<PAGE>
As filed with the Securities and Exchange Commission on March 10, 2000
Registration No. _____-_______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM S-8
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
___________________
HANOVER COMPRESSOR COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 75-2344249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12001 NORTH HOUSTON ROSSLYN
HOUSTON, TEXAS 77086
(Address of principal executive offices)
_______________
1996 EMPLOYEE STOCK OFFERING
DECEMBER 23, 1996 COMMON STOCK OFFERING
1995 MANAGEMENT STOCK OFFERING
1995 EMPLOYEE STOCK OFFERING
1993 MANAGEMENT STOCK OFFERING
1992 STOCK OFFERING
SUBSCRIPTION AGREEMENT BETWEEN HANOVER COMPRESSOR COMPANY
AND DONALD M. DEVILLE
1997 STOCK PURCHASE PLAN
_______________
Copy to:
MICHAEL J. McGHAN RICHARD S. MELLER
President and Chief Executive Officer Latham & Watkins
Hanover Compressor Company Sears Tower
12001 North Houston Rosslyn Suite 5800
Houston, Texas 77086 Chicago, Illinois 60606
(281) 447-8787 (312) 876-6521
(Name, address, including zip code,
and telephone number, including area code,
of agent for service)
<PAGE>
___________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================================
| | PROPOSED MAXIMUM | PROPOSED MAXIMUM | AMOUNT OF
TITLE OF EACH CLASS OF | AMOUNT TO BE | OFFERING PRICE | AGGREGATE | REGISTRATION
SECURITIES TO BE REGISTERED | REGISTERED (1) | PER SHARE (2) | OFFERING PRICE | FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> | <C> | <C> | <C> | <C>
Common Stock, par value $.001 per share | 1,456,763 | $47.63 | $69,385,621.69 | $18,317.80
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 174,590 of such shares were purchased pursuant to the 1996 Employee Stock
Offering; 1580 of such shares were purchased pursuant to the December 23,
1996 Common Stock Offering; 39,500 of such shares were purchased pursuant
to the 1995 Management Stock Offering; 268,126 of such shares were
purchased pursuant to the 1995 Employee Stock Offering; 484,217 of such
shares were purchased pursuant to the 1993 Management Stock Offering;
156,653 of such shares were purchased pursuant to the 1992 Stock Offering;
29,862 of such shares were purchased pursuant to the Subscription Agreement
between Hanover Compressor Company and Donald M. DeVille; 302,235 of such
shares were purchased pursuant to the 1997 Stock Purchase Plan
(2) For purposes of computing the registration fee only. Pursuant to Rule
457(h), the Proposed Maximum Offering Price Per Share is based upon
$47.63, the average of the high and low price for shares of the Company's
common stock, par value $.001 per share, as reported on the New York Stock
Exchange composite tape on March 3, 2000.
<PAGE>
PART I
Item 1. Plan Information
Not required to be filed with this Registration Statement.
Item 2. Registrant Information and Employee Plan Annual Information
Not required to be filed with this Registration Statement.
PART II
Item 3. Incorporation of Documents by Reference
The documents listed below have been filed by Hanover Compressor Company, a
Delaware corporation (the "Company"), with the Securities and Exchange
Commission (the "Commission") and are incorporated in this Registration
Statement by reference:
a. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (the "1998 10-K");
b. The Company's Amended Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1998;
c. The Definitive Proxy Statement filed May 6, 1999;
d. The Company's Quarterly Report on Form 10-Q for the quarters ended
March 31, 1999; June 30, 1999; September 30, 1999.
e. All other reports filed by the Company pursuant to Section 13(a) and
15(d) of the Securities Exchange Act of 1934 since the end of the Company's
fiscal year ended December 31, 1998; and
f. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form S-1 filed on April 11, 1997 pursuant to
Section 12 of the Securities Exchange Act of 1934.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 and
15(d) of the Securities Exchange Act of 1934 prior to the filing of a post-
effective amendment which indicates that all securities offered have been sold
or which deregisters all securities then remaining unsold, shall be deemed to be
incorporated by reference in this Registration Statement and to be part hereof
from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Registration Statement to the extent that a statement
contained herein, or in any other subsequently filed document that also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Registration
Statement.
<PAGE>
Item 4. Description of Securities
Not required to be filed with this Registration Statement.
Item 5. Interests of Named Experts and Counsel
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company and the Selling Stockholders by Latham & Watkins, Chicago,
Illinois. Richard S. Meller, the Secretary of the Company, is of counsel at
Latham & Watkins.
Item 6. Indemnification of Directors and Officers
Under Delaware law, a corporation may indemnify any person who was or is a
party or is threatened to be made a party to an action (other than an action by
or in the right of the corporation) by reason of his service as a director or
officer of the corporation, or his service, at the corporation's request, as a
director, officer, employee or agent of another corporation or other enterprise,
against expenses (including attorneys' fees) that are actually and reasonably
incurred by him ("Expenses"), and judgments, fines and amounts paid in
settlement that are actually and reasonably incurred by him, in connection with
the defense or settlement of such action; provided that he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
Although Delaware law permits a corporation to indemnify any person referred to
above against Expenses in connection with the defense or settlement of an action
by or in the right of the corporation, provided that he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the corporation's
best interest, if such person has been judged liable to the corporation,
indemnification is only permitted to the extent that the adjudicating court (or
the court in which the action was brought) determine that, despite the
adjudication of liability, such person is entitled to indemnity for such
Expenses as the court deems proper. The determination as to whether a person
seeking indemnification has met the required standard of conduct is to be made
(1) by a majority vote of a quorum of disinterested members of the board of
directors, or (2) by independent legal counsel in a written opinion, if such a
quorum does not exist or if the disinterested directors so direct, or (3) by the
stockholders. The General Corporation Law of Delaware also provides for
mandatory indemnification of any director, officer, employee or agent against
Expenses to the extent that such person has been successful in any proceeding
covered by the statute. In addition, the General Corporation Law of Delaware
provides for the general authorization of advancement of a director's or
officer's litigation expenses in lieu of requiring the authorization of such
advancement by the board of directors in specific cases, and that
indemnification and advancement of expenses provided by the statute shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement or otherwise.
The Company's Restated Certificate of Incorporation provides that the
Company shall indemnify its directors and officer and advance expenses incurred
by its directors and officer in defending any civil, commercial, administrative
or investigative action, suit or proceeding, in accordance with and to the
fullest extent permitted by Delaware law.
<PAGE>
The Company has also entered into agreements to indemnify its directors and
certain of its officers, in addition to the indemnification provided for in the
Company's Restated Certificate of Incorporation and By-laws. These agreements,
among other things, will indemnify the Company's directors and officers for all
direct and indirect expenses and costs (including, without limitation, all
reasonable attorneys' fees and related disbursements, other out-of-pocket costs
and reasonable compensation for time spent by such persons for which they are
not otherwise compensated by the Company or any third person) and liabilities of
any type whatever (including, but not limited to, judgments, fines and
settlement fees) actually and reasonably incurred by such person in connection
with either the investigation, defense, settlement or appeal of any threatened,
pending or completed action, suit or other proceeding, including any action by
or in the right of the corporation, arising out of such person's services as a
director, officer, employee or other agent of the Company, any subsidiary of the
Company or any other company or enterprise to which the person provides services
at the request of the Company. The Company believes that these provisions and
agreements are necessary to attract and retain talented and experienced
directors and officers.
The Company maintains liability insurance for the benefit of its directors
and officers.
Item 7. Exemption from Registration Claimed
Not applicable.
Item 8. Exhibits
4.1 1996 Employee Stock Offering - Offering Memorandum
4.2 1996 Employee Stock Offering - Subscription Agreement
4.3 December 23, 1996 Common Stock Offering - Offering Memorandum
4.4 1995 Management Stock Offering - Offering Memorandum
4.5 1995 Management Stock Offering - Subscription Agreement
4.6 1995 Employee Stock Offering - Offering Memorandum
4.7 1995 Employee Stock Offering - Subscription Agreement
4.8 1993 Management Stock Offering - Offering Memorandum
4.9 1993 Management Stock Offering - Subscription Agreement
4.10 1992 Stock Offering - Subscription Agreement
4.11 Subscription Agreement between Hanover Compressor Company and Donald M.
DeVille - Offering Memorandum
4.12 Subscription Agreement between Hanover Compressor Company and Donald M.
DeVille
<PAGE>
4.13 1997 Stock Purchase Plan
5.1 Opinion of Latham & Watkins, counsel to Hanover
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (included in the signature page to the Registration
Statement).
Item 9. Undertakings
a. The undersigned registrant Plan hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) 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 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 and 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 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) 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 (a)(1)(ii) and (a)(1)(iii) shall
not apply to information contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this
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.
<PAGE>
(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.
b. The undersigned registrant hereby undertakes that, for purposes 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 that is incorporated by reference in
this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
c. 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 Securities Act of 1933 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
Securities Act of 1933 and will be governed by the final adjudication of
such issue.
<PAGE>
SIGNATURES
The Registrant. Pursuant to the requirements of the Securities Act of
1933, as amended, the registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-8 and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Houston, Texas, on
March 10, 2000.
HANOVER COMPRESSOR COMPANY
/s/ MICHAEL J. McGHAN
By:________________________________,
Michael J. McGhan
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below, hereby constitutes and appoints Michael A. O'Connor, Michael J. McGhan,
Curtis Bedrich, William S. Goldberg, and Richard S. Meller, and each acting
alone, his true and lawful attorneys-in-fact and agents, with full power of
resubstitution and substitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments or supplements to this
Registration Statement and to file the same with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing necessary or appropriate to be done
with respect to this Registration Statement or any amendments or supplements
hereto in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in their
respective capacities with Hanover Compressor Company and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLES DATE
---------- ------ ----
<S> <C> <C>
/s/ MICHAEL J. MCGHAN
_______________________ President and Chief March 10, 2000
Michael J. McGhan Executive Officer
(Principal Executive
Officer)
/s/ CURTIS BEDRICH
_______________________ Chief Financial Officer March 10, 2000
Curtis Bedrich and Treasurer(Principal
Financial and Accounting
Officer)
/s/ TED COLLINS, JR.
_______________________ Director March 10, 2000
Ted Collins, Jr.
/s/ ROBERT R. FURGASON
_______________________ Director March 10, 2000
Robert R. Furgason
/s/ WILLIAM S. GOLDBERG
_______________________ Director March 10, 2000
William S. Goldberg
/s/ MELVYN N. KLEIN
_______________________ Director March 10, 2000
Melvyn N. Klein
/s/ MICHAEL A. O'CONNOR
_______________________ Director March 10, 2000
Michael A. O'Connor
/s/ ALVIN V. SHOEMAKER
_______________________ Director March 10, 2000
Alvin V. Shoemaker
</TABLE>
<PAGE>
HANOVER COMPRESSOR COMPANY
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------------ ------------------------------------------------------------- -------------
<C> <S> <C>
4.1 1996 Employee Stock Offering - Offering Memorandum
4.2 1996 Employee Stock Offering - Subscription Agreement
4.3 December 23, 1996 Common Stock Offering - Offering Memorandum
4.4 1995 Management Stock Offering - Offering Memorandum
4.5 1995 Management Stock Offering - Subscription Agreement
4.6 1995 Employee Stock Offering - Offering Memorandum
4.7 1995 Employee Stock Offering - Subscription Agreement
4.8 1993 Management Stock Offering - Offering Memorandum
4.9 1993 Management Stock Offering - Subscription Agreement
4.10 1992 Stock Offering - Subscription Agreement
4.11 Subscription Agreement between Hanover Compressor Company
and Donald M. DeVille - Offering Memorandum
4.12 Subscription Agreement between Hanover Compressor Company
and Donald M. DeVille - Subscription Agreement
4.13 1997 Stock Purchase Plan
5.1 Opinion of Latham & Watkins
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (included in the signature page to the
Registration Statement).
</TABLE>
<PAGE>
EXHIBIT 4.1
================================================================================
Dated: March 21, 1996
CONFIDENTIAL OFFERING MEMORANDUM
HANOVER COMPRESSOR COMPANY
Up to 1,111 shares of Common Stock, $.001 par value
$1,800 Minimum Investment
================================================================================
All of the 1,111 shares (the "Shares") of common stock, $.001 par
value (the "Common Stock"), offered hereby are being sold by Hanover Compressor
Company, a Delaware corporation (the "Company"). The Shares are being offered
only to certain employees of the Company and its subsidiaries and are offered
together with options to purchase shares of Common Stock which will be granted
to investors. See "The Offering."
There has been no public market for the Common Stock, and no such
public market is anticipated to exist in the foreseeable future. See
"Determination of Offering Price" for a discussion of the factors considered in
determining the offering price.
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Common Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS OFFERING MEMORANDUM.
ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Fees and Proceeds to the
Offering Price (1) Commissions (2) Company (2)
- --------------------------------------------------------------------------------
Per Share.............. $ 1,800 $0.00 $ 1,800
- --------------------------------------------------------------------------------
Maximum Total.......... $1,999,800 $0.00 $1,999,800
================================================================================
(1) Payable in cash upon subscription (except for shares to be purchased with
proceeds of loans made by the Company). The minimum purchase per investor
is one Share (for a total of $1,800), not including Shares purchased with
the proceeds of four year loans to be made by the Company, and the maximum
aggregate purchase by all investors is 1,111 Shares (for a total of
$1,999,800), including Shares purchased with the proceeds of four year
loans to be made by the Company. See "The Offering."
(2) The Shares are being offered directly by the Company which will pay no
commissions but will utilize a portion of the proceeds to pay legal,
accounting and other expenses of the offering estimated to be $25,000.
THIS OFFERING MEMORANDUM CONSTITUTES AN OFFER ONLY IF A NAME APPEARS IN THE
SPACE BELOW MARKED "NAME OF OFFEREE" AND CONSTITUTES AN OFFER ONLY TO SUCH NAMED
OFFEREE.
Name of Offeree: Memorandum Number:
THESE SECURITIES INVOLVE A SIGNIFICANT DEGREE OF RISK
<PAGE>
______________________________
THIS MEMORANDUM IS SUBMITTED IN CONNECTION WITH THE OFFERING OF THESE
SECURITIES PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), REGULATION D AND/OR SECTION 701 PROMULGATED UNDER THE
SECURITIES ACT AND PURSUANT TO AVAILABLE EXEMPTIONS UNDER STATE SECURITIES LAWS,
AND MAY NOT BE REPRODUCED OR USED FOR ANY OTHER PURPOSE. ANY ACTION CONTRARY TO
THESE RESTRICTIONS MAY INVOLVE A VIOLATION OF CERTAIN FEDERAL OR STATE
SECURITIES LAWS.
______________________________
THE COMPANY HAS AGREED TO MAKE AVAILABLE, PRIOR TO THE CONSUMMATION OF
THE TRANSACTIONS CONTEMPLATED HEREIN, TO EACH OFFEREE OF COMMON STOCK OR HIS
REPRESENTATIVE(S) OR BOTH, THE OPPORTUNITY TO ASK QUESTIONS OF, AND RECEIVE
ANSWERS FROM IT OR ANY PERSON ACTING ON ITS BEHALF CONCERNING THE TERMS AND
CONDITIONS OF THIS OFFERING, AND TO OBTAIN ANY ADDITIONAL INFORMATION, TO THE
EXTENT IT POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE
EFFORT OR EXPENSE, NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION SET FORTH
HEREIN.
______________________________
PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS
MEMORANDUM OR ANY PRIOR OR SUBSEQUENT COMMUNICATION FROM THE COMPANY, ITS
AFFILIATES, DIRECTORS, OFFICERS AND EMPLOYEES OR ANY PROFESSIONAL ASSOCIATED
WITH THIS OFFERING AS LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD CONSULT HIS OWN
PERSONAL COUNSEL, ACCOUNTANT AND OTHER ADVISERS AS TO LEGAL, TAX, ECONOMIC AND
RELATED MATTERS CONCERNING THE INVESTMENT DESCRIBED HEREIN AND ITS SUITABILITY
FOR HIM.
______________________________
NO DISTRIBUTION OF THIS MEMORANDUM IN WHOLE OR IN PART, OR THE
DISCLOSURE OF ANY OF ITS CONTENTS, IS PERMITTED UNLESS AUTHORIZED. EXCEPT FOR
INFORMATION CONTAINED HEREIN OR AUTHORIZED BY THE COMPANY, NO OFFERING
LITERATURE OR ADVERTISING IN WHATEVER FORM SHALL BE EMPLOYED IN THE OFFERING OF
THE SHARES. NO PERSON HAS BEEN AUTHORIZED TO MAKE REPRESENTATIONS, OR GIVE ANY
INFORMATION, WITH RESPECT TO THE SHARES, EXCEPT THE INFORMATION CONTAINED HEREIN
AND IN THE SUMMARY OF THE OFFERING PREPARED BY THE COMPANY.
-ii-
<PAGE>
______________________________
INVESTMENT IN THE COMMON STOCK IS SUITABLE ONLY FOR INVESTORS WHO MEET
THE SUITABILITY STANDARDS DESCRIBED UNDER "THE OFFERING -- SUITABILITY."
______________________________
THE COMMON STOCK OFFERED HEREBY MAY NOT BE TRANSFERRED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM REGISTRATION.
______________________________
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANYONE
IN ANY STATE OR IN ANY OTHER JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION
IS NOT AUTHORIZED.
______________________________
THE COMPANY WILL NOT BE REQUIRED TO DELIVER AN ANNUAL REPORT TO
STOCKHOLDERS PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
HOWEVER, THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS ANNUALLY WITH A COPY OF
THE COMPANY'S AUDITED FINANCIAL STATEMENTS.
______________________________
FOR LOUISIANA RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR THE
LOUISIANA SECURITIES LAWS. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE SOLD OR TRANSFERRED FOR VALUE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
OF THEM UNDER THE SECURITIES ACT AND/OR THE LOUISIANA SECURITIES LAWS OR AN
OPINION OF COUNSEL TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
SUCH ACT OR LAWS.
______________________________
FOR TEXAS RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE TEXAS SECURITIES ACT, AS
AMENDED (THE "TEXAS ACT"), AND ARE OFFERED AND SOLD PURSUANT TO AN EXEMPTION
THEREFROM. THE SHARES CANNOT BE
-iii-
<PAGE>
SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER THE TEXAS ACT,
OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE TEXAS ACT OR IN A
TRANSACTION WHICH IS OTHERWISE IN COMPLIANCE WITH THE TEXAS ACT.
______________________________
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
SECURITIES ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.
-iv-
<PAGE>
CONFIDENTIAL OFFERING MEMORANDUM
HANOVER COMPRESSOR COMPANY
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF THE OFFERING................................................................ 1
THE COMPANY............................................................................ 1
THE OFFERING........................................................................... 1
FEDERAL INCOME TAX CONSEQUENCES........................................................ 10
RISK FACTORS........................................................................... 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. 13
DETERMINATION OF OFFERING PRICE........................................................ 21
PLAN OF OFFERING....................................................................... 21
USE OF PROCEEDS........................................................................ 23
DILUTION............................................................................... 23
CAPITALIZATION......................................................................... 24
DIVIDEND POLICY........................................................................ 25
SELECTED FINANCIAL INFORMATION......................................................... 25
BUSINESS............................................................................... 30
MANAGEMENT............................................................................. 42
PRINCIPAL STOCKHOLDERS................................................................. 51
DESCRIPTION OF CERTAIN INDEBTEDNESS.................................................... 57
DESCRIPTION OF CAPITAL STOCK........................................................... 58
ADDITIONAL INFORMATION................................................................. 62
</TABLE>
-v-
<PAGE>
EXHIBITS:
- ---------
Exhibit A - Subscription Agreement
Exhibit B - Stockholders' Agreement
Exhibit C - Form of Loan Agreement
Exhibit D - Form of Four Year Note
Exhibit E - Form of Pledge Agreement
Exhibit F - Form of 1996 Employee Stock Option Plan
Exhibit G - Form of Option Agreement under 1996 Employee Stock Option Plan
Exhibit H - Letter Agreement Relating to the Stockholders' Agreement
-vi-
<PAGE>
SUMMARY OF THE OFFERING
The following summary is qualified in its entirety by the more
detailed information appearing elsewhere in this Offering Memorandum and the
Exhibits attached hereto. Prospective investors of the Shares should carefully
consider the factors set forth under "Risk Factors."
