<PAGE>
As filed with the Securities and Exchange Commission on December 22, 2000
Registration No. 333-50836
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
Hanover Compressor Company
(Exact name of Registrant as specified in its charter)
Delaware 7359 76-0625124
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
12001 North Houston Rosslyn
Houston, Texas 77086
(281) 447-8787
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
Michael J. McGhan
President and Chief Executive Officer
12001 North Houston Rosslyn
Houston, Texas 77086
(281) 447-8787
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Kyle Longhofer Jack D. Brannon Richard S. Meller
Schlanger, Mills, Mayer & OEC Compression Latham & Watkins
Silver, LLP Corporation 233 South Wacker Drive
109 North Post Oak 2501 Cedar Springs Road Suite 5800
Suite 300 Suite 600 Chicago, Illinois
Houston, Texas 77024 Dallas, Texas 75201 60606
(713) 785-1700 (214) 953-9560 (312) 876-7000
----------------
Approximate date of commencement of the proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective and the
merger of Caddo Acquisition Corporation, a wholly-owned subsidiary of Hanover
Compressor Company, with and into OEC Compression Corporation, as described in
the Agreement and Plan of Merger dated as of July 13, 2000, as amended, becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8 of the
Securities Act or until this Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8, may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
[OEC LOGO]
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Hanover Compressor Company ("Hanover") and OEC
Compression Corporation ("OEC") have agreed on a merger in which Caddo
Acquisition Corporation, a wholly-owned subsidiary of Hanover, will be merged
with and into OEC. As a result of such merger, OEC will become a wholly-owned
subsidiary of Hanover.
If the merger is completed, each outstanding share of OEC common stock will
be converted into the right to receive between .0333333 and .0307692 shares of
Hanover common stock. The actual number of shares that will be issued will be
determined by dividing $1.00 by the average closing sales price per share of
Hanover common stock as reported by the New York Stock Exchange composite tape
for the twenty consecutive trading days immediately preceding the second
business day prior to the effective time of the merger (subject to a maximum of
.0333333 and a minimum of .0307692 shares of Hanover common stock for each
share of OEC common stock owned), and multiplying the result by the number of
shares of OEC common stock outstanding.
We estimate that immediately after the merger OEC stockholders will hold
approximately 3% of the outstanding shares of Hanover. The Hanover common stock
is listed on the New York Stock Exchange under the symbol "HC".
The merger cannot be completed unless the stockholders of OEC approve it.
OEC's stockholders will be asked to vote upon the merger at a special meeting
to be held on January 26, 2001 starting at 10:00 a.m., local time, at 2501
Cedar Springs Road, Suite 600, Dallas, Texas, 75201. Hanover's stockholders
will not be required to vote to approve the Merger pursuant to section
251(f)(3) of the Delaware General Corporation Law as the shares to be issued in
connection with the Merger do not exceed 20% of the shares of common stock of
Hanover outstanding as of July 13, 2000.
Your vote is very important. Whether or not you plan to attend the meeting,
please take the time to vote by completing and mailing the enclosed proxy card
to us.
This proxy statement/prospectus provides you with detailed information about
the proposed merger and the other matters to be voted upon at your meeting. You
should consider the matters discussed under "Risk Factors" beginning on page 14
of the enclosed proxy statement/prospectus before voting.
Sincerely,
[SIGNATURE OF RAY C. DAVIS]
Ray C. Davis [SIGNATURE OF KELCY L. WARREN]
Kelcy L. Warren
Co-Chief Executive Officer and Co-Chief Executive Officer and
Co-Chairman of the Board Co-Chairman of the Board
OEC Compression Corporation OEC Compression Corporation
Neither the Securities and Exchange Commission nor any state securities
regulator has approved the Hanover common stock to be issued under this
proxy statement/prospectus or determined if this proxy
statement/prospectus is accurate or adequate. Any representation to the
contrary is a criminal offense.
The proxy statement/prospectus is dated December 27, 2000 and is being first
mailed to OEC stockholders on or about December 27, 2000.
<PAGE>
[OEC LOGO]
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 26, 2001
----------------
To the stockholders of OEC Compression Corporation:
A special meeting of the stockholders of OEC Compression Corporation will be
held on January 26, 2001, at 2501 Cedar Springs Road, Suite 600, Dallas, Texas,
75201 starting at 10:00 a.m., local time, for the following purposes:
1. To approve an Agreement and Plan of Merger, dated as of July 13, 2000 and
amended as of November 14, 2000 among Hanover Compressor Company, Caddo
Acquisition Corporation and OEC Compression Corporation, which provides
that:
(a) Caddo Acquisition Corporation, a wholly-owned subsidiary of
Hanover Compressor Company, will be merged with and into OEC Compression
Corporation, with OEC continuing as the surviving corporation and
becoming a wholly-owned subsidiary of Hanover; and
(b) If the merger is completed, each outstanding share of OEC common
stock will be converted into the right to receive between .0333333 and
.0307692 shares of Hanover common stock. The actual number of shares that
will be issued will be determined by dividing $1.00 by the average
closing sales price per share of Hanover common stock as reported by the
New York Stock Exchange composite tape for the twenty consecutive trading
days immediately preceding the second business day prior to the effective
time of the merger (subject to a maximum of .0333333 and a minimum of
.0307692 shares of Hanover common stock for each share of OEC common
stock owned) and multiplying the result by the number of shares of OEC
common stock outstanding.
2. To transact such other business as may properly come before the meeting or
any adjournments of the meeting.
The OEC board of directors has fixed the close of business on December 21,
2000 as the record date for determining the OEC stockholders who are entitled
to notice of, and to vote at, the special meeting.
The approval of the Agreement and Plan of Merger will require the
affirmative vote of the holders of a majority of the outstanding shares of OEC
common stock as of the record date. The completion of the merger is conditioned
upon approval of the Agreement and Plan of Merger by the OEC stockholders.
All OEC stockholders are cordially invited to attend the special meeting in
person. However, to ensure your representation at the meeting, please take the
time to vote on the proposals submitted to you by completing and mailing the
enclosed proxy card in the enclosed postage-prepaid envelope. You may revoke
your proxy in the manner described in the accompanying proxy
statement/prospectus at any time before it is voted at the special meeting of
OEC stockholders. If you sign, date and mail your proxy card without indicating
how you wish to vote, your proxy will be counted as a vote in favor of all of
the above proposals. If you fail to return a properly executed proxy card and
do not vote your shares in person at the meeting, it will have the same effect
as a vote against approval of the Agreement and Plan of Merger.
THE OEC BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF MERGER.
By Action of the Board of Directors,
[SIGNATURE OF RAY C. DAVIS] [SIGNATURE OF KELCY L. WARREN]
Ray C. Davis Kelcy L. Warren
Co-Chief Executive Officer and Co-Chief Executive Officer and
Co-Chairman of the Board Co-Chairman of the Board
Dallas, Texas
December 27, 2000
<PAGE>
REFERENCES TO ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and
financial information about Hanover from documents that are not included or
delivered with this proxy statement/prospectus. This information is available
to you without charge upon your written or oral request. You can obtain the
documents incorporated by reference in this proxy statement/prospectus by
requesting them in writing or by telephone from the appropriate company at the
following addresses and telephone numbers:
OEC Compression Corporation Hanover Compressor Company
2501 Cedar Springs Road, Suite 600 12001 N. Houston Rosslyn
Dallas, Texas 75201 Houston, Texas 77086
Telephone: (214) 953-9560 Telephone: (281) 447-8787
To obtain timely delivery of requested documents prior to the meetings, you
must request them no later than January 19, 2001, which is five business days
prior to the date of the OEC special meeting.
See "Where You Can Find More Information" on page 72 of this proxy
statement/prospectus.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................... 1
SUMMARY.................................................................... 3
The Companies............................................................ 3
The Meeting.............................................................. 4
Stockholders Entitled to Vote............................................ 4
Purposes of the OEC Special Meeting...................................... 5
Share Ownership of Management and Directors.............................. 5
The Merger............................................................... 5
Voting and Disposition Agreement......................................... 6
Risk Factors............................................................. 6
Recommendation of the OEC Board of Directors............................. 6
Opinion of Financial Advisor to OEC...................................... 6
Interests of Certain Persons in the Merger............................... 7
Material Contacts........................................................ 7
Management Following the Merger.......................................... 7
Conditions to the Merger................................................. 8
Termination.............................................................. 8
Dissenters' and Appraisal Rights......................................... 8
Material United States Federal Income Tax Consequences................... 9
Accounting Treatment..................................................... 9
Surrender of Certificates................................................ 9
Effects of the Merger on the Rights of Holders of OEC Common Stock....... 9
Selected Financial Data--Hanover......................................... 10
Comparative Per Share Data............................................... 12
Comparative Market Price Information..................................... 13
RISK FACTORS............................................................... 14
Risks Relating to the Merger............................................. 14
Risks Relating to Hanover................................................ 15
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS...................... 18
THE OEC SPECIAL MEETING.................................................... 20
Date, Time and Place..................................................... 20
Matters to be Considered at the OEC Special Meeting...................... 20
The OEC Board of Directors Recommendations............................... 20
Vote Required............................................................ 20
Voting of Proxies........................................................ 20
Revocability of Proxies.................................................. 21
Record Date; Stock Entitled to Vote; Quorum.............................. 21
Solicitation of Proxies.................................................. 21
THE MERGER................................................................. 22
General.................................................................. 22
Background of the Merger................................................. 22
Reasons for the Merger................................................... 26
Recommendation of the OEC Board of Directors............................. 28
Opinion of OEC's Financial Advisor....................................... 28
Interests of Certain Persons in the Merger............................... 32
Material Contacts........................................................ 33
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Determination of Conversion Ratio....................................... 34
Regulatory Approval Required............................................ 34
The Prudential Agreement................................................ 34
Management and Operations Following the Merger.......................... 35
Accounting Treatment.................................................... 35
Material United States Federal Income Tax Consequences.................. 35
Dissenters' and Appraisal Rights........................................ 36
Listing of the Hanover Common Stock to be Issued in the Merger.......... 36
Delisting and Deregistration of OEC Common Stock after the Merger....... 37
Federal Securities Law Consequences..................................... 37
THE AGREEMENT AND PLAN OF MERGER.......................................... 38
General................................................................. 38
Conversion of Shares.................................................... 38
Procedure for the Exchange of Stock Certificates........................ 38
Representations and Warranties.......................................... 39
Certain Covenants Relating to Conduct of Business....................... 41
No Solicitation......................................................... 42
Additional Agreements................................................... 43
Director and Officer Indemnification.................................... 44
Conditions to the Merger................................................ 45
Termination; Termination Fees and Expenses.............................. 46
Amendment and Waiver.................................................... 48
VOTING AND DISPOSITION AGREEMENT.......................................... 49
NONCOMPETITION AGREEMENTS................................................. 50
OEC....................................................................... 51
Business................................................................ 51
General................................................................. 51
Gas Compression Operations.............................................. 52
Equipment Leasing and Contract Compression Services..................... 53
Lease/Contract Compression Terms........................................ 53
Remanufacturing Services................................................ 53
Compressor Sales........................................................ 54
Market and Customers.................................................... 54
Competition............................................................. 54
Compliance with Environmental Laws...................................... 54
Employees............................................................... 54
Properties and Facilities............................................... 54
Legal Proceedings....................................................... 55
Market for OEC's Common Equity.......................................... 55
Executive Officers of OEC............................................... 55
Security Ownership of Certain Beneficial Owners and Management.......... 56
Selected Historical Financial Data--OEC................................. 58
Supplementary Financial Information--OEC................................ 58
OEC Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 60
DESCRIPTION OF HANOVER COMMON STOCK....................................... 65
COMPARISON OF STOCKHOLDER RIGHTS.......................................... 66
Capital Stock........................................................... 66
Number, Election and Removal of Directors............................... 66
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Amendments to Charter and Bylaws....................................... 67
Special Meetings of Stockholders....................................... 67
Action Without a Meeting............................................... 68
Inspection of Stockholder List......................................... 68
Limitation of Directors' Liability..................................... 68
Indemnification of Directors and Officers.............................. 69
Dissenters' and Appraisal Rights....................................... 70
Oklahoma Control Shares Act............................................ 71
Rights Plan............................................................ 71
Interested Stockholder Transactions.................................... 71
LEGAL MATTERS............................................................ 72
EXPERTS.................................................................. 72
WHERE YOU CAN FIND MORE INFORMATION...................................... 72
INDEX TO OEC CONSOLIDATED FINANCIAL STATEMENTS........................... F-1
Annex A--Agreement and Plan of Merger dated as of July 13, 2000 and
amended as of November 14, 2000
Annex B--Opinion of Prudential Securities
Annex C--Voting and Disposition Agreement
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What is the proposed transaction for which I am being asked to vote?
A: OEC proposes to be acquired by Hanover pursuant to the terms of an Agreement
and Plan of Merger as amended. Pursuant to the Agreement and Plan of Merger,
Caddo Acquisition Corporation, a wholly-owned subsidiary of Hanover
Compressor Company, will merge into OEC, with OEC surviving the merger. As a
result, OEC will become a wholly-owned subsidiary of Hanover.
Q: What will happen to my OEC common stock in the merger?
A: In the merger, each issued and outstanding share of OEC common stock will be
converted into the right to receive between .0333333 and .0307693 shares of
Hanover common stock. The actual number of shares of Hanover common stock to
be issued will be determined by dividing $1.00 by the average closing sales
price per share of Hanover common stock as reported by the New York Stock
Exchange composite tape for the twenty consecutive trading days immediately
preceding the second business day prior to the effective time of the merger
(subject to a maximum of .0333333 and a minimum of .0307692 shares of
Hanover common stock for each share of OEC common stock), and multiplying
the result by the number of shares of OEC common stock outstanding. Each
outstanding share of Hanover common stock will remain outstanding and be
unaffected by the merger. As a result of such merger, you will receive
between .0333333 and .0307692 shares of Hanover common stock for each share
of OEC common stock you own.
Q: When do you expect the merger to be completed?
A: We are working toward completing the merger as quickly as possible. We
expect to complete the merger by January 31, 2001. If necessary or
desirable, either party may postpone the merger until March 1, 2001, and
Hanover and OEC may agree to an even later date.
Q: What do I need to do now?
A: We urge you to read this proxy statement/prospectus carefully, including its
annexes, and to consider how the merger would affect you as a stockholder.
You also may want to review the documents referenced under "Where You Can
Find More Information."
Q: How do I vote?
A: Indicate on your proxy card how you want to vote, and sign and mail your
proxy card in the enclosed postage-prepaid return envelope as soon as
possible so that your shares may be represented at your meeting. If you sign
and send in your proxy card and do not indicate how you want to vote, your
proxy will be counted as a vote in favor of each proposal applicable to you.
If you fail to return your proxy card and do not vote in person at your
meeting, the effect will be the same as a vote against the merger proposals
applicable to you.
Q: If my shares are held in a brokerage account, how will my shares be voted?
A: Your broker will not vote your shares for you unless you provide your broker
with written instructions on how to vote. As a result, it is important that
you follow the directions provided by your broker regarding how to instruct
your broker to vote your shares.
Q: May I change my vote after I have mailed a signed proxy card?
A: Yes. You may change your vote in one of the following three ways at any time
before your proxy is voted at your meeting. First, you may send a written
notice stating that you would like to revoke your proxy. Second, you may
complete a new, later-dated proxy card. Third, you can attend the
appropriate meeting and vote in person. If you choose either of the first
two methods, you must submit your notice of revocation or your new proxy to
the Secretary of OEC. If you have instructed a broker to vote your shares,
you must follow the directions received from your broker to change your vote
or to vote in person at your meeting.
1
<PAGE>
Q: Should I send my certificates now?
A: No. After the merger is completed, we will send you written instructions for
exchanging your stock certificates.
Q: Whom do I call with questions?
A: OEC stockholders who have questions about the merger should contact:
Jack Brannon
OEC Compression Corporation
2501 Cedar Springs Road, Suite 600
Dallas, Texas 75201
(214) 953-9560
2
<PAGE>
SUMMARY
This summary may not contain all of the information that is important to
you. You should carefully read this entire document and the other documents we
refer to for a more complete understanding of the merger. In addition, we
incorporate by reference important business and financial information into this
proxy statement/prospectus. You may obtain the information incorporated by
reference without charge by following the instructions in the section "Where
You Can Find More Information." Where necessary, we have included page
references to direct you to a more complete description of the topics in this
summary.
The Companies
Hanover
The information provided in this prospectus gives effect to a restructuring
of Hanover Compressor Company that was effected on December 9, 1999 (the
"Restructuring"). The sole purpose of the Restructuring was to create a holding
company, and the Restructuring has had and will have no effect on Hanover's
business. As a result of the Restructuring, "old" Hanover Compressor Company
was renamed Hanover Compression Inc. ("HCI") and became a wholly-owned
subsidiary of a newly created holding company called Hanover Compressor
Company. Each share of HCI was exchanged for one share of "new" Hanover
Compressor Company, which replaced "old" Hanover Compressor Company as the
publicly held company whose stock is traded on the New York Stock Exchange.
Financial and other information discussed in this prospectus for periods prior
to the Restructuring relates to HCI and its subsidiaries. The information
provided in this prospectus also gives effect to the two-for-one split of
Hanover's common stock effective June 13, 2000.
Hanover is a leading provider of a broad array of natural gas compression
services in the United States and select international markets. Hanover
operates the largest compressor rental fleet, in terms of horsepower, in the
gas compression industry and provides its services on a rental, contract
compression, maintenance, and acquisition leaseback basis. Hanover's customers
include independent and major producers and distributors of natural gas
throughout the Western Hemisphere. Hanover's products and services are
essential to the production, transportation, processing, and storage of natural
gas. Founded in 1990 and publicly held since 1997, Hanover is the largest
public company whose primary focus is in the natural gas compression business.
Hanover's compression services are complemented by its compressor and oil and
gas production equipment fabrication operations, which broaden its customer
relationships both domestically and internationally.
Through internal growth and a series of strategic acquisitions, Hanover has
become the largest operator of rental compression horsepower capacity in the
United States, serving an estimated 28% of the domestic rental market. Hanover
began international operations in 1995 and has become one of the largest
providers of compression services in the rapidly growing Latin American and
Canadian markets. As of September 30, 2000, Hanover's compression rental fleet
included the following:
<TABLE>
<CAPTION>
Units Horsepower
----- ----------
<S> <C> <C>
U.S............................................................ 4,379 1,714,000
International.................................................. 426 384,000
----- ---------
Total Fleet.................................................... 4,805 2,098,000
===== =========
</TABLE>
In addition to our business of providing natural gas compression services,
Hanover also fabricates gas compressors for sale to third parties and for
inclusion in our rental fleet. Hanover was the second largest fabricator of
natural gas compressors (by horsepower) in North America in 1999.
3
<PAGE>
Complementing Hanover's gas compression businesses is its oil and gas
production equipment fabrication business. Oil and gas production equipment is
typically installed at the wellhead immediately before beginning large-scale
production and remains at the site for the life of the well. Hanover fabricates
equipment used by oil and gas producers to separate and treat oil and gas
immediately after it is produced in order to facilitate further processing,
transportation and sale.
Caddo Acquisition Corporation is a company formed in Oklahoma by Hanover on
July 11, 2000 solely for use in the merger.
In addition to the acquisition of OEC, which is the subject of this proxy
statement/prospectus, Hanover acquired the Dresser Rand compression services
division from Ingersoll-Rand Company as of August 31, 2000. This acquisition
adds 312 rental units having an aggregate capacity of approximately 240,000
horsepower. The Dresser-Rand transaction is described more fully in the Form
8-K filed with the Securities and Exchange Commission on July 13, 2000, the
Form 8-K filed with the Securities and Exchange Commission on September 14,
2000, the Form 8-K/A filed with the Securities and Exchange Commission on
November 13, 2000, and the Form 8-K filed on November 22, 2000, all of which
are incorporated by reference into this proxy statement/prospectus.
The mailing address of Hanover's principal executive office is 12001 N.
Houston Rosslyn, Houston, Texas, 77086, and the telephone number is (281)
447-8787.
OEC (Page 51)
OEC Compression Corporation, formerly Equity Compression Services
Corporation, formerly Hawkins Energy Corporation, is principally engaged in the
leasing and contract management of gas compression equipment to operators of
producing natural gas wells and gas gathering systems.
OEC conducts its compressor operations through Ouachita Energy Corporation,
its wholly-owned subsidiary. For the year ended December 31, 1999, its
compressor service fleet consisted of 854 units with an aggregate capacity of
228,903 horsepower. In addition to its compressor operations, OEC is involved
in the overhaul and rework of gas compression equipment owned by third parties
and the direct sale of remanufactured gas compression equipment.
For the year ended December 31, 1999, OEC had total revenues of $25,157,000
and net income of $121,000, or $0.00 per share (diluted). For the nine months
ended September 30, 2000, OEC had total revenues of approximately $16,671,000
and net income of approximately $437,000, or $0.01 per share (diluted).
The mailing address of OEC's principal executive office is 2501 Cedar
Springs Road, Suite 600, Dallas, Texas, 75201, and the telephone number is
(214) 953-9560.
The Meeting
(Page 20 )
The special meeting of OEC stockholders will be held on January 26, 2001 at
2501 Cedar Springs Road, Suite 600, Dallas, Texas, 75201 starting at 10:00
a.m., local time.
Stockholders Entitled to Vote
(Page 21)
Holders of record of shares of OEC common stock at the close of business on
the record date, December 21, 2000, are entitled to notice of, and to vote at,
the special meeting of OEC stockholders. On the record date, there were
approximately 37,060,766 shares of OEC common stock outstanding, each of which
will be entitled to one vote on each matter to be acted upon at the special
meeting of OEC stockholders.
4
<PAGE>
Hanover's stockholders will not be required to vote to approve the Merger
pursuant to section 251(f)(3) of the Delaware General Corporation Law as the
shares to be issued in connection with the Merger do not exceed 20% of the
shares of common stock of Hanover outstanding as of July 13, 2000.
Purpose of the OEC Special Meeting
At the special meeting of OEC stockholders, the stockholders of common stock
will be asked to consider and vote upon proposals to approve:
. the Agreement and Plan of Merger, dated as of July 13, 2000 and amended
as of November 14, 2000, among Hanover Compressor Company, Caddo
Acquisition Corporation and OEC Compression Corporation; and
. any other matters that are properly brought before the special meeting
or any adjournment or postponement of the meeting.
The completion of the merger is conditioned upon OEC's stockholders'
approval of the Agreement and Plan of Merger.
Share Ownership of Management and Directors
(Page 21)
On the record date, directors and executive officers of OEC and their
affiliates held and are entitled to vote approximately 45% of the OEC common
stock outstanding on that date. The vote required for approval of the OEC
merger proposal is a majority of the outstanding shares of OEC common stock.
The Merger
(Page 22)
Upon completion of the merger, Caddo Acquisition Corporation, a wholly-owned
subsidiary of Hanover, will be merged with and into OEC, with OEC continuing as
the surviving corporation and becoming a wholly-owned subsidiary of Hanover.
Each issued and outstanding share of OEC common stock will be converted into
the right to receive between .0333333 and .0307692 shares of Hanover common
stock. The actual number of shares of Hanover common stock to be issued will be
determined by dividing $1.00 by the average closing sales price per share of
Hanover common stock as reported by the New York Stock Exchange composite tape
for the twenty consecutive trading days immediately preceding the second
business day prior to the effective time of the merger (subject to a maximum of
.0333333 and a minimum of .0307692 shares of Hanover common stock for each
share of OEC common stock), and multiplying the result by the number of shares
of OEC common stock owned. As a result of such merger, OEC stockholders will
receive between .0333333 and .0307692 shares of Hanover common stock for each
share of OEC common stock held. Each outstanding share of Hanover common stock
will remain outstanding and be unaffected by the merger.
Based upon the number of outstanding shares of Hanover common stock and OEC
common stock as of the record date, the holders of OEC common stock immediately
prior to the merger will own approximately 3% of the outstanding shares of
Hanover common stock immediately following the merger.
The full text of the Agreement and Plan of Merger is attached as Annex A and
is to be considered a part of this proxy statement/prospectus. OEC stockholders
are urged to read carefully the Agreement and Plan of Merger in its entirety.
5
<PAGE>
Voting and Disposition Agreement
(Page 49)
When Hanover and OEC entered into the Agreement and Plan of Merger, Hanover
required certain stockholders to enter into a voting and disposition agreement
under which those stockholders, among other things:
. agreed to appear, in person or by proxy, for the purpose of obtaining a
quorum at any meeting of the stockholders of OEC at which matters
relating to the merger are considered;
. agreed to vote their shares in favor of approval of the Agreement and
Plan of Merger;
. granted to Hanover an irrevocable proxy to vote all shares owned by them
and in favor of the Agreement and Plan of Merger; and
. agreed to certain restrictions on their ability to sell the shares of
Hanover common stock they will receive in the merger.
The voting and disposition agreement is attached to this proxy
statement/prospectus as Annex C.
Risk Factors
(Page 14)
In evaluating the merger and the proposals set forth in this proxy
statement/prospectus, you should carefully consider the "Risk Factors."
Recommendation of the OEC Board of Directors
(Page 28)
The OEC board of directors believes that the terms of the merger and the
Agreement and Plan of Merger are advisable and fair to, and in the best
interests of, OEC and its stockholders. See "The Merger--Recommendation of the
OEC Board of Directors."
The OEC board of directors has unanimously approved the Agreement and Plan
of Merger and recommends that holders of OEC common stock vote FOR the approval
of the Agreement and Plan of Merger.
Opinion of Financial Advisor to OEC
(Page 28)
On July 14, 2000, Prudential Securities delivered its written opinion to the
OEC board of directors to the effect that, as of that date, the consideration
to be received by the OEC stockholders was fair, from a financial point of
view.
The full text of Prudential Securities' opinion, which sets forth the
assumptions made, procedures followed, matters considered and qualifications
and limitations on the review undertaken, is attached as Annex B and is to be
considered a part of this proxy statement/prospectus. OEC stockholders are
urged to read carefully the opinion of Prudential Securities in its entirety.
6
<PAGE>
Interests of Certain Persons in the Merger
(Page 32)
Directors and officers of OEC have interests in the merger as directors or
officers that are different from, or in addition to, those of other
stockholders. Pursuant to the Agreement and Plan of Merger, Hanover is
obligated to indemnify each present and former director and officer of OEC
against certain liabilities and expenses incurred in connection with claims
relating to certain matters prior to the closing of the merger. See also "The
Agreement and Plan of Merger--Director and Officer Indemnification."
Each of the options held by certain officers and employees of OEC will, as a
result of the merger, become vested and exercisable at the time of the merger
and will be cancelled and converted into the right to receive cash in an amount
equal to the product of (a) $1.00 minus the exercise price per share of such
OEC option, times (b) the number of shares of OEC common stock which may be
purchased upon exercise of such option. Also, the merger will trigger certain
rights under agreements between OEC and some of its officers and employees.
Material Contacts
(Page 33)
In July 1999, Hanover and OEC entered into an agreement under which OEC sold
natural gas compressors to Hanover for $2,265,000, of which $2,000,000 was paid
on the date of the agreement with the remaining $265,000 to be paid 180 days
thereafter unless Hanover or OEC exercised its repurchase option. The agreement
contained provisions that permit OEC, at its option, to repurchase the
compressors or Hanover, at its option, to sell the compressors back to OEC for
a purchase price of $2,000,000 plus interest thereon at a rate of 10% per
annum. Hanover elected to sell the equipment back to OEC, but the completion of
the sale has been deferred pending completion of the merger between OEC and
Hanover. OEC has treated the transaction as a loan for accounting purposes
because of certain unexercised put and call features in the agreement, carrying
the $2,000,000 amount payable to Hanover as a current note payable at September
30, 2000.
In November 2000, OEC and Hanover entered into a management agreement under
which OEC engaged Hanover to provide day to day management services for OEC's
field and shop operations. The management agreement provides that Hanover will
receive a fee of $900,000 per month for performing those services, including
$900,000 for services performed by Hanover during the period ended October 31,
2000. The management fee is payable to Hanover only upon consummation of the
merger. The management agreement provides that Hanover has no responsibility
for OEC's marketing and sales operations, including making bids for new
business, or OEC's financial reporting and accounting operations, all of which
remain the responsibility of OEC's management.
In June of 2000, Hanover sold to an affiliate of Ray C. Davis and Kelcy L.
Warren, each of whom is a co-chief executive officer and co-chairman of the
board of OEC, a 25% interest in an electrical generation plant in Venezuela for
an aggregate amount of $5 million dollars.
In June of 2000, a partnership owned by Mr. Davis and Mr. Warren sold a 50%
interest in a power generation facility to be located in Florida to Hanover for
an aggregate amount of $5 million dollars.
Mr. Warren and Mr. Davis have engaged in discussions with Hanover with
respect to formation of a potential joint venture to cooperate on power
generation projects, but no agreement has been reached as to the terms of the
potential joint venture. While Mr. Warren, Mr. Davis and Hanover may continue
these discussions from time to time, it is not clear when they might reach an
agreement on the terms of the joint venture or if they will be able to reach an
agreement at all.
Management Following the Merger
(Page 35)
Following the merger, OEC will be a wholly-owned subsidiary of Hanover
Compressor Company. For more information on the directors and executive
officers of Hanover, please see Hanover's most recent 10-K,
7
<PAGE>
filed with the Securities and Exchange Commission on March 30, 2000 and
incorporated by reference herein. See also "Where You Can Find More
Information."
Conditions to the Merger
(Page 45)
The obligations of OEC and Hanover to complete the merger are subject to the
satisfaction of certain conditions, including:
. obtaining the requisite approvals of OEC stockholders;
. obtaining the requisite regulatory approvals;
. the continuing accuracy at the time of the merger of the representations
and warranties made by Hanover and OEC in the Agreement and Plan of
Merger;
. Two-year non-competition agreements shall have been executed and
delivered to Hanover by all officers of and affiliates of OEC as
requested by Hanover, including, but not limited to, Ray C. Davis and
Kelcy L. Warren;
. Hanover shall have received an Affiliate Agreement (as defined in the
Agreement and Plan of Merger) from each person identified as an
affiliate pursuant to Section 5.9 of the Agreement and Plan of Merger;
. OEC's financial advisor, Prudential Securities, shall have rendered a
fairness opinion with respect to the Agreement and Plan of Merger and
the transactions contemplated thereby, and such opinion shall not have
been withdrawn or adversely modified; and
. All principal and accrued interest thereon under the promissory notes
made by Dennis W. Estis and Barbara Estis in favor of OEC having
principal amounts of $217,250 and $114,507 respectively, shall have been
paid in full.
Each party may waive any or all of the closing conditions referred to above.
Hanover and OEC filed the required notifications and report forms with the
Department of Justice and the Federal Trade Commission on August 28, 2000 and
received clearance effective September 13, 2000. See also "The Merger--
Regulatory Approval Required."
Termination
(Page 46)
The Agreement and Plan of Merger may be terminated as follows:
. by mutual written consent of Hanover and OEC;
. at the option of either Hanover or OEC if the merger is not completed by
March 1, 2001; and
. upon the occurrence of certain other events.
Under some circumstances, either Hanover or OEC may be required to reimburse
the other for expenses of up to $750,000. Under certain circumstances, OEC may
also be required to pay Hanover a termination fee of $1,665,000.
Dissenters' and Appraisal Rights
(Page 36)
Hanover stockholders will not be entitled to exercise dissenters' or
appraisal rights under Delaware law as a result of the merger, since they are
not required to vote to approve the Agreement and Plan of Merger pursuant to
section 251(f)(3) of the Delaware General Corporation Law as the shares to be
issued in connection with the merger do not exceed 20% of the shares of common
stock of Hanover outstanding as of July 13, 2000.
8
<PAGE>
OEC stockholders will not be entitled under Oklahoma law to exercise
appraisal rights as a result of the merger or to demand payment for their
shares since (i) the shares of Hanover common stock they will receive in the
merger are registered on the New York Stock Exchange and (ii) because the
holders of the OEC common stock will receive only shares of Hanover common
stock and cash in lieu of fractional shares of Hanover common stock as a result
of the merger.
Material United States Federal Income Tax Consequences
(Page 39)
The merger is intended to qualify as a "reorganization" under the Internal
Revenue Code, and both Hanover and OEC shall each use their respective best
efforts to cause the merger to be treated as a "reorganization." Assuming the
merger qualifies as a "reorganization," no gain or loss will be recognized by
Hanover, OEC, or OEC stockholders who receive Hanover common stock as a result
of the merger, except with respect to the receipt of cash in lieu of fractional
shares of Hanover common stock by OEC stockholders. For a further discussion of
the United States federal income tax consequences of the merger, see also "The
Merger-- Material United States Federal Income Tax Consequences."
Accounting Treatment
(Page 39)
The merger will be accounted for as a purchase for accounting and financial
reporting purposes, which means that Hanover will include OEC's operating
results in its financial statements only from the date of consummation of the
merger.
Surrender of Certificates
(Page 38)
Following the merger, the combined company will mail a letter of transmittal
to all holders of record of OEC common stock, which will contain instructions
for surrendering the holders' stock certificates in exchange for certificates
representing shares of Hanover common stock. Certificates should not be
surrendered until the letter of transmittal is received.
Effects of the Merger on the Rights of Holders of OEC Common Stock
(Page 38)
Upon completion of the merger, holders of OEC common stock will become
stockholders of Hanover. The internal affairs of Hanover are governed by the
Delaware General Corporation Law and Hanover's certificate of incorporation and
bylaws, which are different than the law governing the internal affairs of OEC
and the articles of incorporation and bylaws of OEC. See also "Comparison of
Stockholder Rights."
THIS PROXY STATEMENT/PROSPECTUS, AS WELL AS THE OTHER DOCUMENTS TO WHICH WE
REFER IN THIS PROXY STATEMENT/PROSPECTUS, DESCRIBE MANY OF THE POSITIVE FACTORS
AFFECTING HANOVER'S AND OEC'S FUTURE BUSINESS PROSPECTS AND THE POSSIBLE OR
ASSUMED BENEFITS OF THE MERGER. STOCKHOLDERS ALSO SHOULD BE AWARE OF FACTORS
THAT COULD HAVE A NEGATIVE IMPACT ON THOSE PROSPECTS OR ON THE POSSIBLE OR
ASSUMED PROSPECTS OF THE MERGER. THOSE FACTORS INCLUDE, POLITICAL, ECONOMIC OR
OTHER CONDITIONS SUCH AS CURRENCY, EXCHANGE RATES, INFLATION RATES,
RECESSIONARY OR EXPANSIONARY TRENDS, TAXES AND REGULATIONS AND LAWS AFFECTING
HANOVER'S AND OEC'S BUSINESS, AVAILABILITY OF ADDITIONAL FINANCING, COMPETITIVE
PRODUCTS AND SERVICES, PRICING, AND THE RISKS AND UNCERTAINTIES DESCRIBED UNDER
"RISK FACTORS." WHEN WE USE SUCH WORDS AS "BELIEVES," "EXPECTS," "ANTICIPATES"
OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD-LOOKING STATEMENTS. ALL SUCH
FORWARD-LOOKING STATEMENTS ARE NECESSARILY ONLY ESTIMATES OF FUTURE RESULTS,
AND THERE CAN BE NO ASSURANCE THAT ACTUAL RESULT WILL NOT MATERIALLY DIFFER
FROM EXPECTATIONS.
9
<PAGE>
Selected Financial Data--Hanover
In the table below, we have provided you with selected historical
consolidated financial data and pro forma combined condensed financial data of
Hanover. The data for Hanover was derived as of the dates indicated and for
each of the fiscal years in the five-year period ended December 31, 1999 from
audited consolidated financial statements of Hanover. The data as of and for
the nine months ended September 30, 1999 and 2000 was derived from unaudited
condensed consolidated financial statements filed in the Quarterly Report on
Form 10-Q by Hanover for the quarter ended September 30, 2000. In the opinion
of Hanover's management, such unaudited financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position and results of operations of such interim
periods.
On August 31, 2000, Hanover acquired the compression services division of
Dresser-Rand Company for approximately $177 million in cash and Hanover common
stock, subject to adjustment based upon the closing balance sheet pursuant to
the acquisition agreement. The pro forma combined condensed financial data
present the pro forma results of operations of Hanover as if the acquisition
had occurred on January 1, 1999. This pro forma financial data was derived from
the pro forma combined condensed statements of operations for the nine months
ended September 30, 2000 and the year ended December 31, 1999 included in
Hanover's Current Report on Form 8-K dated November 22, 2000. The pro forma
financial data does not purport to be indicative of the results which would
actually have been obtained had the acquisition been completed on the date
indicated or which may be obtained in the future.
The information in this section should be read along with Hanover's
consolidated financial statements, accompanying notes and other financial
information, the combined financial statements of the compression services
division of Dresser-Rand Company and related pro forma financial data
incorporated by reference in this proxy statement/prospectus. See "Where You
Can Find More Information." (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Year end December 31,
----------------------------------------------------------
1995(1) 1996 1997 1998 1999 1999
------- -------- -------- -------- -------- ---------
Pro forma
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total Revenues: $95,964 $136,011 $198,798 $281,957 $317,028 $476,134
------- -------- -------- -------- -------- --------
Expenses:
Operating.............. 56,256 75,031 109,432 150,652 151,169 269,943
Selling, general and
administrative........ 12,542 16,439 20,782 26,626 33,782 47,105
Depreciation and
amortization(2)....... 13,494 20,722 28,439 37,154 37,337 44,932
Lease expense.......... 6,173 22,090 22,090
Interest expense....... 4,560 6,594 10,728 11,716 8,786 15,911
Distributions on
mandatorily redeemable
convertible preferred
securities............ 278 278
------- -------- -------- -------- -------- --------
Total Costs and
Expenses.............. 86,852 118,786 169,381 232,321 253,442 400,259
------- -------- -------- -------- -------- --------
Income before income
taxes.................. 9,112 17,225 29,417 49,636 63,586 75,875
Provision for income
taxes.................. 3,498 6,844 11,314 19,259 23,145 27,618
------- -------- -------- -------- -------- --------
Net income.............. $ 5,614 $ 10,381 $ 18,103 $ 30,377 $ 40,441 $ 48,257
======= ======== ======== ======== ======== ========
Net income available to
common stockholders:
Net Income............. 5,614 10,381 18,103 30,377 40,441 48,257
Dividends on Series A
and Series B preferred
stock................. (832) (1,773)
Series A preferred
stock exchange........ (3,794)
Series B preferred
stock conversion...... (1,400)
------- -------- -------- -------- -------- --------
Net income available to
common stockholders.... $ 4,782 $ 3,414 $ 18,103 $ 30,377 $ 40,441 $ 48,257
======= ======== ======== ======== ======== ========
Weighted average common
and common equivalent
shares:
Basic(3)............... 28,746 40,996 51,246 56,936 57,048 59,968
------- -------- -------- -------- -------- --------
Diluted(3)............. 30,716 44,046 54,690 60,182 61,054 63,974
------- -------- -------- -------- -------- --------
Earnings per common
share:
Basic(3)............... $.17 $.08 $.35 $.53 $.71 $.80
======= ======== ======== ======== ======== ========
Diluted(3)(4).......... $.16 $.08 $.33 $.50 $.66 $.75
======= ======== ======== ======== ======== ========
OTHER DATA:
EBITDA(5).............. $27,166 $ 44,541 $ 68,584 $104,679 $132,077
======= ======== ======== ======== ========
CASHFLOWS PROVIDED BY
(USED IN):
Operating activities... $ 9,088 $ 20,276 $ 32,219 $ 31,147 $ 68,222
Investing activities... (68,474) (87,683) (164,490) (14,699) (92,114)
Financing activities... 62,206 71,740 129,510 (9,328) 18,218
BALANCE SHEET DATA (END
OF PERIOD):
Cash and cash
equivalents........... $ 2,989 $ 7,322 $ 4,561 $ 11,503 $ 5,756
Working capital........ 23,270 41,513 58,027 113,264 107,966
Net property, plant and
equipment............. 198,074 266,406 394,070 392,498 497,465
Total assets........... 252,313 341,387 506,452 614,590 756,510
Long-term debt......... 50,451 122,756 158,838 156,943 69,681
Mandatorily redeemable
convertible preferred
securities............ 86,250
Preferred stockholders'
equity................ 28,894
Common stockholders'
equity................ 139,302 176,895 288,271 316,713 369,157
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September
30,
------------------------------
1999 2000 2000
-------- --------- ---------
Pro forma
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Total Revenues: $227,838 $ 370,222 $426,686
-------- --------- --------
Expenses:
Operating...................................... 108,837 196,326 238,675
Selling, general and administrative............ 24,232 34,481 41,102
Depreciation and amortization.................. 28,536 36,830 42,036
Lease expense.................................. 14,727 29,596 29,596
Interest expense............................... 7,841 5,560 10,310
Distributions on mandatorily redeemable
convertible preferred securities.............. 4,776 4,776
-------- --------- --------
Total Costs and Expenses....................... 184,173 307,569 366,495
-------- --------- --------
Income before income taxes...................... 43,665 62,653 60,191
Provision for income taxes...................... 16,156 23,305 22,389
-------- --------- --------
Net income...................................... $ 27,509 $ 39,348 $ 37,802
-------- --------- --------
Net income available to common stockholders:
Net Income..................................... 27,509 39,348 37,802
Dividends on Series A and Series B preferred
stock.........................................
Series A preferred stock exchange..............
Series B preferred stock conversion............
-------- --------- --------
Net income available to common stockholders..... $ 27,509 $ 39,348 $ 37,802
======== ========= ========
Weighted average common and common equivalent
shares:
Basic(3)....................................... 56,966 60,324 62,937
-------- --------- --------
Diluted(3)..................................... 60,974 64,619 67,232
-------- --------- --------
Earnings per common share:
Basic(3)....................................... $.48 $.65 $.60
======== ========= ========
Diluted(3)..................................... $.45 $.61 $.56
======== ========= ========
OTHER DATA:
EBITDA(5)...................................... $ 94,769 $ 139,415
======== =========
CASHFLOWS PROVIDED BY (USED IN):
Operating activities........................... $ 41,427 $ 7,491
Investing activities........................... (12,386) (162,614)
Financing activities........................... (31,376) 162,453
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents...................... $ 9,090 $ 13,042
Working capital................................ 129,866 224,684
Net property, plant and equipment.............. 426,527 688,588
Total assets................................... 683,980 1,271,468
Long-term debt................................. 124,540 173,835
Mandatorily redeemable convertible preferred
securities.................................... 86,250
Preferred stockholders' equity ................
Common stockholders' equity.................... 348,814 619,838
</TABLE>
--------
(1) The selected historical financial information includes the results of
operations of the Company and its wholly-owned subsidiaries. During 1995,
the Company acquired Astra Resources Compression, Inc., a significant
subsidiary.
(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 $1.5 million ($.03 per
diluted common share) for the year ended December 31, 1996.
(3) In June 2000, the Company completed a 2 for 1 stock split effected in the
form of a 100% stock dividend. All weighted average and common equivalent
shares and earnings per common share information have been restated for all
periods presented to reflect this stock split.
(4) Diluted earnings per share in 1996 was $.24 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.
(5) EBITDA consists of the sum of consolidated net income before interest
expense, lease expense, distributions on mandatorily redeemable convertible
preferred securities, 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.
11
<PAGE>
Comparative Per Share Data
The following tables set forth historical per share data of Hanover and OEC.
OEC stockholders should read the information in this section along with
Hanover's and OEC's historical financial statements, accompanying notes and
other financial information incorporated by reference in this proxy
statement/prospectus. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
Per Share Data For Fiscal Years Ended
--------------------------------------
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Historical--Hanover:
Net earnings--basic.................... $0.35 $0.53 $0.71
Net earnings--diluted.................. 0.33 0.50 0.66
Book value............................. 5.271 5.263 6.046
<CAPTION>
Per Share Data For Fiscal Years Ended
--------------------------------------
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Historical--OEC:
Net earnings (loss)--basic............. $ (.07) $ .0 $ .0
Net earnings (loss)--diluted........... (.07) .0 .0
Book value............................. .988 .987 .988
</TABLE>
12
<PAGE>
Comparative Market Price Information
Hanover common stock is traded on the New York Stock Exchange under the
symbol "HC." OEC common stock is traded on the American Stock Exchange under
the symbol "OOC." The table below sets forth, for the quarters indicated, the
reported high and low sales prices of Hanover common stock and OEC common
stock.
<TABLE>
<CAPTION>
Hanover OEC
Common Stock Common Stock
--------------- ---------------
High Low High Low
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1998:
First Quarter................................. $10.375 $ 8.657 $ 2.750 $ 2.063
Second Quarter................................ 14.813 11.625 2.563 2.063
Third Quarter................................. 14.344 8.750 2.313 1.688
Fourth Quarter................................ 13.532 8.844 1.938 1.063
Fiscal Year Ended December 31, 1999:
First Quarter................................. $14.000 $ 9.625 $ 1.313 $ 0.875
Second Quarter................................ 17.782 13.063 1.750 1.000
Third Quarter................................. 19.063 15.688 1.438 1.000
Fourth Quarter................................ 19.188 14.032 1.250 .5630
Fiscal Year Ended December 31, 2000:
First Quarter................................. $28.438 $16.906 $0.8125 $0.5625
Second Quarter................................ 38.000 22.719 0.8750 0.5000
Third Quarter................................. 40.688 25.250 1.0625 0.7500
Fourth Quarter (through December 20, 2000).... 39.375 28.375 1.00 0.7500
</TABLE>
On July 12, 2000, the last full trading day prior to the public announcement
of the execution of the Agreement and Plan of Merger, the New York Stock
Exchange reported that the last sale price of Hanover common stock was $38.875
per share. The American Stock Exchange reported that the last sale price of OEC
common stock was $0.9375 per share.
On December 20, 2000, the most recent practicable date prior to the printing
of this proxy statement/ prospectus, the New York Stock Exchange reported that
the last sale price of Hanover common stock was $37.875 per share. The American
Stock Exchange reported that the last sale price of OEC common stock was
$0.9325 per share.
Because the market price of Hanover common stock is subject to fluctuation,
the market value of the shares of Hanover common stock that holders of OEC
common stock will receive in the merger may increase or decrease prior to the
merger.
We urge you to obtain current market quotations for Hanover common stock and
OEC common stock.
13
<PAGE>
RISK FACTORS
In addition to the other information included and incorporated by reference
in this proxy statement/prospectus, OEC stockholders should consider carefully
the matters described below in determining whether to approve the merger
proposals.
Risks Relating to the Merger
Hanover may not be able to effectively and efficiently integrate OEC into its
operations.
Over the past six months, Hanover has completed four acquisitions in
addition to OEC, and Hanover's ability to integrate successfully the operations
and management of each of these companies into Hanover is a complex process.
Hanover cannot assure you that this integration will be completed rapidly or
will achieve all of the anticipated synergies and other benefits Hanover
expects from the acquisitions. See "The Merger--Reasons for the Merger."
Hanover may not be able to realize the expected benefits of the merger.
Achieving the benefits Hanover expects from the merger will depend in large
part on integrating the technology, operations and personnel of OEC into
Hanover in a timely and efficient manner to minimize the impact on customers,
employees and management. In addition, Hanover must persuade the personnel of
Hanover and OEC that the business cultures of Hanover and OEC are compatible.
Hanover cannot assure you that it will realize any of the anticipated benefits
of the merger, and failure to do so could adversely affect the business of
Hanover and OEC after the merger.
Hanover will incur merger-related charges.
Hanover expects the total merger-related costs to be approximately $500,000
consisting primarily of financial advisory, legal and accounting fees, employee
benefit costs, financial printing costs and other related charges. The amount
of these expenses is a preliminary estimate and is subject to change.
OEC's officers have conflicts of interest that may influence them to support
or approve the merger.
The executive officers of OEC participate in arrangements that provide them
with interests in the merger that are different from, or are in addition to,
your interests as a stockholder.
In particular, the Agreement and Plan of Merger provides that all of the
unvested stock options will be cancelled and converted into the right to
receive cash from Hanover. In addition, because the merger constitutes a change
in control, many of the officers and employees of OEC are entitled to change of
control payments after the completion of the merger, and enhanced severance
benefits if, within ninety days after the merger, the officer or employee is
terminated other than for cause or if the officer or employee terminates his or
her employment after being demoted or relocated. See "The Merger--Interests of
Certain Persons in the Merger."
As a result, these officers could be more likely to vote to approve the
Agreement and Plan of Merger than if they did not hold these interests. You
should consider whether these interests may have influenced these officers to
support or recommend the merger.
Failure to complete the merger or delays in completing the merger could
negatively impact Hanover's and OEC's stock prices and future business and
operations.
If the merger is not completed for any reason, Hanover and OEC may be
subject to a number of material risks, including the following:
. OEC may be required to pay Hanover a termination fee of $1,665,000;
14
<PAGE>
. Hanover or OEC may be required to reimburse the other for up to $750,000
in merger related expenses;
. the price of Hanover or OEC common stock may decline to the extent that
the current market price of the common stock reflects a market assumption
that the merger will be completed; and
. costs related to the merger, such as legal, accounting and financial
advisor fees, must be paid even if the merger is not completed.
In addition, in response to the announcement of the merger, Hanover's or
OEC's customers may delay or defer purchasing or leasing decisions. Any delay
or deferral of purchasing or leasing decisions by customers could negatively
affect the business and results of operations of Hanover and OEC, regardless of
whether the merger is ultimately completed. Similarly, current and prospective
employees of Hanover and OEC may experience uncertainty about their future
roles with the companies until after the merger is completed or if the merger
is not completed. This may adversely affect the ability of Hanover and OEC to
attract and retain key management, marketing and technical personnel.
Further, if the merger is terminated and the Hanover or OEC boards of
directors determine to seek another merger or business combination, we cannot
assure you that we will be able to find a transaction providing as much
stockholder value as this merger. While the Agreement and Plan of Merger is in
effect, subject to certain limited exceptions, OEC is prohibited from
soliciting, initiating or encouraging or entering into any extraordinary
transactions, such as a merger, sale of assets or other business combination,
with any third party.
Risks Relating to Hanover
Industry Conditions--A prolonged, substantial reduction in oil or gas prices
could adversely affect the business of Hanover.
Hanover's operations depend upon the levels of activity in natural gas
development, production, processing and transportation. In recent years, oil
and gas prices and the level of drilling and exploration activity have been
extremely volatile. For example, from mid-1998 to mid-1999, oil and gas
exploration and development activity and the number of well completions
declined due to a significant reduction in oil and gas prices. As a result, the
demand for Hanover's gas compression and oil and gas production equipment was
adversely affected. Any future significant, prolonged decline in oil and gas
prices could have a material adverse effect on its business, results of
operations and financial condition.
Short Lease Terms-- Hanover's compressor leases have short initial terms, and
it cannot be sure that the compressors will stay out on location after the end
of the initial lease term.
The length of Hanover's leases varies based on operating conditions and
customer needs. In most cases, under currently prevailing lease rates, the
initial lease terms are not long enough to enable Hanover to fully recoup the
average cost of acquiring or manufacturing the compressors. Hanover cannot
assure you that a substantial number of its lessees will continue to renew
their leases or that it will be able to re-lease the compressors to new
customers or that any renewals or re-leases will be at comparable lease rates.
An inability to renew or re-lease a substantial portion of Hanover's compressor
rental fleet would have a material adverse effect upon its business, results of
operations and financial condition.
Competition--Hanover operates in a highly competitive industry and competes
against many larger companies with greater financial resources.
Hanover competes with several large national and multinational companies
which provide compression services to third parties, many of which have greater
financial and other resources than it does. If its competitors were to
substantially increase the resources they devote to the development and
marketing of competitive products and services, Hanover cannot assure you that
it will have sufficient resources to respond accordingly.
15
<PAGE>
Potential Liability and Insurance--Natural gas operations entail inherent
risks that may result in substantial liability to Hanover.
Natural gas operations entail inherent risks, including equipment defects,
malfunctions, failures and natural disasters which could result in
uncontrollable flows of gas or well fluids, fires and explosions. These risks
may expose Hanover to liability for personal injury, wrongful death, property
damage, pollution and other environmental damage. Hanover has obtained
insurance against liability for personal injury, wrongful death and property
damage, but it cannot assure you that the insurance will be adequate to cover
its liability. Similarly, Hanover cannot assure you that it will be able to
obtain insurance in the future at a reasonable cost or at all. Hanover's
business, results of operations and financial condition could be adversely
affected if it incurs substantial liability and the damages are not covered by
insurance or are in excess of policy limits.
Governmental Regulation--Hanover is subject to a variety of governmental
regulations relating to environmental, health and safety.
Hanover's business is subject to a variety of federal, state and local laws
and regulations relating to safety, health and the environment. These laws and
regulations are complex, change frequently and have tended to become more
stringent over time. Failure to comply with these laws and regulations may
result in a variety of civil and criminal enforcement measures, including
assessment of monetary penalties, imposition of remedial requirements, and
issuance of injunctions as to future compliance. As part of the regular
overall evaluation of its current operations, Hanover is updating certain
facility permits with respect to stormwater discharges and air emissions but
does not believe such updates will have a material adverse effect on its
operations as a result of any enforcement measures or capital costs. Based on
Hanover's experience to date, it believes that the future cost of compliance
with existing laws and regulations and the future cost of necessary
investigation or remediation of contamination will not have a material adverse
effect on its business, financial condition and results of operations.
However, future events, such as discovery of unknown contamination, any third
party claims made with respect to previously owned or leased properties,
compliance with more stringent laws and regulations or more vigorous
enforcement policies by regulatory agencies or stricter or different
interpretations of existing laws and regulations could require it to make
material expenditures.
Hanover has conducted preliminary environmental site assessments with
respect to certain properties currently owned or leased by it. Some of these
assessments have revealed that soils and/or groundwater at some of its
facilities are contaminated with hydrocarbons and various other regulated
substances. Hanover does not believe that our operations caused any such
contamination and is not currently under any orders or directives to undertake
any remedial activity. In addition, Hanover has previously owned or leased
certain properties that had in the past experienced soil contamination.
Hanover has since conducted remedial operations at certain of these previously
held properties as it believed necessary and either sold the owned properties
to third parties or returned the leased properties to the lessors. Hanover is
not currently aware of any further remedial obligations at such previously
held properties. Hanover cannot be certain, however, that it will not be
required to undertake any remedial activities involving any substantial costs
on any of these properties in the future.
Substantial Capital Requirements--Hanover requires a substantial amount of
capital to expand its compressor rental fleet and its complementary
businesses.
Hanover will continue to make substantial capital investments to expand our
compressor rental fleet and our complementary businesses. Hanover invested
approximately $374.5 million in capital expenditures, including business
acquisitions, during the nine months ended September 30, 2000, and expects to
invest approximately $100 million in capital expenditures during the remainder
of 2000. The amount of these expenditures may vary depending on the rate of
return Hanover expects to earn from these investments, conditions in the
natural gas industry and whether it makes any significant acquisitions.
