counterparts taken together shall be deemed to constitute one
and the same instrument. A set of the copies of this Agreement signed by all the
parties shall be lodged with HCC and the Administrative Agent.
11.9 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11.10 Integration. This Agreement represents the agreement of
HCC, the Administrative Agent and the Lenders with respect to the subject matter
hereof, and there are no promises, undertakings, representations or warranties
by the Administrative Agent or any Lender relative to subject matter hereof not
expressly set forth or referred to herein or in the other Loan Documents and the
fee letter referred to in subsection 3.2.
11.11 GOVERNING LAW. THIS AGREEMENT AND THE NOTES AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTES SHALL
BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE
STATE OF NEW YORK.
11.12 Submission To Jurisdiction; Waivers. HCC hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to
which it is a party, or for recognition
<PAGE> 70
65
and enforcement of any judgement in respect thereof, to the
non-exclusive general jurisdiction of the courts of the State of New
York, the courts of the United States of America for the Southern
District of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought
in such courts and waives any objection that it may now or hereafter
have to the venue of any such action or proceeding in any such court or
that such action or proceeding was brought in an inconvenient court and
agrees not to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or
certified mail (or any substantially similar form of mail), postage
prepaid, to such Person at its address set forth in subsection 11.2 or
at such other address of which the Administrative Agent shall have been
notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to
effect service of process in any other manner permitted by law or shall
limit the right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any
right it may have to claim or recover in any legal action or proceeding
referred to in this subsection any special, exemplary, punitive or
consequential damages.
11.13 Acknowledgements. HCC hereby acknowledges that:
(a) it has been advised by counsel in the negotiation,
execution and delivery of this Agreement and the Notes and the other
Loan Documents;
(b) neither the Administrative Agent nor any Lender has any
fiduciary relationship to any Credit Party, and the relationship
between Administrative Agent and Lenders, on one hand, and HCC, on the
other hand, is solely that of debtor and creditor; and
(c) no joint venture exists among the Lenders or among any
Credit Party and the Lenders.
11.14 WAIVERS OF JURY TRIAL. EACH OF HCC, THE ADMINISTRATIVE
AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY
IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR THE NOTES OR ANY
OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
11.15 Usury. It is expressly stipulated and agreed to be the
intent of HCC, the Administrative Agent and the Lenders at all times to comply
with the applicable law governing
<PAGE> 71
66
the maximum rate or amount of interest payable on or in connection with the
Notes and the Loans. If the applicable law is ever judicially interpreted so as
to render usurious any amount or compensation called for under this Agreement or
any of the Notes or any of the other Loan Documents, or contracted for, charged,
taken, reserved or received with respect to any of the Loans, or if acceleration
of the maturity of any of the Notes, any prepayment by HCC, or any other
circumstance whatsoever, results in the Lenders, or any of them, having been
paid any interest in excess of that permitted by applicable law, then it is the
express intent of HCC, the Administrative Agent and the Lenders that all excess
amounts theretofore collected by the Lenders be credited on the principal
balances of the Notes (or, if the Notes have been or would thereby be paid in
full, refunded to HCC), and the provisions of such Note or Notes and the other
applicable Loan Documents immediately be deemed reformed and the amounts
thereafter collectible hereunder and thereunder reduced, without the necessity
of the execution of any new document, so as to comply with the applicable law,
but so as to permit the recovery of the fullest amount otherwise called for
hereunder and thereunder. The right to accelerate the maturity of any or all of
the Notes does not include the right to accelerate any interest which has not
otherwise accrued on the date of such acceleration, and the Lenders do not
intend to collect any unearned interest in the event of acceleration. All sums
or other compensation paid or agreed to be paid to the Lenders for the use,
forbearance or detention of the indebtedness evidenced hereby or by the Notes
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread with respect to all of the Notes throughout the full term
of such indebtedness until payment in full of all such indebtedness so that the
rate or amount of interest on account of such indebtedness under all of the
Notes does not exceed the Maximum Lawful Rate or maximum amount of interest
permitted under applicable law. The term "Maximum Lawful Rate" as used herein as
to any Lender means the maximum non-usurious rate of interest which may be
lawfully contracted for, charged, taken, reserved, or received by such Lender
from HCC in connection with the Loans evidenced hereby under applicable law. The
provisions of this Section 11.15 shall control all agreements between HCC and
the Lenders.