The Company
The Company was organized in October 1990 for the purpose of
acquiring, manufacturing, selling, leasing, maintaining and refurbishing
compressors utilized by the natural gas industry. For a more detailed
description of the Company's business, see "Business."
The Offering
Shares of Common Stock offered: 1,111 including Shares to be acquired
for cash out of the subscribing
offeree's own funds or by delivery of a
four year note, but not including shares
which may be acquired pursuant to
options granted under the Employee
Option Plan. See "The Offering."
Shares of Common Stock outstanding 129,525.53 not including (i) shares
after the offering: issuable upon exercise of options and
(ii) 198.40 shares of Common Stock which
are held by the Company as treasury
shares.
Use of Proceeds: All of the net proceeds of this offering
will be used for general corporate
purposes, including working capital.
The Company reserves the right to withdraw this offering and return
all subscriptions or modify this offering at any time during the term of this
offering. Subscriptions for Shares may be accepted or rejected by the Company
in its sole discretion. All cash received by the Company in respect of
subscriptions for the Shares (the "Funds") shall be promptly deposited in an
interest bearing, segregated account and such Funds may be invested in treasury
bills or other cash equivalents, as determined in the sole and absolute
discretion of the Company. If acceptable subscriptions for a minimum aggregate
of one Share is received by the Company on or before March 28, 1996 or such
later date as the Company in its sole discretion may determine without consent
of or notice to the offerees, but in no event later than May 31, 1996 (the
"Termination Date"), all subscriptions will be transferred from the segregated
bank account to the Company, together with all interest, if any, earned thereon.
The minimum subscription per subscribing offeree is one Share (not including any
Shares to be acquired pursuant to a four year loan made by the Company) for an
aggregate of $1,800; however, the Company, in its sole discretion, may accept
subscriptions for a lesser number of Shares, subject to applicable
-1-
<PAGE>
securities laws. In the event all conditions have not been satisfied in full
prior to the Termination Date or the Company withdraws this offering, this
offering will be terminated and all Funds will be returned to subscribing
offerees with a pro rata share of interest earned thereon, if any, calculated on
the basis of the amount of Funds invested by each subscribing offeree and the
length of time interest on such Funds was earned. See "Plan of Offering."
Summary Financial Information
See "Selected Financial Information" for a summary of certain relevant
financial information.
Risk Factors
For a discussion of certain factors that should be considered in
evaluating an investment in the Shares, including, among others, (i) the
Company's limited operating history, (ii) the short terms of compressor leases
and the possible inability of the Company to re-lease its compressors, (iii)
competition, (iv) factors regarding the natural gas compressor leasing industry,
(v) potential liability and insurance, (vi) environmental liability risks, (vii)
governmental regulation, (viii) restrictions imposed by the terms of the
Company's indebtedness and the effect of a default thereunder, (ix) dependence
upon internally generated funds (x) limited preemptive rights, (xi) no public
market for the Common Stock and restrictions on transferability, (xii)
dividends, (xiii) control by principal stockholders, (xiv) capital demands due
to recent expansion activity, (xv) dilution and (xvi) Federal income task risks,
see "Risk Factors."
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THE COMPANY
Hanover Compressor Company is a corporation organized under the laws
of the State of Delaware. The principal executive office of the Company is
located at 12001 North Houston Rosslyn, Houston, Texas 77086, and the Company's
telephone number is (713) 447-8787.
THE OFFERING
This offering is made only to certain employees of the Company and its
subsidiaries for the purpose of providing such persons with the opportunity to
obtain an equity interest in the Company. The Company reserves the right to
withdraw this offering and return all subscriptions or make non-material
modifications to the offering at any time during the term of the offering. All
Funds shall be promptly deposited in an interest bearing, segregated account and
such Funds may be invested in treasury bills or other cash equivalents, as
determined in the sole and absolute discretion of the Company. Funds deposited
in the segregated account may not be withdrawn by subscribers unless the
offering terminates as described herein. The deposit of Funds in such account
does not constitute acceptance of all or any portion of any offeree's
subscription by the Company.
General
Subject to adjustment for over-subscription, each offeree may
subscribe to purchase for cash as many of the Shares as such offeree may desire.
Upon such subscription, the Company will, at the request and option of each
subscribing offeree, loan (the "Four Year Loan") such subscribing offeree
sufficient funds, on a full recourse and secured basis, to purchase two
additional Shares (all such Shares hereinafter the "Loan Shares") for each Share
subscribed for hereunder for cash (the "Cash Shares"). See "The Four Year
Loan." For each Share acquired by a subscribing offeree hereunder, the Company
will grant such subscribing offeree an option to purchase one-third of one share
of Common Stock pursuant to the terms of the 1996 Employee Stock Option Plan,
substantially in the form attached hereto as Exhibit F (the "Employee Option
Plan"). The exercise price for such options will be $1,800 per share (subject
to adjustment for stock splits, stock dividends and other similar events as
described in the Employee Option Plan). See "Options -- Employee Option Plan."
Offerees who desire to subscribe for Shares will be required to (i)
become parties to the Amended and Restated Stockholders' Agreement of Hanover
Compressor Company attached hereto as Exhibit B (the "Stockholders' Agreement")
and (ii) execute a letter agreement regarding the application of Section 3.5(d)
of the Stockholders' Agreement (the "Letter Agreement"). The Stockholders'
Agreement restricts the sale of Common Stock held by the parties thereto and
provides for, among other things, (i) the right of Investors (as hereinafter
defined) to participate in a sale by GKH Partners, L.P., a Delaware limited
partnership ("Partners"), and GKH Investments, L.P., a Delaware limited
partnership (together with Partners,
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"GKH"), of at least 50% of the Common Stock owned by GKH, (ii) the right of GKH
to require all Investors to sell their stock in certain transactions for the
same consideration to be received by GKH and (iii) the right of the Company or
its affiliates to purchase all of an Investor's Common Stock upon the
termination of such Investor's employment with the Company and its subsidiaries
and affiliates. The purchase price for such stock varies depending on the
circumstances and, in cases where an Investor is terminated for cause or
voluntarily terminates his employment without good reason (each as more fully
defined in the Stockholders' Agreement), such purchase price may be
substantially below the fair market value of such Common Stock. See
"Stockholders' Agreement."
The maximum aggregate number of shares which may be subscribed for
pursuant to this offering is 1,111, which number does not include any shares of
Common Stock to be issued upon exercise of options granted under the Employee
Option Plan. If the offerees subscribe for more than such number of shares of
Common Stock, each offeree's subscription will be reduced proportionately based
on the relationship between the number of shares subscribed for by such offeree
and the aggregate number of shares subscribed for by all offerees.
For information regarding the method of subscribing for Shares, see
"Plan of Offering" and the Subscription Agreement attached hereto as Exhibit A
(the "Subscription Agreement").
Suitability
Investment in the Shares offered hereby involves a significant degree
of risk. See "Risk Factors." This offering is a private offering made only by
delivery of a copy of this Offering Memorandum to the employee of the Company or
its subsidiaries whose name appears hereon. The Shares have not been registered
under the Securities Act, or any applicable state securities laws. The Shares
are being offered pursuant to one or more exemptions from the registration
requirements of the Securities Act, including the exemption afforded by Section
4(2) thereof, Regulation D and/or Section 701 promulgated thereunder, and
pursuant to available exemptions under state securities laws, only to certain
employees for investment only. Each person who subscribes for Shares and whose
subscription is accepted by the Company (each an "Investor," collectively, the
"Investors") will be required to represent that he is acquiring the Shares for
his own account, for investment, and without any intention of making a
distribution or resale thereof, either in whole or in part. The Shares may not
be resold or transferred except in accordance with the provisions of the
Securities Act, the rules and regulations thereunder, any applicable state
securities laws and the terms and conditions of the Stockholders' Agreement. As
a result of the foregoing, investment in the Shares is suitable only for persons
of adequate financial means apart from their investment in the Shares, and who
have no need for liquidity with respect to such investment.
Offerees who desire to subscribe for Shares should read and discuss
with their advisors this Offering Memorandum, the Subscription Agreement, the
Stockholders' Agreement,
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the Letter Agreement, the Loan Agreement (as defined below), the Four Year Note
(as defined below), the Pledge Agreement (as defined below), the Employee Option
Plan and the other documents relative to the foregoing regarding the
appropriateness of an investment in the Shares. The desirability of an
investment in the Common Stock depends upon a number of factors including, among
others, (i) the factors set forth under the caption "Risk Factors," (ii) the
nature of the Company's business, (iii) the possibility of a decline in value of
the Common Stock, (iv) the various restrictions on transferability of the Common
Stock, including those contained in the Stockholders' Agreement, and the present
essential illiquidity of the investment, (v) the desirability to the offeree of
a long-term investment, (vi) the likelihood that the Company will not pay
dividends on the Common Stock in the foreseeable future and the likelihood of
restrictions imposed on the Company's ability to pay dividends under the terms
of the agreements governing the Company's senior secured indebtedness and the
Series A and Series B Preferred Stock (as defined below), (vii) the control of
the Company by its principal stockholders, (viii) the relationship between such
offeree's investment (including the investment pursuant to the Four Year Loan)
and such offeree's net worth, (ix) the employment goals of the offeree and the
right of the Company to purchase such offeree's Common Stock upon the
termination of his employment with the Company, in some instances at a purchase
price equal to or less than the offeree's cost thereof, even if such cost is
less than the fair market value of the Common Stock, and (x) other relevant
personal circumstances of each offeree.
The Four Year Loan
Each Investor may, but is not required to, request from the Company a
Four Year Loan to purchase the Loan Shares. Inasmuch as the Four Year Loan will
be made on a full recourse and secured basis, each Investor should consider
carefully the additional risk that he or she will undertake by obtaining the
Four Year Loan to purchase Shares.
The Four Year Loan will bear interest at the prime rate as announced
from time to time by Chemical Bank ("Prime Rate"), will be made pursuant to a
loan agreement substantially in the form of Exhibit C hereto (the "Loan
Agreement"), evidenced by a secured promissory note substantially in the form of
Exhibit D hereto (the "Four Year Note"). Any amount of principal and/or accrued
interest on the Four Year Note which is not paid when due will bear interest at
the Prime Rate plus 2%, except that upon the failure to make the required
payments following (i) the sale of Common Stock or receipt by the Investor of
dividends on Common Stock, (ii) termination for Cause (as defined below) and
(iii) voluntary termination without Good Reason (as defined below), the
outstanding principal and accrued and unpaid interest will bear interest at 15%
per annum, compounded monthly, or the highest rate of interest allowable under
applicable law, whichever is less. Interest on the Four Year Note will be
payable in cash annually on December 31 (each an "Interest Payment Date") to the
extent of 66.7% of the accrued interest to such date (the "Minimum Interest
Payment"), and all accrued interest which is not paid as of an Interest Payment
Date will be automatically added to the principal amount of the Four Year Note.
Each Minimum Interest Payment must be paid to the extent of bonus payments, if
any, less an allowance equal to 33.3% of such bonus payment for federal and
state income tax (the "Net
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Bonus"), paid to the Investor by the Company on or before each Interest Payment
Date (including amounts paid in such calendar year which relate to a previous
calendar year and were not taken into consideration in such prior calendar
year), provided that nothing herein or in the Loan Agreement or the Four Year
Note shall create any obligation on the part of the Company to pay any bonus. In
the event the Net Bonus is insufficient to pay the Minimum Interest Payment, the
Investor shall be required to pay the difference between such Net Bonus and the
Minimum Interest Payment. The Company will have the right to withhold from the
Investor all or any portion of a Net Bonus payable by the Investor in respect of
interest under the Four Year Loan, which amounts will be deemed to have been
paid to the Investor and subsequently repaid by the Investor to the Company. All
principal and accrued and unpaid interest will be due upon maturity, which will
be 48 months from the date of the Loan Agreement, provided that such date may be
accelerated upon the occurrence of an Event of Default (as defined below) or
under other circumstances more fully described in the Loan Agreement and the
Four Year Note.
The Four Year Note will be secured by a pledge of (i) all of the
shares and rights to acquire shares of Common Stock owned by the Investor as of
the date of the Four Year Loan, or which are acquired by the Investor subsequent
to the date of the Four Year Loan and (ii) all proceeds received by an Investor
thereon, including dividends and additional shares received in stock
distributions, all as more fully set forth in the pledge agreement attached
hereto as Exhibit E (the "Pledge Agreement"). The Four Year Note will provide
for mandatory prepayment upon and to the extent of dividends or other
distributions paid to the Investor on the Common Stock and proceeds from the
sale of the Common Stock, and upon termination of the Investor's employment by
the Investor without Good Reason (as defined below) or by the Company for Cause
(as defined below).
The Four Year Note, the Loan Agreement, the Pledge Agreement and any
other documents that are executed in connection therewith (collectively, the
"Loan Documents") will be assignable by the Company to any of its affiliates,
including GKH, or to any third party financial institution or commercial lender
to which the Company is or becomes indebted. The Loan Documents cannot be
assigned by an Investor without the Company's prior written consent.
"Cause," when capitalized and with reference to the termination of the
Investor's employment with the Company, means (i) the commission of an act of
fraud, embezzlement or willful breach of a fiduciary duty to the Company
(including the unauthorized disclosure of confidential or proprietary material
information of the Company), (ii) a conviction (or a plea of nolo contendere in
lieu thereof) for a felony or a crime involving fraud, dishonesty or moral
turpitude, (iii) willful misconduct as an employee of the Company, (iv) the
willful failure to render services to the Company in accordance with such
Investor's employment, which failure amounts to a material neglect of his duties
to the Company or (v) substantial dependence, as determined by the Board of
Directors of the Company (the "Board"), on alcohol or any controlled substance.
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"Good Reason," when capitalized, means, with reference to the
voluntary termination of the Investor's employment with the Company by the
Investor, where such termination (i) promptly follows a material reduction of
such Investor's duties and responsibilities or a permanent change in such
Investor's duties and responsibilities which are materially inconsistent with
the type of duties and responsibilities of such Investor then in effect, (ii)
promptly follows a material reduction in annual base salary (without regard to
bonus compensation, if any), (iii) promptly follows a material reduction in such
Investor's employee benefits (without regard to bonus compensation, if any) if
such reduction results in such Investor receiving benefits which are, in the
aggregate, materially less than the benefits received by other comparable
employees of the Company generally or (iv) the Board otherwise determines that a
voluntary termination by such Investor is for "Good Reason" under the
circumstances then prevailing.
An "Event of Default", when capitalized and with reference to the Four
Year Loan includes, without limitation, (i) the failure to pay principal or
interest when due, which failure has continued for 10 days after written notice
from the Company, (ii) any representation or warranty contained in the Loan
Documents or the Subscription Agreement being incorrect in any material respect
on or as of the date made or deemed made, (iii) the default with respect to any
covenant contained in the Loan Documents, which default is not curable by the
Investor or, if curable, has continued uncured for 10 days after written notice
from the Company, (iv) the failure of the Investor to make any payment when due
under, or other default of the Investor which permits acceleration of, any other
material indebtedness of the Investor and (v) the occurrence of certain
bankruptcy-related events with respect to the Investor which continue for 60
days or are otherwise consented to by the Investor.
Options
Employee Option Plan
For each share of Common Stock acquired by an Investor hereunder, the
Company will grant such Investor an option to purchase one-third of one share of
Common Stock (subject to adjustment for stock splits, stock dividends and other
similar events as described in the Employee Option Plan) at a purchase price of
$1,800 per share. Such options will vest ratably over a five year period
beginning on the first anniversary of the Employee Option Plan (subject to (i)
acceleration upon termination of employment due to death or permanent disability
and upon the occurrence of a Capital Event (as defined in the Employee Option
Plan) and (ii) forfeiture upon termination for Cause) and be governed by the
terms of the Employee Option Plan and individual option agreements (the
"Employee Option Agreements") between the Company and each Investor, forms of
which are attached hereto as Exhibits F and G, respectively. The term of the
options will be 10 years, subject to a limited exercise period for vested
options in the event of the termination of employment of the Investor (other
than for Cause). An option may not be exercised during any period in which the
Investor is in default under the terms of any loan or other obligation that the
Investor may have to the Company. The
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shares of Common Stock acquired upon exercise of the options will be subject to
the terms of the Stockholders' Agreement, as amended by the Letter Agreement.
Options may not be transferred other than by will or the laws of descent and
distribution, and during the lifetime of an Investor, such options may be
exercised only by the Investor. The options granted under the Employee Option
Plan are nonstatutory options and are not intended to qualify as "incentive
stock options" under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and each Investor should consult his tax advisors for
information regarding the tax treatment of such options.
Pursuant to the Employee Option Agreements, each Investor will agree
that he will not during the term of such agreement and for a period of one year
thereafter, (i) compete with any business of the Company or its subsidiaries or
affiliates and (ii) without the Company's express written consent, disclose to
persons outside the Company confidential information concerning the Company or
any of its subsidiaries or affiliates.
Stockholders' Agreement and Letter Agreement
As a condition to the acceptance by the Company of a subscribing
offeree's subscription for Shares, such subscribing offeree is required to
become a party to the Stockholders' Agreement and to execute the Letter
Agreement. The Letter Agreement provides that certain obligations of the
Company which arise upon an Investor's voluntary termination of employment from
the Company without Good Reason are determined by reference to the date of the
Subscription Agreement rather than August 7, 1995, the date of the Stockholders'
Agreement. The summary of the Stockholders' Agreement set forth below is not
intended to be a complete recitation of the provisions thereof, and each offeree
should read and understand all the provisions of the Stockholders' Agreement and
the Letter Agreement before making a determination whether to invest in the
Shares.
Restrictions on Transfer
The Stockholders' Agreement contains substantial restrictions on the
disposition of an Investor's Common Stock. In general, an Investor will be
permitted to transfer some or all shares of his Common Stock to affiliates,
including certain relatives and controlled entities, provided each affiliate
agrees to be bound by the terms of the Stockholders' Agreement. An Investor
will also be permitted to transfer all (but not less than all) of his shares of
Common Stock to a bona fide third party purchaser if such purchaser agrees to be
bound by the terms of the Stockholders' Agreement, but only after such Common
Stock is offered first to the Company and then to GKH on the same terms as
offered to the bona fide third party purchaser. The Investor will be required
to comply with certain mechanical provisions regarding such transfer, including
(i) timely notice to the Company and GKH of any proposed transfer and (ii)
consummation of any transfer within a specified period.
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Rights to Compel Disposition
GKH will have the right to compel each Investor to dispose of all of
his shares of Common Stock and make certain representations with respect to his
ownership of such Common Stock in the event GKH seeks to sell all, but not less
than all, of its Common Stock. If GKH exercises its right to compel the
disposition of the Investors' Common Stock, the consideration for such Common
Stock will be the same per share consideration on the same terms to be received
by GKH for its shares of Common Stock.
Rights of Inclusion
Each Investor will have the right to sell his Common Stock on the same
terms as GKH in a transaction pursuant to which GKH sells at least 50% of the
Common Stock of the Company then owned by GKH. Investors who desire to
participate in such sale will be required to deliver notice on a timely basis
and comply with other mechanical provisions in connection with such transfer.
Preemptive Rights
Although Delaware law does not generally provide for preemptive
rights, in the event the Company offers an existing stockholder who is party to
the Stockholders' Agreement the opportunity to purchase additional shares of
Common Stock, the other parties to the Stockholders' Agreement will have the
right to acquire their respective pro rata share of such Common Stock on the
same terms and conditions offered to such stockholder, except that such right
shall not apply to (i) shares issuable in connection with a merger, acquisition
or similar transaction, (ii) shares issuable upon the exercise of any options,
warrants or other convertible securities, (iii) shares offered by the Company to
employees and directors of the Company or (iv) shares issuable in connection
with preemptive rights granted to other stockholders of the Company in
connection with a merger, acquisition or similar transaction, or in connection
with the issuance by the Company of its Series B Preferred Stock.
