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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
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 1-3071
HANOVER COMPRESSOR COMPANY
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 75-2344249
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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12001 NORTH HOUSTON ROSSLYN, HOUSTON, TEXAS 77086
(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:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: IN WHICH REGISTERED:
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Common Stock, $.001 par value New York Stock Exchange, Inc.
</TABLE>
SECURITIES REGISTERED PURSUANT TO 12(G) OF THE ACT:
Title of class: NONE
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, 1999: $238,989,323. 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, 1999: 28,639,399 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 19, 1999 (to be filed on or before April 30,
1999) are incorporated by reference into Part II, as indicated herein.
The Index to Exhibits is on page E-1.
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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) 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, (3) the introduction of competing technologies by other companies,
(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.
ITEM 1. BUSINESS
GENERAL
Hanover Compressor Company (the "Company") was incorporated in Delaware in
1990 and is the market leader in full-service natural gas compression and a
leading provider of contract natural gas handling service, fabrication and
equipment. As of December 31, 1998, the Company operated a fleet of 2,888
compression rental units with an aggregate capacity of approximately 1,067,000
horsepower. The Company's compression services are complemented by its
compressor and oil and gas production equipment fabrication operations.
The Company believes it is currently the largest natural gas compression
company in the United States on the basis of aggregate rental horsepower with
2,716 rental units having an aggregate capacity of approximately 893,000
horsepower at December 31, 1998. Internationally, the Company estimates it is
one of the largest providers of compression services in the South American
market, primarily in Argentina, Colombia and Venezuela, operating 172 units with
approximately 174,000 horsepower at December 31, 1998.
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 94% 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 4,500 horsepower. This market, which
includes rental and owner operated units, accounts for over 13.5 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 3.5 million horsepower amounting to 26% of
the aggregate U.S. horsepower. Growth of rental compression capacity in the U.S.
market is primarily driven by the increasing trend toward outsourcing by
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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 owned or
operated under lease on December 31, 1998 is summarized in the following table.
<TABLE>
<CAPTION>
RANGE OF AGGREGATE
HORSEPOWER NUMBER HORSEPOWER
PER UNIT OF UNITS (IN THOUSANDS) % OF HORSEPOWER
---------- -------- -------------- ---------------
<S> <C> <C> <C>
0-99.................................................. 1,077 72 6.7%
100-199............................................... 613 85 8.0%
200-499............................................... 518 147 13.8%
500-799............................................... 184 114 10.7%
800-1199.............................................. 281 280 26.2%
1200-2699............................................. 200 314 29.4%
2700-UP............................................... 15 55 5.2%
----- ----- -------
Total....................................... 2,888 1,067 100.00%
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INDUSTRY OVERVIEW
Gas Compression
Typically, compression is required several times during the natural gas
production cycle: at the wellhead, gathering lines, into and out of gas
processing facilities, into and out of storage, and throughout the intrastate
and interstate pipelines.
Over the life of an oil or gas well, natural reservoir pressure and
deliverability 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
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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 and manpower 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.
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 variable compression requirements 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 marketable 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 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 aggregate foreign natural gas consumption (excluding the former
Soviet Union) has recently grown. Despite significant growth in energy demand,
most non-U.S. energy markets, until recently, 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.
Natural gas is considered to be the "fuel of the future" because it
provides the best mix of environment soundness, economy and availability of any
energy source. Rising worldwide energy demand, environmental considerations, the
further development of the natural gas pipeline infrastructure and the
increasing use of natural gas as a fuel source in power generation are the
principal reasons for this steady growth.
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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 has not been subject to
significant technological change.
BUSINESS SEGMENTS
The Company's revenues and income are derived from its four business
segments (comprising three operating divisions) -- domestic compression rental
and maintenance, international compression rental and maintenance, compressor
fabrication and production equipment fabrication. The compression rental segment
has operations primarily in the United States, Canada and South America. For
financial data relating to the Company's divisions, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 16 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, 1998, the
Company's gas compressor fleet consisted of 2,888 units, ranging from 24 to
4,500 horsepower. 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 the degree of
daily operation. Substantially all of the Company's units are operated pursuant
to "contract compression" or "rental with full maintenance" contracts under
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. 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 compressor
maintenance activities are conducted at nine Company facilities staffed by
approximately 500 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
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provided the Company with a highly reliable fleet of compressors in excellent
condition. A well maintained compressor typically has at least a 25 to 30 year
useful life.
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 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 500 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,
1998, the Company had a compressor unit fabrication backlog for sale to third
parties of $10.1 million. All backlog is expected to be produced within a 90-120
day 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 $5 million and is therefore able to meet most customers' rapid
response requirements and minimize customer downtime. As of December 31, 1998,
the Company had a production equipment fabrication backlog of $5.0 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.
MARKET AND CUSTOMERS
The Company's customer base consists of over 600 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 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 1997 or 1998.
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,
Bolivia,
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Mexico and Canada. As of December 31, 1998, approximately 11% and 16% of the
Company's compressor horsepower was being used in offshore and international
applications, respectively.
SALES AND MARKETING
The Company's more than 40 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 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 improved purchasing power and vendor support.
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. The Company is the largest compressor
fabrication company in the United States.
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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, results of operations or cash flows.
Notwithstanding, in part because of the Company's rapid growth, the Company
may not be in compliance with certain environmental requirements for
recently acquired 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, cash flows and financial condition.
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EXECUTIVE OFFICERS
The following sets forth, as of March 23, 1999, the name, age and business
experience for the last five years of each of the executive officers of the
Company.
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AGE POSITION
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Michael A. O'Connor........................ 63 Chairman of the Board; Director
Michael J. McGhan.......................... 44 President and Chief Executive Officer;
Director
Curtis Bedrich............................. 56 Chief Financial Officer and Treasurer
William S. Goldberg........................ 40 Executive Vice President; Director
</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, "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, 1998, the Company had approximately 1,143 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 345,000 square foot manufacturing
facility in Davis, Oklahoma, (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. In addition, the Company has a three year lease on a 190,000
square foot fabrication facility in Houston, Texas with an option to purchase
the facility at the end of the lease.
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.
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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, 1998.
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 periods indicated.
<TABLE>
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HIGH LOW
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Third Quarter 1997.......................................... $25 1/2 $20 5/16
Fourth Quarter 1997......................................... $26 $17 1/8
First Quarter 1998.......................................... $20 3/4 $17 5/16
Second Quarter 1998......................................... $29 5/8 $23 1/4
Third Quarter 1998.......................................... $28 11/16 $17 1/2
Fourth Quarter 1998......................................... $27 1/16 $17 11/16
</TABLE>
As of December 31, 1998, there were 28,590,472 shares of Common Stock
outstanding, held by approximately 243 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.
Set forth below is certain information with respect to all securities of
the Company sold by the Company in 1998 which were not registered under the
Securities Act of 1933, as amended.
<TABLE>
<CAPTION>
TITLE AND AMOUNT OF EXEMPTION
DATE OF SALE SECURITIES PURCHASERS CONSIDERATION CLAIMED
------------ ------------------- ---------- ------------------------- ---------
<S> <C> <C> <C> <C>
12/17/98................ 150,000 shares of Accredited $22.00 per share. Sec. 4(2)
Common Stock Investor
</TABLE>
10
<PAGE> 11
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, 1998. 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995(1) 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Rentals .................................................. $147,609 $100,685 $ 72,897 $ 43,859 $ 29,497
Parts and service......................................... 23,870 10,254 6,458 4,495 2,528
Compressor fabrication.................................... 67,453 49,764 28,764 29,593 16,202
Production equipment fabrication.......................... 37,466 37,052 26,903 16,960 7,272
Other..................................................... 5,559 1,043 989 1,057 581
-------- -------- -------- -------- --------
Total revenues...................................... 281,957 198,798 136,011 95,964 56,080
-------- -------- -------- -------- --------
Expenses:
Rentals .................................................. 49,386 35,113 26,012 13,691 9,201
Parts and service......................................... 17,341 6,360 4,788 4,122 1,807
Compressor fabrication.................................... 58,144 41,584 24,657 25,265 13,733
Production equipment fabrication.......................... 25,781 26,375 19,574 13,178 5,798
Selling, general and administrative....................... 26,626 20,782 16,439 12,542 8,427
Depreciation and amortization(2).......................... 37,154 28,439 20,722 13,494 8,109
Lease expense............................................. 6,173
Interest expense.......................................... 11,716 10,728 6,594 4,560 2,027
-------- -------- -------- -------- --------
Total costs and expenses............................ 232,321 169,381 118,786 86,852 49,102
-------- -------- -------- -------- --------
Income before income taxes.................................. 49,636 29,417 17,225 9,112 6,978
Provision for income taxes.................................. 19,259 11,314 6,844 3,498 2,590
-------- -------- -------- -------- --------
Net income.................................................. $ 30,377 $ 18,103 $ 10,381 $ 5,614 $ 4,388
-------- -------- -------- -------- --------
Other comprehensive income, net of tax:
Foreign currency translation adjustment................... 152
-------- -------- -------- -------- --------
Comprehensive income........................................ 30,529 18,103 10,381 5,614 4,388
======== ======== ======== ======== ========
Net income available to common stockholders:
Net income................................................ $ 30,377 $ 18,103 $ 10,381 $ 5,614 $ 4,388
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:................ 30,377 18,103 3,414 4,782 4,388
======== ======== ======== ======== ========
Weighted average common and common equivalent shares (3):
Basic................................................... 28,468 25,623 20,498 14,373 13,069
-------- -------- -------- -------- --------
Diluted................................................. 30,091 27,345 22,023 15,358 13,606
-------- -------- -------- -------- --------
Earnings per common share (3):
Basic................................................... $ 1.07 $ .71 $ .17 $ .33 $ .34
======== ======== ======== ======== ========
Diluted................................................. $ 1.01 $ .66 $ .16(4) $ .31 $ .32
======== ======== ======== ======== ========
OTHER DATA:
EBITDA(5)................................................. $104,679 $ 68,584 $ 44,541 $ 27,166 $ 17,114
======== ======== ======== ======== ========
Balance Sheet Data (end of period):
Working capital............................................. $113,264 $ 58,027 $ 41,513 $ 23,270 $ 995
Net property, plant and equipment........................... 392,498 394,070 266,406 198,074 88,391
Total assets................................................ 614,590 506,452 341,387 252,313 114,614
Long-term debt.............................................. 156,943 158,838 122,756 50,451 36,878
Preferred stockholders' equity.............................. 26,894
Common stockholders' equity................................. 316,713 288,271 176,895 139,302 51,333
</TABLE>
11
<PAGE> 12
- ---------------
(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.
(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.
(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 before interest
expense, lease 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".
12
<PAGE> 13
The following table summarizes revenues, expenses and gross profit
percentages for each of the Company's business segments:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Revenues:
Rentals -- Domestic....................................... $107.4 $ 78.7 $ 61.7
Rentals -- International.................................. 40.2 22.0 11.2
Compressor fabrication.................................... 67.4 49.8 28.8
Production equipment fabrication.......................... 37.5 37.1 26.9
Other..................................................... 29.5 11.2 7.4
------ ------ ------
Total............................................. $282.0 $198.8 $136.0
====== ====== ======
Expenses:
Rentals -- Domestic....................................... $ 36.6 $ 27.5 $ 21.1
Rentals -- International.................................. 12.8 7.6 4.9
Compressor fabrication.................................... 58.1 41.6 24.7
Production equipment fabrication.......................... 25.8 26.4 19.6
Other..................................................... 22.9 7.4 5.7
------ ------ ------
Total............................................. $156.2 $110.5 $ 76.0
====== ====== ======
Gross profit percentage:
Rentals -- Domestic....................................... 65.9% 65.1% 65.8%
Rentals -- International.................................. 68.2% 65.5% 56.3%
Compressor fabrication.................................... 13.8% 16.5% 14.3%
Production equipment fabrication.......................... 31.2% 28.8% 27.2%
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
Revenues
Revenues from rentals increased by $46.9 million, or 47% to $147.6 million
due to growth in the rental fleet. At December 31, 1998 the compressor rental
fleet consisted of approximately 1,067,000 horsepower, a 37% increase over the
781,000 horsepower in the rental fleet at December 31, 1997. Domestically, the
rental fleet increased by 224,000 horsepower, or 34%, during 1998 and
internationally by 61,000 horsepower, or 54%. Revenue from parts and service
increased by $13.7 million, or 133% to $23.9 million as a result of increased
marketing focus on parts and services and the increase in growth in the rental
fleet. Revenues from compressor fabrication amounted to $67.4 million,
increasing by 36% over 1997. An aggregate of 113,000 horsepower was sold during
1998. In addition, 88,000 horsepower was fabricated and placed in the rental
fleet during 1998. Revenues from the fabrication of production equipment
remained relatively unchanged with an increase of $0.4 million from 1997, or 1%
to $37.5 million during 1998. The change in 1998 production equipment revenue
was negligible as a result of declining well completions.
Expenses
Operating expenses of the rentals segment increased by $14.3 million, or
41% to $49.4 million during 1998. The gross profit percentage from rentals
increased to 67% during 1998 from 65% in 1997. Operating expenses of parts and
service increased $10.9 million, or 173% to $17.3 million during 1998, which
relates to the 133% increase in parts and service revenue. The gross profit
percentage from parts and service decreased to 27% during 1998 from 38% in 1997.
Operating expenses of compressor fabrication increased by $16.5 million, or 40%
to $58.1 million, which relates to the 36% increase in compression fabrication
revenue achieved during
13
<PAGE> 14
1998. In addition, the gross profit margin on compression fabrication decreased
to 14% during 1998, from 16% during 1997. Production equipment fabrication
operating expenses decreased by $0.6 million, or (2%), during 1998 to $25.8
million. The decrease in operating expenses is reflective of the
change in production equipment fabrication revenues during 1998. The gross
profit margin attributable to production equipment fabrication increased to 31%
during 1998, up from 29% during 1997.
Selling, general and administrative expenses increased by $5.8 million, or
28% to $26.6 million during 1998. The increase is attributable to increased
personnel and other administrative and selling expenses associated with the
increase in operating activity in the Company's rentals, parts and service, and
compression fabrication operating segments as well as increased administrative
costs relating to being a public reporting entity. Depreciation and amortization
expense increased by $8.7 million, or 31% during 1998 to $37.1 million as the
Company continued to expand its rental fleet with capital expenditures and net
business acquisitions that amounted to approximately $212.0 million. In
addition, the Company sold certain compression equipment with a book value of
approximately $158.0 million in July, 1998 under a sale and lease back
arrangement. See "LIQUIDITY AND CAPITAL RESOURCES" for a description of the
Equipment Lease. Consequently, the Company incurred compression equipment lease
expense of $6.2 million during 1998. As a result of the Equipment Lease, the
Company expects to incur annual operating lease expense of approximately $14
million. Interest expense increased by $1.0 million, or 9% during 1998 to $11.7
million.
Income Taxes
The Company's effective income tax rate was approximately 39% during 1998
and during 1997. Accordingly, the provision for income taxes increased by $7.9
million, or 70%, during 1998 to $19.3 million as a result of income before
income taxes increasing by 69% during 1998 over 1997.
Net Income and Earnings Per Share
Net income increased $12.3 million, or 68%, to $30.4 million for 1998 from
$18.1 million in 1997 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 which were outstanding for all of 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues
Revenues from rentals increased by $27.8 million, or 38% to $100.7 million
due to growth in the rental fleet. At December 31, 1997 the compressor rental
fleet consisted of 781,000 horsepower, a 37% increase over the 570,000
horsepower in the rental fleet at December 31, 1996. Domestically, the rental
fleet increased by 160,000 horsepower, or 32%, during 1997 and internationally
by 51,000 horsepower, or 83%. Revenue from parts and service increased by $3.7
million, or 59% to $10.2 million during 1997. 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.
Expenses
Operating expenses of the rental segment increased by $9.1 million, or 35%
to $35.1 million during 1997. The gross profit percentage from rentals
increased to 65% during 1997 from 64% 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 parts and service increased $1.6 million, or 33%
to $6.4 million during 1997. The gross profit percentage from parts and service
increased to 38% during 1997 from 26% in 1996. 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
14
<PAGE> 15
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 public
reporting 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 fleet. 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 $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.
LIQUIDITY AND CAPITAL RESOURCES
On July 22, 1998, the Company completed a $200 million, 5-year lease
transaction (the "Equipment Lease") arranged by Chase Securities Inc. The
transaction has been structured as a sale and lease back of compression
equipment. The compression equipment was sold to a Trust for $200 million and
leased back by the Company for a 5-year period. The proceeds of the sale were
used to reduce the Bank Credit Agreement. The compression equipment will
continue to be deployed by the Company under its normal operating procedures.
Additionally, the Company has the option to repurchase the equipment from the
Trust at any time. The lease provides for a residual value guarantee
(approximately 83% of the total cost) by the Company, which is due upon
termination of the lease and which may be satisfied by a cash payment or the
exercise of a purchase option by the Company. The sale of the equipment resulted
in a gain of approximately $42 million, which is being deferred until the end of
the lease.
The Company's cash balance amounted to $11.5 million at December 31, 1998
compared to $4.6 million at December 31, 1997. Primary sources of cash during
1998 were cash provided by internal operations of $31.1 million and net
proceeds of $200.0 million from the sale of compression equipment (the
"Equipment Lease"). Principal uses of cash during the year ended
December 31, 1998 were capital expenditures of $169.5 million, business
combinations and investments in unconsolidated entities of $53.8 million.
Total current assets increased from $94.8 million at December 31, 1997 to
$165.1 million at December 31, 1998 primarily as a result of increases in
accounts receivable and inventories. Accounts receivable at December 31, 1998
increased by $29.2 million to $70.2 million. The increase corresponds with the
42% increase in total revenue realized by the Company during 1998. In addition,
inventories increased by $30.1 million to $63.0 million at December 31, 1998.
The increase in inventories reflects increases in parts and supplies, work in
progress and finished goods as the level of activity in the Company's domestic
and international rental and maintenance and compressor fabrication segments
increased over 1997. Working capital at December 31, 1998 was also affected by
an $15.0 million increase in total current liabilities at
15
<PAGE> 16
December 31, 1998 to $51.8 million. The 41% 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 1998 was $212.0 million which resulted in the addition of
approximately 285,000 horsepower to the rental fleet. At December 31, 1998, the
rental fleet consisted of 893,000 horsepower domestically and 174,000 in the
international rental fleet. Current plans are to spend in excess of $150 million
during 1999, exclusive of any major 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 Bank Credit
Agreement and raising additional equity. In 1996, the Company issued
Subordinated Notes in the aggregate principal amount of $23.5 million in 1996,
bearing interest at 7%, payable semi-annually, with principal due on December
31, 2000. As of December 31, 1998 the Company has approximately $73 million of
credit capacity remaining on its $200 million Bank Credit Agreement (6.9%
interest rate at December 31, 1998). In order to fund the anticipated level
of capital expenditures, the Company anticipates arranging additional sources
of debt and/or equity financing during 1999.
Impact of the Year 2000
Many computer systems, software products and other equipment utilize
microprocessors in which the year is represented by only two digit entries, as
"19" is inferred to be the century. Date sensitive software may interpret a date
using "00" as the year 1900 rather than the year 2000, which could disrupt
operations due to systems failures or software miscalculations. These date
fields need to accept four digit entries to distinguish dates beginning in the
year 2000. Issues related to this situation are commonly referred to as "Year
2000 issues."
Primarily to accommodate its growth, the Company has installed or plans to
install various modifications or upgrade existing computer software and hardware
which include, among others things, an accommodation of Year 2000 issues. The
costs associated with the software modifications are being incurred in the
ordinary course of business and are not expected to be material in relation to
either future operating results, cash flows or financial condition. The Company
expects that all hardware and software upgrades will be completed in mid-1999.
The Company has reviewed its machinery and equipment operation and believes
that none of its significant machinery and equipment is dependent on
microprocessors which may be materially affected by Year 2000 issues.
The Company has initiated communications with all of its significant
customers, 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. There is inherent uncertainty related to Year 2000 issues due to
the possibility of failures by third party customers, suppliers and vendors,
which cannot be anticipated. The Company cannot guarantee the systems of other
companies on which it relies will be converted timely and will not have a
material adverse effect on the Company's operations, cash flows or financial
position. The Company has not developed contingency plans to address any
possible operation disruptions resulting from third party failures but will do
so by the end of 1999.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that, upon
adoption, all derivative instruments (including certain derivative instruments
embedded in other contracts) be recognized in the balance sheet at fair value,
and that changes in such fair values be recognized in earnings unless specific
hedging criteria are met. Changes in the values of derivatives that meet these
hedging criteria will ultimately offset related earnings effects of the hedged
Comprehensive Income pending recognition in earnings. SFAS 133 is effective for
fiscal years beginning after June 15, 1999.
16
<PAGE> 17
The Company does not believe the effect of adoption will have a material
effect on the results of operations, cash flows or financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
In this report, the consolidated financial statements and supplementary
data appearing on pages F1 through F-23 are incorporated in this item 8 by
reference. See Index to the Financial Statements at page 19.
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 1999 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 1999 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 1999 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 1999 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 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 are filed as part of this annual report and such Index to Exhibits
is incorporated herein by reference.
17
<PAGE> 18
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, 1999
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
--------- ----- ----
<C> <S> <C>
/s/ MICHAEL J. MCGHAN President and Chief Executive March 26, 1999
- ----------------------------------------------------- Officer (Principal Executive
Michael J. McGhan Officer and Director)
/s/ CURTIS BEDRICH Chief Financial Officer and March 26, 1999
- ----------------------------------------------------- Treasurer (Principal
Curtis Bedrich Financial and Accounting
Officer)
/s/ TED COLLINS, JR. Director March 26, 1999
- -----------------------------------------------------
Ted Collins, Jr.
/s/ ROBERT R. FURGASON Director March 26, 1999
- -----------------------------------------------------
Robert R. Furgason
/s/ WILLIAM S. GOLDBERG Director March 26, 1999
- -----------------------------------------------------
William S. Goldberg
/s/ MELVYN N. KLEIN Director March 26, 1999
- -----------------------------------------------------
Melvyn N. Klein
/s/ CARL M. KOUPAL, JR. Director March 26, 1999
- -----------------------------------------------------
Carl M. Koupal, Jr.