Historically, Hanover has funded these investments through internally
generated funds, debt and sale and leaseback transactions and equity
financing. While Hanover believe that cash flow from its operations and
borrowings under Hanover's
16
<PAGE>
existing $200 million bank credit facility will provide it with sufficient cash
to fund these investments, Hanover cannot assure you that these sources will be
sufficient. As of September 30, 2000, Hanover had approximately $35 million of
credit capacity remaining on its $200 million bank credit facility (7.88% rate
at September 30, 2000). In October 2000, Hanover received $176.5 million
proceeds from the sale and lease back of compression equipment. These proceeds
were utilized to pay outstanding borrowings on Hanover's $200 million bank
credit facility. In order to fund the estimated levels of 2000 capital
expenditures, Hanover anticipates arranging additional sources of debt and/or
equity during 2000. Hanover would need the consent of the lenders under its
bank credit facility and the lessors under its sale and leaseback transactions
to complete any new financing. Failure to generate sufficient cash flow,
together with the absence of alternative sources of capital, could have a
material adverse effect on Hanover's growth, results of operations and
financial condition.
International Operations--There are many risks for Hanover associated with
conducting operations in international markets.
Hanover operates in many different geographic markets, some of which are
outside the United States. Changes in local economic or political conditions,
particularly in Latin America or Canada, could have a material adverse effect
on its business, financial condition and results of operations. Additional
risks inherent in Hanover's international business activities include the
following:
. difficulties in managing international operations;
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers which may restrict its ability to enter
into new markets;
. potentially adverse tax consequences;
. restrictions on repatriation of earnings;
. the burden of complying with foreign laws; and
. fluctuations in currency exchange rates and the value of the U.S. dollar.
Acquisition Strategy--Hanover may not be able to find suitable acquisition
candidates or successfully integrate acquired companies into our business.
As part of its business strategy, Hanover will continue to pursue the
acquisition of other companies, assets and product lines that either complement
or expand its business. Each acquisition involves potential risks, such as the
diversion of management's attention away from current operations, problems in
integrating acquired businesses and possible short-term adverse effects on
Hanover's operations as a result of that process. Hanover routinely conducts
preliminary discussions with other companies, which have operations or assets
that may be suitable for it to acquire. Given Hanover's selective approach to
acquisitions, it is unable to predict whether or when it will find suitable
acquisition candidates or whether it will be able to complete a material
acquisition. Hanover may seek to finance acquisitions with cash or through the
issuance of new debt and/or equity securities. A relatively large acquisition
in which cash is the primary form of consideration would utilize a substantial
portion of Hanover's existing financial resources. As the compression industry
continues to consolidate, the size of the companies Hanover may consider
acquiring may become larger and, as a result, the general risks inherent in
acquisitions described above may become more significant.
Concentrated Ownership--A significant amount of Hanover's stock is owned by
one stockholder.
Hanover's largest stockholder, GKH Partners, L.P. ("GKH"), controlled
approximately 35.5% of its voting power as of December 20, 2000. GKH is in a
position to exert substantial influence over the outcome of most corporate
actions requiring stockholder approval, including the election of directors,
the future issuance by Hanover of common stock or other securities, and the
approval of transactions involving a change of control. The interests of GKH
could conflict with the interests of Hanover's other stockholders.
17
<PAGE>
Anti-Takeover Provisions--Hanover's certificate of incorporation and by-laws
contain certain provisions that could make a takeover more difficult.
Certain provisions of Hanover's certificate of incorporation and by-laws
could make it more difficult for a third party to acquire control of Hanover,
even if such a change in control would benefit its stockholders. Hanover's
certificate of incorporation allows it to issue preferred stock without
stockholder approval and its by-laws limit who may call special stockholder
meetings. These provisions could make it more difficult for a third party to
acquire Hanover and may discourage acquisition bids or limit the price that
investors might be willing to pay in the future for shares of its common
stock. The ownership of a substantial number of Hanover's shares of common
stock by GKH and Hanover's officers, directors, employees and their affiliates
also could discourage acquisition bids. There are also provisions of Delaware
law that could delay or make difficult a merger, tender offer or proxy
contest.
Please read the "Description of Hanover Common Stock" section of this
prospectus.
Shares Eligible for Future Sale--The market price of Hanover common stock
could be depressed by future sales.
Future sales of Hanover's common stock, or the perception that these sales
could occur, could adversely affect the market price of its common stock.
Hanover cannot assure you as to when, and how many of, the shares of its
common stock will be sold and the effect those sales may have on the market
price of its common stock. In addition, Hanover may issue additional shares of
common stock in connection with future acquisitions or other transactions.
Although those securities may be subject to regulatory or contractual resale
restrictions, as these restrictions lapse or if these shares are registered
for sale to the public, they may be sold to the public. In the event Hanover
issues a substantial number of shares of its common stock, which subsequently
become available for unrestricted resale, there could be a material adverse
effect on the prevailing market price for Hanover common stock.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Certain matters discussed or incorporated by reference in this proxy
statement/prospectus 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 "believes," "anticipates," "expects," "estimates" or words of similar
import. Similarly, statements that describe our 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 proxy
statement/prospectus. The risks and uncertainties include:
.failure by Hanover and OEC to complete the merger on a timely basis or at
all;
. the inaccuracy of financial, regulatory and market trend projections used
by Hanover and OEC and financial advisors in evaluating the merger;
. failure to achieve anticipated cost savings and revenue enhancements as a
result of the merger;
. the risk that Hanover encounters greater than expected costs and
difficulties in integrating the business of OEC;
. inability to retain key personnel after the merger;
. the loss of market share through competition;
. the introduction of competing technologies by other companies;
. a prolonged substantial reduction in oil and gas prices which would cause
a decline in the demand for our compression and oil and gas production
equipment;
18
<PAGE>
. new governmental safety, health and environmental regulations which could
require us to make significant capital expenditures; and
. changes in economic or political conditions in the countries in which we
operate.
In addition, these risks and uncertainties include those uncertainties and
risk factors identified, among other places, under "Selected Pro Forma
Condensed Financial Information," "Risk Factors," "The Merger--Reasons for the
Merger," and "Opinion of OEC's Financial Advisor".
The forward-looking statements included herein are only made as of the date
of this proxy statement/prospectus and we undertake no obligation to publicly
update such forward-looking statements to reflect subsequent events or
circumstances.
19
<PAGE>
THE OEC SPECIAL MEETING
Date, Time and Place
This proxy statement/prospectus is being furnished to holders of OEC common
stock in connection with the solicitation of proxies by the OEC board of
directors for use at the OEC special meeting to be held on January 26, 2001,
and at any adjournment or postponement of the special meeting. The OEC special
meeting will be held at 2501 Cedar Springs Road, Suite 600, Dallas, Texas
75201, starting at 10:00 a.m., local time.
Matters to be Considered at the OEC Special Meeting
At the OEC special meeting, holders of OEC common stock will be asked to
consider and vote upon proposals to approve:
.the Agreement and Plan of Merger, which provides for:
(a) the merger of Caddo Acquisition Corporation, a wholly-owned subsidiary
of Hanover Compressor Company, with and into OEC, with OEC continuing
as the surviving corporation and becoming a wholly-owned subsidiary of
Hanover; and
(b) the conversion of each issued and outstanding share of OEC common stock
into Hanover common stock, with the number of shares of Hanover common
stock to be issued to determined by dividing $1.00 by the average
closing sales price per share of Hanover common stock for the twenty
consecutive trading days immediately preceding the second business day
prior to the effective time of the merger (subject to a maximum of
.0333333 and a minimum of .0307692 shares of Hanover common stock for
each share of OEC common stock), and multiplying the result by the
number of shares of OEC common stock outstanding, as a result of which,
OEC stockholders will receive between .033333 and .0307692 shares of
Hanover common stock for each share of OEC stock they hold.
. any other matters that are properly brought before the OEC special
meeting, or any adjournment or postponement of the meeting.
The OEC Board of Directors Recommendation
The OEC board of directors has unanimously approved the Agreement and Plan
of Merger and recommends that holders of OEC common stock vote FOR the
Agreement and Plan of Merger.
Vote Required
The approval of the Agreement and Plan of Merger will require the
affirmative vote of the holders of a majority of the outstanding shares of OEC
common stock. Stockholders owning approximately 45% of the outstanding OEC
common stock have agreed with Hanover to vote their shares in favor of the
merger. See "Voting and Disposition Agreement."
Voting of Proxies
All shares of OEC common stock which are entitled to vote and are
represented at the OEC special meeting by properly executed proxies received
prior to or at the special meeting, and not revoked, will be voted at the OEC
special meeting in accordance with the instructions indicated on those proxies.
If no instructions are indicated, the proxies will be voted for approval of the
Agreement and Plan of Merger.
If any other matters are properly presented at the OEC special meeting for
consideration, including, among other things, consideration of a motion to
adjourn the OEC special meeting to another time or place, including for the
purposes of soliciting additional proxies or allowing additional time for the
satisfaction of conditions to the merger, the persons named in the proxy will
have discretion to vote on these matters in accordance with their best
judgment. Proxies voted against the Agreement and Plan of Merger will not be
voted in favor of adjournment for the purpose of the continued solicitation of
proxies.
20
<PAGE>
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by:
. filing with the Secretary of OEC, at or before the voting at the OEC
special meeting, a written notice of revocation bearing a later date than
the proxy;
. duly executing a proxy with a later date and delivering it to the
Secretary of OEC before the voting at the OEC special meeting; or
. attending the OEC special meeting and voting in person, although
attendance at the meeting will not by itself constitute a revocation of a
proxy.
Any written notice of revocation or subsequent proxy should be sent to OEC
Compression Corporation, 2501 Cedar Springs Road, Suite 600, Dallas, Texas,
75201, Attention: Secretary, or hand delivered to the Secretary of OEC at or
before the voting at the OEC special meeting.
Record Date; Stock Entitled to Vote; Quorum
The OEC board of directors has fixed December 21, 2000 as the record date
for determining the OEC stockholders entitled to notice of and to vote at the
OEC special meeting. Accordingly, only OEC stockholders of record on the record
date will be entitled to notice of and to vote at the OEC special meeting. As
of the record date, 37,060,766 shares of OEC common stock were outstanding and
entitled to vote, which shares were held by approximately 1,127 holders of
record. Each holder of shares of OEC common stock on the record date is
entitled to one vote per share. Votes may be cast either in person or by a
properly executed proxy.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of OEC common stock entitled to vote at the
OEC special meeting is necessary for a quorum. Shares of OEC common stock
represented in person or by proxy will be counted for the purpose of
determining whether a quorum is present at the OEC special meeting. Abstentions
will have the same effect as a vote against the Agreement and Plan of Merger
since this proposal requires the affirmative vote of the holders of a majority
of the outstanding shares of OEC common stock. Shares represented by broker
non-votes at the OEC special meeting will be counted as present for purposes of
determining whether there is a quorum at the OEC meeting.
As of the record date, directors and executive officers of OEC and their
affiliates may be deemed to have or share beneficial ownership of approximately
45% of the outstanding shares of OEC common stock. Each of the directors and
executive officers of OEC has advised OEC that he intends to vote or direct the
vote of all shares of OEC common stock over which he has or shares voting
control for approval of the Agreement and Plan of Merger. See "OEC--Security
Ownership of Certain Beneficial Owners and Management."
Solicitation of Proxies
All expenses of OEC's solicitation of proxies, including the cost of mailing
this proxy statement/prospectus to OEC stockholders, will be borne by OEC. In
addition to solicitation by use of the mail, proxies may be solicited by
directors, officers and employees of OEC in person or by telephone or other
means of communication. These directors, officers and employees will not
receive additional compensation, but may be reimbursed for reasonable out-of-
pocket expenses in connection with this solicitation. OEC will make
arrangements with brokerage houses, custodians, nominees and fiduciaries to
forward proxy solicitation materials to beneficial owners of shares held of
record by these brokerage houses, custodians, nominees and fiduciaries. OEC
will reimburse these brokerage houses, custodians, nominees and fiduciaries for
their reasonable expenses incurred in forwarding the proxy materials.
You should not send in any stock certificates with your proxies. A
transmittal form with instructions for the surrender of stock certificates for
OEC common stock will be mailed to you as soon as practicable after completion
of the merger.
21
<PAGE>
THE MERGER
This section of the proxy statement/prospectus describes material aspects of
the proposed merger. While we believe that the description covers the material
terms of the merger, this summary may not contain all of the information that
is important to you. You should read this proxy statement/prospectus, the
Agreement and Plan of Merger and the other documents referred to carefully for
a more complete understanding of the merger.
General
The merger will be completed if the required approvals of the OEC
stockholders are obtained and all other conditions to the merger are satisfied
or waived. Upon completion of the merger, Caddo Acquisition Corporation, a
wholly-owned subsidiary of Hanover Compressor Company, will be merged with and
into OEC, with OEC continuing as the surviving corporation and becoming a
wholly-owned subsidiary of Hanover. In the merger, each issued and outstanding
share of OEC common stock will be converted into Hanover common stock, with the
number of shares of Hanover common stock issued to be determined by dividing
$1.00 by the average closing sales price per share of Hanover common stock as
reported by the New York Stock Exchange composite tape for the twenty
consecutive trading days immediately preceding the second business day prior to
the effective time of the merger (subject to a maximum of .0333333 and a
minimum of .0307692 shares of Hanover common stock for each share of OEC common
stock), and multiplying the result by the number of shares of OEC common stock
outstanding. As a result of such merger, OEC stockholders will receive between
.0333333 and .0307692 shares of Hanover common stock for each share of OEC
stock held.
Based on the number of outstanding shares of Hanover common stock and OEC
common stock as of the record date, the holders of OEC common stock immediately
prior to the merger would own approximately 3% of the outstanding shares of the
Hanover immediately after the merger.
Pursuant to the Agreement and Plan of Merger, each outstanding option to
purchase OEC common stock will be cancelled and converted into the right to
receive cash, as provided in the Agreement and Plan of Merger. See "The
Agreement and Plan of Merger."
Background of the Merger
In March 1998, OEC engaged a national investment banking firm to explore
strategic alternatives for the maximization of OEC stockholder value, including
the possible sale of OEC. The firm prepared a descriptive memorandum concerning
OEC and contacted in excess of 100 potential acquirers, including Hanover.
Confidentiality agreements were executed by approximately 30 of the potential
acquirers and confidential information was provided to each. At the end of the
process, the firm asked for expressions of interest from the potential
purchasers concerning the acquisition of OEC. The firm did not receive any
indications or expressions of interest from any of the potential purchasers.
After consultation between OEC and the firm, OEC ended the auction process and
terminated the engagement of the investment banking firm.
In November 1998, OEC received a letter from Dennis Estis, who at that time
was both a director and OEC's Chief Operating Officer, stating that Mr. Estis
was dissatisfied with current management of OEC and that he was requesting a
special meeting of the shareholders of OEC be called to remove several
directors of OEC as well as the President/Chief Executive Officer and Chief
Financial Officer of OEC. Mr. Estis also demanded access to the shareholder
records of OEC and indicated that if the OEC board of directors did not call a
special meeting of the stockholders, he would solicit proxies or shareholders
consents to call a special stockholders meeting. Mr. Estis informed OEC that he
had also obtained the proxies of two other OEC shareholders in favor of calling
a special meeting of OEC's shareholders. Mr. Estis also informed OEC that a
lawsuit had been filed against OEC and certain directors or officers of OEC but
the lawsuit would not be served while the parties were discussing his concerns
and demands.
22
<PAGE>
On November 11, 1998, the OEC board of directors held a special meeting at
which Mr. Estis was given an opportunity to express his concerns about OEC and
its management. The OEC board of directors carefully considered both the views
of Mr. Estis and the position of the management of OEC and voted not to call a
special meeting of the stockholders of OEC. In addition, the OEC board of
directors adopted a resolution expressing confidence in the President/Chief
Executive Officer and the Chief Financial Officer of OEC. The Board of
Directors of OEC also authorized management of OEC to resist any solicitation
of stockholder consents or proxies, to call a special meeting of the
shareholders of OEC by Mr. Estis and to respond to any litigation instituted by
Mr. Estis.
Following further discussions between OEC and Mr. Estis, the parties decided
to resolve the issues raised by the November 10 letter and the lawsuit and to
avoid the necessity of a proxy contest. On December 16, 1998, OEC, Mr. Estis,
the two shareholders who had granted a proxy to Mr. Estis and certain other
parties entered into a settlement agreement under which (i) the proxy contest
was terminated, (ii) Mr. Andy Payne resigned from the Board of Directors, (iii)
all litigation was dismissed, (iv) the parties released each other as to
certain matters, (v) Mr. Estis' and Mr. Payne's employment with OEC was
terminated and (vi) the terms of Mr. Estis' non-competition covenants were
revised.
In February 1999, Hanover contacted OEC concerning a possible acquisition. A
special committee of the OEC board of directors was formed to review the
proposed transaction, and the special committee tentatively approved the
transaction. During July 1999, Hanover and OEC exchanged drafts of a definitive
merger agreement, and Hanover conducted extensive due diligence on OEC.
In connection with the proposed transaction and to augment the working
capital of OEC, in July 1999, Hanover and OEC entered into an agreement under
which OEC sold compressors to Hanover for $2,265,000, of which $2,000,000 was
paid on the date of the agreement with the remaining $265,000 to be paid 180
days thereafter unless Hanover or OEC exercised its repurchase option. The
agreement contained provisions that permit OEC, at its option, to repurchase
the compressors or Hanover, at its option, to sell the compressors back to OEC
for a purchase price of $2,000,000 plus interest thereon at a rate of 10% per
annum. Hanover elected to sell the equipment back to OEC, but the completion of
the sale has been deferred pending completion of the merger between OEC and
Hanover. OEC has treated the transaction as a loan for accounting purposes
because of certain unexercised put and call features in the agreement, carrying
the $2,000,000 amount payable to Hanover as a current note payable at June 30,
2000.
Hanover and OEC never reached final agreement as to the structure of the
acquisition and in August of 1999, Hanover informed OEC that because of
internal Hanover issues, Hanover was not interested in pursuing a transaction
with OEC at that time. The compressor purchase agreement with Hanover was left
in place.
In September 1999, Matthew S. Ramsey resigned as President and Chief
Executive Officer of OEC, and Richard Brannon resigned as Chairman of the OEC
board of directors. Ray C. Davis and Kelcy L. Warren agreed to assume the
positions of Co-Chief Executive Officers and Co-Chairman of the OEC board of
directors. Mr. Brannon and Mr. Ramsey remained as directors of OEC. Mr. Davis
and Mr. Warren agreed to assume such offices and responsibilities for no
compensation and have not received any compensation for their services to OEC.
At the same time as this change in management was occurring, Mr. Davis and
Mr. Warren proposed that OEC merge with a group of companies owned and
controlled by Mr. Davis and Mr. Warren (the "ET Companies"). The OEC board of
directors approved the transaction in principle and appointed a special
committee of OEC's Board (the "OEC Special Committee") to negotiate the values
and exchange ratios between the two companies. In October 1999, OEC and ET
Company, Ltd. executed a non-binding letter of intent concerning the proposed
merger of the ET Companies and OEC.
The OEC Special Committee engaged counsel and an investment banking firm to
review the proposed transaction. In December 1999, after several months of
review the OEC Special Committee informed the Board
23
<PAGE>
of OEC that in the opinion of the OEC Special Committee, a combination of the
ET Companies and OEC was not in the best interest of OEC. Subsequently, Mr.
Davis and Mr. Warren withdrew their offer to combine the ET Companies with OEC.
After receiving the report from the OEC Special Committee regarding the ET
Companies, the OEC board of directors discussed alternatives for OEC, including
the sale or recapitalization of OEC. The OEC board of directors decided to
engage an investment banking firm to advise OEC on strategic alternatives for
the maximization of shareholder value for OEC, including the possible sale of
OEC. In January 2000, OEC interviewed several investment banking firms and
eventually engaged Prudential Securities, Incorporated ("Prudential").
Following its engagement, Prudential prepared a confidential descriptive
memorandum concerning OEC and proceeded to contact potential acquirers.
Prudential contacted 73 potential acquirers, including 25 companies who
expressed an interest in evaluating the acquisition of OEC and who signed
confidentiality agreements and received copies of the confidential descriptive
memorandum. OEC and Prudential provided additional information to several
additional bidders.
Hanover was one of the companies initially contacted by Prudential. In
February 2000, Mr. Warren discussed the proposed sale of OEC with Charles
Erwin, Senior Vice President--Sales and Marketing of Hanover. In early May
2000, Mr. Warren asked Mr. Erwin if Hanover was interested in bidding for OEC.
Mr. Erwin indicated that Hanover was not interested in participating in an
auction but might offer $85 million for OEC, including assumption of debt and
transaction expenses.
During the negotiations with two other potential purchasers, a group led by
Mr. Estis, Don A. Smith, C.M. Butler, III and Robert Gregory (the "Estis
Group") informed OEC that the Estis Group intended to pursue a proxy contest to
elect a slate of directors that excluded Mr. Davis, Mr. Warren, Mr. Ramsey, Mr.
Richard Brannon, Mr. Finley, Mr. Stephenson and Mr. Hawthorne and to take
control of OEC. Three members of the Estis Group (Mr. Estis, Mr. Smith and Mr.
Butler, III) were directors and members of the Board of Directors of OEC and
represented a majority of the members of the OEC Special Committee that had
rejected the proposed merger of OEC with the ET Companies.
At a meeting of the OEC board of directors held in May 2000, the Estis Group
and OEC were advised by both counsel to OEC and Prudential that a proxy contest
would be, at a minimum disruptive, and could possibly even eliminate as an
option the sale of OEC. The Estis Group agreed to postpone the proxy contest
for 30 days to allow Prudential additional time to pursue the sale of OEC. OEC
and the Estis Group executed a limited standstill agreement pursuant to which
such parties agreed not to institute any litigation during such 30 day period.
Before the May 2000 meeting, Mr. Warren contacted Mr. Erwin of Hanover and
discussed the pending proxy contest and the potential sale of OEC. Mr. Erwin
reaffirmed that Hanover was interested in OEC at some price but did not want to
engage in an auction.
In April 2000, OEC continued extensive negotiations with the other two
bidders who had expressed a serious interest in acquiring OEC before the public
announcement of the proxy contest by the Estis Group. Eventually, both of these
bidders lost interest in OEC and terminated negotiations.
Prudential and OEC continued to contact potential purchasers of OEC. In
early June 2000, one additional potential purchaser expressed an interest in
OEC and executed a confidentiality agreement. The bidder conducted limited
financial due diligence on OEC and indicated that it was interested in
potentially making a bid for OEC.
On June 9, 2000, Mr. Davis, Mr. Warren, counsel for OEC and counsel for the
Estis Group met with William S. Goldberg, Executive Vice President of Hanover.
The parties discussed a potential transaction and the ranges of values that
Hanover was interested in paying for OEC. One issue discussed was a requirement
by Hanover that the transaction be structured as 50% cash and 50% stock based
on the enterprise value of OEC.
24
<PAGE>
To meet this requirement, OEC discussed having its subordinated lender agree to
exchange subordinated debt for Hanover stock. In addition, Hanover wanted
certain officers and directors of OEC, including Mr. Warren, Mr. Davis, Mr.
Estis and Mr. Smith, to enter into non-competition agreements on terms
satisfactory to Hanover.
OEC and Hanover negotiated the terms of a letter of intent from June 9, 2000
through June 13, 2000. At the same time the other bidder also provided OEC with
a letter of intent pursuant to which OEC would be acquired for stock of the
other bidder.
On June 10, 2000, HACL, Ltd. exercised a warrant issued to it in December of
1996 and purchased 8,000,000 shares of OEC common stock at $.91 per share.
OEC's Board met several times from June 9, 2000 to June 16, 2000 to consider
a transaction with Hanover and the other bidder. The OEC board of directors
carefully evaluated the terms of each bid and the relative value and
marketability of stock to be received in each transaction. The OEC board of
directors discussed the fact that Hanover had previously conducted extensive
due diligence on OEC and that the other bidder's offer was conditioned on
completion of due diligence. During this period, OEC and Hanover exchanged
drafts of and negotiated a letter of intent concerning the proposed
transaction. As part of such negotiations, Hanover insisted that non-
competition agreements for Mr. Smith and Mr. Estis be in place at the time of
the execution of the definitive merger agreement. Hanover and counsel for Mr.
Smith and Mr. Estis agreed to the general terms of a non-competition and non-
solicitation agreement. On June 16, 2000 the OEC board of directors authorized
OEC to sign a letter of intent with Hanover, which was executed on June 19,
2000. On June 20, 2000, OEC and Hanover issued a press release concerning the
letter of intent.
On June 30, 2000, Hanover and an affiliate of Mr. Davis and Mr. Warren
entered into an unrelated transaction in which Hanover sold a 25% interest in
an electrical generation project in Venezuela to an entity owned by Mr. Davis
and Mr. Warren; and a partnership owned by Mr. Davis and Mr. Warren sold a 50%
interest in a power generation facility in Florida to Hanover.
Following execution of the letter of intent, representatives of OEC and
Hanover met on several occasions to negotiate a definitive Agreement and Plan
of Merger. The OEC board of directors met several times from July 11 to July 13
of 2000 to review negotiations and the status of the merger agreement. On July
11, 2000 the Board of OEC met in person and by telephone to review the status
of negotiations. Mr. Davis informed the OEC board of directors that there were
a few remaining business issues to be resolved. Mr. Davis and Mr. Warren
disclosed to the OEC board of directors the terms of the power generation
transactions between themselves and Hanover. Counsel for OEC reviewed in detail
the Agreement and Plan of Merger with the OEC board of directors and answered
numerous questions by the Board. Prudential made a detailed presentation as to
the financial terms of the proposed merger and reviewed Prudential's
investigation of strategic alternatives for OEC. Prudential then rendered its
oral opinion (which was confirmed in writing) that the consideration to be
received by the OEC stockholders was fair from a financial point of view.
On July 11, 2000, the respective boards of directors of Hanover and Caddo
Acquisition Corporation unanimously approved the merger with OEC and authorized
the officers of each corporation to enter into a Agreement and Plan of Merger
with OEC.
On July 12, 2000, OEC and Hanover reached final agreement on the remaining
issues. The revised Agreement and Plan of Merger was circulated to the Board of
OEC. On July 12, 2000, the OEC board of directors held another meeting to
discuss the proposed merger with Hanover and the Agreement and Plan of Merger.
At this meeting, counsel for OEC reviewed the Agreement and Plan of Merger and
the changes made to the Agreement and Plan of Merger since the last draft
circulated to the OEC board of directors. Prudential reaffirmed its opinion
that the merger was fair to OEC's shareholders from a financial point of view.
The OEC board of directors then discussed the transaction and asked additional
questions about the Agreement and Plan of Merger and the transaction. Following
such discussion and deliberation, the OEC board of directors unanimously
(except for one director who was absent from the meeting) approved the merger
with Hanover and authorized OEC to enter into a Agreement and Plan of Merger
with Hanover.
25
<PAGE>
On July 13, 2000, OEC held its annual shareholders meeting at which the
nominees proposed by OEC were overwhelmingly re-elected. As a result, Mr.
Smith, Mr. Butler, III and Mr. Estis ceased being members of the Board.
On July 13, 2000, OEC and Hanover finalized and executed the definitive
Agreement and Plan of Merger. In addition, Mr. Smith and Mr. Estis each
executed non-competition agreements with OEC.
On July 17, 2000, OEC and Hanover issued a press release announcing the
execution of the definitive Agreement and Plan of Merger.
On August 10, 2000, the new OEC board of directors reviewed, discussed and
unanimously ratified the Agreement and Plan of Merger.
On November 14, 2000, OEC's Board of Directors and Hanover agreed to amend
the Agreement and Plan of Merger to extend the outside date for closing the
merger from January 13, 2001 to March 1, 2001 and make other changes set forth
in the amendment.
Reasons for the Merger
In reaching its decision to approve the Agreement and Plan of Merger and the
merger and to recommend adoption of the Agreement and Plan of Merger by OEC
stockholders, the OEC board of directors consulted with management, as well as
its legal and financial advisors, and independently considered the proposed
Agreement and Plan of Merger and the transactions contemplated by the Agreement
and Plan of Merger. In unanimously approving the Agreement and Plan of Merger
and the merger, the OEC board of directors considered a number of factors,
including the following:
. current industry, market and economic conditions;
. the strategic fit between the two companies;
. the complementary nature of the companies' product and service
offerings;
. OEC's business, capital structure, results of operations, assets,
management, competitive position, operating performance, trading
performance and prospects, including, in the case of the OEC board of
directors, OEC's prospects if it were to continue as a separate company;
and
26
<PAGE>
. Hanover's business, financial condition, results of operations, assets,
management, competitive position, operating performance, trading
performance and prospects.
In the course of deliberations, the OEC board of directors also considered a
number of additional factors relevant to the merger, including:
. the possibility of strategic alternatives to the merger for enhancing
long-term stockholder value, including investigating strategic
transactions with other companies;
. the exchange ratio;
. the market price of Hanover common stock over the last several years and
the potential for an increase or decrease in the market price of Hanover
common stock in the future;
. the market price of OEC common stock over the last several years;
. the opinion of Prudential Securities to the effect that, as of the date
of the opinion and based on and subject to the matters described in the
opinion, the consideration to be received by the OEC stockholders was
fair, from a financial point of view;
. the terms and conditions of the Agreement and Plan of Merger, including
the termination fee and the closing conditions;
. the expected qualification of the merger as a reorganization under
Section 368(a) of the Internal Revenue Code;
. the expected accounting of the merger;
. the impact of the merger on OEC's customers, suppliers and employees;
. the likelihood of the merger being approved by the appropriate
regulatory authorities;
. the likelihood that the merger will be completed; and
. the effect of the public announcement of the merger on the market price
of Hanover's and OEC's common stock.
The OEC board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger,
including the risks that:
. despite Hanover's and OEC's efforts after the merger, OEC may lose key
personnel as a result of the merger;
. a significant number of OEC's customers and suppliers might cease doing
business with OEC after it becomes a subsidiary of Hanover; and
. the potential benefits of the merger might not be fully realized.
The OEC board of directors determined that OEC could avoid or mitigate these
and other risks, and that, overall, these risks were outweighed by the
potential benefits of the merger.
The above discussion of the factors considered by the OEC board of directors
in making its decision is not intended to be exhaustive. In view of the variety
of factors considered in connection with their evaluation of the Agreement and
Plan of Merger and the merger, the board of directors did not find it
practicable to, and did not, quantify or otherwise assign relative weight to
the specific factors considered in reaching its determination. In addition,
individual members of the OEC board of directors may have given different
weight to different factors.
27
<PAGE>
Recommendation of the OEC Board of Directors
After careful consideration, the OEC board of directors unanimously
determined that the terms of the Agreement and Plan of Merger and the merger
are advisable and fair to, and in the best interests of, OEC and its
stockholders and has unanimously approved the Agreement and Plan of Merger and
the merger. The OEC board of directors unanimously recommends that the OEC
stockholders vote "FOR" the adoption of the Agreement and Plan of Merger.
Opinion of OEC's Financial Advisor
This section of the proxy statement/prospectus describes material aspects of
the opinion of Prudential Securities, the financial advisor to OEC. While we
believe that the description covers the material aspects of the opinion, this
summary may not contain all of the information that is important to you. OEC
stockholders are urged to read the Prudential Securities Opinion in its
entirety. A copy of the Prudential Securities Opinion, which sets forth the
assumptions made, all material matters considered and limits on the review
undertaken, is attached to this proxy statement as Annex B and is incorporated
herein by reference.
On July 11, 2000, Prudential Securities Incorporated delivered its oral
opinion to the board of directors of OEC, which opinion was confirmed in
writing on July 14, 2000, to the effect that, as of such date, the exchange
ratio was fair, from a financial point of view, to OEC (the "Prudential
Securities Opinion"). Prudential Securities presented the financial analysis
and assumptions underlying its oral opinion at the meeting of the board of
directors of OEC on July 11, 2000.
In requesting the Prudential Securities Opinion, the OEC board of directors
did not give any special instructions to Prudential Securities or impose any
limitation upon the scope of the investigation that Prudential Securities used
to deliver the Prudential Securities Opinion.
The Prudential Securities Opinion is addressed to the board of directors of
OEC and is directed only to the fairness of the exchange ratio to OEC as of
July 14, 2000 from a financial point of view. It does not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
meeting or as to any other action such stockholder should take regarding the
merger.
In conducting its analysis and arriving at the Prudential Securities
Opinion, Prudential Securities reviewed such information and considered such
financial data and other factors as Prudential Securities deemed relevant under
the circumstances, including the following:
. a draft, dated July 12, 2000, of the Agreement and Plan of Merger;
. a draft, dated July 11, 2000, of the Voting and Disposition Agreement;
. certain publicly available historical financial and operating data
concerning OEC including, but not limited to:
(a) OEC's Annual Report on Form 10-K for the fiscal year ended December
31, 1999;
(b) OEC's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2000; and
(c) OEC's Proxy Statement for the Annual Meeting of Stockholders to be
held on July 13, 2000.
. certain internal financial statements and other financial and operating
data relating to OEC, including financial forecasts for the fiscal years
ending December 31, 2000 through December 31, 2004, prepared by the
management of OEC;
. publicly available financial, operating and stock market data concerning
certain companies engaged in businesses Prudential Securities deemed
reasonably similar to that of OEC or otherwise relevant to Prudential
Securities' inquiry;
. the financial terms of certain recent transactions Prudential Securities
deemed relevant to its inquiry;
28
<PAGE>
. the historical stock prices and trading volumes of OEC common stock; and
. such other financial studies, analyses and investigations that
Prudential Securities deemed appropriate.
Prudential Securities assumed, with OEC's consent, that the drafts of the
Agreement and Plan of Merger and the Voting and Disposition Agreement which it
reviewed would conform in all material respects to those documents when in
final form.
Prudential Securities met with the senior management of OEC and Hanover to
discuss: (i) the past and current operating and financial condition of OEC and
Hanover, respectively; (ii) the prospects for OEC and Hanover, respectively;
(iii) their estimates of the future financial performance of OEC and Hanover,
respectively; and (iv) such other matters that Prudential Securities deemed
relevant.
With respect to certain financial forecasts provided to Prudential
Securities by senior management of OEC, Prudential Securities assumed that such
information (and the assumptions and bases therefore) represents senior
management's best currently available estimate as to the future financial
performance of OEC. The opinion is necessarily based on economic, financial and
market conditions as they exist and can only be evaluated as of the date
thereof and Prudential Securities assumes no responsibility to update or revise
its opinion based upon events or circumstances occurring after the date
thereof.
Prudential Securities was retained by OEC to render a fairness opinion and
received a fee upon rendering that opinion. In the ordinary course of business
Prudential Securities may actively trade the shares of OEC Common Stock for its
own account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities. In addition, Prudential
Insurance Company of America ("Prudential Insurance"), of which Prudential
Securities Incorporated is an indirect wholly-owned subsidiary, is the holder
of a subordinated note of OEC in the principal amount of $15,000,000 and
warrants to purchase shares of OEC common stock. Prudentials' note will become
due and payable in accordance with its terms upon consummation of the merger.
Prudential Insurance has agreed to surrender its warrants to OEC
contemporaneously with the closing of the merger in exchange for a payment of
$400,000 in cash if the merger is consummated on or before December 31, 2000.
If the merger is not consummated before that date, Hanover and OEC will have to
negotiate an alternative arrangement for the cancellation of the Prudential
warrants.
In connection with its review, analysis and preparation of the Prudential
Securities Opinion, Prudential Securities relied upon the accuracy and
completeness of the financial and other information publicly-available or
otherwise provided to Prudential Securities by OEC and did not undertake any
independent verification of such information or any independent valuation or
appraisal of any of the assets or liabilities of OEC. With respect to certain
financial forecasts provided to Prudential Securities by OEC, Prudential
Securities assumed that such information and assumptions represented OEC would
perform in accordance with such projections. Prudential Securities assumes no
responsibility for and expresses no view as to such forecasts and the
assumptions under which they were prepared. For the purposes of the Prudential
Securities Opinion, Prudential Securities assumed the merger qualifies as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended, and that the transaction contemplated by the
Agreement and Plan of Merger will be completed as described in the Agreement
and Plan of Merger and in this document.
The Prudential Securities Opinion is based on economic, financial and market
conditions as they existed on July 11, 2000 and were evaluated as of that date.
Prudential Securities assumes no responsibility to update or revise the
Prudential Securities Opinion based upon events or circumstance occurring after
such date.
The Prudential Securities Opinion, including Prudential Securities'
presentation of such opinion to the OEC board of directors, was one of the many
factors that the board of directors took into consideration in making its
determination to recommend approval of the Agreement and Plan of Merger.
Consequently, Prudential Securities' analyses described below should not be
viewed as determinative of the opinion of the OEC board of directors. The
exchange ratio was determined through arm's length negotiations between OEC and
Hanover and was approved by the OEC board of directors.
29
<PAGE>
The Prudential Securities Opinion does not address nor should it be
construed to address the relative merits of the merger or alternative business
strategies that may be available to OEC. In addition, the Prudential Securities
Opinion does not in any manner address the prices at which Hanover common stock
will trade following completion of the merger.
In arriving at the Prudential Securities Opinion, Prudential Securities
performed a variety of financial analyses presented to the OEC board of
directors at the July 11, 2000 meeting. The preparation of a fairness opinion
is a complex process that involves various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
these methods to the particular circumstance. Therefore, such an opinion is not
necessarily susceptible to partial analysis or summary description. Prudential
Securities believes that its analyses must be considered as a whole and
selecting portions thereof or portions of the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying the Prudential Securities Opinion. Prudential
Securities made numerous assumptions with respect to industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of OEC. Any estimates contained in
Prudential Securities' analyses are not necessarily indicative of actual values
or future results, which may be significantly more or less favorable that
suggested by such analyses. Additionally, estimates of the values of businesses
and securities do not purport to be appraisals or necessarily reflect the
prices at which businesses and securities may be sold. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty.
Subject to the foregoing, the following is a summary of the material financial
analyses, which include all of the material factors considered by Prudential
Securities in its financial analyses, presented by Prudential Securities to the
OEC board of directors on July 11, 2000 in connection with the delivery of the
Prudential Securities Opinion.
Precedent Transactions Analysis
Prudential Securities analyzed the consideration paid in six merger and
acquisition transactions that Prudential Securities deemed to be reasonably
similar to the merger. In its analysis, Prudential Securities considered the
multiple of the acquired entity's enterprise value (defined as equity value
plus total debt, minus cash and cash equivalents) to the acquired entity's
latest twelve months' revenue, the multiple of the acquired entity's enterprise
value to the acquired entity's latest twelve months' EBITDA (defined as
earnings before interest expense, taxes, depreciation and amortization), and
the multiple of the acquired entity's equity value (defined as the price paid
per share in the transaction) multiplied by the diluted number of shares
outstanding) to the acquired entity's latest twelve months' net income, all
based upon publicly available information for such transactions. Prudential
Securities selected these transactions based on its knowledge of OEC's and
Hanover's financial and operating characteristics, the financial terms of the
merger, familiarity with and experience in the industries in which OEC and
Hanover operate, and its review and assessment of the publicly-available
financial terms of acquisition transactions. Prudential Securities did not
identify any reasonably similar transactions that were excluded from its
analysis. The transactions considered were the combinations of:
. Castle Harlan and Tidewater Compression;
. Equity Compression Services Corporation and Ouachita Energy Corporation;
. Camco International, Inc. and Production Operators Corp.;
. Weatherford Enterra and Energy Industries (a subsidiary of Zapata
Corp.);
. Tidewater Inc. and Halliburton Compression; and
. Zapata Corp. and Energy Industries (a subsidiary of The Holt Companies).
The precedent transactions used in this analysis were found to imply for the
acquired entity enterprise values within a range of 1.5x to 6.1x based on
latest twelve month's revenue and 8.5x to 13.3x latest twelve month's EBITDA
and equity values within a range of 23.8x to 43.9x latest twelve month's net
income. Based
30
<PAGE>
upon OEC's operating results for the twelve months ended March 31, 2000 the
offer implies multiples of 3.8x latest twelve month's revenues, 8.2x latest
twelve month's EBITDA and 49.4x latest twelve month's net income.
Publicly-Traded Compression Companies Analysis
Prudential Securities employed an analysis of publicly-traded "compression"
companies considered by Prudential Securities to be reasonably similar to OEC
to establish a range of implied valuation multiples. Prudential Securities
selected these companies, as well as those used in the publicly-traded
midstream companies analysis summarized below, based on its knowledge of OEC's
financial and operating characteristics, its familiarity with and experience in
the industries in which OEC operates and its review and assessment of publicly
available financial data for such companies. Prudential Securities did not
identify any such companies that were excluded from its analysis. Prudential
Securities analyzed publicly-available historical financial results, including
multiples of current enterprise value to EBITDA for the twelve months ended
March 31, 2000 and projected EBITDA for the full year ended December 31, 2000,
and multiples of current equity value (defined as the closing stock price on
July 7, 2000 multiplied by basic shares outstanding) to the latest twelve
month's net income and cash flow from operations (defined as net income plus
depreciation and amortization plus deferred taxes plus other non-cash charges)
as of March 31, 2000 and projected for the full year ended December 31, 2000 of
certain publicly-traded compression companies. The publicly-traded compression
companies used in the analysis included:
. Enerflex Systems, Inc.;
. Hanover Compressor; and
. Universal Compression.
Based on the July 7, 2000 closing stock prices, the compression companies
were found to have current enterprise values within a range of 11.9x to 21.4x
latest twelve month's EBITDA and 10.2x to 17.9x projected 2000 EBITDA. The
compression companies were found to have current equity values within a range
of 30.3x to 53.9x latest twelve month's net income, 23.9x to 42.1x projected
2000 net income, 18.7x to 25.3x latest twelve month's cash flow from operations
and 10.5x to 24.4x projected 2000 cash flow from operations. Based upon OEC's
operating results for the twelve months ended March 31, 2000 the offer implies
multiples of 8.2x latest twelve month's EBITDA and 7.0x projected 2000 EBITDA,
49.4x latest twelve month's net income and 22.2x projected 2000 net income,
6.0x latest twelve month's cash flow from operations and 4.2x projected 2000
cash flow from operations.
Publicly-Traded Midstream Companies Analysis
Prudential Securities employed an analysis of publicly-traded midstream
companies considered by Prudential Securities to be reasonably similar to OEC
to establish a range of implied valuation multiples. Prudential Securities
analyzed publicly-available historical financial results, including multiples
of current enterprise value to EBITDA for the twelve months ended March 31,
2000 and projected EBITDA for the full year ended December 31, 2000, and
multiples of current equity value (defined as the closing stock price on July
7, 2000 multiplied by basic shares outstanding) to the latest twelve month's
net income and cash flow from operations (defined as net income plus
depreciation and amortization plus deferred taxes plus other non-cash charges)
as of March 31, 2000 and projected for the full year ended December 31, 2000 of
certain publicly-traded midstream companies. The publicly-traded midstream
companies used in the analysis included:
. Markwest Hydrocarbon;
. Midcoast Energy;
. Trans Montaigne; and
. Western Gas Resources.
31
<PAGE>
Based on the July 7, 2000 closing stock prices, the midstream companies were
found to have current enterprise values within a range of 6.4x to 12.9x latest
twelve month's EBITDA and 5.6x to 8.8x projected 2000 EBITDA. The midstream
companies were found to have current equity values within a range of 11.8x to
58.2x latest twelve month's net income, 10.0x to 29.7x projected 2000 net
income, 6.7x to 9.8x latest twelve month's cash flow from operations and 5.3x
to 25.0x projected 2000 cash flow from operations. Based upon OEC's operating
results for the twelve months ended March 31, 2000 the offer implies multiples
of 8.2x latest twelve month's EBITDA and 7.0x projected 2000 EBITDA, 49.4x
latest twelve month's net income and 22.2x projected 2000 net income, 6.0x
latest twelve month's cash flow from operations and 4.2x projected 2000 cash
flow from operations.
None of the acquired entities or the publicly-traded companies in the above
Precedent Transactions Analysis, Publicly-Traded Compression Companies
Analysis, or Publicly-Traded Midstream Companies Analysis is identical to OEC,
and none of the transactions is identical to the merger. Accordingly, a
complete analysis of the results of the foregoing calculations cannot be
limited to a quantitative review of such results and involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the acquired entities and the publicly-traded companies and
other factors that could affect the public trading value and consideration paid
for each of the acquired entities and the publicly-traded companies,
respectively, as well as that of OEC.
Historical Stock Trading Analysis.
Prudential Securities analyzed the implied premium of the offer price and
merger consideration per share to the stock price for the respective days,
listed below. Prudential also analyzed the implied premiums in comparable
mergers and acquisitions transactions that Prudential Securities deemed to be
reasonably similar to the merger. OEC's Common Stock was tracked for the
following periods:
. one day prior to the offer;
. one month prior to the offer; and
. three months prior to the offer.
The OEC board of directors selected Prudential Securities to provide a
fairness opinion because it is a nationally recognized investment banking firm
engaged in the valuation of businesses and their securities in connection with
merger and acquisition transactions and because it has substantial experience
in transactions similar to the merger. Pursuant to an engagement letter with
Prudential Securities dated February 16, 2000, Prudential Securities will
receive a fee payable upon completion of the merger equal to 1.25% of the total
consideration (as defined in the engagement letter) to be paid by Hanover,
subject to a minimum fee of $1 million. OEC has agreed to reimburse all
Prudential Securities' reasonable out-of-pocket expenses, including fees and
disbursements of counsel, and will indemnify Prudential Securities and certain
related persons against certain liabilities, including liabilities under
securities laws, arising out of the merger or its engagement.
Interests of Certain Persons in the Merger
When considering the recommendations of the OEC board of directors, you
should be aware that certain OEC directors and officers have interests in the
merger that are different from, or are in addition to, your interests.
In particular, two officers of OEC or its subsidiaries are parties to
individual change of control agreements. The agreement with Jack Brannon, OEC's
Chief Financial Officer, provides that following a change of control, such as
the merger, and either (i) a reduction in his salary and/or bonus compensation,
(ii) relocation or (iii) the election by Mr. Brannon to terminate his
employment within thirty days of a change in control he will be paid an amount
equal to the sum of the monthly rate or salary paid to him at the time of
termination multiplied by 24 months. The agreement with Dan McCormick, OEC's
Vice-President of Sales and Marketing, provides that
32
<PAGE>
following a change of control and either (i) a reduction in has salary and/or
bonus compensation, or (ii) relocation, that Mr. McCormick will be paid an
amount equal to the sum of the monthly rate or salary paid him at the time of
termination multiplied by 12 months, plus the greater of the bonus paid in the
last fiscal year or the amount that he would have earned under the compensation
policies in place as of the date of termination as if the operating results and
financial performance of OEC were annualized as of that date. In addition to
these individual agreements, there are two severance plans in place that
provide severance and change of control benefits to both upper management and
employees at OEC.
The unfunded OEC upper management severance plan covers business development
managers and management employees. Under the upper management severance plan
the benefits are as follows:
. upon a change of control, such as the merger, OEC shall make a lump sum
cash payment to each manager who is employed by OEC on the date such
change of control is consummated of 10% of his or her salary or current
wages;
. OEC shall make a lump sum cash severance payment to the manager if he or
she is (i) terminated for other than good cause, (ii) demoted or (iii)
relocated (mandatory) within 90 days of the change of control, equal to
one month's salary or wages per each full year of service (maximum of
eight months, minimum of three); and
. the manager or his beneficiary, or any other person entitled to receive
benefits with respect to the manager under any retirement plan, welfare
plan (including health and dental plans, disability plans, survivor
income plans, or life insurance plans) or other plan or program
maintained by OEC or any affiliate or associate in which he or she
participates at the date of termination of employment, within 90 days of
a change of control, shall receive any and all benefits accrued under
any such plan or other plan or program to the date of termination of
employment, and the manager's employment shall be deemed to have
terminated by reason of retirement, and without regard to vesting
limitations in such plans, under circumstances that have the most
favorable result for the manager thereunder.
No OEC officers or directors are covered by this upper management severance
plan.
Pursuant to the Agreement and Plan of Merger, Hanover has agreed to
indemnify each present and former director and officer of OEC against all
liabilities or expenses incurred in connection with claims relating to matters
that occur prior to the closing of the merger. See "The Agreement and Plan of
Merger--Director and Officer Indemnification."
The unfunded OEC broad based severance plan requires both change of control
and severance payments to all employees of OEC to which the chief executive
officer of OEC deems it should apply. The terms are substantially identical to
those under the upper management severance plan, with the exception that the
maximum termination payment is six months salary.
Material Contacts
In July 1999, Hanover and OEC entered into an agreement under which OEC sold
compressors to Hanover for $2,265,000, of which $2,000,000 was paid on the date
of the agreement with the remaining $265,000 to be paid 180 days thereafter
unless Hanover or OEC exercised its repurchase option. The agreement contained
provisions that permit OEC, at its option, to repurchase the compressors or
Hanover, at its option, to sell the compressors back to OEC for a purchase
price of $2,000,000 plus interest thereon at a rate of 10% per annum. Hanover
elected to sell the equipment back to OEC, but the completion of the sale has
been deferred pending completion of the merger between OEC and Hanover. OEC has
treated the transaction as a loan for accounting purposes because of certain
unexercised put and call features in the agreement, carrying the $2,000,000
amount payable to Hanover as a current note payable at June 30, 2000.
In November 2000, OEC and Hanover entered into a management agreement under
which OEC engaged Hanover to provide day to day management services for OEC's
field and shop operations. The management agreement provides that Hanover will
receive a fee of $900,000 per month for performing those services, including
$900,000 for services performed by Hanover during the period ended October 31,
2000. The
33
<PAGE>
management fee is payable only upon consummation of the merger. The management
agreement provides that Hanover has no responsibility for OEC's marketing and
sales operations, including making bids for new business, or OEC's financial
reporting and accounting operations, all of which remain the responsibility of
OEC's management.
In June of 2000, Hanover sold to an affiliate of Ray C. Davis and Kelcy L.
Warren, each of whom is a co-chief executive officer and co-chairman of the
board of OEC, a 25% interest in an electrical generation plant in Venezuela for
an aggregate amount of $5 million dollars.
In June of 2000, a partnership owned by Mr. Davis and Mr. Warren sold a 50%
interest in a power generation facility to be located in Florida to Hanover for
an aggregate amount of $5 million dollars.
Mr. Davis and Mr. Warren have engaged in discussions with Hanover with
respect to formation of a potential joint venture to cooperate on power
generation projects, but no agreement has been reached as to the terms of the
potential joint venture. While Mr. Warren, Mr. Davis and Hanover may continue
these discussions from time to time, it is not clear when they might reach an
agreement on the terms of the joint venture or if they will be able to reach an
agreement at all.
Determination of Conversion Ratio
The Conversion Ratio (as defined in the Agreement and Plan of Merger) for
the OEC common stock was determined through arm's-length negotiations between
Hanover and OEC.
Regulatory Approval Required
The merger is subject to the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, which prevents some transactions from being completed
until required information and materials are furnished to the Antitrust
Division of the Department of Justice and the Federal Trade Commission. In
addition, a waiting period must expire. Hanover and OEC filed the required
notifications and report forms with the Department of Justice and the Federal
Trade Commission on August 28, 2000 and received clearance effective September
13, 2000.
The Antitrust Division of the Department of Justice or the Federal Trade
Commission may challenge the merger on antitrust grounds even after expiration
of the waiting period. Accordingly, at any time before or after the completion
of the merger, either the Antitrust Division of the Department of Justice or
the Federal Trade Commission could take any action under the antitrust laws as
it deems necessary or desirable in the public interest, or other persons,
including private parties, could take action under the antitrust laws,
including seeking to enjoin the merger. Additionally, at any time before or
after the completion of the merger, any state could take any action under the
antitrust laws as it deems necessary or desirable in the public interest. We
cannot assure you that a challenge to the merger will not be made or that, if a
challenge were made, it would be defeated.
Any OEC stockholder that acquires Hanover common stock valued in excess of
$15 million in the merger may also be required to make a filing under the Hart-
Scott-Rodino Act. We advise you to consult with legal advisors regarding your
potential filing obligation.
The Prudential Agreement
On October 3, 2000, Hanover, OEC and The Prudential Insurance Company of
America ("Prudential Insurance") entered into a warrant cancellation agreement
providing for the cancellation of the warrant to purchase shares of OEC's
common stock held by Prudential Insurance in exchange for a $400,000 cash
payment by Hanover. The obligation of Prudential Insurance to surrender the
warrant for cancellation is subject to the fulfillment of certain conditions,
including the completion of the merger and the repayment by OEC of the all
principal, interest and other amounts due under certain subordinated notes
issued by OEC to Prudential Insurance. The warrant cancellation agreement will
terminate (i) if the Agreement and Plan of Merger is terminated or (ii) on
December 31, 2000 if the warrant cancellation is not consummated on or before
such date. If the merger is not consummated on or before December 31, 2000, OEC
and Hanover will have to negotiate an alternative arrangement with respect to
the warrant held by Prudential Insurance. Pursuant to the agreement,
cancellation of the warrant will occur simultaneously with the completion of
the merger.
34
<PAGE>
Management and Operations Following the Merger
Upon the closing of the merger, the officers of OEC following the merger
will be officers of Hanover. For information regarding these directors and
officers, their compensation and relationships or related transactions, please
refer to Hanover's latest 10-Q filed with the Securities and Exchange
Commission on November 13, 2000 and its latest 10-K filed with the Securities
and Exchange Commission on March 30, 2000. See also "Where You Can Find More
Information."
The corporate headquarters of OEC after the merger will be located in
Houston, Texas, at the location of the current headquarters of Hanover.
Accounting Treatment
Hanover expects to account for the acquisition of OEC by Hanover under the
purchase method of accounting in accordance with generally accepted accounting
principles. The purchase price will be allocated first among the assets and
liabilities acquired based on their estimated fair values and any remaining
purchase price will be recorded as goodwill.
Material United States Federal Income Tax Consequences
The following summary of material United States federal income tax
consequences of the merger to the OEC common stockholders is based upon current
provisions of the Internal Revenue Code of 1986, as amended, currently
applicable United States Treasury regulations and judicial and administrative
rulings and decisions as of the date hereof. The following summary is not
binding on the Internal Revenue Service, and no rulings have been or will be
sought from the Internal Revenue Service regarding any matters relating to the
merger. In addition, legislative, judicial or administrative changes may be
forthcoming that could alter or modify the statements set forth herein,
possibly on a retroactive basis. This summary does not purport to deal with all
aspects of United States federal income taxation that may be relevant to
particular holders of OEC common stock in light of their individual
circumstances, nor with certain types of holders who are subject to special
treatment under the federal income tax laws (including, without limitation,
tax-exempt organizations; insurance companies; financial institutions; broker-
dealers; persons who hold such stock as part of a hedge, appreciated financial
position, straddle or conversion transaction; holders whose functional currency
is not the United States dollar; holders who acquired their stock pursuant to
the exercise of employee stock options or otherwise as compensation; or holders
who are neither citizens nor residents of the United States, or that are
foreign corporations, foreign partnerships or foreign estates or trusts for
United States federal income tax purposes). The summary also assumes that an
OEC common stockholder holds its shares of OEC common stock as a capital asset.
Finally, no foreign, state or local tax considerations are addressed herein.
Consequently, each holder of OEC common stock is strongly urged to consult its
own tax advisor regarding the tax consequences of the merger in light of each
such holder's particular circumstances, including the applicability and effect
of federal, state, local and foreign income and other tax laws.
Except as otherwise provided, the following discussion assumes that the
merger constitutes a "reorganization" within the meaning of Section 368(a) of
the Internal Revenue Code.