<PAGE> 72
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered in New York, New York by their
proper and duly authorized officers as of the day and year first above written.
HANOVER COMPRESSOR COMPANY
By
--------------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
as Administrative Agent and as a Lender
By
--------------------------------------
Name:
Title:
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By
--------------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By
--------------------------------------
Name:
Title:
<PAGE> 73
CREDIT LYONNAIS, NEW YORK BRANCH
By
--------------------------------------
Name:
Title:
BANQUE PARIBAS
By
--------------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK
By
--------------------------------------
Name:
Title:
BANKERS TRUST COMPANY
By
--------------------------------------
Name:
Title:
<PAGE> 74
Acknowledged and agreed to
as of the date herof:
HANOVER MAINTECH, INC.
By
--------------------------------------
Name:
Title:
HANOVER/SMITH, INC.
By
--------------------------------------
Name:
Title:
HANOVER LAND COMPANY
By
--------------------------------------
Name:
Title:
<PAGE> 75
70
HANOVER COMPRESSOR COMPANY
CREDIT AGREEMENT DISCLOSURE SCHEDULES
GENERAL COMMENTS WITH RESPECT TO HCC DISCLOSURE SCHEDULE:
While HCC has endeavored to identify under each Schedule and (by way of
enumeration or cross reference) the particular items relevant thereto, items
listed under one Schedule may be relevant to another Schedule. Accordingly,
items listed under each Schedule are hereby incorporated by reference in each
other Schedule, but only to the extent relevant to such other Schedule.
Capitalized terms used herein and not otherwise defined have the
meanings ascribed to them in the Agreement.
<PAGE> 76
SCHEDULE I
LENDERS AND COMMITMENTS
Name and Address Commitment
of Lender Percentage Commitment
- -------------- ---------- ----------
The Chase Manhattan Bank 20.0% $40,000,000.00
270 Park Avenue
New York, New York 10017
Attention: Mary Jo Woodford
Telecopy: (212) 270-3897
with a copy to:
The Chase Manhattan Bank
One Chase Manhattan Plaza
Agency Services, 8th Floor
New York, New York 10081
Attention: Dan Fischer
Telecopy: (212) 552-5777
Credit Lyonnais 17.5% 35,000,000.00
1000 Louisiana, Suite 5360
Houston, Texas 77002
Attention: Richard Kaufman
Telecopy: (713) 751-0307
Wells Fargo Bank (Texas), 17.5% 35,000,000.00
National Association
Post Oak Office
P.O. Box 4401
1300 Post Oak Blvd., 2nd Floor
Houston, Texas 77210-4401
Attention: Theodore Nowak
Telecopy: (713) 250-7912
The Bank of Nova Scotia 15.0% 30,000,000.00
600 Peachtree Street Northeast,
Suite 2700
Atlanta, Georgia 30308
Attention: Claude Ashby
Telecopy: (404) 888-8998
With a copy to:
The Bank of Nova Scotia
1100 Louisiana, Suite 3000
Houston, Texas 77002
Attention: Jamie Conn
Telecopy: (713) 752-2425
<PAGE> 77
2
Banque Paribas 12.5% 25,000,000.00
1200 Smith, Suite 3100
Houston, Texas 77002
Attention: Doug Liftman
Telecopy: (713) 659-6915
First Union Bank
1001 Fannin, Suite 2255
Houston, Texas 77002
Attention: David Humphries
Telecopy: (713) 650-6354 12.5% 25,000,000.00
Bankers Trust Company
One Bankers Trust Plaza
New York, New York 10006
Attention: Darin Ackerman
Telecopy: (212) 250-2923 5.0% 10,000,000.00
- ---------- ------- ------------------
Total 100% $200,000,000.00
<PAGE> 78
Schedule II
SUBSIDIARIES
<PAGE> 79
Schedule III
MATERIAL TRANSACTIONS
<PAGE> 80
Schedule IV
MATERIAL CHANGES
<PAGE> 81
Schedule V
REQUIRED CONSENTS
<PAGE> 82
Schedule VI
SALE AND LEASEBACK TRANSACTIONS
<PAGE> 83
Schedule VII
FORMS OF COMPRESSOR AND PRODUCTION EQUIPMENT LEASES
<PAGE> 84
Schedule VIII
[INTENTIONALLY LEFT BLANK]
<PAGE> 85
Schedule IX
ENVIRONMENTAL
<PAGE> 86
Schedule X
EXISTING INDEBTEDNESS
<PAGE> 87
Schedule XI
EXISTING LIENS
<PAGE> 88
Schedule XII
ADDITIONAL EXISTING LIENS
<PAGE> 89
Schedule XIII
AFFILIATE TRANSACTIONS
<PAGE> 1
EXHIBIT 10.31
FORM OF SUBSIDIARIES' GUARANTEE
SUBSIDIARIES' GUARANTEE, dated as of December 15, 1997, made by each
of the corporations that are signatories hereto (the "Guarantors"), in favor of
THE CHASE MANHATTAN BANK, as agent (in such capacity, the "Administrative
Agent") for the lenders (the "Lenders") parties to the Credit Agreement, dated
as of December __, 1997, (as amended, supplemented or otherwise modified from
time to time, the "Credit Agreement"), among Hanover Compressor Company, a
Delaware corporation (the "Borrower"), the Lenders and the Administrative
Agent.