/s/ MICHAEL A. O'CONNOR Director March 26, 1999
- -----------------------------------------------------
Michael A. O'Connor
/s/ ALVIN V. SHOEMAKER Director March 26, 1999
- -----------------------------------------------------
Alvin V. Shoemaker
</TABLE>
18
<PAGE> 19
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of PricewaterhouseCoopers LLP, independent
accountants............................................... F-1
Consolidated Balance Sheet.................................. F-2
Consolidated Statement of Income and Comprehensive Income... F-3
Consolidated Statement of Cash Flows........................ F-4, F-5
Consolidated Statement of Common Stockholders' Equity....... F-6
Notes to Consolidated Financial Statements.................. F-7
Selected Quarterly Financial Data (unaudited)............... F-23
</TABLE>
19
<PAGE> 20
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 and comprehensive 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 25, 1999
F-1
<PAGE> 21
HANOVER COMPRESSOR COMPANY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT FOR PAR VALUE AND SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 11,503 $ 4,561
Accounts receivable, net.................................. 70,205 41,041
Inventory................................................. 63,044 32,860
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 7,871 6,658
Prepaid taxes............................................. 9,466 6,919
Other current assets...................................... 2,967 2,750
-------- --------
Total current assets.............................. 165,056 94,789
-------- --------
Property, plant and equipment:
Compression equipment and facilities...................... 422,896 438,351
Land and buildings........................................ 15,044 10,544
Transportation and shop equipment......................... 21,667 14,589
Other..................................................... 11,119 6,824
-------- --------
470,726 470,308
Accumulated depreciation.................................. (78,228) (76,238)
-------- --------
Net property, plant and equipment................. 392,498 394,070
-------- --------
Intangible and other assets................................. 57,036 17,593
-------- --------
$614,590 $506,452
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 444 $ 2,222
Accounts payable, trade................................... 23,361 16,219
Accrued liabilities....................................... 17,599 9,088
Advance billings.......................................... 9,694 6,752
Billings on uncompleted contracts in excess of costs and
estimated earnings..................................... 694 2,481
-------- --------
Total current liabilities......................... 51,792 36,762
Long-term debt.............................................. 156,943 158,838
Other liabilities........................................... 42,858 899
Deferred income taxes....................................... 46,284 21,682
-------- --------
Total liabilities................................. 297,877 218,181
-------- --------
Commitments and contingencies (Note 15)
Common stockholders' equity:
Common stock, $.001 par value; 100 million shares
authorized; 28,590,472 and 28,367,169 shares issued and
outstanding, respectively.............................. 29 28
Additional paid-in capital................................ 269,005 268,588
Notes receivable -- employee stockholders................. (10,146) (10,748)
Accumulated other comprehensive income.................... 152
Retained earnings......................................... 60,998 30,621
Treasury stock -- 175,547 and 31,347 common shares,
respectively, at cost.................................. (3,325) (218)
-------- --------
Total common stockholders' equity................. 316,713 288,271
-------- --------
$614,590 $506,452
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 22
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Revenues:
Rentals................................................... $147,609 $100,685 $72,897
Parts and service......................................... 23,870 10,254 6,458
Compressor fabrication.................................... 67,453 49,764 28,764
Production equipment fabrication.......................... 37,466 37,052 26,903
Other..................................................... 5,559 1,043 989
-------- -------- -------
281,957 198,798 136,011
-------- -------- -------
Expenses:
Rentals................................................... 49,386 35,113 26,012
Parts and service......................................... 17,341 6,360 4,788
Compressor fabrication.................................... 58,144 41,584 24,657
Production equipment fabrication.......................... 25,781 26,375 19,574
Selling, general and administrative....................... 26,626 20,782 16,439
Depreciation and amortization............................. 37,154 28,439 20,722
Leasing expense........................................... 6,173
Interest expense.......................................... 11,716 10,728 6,594
-------- -------- -------
232,321 169,381 118,786
-------- -------- -------
Income before income taxes.................................. 49,636 29,417 17,225
Provision for income taxes.................................. 19,259 11,314 6,844
-------- -------- -------
Net income.................................................. 30,377 18,103 10,381
-------- -------- -------
Other comprehensive income, net of tax:
Foreign currency translation adjustment................... 152
-------- -------- -------
Comprehensive income........................................ $ 30,529 $ 18,103 $10,381
======== ======== =======
Net income available to common stockholders:
Net income................................................ $ 30,377 $ 18,103 $10,381
Dividends on Series A and Series B preferred stock........ (1,773)
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................. $ 30,377 $ 18,103 $ 3,414
======== ======== =======
Weighted average common and common equivalent shares
outstanding:
Basic.................................................. 28,468 25,623 20,498
======== ======== =======
Diluted................................................ 30,091 27,345 22,023
======== ======== =======
Earnings per common share
Basic.................................................. $ 1.07 $ 0.71 $ 0.17
======== ======== =======
Diluted................................................ $ 1.01 $ 0.66 $ 0.16
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 23
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 30,377 $ 18,103 $10,381
Adjustments:
Depreciation and amortization.......................... 37,154 28,439 20,722
Amortization of debt issuance costs and debt
discount............................................. 852 892 547
Bad debt expense....................................... 349 594 447
Gain on sale of assets................................. (2,552) (148) (352)
Equity in income of nonconsolidated affiliates......... (1,369) 206
Deferred income taxes.................................. 12,358 6,233 2,263
Changes in assets and liabilities, net of effects of
business combinations:
Accounts receivable.................................. (28,337) (13,604) (8,969)
Inventory............................................ (24,169) (14,726) (4,552)
Costs and estimated earnings versus billings on
uncompleted contracts............................. (3,000) 2,929 (1,301)
Accounts payable and other liabilities............... 14,358 7,728 3,309
Advance billings..................................... 2,942 51 435
Other................................................ (7,655) (4,478) (2,654)
--------- --------- -------
Net cash provided by operating activities......... 31,308 32,219 20,276
--------- --------- -------
Cash flows from investing activities:
Capital expenditures...................................... (169,498) (150,995) (83,598)
Proceeds from sale of fixed assets........................ 208,644 2,887 2,404
Cash used for business acquisitions, net.................. (42,581) (6,287) (6,489)
Cash used to acquire investments in unconsolidated
subsidiaries........................................... (11,264) (10,095)
--------- --------- -------
Net cash used in investing activities............. (14,699) (164,490) (87,683)
--------- --------- -------
Cash flows from financing activities:
Net borrowings on revolving credit facility............... 198,147 63,681 50,700
Proceeds from issuance of long-term debt.................. 5,000
Issuance of common stock, net............................. 92,088 23,317
Proceeds from warrant conversions and stock option
exercises.............................................. 120
Equity issuance costs..................................... (160) (687) (498)
Repayment of long-term debt............................... (202,248) (31,757) (379)
Purchase of treasury stock................................ (5,950)
Repayments of shareholder notes........................... 602 1,185
Conversion of Series B preferred stock.................... (1,400)
--------- --------- -------
Net cash provided by (used in) financing
activities...................................... (9,489) 129,510 71,740
--------- --------- -------
Effect of exchange rate changes on cash and equivalents..... (178)
--------- --------- -------
Net increase (decrease) in cash and cash equivalents........ 6,942 (2,761) 4,333
Cash and cash equivalents at beginning of year.............. 4,561 7,322 2,989
--------- --------- -------
Cash and cash equivalents at end of year.................... $ 11,503 $ 4,561 $ 7,322
--------- --------- -------
</TABLE>
F-4
<PAGE> 24
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 10,992 $ 10,069 $ 5,831
========= ========= =======
Income taxes paid......................................... $ 2,249 $ 5,857 $ 2,541
========= ========= =======
Supplemental disclosure of noncash transactions:
Debt issued for property, plant and equipment............. $ 379
=========
Property sold in exchange for note receivable............. $ 1,500
=========
Common stock issued in exchange for notes receivable...... $ 5,163 $ 2,101
========= =======
Acquisitions of businesses:
Property, plant and equipment acquired.................... $ 31,015 $ 6,714
========= =======
Other noncash assets acquired............................. $ 25,000
=========
Liabilities assumed....................................... $ (1,261)
=========
Deferred taxes............................................ $ (12,174)
=========
Common stock issued....................................... $ (3,300) $ (225)
========= =======
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
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 25
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED NOTES
COMMON STOCK ADDITIONAL OTHER RECEIVABLE-
------------------- PAID-IN COMPREHENSIVE TREASURY EMPLOYEE RETAINED
SHARES AMOUNT CAPITAL INCOME STOCK STOCKHOLDERS EARNINGS
---------- ------ ---------- ------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996......... 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
Conversion of warrants........... 198,480 1 (160)
Exercise of stock options........ 24,823 120
Other comprehensive income....... $152
Purchase of 294,200 treasury
shares, at cost............... (5,950)
Issuance of 150,000 treasury
shares at $22.00 per share.... 457 2,843
Repayment of employee shareholder
notes......................... 602
Net income....................... 30,377
---------- --- -------- ---- ------- -------- -------
Balance at December 31, 1998....... 28,590,472 $29 $269,005 $152 $(3,325) $(10,146) $60,998
========== === ======== ==== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 26
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. THE COMPANY, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Hanover Compressor Company and its subsidiaries ("Hanover" or the
"Company") is a leading provider of a broad array of natural gas compression
rental, operations, parts 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.
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. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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 and maintenance contracts which generally range from one month to five
years. Parts and service revenue is recorded as products are delivered or
services are performed for the customer.
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-total cost basis.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
that the Company has with financial institutions. The Company believes that the
credit risk in such instruments is minimal. Trade accounts receivable are due
from companies of varying size engaged principally in oil and gas activities in
the United States, Canada and South America.
F-7
<PAGE> 27
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company reviews the financial condition of customers prior to extending
credit and generally does not obtain collateral for receivables. 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
$1,212,000 and $838,000 at December 31, 1998 and 1997, respectively. The Company
considers this credit risk to be limited due to these companies financial
resources.
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:
<TABLE>
<S> <C>
Compression equipment and facilities........................ 4 to 25 years
Buildings................................................... 30 years
Transportation, shop equipment and other.................... 3 to 12 years
</TABLE>
Major improvements that extend the useful life of an asset are capitalized.
Repairs and maintenance are expensed as incurred. When property, plant and
equipment is sold, retired or otherwise disposed of, the cost and related
accumulated depreciation are eliminated and the gain or loss is recognized.
Depreciation expense was $35,768,000, $27,789,000 and $19,887,000 in 1998, 1997
and 1996, respectively.
Assets under construction of $30,030,000 and $16,638,000 are included in
compression equipment at December 31, 1998 and 1997, respectively.
Long-Lived Assets
The Company reviews for the impairment of long-lived assets, including
property, plant and equipment, and goodwill whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss exists when estimated undiscounted cash flows
expected to result from the use of the asset and its eventual disposition are
less than its carrying amount. The impairment loss recognized represents the
excess of the assets carrying value as compared to its estimated fair market
value.
Intangible and Other Assets
Investments in affiliated corporations in which the Company does not have a
controlling interest are accounted for using the equity method. The excess of
cost over net assets of acquired businesses is recorded as goodwill and
amortized on a straight-line basis over 15 years commencing on the dates of the
respective acquisitions. Accumulated amortization was $1,810,000 and $828,000 at
December 31, 1998 and 1997, respectively.
Included in intangible and other assets are debt issuance costs, net of
accumulated amortization, totaling $1,186,000 and $1,492,000 at December 31,
1998 and 1997, respectively. Such costs are 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
F-8
<PAGE> 28
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 12, 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 Translation
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 resulting gains and losses from the translation of accounts are included in
accumulated other comprehensive income. The resulting translation adjustments
for the years ended December 31, 1997 and 1996 were not significant. For
subsidiaries located in highly inflationary economies, translation gains and
losses are included in net income.
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.
Included in diluted shares are common stock equivalents relating to options
of 1,230,000, 1,153,000 and 956,000 in 1998, 1997 and 1996, respectively, and
warrants of 393,000 in 1998 and 569,000 in 1997 and 1996. The common stock
equivalents excluded from the computation of diluted earnings per share as the
effect would be anti-dilutive were approximately 146,000 in 1998. No common
stock equivalents were anti-dilutive in 1997 and 1996.
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.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standard No. 130 (FAS
130), "Reporting Comprehensive Income," beginning January 1, 1998. FAS 130
established standards for reporting and displaying comprehensive income and its
components. Components of comprehensive income are net income and all changes in
equity during a period except those resulting from transactions with owners. FAS
130 requires enterprises to display comprehensive income in its financial
statements, to classify items of comprehensive income by their nature in the
financial statements and display the accumulated balance of other comprehensive
income in shareholders' equity separately from retained earnings and additional
paid-in capital. Accumulated other comprehensive income consists of the foreign
currency translation adjustment.
F-9
<PAGE> 29
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial Instruments
The Company utilizes off-balance sheet derivative financial instruments
with the principal objective being to minimize the risks and/or costs associated
with financial and global operating activities by managing its exposure to
interest rate fluctuations on a portion of its variable rate debt and leasing
obligations. The Company does not utilize derivative financial instruments for
trading or other speculative purposes. The Company designates and assigns the
financial instruments as hedges of specific assets, liabilities or anticipated
transactions. The cash flow from hedges is classified in the Consolidated
Statements of Cash Flows under the same category as the cash flows from the
underlying assets, liabilities or anticipated transactions. The carrying amounts
reported in the balance sheet for all financial instruments approximate fair
value. See Notes 7 and 8.
Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 1998 financial statement classification. These
reclassifications have no impact on net income.
2. BUSINESS COMBINATIONS
Acquisitions were accounted for under the purchase method of accounting.
Results of operations of companies acquired are included from the dates of such
acquisitions. The Company allocates the cost of the acquired business to the
assets acquired and the liabilities assumed based upon fair value estimates
thereof. These estimates are revised during the allocation period as necessary
when information regarding contingencies becomes available to define and
quantify assets acquired and liabilities assumed. The allocation period varies
for each acquisition but does not exceed one year. To the extent contingencies
are resolved or settled during the allocation period, such items are included in
the revised purchase price allocation. After the allocation period, the effect
of changes in such contingencies is included in results of operations in the
periods the adjustments are determined. The Company's management does not
believe potential deviations between its fair value estimates and actual fair
values to be material.
Year Ended December 31, 1998
Effective June 8, 1998, the Company purchased the stock of Arkoma
Compression Services, Inc. for approximately $17,245,000 in cash.
Effective October 22, 1998, the Company purchased the stock of Eureka
Energy Systems, Inc for approximately $25,335,000 in cash.
The pro forma information set forth below assumes acquisitions in 1998 are
accounted for had the purchases occurred at the beginning of 1997. The pro forma
information is presented for informational purposes only and is not necessarily
indicative of the results of operations that actually would have been achieved
had the acquisitions been consummated at that time (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue..................................................... $296,664 $221,259
Net income.................................................. 31,375 19,153
Earnings per common share -- basic.......................... 1.10 0.75
Earnings per common share -- diluted........................ $ 1.04 $ 0.70
</TABLE>
F-10
<PAGE> 30
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Year Ended December 31, 1997
Effective September 23, 1997, Hanover purchased Wagner Equipment, Inc. and
Gas Tech Compression Services, Inc. for approximately $6,287,000 in cash.
Results of operations for 1997 were not materially impacted by the transaction.
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.
3. INVENTORY
Inventory consisted of the following amounts (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Parts and supplies.......................................... $32,808 $20,141
Work in progress............................................ 19,962 8,766
Finished goods.............................................. 10,274 3,953
------- -------
$63,044 $32,860
======= =======
</TABLE>
4. COMPRESSOR AND PRODUCTION EQUIPMENT FABRICATION CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $ 18,605 $ 16,999
Estimated earnings.......................................... 3,488 3,850
-------- --------
22,093 20,849
Less -- billings to date.................................... (14,916) (16,672)
-------- --------
$ 7,177 $ 4,177
======== ========
</TABLE>
Presented in the accompanying financial statements as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ -------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted
contracts................................................. $7,871 $ 6,658
Billings on uncompleted contracts in excess of costs and
estimated earnings........................................ (694) (2,481)
------ -------
$7,177 $ 4,177
====== =======
</TABLE>
F-11
<PAGE> 31
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Goodwill.................................................... $26,686 $ 6,006
Investments in unconsolidated subsidiaries.................. 25,123 9,190
Notes receivable............................................ 3,799
Other....................................................... 7,175 6,800
------- -------
62,783 21,996
Accumulated amortization.................................... (5,747) (4,403)
------- -------
$57,036 $17,593
======= =======
</TABLE>
Amortization of goodwill and other intangible assets totaled $1,386,000,
$650,000 and $835,000 in 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, the Company's investments in unconsolidated
subsidiaries included a 35% interest in Collicutt Mechanical Services, Ltd., a
35% interest in the Consortium Cosacol/Hanover (the "Consortium"), and a
non-controlling 60% interest in the Hanover/Enron Joint Venture. At December 31,
1997, the Company had a 33% interest in a joint venture with Wartsila Diesal
International Ltd., OY that was dissolved in 1998. There were no distributions
or dividends received during the years ended December 31, 1998 and 1997. Equity
in income of joint ventures was $1,369,000 for 1998 and a loss of $206,000 for
1997 and is included in other revenues. The company had no equity investments in
1996.
In December, 1998, the Company restructured its relationship in the
Consortium. The Company purchased all of the capitalized construction from the
Consortium for 150,000 shares of Hanover common stock valued at $3,300,000. In
addition, the Company acquired a 10% interest in Cosacol for $2,000,000 in cash.
In December, 1998, the Company advanced $8,000,000 to Transportadora de Gas
del Sur S.A. ("TGS"), an Argentina company for a 25% interest in a joint
venture. The Company is finalizing the terms of the joint venture.
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. The excess of
the Company's investment 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, 1998 and 1997.
The notes receivable are from customers for sales of equipment. The notes
vary in length, are non-interest bearing or bear interest at rates ranging from
12% to 15%, approximately $1,500,000 is collateralized by certain equipment.
F-12
<PAGE> 32
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------- ------
<S> <C> <C>
Accrued salaries and wages.................................. $ 1,055 $ 801
Accrued bonuses............................................. 1,539 1,151
Accrued income and other taxes.............................. 6,105 749
Accrued leasing............................................. 2,336
Accrued other............................................... 6,564 6,387
------- ------
$17,599 $9,088
======= ======
</TABLE>
7. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Revolving credit facility................................... $126,500 $131,200
Subordinated promissory notes, net of unamortized discount
of $855 and $1,283........................................ 22,648 22,220
Real estate mortgage, interest at 7.5%, collateralized by
certain land and buildings, payable through 2002.......... 4,583 4,917
Other, interest at various rates, collateralized by
equipment and other assets, net of unamortized discount... 3,656 2,723
-------- --------
157,387 161,060
Less -- current maturities.................................. (444) (2,222)
-------- --------
$156,943 $158,838
======== ========
</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 (6.9% and 6.7% at December 31,
1998 and 1997, respectively). 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 1996, the Company exchanged subordinated notes for Series A
preferred stock (Note 10). 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, 1998 are (in thousands):
1999 -- $444; 2000 -- $23,150; 2001 -- $615; 2002 -- $130,380; 2003 -- $646 and
$2,152 thereafter.
In January, 1998 and in connection with the revolving credit facility, the
Company entered into a two-year interest rate swap transaction to manage
interest rate exposure with a notional amount of $75,000,000 and a strike rate
of 5.43%. The differential paid or received on the swap transaction was
recognized as an adjustment to interest expense. This swap transaction was
cancelled in July, 1998.
F-13
<PAGE> 33
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASING TRANSACTION
In July 1998, the Company completed a $200,000,000 sale and lease back
transaction of certain compression equipment. The transaction was structured as
a sale and lease back of the equipment and is recorded as an operating lease.
Under the agreement, the equipment was sold and leased back by the Company for a
5 year period and will continue to be deployed by the Company under its normal
operating procedures. At any time, the Company has the option to repurchase the
equipment at fair market value. The lease provides for a substantial residual
value guarantee (approximately $167,000,000) by the Company, which is due upon
termination of the lease and which may be satisfied by a cash payment or the
exercise of a purchase option by the Company. The equipment sold had a book
value of $158,007,000 and the equipment sale resulted in a gain of approximately
$41,993,000 which is deferred until the end of the lease. If the Company does
not exercise its purchase options under the agreement, the deferred gain will be
recognized to the extent it exceeds any required payments by the Company under
the residual value guarantee and other requirements of the agreement. The
Company incurred transaction costs of approximately $1,423,000 that are included
in intangible and other assets. The costs are being amortized over the lease
term.
The lease agreement calls for variable quarterly rental payments that vary
with the London Interbank Borrowing Rate. The following provides future minimum
lease payments under the leasing arrangement exclusive of any guarantee payments
(in thousands): 1999 -- $14,000; 2000 -- $14,000; 2001 -- $14,000;
2002 -- $14,000; 2003 -- $7,900.
In July, 1998 and in connection with the leasing transaction, the Company
entered into two-year swap transactions to manage lease rental exposure with
notional amounts of $75,000,000 and $125,000,000 and strike rates of 5.51% and
5.56%, respectively. The differential paid or received on the swap transactions
is recognized as an adjustment to leasing expense. 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.
9. INCOME TAXES
The components of income before income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Domestic................................................ $39,160 $23,596 $15,780
Foreign................................................. 10,476 5,821 1,445
------- ------- -------
$49,636 $29,417 $17,225
======= ======= =======
</TABLE>
F-14
<PAGE> 34
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current tax expense:
Federal............................................. $ 3,421 $ 3,308 $ 3,625
State............................................... 1,741 1,281 720
Foreign............................................. 1,739 492 236
------- ------- -------
Total current............................... 6,901 5,081 4,581
------- ------- -------
Deferred tax expense:
Federal............................................. 10,312 4,543 1,822
State............................................... 85 (23) 441
Foreign............................................. 1,961 1,713
------- ------- -------
Total deferred.............................. 12,358 6,233 2,263
------- ------- -------
Total provision............................. $19,259 $11,314 $ 6,844
======= ======= =======
</TABLE>
The income tax expense for 1998, 1997 and 1996 resulted in effective tax
rates of 38.8%, 38.5% and 39.7%, 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,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Federal income tax at statutory rates................. $17,373 $10,296 $ 6,028
State income taxes, net of federal income tax
benefit............................................. 1,187 817 755
Foreign income taxes.................................. 33 226 (222)
Other, net............................................ 666 (25) 283
------- ------- -------
$19,259 $11,314 $ 6,844
======= ======= =======
</TABLE>
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating losses...................................... $ 3,345 $ 1,308
Alternative minimum tax carryforward...................... 13,276 9,473
Other..................................................... 3,683 1,343
-------- --------
Gross deferred tax assets................................... 20,304 12,124
-------- --------
Deferred tax liabilities:
Property, plant and equipment............................. (58,249) (31,091)
Other..................................................... (8,339) (2,715)
-------- --------
Gross deferred tax liabilities.............................. (66,588) (33,806)
-------- --------
$(46,284) $(21,682)
======== ========
</TABLE>
The Company has net operating loss carryforwards at December 31, 1998 of
$9,558,000 expiring in 2005 to 2018. Of the above net operating loss
carryforward, $3,991,000 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 $13,276,000 which does not expire.
F-15
<PAGE> 35
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recorded approximately $10,174,000 additional deferred income
tax liability resulting from the Arkoma and Eureka acquisitions. See Note 2 for
a description of the transactions.
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.
10. 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. Accrued
dividends in 1996 were $1,368,000 on Series A and $373,000 on Series B preferred
stock. As of December 31, 1998, the Company has reserved 370,470 common shares
for issuance upon warrant exercise.
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.
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>
11. 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 collateralized by the common stock and
the general credit of the employee, bear interest at a prime rate, and are
generally payable
F-16
<PAGE> 36
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
collateralized by the common stock and the general credit of the employee, and
mature in June 2001.
Other
As of December 31, 1998, warrants to purchase approximately 370,000 shares
of common stock at $.01 per share were outstanding. The warrants were issued in
connection with the Series A preferred stock and expire in August 2005.
During 1998, the Company initiated a stock buyback program authorized to
repurchase up to 450,000 of the Company's outstanding shares to assist with
future business acquisitions and for general corporate purposes. During the
year, the Company repurchased 294,200 shares at an average price of $20.22.
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, 5, 10, and 12 for a description of other common stock
transactions.
12. 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, compensation expense of $109,000 was recognized on options granted
at less than fair market value. No compensation expense was recorded in 1998.
Of the options granted in 1998, 350,000 vest 100% on July 1, 2001. The
remaining options granted to employees vest over the following schedule, which
may accelerate upon a change in the Company's controlling ownership.
<TABLE>
<S> <C>
Year 1...................................................... 10%
Year 2...................................................... 30%
Year 3...................................................... 60%
Year 4...................................................... 100%
</TABLE>
F-17
<PAGE> 37
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option activity for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES PRICE PER SHARE
--------- ----------------
<S> <C> <C>
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
---------
Options granted.......................................... 1,047,683 20.26
Options canceled......................................... (42,004) 21.22
Options exercised........................................ (24,823) 4.80
---------
Options outstanding, December 31, 1998..................... 4,395,215 11.90
---------
</TABLE>
Options Outstanding December 31, 1998
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE IN YEARS PRICE SHARES PRICE
--------------- --------- ------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.01-$ 4.59........................ 1,752,203 4.3 $ 4.46 1,752,203 $ 4.46
$ 4.60-$ 6.96........................ 421,421 4.9 5.33 421,421 5.33
$ 6.97-$10.13........................ 129,859 6.4 9.54 129,353 9.54
$10.14-$13.92........................ 70,730 7.2 11.86 70,730 11.86
$19.50-$25.00........................ 2,021,002 8.4 19.86 99,885 19.50
--------- ---------
4,395,215 2,473,592
========= =========
</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 $8.31,
$8.58 and $5.54, per option during 1998, 1997 and 1996, respectively. The
weighted average fair value at date of grant for options where the exercise
price was less than the market price of the stock on the grant date was $10.54
per option during 1996. The fair value of options at date of grant was estimated
using the Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Expected life............................................ 6 years 6 years 10 years
Interest rate............................................ 4.8% 6.7% 6.3%
Volatility............................................... 32.6% 30% 0%
Dividend yield........................................... 0% 0% 0%
</TABLE>
Stock-based compensation costs computed in accordance with FAS 123, would
have reduced pretax income by $1,349,000, $1,369,000 and $237,000 in 1998, 1997
and 1996, respectively. The after-tax impact for
F-18
<PAGE> 38
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998, 1997 and 1996, respectively, was $825,000, $842,000 and $156,000 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 1998 and 1997 and by less than $.01 per
share during 1996. The pro forma effect on net income for 1998, 1997 and 1996 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.
13. 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 made a matching contribution of $273,000 during the
year ended December 31, 1998. The Company did not make a matching contribution
for the years ended December 31, 1997 or 1996.
14. 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 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, 1998 and 1997 are $10,146,000 and $10,748,000, respectively.
Total interest accrued on the loans is $548,000 and $585,000 as of December 31,
1998 and 1997, respectively.
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.
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 and 1996 was $1,388,000 and $2,548,000, 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 $6,801,000, $1,034,000 and $701,000 were paid by
affiliates of Enron in 1998, 1997 and 1996, respectively.
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 $859,000, $1,035,000 and $3,429,000 during 1998, 1997
and 1996, respectively.
See Note 5 for a description of an investment with a related party, Note 10
for a description of redeemable preferred stock transactions with related
parties and Note 11 for a description of common stock transactions with related
parties.
15. COMMITMENTS AND CONTINGENCIES
Rent expense excluding lease payments for the leasing transaction described
in Note 8 for 1998, 1997 and 1996 was approximately $455,000, $376,000 and
$440,000, respectively. Commitments for future minimum rental payments exclusive
of those disclosed in Note 8 are not significant at December 31, 1998.
F-19
<PAGE> 39
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, operating results or cash flows.
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, operating results or cash flows.
16. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
The Company manages its business segments primarily on the type of product
or service provided. The Company has four principal industry segments: Rentals
and Maintenance -- Domestic, Rentals and Maintenance -- International,
Compressor Fabrication and Production Equipment Fabrication. The Rentals and
Maintenance Segment provides natural gas compression rental and maintenance
services which includes parts sales 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.
The Company evaluates the performance of its segments based on segment
gross profit. Segment gross profit for each segment includes direct operating
expenses. Costs excluded from segment gross profit include selling, general and
administrative, depreciation and amortization, leasing, interest and income
taxes. Amounts defined as "Other" include sales of asset, results of other
insignificant operations, corporate related items primarily related to cash
management activities and parts and service operations which are not separately
managed. Revenues include sales to external customers and intersegment sales.
Intersegment sales are accounted for at cost and are eliminated in
consolidation. Identifiable assets are 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. Capital expenditures include
fixed asset purchases.
No single customer accounts for 10% or more of the Company's revenues for
all periods.
F-20
<PAGE> 40
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables present sales and other financial information by
industry segment and geographic region for the years ended December 31, 1998,
1997 and 1996.