Consequences of the Merger
Based on the above assumptions and qualifications, the merger will generally
result in the following United States federal income tax consequences:
. no gain or loss will be recognized by OEC common stockholders on the
exchange of their OEC common stock solely for Hanover common stock
(except to the extent of cash received in lieu of fractional shares as
discussed below);
. the holding period of Hanover common stock received will include the
holding period of shares of OEC common stock surrendered in the merger;
35
<PAGE>
. the aggregate tax basis of Hanover common stock received by OEC common
stockholders who exchange all of their OEC common stock solely for
Hanover common stock in the merger will be the same as the aggregate tax
basis of OEC common stock surrendered in the merger (reduced by any
portion of such tax basis allocable to a fractional share of Hanover
common stock for which cash is received);
. cash payments received by OEC common stockholders in lieu of a
fractional share of Hanover common stock will be treated as capital gain
or loss measured by the difference, if any, between the cash payment
received and the portion of the tax basis in the shares of OEC common
stock allocable to the fractional share. This gain or loss will be long-
term capital gain or loss if the holder's holding period in the OEC
common stock exchanged for the fractional share of Hanover common stock
is more than one year at the time of the merger; and
. no gain or loss will be recognized by Hanover or OEC solely as a result
of the merger.
If the merger does not qualify as a "reorganization" for federal income tax
purposes, then an OEC common stockholder would generally recognize capital gain
or loss in an amount equal to the fair market value of Hanover common stock and
any other property received in the merger less the stockholder's tax basis in
its OEC common stock surrendered in the merger. Any capital gain or loss would
be long-term in nature if the stockholder's holding period in the OEC common
stock surrendered is more than one year at the time of the merger. An OEC
common stockholder's tax basis in the Hanover common stock received would be
equal to its fair market value at the time of the merger, and the holding
period of the Hanover common stock would begin on the first day following the
merger.
Backup Withholding
Backup withholding at the rate of 31% may apply with respect to certain
payments received by an OEC common stockholder in the merger unless:
. the recipient is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact; or
. the recipient provides a correct taxpayer identification number,
certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup
withholding rules.
An OEC common stockholder who does not provide Hanover with its correct
taxpayer identification number may be subject to penalties imposed by the
Internal Revenue Service. Any amounts withheld under the backup withholding
rules may be allowed as a refund or a credit against the holder's federal
income tax liability, provided that the required information is furnished to
the Internal Revenue Service.
Dissenters' and Appraisal Rights
Hanover's stockholders will not be required to vote to approve the Merger
pursuant to section 251(f)(3) of the Delaware General Corporation Law as the
shares to be issued in connection with the Merger do not exceed 20% of the
shares of common stock of Hanover outstanding as of July 13, 2000, and thus
will not be entitled to assert dissenters' or appraisal rights as result of the
merger or to demand payment for their shares.
OEC shareholders will not be entitled under Oklahoma law to exercise
appraisal rights as a result of the merger or to demand payment for their
shares since (i) the shares of Hanover common stock they will receive in the
merger are registered on the New York Stock Exchange and (ii) because the
holders of the OEC common stock will receive only shares of Hanover common
stock and cash in lieu of fractional shares of Hanover common stock as a result
of the merger.
Listing of the Hanover Common Stock to be Issued in the Merger
Hanover will use its best efforts to cause the shares of Hanover common
stock to be issued in the merger to be approved for listing on the New York
Stock Exchange, subject to official notice of issuance, before the
36
<PAGE>
completion of the merger. The listing of the shares of Hanover common stock is
a condition to the completion of the merger.
Delisting and Deregistration of OEC Common Stock after the Merger
If the merger is completed, OEC common stock will be delisted from the
American Stock Exchange and will be deregistered under the Securities Exchange
Act of 1934.
Federal Securities Law Consequences
All shares of Hanover common stock received by OEC stockholders in the
merger will be freely transferable, except that shares of Hanover common stock
received by persons who are deemed to be affiliates of OEC prior to the merger
may be resold by them only in transactions permitted by the resale provisions
of Rule 145 under the Securities Act, or Rule 144 in the case of persons who
become affiliates of Hanover, or otherwise in compliance with, or pursuant to
an exemption from, the registration requirements of the Securities Act. Persons
deemed to be affiliates of Hanover or OEC are those individuals or entities
that control, are controlled by, or are under common control with, the party
and generally include executive officers, directors and principal stockholders
of the party. This proxy statement/prospectus does not cover any resales of
Hanover common stock received by affiliates of OEC in the merger.
37
<PAGE>
THE AGREEMENT AND PLAN OF MERGER
The following is a summary of the material provisions of the Agreement and
Plan of Merger. This description is qualified in its entirety by reference to
the Agreement and Plan of Merger, as amended, which is attached as Annex A to
this proxy statement/prospectus.
General
The Agreement and Plan of Merger provides that Caddo Acquisition
Corporation, a wholly-owned subsidiary of Hanover, will be merged with and into
OEC at the effective time of the merger. OEC will continue as the surviving
corporation in accordance with the Oklahoma General Corporation Act, becoming a
wholly-owned subsidiary of Hanover. The merger will be completed after all
conditions in the Agreement and Plan of Merger are met or waived and Hanover
and OEC file a certificate of merger with the Secretary of State of the State
of Oklahoma. The Agreement and Plan of Merger provides that the closing of the
merger will take place at the offices of Latham & Watkins, Sears Tower, Suite
5800, Chicago, Illinois, 60606 not later than the second business day after
satisfaction or waiver of the conditions to the merger. Hanover and OEC have
tentatively agreed, and they presently expect, that the merger will be
completed by January 31, 2001. However, Hanover and OEC may agree to a
different date.
Conversion of Shares
The Agreement and Plan of Merger provides that each issued and outstanding
share of OEC common stock, other than dissenting shares and shares owned by OEC
or Hanover, will be converted into Hanover common stock with the number of
shares of Hanover common stock to be issued to be determined by dividing $1.00
by the average closing sales price per share of Hanover common stock as
reported by the New York Stock Exchange composite tape for the twenty
consecutive trading days immediately preceding the second business day prior to
the effective time of the merger (subject to a maximum of .0333333 and a
minimum of .0307692 shares of Hanover common stock for each share of OEC common
stock), and multiplying the result by the number of shares of OEC common stock
outstanding. As a result, OEC stockholders will receive between .0333333 and
.0307692 shares of Hanover common stock for each share of OEC common stock they
own.
Each outstanding share of Hanover common stock will remain outstanding and
be unaffected by the merger. However, if prior to the merger, the outstanding
shares of Hanover common stock are changed into a different number of shares or
a different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares,
the Conversion Ratio (as defined in the Agreement and Plan of Merger) will be
adjusted accordingly.
No fractional shares of Hanover common stock will be issued in the merger.
Each holder of OEC common stock who would have otherwise been entitled to
receive a fraction of a share of Hanover common stock will receive cash in lieu
of a fractional share of Hanover common stock. The amount of cash will be equal
to such fractional part of a share of Hanover common stock multiplied by the
average closing sales price per share of Hanover common stock as reported by
the New York Stock Exchange composite tape for the twenty consecutive trading
days immediately preceding the second business day prior to the effective time
of the merger.
Procedure for the Exchange of Stock Certificates
Exchange of Stock Certificates
Hanover and OEC have designated ChaseMellon Stockholder Services to serve as
exchange agent for the exchange of certificates representing OEC common stock
for certificates representing Hanover common stock and for the payment of cash
in lieu of fractional shares. Promptly after the merger is completed, the
exchange
38
<PAGE>
agent will mail transmittal forms and exchange instructions to each holder of
record of OEC common stock. After receiving the transmittal form, each holder
of certificates formerly representing OEC common stock will be able to
surrender the certificates to the exchange agent and receive certificates
evidencing the appropriate number of whole shares of Hanover common stock.
After the merger, each certificate formerly representing OEC common stock,
until surrendered and exchanged, will be deemed, for all purposes, to evidence
only the right to receive a certificate representing the number of whole shares
of Hanover common stock which the holder's shares of OEC common stock were
converted in the merger, plus cash in lieu of fractional shares, if any. For
stockholder meeting quorum and notice purposes, holders of unsurrendered OEC
certificates will be considered to be record holders of the shares of Hanover
common stock represented by their OEC certificates.
Dividends and Distributions
The holder of an unexchanged OEC certificate will not be entitled to receive
any dividends or other distributions otherwise payable by Hanover until the
certificate has been exchanged. Subject to applicable laws, following surrender
of the certificates by the holder, Hanover will pay the holder any accrued and
unpaid dividends and distributions that have become payable between the
effective time of the merger and the time the certificate is surrendered,
without interest.
Lost Certificates
A stockholder must provide an appropriate affidavit to the exchange agent if
any OEC common stock certificates are lost, stolen or destroyed, in order to
receive Hanover common stock or cash in lieu of fractional shares in respect of
the lost, stolen or destroyed certificates. In addition, the surviving
corporation may require the holder of lost, stolen or destroyed certificates to
post a bond as indemnity against any claim that may be made against the
surviving corporation or the exchange agent with respect to the certificates.
No Liability
Neither the surviving corporation nor the exchange agent will be liable to
any former holder of shares of OEC common stock for shares of Hanover common
stock, or dividends or distributions made with respect to those shares,
delivered to a public official under any applicable abandoned property, escheat
or similar law.
Withholding Right
Either the surviving corporation or the exchange agent, on behalf of the
surviving corporation, is entitled to deduct and withhold from the
consideration payable to any former holder of shares of OEC common stock the
amount it is required to deduct and withhold from the consideration under the
Internal Revenue Code or any provision of state, local or foreign tax law. Any
amounts withheld will be treated as having been paid to the former holder of
the OEC common stock.
Please do not send in any stock certificates with your proxies. Please wait
for the transmittal form and instructions from the exchange agent.
Representations and Warranties
OEC has made representations and warranties in the Agreement and Plan of
Merger relating to the following:
. its organization and the organization of its subsidiaries;
. its capital structure;
. the authorization, execution, delivery and enforceability of the
Agreement and Plan of Merger and related matters;
39
<PAGE>
. the absence of conflicts under its certificates or articles of
incorporation, bylaws, agreements and applicable laws;
. required consents or approvals;
. documents and financial statements filed with the Securities and
Exchange Commission and the accuracy of the information contained in
those documents and financial statements;
. the absence of undisclosed liabilities;
. the absence of adverse events or changes reasonably expected to have a
material adverse effect;
. taxes and tax returns;
. properties;
. intellectual property;
. agreements, contracts and commitments;
. litigation;
. environmental matters;
. employee benefit plans;
. compliance with laws;
. accounting and tax matters;
. the accuracy of information contained in the registration statement
filed by Hanover and this proxy statement/prospectus;
. labor matters;
. insurance;
. year 2000 compliance;
. opinions of financial advisor;
. brokers' fees and expenses with respect to the merger;
. transactions with affiliates of OEC;
. the absence of excess parachute or nondeductible payments;
. the inapplicability to the merger of anti-takeover laws;
. accuracy of information furnished to Hanover;
. inventory; and
. customers and suppliers.
Hanover and Caddo Acquisition Corporation have made representations and
warranties in the Agreement and Plan of Merger relating to the following:
. their organization;
. the authorization, execution, delivery and enforceability of the
Agreement and Plan of Merger and related matters;
. the absence of conflicts under their certificates or articles of
incorporation, bylaws, agreements and applicable laws;
. required consents or approvals;
40
<PAGE>
. the validity and non-assesability of Hanover common stock to be issued
in exchange for the OEC common stock;
. documents and financial statements filed with the Securities and
Exchange Commission and the accuracy of the information contained in
those documents and financial statements;
. the accuracy of information contained in the registration statement
filed by Hanover and this proxy statement/prospectus;
. the absence of adverse events or changes reasonably expected to have a
material adverse effect;
. no vote of Hanover's stockholders is required to approve the merger;
. Caddo Acquisition Corporation was formed solely for the purpose of this
merger and has no other obligations or liabilities;
. brokers' fees and expenses with respect to the merger; and
. accuracy of information furnished to OEC.
Certain Covenants Relating to Conduct of Business
Hanover and OEC have agreed that, during the period from the date of the
Agreement and Plan of Merger until the completion of the merger, OEC will, and
will cause its subsidiaries to:
. carry on its business in the ordinary course;
. pay its debts and taxes when due, subject to good faith disputes;
. pay or perform other obligations when due; and
. use reasonable efforts to preserve intact its present business
organization, management team and business relationships.
In addition, unless Hanover agrees in writing or the Agreement and Plan of
Merger provides otherwise, OEC has agreed that before the merger, neither it
nor any of its subsidiaries will:
. adopt any amendment to its articles of incorporation or by-laws;
. issue, sell, authorize or propose to issue or sell any shares of its
capital stock or securities convertible into shares of its capital
stock, or any subscriptions, rights, warrants or options to acquire or
other agreements obligating it to issue any shares or other convertible
securities, subject to certain exceptions;
. declare or pay any dividends on or make other distributions in respect
of any of its capital stock;
. effect certain other changes in its capitalization;
. increase the compensation payable to its officers or employees;
. grant additional severance or termination pay or enter into employment
or severance agreements with any employees, directors or officers;
. enter into any collective bargaining agreement except as required by
law;
. adopt or amend any benefit plan for any directors, officers or
employees;
. sell, pledge, lease, dispose of, grant, encumber or otherwise authorize
the sale, pledge, disposition, grant or encumbrance of any material
property or assets;
. acquire any corporation, partnership other business organization or any
business thereof or any other assets;
41
<PAGE>
. incur, assume or pre-pay any indebtedness except in the ordinary course
of business consistent with past practice under existing lines of
credit;
. assume, guarantee, endorse or otherwise become liable for the
obligations of any other person except in the ordinary course of
business consistent with past practice;
. make any advances, loans or capital contributions to, or investments in,
any other person except in the ordinary course of business consistent
with past practice (excluding wholly-owned subsidiaries);
. authorize, recommend, propose or announce an intention to adopt a plan
of complete or partial liquidation or dissolution of OEC or any of its
subsidiaries;
. make or rescind any express or deemed election relating to taxes, settle
any claim or controversy relating to taxes, amend any tax return except
in the ordinary course of business consistent with past practice, or,
except as may be required by applicable law, make any change to its tax
reporting practice from the prior tax year;
. initiate, compromise or settle any litigation or arbitration proceeding;
. take any action, other than reasonable and usual actions in the ordinary
course of business and consistent with past practice, with respect to
accounting policies or procedures, subject to certain exceptions;
. modify, amend or terminate any material contract or waive, release or
assign any material rights or claims, except in the ordinary course of
business consistent with past practice;
. make any capital expenditures in excess of $100,000 individually or
$300,000 in the aggregate;
. amend, modify or terminate any standstill or confidentiality agreement
or waive any rights hereunder; and
. enter into any agreement, contract, commitment or arrangement to do any
of the foregoing, or authorize, recommend, propose or announce an
intention to do any of the foregoing.
No Solicitation
Under the Agreement and Plan of Merger, OEC has agreed not to:
. solicit, initiate, or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, an acquisition
proposal;
. initiate or engage in negotiations or discussions concerning, or provide
any non-public information to any third party or entity relating to, an
acquisition proposal; or
. agree to or recommend an acquisition proposal.
However, the OEC board of directors may furnish non-public information to,
or enter into discussions or negotiations with, any third party regarding an
unsolicited bona fide written acquisition proposal, if:
. the proposal identifies a price to be paid;
. the board of directors believes in good faith, and after consultation
with its financial advisor, that the acquisition proposal is reasonably
capable of being completed on the terms proposed and would, if
completed, result in a transaction more favorable to its stockholders
than the merger;
. the board of directors determines in good faith, and based upon the
written advice of outside legal counsel, that these actions are required
for the board of directors to comply with its fiduciary duties under
applicable law;
. OEC is not in breach of its obligations under the "no solicitation"
provisions of the Agreement and Plan of Merger; and
42
<PAGE>
. prior to taking these actions, the board of directors receives an
executed confidentiality and standstill agreement from the third party
with terms no less favorable than those contained in the confidentiality
agreement between Hanover and OEC.
The OEC board of directors may also respond to any tender offer that may be
made in order to comply with the requirements of Rule 14e-2 under the
Securities Exchange Act of 1934.
OEC has agreed to notify Hanover, orally and in writing, immediately after
receipt of an acquisition proposal or a request for non-public information or
access to its properties, books or records in connection with an acquisition
proposal. OEC has agreed to keep Hanover fully informed of the status of any
acquisition proposal. If OEC receives an acquisition proposal which the board
of directors believes is more favorable than the merger with Hanover, OEC has
agreed not to accept the acquisition proposal for at least five days and notify
Hanover of the proposal. During the five-day period, OEC shall afford Hanover
the opportunity to beat or improve upon the terms and conditions contained in
the acquisition proposal.
Additional Agreements
Stockholder Meeting
OEC has agreed to call a meeting of its stockholders for the purpose of
considering the approval of the Agreement and Plan of Merger as promptly as
practicable following the date of the Agreement and Plan of Merger. The board
of directors of OEC has agreed to declare advisable and recommend the adopting
of the Agreement and Plan of Merger by the stockholders of OEC and, upon
Hanover's request, to reconfirm such recommendation. However, in the event that
OEC receives a third party acquisition proposal, the board of directors will
not be required to make or reconfirm its recommendation of the merger with
Hanover if OEC is not in breach of its obligations under the "no solicitation"
provisions of the Agreement and Plan of Merger and the board of directors
concludes in good faith (after having consulted with and considered the advice
of outside legal counsel) that the proposal is a superior proposal and that
such action is necessary for the board of directors to comply with its
fiduciary duties under applicable law. Regardless of any permissible change in
the recommendation of the OEC board of directors regarding the Agreement and
Plan of Merger and the merger, OEC has agreed to submit the Agreement and Plan
of Merger and the merger to the OEC stockholders for approval at the special
meeting in order to give OEC stockholders the opportunity to vote on the
Agreement and Plan of Merger and the merger in order to obtain the requisite
approval of OEC's stockholders.
Preparation of the Registration Statement and Proxy Statement
Hanover and OEC have agreed to cooperate in the prompt preparation and
filing of documents under federal and state securities laws and with applicable
governmental authorities.
Access to Information
OEC has agreed to provide to the officers, employees, accountants, counsel
and other representatives of Hanover reasonable access to all personnel,
properties, books, contracts, commitments and records during the period between
the date of the Agreement and Plan of Merger and the merger. OEC has agreed to
furnish to Hanover copies of its monthly financial reports, documents filed or
received by it pursuant to the requirements of the federal securities laws and
other information about its business as Hanover may reasonably request.
Compliance with the Securities Act of 1933
OEC has agreed to deliver to Hanover a list of names and addresses of
affiliates of OEC as defined in Rule 145 under the Securities Act. OEC has
agreed to use all reasonable efforts to deliver to Hanover an affiliate letter
from each of the affiliates prior to the merger.
43
<PAGE>
New York Stock Exchange Listing
Hanover has agreed to use reasonable efforts to list the Hanover common
stock issuable in the merger on the New York Stock Exchange.
Fees and Expenses
Hanover and OEC have agreed that, regardless of whether the merger is
completed, all expenses incurred in connection with the Agreement and Plan of
Merger and the merger will be paid by the party incurring those expenses.
Certain fees and expenses may be payable by Hanover or OEC upon termination of
the Agreement and Plan of Merger. See "The Agreement and Plan of Merger--
Termination; Termination Fees and Expenses."
Tax Treatment
Hanover and OEC have each agreed to use their reasonable efforts before and
after completion of the merger to have the merger qualify as a "reorganization"
within the meaning of Section 368(a) of the Internal Revenue Code.
Reasonable Efforts
Hanover and OEC have each agreed to use their respective best efforts to
take all actions and to do all things, necessary, proper or advisable to
conclude and make effective the merger and any transactions that the Agreement
and Plan of Merger contemplated, including, among other things:
. obtaining all consents, approvals and actions by governmental entities;
. obtaining all necessary consents, approvals or waivers from third
parties;
. defending any lawsuits or legal proceedings that challenge the Agreement
and Plan of Merger; and
. consulting and cooperating with one another in all actions taken with
the proceedings under the Hart-Scott-Rodino Act or any other applicable
law.
Stock Options
As of the record date, OEC had outstanding options to purchase a total of
1,663,657 shares of OEC common stock. These options were issued under OEC's
employee and non-employee directors stock option plans. The Agreement and Plan
of Merger provides that each of these stock options will be cancelled and
converted into the right to receive cash from Hanover, within 10 days following
the effective time, cash in an amount equal to the product of (a) $1.00 minus
the exercise price of such option, times (b) the number of shares of common
stock which may be purchased upon exercise of such option.
Director and Officer Indemnification
The Agreement and Plan of Merger provides that, after the merger, Hanover
will indemnify and hold harmless each present and former director and officer
of OEC against all liabilities or expenses, including attorneys' fees, arising
out of any matters existing or occurring before the completion of the merger.
This right to indemnification will apply regardless of whether the claim was
asserted before or after the merger is completed. Hanover's indemnification
obligations will be to the fullest extent permitted under Oklahoma law and are
in addition to any other indemnification rights available to OEC's current and
former directors and officers.
In addition, for a period of three years after the effective time of the
merger, Hanover will maintain or will cause the surviving corporation to
maintain, to the extent available in the market, a director's and officer's
liability insurance policy at least equal in respect to directors and officers
covered, amount and scope as was OEC's coverage in effect as of July 13, 2000;
provided that, Hanover is not required to expend in the aggregate
44
<PAGE>
in excess of 150% of the annual premium paid as of July 13, 2000 for such
coverage, but instead is only required to maintain insurance policies which
provide the maximum and best coverage available at an annual premium equal to
150% of such amount.
Conditions to the Merger
Joint Conditions to the Merger
The Agreement and Plan of Merger provides that the obligations of Hanover
and OEC to effect the merger are subject to the satisfaction or waiver of the
following conditions:
. the OEC stockholders must approve the Agreement and Plan of Merger;
. any waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 must expire;
. Hanover's registration statement must be effective under the Securities
Act of 1933 and not be the subject of a stop order or proceeding seeking
a stop order;
. the absence of any order, injunction, judgment, statute, rule or
regulation that makes the merger illegal or otherwise prohibits the
completion of the merger; and
. the shares of Hanover common stock to be issued in the merger must be
approved for listing on the New York Stock Exchange.
Hanover's Conditions to the Merger
In addition, the Agreement and Plan of Merger provides that Hanover's and
Caddo Acquisition Corporation's obligations to effect the merger are subject to
the satisfaction or waiver of the following conditions:
. OEC's representations and warranties that are qualified as to
materiality or material adverse effect shall have been true and correct
when made and shall be true and correct on and as of the closing date;
. OEC's representations and warranties not qualified as to materiality or
material adverse effect shall have been true and correct in all material
respects when made and shall be true and correct in all material
respects on and as of the closing date;
. OEC must have performed or complied with all agreements and covenants
required to be performed by it under the Agreement and Plan of Merger as
of the closing date that are qualified as to materiality or material
adverse effect, and shall have complied in all material respects with
all agreements and covenants required to be performed by it under this
agreement and not so qualified;
. all regulatory approvals required to complete the merger shall have been
received;
. there shall have been no event, development or change of circumstance
that constitutes, has had, individually or in the aggregate, or could be
expected to have a material adverse effect on OEC and its subsidiaries;
. all required third party consents shall have been obtained;
. non-competition agreements shall have been executed by all officers of
OEC and affiliates of OEC as requested by Hanover;
. Hanover shall have received an executed affiliate agreement (as defined
in the Agreement and Plan of Merger) from all designated affiliates;
. no suit, action, investigation or other proceeding by any governmental
entity shall have been instituted and be pending which imposes, seeks to
impose or reasonably would be expected to impose
45
<PAGE>
any remedy, condition or restriction that would have a material adverse
effect or would materially restrict Hanover's ownership or operation of
OEC;
. if applicable, dissenters' rights shall not have been perfected with
respect to more than 7.5% of the outstanding shares of OEC common stock
See "The Merger--Dissenters' and Appraisal Rights";
. Prudential Securities shall have rendered a fairness opinion with
respect to the Agreement and Plan of Merger and such opinion shall not
have been withdrawn or adversely modified; and
. all principal and accrued interest thereon under the promissory notes
made by Dennis W. Estis and Barbara Estis in favor of OEC shall have
been paid in full.
OEC's Conditions to the Merger
In addition, the Agreement and Plan of Merger provides that OEC's
obligation to effect the merger is subject to the satisfaction or waiver of
the following conditions:
. Hanover's representations and warranties that are qualified as to
materiality or material adverse effect shall have been true and correct
when made and shall be true and correct on and as of the closing date;
. Hanover's representations and warranties not qualified as to materiality
or material adverse effect shall have been true and correct in all
material respects when made and shall be true and correct in all
material respects on and as of the closing date; and
. Hanover must have performed or complied with all agreements and
covenants required to be performed by it under the Agreement and Plan of
Merger as of the closing date that are qualified as to materiality or
material adverse effect, and shall have complied in all material
respects with all agreements and covenants required to be performed by
it under this agreement and not so qualified.
Termination; Termination Fees and Expenses
Termination of the Agreement and Plan of Merger
The Agreement and Plan of Merger may be terminated at any time prior to the
completion of the merger, before or after approval of the merger and related
matters by the OEC stockholders:
. by mutual written consent of Hanover and OEC; or
. by either Hanover or OEC if:
(a) the merger is not consummated by March 1, 2001, so long as the
terminating party did not prevent the completion of the merger by
failing to fulfill any of its obligations under the Agreement and
Plan of Merger;
(b) a court or other governmental entity has issued an order, decree or
ruling which cannot be appealed and which prohibits the completion
of the merger;
(c) at the OEC stockholder's meeting, the requisite vote of the
stockholders of OEC in favor of the approval of the Agreement and
Plan of Merger shall not have been obtained; or
(d) there has been a breach of any representation, warranty, covenant or
agreement on the part of the other party, which breach will cause
the conditions to the closing of the merger not to be satisfied.
. by Hanover if:
(a) the OEC board of directors withdraws, modifies or fails to reconfirm
its recommendation of the merger or the Agreement and Plan of
Merger;
46
<PAGE>
(b) the OEC board of directors recommends an alternative transaction to
the OEC stockholders;
(c) a tender or exchange offer for 20% or more of the outstanding
shares of OEC common stock is commenced, other than by Hanover, and
the OEC board of directors fails to recommend that the OEC
stockholders not tender their shares in the tender or exchange
offer;
(d) any person or group (other than Hanover) becomes the beneficial
owner of 20% or more of the outstanding shares or OEC common
stock; or
(e) OEC fails to call and hold a stockholders' meeting by March 1,
2001, so long as Hanover has not breached a representation,
warranty, covenant or agreement contained in the Agreement and
Plan of Merger.
. by OEC, if the OEC board of directors determines in good faith, based on
written advice of outside legal counsel, that accepting a superior
proposal is required for the board to comply with its fiduciary duties,
so long as OEC has not breached the no solicitation covenant; provided
that this termination shall not be effective until the termination fee
has been paid.
If the Agreement and Plan of Merger is terminated by either Hanover or OEC
as provided above, the Agreement and Plan of Merger will become void and
neither Hanover nor OEC will have any continuing liabilities or obligations
under the Agreement and Plan of Merger, except for any obligation to reimburse
expenses or pay a termination fee under the circumstances described below and
except that termination will not limit liability for a willful breach of the
Agreement and Plan of Merger.
In addition, the confidentiality agreement between Hanover and OEC will
remain in effect even if Hanover or OEC terminates the Agreement and Plan of
Merger.
Termination Fees and Expenses
OEC has agreed to reimburse Hanover for up to $750,000 in merger-related
expenses incurred by Hanover prior to the termination of the Agreement and Plan
of Merger where OEC terminates the Agreement and Plan of Merger because:
. OEC's stockholders fail to approve the Agreement and Plan of Merger;
. the OEC board of directors withdraws, adversely modifies or fails to
reconfirm its recommendation of the merger;
. the OEC board of directors recommends an alternative transaction to the
OEC stockholders;
. a tender or exchange offer for 20% or more of the outstanding shares of
OEC common stock is commenced, other than by Hanover, and the OEC board
of directors fails to recommend that the OEC stockholders not tender
their shares in the tender or exchange offer;
. any person or group (other than Hanover) becomes the beneficial owner of
20% or more of the outstanding shares or OEC common stock;
. OEC fails to call and hold a stockholders' meeting by March 1, 2001, so
long as Hanover has not breached a representation, warranty, covenant or
agreement contained in the Agreement and Plan of Merger;
. the OEC board of directors determines in good faith, based on written
advice of outside legal counsel, that accepting a superior proposal is
required for the board to comply with its fiduciary duties, so long as
OEC has not breached the no solicitation covenant; provided that this
termination shall not be effective until the termination fee has been
paid;
. the merger is not completed by March 1, 2001; or
47
<PAGE>
. OEC breaches any representation, warranty, covenant or agreement in the
Agreement and Plan of Merger and the breach results in the failure of
the closing conditions relating to the accuracy of OEC's representations
and warranties or the performance by OEC of its covenants.
Hanover has agreed to reimburse OEC for up to $750,000 in merger-related
expenses incurred by OEC prior to termination of the Agreement and Plan of
Merger where OEC terminates the Agreement and Plan of Merger because Hanover
breaches any representation, warranty, covenant or agreement in the Agreement
and Plan of Merger and the breach results in the failure of the closing
conditions relating to the accuracy of Hanover's representations and warranties
or the performance by Hanover of its covenants.
These expense reimbursements must be made within two business days after a
demand for payment and a documented itemization setting forth in reasonable
detail all expenses.
In addition, OEC may be required to pay a termination fee of $1,665,000 in
addition to any expenses under the following circumstances:
. OEC's stockholders fail to approve the Agreement and Plan of Merger;
. the OEC board of directors withdraws, adversely modifies or fails to
reconfirm its recommendation of the merger;
. the OEC board of directors recommends an alternative transaction to the
OEC stockholders;
. a tender or exchange offer for 20% or more of the outstanding shares of
OEC common stock is commenced, other than by Hanover, and the OEC board
of directors fails to recommend that the OEC stockholders not tender
their shares in the tender or exchange offer;
. any person or group (other than Hanover) becomes the beneficial owner of
20% or more of the outstanding shares or OEC common stock;
. OEC fails to call and hold a stockholders' meeting by March 1, 2001;
. the OEC board of directors determines in good faith, based on written
advice of outside legal counsel, that accepting a superior proposal is
required for the board to comply with its fiduciary duties, so long as
OEC has not breached the no solicitation covenant; provided that this
termination shall not be effective until the termination fee has been
paid; or
. OEC breaches any representation, warranty, covenant or agreement in the
Agreement and Plan of Merger and the breach results in the failure of
the closing conditions relating to the accuracy of OEC's representations
and warranties or the performance by OEC of its covenants.
The payments under this section of expenses and termination are the sole and
exclusive remedy of the other party with respect to the matters giving rise to
the payment obligation.
On November 14, 2000, Hanover, Caddo Acquisition Corporation and OEC entered
into an amendment to the Agreement and Plan of Merger to extend the outside
date for the completion of the merger to March 1, 2001 and made certain other
changes. The amendment is included with the Agreement and Plan of Merger
attached hereto as Annex A.
Amendment and Waiver
The Agreement and Plan of Merger may be amended at any time by action taken
by the boards of directors of Hanover and OEC, before or after stockholder
approval of the Agreement and Plan of Merger. However, once the Agreement and
Plan of Merger is approved by the stockholders, no change can be made where
further stockholder approval is required by law. Hanover and OEC may also
extend the time for performance of the obligations or other acts of the other,
may waive inaccuracies in the representations or warranties contained in the
Agreement and Plan of Merger and may waive compliance with any agreements or
conditions contained in the Agreement and Plan of Merger.
48
<PAGE>
Voting and Disposition Agreement
Voting and Proxies
As a condition to Hanover's execution of the Agreement and Plan of Merger,
HACL, Ltd. and Energy Investors Joint Venture were required to enter into a
voting and disposition agreement with Hanover. Under the voting and disposition
agreement, HACL Ltd. and Energy Investors Joint Venture have each agreed, among
other things:
. to vote all shares of OEC common stock held by them in favor of the
merger, the adoption and execution by OEC of the Agreement and Plan of
Merger and the approval of the terms thereof and each of the other
transactions contemplated by the Agreement and Plan of Merger;
. to vote all shares of OEC common stock held by them against the
following actions (other than the merger and the transactions
contemplated by the Agreement and Plan of Merger):
(a) any merger, consolidation, business combination, recapitalization,
sale of substantial assets, sale or acquisition of shares of
capital stock or similar transaction involving OEC or any of its
subsidiaries other than the merger;
(b) any amendment of OEC's certificate of incorporation or bylaws or
any change in the majority of the Board of Directors of OEC;
(c) any material change in the present capitalization of OEC;
(d) any other material change in OEC's corporate structure or business;
(e) any other action which, in the case of each of matters referred to
in clauses (b), (c) and (d) above, is intended or could reasonably
be expect to impede, interfere with, delay, postpone, discourage or
materially adversely affect the consummation of the merger or the
transactions contemplated by the Agreement and Plan of Merger or
the voting and disposition agreement; or
(f) any action or agreement that would result in a breach in any
respect of any covenant, representation or warranty or any other
obligation or agreement of OEC under the Agreement and Plan of
Merger or any obligation of HACL Ltd. or Energy Investors Joint
Venture under the voting and disposition agreement.
In addition, each of HACL, Ltd. and Energy Investors Joint Venture has
granted Caddo Acquisition Corporation an irrevocable proxy to vote its shares
of OEC common stock in the manner described above. The voting and disposition
agreement will terminate upon the earlier to occur of the termination of the
Agreement and Plan of Merger or the completion of the merger.
The aggregate number of shares of OEC common stock that is subject to the
voting and disposition agreement is 16,000,000, or approximately 45% of all OEC
common stock outstanding on December 20, 2000.
Prohibited Actions
Each of HACL, Ltd. and Energy Investors Joint Venture has also agreed that
it will not:
. solicit, initiate, encourage or respond to, or take any other action to
knowingly facilitate any inquiries or the making of any proposal by and
other person with respect to OEC that constitutes, or could reasonably
be expected to lead to, an acquisition proposal or permit or authorize
any person acting on the stockholder's behalf to do any of the
foregoing;
49
<PAGE>
. offer for sale, sell, transfer, tender, pledge, encumber, assign or
otherwise dispose of, or enter into any contract, option or other
arrangement or understanding with respect to or consent to the offer for
sale, sale, transfer, pledge, encumbrance, assignment or other
disposition of, any or all of the shares;
. grant any proxy or power of attorney, deposit any of the shares into a
voting trust or enter into a voting agreement with respect to the
shares;
. exercise any rights of appraisal or rights to dissent from the merger;
or
. request that OEC register the transfer of any certificate or
uncertificated interest in the shares except in accordance with the
voting and disposition agreement.
Restrictions on Disposition of Hanover Common Stock
Each of HACL, Ltd. and Energy Investors Joint Venture has also agreed, with
respect to the shares of Hanover common stock issuable to it in the merger,
not to sell or otherwise dispose of any Hanover common stock received by it in
the merger for a period of 120 days from the date of completion of the merger,
unless Hanover consents in writing. In addition, for each succeeding 30-day
period thereafter, each of HACL, Ltd. and Energy Investors Joint Venture has
agreed not to sell, offer or agree to sell or otherwise dispose of, more than
15% of the shares of Hanover common stock received by it in the merger, unless
Hanover consents in writing.
A copy of the voting and disposition agreement is attached as Annex C to
this proxy statement/prospectus.
Noncompetition Agreements
In order to induce Hanover to enter into the Agreement and Plan of Merger,
two OEC stockholders have each entered into noncompetition agreements at
Hanover's request. These stockholders are Dennis W. Estis and Don E. Smith.
Pursuant to the noncompetition agreements, each of Mr. Estis and Mr. Smith has
agreed not to engage or participate in the business of renting, leasing or
managing compression equipment within the States of Texas, Kansas, Arkansas,
Mississippi, Alabama, certain parishes of Louisiana and certain counties of
Oklahoma until August 19, 2001, unless Hanover or OEC consents, subject to
certain exceptions.
Each of Mr. Estis and Mr. Smith has agreed that prior to August 19, 2001 he
will not solicit any person who was employed by Hanover or OEC on June 19,
2000 to leave the employ of Hanover or OEC, except for employees who are
terminated or demoted by OEC or Hanover after June 19, 2000 or are required to
relocated after completion of the merger in order to perform their jobs.
In addition, it is a condition to completion of the merger that OEC's Co-
Chief Executive Officers, Ray C. Davis and Kelcy L. Warren, and other
affiliates of OEC as requested by Hanover enter into similar noncompetition
agreements.
50
<PAGE>
OEC
Business
The information in this section describes the business of OEC as it is
currently conducted, without giving effect to the merger. For a more
comprehensive discussion of OEC's business, you should read its recent annual
report on Form 10-K, which was filed with the Securities and Exchange
Commission on April 19, 2000. OEC's principal executive offices are located at
2501 Cedar Springs Road, Suite 600, Dallas, Texas, 75201.
General
OEC Compression Corporation, formerly Equity Compression Services
Corporation, formerly Hawkins Energy Corporation is engaged in the leasing,
contract management, outsourcing, remanufacturing and direct sale of gas
compression equipment to operators of producing natural gas wells and gas
gathering systems. Its principal geographical operating areas lie within the
states of Alabama, Mississippi, Louisiana, Oklahoma, Arkansas, Kansas, New
Mexico and Texas.
OEC was incorporated as Hawkins Energy Corporation in the state of Oklahoma
in June 1989 for the purpose of consolidating the businesses and assets of
Equity Compressors, Inc. ("Equity Compressors") and ten Hawkins Exploration oil
and gas limited partnerships (the "Hawkins Limited Partnerships"). To effect
the consolidation, OEC extended an exchange offer to the stockholders of Equity
Compressors and the partners of the Hawkins Limited Partnerships. Following
approval by a majority in interest of the limited partners in each of the
Hawkins Limited Partnerships, OEC acquired the assets and assumed the
liabilities of the Hawkins Limited Partnerships and acquired the stock of
Equity Compressors, all in exchange for common stock of OEC, and commenced
operations on December 29, 1989.
OEC acquired Equity Compressors when its sole business was the leasing of
gas compression equipment to operators. Equity Compressors broadened its scope
of operations through its acquisition in April 1990 of a compressor
remanufacturing and service business. The business of the acquired company
centered around the acquisition, remanufacture and sale of existing gas
compressor units. By May 1990, this business was fully integrated into Equity
Compressors.
In June 1993, OEC acquired Mid-South Compressors, Inc., a privately held gas
compression company ("Mid-South"). Mid-South leased compression equipment
throughout the gas-producing regions of Mississippi, Alabama and Northern
Louisiana. The transaction involved the issuance of approximately 5.4 million
shares of Company common stock and the payment of $1.4 million in cash to Mid-
South. OEC financed the cash portion of the acquisition through additional
borrowings.
In July 1993, OEC acquired all the outstanding shares of common stock of
Owens Compression Service, Inc. ("Owens"), a privately held company that
provided gas compression services primarily in East Texas and North Louisiana
in exchange for cash consideration of $42,000 and approximately 3.2 million
shares of Company common stock.
During March 1995, the Boards of Directors of Equity Compressors, Mid-South
and Owens each approved the formal merger of Mid-South and Owens with and into
Equity Compressors. The companies merged their operations under the Equity
Compressors name as of January 1, 1995. The businesses of Equity Compressors
included leasing, direct sales and remanufacturing services of various types of
gas compression equipment.
During December 1996, the stockholders of OEC approved an increase in the
number of authorized shares of common stock enabling OEC to sell 8 million
shares of common stock and 8 million contingent warrants for a total cash
consideration of $4.4 million to HACL, Ltd., a Dallas-based investment group.
Additionally, stockholders voted to change the name of OEC to Equity
Compression Services Corporation.
On August 6, 1997, OEC acquired 100% of the common stock of Ouachita Energy
Corporation ("Ouachita") and the majority of the assets of Ouachita Compression
Group, LLC and Ouachita Energy
51
<PAGE>
Partners, LTD. Under the terms of the acquisition agreements that were closed
effective July 31, 1997, OEC issued to the stockholders 7.6 million shares of
OEC's common stock and paid approximately $24 million in cash and assumption of
debt.
On October 30, 1997, OEC, through its wholly-owned subsidiary, Sunterra
Energy Corporation, entered into a venture with Prize Petroleum, L.L.C.
("Prize") of Tulsa, Oklahoma, to form Sunterra Petroleum Company, L.L.C.
("Sunterra L.L.C."). Sunterra L.L.C. was initially capitalized with oil and gas
properties and cash commitments with a value in excess of $9 million.
On December 31, 1997, OEC closed its shop facilities in Oklahoma City,
Oklahoma, Kilgore, Texas, and Columbia, Mississippi. The acquisition of
Ouachita enabled OEC to consolidate the facilities operations into one state-
of-the-art facility located in West Monroe, Louisiana. Although significant
costs were incurred as a result of the closing of these facilities in the
fourth quarter of 1997, the consolidation of the shop facilities allowed OEC
greater control over product engineering and design, better quality equipment,
more reliable service and increased control over expenses at the facility
level.
On March 6, 1998, OEC merged Equity Compressors into Ouachita. At December
31, 1999, the combined compressor fleet had 854 gas compression units with a
total of approximately 229,000 horsepower.
In March 1998, the number of authorized shares of common stock was increased
and the name of OEC changed to OEC Compression Corporation.
At December 31, 1998, Sunterra L.L.C.'s oil and gas properties were
estimated to have proved reserves of 12,720,000 thousand cubic feet ("mcf") of
natural gas and 163,000 barrels of oil. Natural gas reserves constituted
approximately 93% of OEC's reserve base on a "gas equivalent" basis (converting
each barrel of oil to six mcf of natural gas).
On July 2, 1999, Sunterra sold 100% of its interest in Sunterra L.L.C. to
Prize. Sunterra received $1 million in cash and the Will-O-Mills gas treating
plant located in southwest Texas. The Will-O-Mills gas treating plant is a 300
gpm amine plant, which extracts carbon dioxide, and minor amounts of hydrogen
sulfide from natural gas flowed to the plant by area producers under long-term
treating contracts. The Sunterra L.L.C. sale effectively removed OEC from the
oil and gas production business.
The primary business plan of OEC is growth within the compression service
sector of the natural gas industry. OEC plans to extend its activities in the
compression service sector by expanding its customer base and its business with
existing customers by providing the highest quality compression services.
Additionally, OEC will pursue the purchase of customer owned compressors as
well as the purchase of competitors.
Gas Compression Operations
General
OEC conducts its compressor operations through Ouachita Energy Corporation,
its wholly-owned subsidiary located in West Monroe, Louisiana. The age of a gas
well usually affects its need for compression. A gas well has a natural flowing
pressure which may or may not be adequate to overcome the pipeline pressure at
the point where the gas is introduced into a gathering system or transmission
pipeline. If the flowing pressure of the gas is not adequate to overcome the
pipeline pressure, it is not physically possible to produce or transport the
gas without the aid of compression. Gas compression is used to overcome this
problem by boosting the flowing pressure of the gas. Theoretically, all gas
wells will eventually need compression to boost natural well flowing pressure
to exceed pipeline pressure. Historically, gas compressors have generally been
purchased and operated by gas producers and gas transporters. However, over the
last several years, these same groups have also used equipment leasing and
contract compression services as an accepted means of providing for their gas
compression needs.
52
<PAGE>
Equipment Leasing and Contract Compression Services
At year-end 1999, OEC's service fleet included 854 compressors located in
Alabama, Arkansas, Kansas, Louisiana, Mississippi, Oklahoma, New Mexico and
Texas. These compressors average 268 horsepower in size and their cost as a new
unit of similar size averages about $230,000. OEC's rental fleet is comprised
mostly of used, remanufactured equipment, which was acquired at a substantial
discount to the cost of comparable new compressor units. The fleet includes
engines and compressors of various manufacturers.
Prior to the Ouachita acquisition in the third quarter of fiscal year 1997,
OEC's core business was compression rental-with-maintenance to natural gas
producers, processors and pipelines. With the Ouachita acquisition, OEC
commenced providing full contract compression services, which is the complete
"outsourcing" of a client's compression operations to OEC.
The size and configuration of each compressor varies depending on the
particular application for which it is utilized. Consideration is given to the
differential between the wellhead and pipeline flowing pressures and the
volumes of gas delivered from the wellhead.
The following table sets forth certain data concerning OEC's activity in the
acquisition and leasing of compressors:
<TABLE>
<CAPTION>
September 30 December 31
2000 1999 1998
------------ ------- -----------
<S> <C> <C> <C> <C>
Number of units............................. 845 854 843
Horsepower utilization rate at end of
period..................................... 71% 72% 79%
Equipment horsepower at end of period....... 229,177 228,903 217,663
</TABLE>
Lease/Contract Compression Terms
Generally, OEC's compressors are leased for contract compression services,
which are provided to well operators under written agreements for periods
ranging from month-to-month to six years. These contracts are sometimes renewed
at the end of the specified term at which time the rentals and other terms may
be renegotiated. The competitive marketplace determines the rental/contract
rates used in new contracts and in renewals of existing contracts. Once the
minimum term has expired, the equipment continues on a month-to-month basis,
with either party having the right to terminate the contract by giving a 30-day
written notice. The majority of the deployed compressors at December 31, 1999
were leased on a month-to-month basis.
Under the typical rental-with-maintenance lease, the lessee pays the costs
of transporting the compressor to the well site, installation, all fuel and
other operating costs. The compressors are operated on a daily basis by the
employees of the lessee. OEC maintains service departments which employ skilled
compressor mechanics who service and maintain compression equipment. Under the
most common type of lease, the lessee pays a flat fee for monthly compression
inclusive of service, equipment rental, lubricants and all parts and
maintenance. Under the typical contract compression service contract, OEC
provides the customer with both the compression equipment and operates that
equipment for the customer. OEC's personnel are responsible for both day-to-day
operation and maintenance of the provided compression equipment for a monthly
service fee. Revenues associated with contracts for rental-with-maintenance and
contract compression services are recognized on the first day of the month in
which the service is provided.
Remanufacturing Services
Remanufacturing services involve the overhaul and rework of equipment owned
by third parties. These services are performed under contract with numerous
customers, including gas gathering and transmission companies, major oil
companies, large independents and small producers to overhaul and rework their
gas compression equipment. Generally, OEC prepares a description of the work to
be conducted and the parts to be provided. An estimate or a fixed bid of the
costs to be charged to the customer for the overhaul work accompanies this
description. In the event additional labor or parts are required once the work
is in process, the owner of the unit is contacted regarding the work and
additional charges are then agreed on. Overhaul work is normally guaranteed for
a period of 90 days.
53
<PAGE>
Compressor Sales
OEC is also involved in the direct sales of remanufactured gas compression
equipment. OEC acquires, rebuilds and sells previously owned gas compressor
units to gas producers and transporters. OEC maintains an inventory of
compression parts and equipment at its facility in West Monroe, Louisiana. OEC
is able to sell its remanufactured equipment at a discount to the cost of
comparable new equipment, and in most cases is able to customize and complete a
compressor unit for a customer in substantially less time than the same
customer could acquire the equipment new from the original manufacturer. OEC,
via its field mechanics, is responsible for the service and maintenance of its
direct sales units during their 90-day warranty period.
Market and Customers
OEC's customer base consists of over 180 U.S. 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. No individual customer accounted for more than 10% of
OEC's consolidated revenues during 1998 or 1999.
Competition
The natural gas compression services business is highly competitive.
Overall, OEC faces competition from companies with considerably greater
financial resources as well as from several smaller companies on a more
regional basis. OEC believes it is the sixth largest compressor services
company, defined by total horsepower, in the onshore domestic markets in which
it operates. Increased size and geographic breadth offer compressor services
companies' significant advantages. Supporting staff costs (i.e. sales,
accounting, engineering) do not rise proportionately with increases in the
number of deployed compressors. As a result, companies the size of OEC or
larger benefit from lower overall operating costs than competing smaller
companies. OEC believes it competes effectively on the basis of price as well
as the quality and reliability of service in the geographic markets it operates
(Alabama, Mississippi, Louisiana, Arkansas, Oklahoma, Kansas, Texas and New
Mexico).
Compliance with Environmental Laws
The design and operation of gas compressors is subject to certain federal
and state environmental laws and regulations which, directly or indirectly,
relate to the discharge of materials into the environment. Complete compliance
with all of such laws and regulations may affect OEC's operations and costs as
a result of their effect on the design, condition and operation of its gas
compressors or its costs of repairing or remanufacturing them. Under most of
the leases for the gas compressors, responsibility for compliance with the
majority of these laws and regulations is placed on the lessee. However, there
can be no assurance that OEC would not be liable for any penalties or fines
that may be imposed as a result of any material noncompliance. It is not
anticipated that OEC will be required in the near future to expend amounts that
are material in the aggregate to OEC's overall operations by reason of such
laws and regulations.
Employees
As of November 27, 2000, OEC had 98 full-time employees. OEC has 93
employees in its gas compression operations and 5 employees in its general
corporate area. None of these employees are represented by a union or labor
organization. OEC considers its relations with these employees to be
satisfactory.
Properties and Facilities
OEC owns its shop facilities in West Monroe, Louisiana. The main building
contains approximately 35,000 square feet, the majority of that space designed
for the re-manufacturing and overhauling of OEC's compression fleet with the
balance being office space. The property includes approximately eight acres of
land. OEC owns 12 acres of land, office facilities and a warehouse in
Bridgeport, Texas. OEC leases its executive office space in Dallas, which
consists of approximately 4,500 square feet.
54
<PAGE>
Legal Proceedings
OEC is not currently involved in any material litigation or proceeding and
is not aware of any such litigation or proceeding threatened against it.
Market for OEC's Common Equity
As of September 30, 2000, OEC had approximately 1,140 holders of record of
its common stock. Effective September 3, 1998, OEC's common stock was approved
for listing on the American Stock Exchange ("AMEX") under the symbol "OOC." The
table below reflects the high and low bid prices per share of OEC's common
stock for each calendar quarter during the time period from 1998 to 2000 as
quoted by AMEX since September 3, 1998, and NASDAQ for prior periods. The bid
quotations reflect inter-dealer prices without adjustment for retail markups,
markdowns or commissions and may not reflect actual transactions.
<TABLE>
<CAPTION>
2000 1999 1998
--------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
QUARTER High Low High Low High Low
First.......................... $0.8125 $0.5625 $1.313 $0.875 $2.750 $2.063
Second......................... 0.8750 0.5000 1.750 1.000 2.563 2.063
Third.......................... 1.0625 0.7500 1.438 1.000 2.313 1.688
Fourth (through December 20,
2000)......................... 1.00 0.7500 1.250 0.563 1.938 1.063
</TABLE>
Executive Officers of OEC
Set forth below is certain information with respect to each executive
officer of OEC. Executive officers are elected by the Board of Directors of OEC
and serve at its discretion.
<TABLE>
<C> <C> <S>
Kelcy L Warren 44 Co-Chief Executive Officer
Co-Chairman of the Board
Ray C. Davis 57 Co-Chief Executive Officer
Co-Chairman of the Board
Jack D. Brannon 43 Senior Vice-President/
Chief Financial Officer
</TABLE>
The following is a brief description of the business background of each of the
executive officers of OEC.
Mr. Ray C. Davis has served as Co-Chief Executive Officer and Co-Chairman of
the Board of Directors since September 22, 1999. He is also a co-founder and
senior partner of Energy Transfer Company, a group of partnerships focused on
the acquisition and enhancement of natural gas related midstream assets and
energy service companies. From March 1993 through May, 1996, Mr. Davis served
as Chairman of the Board and Chief Executive Officer of Cornerstone Natural
Gas, Inc., a publicly traded natural gas company focused on midstream assets.
From 1988 through 1993, he served as Chairman of the Board of Capstone
Partners, Inc., an investment and management company specializing in company
acquisitions and special management situations. Mr. Davis received a B.S. and a
B.A. from LeTourneau University.
Mr. Kelcy Warren has served as Co-Chief Executive Officer and Co-Chairman of
the Board of Directors since September 22, 1999. He is also a cofounder and
senior partner of Energy Transfer Company, a group of partnerships focused on
the acquisition and enhancement of natural gas related midstream assets and
energy service companies. From March, 1993 through May, 1996, Mr. Warren served
as President and Chief Operating Officer of Cornerstone Natural Gas, Inc., a
publicly traded natural gas company focused on midstream assets. From 1981
through 1993, Endevco, Inc. (predecessor of Cornerstone Natural Gas) employed
Mr. Warren in various capacities, the last as President. Mr. Warren received
B.S. from the University of Texas at Arlington.
Mr. Jack Brannon has served as Senior Vice President and Chief Financial
Officer since January 1, 1997. Previously, he was employed by BOK Capital
Services Corporation as Senior Vice President (1994--1996) and its affiliate,
Bank of Oklahoma, N.A., as Vice President, Energy Group (1984 -1996). He holds
three degrees from the University of Texas at Austin: a B.S. with honors, an
M.A, and an M.B.A.
55
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information concerning the beneficial
ownership of OEC common stock as of the record date and as of the completion of
the merger for the following:
. each stockholder known by OEC to beneficially own 5% or more of the
outstanding shares of OEC common stock;
. each of OEC's directors;
. OEC's chief executive officer and certain other highly compensated
executive officers of OEC; and
. all of OEC's executive officers and directors as a group.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Exchange Act, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under
this rule, beneficial ownership includes any shares as to which the stockholder
has voting power or investment power and any shares that the stockholder has
the right to acquire within 60 days of the record date through the exercise of
any stock option, warrant or other right. Unless otherwise indicated in the
footnotes or the table, each stockholder has sole voting and investment power
with respect to the shares shown as beneficially owned. The information
relating to beneficial ownership of shares of common stock of the combined
company after the merger does not include shares of Hanover common stock
beneficially owned by the listed stockholders. OEC is not aware that any of
these stockholders beneficially own shares of Hanover common stock.
<TABLE>
<CAPTION>
Percent
Name and Address of of
Beneficial Owner Number of Shares Classes
------------------- ---------------- -------
<S> <C> <C>
HACL, Ltd., ........................................ 11,463,636(1) 31.42
a Texas Limited Partnership
2838 Woodside Street
Dallas, TX 75206
Energy Investors.................................... 4,136,364 11.18
a Texas Joint Venture
2838 Woodside Street
Dallas, TX 75206
Gregory & Cook, Inc................................. 3,037,251 8.21
7575 San Felipe, Suite 350,
Houston, TX 77063
James D. Finley..................................... 148,788(2) *
Neal A. Hawthorn.................................... 3,333(3) *
Clifford S. Lewis................................... 94,911(4) *
Jack D. Brannon..................................... 263,000(5) *
Richard D. Brannon.................................. 1,101,136(6) 2.98
Ray C. Davis........................................ 4,491,742(7) 12.14
Matthew S. Ramsey................................... 229,182(8) *
Jon P. Stephenson................................... 370,379(9) 1.00
Kelcy L. Warren..................................... 4,491,742(10) 12.14
Dennis W. Estis..................................... 5,370,487(11) 14.52
William J. (Bill) Murray............................ 185,623(12) 14.52
All Directors and Executive Officers as a Group (12
Persons) .......................................... 17,608,948(13) 48.00
</TABLE>
56
<PAGE>
--------
* Less than 1%
(1) Does not include the 4,136,364 shares of Common Stock held by Energy
Investors, a Texas joint venture. HACL, Ltd. is the managing joint venturer
of Energy Investors, but is obligated to vote the shares as directed by the
other joint venturers (proportionately according to their interests) and
HACL, Ltd. is not entitled to participate in the distribution or profits
attributable to the shares until the other joint venturers receive a
specified annual return on their investment in the shares.