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, the Lenders have severally
agreed to make Loans to the Borrower upon the terms and subject to the
conditions set forth therein, to be evidenced by the Notes issued by the
Borrower under the Credit Agreement;
WHEREAS, each Guarantor is a Qualified Subsidiary of the Borrower;
WHEREAS, the proceeds of the Loans will be used in part to enable the
Borrower to make valuable transfers (as determined as provided herein) to some
of the Guarantors in connection with the operation of their respective
businesses;
WHEREAS, it is a condition precedent to the obligation of the Lenders
to make their respective Loans to the Borrower under the Credit Agreement that
the Guarantors shall have executed and delivered this Guarantee to the
Administrative Agent for the ratable benefit of the Lenders.
NOW, THEREFORE, in consideration of the premises and to induce the
Administrative Agent and the Lenders to enter into the Credit Agreement and to
induce the Lenders to make their respective loans to the Borrower under the
Credit Agreement, the Guarantors hereby agree with the Administrative Agent,
for the ratable benefit of the Lenders, as follows:
1. Defined Terms. (a) Unless otherwise defined herein, terms defined
in the Credit Agreement and used herein shall have the meanings given to them
in the Credit Agreement.
(a) As used herein, "Obligations" means the collective reference to
the unpaid principal of and interest on the Notes and all other obligations and
liabilities of the Borrower to the Administrative Agent or the Lenders
(including, without limitation, interest accruing at the then applicable rate
provided in the Credit Agreement after the maturity of the Loans and interest
accruing at the then applicable rate provided in the Credit Agreement after the
filing of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like
<PAGE> 2
2
proceeding, relating to the Borrower, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding), whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter incurred, which may arise under, out of, or in connection with, the
Credit Agreement, the Notes, the Letters of Credit, the other Loan Documents or
any other document made, delivered or given in connection therewith, whether on
account of principal, interest, reimbursement obligations, fees, indemnities,
costs, expenses or otherwise (including, without limitation, all fees and
disbursements of counsel to the Administrative Agent or to the Lenders that are
required to be paid by the Borrower or the Guarantor pursuant to the terms of
the Credit Agreement or this Agreement or any other Loan Document).
(b) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Guarantee shall refer to this Guarantee as a whole and
not to any particular provision of this Guarantee, and section and paragraph
references are to this Guarantee unless otherwise specified.
(c) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
2. Guarantee (a) Subject to the provisions of paragraph a, each of
the Guarantors hereby, jointly and severally, unconditionally and irrevocably,
guarantees to the Administrative Agent, for the ratable benefit of the Lenders
and their respective successors, indorsees, transferees and assigns, the prompt
and complete payment and performance by the Borrower when due (whether at the
stated maturity, by acceleration or otherwise) of the Obligations.
(a) Anything herein or in any other Loan Document to the contrary
notwithstanding, the maximum liability of each Guarantor hereunder and under
the other Loan Documents shall in no event exceed the amount which can be
guaranteed by such Guarantor under applicable federal and state laws relating
to the insolvency of debtors.