Industry Segments
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL PRODUCTION
RENTALS AND RENTALS AND COMPRESSOR EQUIPMENT ELIMINA- CONSOLI-
MAINTENANCE MAINTENANCE FABRICATION FABRICATION OTHER TIONS DATED
----------- ------------- ----------- ----------- ------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
1998:
Revenues from external
customers........... $107,420 $ 40,189 $ 67,453 $37,466 $29,429 $281,957
Intersegment sales.... 1,200 54,369 2,902 10,735 $(69,206) --
-------- -------- -------- ------- ------- -------- --------
Total
revenues..... 107,420 41,389 121,822 40,368 40,164 (69,206) 281,957
Gross profit.......... 70,850 27,374 9,309 11,685 6,528 125,746
Identifiable assets... 422,026 129,628 33,578 17,855 11,503 614,590
Capital
expenditures........ 111,216 54,830 2,524 855 169,425
Depreciation and
amortization........ 28,383 7,128 701 942 37,154
1997:
Revenues from external
customers........... $ 78,656 $ 22,029 $ 49,764 $37,052 $11,297 $198,798
Intersegment sales.... 1,200 48,072 462 7,775 $(57,509) --
-------- -------- -------- ------- ------- -------- --------
Total
revenues..... 78,656 23,229 97,836 37,514 19,072 (57,509) 198,798
Gross profit.......... 51,149 14,423 8,180 10,677 3,894 88,323
Identifiable assets... 360,362 98,421 30,088 13,020 4,561 506,452
Capital
expenditures........ 109,540 36,545 993 3,917 150,995
Depreciation and
amortization........ 23,261 3,912 554 712 28,439
1996:
Revenues from external
customers........... $ 61,609 $ 11,288 $ 28,764 $26,903 $ 7,447 $136,011
Intersegment sales.... 1,200 36,851 526 1,871 $(40,448) --
-------- -------- -------- ------- ------- -------- --------
Total
revenues..... 61,609 12,488 65,615 27,429 9,318 (40,448) 136,011
Gross profit.......... 40,519 6,366 4,107 7,329 1,670 59,991
Identifiable assets... 221,804 77,956 14,550 19,755 7,322 341,387
Capital
expenditures........ 75,554 6,602 578 864 83,598
Depreciation and
amortization........ 17,212 2,442 490 578 20,722
</TABLE>
F-21
<PAGE> 41
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic Data
<TABLE>
<CAPTION>
UNITED
STATES INTERNATIONAL CONSOLIDATED
-------- ------------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
1998:
Revenues from external customers........................ $230,605 $ 51,352 $281,957
Identifiable assets..................................... $484,269 $130,321 $614,590
1997:
Revenues from external customers........................ $176,045 $ 22,753 $198,798
Identifiable assets..................................... $406,602 $ 99,850 $506,452
1996:
Revenues from external customers........................ $124,324 $ 11,687 $136,011
Identifiable assets..................................... $262,175 $ 79,212 $341,387
</TABLE>
F-22
<PAGE> 42
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>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998
Revenue...................................... $61,449 $68,933 $71,796 $79,779
Gross profit................................. 28,411 31,963 34,841 36,090
Net income................................... 6,251 6,972 8,048 9,106
Earnings per common and common equivalent
share:
Basic..................................... $ 0.22 $ 0.24 $ 0.28 $ 0.32
Diluted................................... $ 0.21 $ 0.23 $ 0.27 $ 0.30
1997
Revenue...................................... $40,924 $49,197 $51,467 $57,210
Gross profit................................. 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:
Basic..................................... $ 0.15 $ 0.15 $ 0.18 $ 0.22
Diluted................................... $ 0.14 $ 0.14 $ 0.17 $ 0.20
</TABLE>
F-23
<PAGE> 43
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Amended and Restated Certificate of Incorporation of the
Company(1) I3.1J
3.2 -- Amended and Restated By-laws of the Company(1) I3.2J
3.3 -- Certificate of Amendment of Certificate of Incorporation
of the Company filed March 8, 1996(1) I3.3J
3.4 -- Second Certificate of Amendment of Certificate of
Incorporation of the Company filed June 24, 1997(1) I3.4J
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(1) I4.1J
4.10 -- Form of Warrant Agreement(1) I4.10J
4.11 -- Specimen Stock Certificate(1) I4.11J
4.12 -- Form of Second Amended and Restated Stockholders
Agreement of Hanover Compressor Company dated as of June,
1997(1) I4.12J
4.13 -- Form of Amended and Restated Stockholders Agreement
(JEDI) dated as of May, 1997(1) I4.13J
4.14 -- Form of Amended and Restated Stockholders Agreement
(Westar Capital, Inc.) dated as of May, 1997(1) I4.14J
4.15 -- Form of Amended and Restated Stockholders Agreement
(HEHC) dated as of May, 1997(1) I4.15J
10.1 -- 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(2) I10.30J
10.2 -- Subsidiaries' Guarantee, dated as of December 15, 1997,
by certain of the Company's subsidiaries in favor of The
Chase Manhattan Bank, as agent(2) I10.31J
10.3 -- Management Fee Letter, dated November 14, 1995 between
GKH Partners, L.P. and the Company(1) I10.3J
10.4 -- Hanover Compressor Company Senior Executive Stock Option
Plan(1) I10.4J
10.5 -- 1993 Hanover Compressor Company Management Stock Option
Plan(1) I10.5J
10.6 -- Hanover Compressor Company Incentive Option Plan(1)
I10.6J
10.7 -- Amendment and Restatement of Hanover Compressor Company
Incentive Option Plan(1) I10.7J
10.8 -- Hanover Compressor Company 1995 Employee Stock Option
Plan(1) I10.8J
10.9 -- Hanover Compressor Company 1995 Management Stock Option
Plan(1) I10.9J
10.10 -- Hanover Compressor Company 1996 Employee Stock Option
Plan(1) I10.10J
10.11 -- OEM Sales and Purchase Agreement, between Hanover
Compressor Company and the Waukesha Engine Division of
Dresser Industries, Inc.(1) I10.11J
10.12 -- Distribution Agreement, dated February 23, 1995, between
Ariel Corporation and Maintech Enterprises, Inc.(1)
I10.12J
10.13 -- Exclusive Distribution Agreement, dated as of February
23, 1995 by and between Hanover/Smith, Inc. and Uniglam
Resources, Ltd.(1) I10.13J
</TABLE>
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<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.14 -- Lease Agreement with Option to Purchase dated as of
February 24, 1995 between Smith Industries, Incorporated
and Hanover/Smith, Inc.(1) I10.14J
10.15 -- Lease Agreement, dated December 4, 1990, between Hanover
Compressor Company and Ricardo J. Guerra and Luis J.
Guerra as amended(1) I10.15J
10.16 -- Lease Agreement, dated as of March 31, 1995 between
Hanover Compressor Company and Smith Industries,
Incorporated(1) I10.16J
10.17 -- Lease Agreement with Option to Purchase, dated June 8,
1993 between C&M Land Account and Hanover Compressor
Company(1) I10.17J
10.18 -- Indemnification Agreement, dated as of December 5, 1995,
between Hanover Compressor Company and Western Resources
(formerly Astra Resources, Inc.)(1) I10.18J
10.19 -- Put Agreement, dated December 5, 1995, by and between
Western Resources, Inc. (formerly Astra Resources, Inc.)
an Hanover Compressor Company and Hanover Acquisition
Corporation (formerly Astra Resources Compression,
Inc.)(1) I10.19J
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(1) I10.20J
10.21 -- Cooperation Agreement dated January 16, 1997 among the
Company, Wartsila and Wartsila Compression Services,
GMBH(1) I10.21J
10.22 -- Distributorship Agreement dated January 16, 1997 between
the Company and Wartsila Compression Services(1) I10.22J
10.23 -- 1997 Stock Option Plan, as amended(1) I10.23J
10.24 -- 1997 Stock Purchase Plan(1) I10.24J
10.25 -- Exchange Agreement by and between Hanover Compressor
Company and JEDI, dated December 23, 1996(1) I10.27J
10.26 -- Lease dated as of July 20, 1998 between Hanover Equipment
Trust 1998A (the "Trust") and the Company.(3) I10.1J
10.27 -- Guarantee dated as of July 22, 1998 and made by the
Company, Hanover/Smith, Inc., Hanover Maintech, Inc. and
Hanover Land Company.(3) I10.2J
10.28 -- Lessee's and Guarantor's Consent dated as of July 20,
1998 made by the Company, Hanover/Smith, Inc., Hanover
Maintech, Inc. and Hanover Land Company.(3) I10.3J
10.29 -- Participation Agreement dated as of July 22, 1998 among
the Company, the Trust, The Chase Manhattan Bank, as
agent, Societe General & Financial Corporation, and
Wilmington Trust Company.(3) I10.4J
10.30 -- Security Agreement dated as of July 22, 1998 made by the
Trust in favor of The Chase Manhattan Bank, as agent,
with the Company joining by Joinder of Lessee.(3) I10.5J
10.31 -- Lease Supplement No. 1 dated as of July 22, 1998 between
the Trust and the Company.(3) I10.6J
10.32 -- 1998 Stock Option Plan(4) 10.7
10.33 -- December 10, 1998 Stock Option Plan*(5)
10.34 -- 1999 Stock Option Plan*(5)
</TABLE>
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<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
21.1 -- List of Subsidiaries*
27.1 -- Financial Data Schedule*
</TABLE>
- ---------------
(1) Such exhibit previously filed as an exhibit to the Registration Statement
(File No. 333-27953) on Form S-1, as amended, under the exhibit number
indicated in brackets I J, and is incorporated by reference.
(2) Such exhibit previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the Year Ended 1997 under the exhibit number indicated in
brackets I J, and is incorporated by reference.
(3) Such exhibit previously filed as an exhibit to the Company's Current Report
on Form 8-K dated July 22, 1998, under the exhibit number indicated in
brackets I J, and is incorporated by reference.
(4) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Third Quarter of 1998, under the exhibit number
indicated in brackets I J, and is incorporated by reference.
(5) Compensatory plan or arrangement required to be filed.
* Filed herewith.
E-3
<PAGE> 1
EXHIBIT 10.33
HANOVER COMPRESSOR COMPANY
DECEMBER 9, 1998 STOCK OPTION PLAN
1. Preamble.
Hanover Compressor Company, a Delaware corporation (the "Company"), hereby
establishes the Hanover Compressor Company December 9, 1998 Stock Option Plan
(the "Plan") as a means whereby the Company may, through awards of non-
qualified stock options:
(a) provide Company Officers, employees, Directors and consultants
with additional incentive to promote the success of the Company's and its
Subsidiaries' businesses;
(b) enable such employees to acquire proprietary interests in the
Company;
(c) encourage such employees to remain in the employ of the Company
and its Subsidiaries; and
(d) provide officers and directors of, and consultants to, the
Company and its Subsidiaries (who are not otherwise employees) with
additional incentive to promote the success of the businesses of the
Company and its Subsidiaries.
The awards under this Plan shall be granted by the Company to
appropriately reward employees who participated in the Company's 1997 Stock
Purchase Plan as of the date hereof and have agreed to accept options under
this Plan in exchange for waiving their rights to a contingent payment on July
1, 2001 under the terms of a Performance Award granted under the 1997 Stock
Purchase Plan. Except as specifically provided in the prior sentence or
otherwise herein, the provisions of this Plan do not apply to or affect any
option, stock appreciation rights, or stock heretofore or hereafter granted
under any other stock plan of the Company or any subsidiary, and all such
options, stock appreciation rights or stock continue to be governed by and
subject to the applicable provisions of the plan or agreement under which they
were granted.
2. Definitions.
2.01 "Board" or "Board of Directors" means the board of directors of
the Company.
2.02 "Cause" means (i) the commission by such Participant of an act
of fraud, embezzlement or willful breach of a fiduciary duty to the Company
(including the unauthorized disclosure of confidential or proprietary material
information of the Company), (ii) a conviction of such Participant (or a plea
of nolo contendere in lieu thereof) for a felony or a crime involving fraud,
dishonesty or moral turpitude, (iii) willful failure of a Participant to follow
the written directions of the chief executive officer of the Company or the
Board in the case of executive officers of the Company; (iv) willful misconduct
as an employee of the Company, (v) the willful failure of such Participant to
render services to the Company in accordance with his employment or consulting
arrangement, which failure amounts to a material neglect of his duties to the
Company or (vi) substantial dependence, as determined by the Board, on alcohol
or any drug, immediate precursor or other substance listed in Schedule I-V of
the Federal Comprehensive Drug Abuse Prevention and Control Act of 1970, as
amended, as determined in the sole discretion of the Committee.
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<PAGE> 2
2.03 "Change in Control" means the occurrence of any one of the
following events:
(a) any (A) consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or which
contemplates that all or substantially all of the business and/ or assets
of the Company shall be controlled by another corporation or (B) a
recapitalization (including an exchange of Company equity securities by
the holders thereof), in either case, in which any "Person" (as such term
is used in Sections 13(d) and (14(d)(2) of the Exchange Act), other than
the Controlling Shareholders, becomes the beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of securities of
the Company representing more than 50% of the combined voting power of the
Company's then outstanding securities ordinarily having the right to vote
in the election of directors;
(b) any sale, lease, exchange or transfer (in one transaction or
series of related transactions) of all or substantially all of the assets
of the Company and its Subsidiaries;
(c) approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company, unless such
plan or proposal is abandoned within 60 days following such approval; or
(d) any "Person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act), other than the Controlling Shareholders,
shall become the beneficial owner of securities of the Company
representing more than 50% of the combined voting power of the Company's
then outstanding securities ordinarily having the right to vote in the
election of directors.
2.04 "Code" means the Internal Revenue Code of 1986, as it exists now
and as it may be amended from time to time.
2.05 "Committee" means the Compensation Committee of the Board or any
other committee comprised of two or more outside Directors appointed by the
Board to administer the Plan, as the case may be. Each member of the Committee
shall (a) be a member of the Board of Directors who has not at any time within
one year prior thereto, or at any time during such member's term of service on
the Committee, received any stock options, stock appreciation rights or
allocations of any equity securities under the Plan or any other plan
maintained by the Company or any of its affiliates, except as permitted
pursuant to the provisions of Rule 16b-3(c)(2)(i) of the Exchange Act or any
successor rule thereof; and (b) be an outside Director as determined under
Treasury Regulation 26 CFR Section 1.162-27(e)(3) or any successor regulation
thereto. Once appointed, the Committee shall continue to serve until otherwise
directed by the Board of Directors.
2.06 "Common Stock" means the common stock of the Company, $.001 par
value.
2.07 "Company" means Hanover Compressor Company, a Delaware
corporation, and any successor thereto.
2.08 "Controlling Shareholders" means GKH Investments, L.P., GKH
Partners, L.P., and the partners therein.
2.09 "Director" means a member of the Board.
2.10 "Disability" means being entitled to disability benefits under
the terms of the Company's long term disability plan.
2.11 "Exchange Act" means the Securities Exchange Act of 1934, as it
exists now or from time to time may hereafter be amended.
2.12 "Fair Market Value" means for the relevant day:
(a) If shares of Common Stock are listed or admitted to unlisted
trading privileges on any national or regional securities exchange, the
last reported sale price, regular way, on the composite tape of that
exchange on the day Fair Market Value is to be determined;
-2-
<PAGE> 3
(b) If the Common Stock is not listed or admitted to unlisted
trading privileges as provided in paragraph (a), and if sales prices for
shares of Common Stock are reported by the National Association of
Securities Dealers, Inc. Automated Quotations, Inc. National Market System
("NASDAQ System"), then the last sale price for Common Stock reported as
of the close of business on the day Fair Market Value is to be determined,
or if no such sale takes place on that day, the average of the high bid
and low asked prices so reported; if Common Stock is not traded on that
day, the next preceding day on which such stock was traded; or
(c) If trading of the Common Stock is not reported by the NASDAQ
System or on a stock exchange, Fair Market Value will be determined by the
Committee in its discretion based upon the best available data.
2.13 "Officer" means a corporate or equivalent officer of the Company
or any Subsidiary of the Company.
2.14 "Option" means the right of a Participant to purchase a
specified number of shares of Common Stock, subject to the terms and conditions
of the Plan.
2.15 "Option Date" means the date upon which an Option is awarded to
a Participant under the Plan.
2.16 "Option Price" means the price per share at which an Option may
be exercised.
2.17 "Participant" means an individual to whom an Option has been
granted under the Plan.
2.18 "Plan" means the Hanover Compressor Company December 9, 1998
Stock Option Plan, as set forth herein and as from time to time amended.
2.19 "Securities Act" means the Securities Act of 1933, as it exists
now or from time to time may hereinafter be amended.
2.20 "Subsidiary" means any corporation or other entity of which the
majority voting power or equity interest is owned directly or indirectly by the
Company.
2.21 "Termination of Employment" means,
(a) with respect to an employee when the employee's employment
relationship with the Company and all of its Subsidiaries is
terminated, regardless of any severance arrangements. A transfer
from the Company to a Subsidiary, or vice versa is not a termination
of employment for purposes of this Plan;
(b) with respect to a consultant when the consultant's consulting
relationship with the Company is terminated either due to the
termination of any consulting agreement, or otherwise, regardless of
the fact that no employment relationship exists;
(c) with respect to an Officer or Director when such individual is no
longer serving as an Officer or Director of the Company, as a
consultant to or employee of the Company and any of its Subsidiaries.
2.22 Rules of Construction.
(a) Governing Law. The construction and operation of this Plan are
governed by the laws of the State of Delaware.
(b) Undefined Terms. Unless the context requires another meaning,
any term not specifically defined in this Plan has the meaning given to it
by the Code.
(c) Headings. All headings in this Plan are for reference only and
are not to be utilized in construing the Plan.
-3-
<PAGE> 4
(d) Gender. Unless clearly appropriate, all nouns of whatever
gender refer indifferently to persons of any gender.
(e) Singular and Plural. Unless clearly inappropriate, singular
terms refer also to the plural and vice versa.
(f) Severability. If any provision of this Plan is determined to be
illegal or invalid for any reason, the remaining provisions shall continue
in full force and effect and shall be construed and enforced as if the
illegal or invalid provision did not exist, unless the continuance of the
Plan in such circumstances is not consistent with its purposes.
3. Stock Subject to the Plan.
Except as otherwise provided in Section 10, the aggregate number of shares
of Common Stock that may be issued under Options under this Plan may not exceed
350,000 shares of Common Stock. Reserved shares may be either authorized but
unissued shares or treasury shares, in the Board's discretion. If any grants
hereunder shall terminate or expire such shares shall be eligible to be granted
as new Options under this Plan.
4. Administration.
The Plan shall be administered by the Committee. In addition to any other
powers set forth in this Plan, the Committee has the exclusive authority:
(a) to construe and interpret the Plan, and to remedy any
ambiguities or inconsistencies therein;
(b) to establish, amend and rescind appropriate rules and
regulations relating to the Plan;
(c) subject to the express provisions of the Plan, to determine the
individuals who will receive grants of Options, the times when they will
receive them, the number of shares to be subject to each award and the
Option Price, payment terms, payment method, and expiration date
applicable to each award;
(d) to contest on behalf of the Company or Participants, at the
expense of the Company, any ruling or decision on any matter relating to
the Plan or to any grants of Options;
(e) generally, to administer the Plan, and to take all such steps
and make all such determinations in connection with the Plan and the
grants of Options as it may deem necessary or advisable;
(f) to determine the form in which tax withholding under Section 13
of this Plan will be made; and
(g) to amend the Plan or any Option granted hereunder as may be
necessary in order for any business combination involving the Company to
qualify for pooling-of-interest treatment under APB No. 16.
5. Eligible Participants
All employees, Officers, and Directors of the Company and its
Subsidiaries, and those consultants (who are not otherwise employees of the
Company or any of its Subsidiaries) are eligible to participate in the Plan.
Subject to the provisions of the Plan, the Committee shall determine from time
to time those individuals who shall be designated as Participants and the
number, if any, of Options to be granted to each such Participant;
6. Terms and Conditions of Options.
All Options granted under this Plan shall be nonstatutory options, which
are not intended to be classified as "incentive stock options" under Section
422 of the Code. The Committee may, in its discretion, grant Options to any
Participant under the Plan. Each Option shall be evidenced by an agreement
between the Company and the Participant.
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<PAGE> 5
Each Option agreement, in such form as is approved by the Committee, shall be
subject to the following express terms and conditions and to such other terms
and conditions, not inconsistent with the Plan as the Committee may deem
appropriate:
(a) Option Period. Each Option will expire as of the earliest of:
(i) ten years from the Grant Date;
(ii) the date on which it is forfeited under the provisions of
Section 8;
(iii) the date three months after the Participant's Termination
of Employment for any reason other than death or Disability; or
(iv) the date twelve months after the Participant's death or
Disability.
(b) Option Price. At the time when the Option is granted, the
Committee will fix the Option Price. The Option Price may be greater
than, less than, or equal to Fair Market Value on the Option Date, as
determined in the sole discretion of the Committee.
(c) Other Option Provisions. The form of Option authorized by the
Plan may contain such other provisions as the Committee may from time to
time determine.
-5-
<PAGE> 6
7. Manner of Exercise of Options.
To exercise an Option in whole or in part, a Participant (or, after his
death, his executor or administrator) must give written notice to the
Committee, stating the number of shares to which he intends to exercise the
Option. The Company will issue the shares with respect to which the Option is
exercised upon payment in full of the Option Price. The Option Price may be
paid (i) in cash, (ii) in shares of Common Stock having an aggregate Fair
Market Value, as determined on the date of delivery, equal to the Option Price,
(iii) if permitted by the Committee, by cash or certified or cashier's check
for the par value of the Plan Shares plus a promissory note for the balance of
the purchase price, which note shall provide for full personal liability of the
maker and shall contain such other terms and provisions as the Committee may
determine, including without limitation the right to repay the note partially
or wholly with Common Stock, or (iv) by delivery of irrevocable instructions to
a broker to promptly deliver to the Company the amount of sale or loan proceeds
necessary to pay for all Common Stock acquired through such exercise and any
tax withholding obligations resulting from such exercise. The Option Price may
be paid in shares of Common Stock which were received by the Participant upon
the exercise of one or more Options.
8. Vesting.
A Participant may not exercise an Option until it has become vested. The
portion of an Option award that is vested depends upon the period that has
elapsed since the Option Date. Unless the Committee establishes a different
vesting schedule at the time when an Option is granted, all Options granted
under this Plan shall vest according to the following schedule:
Period Elapsed Vested Percentage
-------------- -----------------
First Anniversary of Option Date 10%
Second Anniversary of Option Date 30%
Third Anniversary of Option Date 60%
Fourth Anniversary of Option Date 100%
Except as provided below, upon a Termination of Employment, a Participant
forfeits any Options that are not yet vested. Unless the Committee in its sole
discretion specifically waives the application of this sentence, then
notwithstanding the vesting schedule contained herein or in the Participant's
agreement, if the Participant's Termination of Employment is terminated for
Cause all Options granted to the Participant will be immediately cancelled and
forfeited by the Participant upon delivery to him of notice of such termination
for Cause.
9. Change of Control.
Notwithstanding the provisions of Section 8 or anything contained in a
Participant's agreement to the contrary, upon a Change in Control all Options
shall be subject to the following:
(a) The Company shall have the right to acquire from Participants
their vested Options by payment of the difference between the price per
share of Common Stock established in the Change of Control and the Option
Price; and
(b) All unvested Options shall either (i) convert into options to
purchase securities of the acquirer in the Change of Control on the same
terms and conditions as apply to the Options under the Plan, (ii) convert
into such consideration as the Participant would have received had the
Options been fully vested, or (iii) be treated as otherwise determined by
the Committee.
10. Adjustments to Reflect Changes in Capital Structure.
If there is any change in the corporate structure or shares of the
Company, the Committee may, in its discretion, make any adjustments necessary
to prevent accretion, or to protect against dilution, in the number and kind of
shares authorized by the Plan and, with respect to outstanding Options, in the
number and kind of shares covered thereby and in the applicable Option Price.
For the purpose of this Section 10, a change in the
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<PAGE> 7
corporate structure or shares of the Company includes, without limitation, any
change resulting from a recapitalization, stock split, stock dividend,
consolidation, rights offering, spin-off, reorganization, or liquidation and
any transaction in which shares of Common Stock are changed into or exchanged
for a different number or kind of shares of stock or other securities of the
Company or another entity.
11. Non-Transferability of Options.
The Options granted under the Plan are not transferable, voluntarily or
involuntarily, other than by will or the laws of descent and distribution, or
to the extent permissible under Section 422 of the Code pursuant to a qualified
domestic relations order as defined in Section 414(p) of the Code. During a
Participant's lifetime his Options may be exercised only by him.
12. Rights as Stockholder.
No Common Stock may be delivered upon the exercise of any Option until
full payment has been made and all income tax withholding requirements thereon
have been satisfied. A Participant has no rights whatsoever as a stockholder
with respect to any shares covered by an Option until the date of the issuance
of a stock certificate for the shares.
13. Withholding Tax.
The Company shall have the right to withhold in cash or shares of Common
Stock with respect to any payments made to Participants under the Plan any
taxes required by law to be withheld because of such payments.
-7-
<PAGE> 8
14. Non-Competition and Confidential Information.
Each Participant receiving Options shall be subject to the restriction
that, during the term of his Option Agreement and for a period of two years
thereafter, he or she (i) will not compete with any business of the Company or
its Subsidiaries and (ii) will not disclose to persons outside the Company
confidential information concerning the Company or its Subsidiaries without the
Company's express written consent.
15. No Right To Employment.
Participation in the Plan will not give any Participant a right to be
retained as an employee of the Company or any Subsidiary, or any right or claim
to any benefit under the Plan, unless the right or claim has specifically
accrued under the Plan.