Transfers upon Termination
The Company will have the right to purchase all of the Common Stock of
an Investor in the event such Investor ceases to be an employee of the Company
or any of its subsidiaries or affiliates. The purchase price for such Common
Stock will be (i) in the event such Investor's employment is terminated for
Cause, the lower of the Investor's cost for his Common Stock on a share by share
basis and 80% of fair market value thereof, (ii) in the event such employment is
voluntarily terminated without Good Reason, the lower of cost and fair market
value and (iii) in the event such Investor's employment is terminated by death,
retirement, permanent disability, without Cause or voluntarily with Good Reason,
the fair market value of such Common Stock. The purchase price for such Common
Stock will be payable (a) in cash (and/or by the delivery of a term note with
the shortest term permissible if required by any
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agreement to which the Company is then subject) if such Investor's employment is
terminated with Good Reason or upon death, retirement, permanent disability or
without Cause, or voluntarily without Good Reason more than three years after
the date of the Subscription Agreement, and (b) by delivery of a seven year term
note if such employment is terminated for Cause, or voluntarily without Good
Reason on or prior to the third anniversary of the Subscription Agreement. Any
note delivered in connection with the foregoing will bear interest, payable
annually, at the Prime Rate.
Cost, fair market value, retirement, permanent disability and
voluntary termination are each defined in the Stockholders' Agreement.
FEDERAL INCOME TAX CONSEQUENCES
THE DISCUSSION SET FORTH BELOW PROVIDES GENERAL INFORMATION AS TO
CERTAIN ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH SUBSCRIPTION
FOR THE SHARES AND OPTIONS HEREUNDER. EACH INVESTOR SHOULD CONSULT HIS TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF HIS SUBSCRIPTION, INCLUDING THE
APPLICATION OF POSSIBLE STATE AND LOCAL TAX LAWS.
Restricted Stock
Code Section 83 governs transfers of property to persons (whether
employees or independent contractors) in exchange for services. Under that
section, a person receiving property as compensation for services must report
(as compensation income) the excess of the fair market value of the property
received over the amount paid in exchange therefor (such excess referred to
herein as "In-Kind Compensation").
In determining when a recipient of In-Kind Compensation must report
income attributable thereto, Code Section 83(a) provides that the value of such
In-Kind Compensation (without regard to any restriction other than a restriction
which by its terms will never lapse) is includible in the recipient's income at
the first time that the recipient's rights in the property are substantially
vested. For such purposes, property is considered to be substantially vested
when it is either (a) transferable or (b) not subject to a substantial risk of
forfeiture. A substantial risk of forfeiture is generally considered to exist
when the recipient's rights to the property are predicated upon the future
performance of services or upon the occurrence of a condition related to the
transfer. Further, an interest in restricted property is transferable only if
the subsequent transferee's rights in the property are not subject to a
substantial risk of forfeiture.
Alternatively, Code Section 83(b) provides each recipient of In-Kind
Compensation the ability to include such amounts in income in the year in which
he receives them, rather than the year in which the In-Kind Compensation becomes
substantially vested. Under that section, a taxpayer may elect, within 30 days
of the transfer of property, to include in
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income the value of any In-Kind Compensation (as determined without regard to
the restrictions thereon). Taxpayers who include In-Kind Compensation in income
under Code Section 83(b) but later forfeit the property received are denied a
deduction for any portion of the In-Kind Compensation reported by the taxpayer.
Once includible in the income of the recipient, In-Kind Compensation
is considered payment of wages subject to withholding of income tax and deposits
pursuant to the Federal Insurance Contributions Act (FICA). Upon the subsequent
sale of the transferred stock or other property, the taxpayer will recognize
income to the extent that the amounts realized on sale exceed the sum of (a) the
amount includible in his income under Code Section 83 and (b) the amount paid
for the property.
Offerees who desire to subscribe for Shares will be required to become
parties to the Stockholders' Agreement. Pursuant to the Stockholders'
Agreement, each Investor may be required, in the event his employment terminates
for Cause or without Good Reason, to sell his Shares back to the Company for an
amount equal to the lower of (a) cost or (b) a percentage (either 100% or 80%)
of fair market value. Any transferee of an Investor may be required to sell the
transferred Shares to the Company upon similar terms in the event that the
Investor's employment is terminated for Cause or without Good Reason. Such
restrictions lapse with respect to any Investor on the earliest to occur of (a)
the Investor's death, retirement, permanent disability, or involuntary
termination of employment without Cause, (b) the Investor's voluntary
termination of employment with Good Reason, or (c) the failure of the Company to
exercise its rights to purchase the Investor's Shares in a timely fashion
following the termination of his employment for Cause or without Good Reason
(each such event referred to as a "Lapse Event"). See "The Offering --
Stockholders' Agreement."
The Company believes that, in light of various provisions of the
Stockholders' Agreement, each Investor subscribing for Shares hereunder will
acquire such Shares subject to a substantial risk of forfeiture. Further, the
Company believes that the Shares subscribed for hereunder are not transferable
within the meaning of Code Section 83. As such, to the extent that the fair
market value of any Share exceeds the amount paid therefor, no Investor should
be required to include in income the In-Kind Compensation attributable thereto
until the restrictions lapse at the occurrence of a Lapse Event. Nevertheless,
any Investor may elect, under Code Section 83(b), to include the value of the
In-Kind Compensation in the year in which he purchases Shares pursuant to this
Offering.
Stock Options
Taxpayers receiving compensatory, nonstatutory stock options (i.e.,
options other than "qualified options" taxable under Code Section 421) generally
do not recognize income as a result of the grant of such options. Unless the
granted options have a readily ascertainable fair market value within the
meaning of Code Section 83 as of the date of grant, the taxpayer realizes income
only on the date he exercises or disposes of such options. At that time, he
realizes
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compensation income equal to the difference between the market value of the
stock and the price paid to acquire and exercise the option. However, where the
optionee's rights in the property transferred pursuant to the exercise of such
option are not substantially vested (within the meaning of Code Section 83), the
optionee does not realize income until the first time that his rights in that
property become substantially vested. See "-- Restricted Stock."
When an option is not regularly traded on an established market, it
does not have a readily ascertainable market value unless its value can be
determined with "reasonable accuracy." For such purposes, the value of an
option cannot be determined with reasonable accuracy unless all of the following
conditions exist:
(i) The option is transferable;
(ii) The option is exercisable immediately in full;
(iii) The option is not subject to any restriction or condition which
has a significant effect upon its value; and
(iv) The value of the option privilege is readily ascertainable.
For each Share acquired by an Investor hereunder, the Company will
grant such Investor an option to purchase one-third of one share of Common Stock
(subject to certain adjustments) at a purchase price of $1,800 per share. Such
options will vest ratably over a five-year period commencing on the first
anniversary of the Employee Option Plan, will be nontransferable (except by will
or the laws of descent and distribution) and, during the life of the Investor,
may be exercised solely by the Investor. See "The Offering -- Options --
Employee Option Plan." Once exercised, the shares of Common Stock acquired
pursuant to such exercise will become subject to the Stockholders' Agreement, as
amended by the Letter Agreement, including its restrictions and repurchase
rights vested in the Company. The options will not be actively traded on an
established market as of the date the Company grants them.
The Company believes that, since the options are neither exercisable
immediately in full nor transferable (except at death), the value of options may
not be determined with reasonable accuracy. As the options should not have a
readily ascertainable market value within the meaning of Code Section 83, the
Company believes that they should not be compensation income to the optionee on
the date of grant (notwithstanding that their value may later become readily
ascertainable). Further, since the property acquired pursuant to the exercise
of such options (i.e., shares of Common Stock) will be subject to the
Stockholders' Agreement, the Company believes that an Investor exercising an
option granted hereunder will acquire property in which his rights are not
substantially vested within the meaning of Code Section 83. Accordingly, the
Company believes that an Investor should not have compensation income until the
date that the restrictions on the Common Stock acquired pursuant to such
exercise lapse (i.e., at the occurrence of a Lapse Event under the Stockholders'
Agreement). At that time, the
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Investor should recognize compensation income in an amount equal to the excess
of the market value of the stock as of such date over the price paid to exercise
and acquire the applicable option. Any Investor may, however, choose to
accelerate the recognition of income to the date he exercises an option provided
he makes the election under Code Section 83(b).
RISK FACTORS
Investors should consider the specific factors set forth below as well
as the other information set forth in this Offering Memorandum. The following
is not necessarily a comprehensive list of all of the possible risk factors
associated with an investment in the Common Stock.
Limited Operating History
The Company's products are well-established in the marketplace, and
the Company has experienced net profits in four of its five full fiscal years of
operation. However, there can be no assurance that the Company will remain
profitable in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Short Lease Terms; Possible Inability to Re-lease Compressors
The Company has historically leased its compressors under leases with
an average fixed term of approximately six months and which continue thereafter
on a month to month basis. Historically, lessees have renewed their leases on a
month to month basis for an average period of approximately 24 months. Based on
the average cost of new compressors and the average lease price, the Company
generally does not recoup its investment in the compressors until after its
receipt of at least 48 months of lease payments. Accordingly, the Company
assumes substantial risk of not recovering its entire investment in the
equipment it purchases. Although the Company has historically been successful
in re-leasing units in its inventory, there can be no assurance that the Company
will continue to be able to do so or that a substantial portion of its lessees
will not terminate their leases at approximately the same time, thereby causing
an adverse accumulation of unleased compressors in the Company's inventory. The
inability of the Company to lease a substantial portion of its compressors for
any reason would have a material adverse effect upon the Company's financial
condition and its results of operations. See "Business."
Competition
The natural gas compression industry and the oil and gas production
equipment business are highly competitive. The Company competes with several
large national and international companies which, like the Company, offer a wide
range of compressors and oil and gas production equipment for purchase or lease.
There can be no assurance that such competitors will not substantially increase
the resources devoted to the development and marketing of
-13-
<PAGE>
products competitive with those of the Company or that new competitors will not
enter the industry. See "Business -- Competition."
Natural Gas Compressor Industry Considerations
The Company's profitability is, in part, dependent upon the current
demand for natural gas. Natural gas demand, aided by competitive pricing and
interstate pipeline deregulation, has increased at a rate of approximately 2-3%
per year from 1986 through 1994. The Company's management estimates that demand
for gas compression has increased approximately 6-10% per year during this time
frame. This increase is a result of increased production from lower reservoir-
pressured areas and the increased amount of coal-seam and tight-gas drilling in
certain geographic areas.
Depressed natural gas prices tend to decrease efforts to discover and
develop new natural gas reserves domestically. This places greater reliance
upon older, developed reserves which requires additional compression to deliver
the remaining natural gas to market. A significant decline in the price of
natural gas could result in the widespread failure of independent producers and
increased pricing pressure and credit risk for compressor rental companies.
This would have a material adverse effect on the Company's financial condition
and results of operations. See "Business."
Potential Liability and Insurance
Natural gas operations are subject to certain risks, including
explosions, uncontrollable flows of gas or well fluids, fires, pollution and
other environmental risks. These risks could expose the Company to substantial
liability for injury and loss of life, property damage, pollution and other
environmental damages, and consequential damages, if such damages resulted from
an alleged compressor defect or from the Company's negligence in maintaining,
servicing or refurbishing its compressors.
Although the Company has obtained certain insurance, no assurance can
be given that such insurance is adequate to cover the Company's operations, will
be generally available in the future or, if available, that premiums will be
commercially justifiable. If the Company were to incur a substantial liability
and such damages were not covered by insurance or were in excess of policy
limits, or if the Company were to incur such liability at a time when it is no
longer able to obtain liability insurance, its financial condition could be
materially adversely affected. The Company, consistent with industry trends,
may find it difficult to obtain adequate insurance coverage against possible
liabilities that may be incurred in connection with the conduct of its business.
There can be no assurance that all possible types of liabilities that may be
incurred by the Company will be covered by its insurance or that the dollar
amount of such liabilities will not exceed the Company's policy limits. A
partially or completely uninsured claim, if successful and of sufficient
magnitude, could have a material adverse effect on the Company and its financial
condition.
-14-
<PAGE>
Environmental Liability Risks
In addition to liability which may arise as a result of an alleged
compressor defect or alleged Company negligence, if environmental damage is
found to have occurred as a result of the Company's operating activities, the
Company could incur substantial liability. In such event, the Company could be
liable for all costs of remediation, as well as certain other costs. Under the
Comprehensive Response, Compensation and Liability Act ("CERCLA"), the Company
may also be liable for all costs of remediation of any property of which it is
deemed to be the owner or operator. Various Preliminary Environmental (Phase I)
Site Assessments were conducted in 1990 and 1991 with respect to certain
properties owned or operated by the Company and its subsidiaries. Such
assessments identified potential sources of ground contamination. Although
remediation efforts have been undertaken by the previous owners, no assurances
can be given that such remediation efforts will be successful or that the
Company will not incur costs in remediating such contamination or discover
additional sources of enumerated contamination. In addition, pursuant to the
HPC Merger (as defined below), the Company acquired certain potential
environmental liabilities estimated at December 31, 1995 to be between $139,000
and $200,000. See "Business -- Company History" for a description of the HPC
Merger.
As a result of the Company's acquisition of Astra Resources
Compression, Inc. ("Astra"), the Company, through a wholly owned subsidiary,
indirectly owns a 17 acre parcel of land which includes a lagoon at Astra's East
Bernard, Texas facility, formerly the site of a solid waste landfill. The
Company has been indemnified by Astra's former parent for any environmental
liability associated with the landfill in excess of $250,000 and has the right
to "put" the property to Astra's former parent for $150,000 under certain
circumstances.
In June 1993, a Phase I and Phase II Environmental Assessment was
conducted on the Company's 20 acre headquarters/fabrication facility in Houston,
which Assessment indicated that such site has minimal apparent risk with respect
to environmental liability. In addition, the company maintains a professionally
designed Spill Prevention Control and Countermeasure Plan (the "SPCC Plan") with
respect to its Fort Smith, Arkansas maintenance facility, which is designed to
prevent oil spills and waste releases and to describe protocols for immediate
coordination of necessary activities to minimize any harmful effects should a
spill or other release occur. Although the Fort Smith facility does not
routinely generate hazardous waste, the SPCC Plan includes waste release
measures given that during an oil spill event, certain characteristic hazardous
waste from spill residue may be generated. Moreover, the Company is currently
implementing a Site Remediation and Clean Up Proposal regarding real property
located in Columbus, Texas with respect to which the Company acquired a lease
and purchase option pursuant to the February 1995 acquisition by the Company of
substantially all of the assets of Smith Industries, Incorporated. See
"Business -- Company History."
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<PAGE>
Governmental Regulation
The Company is subject to various federal, state and local laws and
regulatory standards in the areas of safety, health and the environment,
including regulations regarding emission controls. The Company believes that it
is in substantial compliance with such laws and regulations and that the phasing
in of emission controls and other known standards at the rate currently
contemplated by such laws and regulations will not have a material adverse
effect on the Company's financial condition or results of operations. However,
various state and federal agencies from time to time consider adopting new laws
and regulations or amending existing laws and regulations regarding
environmental protection. While the Company may be able to pass on the
additional costs of complying with such laws, there can be no assurances that
attempts to do so would be successful. Accordingly, new laws or regulations or
amendments to existing laws or regulations could require the Company to
undertake significant capital expenditures and could otherwise have a material
adverse effect on the Company's financial condition and results of operations.
Restrictions Imposed by the Terms of the Company's Indebtedness; Effect of
Default
The terms of the Company's existing credit agreement dated December
19, 1995 (the "Bank Credit Agreement") among the Company, Chemical Bank, as
agent, and the other banks party thereto and the loan agreement dated as of
December 19, 1995 (the "JEDI Loan Agreement") among the Company, Joint Energy
Development Investments Limited Partnership ("JEDI") as agent and the financial
institutions named therein impose a variety of restrictions on the Company's
operations, including, without limitation, limiting the Company's ability to
incur additional indebtedness, grant or suffer liens or other encumbrances on
its property, make investments, loans or advances except under certain
enumerated circumstances, make capital expenditures above specified levels,
enter into sale/leaseback arrangements as a seller/lessee, dispose of its assets
or extend guarantees. Such restrictions may limit the Company's ability to
exploit fully certain business opportunities. In addition, under the terms of
the Bank Credit Agreement and the JEDI Loan Agreement, the Company may not
declare or pay any dividend on or make any payment for the purchase, redemption
or acquisition of any shares of Common Stock other than repurchases of Common
Stock from employees of the Company which do not exceed an aggregate of
$2,500,000. In addition, the failure of the Company to maintain certain
financial ratios may cause the Company to be in default under the agreements
governing its indebtedness and such default, if uncured, may ultimately entitle
its creditors to foreclose on all of the assets of the Company. See
"Description of Certain Indebtedness."
Dependence on Internally Generated Funds; Capital Needs
The compressor leasing business and the oil and gas production
equipment business in which the Company is involved are capital intensive
businesses, and the inability of the Company to continue to have access to
sufficient capital could have a material adverse effect on the Company's ability
to finance compressor purchases and production equipment materials
-16-
<PAGE>
purchases and, thus, maintain its future leasing revenues and profitability.
Company growth has historically been financed through (i) sales of Common Stock,
including the sale of approximately $15,000,000 of Common Stock to certain
executive officers and then existing stockholders of the Company in 1992 (the
"1992 Offering"), the sale of approximately $2,500,000 of Common Stock to
certain members of the Company's management in 1993 (the "1993 Offering"), the
sale of approximately $16,000,000 of Common Stock to GKH in 1993, the sale of
$275,000 of Common Stock to certain employees of the Company at $1,100 per share
in 1995 (the "1995 Management Offering"), the sale of $2,590,500 of Common Stock
to certain employees of the Company at $1,500 per share in 1995 (the "1995
Employee Offering"), the sale of $20,000,000 of Common Stock and $10,000,000 of
Series B Preferred Stock to JEDI in 1995 and the sale of $21,602,000 of Series A
Prepared Stock to GKH, other existing investors in the Company and certain
others in 1995, (ii) internally generated funds, (iii) borrowings under the Bank
Credit Agreement, which provides for a revolving credit facility with a
commitment of $90,000,000 and borrowings under the JEDI Loan Agreement, which
provides for a revolving credit facility with a commitment of $100,000,000 and
(iv) a merger involving the acquisition of all of the outstanding shares of
Astra in exchange for cash consideration and 30,556 shares of Common Stock
issued to Astra's parent (the "Astra Merger").
In addition, although the Company believes that it will have
sufficient capital resources based on internally generated funds, the amounts
available under the Bank Credit Agreement and the JEDI Loan Agreement and other
potential placements of equity to fund its anticipated capital needs for at
least the next several years, there can be no assurance that the Company will
meet its projected earnings and that sufficient cash flow will be generated.
Failure to generate sufficient cash flow together with the absence of
alternative sources of capital could have a material adverse effect on the
financial condition, operations and expected growth of the Company. See
"Management's Discussion of and Analysis of Financial Condition and Results of
Operations."
Limited Preemptive Rights
Although Delaware law does not generally provide for preemptive
rights, in the event the Company offers any party to the Stockholders' Agreement
the opportunity to purchase additional shares of Common Stock, all other parties
to the Stockholders' Agreement will have the right to acquire their respective
pro rata share of such Common Stock on the same terms and conditions offered to
such other stockholder, except that such right shall not apply to (i) shares
issuable in connection with a merger, acquisition or similar transaction, (ii)
shares issuable upon the exercise of any options, warrants or other convertible
securities or (iii) shares offered by the Company to employees of the Company.