(2) Includes 3,333 shares which may be acquired upon the exercise of presently
exercisable options and 145,455 share attributable to Mr. Finley's interest
in Energy Investors.
(3) Includes 3,333 shares which may be acquired upon the exercise of presently
exercisable options.
(4) Includes 63,332 shares which may be acquired upon the exercise of presently
exercisable options, and 31,920 shares held by the 401(k) Plan and
allocated to the account of Mr. Lewis. Excludes 650,000 shares owned by
Hawkins Oil & Gas.
(5) Includes 23,000 shares which may be acquired upon the exercise of presently
exercisable options and 240,000 shares acquired upon the exercise of the
HACL warrants.
(6) Includes 3,333 shares which may be acquired upon the exercise of presently
exercisable options, 1,101,136 shares attributable to Mr. Brannon's
interest in HACL, Ltd.
(7) Includes 3,333 shares which may be acquired upon the exercise of presently
exercisable options, 4,491,742 shares attributable to Mr. Davis' interest
in HACL, Ltd.
(8) Includes 35,000 shares which may be acquired upon the exercise of presently
exercisable options, 193,182 shares attributable to Mr. Ramsey's interest
in HACL, Ltd.
(9) Includes 3,333 shares which may be acquired upon the exercise of presently
exercisable options, 367,045 shares attributable to Mr. Stephenson's
interest in HACL, Ltd.
(10) Includes 3,333 shares which may be acquired upon the exercise of presently
exercisable options, 4,491,742 shares attributable to Mr. Warren's
interest in HACL, Ltd.
(11) Excludes 1,380,675 shares which are held by the ex-wife of the Mr. Estis.
Mr. Estis disclaims beneficial ownership of such shares. Includes, 6,666
shares which may be acquired by currently exercisable options.
(12) Includes 183,523 shares attributable to Mr. Murray's interest in a partner
of HACL, Ltd.
(13) Includes 217,165 shares which may be acquired upon the exercise of
presently exercisable options, 51,638 shares held by the 401(k) Plan and
allocated to the accounts of such individuals, 2,884,847 shares
attributable to such persons' interests in HACL, Ltd., 5,923,024 shares
which may be acquired upon the exercise of presently exercisable warrants
and which are attributable to such persons' interests in HACL, Ltd. and
145,455 shares which are attributable to Mr. Finley's interest in Energy
Investors.
57
<PAGE>
Selected Historical Financial Data--OEC
In the table below, we provide you with selected historical consolidated
financial data of OEC. OEC prepared this information using its consolidated
financial statements as of the dates indicated and for each of the fiscal years
in the five-year period ended December 31, 1999, and for the nine-month periods
ended September 30, 1999 and September 30, 2000. OEC derived the consolidated
income statement data below for each of the years ended December 31, 1999 and
1998 from financial statements audited by Arthur Andersen LLP, independent
public accountants. OEC derived the consolidated income statement data below
for the years 1997, 1996 and 1995 from financial statements audited by
PricewaterhouseCoopers LLP, independent accountants. OEC derived the remaining
data from unaudited consolidated financial statements.
The information in this section should be read along with OEC's consolidated
financial statements, accompanying notes and other financial information
attached to this proxy statement/prospectus at Page F-1.
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
------------------------------------------- -----------------------------
September 30, September 30,
1995 1996 1997 1998 1999 1999 2000
------ ------ ------- -------- -------- -------------- --------------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Compressor rentals,
service and treating
fees................. $6,802 $6,445 $12,363 $ 23,125 $ 23,353 $ 17,484 $ 16,473
Compressor sales and
remanufacturing...... 1,611 1,177 979 708 405 286 198
Oil and gas sales..... 1,530 1,821 2,685 2,409 1,399 1,399 --
------ ------ ------- -------- -------- -------- --------
Total revenues........ 9,943 9,443 16,027 26,242 25,157 19,169 16,671
------ ------ ------- -------- -------- -------- --------
Operating Expenses:
Operating costs--
rentals, service and
treating fees........ 3,558 2,643 5,063 9,700 9,488 7,358 5,767
Cost of compressor
sales and
remanufacturing...... 1,093 894 941 672 274 180 108
Operating costs--oil
and gas.............. 621 516 804 728 470 510 --
Depreciation,
depletion and
amortization......... 2,326 2,201 3,687 5,970 6,346 4,829 4,360
Inventory write-down.. -- -- 404 -- -- -- --
Shop closing costs.... -- -- 307 -- -- -- --
General and
administrative....... 1,881 2,080 4,110 4,299 3,923 2,939 1,759
Asset impairment...... 1,790 -- -- 162 -- -- --
------ ------ ------- -------- -------- -------- --------
Total expenses....... 11,269 8,334 15,316 21,531 20,501 15,816 11,994
------ ------ ------- -------- -------- -------- --------
Income (loss) from
operations............. (1,326) 1,109 711 4,711 4,656 3,353 4,677
------ ------ ------- -------- -------- -------- --------
Other income (expense):
Merger related and
employee retention
expense.............. -- -- -- -- -- -- (608)
Gain (loss) on sale of
assets............... (23) (437) 10 (22) 276 335 748
Interest and other
income............... 102 26 52 122 91 78 173
Interest expense...... (1,043) (927) (1,884) (4,536) (5,228) (3,915) (4,263)
Contingent warrant
expense.............. -- -- (1,440) -- -- -- --
Minority interest in
results of oil and
gas operations..... . -- -- (60) (146) (88) (88) --
------ ------ ------- -------- -------- -------- --------
(964) (1,338) (3,322) (4,582) (4,949) (3,590) (3,950)
------ ------ ------- -------- -------- -------- --------
Net income (loss) before
income taxes and
extraordinary item..... (2,290) (229) (2,611) 129 (293) (237) 727
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
------------------------------------------ -----------------------------
September 30, September 30,
1995 1996 1997 1998 1999 1999 2000
------- ------ ------- ------- ------- -------------- --------------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income tax (expense)
benefit................ 852 69 924 (75) 414 454 (290)
------- ------ ------- ------- ------- ------- -------
Net income (loss) before
extraordinary item..... (1,438) (160) (1,687) 54 121 217 437
Extraordinary item:
Write-off of unamortized
debt issue costs on
debt retirement (net of
$28 tax)............... -- -- -- (42) -- -- --
Net income (loss)....... $(1,438) $ (160) $(1,687) $ 12 $ 121 $ 217 $ 437
======= ====== ======= ======= ======= ======= =======
Basic and dilutive net
income (loss) before
extraordinary item per
common share........... $ (.11) $ (.01) $ (.07) $ .00 $ .00 $ .01 $ .01
======= ====== ======= ======= ======= ======= =======
Extraordinary item...... $ .00 $ .00 $ .00 $ .00 $ .00 $ .00 $ .00
======= ====== ======= ======= ======= ======= =======
Basic and dilutive net
income (loss) per
common share........... $ (.11) $ (.01) $ (.07) $ .00 $ .00 $ (.01) $ .01
======= ====== ======= ======= ======= ======= =======
Cash and cash
equivalents............ 177 10 1 7 405 400 8,689
Working capital......... 930 787 1,260 4,300 921 (869) (28,653)
Total assets............ 26,041 25,810 84,365 106,921 106,393 105,643 112,390
Total debt, including
current maturities..... 9,682 11,013 54,212 58,829 61,299 61,289 60,682
Stockholder's equity.... 10,698 14,797 28,735 28,792 28,654 28,748 36,371
</TABLE>
59
<PAGE>
OEC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is Management's discussion and analysis of certain significant
factors which have affected the OEC's earnings and financial condition during
the periods included in the accompanying Consolidated Balance Sheets,
Statements of Operations and Cash Flows.
Results of Operations:
Nine Months Ended September 30, 2000 versus Nine Months Ended September 30,
1999
Gas compressor rentals, service & treating fees of $16.5 million for the
nine months ended September 30, 2000 (the "September 30, 2000 Period")
represented a 6% reduction from that achieved in the nine months ended
September 30, 1999 (the "September 30, 1999 Period"). The decline was due to a
slight drop in the average amount of compression horsepower deployed during the
September 30, 2000 Period as compared to the September 30, 1999 Period and a
slight increase in the average unit size of a deployed unit. As stated earlier,
compression rental rates and, in general, operating costs, on a per horsepower
basis is inversely related to unit size. The decline in rental service and
treating fees was more than offset by a 22% decline, from September 30, 1999
Period levels, in the associated direct operating costs to $5.8 million. The
comparative period cost reduction was due to (1) the previously described
economies of scale in cost structure from deploying larger horsepower
equipment, and (2) continued focus on cost structure efficiencies in OEC's
field operations. As a result, OEC's gas compressor rentals, service and
treating operations generated a gross profit (revenues--direct expense) of
$10.7 million for the September 30, 2000 Period versus the September 30, 1999
Period's $10.1 million, a 6% improvement. The September 30, 2000 Period's and
September 30, 1999 Period's gross margins for these operations (gross profit
divided by revenue) were 65% and 58%, respectively.
In the September 30, 2000 Period, compressor sales and remanufacturing
revenues decreased 31% from September 30, 1999 Period levels to $198,000. The
associated cost-of-goods-sold fell 40% from September 30, 1999 Period levels to
$108,000. As a result the gross profit from these operations declined just 15%
from September 30, 1999 Period levels to $90,000. The gross margin improved to
45% from the September 30, 1999 Period's 37%. OEC continues to minimize its
focus on this business sector in favor of the typically more profitable gas
compression rental, service and treating sector.
Oil and gas revenues and the associated operating costs fell to $0 in the
September 30, 2000 Period due to the July, 1999 sale of 100% of its oil and gas
operations to Prize Petroleum. OEC exited the oil and gas production business
to redirect its capital investment into its core gas compression, service and
treating business.
Depreciation, depletion and amortization costs for the September 30, 2000
Period fell 10% from September 30, 1999 Period levels. The loss of depletion
due to the July, 1999 sale of the oil and gas operations was the predominant
cause.
In the September 30, 2000 Period, selling, general and administrative
expense ("G&A") fell $1.8 million (-40%) from September 30, 1999 Period levels
to $1.8 million. The decrease reflected OEC's continued focus on expense
controls. The bulk of the G&A reduction was achieved through personnel
reductions. The September 30, 2000 Period's G&A expense also includes an
estimated $130,000 in legal, professional and other expenses associated with
(1) OEC's response to a shareholder proxy solicitation instigated by three
dissident directors of OEC, and (2) costs associated with OEC's support of the
investment bank, engaged in February, 2000, in its efforts to market OEC. At
the July 13, 2000 annual OEC shareholders' meeting, OEC's shareholders
overwhelmingly rejected the dissident directors' alternative slate of directors
in favor of the slate proposed by OEC and the three dissident directors were
not reelected to OEC's board. Additionally, OEC rejected the dissident group's
request, delivered by their legal counsel, to reimburse the dissident group's
legal and proxy solicitation expenses.
60
<PAGE>
OEC's improved cost structure in both its field operations and
selling/administration more than offset the September 30, 2000 Period revenue
decline from the comparative period. As a result, Income from Operations rose
$1.3 million (39%) from September 30, 1999 Period levels to $4.7 million.
Cashflow, defined here as earnings before interest, taxes, depreciation,
amortization and non-recurring expenses (commonly referred to as "EBITDA"),
rose $855,000 (10%) from September 30, 1999 Period's performance level to $9.0
million.
Interest income for the September 30, 2000 Period of $173,000 represents a
$95,000 increase over the September 30, 1999 Period levels and is due to the
increase in short-term cash investments held by OEC during the last three
months of the September 30, 2000 Period. As of September 30, 2000, OEC had $8.7
million in cash and short-term investments. The bulk of the cash investments
are the result of a common stock warrant exercise by three officers of OEC in
mid June, 2000. The September 30, 2000 Period interest expense of $4.3 million
represented a 9% increase over the September 30, 1999 Period levels and was due
to (1) slightly higher levels of senior debt, and (2) higher debt interest
rates in the current period.
On July 17, 2000, OEC and Hanover Compressor Company announced that the two
companies have executed a definitive merger agreement under which Hanover would
acquire OEC in an all-stock transaction. The merger, which is subject to the
approval of OEC's shareholders, is expected to close in late December, 2000 or
early January, 2001. Prior to the merger announcement, OEC's board approved a
company wide employee retention plan to incentivise OEC employees to remain
during the sale and merger process. During the September 30, 2000 Period, OEC
incurred legal costs of approximately $150,000 associated with the planned
merger and paid retention bonuses under the employee retention plan totaling
$458,000. These combined costs have been included as a line item under "Other
income (expense)" in the financial statements.
In February, 2000, OEC sold a 50% undivided interest in the Will-o-Mills gas
treating plant for cash proceeds of $2 million. The sale generated a gain-on-
sale of $738,000 during the first quarter of 2000. This compares with a
$310,000 gain taken in July, 1999 with the previously described sale of OEC's
oil and gas operations to Prize Petroleum. Minority interest was eliminated
with the Prize sale.
As result of the improved operating margins and reduced G&A expenses, OEC
reported pretax net income of $727,000 for the September 30, 2000 Period versus
a $237,000 pretax loss for the comparative September 30, 1999 Period. The
September 30, 2000 Period's pretax net income, before (1) the merger and
employee retention Expenses, and (2) one time gains on asset sales, was
$587,000. The comparative September 30, 1999 Period generated a pretax net loss
before comparable expenses and sale gains of $572,000.
Income tax expense for the September 30, 2000 Period of $290,000 resulted in
net income for the period of $437,000. A $454,000 tax benefit in the
comparative September 30, 1999 Period reversed the period's $237,000 pretax net
loss to a positive net income of $217,000.
1999 versus 1998
Compression and gas treating service fees increased $228,000 or 1% from
1998. OEC did not experience the level of revenue growth in 1999 that it
achieved in 1998. The reasons were twofold: OEC discontinued compression
services in February 1999, for a client which represented approximately 6% of
its deployed compression horsepower. Additionally, OEC believes the entire
compression services industry experienced a general slowdown in compression
demand growth apparently caused by the precipitous fall in 1998 of natural gas
prices which subsequently impacted the industry's client base's capital budgets
for 1999. OEC believes the rebound in the natural gas price in 1999 has
refueled compression demand growth in the last half of the year. From July
through December 1999, OEC's deployed compression horsepower grew 7%. July was
OEC's lowest deployment level for all of 1999. Compression operating costs
decreased $212,000 (3%) from 1998 due to continued focus on cost controls in
the field operations.
Compressor sales and remanufacturing revenue fell $303,000 (43%) from 1998.
The decrease reflects OEC's continued focus on the higher margin contract
compression services over third-party equipment sales.
61
<PAGE>
The associated compressor sales and remanufacturing direct costs fell $398,000
(59%) from 1998 due to increased focus on job costing.
Oil and gas sales decreased $1 million from 1998 due to the sale of the oil
and gas operations in July 1999. OEC held 100% of its oil and gas producing
interest in Sunterra. which was majority owned by OEC but operated by the
minority owner Prize. On July 2, 1999, OEC sold 100% of its interest in
Sunterra to Prize for $1 million in cash and 100% interest in the Will-O-Mills
gas treating plant, a 300GPM Amine Plant in West Texas. OEC entered into the
transaction to replace a depleting asset with a redeployable asset with a
similar operating profile to gas compression. OEC reported a $421,000 gain on
the sale. Oil and gas operating costs fell $258,000 from 1998 due to the
previously described sale.
Compressor depreciation increased $200,000 (4%) from 1998. The increase was
due to 1) continued capital investment to upgrade the fleet and 2) a
substantial turnover of compression equipment on existing compression jobs in
the March--July 1999 period. OEC believes the latter was the result of an
industry-wide turnover of equipment. The industry's collective client base,
predominantly exploration and production companies, coming off a poor gas price
year in 1998 and looking for cost and revenue efficiencies, made a major effort
to "right size" their existing rental compression to the current application.
The result was a major turnover of equipment on applications. The turnover
generated a higher than normal level of capital investment in refurbishing idle
equipment to replace the returning over or under sized equipment. Oil and gas
depletion and depreciation fell $270,000 due to the July Sunterra sale
described above. Intangibles amortization increased $233,000 from 1998 due to
the amortization of the balance of the non-compete and non-solicitation
agreements between OEC and two former executive officers of OEC who resigned in
December 1998.
General and administrative expense fell $375,000 (9%) from 1998. OEC's
continued focus on cost controls was the principal reason for the cost
reduction. Included in 1999 general and administrative costs is approximately
$300,000 of predominately legal and professional costs surrounding the
activities of two special committees of the Board of Directors established to
review and evaluate certain merger and acquisition activities during the year.
In November 1999, OEC sold and leased back virtually all of its owned
vehicles to a subsidiary of GE Capital. The transaction generated a net loss on
sale of $169,000.
Interest expense increased $692,000 from 1998 due to substantial fleet
growth in 1998 that was predominantly debt financed. That growth was being
generated over all of 1998, the increased interest expense is fully realized in
1999. The July Sunterra sale eliminated minority interest expense beyond that
point. As a result, this expense item fell $58,000.
OEC reported a pre-tax loss of $293,000 for the 1999 fiscal year versus
$129,000 pre-tax profit for 1998. However, an income tax benefit of $414,000
created after-tax net income of $121,000 versus 1998 net earnings of $12,000.
Capital expenditures on the compressor fleet totaled $11.1 million in 1999
versus $21.1 million in 1998. The acquisition of compression equipment through
purchase / leaseback transactions accounted for $1.5 million of the 1999 fleet
capital expenditures. Roughly 85% of the aggregate purchase / leaseback
investment occurred in December 1999 and, therefore, had little impact on 1999
earnings. Field capital expenditures, to sustain the value and operational
performance of the operating fleet, totaled $3.1 million. Roughly 90% of the
remaining $6.5 million capital investment represented investment in the
existing fleet through shop operations to sustain and enhance the value of the
existing fleet as it was deployed on new jobs. The balance represented
purchases of equipment in the open market to fill job applications, which could
not be matched with equipment in the existing fleet. OEC believes that the shop
CAPEX levels on the existing fleet were inflated in 1999 due to the substantial
turnover of equipment on existing jobs in the spring-through-summer period of
1999. As previously discussed, OEC believes the entire compression industry
experienced a substantial turnover of equipment during the defined period as
the industry's collective client base, mostly independent exploration and
62
<PAGE>
production companies, attempted to "right size" their leased compression to
gain cost and production efficiencies in the face of 1998 gas and oil price
driven budget constraints. The immediate impact of the action is increased
capital investment for little if any additional revenue. However, there are
longer-term benefits in the form of decreased future capital investment.
Capital Resources and Liquidity
As of September 30, 2000, OEC has in place a $39.5 million senior credit
facility with a major international bank. The facility is a borrowing base
revolver effective through July 2001, due in full on July 31, 2001. The
September 30, 2000 borrowing base is $48 million but is limited to the current
commitment that reduces by $150,000 per month through the July 31, 2000
maturity. The credit facility is collateralized by substantially all of the
assets of OEC. On September 30, 2000, the senior credit facility's outstanding
balance was $39.3 million which was classified as a current maturity.
In July 1997, OEC entered into a senior subordinated term note agreement and
senior floating rate note agreement with The Prudential Insurance Company of
North America ("Prudential") for $15 million and $5 million, respectively. The
$15 million term note agreement contained a warrant purchase agreement
authorizing Prudential to purchase up to 1 million shares of OEC's common stock
at an initial exercise price of $2.80 per share until the termination date of
the related term note. The fair value of the warrants, $870,000, was determined
using the Black-Scholes model and was treated as an addition to paid-in
capital. The resulting term note amount of $14,130,000 will be accreted over
the 10-year term using its effective interest rate of 11.14%. The exercise
price of the warrants was subsequently lowered to $1.00 per share in 1999 in
connection with the waiver of covenants. OEC's cash interest payout over the
term of the note is at the stated rate of 10.15%.
Covenants related to the debt agreements include the maintenance of specific
levels of working capital, tangible net worth, and various debt service ratios,
as defined by the agreements. Further, the debt agreements prohibit the payment
of dividends, limit OEC's repurchase of its own stock, and restrict new
borrowings. At September 30, 2000, OEC was in compliance with all covenants in
both its senior and subordinated credit facilities.
OEC relies primarily on the collection of revenues associated with rental-
with-maintenance and contract compression contracts to fund OEC's working
capital and capital expenditure needs. Borrowings from OEC's senior credit
facility are used primarily to finance the growth of OEC. The coordination of
the cash flow from operations and borrowings from the senior credit facility
allows OEC to optimize its cash flow.
On June 12, 2000, OEC's Co-Chief Executive Officers and Chief Financial
Officer exercised a warrant, issued by OEC in December 1996, for 8 million
shares of OEC's common stock at an exercise price of $0.91 per share. OEC
received cash proceeds of $7.28 million upon the warrant exercise. OEC has
invested the cash in short-term liquid investments.
In July 1999, OEC sold approximately 5,000 horsepower of idle compression
equipment (approximately 2% of the total fleet) in a single transaction for $2
million. The purchase and sale agreement contains put and call features that
permit 1) OEC to repurchase, at its option, ("Call") the equipment by the end
of 1999 at cost, and (2) the purchaser to ("Put") the equipment back to OEC and
recover the purchase price plus accrued interest at 10%. The Put and Call
features, which were to expire on December 31, 1999, have been extended by
mutual agreement of OEC and the purchaser to August 30, 2000. On July 17, 2000,
OEC announced that it had executed a definitive Agreement and Plan of Merger
with Hanover Compressor Company, the purchaser of the equipment. The merger is
expected to close between late December, 2000 and early January, 2001. OEC
expects that the existing terms of the equipment purchase and sale agreement
will be extended until the merger's completion. Regardless, OEC has sufficient
cash reserves to pay-off the note. OEC has treated the transaction as a loan
for accounting purposes until such time as the put and call features have
either been exercised or expire. To that end, the $2 million sale is carried as
a $2 million current note payable at June 30, 2000.
63
<PAGE>
Net cash provided by operating activities decreased to $3.8 million in the
first nine months, ending September 30, 2000 from $7.0 million in the
comparable nine months of 1999 primarily due to a $1.3 million reduction in
accounts payable and accrued liabilities as well as the backing out of the
$.748 million gain on asset sale from the previously described February, 2000
sale of a 50% interest in the Will-O-Mills gas treating plant. Net cash used in
investing activities fell from 1999's $8.4 million to 2000's $2.0 million. The
principal causes were (1) a $5.2 million reduction in capital expenditure
levels for acquisitions to and enhancements of OEC's compressor fleet and (2)
the $2 million cash proceeds from the previously described February 2000 Gas
plant interest sale. Net cash provided by financing activities increased from
1999's $1.7 million to 2000's $6.5 million due primarily to the $7.28 million
in cash proceeds received from the previously described June 12, 2000 stock
warrant exercise and a $658 thousand net reduction in borrowings.
At September 30, 2000, OEC had current assets of $17.0 million and current
liabilities, excluding the $39.3 million senior revolver balance, of $7.3
million. OEC has minimal availability under its senior credit facility and does
not have access to the borrowing base above the current $39.0 million
commitment (as of November 8, 2000) unless additional lenders are recruited
into the credit facility. Given the planned Hanover merger, OEC has no plans to
recruit additional lenders at this time. Further, as of September 30, 2000, OEC
possesses $8.7 million in cash reserves which management believes is
sufficient, along with cash from operations, to support working capital and
capital investments through completion of the Hanover merger.
64
<PAGE>
DESCRIPTION OF HANOVER COMMON STOCK
The following is a summary of the material terms of Hanover's common stock.
Because it is only a summary, it does not contain all the information that may
be important to you. Accordingly, you should read carefully the more detailed
provisions of Hanover's certificate of incorporation and bylaws.
General
Hanover's authorized capital stock currently consists of 200,000,000 shares
of common stock and 3,000,000 shares of preferred stock, $.001 par value per
share. The following summary description relating to the capital stock does not
purport to be complete. For a detailed description, reference is made to
Hanover's certificate of incorporation.
Common Stock
As of November 11, 2000, 62,864,191 shares of Hanover common stock were
issued and held of record by approximately 294 stockholders. The holders of
common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. Subject to preferential rights
with respect to Hanover preferred stock, holders of common stock are entitled
to receive ratably any dividends declared by its board of directors out of
legally available funds. On liquidation, dissolution, sale or winding up of
Hanover, holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and satisfaction of preferential rights.
Holders of common stock have no preemptive or subscription rights. The
outstanding shares of common stock are, and the shares of common stock to be
issued upon conversion of the preferred securities will be, fully paid and
nonassessable. Hanover has never declared a dividend of cash or property on the
common stock, and its bank credit agreement prohibits the payment of dividends
on common stock without the lenders' prior written consent. The payment of any
such dividends also will be subject to, and may be limited by, the terms of any
preferred stock Hanover may issue in the future.
Transfer Agent And Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services.
65
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of certain of the material differences between
the rights of holders of Hanover common stock and the rights of holders of OEC
common stock. Hanover is organized under the laws of the State of Delaware and
OEC is organized under the laws of the State of Oklahoma. The rights of
stockholders of the two corporations arise from both state laws and the
certificate of incorporation and bylaws of Hanover and the articles of
incorporation and bylaws of OEC, as applicable. The Oklahoma General
Corporation Act was first adopted in 1986 and was modeled on the Delaware
General Corporation Law. Consequently, there are a great many similarities in
the state corporate laws governing the two companies.
The following summary is not a complete statement or comparison of the
rights of holders of Hanover common stock or holders of OEC common stock and is
qualified in its entirety by reference to the Delaware General Corporation Law
and the Oklahoma General Corporation Act and the respective charter and bylaw
documents of Hanover and OEC.
--------------------------------------------------------------------------------
Hanover Stockholder Rights OEC Stockholder Rights
--------------------------------------------------------------------------------
Capital Stock
The total number of authorized shares of Hanover capital stock is
203,000,000, which consists of 200,000,000 shares of common stock, par value
$.001 per share, and 3,000,000 shares of preferred stock, par value $.001.
The total number of authorized shares of OEC capital stock is 61,000,000,
which consists of 60,000,000 shares of common stock, par value $.01 per share,
and 1,000,000 shares of preferred stock, par value $1.00.
Number, Election and Removal of Directors
Number of Directors
Under the Delaware General Corporation Law, the certificate of incorporation
or bylaws of a corporation may specify the number of directors of the
corporation. Hanover's bylaws provide that the number of directors of Hanover
will be seven or such other number as may be determined by the board of
directors. The Hanover board of directors is currently set at seven.
Under the Oklahoma General Corporation Act, the certificate of incorporation
or bylaws of a corporation may specify the number of directors of the
corporation. OEC's bylaws provide that the number of directors of OEC will be
not less than one nor more 15 or such other number as may be determined by the
board of directors. The OEC board of directors is currently set at nine.
Election of Directors
Hanover's bylaws provide that directors will be elected at the annual
meeting of stockholders by a plurality of the votes of the shares present in
person or represented by proxy and entitled to vote. Under the Delaware General
Corporation Law, stockholders do not have the right to cumulative voting unless
a corporation's certificate of incorporation provides for cumulative voting.
Hanover's certificate of incorporation does not provide for cumulative voting.
OEC's bylaws provide that directors will be elected at the annual meeting of
stockholders by a plurality of the votes of the shares present in person or
represented by proxy and entitled to vote. Under the Oklahoma General
Corporation Act, stockholders do not have the right to cumulative voting unless
a corporation's certificate of incorporation provides for cumulative voting.
OEC's certificate of incorporation does not provide for cumulative voting.
Under OEC's bylaws, OEC shareholders must give advance notification of any
nominations of directors in lieu of the slate of directors being nominated by
the OEC Board of directors. Such notice must be given to OEC not less than 60
nor more than 90 days prior to a shareholders meeting.
66
<PAGE>
Vacancies on the Board of Directors
Vacancies on the Hanover board of directors and newly created directorships
shall be filled by a majority of the directors then in office.
Vacancies on the OEC board of directors and newly created directorships
shall be filled by a majority of the directors then in office, even though less
than a quorum.
Removal
Under Hanover's bylaws, any of Hanover's directors or its entire board of
directors may be removed from office at any time, with or without cause, by the
holders of a majority of the outstanding shares of Hanover common stock
entitled to vote.
Under OEC's bylaws, any of OEC's directors or its entire board of directors
may be removed from office at any time, with or without cause, by the holders
of a majority of the outstanding shares of OEC common stock entitled to vote.
Amendments to Charter and Bylaws
Amendments to Charter
Most of the provisions of Hanover's certificate of incorporation may be
amended by the holders of a majority of the outstanding Hanover common stock as
provided under the Delaware General Corporation Law, since a greater vote is
not required by Hanover's certificate of incorporation.
All of the provisions of OEC's certificate of incorporation may be amended
by the holders of a majority of the outstanding OEC common stock as provided
under the Oklahoma General Corporation Act, since a greater vote is not
required by OEC's certificate of incorporation.
Amendments to Bylaws
The Delaware General Corporation Law provides that only the stockholders may
amend the bylaws of a corporation unless this authority is conferred upon the
board of directors in the certificate of incorporation. Hanover's certificate
of incorporation and bylaws provide that its bylaws may be amended or new
bylaws may be adopted by the stockholders or by the board of directors.
The Oklahoma General Corporation Act provides that only the stockholders may
amend the bylaws of a corporation unless this authority is conferred upon the
board of directors in the certificate of incorporation. OEC's certificate of
incorporation and bylaws provide that its bylaws may be amended or new bylaws
may be adopted by the stockholders or by the board of directors.
Special Meetings of Stockholders
Under the Delaware General Corporation Law, a special meeting of
stockholders may be called by the board of directors or by any other person
authorized by the certificate of incorporation or bylaws. Hanover's bylaws
provide that a special meeting of stockholders may be called by the president,
the Board of Directors or by a request in writing from holders of not less than
10% of the issued and outstanding voting stock.
Under the Oklahoma General Corporation Act, a special meeting of
stockholders may be called by the board of directors or by any other person
authorized by the certificate of incorporation or bylaws. OEC's bylaws provide
that a special meeting of stockholders may be called by the president or the
Board of Directors.
67
<PAGE>
Action Without a Meeting
The Delaware General Corporation Law provides that any action required or
permitted to be taken at a stockholders meeting may be taken without a meeting
by written consent, unless a corporation's certificate of incorporation
provides otherwise. Hanover's certificate of incorporation does not provide
otherwise.
The Oklahoma General Corporation Act provides that any action required or
permitted to be taken at a stockholders meeting may be taken without a meeting
by written consent, unless a corporation's certificate of incorporation or
bylaws provides otherwise, provided however, that if a corporation's stock is
registered under the Securities Exchange Act of 1934, as amended, and it has
1,000 or more shareholders of record, the written consent must be signed by all
of the holders of the outstanding shares entitled to vote. OEC's bylaws
provides that shareholders may not act by written consent.
Inspection of Stockholder List
The Delaware General Corporation Law permits any stockholder of record to
inspect the stockholder list for any purpose reasonably related to the person's
interest as a stockholder.
The Oklahoma General Corporation Act permits any stockholder of record to
inspect the stockholder list for any purpose reasonably related to the person's
interest as a stockholder.
Limitation of Directors' Liability
As permitted by the Delaware General Corporation Law, Hanover's certificate
of incorporation provides that a director shall not be personally liable for
monetary damages for breach of fiduciary duty as a director, except for
liability for:
. any breach of the director's duty of loyalty to Hanover or its stockholders;
. acts and omissions not in good faith or which involve intentional misconduct
or a knowing violation of law;
. liability associated with the unlawful payment of dividends or an unlawful
stock purchase or redemption; or
. any transaction from which the director derived an improper personal benefit.
As permitted by the Oklahoma General Corporation Act, OEC's certificate of
incorporation provides that a director shall not be personally liable for
monetary damages for breach of fiduciary duty as a director, except for
liability for:
. any breach of the director's duty of loyalty to OEC or its stockholders;
. acts and omissions not in good faith or which involve intentional misconduct
or a knowing violation of law;
. liability associated with the unlawful payment of dividends or an unlawful
stock purchase or redemption; or
. any transaction from which the director derived an improper personal benefit.
68
<PAGE>
Indemnification of Directors and Officers
The Delaware General Corporation Law provides that a corporation:
. may indemnify a director or officer who is a party to any action or
proceeding by reason of his position with the corporation against expenses,
judgments, fines and settlements actually and reasonably incurred if that
person acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the corporation and, in the
case of a criminal proceeding, had no reasonable cause to believe the conduct
was unlawful;
. may indemnify a director or officer who is a party to any action by or in the
right of the corporation against expenses actually and reasonably incurred by
the person in connection with the defense or settlement of the action if the
person acted in good faith and in a manner the person believed to be in or
not opposed to the best interests of the corporation, provided that, if such
person is adjudged to be liable to the corporation, indemnification of
expenses is permitted only if and to the extent determined by the court in
the proceeding;
. shall indemnify a director or officer against expenses actually and
reasonably incurred in successfully defending, on the merits or otherwise,
any claim, issue or matter in any action or proceeding referred to above; and
. may advance a director or officer the expenses incurred in defending any
action, if the corporation first receives a commitment from the person to
repay the amounts advanced if it is ultimately determined that the person is
not entitled to indemnification.
Hanover's bylaws provide for indemnification of its officers and directors
to the fullest extent provided by law.
The Oklahoma General Corporation Act provides that a corporation:
. may indemnify a director or officer who is a party to any action or
proceeding by reason of his position with the corporation against expenses,
judgments, fines and settlements actually and reasonably incurred if that
person acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the corporation and, in the
case of a criminal proceeding, had no reasonable cause to believe the conduct
was unlawful;
. may indemnify a director or officer who is a party to any action by or in the
right of the corporation against expenses actually and reasonably incurred by
the person in connection with the defense or settlement of the action if the
person acted in good faith and in a manner the person believed to be in or
not opposed to the best interests of the corporation, provided that, if such
person is adjudged to be liable to the corporation, indemnification of
expenses is permitted only if and to the extent determined by the court in
the proceeding;
. shall indemnify a director or officer against expenses actually and
reasonably incurred in successfully defending, on the merits or otherwise,
any claim, issue or matter in any action or proceeding referred to above; and
. may advance a director or officer the expenses incurred in defending any
action, if the corporation first receives a commitment from the person to
repay the amounts advanced if it is ultimately determined that the person is
not entitled to indemnification.
OEC's bylaws provide for indemnification of its officers and directors to
the fullest extent provided by law.
69
<PAGE>
Dissenters' and Appraisal Rights
Under the Delaware General Corporation Law, a stockholder of a corporation
who does not vote in favor of certain merger or consolidation transactions and
who demands appraisal of his shares in connection therewith may, under varying
circumstances, be entitled to appraisal rights pursuant to which such
stockholder may receive cash in the amount of the fair value of his shares
together with a fair rate of interest, if any, in lieu of the consideration he
would otherwise receive in the transaction. Unless the corporation's
certificate of incorporation provides otherwise, appraisal rights are not
available:
. in connection with the merger or consolidation with another corporation the
shares of which are either listed on a national securities exchange
(including the New York Stock Exchange) or designated as a national market
security on Nasdaq or are held of record by more than 2,000 holders unless,
in connection with the transaction, the stockholders will receive for their
stock anything other than shares of stock of the surviving corporation,
shares of any other corporation which are either listed on a national
securities exchange or designated as a national market security on Nasdaq or
held of record by more that 2,000 holders, or cash in lieu of fractional
shares of the surviving corporation; or
. to stockholders of a corporation surviving a merger if no vote of such
stockholders is required to approve the merger or consolidation.
Hanover's certificate of incorporation does not provide for appraisal rights
where such rights are not afforded by the Delaware General Corporation Law.
Under the Oklahoma General Corporation Act, a stockholder of a corporation
or other business entity who does not vote in favor of certain merger,
consolidation or statutory share acquisition transactions, and each stockholder
of an issuing public corporation of which an acquiring person has been accorded
full voting rights for a majority of the total voting power of the corporation
under the Oklahoma Control Shares Act (described below), and who demands
appraisal of his shares in connection therewith may, under varying
circumstances, be entitled to appraisal rights pursuant to which such
stockholder may receive cash in the amount of the fair value of his shares
together with a fair rate of interest, if any, in lieu of the consideration he
would otherwise receive in the transaction. Unless the corporation's
certificate of incorporation provides otherwise, appraisal rights are not
available:
. in connection with the merger or consolidation with another corporation the
shares of which are either listed on a national securities exchange
(including the New York Stock Exchange) or designated as a national market
security on Nasdaq or are held of record by more than 2,000 holders unless,
in connection with the transaction, the stockholders will receive for their
stock anything other than shares of stock of the surviving corporation,
shares of any other corporation which are either listed on a national
securities exchange or designated as a national market security on Nasdaq or
held of record by more that 2,000 holders, or cash in lieu of fractional
shares of the surviving corporation; or
. to stockholders of a corporation surviving a merger if no vote of such
stockholders is required to approve the merger or consolidation.
OEC's certificate of incorporation does not provide for appraisal rights
where such rights are not afforded by the Oklahoma General Corporation Act.
70
<PAGE>
Oklahoma Control Shares Act
Not Applicable
The Oklahoma General Corporation Act provides that, with certain exceptions,
whenever an acquiring person acquires shares of an issuing public corporation
that (if permitted to vote) would give the acquiring person, directly or
indirectly and individually or in association with others, one-fifth, one-third
or a majority or more of the voting power in the election of directors of the
corporation (a "controlling interest"), the newly acquired control shares will
obtain only such voting rights as are conferred by a resolution of the
stockholders of the corporation approved at a special or annual meeting. Except
as otherwise provided by the certificate of incorporation of the issuing public
corporation, a resolution of the stockholders granting voting rights to the
control shares acquired by an acquiring person must be approved by the holders
of a majority of the voting power of the corporation and, in certain instances,
by the holders of a majority of each class or series of stock, if any, whose
preferences or other rights would be changed by reason of the acquisition. A
corporation is an "issuing public corporation" if it is organized in the state
of Oklahoma and has at least 1,000 shareholders and (i) at least 10% of the
shareholders or the holders of at least 10% of its shares are Oklahoma
residents, or (ii) at least 10,000 of its shareholders are Oklahoma residents.
Rights Plan
Hanover has not adopted a stockholders rights plan.
OEC has not adopted a stockholders rights plan.
Interested Stockholder Transactions
The Delaware General Corporation Law provides that, subject to certain
exceptions, a corporation may not engage in any business combination with any
"interested stockholder" (generally defined to mean any beneficial owner of
more than 15% of the corporation's voting stock) for a three-year period
following the date that stockholder becomes an interested stockholder unless
certain actions are taken by the corporation's board of directors or
stockholders. See "Description of Hanover Capital Stock--Delaware General
Corporation Law."
The Oklahoma General Corporation Act provides that, subject to certain
exceptions, a corporation may not engage in any business combination with any
"interested stockholder" (generally defined to mean any beneficial owner of
more than 15% of the corporation's voting stock) for a three-year period
following the date that stockholder becomes an interested stockholder unless
certain actions are taken by the corporation's board of directors or
stockholders.
71
<PAGE>
LEGAL MATTERS
The legality of the Hanover common stock offered by this proxy
statement/prospectus will be passed upon for Hanover by its counsel, Latham &
Watkins, Chicago, Illinois.
EXPERTS
The financial statements incorporated in this proxy statement/prospectus by
reference to the Annual Report on Form 10-K of Hanover Compressor Company for
the year ended December 31, 1999 and the audited historical financial
statements of the Dresser-Rand Compression Services Rental and Packaging
Division included under item 7(a) of Hanover Compressor Company's Current
Report on Form 8-K/A dated November 13, 2000 have been so incorporated in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of OEC Compression Corporation included in the
proxy statement/prospectus to the extent and for the periods indicated in their
report have been audited by Arthur Andersen LLP, independent public accountants
and are included herein in reliance upon the authority of said firm as experts
in giving said report.
The statements of operations, changes in stockholders' equity and cash flows
of OEC Compression Corporation for the year ended December 31, 1997, included
in this proxy statement/prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
Hanover and OEC file annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information we file with the
Securities and Exchange Commission at the following locations:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661
You may call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference rooms. Our Securities and Exchange
Commission filings are also available to the public from commercial document
retrieval services and at the web site maintained by the Securities and
Exchange Commission at "http://www.sec.gov." In addition, you may inspect
reports, proxy statement and other information that we file with the New York
Stock Exchange at the offices of the New York Stock Exchange at 20 Broad
Street, New York, New York 10005.
The Securities and Exchange Commission allows us to "incorporate by
reference" information into this proxy statement/prospectus, which means that
we can disclose important information to you by referring you to another
document filed separately with the Securities and Exchange Commission. This
proxy statement/prospectus incorporates by reference the documents set forth
below that we have previously filed with the Securities and Exchange
Commission. These documents contain important information about our companies
and their finances.
72
<PAGE>
The following Hanover documents filed with the Commission are incorporated
by reference in this proxy statement/prospectus:
1. Annual Report on Form 10-K for the year ended December 31, 1999;
2. Quarterly Report on From 10-Q filed with the Securities and Exchange
Commission on November 14, 2000;
3. Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2000;
4. Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on May 15, 2000;
5. Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 21, 2000;
6. Current Report on Form 8-K/A filed with the Securities and Exchange
Commission on November 13, 2000;
7. Two Current Reports on Form 8-K filed with the Securities and Exchange
Commission on November 9, 2000;
8. Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 14, 2000;
9. Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 19, 2000;
10. Two Current Reports on Form 8-K filed with the Securities and Exchange
Commission on July 13, 2000;
11. Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 7, 2000;
12. Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 23, 2000; and
13. Two Current Reports on Form 8-K filed with the Securities and Exchange
Commission on May 5, 2000.
We are also incorporating by reference all additional documents that we may
file with the Securities and Exchange Commission pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 between the date of
this proxy statement/prospectus and the date of the OEC special meeting.
Hanover filed a registration statement on Form S-4 to register with the
Securities and Exchange Commission the Hanover common stock to be issued to the
OEC stockholders in the merger. This proxy statement/prospectus is a part of
that registration statement and constitutes a prospectus of Hanover in addition
to being a proxy statement of OEC for its meeting. As allowed by Securities and
Exchange Commission rules, this proxy statement/prospectus does not contain all
the information you can find in the registration statement or the exhibits to
the registration statement.
Any statement contained in a document incorporated or deemed to be
incorporated by reference into this proxy statement/prospectus will be deemed
modified or superseded for purposes of this proxy statement/prospectus to the
extent that a statement contained in this proxy statement/prospectus or in any
subsequently filed document that also is or is deemed to be incorporated by
reference in this proxy statement/prospectus modifies or supersedes that
statement. Any statement so modified or superseded will not be deemed, except
as so modified or superseded, to constitute a part of this proxy
statement/prospectus.
Hanover has supplied all information contained or incorporated by reference
in this proxy statement/prospectus relating to Hanover. OEC has supplied all
information contained or incorporated by reference in this proxy
statement/prospectus relating to OEC.
73
<PAGE>
You can obtain any of the documents incorporated by reference through us or
the Securities and Exchange Commission. Documents incorporated by reference are
available from us without charge, excluding all exhibits unless we have
specifically incorporated by reference an exhibit in this proxy
statement/prospectus. You may obtain a copy of any document incorporated by
reference in this proxy statement/prospectus by requesting them in writing or
by telephone at the following address:
Hanover Compressor Company
12001 N. Houston Rosslyn
Houston, Texas 77086
Telephone: (281) 447-8787
If you would like to request documents from us, please do so by January 19,
2001 to receive them before the OEC special meeting.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote on the matters being
considered at the meetings. We have not authorized anyone to provide you with
information that is different from what is contained in this proxy
statement/prospectus. This proxy statement/prospectus is dated December 27,
2000. You should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date other than December 27, 2000,
and neither the mailing of the proxy statement/prospectus to stockholders nor
the issuance of Hanover common stock in the merger shall create any implication
to the contrary.
74
<PAGE>
INDEX TO OEC CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
DECEMBER 31, 1999, 1998 AND 1997
Report of Independent Public Accountants................................ F-2
Report of Independent Accountants....................................... F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998............ F-4
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997.................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1999, 1998, and 1997................................ F-6
Consolidated Statements of Cash Flows for the Years ended December 31,
1998, 1998 and 1997.................................................... F-7
Notes to the Consolidated Financial Statements.......................... F-8
SEPTEMBER 30, 2000 AND 1999
Consolidated Balance Sheets as of September 30, 2000 and 1999........... F-24
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2000 and September 30, 1999.............................. F-25
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and September 30, 1999.............................. F-26
Notes to the Consolidated Financial Statements for the Nine Months Ended
September 30, 2000..................................................... F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
OEC Compression Corporation:
We have audited the accompanying consolidated balance sheets of OEC
Compression Corporation (an Oklahoma Corporation) as of December 31, 1999 and
1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OEC Compression Corporation
as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Dallas, Texas
March 27, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
OEC Compression Corporation
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows of OEC Compression Corporation
(an Oklahoma Corporation) for the year ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of OEC
Compression Corporation for the year ended December 31, 1997, in conformity
with accounting principles generally accepted in the United States of America.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
March 30, 1998
F-3
<PAGE>
OEC COMPRESSION CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
(In thousands,
except share
amount)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................ $ 405 $ 7
Accounts receivable, less allowance for doubtful accounts
of $197 and $109 in 1999 and 1998, respectively......... 2,163 3,177
Accounts receivable-related party (Note 10).............. 255 60
Unbilled accounts receivable............................. 119 72
Prepaid Assets........................................... 151 300
Compressors and compressor parts inventory............... 6,193 6,293
Other.................................................... 84 --
-------- --------
Total Current Assets................................... 9,370 9,909
Property and equipment, less depreciation of $18,344 and
$46,289 in 1999 and 1998, respectively (Note 5)........... 95,093 94,592
Interest receivable-related party (Note 10)................ 52 30
Notes receivable-related party (Note 10)................... 332 332
Goodwill and other intangibles, net of amortization of $960
in 1999 and $409 in 1998.................................. 1,544 2,057
Other assets............................................... 2 1
-------- --------
Total Assets............................................... $106,393 $106,921
======== ========
Current Liabilities:
Accounts payable and accrued liabilities................. $ 5,324 $ 5,255
Accounts payable-related party (Note 10)................. 12 35
Current portion of capital lease obligations (Note 7).... 195 319
Current portion of long-term debt (Note 6)............... 2,918 --
-------- --------
Total Current Liabilities.............................. 8,449 5,609
Long-term debt (Note 6).................................... 58,381 58,829
Capital lease obligations (Note 7)......................... 1,107 1,354
Deferred income taxes (Note 8)............................. 9,802 10,216
Other...................................................... -- 89
-------- --------
Total Liabilities.......................................... 77,739 76,097
-------- --------
Minority interest.......................................... -- 2,032
Stockholders' Equity:
Preferred stock, $1.00 par value, 1,000,000
Shares authorized, none issued......................... -- --
Common stock, $.01 par value, 60,000,000 shares
authorized, 29,171,211 and 29,171,211 shares issued with
28,986,711 and 29,162,044 shares outstanding in 1999 and
1998, respectively...................................... 291 291
Additional paid-in capital............................... 31,841 31,841
Accumulated deficit...................................... (3,210) (3,331)
Treasury stock, at cost (184,500 and 9,167 shares in 1999
and 1998, respectively)................................. (268) (9)
-------- --------
Total Stockholders' Equity................................. 28,654 28,792
-------- --------
Total Liabilities and Stockholders' Equity................. $106,393 $106,921
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
OEC COMPRESSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
(In thousands, except
for per share amounts)
<S> <C> <C> <C>
Revenues:
Compressor rentals, service and treating fees..... $23,353 $23,125 $12,363
Compressor sales and remanufacturing.............. 405 708 979
Oil and gas sales................................. 1,399 2,409 2,685
------- ------- -------
Total revenues.................................. 25,157 26,242 16,027
------- ------- -------
Operating Expenses:
Operating costs-rentals, service and treating
fees............................................. 9,488 9,700 5,063
Cost of compressor sales and remanufacturing...... 274 672 941
Operating costs-oil and gas....................... 470 728 804
Depreciation, depletion and amortization.......... 6,346 5,970 3,687
Inventory write-down.............................. -- -- 404
Shop closing costs................................ -- -- 307
General and administrative.......................... 3,923 4,299 4,110
Asset Impairment.................................... -- 162 --
------- ------- -------
Total expenses.................................. 20,501 21,531 15,316
------- ------- -------
Income from operations.............................. 4,656 4,711 711
------- ------- -------
Other income (expense):
Gain (loss) on sale of assets..................... 276 (22) 10
Interest and other income......................... 91 122 52
Interest expense.................................. (5,228) (4,536) (1,884)
Contingent warrant expense........................ -- -- (1,440)
Minority interest in results of oil and gas
operations....................................... (88) (146) (60)
------- ------- -------
(4,949) (4,582) (3,322)
------- ------- -------
Net income before income taxes and extraordinary
item............................................... (293) 129 (2,611)
Income tax (expense) benefit........................ 414 (75) 924
------- ------- -------
Net income (loss) before extraordinary item......... 121 54 (1,687)
Extraordinary item:
Write-off of unamortized debt issue costs on debt
retirement (net of $28 tax)...................... -- (42) --
------- ------- -------
Net income.......................................... $ 121 $ 12 $(1,687)
======= ======= =======
Basic and dilutive net income before extraordinary
item per common share.............................. $ .00 $ .00 $ (.07)
======= ======= =======
Extraordinary item.................................. $ .00 $ .00 $ .00
======= ======= =======
Basic and dilutive net income per common share...... $ .00 $ .00 $ (.07)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
OEC COMPRESSION CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Deferred
Additional Retained Expense--
Common Paid-In Earnings Treasury Contingent
Stock Capital (Deficit) Stock Warrants Total
------ ---------- --------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... $210 $17,692 $(1,656) $ (9) $ (1,440) $14,797
Exercise of stock
options.............. 1 73 -- -- -- 74
Issuance of shares in
connection with
Ouachita acquisition
(7.6 million
shares).............. 76 12,464 -- -- -- 12,540
Issuance of shares in
connection with
settlement of
liability (Note 2)... 3 698 -- -- -- 701
Vesting of contingent
warrants............. -- -- -- -- 1,440 1,440
Warrants issued in
connection with
secured senior
subordinated term
note................. -- 870 -- -- -- 870
Net loss.............. -- -- (1,687) -- -- (1,687)
---- ------- ------- -------- -------- -------
Balance, December 31,
1997................... 290 31,797 (3,343) (9) -- 28,735
---- ------- ------- -------- -------- -------
Exercise of stock
options.............. 1 44 -- -- -- 45
Net Income............ -- -- 12 -- -- 12
---- ------- ------- -------- -------- -------
Balance, December 31,
1998................... 291 31,841 (3,331) (9) -- 28,792
---- ------- ------- -------- -------- -------
Trade airplane for
treasury stock....... -- -- -- (259) -- (259)
Net Income............ -- -- 121 -- -- 121
---- ------- ------- -------- -------- -------
Balance, December 31,
1999................... $291 $31,841 $(3,210) $ (268) $ -- $28,654
==== ======= ======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
OEC COMPRESSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 121 $ 12 $ (1,687)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depletion, depreciation, and amortization...... 6,346 5,970 3,687
Deferred taxes................................. (414) 102 (709)
Contingent warrant expense..................... -- -- 1,440
Minority interest oil and gas operations....... 88 146 60
Accounts and notes receivable.................. (185) (535) (1,131)
Compressors and parts inventory................ 101 (2,706) (209)
Accounts payable and accrued liabilities....... 906 272 720
Other.......................................... (279) 465 27
-------- -------- --------
Net cash provided by operating activities.... 6,684 3,726 2,198
-------- -------- --------
Cash flows from investing activities:
Acquisitions of equipment...................... (11,965) (21,056) (11,788)
Acquisition of subsidiary...................... -- -- (23,831)
Proceeds from sale assets...................... 2,202 846 353
Additions to oil and gas properties............ (108) (2,241) (877)
Increase in goodwill and other assets.......... (48) (1,275) (525)
-------- -------- --------
Net cash used in investing activities........ (9,919) (23,726) (36,668)
-------- -------- --------
Cash flows from financing activities:
Payments of capital lease obligations.......... (371) (420) (144)
Proceeds of long-term debt..................... 2,477 45,321 40,336
Note due to proceeds from equipment sale....... 2,000 -- --
Payments on long-term debt..................... (473) (25,040) (5,805)
Proceeds of stock issuance..................... -- 45 74
Minority interest capital contributions........ -- 100 --
-------- -------- --------
Net cash provided by financing activities.... 3,633 20,006 34,461
-------- -------- --------
Net increase (decrease) in cash.................. 398 6 (9)
Cash beginning of year........................... 7 1 10
-------- -------- --------
Cash end of year................................. $ 405 $ 7 $ 1
======== ======== ========
Supplemental disclosure
Interest paid.................................. $ 5,074 $ 4,062 $ 1,646
======== ======== ========
Income taxes paid.............................. $ -- $ -- $ 35
======== ======== ========
Non-cash investing and financing activities:
Acquisition of subsidiary...................... $ -- $ -- $ --
Capital leases assumed....................... -- -- 608
Issuance of common stock..................... -- -- 12,540
Issue warrants for secured senior term note.... -- -- 870
Issuance of common stock in connection
With settlement of liability (Note 2)........ -- -- 701
Contributions by minority interest owner....... -- 368 1,358
Capital leases of compressor equipment......... -- 1,629 --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
OEC COMPRESSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Summary of Significant Accounting Policies
Nature of Business
OEC Compression Corporation (an Oklahoma Corporation), formerly Equity
Compression Services Corporation, formerly Hawkins Energy Corporation (the
"Company") is engaged in the leasing, remanufacturing and direct sale of gas
compression equipment to operators of producing natural gas wells and gas
gathering systems and in the production of natural gas and oil. Its principal
geographical operating areas lie within the states of Alabama, Mississippi,
Louisiana, Oklahoma, Arkansas, New Mexico, Kansas and Texas.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries, Ouachita Energy Corporation ("Ouachita"), Equity
Leasing Corporation, Sunterra Energy Corporation ("Sunterra") and through July
2, 1999, its 82% owned oil and gas venture Sunterra Petroleum Company, L.L.C.
("Sunterra L.L.C.") which was sold. All intercompany transactions have been
eliminated.
Cash Equivalents
The Company includes in cash equivalents all investments with original
maturities of three months or less at the date of purchase, which are readily
convertible into known amounts of cash.
Compressors and Compressor Parts Inventory
Compressors and compressor parts are carried at the lower of cost or market,
using specific identification of costs and weighted average costs,
respectively. At December 31, compressor and compressor parts inventory
consisted of:
<TABLE>
<CAPTION>
1999 1998
------ ------
(In
thousands)
<S> <C> <C>
Compressor Work in Progress................................ $1,049 $2,844
Cylinders.................................................. 1,522 1,475
Engines.................................................... 770 763
Parts and Supplies......................................... 2,852 1,211
------ ------
$6,193 $6,293
====== ======
</TABLE>
Oil and Gas Operations
During October 1997, the Company through its wholly owned subsidiary,
Sunterra, entered into a venture with Prize Petroleum, L.L.C. ("Prize") of
Tulsa, Oklahoma, to form Sunterra L.L.C. Sunterra L.L.C. was capitalized with
all of the Company's oil and gas properties and oil and gas properties
contributed by Prize. At June 30, 1999, the Company had an approximate 82%
ownership in Sunterra L.L.C. The Company had effective control over the
operations of Sunterra L.L.C. and has consolidated its results since its
formation, October 1, 1997 until the sale of its interest in the Sunterra
L.L.C. to Prize on July 2, 1999.