16. Amendment of the Plan.
The Committee may from time to time amend or revise the terms of this
Plan in whole or in part and may, without limitation, adopt any amendment
deemed necessary; provided, however, that, except as provided in Section 4(g),
no change in any Options previously granted to a Participant may be made that
would impair the rights of the Participant without the Participant's consent.
17. Conditions Upon Issuance of Shares.
An Option shall not be exercisable and a share of Common Stock shall not
be issued pursuant to the exercise of an Option until such time as the Plan has
been approved by the Board of Directors and unless the exercise of such Option
and the issuance and delivery of such share pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the shares of Common Stock
may then be listed, and shall be further subject to the approval of counsel for
the Company with respect to such compliance. As a condition to the exercise of
an Option, the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Common Stock is
being purchased only for investment and without any present intention to sell
or distribute such shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant provisions of
law.
18. Effective Date and Termination of Plan.
18.1 Effective Date. This Plan is effective as of the date of its
adoption by the Board of Directors. Prior to the Board of Director's approval,
the Committee may, in its discretion, grant options under the Plan as if the
Plan were effective, provided the exercise of the options so granted shall be
expressly subject to the approval of the Plan by the Board of Directors.
18.2 Termination of the Plan. The Board may terminate the Plan at
any time with respect to any shares that are not then subject to Options.
Termination of the Plan will not affect the rights and obligations of any
Participant with respect to Options granted before termination.
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<PAGE> 1
EXHIBIT 10.34
HANOVER COMPRESSOR COMPANY
1999 STOCK OPTION PLAN
1. Preamble.
Hanover Compressor Company, a Delaware corporation (the "Company"),
hereby establishes the Hanover Compressor Company 1999 Stock Option Plan (the
"Plan") as a means whereby the Company may, through awards of non-qualified
stock options:
(a) provide Company Officers, employees, Directors and consultants
with additional incentive to promote the success of the Company's and its
Subsidiaries' businesses;
(b) enable such employees to acquire proprietary interests in the
Company; and
(c) encourage such employees to remain in the employ of the Company
and its Subsidiaries.
(d) provide officers and directors of, and consultants to, the
Company and its Subsidiaries (who are not otherwise employees) with
additional incentive to promote the success of the businesses of the
Company and its Subsidiaries.
Except as specifically provided herein, the provisions of this Plan do
not apply to or affect any option, stock appreciation rights, or stock
heretofore or hereafter granted under any other stock plan of the Company or
any subsidiary, and all such options, stock appreciation right or stock
continue to be governed by and subject to the applicable provisions of the plan
or agreement under which they were granted.
2. Definitions.
2.01 "Board" or "Board of Directors" means the board of directors of the
Company.
2.02 "Cause" means (i) the commission by such Participant of an act of
fraud, embezzlement or willful breach of a fiduciary duty to the Company
(including the unauthorized disclosure of confidential or proprietary material
information of the Company), (ii) a conviction of such Participant (or a plea
of nolo contendere in lieu thereof) for a felony or a crime involving fraud,
dishonesty or moral turpitude, (iii) willful failure of a Participant to follow
the written directions of the chief executive officer of the Company or the
Board in the case of executive officers of the Company; (iv) willful misconduct
as an employee of the Company, (v) the willful failure of such Participant to
render services to the Company in accordance with his employment or consulting
arrangement, which failure amounts to a material neglect of his duties to the
Company or (vi) substantial dependence, as determined by the Board, on alcohol
or any drug, immediate precursor or other substance listed in Schedule I-V of
the Federal Comprehensive Drug Abuse Prevention and Control Act of 1970, as
amended, as determined in the sole discretion of the Committee.
-1-
<PAGE> 2
2.03 "Change in Control" means the occurrence of any one of the following
events:
(a) any (A) consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or which
contemplates that all or substantially all of the business and/ or assets
of the Company shall be controlled by another corporation or (B) a
recapitalization (including an exchange of Company equity securities by
the holders thereof), in either case, in which any "Person" (as such term
is used in Sections 13(d) and (14(d)(2) of the Exchange Act), other than
the Controlling Shareholders, becomes the beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of securities
of the Company representing more than 50% of the combined voting power of
the Company's then outstanding securities ordinarily having the right to
vote in the election of directors;
(b) any sale, lease, exchange or transfer (in one transaction or
series of related transactions) of all or substantially all of the assets
of the Company and its Subsidiaries or Affiliates;
(c) approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company, unless such
plan or proposal is abandoned within 60 days following such approval; or
(d) any "Person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act), other than the Controlling Shareholders,
shall become the beneficial owner of securities of the Company
representing more than 50% of the combined voting power of the Company's
then outstanding securities ordinarily having the right to vote in the
election of directors.
2.04 "Code" means the Internal Revenue Code of 1986, as it exists now and
as it may be amended from time to time.
2.05 "Committee" means the Compensation Committee of the Board or any
other committee comprised of two or more outside Directors appointed by the
Board to administer the Plan, as the case may be. Each member of the Committee
shall (a) be a member of the Board of Directors who has not at any time within
one year prior thereto, or at any time during such member's term of service on
the Committee, received any stock options, stock appreciation rights or
allocations of any equity securities under the Plan or any other plan
maintained by the Company or any of its affiliates, except as permitted
pursuant to the provisions of Rule 16b-3(c)(2)(i) of the Exchange Act or any
successor rule thereof; and (b) be an outside Director as determined under
Treasury Regulation 26 CFR ss.1.162-27(e)(3) or any successor regulation
thereto. Once appointed, the Committee shall continue to serve until otherwise
directed by the Board of Directors.
2.06 "Common Stock" means the common stock of the Company, $.001 par
value.
2.07 "Company" means Hanover Compressor Company, a Delaware corporation,
and any successor thereto.
-2-
<PAGE> 3
2.08 "Controlling Shareholders" means GKH Investments, L.P., GKH
Partners, L.P., and the partners therein.
2.09 "Director" means a member of the Board.
2.10 "Disability" means being entitled to disability benefits under the
terms of the Company's long term disability plan.
2.11 "Exchange Act" means the Securities Exchange Act of 1934, as it
exists now or from time to time may hereafter be amended.
2.12 "Fair Market Value" means for the relevant day:
(a) If shares of Common Stock are listed or admitted to unlisted
trading privileges on any national or regional securities exchange, the
last reported sale price, regular way, on the composite tape of that
exchange on the day Fair Market Value is to be determined;
(b) If the Common Stock is not listed or admitted to unlisted
trading privileges as provided in paragraph (a), and if sales prices for
shares of Common Stock are reported by the National Association of
Securities Dealers, Inc. Automated Quotations, Inc. National Market
System ("NASDAQ System"), then the last sale price for Common Stock
reported as of the close of business on the day Fair Market Value is to
be determined, or if no such sale takes place on that day, the average of
the high bid and low asked prices so reported; if Common Stock is not
traded on that day, the next preceding day on which such stock was
traded; or
(c) If trading of the Common Stock is not reported by the NASDAQ
System or on a stock exchange, Fair Market Value will be determined by
the Committee in its discretion based upon the best available data.
2.13 "Officer" means a corporate or equivalent officer of the Company or
any Subsidiary or Affiliate of the Company.
2.14 "Option" means the right of a Participant to purchase a specified
number of shares of Common Stock, subject to the terms and conditions of the
Plan.
2.15 "Option Date" means the date upon which an Option is awarded to a
Participant under the Plan.
2.16 "Option Price" means the price per share at which an Option may be
exercised.
2.17 "Participant" means an individual to whom an Option has been granted
under the Plan.
-3-
<PAGE> 4
2.18 "Plan" means the Hanover Compressor Company 1999 Stock Option Plan,
as set forth herein and as from time to time amended.
2.19 "Securities Act" means the Securities Act of 1933, as it exists now
or from time to time may hereinafter be amended.
2.20 "Subsidiary" means any corporation or other entity of which the
majority voting power or equity interest is owned directly or indirectly by the
Company.
2.21 "Termination of Employment" means,
(a) with respect to an employee when the employee's employment
relationship with the Company and all of its Subsidiaries is
terminated, regardless of any severance arrangements. A transfer
from the Company to a Subsidiary or affiliate, or vice versa is not
a termination of employment for purposes of this Plan;
(b) with respect to a consultant when the consultant's consulting
relationship with the Company is terminated either due to the
termination of any consulting agreement, or otherwise, regardless of
the fact that no employment relationship exists;
(c) with respect to an Officer or Director when such individual is
no longer serving as an Officer or Director of the Company, as a
consultant to or employee of the Company and any of its
Subsidiaries.
2.22 Rules of Construction.
(a) Governing Law. The construction and operation of this Plan
are governed by the laws of the State of Delaware.
(b) Undefined Terms. Unless the context requires another meaning,
any term not specifically defined in this Plan has the meaning given to
it by the Code.
(c) Headings. All headings in this Plan are for reference only and
are not to be utilized in construing the Plan.
(d) Gender. Unless clearly appropriate, all nouns of whatever gender
refer indifferently to persons of any gender.
(e) Singular and Plural. Unless clearly inappropriate, singular
terms refer also to the plural and vice versa.
(f) Severability. If any provision of this Plan is determined to be
illegal or invalid for any reason, the remaining provisions shall
continue in full force and effect and shall be construed and enforced as
if the illegal or invalid provision did not exist, unless the continuance
of the Plan in such circumstances is not consistent with its purposes.
-4-
<PAGE> 5
3. Stock Subject to the Plan.
Except as otherwise provided in Section 10, the aggregate number of
shares of Common Stock that may be issued under Options under this Plan may not
exceed 300,000 shares of Common Stock. Reserved shares may be either authorized
but unissued shares or treasury shares, in the Board's discretion. If any
grants hereunder shall terminate or expire such shares shall be eligible to be
granted as new Options under this Plan.
4. Administration.
The Plan shall be administered by the Committee. In addition to any other
powers set forth in this Plan, the Committee has the exclusive authority:
(a) to construe and interpret the Plan, and to remedy any
ambiguities or inconsistencies therein;
(b) to establish, amend and rescind appropriate rules and
regulations relating to the Plan;
(c) subject to the express provisions of the Plan, to determine the
individuals who will receive grants of Options, the times when they will
receive them, the number of shares to be subject to each award and the
Option Price, payment terms, payment method, and expiration date
applicable to each award;
(d) to contest on behalf of the Company or Participants, at the
expense of the Company, any ruling or decision on any matter relating to
the Plan or to any grants of Options;
(e) generally, to administer the Plan, and to take all such steps
and make all such determinations in connection with the Plan and the
grants of Options as it may deem necessary or advisable;
(f) to determine the form in which tax withholding under Section 13
of this Plan will be made; and
(g) to amend the Plan or any Option granted hereunder as may be
necessary in order for any business combination involving the Company to
qualify for pooling-of-interest treatment under APB No. 16.
5. Eligible Participants
All employees, Officers, and Directors of the Company and its
Subsidiaries, and those consultants (who are not otherwise employees of the
Company or any of its Subsidiaries) are eligible to participate in the Plan.
Subject to the provisions of the Plan, the Committee
-5-
<PAGE> 6
shall determine from time to time those individuals who shall be designated as
Participants and the number, if any, of Options to be granted to each such
Participant;
6. Terms and Conditions of Options.
All Options granted under this Plan shall be nonstatutory options, which
are not intended to be classified as "incentive stock options" under Section
422 of the Code. The Committee may, in its discretion, grant Options to any
Participant under the Plan. Each Option shall be evidenced by an agreement
between the Company and the Participant. Each Option agreement, in such form as
is approved by the Committee, shall be subject to the following express terms
and conditions and to such other terms and conditions, not inconsistent with
the Plan as the Committee may deem appropriate:
(a) Option Period. Each Option will expire as of the earliest of:
(i) ten years from the Grant Date;
(ii) the date on which it is forfeited under the provisions of
Section 8;
(iii) the date three months after the Participant's Termination
of Employment for any reason other than death or Disability; or
(iv) the date twelve months after the Participant's death or
Disability.
(b) Option Price. At the time when the Option is granted, the
Committee will fix the Option Price. The Option Price may be greater
than, less than, or equal to Fair Market Value on the Option Date, as
determined in the sole discretion of the Committee.
(c) Other Option Provisions. The form of Option authorized by the
Plan may contain such other provisions as the Committee may from time to
time determine.
-6-
<PAGE> 7
7. Manner of Exercise of Options.
To exercise an Option in whole or in part, a Participant (or, after his
death, his executor or administrator) must give written notice to the
Committee, stating the number of shares to which he intends to exercise the
Option. The Company will issue the shares with respect to which the Option is
exercised upon payment in full of the Option Price. The Option Price may be
paid (i) in cash, (ii) in shares of Common Stock having an aggregate Fair
Market Value, as determined on the date of delivery, equal to the Option Price,
(iii) if permitted by the Committee, by cash or certified or cashier's check
for the par value of the Plan Shares plus a promissory note for the balance of
the purchase price, which note shall provide for full personal liability of the
maker and shall contain such other terms and provisions as the Committee may
determine, including without limitation the right to repay the note partially
or wholly with Common Stock, or (iv) by delivery of irrevocable instructions to
a broker to promptly deliver to the Company the amount of sale or loan proceeds
necessary to pay for all Common Stock acquired through such exercise and any
tax withholding obligations resulting from such exercise. The Option Price may
be paid in shares of Common Stock which were received by the Participant upon
the exercise of one or more Options.
8. Vesting.
A Participant may not exercise an Option until it has become vested. The
portion of an Option award that is vested depends upon the period that has
elapsed since the Option Date. Unless the Committee establishes a different
vesting schedule at the time when an Option is granted, all Options granted
under this Plan shall vest according to the following schedule:
<TABLE>
<CAPTION>
Period Elapsed Vested Percentage
-------------- -----------------
<S> <C>
First Anniversary of Option Date 10%
Second Anniversary of Option Date 30%
Third Anniversary of Option Date 60%
Fourth Anniversary of Option Date 100%
</TABLE>
Except as provided below, upon a Termination of Employment, a Participant
forfeits any Options that are not yet vested. Unless the Committee in its sole
discretion specifically waives the application of this sentence, then
notwithstanding the vesting schedule contained herein or in the Participant's
agreement, if the Participant's Termination of Employment is terminated for
Cause all Options granted to the Participant will be immediately cancelled and
forfeited by the Participant upon delivery to him of notice of such termination
for Cause.
9. Change of Control.
Notwithstanding the provisions of Section 8 or anything contained in a
Participant's agreement to the contrary, upon a Change in Control all Options
shall be subject to the following:
-7-
<PAGE> 8
(a) The Company shall have the right to acquire from Participants
their vested Options by payment of the difference between the price per
share of Common Stock established in the Change of Control and the Option
Price; and
(b) All unvested Options shall either (i) convert into options to
purchase securities of the acquirer in the Change of Control on the same
terms and conditions as apply to the Options under the Plan, (ii) convert
into such consideration as the Participant would have received had the
Options been fully vested, or (iii) be treated as otherwise determined by
the Committee.
10. Adjustments to Reflect Changes in Capital Structure.
If there is any change in the corporate structure or shares of the
Company, the Committee may, in its discretion, make any adjustments necessary
to prevent accretion, or to protect against dilution, in the number and kind of
shares authorized by the Plan and, with respect to outstanding Options, in the
number and kind of shares covered thereby and in the applicable Option Price.
For the purpose of this Section 10, a change in the corporate structure or
shares of the Company includes, without limitation, any change resulting from a
recapitalization, stock split, stock dividend, consolidation, rights offering,
spin-off, reorganization, or liquidation and any transaction in which shares of
Common Stock are changed into or exchanged for a different number or kind of
shares of stock or other securities of the Company or another entity.
11. Non-Transferability of Options.
The Options granted under the Plan are not transferable, voluntarily or
involuntarily, other than by will or the laws of descent and distribution, or
to the extent permissible under Section 422 of the Code pursuant to a qualified
domestic relations order as defined in Section 414(p) of the Code. During a
Participant's lifetime his Options may be exercised only by him.
12. Rights as Stockholder.
No Common Stock may be delivered upon the exercise of any Option until
full payment has been made and all income tax withholding requirements thereon
have been satisfied. A Participant has no rights whatsoever as a stockholder
with respect to any shares covered by an Option until the date of the issuance
of a stock certificate for the shares.
13. Withholding Tax.
The Company shall have the right to withhold in cash or shares of Common
Stock with respect to any payments made to Participants under the Plan any
taxes required by law to be withheld because of such payments.
-8-
<PAGE> 9
14. Non-Competition and Confidential Information.
Each Participant receiving Options shall be subject to the restriction
that, during the term of his Option Agreement and for a period of two years
thereafter, he or she (i) will not compete with any business of the Company or
its Subsidiaries and (ii) will not disclose to persons outside the Company
confidential information concerning the Company or its Subsidiaries without the
Company's express written consent.
15. No Right To Employment.
Participation in the Plan will not give any Participant a right to be
retained as an employee of the Company or any Subsidiary, or any right or claim
to any benefit under the Plan, unless the right or claim has specifically
accrued under the Plan.
16. Amendment of the Plan.
The Committee may from time to time amend or revise the terms of this
Plan in whole or in part and may, without limitation, adopt any amendment
deemed necessary; provided, however, that, except as provided in Section 4(g),
no change in any Options previously granted to a Participant may be made that
would impair the rights of the Participant without the Participant's consent.
17. Conditions Upon Issuance of Shares.
An Option shall not be exercisable and a share of Common Stock shall not
be issued pursuant to the exercise of an Option until such time as the Plan has
been approved by the Board of Directors and unless the exercise of such Option
and the issuance and delivery of such share pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the shares of Common Stock
may then be listed, and shall be further subject to the approval of counsel for
the Company with respect to such compliance. As a condition to the exercise of
an Option, the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Common Stock is
being purchased only for investment and without any present intention to sell
or distribute such shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant provisions of
law.
18. Effective Date and Termination of Plan.
18.1 Effective Date. This Plan is effective as of the date of its
adoption by the Board of Directors. Prior to the Board of Director's approval,
the Committee may, in its discretion, grant options under the Plan as if the
Plan were effective, provided the exercise of the options so granted shall be
expressly subject to the approval of the Plan by the Board of Directors.
18.2 Termination of the Plan. The Board may terminate the Plan at any
time with respect to any shares that are not then subject to Options.
Termination of the Plan will not affect the rights and obligations of any
Participant with respect to Options granted before termination.
-9-
<PAGE> 1
EXHIBIT 10.35
HANOVER COMPRESSOR COMPANY
$200,000,000 CREDIT AGREEMENT,
DATED AS OF DECEMBER 15, 1997
AMENDMENTS FIRST THROUGH THIRD
INDEX OF CLOSING DOCUMENTS
<TABLE>
<CAPTION>
DOCUMENT TAB
<S> <C>
1. Waiver and First Amendment, with Annexes
attached thereto, dated as of June 10, 1998 ............................ 1
2. Letter Agreement, dated June 1, 1998,
waiving defaults under and amending the
Exchange and Subordinated Loan Agreement ............................... 2
3. Letter Agreement, dated June 10, 1998,
committing Chase to additional loans ................................... 3
4. Promissory Note, dated June 10, 1998 ................................... 4
5. Resolutions of the Company and Subsidiaries,
dated as of June 10, 1998 .............................................. 5
6. Second Amendment, dated as of June 29, 1998 ............................ 6
7. Synthetic Lease Summary of Terms and Conditions
(Annex I to the Second Amendment) ...................................... 7
8. Third Amendment, dated as of July 28, 1998 ............................. 8
</TABLE>
<PAGE> 2
WAIVER AND FIRST AMENDMENT
WAIVER AND FIRST AMENDMENT, dated as of June 10, 1998 (this "Waiver
and Amendment"), to the Credit Agreement, dated as of December 15, 1997 (as the
same may be amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among HANOVER COMPRESSOR COMPANY, a Delaware corporation
("HCC"), the several banks and other financial institutions from time to time
parties thereto (the "Lenders") and THE CHASE MANHATTAN BANK, a New York banking
corporation, as the administrative agent for the Lenders (in such capacity, the
"Administrative Agent").
W I T N E S S E T H:
WHEREAS, HCC, the Lenders and the Administrative Agent are parties to
the Credit Agreement; and
WHEREAS, HCC has requested that the Administrative Agent and the
Required Lenders amend (i) the indebtedness covenant in the Credit Agreement so
as to permit HCC to incur additional indebtedness up to $35,000,000 and (ii)
certain Schedules to the Credit Agreement; and
WHEREAS, HCC has requested that the Administrative Agent and the
Required Lenders agree to waive any failure by HCC to comply with certain
provisions of the Credit Agreement, upon the terms and subject to the
conditions set forth herein; and
WHEREAS, the Administrative Agent and the Required Lenders are
agreeable to the requested amendments and waivers, but only on the terms and
subject to the conditions set forth herein;
NOW THEREFORE, in consideration of the premises herein contained and
for other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein which are defined in the Credit Agreement are used herein as
therein defined.
2. Amendment to Subsection 1.1 (Defined Terms). (a) Subsection 1.1 of
the Credit Agreement is hereby amended by inserting the following new
definition in the appropriate alphabetical order:
"Chase Letter Agreement": the $30,000,000 Letter Agreement, dated June
10, 1998, between The Chase Manhattan Bank and HCC.
<PAGE> 3
3. Amendment to Schedule II. Schedule II of the Credit Agreement is
hereby amended by deleting it in its entirety and substituting in place thereof
Annex A attached hereto.
4. Amendment to Schedule IX. Schedule IX of the Credit Agreement is
hereby amended by deleting it in its entirety and substituting in place thereof
Annex B attached hereto.
5. Waiver of Subsection 7.7(a). The Administrative Agent and the
Required Lenders hereby waive any violation of subsection 7.7(a) of the Credit
Agreement as a result of any failure by HCC prior to the date hereof to give
notice to the Administrative Agent and each Lender of HCC's defaults under
subsection 5.6, Section 6 and subsections 7.1(c), (d) and (k) of the
Shareholder Subordinated Loan Agreement.
6. Amendment to Subsection 8.2 (Limitation on Indebtedness).
Subsection 8.2 of the Credit Agreement is hereby amended by deleting paragraph
(i) therefrom and substituting in place thereof the following:
"(i) Indebtedness not contemplated by clauses (a)-(h) above not
exceeding (i) $35,000,000 in the aggregate at any time outstanding until the
earlier of (A) September 10, 1998 and (B) the date of the initial extension
of credit made under the proposed approximate $194,000,000 equipment lease
transaction being arranged by Chase Securities Inc. for HCC, and (ii)
thereafter $5,000,000 in the aggregate at any time outstanding."
7. Waiver of Subsection 8.10 (Limitation on Investments, Loans and
Advances). The Administrative Agent and the Required Lenders hereby waive
compliance with subsection 8.10(g) of the Credit Agreement for the period
commencing the date hereof and ending on the date that the loans made by The
Chase Manhattan Bank to HCC under the Chase Letter Agreement are required to be
paid or prepaid in full, provided that (i) all acquisitions made by HCC and/or
its Subsidiaries in connection with all such Permitted Business Acquisitions
does not exceed $35,000,000.
8. Waiver of Subsection 9(f). The Administrative Agent and the
Required Lenders hereby waive any violation prior to the date hereof of
subsection (9)(f)(ii) of the Credit Agreement as a result of HCC's defaults
under subsection 5.6, Section 6 and subsections 7.1(c),(d) and (k) of the
Shareholder Subordinated Loan Agreement.
9. Effectiveness. This Waiver and Amendment shall become effective on
June 10, 1998 subject to the fulfillment of the following conditions: (a) HCC
and each of its Subsidiaries listed on the signature pages hereto shall have
delivered to the Administrative Agent duly executed copies of this Waiver and
Amendment, (b) the Administrative Agent shall have received duly executed
copies of this Waiver and Amendment from the Required
<PAGE> 4
3
Lenders, (c) the Administrative Agent shall have received evidence reasonably
satisfactory to it that the lenders under the Shareholder Subordinated Loan
Agreement have waived HCC's defaults under subsection 5.6, Section 6 and
subsections 7.1(c), (d) and (k) of the Shareholder Subordinated Loan Agreement
and (d) no Default or Event of Default shall have occurred and be continuing on
the date hereof after giving effect to this Waiver and Amendment.
10. Representations and Warranties. HCC hereby represents and
warrants that the representations and warranties contained in the Credit
Agreement (except those which expressly speak as of a certain date) will be,
after giving effect to this Waiver and Amendment, true and correct in all
material respects, as if made on and as of the date hereof.
11. Continuing Effect of Credit Agreement. This Waiver and Amendment
shall not constitute an amendment or waiver of any other provision of the
Credit Agreement or the Loan Documents not expressly referred to herein and
shall not be construed as a waiver or consent to any further or future action
on the part of HCC that would require a waiver or consent of the Administrative
Agent and/or the Lenders. Except as expressly amended hereby, the provisions of
the Credit Agreement and the Loan Documents are and shall remain in full force
and effect.
12. Counterparts. This Waiver and Amendment may be executed in
counterparts and all of the said counterparts taken together shall be deemed to
constitute one and the same instrument. Delivery of an executed signature page
of this Waiver and Amendment by facsimile transmission shall be effective as
delivery of a manually executed counterpart hereof.
13. GOVERNING LAW. THIS WAIVER AND AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
14. Expenses. HCC agrees to pay or reimburse the Administrative
Agent for all of their out-of-pocket costs and expenses incurred in connection
with the preparation, negotiation and execution of this Waiver and Amendment,
including, without limitation, the fees and disbursements of counsel to the
Administrative Agent.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Waiver and
Amendment to be executed and delivered by their duly authorized officers as of
the date first written above.