See "The Offering -- Stockholders' Agreement -- Preemptive Rights" and
"Description of Capital Stock." JEDI has the right with respect to certain
equity offerings of the Company to existing Company stockholders (each a "Rights
Offering") to (a) subscribe for the first fifteen percent of such Rights
Offering on an exclusive basis, and (b) subscribe for its pro rata share of the
remaining equity under the Rights Offering in the event the Company offers
additional shares in exchange for capital required to satisfy certain
-17-
<PAGE>
covenants under the JEDI Credit Agreement. Astra Resources also has a preemptive
right to subscribe for shares of Common Stock sufficient for it to maintain
ownership of at least 20% of the outstanding Common Stock subject to a specified
threshold. In addition, in the event the Company sells or otherwise issues any
shares of Common Stock to GKH, the non-GKH parties to the Gale Force
Stockholders' Agreement (as defined below) will have the right to acquire their
respective pro rata amount of Common Stock on the same terms and conditions as
such Common Stock is sold or otherwise issued to GKH. See "Principal
Stockholders --Stockholders' Agreements -- Gale Force Stockholders' Agreement,"
"-JEDI Stockholders' Agreement" and -"Astra Stockholders' Agreement".
No Public Market for Common Stock; Restriction on Transferability
Each subscribing offeree will be required to represent that he is
purchasing the Shares for investment purposes for his own account and not with a
view towards resale or distribution. There is no public market for the Shares
and an Investor's ability to transfer his Common Stock will be significantly
restricted by the terms of the Stockholders' Agreement. In addition, the
Stockholders' Agreement (i) gives GKH the right to cause all Investors to sell
their Common Stock in certain transactions and (ii) gives the Company or certain
of its affiliates the right, but not the obligation, to purchase all of the
Common Stock of an Investor upon the termination of such Investor's employment
with the Company. The purchase price for such stock varies depending on the
circumstances and, in cases where an Investor is terminated for Cause or
voluntarily terminates his employment without Good Reason, such purchase price
may be substantially below the fair market value of such Common Stock. See "The
Offering -- Stockholders' Agreement." Any potential Investor must be able and
willing to bear the risk of his investment for an indefinite period.
Dividends
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. In
addition, the ability of the Company to pay dividends will be limited by the
terms of the Bank Credit Agreement, the JEDI Loan Agreement, the Series A
Preferred Stock and the Series B Preferred Stock. See "Description of Certain
Indebtedness," and "Certain Contemplated Transactions."
Control by Principal Stockholders
As of December 31, 1995, approximately 51.7% of the Company's
outstanding Common Stock (not including shares issuable pursuant to existing
option programs) was owned by GKH. Subsequent to this offering, GKH will
continue to own a majority of the Common Stock of the Company and by virtue of a
voting trust with certain members of management, will control a majority, on a
fully diluted basis, of the Common Stock. By maintaining such majority control,
GKH will continue to have the power to determine the policies of the Company and
its subsidiaries, the persons constituting the directors and officers thereof
(subject to the terms of
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<PAGE>
(i) the Gale Force Stockholders' Agreement, (ii) the Hanna Stockholders'
Agreement, (iii) the HEHC Stockholders' Agreement, (iv) the Astra Stockholders'
Agreement and (v) the Stockholders' Agreement) and the outcome of various
corporate actions requiring stockholder approval (subject to the terms of the
HEHC Stockholders' Agreement). See "Principal Stockholders --Stockholders'
Agreements" for a description of these agreements.
Recent Expansion Activity
The Company recently acquired Astra thereby increasing its compressor
fleet by 12% and its work force by 10%. (See "Business -- Company History").
Through its acquisition of the production equipment business of Smith
Industries, Incorporated (the "Smith Business;" See "Business -- Company
History"), the Company substantially expanded its oil and gas production
equipment fabrication operations. The Company is now in the process of
integrating both of these acquisitions into its current operations. Given the
size of the acquisitions, there can be no assurance that the integration will be
successful or that additional capital will not be required to operate the
Company's oil and gas production equipment business or the compressor business.
As of September 8, 1995, HCC (through its wholly owned subsidiary
H.C.C. Compressor de Venezuela, C.A.) acquired 100% of the issued and
outstanding stock of Proyecto Gas Natural P.G.N., C.A., a Venezuelan corporation
("PGN"), from Walter Rode and Luis Zubillaga in exchange for cash, assumption of
certain liabilities of PGN and 104.6667 shares of Common Stock (to Mr. Rode
only). PGN is an owner and lessor of natural gas compression equipment in
Venezuela and provides natural gas compression services under contract to
Corpoven, S.A. and Bitumenes Orinoco, S.A. BITOR, both of which are
instrumentalities of the Venezuelan government. Mr. Rode continues to be
employed by HCC (or its affiliates) in connection with the operations of PGN.
In addition, the Company has also made certain other acquisitions,
which management believes will enhance the Company's competitive position in the
natural gas compression industry, which is generally experiencing a considerable
amount of consolidation. See "Business -- Company History." However, there can
be no assurance that such acquisitions will effect the desired results.
Dilution
Assuming all of the Shares are issued, the value of the Shares
purchased pursuant to this offering will be subject to immediate dilution in the
net tangible book value of $546.79 per Share from the adjusted net tangible book
value as of December 31, 1995.
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<PAGE>
Federal Income Tax Risks
The following discussion summarizes certain federal income tax risks
associated with an investment in the Shares and the exercise of options acquired
therewith, and should be read in conjunction with "Federal Income Tax
Consequences." As the following does not purport to be a complete discussion of
all relevant tax issues, prospective investors should consult their own tax
advisors for advice regarding the impact of a subscription for Shares and
options upon their individual tax positions, including the application of state
and local income tax law, if any.
Treatment of Compensation Income; Receipt of Shares
No assurance can be given that the Internal Revenue Service ("IRS")
will consider the provisions of the Stockholders' Agreement to be sufficient to
render Shares subscribed for hereunder to be nontransferable and each Investor's
rights therein to be subject to a substantial risk of forfeiture within the
meaning of Code Section 83. Further, no assurance can be given that a court of
competent jurisdiction would agree with the conclusions of the Company. In the
event that the IRS considers the provisions of the Stockholders' Agreement to be
insufficient for such purpose, it may consider each Investor to have
compensation income (as of the date he acquires Shares) in an amount equal to
the difference between the fair market value of such Shares and the Investor's
purchase price. Each Investor may thus be required to pay federal income and
FICA tax on such income, plus interest and penalties as applicable. Further,
the Company may be required to pay federal unemployment and other taxes on the
compensation deemed to be transferred to each Investor, plus interest and
penalties as applicable, which tax may indirectly effect the value of each
Investor's Shares.
Treatment of Compensation Income; Receipt of Options
No assurance can be given that the IRS (or any court) will agree that
an Investor acquiring Common Stock pursuant to the exercise of any option is
subject to a substantial risk of forfeiture with respect to such Stock and such
Stock is nontransferable under Section 83 of the Code. As such, an Investor
exercising options granted hereunder may realize compensation income at the date
he exercises an option in an amount equal to the difference between the fair
market value of the Common Stock on that date over the price paid to exercise
and acquire the applicable option. An Investor may thus be required to pay
federal income and FICA tax (and interest and penalties, as applicable) with
respect to such compensation income. Similarly, the Company may be required to
pay federal unemployment and other taxes (including penalties and interest)
which payment may indirectly effect the value of each Investor's Common Stock.
Election under Code Section 83(b)
Any Investor may make an election to include amounts in income on the
date he acquires shares of Common Stock (whether at subscription for Shares or
upon the exercise of any
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<PAGE>
option granted hereunder). Electing Investors will thus not recognize additional
compensation income upon the occurrence of a Lapse Event under the Stockholders'
Agreement. However, since each electing Investor accelerates the recognition of
income from the time at which the Company believes it would otherwise be first
recognizable (i.e., the date of any Lapse Event), each electing Investor must
bear certain market risks associated with the value of his Shares. If the value
of an electing Investor's Shares does not exceed the value of such Shares on the
date that the Investor acquired them, such electing Investor will have included
amounts in income which would not have otherwise have been includible had he not
made the election under Code Section 83(b). Such electing Investor will not be
entitled to deduct any amounts attributable to that income acceleration.
Further, in the event that an electing Investor is required to sell
Shares of Common Stock back to the Company (e.g., pursuant to the exercise of
the Company's rights to repurchase such Shares in the Stockholders' Agreement),
that Investor will not be allowed any deduction for any portion of the basis in
such Shares that he acquired as a result of a Section 83(b) election.
DETERMINATION OF OFFERING PRICE
The offering price of $1,800 per Share was determined solely by the
Board based on a number of factors, including the date of the Company's hiring
of the offerees and a comparison of the Company's 1994 and 1995 financial
performance to the financial performance and corresponding per share market
multiples of a select group of public companies involved in the natural gas
compressor leasing and fabrication and energy services industries. By virtue of
the nature of this offering, the offering price was not determined pursuant to
arm's length negotiations with a third party, and there can be no assurance that
such price is indicative of the fair market value of the Shares. However, the
Company's recent issuances of shares of Common Stock to each of JEDI on August
7, 1995 and Astra Resources on October 3, 1995 were effected at $1,800 per
share. See "Business -- Company History."
PLAN OF OFFERING
The minimum purchase per subscribing offeree is one Share (excluding
Shares to be acquired by delivery of a Four Year Note) for a minimum aggregate
purchase price of $1,800. The minimum aggregate purchase for all Investors is
one Share (excluding Shares to be purchased by delivery of a Four Year Note) for
a minimum aggregate purchase price of $1,800. The Company reserves the right
(i) to reject any subscription for any reason and (ii) to make non-material
modifications to or terminate this offering at any time for any reason.
Each offeree who desires to subscribe for Shares must (i) on or before
Thursday, March 28, 1996, call Curtis Bedrich (at 713-447-8787) to communicate
the number of Cash Shares and Loan Shares for which such offeree desires to
subscribe and (ii) on or prior to Thursday, April 11, 1996, execute and return
to the Company, c/o Curtis Bedrich, (a) one copy and one extra signature page of
the Subscription Agreement included herewith (including Schedule A attached
thereto), (b) one copy
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and one extra signature page of the Stockholders' Agreement included herewith
(including the spousal consent, if applicable) and (c) one copy and one extra
signature page of the Letter Agreement included herewith.
Upon oral confirmation of the number and type of Shares subscribed for
by a subscribing offeree, the Company will prepare and distribute for execution
to such subscribing offeree (i) one execution copy of each of the Loan Agreement
and Four Year Note, if applicable, (ii) two copies of the Pledge Agreement, if
applicable, (iii) two copies of the Employee Option Agreement, (iv) an
assignment separate from certificate, if the subscribing offeree has requested a
Four Year Loan and (v) an IRS Form W-9. In addition to the Subscription
Agreement, the Stockholders' Agreement and the Letter Agreement previously
delivered, each subscribing offeree must then, prior to Thursday, April 25,
1996, return to the Company, c/o Curtis Bedrich, to the extent applicable, (i)
the executed Loan Agreement and Four Year Note, (ii) two executed counterparts
of the Pledge Agreement, (iii) two executed counterparts of the Employee Option
Agreement, (iv) the assignment separate from certificate, executed in blank, (v)
the fully completed and executed Form W-9 and (vi) if applicable, a check in an
amount equal to the product of (a) the number of Cash Shares subscribed for and
(b) $1,800.
The foregoing deadlines are summarized as follows:
<TABLE>
<CAPTION>
=============================================================================================
Event Deadline
=============================================================================================
<S> <C>
Orally contact Curtis Bedrich (at 713-447-8787) to Thursday, March 28, 1996
indicate the number and type (Cash and/or Loan
Shares) of shares you wish to subscribe for
- ---------------------------------------------------------------------------------------------
Deliver one executed copy and one extra executed Thursday, April 11, 1996
counterpart of (i) the Subscription Agreement
(including Schedule A attached thereto and, if
applicable, the spousal consent), (ii) the
Stockholders' Agreement (including the spousal
consent, if applicable) and (iii) the Letter
Agreement
- ---------------------------------------------------------------------------------------------
Deliver, as applicable, (i) one copy of each of the Thursday, April 25, 1996
Loan Agreement and Four Year Note, (ii) one NOTE: These documents will be
executed copy and one extra executed counterpart delivered to you on or prior to
of the Pledge Agreement, (iii) one executed copy Thursday, April 11, if you orally
and one extra executed counterpart of the Employee contact Curtis Bedrich with your
Option Agreement, (iv) an assignment separate from subscription by Thursday, March 28.
certificate executed in blank, (v) an IRS Form W-9
and (vi) a check in the proper amount
=============================================================================================
</TABLE>
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All Funds shall be promptly deposited in an interest bearing,
segregated account and such Funds may be invested in treasury bills or other
cash equivalents, as determined in the sole and absolute discretion of the
Company. If acceptable subscriptions for a minimum aggregate of one Share is
received by the Company on or before April 11, 1996, or such later time as
determined in the sole and absolute discretion of the Company without notice to
or consent of the offerees, but in no event later than the Termination Date, all
Funds will be transferred from the segregated bank account to the Company,
together with all interest, if any, earned thereon. In the event such condition
has not been satisfied on or before the Termination Date or this offering is
withdrawn by the Company, this offering will be terminated and all Funds will be
returned to the subscribing offerees with a pro rata share of interest earned
thereon, calculated on the basis of the amount of Funds invested by each
subscribing offeree and the length of time interest on such Funds was earned.
USE OF PROCEEDS
Assuming all of the Shares are issued, the net proceeds of the
offering, estimated to be $1,974,800, will be used for general corporate
purposes, including working capital.
DILUTION
As of December 31, 1995, the Company had adjusted net tangible book
value (defined as total stockholders' equity less goodwill) of $160,376,945, or
$1,248.48 per share of Common Stock. Adjusted net tangible book value per
share of Common Stock is determined by dividing the actual net tangible book
value by the number of shares of its Common Stock and treating all such Common
Stock as having been issued for cash which would have been outstanding as of
December 31, 1995. After giving effect to the sale of the Shares and the
application by the Company of the estimated net proceeds therefrom as described
in "Use of Proceeds", the pro forma net tangible book value of the Company as of
December 31, 1995 would have been $162,376,745, or $1,253.21 per share of Common
Stock. This value represents an immediate increase in the adjusted net tangible
book value of $4.73 per share of Common Stock to the current shareholders and an
immediate dilution in net tangible book value of $546.79 per Share to purchasers
of the Shares. Dilution per share is determined by subtracting the pro forma
adjusted net tangible book value per share of Common Stock after the completion
of this offering from the per share price paid by purchasers of the Shares. The
following table (1) illustrates this per share dilution:
<TABLE>
<S> <C>
Price per share pursuant to this offering................................. $1,800.00
Adjusted net tangible book value per share as of December 31, 1995........ $1,248.48
Increase in adjusted net tangible book value per share
attributable to the offering(2)........................................... $ 4.73
Pro forma adjusted net tangible book value per share after this offering.. $1,253.21
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Dilution per share to purchasers of the Shares............................ $ 546.79
</TABLE>
(1) Assumes that all of the Shares are subscribed for and excludes shares of
Common Stock reserved for issuance pursuant to options which have
previously been granted to certain members of management. To the extent
such options are exercised, the value of Shares purchased by Investors may
be subject to further dilution. See "Capitalization," "The Offering --
Stock Options" and "Description of Capital Stock -- Options."
(2) Does not reduce stockholders' equity for the aggregate amount of all Four
Year Loans.
The following table sets forth as of December 31, 1995 (calculated on
the same basis as the preceding paragraph and rounded for purposes of this
presentation) the number of shares of Common Stock purchased from the Company,
the value of the total consideration received, the average price per share paid
by the existing shareholders of the Company and the price per share to be paid
by Investors:
<TABLE>
<CAPTION>
============================================================================================
Avg. Price Per
Shares Purchased Total Consideration Share
- -------------------------------------------------------------------------- -----
Number % Amount %
------ - ------ -
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders 128,458 99.14 $137,450,090 98.57 $1,070.00
- -----------------------------------------------------------------------------------------------
Investors 1,111 0.86 $ 1,999,800 1.43 1,800.00
- -----------------------------------------------------------------------------------------------
Total 129,569 100.00 $139,449,890 100.00 $1,076.26
===============================================================================================
</TABLE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company
as of December 31, 1995 and as adjusted to reflect the consummation of this
offering (assuming all 1,111 Shares are subscribed for) after the anticipated
application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
=========================================================================================================================
As Adjusted for the
Actual Offering
=========================================================================================================================
<S> <C> <C>
Current installments of long-term debt........................................ $ -0- $ -0-
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current portions......................................... 51,022,966 51,022,966
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
- -------------------------------------------------------------------------------------------------------------------------
Undesignated Preferred Stock, $.01 par value, 135,000 shares authorized,
0 shares issued and outstanding............................................ -- --
Series A Preferred Stock $.01 par value, 50,000 shares authorized,
21,602 issued and outstanding.............................................. 216 216
Series B Preferred Stock, $.01 par value, 15,000 shares authorized,
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
=========================================================================================================================
As Adjusted for the
Actual Offering
=========================================================================================================================
<S> <C> <C>
10,000 issued and outstanding............................................. 100 100
- -------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, 200,000 shares authorized, 128,458.03 issued
and outstanding, 129,569.03 issued and outstanding after the offering(1)..... 129 130
- -------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital.................................................... 161,146,137 163,145,936
- -------------------------------------------------------------------------------------------------------------------------
Retained earnings............................................................. 9,935,893 9,935,893
- -------------------------------------------------------------------------------------------------------------------------
Less:
- -------------------------------------------------------------------------------------------------------------------------
Notes receivable from officers and employees for purchase of Common Stock..... 4,668,702 6,000,702
- -------------------------------------------------------------------------------------------------------------------------
198.40 Treasury shares, at cost............................................... 218,240 218,240
- -------------------------------------------------------------------------------------------------------------------------
Net stockholders' equity...................................................... 166,195,533 166,863,333
- -------------------------------------------------------------------------------------------------------------------------
Total capitalization..................................................... 217,218,499 217,886,299
=========================================================================================================================
</TABLE>
(1) Includes 198.40 treasury shares and 3.22 shares to be issued to William E.
Simon, Jr., as trustee for the benefit of William E. Simon Family S
Corporation Trust, f/b/o William E. Simon, Jr. u/a/d August 9, 1989, but
excludes (i) an aggregate of 14,524.34 shares of Common Stock subject to
options previously granted to executive officers and other members of
management of the Company pursuant to the 1992 Stock Plan, the 1993 Option
Plan, the Senior Executive Plan, the 1995 Management Option Plan, the 1995
Employee Option Plan and the Incentive Option Plan (see "Management --
Options"), and all options to be granted to Investors pursuant to the 1996
Employee Stock Option Plan, (ii) 15 shares of Common Stock and options to
purchase 75 shares of Common Stock issued to each of Glen Wind and Kurt
Wind as of January 24, 1996 and (iii) an aggregate of 124.9 shares of
Common Stock issued to John C. Oxley and New Prospect Drilling Company, an
Arkansas Corporation.
DIVIDEND POLICY
The Company has not paid dividends since its inception. The Company
currently intends to retain all earnings, if any, to fund the expansion of its
business and therefore does not anticipate paying any dividends on the Common
Stock in the foreseeable future. In addition, the ability of the Company to pay
dividends is limited by the terms of the Bank Credit Agreement and the JEDI Loan
Agreement, the Series A Preferred Stock and the Series B Preferred Stock.