(b) Each Guarantor further agrees to pay any and all expenses
(including, without limitation, all fees and disbursements of counsel) which
may be paid or incurred by the Administrative Agent or any Lender in enforcing,
or obtaining advice of counsel in respect of, any rights with respect to, or
collecting, any or all of the Obligations and/or enforcing any rights with
respect to, or collecting against, such Guarantor under this Guarantee. This
Guarantee shall remain in full force and effect until the Obligations are paid
in full and the Commitments are terminated, notwithstanding that from time to
time prior thereto the Borrower may be free from any Obligations.
(c) Each Guarantor agrees that the Obligations may at any time and
from time to time exceed the amount of the liability of such Guarantor
hereunder without impairing this Guarantee or affecting the rights and remedies
of the Administrative Agent or any Lender hereunder.
<PAGE> 3
3
(d) No payment or payments made by the Borrower, any of the
Guarantors, any other guarantor or any other Person or received or collected by
the Administrative Agent or any Lender from the Borrower, any of the
Guarantors, any other guarantor or any other Person by virtue of any action or
proceeding or any set-off or appropriation or application at any time or from
time to time in reduction of or in payment of the Obligations shall be deemed
to modify, reduce, release or otherwise affect the liability of any Guarantor
hereunder which shall, notwithstanding any such payment or payments other than
payments made by such Guarantor in respect of the Obligations or payments
received or collected from such Guarantor in respect of the Obligations, remain
liable for the Obligations up to the maximum liability of such Guarantor
hereunder until the Obligations are paid in full and the Commitments are
terminated.
3. Right of Contribution. Each Guarantor hereby agrees that to the
extent that a Guarantor shall have paid more than its proportionate share of
any payment made hereunder, such Guarantor shall be entitled to seek and
receive contribution from and against any other Guarantor hereunder who has not
paid its proportionate share of such payment. Each Guarantor's right of
contribution shall be subject to the terms and conditions of Section 5 hereof.
The provisions of this Section shall in no respect limit the obligations and
liabilities of any Guarantor to the Administrative Agent and the Lenders, and
each Guarantor shall remain liable to the Administrative Agent and the Lenders
for the full amount guaranteed by such Guarantor hereunder.
4. Right of Set-off. Upon the occurrence of any Event of Default,
each Guarantor hereby irrevocably authorizes each Lender at any time and from
time to time without notice to such Guarantor or any other Guarantor, any such
notice being expressly waived by each Guarantor, to set-off and appropriate and
apply any and all deposits (general or special, time or demand, provisional or
final), in any currency, and any other credits, indebtedness or claims, in any
currency, in each case whether direct or indirect, absolute or contingent,
matured or unmatured, at any time held or owing by such Lender to or for the
credit or the account of such Guarantor, or any part thereof in such amounts as
such Lender may elect, against and on account of the obligations and
liabilities of such Guarantor to such Lender hereunder and claims of every
nature and description of such Lender against such Guarantor, in any currency,
whether arising hereunder, under the Credit Agreement, any Note, any Letter of
Credit or any Loan Document, as such Lender may elect, whether or not the
Administrative Agent or any Lender has made any demand for payment and although
such obligations, liabilities and claims may be contingent or unmatured. The
Administrative Agent and each Lender shall notify such Guarantor promptly of
any such set-off and the application made by the Administrative Agent or such
Lender, provided that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of the Administrative
Agent and each Lender under this Section are in addition to other rights and
remedies (including, without limitation, other rights of set-off) which the
Administrative Agent or such Lender may have.
5. No Subrogation. Notwithstanding any payment or payments made by
any of the Guarantors hereunder or any set-off or application of funds of any
of the Guarantors by any
<PAGE> 4
4
Lender, no Guarantor shall be entitled to be subrogated to any of the rights of
the Administrative Agent or any Lender against the Borrower or any other
Guarantor or any collateral security or guarantee or right of offset held by
any Lender for the payment of the Obligations, nor shall any Guarantor seek or
be entitled to seek any contribution or reimbursement from the Borrower or any
other Guarantor in respect of payments made by such Guarantor hereunder, until
all amounts owing to the Administrative Agent and the Lenders by the Borrower
on account of the Obligations are paid in full and the Commitments are
terminated. If any amount shall be paid to any Guarantor on account of such
subrogation rights at any time when all of the Obligations shall not have been
paid in full, such amount shall be held by such Guarantor in trust for the
Administrative Agent and the Lenders, segregated from other funds of such
Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over
to the Administrative Agent in the exact form received by such Guarantor (duly
indorsed by such Guarantor to the Administrative Agent, if required), to be
applied against the Obligations, whether matured or unmatured, in such order as
the Administrative Agent may determine.