On July 2, 1999, Sunterra sold 100% of its interest in Sunterra L.L.C. to
Prize. Sunterra received $1 million in cash and the Will-O-Mills gas treating
plant located in southwest Texas. The Will-O-Mills gas treating plant is a 300
gpm amine plant, which extracts carbon dioxide, and minor amounts of hydrogen
sulfide from natural gas flowed to the plant by area producers under long-term
treating contracts. The Sunterra L.L.C sale effectively removed the Company
from the oil and gas production business.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Prior to the sale of the Sunterra L.L.C. the Company accounted for its oil
and gas exploration and development activities on the full cost method of
accounting prescribed by the Securities and Exchange Commission ("SEC").
Accordingly, all productive and non-productive costs incurred in connection
with the acquisition, exploration and development of oil and gas reserves are
capitalized and amortized using the units-of-production method based on proved
oil and gas reserves. Beginning in 1997, the Company's oil and gas reserves
were estimated by a petroleum engineer who was an employee of the Company.
The depreciation, depletion and amortization rates were $.62, $.51 and $.43
per equivalent mcf produced in 1999, 1998 and 1997, respectively. In the event
the unamortized cost of oil and gas properties being amortized exceeds the
full-cost ceiling as defined by the SEC, the excess is charged to expense in
the period during which such excess occurs.
Sales and abandonments of properties were accounted for as adjustments of
capitalized costs with no gain or loss recognized unless a significant amount
of reserves were involved. Since all of the Company's oil and gas properties
were located in the United States, a single cost center was used with one
amortization base.
Hedging Activity
As a part of its risk management program, Sunterra L.L.C. entered into non-
traded natural gas price swap contracts. Gains and losses related to the
contracts were deferred and recognized in income when the hedging transaction
occurs. Prior to the sale of the oil and gas properties, Sunterra L.L.C. had
recognized a gain of $137,000 due to hedging activity.
Goodwill and Other Intangibles
Goodwill is amortized using the straight-line method over the estimated
benefit periods of 24 to 30 years. Non-compete agreements are amortized using
the straight-line method over the life of the agreements of one to three years.
Debt issue costs are amortized using the straight-line method over the life of
the agreements ranging from 7 to 10 years.
Cash Deficit
On March 10, 1998, the Company replaced its existing senior bank credit
facility with a new senior bank credit facility. The prior facility
automatically funded or withdrew the balance in the Company's bank account
daily. The new facility requires the Company to formally request advances to
fund operations. This change has at times caused the Company to incur a cash
deficit for financial reporting purposes due to outstanding checks, which will
be funded through cash flow from operations or borrowings from the new
facility. This cash deficit was necessary to maximize the Company's cash flow
and in no way impairs the Company's ability to fund its daily operations. The
cash deficit is included in the Company's Balance Sheet in the Current
Liabilities section under the caption "accounts payable and accrued
liabilities." At December 31, 1998, the Company had outstanding checks in
excess of its cash balance of approximately $1.3 million. The aforementioned
cash strategy was discontinued in 1999 when the bank facility was fully funded.
At December 31, 1999, the Company had a positive cash balance.
Income Taxes
The Company uses Statement of Financial Accounting Standards ("SFAS") No.
109 "Accounting for Income Taxes." This standard requires the measurement of
deferred tax assets for deductible temporary differences and deferred tax
liabilities for taxable temporary differences. Measurement of current and
deferred tax liabilities and assets is based on provisions of enacted tax law;
the effects of future changes in tax laws or rates are not included in the
measurement. Deferred tax liabilities primarily result from the recognition of
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
depreciation, depletion and amortization in different periods for financial
reporting and tax purposes. Income tax benefit or expense is the tax payable
for the current year and the change during that year in deferred tax assets and
liabilities.
Stock-Based Compensation
The Company applies Accounting Principles Board ("APB") Opinion No. 25 in
accounting for its stock option plans. Under this standard, no compensation
expense is recognized for grants of options which include an exercise price
equal to or greater than the market price of the stock on the date of grant.
Accordingly, based on the Company's grants in 1999, 1998 and 1997, no
compensation expense has been recognized. As provided by SFAS No. 123
"Accounting for Stock-Based Compensation," the Company has disclosed the pro
forma effects of recording compensation for such option grants based on their
fair value in Note 9 to the financial statements.
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of trade receivables with a variety of oil and gas
companies. The Company generally does not require collateral related to
receivables. Such credit risk is considered by management to be limited due to
the large number of customers comprising the Company's customer base.
Financial instruments, which are potentially subject to concentrations of
credit risk, consist principally of cash, cash equivalents and accounts
receivable. Cash and cash equivalents are placed with high credit quality
financial institutions to minimize risk. The carrying amounts of these
instruments approximate fair value because of their short maturities.
Fair values of the Company's financial instruments are estimated through a
combination of management's estimates and by reference to quoted prices from
market sources and financial institutions, if available. As of December 31,
1999, the fair market value of existing debt was equal to the carrying value of
the existing debt.
Capital Resources
Although, the Company has generated income and cash flow from operations in
1999 and 1998, the Company has funded its fleet expansion capital expenditures
through borrowings under its senior credit facility. As of December 31, 1999,
the Company has no availability under its senior credit facility. The Company
believes it could raise additional capital through a private or public equity
or debt financing; however, the Company cannot assure that such financing would
be available, or available under acceptable terms. If such financing proved
unavailable, the Company believes that a significant reduction in capital
expenditure related to the expansion of its compressor fleet would allow the
Company to continue as a going concern through 2000.
On January 4, 2000, the Company announced that the previously announced
merger negotiations with Energy Transfer Company had been terminated. Further,
the Company's Board of Directors had authorized certain board members to
interview and engage an investment banker to explore strategic alternatives and
steps to maximize shareholder value. The Company formally engaged a major
investment bank in February 2000, for this purpose. All strategic alternatives
are being explored including the possible sale of the Company.
Shop Closing Costs
In the fourth quarter of 1997, the Company recognized a $307,000 charge in
connection with the closure of its Oklahoma City, Oklahoma, Kilgore, Texas and
Columbia, Mississippi shop facilities. The charge was comprised of provisions
for approximately $143,000 related to severance costs, approximately $130,000
for moving and relocation costs, approximately $23,000 for transfer bonuses and
approximately $11,000 related to
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the loss on sale of the Columbia, Mississippi facility. Approximately $34,000
of the costs were paid in 1997. The remaining $273,000 of costs were paid
during 1998.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings Per Share
Approximately 10,897,000 of common stock options and warrants outstanding at
December 31, 1997, were excluded from the computation of dilutive earnings per
share ("EPS") because their effect on EPS would have been anti-dilutive for
that period. Basic EPS is computed based on weighted average number of shares
of common stock outstanding during the period. Dilutive EPS is computed based
on weighted average number of shares of common stock outstanding during the
period adjusted for the effect of dilutive securities.
The following is a reconciliation of basic and dilutive EPS computations:
<TABLE>
<CAPTION>
Year Ended December
31,
---------------------
1999 1998 1997
------ ------ -------
(In thousands)
<S> <C> <C> <C>
Basic:
Net Income (loss)..................................... $ 121 $ 12 $(1,687)
Weighted average shares of common stock outstanding... 29,026 29,154 24,196
------ ------ -------
Basic EPS............................................. $ .00 $ .00 $ (.07)
====== ====== =======
Effect of dilutive securities:
Warrants.............................................. 1,518 4,431 --
Common stock options.................................. 88 240 --
------ ------ -------
1,606 4,671 --
Dilutive:
Net income (loss)..................................... $ 121 $ 12 $(1,687)
Weighted average share of common stock outstanding and
dilutive securities.................................. 30,632 33,825 24,196
------ ------ -------
Dilutive EPS.......................................... $ .00 $ .00 $ (.07)
====== ====== =======
</TABLE>
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Issued Accounting Pronouncements
In December 1997, the Company adopted SFAS No. 129, "Disclosure of
Information about Capital Structure," resulting in no material impact. In
addition, in June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
effective for fiscal years beginning after December 15, 1997. These statements,
were adopted in 1998 and did not have a material effect on the Company's
financial position or results of operations.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1998, the Company adopted Statement of Position ("SOP") 98-5
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires cost of
start-up activities and organization costs to be expensed as incurred. The
Company incurred a charge-off of unamortized original organizational costs upon
adoption of SOP 98-5. The effect of adopting SOP 98-5 decreased the 1998 income
from operations, net income and income per share (dilutive) by approximately
$112,000, $69,000 and $.00, respectively.
In June 1999, the FASB issued SFA No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities," which is effective for all
fiscal years beginning after June 15, 2000. If the Company had adopted SFAS No.
133 during 1999, there would be no effect on the Company's financial statements
as the Company had no hedges outstanding at December 31, 1999. Although the
future impact of adopting SFAS 133 has not been determined yet, the Company
does not believe the impact will be material.
NOTE 2 Acquisition of Subsidiary
On August 6, 1997, the Company completed the acquisition of 100% of the
common stock of Ouachita and the majority of the assets of both Ouachita
Compression Group, LLC and Ouachita Energy Partners, LTD. Under the terms of
the acquisition the Ouachita companies' shareholders received 7.6 million
shares of the Company's common stock valued at $12,540,000, and approximately
$24 million in cash and assumption of debt. The acquisition was accounted for
using the purchase method of accounting and accordingly, the results of
operations of Ouachita are included in the Company's results of operations
since the date of acquisition. The aggregate purchase price of $36,560,000 has
been allocated as follows (in thousands):
<TABLE>
<S> <C>
Current assets................................................... $ 3,305
Compressor equipment............................................. 41,730
Buildings and equipment.......................................... 2,210
Current liabilities.............................................. (2,507)
Deferred income tax liability.................................... (8,178)
-------
$36,560
=======
</TABLE>
The following unaudited pro forma consolidated results of operations for the
year ended December 31, 1997, assuming the acquisition occurred as of January
1, 1997, are as follows:
<TABLE>
<CAPTION>
1997
----
(In thousands, except per share amount)
<S> <C>
Revenue........................... $23,600
Net loss.......................... $(3,700)
Loss per share.................... $ (.13)
</TABLE>
A liability to the former owner of Ouachita totaling approximately $701,000
which was assumed in the acquisition was subsequently settled by the issuance
of an additional 286,976 shares of the Company's common stock.
NOTE 3 Sale of Common Stock and Issuance of Contingent Warrants
Effective December 19, 1996, the Company sold to HACL, Ltd., a private
investment group, 8,000,000 shares of its common stock and warrants which, upon
satisfying certain vesting requirements, entitle the purchase of an additional
8,000,000 shares of its common stock at a price of $.91 per share, for
aggregate consideration of $4,400,000. The Company reported the cash
consideration received, net of related costs, of $4,400,000 as an addition to
common stock and paid-in capital. The "fair value" of the warrants was
estimated by an independent valuation firm to be $1,440,000, which the Company
reported as an addition to paid-in capital offset by a deferred expense contra-
equity account. A committee of the Board of Directors determined
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
that the warrants fully vested during the third quarter of 1997. Accordingly,
the $1,440,000 was expensed in the third quarter of 1997. The warrants for the
corresponding 8,000,000 shares of common stock have not been exercised as of
December 31, 1999.
NOTE 4 Provision to Reduce the Carrying Value of Other Equipment
In December 1998 the Company as part of a Settlement Agreement (Note 10)
agreed to exchange an airplane, owned by the Company, for shares of the
Company's common stock and value related to a truck. It was determined during
negotiations that the airplane be reduced to its estimated fair value of
approximately $290,000, resulting in a provision to reduce the carrying value
of the airplane of $162,000.
NOTE 5 Property and Equipment
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998
------------ -----------
(In thousands)
<S> <C> <C>
Land and building.............................. $ 1,938 $ 1,846
Oil and gas properties, full cost method....... -- 39,401
Compressor equipment........................... 109,401 95,763
Other equipment................................ 2,098 3,871
------------ -----------
113,437 140,881
Less accumulated depreciation, depletion and
amortization.................................. 18,344 46,289
------------ -----------
Net property and equipment..................... $ 95,093 $ 94,592
============ ===========
</TABLE>
Compressor equipment held by the Company for rental purposes is stated at
cost and depreciated over the serviceable life of the equipment. Leased
compressor equipment is depreciated on a straight-line basis over an estimated
useful life of 12 to 20 years. Due to the nature of compressor equipment no
depreciation is recorded for idle equipment not under contract. Depreciation is
resumed when the compressor equipment is contracted. Associated with its
acquisition of Ouachita, the Company changed its estimate of useful lives for
certain of its compressor equipment to 15 to 20 years with capitalized
overhauls on compressor rental equipment depreciated over five years. The
effect of these changes decreased the 1997 loss from operations, net loss and
loss per share (dilutive) by approximately $265,000, $165,000 and $.01,
respectively. Buildings and other equipment are stated at cost and depreciated
over their estimated useful lives of 30 years and 5 years, respectively.
Repairs and maintenance are charged to expense as incurred and major
overhauls and betterments are capitalized. Upon sale or retirement of
equipment, the cost of the equipment disposed of and the related accumulated
depreciation are removed from the accounts and the resulting gain or loss is
reflected in operations.
Long-lived assets are evaluated for impairment whenever events or changes
and circumstances indicate that the carrying value of an asset may not be
recoverable. Assets determined to be impaired based on estimated undiscounted
future net cash flows are reduced to estimated fair value. Changes in such
estimates could cause the Company to reduce the carrying value of its property
and equipment and goodwill.
During 1999, the Company completed purchase leasebacks, where the Company
bought compressors from our customers then leased the compressors back to its
customers. The purchase leasebacks accounted for the expenditure of
approximately $1.5 million and an increase in horsepower of over 10,000 with
lease terms from six months to five years.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6 Long-Term Debt
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
Long-term debt consists of the following:
Revolving line of credit due July 2001 (interest on
loans at LIBOR and Prime) (a)(d).................. $ 40,000 $ 38,013
8.25% Revolving line of credit (a)................. -- --
8.25% Revolving line of credit due December 1999
(b) (d)........................................... -- 1,617
Secured Senior Subordinated Term Note due July 2007
(c) (d)........................................... 14,256 14,199
Senior Floating Rate Secured Term Note due July
2004 (interest at LIBOR), (c) (d)................. 5,000 5,000
Notes payable other................................ 2,044 --
----------- -----------
Total debt......................................... 61,300 58,829
Less current portion............................... 2,918 --
----------- -----------
Total long-term debt............................... $ 58,382 $ 58,829
=========== ===========
</TABLE>
--------
(a) On March 10, 1998, the Company replaced its previously existing $20 million
senior bank credit facility with a new senior bank credit facility. The
initial maximum commitment was $40 million, which can be expanded to $60
million with the future addition of other participating financial
institutions. The facility is a borrowing base revolver maturing in July ,
2001, and due in its entirety at that time. The December 31, 1999,
borrowing base of $47 million exceeds the $40 million commitment. Interest
on the new facility is comprised of conforming and non-conforming borrowing
bases which accrue interest at LIBOR plus 1.75% and LIBOR plus 2.25%,
respectively. Initial borrowings are at Prime until converted to LIBOR
loans. At December 31, 1999, the average interest rate on outstanding loans
was 7.91%. The credit facility is collateralized by substantially all of
the assets of the Company with the exception of the Company's gas treating
plant. At December 31, 1999 the current available portion was zero.
Beginning in July 2000, the $40 million commitment will decrease by
$150,000 per month until due in July 2001.
(b) In December 1997, Sunterra L.L.C., entered into a new $10 million bank
revolving credit facility with borrowings limited to a borrowing base
determined on the value of the underlying oil and gas reserves. This
facility was assumed by Prize when they acquired the oil and gas
properties.
(c) In July 1997, the Company entered into senior subordinated term note
agreements with The Prudential Insurance Company of North America
("Prudential") for $15 million and $5 million. The $15 million term note
agreement contained a warrant purchase agreement authorizing Prudential to
purchase up to 1 million shares of the Company's common stock at an initial
exercise price of $2.80 per share until the termination date of the related
term note. The fair value of the warrants, $870,000, was determined using
the Black-Scholes model and was reported as an addition to paid-in capital
and as a discount on the notes. The resulting term note amount of
$14,130,000 will be accreted over the ten-year term using its effective
interest rate of 11.14%. The Company's cash payout over the term of the
notes is at the stated rate of 10.15%. The warrants were adjusted to an
exercise price of $1.45 on July 2, 1999 and again on December 1, 1999 the
warrants were repriced to an exercise price of $1.00 to garnish waivers of
the debt covenants. The $5 million note accrues interest at LIBOR plus
2.25%. At December 31, 1999, the rate was 8.73%.
(d) Covenants related to the debt agreements include the maintenance of
specified levels of working capital, tangible net worth and debt service
ratio, as defined by the agreements. Additionally, the agreements prohibit
the payment of dividends and place limitations on the repurchase of shares
of the Company's stock and the incurrence of new borrowings. During 1999,
the Company was not in compliance with the interest coverage, G&A coverage,
and EBITDA multiple covenants of its debt agreements, which were waived or
modified by the lender.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt maturities as of December 31, 1999, are $2,918,000,
$39,126,000, $0, $0 and $5,000,000 in 2000, 2001, 2002, 2003 and 2004,
respectively, with a remainder of $14,256,000 due in subsequent years. Based on
the interest rates currently available to the Company for borrowings with
similar terms and maturities, the long-term debt at December 31, 1999,
approximates fair value. There was not any interest capitalized in 1999. The
Company has generated income and cash flow from operations in 1999 and 1998,
the Company has funded its fleet expansion capital expenditures through
borrowings under its senior credit facility. As of December 31, 1999, the
Company has no availability under its senior credit facility. The Company
believes it could raise additional capital through a private or public equity
or debt financing; however, the Company cannot assure that such financing would
be available, or available under acceptable terms. If such financing proved
unavailable, the Company believes that a significant reduction in capital
expenditure related to the expansion of its compressor fleet would allow the
Company to continue as a going concern through 2000.
NOTE 7 Capital Leases
The Company has compression equipment and vehicles under capital lease
agreements with a cost of $1,699,000 and accumulated amortization of $394,000.
Future minimum lease payments for the above assets under capital leases at
December 31, 1999, are as follows (in thousands):
<TABLE>
<S> <C>
2000.............................................................. $ 311
2001.............................................................. 306
2002.............................................................. 516
2003.............................................................. 463
------
Total minimum obligations......................................... 1,596
Interest.......................................................... (294)
------
Minimum obligations, net.......................................... 1,302
Current portion................................................... (195)
------
Long term portion................................................. $1,107
======
</TABLE>
NOTE 8 Income Taxes
Consolidated income tax (benefit) expense for each of the three years in the
period ended December 31, 1999, consists of the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- --------
(In thousands)
<S> <C> <C> <C>
Current provision expense (benefit)............. $ -- $ -- $ (182)
Deferred expense (benefit)...................... (414) 75 (742)
-------- ------ --------
Total income tax expense (benefit).............. $ (414) $ 75 $ (924)
======== ====== ========
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's effective tax rate on pre-tax income differs from the U.S.
federal statutory regular tax rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
U.S. statutory regular tax rate............... (34)% 34% (34)%
State taxes................................... (4)% 4% (4)%
Goodwill and other............................ (9)% 20% 2 %
Sale of oil and gas properties................ (94)% --% -- %
-------- ------- -------
Total......................................... (141)% 58% (36)%
======== ======= =======
</TABLE>
Deferred tax assets and liabilities are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- -------
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Allowances for losses............................. $ 38 $ 41 $ 29
Net operating loss carryforward................... 8,588 6,175 3,132
Alternative minimum tax credit carryforward....... 610 602 602
Warrant expense deferred for income tax purposes.. 547 547 547
Miscellaneous gain................................ 16 -- --
Accounting method change for tax due to
acquisition...................................... 137 274 411
------ ------- -------
Gross deferred tax assets....................... 9,936 7,639 4,721
Deferred tax liabilities:
Property and equipment--depreciation
Depletion and amortization...................... 19,738 17,855 14,863
------ ------- -------
Gross deferred tax liabilities.................. 19,738 17,855 14,863
------ ------- -------
Net deferred tax liability.......................... $9,802 $10,216 $10,142
====== ======= =======
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards for
regular tax purposes of $22,601,000, which expire in 2009 through 2019.
NOTE 9 Compensation Plans
Employee Stock Option Plan
On August 8, 1989, the Board of Directors of the Company adopted and its
stockholders approved an Employee Stock Option Plan (the "Stock Option Plan")
which became effective on that date. An aggregate of 130,000 shares of common
stock were initially available for sale upon exercise of options granted under
the Stock Option Plan, provided that the number of shares available for options
which may be granted under the Stock Option Plan will automatically be
increased without action of the directors or stockholders of the Company to an
amount equal to (when added to the number of shares of common stock subject to
all other options granted by the Company) 8% of the issued and outstanding
shares of common stock upon each issuance of shares of common stock occurring
after February 28, 1990 (other than issuance of shares upon the exercise of
options granted under the Stock Option Plan). The Board of Directors may make
authorized but unissued common stock available for the exercise of options or
it may utilize shares held in treasury. On February 4, 1999, the Board of
Directors approved the issuance of 198,874 stock options under the Stock Option
Plan. The Stock Option Plan is not subject to the provisions of the Employee
Retirement Income Security Act of 1974 and the options are not "incentive stock
options," as such term is defined in Internal
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Code Section 422A. As of December 31, 1999, options to acquire
1,205,882 shares of common stock at prices ranging from $.50 to $2.25 were
outstanding.
Director Stock Option Plans
On August 8, 1989, the Board of Directors adopted and the stockholders
approved a Director Stock Option Plan (the "1989 Director Plan") which became
effective on that date. An aggregate of 170,000 shares of common stock are
available for sale upon exercise of options granted under the 1989 Director
Plan. At December 31, 1999, options for 30,000 shares at a price of $2.50 were
exercisable. As of December 31, 1999, no options had been exercised. The 1989
Director Plan is not subject to the provisions of the Employee Retirement
Income Security Act of 1974 and the options will not be "incentive stock
options," as such term is defined in Internal Revenue Code Section 422A.
On May 25, 1994, the Board of Directors adopted and the stockholders
approved the 1994 Director Stock Option Plan which became effective on that
date. Options to acquire an aggregate of 355,000 shares of common stock were
initially granted; however, options to acquire 280,000 shares of common stock
were surrendered for cancellation in 1996. At December 31, 1999, options for
75,000 shares at a price of $1.40 were exercisable. As of December 31, 1999, no
options had been exercised. These options expire on May 24, 2004.
On March 27, 1996, the Board of Directors adopted and on May 29, 1996, the
stockholders approved the Director Stock Plan, which became effective on the
date of its approval by the Company's stockholders. Under the Director Stock
Plan, non-qualified stock options may be issued to non-employee directors of
the Company. An aggregate of 500,000 shares of common stock are reserved for
issuance upon the exercise of options granted under the Director Stock Plan.
The Director Stock Plan provided for, effective upon its approval by the
Company's stockholders, the automatic grant to eligible directors of an option
to purchase either (i) 50,000 shares of common stock, if such eligible director
had been an employee of the Company at any time, or (ii) 17,500 shares of
common stock, if such eligible director had never been an employee of the
Company. On each anniversary of each eligible director's election to the Board
for the term as a director which he or she is currently serving, each such
director will be granted an option to purchase 6,666 shares of common stock. In
addition, upon an eligible director's initial election or appointment to the
Board, such director will receive the grant of an option to purchase 10,000
shares of common stock. At December 31, 1999, options to acquire 302,488 shares
of common stock at prices ranging from $.56 to $2.31 were outstanding. As of
December 31, 1999, no options issued under the Director Stock Plan had been
exercised. The Director Stock Plan is not subject to any of the provisions of
the Employee Retirement Income Security Act of 1974 and the options will not be
"incentive stock options," as such term is defined in Internal Revenue Code
Section 422A.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity pertaining to the Company's employee and director stock option
plans is as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996.................... 637,500 .81
Granted........................................... 1,404,240 1.86
Exercised......................................... (145,000) (.51)
Canceled.......................................... -- --
---------
Outstanding at December 31, 1997.................... 1,896,740 1.61
Granted........................................... 163,664 1.61
Exercised......................................... (90,000) (.50)
Canceled.......................................... (274,795) (1.98)
---------
Outstanding at December 31, 1998.................... 1,695,609 $ 1.64
Granted........................................... 258,848 1.09
Exercised......................................... -- --
Canceled.......................................... (341,087) (1.70)
---------
Outstanding at December 31, 1999.................... 1,613,370 $ 1.55
=========
</TABLE>
OUTSTANDING OPTIONS
<TABLE>
<CAPTION>
Weighted
Average Weighted
Number Remaining Average
Exercise of Contractual Exercise
Prices Shares Life* Price
-------- ------- ----------- --------
<S> <C> <C> <C>
$ .50-1.00..................................... 371,574 16.5 years $ .69
$1.00-2.00..................................... 595,994 25.6 years $1.35
$2.00-2.50..................................... 645,802 35.4 years $2.23
</TABLE>
--------
As of December 31, 1999, options on 1,069,532 shares were exercisable.
* Upon termination of employment or board service the option term becomes four
years from date of termination.
The Company applies APB Opinion No. 25 in accounting for its employee and
director stock option plans. Accordingly, based on the nature of the Company's
grants of options, no compensation cost has been recognized in 1999, 1998, or
1997. Had compensation been determined on the basis of fair value pursuant to
SFAS No. 123, "Accounting for Stock-Based Compensation" net loss per share
would have been as follows at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -------
<S> <C> <C> <C>
Net income (loss) (in thousands)
As reported..................................... $ 121 $ 12 $(1,687)
Pro forma....................................... $(151) $(294) $(1,805)
Loss per share (dilutive)
As reported..................................... $ .00 $ .00 $ (.07)
Pro forma....................................... $(.01) $(.01) $ (.07)
</TABLE>
The fair value of each option granted is estimated using the Black-Scholes
model. The Company's estimated stock volatility was 68%, 75%, and 86% for 1999,
1998, and 1997, respectively, based on previous stock performance. Dividend
yield was estimated to remain at zero with a risk-free interest rate of 6% for
1997
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
through 1999. Expected life was estimated at four to eight years based on prior
experience depending on the vesting periods involved and the make up of
participating employees within each grant. The weighted average fair value of
options granted during 1999, 1998, and 1997, as estimated using the Black-
Scholes option pricing model, was $1.12, $1.31, and $1.06 respectively.
Employee Benefit Plan
Substantially all of the Company's employees are covered by a defined
contribution 401(k) plan adopted in 1991. The Company matches 50% of the
employee contributions up to a limit of 4% of employee annual earnings. All
matching contributions are made in Company stock. Total expense related to the
plan amounted to $79,000 in 1999, $87,000 in 1998, $50,000 in 1997.
Other
Non-qualified options for 15,000 shares at a price of $2.50 per share were
granted to a former employee of the Company in 1990, all of which are currently
exercisable with an expiration date of January 2030.
NOTE 10 Transactions with Related Parties
The Company transacts business with certain companies, which are directly
controlled by members of the Company's Board of Directors and employees. The
terms of these transactions are equivalent to the terms of transactions
conducted with non-related parties.
On December 16, 1998, the Company, Dennis Estis, the two other shareholders
who granted a proxy to Mr. Estis and certain other parties entered into a
Settlement Agreement. Among other things, the Settlement Agreement (i)
prohibits Mr. Estis from participating in any proxy solicitation relating to
certain actions, (ii) requires termination of the proxies granted to him by the
two other shareholders, (iii) dismissed a lawsuit filed by Mr. Estis, (iv)
released certain claims between the parties, (v) provided for a "standstill"
agreement until June 30, 1999, (subject to possible extension and reinstatement
as described below) prohibiting Mr. Estis from participating in enumerated
actions relating to control of the Company and (vi) requires the Company to
reimburse Mr. Estis for certain of his out-of-pocket expenses. The Company has
agreed to use its best effort to sell or assist Mr. Estis to sell at least one-
half of his shares of common Stock at $2.00 or more per share. If such a sale
is not completed prior to June 30, 2000, then Mr. Estis' non-competition
agreement shall be terminated except as to Mr. Estis' agreement not to solicit
or hire employees of the Company. If the sale by Mr. Estis occurs prior to
December 31, 2001, then the standstill agreement described above will be
extended or reinstated, as the case may be, through December 31, 2001. As part
of this settlement, Mr. Estis, in exchange for shares of the Company's common
stock and the value of a truck, purchased an airplane from the Company. In
closing this transaction the Company incurred an impairment of $162,000 on the
airplane.
Through its acquisition of Ouachita, the Company acquired note receivables
of approximately $332,000 from the former owner of Ouachita, who is now a
director of the Company and another party. Interest receivable related to these
notes at December 31, 1999, 1998 and 1997, was approximately $52,000, $30,000
and $9,000, respectively. Interest on these notes accrues at the rate of 6.5%
and is payable when the note matures.
On December 31, 1997, the Company sold its facility located in Columbia,
Mississippi to a current member of the Company's Board of Directors. The
Company received $316,000 in cash resulting in a loss of $11,000. During 1999,
the Company remitted payments to this related-party totaling approximately
$499,000 for service work on compression component parts at this facility. The
Company owed approximately $12,000 to the director related to the facility at
December 31, 1999.
The Company maintains a rent and expense sharing agreement with an
affiliate. At December 31, 1999, 1998 and 1997, the Company was owed
approximately $ 65,000, $40,000 and $11,000, respectively, from the affiliate.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company earned compressor rental revenues from affiliates totaling
$809,000 in 1999, $279,000 in 1998, $341,000 in 1997. At December 31, 1999, the
Company was owed approximately $ 255,000 on rental revenues earned in 1999. At
December 31, 1998, the Company was owed approximately $60,000 on rental
revenues earned in 1998. At December 31, 1997, the Company was owed
approximately $135,000 on rental revenues earned in 1997.
The Company leases the use of an airplane from an employee. As of December
31, 1999, the Company had paid approximately $16,000 under this arrangement.
The Company paid its former Chairman of the Board $30,000 in total
consulting fees through June 30, 1999.
On February 8, 2000, the Company sold a 50% undivided interest in the Will-
O-Mills gas treating plant for cash proceeds of $2,000,000 to an affiliate of
HACL, LTD.
NOTE 11 Commitments
The Company leases compressor equipment under contracts with terms ranging
from month-to-month to six years. The future revenues to be received under
contracts at December 31, 1999, are $5,357,000, $2,439,000, $950,000, $679,000
and $7,000 in 2000, 2001, 2002, 2003 and 2004, respectively.
The Company leases facilities for its corporate and field offices with lease
terms ranging from month-to-month to three years. The Company has certain other
operating leases for other facilities, office equipment and automobiles. Future
minimum rental payments under these leases total $216,569 and $133,532 for 2000
and 2001, respectively. The Company's rental expenses were $ 389,000 ,$382,000,
and $467,000 in 1999, 1998, and 1997, respectively.
NOTE 12
Industry Segment Information
Operations by Industry Segment
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Compressor and Gas Treating operations:
Net revenues.................................... $23,758 $23,833 $13,342
Operating income (loss)......................... 4,192 3,938(/1/) (501)
Identifiable assets (Note 5).................... 113,437 99,635 77,985
Capital expenditures............................ 11,835 21,056 11,788
Depreciation and amortization................... $ 6,017 $ 5,370 $ 3,278
Oil and gas:(/2/)
Net revenues.................................... $ 1,399 $ 2,409 $ 2,685
Operating income................................ 464 773 1,212
Identifiable assets............................. 0 41,246 36,380
Capital expenditures............................ 108 2,241 877
Depreciation, depletion and amortization........ $ 329 $ 600 $ 409
</TABLE>
--------
(1) Includes a provision to reduce the carrying value of other equipment of
$162,000 and a charge-off of the Company's unamortized original
organizational costs of $112,000.
(2) Oil and gas properties were sold July 2, 1999, with an effective date of
June 30, 1999.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13 Subsequent Events
On January 4, 2000, the Company announced that the previously announced
merger negotiations with Energy Transfer Company had been terminated. Further,
the Company's Board of Directors had authorized certain board members to
interview and engage an investment banker to explore strategic alternatives and
steps to maximize shareholder value. The Company formally engaged a major
investment bank in February 2000, for this purpose. All strategic alternatives
are being explored including the possible sale of the Company.
On February 8, 2000, the Company sold a 50% undivided interest in the Will-
O-Mills gas treating plant for cash proceeds of $2,000,000 to an affiliate. The
Company expects to report a gain on the sale for the first quarter of 2000.
NOTE 14 Oil and Gas Information (Unaudited as to Reserve Information)
The Company sold all of its oil and gas producing properties on July 2, 1999
with the sale of its interest in Sunterra L.L.C.
Capitalized costs for the years ended and costs incurred during the years
ended were as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Capitalized costs:
Proved properties......................................... $39,401 $37,374
Unproved properties....................................... -- --
------- -------
Total....................................................... 39,401 37,374
Less:
Accumulated depreciation, depletion and amortization and
provision to reduce carrying value....................... 32,568 31,824
------- -------
Net capitalized costs................................... $ 6,833 $ 5,550
======= =======
Costs incurred:
Proved properties......................................... $ 2,026 $ --
Development............................................... 582 877
------- -------
Total costs incurred........................................ $ 2,608 $ 877
======= =======
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Results of operations for producing activities were as
follows:
Revenues.................................................... $ 2,409 $ 2,685
Production costs............................................ (728) (804)
Depreciation, depletion and amortization.................... (600) (409)
Income taxes................................................ (411) (538)
------- -------
Results of operations for producing activities activities
(excluding overhead and financing costs)................... $ 670 $ 934
======= =======
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
Oil Gas Oil Gas
Bbls Mcf Bbls Mcf
---- ------ ---- -----
<S> <C> <C> <C> <C>
Proved Reserves:
Beginning of year.................................. 603 9,425 930 4,989
Revision of estimates.............................. (164) 1,106 (321) 1,337
Extension and discoveries.......................... -- 268 -- 1,015
Purchase of reserves............................... 38 2,971 46 2,716
Sales of reserves.................................. (290) (36) -- --
Production......................................... (24) (1,014) (52) (632)
---- ------ ---- -----
End of Year........................................ 163 12,720 603 9,425
==== ====== ==== =====
Proved Developed Reserves............................ 163 12,720 603 9,245
==== ====== ==== =====
</TABLE>
All of the Company's reserves were attributable to Sunterra L.L.C. for which
there was an approximate 18% minority interest.
Proved reserves are those quantities which, upon analysis of geological and
engineering data, appear with reasonable certainty to be recoverable in the
future from known oil and gas reservoirs under existing economic and operating
conditions. Proved developed reserves are those reserves which can be expected
to be recovered through existing wells with existing equipment and operating
methods.
Oil and gas reserves cannot be measured exactly. Estimates of oil and gas
reserves require extensive judgments of reservoir engineering data and are
generally less precise than other estimates made in connection with financial
disclosures.
Assigning monetary values to such estimates does not reduce the subjectivity
and changing nature of such reserve estimates. Indeed the uncertainties
inherent in the disclosure are compounded by applying additional estimates of
the rates and timing of production and the costs that will be incurred in
developing and producing the reserves. The information set forth herein is
therefore subjective and, since judgments are involved, may not be comparable
to estimates submitted by other oil and gas producers. In addition, since
prices and costs do not remain static and no price or cost escalation's or de-
escalation's have been considered, the results are not necessarily indicative
of the estimated fair market value of estimated proved reserves nor of
estimated future cash flows.
Standardized Measure of Discounted Future Net Cash Flows
The standardized measure of discounted future net cash flows ("SMOG") was
calculated using year-end prices and costs, and year-end statutory tax rates,
adjusted for permanent differences, that relate to existing proved oil and gas
reserves. Future net cash flows are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Future cash flows................................... $ 26,895 $ 29,730
Production costs.................................... (11,780) (11,849)
Development costs................................... (147) --
Income tax expense.................................. (4,434) (6,790)
-------- --------
Future net cash flows............................... 10,534 11,091
10% discount factor................................. (4,111) (4,232)
-------- --------
Standardized measure of discounted future net cash
flows.............................................. $ 6,423 $ 6,859
======== ========
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the principal factors comprising the changes
in the standardized measure of discounted future net cash flows.
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Standardized measure, beginning of year.................... $ 6,859 $10,238
Sales of oil and gas net of production costs............... (1,620) (1,822)
Net changes in prices and production costs................. (2,362) (4,311)
Extensions and discoveries less related costs.............. 180 687
Purchase of reserves....................................... 2,081 1,290
Sale of reserves........................................... (1,035) --
Revisions of previous estimates............................ 218 (707)
Accretion of discount...................................... 602 885
Change in income tax expense............................... 1,500 599
------- -------
Standardized measure, end of year.......................... $ 6,423 $ 6,859
======= =======
</TABLE>
All of the Company's reserves and standardized measure of discounted future
net cash flows are attributable to Sunterra L.L.C., for which there was an
approximate 18% minority interest.
The Company's reserves were determined at December 31, 1998 using constant
prices of approximately $9.51 per Bbl of oil and $1.99 per Mcf of gas.
NOTE 15
SELECTED QUARTERLY UNAUDITED FINANCIAL DATA
The table below sets forth selected unaudited financial information for each
quarter of the last two years:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
1999
Revenue............... $6,804 $6,429 $5,901 $6,023
Gross Profit.......... 1,307 1,047 998 1,304
Net Income............ 18 (175) 373 (94)
Earnings per common
share:
Basic............... .00 (.01) .01 .00
Dilutive............ .00 (.01) .01 .00
1998
Revenue............... 6,133 6,560 6,499 7,050
Gross Profit.......... 1,441 1,587 1,223 460
Net Income............ 227 351 4 (570)
Earnings per common
share:
Basic............... .01 .01 .00 (.02)
Dilutive............ $ .01 $ .01 $ .00 $ (.02)
</TABLE>
F-23
<PAGE>
OEC COMPRESSION CORPORATION
CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................ $ 8,689 $ 405
Accounts receivable, less allowances for doubtful
accounts of $225 and $197 in 2000 and 1999,
respectively.................................... 1,366 2,163
Accounts receivable--related party............... 131 255
Unbilled accounts receivable..................... 300 119
Prepaid Assets................................... 146 151
Compressors and compressor parts inventory....... 6,298 6,193
Other............................................ 75 84
-------- --------
Total current assets........................... 17,005 9,370
Property and equipment, less depreciation of
$22,053 and $18,344 in 2000 and 1999,
respectively...................................... 93,798 95,093
Interest receivable--related party................. 68 52
Notes receivable--related party.................... 332 332
Goodwill and other intangibles, net of amortization
of $1,389 in 2000 and $960 in 1999................ 1,186 1,544
Other assets....................................... 1 2
-------- --------
Total assets................................... $112,390 $106,393
======== ========
Current Liabilities:
Accounts payable and accrued liabilities......... $ 4,086 $ 5,324
Accounts payable--related party.................. -- 12
Current portion of capital lease obligations..... 205 195
Current portion of long term debt................ 41,367 2,918
-------- --------
Total current liabilities...................... 45,658 8,449
Long-term debt..................................... 19,315 58,381
Capital lease obligations.......................... 954 1,107
Deferred income taxes.............................. 10,092 9,802
-------- --------
Total Liabilities.............................. 76,019 77,739
Stockholders' Equity:
Preferred stock, $1.00 par value, 1,000,000
shares authorized, none issued.................. -- --
Common stock, $.01 par value, 60,000,000 shares
authorized, 37,381,211 shares issued, and
28,986,711 shares outstanding on December 31,
1999............................................ 373 291
Additional paid-in capital....................... 39,039 31,841
Accumulated deficit.............................. (2,773) (3,210)
Treasury stock, at cost (320,445 and 184,500
shares in 2000 and 1999 respectively)........... (268) (268)
-------- --------
Total stockholders' equity..................... 36,371 28,654
-------- --------
Total Liabilities and Stockholders' Equity..... $112,390 $106,393
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
<PAGE>
OEC COMPRESSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Compressor rentals, service and treating
fees..................................... $5,275 $ 5,819 $16,473 $17,484
Compressor sales and re-manufacturing..... 97 82 198 286
Oil & gas sales........................... -- -- -- 1,399
------ ------- ------- -------
Total revenues.......................... 5,372 5,901 16,671 19,169
------ ------- ------- -------
Expenses:
Costs--Compressor rentals, service and
treating................................. 1,597 2,475 5,767 7,358
Costs--
compressor sales and re-manufacturing.... 51 59 108 180
Operating costs--oil and gas.............. -- -- -- 510
Depreciation, depletion and amortization.. 1,457 1,504 4,360 4,829
General and administrative................ 579 865 1,759 2,939
------ ------- ------- -------
Total expenses.......................... 3,684 4,903 11,994 15,816
------ ------- ------- -------
Income from operations...................... 1,688 998 4,677 3,353
------ ------- ------- -------
Other income (expense):
Merger related and employee retention
expense.................................. (608) -- (608) --
Gain on sale of assets.................... 10 313 748 335
Interest income and other................. 135 7 173 78
Interest expense.......................... (1,426) (1,323) (4,263) (3,915)
Minority interes.......................... -- -- -- (88)
------ ------- ------- -------
(1,889) (1,003) (3,950) (3,590)
------ ------- ------- -------
Income (loss) before income taxes........... (201) (5) 727 (237)
Income tax benefit (expense)................ 72 378 (290) 454
------ ------- ------- -------
Net (loss) income........................... $ (129) $ 373 $ 437 $ 217
====== ======= ======= =======
Basic and dilutive net income (loss) per
common share............................... $ .00 $ .01 $ .01 $ .01
====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-25
<PAGE>
OEC COMPRESSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
----------------
2000 1999
------- -------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 437 $ 217
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization.................. 4,360 4,784
Deferred income taxes..................................... 290 (454)
Minority interest in results of oil and gas operations.... -- 88
Gain on sale of assets.................................... (748) --
Other..................................................... -- --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts and notes receivable............................. 724 677
Compressor and compressor parts inventory................. (105) 300
Accounts payable and accrued liabilities.................. (1,249) 6
Other..................................................... 55 1,384
------- -------
Net cash provided (used) by operating activities........ 3,764 7,002
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of compressor and other equipment............ (3,978) (9,217)
Proceeds from disposition of assets....................... 90 954
Proceeds from sale of 50% of gas treating assets.......... 2,000 --
Additions to oil and gas properties....................... -- (108)
Increase in goodwill and other assets..................... (71) 20
------- -------
Net cash provided (used) in investing activities........ (1,959) (8,351)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long-term debt................................ 6 2,477
Sale of common stock...................................... 7,280 --
Payments on long-term debt................................ (664) (469)
Payments on capital lease obligations..................... (143) (266)
------- -------
Net cash provided (used) by financing activities........ 6,479 1,742
------- -------
Net increase in cash and cash equivalents................... 8,284 393
Cash and cash equivalents, beginning of period.............. 405 7
------- -------
Cash and cash equivalents, end of period.................... $ 8,689 $ 400
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. $ 4,263 $ 3,915
======= =======
Income taxes paid......................................... $ -- $ --
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE>
OEC COMPRESSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 Organization and Basis of Presentation
OEC Compression Corporation, formerly Equity Compression Services
Corporation, formerly Hawkins Energy Corporation is engaged in the leasing,
contract management, outsourcing, re-manufacturing and direct sale of gas
compression equipment to operators of producing natural gas wells and gas
gathering systems and in the production of natural gas and oil. Its principal
geographical operating areas lie within the states of Alabama, Mississippi,
Louisiana, Oklahoma, Arkansas, Kansas, New Mexico and Texas.
The consolidated financial statements include the accounts of OEC, its
wholly owned subsidiaries Ouachita Energy Corporation ("Ouachita"), Equity
Leasing Corporation and Sunterra Energy Corporation ("Sunterra"). All
intercompany transactions have been eliminated.
In the opinion of OEC, the accompanying financial statements contain all
adjustments necessary (all of which are of a normal recurring nature) to
present fairly the financial position of OEC and its wholly owned subsidiaries
as of September 30, 2000, and the results of its operations and cash flows for
the periods ended September 30, 2000 and 1999. Certain prior year amounts have
been reclassified to conform to the current year presentation.
The financial statements should be read in conjunction with OEC's Form 10-K
for the year-ended December 31, 1999. The year-end Consolidated Balance Sheet
data was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
NOTE 2 Property and Equipment
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(In thousands)
<S> <C> <C>
Land and building................................. $ 1,939 $ 1,938
Compressor equipment and gas plant................ 111,776 109,401
Other equipment................................... 2,136 2,098
-------- --------
115,851 113,437
Less accumulated depreciation..................... 22,053 18,344
-------- --------
Net property and equipment........................ $ 93,798 $ 95,093
======== ========
</TABLE>
NOTE 3 Transactions with Related Parties
OEC transacts business with certain companies, which are directly controlled
by members of OEC's Board of Directors and employees. The terms of these
transactions are equivalent to the terms of transactions conducted with non-
related parties.
NOTE 4 Commitments
OEC leases compressor equipment under contracts with terms ranging from
month to month to six years. The future revenues to be received under contracts
at September 30, 2000 are $2.1 million, $3.5 million, $1.6 million, $854,000
and $7,000 in 2000, 2001, 2002, 2003 and 2004, respectively.
F-27
<PAGE>
OEC COMPRESSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
UNAUDITED
NOTE 5 Earnings per Share
Earnings per share ("EPS") is computed based on the weighted average number
of shares of common stock outstanding during the period.
The following is a reconciliation of basic and dilutive EPS computations:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------- ---------------
2000 1999 2000 1999
------- ------- ------- -------
(In thousands, except per share
amounts.)
<S> <C> <C> <C> <C>
Basic:
Net income (loss)............................ $ (129) $ 373 $ 437 $ 217
Common stock................................. 37,061 28,987 32,253 29,040
------- ------- ------- -------
Basic Earnings (loss) Per Share................ $ -- $ .01 $ .01 $ .01
======= ======= ======= =======
Effect of dilutive securities:
Warrants..................................... -- 1,135 -- 1,135
Common stock options......................... -- 97 71 97
------- ------- ------- -------
-- 1,232 71 1,232
Dilutive:
Net income (loss)............................ $ (129) $ 373 $ 437 $ 217
Common stock and dilutive securities......... 37,061 30,219 32,324 30,272
------- ------- ------- -------
Dilutive Earnings (loss) Per Share............. $ .00 $ .01 $ .01 $ .01
======= ======= ======= =======
</TABLE>
NOTE 6 Merger with Hanover Compression
On July 17, 2000, OEC and Hanover Compressor Company ("Hanover") announced
the two companies had executed a definitive merger agreement under which
Hanover will acquire OEC in an all-stock transaction. Under the terms of the
merger agreement, OEC's common stock will be valued at $1.00 per share on the
closing date of the merger. OEC's shares being acquired will be exchanged for
newly issued Hanover common shares equal to the average of the closing price
for Hanover common shares for the 20 day trading period ending two days prior
to the merger. The conversion ratio is subject to a Hanover share price floor
and ceiling of $30.00 and $32.50, respectively. One of the conditions to the
consummation of the proposed merger between OEC and Hanover is the approval of
the OEC shareholders of such merger. Under Securities and Exchange Commission
rules, this approval must be done at a special meeting of the shareholders of
OEC following delivery of a merger proxy and registration statement for the
Hanover common stock to be issued to the OEC shareholders in the merger. In
September of 2000, Hanover acquired the Dresser-Rand Compression Services
Division ("DRCS") from Ingersoll-Rand Company and under SEC rules, the
registration/proxy statement needed to include audited financial statements of
DRCS and certain pro forma financial statements. The required DRCS audit was
just recently completed. Hanover and OEC expect to file a proxy/registration
statement shortly and to consummate the merger in either December of 2000 or
early 2001.
Due to the delay in filing the proxy/registration statement on November 14,
2000, the Company's Board of Directors and Hanover agreed to (i) extend the
outside date for closing the merger from January 15, 2001 to March 1, 2001,
(ii) agreed that actions and events that have occurred prior to November 14,
2000 are not material adverse changes under the Merger Agreement, (iii) change
the definition of material adverse change in the merger agreement such that
changes in the financial performance or condition of the Company will not be
grounds for Hanover refusing to close the merger, and (iv) eliminated the
requirement that the Company have in place an agreement for one of the
Company's lenders to cancel certain warrants prior to the closing of the
merger.
F-28
<PAGE>
OEC COMPRESSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
UNAUDITED
Given the extended delay in closing the proposed merger of the Company and
Hanover, on November 14, 2000 the Company's Board of Directors and Hanover
agreed to enter into a management agreement whereby Hanover will assume
management responsibilities for the Company's shop and field operations through
completion of the merger. Hanover will receive monthly compensation under the
agreement of $900,000 effective beginning in October of this year. The
Company's senior management will continue to oversee all marketing,
administrative, accounting and financial operations as well as oversight of
OEC's shop and field management.
F-29
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
dated as of July 13, 2000
among
Hanover Compressor Company
Caddo Acquisition Corporation
and
OEC Compression Corporation
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I. THE MERGER................................................... A1
Section 1.1. Effective Time of the Merger.......................... A1
Section 1.2. Closing............................................... A1
Section 1.3. Effect of the Merger.................................. A2
Section 1.4. Certificate of Incorporation; Bylaws.................. A2
Section 1.5. Directors and Officers................................ A2
Section 1.6. Conversion of Capital Stock........................... A2
Section 1.7. Adjustment of Conversion Number....................... A2
Section 1.8. No Further Ownership Rights in Company Common Stock... A3
Section 1.9. No Fractional Shares.................................. A3
Section 1.10. Shares of Dissenting Shareholders..................... A3
Section 1.11. Company Options....................................... A3
Section 1.12. Tax Consequences...................................... A3
ARTICLE II. EXCHANGE OF CERTIFICATES.................................... A4
Section 2.1. Exchange Agent........................................ A4
Section 2.2. Exchange and Payment Procedures....................... A4
Section 2.3. Distributions with Respect to Unexchanged Shares...... A4
Section 2.4. Termination of Exchange Fund.......................... A5
Section 2.5. No Liability.......................................... A5
Section 2.6. Lost Certificates..................................... A5
Section 2.7. Withholding Rights.................................... A5
Section 2.8. Further Assurances.................................... A5
Section 2.9. Stock Transfer Books.................................. A5
Section 2.10. Affiliates............................................ A5
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF the Company.............. A6
Section 3.1. Organization of the Company and its Subsidiaries...... A6
Section 3.2. Capitalization........................................ A6
Section 3.3. Authority; No Conflict; Required Filings and Consents;
Recommendation of the Board.......................... A7
Section 3.4. SEC Filings; Financial Statements..................... A8
Section 3.5. No Undisclosed Liabilities............................ A9
Section 3.6. Absence of Certain Changes or Events.................. A9
Section 3.7. Taxes................................................. A9
Section 3.8. Title to Assets....................................... A10
Section 3.9. Real Property......................................... A10
Section 3.10. Intellectual Property................................. A12
Section 3.11. Agreements, Contracts and Commitments................. A12
Section 3.12. Litigation............................................ A13
Section 3.13. Environmental Matters................................. A13
Section 3.14. Employee Benefit Plans................................ A14
Section 3.15. Compliance with Law; Authorizations................... A16
Section 3.16. Registration Statement and Proxy Statement............ A17
Section 3.17. Labor Matters......................................... A17
Section 3.18. Insurance............................................. A17
Section 3.19. Year 2000 Problem..................................... A17
Section 3.20. Opinion of Financial Advisor.......................... A17
Section 3.21. Brokers............................................... A17
Section 3.22. Transactions With Affiliates.......................... A17
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 3.23. No Excess Parachute or Nondeductible Payments......... A18
Section 3.24. State Anti-Takeover Statutes.......................... A18
Section 3.25. Accuracy of Information............................... A18
Section 3.26. Inventory............................................. A18
Section 3.27. Customers and Suppliers............................... A18
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF PARENT and Merger sub..... A18
Section 4.1. Organization.......................................... A18
Section 4.2. Authority; No Conflict; Required Filings and A19
Consents.............................................
Section 4.3. Parent Common Stock................................... A19
Section 4.4. SEC Filings: Financial Statements..................... A19
Section 4.5. Proxy Statement/Registration Statement................ A20
Section 4.6. Absence of Certain Changes or Events.................. A20
Section 4.7. No Vote Required...................................... A20
Section 4.8. Merger Sub............................................ A20
Section 4.9. Brokers............................................... A21
Section 4.10. Accuracy of Information............................... A21
ARTICLE V. COVENANTS.................................................... A21
Section 5.1. Conduct of Business of the Company.................... A21
Section 5.2. Cooperation; Notice; Cure............................. A22
Section 5.3. No Solicitation....................................... A23
Section 5.4. Preparation of Proxy Statement/Registration; Company A24
Shareholder Meeting..................................
Section 5.5. Access to Information................................. A25
Section 5.6. Legal Conditions to Merger............................ A25
Section 5.7. Publicity............................................. A26
Section 5.8. Tax-Free Reorganization............................... A26
Section 5.9. Affiliate Agreements.................................. A26
Section 5.10. NYSE Listing.......................................... A26
Section 5.11. Prudential Agreement.................................. A26
Section 5.12. Indemnification....................................... A26
Section 5.13. Letter of the Company's Accountants................... A27
Section 5.14. Stockholder Litigation................................ A27
Section 5.15. Stock Exchange Listing................................ A27
Section 5.16. Employee Benefits..................................... A27
Section 5.17. Fees and Expenses..................................... A27
ARTICLE VI. CONDITIONS TO MERGER........................................ A28
Section 6.1. Conditions to Each Party's Obligation to Effect the A28
Merger...............................................
Section 6.2. Additional Conditions to Obligations of the Company... A28
Section 6.3. Additional Conditions to Obligations of Parent and A28
Merger Sub...........................................
ARTICLE VII. TERMINATION AND AMENDMENT.................................. A30
Section 7.1. Termination........................................... A30
Section 7.2. Effect of Termination................................. A31
Section 7.3. Fees and Expenses..................................... A31
Section 7.4. Amendment............................................. A31
Section 7.5. Extension; Waiver..................................... A31
ARTICLE VIII. MISCELLANEOUS............................................. A32
Section 8.1. Nonsurvival of Representations, Warranties and A32
Agreements...........................................