SELECTED FINANCIAL INFORMATION
The selected financial data presented below for the years ended
December 31, 1994 and 1993 is derived from the audited financial statements of
the Company. The selected financial data set forth below as of December 31,
1995 was derived from the Company's
-25-
<PAGE>
unaudited financial statements. The data set forth herein should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements and notes
thereto.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 1995 Year Ended Year Ended
Statement of Income Data (unaudited) December 31, 1994 December 31, 1993
- ------------------------ --------- ----------------- -----------------
=======================================================================================================================
<S> <C> <C> <C>
Revenues:
- -----------------------------------------------------------------------------------------------------------------------
Leasing and Maintenance.......................... $48,120,115 $32,024,912 $25,722,662
- -----------------------------------------------------------------------------------------------------------------------
Compressor Packaging............................. 29,593,205 16,201,887 14,034,275
- -----------------------------------------------------------------------------------------------------------------------
Production Equipment............................. 16,007,855 7,271,641 3,178,386
- -----------------------------------------------------------------------------------------------------------------------
Other............................................ 776,161 581,526 411,298
- -----------------------------------------------------------------------------------------------------------------------
Total revenues................................ 94,497,336 56,079,966 43,346,621
- -----------------------------------------------------------------------------------------------------------------------
Costs and expenses:
- -----------------------------------------------------------------------------------------------------------------------
Leasing and Maintenance............................. 16,851,706 11,007,891 9,739,248
- -----------------------------------------------------------------------------------------------------------------------
Compressor packaging................................ 25,265,016 13,732,736 12,130,915
- -----------------------------------------------------------------------------------------------------------------------
Production Equipment............................. 12,882,556 5,798,521 2,671,178
- -----------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses..... 12,331,603 8,427,020 7,413,158
- -----------------------------------------------------------------------------------------------------------------------
Depreciation and amortization.................... 13,493,813 8,108,596 5,757,381
- -----------------------------------------------------------------------------------------------------------------------
Interest expense................................. 4,560,133 2,027,414 1,366,297
- -----------------------------------------------------------------------------------------------------------------------
Total costs and expenses...................... 85,384,827 49,102,178 39,078,177
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes.......................... 9,112,509 6,977,788 4,268,444
- -----------------------------------------------------------------------------------------------------------------------
Income tax expense.................................. 3,498,456 2,590,000 1,597,000
- -----------------------------------------------------------------------------------------------------------------------
Net income.......................................... $5,614,053 $ 4,387,788 $ 2,671,444
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
=======================================================================================================================
December 31, 1995
Balance Sheet Data (unaudited) December 31, 1994 December 31, 1993
- ------------------ --------- ----------------- -----------------
=======================================================================================================================
<S> <C> <C> <C>
Total current assets................................ $ 49,959,988 $ 21,484,358 $10,696,270
- -----------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment................... 193,259,462 88,391,054 61,722,508
- -----------------------------------------------------------------------------------------------------------------------
Other assets........................................ 9,186,862 4,738,740 4,360,547
- -----------------------------------------------------------------------------------------------------------------------
Total............................................... $252,406,312 $114,614,152 $76,779,325
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities........................... $ 22,082,426 $ 20,489,078 $ 9,734,146
- -----------------------------------------------------------------------------------------------------------------------
Long-Term debt and other liabilities................ 64,128,353 42,792,233 20,100,126
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity................................ 166,195,533 51,332,841 46,945,053
</TABLE>
-26-
<PAGE>
<TABLE>
<S> <C> <C> <C>
================================================================================
Total.............................. $252,406,312 $114,614,152 $76,779,325
================================================================================
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's primary operations consist of three business segments.
The principal segment consists of the leasing and maintenance of the Company's
natural gas compressor units ("Leasing and Maintenance"), and the other segments
consist of the design, engineering and fabrication of natural gas compressor
units ("Compressor Packaging") and the design, engineering, fabrication and
rental of oil and gas production equipment ("Production Equipment"). See
"Business -- Operations."
The Company commenced operations during the latter part of 1990 with
the acquisition of three regional compression leasing companies. In addition, a
compression leasing and fabricating operation was acquired in July, 1991. A
machine shop operation acquired by the Company in 1990, Precision Welding &
Machine, Inc., a Texas corporation ("PWMI"), was sold by the Company in November
1993. See "Business -- Company History." The compression rental fleet has been
expanded significantly since the Company's inception, and amounted to 1,215
units aggregating 418,480 horsepower at December 31, 1995. This growth has been
funded by a combination of internally generated cash flow, bank financing, the
acquisition of Astra primarily through the issuance of Common Stock, additional
equity in the form of Common Stock sold to the Company's management group,
certain employees and existing shareholders in 1992, 1993 and 1995, additional
Common Stock sold to JEDI in 1995, and the sale of Series B Preferred Stock to
JEDI and Series A Preferred Stock to certain existing shareholders and two new
investors in 1995, as well as the commencement of Production Equipment
activities in 1993. As discussed elsewhere herein, the operation of the
Production Equipment segment has been significantly enhanced by the Smith
Acquisition. See "Business -- Company History."
Liquidity and Capital Resources
Earnings before depreciation and amortization and income taxes
amounted to $27.2 million during 1995. Other significant sources of funds
during 1995 were amounts available under the Bank Credit Agreement and the JEDI
Loan Agreement and proceeds from sales of Common Stock and Preferred Stock.
Significant uses of funds included the repayment of debt under the Bank Credit
Agreement and net capital expenditures aggregating $69 million during 1995.
The financing necessary to support the Company's historical operations
has principally been provided from borrowings under the Bank Credit Agreement
and sales of Common Stock.
-27-
<PAGE>
For a discussion of the Company's anticipated capital expenditures for
the next two years, see "Business -- Business Strategy."
Historically, inflation has not had a significant impact on the
operations of the Company.
Results of Operations
Year ended December 31, 1995 compared to year ended December 31, 1994
Revenues
Revenues from Leasing and Maintenance increased by $16.1 million, or
50%, from $32.0 million in 1994 to $48.1 million in 1995. This increase
resulted primarily from the addition of 456 compression units, aggregating
189,853 horsepower, to the compressor rental fleet. Monthly horsepower
utilization of 93% to 96% during 1995 was consistently in excess of the industry
average.
Revenues from Compressor Packaging increased by $13.4 million, or 83%,
from $16.2 million in 1994 to $29.6 million in 1995. Compressor Packaging
operations generated operating profit (earnings before depreciation and
amortization expense and interest expense) of $1,969,000 during 1995, as
compared to $1,270,000 during 1994.
Revenues from Production Equipment increased by $8.7 million, or 119%,
from $7.3 million in 1994 to $16.0 million in 1995. Production Equipment
operations resulted in an operating profit (earnings before depreciation and
amortization expense and interest expense) of $641,000 during 1995, as compared
to an operating profit of $364,000 during 1994.
Expenses
Leasing and Maintenance expenses increased by $5.9 million, or 54%,
from $11.0 million in 1994 to $16.9 million in 1995. This increase resulted
from additions to the compressor rental fleet as reflected by a 50% increase in
Leasing and Maintenance revenue.
Costs and expenses of Compressor Packaging increased by $11.5 million,
or 84%, from $13.7 million in 1994 to $25.2 million in 1995. This increase is
attributable to the increase in Compressor Packaging operations.
Costs and expenses of Production Equipment increased by $7.1 million,
or 122%, from $5.8 million in 1994 to $12.9 million in 1995. This increase
resulted from an increase in the volume of production equipment fabrication.
-28-
<PAGE>
Selling, general and administrative expenses increased by $3.9
million, or 46% from $8.4 million in 1994 to $12.3 million in 1995. This
increase resulted from the expanded level of activity in each of the Company's
business segments.
Depreciation and amortization increased $5.4 million, or 67%, from
$8.1 million in 1994 to $13.5 million in 1995. This increase resulted from
expansion of the rental fleet and other capital expenditures.
Interest expense increased $2.6 million, or 130%, from $2.0 million in
1994 to $4.6 million in 1995 as a result of borrowings under the Bank Credit
Agreement and the JEDI Loan Agreement which was used for general corporate
purposes as well as to finance additions to the compressor rental fleet.
The Company's effective income tax rate approximates the statutory
income tax rate during 1995 and 1994. Accordingly, the $900,000 increase, or
35%, from $2.6 million in 1994 to $3.5 million in 1995 results from a comparable
31% increase in income before income taxes from 1994 to 1995.
Year ended December 31, 1994 compared to year ended December 31, 1993
Revenues
Revenues from Leasing and Maintenance increased by $6.3 million, or
25%, from $25.7 million in 1993 to $32.0 million in 1994. This increase
resulted primarily from the addition of 168 compression units, aggregating
84,060 horsepower, to the compressor rental fleet. Monthly horsepower
utilization of 94% to 96% during 1994 was consistently in excess of the industry
average.
Revenues from Compressor Packaging increased by $2.2 million, or 15%,
from $14.0 million in 1993 to $16.2 million in 1994. This increase resulted
from an increase in the volume of Compressor Packaging during 1994 following the
move in August, 1993, to an expanded fabrication facility. Compressor Packaging
operations generated operating profit (earnings before depreciation and
amortization expense and interest expense) of $1,270,000 during 1994, as
compared to $814,000 during 1993.
Revenues from Production Equipment increased by $4.1 million, or 129%,
from $3.2 million in 1993 to $7.3 million in 1994. This increase resulted from
an increase in the volume of production equipment fabrication as well as 1994
being the first full year for production equipment packaging, the operations of
which commenced in March, 1993. Production Equipment operations resulted in an
operating profit (earnings before depreciation and amortization expense and
interest expense) of $364,000 during 1994, as compared to an operating loss of
$130,000 during 1993.
-29-
<PAGE>
Expenses
Leasing and Maintenance expenses increased by $1.3 million, or 13%,
from $9.7 million in 1993 to $11.0 million in 1994. This increase resulted from
additions to the compressor rental fleet as reflected by a 25% increase in
Leasing and Maintenance revenue.
Costs and expenses of Compressor Packaging increased by $1.6 million,
or 13%, from $12.1 million in 1993 to $13.7 million in 1994. This increase is
attributable to the increase in Compressor Packaging operations.
Costs and expenses of Production Equipment increased by $3.1 million,
or 117%, from $2.7 million in 1993 to $5.8 million in 1994. This increase
resulted from an increase in the volume of production equipment fabrication and
the inclusion of a full year of operations in 1994.
Selling, general and administrative expenses increased by $1.0
million, or 14% from $7.4 million in 1993 to $8.4 million in 1994. This
increase resulted from the expanded level of activity in each of the Company's
business segments.
Depreciation and amortization increased $2.3 million, or 41%, from
$5.8 million in 1993 to $8.1 million in 1994. This increase resulted from
additions to the rental fleet and other capital expenditures which aggregated
$31.8 million during 1994.
Interest expense increased $700,000, or 56%, from $1.3 million in 1993
to $2.0 million in 1994 as a result of borrowings under the Credit Agreement
which was utilized to finance additions to the compressor rental fleet.
The Company's effective income tax rate approximates the statutory
income tax rate during 1994 and 1993. Accordingly, the $1.0 million increase,
or 62%, from $1.6 million in 1993 to $2.6 million in 1994 results from a
comparable 63% increase in income before income taxes from 1993 to 1994.
BUSINESS
Company History
The Company was incorporated in Delaware in October 1990 as a
majority-owned subsidiary of Hanover Energy Inc., a Texas corporation ("HEI").
In November and December 1990, the Company acquired all of the capital stock of
Guerra Engineering, Inc., a Texas corporation ("GEI"), Energy Recovery Systems,
Inc., a Texas corporation ("ERSI"), and PWMI, and substantially all of the
assets of C&B Compression Sales and Service, Inc., a Louisiana corporation
("C&B"), which acquisitions were accounted for using the purchase method of
accounting.
-30-
<PAGE>
In May 1991, HEI was acquired by Hanover Energy Holding Corporation, a
Delaware corporation ("HEHC"), the principal stockholders of which were GKH.
In July 1991, HEHC acquired all of the common stock of Maintech
Enterprises, Inc., a Texas corporation ("MEI"), through a subsidiary created
solely for that purpose. Such subsidiary was subsequently merged into MEI, and
HEHC contributed the stock of MEI to the Company in April 1992 in connection
with the refinancing of the Company's then current senior credit facility. As a
result of the acquisition of MEI, the Company acquired a 50% interest in a joint
venture, the operations of which consisted of leasing natural gas compressor
units. The remaining interest in the joint venture was acquired by the Company
effective April 1, 1993 and the joint venture was liquidated shortly thereafter.
Effective December 31, 1992, HEI merged into HEHC, and as a result
thereof, the Company became a direct majority-owned subsidiary of HEHC. Also
effective as of December 31, 1992, GEI and ERSI merged into the Company and, as
a result thereof, the separate existence of GEI and ERSI ceased and all of their
respective assets and liabilities became vested in the Company.
On June 24, 1993, Hanover Pipeline Company, a Delaware corporation and
a wholly-owned subsidiary of HEHC ("HPC"), was merged with and into the Company
(the "HPC Merger"). Pursuant to the HPC Merger, the Company issued to HEHC
2,381.11 shares of Common Stock. HPC's assets consisted of 16 natural gas
compressors. HPC had certain potential environmental liabilities estimated at
December 31, 1992 to be between $139,000 and $200,000; however, pursuant to the
merger agreement, HEHC agreed to indemnify the Company for any diminution in
value to the HPC common stock caused by the incurrence by HPC of any
environmental liability.
On October 7, 1993, the Company acquired all of the issued and
outstanding stock of Hanna Compressor Group, Inc., an Arkansas corporation
("Hanna Compressor"), from Hanna Investment Group, an Arkansas general
partnership ("HIG"), in exchange for 1,875 shares of Common Stock (the "Hanna
Acquisition"). Hanna Compressor's assets consisted of (i) six natural gas
compressor units, (ii) a 4,000 foot combination division office and maintenance
facility situated on five acres of land in Pocola, Oklahoma and (iii) cash. In
connection with the Hanna Acquisition, the Company, HEHC, GKH and HIG entered
into the Hanna Stockholders' Agreement. See "Principal Stockholders --
Stockholders' Agreements -- Hanna Stockholders' Agreement." Effective as of
February 9, 1994, Hanna Compressor was merged into the Company and, as a result
thereof, the separate existence of Hanna Compressor ceased and all of its assets
and liabilities became vested in the Company.
On November 5, 1993, the Company sold all of the issued and
outstanding capital stock of PWMI to a corporation (the "PWMI Purchaser")
controlled by two former employees of PWMI (the "PWMI Employees") for a purchase
price equal to $500,000. The purchase price was paid in the form of two secured
promissory notes, one in the principal amount of $475,000
-31-
<PAGE>
and the other in the principal amount of $25,000, each of which bear interest at
8% per annum. The $475,000 note has a ten year amortization, and is payable to
the Company in equal monthly installments of principal and interest beginning on
December 1, 1993, with the entire outstanding balance due and payable December
1, 1996. The PWMI Purchaser has missed a number of payments under the promissory
notes, and the Company and the PWMI Purchaser are currently in the process of
negotiating a new payment schedule under the notes. The obligations of the PWMI
Purchaser under the notes are guaranteed jointly and severally by the PWMI
Employees, which guarantee is secured by a pledge to the Company of the PWMI
capital stock, as well as a security interest in certain assets of PWMI. As of
December 31, 1995, the promissory notes of PWMI Purchaser have been written down
on the books of the Company to $200,000.
On January 27, 1995, HEHC was merged with and into the Company (the
"HEHC Merger") and, as a result thereof, the separate existence of HEHC ceased
and all of its assets and liabilities became vested in the Company. Pursuant to
the HEHC Merger, the Company issued to the stockholders of HEHC in the aggregate
59,053.11 shares of Common Stock, which was equal to the number of shares of
Common Stock owned by HEHC immediately prior to the HEHC Merger. In connection
therewith, the Company, GKH and the other stockholders of HEHC immediately prior
to the Merger entered into the HEHC Stockholders' Agreement. See "Principal
Stockholders -- Stockholders' Agreements -- HEHC Stockholders' Agreement" for a
discussion of the terms of the HEHC Stockholders' Agreement. In addition, each
former stockholder of HEHC agreed to indemnify the Company for (i) the breach or
inaccuracy of any representation or warranty made by HEHC or such stockholder
under the HEHC Merger Agreement and (ii) the breach or default of any agreement
by HEHC or such stockholder under the HEHC Merger Agreement, payable in shares
of Common Stock issued in the HEHC Merger.
Effective as of January 1, 1995, the Company acquired from CBC
Compression, an Oklahoma general partnership ("CBC"), 40 natural gas compressor
units and certain related equipment for a purchase price of $3,025,000 plus five
percent of rental amounts (exclusive of sales tax, freight and installation
charges) received by the Company under the related Master Gas Compression
Agreement described below. Pursuant to an agreement (the "Master Gas
Compression Agreement") with AnSon Company, a sister partnership of CBC
("AnSon"), the Company agreed to lease the 40 compressors back to AnSon, along
with at least 25 additional compressors, for an initial term of 24 months. The
Master Gas Compression Agreement is scheduled to continue for an additional 24-
month period beyond the initial 24-month period; however, the rental price
during such period has not been established. AnSon, CBC and the Company have
also entered into a 48-month "most favored vendor" relationship whereby AnSon
and CBC have agreed to purchase or lease production equipment from the Company
so long as the Company's price is equal to or less than other bidders.
Similarly, the Company has agreed to retain trucking services from MB Oilfield
Service (an affiliate of CBC and AnSon) during such 48-month period so long as
MB Oilfield Service's price is not higher than other bidders for such services.
-32-
<PAGE>
Effective as of February 1, 1995, the Company purchased from Gale
Force Compression Services, Inc. ("Gale Force") 107 natural gas compressors,
certain furniture, fixtures, equipment and other fixed assets, vehicles, the
name "Gale Force", and equipment leases for an aggregate purchase price of
$9,782,800 plus 1,150 shares of Common Stock (the "Gale Force Acquisition").
The compressors are located primarily in Oklahoma and most are currently leased
by the Company pursuant to leases transferred in the sale. Concurrently with
the Gale Force Acquisition, the Company entered into a four year alliance
agreement with Ward Petroleum, an affiliate of Gale Force, for gas compression
services to be provided by the Company. In connection with the Gale Force
Acquisition, the Company, GKH and those persons who acquired Common Stock
pursuant to the transaction entered into the Gale Force Stockholders' Agreement.
See "Principal Stockholders -- Stockholders' Agreements -- Gale Force
Stockholders' Agreement" for a discussion of the terms of the Gale Force
Stockholders' Agreement. Also in connection with this transaction, the Company
entered into an employment agreement with Alan D. Lavenue, a Gale Force
affiliate, for a two year term.
On February 24, 1995, the Company, through its wholly-owned
subsidiary, Hanover/Smith, Inc. ("Hanover/Smith"), acquired (the "Smith
Acquisition") substantially all of the operating assets of the oil and gas
production equipment division of Smith Industries, Incorporated, a Delaware
corporation ("Smith"), which has been in the fabrication of oil and gas
production equipment industry since its inception in 1927. The assets acquired
include real property located in Corpus Christi, Texas, a lease and purchase
option on real property located in Columbus, Texas, manufacturing equipment used
in the fabrication of oil and gas production equipment, vehicles, inventory, the
name "Smith Industries" and Smith's logo. Smith filed for protection under the
United States Bankruptcy Code, 11 U.S.C. --101 et seq., in May 1994, in the
United States Bankruptcy Court for the Southern District of Texas, Houston
Division, in a Case styled In Re: Smith Industries, Incorporated, No. 94-43705-
H3-11. The Bankruptcy Court approved the necessary orders authorizing the
acquisition. The total acquisition price after various credits and adjustments
was $2,595,714. The oil and gas production equipment operations of Smith
acquired by Hanover/Smith have been consolidated with the existing oil and gas
production equipment fabricating operations of the Company and will operate as
Hanover/Smith.
On August 7, 1995, JEDI purchased $20,000,000 of Common Stock at
$1,800 per share and $10,000,000 of 6.5% Cumulative Redeemable Convertible
Series B Preferred Stock (the "Series B Preferred Stock") at $1,000 per share
(the "Series B Preferred Stock Issuance"). See "Description of Capital Stock --
Preferred Stock."
On August 7 and September 29, 1995, the Company issued 21,602 shares
of 6.5% Cumulative Redeemable Series A Preferred Stock (the "Series A Preferred
Stock") at $1,000 per share (the "Series A Preferred Stock Issuance"). See
"Description of Capital Stock -- Preferred Stock."