HANOVER COMPRESSOR COMPANY
BY: /s/ CURTIS BEDRICH
--------------------------
Name: Curtis Bedrich
Title: Treasurer
THE CHASE MANHATTAN BANK (formerly known
as Chemical Bank), as Administrative
Agent and as a Lender
BY: /s/ [ILLEGIBLE]
--------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
BY: /s/ [ILLEGIBLE]
--------------------------
Name: [ILLEGIBLE]
Title: Senior Manager, Loan Operations
CREDIT LYONNAIS, NEW YORK BRANCH
BY: /s/ PHILIPPE SOUSTRA
--------------------------
Name: Philippe Soustra
Title: Senior Vice President
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
BY:
--------------------------
Name:
Title:
<PAGE> 6
BANQUE PARIBAS
BY: /s/ BARTON D. SCHOUEST
-----------------------------
Name: Barton D. Schouest
Title: Managing Director
BY: /s/ BETSY R. JOCHER
-----------------------------
Name: Betsy R. Jocher
Title: Assistant Vice President
FIRST UNION BANK
BY: /s/ ROBERT R. WETTEROFF
-----------------------------
Name: Robert R. Wetteroff
Title: Senior Vice President
BANKERS TRUST COMPANY
BY:
-----------------------------
Name:
Title:
Acknowledged and agreed to as of
the date hereof:
HANOVER MAINTECH, INC.
BY: /s/ CURTIS BEDRICH
-----------------------------
Name: Curtis Bedrich
Title: Treasurer
HANOVER/SMITH, INC.
BY: /s/ CURTIS BEDRICH
-----------------------------
Name: Curtis Bedrich
Title: Treasurer
HANOVER LAND COMPANY
BY: /s/ CURTIS BEDRICH
-----------------------------
Name: Curtis Bedrich
Title: Treasurer
<PAGE> 7
ANNEX A
<TABLE>
<CAPTION>
SCHEDULE II SUBSIDIARIES
- ----------- ------------
<S> <C>
1. Hanover Acquisition Corporation, a Texas corporation and a wholly-owned
Subsidiary of HCC.
2. Hanover Compressor Colombia, Inc., a Delaware corporation and a wholly-owned
Subsidiary of HCC.
3. Hanover Land Company, a Texas corporation and a wholly-owned Subsidiary of HCC
(initial Credit Party).
4. Hanover Maintech, Inc. (f/k/a Maintech Enterprises, Inc.), a Texas corporation
and a wholly-owned Subsidiary of HCC (initial Credit Party).
5. Hanover/Smith, Inc., a Delaware corporation and a wholly-owned Subsidiary of HCC
(initial Credit Party).
6. HCC owns 33% of the issued and outstanding stock of Warsila Compression Systems
GmbH, a German Company.
7. H.C.C. Compressor de Venezuela, C.A., a Venezuelan corporation ("H.C.C.
Venezuela") and a wholly-owned Subsidiary of HCC.
8. Hanover-PGN Compressor, C.A., a Venezuelan corporation and a wholly-owned
Subsidiary of H.C.C. Venezuela.
9. HCC owns 99.992% of the issued and outstanding stock of Contract Compression
International Argentina, S.A., an Argentinean corporation ("CCIA"). HMI owns the
remaining 0.008% of CCIA stock.
10. Hanover Compressor Holding Company NL B.V., a Dutch company ("Hanover Holding")
and a wholly-owned Subsidiary of HCC.
11. Hanover Cayman Limited, a Cayman Islands company ("Hanover Cayman") and a
wholly-owned Subsidiary of HCC.
12. Hanover Holding owns 99.99% of the issued and outstanding stock of Hanover
Compressor Company Bolivia, Ltd., a Bolivian company ("HCC Bolivia"). Hanover
Cayman owns the remaining 0.01% of HCC Bolivia stock.
13. Hanover Cayman owns 60% of the issued and outstanding stock of Hanover/Enron
Venezuela, Ltd., a Cayman Islands company.
</TABLE>
<PAGE> 8
<TABLE>
<S> <C>
14. HCC owns 99.99% of the membership interests of Hanover Compressor Mexico SRL, a
Mexican limited liability company ("Hanover Mexico"). Hanover Cayman owns the
remaining 0.01% of said membership interests.
15. Hanover Compressor Sucursal Mexico, a Mexican branch and a wholly-owned
Subsidiary of HCC.
16. HCC owns 51% of Hanover/Cosacol Consortium, a Columbian consortium.
17. HCC owns 51% of Hanover Compressor Colombia Ltd., a Colombian limitada.
18. HCC owns 99% of the membership interests of 3013442 Nova Scotia Co., a Nova
Scotia unlimited liability company. HMI owns the remaining 1% of said membership
interests.
19. Wagner Equipment, Inc., a Texas corporation and a wholly-owned Subsidiary of HCC.*
20. Gas Tech Compression Services, Inc., a Texas corporation and a wholly-owned
Subsidiary of HCC.*
21. HCC owns 35% of Collicutt's Mechanical Services, Ltd., a Canadian corporation.
22. Astra Resources International, Inc., a Texas corporation and a wholly-owned
subsidiary of Hanover Acquisition Corporation.
23. HCC Acquisition, Inc., a Texas corporation and a wholly-owned subsidiary of HCC.
24. Regina Corporation, a Delaware corporation and a wholly-owned subsidiary of HCC.
25. Hanover International Trade Corporation a West Indies (Barbados) corporation.
</TABLE>
- ---------------------
* The assets of this entity have been transferred to HCC and it is now an
inactive corporation.
2
<PAGE> 9
ANNEX B
SCHEDULE IX ENVIRONMENTAL
BRIGHTON, COLORADO
1. This is leased facility while HCC is in the process of shutting down. The
existing property has been documented as having elevated levels of TPH and
some metals in the surface soils prior to HCC's acquisition of the
EconoFlow assets. Since the acquisition HCC has conducted no activities
that would result in increased level of TPH or soil contamination. The
documented levels are the responsibility of the property owner.
BRYAN, TEXAS
1. Leased facility at 4511 Highway 21 E. Bryan, Texas 77808. Preliminary Phase
II surface soil and water testing has been conducted. There are elevated
levels of TPH and some metals in the surface soil which relate to periods
prior to HCC's occupancy. A letter is being sent to the lessor regarding
those elevated levels of TPH and the surface soil conditions of response as
to compliance according to state and federal regulations. A Notice of
Violation was issued because no permit was issued prior to the commencement
of painting operations. The matter was resolved when the PI-7 was received
and an exemption was granted.
COLUMBUS, TEXAS
1. Environmental Management Services ("EMS"), an environmental consultant to
HCC, is submitting an Application to Amend an existing Air Permit to the
TNRCC regarding sand blasting and painting, operations at the facility in
order to update permit conditions. The applications is slated for submittal
June 1, 1998. HCC/Smith has submitted a Notice of Intent ("NOI") to apply
for a stormwater permit. EMS has completed two quarterly stormwater
sampling events, which were within EPA discharge limits. EMS is currently
waiting on further rain to conduct its final sampling. EMS has also
prepared a Pollution Prevention Plan as required by the EPA Stormwater
Permitting Rules. The final EPA stormwater permit application will also be
submitted June 1, 1998.
2. EMS completed a Site Remediation and Cleanup Proposal with respect to
metals and TPH contamination in the soils at the Columbus facility, which
results from previous tenant activities. GeoMonitoring Services ("GMS"),
another environmental consultant to HCC, recently completed a Voluntary
Cleanup Plan ("VCP") to address residual levels of contamination. GMS has
recommended to HCC that it delay implementation of the VCP until recently
proposed TNRCC rules as finalized.
EAST BERNARD, TEXAS
1. Remediation was conducted at the East Bernard facility by an FDIC
consultant firm prior to occupancy by HCC; however, a final certification
of completion was not issued for a non-hazardous landfill remediation
located on the property. Webster Capital has
<PAGE> 10
indemnified HCC regarding potential environmental liabilities relating to
the closed landfill.
2. Potable water at this facility may need to be tested and certified.
3. An underground separator at this facility may need to be registered as a
UST with possible overflow discharge.
4. A spill control and contingency planning document for an 8,000 gallon
above-ground tank is required for this facility. Plans are under way to
relocate this tank to another facility.
FARMINGTON, NEW MEXICO
- ----------------------
1. This is a leased facility that has limited surface soil oil staining. HCC
is fabricating a new facility approximately a mile away to be opened in the
summer of 1998. Once HCC has relocated, HCC will complete any required
cleanup of the property in accordance with applicable law.
HOUSTON (NORTH HOUSTON ROSSLYN), TEXAS
- --------------------------------------
1. The City of Houston issued a Notice of Violation ("NOV") to HCC in 1996
with respect to painting and sand blasting at this facility. HCC has taken
measures to comply with applicable TNRCC requirements and has submitted
documentation of such compliance. However, since the City of Houston is not
required to issue a final resolution letter, it has not done so, and
subsequently, a second NOV was issued by the City of Houston on August 4,
1997. On August 22, 1997, the second NOV was deleted by the City of Houston
as not valid. HCC filed an application for and received a PI-7 and operates
thereunder.
2. HCC purchased the property adjoining the North Houston Rosslyn facility
from George M. Construction, Inc. ("GMCI"). HCC leased the property back to
GMCI through December 1998. The property contains stockpiled soils, waste
oil drums, used transformers, used tires, telephone poles, scrap equipment
and other debris that will be removed prior to HCC taking possession of the
property. GMCI is required to clean-up the property prior to the expiration
of its Lease.
HOUSTON (SOUTH LOOP), TEXAS
- ---------------------------
1. This leased facility has limited soil and groundwater contamination based
on a preliminary Phase II investigation by GMS. Waukesha/Pearce, Inc.
("WPI") is responsible for any environmental contamination and related
clean-up. HCC is in negotiations with WPI to install four permanent
groundwater monitoring wells and conduct additional groundwater and soil
testing at the facility based on GMS' test results.
2
<PAGE> 11
HCC is also asking WPI to bioremediate soils in contaminated area near the
main building and to remove soils around the paint and waste storage areas.
GENERAL FACILITIES DISCLOSURE
- -----------------------------
HCC has acquired air permits or received approval of standard exemptions
for painting and/or sandblasting activities at East Bernard, Midland,
Bridgeport, Victoria and Bryan, Kilgore. Yukon and Ft. Smith (Pocola, OK) are
exempted from air permitting under applicable law.
HCC has not acquired stormwater permits for any of its facilities, but has
determined that these permits are only required at its manufacturing facilities
in Columbus and Houston. Stormwater permitting applications at these facilities
are currently being prepared or evaluated. The other facilities are
reconditioning facilities and not fabricating facilities and permitting is not
required.
Underground storage tanks formerly containing waste oils, glycols and wash
waters have been removed from the Houston, Columbus and Oklahoma City
facilities. Minor releases associated with these tanks were detected in
surrounding soils, but were below applicable risk-based cleanup levels. None of
these tanks are used by HCC.
The following lube/oil antifreeze storage tanks are above 1,100 gallon
capacity and therefore may require permitting: Deweyville (8,000 gallon);
Lafayette (8,000 gallon); Wilburton (2 at 8,800 gallons, 2 at 2,000 gallons);
East Bernard (8,000 gallon); Refugio (6,000 gallon, 4,000 gallon and 2,000
gallon); Sterling City.
Most HCC facilities (including, but not limited to, Houston, Columbus,
Lafayette, Fort Smith, Oklahoma City, Victoria and Bridgeport) have sumps which
are typically associated with cleaning, painting, ballasting, testing and
fabrication operations. HCC does not believe any of the sumps operated at their
facilities are USTs as defined under the EPA definition under RCRA. These sumps
may require state registration or the filing of Notice of Registrations with the
appropriate state or federal agency.
HCC contracts with various solvent, oil and waste handling and disposal
companies to dispose of used oils, glycols, equipment wash waters and other
wastewaters or sediments. We are not aware of any violations or notices of
non-compliance relating to the off-site disposal or re-use of such waste
materials.
3
<PAGE> 12
HANOVER COMPRESSOR COMPANY
12001 NORTH HOUSTON - ROSSLYN
HOUSTON, TEXAS 77046
June 1, 1998
To the Holders of Hanover Compressor
Company's Subordinated Notes due
December 21, 2000
Re: Hanover Compressor Company ("HCC")
Reference is made to the Exchange and Subordinated Loan Agreement dated as
of December 23, 1996 (the "SUB DEBT AGREEMENT") among HCC and the parties
listed on the signature pages thereof as Lenders. Capitalized terms not
otherwise defined herein have the meanings ascribed to them in the Sub Debt
Agreement.
As you may recall, the negative covenants set forth in Section 6 of the
Sub Debt Agreement are tied directly to the negative covenants in the Second
Amended and Restated Credit Agreement, dated as of December 15, 1995 among HCC,
The Chase Manhattan Bank, as agent and the banks parties thereto, as amended
(the "OLD SENIOR CREDIT AGREEMENT"). In December of 1997, HCC terminated the
Old Senior Credit Agreement and simultaneously entered into a Credit
Agreement dated as of December 15, 1997 among HCC, The Chase Manhattan Bank, as
Administrative Agent and the several lenders parties thereto (the "EXISTING
SENIOR CREDIT AGREEMENT"), which provides HCC with a $200,000,000 unsecured
revolving line of credit. In connection with the negotiation of the Existing
Senior Credit Agreement, HCC was able to improve the terms of a number of
covenants and events of default as compared to those in the Old Senior Credit
Agreement. These improvements recognized the expanding, more mature nature of
HCC's business and its status as a public company.
Due to the fact that Section 6 of the Sub Debt Agreement did not
automatically incorporate the more flexible covenants in the Existing Senior
Credit Agreement (because it was a new agreement and not an amendment of the
Old Senior Credit Agreement) there are a number of inconsistencies between the
negative covenants in Section 6 of the Sub Debt Agreement and the negative
covenants in Section 8 of the Existing Senior Credit Agreement. As HCC has been
operating in a manner consistent with the Existing Senior Credit Agreement's
more flexible covenants certain technical Events of Default may have occurred
under the terms of the Sub Debt Agreement.
<PAGE> 13
June 1, 1998
Page 2
In order to avoid (i) the occurrence and continuation of Defaults and
Events of Default under the Sub Debt Agreement (and related defaults under the
Existing Senior Credit Agreement) and (ii) inconsistencies between the Sub Debt
Agreement and the Existing Senior Credit Agreement, HCC hereby requests that
the Lenders agree as follows:
(a) to waive any and all Defaults and Events of Default that exist under
the Sub Debt Agreement arising out of or related to actions or omissions of HCC
and its Subsidiaries that were permitted by the negative covenants in the
Existing Senior Credit Agreement;
(b) to waive any Events of Default caused by the breach of the covenants
in Sections 5.6(a) and 5.6(b)(i) of the Sub Debt Agreement due to the failure
of HCC to timely notify the Lender of any default or Event of Default waived in
clause (a) above;
(c) to amend Section 1.1 of the Sub Debt Agreement to delete the text of
the definition of "Senior Loan Agreements" in its entirety and substitute the
following in lieu thereof:
"SENIOR LOAN AGREEMENTS": that certain Credit Agreement dated as of
December 15, 1997 (as amended), by and among the Company and The Chase
Manhattan Bank administrative agent for the banks parties thereto and any
successor agreements under any restructuring, refinancing, replacement, or
succession thereof, or any other new creditor facility provided by
institutional lenders for the benefit of the Company, its Subsidiaries, or
their respective successors and assigns as such agreements may be amended,
restated modified or supplemented from time to time, including, without
limitation, amendments, modifications, supplements and restatements thereof
giving effect to increases, renewals, extensions, refundings, deferrals,
restructurings, replacements or refinancing of, or additions to, the
arrangements provided in such Agreements (whether provided by the original
lenders and administrative agent under such Credit Agreement or any
successor agent or other lenders).
(d) to amend Section 5.6 of the Sub Debt Agreement by deleting the text
of that Section in its entirety and substituting the text of Section 7.7 of the
Existing Senior Credit Agreement, mutatis mutandis, in lieu thereof; provided,
that to the extent Section 7.7 of the Existing Senior Credit Agreement is
hereafter amended, supplemented, waived, or deleted, the text of Section 5.6 of
the Sub Debt Agreement shall be deemed to be so amended, waived, supplemented
or deleted;
(e) to amend Section 6 of the Sub Debt Agreement by deleting the text of
that Section
<PAGE> 14
June 1, 1998
Page 3
in its entirety and substituting the following in lieu thereof:
"So long as the Notes remain outstanding and unpaid, or any other amount is
owing to the Lenders hereunder, the Company shall not, and shall not permit
any of its Subsidiaries to, directly or indirectly take any action, omit to
take any action, or permit to exist any circumstances, that would cause the
Company to fail to comply with the negative covenants set forth in the
Senior Loan Agreements, with such amendments, supplements and other changes
to such negative covenants, and such consents, waivers or other
modifications and other changes to such negative covenants, and such
consents, waivers or other modifications granted in connection therewith,
as shall be adopted or granted pursuant to the terms of such Senior Loan
Agreements. The obligations of the Company set forth in this Section 6
shall continue notwithstanding the termination of such Senior Loan
Agreements; provided, however, in the event that the Company is bound by
more than one Senior Loan Agreement and the negative covenants in such
Senior Loan Agreements conflict, the negative covenants that provide the
Company with the greatest flexibility will govern and bind the Company for
the purposes of this Section 6."
(f) to amend Sections 7(e), 7(h) and 7(i) of the Sub Debt Agreement to
delete the references to "$2,500,000" therein and substitute "$5,000,000" in
lieu thereof;
(g) to amend Section 9.2 of the Sub Debt Agreement to delete the
telecopier number for HCC listed therein and substituting "(281) 447-0821" in
lieu thereof;
(h) to amend Section 9 of the Sub Debt Agreement by adding a new Section
9.16 thereto as follows:
"9.16 Conflicts with Senior Loan Agreements. In the event that any
provisions of this Agreement conflicts with any provisions of the Senior
Loan Agreements, the provisions of this Agreement shall be deemed amended,
supplement or waived to the extent necessary to avoid such conflict."
The effectiveness of the waivers and amendment set forth herein is subject
to the approval by each Lender of the terms hereof, which approval shall be
indicated by the execution by all such Lenders of counterparts of this letter.
Except as specifically set forth herein, the Sub Debt Agreement shall
remain in full force and effect in accordance with its terms, without any
further amendment, modification or waiver
<PAGE> 15
June 1, 1998
Page 4
of any provision thereof.
This letter may be executed by one or more of the parties hereto on any
number of separate counterparts, and all of said counterparts taken together
shall be deemed to constitute one and the same instrument. This letter may be
executed and delivered by telecopier.
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS
THEREOF.
If you are in agreement with the foregoing, please execute a copy of
this letter in the space indicated below, which signature will constitute
acceptance of the terms hereof and will implement the waivers and amendments
described above (subject to the condition to effectiveness described above), and
return it no later than Friday, June 5, 1998 by facsimile to 312/269-1747,
Attention: Richard S. Meller, with a hard copy to follow by U.S. Mail addressed
as follows:
Neal, Gerber & Eisenberg
Two North LaSalle, Suite 2100
Chicago, Illinois 60602
Attention: Richard S. Meller
If you have any questions regarding the foregoing please contact Curtis
Bedrich at 281/447-8787 or Michael A. Pucker at 312/269-8444.
Very truly yours,
HANOVER COMPRESSOR COMPANY
By: /s/ CURTIS BEDRICH
--------------------------------------
Curtis Bedrich,
Chief Financial Officer
Agreed to and Accepted as of June 1, 1998:
<PAGE> 16
June 1, 1998
Page 5
GKH INVESTMENTS, L.P., a Delaware limited
partnership
By: GKH PARTNERS, L.P., a Delaware
limited partnership, its general partner
By: JAKK Holding Corp., a general partner
By: /s/ MELVYN N. KLEIN
------------------------------
Melvyn N. Klein, President
GKH PARTNERS, L.P., a Delaware limited
partnership
By: JAKK Holding Corp., a general partner
By: /s/ MELVYN N. KLEIN
------------------------------
Melvyn N. Klein, President
IPP95, L.P.
By: WESINVEST, Inc., its general partner
By: /s/ [ILLEGIBLE]
-------------------------------
Title: [ILLEGIBLE]
<PAGE> 17
June 1, 1998
Page 6
HANNA INVESTMENT GROUP II
By: /s/ JIM L. HANNA
--------------------------------
Title: Managing Partner
OTTO CANDIES, INC.
By: /s/ PHYLLIS S. HOJEL
--------------------------------
Title: Agent
HERBERT E. WARE, JR. PROPERTIES, INC.
By: /s/ HERBERT E. WARE, JR.
--------------------------------
Title: President
/s/ PHYLLIS S. HOJEL
--------------------------------
PHYLLIS S. HOJEL
/s/ TED COLLINS, JR.
--------------------------------
TED COLLINS, JR.
/s/ L. O. WARD
--------------------------------
L. O. WARD
<PAGE> 18
[CHASE LOGO]
June 10, 1998
Hanover Compressor Company
12001 North Houston-Rosslyn
Houston, Texas 77096
Dear Sirs:
The Chase Manhattan Bank ("Chase") is pleased to inform you of its
agreement, subject to the terms and conditions hereof, to make loans to Hanover
Compressor Company ("HCC") from time to time through September 10, 1998, in an
aggregate principal amount not to exceed $30,000,000 at any one time outstanding
(the "Loans"). The Loans to be made under this letter agreement (the "Letter
Agreement") are in addition to loans Chase is committed to make under the Credit
Agreement, dated as of December 15, 1997, as amended by the Waiver and First
Amendment thereto, dated as of June 10, 1998 (the "Credit Agreement") among HCC,
the several Lenders party thereto and The Chase Manhattan Bank, as
Administrative Agent, Except as otherwise defined herein, all capitalized terms
used in the Credit Agreement are used herein with their defined meanings.
The Loans to be made under this Letter Agreement will be governed by
the same terms and provisions of the Credit Agreement as if Chase were the sole
Lender thereunder, the functions of the Administrative Agent were performed by
Chase and the
<PAGE> 19
Hanover Compressor Company -2- June 10, 1998
Loans were made under the Credit Agreement. The Applicable Margin for the Loans
and Applicable Commitment Fee Rate for the Bank's agreement to make the Loans
hereunder will be the rates as provided in the Credit Agreement. The Loans under
this Letter Agreement will be evidenced by the promissory note attached hereto
as Exhibit A (the "Note"). All Loans shall be paid in full no later than
September 10, 1998 (the "Final Maturity Date"). In addition, HCC shall prepay
the Loans in full (together with all interest and any other amounts described in
subsection 3.13 of the Credit Agreement with respect to such Loans) on the date
that the initial extension of credit is made under the proposed approximate
$194,000,000 equipment lease transaction being arranged by Chase Securities Inc.
So long as the Loans are available to HCC pursuant to the terms hereof, HCC may
borrow, prepay and reborrow the Loans in whole or in part.
In furtherance of the foregoing, the provisions of the Credit Agreement
(other than subsections 2.1, 3.6, 3.14, Section 4, subsection 6.1, Section 10
and subsections 11.5(a) and 11.7(a)) are hereby incorporated by reference,
mutatis mutandis. Notwithstanding anything to the contrary contained herein, no
amendment, modification or waiver of any provision of the Credit Agreement after
the date hereof shall be effective under this Letter Agreement unless consented
to by Chase thereunder.
In order to induce Chase to enter into this Letter Agreement and make
the Loans provided for herein, HCC hereby confirms that the representations and
warranties as incorporated herein from the Credit Agreement are true and correct
in all material respects on the date hereof (except for (i) the representations
and warranties or parts
<PAGE> 20
Hanover Compressor Company -3- June 10, 1998
thereof that, by their terms, expressly relate solely to a specific date, in
which case such representations or warranties or parts thereof shall be true and
correct in all material respects as of such specific date and (ii) to the extent
updated in connection with the Waiver and First Amendment dated as of June 10,
1998).
This Letter Agreement and Chase's obligations to make Loans hereunder
shall become effective upon Chase's receipt of (i) a copy of this Letter
Agreement and the Note executed by a Responsible Officer of HCC and each
Subsidiary Guarantor listed below and (ii) a copy of resolutions authorizing
HCC's execution, delivery and performance of this Letter Agreement and the Note.
This Letter Agreement may be executed in counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. Delivery of an executed signature page of this Letter Agreement by
facsimile transmission shall be effective as delivery of a manually executed
counterpart hereof.
THIS LETTER AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
HCC agrees to pay or reimburse Chase for all of Chase's reasonable
out-of-pocket costs and expenses incurred in connection with the preparation,
negotiation and execution of this Letter Agreement, including, without
limitation, the reasonable fees and disbursements of counsel to Chase.
<PAGE> 21
Hanover Compressor Company -4- June 10, 1998
If you are in agreement with the foregoing, please execute a copy of
this letter in the space provided below, whereupon this Letter Agreement shall
become an agreement among us as of the day and year first above written.
Very truly yours,
THE CHASE MANHATTAN BANK
By: /s/ PETER M. LING
-------------------------------
Title: Peter M. Ling
Vice President
Agreed to and Accepted:
HANOVER COMPRESSOR COMPANY
By: /s/ CURTIS BEDRICH
---------------------------
Title: Treasurer
Each of the undersigned hereby acknowledges receipt of the foregoing
Letter Agreement and hereby, jointly and severally, unconditionally and
irrevocably guarantees to Chase the prompt, complete payment and performance by
HCC when due (whether at stated maturity, by acceleration or otherwise) of the
unpaid principal of and interest on the Loans and all other obligations and
liabilities of HCC to Chase (including, without limitation, interest accruing at
the then applicable rate provided in the Letter Agreement after the maturity of
the Loans and interest accruing at the then applicable rate provided in the
Letter Agreement after the filing of any petition in bankruptcy, or the
commencement of any insolvency, reorganization or like proceeding, relating to
HCC,
<PAGE> 22
Hanover Compressor Company -5- June 10, 1998
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 Letter Agreement, the Note, 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 Chase that are required to be paid by HCC).