Section 8.2. Notices............................................... A32
Section 8.3. Interpretation; Certain Definitions................... A32
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 8.4. Counterparts............................................. A33
Section 8.5. Entire Agreement; No Third Party Beneficiaries........... A33
Section 8.6. Governing Law............................................ A33
Section 8.7. Assignment............................................... A33
Annex I Key Stockholders
</TABLE>
iii
<PAGE>
TABLE OF EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
Exhibit A Form of Voting and Disposition Agreement
Exhibits B-1 and B-2 Estis and Smith Agreements
Exhibit C Form of Non-Competition Agreement
</TABLE>
iv
<PAGE>
Table of Defined Terms
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Acquisition Proposal............................................ 5.3(a)
Affiliate....................................................... 8.3 and 5.9
Affiliate Agreement............................................. 5.9
Agreement....................................................... Preamble
AMEX............................................................ 3.3(c)
Assets.......................................................... 3.8(a)
Average Parent Stock Price...................................... 1.6(b)
Benefit Arrangement............................................. 3.14(a)(i)
Business Day.................................................... 1.2
Certificates.................................................... 1.8
Certificate of Merger........................................... 1.1
Closing......................................................... 1.2
Closing Date.................................................... 1.2
Code............................................................ Recitals
Company......................................................... Preamble
Company 401 (k) Plan............................................ 5.16
Company Balance Sheet........................................... 3.4(b)(i)
Company Common Stock............................................ 1.6
Company Disclosure Schedule..................................... ARTICLE III
Company Intellectual Property................................... 3.10
Company Options................................................. 1.11
Company Material Adverse Effect................................. 3.1
Company Material Contracts...................................... 3.11(a)
Company Preferred Stock......................................... 3.2(a)
Company SEC Reports............................................. 3.4(a)
Company Stock Option Plans...................................... 3.2(b) and 1.11
Company Stockholders' Meeting................................... 5.4(e)
Confidentiality Agreement....................................... 5.3(a)
Contracts....................................................... 3.11(a)
Conversion Ratio................................................ 1.6(b)
Dissenting Shares............................................... 1.10
Effective Time.................................................. 1.1
Employee Plans.................................................. 3.14(a)(iii)
Encumbrance..................................................... 3.9
Environmental Condition......................................... 3.13
Environmental Laws.............................................. 3.13
Environmental Liabilities and Costs............................. 3.13
ERISA........................................................... 3.14(a)(iv)
ERISA Affiliate................................................. 3.14(a)(v)
Exchange Act.................................................... 3.3(c)
Exchange Agent.................................................. 2.1
Exchange Fund................................................... 2.1
Expenses........................................................ 5.17
GAAP............................................................ 4.4(b)(i)
Governmental Entity............................................. 3.3(c)
Hazardous Substances............................................ 3.13
HSR Act......................................................... 3.3(c)
Indebtedness.................................................... 3.11(a)
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Indemnified Parties............................................... 5.12(a)
Intellectual Property............................................. 3.10
Key Stockholders.................................................. Recitals
Knowledge......................................................... 8.3
Leases............................................................ 3.9
Liens............................................................. 3.8
Merger............................................................ Recitals
Merger Consideration.............................................. 1.6(b)
Merger Sub........................................................ Preamble
Multiemployer Plan................................................ 3.14(a)(vi)
NYSE.............................................................. 4.2(c)
OGCA.............................................................. 1.1
Order............................................................. 5.6(b)
Other Benefit Obligations......................................... 3.14(a)(vii)
Outside Date...................................................... 7.1(b)
Parent............................................................ Preamble
Parent 401(k) Plan................................................ 5.16
Parent Balance Sheet.............................................. 4.4(b)(i)
Parent Common Stock............................................... 1.6(b)
Parent Disclosure Schedule........................................ ARTICLE IV
Parent Material Adverse Effect.................................... 4.1
Parent SEC Reports................................................ 4.4
Pension Plan...................................................... 3.14(a)(viii)
Permits........................................................... 3.15(b)
Permitted Encumbrance............................................. 3.9
Permitted Liens................................................... 3.8
Proxy Statement................................................... 5.4(a)
Prudential........................................................ 5.11
Prudential Agreement.............................................. 5.11
Registration Statement............................................ 5.4(a)
Regulations....................................................... 3.15(a)
Required Company Vote............................................. 3.3(a)
Required Consents................................................. 5.6(c)
Rule 145.......................................................... 5.9
Securities Act.................................................... 3.3(c)
Subsidiary........................................................ 3.1
Superior Proposal................................................. 5.3(a)
Surviving Corporation............................................. 1.3
Tax Returns....................................................... 3.7(b)
Taxes............................................................. 3.7(b)
Third Party....................................................... 5.3(a)
to the knowledge of............................................... 8.3
Voting, Option and Disposition Agreement.......................... Recitals
Voting Debt....................................................... 3.2(b)
Warrants.......................................................... 1.12
Welfare Plan...................................................... 3.14(a)(ix)
Year 2000 Problem................................................. 3.19
</TABLE>
vi
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of July 13, 2000,
by and among Hanover Compressor Company, a Delaware corporation ("Parent"),
Caddo Acquisition Corporation, an Oklahoma corporation and a direct wholly
owned subsidiary of Parent ("Merger Sub"), and OEC Compression Corporation, an
Oklahoma corporation (the "Company").
WHEREAS, the respective Boards of Directors of Parent and Merger Sub have
determined that the merger of Merger Sub with and into the Company, upon the
terms and subject to the conditions set forth in this Agreement (the "Merger"),
is advisable and in the best interests of each corporation and its respective
stockholders;
WHEREAS, the Board of Directors of the Company has determined that the
Merger is fair to, and in the best interests of, the Company and its
stockholders;
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the
Company have each approved and adopted this Agreement and approved the Merger
and the other transactions contemplated hereby;
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, contemporaneous with the execution of this Agreement, certain of
the stockholders of the Company listed on Annex I hereto (the "Key
Stockholders") have entered into an agreement in substantially the form of
Exhibit A hereto (the "Voting and Disposition Agreement") to vote all of their
shares of Company Common Stock in favor of the Merger, grant Parent certain
rights to acquire such shares and limit their disposition of Parent Common
Stock;
WHEREAS, the Company and Dennis W. Estis and Don E. Smith have each entered
into a non-competition and non-solicitation agreement attached as Exhibits B-1
and B-2 hereto;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:
Article I.
THE MERGER
Section 1.1. Effective Time of the Merger. Subject to the provisions of this
Agreement, a certificate of merger (the "Certificate of Merger") in such form
as is required by the relevant provisions of the Oklahoma General Corporation
Act (the "OGCA") shall be duly prepared, executed and acknowledged by the
Surviving Corporation and thereafter delivered to the Secretary of State of the
state of Oklahoma for filing, as provided in the OGCA, as early as practicable
on the Closing Date. The Merger shall become effective upon the filing of the
Certificate of Merger with the Secretary of State of the state of Oklahoma or
such later time as specified in the Certificate of Merger (the "Effective
Time").
Section 1.2. Closing. The closing of the Merger (the "Closing") will take
place on the second business day, which is any day other than a Saturday, a
Sunday or a day on which U.S. banking institutions are authorized by law,
regulation or executive order to remain closed (a "Business Day"), after
satisfaction or waiver (as permitted by this Agreement and applicable law) of
the conditions (excluding conditions that, by their terms, cannot be satisfied
until the Closing Date) set forth in Article VI (the "Closing Date"), unless
another time or date is agreed to in writing by the parties hereto. The Closing
shall be held at the offices of Latham & Watkins, 5800 Sears Tower, Chicago,
Illinois 60606, unless another place is agreed to in writing by the parties
hereto. The Certificate of Merger shall be filed on or as promptly as
practicable following the Closing Date.
A-1
<PAGE>
Section 1.3. Effect of the Merger. As a result of the Merger, the separate
corporate existence of Merger Sub shall cease and the Company shall continue as
the surviving corporation (the "Surviving Corporation"). Upon becoming
effective, the Merger shall have the effects set forth in the OGCA. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all properties, rights, privileges, powers and franchises of the Company
and Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
Section 1.4. Certificate of Incorporation; Bylaws. At the Effective Time,
(i) the Certificate of Incorporation of the Company, as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation of the
Surviving Corporation, and (ii) the Bylaws of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the Bylaws of the Surviving
Corporation, in each case until duly amended in accordance with applicable law.
Section 1.5. Directors and Officers. The directors of Merger Sub immediately
prior to the Effective Time shall be the initial directors of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. The officers of the
Company immediately prior to the Effective Time shall be the initial officers
of the Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation.
Section 1.6. Conversion of Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holders of any
shares of the Company's common stock, par value $.01 per share ("Company Common
Stock"), or capital stock of Merger Sub:
(a) Cancellation of Stock. Each share of Company Common Stock that is
owned by the Company or any wholly owned subsidiary of the Company (as
treasury stock or otherwise) shall automatically be canceled and retired
and shall cease to exist and no consideration shall be delivered in
exchange therefor.
(b) Consideration for Company Common Stock. Subject to Section 1.10,
each issued and outstanding share of Company Common Stock (other than
Dissenting Shares and shares to be canceled in accordance with Section
1.6(a)) shall be converted into the right to receive a number of fully paid
and nonassessable shares of common stock, par value $.001 per share, of
Parent ("Parent Common Stock") equal to the Conversion Ratio (as defined
below) (the "Merger Consideration"). The "Conversion Ratio" shall be equal
to $1.00 divided by the Average Parent Stock Price (as defined below). The
"Average Parent Stock Price" shall mean the closing sales price per share
of Parent Common Stock as reported by The New York Stock Exchange Composite
Tape for the twenty consecutive trading days (on which shares of Parent
Common Stock are actually traded) immediately preceding the second Business
Day prior to the Effective Time; provided, however, that if the foregoing
amount is calculated to be less than $30, then the Average Parent Stock
Price shall be $30; and provided further, that if the foregoing amount is
calculated to be greater than $32.50, then the Average Parent Stock Price
shall be $32.50. As of the Effective Time, all such shares of Company
Common Stock shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each holder of a
certificate which, prior to the Effective Time, represented any such shares
of Company Common Stock shall cease to have any rights with respect
thereto, except the right to receive, upon surrender of such certificate in
accordance with Section 2.2, the Merger Consideration in accordance with
this Section 1.6.
(c) Merger Sub Capital Stock. Each share of capital stock of Merger Sub
issued and outstanding immediately prior to the Effective Time shall remain
outstanding and shall be unchanged as a share of capital stock of the
Surviving Corporation.
Section 1.7. Adjustment of Conversion Number. In the event that pursuant to
a transaction announced after the date hereof and becoming effective prior to
the Effective Time (i) any distribution is made in respect of Parent Common
Stock other than a regular quarterly cash dividend or (ii) any stock dividend,
stock split, reclassification, recapitalization, combination or mandatory
exchange of shares occurs with respect to, or rights (other than non-mandatory
offers to exchange) are issued in respect of, Parent Common Stock, then, the
Conversion Ratio shall be adjusted accordingly.
A-2
<PAGE>
Section 1.8. No Further Ownership Rights in Company Common Stock. All shares
of Parent Common Stock issued upon the surrender for exchange of certificates
which immediately prior to the Effective Time represented outstanding share of
Company Common Stock ("Certificates") in accordance with the terms hereof
(including any cash paid pursuant to Sections 1.9 or 2.3) shall be deemed to
have been issued in full satisfaction of all rights pertaining to such shares
of Company Common Stock, and from and after the Effective Time there shall be
no further registration of transfers of the shares of Company Common Stock
which were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in Article II.
Section 1.9. No Fractional Shares. No certificate or scrip representing
fractional shares of Parent Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any other rights of a stockholder of Parent.
Notwithstanding any other provision of this Agreement, each holder of shares of
Company Common Stock exchanged pursuant to the Merger who would otherwise have
been entitled to receive a fraction of a share of Parent Common Stock (after
taking into account all Certificates delivered by such holder) shall receive,
in lieu thereof, cash (without interest) in an amount equal to such fractional
part of a share of Parent Common Stock multiplied by the Average Parent Stock
Price.
Section 1.10. Shares of Dissenting Shareholders. Notwithstanding anything in
this Agreement to the contrary, any shares of Company Common Stock that are
outstanding immediately prior to the Effective Time and have not been voted in
favor of the Merger and with respect to which appraisal rights shall have been
demanded and perfected in accordance with Section 1091 of the OGCA to the
extent applicable (collectively, the "Dissenting Shares") and not withdrawn
shall not be converted into or represent the right to receive the Merger
Consideration, but such shares shall become the right to receive such
consideration as may be determined to be due to holders of Dissenting Shares
pursuant to the laws of the State of Oklahoma unless and until the holder of
such Dissenting Shares withdraws his or her demand for such appraisal in
accordance with the OGCA or becomes ineligible for appraisal. If, after the
Effective Time, any such holder withdraws his or her demand for appraisal or
becomes ineligible for appraisal (through failure to perfect or otherwise),
such Dissenting Shares shall thereupon be deemed to have been converted into
and to have become exchangeable for, as of the Effective Time, the right to
receive, without any interest thereon, the consideration provided for in
Section 1.6. The Company shall give Parent prompt notice of any demands for
appraisal for shares of Company Common Stock received by the Company, and
Parent shall have the right to direct all proceedings, negotiations and actions
taken by the Company in respect thereof.
Section 1.11. Company Options. At the Effective Time, each unexpired and
unexercised outstanding option, whether or not then vested or exercisable in
accordance with its terms, to purchase shares of Company Common Stock (the
"Company Options") previously granted by the Company or its Subsidiaries shall
be canceled and converted into the right to receive from the Parent, within 10
days following the Effective Time, cash in an amount equal to the product of
(a) $1.00 minus the exercise price per share of such Company Option, times (b)
the number of shares of Common Stock which may be purchased upon exercise of
such Company Option (whether or not then exercisable). Prior to (but effective
at) the Effective Time, the Company shall (i) obtain any consents from all
holders of Company Options and (ii) make any amendments to the terms of such
stock option or compensation plans or arrangements that, in the case of either
clause (i) or (ii), are necessary to give effect to the transactions
contemplated by this Section 1.11. Immediately prior to the Effective Time, the
Company shall terminate all plans and other arrangements pursuant to which such
Company Options were granted (the "Company Stock Option Plans") effective as of
the Effective Time with no further liability to the Company.
Section 1.12. Tax Consequences. It is intended by the parties hereto that
the Merger shall constitute a "reorganization" within the meaning of Section
368(a) of the Code. The parties hereto hereby adopt this Agreement as a "plan
of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of
the United States Treasury Regulations.
A-3
<PAGE>
Article II.
EXCHANGE OF CERTIFICATES
Section 2.1. Exchange Agent. As of the Effective Time, Parent shall deposit
with ChaseMellon Shareholder Services or such other bank or trust company as
may be designated by Parent and be reasonably acceptable to the Company (the
"Exchange Agent") for the benefit of the holders of shares of Company Common
Stock, for exchange or payment in accordance with this Section 2.1, through the
Exchange Agent, (i) certificates evidencing such number of shares of Parent
Common Stock equal to (x) the Merger Consideration multiplied by (y) the
aggregate number of shares of Company Common Stock which may be converted into
the right to receive Parent Common Stock in the Merger; and (ii) any cash
necessary to pay amounts due pursuant to Section 1.9 (such certificates for
shares of Parent Common Stock and such cash being hereinafter referred to as
the "Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable
instructions in accordance with Articles I and II, deliver the Parent Common
Stock and cash contemplated to be issued pursuant to Sections 1.6(b) and 1.9
out of the Exchange Fund. The Exchange Fund shall not be used for any other
purpose. The Exchange Agent shall invest any cash included in the Exchange
Fund, as directed by Parent, on a daily basis. Any interest and other income
resulting from such investments shall be paid to Parent.
Section 2.2. Exchange and Payment Procedures. As soon as reasonably
practicable after the Effective Time, the Exchange Agent shall mail to each
holder of record of a Certificate or Certificates that were converted into the
right to receive shares of Parent Common Stock and cash pursuant to Sections
1.6(b) and 1.9, (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon proper delivery of the Certificates to the Exchange Agent, and which
shall be in such form and have such other provisions as Parent may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for shares of Parent Common Stock and cash. Upon
surrender of a Certificate for cancellation to the Exchange Agent together with
such letter of transmittal, duly executed and completed in accordance with the
instructions thereto, and such other documents as may reasonably be required by
the Exchange Agent, the holder of such Certificate shall be entitled to receive
in exchange therefor a certificate representing that number of whole shares of
Parent Common Stock and cash which such holder has the right to receive
pursuant to the provisions of Article I and this Article II and the Certificate
so surrendered shall forthwith be canceled. In the event of a transfer of
ownership of Company Common Stock that is not registered in the transfer
records of the Company, a certificate representing the proper number of shares
of Parent Common Stock may be issued, and cash, if any, pursuant to Sections
1.6(b) and 1.9 may be paid, to a person other than the person in whose name the
Certificate so surrendered is registered if the Certificate representing such
Company Common Stock is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Article II, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon surrender
the certificate representing shares of Parent Common Stock and cash as
contemplated by Article I.
Section 2.3. Distributions with Respect to Unexchanged Shares. No dividends
or other distributions declared or made after the Effective Time with respect
to Parent Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Certificate with respect to the shares
of Parent Common Stock to which such holder is entitled hereunder and no cash
payment paid to any such holder pursuant to Sections 1.6(b) and 1.9 until the
holder of record of such Certificate shall surrender such Certificate. Subject
to the effect of applicable laws, following surrender of any such Certificate,
there shall be given to the record holder of the certificates representing
whole shares of Parent Common Stock to which such holder is entitled hereunder,
without interest, (i) at the time of such surrender, a certificate representing
the number of whole shares of Parent Common Stock and the amount of cash, if
any, pursuant to Section 1.9 to which such holder is entitled pursuant to
Section 1.9 and the amount of dividends or other distributions with respect to
such whole shares of Parent Common Stock with a record date after the Effective
Time and a payment date prior to the date of issuance to such holder, and (ii)
at the appropriate payment date, the amount of dividends or other
A-4
<PAGE>
distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of Parent Common Stock.
Section 2.4. Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the holders of Certificates for nine months
after the Effective Time shall be delivered to Parent, upon demand, and any
shareholders of the Company who have not previously complied with the
provisions of this Article II shall thereafter look only to Parent for payment
of their claim for Parent Common Stock and cash and any dividends or
distributions with respect to Parent Common Stock. Any portion of the Exchange
Fund remaining unclaimed by holders of Company Common Stock five years after
the Effective Time (or such earlier date immediately prior to such time as such
portion would otherwise escheat to or become property of any Governmental
Entity) shall, to the extent permitted by applicable law, become the property
of Parent free and clear of any claims or interest of any person previously
entitled therein.
Section 2.5. No Liability. To the fullest extent permitted by law, none of
Parent, Merger Sub, the Company or the Surviving Corporation shall be liable to
any holder of Company Common Stock or Parent Common Stock, as the case may be,
for any shares (or dividends or distributions with respect thereto) and/or cash
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
Section 2.6. Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
Parent, the posting by such person of a bond in such reasonable amount as
Parent may direct as indemnity against any claim that may be made against it
with respect to such Certificate, the Exchange Agent will deliver in exchange
for such lost, stolen or destroyed Certificate the shares of Parent Common
Stock and cash in accordance with this Agreement.
Section 2.7. Withholding Rights. Parent and the Exchange Agent shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Company Common Stock such
amounts as Parent or the Exchange Agent, as applicable, is required to deduct
and withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign Tax law. To the extent that amounts are so
withheld by Parent or the Exchange Agent, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the holder of
the shares of Company Common Stock in respect of which such deduction and
withholding was made by such party.
Section 2.8. Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Merger Sub,
any deeds, bills of sale, assignments or assurances and to take and do, in the
name and on behalf of the Company or Merger Sub, any other actions and things
to vest, perfect or confirm of record or otherwise in the Surviving Corporation
any and all right, title and interest in, to and under any of the rights,
properties or assets acquired or to be acquired by the Surviving Corporation as
a result of, or in connection with, the Merger.
Section 2.9. Stock Transfer Books. At the Effective Time, the stock transfer
books of the Company shall be closed and there shall be no further registration
of transfers of shares of Company Common Stock thereafter on the records of the
Company. From and after the Effective Time, the holders of Certificates shall
cease to have any rights with respect to such shares of Company Common Stock
formerly represented thereby, except as otherwise provided herein or by law. On
or after the Effective Time, any Certificates presented to the Exchange Agent
or Parent for any reason shall be converted into the Merger Consideration with
respect to the shares of Company Common Stock formerly represented thereby.
Section 2.10. Affiliates. Notwithstanding anything herein to the contrary,
Certificates surrendered for exchange by any Affiliate (as defined in Section
5.9) of the Company shall not be exchanged until Parent has received an
Affiliate Agreement (as defined in Section 5.9) from such Affiliate.
A-5
<PAGE>
Article III.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub that the
statements contained in this Article III are true and correct except as set
forth herein and in the disclosure schedule delivered by the Company to Parent
and Merger Sub on or before the date of this Agreement (the "Company Disclosure
Schedule"). The Company Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
III.
Section 3.1. Organization of the Company and its Subsidiaries. Each of the
Company and its Subsidiaries (as defined below) is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization and has all requisite corporate, partnership or limited liability
company power and authority to carry on its business as now being conducted and
as proposed to be conducted. Each of the Company and its Subsidiaries is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification or licensing
necessary, except where the failure to be so qualified, licensed or in good
standing, individually or in the aggregate, could not be expected to have a
material adverse effect on the business, properties, financial condition or
results of operations of the Company and its Subsidiaries, taken as a whole (a
"Company Material Adverse Effect"). The Company has delivered to Parent a true
and correct copy of the Certificate of Incorporation and Bylaws of the Company
and each of its Subsidiaries, in each case as amended to date and each of such
documents is in full force and effect. Neither the Company nor any of its
Subsidiaries is in violation of any provision of any of such documents. The
respective organizational documents of the Company's Subsidiaries do not
contain any provision that would limit or otherwise restrict the ability of
Parent or the Surviving Corporation, following the Effective Time, from owning
or operating such Subsidiaries on the same basis as the Company. A true and
complete list of all of the Company's Subsidiaries, together with the
jurisdiction of incorporation of each such Subsidiary and the percentage of
ownership interest of the Company therein, is set forth in Section 3.1 of the
Company Disclosure Schedule. Neither the Company nor any of its Subsidiaries
directly or indirectly owns (other than ownership interests in the Company or
in one or more of its Subsidiaries) any equity or similar interest in, or any
interest convertible into or exchangeable or exercisable for, any corporation,
partnership, joint venture or other business association or entity. As used in
this Agreement, the word "Subsidiary" means, with respect to any party, any
corporation or other organization, whether incorporated or unincorporated, of
which (i) such party or any other Subsidiary of such party is a general partner
or member or (ii) at least twenty-five percent (25%) of the securities or other
interests having by their terms ordinary voting power to elect or select a
majority of the Board of Directors or other persons or entities performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such party or by any one or more
of its Subsidiaries, or by such party and one or more of its Subsidiaries.
Section 3.2. Capitalization.
(a) The authorized capital stock of the Company consists of 60,000,000
shares of Company Common Stock and 1,000,000 shares of the Company's Preferred
Stock, $1.00 par value per share ("Company Preferred Stock"). As of the date
hereof, (i) 36,885,333 shares of Company Common Stock are issued and
outstanding, all of which are validly issued, fully paid and nonassessable,
(ii) 320,445 shares of Company Common Stock are held in the treasury of the
Company or by Subsidiaries of the Company, and (iii) no shares of Company
Preferred Stock are issued and outstanding. There are no obligations,
contingent or otherwise, of the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of Company Common Stock or
the capital stock of any Subsidiary or to provide funds to or make any material
investment (in the form of a loan, capital contribution or otherwise) in any
such Subsidiary or any other entity (other than to or in a wholly owned
Subsidiary of the Company). All of the outstanding shares of capital stock
(including shares which may be issued upon exercise of outstanding options) or
other ownership interests of each of the Company's Subsidiaries are duly
authorized, validly issued, fully paid and nonassessable and all such shares
are owned by
A-6
<PAGE>
the Company or another Subsidiary of the Company free and clear of all security
interests, liens, claims, pledges, agreements, limitations on the Company's
voting rights, charges or other encumbrances of any nature.
(b) There are no bonds, debentures, notes or other indebtedness having
voting rights (or convertible into securities having such rights) ("Voting
Debt") of the Company or any of its Subsidiaries issued and outstanding.
Section 3.2(b) of the Company Disclosure Schedule sets forth (i) the total
number of shares of Company Common Stock reserved for issuance upon exercise of
Company Stock Options granted and outstanding as of the date hereof and (ii)
the Company Stock Option Plan, the name of each holder under the Company Stock
Option Plans, the number of Company Stock Options held by such holder, and the
exercise price of each such Company Stock Option. Except as reserved for future
grants of options or restricted stock under the Company Stock Option Plans, (x)
there are no shares of capital stock of any class of the Company, or any
security exchangeable into or exercisable for such equity securities, issued,
reserved for issuance or outstanding; (y) there are no options, warrants (other
than warrants to purchase 1,000,000 shares of Company Common Stock issued to
The Prudential Life Insurance Company), equity securities, calls, rights,
commitments or agreements of any character to which the Company or any of its
Subsidiaries is a party or by which any of them is bound obligating the Company
or any of its Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other ownership
interests (including Voting Debt) of the Company or any of its Subsidiaries or
obligating the Company or any of its Subsidiaries to grant, extend, accelerate
the vesting of or enter into any such option, warrant, equity security, call,
right, commitment or agreement; and (z) there are no voting trusts, proxies or
other voting agreements or understandings with respect to the shares of capital
stock of the Company, including, without limitation, any registration rights
agreements (other than those registration rights agreements listed in Section
3.2(b) of the Company Disclosure Schedule) or shareholder agreements. All
shares of Company Common Stock subject to issuance as specified in this Section
3.2(b) or the related Company Disclosure Schedule section are duly authorized
and, upon issuance on the terms and conditions specified in the instruments
pursuant to which they are issuable, shall be validly issued, fully paid and
nonassessable.
Section 3.3. Authority; No Conflict; Required Filings and Consents;
Recommendation of the Board.
(a) The Company has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by the Company have been duly authorized by
all necessary corporate action on the part of the Company, subject only to the
approval and adoption of this Agreement and the Merger by the holders of a
majority of the Company's outstanding common stock (the "Required Company
Vote"). This Agreement has been duly executed and delivered by the Company and
constitutes the valid and binding obligation of the Company, enforceable
against it in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditor rights and to general equity
principles.
(b) The execution and delivery of this Agreement by the Company does not,
and the consummation of the transactions contemplated hereby will not, (i)
conflict with, or result in any violation or breach of, any provision of the
Certificate of Incorporation or Bylaws of the Company or the comparable
charter, organizational or governing documents of any of its Subsidiaries, (ii)
result in any violation or breach of, or constitute (with or without notice or
lapse of time, or both) a default (or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any material benefit)
under, or require a consent or waiver under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, contract or other
agreement, instrument or obligation to which the Company or any of its
Subsidiaries is a party or by which any of them or any of their properties or
assets may be bound other than as disclosed in Section 3.3(b) of the Company
Disclosure Schedule, or (iii) subject to the governmental filings and other
matters referred to in Section 3.3(c), conflict with or violate any permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or any of its
Subsidiaries or any of its or
A-7
<PAGE>
their properties or assets. No consent of any holder of outstanding Company
Stock Options is required in connection with the conversion of such Company
Stock Options in accordance with the provisions of Section 1.11.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, whether federal, state or
local (or any subdivision thereof) ("Governmental Entity") is required by or
with respect to the Company or any of its Subsidiaries in connection with the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (i) those required under or in
relation to the Hart-Scott Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), (ii) state securities or "blue sky" laws, (iii) the
Securities Act of 1933, as amended (the "Securities Act"), (iv) the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (v) the OGCA with
respect to the filing and recordation of appropriate documents to effect the
Merger and (vi) rules and regulations of the American Stock Exchange ("AMEX").
(d) The Board of Directors of the Company has, by a unanimous vote at a
meeting of such Board (with one director absent) duly held on July 12, 2000,
approved, adopted and declared advisable this Agreement, the Merger and the
other transactions contemplated hereby, and determined that this Agreement, the
Merger and the other transactions contemplated hereby, taken together, are in
the best interests of the Company and of the stockholders of the Company, and
prior to the date hereof such Board has resolved to recommend that the
shareholders of the Company approve this Agreement, the Merger and the other
transactions contemplated hereby.
Section 3.4. SEC Filings; Financial Statements.
(a) The Company has filed and made available to Parent all forms, reports
and documents filed by the Company with the SEC since December 31, 1996
(collectively, the "Company SEC Reports"). The Company SEC Reports (including
any financial statements filed as a part thereof or incorporated by reference
therein) (i) at the time filed, complied in all material respects with the
applicable requirements of the Securities Act and the Exchange Act, as the case
may be, and (ii) did not, at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing), contain any untrue statement of a material fact or omit to state
a material fact required to be stated in such Company SEC Reports or necessary
in order to make the statements in such Company SEC Reports, in the light of
the circumstances under which they were made, not misleading as of such date.
None of the Company's Subsidiaries is required to file any forms, reports or
other documents with the SEC.
(b) (i) Each of the consolidated financial statements (including, in each
case, any related notes) of the Company contained in the Company SEC Reports
complied as to form in all material respects with the applicable rules,
regulations and practices of the SEC with respect thereto, was prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes to such financial statements or, in the case of unaudited statements,
as permitted by Form 10-Q under the Exchange Act) and fairly presented the
consolidated financial position of the Company and its Subsidiaries as of the
dates and the consolidated results of its operations and cash flows for the
periods indicated, except that the unaudited interim financial statements were
or are subject to normal and recurring year-end adjustments which were not or
are not expected to be material in amount. The audited balance sheet of the
Company as of December 31, 1999 is referred to herein as the "Company Balance
Sheet."
(ii) The Company maintains a system of accounting controls sufficient to
provide reasonable assurances that (A) its transactions and those of its
Subsidiaries are executed in accordance with management's general or specific
authorization, (B) its transactions and those of its Subsidiaries are recorded
as necessary to permit preparation of financial statements in accordance with
GAAP and to maintain accountability for assets, (C) access to its assets and
those of its Subsidiaries is permitted only in accordance with management's
general or specific authorization, and (D) the recorded accountability for its
assets and those of its Subsidiaries is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
A-8
<PAGE>
Section 3.5. No Undisclosed Liabilities. Except for, and to the extent of,
those liabilities that are reflected or reserved against, to the extent
reflected or reserved against, on the consolidated balance sheet of the Company
and its Subsidiaries included in the Company's Quarterly Report on Form 10-Q
for the fiscal period ended March 31, 2000, or the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, and except for obligations
under contracts and commitments incurred in the ordinary course of business
which are not required under GAAP to be reflected in the financial statements
of the Company, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company, and
except for liabilities and obligations incurred in the ordinary course of
business consistent with past practice since March 31, 2000, and except and as
to the extent disclosed in the Company Disclosure Schedule, neither the Company
nor any of its Subsidiaries has any liabilities or obligations of any nature
whatsoever (whether fixed, absolute, accrued, contingent or otherwise and
whether due or to become due).
Section 3.6. Absence of Certain Changes or Events. Except as disclosed in
the Company's SEC Reports filed prior to the date hereof, since the date of the
Company Balance Sheet, the Company and its Subsidiaries have conducted their
businesses only in the ordinary course and in a manner consistent with past
practice and, since such date, there has not been (i) any event, change or
development which, individually or in the aggregate, has had or could
reasonably be expected to have a Company Material Adverse Effect; (ii) any
change by the Company in its accounting methods, principles or practices; (iii)
any revaluation by the Company of any asset; (iv) any modification of any
Material Contract, except in the ordinary course of business or as contemplated
by this Agreement; (v) any disposition of any assets of the Company or any of
its Subsidiaries outside the ordinary course of business; or (vi) any other
action or event that would have required the consent of Parent pursuant to
Section 5.1 of this Agreement had such action or event occurred after the date
of this Agreement.
Section 3.7. Taxes.
(a) Except as set forth in Section 3.7 of the Company Disclosure Schedule:
(i) the Company and each of its Subsidiaries have duly and timely filed (taking
into account any extension of time within which to file) all Tax Returns
required to be filed by any of them and all such filed Tax Returns are complete
and accurate in all respects; (ii) the Company and each of its Subsidiaries
have timely paid to the proper taxing authorities all Tax liabilities (whether
or not shown as due on such filed Tax Returns), including Taxes that the
Company or any of its Subsidiaries have been obligated to withhold from amounts
paid or owed to any employee, independent contractor, creditor or third party,
except with respect to matters contested in good faith and which are set forth
in Section 3.7 of the Company Disclosure Schedule, or for which a reserve
(other than any reserve for deferred Taxes established to reflect timing
differences between book and Tax income) is provided on the Company Balance
Sheet; (iii) as of the date hereof: (A) there are no pending or, to the
knowledge of the Company, threatened audits, examinations, investigations or
other proceedings in respect of Taxes or Tax matters relating to the Company or
any of its Subsidiaries, (B) there are no deficiencies or claims for any Taxes
that have been proposed, asserted or assessed against the Company or any of its
Subsidiaries, (C) there are no Liens for Taxes upon the assets of the Company
or any of its Subsidiaries, other than Liens for current Taxes not yet due and
payable and Liens for Taxes that are being contested in good faith by
appropriate proceedings and properly reserved for and (D) neither the Company
nor any of its Subsidiaries has requested any extension of time within which to
file any Tax Returns in respect of any taxable year which have not since been
filed, and no request for waivers of the time to assess any Taxes are pending
or outstanding; (iv) none of the Company or any of its Subsidiaries has made a
consent under Section 341(f) of the Code; (v) as of the date hereof, the
consolidated federal income Tax Returns for the Company and its Subsidiaries
have never been examined by the Internal Revenue Service; (vi) neither the
Company nor any of its Subsidiaries has any liability for Taxes of any person
(other than the Company and its Subsidiaries) under Treasury Regulation Section
1.1502-6 (or any comparable provision of state, local or foreign law), as a
transferee or successor, by contract, or otherwise; (vii) neither the Company
nor any Subsidiary is a party to any agreement relating to the allocation or
sharing of Taxes; and (viii) as of the date hereof, neither the Company nor any
of its Subsidiaries knows of any facts with respect to the Company or its
Subsidiaries that would reasonably be expected to prevent or materially or
A-9
<PAGE>
burdensomely impede the Merger from qualifying as a "reorganization" within the
meaning of Section 368(a) of the Code. Neither the Company nor any of its
Subsidiaries will, as a result of the consummation of the transactions
contemplated by this Agreement, recognize any gain under any applicable
provisions of the federal consolidated return regulations (Treasury Regulation
Section 1.1502 et seq.) with respect to any excess loss account or any
intercompany transaction or distribution in which the taxation of gain or loss
was previously deferred. None of the Company or its Subsidiaries has been a
"United States real property holding corporation" within the meaning of Section
897(c)(2) of the Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code. No written power of attorney that has been
granted by the Company or its Subsidiaries currently is in force with respect
to any matter relating to Taxes. The Company has not distributed the stock of a
"controlled corporation" (within the meaning of Section 355(a) of the Code) in
a transaction subject to Section 355 of the Code within the past two years.
None of the Company or its Subsidiaries has made an election, nor is required,
to treat any Assets as owned by another person or entity or as tax-exempt bond
financed property or tax-exempt use property for tax purposes.
(b) (i) "Taxes" shall mean all taxes, assessments, charges, duties, fees,
levies, imposts or other governmental charges, including, without limitation,
all federal, state, local, foreign and other income, environmental, add-on,
minimum, franchise, profits, capital gains, capital stock, capital structure,
transfer, sales, gross receipts, use, ad valorem, service, occupation,
property, excise, severance, windfall profits, premium, stamp, license,
payroll, social security, employment, unemployment, disability, value-added,
withholding and other taxes, assessments, charges, duties, fees, levies,
imposts or other governmental charges of any kind whatsoever (whether payable
directly or by withholding and whether or not requiring the filing of a Tax
Return), and all estimated taxes, deficiency assessments, additions to tax,
additional amounts imposed by any governmental authority (domestic or foreign),
penalties and interest, and shall include any liability for such amounts as a
result either of being a member of a combined, consolidated, unitary or
affiliated group or of a contractual obligation to indemnify any person,
corporation or other organization regardless of whether disputed, and (ii) "Tax
Returns" shall mean all returns and reports (including elections, claims,
declarations, disclosures, schedules, estimates, computations and information
returns) required to be supplied to a governmental authority in any
jurisdiction (domestic or foreign) relating to Taxes, including any schedule or
amendment thereto or amendment thereof.
Section 3.8. Title to Assets.. The Company and each of its Subsidiaries owns
and has good and valid title to, or a valid leasehold interest in, or otherwise
has sufficient and legally enforceable rights to use, all of the properties and
assets (real, personal or mixed, tangible or intangible), used, or held for use
by, the Company and such Subsidiaries in connection with the conduct of their
business (the "Assets"), including Assets reflected on the Company Balance
Sheet or acquired since the date thereof, except for Assets disposed of in the
ordinary course of business consistent with past practice and in accordance
with this Agreement, in each case free and clear of any lien, charge,
encumbrance or security interest of any kind ("Liens") except for Permitted
Liens. "Permitted Liens" shall mean those Liens (i) securing debt that is
reflected on the Company Balance Sheet or the notes thereto, (ii) for Taxes not
yet due or payable or being contested in good faith and for which adequate
reserves have been established in accordance with GAAP, (iii) that constitute
mechanics', carriers', workmens' or similar liens, liens arising under original
purchase price conditional sale contracts and equipment leases with third
parties entered into in the ordinary course of business consistent with past
practice, and for which adequate provision for payment has been made, and (iv)
incurred or deposits made in the ordinary course of business consistent with
past practice in connection with workers' compensation, unemployment insurance
and social security, retirement and other legislation. This Section 3.8 does
not relate to intellectual property (for which Section 3.10 is applicable).
Section 3.8 of the Company Disclosure Schedule includes a list of all
compressors and related equipment owned or leased by the Company (specifying
for each compressor the horsepower and whether such compressor is owned or
leased).
Section 3.9. Real Property.
(a) Section 3.9 (a) of the Company Disclosure Schedule sets forth a true
and correct list of all facilities owned by the Company and its Subsidiaries or
to be acquired by the Company or its Subsidiaries prior to the Effective Time.
With respect to each parcel of owned real property, except as set forth in
Section 3.9 (a) of the
A-10
<PAGE>
Company Disclosure Schedule, (i) the Company or any Subsidiary of the Company,
as the case may be, has good and indefeasible fee simple title to such parcel
of real property, free and clear of any and all Encumbrances other than
Permitted Encumbrances, (ii) there are no leases, subleases, licenses, options,
rights, concessions or other agreements, written or oral, granting to any party
or parties the right of use or occupancy of any portion of such parcel of real
property, (iii) there are no outstanding options or rights of first refusal in
favor of any other party to purchase any such parcel of real property or any
portion thereof or interest thereof or interest therein, (iv) there are no
parties (other than the Company or its Subsidiary, as the case may be) who are
in possession of or who are using any such parcel of real property, except in
connection with a Permitted Encumbrance, and (v) there is no (A) pending or, to
the knowledge of the Company, threatened condemnation or expropriation
proceeding relating to such parcel of real property, (B) pending or, to the
knowledge of the Company, threatened Action relating to such parcel of real
property, (C) to the knowledge of the Company, other matter adversely affecting
the current use or occupancy of such parcel of real property in any material
respect, (D) pending, or to the knowledge of the Company, threatened special
assessment relating to such real property or (E) pending, or to the Company's
knowledge, proposed or threatened zoning change to any zoning affecting the
property.
(b) Section 3.9 (b) of the Company Disclosure Schedule sets forth all leases
of real property (the "Leases"), to which the Company is a party and has
delivered true and correct copies of all such Leases. The Leases are in full
force and effect and are valid and binding obligations of the parties thereto
enforceable against each such party in accordance with their terms. The Company
is not in default or, to the Company's knowledge, alleged to be in default
thereunder. To the knowledge of the Company, none of the other parties to the
Leases are in default, or alleged to be in default, thereunder or have any
defenses to their obligation thereunder. Except as set forth in Section 3.9(b)
of the Company Disclosure Schedule, the Company has full legal power and
authority to assign its rights under the Leases, and the continuation, validity
and effectiveness thereof will not be affected by the occurrence of the
Effective Time. The Company has not assigned, subleased, mortgaged, deeded in
trust or otherwise transferred or encumbered any Lease or interest therein.
With respect to each Lease and the real property demised thereby: (i) the
Company or any Subsidiary of the Company, as the case may be, has good and
valid leasehold interest in such property, free and clear of any and all
Encumbrances other than Permitted Encumbrances, (ii) there are no subleases,
licenses, options, rights, concessions or other agreements, written or oral,
granting to any party or parties the right of use or occupancy of any portion
of such parcel of real property, (iii) there are no outstanding options or
rights of first refusal in favor of any other party to purchase, lease or
sublease any such parcel of real property or any portion thereof or interest
thereof or interest therein, (iv) there are no parties (other than the Company
or its Subsidiary, as the case may be) who are in possession of or who are
using any such parcel of real property, except in connection with a Permitted
Encumbrance, and (v) there is no (A) pending or, to the knowledge of the
Company, threatened condemnation or expropriation proceeding relating to such
parcel of real property, (B) pending or, to the knowledge of the Company,
threatened Action relating to such parcel of real property, (C) to the
knowledge of the Company, other matter adversely affecting the current use or
occupancy of such parcel of real property in any material respect, (D) pending,
or to the knowledge of the Company, threatened special assessment relating to
such real property or (E) pending, or to the Company's knowledge, proposed or
threatened zoning change to any zoning affecting the property.
For purposes of this Section 3.9, the following definitions shall apply:
"Encumbrance" means any claim, lien, pledge, option, lease, license,
occupancy agreement, charge, easement, tax assessment, security interest, deed
of trust, mortgage, right-of-way, encroachment, building or use restriction,
title defect, work order, conditional sales agreement, encumbrance or other
right of third parties or other restriction on use, whether voluntarily
incurred or arising by operation of law, and includes any agreement to give any
of the foregoing in the future, and any contingent sale or other title
retention agreement or lease in the nature thereof.
A-11
<PAGE>
"Permitted Encumbrances" means (a) statutory liens of landlords, liens of
carriers, warehousepersons, mechanics and materialpersons incurred in the
ordinary course of business for sums (i) not yet due and payable, or (ii) being
contested in good faith, if, in either such case, an adequate reserve, shall
have been made therefor in such Person's financial statements, (b) liens
incurred or deposits made in connection with workers' compensation,
unemployment insurance and other similar types of social security programs or
to secure the performance of tenders, statutory obligations, surety and appeal
bonds, bids, leases, government contracts, performance and return of money
bonds and similar obligations, in each case in the ordinary course of business,
consistent with past practice, (c) easements, rights-of-way, restrictions and
other similar non-monetary charges or encumbrances which, in each case, and in
the aggregate, do not interfere with the ordinary conduct of business of the
Company and its Subsidiaries and do not materially detract from the value, use
or occupancy of the property upon which such encumbrance exists, and (d) liens
securing taxes, assessments and governmental charges not yet delinquent or the
amount or validity of which are being contested in good faith by appropriate
proceedings by the Company or its Subsidiaries, as applicable.
Section 3.10. Intellectual Property. The Company and its Subsidiaries own or
possess adequate and enforceable rights to use the Intellectual Property used
in their respective businesses as currently conducted (the "Company
Intellectual Property"). There are no restrictions or conditions on the use of
the Company Intellectual Property. The Company Intellectual Property is owned
or licensed by the Company free from any Liens except for Permitted Liens. The
conduct of the respective businesses of the Company and its Subsidiaries does
not infringe or conflict with the rights of any third party in respect of any
Intellectual Property. To the Company's knowledge, none of the Company
Intellectual Property is being infringed by any third party. "Intellectual
Property" means all trademarks, trademark applications, trade names, marketing
or advertising slogans, service marks, trade secrets (including customer lists
and databases), copyrights, patents, licenses, know-how and other proprietary
intellectual property rights. The Company has taken and will take all actions
and necessary precautions to preserve the confidentiality of its trade secrets
(including customer lists and customer databases). Section 3.10 of the Company
Disclosure Schedule lists (i) all trademark and service mark registrations and
applications owned by the Company or any of its Subsidiaries, (ii) license
Contracts concerning Intellectual Property to which the Company or any of its
Subsidiaries is a party and (iii) patents, patent applications and copyrights
owned by the Company or any of its Subsidiaries.
Section 3.11. Agreements, Contracts and Commitments.
(a) Set forth in Section 3.11 of the Company Disclosure Schedule are all of
the following to which the Company or any of its Subsidiaries is a party: (i)
agreements, contracts, indentures or other instruments or arrangements
("Contracts") relating to Indebtedness (as defined below) in an amount
exceeding $100,000, (ii) partnership, joint venture or limited liability
agreements with any person, (iii) Contracts pursuant to which the Company or
any of its Subsidiaries will or may be obligated to issue after the date of
this Agreement any equity securities (including Company Common Stock) or any
security convertible equity securities (including Company Common Stock), (iv)
Contracts which provide for the payment or receipt of consideration by the
Company in excess of $100,000 in any 12-month period, (v) Contracts to be
performed after the date hereof which would be material contracts (as defined
in Item 601(b)(10) of Regulation S-K of the SEC), (vi) Contracts which restrict
the conduct of any line of business by the Company or any of its Subsidiaries,
(vii) Contracts which are not terminable by the Company within the next twelve
months without the payment of any termination fee or penalty, (viii) all leases
pursuant to which the Company leases compressors and related equipment that
provide for lease payments of more than $100,000 on an annual basis and (ix)
Contracts which include provisions relating to non-competition or non-
solicitation or non-hiring of employees (collectively, the "Company Material
Contracts"). "Indebtedness" means any liability in respect of (A) borrowed
money, (B) capitalized lease obligations, (C) the deferred purchase price of
property or services (other than trade payables in the ordinary course of
business) and (D) guarantees of any of the foregoing incurred by any other
person other than the Company or any of its wholly owned Subsidiaries.
(b) (i) Each of the Company Material Contracts is valid and binding in
accordance with its terms and is in full force and effect, (ii) there is no
material breach or violation of or default by the Company or any of its
A-12
<PAGE>
Subsidiaries under any of the Company Material Contracts, whether or not such
breach, violation or default has been waived, and (iii) no event has occurred
which, with notice or lapse of time or both, would constitute a material
breach, violation or default, or give rise to a right of termination,
modification, cancellation, foreclosure, imposition of a lien, prepayment or
acceleration under any of the Company Material Contracts. To the knowledge of
the Company, no counterparty to any Company Material Contract has violated any
provision of, or committed or failed to perform any act which, with or without
notice, lapse of time, or both, could reasonably be expected to constitute a
default or other breach under the provisions of, such the Company Material
Contract.
Section 3.12. Litigation. Except as set forth in Section 3.12 of the Company
Disclosure Letter, (a) there is no action, suit or proceeding, claim,
arbitration or investigation against the Company or any of its Subsidiaries
pending, or as to which the Company or any of its Subsidiaries has received any
written notice of assertion or, to the best knowledge of the Company,
threatened against or affecting, the Company or any of its Subsidiaries or any
property or asset of the Company or any of its Subsidiaries, before any
Governmental Entity, domestic or foreign and (b) there is no judgment, order,
injunction or decree of any Governmental Entity outstanding against the Company
or any of its Subsidiaries.
Section 3.13. Environmental Matters. (a) The Company is currently and has in
the past been in compliance with all applicable Environmental Laws, (b) there
are no existing or potential Environmental Liabilities and Costs of the Company
or its Subsidiaries, (c) there are no Environmental Conditions on or related to
any of the property owned or leased by the Company or its Subsidiaries, or the
other assets of the Company or its Subsidiaries, (d) none of the Company or its
Subsidiaries has received any notices from any governmental agency or other
third party regarding the existence of any Hazardous Substance on any of the
property owned or leased by the Company or its Subsidiaries alleging any
violation of or noncompliance with any Environmental Law, or requiring the
investigation, removal, clean-up, or remediation of any Environmental Condition
whether or not on property owned or leased by the Company or its Subsidiaries,
(e) the Company is not subject to any enforcement or investigatory action by
any governmental agency regarding an Environmental Condition with respect to
any of the property owned or leased by the Company or its Subsidiaries, or any
other property related in any way to the Company or its Subsidiaries, (f) there
are no underground tanks or other underground storage receptacles for Hazardous
Substances located on any of the property owned or leased by the Company or its
Subsidiaries, (g) the Company has no knowledge of any leaks, releases, threats
of releases, spills or discharge of fluids at any property owned or leased by
the Company or its Subsidiaries, (h) there are no PCBs or asbestos located at
or on any property owned or leased by the Company or its Subsidiaries and (i)
true and correct copies of any environmental reports, audits, analysis, summary
or assessments which have been conducted, either by or on behalf of the Company
or its Subsidiaries, at any of the property currently or previously owned or
leased by the Company or its Subsidiaries have been made available to Parent
and Merger Sub. The Company and its Subsidiaries have no obligation to
indemnify any other person, corporation or other entity with respect to any
Environmental Liabilities and Costs.
For purposes of this Section 3.13, the following definitions shall apply:
"Environmental Laws" means all applicable foreign, federal, state and local
statutes or laws, common law, judgments, orders, notice requirements,
regulations, agency guidelines, policies, licenses, permits, rules and
ordinances relating to pollution or protection of health, safety or the
environment, including, but not limited to the Federal Water Pollution Control
Act (33 U.S.C. (S) 251 et seq.), Resource Conservation and Recovery Act (42
U.S.C. (S) 901 et seq.), Safe Drinking Water Act (42 U.S.C. (S) 000(f) et
seq.), Toxic Substances Control Act (15 U.S.C. (S) 601 et seq.), Clean Air Act
(42 U.S.C. (S) 401 et seq.), Comprehensive Environmental Response, Compensation
and Liability Act (42 U.S.C. (S) 601 et seq.), each as amended, and other
similar state and local statutes.
"Environmental Condition" means the introduction into the environment of any
pollution, including without limitation any contaminant, pollutant, hazardous
or toxic waste, substance or material (whether or not upon the any of the
property owned or leased by the Company or its Subsidiaries and whether or not
such
A-13
<PAGE>
pollution constituted at the time thereof a violation of any Environmental Law
as a result of any release of any kind of any toxic or hazardous waste,
substance or material) as a result of which the Company (1) has or may become
liable to any person, (2) is or was in violation of any Environmental Law, or
(3) by reason of which any of the property owned or leased by the Company or
its Subsidiaries or other assets of the Company, may suffer or be subject to
any lien.
"Environmental Liabilities and Costs" means all liabilities, obligations,
responsibilities, obligations to conduct cleanup, losses, damages,
deficiencies, punitive damages, consequential damages, treble damages, costs
and expenses (including, without limitation, all reasonable fees, disbursements
and expenses of counsel, expert and consulting fees and costs of investigations
and feasibility studies and responding to government requests for information
or documents), fines, penalties, restitution and monetary sanctions, interest,
direct or indirect, known or unknown, absolute or contingent, past, present or
future, resulting from any claim or demand, by any person or entity, whether
based in contract, tort, implied or express warranty, strict liability, joint
and several liability, criminal or civil statute, under any Environmental Law,
or arising from environmental, health or safety conditions, as a result of past
or present ownership, leasing or operation of any properties, owned, leased or
operated by the Company or any of its Subsidiaries.
"Hazardous Substances" means all pollutants, contaminants, chemicals,
wastes, and any other carcinogenic, ignitable, corrosive, reactive, toxic or
otherwise hazardous substance, material or waste (whether solid, liquid or gas)
subject to regulation, control or remediation under Environmental Laws.
Section 3.14. Employee Benefit Plans.
(a) The following terms, when used in this Section 3.14, shall have the
following meanings. Any of these terms may, unless the context otherwise
requires, be used in the singular or the plural depending on the reference.
(i) Benefit Arrangement. "Benefit Arrangement" shall mean any
employment, consulting, severance or other similar contract, arrangement or
policy and each plan, arrangement (written or oral), program, agreement or
commitment providing for insurance coverage (including without limitation
any self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits,
life, health, disability or accident benefits (including without limitation
any "voluntary employees' beneficiary association" as defined in Section
501(c)(9) of the Code providing for the same or other benefits) or for
deferred compensation, profit-sharing bonuses, stock options, stock
appreciation rights, stock purchases or other forms of incentive
compensation or post-retirement insurance, compensation or benefits which
is not a Welfare Plan, Pension Plan or Multiemployer Plan and is entered
into, maintained, contributed to or required to be contributed to, as the
case may be, by the Company or an ERISA Affiliate or under which the
Company or any ERISA Affiliate may incur any liability.
(ii) Code. "Code" shall have the meaning set forth in the Preamble.
(iii) Employee Plans. "Employee Plans" shall mean all Benefit
Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans.
(iv) ERISA. "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended.
(v) ERISA Affiliate. "ERISA Affiliate" shall mean any entity which is
(or at any relevant time was) a member of a "controlled group of
corporations" with, under "common control" with, or a member of an
"affiliated service group" with, the Company as defined in Section 414(b),
(c), (m) or (o) of the Code.
(vi) Multiemployer Plan. "Multiemployer Plan" shall mean any
"multiemployer plan," as defined in Section 3(37) of ERISA.
(vii) Other Benefit Obligations. "Other Benefit Obligations" shall mean
all obligations, arrangements or customary practices, whether or not
legally enforceable, to provide benefits, other than salary or
A-14
<PAGE>
commissions, as compensation for services rendered, to present or former
directors, employees or agents, other than obligations, arrangements and
practices that are Employee Plans. Other Benefit Obligations include
employment agreements, consulting agreements under which the compensation
paid does not depend upon the amount of service rendered, sabbatical
policies, severance payment policies and fringe benefits within the meaning
of Code Section 132.
(viii) Pension Plan. "Pension Plan" shall mean any "employee pension
benefit plan" as defined in Section 3(2) of ERISA (other than a
Multiemployer Plan) which the Company or any ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or, within the
five years prior to the Closing Date, maintained, administered, contributed
to or was required to contribute to, or under which the Company or any
ERISA Affiliate may incur any liability.
(ix) Welfare Plan. "Welfare Plan" shall mean any "employee welfare
benefit plan" as defined in Section 3(1) of ERISA, which the Company or any
ERISA Affiliate maintains, administers, contributes to or is required to
contribute to, or under which the Company or any ERISA Affiliate may incur
any liability.
(b) Section 3.14 of the Company Disclosure Schedule contains a complete list
of the Employee Plans and Other Benefit Obligations. True and complete copies
of each of the following documents have been delivered by the Company to
Parent: (i) each Employee Plan (and, if applicable, related trust agreements)
and all amendments thereto, all written interpretations thereof and written
descriptions thereof which have been distributed to employees and all annuity
contracts or other funding instruments, (ii) the most recent determination or
opinion letter issued by the Internal Revenue Service with respect to each
Pension Plan and, if applicable, each Welfare Plan, (iii) for the three most
recent plan years, Annual Reports on Form 5500 Series required to be filed with
any governmental agency for each Pension Plan and Welfare Plan, (iv) all
actuarial reports prepared for the last three plan years for each Employee
Plan, (v) all documents that set forth the terms of each Other Benefit
Obligation of the Company and its ERISA Affiliates for which a plan description
or summary plan description is not required and (vi) all personnel, payroll and
employment manuals and policies of the Company and its ERISA Affiliates.
(c) (i ) Pension Plans. No Pension Plan is subject to Title IV of ERISA
or the minimum funding requirements of Section 412 of the Code. Each
Pension Plan has been maintained in compliance with its terms and, both as
to form and in operation, is qualified and tax-exempt under the provisions
of Code Section 401(a) and 501(a) and no fact or condition exists which
would adversely affect such qualified status.
(ii) Multiemployer Plans. Neither the Company nor any ERISA Affiliate
has, at any time, contributed to, or been obligated to contribute to, or
have any liability to any Multiemployer Plan.
(iii) Welfare Plans.