-33-
<PAGE>
On September 8, 1995, in connection with the Company's acquisition of
PGN, the Company issued Walter Rode, a former shareholder of PGN, 571.34 shares
of Common Stock.
On October 13, 1995, in connection with the Astra Merger, the Company
issued 30,556 shares of Common Stock to Astra Resources.
On October 31, 1995, in connection with the merger of Combustion
Control Corporation, a Delaware corporation ("Combustion"), with and into the
Company, the Company issued 338.43 shares of Common Stock to former shareholders
of Combustion.
On January 24, 1996, each of Glen Wind and Kurt Wind purchased 15
shares of Common Stock (30 shares total) at $1,100 per share.
Industry
Natural gas compressors generally do not suffer significant
technological obsolescence, so that the useful life of a compressor is based
primarily on its mechanical integrity. The useful life of a compressor may also
be extended by refurbishing or overhauling the compressor at regular intervals
of approximately five to six years. Refurbished or overhauled compressors may
be leased at prices substantially similar to new compressors.
The gas compressor industry services both independent producers and
major integrated natural gas producers, as well as pipeline, gas processing and
gathering and transmission companies, and is substantially dependent on the
natural gas industry. The Company believes that independent producers currently
account for a substantial portion of the natural gas industry. The Company also
believes that independent gas producers are now accounting for an increasing
portion of the natural gas produced in the United States relative to that
produced by major integrated energy producers and that independent producers are
more likely to lease compressors from third parties such as the Company as a
result of generally greater constraints on their ability to make the large
capital expenditures necessary to purchase compressors. In addition, many major
integrated gas producers are directing their capital investments overseas and
allowing their U.S. capital base to decline, thus resulting in further increased
demand for rental compressors. Moreover, the market for rental compression
services has been expanding as gas producers and pipeline companies strive to
lower operating costs and improve efficiency by outsourcing their gas handling
requirements.
The Company believes that the market for natural gas compressors is
driven by a variety of factors, including, without limitation, (i) the demand
for natural gas, (ii) the age of particular gas wells, (iii) the relative price
of natural gas to the price of oil or other alternative energy sources and (iv)
the season. All other things being equal, the gas compression industry is
generally benefited by either an increase in gas prices, which generally results
in the development of new wells, fields and pipeline systems and a corresponding
increase in demand for compression, or, up to a point, by a decrease in natural
gas prices, which results in
-34-
<PAGE>
outsourcing by independent producers and an increase in the need for leased
compression. Increases in the age of natural gas wells also has a positive
impact on the gas compression industry since older wells generally experience a
decline in their reservoir pressure and require compressors to increase their
productivity. In contrast, a number of factors would potentially have an adverse
effect on the gas compressor industry. See "Risk Factors -- Natural Gas
Compressor Industry Considerations."
Conversely, all other things being equal, a relative decrease in the
price of oil or other energy sources as compared to natural gas generally will
have an adverse effect on the natural gas compression industry since such
circumstances encourage energy users to switch from natural gas to alternative
fuel sources thereby decreasing demand for natural gas.
The Company believes that the natural gas compressor industry is also
affected by seasonality, with the highest demand for compression in winter
months when natural gas is in greater demand. As a result of such seasonality,
the Company generally experiences slightly decreased revenues for its Leasing
and Maintenance segment during the months of May through August.
In addition, the Company believes that as environmental considerations
become more important due to the Federal Clean Air Act and related legislative
and social considerations, natural gas, as a cleaner burning fuel than either
oil or coal, will make up a greater share of the domestic energy market.
Additionally, the continuing economic development of lesser developed countries
appears to be having a favorable impact on the demand for natural gas and
related gas handling projects. However, there can be no assurance that such
increased use of natural gas will occur.
Market Position
Leasing and Maintenance
The Company believes that the market for the leasing of natural gas
compressors may be distinguished from the market for the sale of natural gas
compressors since the decision to lease a compressor is generally made prior to
a customer's entrance into the marketplace. Generally, lessees are customers
who anticipate only a short term need for the compressor which is substantially
less than the estimated useful life of the unit or customers who are unable to
or otherwise choose not to internally finance the purchase of such units.
The Company believes that the natural gas compressor leasing industry
may be divided into categories based on the compressor horsepower and that
market share of the participants in the industry may be determined based on
either (i) the number of units leased by such participants or (ii) the total
horsepower leased by such participants.
-35-
<PAGE>
The Company's compressor fleet as of December 31, 1995 was divided by
horsepower as follows:
<TABLE>
<CAPTION>
======================================================================
Units Total Horsepower
Category (by Horsepower) (% of Fleet) (% of fleet)
------------------------ ------------
=====================================================================
<S> <C> <C>
0 - 44 109 (9%) 3,482 (1%)
---------------------------------------------------------------------
45 - 60 102 (8%) 5,746 (1%)
---------------------------------------------------------------------
61 - 100 227 (19%) 18,350 (4%)
---------------------------------------------------------------------
101 - 200 272 (22%) 38,265 (9%)
---------------------------------------------------------------------
201 - 500 232 (19%) 72,559 (18%)
---------------------------------------------------------------------
501 - 800 95 (8%) 63,004 (15%)
---------------------------------------------------------------------
801 - 1100 83 (7%) 81,826 (20%)
---------------------------------------------------------------------
1100+ 95 (8%) 135,248 (32%)
---------------------------------------------------------------------
TOTAL 1,215 (100%) 418,480 (100%)
=====================================================================
</TABLE>
Based on industry statistics, the Company believes that the U.S.
natural gas compressor leasing industry is a highly fragmented business made up
of in excess of 50 companies aggregating approximately 2,200,000 horsepower.
Based on information available to the Company, the Company believes that it is
the fourth largest compressor leasing company in the U.S. based on total units
and the second largest compressor leasing company in the U.S. based on total
operating horsepower.
Compressor Packaging
The Compressor Packaging business, carried on primarily through MEI,
competes with other manufacturers of compressor units. The Compressor Packaging
business is dominated by a few major competitors, several of whom also compete
with the Company in the compressor leasing business. Although sufficient
information is not available to definitively estimate the Company's relative
position in the Compressor Packaging market, management believes that the
Company is the sixth largest Compressor Packaging company in the U.S. based on
estimated 1995 revenues of the Company's competitors in such business.
Production Equipment
The Production Equipment business is a highly fragmented business with
approximately eight substantial competitors. The Company believes that, with
the Smith Acquisition, it is among the top five major competitors in the
business.
-36-
<PAGE>
Business Strategy
The Company's primary focus will be continued expansion of the
compression rental fleet. Anticipated levels of capital expenditures, from
internally generated cash flow and bank financing, relating to the rental fleet
amount to approximately $60 million during 1996 and $50 million during 1997.
The rental fleet consisted of 1,215 units aggregating 418,480 horsepower at
December 31, 1995. With the level of capital expenditures contemplated,
management believes that the Company's rental fleet should grow to approximately
525,000 horsepower by year end 1996. In addition, the contribution of the
Production Equipment segment is expected to increase, both in terms of revenues
and operating income, in light of the Smith Acquisition. However, there can be
no assurances that the above projections will actually be met.
The Company does not anticipate making any material expenditures for
product research and development inasmuch as the Company's Leasing and
Maintenance, Compressor Packaging and Production Equipment segments do not
generally require such expenditures.
Operations
The following tables show (i) the revenues and operating profit (loss)
for each of the years ended December 31, 1995, December 31, 1994 and December
31, 1993 and (ii) the assets of the Company as of December 31, 1995, December
31, 1994 and December 31, 1993, in each case for each of the Leasing and
Maintenance segment, the Compressor Packaging segment, the Production Equipment
segment and the Company's other revenue sources:
<TABLE>
<CAPTION>
=======================================================================================================
Year Ended
December 31, 1995
-----------------
Year Ended Year Ended
(unaudited) December 31, 1994 December 31, 1993
----------------- -----------------
=======================================================================================================
<S> <C> <C> <C>
Revenues:
- -------------------------------------------------------------------------------------------------------
Leasing and Maintenance $48,120,115 $32,024,912 $25,722,662
- -------------------------------------------------------------------------------------------------------
Compressor Packaging 29,593,205 16,201,887 14,034,275
- -------------------------------------------------------------------------------------------------------
Production Equipment 16,007,855 7,271,641 3,178,386
- -------------------------------------------------------------------------------------------------------
Other 776,161 581,526 411,298
- -------------------------------------------------------------------------------------------------------
TOTAL REVENUES $94,497,336 $56,079,966 $43,346,621
- -------------------------------------------------------------------------------------------------------
Operating profit (loss)(1):
- -------------------------------------------------------------------------------------------------------
Leasing and Maintenance $26,788,999 $17,070,138 $12,775,114
- -------------------------------------------------------------------------------------------------------
Compressor Packaging 1,969,070 1,270,314 813,868
- -------------------------------------------------------------------------------------------------------
Production Equipment 641,464 363,851 (130,492)
- -------------------------------------------------------------------------------------------------------
Other(2) (2,233,078) (1,590,505) (2,066,368)
</TABLE>
-37-
<PAGE>
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
TOTAL OPERATING PROFIT $27,166,455 $17,113,798 $11,392,122
=======================================================================================================
</TABLE>
(1) Determined by subtracting expenses from revenues for each segment and
adding back the corresponding portion of depreciation and amortization
expense and interest expense.
(2) Consists primarily of corporate administrative expenses.
<TABLE>
<CAPTION>
==================================================================================================
December 31, 1995
------------------
(unaudited) December 31, 1994 December 31, 1993
----------------- -----------------
==================================================================================================
<S> <C> <C> <C>
Assets:
- --------------------------------------------------------------------------------------------------
Leasing and Maintenance $226,483,062 $100,428,593 $70,807,541
- --------------------------------------------------------------------------------------------------
Compressor Packaging 8,832,811 8,453,184 3,535,761
- --------------------------------------------------------------------------------------------------
Production Equipment 14,101,918 5,562,940 2,140,545
- --------------------------------------------------------------------------------------------------
Other 2,988,521 169,435 295,478
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $252,406,312 $114,614,152 $76,779,325
==================================================================================================
</TABLE>
Leasing and Maintenance
The Company provides natural gas compression equipment, on a rental
basis, primarily to natural gas production and transmission companies. These
rental units are utilized to compress natural gas when the reservoir pressure
for a natural gas field is less than the pressure for the natural gas pipeline
transporting the gas. The Company also provides maintenance of customer-owned
compressor units as well as compressor parts sales to third parties.
As of December 31, 1995, the Company's gas compressor fleet consisted
of 1,215 units, ranging from 25 to 2,650 horsepower, of which 93.5% of available
horsepower and 91.6% of the available units were being utilized. Leases for the
compressor units provide for fixed monthly payments for an average term of
approximately six months and continue thereafter on a monthly basis. Based on
the Company's historical operations, the Company estimates that the terms of its
leases have extended for an average of approximately 24 months.
Although natural gas compressors generally do not suffer significant
technological obsolescence, they do require routine maintenance and periodic
refurbishing to prolong their useful life. In general, the Company anticipates
refurbishing its compressor units approximately every five to six years.
The Company's compressor leasing activities are located in Texas,
Oklahoma, Arkansas, Louisiana, New Mexico, Mississippi, Alabama, Kansas,
Colorado and offshore Gulf of Mexico, Trinidad, Venezuela and Argentina.
-38-
<PAGE>
Compressor Packaging
The Company's Compressor Packaging segment, operated primarily through
MEI, designs, engineers and assembles compression units for sale to third
parties as well as for placement in its compressor fleet. In general, units to
be sold to third parties are assembled according to such customer's
specifications and sold on a turnkey basis. Components for such compressor
units are acquired from third party suppliers. At December 31, 1995, backlog of
fabrication of compressor units amounted to 7.5 million.
Production Equipment
The Company designs and fabricates and, to a lesser extent, rents a
broad range of oil and gas production equipment designed to heat, separate,
dehydrate and measure crude oil and natural gas. The product line includes line
heaters, oil and gas separators, glycol dehydration units and skid mounted
production packages designed for both onshore and offshore production
facilities. At December 31, 1995, backlog of production equipment fabrication
amounted to $5.3 million.
Customers
No amounts received from any individual customer equaled more than 10%
of the Company's consolidated revenues during 1994 or 1995.
Competition
Leasing and Maintenance
The natural gas compressor leasing business is highly competitive.
Overall, the Company experiences considerable competition from larger companies
with significantly greater financial resources and, on a regional basis, several
smaller companies compete directly with the Company. Based on information
available to the Company, the Company ranks among the top four companies
providing compressor units on a rental basis based on the number of units and
among the top three based on total available horsepower. See "-- Market
Position."
The Company believes that it competes in the Leasing and Maintenance
segment on the basis of price, customer service, including the availability of
personnel in remote locations, flexibility in meeting customer needs and quality
and reliability of its compressors and related services.
Compressor Packaging
The Company believes that it competes in the Compressor Packaging
segment based on price and quality and that the Company is competitive in both
areas.
-39-
<PAGE>
Production Equipment
The Company believes that it competes in the Compressor Packaging
segment based on price and quality and that the Company is competitive in both
areas. Competition in the Production Equipment segment is also based on the
ability to service customers' needs. The Company believes that with the Smith
Acquisition, it is among the top five major competitors in the Production
Equipment market.
Employees
As of December 31, 1995, the Company employed approximately 556
people, of which 28 were administrative, 27 were sales, 120 were Compressor
Packaging personnel, 157 were Production Equipment personnel and 224 were in
field service locations. No employees are represented by labor unions and the
Company believes that its relations with its employees is satisfactory.
Insurance
Natural gas operations are subject to certain risks, including
explosions, uncontrollable flows of gas or well fluids, fires, pollution and
other environmental risks. These risks could expose the Company to substantial
liability for injury and loss of life, property damage, pollution and other
environmental damages, and consequential damages, if such damages resulted from
a compressor defect or from the Company's negligence in maintaining, servicing
or refurbishing its compressors.
The Company believes that is has obtained adequate insurance to cover
such risks; however, no assurance can be given that such insurance will be
adequate to cover the Company's operations in the event the Company incurs
liability in excess of anticipated potential levels or that such insurance will
be generally available in the future or, if available, that premiums will be
commercially reasonable. See "Risk Factors -- Potential Liability and
Insurance."
Properties and Assets
As of December 31, 1995, the Company's rental fleet consisted of 1,215
compressor units, five of which are leased and the remainder of which are owned
by the Company, with a total of 418,480 horsepower and an average of 344
horsepower. By virtue of the Smith Acquisition, the Company also owns
substantially all of the operating assets of the oil and gas production
equipment division of Smith. The assets acquired include real property located
in Corpus Christi, Texas, a lease and purchase option on real property located
in Columbus, Texas, manufacturing equipment used in the fabrication of oil and
gas production equipment, vehicles, inventory, the name "Smith Industries" and
Smith's logo.
-40-
<PAGE>
The Company owns its corporate offices in Houston, Texas, which are
housed in a combination corporate office and compressor fabrication facility
consisting of approximately 190,000 square feet plant capacity located on
twenty-six acres. This facility (assuming the purchase of the adjacent land) is
anticipated to provide the Company with sufficient space and capacity for at
least the next three years. The Company also owns (i) a 6,400 square foot
combination office and maintenance shop located on two acres in Oklahoma City,
Oklahoma, (ii) a 4,000 foot combination division office and maintenance facility
situated on five acres of land in Pocola, Oklahoma, (iii) its maintenance
facilities in Midland, Texas and Fort Smith, Arkansas, (iv) real property
located in Corpus Christi, Texas, (v) a 13,000 square feet facility in East
Bernard, Texas which is being converted to a compressor maintenance and
refurbishment facility, and (vi) a lease and purchase option regarding the
212,000 square feet manufacturing facility located on 83 acres in Columbus,
Texas. In addition, the Company leases its maintenance facilities in Victoria,
Texas and Lafayette, Louisiana under ten-year leases.
Litigation
The Company is not a party to any litigation that, in the judgment of
management, would have a material adverse effect on the Company's operations or
financial condition if adversely determined.
Governmental Regulation
The Company is subject to various federal and state laws and
regulations relating to environmental protection, including regulations
regarding emission controls. The Company believes that it is in substantial
compliance with such laws and regulations and that the phasing in of emission
controls and other known standards at the rate currently contemplated by such
laws and regulations will not have a material adverse effect on the Company's
financial condition or results of operations. However, various state and
federal agencies from time to time consider adopting new laws and regulations or
amending existing laws and regulations regarding environmental protection.
While the Company may be able to pass on the additional costs of complying with
such laws, there can be no assurance that attempts to do so would be successful.
Accordingly, new laws or regulations or amendments to existing laws or
regulations could require the Company to undertake significant capital
expenditures and could otherwise have a material adverse effect on the Company's
financial condition and results of operations.
From time to time since President Clinton took office, his
administration has proposed various taxes with respect to the energy industry,
none of which have been enacted and all of which have received significant
scrutiny from various industry lobbyists. At the present time, given the
uncertainties regarding the proposed taxes, including the uncertainties
regarding the terms which the proposed taxes might ultimately contain and the
industries and persons who may ultimately be subject to any such taxes, it is
not possible to determine whether any such tax will have a material adverse
effect on the Company.
-41-
<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are set forth
below. Positions with the Company include positions with the Company's
predecessors. All directors hold office until the annual meeting of the
stockholders following their election or until their successors are duly elected
and qualified. Officers are appointed by and serve at the discretion of the
Board.
<TABLE>
<CAPTION>
========================================================================================
Name Age Position
- ---- --- --------
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Michael A. O'Connor 60 Chairman of the Board; Director
- ----------------------------------------------------------------------------------------
Michael J. McGhan 41 President and Chief Executive Officer; Director
- ----------------------------------------------------------------------------------------
Curtis Bedrich 53 Chief Financial Officer and Treasurer
- ----------------------------------------------------------------------------------------
William S. Goldberg 37 Executive Vice President; Director
- ----------------------------------------------------------------------------------------
Charles D. Erwin 35 Vice President, Sales
- ----------------------------------------------------------------------------------------
William C. Bryant 42 Vice President, Sales-Mid Continent
- ----------------------------------------------------------------------------------------
Maxwell C. McDonald 47 Vice President, Sales-Southeast
- ----------------------------------------------------------------------------------------
Joseph Bradford 36 Vice President, Operations-Western Division
- ----------------------------------------------------------------------------------------
Donald M. DeVille 40 Vice President
- ----------------------------------------------------------------------------------------
Teddy J. Head 43 Vice President
- ----------------------------------------------------------------------------------------
Richard S. Meller 38 Secretary
- ----------------------------------------------------------------------------------------
Jeri Howell 43 Assistant Secretary
- ----------------------------------------------------------------------------------------
Ted Collins, Jr. 56 Director
- ----------------------------------------------------------------------------------------
Robert Wasielewski 33 Director
- ----------------------------------------------------------------------------------------
Melvyn N. Klein 53 Director
- ----------------------------------------------------------------------------------------
Alvin V. Shoemaker 56 Director
- ----------------------------------------------------------------------------------------
James Hanna 61 Director
- ----------------------------------------------------------------------------------------
William E. Simon, Jr. 44 Director
- ----------------------------------------------------------------------------------------
Robert R. Furgason 59 Director
- ----------------------------------------------------------------------------------------
Steven L. Kitchen 50 Director
- ----------------------------------------------------------------------------------------
C. Bob Cline 49 Director
- ----------------------------------------------------------------------------------------
Mark A. Ruelle 34 Director
========================================================================================
</TABLE>
Michael O'Connor has served as Chairman of the Board and a director of
the Company since January 1992. Prior thereto, Mr. O'Connor served as president
of Gas
-42-
<PAGE>
Compressors Inc. from 1965 through 1986 and was a private investor from January
1, 1987 through January 1, 1992. Mr. O'Connor also serves as a director of
certain affiliates of the Company.