The terms and provisions of the foregoing guarantee shall be subject to
the same terms and conditions of the Subsidiaries' Guarantee dated as of
December 15, 1997 made by each of the undersigned as if such provisions were
herein incorporated mutatis mutandis, provided that the term Obligations shall
refer specifically and only to the obligations described in the immediately
preceding paragraph.
<PAGE> 23
Hanover Compressor Company -6- June 10, 1998
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 /s/ CURTIS BEDRICH By /s/ CURTIS BEDRICH
--------------------------------- ---------------------------------
Name: Curtis Bedrich Name: Curtis Bedrich
Title: Treasurer Title: Treasurer
Address for Notices: Address for Notices:
12001 North Houston Rosslyn 12001 North Houston Rosslyn
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 /s/ CURTIS BEDRICH
---------------------------------
Name: Curtis Bedrich
Title: Treasurer
Address for Notices:
12001 North Houston Rosslyn
Houston, Texas 77086
Attn: Chief Financial Officer
Fax: 281-447-8781
<PAGE> 24
EXHIBIT A
PROMISSORY NOTE
$30,000,000 New York, New York
June 10, 1998
FOR VALUE RECEIVED, the undersigned, Hanover Compressor Company, a Delaware
corporation ("HCC"), hereby unconditionally promises to pay to the order of The
Chase Manhattan Bank ("The Bank") at its office located at 270 Park Avenue, New
York, New York 10017, in lawful money of the United States of America and in
immediately available funds, on the Final Maturity Date the principal amount of
(a) THIRTY MILLION DOLLARS ($30,000,000), or, if less, (b) the aggregate unpaid
principal amount of all Loans made by the Bank to HCC pursuant to the Letter
Agreement, as hereinafter defined. HCC further agrees to pay interest in like
money at such office on the unpaid principal amount hereof from time to time
outstanding at the rates and on the dates specified in the Letter Agreement.
The holder of this Note is authorized to endorse on the schedules annexed
hereto and made a part hereof or on a continuation thereof which shall be
attached hereto and made a part hereof the date, Type and amount of each Loan
made pursuant to the Letter Agreement and the date and amount of each payment or
repayment of principal thereof, each continuation thereof, each conversion of
all or a portion thereof to another Type and, in the case of Eurodollar Loans,
the length of each Interest Period with respect thereto. Each such endorsement
shall constitute prima facie evidence of the accuracy of the information
endorsed. The failure to make any such endorsement shall not affect the
obligations of HCC in respect of such Loan.
This Note (a) is the Note referred to in the Letter Agreement dated June
10, 1998 (as further amended, supplemented or otherwise modified from time to
time, the "Letter Agreement"), between HCC and the Bank, (b) is subject to the
provisions of the Letter Agreement and (c) is subject to optional and mandatory
prepayment in whole or in part as provided in the Letter Agreement. This Note
is guaranteed as provided in the Letter Agreement. Reference is hereby made to
the Letter Agreement for a description of the nature and extent of the
guarantees, the terms and conditions upon which each guarantee was granted and
the rights of the holder of this Note in respect thereof.
<PAGE> 25
2
Upon the occurrence of any one or more of the Events of default, all
amounts then remaining unpaid on this Note shall become, or may be declared to
be, immediately due and payable, all as provided in the Letter Agreement.
All parties now and hereafter liable with respect to this Note, whether
maker, principal, surety, guarantor, endorser or otherwise, hereby waive
presentment, demand, protest and all other notices of any kind.
Unless otherwise defined herein, terms defined in the Letter Agreement
and used herein shall have the meanings given to them in the Letter Agreement.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
HANOVER COMPRESSOR COMPANY
By: /s/ CURTIS BEDRICH
-------------------------------------
Name: Curtis Bedrich
-----------------------------------
Title: Treasurer
----------------------------------
<PAGE> 26
3
SCHEDULE A
TO PROMISSORY NOTE
LOANS, CONVERSIONS AND REPAYMENTS OF ABR LOANS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
AMOUNT OF ABR
AMOUNT AMOUNT OF LOANS CONVERTED UNPAID PRINCIPAL
AMOUNT OF ABR CONVERTED TO PRINCIPAL OF ABR TO BALANCE OF ABR NOTATION
DATE LOANS ABR LOANS LOANS REPAID EURODOLLAR LOANS LOANS MADE BY
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 27
4
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
AMOUNT OF ABR
AMOUNT AMOUNT OF LOANS CONVERTED UNPAID PRINCIPAL
AMOUNT OF ABR CONVERTED TO PRINCIPAL OF ABR TO BALANCE OF ABR NOTATION
DATE LOANS ABR LOANS LOANS REPAID EURODOLLAR LOANS LOANS MADE BY
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
==========================================================================================================
</TABLE>
<PAGE> 28
SCHEDULE B
TO PROMISSORY NOTE
LOANS, CONTINUATIONS, CONVERSIONS AND REPAYMENTS OF EURODOLLAR LOANS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Amount of Unpaid
Amount Interest Period Amount of Eurodollar Principal
Amount of Converted to and Eurodollar Principal of Loans Balance of
Eurodollar Eurodollar Rate with Eurodollar Converted to Eurodollar Notation
Date Loans Loans Respect Thereto Loans Repaid ABR Loans Loans Made By
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
</TABLE>
<PAGE> 29
HANOVER COMPRESSOR COMPANY
SECRETARY'S CERTIFICATE
I, Richard S. Meller, do hereby certify that I am the Secretary of
Hanover Compressor Company, a Delaware corporation (the "Corporation"), and that
I have been duly appointed and qualified and am presently serving in the
capacity of Secretary of the Corporation in accordance with the By-laws of the
Corporation. I hereby further certify as follows:
1. Annexed hereto as Exhibit A are true and correct copy of the
resolutions duly adopted by the Board of Directors of the Corporation. The
resolutions set forth in Exhibit A have not been altered, amended, modified,
revoked or rescinded and are in full force and effect on the date hereof.
IN WITNESS WHEREOF, I have set my hand hereto as of the 15th day of
July, 1998.
/s/ RICHARD S. MELLER
-------------------------------------
Richard S. Meller, Secretary
<PAGE> 30
EXHIBIT A
APPROVAL OF SUPPLEMENTAL $30 MILLION SHORT TERM CREDIT FACILITY.
Mr. Bedrich presented to the Board a proposal for a supplemental $30
million short term credit facility from the Chase Manhattan Bank. After motion
duly made and seconded, the Board approved the following resolutions:
RESOLVED, that a new $30 million credit facility (the
"Supplemental Credit Facility") with The Chase Manhattan Bank
("Chase") in the form of Exhibit C hereto together with the
amendment to the Company's $200 million revolving credit
facility (the "Amendment") permitting the Supplemental Credit
Facility in the form of Exhibit D hereto is hereby authorized
and approved.
FURTHER RESOLVED, that the proper officers of the Company be,
and they hereby are, authorized and directed on behalf of the
Company to execute any and all agreements, instruments and
documents and to do or cause to be done all such further acts
and things as they may deem necessary or advisable in order to
carry into effect the tenor and purport of the above
resolutions; and that all actions taken by the officers of the
Company and all actions heretofore taken by the officers, be
and they hereby are, ratified, approved, adopted and confirmed;
FURTHER RESOLVED, that whenever it is provided in these
resolutions that any officer or officers of the Company may
execute any document or other instrument or take such other
action as he or they may or shall deem, or determine to be,
advisable or in the best interests of the Company or as he or
they may or shall approve, the fact that such officer or
officers shall execute such document or other instrument or
take such other action shall be deemed to be conclusive
evidence that such officer or officers deem and determine the
execution of such document or other instrument or the taking of
such other action to be advisable and in the best interests of
the Company and approve such action; and
FURTHER RESOLVED, that for purposes of these resolutions the
"proper officers of the Company" shall be deemed to be the
Chairman of the Board, the President and Chief Executive
Officer, the Executive Vice President and the Chief Financial
Officer and Treasurer of the Company, unless applicable
statutes, rules or regulations applicable to the Company
require action by a particular officer or officers of the
Company, in which event the term "proper officers of the
Company" shall be deemed to include any such officer or
officers and the action of any proper officer
<PAGE> 31
of the Company may be attested to or verified under the
corporate seal of the Company by the Secretary of the Company.
SYNTHETIC LEASE FINANCING
Mr. Bedrich then presented to the Board plans for a synthetic lease
financing facility in the amount of $200 million and reviewed the terms thereof
and attached hereto as Exhibit E. After discussion and a motion duly made and
seconded, the Board unanimously adopted the following resolutions:
RESOLVED, that the lease transaction described in Exhibit E
attached hereto, is hereby authorized and approved, including
without limitation, the sale of compressors and related
equipment, the lease of such compressors and related equipment
and the guaranty all as contemplated therein.
FURTHER RESOLVED, that the proper officers of the Company be,
and they hereby are, authorized and directed on behalf of the
Company to execute any and all agreements, instruments and
documents and to do or cause to be done all such further acts
and things as they may deem necessary or advisable in order to
carry into effect the tenor and purport of the above
resolutions; and that all actions taken by the officers of the
Company and all actions heretofore taken by the officers, be
and the hereby are, ratified, approved, adopted and confirmed;
FURTHER RESOLVED, that whenever it is provided in these
resolutions that any officer or officers of the Company may
execute any document or other instrument or take such other
action as he or they may or shall deem, or determine to be,
advisable or in the best interests of the Company or as he or
they may or shall approve, the fact that such officer or
officers shall execute such document or other instrument or
take such other action shall be deemed to be conclusive
evidence that such officer or officers deem and determine the
execution of such document or other instrument or the taking
of such other action to be advisable and in the best interests
of the Company and approve such action; and
FURTHER RESOLVED, that for purposes of these resolutions the
"proper officers of the Company" shall be deemed to be the
Chairman of the Board, the President and Chief Executive
Officer, the Executive Vice President and the Chief Financial
Officer and Treasurer of the Company, unless applicable
statutes, rules or regulations applicable to the Company
require action by a particular officer or officers of the
Company, in which event the
<PAGE> 32
term "proper officers of the Company" shall be deemed to
include any such officer or officers and the action of any
proper officer of the Company may be attested to or verified
under the corporate seal of the Company by the Secretary of
the Company.
<PAGE> 33
EXHIBIT C
See tab 3 of this set of Closing Documents, "Letter Agreement, dated
June 10 1998, committing Chase to additional loans."
<PAGE> 34
EXHIBIT D
See tab 1 of this set of Closing Documents, "Waiver and First
Amendment, with Annexes attached thereto, dated as of June 10, 1998."
<PAGE> 35
EXHIBIT E
See tab 7 of this set of Closing Documents, "Synthetic Lease Summary of
Terms and Conditions (Annex I to the Second Amendment)."
<PAGE> 36
HANOVER/SMITH, INC.
SECRETARY'S CERTIFICATE
I, Richard S. Meller, do hereby certify that I am the Secretary of
Hanover/Smith, Inc., a Texas corporation (the "Corporation"), and that I have
been duly appointed and qualified and am presently serving in the capacity of
Secretary of the Corporation in accordance with the By-laws of the Corporation.
I hereby further certify as follows:
1. Annexed hereto as Exhibit A are true and correct copy of the
resolutions duly adopted by the Board of Directors of the Corporation. The
resolutions set forth in Exhibit A have not been altered, amended, modified,
revoked or rescinded and are in full force and effect on the date hereof.
IN WITNESS WHEREOF, I have set my hand hereto as of the 15th day of
July, 1998.
/s/ RICHARD S. MELLER
-------------------------------------
Richard S. Meller, Secretary
<PAGE> 37
EXHIBIT A
UNANIMOUS WRITTEN CONSENT
OF THE BOARD OF DIRECTORS OF
HANOVER/SMITH, INC.
The undersigned, being all of the directors of HANOVER/SMITH, INC., a
Delaware corporation (the "Corporation"), in lieu of a special meeting of the
Board of Directors and pursuant to the authority of Section 141(f) of the
Delaware General Corporation Law, hereby consent to, authorize and adopt the
following resolutions with the same force and effect as if the undersigned were
personally present at a meeting of the Board of Directors of the Corporation and
had voted for the same:
RESOLVED, that a new $30 million credit facility (the
"Supplemental Credit Facility") with The Chase Manhattan Bank
("Chase") in the form of Exhibit A hereto together with the
amendment to the Company's $200 million revolving credit
facility (the "Amendment") permitting the Supplemental Credit
Facility in the form of Exhibit B hereto is hereby authorized
and approved.
FURTHER RESOLVED, that the proper officers of the Company be,
and they hereby are, authorized and directed on behalf of the
Company to execute any and all agreements, instruments and
documents and to do or cause to be done all such further acts
and things as they may deem necessary or advisable in order to
carry into effect the tenor and purport of the above
resolutions; and that all actions taken by the officers of the
Company and all actions heretofore taken by the officers, be
and they hereby are, ratified, approved, adopted and confirmed;
FURTHER RESOLVED, that whenever it is provided in these
resolutions that any officer or officers of the Company may
execute any document or other instrument or take such other
action as he or they may or shall deem, or determine to be,
advisable or in the best interests of the Company or as he or
they may or shall approve, the fact that such officer or
officers shall execute such document or other instrument or
take such other action shall be deemed to be conclusive
evidence that such officer or officers deem and determine the
execution of such document or other instrument or the taking of
such other action to be advisable and in the best interests of
the Company and approve such action; and
FURTHER RESOLVED, that for purposes of these resolutions the
"proper officers of the Company" shall be deemed to be the
Chairman of the Board, the President and Chief Executive
Officer, the Executive Vice President and the Chief Financial
Officer and Treasurer of the Company, unless applicable
statutes,
<PAGE> 38
rules or regulations applicable to the Company require action
by a particular officer or officers of the Company, in which
event the term "proper officers of the Company" shall be
deemed to include any such officer or officers and the action
of any proper officer of the Company may be attested to or
verified under the corporate seal of the Company by the
Secretary of the Company.
FURTHER RESOLVED, that the lease transaction described in
Exhibit C attached hereto, is hereby authorized and approved,
including without limitation, the sale of compressors and
related equipment, the lease of such compressors and related
equipment and the guaranty all as contemplated therein.
FURTHER RESOLVED, that the proper officers of the Company be,
and they hereby are, authorized and directed on behalf of the
Company to execute any and all agreements, instruments and
documents and to do or cause to be done all such further acts
and things as they may deem necessary or advisable in order to
carry into effect the tenor and purport of the above
resolutions; and that all actions taken by the officers of the
Company and all actions heretofore taken by the officers, be
and they hereby are, ratified, approved, adopted and
confirmed;
FURTHER RESOLVED, that whenever it is provided in these
resolutions that any officer or officers of the Company may
execute any document or other instrument or take such other
action as he or they may or shall deem, or determine to be,
advisable or in the best interests of the Company or as he or
they may or shall approve, the fact that such officer or
officers shall execute such document or other instrument or
take such other action shall be deemed to be conclusive
evidence that such officer or officers deem and determine the
execution of such document or other instrument or the taking
of such other action to be advisable and in the best interests
of the Company and approve such action; and
-2-
<PAGE> 39
FURTHER RESOLVED, that for purposes of these resolutions the
"proper officers of the Company" shall be deemed to be the
Chairman of the Board, the President and Chief Executive
Officer, the Executive Vice President and the Chief Financial
Officer and Treasurer of the Company, unless applicable
statutes, rules or regulations applicable to the Company
require action by a particular officer or officers of the
Company, in which event the term "proper officers of the
Company" shall be deemed to include any such officer or
officers and the action of any proper officer of the Company
may be attested to or verified under the corporate seal of the
Company by the Secretary of the Company.
Dated: May 20, 1998
/s/ MICHAEL J. MCGHAN
-------------------------------------------
Michael J. McGhan
/s/ WILLIAM S. GOLDBERG
-------------------------------------------
William S. Goldberg
/s/ CURTIS BEDRICH
-------------------------------------------
Curtis Bedrich
BEING ALL OF THE DIRECTORS OF THE
CORPORATION
-3-
<PAGE> 40
EXHIBIT A
See tab 3 of this set of Closing Documents, "Letter Agreement, dated
June 10 1998, committing Chase to additional loans."
<PAGE> 41
EXHIBIT B
See tab 1 of this set of Closing Documents, "Waiver and First
Amendment, with Annexes attached thereto, dated as of June 10, 1998."
<PAGE> 42
EXHIBIT C
See tab 7 of this set of Closing Documents, "Synthetic Lease Summary of
Terms and Conditions (Annex I to the Second Amendment)."
<PAGE> 43
HANOVER LAND COMPANY
SECRETARY'S CERTIFICATE
I, Richard S. Meller, do hereby certify that I am the Secretary of
Hanover Land Company, a Texas corporation (the "Corporation"), and that
I have been duly appointed and qualified and am presently serving in the
capacity of Secretary of the Corporation in accordance with the By-laws of the
Corporation. I hereby further certify as follows:
1. Annexed hereto as Exhibit A are true and correct copy of the
resolutions duly adopted by the Board of Directors of the Corporation. The
resolutions set forth in Exhibit A have not been altered, amended, modified,
revoked or rescinded and are in full force and effect on the date hereof.
IN WITNESS WHEREOF, I have set my hand hereto as of the 15th day of
July, 1998.
/s/ RICHARD S. MELLER
-------------------------------------
Richard S. Meller, Secretary
<PAGE> 44
EXHIBIT A
UNANIMOUS WRITTEN CONSENT
OF THE BOARD OF DIRECTORS OF
HANOVER LAND COMPANY
The undersigned, being all of the directors of HANOVER LAND COMPANY, a
Texas corporation (the "Corporation"), in lieu of a special meeting of the Board
of Directors and pursuant to the authority of Section 9.10 of the Texas Business
Corporation Act, hereby consent to, authorize and adopt the following
resolutions with the same force and effect as if the undersigned were personally
present at a meeting of the Board of Directors of the Corporation and had voted
for the same:
RESOLVED, that a new $30 million credit facility (the
"Supplemental Credit Facility") with The Chase Manhattan Bank
("Chase") in the form of Exhibit A hereto together with the
amendment to the Company's $200 million revolving credit
facility (the "Amendment") permitting the Supplemental Credit
Facility in the form of Exhibit B hereto is hereby authorized
and approved.
FURTHER RESOLVED, that the proper officers of the Company be,
and they hereby are, authorized and directed on behalf of the
Company to execute any and all agreements, instruments and
documents and to do or cause to be done all such further acts
and things as they may deem necessary or advisable in order to
carry into effect the tenor and purport of the above
resolutions; and that all actions taken by the officers of the
Company and all actions heretofore taken by the officers, be
and they hereby are, ratified, approved, adopted and confirmed;
FURTHER RESOLVED, that whenever it is provided in these
resolutions that any officer or officers of the Company may
execute any document or other instrument or take such other
action as he or they may or shall deem, or determine to be,
advisable or in the best interests of the Company or as he or
they may or shall approve, the fact that such officer or
officers shall execute such document or other instrument or
take such other action shall be deemed to be conclusive
evidence that such officer or officers deem and determine the
execution of such document or other instrument or the taking of
such other action to be advisable and in the best interests of
the Company and approve such action; and
FURTHER RESOLVED, that for purposes of these resolutions the
"proper officers of the Company" shall be deemed to be the
Chairman of the Board, the President and Chief Executive
Officer, the Executive Vice President and the Chief Financial
Officer and Treasurer of the Company, unless applicable
statutes,
<PAGE> 45
rules or regulations applicable to the Company require action
by a particular officer or officers of the Company, in which
event the term "proper officers of the Company" shall be
deemed to include any such officer or officers and the action
of any proper officer of the Company may be attested to or
verified under the corporate seal of the Company by the
Secretary of the Company.
FURTHER RESOLVED, that the lease transaction described in
Exhibit C attached hereto, is hereby authorized and approved,
including without limitation, the sale of compressors and
related equipment, the lease of such compressors and related
equipment and the guaranty all as contemplated therein.
FURTHER RESOLVED, that the proper officers of the Company be,
and they hereby are, authorized and directed on behalf of the
Company to execute any and all agreements, instruments and
documents and to do or cause to be done all such further acts
and things as they may deem necessary or advisable in order to
carry into effect the tenor and purport of the above
resolutions; and that all actions taken by the officers of the
Company and all actions heretofore taken by the officers, be
and they hereby are, ratified, approved, adopted and
confirmed;
FURTHER RESOLVED, that whenever it is provided in these
resolutions that any officer or officers of the Company may
execute any document or other instrument or take such other
action as he or they may or shall deem, or determine to be,
advisable or in the best interests of the Company or as he or
they may or shall approve, the fact that such officer or
officers shall execute such document or other instrument or
take such other action shall be deemed to be conclusive
evidence that such officer or officers deem and determine the
execution of such document or other instrument or the taking
of such other action to be advisable and in the best interests
of the Company and approve such action; and
-2-
<PAGE> 46
FURTHER RESOLVED, that for purposes of these resolutions the
"proper officers of the Company" shall be deemed to be the
Chairman of the Board, the President and Chief Executive
Officer, the Executive Vice President and the Chief Financial
Officer and Treasurer of the Company, unless applicable
statutes, rules or regulations applicable to the Company
require action by a particular officer or officers of the
Company, in which event the term "proper officers of the
Company" shall be deemed to include any such officer or
officers and the action of any proper officer of the Company
may be attested to or verified under the corporate seal of the
Company by the Secretary of the Company.
Dated: May 20, 1998
/s/ MICHAEL J. MCGHAN
-------------------------------------------
Michael J. McGhan
/s/ WILLIAM S. GOLDBERG
-------------------------------------------
William S. Goldberg
BEING ALL OF THE DIRECTORS OF THE
CORPORATION
-3-
<PAGE> 47
EXHIBIT A
See tab 3 of this set of Closing Documents, "Letter Agreement, dated
June 10 1998, committing Chase to additional loans."
<PAGE> 48
EXHIBIT B
See tab 1 of this set of Closing Documents, "Waiver and First
Amendment, with Annexes attached thereto, dated as of June 10, 1998."
<PAGE> 49
EXHIBIT C
See tab 7 of this set of Closing Documents, "Synthetic Lease Summary of
Terms and Conditions (Annex I to the Second Amendment)."
<PAGE> 50
MAINTECH ENTERPRISES, INC.
SECRETARY'S CERTIFICATE
I, Richard S. Meller, do hereby certify that I am the Secretary of
Maintech Enterprises, Inc., a Texas corporation (the "Corporation"), and that
I have been duly appointed and qualified and am presently serving in the
capacity of Secretary of the Corporation in accordance with the By-laws of the
Corporation. I hereby further certify as follows:
1. Annexed hereto as Exhibit A are true and correct copy of the
resolutions duly adopted by the Board of Directors of the Corporation. The
resolutions set forth in Exhibit A have not been altered, amended, modified,
revoked or rescinded and are in full force and effect on the date hereof.
IN WITNESS WHEREOF, I have set my hand hereto as of the 15th day of
July, 1998.
/s/ RICHARD S. MELLER
-------------------------------------
Richard S. Meller, Secretary
<PAGE> 51
EXHIBIT A
UNANIMOUS WRITTEN CONSENT
OF THE BOARD OF DIRECTORS OF
MAINTECH ENTERPRISES, INC.
The undersigned, being all of the directors of MAINTECH ENTERPRISES,
INC., a Texas corporation (the "Corporation"), in lieu of a special meeting of
the Board of Directors and pursuant to the authority of Section 9.10 of the
Texas Business Corporation Act, hereby consent to, authorize and adopt the
following resolutions with the same force and effect as if the undersigned were
personally present at a meeting of the Board of Directors of the Corporation and
had voted for the same:
RESOLVED, that a new $30 million credit facility (the
"Supplemental Credit Facility") with The Chase Manhattan Bank
("Chase") in the form of Exhibit A hereto together with the
amendment to the Company's $200 million revolving credit
facility (the "Amendment") permitting the Supplemental Credit
Facility in the form of Exhibit B hereto is hereby authorized
and approved.
FURTHER RESOLVED, that the proper officers of the Company be,
and they hereby are, authorized and directed on behalf of the
Company to execute any and all agreements, instruments and
documents and to do or cause to be done all such further acts
and things as they may deem necessary or advisable in order to
carry into effect the tenor and purport of the above
resolutions; and that all actions taken by the officers of the
Company and all actions heretofore taken by the officers, be
and they hereby are, ratified, approved, adopted and confirmed;
FURTHER RESOLVED, that whenever it is provided in these
resolutions that any officer or officers of the Company may
execute any document or other instrument or take such other
action as he or they may or shall deem, or determine to be,
advisable or in the best interests of the Company or as he or
they may or shall approve, the fact that such officer or
officers shall execute such document or other instrument or
take such other action shall be deemed to be conclusive
evidence that such officer or officers deem and determine the
execution of such document or other instrument or the taking of
such other action to be advisable and in the best interests of
the Company and approve such action; and
FURTHER RESOLVED, that for purposes of these resolutions the
"proper officers of the Company" shall be deemed to be the
Chairman of the Board, the President and Chief Executive
Officer, the Executive Vice President and the Chief Financial
Officer and Treasurer of the Company, unless applicable
statutes,
<PAGE> 52
rules or regulations applicable to the Company require action
by a particular officer or officers of the Company, in which
event the term "proper officers of the Company" shall be
deemed to include any such officer or officers and the action
of any proper officer of the Company may be attested to or
verified under the corporate seal of the Company by the
Secretary of the Company.