6. Amendments, etc. with respect to the Obligations; Waiver of
Rights. Each Guarantor shall remain obligated hereunder notwithstanding that,
without any reservation of rights against any Guarantor and without notice to
or further assent by any Guarantor, any demand for payment of any of the
Obligations made by the Administrative Agent or any Lender may be rescinded by
such party and any of the Obligations continued, and the Obligations, or the
liability of any other party upon or for any part thereof, or any collateral
security or guarantee therefor or right of offset with respect thereto, may,
from time to time, in whole or in part, be renewed, extended, amended,
modified, accelerated, compromised, waived, surrendered or released by the
Administrative Agent or any Lender, and the Credit Agreement, the Notes and the
other Loan Documents and any other documents executed and delivered in
connection therewith may be amended, modified, supplemented or terminated, in
whole or in part, as the Administrative Agent (or the Required Lenders, as the
case may be) may deem advisable from time to time, and any collateral security,
guarantee or right of offset at any time held by the Administrative Agent or
any Lender for the payment of the Obligations may be sold, exchanged, waived,
surrendered or released. Neither the Administrative Agent nor any Lender shall
have any obligation to protect, secure, perfect or insure any Lien at any time
held by it as security for the Obligations or for this Guarantee or any
property subject thereto. When making any demand hereunder against any of the
Guarantors, the Administrative Agent or any Lender may, but shall be under no
obligation to, make a similar demand on the Borrower or any other Guarantor or
guarantor, and any failure by the Administrative Agent or any Lender to make
any such demand or to collect any payments from the Borrower or any such other
Guarantor or guarantor or any release of the Borrower or such other Guarantor
or guarantor shall not relieve any of the Guarantors in respect of which a
demand or collection is not made or any of the Guarantors not so released of
their several obligations or liabilities hereunder, and shall not impair or
affect the rights and remedies, express or implied, or as a matter of law, of
the Administrative Agent or any Lender against any of the Guarantors. For the
purposes hereof "demand" shall include the commencement and continuance of any
legal proceedings.
<PAGE> 5
5
7. Guarantee Absolute and Unconditional. Each Guarantor waives any
and all notice of the creation, renewal, extension or accrual of any of the
Obligations and notice of or proof of reliance by the Administrative Agent or
any Lender upon this Guarantee or acceptance of this Guarantee, the
Obligations, and any of them, shall conclusively be deemed to have been
created, contracted or incurred, or renewed, extended, amended or waived, in
reliance upon this Guarantee; and all dealings between the Borrower and any of
the Guarantors, on the one hand, and the Administrative Agent and the Lenders,
on the other hand, likewise shall be conclusively presumed to have been had or
consummated in reliance upon this Guarantee. Each Guarantor waives diligence,
presentment, protest, demand for payment and notice of default or nonpayment to
or upon the Borrower or any of the Guarantors with respect to the Obligations.
Each Guarantor understands and agrees that this Guarantee shall be construed as
a continuing, absolute and unconditional guarantee of payment without regard to
(a) the validity, regularity or enforceability of the Credit Agreement, any
Note or any other Loan Document, any of the Obligations or any other collateral
security therefor or guarantee or right of offset with respect thereto at any
time or from time to time held by the Administrative Agent or any Lender (b)
any defense, set-off or counterclaim (other than a defense of payment or
performance) which may at any time be available to or be asserted by the
Borrower against the Administrative Agent or any Lender, or (c) any other
circumstance whatsoever (with or without notice to or knowledge of the Borrower
or such Guarantor) which constitutes, or might be construed to constitute, an
equitable or legal discharge of the Borrower for the Obligations, or of such
Guarantor under this Guarantee, in bankruptcy or in any other instance. When
pursuing its rights and remedies hereunder against any Guarantor, the
Administrative Agent and any Lender may, but shall be under no obligation to,
pursue such rights and remedies as it may have against the Borrower or any
other Person or against any collateral security or guarantee for the
Obligations or any right of offset with respect thereto, and any failure by the
Administrative Agent or any Lender to pursue such other rights or remedies or
to collect any payments from the Borrower or any such other Person or to
realize upon any such collateral security or guarantee or to exercise any such
right of offset, or any release of the Borrower or any such other Person or any
such collateral security, guarantee or right of offset, shall not relieve such
Guarantor of any liability hereunder, and shall not impair or affect the rights
and remedies, whether express, implied or available as a matter of law, of the
Administrative Agent and the Lenders against such Guarantor. This Guarantee
shall remain in full force and effect and be binding in accordance with and to
the extent of its terms upon each Guarantor and the successors and assigns
thereof, and shall inure to the benefit of the Administrative Agent and the
Lenders, and their respective successors, indorsees, transferees and assigns,
until all the Obligations and the obligations of each Guarantor under this
Guarantee shall have been satisfied by payment in full and the Commitments
shall be terminated, notwithstanding that from time to time during the term of
the Credit Agreement the Borrower may be free from any Obligations.