(A) None of the Company, any ERISA Affiliate or any Welfare Plan
has any present or future obligation to make any payment to, or with
respect to any present or former employee of the Company or any ERISA
Affiliate pursuant to, any retiree medical benefit plan, or other
retiree Welfare Plan, except to the extent required by the Code or
ERISA, and no condition exists which would prevent the Company from
amending or terminating any such benefit plan or Welfare Plan.
(B) Each Welfare Plan which is a "group health plan," as defined in
Section 607(1) of ERISA, has been operated in material compliance with
provisions of Parts 6 and 7 of Title I, Subtitle B of ERISA and
Sections 4980B of the Code.
(iv) Benefit Arrangements. Each Benefit Arrangement has been
maintained in compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations which are
applicable to such Benefit Arrangement, including without limitation the
Code.
(v) Deductibility of Payments. There is no contract, agreement, plan or
arrangement covering any employee or former employee of the Company (with
respect to its relationship with such entities) that,
A-15
<PAGE>
individually or collectively, provides for the payment by the Company of
any amount that is not deductible under Section 162(a)(1) or 404 of the
Code,
(vi) Foreign Employees. No Employee Plan covers foreign employees, other
than resident aliens.
(vii) Fiduciary Duties and Prohibited Transactions. None of the Company,
any ERISA Affiliate or any plan fiduciary of any Employee Plan has engaged
in any transaction in violation of Sections 404 or 406 of ERISA or any
"prohibited transaction," as defined in Section 4975(c)(1) of the Code, for
which no exemption exists under Section 408 of ERISA or Section 4975(c)(2)
or (d) of the Code, or has otherwise violated the provisions of Part 4 of
Title I, Subtitle B of ERISA, which could result in any material liability
to the Company. The Company has not been assessed any civil penalty under
Section 502(l) of ERISA.
(viii) Litigation. There is no action, order, writ, injunction, judgment
or decree outstanding or claim, suit, litigation, proceeding, arbitral
action, letters requesting information, governmental audit, investigation
or voluntary compliance resolution or closing agreement program proceeding
relating to or seeking benefits under any Employee Plan that is pending,
threatened or anticipated against the Company, any ERISA Affiliate or any
Employee Plan.
(ix) No Acceleration or Creation of Rights. Except as provided in
Section 3.14 of the Company Disclosure Schedule, neither the execution and
delivery of this Agreement or other related agreements by the Company nor
the consummation of the transactions contemplated hereby or the related
transactions will result in the acceleration or creation of any rights of
any person to benefits under any Employee Plan (including, without
limitation, the acceleration of the vesting or exercisability of any stock
options, the acceleration of the vesting of any restricted stock, the
acceleration of the accrual or vesting of any benefits under any Pension
Plan or the acceleration or creation of any rights under any severance,
parachute or change in control agreement).
(x) Other. The Company and its ERISA Affiliates have performed all of
their obligations under all the Employee Plans and Other Benefit
Obligations of the Company and its ERISA Affiliates. No statement, either
written or oral, has been made by the Company or any ERISA Affiliate to any
person with regard to any Employee Plan or Other Benefit Obligation that
was not in accordance with the Employee Plan or Other Benefit Obligation
and that could have, individually or in the aggregate, a material adverse
effect on the Company or such ERISA Affiliate. All tax, annual reporting
and other governmental filings required by ERISA and the Code as to each
Plan of the Company or its ERISA Affiliates have been timely filed with the
appropriate governmental agency, and all notices and disclosures to
participants of such Plans required by either ERISA or the Code have been
timely provided to such participants. No amount, nor any asset of any
Employee Plan of the Company and its ERISA Affiliates is subject to tax as
unrelated business taxable income.
Section 3.15. Compliance with Law; Authorizations.
(a) The Company, each of its Subsidiaries and the conduct of their
respective businesses is and has been in compliance with all applicable
Regulations and judgments, decisions or orders entered by any Governmental
Entity relating to the business, operations, assets or properties of the
Company and each of its Subsidiaries. "Regulations" shall mean any laws,
statutes, ordinances, regulations, rules, notice requirements, agency
guidelines and orders of any Governmental Entity. Neither the Company nor any
of its Subsidiaries has received any written or, to its knowledge, other notice
to the effect that, or otherwise been advised that, it is not in or may not be
in compliance with any Regulations, and neither the Company nor any of its
Subsidiaries have any reason to anticipate that any currently existing
circumstances are or have been likely to result in violations of any
Regulations.
(b) The Company and each of its Subsidiaries have all licenses, permits,
authorizations and approvals issued by Governmental Entities (collectively,
"Permits"), all of which are currently valid and in full force and effect,
necessary to carry on their respective businesses as presently conducted and as
proposed to be conducted.
A-16
<PAGE>
Section 3.16. Registration Statement and Proxy Statement. The information to
be supplied by the Company for inclusion in the Registration Statement shall
not at the time the Registration Statement is filed with or declared effective
by the SEC or at the date of the Company Stockholders' Meeting contain any
untrue statement of a material fact or omit to state any material fact required
to be stated in the Registration Statement or necessary in order to make the
statements in the Registration Statement, in light of the circumstances under
which they were made, not misleading. The Proxy Statement shall not, on the
date the Proxy Statement is first mailed to shareholders of the Company, at the
time of the Company Shareholders' Meeting, or at the Effective Time, contain
any statement which, at such time and in light of the circumstances under which
it shall be made, is false or misleading with respect to any material fact, or
omit to state any material fact necessary in order to make the statements made
in the Proxy Statement not false or misleading (excluding any statement based
upon information supplied by Parent for inclusion in the Proxy Statement).
Section 3.17. Labor Matters. (i) There are no controversies pending or, to
the best knowledge of the Company, threatened between the Company or any of its
Subsidiaries and any of their respective employees; (ii) to the knowledge of
the Company, there are no activities or proceedings of any labor union to
organize any non-unionized employees; and (iii) there are no unfair labor
practice complaints pending against the Company or any of its Subsidiaries
before the National Labor Relations Board, or any similar foreign labor
relations governmental bodies, or any current union representation questions
involving employees of the Company or any of its Subsidiaries. The Company and
its Subsidiaries are not parties to any collective bargaining agreements.
Section 3.18. Insurance. The Company and its Subsidiaries maintain policies
or binders of fire, liability, title, worker's compensation and other forms of
insurance in a character and in amounts at least equivalent to that carried by
persons engaged in similar businesses and which are sufficient for compliance
with all requirements of law and of all Material Contracts to which the Company
or any of its Subsidiaries is a party. The Company is not in default under any
of such policies or binders, the Company has not failed to give any notice or
to present any claim under any such policy or binder in a due and timely
fashion, and such policies and binders are in full force and effect on the date
hereof and shall be kept in full force and effect by the Company through the
Closing Date.
Section 3.19. Year 2000 Problem. The "Year 2000 Problem" (that is, the risk
that computer applications used by any person may be unable to recognize and
perform properly date-sensitive functions involving certain dates prior to and
any date after December 31, 1999) did not and will not have a Company Material
Adverse Effect.
Section 3.20. Opinion of Financial Advisor. The financial advisors of the
Company, Prudential Securities, delivered to the Company an opinion dated the
date of this Agreement to the effect that the Merger Consideration is fair to
the holders of the Company Common Stock from a financial point of view.
Section 3.21. Brokers. None of the Company, any of its Subsidiaries, or any
of their respective officers, directors or employees have employed any broker,
financial advisor or finder or incurred any liability for any brokerage fees,
commissions or finder's fees in connection with the transactions contemplated
by this Agreement, except that the Company has retained Prudential Securities
as its financial advisor, the arrangements with which have been disclosed in
writing to Parent and Merger Sub prior to, and will not be modified subsequent
to, the date of this Agreement.
Section 3.22. Transactions With Affiliates. Other than the transactions
contemplated by this Agreement and except to the extent disclosed in the
Company SEC Reports filed prior to the date hereof or as disclosed in Section
3.23 of the Company Disclosure Schedule, there have been no transactions,
agreements, arrangements or understandings between the Company or any of its
Subsidiaries, on the one hand, and the Company's affiliates or other persons,
on the other hand, that would be required to be disclosed under Item 404 of
Regulation S-K under the Securities Act.
A-17
<PAGE>
Section 3.23. No Excess Parachute or Nondeductible Payments. Any amount that
could be received (whether in cash or property or the vesting of property) as a
result of any of the transactions contemplated by this Agreement by any
employee, officer or director of the Company or any of its affiliates who is a
"disqualified individual" (as such term is defined in proposed Treasury
Regulation Section 1.280G-1) under any employment, severance or termination
agreement, other compensation arrangement or Benefit Arrangement currently in
effect does not constitute an "excess parachute payment" (as such term is
defined in Section 280G(b)(1) of the Code and the proposed regulations
thereunder). Neither the Company nor any of its Subsidiaries is a party to any
agreement, contract or arrangement that could result, on account of the
transactions contemplated hereunder, individually or in the aggregate, in any
payment that would be nondeductible under Section 162(m) of the Code.
Section 3.24. State Anti-Takeover Statutes. The Board of Directors of the
Company has approved the terms of this Agreement and the Voting, Option and
Disposition Agreement and the consummation of the transactions contemplated
hereby and thereby, and such approvals are sufficient to render inapplicable to
the Merger and the other transactions contemplated by this Agreement and the
Voting, Option and Disposition Agreement the restrictions of Section 1090.3 of
the OGCA. No other "fair price," "moratorium," "control share acquisition" or
other similar anti-takeover statute or regulation applies or purports to apply
to the Merger, this Agreement, the Voting, Option and Disposition Agreement or
any of the transactions contemplated by this Agreement or the Voting, Option
and Disposition Agreement.
Section 3.25. Accuracy of Information. No representation or warranty by the
Company contained in this Agreement or in any certificate to be furnished by or
on behalf of the Company or its Subsidiaries pursuant hereto contains or will
contain any untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained herein or therein, in light of
the circumstances under which they were made, not misleading with respect to
the Company and its Subsidiaries as a whole or the transactions contemplated by
this Agreement.
Section 3.26. Inventory. Except as set forth in Section 3.26 of the Company
Disclosure Schedule, (i) all items of the Company's inventory and related
supplies reflected on the Company Balance Sheet or thereafter acquired (and not
subsequently disposed of in the ordinary course of business) are merchantable,
for sale in the ordinary course of business at normal mark-ups, (ii) none of
such items of the Company's inventory is obsolete (except to the extent accrued
from the Company Balance Sheet) and (iii) each item of such inventory reflected
on the Company Balance Sheet and the books and records of the Company is so
reflected on the basis of a complete physical count and is valued at the lower
of cost or market in accordance with GAAP.
Section 3.27. Customers and Suppliers. Except for matters that reasonably
could not be expected to have a Company Material Adverse Effect, no supplier or
customer of the Company has advised the Company formally or informally that
such customer or supplier intends to terminate, discontinue or substantially
reduce its business with the Company and the Company does not expect the
occurrence of the Effective Time to adversely affect such relationship.
Article IV.
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company that the
statements contained in this Article IV are true and correct except as set
forth herein and in the disclosure schedule delivered by Parent and Merger Sub
to the Company on or before the date of this Agreement (the "Parent Disclosure
Schedule"). The Parent Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
IV.
Section 4.1. Organization. Each of Parent and Merger Sub is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization and has all requisite corporate, partnership or
A-18
<PAGE>
limited liability company power and authority to carry on its business as now
being conducted and as proposed to be conducted. Each of Parent and its
Subsidiaries is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the property owned, leased or operated
by it or the nature of the business conducted by it makes such qualification or
licensing necessary, except where the failure to be so qualified, licensed or
in good standing could not be expected, individually or in the aggregate, to
have a material adverse effect on the business, properties, financial condition
or results of operations of Parent and its Subsidiaries, taken as a whole (a
"Parent Material Adverse Effect"). Parent has delivered to the Company true and
correct copies of the Certificate of Incorporation and Bylaws of each of Parent
and Merger Sub, in each case as amended to the date and each of such documents
is in full force and effect.
Section 4.2. Authority; No Conflict; Required Filings and Consents.
(a) Parent and Merger Sub have all requisite corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby by Parent and Merger Sub have been duly
authorized by all necessary corporate action on the part of Parent and Merger
Sub. This Agreement has been duly executed and delivered by Parent and Merger
Sub (as applicable) and constitutes the valid and binding obligation of Parent
and Merger Sub (as applicable), enforceable against each of them in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating
to or affecting creditor rights and to general equity principles.
(b) The execution and delivery of this Agreement by Parent and Merger Sub
(as applicable) does not, and the consummation of the transactions contemplated
hereby will not, (i) conflict with, or result in any violation or breach of,
any provision of the Certificate of Incorporation or Bylaws of Parent or Merger
Sub (ii) result in any violation or breach of, or constitute (with or without
notice or lapse of time, or both) a default (or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
material benefit) under, or require a consent or waiver under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
contract or other agreement, instrument or obligation to which Parent or Merger
Sub is a party or by which any of them or any of their properties or assets may
be bound other than as disclosed in Section 4.2(b) of the Parent Disclosure
Schedule, or (iii) subject to the governmental filings and other matters
referred to in Section 4.2(c), conflict with or violate any permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Parent or Merger Sub or any of its or their properties
or assets.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Parent or Merger Sub in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated hereby,
except for (i) those required under or in relation to the HSR Act, (ii) state
securities or "blue sky" laws, (iii) the Securities Act, (iv) the Exchange Act,
(v) the OGCA with respect to the filing and recordation of appropriate
documents to effect the Merger and (vi) rules and regulations of the New York
Stock Exchange ("NYSE").
Section 4.3. Parent Common Stock. The shares of Parent Common Stock to be
issued pursuant to Article I will, when issued, be duly authorized, validly
issued, fully paid and nonassessable, and no stockholder of Parent is entitled
to preemptive rights as a result of the issuance of the Parent Company Stock
hereunder. The Parent Common Stock to be issued in the Merger pursuant to
Article I will, when issued, be registered under the Securities Act and the
Exchange Act and registered or exempt from registration under any applicable
state securities laws, in each case for delivery hereunder to holders of
Company Common Stock. Parent has available for issuance a sufficient number of
shares of authorized Parent Common Stock necessary to satisfy the obligations
of Parent under this Agreement.
Section 4.4. SEC Filings: Financial Statements. Parent has made available to
the Company all forms, statements and documents filed by Parent with the SEC
since April 1, 1997 (collectively, the "Parent SEC Reports"). The Parent SEC
Reports (including any financial statements filed as a part thereof or
incorporated
A-19
<PAGE>
by reference therein) (i) at the time filed, complied in all material respects
with the applicable requirements of the Securities Act and the Exchange Act, as
the case may be, and (ii) did not, at the time they were filed (or if amended
or superseded by a filing prior to the date of this Agreement, then on the date
of such filing), contain any untrue statement of a material fact or omit to
state a material fact required to be stated in such Parent SEC Reports or
necessary in order to make the statements in such Parent SEC Reports, in the
light of the circumstances under which they were made, not misleading.
(a) (i) Each of the consolidated financial statements (including, in
each case, any related notes) of Parent contained in the Parent SEC Reports
complied as to form in all material respects with the applicable rules,
regulations and practices of the SEC with respect thereto, was prepared in
accordance with generally accepted accounting principles ("GAAP") applied
on a consistent basis throughout the periods involved (except as may be
indicated in the notes to such financial statements or, in the case of
unaudited statements, as permitted by Form 10-Q under the Exchange Act) and
fairly presented the consolidated financial position of Parent and its
Subsidiaries as of the dates and the consolidated results of its operations
and cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount.
The audited balance sheet of Parent as of December 31, 1999 is referred to
herein as the "Parent Balance Sheet."
(ii) Parent maintains a system of accounting controls sufficient to
provide reasonable assurances that (A) its transactions and those of its
Subsidiaries are executed in accordance with management's general or
specific authorization, (B) its transactions and those of its Subsidiaries
are recorded as necessary to permit preparation of financial statements in
accordance with GAAP and to maintain accountability for assets, (C) access
to its assets and those of its Subsidiaries is permitted only in accordance
with management's general or specific authorization, and (D) the recorded
accountability for its assets and those of its Subsidiaries is compared
with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
Section 4.5. Proxy Statement/Registration Statement. The Registration
Statement shall not at the time the Registration Statement is declared
effective by the SEC contain any untrue statement of a material fact or omit to
state any material fact required to be stated in the Registration Statement or
necessary in order to make the statements in the Registration Statement, in
light of the circumstances under which they were made, not misleading
(excluding any statement based upon information supplied by the Company for
inclusion in the Proxy Statement). The information to be supplied by Parent for
inclusion in the Registration Statement shall not on the date the Proxy
Statement is first mailed to shareholders of the Company, at the time of the
Company Stockholders' Meeting, and at the Effective Time, contain any statement
that, at such time and in light of the circumstances under which it shall be
made, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements made in the
Proxy Statement not false or misleading.
Section 4.6. Absence of Certain Changes or Events. Except as disclosed in
the Parent SEC Reports filed prior to the date of this Agreement, since March
31, 2000, there has not been any event, change or development which,
individually or in the aggregate, could reasonably be expected to have a Parent
Material Adverse Effect.
Section 4.7. No Vote Required. No vote or approval of the holders of any
class of Parent shares is necessary to approve this Agreement and the
transactions contemplated hereby.
Section 4.8. Merger Sub. Merger Sub was formed solely for the purpose of
effecting the Merger and has not engaged in any business activities or
conducted any operations other than in connection with the Merger. Except for
obligations or liabilities incurred in connection with its incorporation or
organization and the transactions contemplated by this Agreement, and except
for this Agreement and any other agreements or arrangements contemplated by
this Agreement, Merger Sub has not incurred, directly or indirectly, through
any subsidiary or affiliate, any obligations or liabilities or entered into any
agreement or arrangements with any person.
A-20
<PAGE>
Section 4.9. Brokers. None of Parent, any of its Subsidiaries, or any of
their respective officers, directors or employees have employed any broker,
financial advisor or finder or incurred any liability for any brokerage fees,
commissions or finder's fees in connection with the transactions contemplated
by this Agreement.
Section 4.10. Accuracy of Information. No representation or warranty by
Parent or Merger Sub contained in this Agreement or in any certificate to be
furnished by or on behalf of Parent or its Subsidiaries pursuant hereto
contains or will contain any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained herein or
therein, in light of the circumstances under which they were made, not
misleading with respect to Parent and its Subsidiaries as a whole or the
transactions contemplated by this Agreement.
Article V.
COVENANTS
Section 5.1. Conduct of Business of the Company. During the period from the
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, the Company agrees as to itself and each
of its Subsidiaries (except to the extent that Parent shall otherwise consent
in writing) to carry on its business in the usual, regular and ordinary course
in substantially the same manner as previously conducted, to pay its debts and
taxes when due subject to good faith disputes over such debts or taxes, to pay
or perform its other obligations when due, and, to the extent consistent with
such business, use all reasonable efforts consistent with past practices and
policies to preserve intact its present business organization, keep available
the services of its present officers and key employees and preserve its
relationships with customers, suppliers, distributors, and others having
business dealings with it. Without limiting the generality of the foregoing and
except as expressly contemplated by this Agreement, during the period from the
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, without the written consent of Parent,
the Company shall not and shall not permit any of its Subsidiaries to:
(i) adopt any amendment to its Certificate of Incorporation or Bylaws
or comparable charter or organizational documents;
(ii) (A) other than pursuant to the Prudential Agreement issue, pledge
or sell, or authorize the issuance, pledge or sale of additional shares of
capital stock of any class, or securities convertible into capital stock of
any class, or any rights, warrants or options to acquire any convertible
securities or capital stock, or any other securities in respect of, in lieu
of, or in substitution for, shares of Company Common Stock outstanding on
the date hereof or (B) amend, waive or otherwise modify any of the terms of
any option, warrant or stock option plan of the Company or any of its
Subsidiaries, including without limitation, the Company Stock Options or
the Company Option Plans;
(iii) declare, set aside or pay any dividend or other distribution
(whether in cash, securities or property or any combination thereof) in
respect of any class or series of its capital stock other than between any
wholly owned Subsidiary of the Company and the Company or any other wholly
owned Subsidiary of the Company;
(iv) split, combine, subdivide, reclassify or other than pursuant to the
Prudential Agreement, redeem, purchase or otherwise acquire, or propose to
redeem or purchase or otherwise acquire, any shares of its capital stock,
or any of its other securities;
(v) (A) increase the compensation or fringe benefits payable or to
become payable to its directors, officers or employees (whether from the
Company or any of its Subsidiaries), or pay any benefit not required by any
existing plan or arrangement (including, without limitation, the granting
of stock options, stock appreciation rights, shares of restricted stock or
performance units) or grant any severance or termination pay to, or (B)
enter into any employment or severance agreement with, any director,
officer or employee of the Company or any of its Subsidiaries or establish,
adopt, enter into, or amend any collective bargaining, Employee plan or
Other Benefit Obligation, to the extent required by applicable Regulations;
A-21
<PAGE>
(vi) (A) sell, pledge, lease, dispose of, grant, encumber, or otherwise
authorize the sale, pledge, disposition, grant or encumbrance of any
material properties or assets of the Company or any of its Subsidiaries or
(B) acquire (including, without limitation, by merger, consolidation, lease
or acquisition of stock or assets) any corporation, partnership, other
business organization or any business thereof (or a substantial portion of
the assets thereof) or any other assets;
(vii) (A) incur, assume or pre-pay any Indebtedness, except that the
Company and its Subsidiaries may incur or pre-pay debt in the ordinary
course of business consistent with past practice under existing lines of
credit, (B) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the
obligations of any other person except in the ordinary course of business
consistent with past practice, or (C) make any loans, advances or capital
contributions to, or investments in, any other person except in the
ordinary course of business consistent with past practice and except for
loans, advances, capital contributions or investments between any wholly-
owned Subsidiary of the Company and the Company or another wholly-owned
Subsidiary of the Company; provided, however, that in no event shall the
Company or any of its Subsidiaries incur Indebtedness which is subject to
any penalty, premium, "make-whole" or similar obligation in connection with
pre-payment thereof;
(viii) authorize, recommend, propose or announce an intention to adopt a
plan of complete or partial liquidation or dissolution of the Company or
any of its Subsidiaries;
(ix) make or rescind any express or deemed election relating to Taxes,
settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes, amend
any Tax Return except in the ordinary course of business consistent with
past practice, or, except as may be required by applicable law, make any
change to any of its methods of reporting income or deductions for federal
income tax purposes from those employed in the preparation of the Company's
consolidated federal income tax return for the taxable year ending December
31, 1998;
(x) settle or consent to any judgment concerning any pending or
threatened litigation involving the Company or any of its Subsidiaries
(whether brought by a private party or a Governmental Entity);
(xi) take any action, other than reasonable and usual actions in the
ordinary course of business and consistent with past practice, with respect
to accounting policies or procedures, unless required by GAAP or the SEC;
(xii) modify, amend or terminate any of the Company Material Contracts
or waive, release or assign any material rights or claims, except in the
ordinary course of business consistent with past practice;
(xiii) take, or agree to commit to take, any action that would make any
representation or warranty of the Company contained herein inaccurate in
any respect at, or as of any time prior to, the Effective Time such that
the condition to Closing set forth in Section 6.3(a) would not be likely
satisfied;
(xiv) engage in any transaction with, or enter into any agreement,
arrangement, or understanding with, directly or indirectly, any of the
Company's Affiliates which involves the transfer of consideration or has a
financial impact on the Company, other than pursuant to such agreements,
arrangements, or understandings existing on the date of this Agreement
which are set forth in the Company Disclosure Schedule or in the Company
SEC Reports filed prior to the date hereof;
(xv) make any capital expenditures in excess of $100,000, individually
or $300,000 in the aggregate;
(xvi) amend, modify or terminate any standstill or confidentiality
agreement or waive, release or assign any rights of the Company under any
such agreement; or
(xvii) enter into an agreement, contract, commitment or arrangement to
do any of the foregoing, or to authorize, recommend, propose or announce an
intention to do any of the foregoing.
Section 5.2. Cooperation; Notice; Cure. Subject to compliance with
applicable law, from the date hereof until the Effective Time, the Company
shall confer on a regular basis with one or more representatives of
A-22
<PAGE>
Parent to report on the general status of ongoing operations at the Company.
Each of Parent and the Company shall promptly notify the other in writing of,
and will use all commercially reasonable efforts to cure before the Closing
Date, any event, transaction or circumstance, as soon as practical after it
becomes known to such party, that causes or will cause any covenant or
agreement of such party under this Agreement to be breached or that renders or
will render untrue any representation or warranty of such party contained in
this Agreement. No notice given pursuant to this paragraph shall have any
effect on the representations, warranties, covenants or agreements contained in
this Agreement for purposes of determining satisfaction of any condition
contained herein.
Section 5.3. No Solicitation.
(a) The Company shall not, directly or indirectly, through any officer,
director, employee, financial advisor, representative or agent of such party
(i) solicit, initiate, or encourage any inquiries or proposals that constitute,
or could reasonably be expected to lead to, a proposal or offer for a merger,
consolidation, business combination, recapitalization, sale of substantial
assets, sale or acquisition of shares of capital stock (including, without
limitation, by way of a tender offer) or similar transaction involving the
Company or any of its subsidiaries, other than the transactions contemplated by
this Agreement (any of the foregoing inquiries or proposals being referred to
in this Agreement as an "Acquisition Proposal"), (ii) initiate or engage in
negotiations or discussions with any person (or group of persons) other than
the Parent or its respective affiliates (a "Third Party") concerning, or
provide any non-public information to any person or entity relating to or in
contemplation of, any Acquisition Proposal, or (iii) agree to or recommend any
Acquisition Proposal; provided, however, that nothing contained in this
Agreement shall prevent the Company or its Board of Directors from (A)
furnishing non-public information to, or entering into discussions or
negotiations with, any person or entity in connection with an unsolicited bona
fide written Acquisition Proposal by such person or entity or modifying or
withdrawing its recommendation with respect to the transactions contemplated
hereby or recommending an unsolicited bona fide written Acquisition Proposal to
the stockholders of the Company, if and only to the extent that (1) a Third
Party has made a written proposal to the Board of Directors of the Company to
consummate an Acquisition Proposal, which proposal identifies a price to be
paid for the outstanding securities or substantially all of the assets of the
Company, (2) the Board of Directors of the Company believes in good faith,
after consultation with its financial advisors, that such Acquisition Proposal
is reasonably capable of being completed on the terms proposed and would, if
consummated, result in a transaction more favorable to the stockholders of such
party than the transaction contemplated by this Agreement, (3) the Board of
Directors of the Company determines in good faith based on the written advice
of outside legal counsel, that such action is required for such Board of
Directors to comply with its fiduciary duties to stockholders under applicable
law, (4) the Company is not in breach of its obligations under this Section
5.3, and (5) prior to furnishing such non-public information to, or entering
into discussions or negotiations with, such Third Party, the Board of Directors
of the Company receives from such Third Party an executed confidentiality and
standstill agreement with terms no less favorable to such party than those
contained in the Confidentiality Agreement dated July 8, 1999 between the
Parent and the Company (the "Confidentiality Agreement") (an Acquisition
Proposal meeting the requirements of each of clauses (1) through (5) above is
referred to as a "Superior Proposal"); or (B) complying with Rule 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal. The
Company agrees not to release any Third Party from, or waive any provision of,
any standstill agreement to which it is a party or any confidentiality
agreement between it and another person who has made, or who may reasonably be
considered likely to make, an Acquisition Proposal, unless the Board of
Directors of the Company determines in good faith based on the written advice
of outside legal counsel, that such action is required for the Board of
Directors of the Company to comply with its fiduciary duties to stockholders
under applicable law.
(b) The Company shall notify the Parent immediately after receipt by the
Company or any of its subsidiaries (or any of their advisors) of any
Acquisition Proposal or any request for non-public information in connection
with an Acquisition Proposal or for access to the properties, books or records
of such party by any Third Party that informs the Company or any of its
subsidiaries (or any of their advisors) that it is interested in
A-23
<PAGE>
making, considering making, or has made, an Acquisition Proposal. Such notice
shall be made orally and in writing and shall indicate in reasonable detail the
identity of the offeror and the terms and conditions of such proposal, inquiry
or contact. The Company shall continue to keep the Parent informed, on a
current basis, of the status of any such discussions or negotiations and the
terms being discussed or negotiated. Notwithstanding the foregoing, the Company
shall not accept or enter into any agreement concerning a Superior Proposal for
a period of at least five business days after the Parent's receipt of the
notification of the terms thereof pursuant the second preceding sentence,
during which period the Parent shall be afforded the opportunity to beat or
improve upon the terms and conditions contained in such Superior Proposal.
(c) The Company has terminated any direct or indirect (through any officer,
director, employee, financial advisor, representative or agent of such party)
discussions or negotiations with, and the provision of information or data to,
any person (other than the Parent) respecting an Acquisition Proposal.
Section 5.4. Preparation of Proxy Statement/Registration; Company
Shareholder Meeting.
(a) As promptly as practicable after the execution of this Agreement,
Parent shall prepare and the Company shall cooperate therewith, and the Company
shall file with the SEC, a proxy statement/prospectus (the "Proxy Statement")
to be sent to the shareholders of the Company in connection with the Company
Stockholders' Meeting to consider the Merger and the issuance of Parent Common
Stock in connection therewith, and Parent shall prepare and file with the SEC a
registration statement on Form S-4 pursuant to which the shares of Parent
Common Stock to be issued in the Merger will be registered under the Securities
Act (the "Registration Statement") and the Company shall cooperate therewith,
in which the Proxy Statement will be included as a prospectus. Parent may delay
the filing of the Registration Statement until after the Proxy Statement has
been declared effective. Parent and the Company shall use reasonable best
efforts to cause the Registration Statement to become effective as soon after
filing as practicable. The Proxy Statement shall include the unanimous
recommendation of the Board of Directors of the Company (with one director
absent) in favor of this Agreement and the Merger unless the Board changes such
recommendation pursuant to clause (e) below. Parent and the Company shall make
all other necessary filings with respect to the Merger under the Securities Act
and the Exchange Act and the rules and regulations thereunder. If at any time
before the Effective Time any event relating to the Company or Parent, or any
of its affiliates, officers, or directors, is discovered by the Company or
Parent, respectively, that should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, such party shall
promptly so inform the other.
(b) The Company shall take all action necessary to cause the representation
set forth in Section 3.16 to be true and correct at all applicable times with
respect to each of the Proxy Statement and the Registration Statement.
(c) Parent shall take all action necessary to cause the representation set
forth in Section 4.5 to be true and correct at all applicable times with
respect to each of the Proxy Statement and the Registration Statement.
(d) As soon as reasonably practicable, the Company and Parent shall take all
such actions as may be necessary to comply with state "blue sky" or securities
laws in connection with the transactions contemplated by this Agreement.
(e) The Company shall, as soon as practicable following the date of this
Agreement, duly call, give notice of, convene and hold a meeting of its
shareholders (the "Company Stockholders' Meeting") for the purpose of obtaining
the Required Company Votes with respect to this Agreement. The Board of
Directors of the Company shall unanimously declare advisable and recommend
adoption of this Agreement by the stockholders of the Company and, upon
Parent's request, reconfirm such recommendation (provided that the Board of
Directors of the Company need not make or reconfirm such recommendation (1) (x)
if at the time that it would otherwise be required to make or reconfirm such
recommendation the Company is not then in breach of its obligations under
Section 5.3 and (y) in such event, if and only to the extent that the Board of
Directors of the Company concludes in good faith (after having consulted with
and considered the advice of outside legal counsel) in
A-24
<PAGE>
connection with the receipt of a Superior Proposal that such action is
necessary in order for its directors to comply with their respective fiduciary
duties under applicable law, or (2) if no other Acquisition Proposal is pending
or in Parent's reasonable judgment likely to become pending). Notwithstanding
the foregoing, the Company shall use its best efforts to solicit such adoption,
and the Company shall nevertheless submit this Agreement to its stockholders
for consideration.
Section 5.5. Access to Information. Upon reasonable notice, the Company
shall (and shall cause its Subsidiaries to) afford to the officers, employees,
accountants, counsel and other representatives of Parent, access, during normal
business hours during the period prior to the Effective Time, to all its
personnel, properties, books, contracts, commitments and records and, during
such period, the Company shall, and shall cause its Subsidiaries to, furnish
promptly to the other (a) copies of monthly financial reports and acquisition
related reports, (b) a copy of each report, schedule, registration statement
and other document filed or received by it during such period pursuant to the
requirements of federal securities laws and (c) all other information
concerning its business, properties and personnel as Parent may reasonably
request. Parent will hold any such information furnished to it by the Company
which is nonpublic in confidence in accordance with the Confidentiality
Agreement. No information or knowledge obtained in any investigation pursuant
to this Section 5.5 shall affect or be deemed to modify any representation or
warranty contained in this Agreement or the conditions to the obligations of
the parties to consummate the Merger.
Section 5.6. Legal Conditions to Merger.
(a) The Company and Parent shall each use their best efforts to (i) take,
or cause to be taken, all appropriate action, and do, or cause to be done, all
things necessary and proper under applicable law to consummate and make
effective the transactions contemplated hereby as promptly as practicable, (ii)
obtain from any Governmental Entity or any other third party any consents,
licenses, permits, waivers, approvals, authorizations, or orders required to be
obtained or made by the Company or Parent or any of their Subsidiaries in
connection with the authorization, execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby including, without
limitation, the Merger, and (iii) as promptly as practicable, make all
necessary filings, and thereafter make any other required submissions, with
respect to this Agreement and the Merger required under (A) the Securities Act
and the Exchange Act, and any other applicable federal or state securities
laws, (B) the HSR Act and any related governmental request thereunder, and (C)
any other applicable law; without limiting the foregoing, the parties shall
undertake all reasonable efforts to cause to be filed all requisite filings
under the HSR Act within 10 business days of the date of this Agreement. The
Company and Parent shall cooperate with each other in connection with the
making of all such filings, including providing copies of all such documents to
the non-filing party and its advisors prior to filing and, if requested, to
accept all reasonable additions, deletions or changes suggested in connection
therewith. The Company and Parent shall use their best efforts to furnish to
each other all information required for any application or other filing to be
made pursuant to the rules and regulations of any applicable law (including all
information required to be included in the Proxy Statement and the Registration
Statement) in connection with the transactions contemplated by this Agreement.
(b) Parent and the Company agree, and shall cause each of their respective
Subsidiaries, to cooperate and to use their respective best efforts to obtain
any government clearances required for Closing (including through compliance
with the HSR Act), to respond to any government requests for information, and
to contest and resist any action, including any legislative, administrative or
judicial action, and to have vacated, lifted, reversed or overturned any
decree, judgment, injunction or other order (whether temporary, preliminary or
permanent) (an "Order") that restricts, prevents or prohibits the consummation
of the Merger or any other transactions contemplated by this Agreement,
including, without limitation, by vigorously pursuing all available avenues of
administrative and judicial appeal and all available legislative action. The
parties hereto will consult and cooperate with one another, and consider in
good faith the views of one another, in connection with any analyses,
appearances, presentations, memoranda, briefs, arguments, opinions and
proposals made or submitted by or on behalf of any party hereto in connection
with proceedings under or relating to the HSR Act or any
A-25
<PAGE>
other federal or state antitrust or fair trade law. Parent shall be entitled to
direct any proceedings or negotiations with any Governmental Entity relating to
any of the foregoing, provided that it shall afford the Company a reasonable
opportunity to participate therein. Notwithstanding anything to the contrary in
this Section 5.6, neither Parent nor the Company nor any of their respective
Subsidiaries shall be required to take any action that would reasonably be
expected to substantially impair the overall benefits expected, as of the date
hereof, to be realized from the consummation of the Merger or the divestiture
or holding separate of any assets or businesses.
(c) Each of the Company and Parent shall give (or shall cause their
respective Subsidiaries to give) any notices to third parties, and use, and
cause their respective Subsidiaries to use, their best efforts to obtain any
third party consents related to or required in connection with the Merger that
are set forth on Schedule 5.6(c) (collectively, the "Required Consents").
Section 5.7. Publicity. Parent and the Company shall agree on the form and
content of the initial press release regarding the transactions contemplated
hereby and thereafter shall consult with each other before issuing, and use all
reasonable efforts to agree upon, any press release or other public statement
with respect to any of the transactions contemplated hereby and shall not issue
any such press release or make any such public statement prior to such
consultation, except as may be required by law.
Section 5.8. Tax-Free Reorganization. Parent and the Company shall each use
their respective best efforts to cause the Merger to be treated as a
"reorganization" within the meaning of Section 368(a) of the Code.
Section 5.9. Affiliate Agreements. Upon the execution of this Agreement, the
Company will provide Parent with a list of those persons who are, in the
Company's reasonable judgment, "affiliates" of the Company within the meaning
of Rule 145 (each such person who is an "affiliate" of the Company within the
meaning of Rule 145 is referred to as an "Affiliate") promulgated under the
Securities Act ("Rule 145"). The Company shall provide Parent such information
and documents as Parent shall reasonably request for purposes of reviewing such
list and shall notify Parent in writing regarding any change in the identity of
its Affiliates prior to the Closing Date. The Company shall use its best
efforts to deliver or cause to be delivered to Parent by August 15, 2000 (and
in any case prior to the Effective Time) from each of its Affiliates, an
executed Affiliate Agreement, in form and substance satisfactory to Parent (an
"Affiliate Agreement"). Parent shall be entitled to place appropriate legends
on the certificates evidencing any Parent Common Stock to be received by such
Affiliates of the Company pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the transfer agent for the Parent
Common Stock, consistent with the terms of the Affiliate Agreements (provided
that such legends or stop transfer instructions shall be removed, one year
after the Effective Date, upon the request of any stockholder that is not then
an Affiliate of Parent).
Section 5.10. NYSE Listing. Parent shall promptly prepare and submit to the
NYSE a listing application covering the shares of Parent Common Stock to be
issued in the Merger, and shall use all reasonable efforts to cause such shares
to be approved for listing on the NYSE, subject to official notice of issuance,
prior to the Effective Time.
Section 5.11. Prudential Agreement. Parent, the Company and the Prudential
Insurance Company of America ("Prudential") shall enter into an agreement with
respect to the repayment of certain subordinated notes, on terms and conditions
satisfactory to each of the Parent, the Company and Prudential (the "Prudential
Agreement").
Section 5.12. Indemnification.
(a) From and after the Effective Time, Parent agrees that it will, and will
cause the Surviving Corporation to, indemnify and hold harmless each present
and former director and officer of the Company (the "Indemnified Parties"),
against any costs or expenses (including attorneys' fees), judgments, fines,
losses, claims, damages, liabilities or amounts paid in settlement incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of or pertaining
to matters
A-26
<PAGE>
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time, to the fullest extent that
the Company would have been permitted under Oklahoma law and its Certificate of
Incorporation or Bylaws in effect on the date hereof to indemnify such
Indemnified Party.
(b) For a period of three years after the Effective Time, Parent shall
maintain or shall cause the Surviving Corporation to maintain (to the extent
available in the market) in effect a directors' and officers' liability
insurance policy covering those persons who are currently covered by the
Company's directors' and officers' liability insurance policy (copies of which
have been heretofore delivered by the Company to Parent) with coverage in
amount and scope at least as favorable as the Company's existing coverage;
provided that in no event shall Parent or the Surviving Corporation be required
to expend in the aggregate in excess of 150% of the annual premium currently
paid by the Company for such coverage; and if such premium would at any time
exceed 150% of the such amount, then Parent or the Surviving Corporation shall
maintain insurance policies which provide the maximum and best coverage
available at an annual premium equal to 150% of such amount.
(c) The provisions of this Section 5.12 are intended to be an addition to
the rights otherwise available to the current officers and directors of the
Company by law, charter, statute, bylaw or agreement, and shall operate for the
benefit of, and shall be enforceable by, each of the Indemnified Parties, their
heirs and their representatives.
Section 5.13. Letter of the Company's Accountants. The Company shall use
reasonable efforts to cause to be delivered to Parent and the Company a letter
of Arthur Andersen LLP, the Company's independent auditors, dated a date within
two business days before the date on which the Registration Statement shall
become effective and addressed to Parent, in form reasonably satisfactory to
Parent and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the Registration Statement.
Section 5.14. Stockholder Litigation. The Company shall give Parent the
reasonable opportunity to participate in the defense of any stockholder
litigation against the Company and its directors relating to the transactions
contemplated hereby.
Section 5.15. Stock Exchange Listing. Parent and the Company agree to
continue the listing and quotation of Parent Common Stock and Company Common
Stock on the NYSE and the AMEX, respectively, during the term of this Agreement
though the Effective Time.
Section 5.16. Employee Benefits. Parent and the Company agree that the
Company and the Surviving Corporation shall pay promptly or provide when due
all compensation and benefits required to be paid pursuant to the terms of any
Employee Plan or Other Benefit Obligation as disclosed to Parent as of the
Effective Time. The Company shall take all action necessary to terminate its
401(k) Plan (the "Company 401(k) Plan") in compliance with applicable law, no
later than immediately prior to the Effective Time. On or as soon as
administratively practicable following the Effective Time employees who were
participants in the Company 401(k) Plan shall be eligible to participate in the
401(k) Plan sponsored by Parent or one of its Subsidiaries ("Parent 401(k)
Plan"). At the election of participants, Parent 401(k) Plan shall accept
rollovers from the Company 401(k) Plan. Nothing herein shall require the
continued employment of any person. Years of service with the Company and its
Subsidiaries prior to the Effective Time shall be treated as service with the
Surviving Corporation or Parent for eligibility and vesting purposes and for
purposes of vacation and severance pay accruals, except to the extent such
treatment will result in the duplication of benefits.
Section 5.17. Fees and Expenses. Whether or not the Merger is consummated,
all Expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such Expenses.
"Expenses" means all reasonable out-of-pocket expenses (including, without
limitation, all fees and expenses of counsel, accountants, investment bankers,
experts and consultants to a party hereto and its affiliates) incurred by a
party or on its behalf in connection with or related to the authorization,
preparation, negotiation, execution and performance of this Agreement and the
transactions contemplated hereby, including the preparation, printing, filing
and mailing of the Proxy Statement and the solicitation of shareholder
approvals and all other matters related to the transactions contemplated
hereby.
A-27
<PAGE>
Article VI.
CONDITIONS TO MERGER
Section 6.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction or waiver by each party prior to the
Effective Time of the following conditions:
(a) HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(b) No Injunctions. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any order, executive order, stay, decree,
judgment or injunction or statute, rule, regulation which is in effect and
which has the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger.
(c) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order.
(d) NYSE Listing. The shares of Parent Common Stock to be issued in the
Merger shall have been approved for listing on the NYSE.
(e) Stockholder Approval. The Required Company Vote shall have been
obtained.
Section 6.2. Additional Conditions to Obligations of the Company. The
obligation of the Company to effect the Merger is subject to the satisfaction
of each of the following conditions prior to the Effective Time, any of which
may be waived in writing exclusively by the Company:
(a) Representations and Warranties. (i) Each of the representations and
warranties of Parent and Merger Sub set forth in this Agreement that is
qualified as to materiality or Parent Material Adverse Effect shall have been
true and correct when made and shall be true and correct on and as of the
Closing Date as if made on and as of such date (other than representations and
warranties which address matters only as of a certain date which shall be true
and correct as of such certain date), and (ii) each of the representations and
warranties of each of Parent and Merger Sub that is not so qualified shall have
been true and correct when made and shall be true and correct on and as of the
Closing Date as if made on and as of such date (other than representations and
warranties which address matters only as of a certain date which shall be true
and correct as of such certain date), except for such inaccuracies as could not
be expected, individually or in the aggregate, to have a Parent Material
Adverse Effect, and the Company shall have received a certificate of the chief
executive officer and the chief financial officer of Parent to such effect with
respect to both (i) and (ii) above.
(b) Performance of Obligations of Parent. Parent shall have performed or
complied with all agreements and covenants required to be performed by it under
this Agreement at or prior to the Closing Date that are qualified as to
materiality or Parent Material Adverse Effect and shall have performed or
complied in all material respects with all agreements and covenants required to
be performed by it under this Agreement at or prior to the Closing Date that
are not so qualified as to materiality, and the Company shall have received a
certificate of an executive officer of Parent to such effect.
Section 6.3. Additional Conditions to Obligations of Parent and Merger Sub.
The obligations of Parent and Merger Sub to effect the Merger are subject to
the satisfaction of each of the following conditions prior to the Effective
Time, any of which may be waived in writing exclusively by Parent:
(a) Representations and Warranties. (i) Each of the representations and
warranties of the Company set forth in this Agreement that is qualified as to
materiality or Company Material Adverse Effect shall have been true and correct
when made and shall be true and correct on and as of the Closing Date as if
made on and as of
A-28
<PAGE>
such date (other than representations and warranties which address matters only
as of a certain date which shall be true and correct as of such certain date),
and (ii) each of the representations and warranties of the Company that is not
so qualified shall have been true and correct in all material respects when
made and shall be true and correct on and as of the Closing Date as if made on
and as of such date (other than representations and warranties which address
matters only as of a certain date which shall be true and correct as of such
certain date), except for such inaccuracies as could not be expected,
individually or in the aggregate, to have a Company Material Adverse Effect,
and Parent and Merger Sub shall have received a certificate of the chief
executive officer and the chief financial officer of the Company to such effect
with respect to both (i) and (ii) above.
(b) Performance of Obligations. The Company shall have performed or complied
with all agreements and covenants required to be performed by it under this
Agreement at or prior to the Closing Date that are qualified as to materiality
or Company Material Adverse Effect and shall have performed or complied in all
material respects with all agreements and covenants required to be performed by
it under this Agreement at or prior to the Closing Date that are not so
qualified as to materiality or Company Material Adverse Effect, and Parent and
Merger Sub shall have received a certificate of the chief executive officer and
the chief financial officer of the Company to such effect.
(c) Regulatory Approvals. All consents, approvals, orders, authorizations
of, or registrations, licenses, declarations or filings with, any Governmental
Entity required to consummate the transactions contemplated hereby shall have
been obtained and shall remain in full force and effect and all statutory
waiting periods in respect thereof shall have expired and no such approval
shall contain any conditions, limitations or restrictions which Parent
reasonably determines in good faith will have or would reasonably be expected
to have a Company Material Adverse Effect or a Parent Material Adverse Effect.
(d) Absence of Certain Changes or Events. Since the date of this Agreement,
there shall not have been any event, development or change of circumstance that
constitutes, has had, or to have, individually or in the aggregate, or could be
expected to have a Company Material Adverse Effect.
(e) Required Consents. All Required Consents shall have been obtained, and
the Company shall have provided evidence thereof to the Parent, which evidence
shall be reasonably satisfactory to Parent.
(f) Non-Competition Agreements. Two-year non-competition agreements,
substantially in the form attached as Exhibit C hereto, shall have been
executed and delivered to Parent by all officers of the Company and affiliates
of the Company as requested by Parent, including, but not limited to, Ray C.
Davis and Kelcy L. Warren.
(g) Prudential Agreement. Parent, the Company and Prudential shall have
entered into the Prudential Agreement, and the Prudential Agreement shall be in
full force and effect as of the Effective Time or shall have been consummated
prior to the Effective Time.
(h) Affiliate Agreements. Parent shall have received an Affiliate Agreement
from each Person identified as an Affiliate pursuant to Section 5.9.
(i) Suits; Actions. No suit, action, investigation or other proceeding by
any Governmental Entity shall have been instituted and be pending which
imposes, seeks to impose or reasonably would be expected to impose any remedy,
condition or restriction that would have a Company Material Adverse Effect or
that would materially restrict Parent's ownership or operation of the Company
(except as provided in Section 5.6(b)).
(j) Dissenting Shares. The number of shares of Company Common Stock with
respect to which dissenters' rights have been asserted under the OGCA shall not
exceed 7.5% of the number of outstanding shares of Company Common Stock.
(k) Fairness Opinion. The Company's financial advisor, Prudential
Securities, shall have rendered a fairness opinion with respect to this
Agreement and the transactions contemplated hereby, and such opinion shall not
have been withdrawn or adversely modified.
A-29
<PAGE>
(l) Estis Promissory Notes. All principal and accrued interest thereon under
the promissory notes made by Dennis W. Estis and Barbara Estis in favor of the
Company having principal amounts of $217,250 and $114,507 respectively, shall
have been paid in full.
Article VII.
TERMINATION AND AMENDMENT
Section 7.1. Termination. This Agreement may be terminated at any time prior
to the Effective Time (with respect to Sections 7.1(b) through 7.1(h), by
written notice by the terminating party to the other party), whether before or
after approval of the matters presented in connection with the Merger by the
stockholders of the Company:
(a) by mutual written consent of the Company and Parent; or
(b) by either Parent or the Company if the Merger shall not have been
consummated by six months from signing (the "Outside Date"), provided that the
right to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date); or
(c) by either Parent or the Company if a court of competent jurisdiction or
other Governmental Entity shall have issued a nonappealable final order, decree
or ruling or taken any other nonappealable final action, in each case having
the effect of permanently restraining, enjoining or otherwise prohibiting the
Merger; or
(d) by Parent or the Company, if, at the Company Stockholders' Meeting
(including any adjournment or postponement), the requisite vote of the
stockholders of the Company in favor of the approval and adoption of this
Agreement and the Merger shall not have been obtained; or
(e) By Parent if (i) the Board of Directors of the Company shall have
withdrawn, or adversely modified, or failed (upon Parent's request) to
reconfirm its recommendation of the Merger or this Agreement (or determined to
do so); (ii) the Board of Directors of the Company shall have determined to
recommend to the shareholders of the Company that they approve an Acquisition
Proposal other than that contemplated by this Agreement or shall have
determined to accept a Superior Proposal; (iii) a tender offer or exchange
officer that, if successful, would result in any person or "group" becoming a
"beneficial owner" (such terms having the meaning in this Agreement as is
ascribed under Regulation 13D under the Exchange Act) of 20% or more of the
outstanding shares of Company Common Stock is commenced (other than by Parent
or an Affiliate of Parent) and the Board of Directors of the Company fails to
recommend that the shareholders of the Company not tender their shares in such
tender or exchange offer; (iv) any person (other than Parent or an Affiliate of
Parent) or "group" becomes the "beneficial owner" of 20% or more of the
outstanding shares of Company Common Stock; or (v) for any reason the Company
fails to call or hold the Company Shareholders Meeting by the Outside Date; or
(f) by the Company, prior to the Required Company Vote if, as a result of a
Superior Proposal received by such party from a Third Party, the Board of
Directors of the Company determines in good faith, based on written advice of
outside legal counsel, that accepting such Superior Proposal is required for
the Board of Directors of the Company to comply with its fiduciary duties to
stockholders under applicable law; provided, however, that (i) no termination
shall be effective pursuant to this Section 7.1(f) under circumstances in which
a termination fee is payable by the Company pursuant to Section 7.3(b)(iv),
unless concurrently with such termination, such termination fee is paid in full
by the Company in accordance with Section 7.3(b)(iv) and (ii) the Company's
right to terminate under this paragraph (f) shall not be available if the
Company has breached Section 5.3; or
(g) by Parent or the Company, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other party
set forth in this Agreement, which breach will cause the conditions set forth
in Section 6.2(a) or (b) (in the case of termination by the Company) or Section
6.3(a) or (b) (in the case of termination by Parent) not to be satisfied.
A-30
<PAGE>
Section 7.2. Effect of Termination. In the event of termination of this
Agreement as provided in Section 7.1, this Agreement shall immediately become
void and there shall be no liability or obligation on the part of Parent,
Merger Sub or the Company, or their respective officers, directors,
stockholders or Affiliates, except as set forth in Section 7.3 and Article VIII
and except that such termination shall not limit liability for a willful breach
of this Agreement; provided that, the provisions of Section 7.3 of this
Agreement and the Confidentiality Agreement shall remain in full force and
effect and survive any termination of this Agreement.
Section 7.3. Fees and Expenses.
(a) (i) In addition to any payment required by Section 7.3(b), if this
Agreement is terminated pursuant to Section 7.1(d), (e), (f) or by Parent
pursuant to Section 7.1(b) (but only if such termination is due to the failure
of the condition specified in Section 6.3(g) to be satisfied) or 7.1(g), then
the Company shall pay Parent an amount equal to the sum of Parent's Expenses up
to an amount equal to $750,000.
(ii) If this Agreement is terminated pursuant to Section 7.1(g) by the
Company, then Parent shall pay the Company an amount equal to the sum of the
Company's expenses up to an amount equal to $750,000.
(b) The Company shall pay Parent a termination fee of $1,665,000 upon the
earliest to occur of the following events:
(i) the termination of this Agreement by Parent pursuant to Section
7.1(b), if such termination is due to the failure of the condition
specified in Section 6.3(g) to be satisfied;
(ii) the termination of this Agreement pursuant to Section 7.1(d);
(iii) the termination of this Agreement pursuant to Section 7.1(e);
(iv) the termination of this Agreement pursuant to Section 7.1(f); or
(v) the termination of this Agreement by Parent pursuant to Section
7.1(g).
(c) The Company's or Parent's satisfaction of its obligations under this
Section 7.3 shall be the sole and exclusive remedy of Parent against the
Company and the Company against Parent and Merger Sub, as the case may be, and
their respective directors, officers, employees, agents, advisors or other
representatives with respect to the occurrences giving rise to such payment and
the termination of this Agreement; provided that this limitation shall not
apply in the event of a willful breach of this Agreement by the Company or
Parent.
(d) Fees payable pursuant to Section 7.3(b)(iv) shall be paid concurrently
with the event described in Section 7.3(b)(iv). Fees pursuant to Section
7.3(b)(i), (ii), (iii) or (v) shall be paid within two business days of the
first to occur of the events described in Section 7.3(b)(i), (ii), (iii) or
(v). Expenses payable pursuant to Section 7.3(a) shall be paid with two
business days of delivery to the Company or Parent, as the case may be, of a
demand for payment and a documented itemization setting forth in reasonable
detail all Expenses of Parent or the Company (which itemization may be
supplemented and updated from time to time by Parent or the Company until the
60th day after Parent or the Company delivers such notice of demand for
payment). All payments under this Section 7.3 shall be made by wire transfer of
immediately available funds to an account designated by Parent or the Company,
as the case may be.
Section 7.4. Amendment. This Agreement may be amended by the parties hereto,
by action taken or authorized by their respective Boards of Directors, at any
time before or after approval of the matters presented in connection with the
Merger by the stockholders of the Company, but, after any such approval, no
amendment shall be made which by law requires further approval by such
stockholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
Section 7.5. Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant
A-31
<PAGE>
hereto and (iii) waive compliance with any of the agreements or conditions
contained here. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in a written instrument
signed on behalf of such party.
Article VIII.
MISCELLANEOUS
Section 8.1. Nonsurvival of Representations, Warranties and Agreements. None
of the representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for the agreements contained in Sections 1.3, 5.12, 5.16 and 5.17
and Articles II and VIII, and the agreements of the Affiliates delivered
pursuant to Section 5.9. The Confidentiality Agreement shall survive the
execution and delivery of this Agreement.
Section 8.2. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to the Company, to
OEC Compression Corporation
2501 Cedar Springs Road, Suite 600
Dallas, Texas 75201
Attn: President
Telecopy: (214) 954-9584
with a copy to
Schlanger, Mills, Mayer & Silver, LLP
109 North Post Oak Lane, Suite 300
Houston, Texas 77024
Attn: Kyle Longhofer
Telecopy: (713) 785-2091
(b) if to Parent, to
Hanover Compressor Company
12001 N. Houston Rosslyn Road
Houston, Texas 77086
Attn: Michael J. McGhan
Telecopy: (281) 447-0821
with a copy to:
Latham & Watkins
233 South Wacker Drive
Suite 5800
Chicago, Illinois 60606
Attn: Richard Meller, Esq.