FURTHER RESOLVED, that the lease transaction described in
Exhibit C attached hereto, is hereby authorized and approved,
including without limitation, the sale of compressors and
related equipment, the lease of such compressors and related
equipment and the guaranty all as contemplated therein.
FURTHER RESOLVED, that the proper officers of the Company be,
and they hereby are, authorized and directed on behalf of the
Company to execute any and all agreements, instruments and
documents and to do or cause to be done all such further acts
and things as they may deem necessary or advisable in order to
carry into effect the tenor and purport of the above
resolutions; and that all actions taken by the officers of the
Company and all actions heretofore taken by the officers, be
and they hereby are, ratified, approved, adopted and
confirmed;
FURTHER RESOLVED, that whenever it is provided in these
resolutions that any officer or officers of the Company may
execute any document or other instrument or take such other
action as he or they may or shall deem, or determine to be,
advisable or in the best interests of the Company or as he or
they may or shall approve, the fact that such officer or
officers shall execute such document or other instrument or
take such other action shall be deemed to be conclusive
evidence that such officer or officers deem and determine the
execution of such document or other instrument or the taking
of such other action to be advisable and in the best interests
of the Company and approve such action; and
-2-
<PAGE> 53
FURTHER RESOLVED, that for purposes of these resolutions the
"proper officers of the Company" shall be deemed to be the
Chairman of the Board, the President and Chief Executive
Officer, the Executive Vice President and the Chief Financial
Officer and Treasurer of the Company, unless applicable
statutes, rules or regulations applicable to the Company
require action by a particular officer or officers of the
Company, in which event the term "proper officers of the
Company" shall be deemed to include any such officer or
officers and the action of any proper officer of the Company
may be attested to or verified under the corporate seal of the
Company by the Secretary of the Company.
Dated: May 20, 1998
/s/ MICHAEL J. MCGHAN
-------------------------------------------
Michael J. McGhan
/s/ WILLIAM S. GOLDBERG
-------------------------------------------
William S. Goldberg
/s/ CURTIS BEDRICH
-------------------------------------------
Curtis Bedrich
BEING ALL THE DIRECTORS OF THE
CORPORATION
-3-
<PAGE> 54
EXHIBIT A
See tab 3 of this set of Closing Documents, "Letter Agreement, dated
June 10 1998, committing Chase to additional loans."
<PAGE> 55
EXHIBIT B
See tab 1 of this set of Closing Documents, "Waiver and First
Amendment, with Annexes attached thereto, dated as of June 10, 1998.
<PAGE> 56
EXHIBIT C
See tab 7 of this set of Closing Documents, "Synthetic Lease Summary of
Terms and Conditions (Annex I to the Second Amendment)."
<PAGE> 57
EXECUTION COPY
SECOND AMENDMENT
SECOND AMENDMENT, dated as of June 29, 1998 (this "Amendment"), to the
Credit Agreement, dated as of December 15, 1997 (as the same may be amended,
supplemented or otherwise modified from time to time, the "Credit Agreement"),
among HANOVER COMPRESSOR COMPANY, a Delaware corporation ("HCC") the several
banks and other financial institutions from time to time parties thereto (the
"Lenders") and THE CHASE MANHATTAN BANK, a New York banking corporation, as the
administrative agent for the Lenders (in such capacity, the "Administrative
Agent").
W I T N E S S E T H:
WHEREAS, HCC, the Lenders and the Administrative Agent are parties to
the Credit Agreement; and
WHEREAS, HCC has requested that the Administrative Agent and the
Required Lenders amend certain definitions and covenants in the Credit Agreement
so as to permit HCC to enter into transactions involving Equipment Leases (as
hereinafter defined); and
WHEREAS, the Administrative Agent and the Required Lenders are
agreeable to the requested amendments, but only on the terms and subject to the
conditions set forth herein;
NOW THEREFORE, in consideration of the premises herein contained and
for other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein which are defined in the Credit Agreement are used herein as
therein defined.
2. Amendment to Subsection 1.1 (Defined Terms), (a) Subsection 1.1 of
the Credit Agreement is hereby amended by deleting therefrom the definitions of
the following defined terms in their respective entireties and substituting in
place thereof the following new definitions:
"Consolidated Earnings Before Interest and Taxes": for any
period, with respect to HCC and its Subsidiaries, 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 (to
the extent
<PAGE> 58
2
that such amounts have been deducted in determining Consolidated Net
Income for such period).
"Consolidated Interest Expense": for any period, with respect
to any HCC and its Subsidiaries, 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 HCC
and its Subsidiaries for such period, plus, to the extent not so
included, payments by HCC under the Equipment Lease attributable to (i)
interest payments under the Equipment Lease Tranche A Loans and
Equipment Lease Tranche B Loans and (ii) the yield to the Investors in
connection with the Equipment Lease Transaction.
"Consolidated Lease Expense": for any period as to HCC and its
Subsidiaries, the aggregate rental obligations of HCC 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, but excluding
obligations of HCC with respect to the Equipment Lease.
"Consolidated Net Income": for any period as to HCC and its
Subsidiaries, the consolidated net income (or loss) of such Person and
its Subsidiaries, determined on a consolidated basis in accordance with
GAAP, provided that for purposes of determining Consolidated Net
Income, payments under Equipment Leases attributable to (i) Equipment
Lease Tranche A Loans and Equipment Lease Tranche B Loans and (ii)
the yield to the Investors in connection with the Equipment Lease
Transaction shall be considered interest expense.
"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), provided that for purposes of calculating the Current
Ratio, current liabilities of the Lessor which are then accrued but
unpaid with respect to the Equipment Lease Tranche A Loans shall be
included as current liabilities of HCC.
"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, and excluding all obligations with respect to the Equipment
Lease.
"Indebtedness": of HCC and its Subsidiaries at any date, (a)
all indebtedness of HCC and its Subsidiaries for borrowed money or for
the deferred purchase price of
<PAGE> 59
3
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 HCC and its Subsidiaries
under Financing Leases, (c) all obligations of HCC and its
Subsidiaries in respect of acceptances issued or created for the
account of HCC and its Subsidiaries 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 HCC or its Subsidiaries even
though HCC and its Subsidiaries have not assumed or otherwise become
liable for the payment thereof, provided that all obligations of the
Lessor with respect to Equipment Lease Tranche A Loans shall be
considered Indebtedness of HCC.
(b) Subsection 1.1 of the Credit Agreement is hereby amended
by inserting the following new definitions in the appropriate alphabetical
order:
"Equipment Lease": the lease to be entered into by HCC, as
lessee, in connection with the Equipment Lease Transaction as described
in Annex I to this Amendment.
"Equipment Lease Transaction": the transaction whereby HCC
leases natural gas compressors from the Lessor as described in Annex I
to this Amendment.
"Equipment Lease Tranche A Loans": the loans to be made to the
Lessor in connection with the Equipment Lease Transaction and
identified as the "Tranche A Loans" as described in Annex I to this
Amendment.
"Equipment Lease Tranche B Loans": the loans to be made to the
Lessor in connection with the Equipment Lease Transaction and
identified as the "Tranche B Loans" as described in Annex I to this
Amendment.
"Investor": the parties that hold the beneficial interest in
the Lessor.
"Lessor": the lessor under the Equipment Lease.
"Sale and Leaseback Transaction": as defined in subsection
8.13.
3. Amendment to Subsection 8.2 (Limitation on Indebtedness).
Subsection 8.2 of the Credit Agreement is hereby amended by deleting paragraph
(i) therefrom and substituting in place thereof the following:
"(i) Indebtedness in respect of Equipment Lease Tranche A
Loans; and
(j) Indebtedness not contemplated by clauses (a)-(i) above not
exceeding (i) $35,000,000 in the aggregate at any time outstanding
until the earlier of (A) September 10, 1998 and (B) the date of the
initial extension of credit made under the
<PAGE> 60
4
Equipment Lease Transaction, and (ii) thereafter $5,000,000 in the
aggregate at any time outstanding."
4. Amendment to Subsection 8.3 (Limitation on Liens).
Subsection 8.3 of the Credit Agreement is hereby amended by deleting paragraph
(s) therefrom and substituting in place thereof the following:
"(s) Liens that arise in connection with the Equipment Lease
Transaction; and
(t) Liens not otherwise permitted in clauses (a)-(s) above
securing Indebtedness not exceeding $2,500,000 in the aggregate."
5. Amendment to Subsection 8.4 (Limitation on Guarantee
Obligations). Subsection 8.4 of the Credit Agreement is hereby amended by
deleting paragraph (e) therefrom and substituting in place thereof the
following:
"(e) guarantees in respect of Indebtedness (other than
Subordinated Debt) permitted under this Agreement; and
(f) Guarantee Obligations arising pursuant to the Equipment
Lease Transaction."
6. Amendment to Subsection 8.6 (Limitation on Sale or Lease of
Assets). Subsection 8.6 of the Credit Agreement is hereby amended by deleting
paragraph (g) therefrom and substituting in place thereof the following:
"(g) the lease by the Real Estate Subsidiary or any other
Qualified 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; and
(h) the sale of natural gas compressors to the Lessor in
connection with the Equipment Lease Transaction."
7. Amendment to Subsection 8.11 (Limitation on Optional
Payments and Modifications of Debt Instruments). Subsection 8.11 of the Credit
Agreement is hereby amended by deleting it in its entirety and substituting in
place thereof the following:
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 and Indebtedness under the Equipment Lease
Transaction, (a) make any optional payment or prepayment in excess of
$10,000,000 during any calendar year on or redemption of any
Indebtedness (other than Indebtedness pursuant to this Agreement) 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
<PAGE> 61
5
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. Amendment of Subsection 8.13 (Sale and Leaseback).
Subsection 8.13 of the Credit Agreement is hereby amended by deleting it in its
entirety and substituting in place thereof the following:
"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 (any of such arrangements, a "Sale and Leaseback
Transaction"), except that (i) 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 and (ii) HCC may enter into Sale and Leaseback
Transactions as lessee for natural gas compressors in connection with
the Equipment Lease Transaction,"
9. Effectiveness, This Amendment shall become effective upon
fulfillment of the following conditions precedent: (a) HCC and each of its
Subsidiaries listed on the signature pages hereto shall have delivered to the
Administrative Agent duly executed copies of this Amendment, (b) the
Administrative Agent shall have received duly executed copies of this Amendment
from the Required Lenders and (c) no Default or Event of Default shall have
occurred and be continuing on the date hereof after giving effect to this
Amendment.
10. Representations and Warranties. HCC hereby represents
and warrants that the representations and warranties contained in the Credit
Agreement (except those which expressly speak as of a certain date) will be,
after giving effect to this Amendment, true and correct in all material
respects, as if made on and as of the date hereof.
11. Continuing Effect of Credit Agreement. This Amendment
shall not constitute an amendment or waiver of any other provision of the Credit
Agreement or the Loan Documents not expressly referred to herein and shall not
be construed as a waiver or consent to any further or future action on the part
of HCC that would require a waiver or consent of the Administrative Agent and/or
the Lenders. Except as expressly amended hereby, the provisions of the Credit
Agreement and the Loan Documents are and shall remain in full force and effect.
12. Counterparts. This Amendment may be executed in
counterparts and all of the said counterparts taken together shall be deemed to
constitute one and the same instrument. Delivery of an executed signature page
of this Amendment by facsimile transmission shall be effective as delivery of a
manually executed counterpart hereof.
<PAGE> 62
6
13. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
14. Expenses. HCC agrees to pay or reimburse the
Administrative Agent for all of their out-of-pocket costs and expenses incurred
in connection with the preparation, negotiation and execution of this Amendment,
including, without limitation, the fees and disbursements of counsel to the
Administrative Agent.
<PAGE> 63
7
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their duly authorized officers of the
date first written above.
HANOVER COMPRESSOR COMPANY
BY: /s/ CURTIS BEDRICH
----------------------------------
Name: Curtis Bedrich
Title: Treasurer
THE CHASE MANHATTAN BANK (formerly
known as Chemical Bank), as Administrative
Agent and as a Lender
BY: /s/ PETER M. LING
----------------------------------
Name: Peter M. Ling
Title: Vice President
THE BANK OF NOVA SCOTIA
BY: /s/ F.O.R. ASHBY
----------------------------------
Name: F.O.R. Ashby
Title: Senior Manager
Loan Operations
CREDIT LYONNAIS, NEW YORK BRANCH
BY: /s/ PASCAL POURELLE
----------------------------------
Name: Pascal Pourelle
Title: Executive Vice President
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
BY: /s/ THEODORE M. NOWAK
----------------------------------
Name: Theodore M. Nowak
Title: Vice President
<PAGE> 64
8
BANQUE PARIBAS
BY: /s/ MICHAEL H. FIUZAT
----------------------------------
Name: Michael H. Fiuzat
Title: Vice President
FIRST UNION BANK
BY: /s/ ROBERT R. WETTEROFF
----------------------------------
Name: Robert r. Wetteroff
Title: Senior Vice President
Acknowledged and agreed to as
of the date hereof:
HANOVER MAINTECH, INC.
By: /s/ CURTIS BEDRICH
----------------------------------
Name: Curtis Bedrich
Title: Treasurer
HANOVER/SMITH, INC.
By: /s/ CURTIS BEDRICH
----------------------------------
Name: Curtis Bedrich
Title: Treasurer
HANOVER LAND COMPANY
By: /s/ CURTIS BEDRICH
----------------------------------
Name: Curtis Bedrich
Title: Treasurer
<PAGE> 65
ANNEX I
CONFIDENTIAL HANOVER COMPRESSOR COMPANY
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SUMMARY OF PRINCIPAL TERMS AND CONDITIONS
THIS SUMMARY OF PRINCIPAL TERMS AND CONDITIONS DOES NOT CONSTITUTE A
COMMITMENT, OR A PROMISE TO COMMIT, ON THE PART OF THE CHASE MANHATTAN BANK OR
CHASE SECURITIES INC. ANY AGREEMENT, COMMITMENT, ASSURANCE OR INTENTION ON
BEHALF OF THE CHASE MANHATTAN BANK OR CHASE SECURITIES INC. SHALL BE EFFECTIVE
ONLY IF IN WRITING AND DULY EXECUTED ON BEHALF OF THE CHASE MANHATTAN BANK OR
CHASE SECURITIES INC., AS THE CASE MAY BE.
PART I -- PARTIES
LESSEE: Hanover Compressor Company ("Hanover Compressor"
or the "Lessee").
INVESTOR: A party or parties acceptable to Hanover
Compressor and Chase that will hold the beneficial
interest in the Lessor (the "Investor").
LESSOR: A Delaware business trust established for the
benefit of the Investor (the "Lessor"). The trust
will be managed by a bank or trust company
acceptable to the Agent and to the Company, (the
"Trustee"). The Lessor shall own the Equipment,
borrow the Loans and execute a lease for all the
Equipment (the "Lease") with the Lessee.
GUARANTOR: Hanover Compressor and all guarantors (the
"Guarantors") under the Lessee's existing senior
credit facility dated December 15, 1997 (the
"Senior Credit Facility").
LENDERS: A syndicate of financial institutions (the
"Lenders") providing the Loans (as defined below)
to the Lessor to fund 97% of the Equipment Cost.
AGENT: The Chase Manhattan Bank ("Chase") will act as
administrative agent (in such capacity, the
"Agent") for the Lenders.
ARRANGER: Chase Securities Inc. ("CSI") will act as
syndication agent and arranger for the Loans and
the Investor Contribution (as defined below).
PART II -- THE EQUIPMENT
EQUIPMENT: Compressors identified by the Lessee (the
"Equipment"). The Lessee will furnish to the Agent
an inventory of the compressors (the "Inventory")
every six months throughout the term of the Lease.
The Inventory will include a comprehensive list of
all the compressors in the Lease and the location
of each unit.
EQUIPMENT COST: As used herein. the "Equipment Cost" means all
cost and expenses of any kind or character
incurred to acquire such Equipment. The Equipment
Cost is expected to be approximately $200,000,000.
There shall be no limit on the number of items of
Equipment or the value or the cost of acquisition
thereof provided, however, that the aggregate
Equipment Cost subject to the financing
contemplated hereby must at all times equal the
aggregate outstanding principal amount of the
Loans (as defined below) and the unrecovered
Investor Contribution.
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[CHASE LOGO] 1 CHASE SECURITIES INC.
<PAGE> 66
CONFIDENTIAL HANOVER COMPRESSOR COMPANY
- --------------------------------------------------------------------------------
PART III -- TRANSACTION STRUCTURE
STRUCTURE OF THE
FINANCING: The Investor will contribute 3% of the Equipment
Cost and the Lessor will agree to borrow from the
Lenders, and the Lenders will agree to lend to
the Lessor, on a non-recourse basis, 97% of the
Equipment Cost, up to a maximum of $194,000,000
aggregate principal amount of Loans outstanding
at any time. The Investor will fund its 3%
portion of the Equipment Cost simultaneously and
pro rata with the funding by the Lenders. The
Investor contribution will not be more than
$6,000,000.
APPRAISAL: Prior to the acquisition by the Lessor of any
Equipment, the Lessee will deliver to the Agent
and the Investor an appraisal with respect to
such Equipment from an independent appraiser (the
"Appraisal") satisfactory to the Agent, which
will be in form and substance satisfactory to the
Lenders, the Agent, and the Investor.
PARTICIPATION
AGREEMENT: On the Closing Date, the Lessor, the Trustee, the
Agent, the Investor, the Lenders and the Lessee
will enter into a participation agreement (the
"Participation Agreement") which will include,
among other things, similar representations,
warranties, indemnities and terms and conditions
as those found in the Senior Credit Facility in
addition to other terms and conditions typically
found in similar synthetic lease financing
facilities.
PART IV -- THE LOANS:
STRUCTURE: The Loans will be advanced pursuant to a Credit
Agreement (the "Credit Agreement") among the
Lessor, as borrower, the Lenders and the Agent.
The Lenders will commit under the Credit
Agreement to make Loans to the Lessor to fund 97%
of the Equipment Costs as incurred or invoiced.
The Lenders' commitments will be in the nature of
a revolving credit facility commencing on the
Closing Date and ending upon the first
anniversary thereof (the "Revolving Period").
After that, the Lenders' commitments will be in
the nature of a term loan credit facility
maturing on the fifth anniversary of the Closing
Date. Loans to fund Equipment Cost will be
separated into two tranches, with Loans, in the
aggregate, equal to the Maximum Residual
Guarantee Amount (as defined below) being
advanced as Tranche A Loans (the "Tranche A
Loans") and the balance of the Loans being
advanced as Tranche B Loans (the "Tranche B
Loans"; collectively with the Tranche A Loans,
the "Loans"). The Lenders will make Tranche A
Loans and Tranche B Loans ratably according to
their respective commitments. Hanover Compressor
will agree to maintain a ratio of aggregate
Tranche A Loans to the Equipment Cost of not less
than 85.0% and not more than 89.9%.
PURPOSE: To finance a maximum of 97% of the Equipment Cost.
MATURITY: 5 years after the Closing Date (the "Maturity
Date").
- --------------------------------------------------------------------------------
[CHASE LOGO]
2 CHASE SECURITIES INC.
<PAGE> 67
CONFIDENTIAL HANOVER COMPRESSOR COMPANY
- --------------------------------------------------------------------------------
REPAYMENT: The Loans will be payable in full on the Maturity Date
and will not be subject to any amortization prior
thereto depending upon the results of the Appraisal.
The Loans may be prepaid at any time (without premium
or penalty, other than "break funding" costs with
respect to Eurodollar Loans) and shall be repaid in
the event of (i) any sale of Equipment (pursuant to a
purchase option under the Lease or otherwise), (ii)
any Event of Loss (as defined below) with respect to
Equipment (subject to the Lessee's rights to restore
or rebuild such Equipment, as described below) or
(iii) the termination of the Lease with respect to any
Equipment (pursuant to an early termination option
under the Lease or otherwise). If any such event
occurs with respect to one or more items (but less
than all) of the Equipment, then the principal amount
of the Loans that must be repaid will be limited to
the portion of the outstanding Loans allocable to the
affected Equipment (i.e., 97% of the total Equipment
Cost of the affected Equipment).
SOURCE OF REPAYMENT: On the Maturity Date, if the Lessee has exercised its
purchase option to purchase all of the Equipment
(having provided notice to the Lessor six months prior
to the Maturity Date), all the Loans and the
Investor's unrecovered equity investment (the
"Investor Contribution") will be repaid from the
proceeds of such purchase. If the Lessee does not
exercise its option to purchase the Equipment on the
Maturity Date, the following provisions shall apply:
(a) the Lessee shall market and use its best efforts
to sell the Equipment on the Lessor's behalf on or
prior to the Maturity Date;
(b) if the Equipment is sold to a third party, after
the Lessee makes a rent payment equal to the Maximum
Residual Guarantee Amount, the proceeds will be
applied first, to the payment of the Tranche B Loans
and accrued interest on the Tranche B Loans, and,
second, to the payment of the Investor Contribution
and accrued Investor Yield. Excess proceeds will be
returned to the Lessee;
(c) in the event that the Equipment has not been sold
on or prior to the Maturity Date, (i) the Lessee shall
pay to the Agent (as assignee of the Lessor) the
Maximum Residual Guarantee Amount, which shall be
applied to pay the Tranche A Loans in full; and (ii)
the Lessee shall surrender possession of the Equipment
to the Lessor.
FEES AND INTEREST RATES: As set forth in Annex I.
GUARANTEE: Independent of the obligations of the Lessee under the
Lease, the Guarantor will execute and deliver a
guarantee (the "Guarantee") in favor of the Agent for
the benefit of the Lenders, pursuant to which the
Guarantor will unconditionally guarantee the payment
when due of all amounts required to be paid by the
Lessor under the Credit Agreement, including the
Loans; provided that the Guarantor will not be
required to make any payment under the Guarantee in
respect of the Tranche B Loan principal or Investor
Contribution unless an Event of Default under the
Lease has occurred and is continuing.
- --------------------------------------------------------------------------------
[CHASE LOGO] 3 Chase Securities Inc.
<PAGE> 68
CONFIDENTIAL HANOVER COMPRESSOR COMPANY
- --------------------------------------------------------------------------------
COLLATERAL: The obligations of the Lessor under the Credit
Agreement will be secured by perfected and
first-priority security interests in the Lessors
interest in and liens on all of the assets of the
Lessor, including an absolute and present
assignment of the Lease. The Lenders, however,
acknowledge that, due to the right of the Lessee
to relocate the Equipment, certain of the
Equipment may not be subject to such perfected and
first priority security interest for a period of
time not to exceed six months. The Lessor and the
Lessee shall execute and deliver all necessary
financing statements to perfect and create a first
priority security interest in such Equipment
simultaneously with the delivery of the inventory
required to be delivered to the Agent every six
months. The Equipment will be released from such
liens and security interests upon the purchase by
the Lessee, or its assignee, of such Equipment and
the payment by the Lessee of the Loans allocable
to such Equipment and all other amounts due to
the Lenders and the Agent with respect to such
Equipment.
CERTAIN CONDITIONS: The obligations of the Lenders to make Loans under
the Credit Agreement will be subject to the
following conditions: (i) receipt by the Agent of
a borrowing certificate, (ii) accuracy of
representations, (iii) absence of defaults, (iv)
an appraisal of the Equipment reasonably
satisfactory to the Agent, the Lender and the
Investor, and (v) evidence of perfection of liens
(subject to agreed exceptions) and other
appropriate documentation. The Lessee will warrant
to the Agent and the Lenders title to the
Equipment.
PARTICIPATIONS: Lenders will be permitted to assign Loans, notes
and commitments to other financial institutions
without the consent of the Lessor; provided that,
except in the case of assignments to another
Lender or an affiliate of a Lender, the Lessee's
consent will be required for an assignment (which
consent will not be unreasonably withheld).
Assignments will be by novation.
Lenders will be permitted to participate in Loans,
notes and commitments to other financial
institutions.
All assignments and participations will be on
terms substantially the same as contained in the
Senior Credit Facility.
REQUIRED LENDERS: 51%
FINANCIAL COVENANTS: To include, without limitation.
(a) maintenance of a ratio of indebtedness to
capitalization at a level not greater than
0.65 : 100;
(b) maintenance of a ratio of total current assets
to total current liabilities at a level not less
than 1.00 : 1.00;
(c) maintenance of a ratio of U.S. EBITDA to
indebtedness at a level not less than 1.00 : 4.50:
and
(d) maintenance of a ratio of EBITDA to interest
expense (including rental payments) at a level not
less than 2.50 : 1.00.
- --------------------------------------------------------------------------------
[CHASE LOGO] CHASE SECURITIES INC.
<PAGE> 69
CONFIDENTIAL HANOVER COMPRESSOR COMPANY
- --------------------------------------------------------------------------------
OTHER TERMS AND
CONDITIONS: The Credit Agreement will contain similar
representations, warranties, indemnities and
terms and conditions as those found in the Senior
Credit Facility, as amended and restated, in
addition to other terms and conditions typically
found in similar synthetic lease financing
facilities.
PART V - INVESTOR
CONTRIBUTION:
AMOUNT: The Investor will advance 3% of the Equipment
Cost, up to $6,000,000 at anytime outstanding,
simultaneously and pro rata with the Loans made
by the Lenders.
PURPOSE: To finance 3% of the Equipment Cost.
YIELD: The Investor will receive a current yield, paid
from rent, in amounts to be agreed to prior to
the Closing Date between the Lessee and the
Investor (the "Investor Yield").
CERTAIN TERMS: The Lessor will be obligated to distribute to
the Investor any rent and other payments due
under the Lease by the Lessee and received by
the Lessor for the benefit of the Investor to
the extent that said amounts are in excess of
payments due to the Lenders thereunder. Like the
Loans, the Investor Contribution will be in the
nature of a revolving credit facility up until
the first anniversary of the Closing Date. After
that, it will be in the nature of a term credit
facility. In any case, at no time shall the
Investor Contribution be in an amount that is
less than 3% of the outstanding Equipment Cost.