8. Reinstatement. This Guarantee shall continue to be effective, or
be reinstated, as the case may be, if at any time payment, or any part thereof,
of any of the Obligations is rescinded or must otherwise be restored or
returned by the Administrative Agent or any Lender upon the insolvency,
bankruptcy, dissolution, liquidation or reorganization of the Borrower or any
<PAGE> 6
6
Guarantor, or upon or as a result of the appointment of a receiver, intervenor
or conservator of, or trustee or similar officer for, the Borrower or any
Guarantor or any substantial part of its property, or otherwise, all as though
such payments had not been made.
9. Payments. Each Guarantor hereby guarantees that payments
hereunder will be paid to the Administrative Agent without set-off or
counterclaim in U.S. Dollars at the office of the Administrative Agent located
at 270 Park Avenue, New York, New York 10017.
10. Representations and Warranties. Each Guarantor hereby represents
and warrants that:
(a) it is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
corporate power and authority and the legal right to own and operate its
property, to lease the property it operates and to conduct the business in
which it is currently engaged;
(b) it has the corporate power and authority and the legal right to
execute and deliver, and to perform its obligations under, this Guarantee, and
has taken all necessary corporate action to authorize its execution, delivery
and performance of this Guarantee;
(c) this Guarantee constitutes a legal, valid and binding obligation
of such Guarantor enforceable in accordance with its terms, except as affected
by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium
and other similar laws relating to or affecting the enforcement of creditors'
rights generally, general equitable principles and an implied covenant of good
faith and fair dealing;
(d) the execution, delivery and performance of this Guarantee will
not violate any provision of any Requirement of Law or Contractual Obligation
of such Guarantor and will not result in or require the creation or imposition
of any Lien on any of the properties or revenues of such Guarantor pursuant to
any Requirement of Law or Contractual Obligation of the Guarantor;
(e) no consent or authorization of, filing with, or other act by or
in respect of, any arbitrator or Governmental Authority and no consent of any
other Person (including, without limitation, any stockholder or creditor of
such Guarantor) is required in connection with the execution, delivery,
performance, validity or enforceability of this Guarantee;
(f) no litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority is pending or, to the knowledge of such
Guarantor, threatened by or against such Guarantor or against any of its
properties or revenues (1) with respect to this Guarantee or any of the
transactions contemplated hereby, (2) which would reasonably be expected to
have a material adverse effect on the business, operations, property or
financial or other condition of such Guarantor.
<PAGE> 7
7
11. Authority of Administrative Agent. Each Guarantor acknowledges
that the rights and responsibilities of the Administrative Agent under this
Guarantee with respect to any action taken by the Administrative Agent or the
exercise or non-exercise by the Administrative Agent of any option, right,
request, judgment or other right or remedy provided for herein or resulting or
arising out of this Guarantee shall, as between the Administrative Agent and
the Lenders, be governed by the Credit Agreement and by such other agreements
with respect thereto as may exist from time to time among them, but, as between
the Administrative Agent and such Guarantor, the Administrative Agent shall be
conclusively presumed to be acting as agent for the Lenders with full and valid
authority so to act or refrain from acting, and no Guarantor shall be under any
obligation, or entitlement, to make any inquiry respecting such authority.
12. Notices. All notices, requests and demands to or upon the
Administrative Agent, any Lender or any Guarantor to be effective shall be in
writing (or by telex, fax or similar electronic transfer confirmed in writing)
and shall be deemed to have been duly given or made (1) when delivered by hand
or (2) if by overnight courier service, when received or (3) if given by mail,
when deposited in the mails by certified mail, return receipt requested, or (4)
if by telex, fax or similar electronic transfer, when sent and receipt has been
confirmed, addressed as follows:
(a) if to the Administrative Agent or any Lender, at its address or
transmission number for notices provided in subsection 11.2 of the Credit
Agreement; and
(b) if to any Guarantor, at its address or transmission number for
notices set forth under its signature below.