Michael J. McGhan has served as President and Chief Executive Officer
of the Company since October 1991 and served as Chief Operating Officer of the
Company from December 1990 through October 1991. Mr. McGhan has served as a
director of the Company since March, 1992. Prior thereto, Mr. McGhan was sales
manager of Energy Industries, Inc. ("EII"). Mr. McGhan has been involved in the
gas compression industry for 17 years. Mr. McGhan also serves as a director of
certain affiliates of the Company.
Curtis Bedrich has served as Chief Financial Officer and Treasurer of
the Company since November 1991. Mr. Bedrich served as Vice President of Adobe
Resources Corporation from 1980 until 1991. Mr. Bedrich has been involved in
the oil and gas industry for 18 years.
William S. Goldberg has served as Executive Vice President and
director of the Company since May 1991. Mr. Goldberg has been employed by GKH
since 1988 and has served as Managing Director of GKH since June 1990. Mr.
Goldberg also serves as a director of certain affiliates of the Company.
Charles D. Erwin has served as a Vice President of the Company since
October 1990 and served as a sales representative of EII from 1985 until October
1990. Mr. Erwin has been involved in the gas compression industry for 10 years.
William C. Bryant has served as a Vice President of the Company since
October 1990 and served as a sales representative of EII from 1988 until October
1990. Mr. Bryant has been involved in the gas compression industry for 20
years.
Maxwell C. McDonald has served as a Vice President of the Company
since December 1990 and served as President of C&B from 1985 until its
acquisition by the Company in 1990. Mr. McDonald has been involved in the gas
compression industry for 22 years.
Joe Bradford has served as a Vice President of the Company since March
1993 and served as Operations Manager from January 1, 1991 until March 1993.
Mr. Bradford served as mechanic supervisor of HEI from 1987 until January 1991.
Mr. Bradford has been involved in the oil and gas industry for 20 years.
Donald M. DeVille has served as a Vice President of the Company since
February 14, 1996. Mr. DeVille has been involved in the gas compression
industry for 16 years.
Teddy J. Head has served as a Vice President of the Company since
February 14, 1996. Mr. Head has been involved in the gas compression industry
for 22 years.
-43-
<PAGE>
Richard S. Meller has served as Secretary of the Company since October
1991. Mr. Meller is a partner of the law firm of Neal, Gerber & Eisenberg,
which provides legal services to the Company and GKH.
Jeri Howell has served as Assistant Secretary of the Company since May
15, 1995.
Ted Collins, Jr. has served as a director of the Company since April
1992. Mr. Collins is the President of Collins & Ware Properties, Inc., a
natural gas producer. Mr. Collins has 35 years of experience in the oil and gas
industry.
Robert Wasielewski has served as a director of the Company since May
15, 1995. Mr. Wasielewski has served as an Associate of GKH since October 1991.
Prior to that time, Mr. Wasielewski was a Vice President of Citicorp's leveraged
capital division. Mr. Wasielewski also serves as a director of certain
affiliates of the Company.
Melvyn N. Klein has served as a director of the Company since May
1991. Mr. Klein is the sole stockholder of a corporation which is a general
partner of GKH Partners, L.P. Mr. Klein has been an attorney and counselor-at-
law since 1968. Mr. Klein serves as a director of Bayou Steel Corporation,
Anixter International Corporation, Santa Fe Energy Resources, Inc., Savoy
Pictures Entertainment, Inc. and certain privately held companies. Mr. Klein is
also a founder and principal of Questor Partners Fund, L.P.
Alvin V. Shoemaker has served as a director of the Company since May
1991 and has been a private investor since his retirement as chairman of the
board of The First Boston Corporation in January 1989.
James Hanna has served as a director of the Company since May 15,
1995. Mr. Hanna is the President of Hanna Oil and Gas Company, and a director
of the Independent Petroleum Association of America and the Merchants National
Bank of Fort Smith, Arkansas. Mr. Hanna has 35 years of experience in the oil
and gas industry.
William E. Simon, Jr. has served as a director of the Company since
December 21, 1995. Mr. Simon is also the Executive Director of William E. Simon
& Sons, L.L.C., a private investment company based in Morristown, New Jersey and
is a former Assistant United States Attorney for the Southern District of New
York.
Robert R. Furgason has served as a director of the Company since May
15, 1995. Mr. Furgason is the President of Texas A&M University -- Corpus
Christi, and has held a series of faculty and administrative positions at
various universities. Mr. Furgason is the former President of the Accreditation
Board for Engineering and Technology Board of Directors, and also serves on a
number of other accreditation and policy boards.
-44-
<PAGE>
Steven L. Kitchen has served as a director of the Company since March
1, 1996.
C. Bob Cline has served as a director of the Company since December
21, 1995. Mr. Cline is Chairman, President and Chief Executive Officer of
Westar Capital, Inc., a subsidiary of Western Resources, Inc. and a shareholder
of the Company. Mr. Cline has 24 years of experience in the oil and gas
industry.
Mark A. Ruelle has served as a director of the Company since December
31, 1995. Mr. Ruelle is also vice president, corporate development of Western
Resources, Inc. Mr. Ruelle has held various positions with Western Resources
Inc. in regulation, treasury, finance and planning since 1986.
Compensation of Directors
Non-employee directors of the Company generally do not receive any
compensation for serving on the Board but are entitled to reimbursement for
expenses incurred in connection with their attendance at Board meetings. The
foregoing notwithstanding, the Company has agreed to pay Mr. Furgason an annual
director's fee equal to $15,000, plus $2,500 per Board meeting attended in
person by Mr. Furgason, subject to an annual cap of $20,000.
Options
1992 Stock Plan
In April 1992, the Board adopted the Company's Stock Compensation Plan
(the "1992 Stock Plan"), which provides for the granting of options to executive
officers, directors, employees or advisors of the Company. The 1992 Stock Plan
permits the Board to issue options with respect to a maximum of 15% of the total
shares of Common Stock outstanding, computed on a fully diluted basis and
including shares which are issuable under the 1992 Stock Plan, at the time of
the grant of an option. As of December 31, 1995, options with respect to 1,023
shares of Common Stock were outstanding, 945.60 of which were presently vested,
and the remainder of which will generally vest ratably over the next two years.
With respect to these options, 172.5 are exercisable at $1.00 per share and
850.5 are exercisable at $725 per share. Options granted under the 1992 Stock
Plan are nonstatutory options and are not classified as "incentive stock
options" within the meaning of Section 422 of the Code.
The exercise price for additional options which may be granted under
the 1992 Stock Plan would be determined by a committee appointed by the Board
(the "Committee"), which Committee is currently comprised of the members of the
Board, and may be less than the fair market value of the Common Stock on the
date of grant. Other than the maximum number of shares available under the 1992
Stock Plan, there is no minimum or maximum number of shares that may be granted
to any person. Options granted under the 1992 Stock Plan generally expire
within a specified number of days of the termination of employment of an
optionee who is
-45-
<PAGE>
an employee. Options granted under the 1992 Stock Plan fully vest and become
exercisable for a specified number of days upon the death or permanent
disability of the optionee and are forfeited upon the termination for Cause of
the optionee. In addition, options granted under the 1992 Stock Plan fully vest
and become exercisable upon the occurrence of a change in control accompanied by
a constructive termination of employment of such optionee, all as more fully
described in the 1992 Stock Plan.
Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee. The term of each option granted under the 1992
Stock Plan may not exceed fifteen years from the date the option is granted.
Options may become exercisable in whole at grant or in installments over time,
as determined by the Committee. Under the terms of the 1992 Stock Plan, payment
upon the exercise of an option may be in cash, by delivery of shares of Common
Stock with a fair market value equal to the aggregate exercise price or, if the
optionee's stock option agreement so provides, by delivery of a promissory note
with such terms as the Committee may approve.
The acceleration of options in the event of a change of control could
be seen as an anti-takeover provision and may have the effect of discouraging a
proposal for merger or other efforts to purchase or sell control of the Company.
1993 Option Plan
In connection with the 1993 Offering, the Board adopted the 1993
Management Stock Option Plan (the "1993 Option Plan") pursuant to which members
of the Company's management who purchased Common Stock in the 1993 Offering were
issued options to purchase one-third of one share of Common Stock at a purchase
price of $725 per share (subject to adjustment for stock splits, stock dividends
and other similar events) for each share of Common Stock owned by such persons
or purchased by such persons in the 1993 Offering. Such options vest ratably
over a five year period which began on June 23, 1993 and are governed by the
terms of the 1993 Option Plan and individual option agreements (the "1993 Option
Agreements"). As of December 31, 1995, options with respect to 1,514 shares of
Common Stock were outstanding, and options with respect to 605.60 were presently
vested. Other than with respect to the applicable exercise price and the actual
vesting and expiration dates, the 1993 Option Plan and the 1993 Option
Agreements are substantially the same as the Employee Option Plan and the
Employee Option Agreements, respectively.
Senior Executive Plan
In connection with the 1993 Offering, Messrs. O'Connor and McGhan were
granted options pursuant to the Company's Senior Executive Stock Option Plan
(the "Senior Executive Plan") to purchase up to 1,291.95 and 645.97 shares of
Common Stock, respectively, at an exercise price of $833.75 per share (subject
to adjustment for stock splits, stock dividends
-46-
<PAGE>
and similar events). Such options vest ratably over a seven year period which
began on June 29, 1993 and will fully vest upon an optionee's death or permanent
disability or upon the occurrence of a Capital Event (as defined in the Senior
Executive Plan) resulting in a compounded annual return of 20% actually realized
on the shares of Common Stock purchased in the 1993 Offering. In addition, on
May 15, 1995, Messrs. McGhan and Bedrich were granted options to purchase 215.32
and 430.65 shares of Common Stock, respectively, under the Senior Executive
Plan. Such options have the same terms as those issued to Messrs. O'Connor and
McGhan in connection with the 1993 Offering, except that such options will vest
ratably over a seven year period which began on May 15, 1995.
Options granted under the Senior Executive Plan generally expire
within a specified number of days of the termination of employment of an
optionee, and such options will be forfeited upon the termination for Cause of
an optionee. The term of each option may not exceed 10 years from the date the
option is granted. Options may not be transferred other than by will or the
laws of descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee. Options granted under the Senior Executive Plan
are nonstatutory options and are not classified as "incentive stock options"
within the meaning of Section 422 of the Code.
Pursuant to the agreements executed in connection with the grant of
options under the Senior Executive Plan, each of Messrs. O'Connor, McGhan and
Bedrich agreed that he will not, during the term of such agreement and for a
period of one year thereafter, (i) compete with any business of the Company and
(ii) without the Company's consent, disclose to persons outside the Company
confidential information concerning the Company.
1995 Management Option Plan
In connection with the 1995 Management Offering at $1,100 per share,
the Board adopted the 1995 Management Stock Option Plan (the "1995 Management
Option Plan"), pursuant to which members of the Company's management and
employees who purchased Common Stock in the 1995 Management Offering were issued
options to purchase one-third of one share of Common Stock at a purchase price
of $1,100 per share (subject to adjustment for stock splits, stock dividends and
other similar events) for each share of Common Stock purchased by such persons
in the 1995 Management Offering. Such options vest ratably over a five year
period which began on July 7, 1995, and are governed by the terms of the 1995
Management Option Plan and individual option agreements (the "1995 Management
Option Agreements"). As of the date of this Offering Memorandum, options with
respect to 83.33 shares of Common Stock were outstanding, none of which were
presently vested. Other than with respect to the applicable exercise price and
the actual vesting and expiration dates, the 1995 Management Option Plan and the
1995 Management Option Agreements are substantially the same as the Employee
Option Plan and the Employee Option Agreements, respectively.
-47-
<PAGE>
1995 Employee Option Plan
In connection with the 1995 Employee Offering at $1,500 per share, the
Board adopted the 1995 Employee Stock Option Plan (the "1995 Employee Option
Plan"), pursuant to which members of the Company's management who purchased
Common Stock in the 1995 Employee Offering were issued options to purchase one-
third of one share of Common Stock at a purchase price of $1,500 per share
(subject to adjustment for stock splits, stock dividends and other similar
events) for each share of Common Stock purchased by such persons in the 1995
Employee Offering. Such options vest ratably over a five year period which
began on August 31, 1995, and are governed by the terms of the 1995 Employee
Option Plan and individual option agreements (the "1995 Employee Option
Agreements"). As of the date of this Offering Memorandum, options with respect
to 575.67 shares of Common Stock were outstanding, none of which were presently
vested. Other than with respect to the applicable exercise price and the actual
vesting and expiration dates, the 1995 Employee Option Plan and the 1995
Employee Option Agreements are substantially the same as the Employee Option
Plan and the Employee Option Agreements, respectively.
Rode Issuance
In connection with the Company's acquisition of PGN, the Company
granted Walter Rode, a former shareholder of PGN, options to purchase 190.45
shares of Common Stock at $1,500 per share. The terms of these options are
identical to the 1995 Employee Option Plan, except that the vesting period began
on September 8, 1995.
Winds Issuance
In connection with the issuance of 15 shares of Common Stock to each
of Glen Wind and Kurt Wind (30 shares total) as of January 24, 1996, the Company
granted to each of Glen Wind and Kurt Wind options to acquire 75 shares of
Common Stock (150 shares total) at $1 per share exercisable on terms
substantially similar to the terms of the options granted under the 1995
Employee Offering.
Incentive Option Plan
In connection with the 1993 Offering, the Board adopted the Company's
Incentive Option Plan, which was amended and restated as of July 20, 1995 (as
amended, the "Incentive Option Plan"), participation in which was open to
members of management who participated in the 1993 Offering and who are employed
by the Company or any of its subsidiaries or affiliates at the time of a Capital
Event (as defined in the Incentive Option Plan) (each a "1993 Eligible
Participant").
Pursuant to the Incentive Option Plan as presently constituted, the
Company granted certain employees options to purchase 8,554 shares of Common
Stock at an exercise
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<PAGE>
price of $725 per share. The options vest ratably over a five year period
commencing July 20, 1995 and are governed by the Incentive Option Plan and
individual option agreements (the "Incentive Option Agreements"). As of the date
of this Offering Memorandum, options with respect to 8,554 shares of Common
Stock were outstanding, none of which are presently vested. Other than with
respect to the applicable exercise price and the actual vesting and expiration
dates, the Incentive Option Plan and the Incentive Option Agreements are
substantially the same as the Employee Option Plan and the Employee Option
Agreements.
Summary Compensation Table
The following table sets forth the total compensation that was awarded
to, earned by or paid to Michael J. McGhan, Michael O'Connor, Curtis Bedrich,
Maxwell McDonald and Charles Erwin (the five other most highly paid executive
officers) as a group during the year ended December 31, 1995.
<TABLE>
<CAPTION>
====================================================================================================
Long Term All Other
Annual Compensation Compensation Compensation(1)
Awards Option
Salary Bonus Grants
====================================================================================================
<S> <C> <C> <C> <C>
CEO and four other most highly $500,000 $527,120 -- $4,326
compensated executive officers...........
====================================================================================================
</TABLE>
(1) Consisting of life insurance premiums.
Option Grants in Last Fiscal Year
During the year ended December 31, 1995, the Company granted the
following number of Options: (i) 645.97 under the Senior Executive Plan, (ii)
83.33 under the 1995 Management Option Plan, (iii) 575.67 under the 1995
Employee Option Plan, (iv) 8,554 under the Incentive Option Plan and (v) 190.45
to Walter Rode in connection with the Company's acquisition of PGN. The Company
has not, to date, granted any stock appreciation rights.
Fiscal Year End Option Values
Shown below is information with respect to unexercised options to
purchase Common Stock in effect as of year-end 1995, all of which were granted
pursuant to the existing option plans of the Company as described in this
Offering Memorandum. See "Management -- Options." None of such options have
been exercised.
<TABLE>
<CAPTION>
==========================================================================================================
Number of Unexercised Options Value of Unexercised in-the-Money
December 31, 1995 Options at December 31, 1995
----------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
49
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CEO and four other most highly 1,893.66 9,468.33 $2,036,781 $9,836,610
compensated executive officers
==========================================================================================================
</TABLE>
Employment Contracts and Other Agreements
In connection with the Gale Force Acquisition, the Company entered
into an employment agreement with Alan D. Lavenue providing for a two year term.
In connection with the Astra acquisition, the Company adopted a severance plan
for Astra employees. Such severance plan provides that if, within 12 months
following the Astra acquisition, an Astra employee is terminated without cause
or his or her compensation is reduced by 5% or more as measured relative to his
or her compensation level at the effective time of the Astra acquisition, such
employee is entitled to receive a severance payment equal to (i) the product of
(a) 12 and (b) the employee's average compensation for the 12 month period
preceding such employee's termination, less (ii) the amount of compensation
actually paid to such employee since the effective time of the Astra
acquisition.
Compensation Committee and Insider Participation
The Compensation Committee of the Board consists of Messrs. Goldberg,
Shoemaker, O'Connor and Furgason. All decisions with respect to compensation
are made by the Board after consideration of the advice of the Compensation
Committee. From time to time, Mr. McGhan will participate in the deliberations
regarding compensation of the other executive officers of the Company.
<TABLE>
<CAPTION>
=====================================================================================================
OPTIONS ISSUED
OPTIONS ISSUED PURSUANT TO
PURSUANT TO THE 1995 OPTIONS ISSUED OPTIONS ISSUED
THE 1995 EMPLOYEE PURSUANT TO PURSUANT TO
MANAGEMENT STOCK OPTION THE INCENTIVE THE SENIOR
OPTION PLAN PLAN OPTION PLAN EXECUTIVE PLAN
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CEO and four other most 14.34 152.00 6,499.76 645.97
highly compensated
executive officers
=====================================================================================================
</TABLE>
Certain Relationships and Related Transactions
GKH and certain other stockholders of the Company formerly owned
substantially all of the common stock of Combustion. Combustion was in the
business of refurbishing existing natural gas compressors to bring them into
compliance with certain environmental emissions regulations. On March 21, 1995,
the Company borrowed $500,000 from Combustion in order to fund certain working
capital needs. This loan was evidenced by a demand promissory note of the
Company payable to the order of Combustion. On November 20, 1995, Combustion
merged with and into the Company and as a result thereof, the shareholders of
Combustion received 338.43 shares of Common Stock.
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<PAGE>
Mr. Collins, one of the Company's directors and minority stockholders,
controls a corporation which owns a 50% interest in a joint venture to which the
Company leases compressors pursuant to a long-term lease which provides for
monthly payments of $56,450.
Mr. Hanna, one of the Company's directors and minority stockholders,
is the President of Hanna Oil and Gas Company, to which the Company leases
compressors pursuant to month-to-month leases which provide for aggregate
monthly payments of $32,775.
GKH and the Company have entered into an agreement whereby in exchange
for investment banking and financial advisory services to be rendered by GKH,
the Company has agreed to pay GKH a fee equal to .75% of the value of the
Company determined and payable at such time (i) a capital transaction is
consummated resulting in GKH Investments, L.P. owning less than 25% of the
outstanding Common Stock or (ii) any other transaction occurs resulting in the
effective sale of the Company or its business by the current owners.
PRINCIPAL STOCKHOLDERS
Principal Stockholders
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company as of December 31, 1995
(i) by each person who is known by the Company to own beneficially more than 5%
of any class of the outstanding Common Stock, (ii) by each director and the
chief executive officer and the four other most highly compensated executive
officers of the Company and (iii) by all of the Company's directors and
executive officers as a group.
<TABLE>
<CAPTION>
=========================================================================================
Stock Beneficially Percentage of Stock
Name of Person or Group Owned Beneficially Owned(1)
----------------------- ----- ------------------
-----------------------------------------------------------------------------------------
<S> <C> <C>
GKH Investments, L.P.(2) 64,053.54 49.9405%
-----------------------------------------------------------------------------------------
Joint Energy Development Investments 11,111.11 8.6630%
Limited Partnership
-----------------------------------------------------------------------------------------
Astra Resources, Inc. (Westar 30,555.56 23.8232%
Capital, Inc.)