PART VI - TERMS AND CONDITIONS OF THE LEASE:
GENERAL: The Lease will be executed on the Closing Date.
BASIC LEASE TERM: The term for the Lease will commence (the "Lease
Commencement Date") on the Closing Date. The term
of the Lease (the "Lease Term") for all the
Equipment will expire on the Maturity Date.
The Lease will provide that it will terminate
early as to all Equipment as of any rent payment
date on which the Loans mature.
NET LEASE: The Lease will be a triple net lease whereby the
Lessee is responsible for the operation and
maintenance, insurance and other expenses
relating to the Equipment and is unconditionally
obligated to pay all rent coming due during the
Lease Term without offset.
RENT PAYMENTS: During the Lease Term, the Lessee will make rent
payments ("Basic Rent Payments") as follows: (i)
on each Interest Payment Date, an amount equal to
such payment then due plus (ii) a yield to the
Investor on the Investor Contribution, at times
and in amounts agreed between the Lessee and the
Investor. Further, during the Lease Term with
respect to the Equipment, the Lessee will make
rent payments ("Supplemental Rent Payments") from
time to time in an amount sufficient to allow the
Lessor to pay all amounts due to the Lenders and
the Agent under the Credit Agreement, including
- --------------------------------------------------------------------------------
[CHASE LOGO] 5 CHASE SECURITIES INC.
<PAGE> 70
CONFIDENTIAL HANOVER COMPRESSOR COMPANY
- -------------------------------------------------------------------------------
commitment fees, cost and yield protection
provisions, indemnities and expenses.
On the Maturity Date the Lessee will pay (in
addition to Basic Rent and Supplemental Rent) an
amount equal to the maximum amount permitted under
SFAS No. 13 which permits the lessee to account
for the lease as an operating lease (but in no
event less than 85.0% nor more than 89.9% of the
Equipment Cost). The amount referred to in the
preceding sentence shall be referred to as the
"Maximum Residual Guarantee Amount". The Maximum
Residual Guarantee Amount payments will be used
only to repay Tranche A Loans. The foregoing
amounts shall not be required to be paid in
respect of Equipment if the Lessee exercises its
purchase option under the Lease to purchase such
Equipment or otherwise pays the Termination Value
(as defined below).
TERMINATION VALUE: The total termination value (the "Termination
Value") at any time will be an amount equal to the
sum of the aggregate outstanding principal amount
of the Loans, any accrued interest to the date of
payment, the unrecovered Investor Contribution and
the unpaid Investor Yield and all other amounts
due by Lessee under any of the operative
agreements. If it is necessary to compute the
Termination Value for a particular item(s) of
Equipment, the total Termination Value will be
allocated among the Equipment based upon the
relative Equipment Cost of each item.
PURCHASE OPTIONS
AND EARLY TERMINATION
RIGHTS: The Lease will permit the Lessee, at its option,
to purchase at any time 6 months prior to the
Maturity Date all of the Equipment and terminate
the Lease with respect to the Equipment upon the
payment of the Termination Value. In the event the
Lessee wants to purchase less than all of the
Equipment, no Default or Event of Default shall
have occurred and be continuing. By giving written
notice to the Lessor 6 months prior to the
Maturity Date, the Lessee will have the option to
purchase, or designate another person to purchase,
on the Maturity Date all, but not less than all,
the Equipment then subject to the Lease. If six
months prior to the Maturity Date, the aggregate
Termination Value of all Equipment then held by
the Lessor is less than 75% of the highest
Termination Value of all Equipment held by the
Lessor at any one time during the period starting
at the first anniversary of the Closing Date and
ending six months prior to the Maturity Date, then
the Lessee will be required to purchase, or cause
its designee to purchase, all remaining Equipment
on the Maturity Date.
EVENT OF LOSS: An Event of Loss means any of the following
events: (i) destruction, damage beyond repair or
rendition of the affected Equipment permanently
unfit for the Lessee's normal use for any reason
whatsoever; or (ii) the condemnation,
confiscation or seizure of in whole or in any
significant part of the affected Equipment, or
requisition of title to, or use of, any
significant part of the affected Equipment
rendering such affected Equipment permanently
unfit for the Lessee's normal use: or (iii) the
occurrence or discovery of certain environmental
conditions or events affecting the Equipment, the
estimated cost to remediate would exceed 10% of
the Equipment Cost for such Equipment.
Upon the occurrence of an Event of Loss, the
Lessee, at its election, shall either: (i)
purchase the affected Equipment by paying or
causing to be paid
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[CHASE LOGO] 6 Chase Securities Inc.
<PAGE> 71
CONFIDENTIAL HANOVER COMPRESSOR COMPANY
- --------------------------------------------------------------------------------
the Termination Value of the affected Equipment
(upon such payment, title to the affected
Equipment will be transferred to the Lessee or its
designee); or (ii) rebuild and restore the
affected Equipment to like kind, value and quality
immediately prior to the time of the Event of
Loss, in which case the Lease of the affected
Equipment will continue and the rent payable under
the Lease will not be reduced; provided that if in
the Lessee's reasonable judgment the Equipment
cannot be rebuilt prior to the Maturity Date, then
the Lessee will purchase the affected Equipment
pursuant to clause (i). Except as set forth above,
proceeds from insurance or condemnation will be
used to repay the Loans and excess insurance
proceeds or condemnation awards will be paid to
the Lessee unless an Event of Default has
occurred and is continuing.
REMARKETING AND
RETURN: In the event that the Lessee does not exercise
its option to purchase all of the Equipment, then
not later than 6 months prior to the Maturity
Date the Lessee will be required to use its best
efforts to remarket the Equipment on the Lessor's
behalf and consummate a sale of all of the
Equipment on or prior to the Maturity Date. The
proceeds from the sale of the Equipment will be
applied to, first, repay the Tranche B Loans and
second, repay the unrecovered Investor
Contribution. On the date of sale of the
Equipment, a Maximum Residual Guarantee Payment
will be made to repay in full the Tranche A Loans.
Excess proceeds will be returned to Lessee on the
Maturity Date. If the sale proceeds from the
Equipment is less than the sum of the amount
necessary to pay the Tranche B Loans and the
unrecovered Investor Contribution, then Lessee
shall be liable for an assessment of additional
rent with respect to actual excess wear and tear
of the Equipment, as determined by an appraisal
procedure up to such sum; provided, however, that
such assessment shall under no circumstances
prevent the Lessee from accounting for the Lease
as an operating lease under SFAS No. 13.
If the Lessee is unable to sell the Equipment on
or prior to the Maturity Date, then the Lessee
shall pay the Maximum Residual Guarantee Amount
and shall surrender possession of the Equipment
to the Lessor on the Maturity Date.
ASSIGNMENT AND
SUBLETTING: The Lease will permit the Lessee to sublease the
Equipment but will prohibit assignment.
Notwithstanding any sublease, the Lessee will
remain primarily liable for the performance of
all of its obligations under the Lease.
QUIET ENJOYMENT: The Lessee will have the right to peaceably and
quietly hold, possess and use the Equipment
during the Lease Term prior to the Maturity Date
so long as no Event of Default shall have
occurred and be continuing under the Lease.
MAINTENANCE: The Lessee will cause the Equipment to be
maintained and repaired in good condition,
ordinary wear and tear excepted. The Equipment
will be maintained at all times in accordance
with applicable law, including without limitation
all environmental laws, and in accordance with
all insurance requirements.
INSURANCE: The Lessee will carry and maintain with respect
to the Equipment commercial general liability and
property insurance in amounts and on terms
reasonably satisfactory to the Agent. Each
liability policy and equipment policy shall be
primary without right of contribution from any
other insurance carried by the parties to the
transaction.
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[CHASE LOGO]
7 CHASE SECURITIES INC.
<PAGE> 72
CONFIDENTIAL HANOVER COMPRESSOR COMPANY
- --------------------------------------------------------------------------------
MODIFICATIONS: The Lessee will have the right to make modifications,
alterations or renovations to the Equipment (the
"Modifications") so long as such Modifications do not
impair the value, utility or the useful life of the
Equipment. The Lessee will also be required to make any
Modifications that are required by law or by any
governmental or regulatory authority having jurisdiction
over the Equipment. Title will vest with the Lessor with
respect to all required Modifications and to all other
Modifications that are not severable from the Equipment
without damage or other loss of value. Title to all other
Modifications will vest with the Lessee.
GENERAL INDEMNITIES: The Lessee will indemnify, on an after-tax basis, the
Lessor, the Trust Company, the Investor, the Lenders and
the Agent and any of such parties' assignees, affiliates
and their officers (the "Indemnified Persons") from and
against liabilities, losses or expenses which may be
asserted against any such person arising out of (i) the
ownership, leasing, maintenance, use, or possession of
the Equipment, and (ii) the transactions in connection
with the Lease and the Loans. The General Indemnity
will exclude claims that are attributable to the gross
negligence or willful misconduct of the applicable
indemnified party or its affiliates, representatives
or agents. There will be no structural indemnity with
respect to the tax characterization or accounting
treatment of the Lease.
TAX INDEMNIFICATION: The Lessee will indemnify, on an after tax basis, the
Indemnified Persons against and will agree to pay any and
all taxes payable as a result of ownership, rental,
operation, use, maintenance or sale of the Equipment,
including, but not limited to, rental, withholding,
sales, use, gross receipts, personal equipment,
franchise, excise, value added or other taxes, but
excluding (i) federal net income taxes and (ii) state and
local net income taxes except taxes imposed by the state
where the Equipment are located.
ENVIRONMENTAL
INDEMNIFICATION: The Lessee will indemnify the Indemnified Persons from
and against liabilities, losses or expenses arising out
of or related to any pre-existing condition, or any
activity, occurrence or other condition that violates or
threatens to violate or results in non-compliance with
any environmental law.
OTHER TERMS AND
CONDITIONS: The Lease, Participation Agreement and Guarantee will
contain representations, warranties, covenants,
indemnities and Events of Default similar to those
contained in the Senior Credit Facility, as amended and
restated.
LEASE COLLATERAL: The Lessee will secure its obligations under the Lease by
granting to Lessor a first perfected security interest
and lien on Lessee's right, title and interest in the
Lease, all other operative documents, the Equipment and
all proceeds therefrom, and will file appropriate UCC
financing statements as required by the Agent.
PART VII -- GENERAL PROVISIONS
CLOSING CONDITIONS: The obligations of the Lessee, the Lessor, the Investor
and the Lenders to enter into agreements contemplated
hereby on or prior to the Closing Date will be subject
to certain further conditions which include the
following:
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[CHASE LOGO]
8 CHASE SECURITIES INC.
<PAGE> 73
CONFIDENTIAL HANOVER COMPRESSOR COMPANY
- -------------------------------------------------------------------------------
(i) execution of documentation satisfactory to the
parties;
(ii) receipt of legal opinions satisfactory to the
parties;
(iii) receipt of any required consents or waivers under
Hanover Compressor's existing debt instruments; and
(iv) other customary conditions to closing for a
transaction of this type.
TRANSACTION EXPENSES: The Lessee will pay as transaction expenses all fees and
out-of-pocket expenses associated with the negotiation
and preparation of the documents, including, but not
limited to, the reasonable fees of outside legal counsel
for the Lessor, the Lessee, the Investor and the Agent,
the syndication and arrangement fees and reasonable
out-of-pocket expenses of CSI, commitment fees of the
Lenders, any applicable recording costs of the
documentation, and reasonable fees and expenses of the
Trustee.
DOCUMENTATION: Documentation for the transaction will be prepared by
Simpson Thacher & Bartlett, counsel to Chase.
EVENTS OF DEFAULT: The Credit Agreement will contain Events of Defaults
similar to those found in the Senior Credit Facility,
as amended and restated, and usual for facilities of
this type, including a cross default to the Lease, the
Guarantee and other debt instruments of Hanover
Compressor. The Lessee may cure any Equipment-related
default under the Lease and the Guarantee by purchasing
such Equipment for Termination Value.
GOVERNING LAW: All documents will be governed by the laws of the State
of New York.
- -------------------------------------------------------------------------------
[CHASE LOGO] 9 CHASE SECURITIES INC.
<PAGE> 74
CONFIDENTIAL HANOVER COMPRESSOR COMPANY
- -------------------------------------------------------------------------------
ANNEX I
INTEREST AND CERTAIN FEES
INTEREST RATE
OPTIONS: The Lessor, at the direction of the Lessee, may elect
that all or a portion of the Loans bear interest at a
rate per annum equal to:
the ABR plus the Applicable Margin; or
the Eurodollar Rate plus the Applicable Margin.
As used herein;
"ABR" means the highest of (i) the rate of interest
publicly announced by Chase as its prime rate in
effect at its principal office in New York City (the
"Prime Rate"), (ii) the secondary market rate for
certificates of deposit (grossed up for maximum
statutory reserve requirements) plus 1% and (iii) the
federal funds effective rate from time to time plus
0.5%.
"Applicable Margin" means a percentage determined in
accordance with the pricing grid attached hereto as
Annex I-A.
"Eurodollar Rate" means the rate (grossed-up for
maximum statutory reserve requirements for
eurocurrency liabilities) at which eurodollar deposits
for one, two, three or six months (as selected by the
Lessor, at the direction of the Lessee) are offered to
Chase in the interbank eurodollar market in the
approximate amount of Chase's share of the relevant
Loan.
INTEREST PAYMENT
DATES: In the case of Loans bearing interest based upon the
ABR ("ABR Loans"), quarterly in arrears.
In the case of Loans bearing interest based upon the
Eurodollar Rate ("Eurodollar Loans"), on the last day
of each relevant interest period and, in the case of
any interest period longer than three months, on each
successive date three months after the first day of
such interest period.
REVOLVING COMMITMENT
FEES: The Lessor shall pay a revolving commitment fee
calculated at the rate per annum on the average daily
unused portion of the Loans and the Investor
Contribution during the Revolving Period, payable
quarterly in arrears as shown on the pricing grid
below.
DEFAULT RATE: At any time when the Lessor is in default in the
payment of any amount due under the Credit Agreement,
the principal of all Loans shall bear interest at 2%
above the rate otherwise applicable thereto. Overdue
interest, fees and other amounts shall bear interest
at 2% above the rate applicable to ABR Loans.
RATE AND FEE BASIS: All per annum rates shall be calculated on the basis
of a year of 365/366 days for actual days elapsed.
- -------------------------------------------------------------------------------
[CHASE LOGO] 10 CHASE SECURITIES INC.
<PAGE> 75
CONFIDENTIAL HANOVER COMPRESSOR COMPANY
- --------------------------------------------------------------------------------
ANNEX I-A
APPLICABLE MARGIN/COMMITMENT FEE
For Loans, the rate per annum set forth below opposite the ratio of indebtedness
to EBITDA:
Debt/EBITDA
<TABLE>
<CAPTION>
RATIO ABR LOANS EURODOLLAR LOANS COMMITMENT FEE
- ----- --------- ---------------- --------------
<S> <C> <C> <C>
<1.00 0.00% 0.75% .1875%
- -
>1.00 and < or = 2.00 0.00% 1.00% .25%
>2.00 and < or = 3.00 0.50% 1.25% .30%
>3.00 and < or = 4.00 0.50% 1.50% .30%
>4.00 0.75% 1.75% .375%
</TABLE>
- --------------------------------------------------------------------------------
[CHASE LOGO] CHASE SECURITIES INC.
11
<PAGE> 76
EXECUTION COPY
THIRD AMENDMENT
THIRD AMENDMENT, dated as of July 28, 1998 (this "Amendment"),
to the Credit Agreement, dated as of December 15, 1997, as amended by the Waiver
and First Amendment, dated as of June 10, 1998 and the Second Amendment, dated
as of June 29, 1998 (as the same may be further amended, supplemented or
otherwise modified from time to time, the "Credit Agreement"), among HANOVER
COMPRESSOR COMPANY, a Delaware corporation ("HCC"), the several banks and other
financial institutions from time to time parties thereto (the "Lenders") and THE
CHASE MANHATTAN BANK, a New York banking corporation, as the administrative
agent for the Lenders (in such capacity, the "Administrative Agent").
W I T N E S S E T H:
WHEREAS, HCC, the Lenders and the Administrative Agent are
parties to the Credit Agreement; and
WHEREAS, HCC has requested that the Administrative Agent and
the Required Lenders amend certain covenants in the Credit Agreement in
connection with (i) required amendments to the Subsidiaries' Guarantee (as
hereinafter defined) and (ii) guidelines concerning capital stock owned by
employees, officers and directors; and
WHEREAS, the Administrative Agent and the Required Lenders are
agreeable to the requested amendments, but only on the terms and subject to the
conditions set forth herein;
NOW THEREFORE, in consideration of the premises herein
contained and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized
terms used herein which are defined in the Credit Agreement are used herein as
therein defined.
2. Amendment to Subsection 7.9 (Subsequent Guarantees).
Subsection 7.9 of the Credit Agreement is hereby amended by deleting it in its
entirety and substituting in place thereof the following:
"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 $20,000,000, to
execute an amendment to the Subsidiaries' Guarantee, substantially in
the form of Exhibit A to the Subsidiaries' Guarantee within
<PAGE> 77
2
one year after the later of (i) the date on which such Qualified
Subsidiary becomes a Subsidiary of HCC and (ii) the date on which such
Qualified Subsidiary's assets attain an aggregate value in excess of
$20,000,000; provided, however, that if during such one-year period the
aggregate value of such Qualified Subsidiary's assets is or becomes
$20,000,000 or less, such Qualified Subsidiary shall not be required to
become a party to the Subsidiaries' Guarantee."
3. Amendment to Subsection 8.8 (Limitation on Dividends).
Subsection 8.8 of the Credit Agreement is hereby amended by deleting the amount
"$2,500,000" from clause (ii) thereof and substituting in place thereof the
amount "7,500,000".
4. Amendment to Subsection 5,10 (Limitation on investments,
Loans and Advances). Subsection 8.10 of the Credit Agreement is hereby amended
by deleting paragraph (i) therefrom and substituting in place thereof the
following:
"(i) Loans to employees, officers and directors of HCC and its
Subsidiaries to acquire shares of capital stock of HCC not to exceed
$20,000,000."
5. Effectiveness. This Amendment shall become effective upon
fulfillment of the following conditions precedent: (a) HCC and each of its
Subsidiaries listed on the signature pages hereto shall have delivered to the
Administrative Agent duly executed copies of this Amendment, (b) the
Administrative Agent shall have received duly executed copies of this Amendment
from the Required Lenders and (c) no Default or Event of Default shall have
occurred and be continuing on the date hereof after giving affect to this
Amendment.
6. Representations and Warranties. HCC hereby represents and
warrants that the representations and warranties contained in the Credit
Agreement (except those which expressly speak as of a certain date) will be,
after giving effect to this Amendment, true and correct in all material
respects, as if made on and as of the date hereof
7. Continuing Effect of Credit Agreement. This Amendment shall
not constitute an amendment or waiver of any other provision of the Credit
Agreement or the Loan Documents not expressly referred to herein and shall not
be construed as a waiver or consent to any further or future action on the part
of HCC that would require a waiver or consent of the Administrative Agent and/or
the Lenders. Except as expressly amended hereby, the provisions of the Credit
Agreement and the Loan Documents are and shall remain in full force and effect.
8. Counterparts. This Amendment may be executed in
counterparts and all of the said counterparts taken together shall be deemed to
constitute one and the same instrument. Delivery of an executed signature page
of this Amendment by facsimile transmission shall be effective as delivery of a
manually executed counterpart hereof.
9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE> 78
3
10. Expenses. HCC agrees to pay or reimburse the
Administrative Agent for all of their out-of-pocket costs and expenses incurred
in connection with the preparation, negotiation and execution of this Amendment,
including, without limitation, the fees and disbursements of counsel to the
Administrative Agent.
<PAGE> 79
4
IN WITNESS WHEREOF, the parties have caused this Amendment to
be executed and delivered by their duly authorized officers of the date first
written above.
HANOVER COMPRESSOR COMPANY
BY: /s/ CURTIS BEDRICH
----------------------------------
Name: Curtis Bedrich
Title: Treasurer
THE CHASE MANHATTAN BANK (formerly
known as Chemical Bank), as Administrative
Agent and as a Lender
BY: /s/ PETER M. LING
----------------------------------
Name: Peter M. Ling
Title: Vice President
THE BANK OF NOVA SCOTIA
BY: /s/ F.O.R. ASHBY
----------------------------------
Name: F.O.R. Ashby
Title: Senior Manager
Loan Operations
CREDIT LYONNAIS, NEW YORK BRANCH
BY: /s/ PHILIPPE SOUSTRA
----------------------------------
Name: Philippe Soustra
Title: Senior Vice President
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
BY: /s/ THEODORE M. NOWAK
----------------------------------
Name: Theodore M. Nowak
Title: Vice President
<PAGE> 80
5
BANQUE PARIBAS
BY: /s/ MICHAEL H. FIUZAT
----------------------------------
Name: Michael H. Fiuzat
Title: Vice President
FIRST UNION BANK
BY: /s/ ROBERT R. WETTEROFF
----------------------------------
Name: Robert R. Wetteroff
Title: Senior Vice President
BANKERS TRUST COMPANY
BY: /s/ MARCUS M. TARKINGTON
----------------------------------
Name: Marcus M. Tarkington
Title: Principal
Acknowledged and agreed to as
of the date hereof:
HANOVER MAINTECH, INC.
By: /s/ CURTIS BEDRICH
----------------------------------
Name: Curtis Bedrich
Title: Treasurer
HANOVER/SMITH, INC.
By: /s/ CURTIS BEDRICH
----------------------------------
Name: Curtis Bedrich
Title: Treasurer
HANOVER LAND COMPANY
By: /s/ CURTIS BEDRICH
----------------------------------
Name: Curtis Bedrich
Title: Treasurer
<PAGE> 1
EXHIBIT 21.1
Hanover Compressor Company ("HCC"), list of subsidiaries
1. Hanover Acquisition Corporation, a Texas corporation and a wholly owned
subsidiary of HCC.
2. Hanover Compressor Colombia, Inc., a Delaware corporation and a wholly
owned subsidiary of HCC.
3. Hanover Land Company, a Texas corporation and a wholly owned subsidiary
of HCC.
4. Hanover Maintech, Inc. (f/k/a Maintech Enterprises, Inc.), a Texas
corporation and a wholly owned subsidiary of HCC.
5. Hanover/Smith, Inc., a Delaware corporation and a wholly owned subsidiary
of HCC.
6. HCC owns 33% of the issued and outstanding stock or Wartsila Compressions
Systems GmbH, a German company.
7. H.C.C Compressor de Venezuela, C.A., a Venezuelan corporation and a
wholly owned subsidiary of HCC.
8. Hanover-PGN Compressor, C.A., a Venezuelan corporation and a wholly owned
subsidiary of H.C.C. Venezuela.
9. HCC owns 99.992% of the issued and outstanding stock of Contract
Compression International Argentina, S.A., an Argentinean corporation
("CCIA"). HMI owns the remaining 0.008% of CCIA stock.
10. Hanover Compressor Holding Company NL B.V., a Dutch company ("Hanover
Holding") and a wholly-owned subsidiary of HCC
11. Hanover Cayman Limited, a Cayman Islands company ("Hanover Cayman") and a
wholly-owned subsidiary of HCC
12. Hanover Holding owns 99.99%$ of the issued and outstanding of Hanover
Compressor Company Bolivia, Ltd., a Bolivian company ("HCC Bolivia").
Hanover Cayman owns the remaining 0.01% of HCC Bolivia stock
13. Hanover Cayman owns 60% of the issued and outstanding stock of
Hanover/Enron Venezuela, Ltd., and a Cayman Islands company.
14. HCC owns 99.99% of the membership interests of Hanover Compressor Mexico
SRL, a Mexican limited liability company ("Hanover Mexico"). Hanover
Cayman owns the remaining 0.01% of said membership interests.
15. Hanover Compressor Sucursal Mexico, a Mexican branch and a wholly owned
subsidiary of HCC.
16. HCC owns 35% of Hanover/Cosacol Consortium, a Colombian consortium.
17. HCC owns 51% of Hanover Compressor Colombia Ltd., a Colombian limitada.
18. HCC owns 99% of the membership interest of 3113442 Nova Scotia Co., a
Nova Scotia unlimited liability company. HMI owns the remaining 1% of
said membership interests.
19. HCC owns 35% of Collicutt's Mechanical Services, Ltd., a Canadian
corporation.
20. Astra Resources International, Inc., a Texas corporation and wholly owned
subsidiary of Hanover Acquisition Corporation.
21. HCC Acquisition, Inc., a Texas corporation and a wholly owned subsidiary
of HCC.
22. Eureka Energy Systems, Inc., a Delaware corporation and wholly owned
subsidiary of HCC.
<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, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,503
<SECURITIES> 0
<RECEIVABLES> 71,417
<ALLOWANCES> 1,212
<INVENTORY> 63,044
<CURRENT-ASSETS> 165,056
<PP&E> 470,726
<DEPRECIATION> 78,228
<TOTAL-ASSETS> 614,590
<CURRENT-LIABILITIES> 51,792
<BONDS> 0
0
0
<COMMON> 269,034
<OTHER-SE> 47,679
<TOTAL-LIABILITY-AND-EQUITY> 614,590
<SALES> 104,919
<TOTAL-REVENUES> 281,957
<CGS> 83,925
<TOTAL-COSTS> 220,605
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,716
<INCOME-PRETAX> 49,636
<INCOME-TAX> 19,259
<INCOME-CONTINUING> 30,377
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,377
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.01
</TABLE>