The Administrative Agent, each Lender and each Guarantor may change
its address and transmission numbers for notices by notice in the manner
provided in this Section.
13. Counterparts. This Guarantee may be executed by one or more of
the Guarantors on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the counterparts of this Guarantee signed by all the
Guarantors shall be lodged with the Administrative Agent.
14. Severability. Any provision of this Guarantee which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
15. Integration. This Guarantee represents the agreement of each
Guarantor with respect to the subject matter hereof and there are no promises
or representations by the Administrative Agent or any Lender relative to the
subject matter hereof not reflected herein.
<PAGE> 8
8
16. Amendments in Writing; No Waiver; Cumulative Remedies. (a)
None of the terms or provisions of this Guarantee may be waived, amended,
supplemented or otherwise modified except by a written instrument executed by
each Guarantor and the Administrative Agent, provided that any provision of
this Guarantee may be waived by the Administrative Agent and the Lenders in a
letter or agreement executed by the Administrative Agent or by telex or
facsimile transmission from the Administrative Agent.
(a) Neither the Administrative Agent nor any Lender shall by any act
(except by a written instrument pursuant to paragraph 16 hereof), delay,
indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Default or Event of Default or in any
breach of any of the terms and conditions hereof. No failure to exercise, nor
any delay in exercising, on the part of the Administrative Agent or any Lender,
any right, power or privilege hereunder shall operate as a waiver thereof. No
single or partial exercise of any right, power or privilege hereunder shall
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by the Administrative Agent or any Lender
of any right or remedy hereunder on any one occasion shall not be construed as
a bar to any right or remedy which the Administrative Agent or such Lender
would otherwise have on any future occasion.
(b) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
17. Section Headings. The section headings used in this Guarantee
are for convenience of reference only and are not to affect the construction
hereof or be taken into consideration in the interpretation hereof.
18. Successors and Assigns. This Guarantee shall be binding upon the
successors and assigns of each Guarantor and shall inure to the benefit of the
Administrative Agent and the Lenders and their successors and assigns.
19. Governing Law. This Guarantee shall be governed by, and
construed and interpreted in accordance with, the law of the State of New York.
<PAGE> 9
9
IN WITNESS WHEREOF, each of the undersigned has caused this
Guarantee to be duly executed and delivered by its duly authorized officer as
of the day and year first above written.
HANOVER/SMITH, INC. HANOVER MAINTECH, INC.
By By
-------------------------------- --------------------------------
Name: Name:
Title: Title:
Address for Notices: Address for Notices:
12001 North Houston Rosslyn 12001 North Houston Rosslyn
Suite 350 Suite 350
Houston, Texas 77086 Houston, Texas 77086
Attn: Chief Financial Officer Attn: Chief Financial Officer
Fax: 281-447-8781 Fax: 281-447-8781
HANOVER LAND COMPANY
By
--------------------------------
Name:
Title:
Address for Notices:
12001 North Houston Rosslyn
Suite 350
Houston, Texas 77086
Attn: Chief Financial Officer
Fax: 281-447-8781
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE HANOVER COMPRESSOR COMPANY FINANCIAL STATEMENTS AS OF AND FOR THE
TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,561
<SECURITIES> 0
<RECEIVABLES> 41,879
<ALLOWANCES> 838
<INVENTORY> 32,860
<CURRENT-ASSETS> 94,789
<PP&E> 470,308
<DEPRECIATION> 76,238
<TOTAL-ASSETS> 506,452
<CURRENT-LIABILITIES> 36,762
<BONDS> 0
0
0
<COMMON> 268,616
<OTHER-SE> 19,655
<TOTAL-LIABILITY-AND-EQUITY> 506,452
<SALES> 86,816
<TOTAL-REVENUES> 198,798
<CGS> 67,959
<TOTAL-COSTS> 158,653
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,728
<INCOME-PRETAX> 29,417
<INCOME-TAX> 11,314
<INCOME-CONTINUING> 18,103
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,103
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.66
</TABLE>