Telecopy: (312) 993-9767
Section 8.3. Interpretation; Certain Definitions. When a reference is made
in this Agreement to Sections, such reference shall be to a Section of this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the
A-32
<PAGE>
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement they shall be deemed to be
followed by the words "without limitation." "Knowledge" or "to the knowledge
of" of the Company or any of its Subsidiaries means the actual knowledge of
Jack Brannon, Ray C. Davis, Kelcy L. Warren, Dan McCormick and Dennis W. Estis.
"Person" or "person" has the meaning given to it in Section 3(a) of the
Exchange Act. The term "affiliate" has the meaning given to it in Rule 12b-2
under the Exchange Act.
Section 8.4. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 8.5. Entire Agreement; No Third Party Beneficiaries. This Agreement
and all documents and instruments referred to herein (a) constitute the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof, and (b)
except as provided in Section 5.12, are not intended to confer upon any person
other than the parties hereto any rights or remedies hereunder; provided that
the Confidentiality Agreements shall remain in full force and effect until the
Effective Time. Each party hereto agrees that, except for the representations
and warranties contained in this Agreement, none of Parent, Merger Sub or the
Company makes any other representations or warranties, and each hereby
disclaims any other representations and warranties made by itself or any of its
officers, directors, employees, agents, financial and legal advisors or other
representatives, with respect to the execution and delivery of this Agreement
or the transactions contemplated hereby, notwithstanding the delivery or
disclosure to any of them or their respective representatives of any
documentation or other information with respect to any one or more of the
foregoing.
Section 8.6. Governing Law. The laws of the State of Oklahoma shall govern
the interpretation, validity and performance of the terms of this Agreement,
regardless of the law that might be applied under principles of conflicts of
law. Any suit, action or proceeding by a party hereto with respect to this
Agreement, or any judgment entered by any court in respect of any thereof, may
be brought in any state or federal court of competent jurisdiction in Houston,
Texas, and each party hereto hereby submits to the exclusive jurisdiction of
such courts for the purpose of any such suit, action, proceeding or judgment.
Nothing herein shall in any way be deemed to limit the ability of a party
hereto to serve any such writs, process or summonses in any other manner
permitted by applicable law. Each party hereto hereby irrevocably waives any
objections which it may now or hereafter have to the laying of the venue of any
suit, action or proceeding arising out of or relating to this Agreement brought
in any state or federal court of competent jurisdiction in Houston, Texas, and
hereby further irrevocably waives any claim that any such suit, action or
proceeding brought in any such court has been brought in any inconvenient
forum. No suit, action or proceeding against a party hereto with respect to
this Agreement may be brought in any court, domestic or foreign, or before any
similar domestic or foreign authority other than in a court of competent
jurisdiction in Houston, Texas, and each party hereto hereby irrevocably waives
any right which it may otherwise have had to bring such an action in any other
court, domestic or foreign, or before any similar domestic or foreign
authority.
Section 8.7. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto, in whole or in part (whether by operation of law or otherwise), without
the prior written consent of the other parties, and any attempt to make any
such assignment without such consent shall be null and void, except that Merger
Sub may assign, in its sole discretion, any or all of its rights, interests and
obligations under this Agreement to any direct or indirect Subsidiary of Parent
which is controlled (as such term is defined in Regulation S-X under the
Exchange Act) by Parent without the consent of the Company. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit
of and be enforceable by the parties and their respective successors and
assigns.
A-33
<PAGE>
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be signed by their respective duly authorized officers as of the
date first written above.
HANOVER COMPRESSOR COMPANY
By: _________________________________
Its: ________________________________
Title: ______________________________
CADDO ACQUISITION CORPORATION
By: _________________________________
Its: ________________________________
Title: ______________________________
OEC COMPRESSION CORPORATION
By: _________________________________
Its: ________________________________
Title: ______________________________
A-34
<PAGE>
Annex I
Key Stockholders
HACL, Ltd.
Energy Investors Joint Venture
A-35
<PAGE>
AMENDMENT NO. 1 TO AGREEMENT
AND PLAN OF MERGER
THIS AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER (this "Amendment") is
dated as of November 14, 2000 and is by and among Hanover Compressor Company, a
Delaware corporation ("Parent"), Caddo Acquisition Corporation, an Oklahoma
corporation and a direct, wholly owned subsidiary of Parent ("Merger Sub"), and
OEC Compression Corporation, an Oklahoma corporation (the "Company"). Terms
used and not defined herein shall have the meanings assigned to them in the
Agreement and Plan of Merger dated as of July 13, 2000 by and among the Parent,
Merger Sub and the Company (the "Merger Agreement").
RECITALS:
A. Parent, Merger Sub and the Company entered into the Merger Agreement as
of July 13, 2000; and
B. Parent, Merger Sub and the Company desire to amend the Merger Agreement
as set forth in this Amendment.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Merger Sub and the Company hereby agree as follows:
1. The second sentence of Section 3.2 of the Merger Agreement is amended to
read in its entirety as follows: "As of the date hereof, (i) 37,060,776 shares
of Company Common Stock are issued and outstanding, all of which are validly
issued, fully paid and nonassessable, (ii) 320,445 shares of Company Common
Stock are held in the treasury of the Company or by Subsidiaries of the
Company, and (iii) no shares of Company Preferred Stock are issued and
outstanding."
2. Sections 5.11 and 6.3(g) of the Merger Agreement are deleted in their
entirety. Parent and Merger Sub hereby waive any rights they may have as a
result of the breach or non-fulfillment of the requirements of such Sections
prior to the date of this Amendment.
3. Section 6.3(d) of the Merger Agreement is amended to read in its entirety
as follows:
(d) Absence of Certain Changes or Events. Since the date of this
Agreement there shall not have been any event, development or change of
circumstance that constitutes, has had, or, individually or in the
aggregate, could be expected to have a Company Material Adverse Effect.
Solely for purposes of this Section 6.3(d), a Company Material Adverse
Effect shall have been deemed to occur only if it results from: (i) natural
disasters or acts of God; (ii) war, terrorism or civil strife; (iii)
criminal acts or civil fraud; or (iv) willful misconduct of the Company's
officers.
4. Section 7.1(b) of the Merger Agreement is amended to read in its entirety
as follows:
(b) by either Parent or the Company if the Merger shall not have been
consummated by March 1, 2001 (the "Outside Date"), provided that the right
to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date); or
5. The following is added as the last sentence of Section 8.3 of the Merger
Agreement: "Knowledge" or "to the knowledge of" Parent or Merger Sub means the
actual knowledge of Michael J. McGhan, William S. Goldberg and Charles A.
Erwin.
A-36
<PAGE>
6. As of the date of this Amendment, to the knowledge of Parent and Merger
Sub, there has not been any event, development or change of circumstance that
constitutes, has had, or, individually or in the aggregate, could be expected
to have a Company Material Adverse Effect (as such term is used in Section
6.3(d) of the Merger Agreement, as amended by this Amendment).
7. As of the date of this Amendment, to the knowledge of Parent and Merger
Sub, the Company has not breached any of the representations and warranties
contained in Article III of the Merger Agreement.
8. The Merger Agreement, as amended by this Amendment, and all documents and
instruments referred to in the Merger Agreement (a) constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof, and (b)
except as provided in Section 5.12 of the Merger Agreement, are not intended to
confer upon any person other than the parties hereto any rights or remedies
hereunder; provided that the Confidentiality Agreements shall remain in full
force and effect until the Effective Time.
9. The laws of the State of Oklahoma shall govern the interpretation,
validity and performance of the terms of this Amendment, regardless of the law
that might be applied under principles of conflicts of law.
10. This Amendment may be executed in two or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
two or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.
[Remainder of this page intentionally left blank;
Signature page follows]
A-37
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Amendment
or caused this Amendment to be duly executed on its behalf by its officer
thereunto duly authorized, as of the day and year first above written.
HANOVER COMPRESSOR COMPANY
a Delaware corporation
By: _________________________________
Name: Michael J. McGhan
Title: Chief Executive Officer
CADDO ACQUISITION CORPORATION
an Oklahoma corporation
By: _________________________________
Name: Michael J. McGhan
Title: Chief Executive Officer
OEC COMPRESSION CORPORATION
an Oklahoma corporation
By: _________________________________
Name: _______________________________
Title: ______________________________
A-38
<PAGE>
ANNEX B
PRIVATE AND CONFIDENTIAL
July 14, 2000
The Board of Directors
OEC Compression Corporation
2501 Cedar Springs Road
Suite 600
Dallas, TX 75201
Members of the Board of Directors:
We understand that Hanover Compressor Company ("Hanover"), Caddo Acquisition
Corporation, a wholly-owned subsidiary of Hanover ("Merger Sub") and OEC
Compression Corporation (the "Company") have entered into an Agreement and Plan
of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement, Merger
Sub shall merge with and into the Company (the "Merger"). In the Merger, each
share of the Company's common stock, par value $.01 per share ("Company Common
Stock") outstanding immediately prior to the effective time of the Merger will
be converted into the right to receive a number of fully paid and nonassessable
shares of common stock, par value $.001 per share, of Hanover ("Hanover Common
Stock") equal to the quotient of (a) $1.00 divided by (b) the Hanover Price
(the "Consideration"). The Hanover Price equals the average of the closing
sales price per share of Hanover Common Stock for the twenty consecutive
trading days immediately preceding the second business day prior to the
effective date of the Merger; provided, however, that in no event will the
Hanover Price be less than $30 or greater than $32.50. In addition, we
understand that certain stockholders of the Company who in the aggregate own
shares of Company Stock representing 43% of the currently issued and
outstanding shares of Company Common Stock have entered into a Voting and
Disposition Agreement (the "Voting and Disposition Agreement") with Hanover,
contemporaneously with the execution of the Merger Agreement, pursuant to which
each such stockholder agrees, among other things, to vote all shares of Company
Common Stock owned by such stockholder in favor of the Merger.
You have requested our opinion as to the fairness, from a financial point of
view, of the Consideration to be received by the holders of the Company Common
Stock in the Merger.
In conducting our analysis and arriving at the opinion expressed herein, we
have reviewed such materials and considered such financial and other factors we
deemed relevant under the circumstances, including:
(i) a draft, dated July 12, 2000, of the Merger Agreement;
(i) a draft, dated July 11, 2000, of the Voting and Disposition
Agreement;
(i) certain publicly available historical financial and operating data
concerning the Company including, but not limited to: (a) the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999; (b)
the Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2000; (c) and the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on July 13, 2000.
(i) certain internal financial statements and other financial and
operating data relating to the Company, including financial forecasts for
the fiscal years ending December 31, 2000 through December 31, 2004,
prepared by the management of the Company;
(i) publicly available financial, operating and stock market data
concerning certain companies engaged in businesses we deemed reasonably
similar to that of the Company or otherwise relevant to our inquiry;
(i) the financial terms of certain recent transactions we deemed
relevant to our inquiry;
(i) the historical stock prices and trading volumes of Company Common
Stock; and
B-1
<PAGE>
(i) such other financial studies, analyses and investigations that we
deemed appropriate.
We have assumed, with your consent, that the drafts of the Merger Agreement
and the Voting and Disposition Agreement which we reviewed will conform in all
material respects to those documents when in final form.
We have met with the senior management of the Company and Hanover to
discuss: (i) the past and current operating and financial condition of the
Company and Hanover, respectively; (ii) the prospects for the Company and
Hanover, respectively; (iii) their estimates of the future financial
performance of the Company and Hanover, respectively; and (iv) such other
matters that we deemed relevant.
In connection with our review and analysis and in arriving at our opinion,
we have relied upon the accuracy and completeness of the financial and other
information that is publicly available or was provided to us by the Company and
we have not undertaken any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities of the
Company.
With respect to certain financial forecasts provided to us by senior
management of the Company, we have assumed that such information (and the
assumptions and bases therefor) represents senior management's best currently
available estimate as to the future financial performance of the Company. Our
opinion is necessarily based on economic, financial and market conditions as
they exist and can only be evaluated as of the date hereof and we assume no
responsibility to update or revise our opinion based upon events or
circumstances occurring after the date hereof.
Our opinion does not address nor should it be construed to address the
relative merits of the Merger or alternative business strategies that may be
available to the Company.
As you know, we have been retained by the Company to render this opinion and
will receive a fee upon rendering this opinion. In the ordinary course of
business we may actively trade the shares of Company Common Stock for our own
account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities. In addition, Prudential
Insurance Company of America ("Prudential Insurance"), of which Prudential
Securities Incorporated is an indirect wholly-owned subsidiary, is the holder
of a subordinated note of the Company in the principal amount of $15,000,000.
Prudential Insurance has agreed to surrender to the Company such note
contemporaneously with the closing of the merger in exchange for a partial
prepayment of $7,280,000 in cash and delivery of newly issued shares of Company
Common Stock for the remaining outstanding principal amount.
This letter and the opinion expressed herein are for the use of the Board of
Directors of the Company. This opinion does not constitute a recommendation to
the stockholders of the Company as to how such stockholders should vote
regarding the Merger or as to any other action such stockholders should take
regarding the Merger. This opinion may not be reproduced, summarized, excerpted
from or otherwise publicly referred to or disclosed in any manner without our
prior written consent; except that the Company may include this opinion in its
entirety in any proxy statement or other document distributed to the Company's
stockholders and filed with the Securities and Exchange Commission.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Consideration to be received by the holders of the Company
Common Stock in the Merger is fair to such holders from a financial point of
view.
Very truly yours,
PRUDENTIAL SECURITIES INCORPORATED
B-2
<PAGE>
ANNEX C
VOTING AND DISPOSITION AGREEMENT
This VOTING AND DISPOSITION AGREEMENT, dated as of July 13, 2000 (this
"Agreement"), by and among Hanover Compressor Company, a Delaware corporation
("Parent"), and the undersigned holders (collectively, the "Holders" and each a
"Holder") of shares of common stock, par value $.01 per share ("Company Common
Stock"), of OEC Compression Corporation, an Oklahoma corporation (the
"Company").
RECITALS
WHEREAS, the Company, Parent and Caddo Acquisition Corporation, an Oklahoma
corporation and a wholly-owned subsidiary of Parent ("Merger Sub"), propose to
enter into an Agreement and Plan of Merger dated as of the date hereof (the
"Merger Agreement"; capitalized terms used and not defined herein having the
meanings given them in the Merger Agreement), pursuant to which Merger Sub
would be merged with and into the Company (the "Merger"), and each outstanding
share of Company Common Stock would be converted into the right to receive
shares of common stock, par value $.001 per share, of Parent ("Parent Common
Stock");
WHEREAS, as a condition of its entering into the Merger Agreement, Parent
has requested each Holder to agree, and each Holder hereby agrees, to enter
into this Agreement;
WHEREAS, prior to the date hereof, Parent and the Holders had no agreement,
arrangement or understanding (as such terms are used in Section 1090.3 of the
Oklahoma General Corporation Law (the "OGCL")) for the purpose of acquiring,
holding, voting or disposing of shares of Company Common Stock; and
WHEREAS, in consideration for the agreements contained herein, prior to the
execution hereof, and prior to Parent becoming an "interested stockholder" for
purposes of Section 1090.3 of the OGCL, the Board of Directors of the Company
has approved this Agreement, the Merger Agreement and the transactions
contemplated hereby and thereby, including the agreement of the Holders to vote
as provided in Section 2 of this Agreement and not to transfer shares of
Company Common Stock as provided in Section 6(B) of this Agreement.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Representations and Warranties of the Holders. Each Holder represents and
warrants, severally and not jointly, to Parent as follows:
A. Ownership of Securities. As of the date hereof, such Holder is the
record and/or beneficial owner of the number of shares of Company Common
Stock (the "Existing Securities") (together with any shares of Company
Common Stock or other securities, of the Company hereafter acquired by the
Holder through purchase, exercise of options or warrants or otherwise, the
"Subject Securities") set forth on the signature page to this Agreement.
Such Holder does not beneficially or of record own any securities of the
Company on the date hereof other than the Existing Securities. Such Holder
has sole voting power and sole power to issue instructions with respect to
the voting of the Existing Securities, sole power of disposition, sole
power of exercise and the sole power to demand appraisal rights, in each
case with respect to all of the Existing Securities, and, on the date of
the Company Stockholders' Meeting (as defined in the Merger Agreement),
will have the sole voting power and power to issue instructions with
respect to the voting of all of such Holder's Subject Securities, the sole
powers of disposition, exercise and the sole power to demand appraisal
rights, in each case with respect to all of such Holder's Subject
Securities.
C-1
<PAGE>
B. Authority; Binding Agreement. Each Holder has the legal capacity,
power and authority to enter into and perform all of such Holder's
obligations under this Agreement. The execution, delivery and performance
of this Agreement by each Holder will not violate any other agreement
relating to the Subject Securities to which the Holder is a party,
including, without limitation, any voting agreement, stockholder's
agreement, partnership agreement or voting trust. This Agreement has been
duly and validly executed and delivered by such Holder and constitutes a
valid and binding agreement of such Holder, enforceable against such Holder
in accordance with its terms, except that (i) such enforcement may be
subject to applicable bankruptcy, insolvency or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, and (ii) the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought.
C. No Conflicts. No filing with, and no permit, authorization, consent
or approval of, any local, state or federal public body or authority is
necessary for the execution of this Agreement by such Holder and the
consummation by such Holder of the transactions contemplated hereby, and
neither the execution and delivery of this Agreement by such Holder, nor
the consummation by such Holder of the transactions contemplated hereby nor
compliance by such Holder with any of the provisions hereof shall conflict
with or result in any breach of any applicable corporate, partnership or
other organizational documents applicable to such Holder, result in a
violation or breach of, or constitute (with or without notice or lapse of
time or both) a default (or give rise to any third-party right of
termination, cancellation, material modification or acceleration) under any
of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, contract, commitment, arrangement, understanding,
agreement or other instrument or obligation of any kind to which such
Holder is a party or by which such Holder's properties or assets may be
bound or violate any order, writ, injunction, decree, judgment, statute,
rule or regulation applicable to such Holder or any of such Holder's
properties or assets.
D. No Encumbrances. The Subject Securities are now, and at all times
during the term hereof will be, held by such Holder, or by a nominee or
custodian for the benefit of such Holder, free and clear of all liens,
claims, options, charges, security interests, proxies, voting trusts or
agreements, understandings or arrangements or any other encumbrances or
proxies whatsoever (collectively, "Encumbrances"), except for any
encumbrances or proxies arising hereunder.
E. No Finder's Fees. No broker, investment banker, financial advisor or
other Person (as defined below) is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with
the transactions contemplated hereby based upon arrangements made by or on
behalf of the Holder except that the Company has employed Prudential
Securities as its financial advisor, the arrangements with which have been
disclosed in writing to Parent and Merger Sub prior to, and will not be
modified subsequent to, the date of the Merger Agreement. "Person" shall
mean any individual, corporation, partnership, limited liability company,
sole proprietorship, trust, joint venture, firm, association, company or
other entity.
F. No Other Agreements. Except pursuant to the Merger Agreement, no
Holder has a legal obligation, absolute or contingent, to any other Person
to sell, dispose of or otherwise transfer all or any portion of the Subject
Securities.
G. Reliance by Parent. The Holders understand and acknowledge that
Parent is entering into, and causing Merger Sub to enter into, the Merger
Agreement in reliance upon the Holder's execution, delivery and performance
of this Agreement.
2. Agreement to Vote Shares. During the period commencing on the date hereof
and continuing until the first to occur of (i) the Effective Time and (ii) the
termination of the Merger Agreement, at every meeting of the stockholders of
the Company however called and at every adjournment thereof, and on every
action or approval by written consent of the stockholders of the Company with
respect to any of the following, each Holder, severally and not jointly, agrees
that it shall vote (or caused to be voted), or execute a written consent with
respect to, as appropriate, all of the Subject Securities as to which it has
power to vote in any such vote or
C-2
<PAGE>
consent: (i) in favor of the Merger, the adoption of and execution and delivery
by the Company of the Merger Agreement and the approval of the terms thereof
and each of the other transactions contemplated by the Merger Agreement and
(ii) against the following actions (other than the Merger and the transactions
contemplated by the Merger Agreement): (1) any merger, consolidation, business
combination, recapitalization, sale of substantial assets, sale or acquisition
of shares of capital stock (including, without limitation, by way of a tender
offer) or similar transaction involving the Company or any of its subsidiaries;
(2) (a) any amendment of the Company's certificate of incorporation or bylaws
or any change in the majority of the Board of Directors of the Company; (b) any
material change in the present capitalization of the Company; (c) any other
material change in the Company's corporate structure or business; or (d) any
other action, which, in the case of each of the matters referred to in clauses
(a), (b) or (c) above, is intended, or could reasonably be expected, to impede,
interfere with, delay, postpone, discourage or materially adversely affect the
consummation of the Merger or the transactions contemplated by the Merger
Agreement or this Agreement; and (3) any action or agreement that would result
in a breach in any respect of any covenant, representation or warranty or any
other obligation or agreement of the Company under the Merger Agreement or of a
Holder under this Agreement.
3. IRREVOCABLE PROXY. EACH HOLDER HEREBY, SEVERALLY AND NOT JOINTLY, GRANTS
TO, AND APPOINTS MERGER SUB AND THE PRESIDENT OF MERGER SUB AND THE TREASURER
OF MERGER SUB, IN THEIR RESPECTIVE CAPACITIES AS OFFICERS OF MERGER SUB, AND
ANY INDIVIDUAL WHO SHALL HEREAFTER SUCCEED TO ANY SUCH OFFICE OF MERGER SUB,
AND ANY OTHER DESIGNEE OF MERGER SUB, EACH OF THEM INDIVIDUALLY, SUCH HOLDER'S
PROXY WITH RESPECT TO THE SUBJECT SECURITIES AND ATTORNEY-IN-FACT (WITH FULL
POWER OF SUBSTITUTION) TO VOTE OR ACT BY WRITTEN CONSENT WITH RESPECT TO SUCH
HOLDER'S SUBJECT SECURITIES IN ACCORDANCE WITH SECTION 2 HEREOF. THIS PROXY IS
COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE. EACH HOLDER WILL TAKE SUCH
FURTHER ACTION OR EXECUTE SUCH OTHER INSTRUMENTS, INCLUDING, WITHOUT
LIMITATION, THE FORM OF PROXY ATTACHED HERETO AS EXHIBIT A (THE "PROXY") AS MAY
BE REASONABLY NECESSARY TO EFFECTUATE THE INTENT OF THIS PROXY AND HEREBY
REVOKES ANY PROXY PREVIOUSLY GRANTED BY IT WITH RESPECT TO THE SUBJECT
SECURITIES. AS PROMPTLY AS PRACTICABLE, EACH HOLDER SHALL MAKE ALL FILINGS AND
GIVE ALL NOTICES WITH RESPECT TO THE PROXY AS MAY BE REQUIRED BY APPLICABLE
LAW. THE HOLDER SHALL NOT ENTER INTO ANY AGREEMENT OR UNDERSTANDING WITH ANY
PERSON, THE EFFECT OF WHICH WOULD BE INCONSISTENT WITH, OR VIOLATIVE OF, THE
PROVISIONS AND AGREEMENTS CONTAINED IN THIS SECTION 3.
4. Restrictions on Transfer of Parent Common Stock. Each of the Holders,
hereby agree that such Holder shall not, directly or indirectly, during a
period of 120 days from the Effective Time (the "Standstill Period"), without
the prior written consent of Parent, sell, offer or agree to sell or otherwise
dispose of any Parent Common Stock received by such Holder pursuant to the
Merger. Each Holder further agrees that, for each succeeding 30-day period
following the Standstill Period, such Holder shall not, directly or indirectly,
without the written consent of Parent, sell, offer or agree to sell or
otherwise dispose of, more than 15% of the shares of Parent Common Stock such
Holder receives in connection with the Merger. Each Holder acknowledges and
agrees that the certificates representing such Holder's Parent Common Stock
will bear a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER SET FORTH IN THAT CERTAIN VOTING AND DISPOSITION
AGREEMENT DATED AS OF JULY 13, 2000 BY AND AMONG THE RESTRICTED HOLDERS (AS
DEFINED THEREIN), HANOVER COMPRESSOR COMPANY AND CADDO ACQUISITION
CORPORATION.
5. Representations and Warranties of Parent.
A. Power; Binding Agreement. Parent has full corporate power and
authority to enter into and perform all of Parent's obligations under this
Agreement. This Agreement has been duly and validly
C-3
<PAGE>
executed and delivered by Parent and constitutes a valid and binding
agreement of Parent, enforceable against Parent in accordance with its
terms, except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
B. No Conflicts. No filing with, and no permit, authorization, consent
or approval of, any state or federal public body or authority is necessary
for the execution of this Agreement by Parent and the consummation by
Parent of the transactions contemplated hereby and neither the execution
and delivery of this Agreement by Parent nor the consummation by Parent of
the transactions contemplated hereby, nor compliance by Parent with any of
the provisions hereof shall conflict with or result in any breach of any
organizational documents applicable to Parent, or result in a violation or
breach of, or constitute (with or without notice or lapse of time or both)
a default, or give rise to any third-party right of termination,
cancellation, material modification or acceleration under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
contract, commitment, arrangement, understanding, agreement or other
instrument or obligation of any kind to which Parent is a party or by which
Parent's properties or assets may be bound, or violate any order, writ,
injunction, decree, judgment, statute, rule or regulation applicable to
Parent or any of Parent's properties or assets, except for any such
conflicts, breaches, defaults or violations as would not materially impair
Parent's performance of its obligations hereunder.
6. Covenants of the Holders. Each Holder, severally and not jointly, hereby
agrees and covenants that:
A. No Solicitation. Such Holder (and Persons acting on behalf of the
Holder) shall not, directly or indirectly, solicit (including by way of
furnishing information), initiate, encourage or respond to, or take any
other action knowingly to facilitate any inquiries or the making of any
proposal by any Person with respect to the Company that constitutes, or
could reasonably be expected to lead to, an Acquisition Proposal or permit
or authorize any Person acting on behalf of the Holder to do any of the
foregoing. If any Holder receives any such inquiry or proposal, then it
shall immediately inform Parent of all terms and conditions, if any, of
such inquiry or proposal and the identity of the person making it and
shall, in the case of written proposals or inquiries, furnish Parent with a
copy of such proposal or inquiry (and all amendments and supplements
thereto). Such Holder will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing.
B. Restriction on Transfer of Company Common Stock, Proxies and
Noninterference. Such Holder shall not, prior to the termination of this
Agreement, directly or indirectly, except pursuant to the terms of the
Merger Agreement or this Agreement: (i) offer for sale, sell, transfer
(whether by merger, operation of law or otherwise), tender, pledge,
encumber, assign or otherwise dispose of, or enter into any contract,
option or other arrangement or understanding with respect to or consent to
the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment
or other disposition of, any or all of such Holder's Subject Securities;
(ii) grant any proxies or powers of attorney, deposit any such Subject
Securities into a voting trust or enter into a voting agreement with
respect to any of such Holder's Subject Securities; or (iii) take any
action that would make any representation, warranty, covenant or other
provision contained herein untrue or incorrect or have the effect of, or
could reasonably be expected to, impede, interfere with, delay, postpone,
discourage or materially adversely affect such Holder from performing its
obligations under this Agreement. The Holder's Company Common Stock
certificates shall be legended to reflect the above restrictions.
C. Waiver of Appraisal Rights. Such Holder hereby irrevocably waives any
rights of appraisal or rights to dissent, if any, from the Merger that the
Holder may now or hereafter have.
D. Stop Transfer; Changes in Subject Securities. Such Holder shall not
request that the Company register the transfer (book-entry or otherwise) of
any certificate or uncertificated interest representing any of the Subject
Securities, unless such transfer is made in compliance with this Agreement.
In the event of
C-4
<PAGE>
a stock dividend or distribution, or any change in the Company Common Stock
by reason of any stock dividend, split-up, merger, recapitalization,
combination, conversion or exchange of shares or the like (in each case
with a record date prior to the termination of this Agreement), the term
"Subject Securities" shall be deemed to refer to and include the Subject
Securities as well as all such stock dividends and distributions and any
securities into which or for which any or all of the Subject Securities may
be changed or exchanged and such dividends, distributions and securities,
as the case may be, shall be paid to Parent at the Closing or promptly
following the receipt of such dividend or distribution, if the Closing
theretofor shall have occurred.
E. Confidentiality. Such Holder recognizes that successful consummation
of the transactions contemplated by this Agreement and the Merger Agreement
may be dependent upon confidentiality with respect to the matters referred
to herein. In this connection, pending public disclosure thereof in
accordance with the provisions of the Merger Agreement, the Holder hereby
agrees not to disclose or discuss such matters with any Person (other than
Parent or Merger Sub and the respective counsel and advisors of the
Holders, Parent and Merger Sub) without the prior written consent of
Parent, except for filings required pursuant to the Exchange Act and the
rules and regulations thereunder or disclosures necessary in order to
fulfill the Holder's obligations imposed by law, in which event the Holder
shall give prior written notice of such disclosure to Parent as promptly as
practicable so as to enable Parent to seek a protective order from a court
of competent jurisdiction with respect thereto.
7. Fiduciary Duties. Notwithstanding anything in this Agreement to the
contrary, the covenants and agreements set forth herein shall not prevent any
Holders serving on the Company's Board of Directors from taking any action,
subject to applicable provisions of the Merger Agreement, which such director
shall determine in good faith, after consultation with legal counsel, to be
required by his fiduciary duties to the Company or its stockholders while
acting in such person's capacity as a director of the Company.
8. Assignment; Benefits This Agreement may be assigned, in whole or in part,
by Parent to Merger Sub or any other wholly-owned subsidiary of Parent, to the
extent and for so long as such subsidiary remains a wholly-owned subsidiary of
Parent. Other than as permitted in the preceding sentence, this Agreement may
not be assigned by any party hereto without the prior written consent of the
other party. This Agreement shall be binding upon, and shall inure to the
benefit of, the Holder, Parent and their respective successors and permitted
assigns.
9. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (which is
confirmed) or mailed by registered or certified mail (return receipt requested)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
(a) if to a Holder, to:
The corresponding address set forth on the signature pages hereto;
(b) if to Parent, to:
Hanover Compressor Company
12001 N. Houston Rosslyn Road
Houston, Texas 77086
Attention: Michael J. McGhan
Telecopy: (281) 447-0821
with a copy to:
Latham & Watkins
233 South Wacker Drive
Suite 5800
Chicago, Illinois 60606
Attention: Richard Meller, Esq.
Telecopy: (312) 993-9767
C-5
<PAGE>
10. Specific Performance. The parties hereto agree that irreparable harm
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with its specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
11. Amendment. This Agreement may not be amended or modified, except by an
instrument in writing signed by or on behalf of each of the parties hereto.
This Agreement may not be waived by either party hereto, except by an
instrument in writing signed by or on behalf of the party granting such waiver.
12. Governing Law. The laws of the State of Oklahoma shall govern the
interpretation, validity and performance of the terms of this Agreement,
regardless of the law that might be applied under principles of conflicts of
law. Any suit, action or proceeding by a party hereto with respect to this
Agreement, or any judgment entered by any court in respect of any thereof, may
be brought in any state or federal court of competent jurisdiction in Houston,
Texas and each party hereto hereby submits to the exclusive jurisdiction of
such courts for the purpose of any such suit, action, proceeding or judgment.
Each party hereto hereby irrevocably waives any objections which it may now or
hereafter have to the laying of the venue of any suit, action or proceeding
arising out of or relating to this Agreement brought in any state or federal
court of competent jurisdiction in Houston, Texas and hereby further
irrevocably waives any claim that any such suit, action or proceeding brought
in any such court has been brought in any inconvenient forum. No suit, action
or proceeding against a party hereto with respect to this Agreement may be
brought in any court, domestic or foreign, or before any similar domestic or
foreign authority other than in a court of competent jurisdiction Houston,
Texas and each party hereto hereby irrevocably waives any right which it may
otherwise have had to bring such an action in any other court, domestic or
foreign, or before any similar domestic or foreign authority.
13. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
14. Termination. This Agreement shall terminate upon the earlier of (i) the
Effective Time or (ii) the date of termination of the Merger Agreement. Upon
any termination of this Agreement, this Agreement shall thereupon become void
and of no further force and effect, and there shall be no liability in respect
of this Agreement or of any transactions contemplated hereby or by the Merger
Agreement on the part of any party hereto or any of its directors, officers,
partners, stockholders, employees, agents, advisors, representatives or
affiliates; provided, however, that nothing herein shall relieve any party from
any liability for such party's willful breach of this Agreement; and provided
further that nothing herein shall limit, restrict, impair, amend or otherwise
modify the rights, remedies, obligations or liabilities of any Person under any
other contract or agreement, including, without limitation, the Merger
Agreement.
15. Further Assurances. From time to time, at the other party's request and
without further consideration, each party hereto shall execute and deliver such
additional documents and take all such further lawful action as may be
necessary or appropriate to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this
Agreement.
16. Entire Agreement; No Third Party Beneficiaries. This Agreement, together
with the Merger Agreement, constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all other prior
agreements and understandings, both written and oral, between the parties
hereto with respect to the subject matter hereof. This Agreement is not
intended for the benefit of or intended to confer upon any Person other than
the parties hereto any rights or remedies hereunder.
C-6
<PAGE>
17. Certain Events. Each Holder agrees that this Agreement and the
obligations hereunder shall attach to the Subject Securities and shall be
binding upon any Person to which legal or beneficial ownership of such Subject
Securities shall pass, whether by operation of law or otherwise, including,
without limitation, the Holder's heirs, guardians, administrators or
successors. Notwithstanding any transfer of Subject Securities, the transferor
shall remain liable for the performance of all obligations of the transferor
under this Agreement.
18. Descriptive Headings. The descriptive headings used herein are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
19. Severability. Whenever possible, each provision or portion of any
provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law, but if any provision or portion of
any provision of this Agreement is held to be invalid, illegal or unenforceable
in any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceabilty will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein.
20. Remedies Cumulative. All rights, powers and remedies provided under this
Agreement or otherwise available in respect hereof at law or in equity shall be
cumulative and not alternative, and the exercise of any thereof by either party
hereto shall not preclude the simultaneous or later exercise of any other such
right, power or remedy by such party.
21. No Waiver. The failure of either party hereto to exercise any right,
power or remedy provided under this Agreement or otherwise available in respect
hereof at law or in equity, or to insist upon compliance by the other party
hereto with its obligations hereunder, and any custom or practice of the
parties hereto at variance with the terms hereof shall not constitute a waiver
by such party of its or his right to exercise any such or other right, power or
remedy or to demand such compliance.
[SIGNATURE PAGE FOLLOWS]
C-7
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by or on behalf of each
of the parties hereto, all as of the date first above written.
HANOVER COMPRESSOR COMPANY
By: _________________________________
Its: ________________________________
HOLDERS:
HACL, Ltd.
By: Six-Dawaco, Inc., its general
partner
By: _________________________________
Its: ________________________________
Address:2838 Woodside
Dallas, Texas 75201
Telecopy:(214) 981-0700
Energy Investors Joint Venture
By: HACL, Ltd., its managing joint
venture partner
By: Six-Dawaco, Inc., its general
partner
By: _________________________________
Its: ________________________________
Address:2838 Woodside
Dallas, Texas 75201
Telecopy:(214) 981-0700
C-8
<PAGE>
EXHIBIT A
Form of Irrevocable Proxy
Pursuant to Section 3 of the Voting and Disposition Agreement, dated as of
July 13, 2000, as the same may be amended from time to time, (the "Voting
Agreement"), between Hanover Compressor Company, a Delaware corporation
("Parent") and the undersigned stockholders (collectively, the "Holders" and
each a "Holder") of shares of common stock, par value $.01 per share ("Company
Common Stock"), of OEC Compression Corporation, an Oklahoma corporation (the
"Company"), the undersigned hereby irrevocably appoint Caddo Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of Parent ("Merger
Sub"), Michael J. McGhan, and William S. Goldberg, and each of them, or any
other designee of Parent or Merger Sub, their attorneys-in-fact and proxies of
the undersigned, each with full power of substitution:
(a) to attend any meeting (whether annual or special or both) of the
stockholders of the Company, including any adjournment or postponement
thereof, on behalf of the undersigned, and at such meeting, with respect to
all shares of common stock of the Company owned (or beneficially owned) by the
undersigned on the date hereof or acquired hereafter that are entitled to vote
at such meeting or over which the undersigned has voting power (and any and
all other shares of common stock of the Company or other securities issued on
or after the date hereof in respect of any such shares), including, without
limitation, the shares indicated in the last paragraph of this proxy:
(i) to vote (in person or by proxy) in favor of the approval of the plan
of merger contained in Agreement and Plan of Merger, dated as of July 13,
2000, by and among Parent, Merger Sub and the Company (as the same may be
amended from time to time, the "Merger Agreement"), and in favor of any
other action related to the Merger (as defined in the Merger Agreement) or
in furtherance of the transactions contemplated by the Merger Agreement,
and otherwise to act with respect to such shares as each such attorney and
proxy or his or her substitute shall in his or her reasonable discretion
deem necessary or appropriate for such purpose; and
(ii) to vote (in person or by proxy) against (A) any merger agreement or
merger (other than the Merger Agreement and the Merger), consolidation,
liquidation, dissolution, recapitalization, reorganization, winding up or
other business combination, acquisition or sale or other disposition of a
material amount of assets or securities, tender offer or exchange offer or
any other similar transaction involving the Company, its securities or any
of its material subsidiaries or divisions, (B) any action or agreement that
would result in a breach in any respect of any covenant, representation or
warranty or any other obligation or agreement of the Company under the
Merger Agreement or of any Holder under the Voting Agreement, (C) any
change in the present capitalization of the Company or any amendment of
Company's articles of incorporation or by-laws, (D) any other material
change in the Company's corporate structure or business and (E) any other
action involving the Company or its subsidiaries which is intended, or
could reasonably be expected, to impede, interfere with, delay, postpone,
or otherwise adversely affect the Merger or any transaction contemplated by
the Merger Agreement; and
(b) to execute and deliver one or more consents in writing in lieu of such
meeting or adjournment thereof.
The undersigned affirms that this proxy is issued in connection with the
Merger Agreement to facilitate the transactions contemplated thereunder and in
consideration of Parent entering into the Merger Agreement and as such is
coupled with an interest and is irrevocable. This proxy will terminate upon
the termination of the Merger Agreement in accordance with its terms. For
purposes of this proxy, any written consent shall be deemed delivered to such
attorneys and proxies and their substitutes when delivered to Merger Sub in
accordance with the Merger Agreement, and any written consent shall be deemed
delivered to the Company when delivered to it in accordance with the Merger
Agreement.
By execution and delivery of this proxy to the designees of Merger Sub, the
undersigned (a) confirms that the undersigned has received copies of the
Merger Agreement and the Voting Agreement, and that all other
C-9
<PAGE>
information deemed necessary by the undersigned concerning the Merger, the
Merger Agreement, the Voting Agreement and the transactions contemplated under
any such agreements or any other matters considered by the undersigned to be
relevant to the undersigned's decision to execute this proxy have been made
available to the undersigned and (b) agrees that the undersigned win not sell,
transfer or otherwise dispose of any Subject Shares (as defined in the Voting
Agreement) prior to the termination of the Voting Agreement.
All authority herein conferred or agreed to be conferred shall survive the
death, liquidation or incapacity of the undersigned and any obligation of the
undersigned hereunder shall be binding upon the heirs, personal
representatives, successors and assigns of the undersigned. This proxy revokes
any and all other proxies heretofore granted by the undersigned to vote or
otherwise to act with respect to any of the shares to which this proxy relates.
The undersigned will not give any subsequent proxy (and such proxy if given
will be deemed not to be effective) with respect to such shares that purports
to grant authority within the scope of the authority hereby conferred, except
on the express condition that such proxy shall not be effective unless and
until this proxy shall have terminated in accordance with its terms. This proxy
shall be governed by the internal laws of the State of Delaware.
As of the date hereof, the undersigned owns or possesses voting power with
respect to shares of common stock, par value $.01 per share, of the Company,
and such shares are entitled to vote with respect the approval by the
stockholders of the Company of the plan of merger set forth in the Merger
Agreement and each of the other transactions contemplated by the Merger
Agreement.
By: _________________________________
[HOLDER]
C-10
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 102(b)(7) of the Delaware General Corporation Law authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
directors' fiduciary duty of care. Although Section 102(b) does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. Our certificate of
incorporation limits the liability of directors (in their capacity as directors
but not in their capacity as officers) to us or our stockholders to the fullest
extent permitted by Section 102(b). Specifically, our directors will not be
personally liable for monetary damages for breach of a director's fiduciary
duty as a director, except for liability for (a) any breach of the director's
duty of loyalty to Hanover or our stockholders (b) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (c) unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
or (d) any transaction from which the director derived an improper personal
benefit.
To the maximum extent permitted by law, our certificate of incorporation and
bylaws provide for mandatory indemnification of directors and officers and
permit indemnification of our officers, employees, and agents against all
expense, liability, and loss to which they may become subject or which they may
incur as a result of being or having been a director, officer, employee, or
agent of Hanover or its subsidiaries. In addition, we must advance or reimburse
directors and may advance or reimburse officers, employees , and agents for
expenses incurred by them in connection with indemnifiable claims.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (a) before that
person became an interested stockholder, the corporation's board of directors
approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (b) upon
completion of the transaction that resulted in the interested stockholders'
becoming an interested stockholder, the interested stockholder owns at least
85% of the voting stock outstanding at the time the transaction commenced
(excluding stock held by directors who are also officers of the corporation and
by employee stock plans that do not provide employees with the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer); or (c) following the transaction in
which that person became an interested stockholder, the business combination is
approved by the corporation's board of directors and authorized at a meeting of
stockholders by the affirmative vote of the holders of at least two-thirds of
the outstanding voting stock not owned by the interested stockholder. Under
Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement
or notification of one of certain extraordinary transactions involving the
corporation and a person who was not an interested stockholder with the
approval of a majority of the corporation's directors, if that extraordinary
transaction is approved or not opposed by a majority of the directors who were
directors before any person became an interested stockholder in the previous
three years or who were recommended for election or elected to succeed such
directors by a majority of such directors then in office. "Business
combination" includes mergers, assets sales, and other transactions resulting
in a financial benefit to the stockholder. "Interested stockholder" is a person
who, together with affiliates and associates, owns (or, within three years, did
own) 15% or more of the corporation's voting stock.
Item 21. Exhibits and Financial Statement Schedules
(a) See Exhibit Index
II-1
<PAGE>
(b) All financial statement schedules of Hanover which are required to be
included herein are included in Hanover's annual report on form 10-K for the
fiscal year ended December 31, 1999, which is incorporated herein by reference.
OEC's financial statement schedules are included in this proxy
statement/prospectus.
(c) See Exhibit Index
Item 22. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (1)(a) and (1)(b) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) That, for the purpose of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters in
addition to the information called for by the other items of the applicable
form.
(6) That every prospectus: (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
II-2
<PAGE>
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such an
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(7) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(8) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11 or 13 of Form S-4, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the request.
(9) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it
became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 21st day of December, 2000.
Hanover Compressor Company
/s/ Michael J. McGhan
By: _________________________________
Michael J. McGhan
President and CEO
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
Date: December 21, 2000
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons, on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Michael J. McGhan President and Chief Executive Officer
______________________________________ (Principal Executive Officer and Director)
Michael J. McGhan
* Chief Financial Officer and Director
______________________________________ (Principal Financial and Accounting Officer)
William S. Goldberg
* Director
______________________________________
Ted Collins, Jr.
* Director
______________________________________
Robert R. Furgason
* Director
______________________________________
Melvyn N. Klein
* Director
______________________________________
Michael A. O'Connor
* Director
______________________________________
Alvin V. Shoemaker
</TABLE>
*By_________________________
Michael J. McGhan
Attorney-in-Fact
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Certificate of Incorporation of the Hanover Compressor Holding Co.
(9)[4.1]
3.2 Certificate of Amendment of Certificate of Incorporation of Hanover
Compressor Holding Co. dated December 9, 1999 (9)[4.2]
3.3 Bylaws of Hanover Compressor Company (9)[4.3]
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) [4.1]
4.10 Form of Warrant Agreement (1) [4.10]
4.11 Specimen Stock Certificate (1) [4.11]
4.12 Form of Second Amended and Restated Stockholders Agreement of Hanover
Compressor Company dated as of June, 1997 (1) [4.12]
4.13 Form of Amended and Restated Stockholders Agreement (JEDI) dated as of
May, 1997 (1) [4.13]
4.14 Form of Amended and Restated Stockholders Agreement (Westar Capital,
Inc.) dated as of May, 1997 (1) [4.14]
4.15 Form of Amended and Restated Stockholders Agreement (HEHC) dated as of
May, 1997 (1) [4.15]
10.1 Credit Agreement, dated as of December 15, 1997, as amended and
restated through March 13, 2000, by and between the Company, The Chase
Manhattan Bank, a New York banking corporation as Administrative Agent
and several banks and other financial institutions that are parties
thereto*
10.2 Subsidiaries' Guarantee, dated as of March 13, 2000, by certain of the
Company's subsidiaries in favor of The Chase Manhattan Bank, as agent*
10.3 Management Fee Letter, dated November 14, 1995 between GKH Partners,
L.P. and the Company (1) [10.3]
10.4 Hanover Compressor Company Senior Executive Stock Option Plan (1)
[10.4]
10.5 1993 Hanover Compressor Company Management Stock Option Plan (1)
[10.5]
10.6 Hanover Compressor Company Incentive Option Plan (1) [10.6]
10.7 Amendment and Restatement of Hanover Compressor Company Incentive
Option Plan (1) [10.7]
10.8 Hanover Compressor Company 1995 Employee Stock Option Plan (1) [10.8]
10.9 Hanover Compressor Company 1995 Management Stock Option Plan (1)
[10.9]
10.10 Hanover Compressor Company 1996 Employee Stock Option Plan (1) [10.10]
10.11 OEM Sales and Purchase Agreement, between Hanover Compressor Company
and the Waukesha Engine Division of Dresser Industries, Inc. (1)
[10.11]
10.12 Distribution Agreement, dated February 23, 1995, between Ariel
Corporation and Maintech Enterprises, Inc. (1) [10.12]
10.13 Exclusive Distribution Agreement, dated as of February 23, 1995 by and
between Hanover/Smith, Inc. and Uniglam Resources, Ltd. (1) [10.13]
10.14 Lease Agreement, dated December 4, 1990, between Hanover Compressor
Company and Ricardo J. Guerra and Luis J. Guerra as amended (1)
[10.15]
10.15 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) [10.20]
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.16 1997 Stock Option Plan, as amended (1) [10.23]
10.17 1997 Stock Purchase Plan (1) [10.24]
10.18 Exchange Agreement by and between Hanover Compressor Company and JEDI,
dated December 23, 1996 (1) [10.27]
10.19 Lease dated as of July 20, 1998 between Hanover Equipment Trust 1998A
(the "Trust") and the Company (3) [10.1]
10.20 Guarantee dated as of July 22, 1998 and made by the Company,
Hanover/Smith, Inc., Hanover Maintech, Inc. and Hanover Land Company
(3) [10.2]
10.21 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) [10.3]
10.22 Participation Agreement dated as of July 22, 1998 among the Company,
the Trust, The Chase Manhattan Bank, as agent, Societe Generale &
Financial Corporation, and Wilmington Trust Company (3) [10.4]
10.23 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) [10.5]
10.24 Lease Supplement No. 1 dated as of July 22, 1998 between the Trust and
the Company (3) [10.6]
10.25 1998 Stock Option Plan (4) 10.7
10.26 December 10, 1998 Stock Option Plan (5)
10.27 1999 Stock Option Plan (5)
10.28 1998 Amendments to Credit Agreement, dated as of December 15, 1997,
with the Chase Manhattan Bank, a New York banking corporation as
Administrative Agent and several banks and other financial
institutions that are parties thereto (7) [10.35]
10.29 Lease dated as of June 15, 1999 between Hanover Equipment Trust 1999
and the Company (8) [10.36]
10.30 Guarantee dated as of June 15, 1999 and made by the Company,
Hanover/Smith, Inc. and Hanover Maintech, Inc. and Hanover Land
Company (8) [10.37]
10.31 Participation Agreement dated as of June 15, 1999 among the Company,
the Trust, Societe Generale Financial Corporation and FTBC Leasing
Corp., The Chase Manhattan Bank, as agent, and Wilmington Trust
Company (8) [10.38]
10.32 Security Agreement dated as of June 15, 199 made by the Trust in favor
of The Chase Manhattan Bank, as agent (8) [10.39]
10.33 Lease Supplement No. 1 dated June 15, 1999 between the Trust and the
Company (8) [10.40]
10.34 Lessee's and Guarantor's Consent dated as of June 15, 1999 made by the
Company. Hanover/Smith, Inc., Hanover Maintech, Inc. and Hanover Land
Trust Company (8) [10.41]
10.35 Amended and Restated Declaration of Trust of Hanover Compressor
Capital Trust, dated as of December 15, 1999, among Hanover Compressor
Company, as sponsor, Wilmington Trust Company, as property trustee,
and Richard S. Meller, William S. Goldberg and Curtis A. Bedrich, as
administrative trustees. (6) [4.5]
10.36 Indenture for the Convertible Junior Subordinated Indentures due 2029,
dated as of December 15, 1999 among Hanover Compressor Company, as
issuer, and Wilmington Trust Company, as trustee. (6) [4.6]
10.37 Form of Hanover Compressor Capital Trust 7 1/4% Convertible Preferred
Securities (6) [4.8]
10.38 Form of Hanover Compressor Company Convertible Subordinated Junior
Debentures due 2029 (6) [4.9]
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.39 Preferred Securities Guarantee, dated as of December 15, 1999, between
Hanover Compressor Company, as guarantor, and Wilmington Trust
Company, as guarantee trustee (6) [4.10]
10.40 Common Securities Guarantee dated as of December 15, 1999, by Hanover
Compressor Company, as guarantor (6) [4.11]
10.41 Lease dated as of March 13, 2000 between Hanover Equipment Trust 2000A
and Hanover Compression Inc. (9) [10.43]
10.42 Guarantee dated as of March 13, 2000 and made by the Company, Hanover
Compression Inc. and certain of their Subsidiaries (9) [10.44]
10.43 Participation Agreement dated as of March 13, 2000 among the Company,
the Hanover Equipment Trust 2000A and various banks (9) [10.45]
10.44 Security Agreement dated as of March 13, 2000 made by the Trust in
favor of the Chase Manhattan Bank, as agent (9) [10.46]
10.45 Assignment of Leases, rents and Guarantees from Hanover Equipment
Trust 2000A to the Chase Manhattan Bank dated as of March 13, 2000 (9)
[10.47]
10.46 Agreement and Plan of Merger by and among Hanover Compressor Company,
APSI Acquisition Corporation and Applied Process Solutions, Inc. dated
as of May 3, 2000 (10) [10.48]
10.47 Amendment to Agreement and Plan of Merger by and among Hanover
Compressor Company, APSI Acquisition Corporation and Applied Process
Solutions, Inc. dated as of May 31, 2000 (10) [10.49]
10.48 Amendment No. 2 dated as of October 24, 2000, to Agreement and Plan of
Merger by and among Hanover Compressor Company, APSI Acquisition
Corporation and Applied Process Solutions, Inc. (12) [10.50]
10.49 Agreement and Plan of Merger dated as of July 13, 2000 by and among
Hanover Compressor Company, Caddo Acquisition Corporation and OEC
Compression Corporation. (13) [10.51]
10.50 Voting and Disposition Agreement dated as of July 13, 2000 by and
among Hanover Compressor Company and the holders of common stock of
OEC Compression Corporation named therein (13) [10.52]
10.51 Amendment No. 1 to Agreement and Plan of Merger dated as of November
14, 2000 and by and among Hanover Compressor Company, a Delaware
corporation, Caddo Acquisition Corporation, an Oklahoma corporation
and OEC Compression Corporation, an Oklahoma corporation (14) [10.51]
10.52 Management Agreement (14) [10.52]
10.53 Asset Purchase Agreement made on July 10, 2000 by and among Hanover
Compressor Inc. and Stewart & Stevenson Services, Inc., Stewart &
Stevenson Power, Inc. and PAMCO Services International, Inc.*
10.54 Lease dated as of October 27, 2000 between Hanover Equipment Trust
2000B and Hanover Compression Inc.*
10.55 Guarantee dated as of October 27, 2000 and made by Hanover Compressor
Company, Hanover Compression Inc. and certain subsidiaries.*
10.56 Participation Agreement dated as of October 27, 2000 among Hanover
Compression Inc., Hanover Equipment Trust 2000B, The Chase Manhattan
Bank, National Westminster Bank plc, Citibank N.A., Credit Suisse
First Boston, and the Industrial Bank of Japan as co-agents; Bank
Hapoalim B.M. and FBTC Leasing Corp., as investors; Wilmington Trust
Company and various lenders.*
10.57 Security Agreement dated as of October 27, 2000 made by Hanover
Equipment Trust 2000B in favor of the Chase Manhattan Bank as agent
for the lenders.*
10.58 Assignment of Leases, Rents and Guarantee dated as of October 27,
2000, made by Hanover Equipment Trust 2000B in favor of the Chase
Manhattan Bank as agent for the lenders*
21.1 List of Subsidiaries (9) [21.1]
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
23.1 Consent of Independent Public Accountants*
23.2 Consent of Independent Accountants*
23.3 Consent of Independent Accountants*
23.4 Consent of Independent Accountants*
24.1 Powers of Attorney (included on the signature page of this
Registration Statement)
99.1 Purchase Agreement, dated as of May 23, 2000, by and among Hanover
Compressor Company and Janus Aspen Series on behalf of its series
Janus Aspen Aggressive Growth Fund (13) [99.1]
99.2 Purchase Agreement, dated as of May 23, 2000, by and among Hanover
Compressor Company and Janus Aspen Series on behalf of its Series
Janus Enterprise Fund (13) [99.2]
99.3 Purchase Agreement, dated as of July 11, 2000, as amended August 31,
2000, among Hanover Compressor Compression Inc., Dresser-Rand Company
and Ingersoll-Rand Company (1) [99.2]
99.4 Form of Proxy to be mailed to OEC shareholders*
</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 [ ], 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 [ ], 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 [ ], 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 [ ], and is incorporated by reference.
(5) Compensatory plan or arrangement required to be filed
(6) Such exhibit previously filed as an exhibit to the Registration
Statement (File No. 333-30344) on Form S-3, as amended, under the
exhibit number indicated in brackets [ ], and is incorporated by
reference.
(7) Such exhibit previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the Year Ended 1998 under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
(8) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Second Quarter of 1999, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
(9) Such exhibit previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the Year Ended 1999 under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
(10) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Second Quarter of 2000, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
(11) Such exhibit previously filed as an exhibit to the Registration
Statement (File No. 333-50470) on Form S-3, as amended, under the
exhibit number indicated in brackets [ ], and is incorporated by
reference.
(12) Such exhibit previously filed as an exhibit to the Company's current
report on Form 8-K dated September 14, 2000, under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
(13) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Third Quarter of 2000, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
(14) Such exhibit previously filed as an exhibit to the Registration
Statement (File No. 333-50836) on Form S-4 under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
* Filed herewith.