-----------------------------------------------------------------------------------------
Ted Collins, Jr. 855 *
-----------------------------------------------------------------------------------------
William S. Goldberg(3) -- --
-----------------------------------------------------------------------------------------
Robert Wasielewski -- --
-----------------------------------------------------------------------------------------
Melvyn N. Klein(4) -- --
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
=========================================================================================
Stock Beneficially Percentage of Stock
Name of Person or Group Owned Beneficially Owned(1)
----------------------- ----- ------------------
-----------------------------------------------------------------------------------------
<S> <C> <C>
Michael J. McGhan 648.51 *
-----------------------------------------------------------------------------------------
Michael A. O'Connor 2,055.07 1.6023%
-----------------------------------------------------------------------------------------
Alvin V. Shoemaker(5) 1,622.09 1.2647%
-----------------------------------------------------------------------------------------
Maxwell C. McDonald 754.94 *
-----------------------------------------------------------------------------------------
Curtis Bedrich 560.33 *
-----------------------------------------------------------------------------------------
James Hanna 1,875 1.4619%
-----------------------------------------------------------------------------------------
William E. Simon, Jr.(6) 1,827.66 1.4250%
-----------------------------------------------------------------------------------------
Robert A. Furgason -- --
-----------------------------------------------------------------------------------------
Charles D. Erwin 190.290 *
-----------------------------------------------------------------------------------------
William C. Bryant 240.940 *
-----------------------------------------------------------------------------------------
Joseph Bradford 103.290 *
-----------------------------------------------------------------------------------------
Donald M. DeVille 126.000 *
-----------------------------------------------------------------------------------------
All directors and officers as a 10,859.120 8.4623%
group(7)
=========================================================================================
</TABLE>
_______________________________________________
*Represents less than 1% of the outstanding Common Stock.
(1) There are presently 198.40 treasury shares issued which are not counted as
outstanding in calculating the beneficial ownership percentages.
(2) Does not include 2,419.69 shares of Common Stock (1.882% of the outstanding
shares) owned by GKH Partners, L.P., a Delaware limited partnership, as
nominee for GKH Private Limited, a Singapore corporation. GKH Partners,
L.P. is the general partner of GKH Investments, L.P.
(3) Does not include 255.80 shares of Common Stock (less than 1% of the
outstanding shares) owned by Mr. Goldberg's wife, Nancy K. Goldberg, not
individually, but solely as trustee of the Nancy K. Goldberg Declaration of
Trust. Mr. Goldberg disclaims beneficial ownership of such shares.
(4) Mr. Klein, who is a director of the Company, is the sole stockholder of a
corporation which is a general partner of GKH Partners, L.P. Mr. Klein
disclaims beneficial ownership of all shares owned by GKH Partners, L.P.
and GKH Investments, L.P. and such shares are not included in the number of
shares owned by Mr. Klein.
-52-
<PAGE>
(5) Mr. Shoemaker disclaims beneficial ownership of shares owned indirectly by
his affiliates.
(6) Mr. Simon disclaims beneficial ownership of shares owned by his affiliates.
(7) Does not include shares owned by all directors and officers as a group or
their affiliates for which such directors and officers disclaim beneficial
ownership.
Stockholders' Agreements
1992 Stockholders' Agreement
In connection with the 1992 Offering, the persons participating
therein, the Company, HEI, GKH and certain other present and former stockholders
of the Company entered into that certain Stockholders' Agreement dated April 10,
1992 (the "1992 Stockholders' Agreement"). The 1992 Stockholders' Agreement
restricts the sale of Common Stock held by the parties thereto and provides for,
among other things, (i) the right of first refusal of the Company and the right
of second refusal of the other parties thereto with respect to any proposed
transfer of Common Stock (except transfers to affiliates) by a party thereto
other than GKH, (ii) the right of the parties thereto who own a majority of the
shares of Common Stock held by all parties thereto to compel the other parties
thereto to sell their Common Stock upon the sale by such majority of all of
their Common Stock and (iii) the right of each party thereto to participate in
the sale by one or more parties thereto of more than 50% of the outstanding
Common Stock held by all parties thereto. The 1992 Stockholders' Agreement does
not contain provisions regarding the ability of the Company to redeem all of a
stockholder's Common Stock upon the termination of his employment with the
Company.
Upon consummation of the 1993 Offering, the Company, HEHC, GKH and
certain persons who purchased Common Stock pursuant thereto entered into that
certain Stockholders' Agreement, dated as of June 29, 1993 (the "1993
Stockholders' Agreement") which substantially superseded the 1992 Stockholders'
Agreement as among the Company and each person who executed the 1993
Stockholders' Agreement. However, the 1992 Stockholders' Agreement remains in
full force and effect as among the parties thereto which still own shares of
Common Stock. See "-- 1993 Stockholders' Agreement."
Hanna Stockholders' Agreement
In connection with the Hanna Acquisition, the Company, GKH, HEHC and
HIG entered into that certain Supplemental Stockholders' Agreement dated as of
October 8, 1993 (the "Hanna Stockholders' Agreement"). The Hanna Stockholders'
Agreement restricts the sale of Common Stock held by the parties thereto and
provides for, among other things, (i) the right of first refusal of the Company
with respect to any proposed transfer of Common Stock (except transfers to
affiliates by HIG), (ii) the right of GKH to compel HIG to sell its Common Stock
-53-
<PAGE>
upon the sale by GKH of all of its Common Stock and (iii) the right of HIG to
participate in the sale by GKH of more than fifty percent of the Common Stock
then owned by GKH. The Hanna Stockholders' Agreement will terminate six months
after 10% or more of the Common Stock is listed on a nationally recognized
exchange or quoted on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ").
Brenda K. Phillips Stockholders' Agreement
In connection with the resignation of Brenda K. Phillips ("Phillips"),
a former employee and current stockholder of the Company, Phillips, the Company,
HEHC and GKH entered into that certain Supplemental Stockholders' Agreement,
dated November 19, 1993, the terms of which are similar to those of the Hanna
Stockholders' Agreement.
HEHC Stockholders' Agreement
In connection with the HEHC Merger, the Company, GKH and the other
former stockholders of HEHC (the "HEHC Stockholders") entered into that certain
Supplemental Stockholders' Agreement dated as of January 27, 1995 (the "HEHC
Stockholders' Agreement"). The HEHC Stockholders' Agreement restricts the sale
of Common Stock held by the parties thereto (subject to certain exceptions for
dispositions pursuant to an effective registration statement under the
Securities Act or pursuant to any public distribution pursuant to Rule 144 of
the Securities Act, and except for dispositions of Common Stock by GKH to its
partners) and provides for, among other things, (i) the right of first refusal
of GKH with respect to any proposed transfer of Common Stock (except transfers
to affiliates) by an HEHC Stockholder, (ii) the right of GKH to compel the HEHC
Stockholders to sell their Common Stock upon the sale by GKH of all of its
Common Stock and (iii) the right of each HEHC Stockholder to participate in the
sale by GKH of any or all of its Common Stock. The HEHC Stockholders' Agreement
also contains provisions regarding the right of the HEHC Stockholders to
designate a maximum of two members of the Board (the "HEHC Designees"), as well
as a requirement that such HEHC Designees approve certain transactions and acts
engaged in by the Company. Each party to the HEHC Stockholders' Agreement also
agrees to notify the Board if it or any of its affiliates engages in or makes an
investment in any business or entity competitive with the business then being
conducted by the Company or any subsidiary thereof. The HEHC Stockholders'
Agreement would terminate upon the consummation of a publicly registered
offering of twenty-five percent or more of the Common Stock. The parties to the
HEHC Stockholders' Agreement are also parties to the Amended and Restated
Registration Rights Agreement. See "-- Registration Rights Agreements."
Gale Force Stockholders' Agreement
In connection with the Gale Force Acquisition, the Company, GKH, and
certain persons who acquired Common Stock pursuant to the Gale Force Acquisition
(the "Gale Force Stockholders") entered into that certain Supplemental
Stockholders' Agreement, dated as of
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<PAGE>
March 8, 1995 (the "Gale Force Stockholders' Agreement"). The Gale Force
Stockholders' Agreement restricts the sale of Common Stock held by the parties
thereto and provides for, among other things, (i) the right of first refusal of
the Company and the right of second refusal of GKH with respect to any proposed
transfer of Common Stock (except transfers to affiliates) by a Gale Force
Stockholder, (ii) the right of GKH to compel the Gale Force Stockholders to sell
their Common Stock upon the sale by GKH of all of its Common Stock and (iii) the
right of each Gale Force Stockholder to participate in the sale by (a) GKH of
more than fifty percent of the Common Stock then owned by GKH or (b) by GKH and
other stockholders of the Company of more than fifty percent of the outstanding
Common Stock of the Company. The Gale Force Stockholders' Agreement also
contains provisions whereby the Gale Force Stockholders agree to vote their
shares in order to ensure the election to the Board of Messrs. O'Connor and
McGhan and such other individuals as nominated by GKH. In addition, in the event
the Company offers GKH the opportunity to purchase additional shares of Common
Stock, the Gale Force Stockholders will have the right to acquire their
respective pro rata share of such Common Stock on the same terms and conditions
offered to GKH. The Gale Force Stockholders' Agreement will terminate upon ten
percent or more of the Common Stock being listed on a nationally recognized
exchange or quoted on the NASDAQ. The parties to the Gale Force Stockholders'
Agreement are also parties to the Amended and Restated Registration Rights
Agreement. See "--Registration Rights Agreements."
JEDI Stockholders' Agreement
In connection with the Series B Preferred Stock Issuance and the
issuance of Common Stock to JEDI, the Company, GKH and JEDI entered into that
certain Stockholders' Agreement dated as of August 7, 1995 (the "JEDI
Stockholders' Agreement"), containing terms substantially similar to those
contained in the Stockholders' Agreement, except that (i) until the earlier to
occur of the Company having satisfied all of its obligations to JEDI under the
JEDI Loan Agreement and a public offering of the Common Stock, JEDI has the
right with respect to certain equity offerings of the Company to existing
Company stockholders (each a "Rights Offering") (a) to subscribe for the first
fifteen percent of such Rights Offering on an exclusive basis, (b) subscribe for
its pro rata share of the remaining equity under the Rights Offering and (c)
cause its duly licensed affiliate to underwrite all of such Rights Offering in
the event JEDI and the Company can mutually agree on the terms of such
underwriting, (ii) so long as JEDI owns at least 7.5% of the outstanding Common
Stock (on a fully diluted basis) and generally does not hold an equity interest
in a competitor of the Company, JEDI has certain rights regarding notice of and
attendance at meetings of the Board and has the right to elect one member of the
Board and (iii) the right of inclusion of the non-GKH stockholders parties
thereto is triggered only in the event that GKH proposes to sell all of its
Common Stock and Preferred Stock. In addition, the agreement terminates upon
the earliest to occur of certain events, including the consummation of a
publicly registered offering of 20% or more of the Common Stock or August 1,
2005.
-55-
<PAGE>
Astra Stockholders' Agreement
In connection with the Astra merger, the Company, GKH and Astra
Resources entered into that certain stockholders' agreement dated as of December
6, 1995 (the "Astra Stockholders' Agreement") containing terms substantially
similar to those contained in the Stockholders' Agreement except that (i) in the
event the Company makes an equity offering of Common Stock, Astra has the right
to subscribe for such amount of Common Stock as to enable it to maintain a 20%
ownership interest in the Company, (ii) so long as Astra owns at least 15% of
the outstanding Common Stock and does not engage in a competitive business it
shall have the right to nominate that number of directors which would constitute
20% of the members of the Board, and (iii) the right of inclusion of the non-GKH
stockholders parties thereto is triggered only in the event that GKH proposes to
sell all of its Common Stock and Preferred Stock. In addition, the agreement
terminates upon the earliest to occur of certain events, including consummation
of a publicly registered offering of 20% or more of the Common Stock or August
1, 2005.
Registration Rights Agreements
The Company, GKH and the other parties to the HEHC Stockholders'
Agreement, the Gale Force Stockholders' Agreement, the JEDI Stockholders'
Agreement and the Astra Stockholders' Agreement (GKH and such stockholders,
hereinafter "Holders") are party to that certain Third Amended and Restated
Registration Rights Agreement, dated as of December 5, 1995 (the "Third Amended
and Restated Registration Rights Agreement"). The Third Amended and Restated
Registration Rights Agreement generally provides that in the event the Company
proposes to register under the Securities Act shares of its capital stock or any
other securities, then upon the request of those Holders owning in the aggregate
at least 2.5% of the Common Stock or derivatives thereof (the "Registrable
Securities") then held by all of the Holders, the Company must use its
reasonable best efforts to cause the Registrable Securities so requested by the
Holders to be included in the applicable registration statement; provided,
however, that the Holders' right to have their Registrable Securities so
included in a registration is limited in the event and to the extent that the
managing underwriter(s) of the registration in question are of the opinion that
the inclusion of the number of Registrable Securities held by Holders requesting
inclusion in the applicable registration statement would materially interfere
with the underwriters' ability to effectuate the registration and sale of
securities proposed to be offered and sold pursuant to such registration
statement. The Company agrees to pay all registration expenses in connection
with registrations of Registrable Securities effected pursuant to the Third
Amended and Restated Registration Rights Agreement; however, all fees and
expenses relating to the distribution of such Registrable Securities are to be
borne by the Company and each Holder pro rata based on the number of Registrable
Securities included in the registration for the account of the Company and each
Holder. The Company, in connection with filing a registration statement in
accordance with this agreement, would also have the obligation to apply for
listing and use its reasonable best efforts to list the Registrable Securities
being registered on any national exchange on which a class of the Company's
equity securities is listed, or if there is no
-56-
<PAGE>
class of Company equity security so listed, then to use its reasonable best
efforts to qualify such Registrable Securities for inclusion on the NASDAQ. In
addition, after December 5, 1999, any single Holder of Common Stock which owns
18% or more of the Common Stock has the right to demand the registration of its
Common Stock.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summaries relate to (i) certain provisions of the Bank
Credit Agreement and (ii) certain provisions of the JEDI Loan Agreement. The
summary of the provisions relating to the Bank Credit Agreement and the JEDI
Loan Agreement do not purport to be complete and are qualified in their entirety
by reference to the relevant agreements (including all amendments) relating
thereto, copies of which are available for review at the principal offices of
the Company.
The Bank Credit Agreement and the JEDI Loan Agreement
The Bank Credit Agreement provides for a four year revolving credit
facility which provides for a maximum commitment of $90,000,000. Amounts
outstanding under the Bank Credit Agreement bear interest at a rate equal to
LIBOR plus 0.5% to LIBOR plus 1.5% and matures (absent acceleration) on December
18, 1999. As of December 31, 1995, $16,900,000 was outstanding under the Bank
Credit Agreement.
The JEDI Loan Agreement provides for a revolving five year committed
availability (through December 19, 2000) of up to $100,000,000 with maturities
ranging from one to seven years. Amounts outstanding under the JEDI Loan
Agreement bear interest at a rate equal to, at the Company's option, either (i)
the sum of the U.S. Treasury Bill yield to maturity as set forth in the Wall
Street Journal plus a specified margin or (ii) the sum of the LIBOR Base Rate
(as defined in the JEDI Loan Agreement) plus a specified margin. As of December
31, 1995 principal of $30,000,000 was outstanding under the JEDI Loan Agreement.
Each of the Bank Credit Agreement and the JEDI Loan Agreement
(collectively, the "Loan Agreements") is secured pursuant to a collateral trust
agreement by all of the assets of the Company and its qualified subsidiaries and
contains certain restrictive covenants that impose limitations (subject to
certain exceptions) on the Company, including, among others, limitations with
respect to (i) maintaining certain ratios, including ratios with respect to (a)
consolidated indebtedness to consolidated capitalization, (b) consolidated
earnings before income tax, depreciation and amortization to consolidated
interest expense and (c) current assets to current liabilities, (ii) incurring
additional indebtedness, (iii) creating, incurring, assuming or suffering to
exist any mortgage, pledge, lien or other encumbrance or security interest, (iv)
creating, incurring, assuming or suffering to exist any guarantee or similar
obligation, (v) effecting certain fundamental changes, including any merger or
sale of all or substantially all of the Company's assets, (vi) selling any of
the Company's assets except in the ordinary course of business or as otherwise
permitted, (vii) increasing lease expense in excess of certain limits, (viii)
declaring or
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<PAGE>
paying dividends, (ix) making capital expenditures in excess of certain
prescribed limits, (x) making any advance, loan or similar investment in any
person, (xi) making optional payments or prepayments or amending the terms of
any indebtedness, (xii) entering into any transaction with affiliates, (xiii)
the sale and leaseback of any of the Company's real or personal property, (xiv)
changing the Company's fiscal year and (xv) entering into agreements which
permits the Company to incur liens or other restrictions on its assets.
Each of the Loan Agreements contains certain default provisions,
including, among others, (i) failure of the Company to pay any principal or
interest thereunder when due, (ii) breach by the Company or any of its
subsidiaries or affiliates which are parties to the Loan Agreements of any
representation or warranty made therein or in the other documents contemplated
thereby, (iii) default by the Company or any of its subsidiaries in the
observance or performance of any covenant or agreement contained therein or in
the other documents contemplated thereby, (iv) cessation of the security
agreements and related documents executed thereunder to be in full force and
effect, (v) default by the Company or any of its subsidiaries in the payment of
any indebtedness or guarantee in excess of specified amounts, which default
remains in effect for 30 days, or any other breach under agreements with respect
to such indebtedness or guarantees which causes such indebtedness or guarantee
to be accelerated, (vi) occurrence of certain bankruptcy related events, (vii)
occurrence of certain events related to ERISA obligations, (viii) entering of
one or more significant judgements or decrees against the Company or any of its
subsidiaries, (ix) the incurrence by the Company or any of its subsidiaries of
significant liability for remediation or environmental compliance (or penalty
with respect thereto) and (x) under the Bank Credit Agreement, the cessation of
GKH to own directly or indirectly 30% of the issued and outstanding Common
Stock.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of
500,000 shares of Common Stock and 200,000 shares of Preferred Stock, $.01 par
value per share, of which 50,000 shares have been designated as Series A
Preferred Stock, 15,000 shares have been designated as Series B Preferred Stock
and 135,000 shares remain undesignated ("Preferred Stock"). As of December 31,
1995, 128,259.63 shares of Common Stock are issued and outstanding, and 21,602
shares and 10,000 shares of Series A and Series B Preferred Stock, respectively,
are outstanding. An additional 22,887.29 shares of Common Stock are reserved
for issuance pursuant to options, warrants and the conversion of the Series B
Preferred Stock.
The following summary description relating to the capital stock does
not purport to be complete. For a detailed description, reference is made to
the Certificate of Incorporation of the Company, as amended (the "Certificate"),
which is available at the Company for review.
-58-
<PAGE>
Common Stock
As of December 31, 1995, there were 128,259.63 shares of Common Stock
outstanding held of record by 100 stockholders (not including 198.40 treasury
shares then held by the Company). 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 the Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board out of legally available funds. In the event of a
liquidation, dissolution, sale or winding up of the Company, holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and satisfaction of preferential rights and have no rights to
convert their Common Stock into any other securities. Holders of Common Stock
have no preemptive or subscription rights unless (i) they are a party to the
Gale Force Stockholders' Agreement, the JEDI Stockholders' Agreement or the
Astra Stockholders' Agreement or (ii) they become a party to the Stockholders'
Agreement, and then only to the extent provided in each such agreement. See
"Principal Stockholders -- Stockholders' Agreements" and "The Offering --
Stockholders' Agreement -- Preemptive Rights." There are no redemption or
conversion rights with respect to any shares of Common Stock. The outstanding
shares of Common Stock are, and the shares of Common Stock to be issued pursuant
to this offering will be, fully paid and nonassessable.
Preferred Stock
The Company currently has 21,602 shares of Series A and 10,000 shares
of Series B Preferred Stock outstanding. In addition, the Board has the
authority to cause the Company to issue without any further vote or action by
the stockholders, up to the remaining authorized and unissued number of shares
of Preferred Stock in one or more series, to designate the number of shares
constituting any series, and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, rights and terms of redemption, redemption price or prices and
liquidation preferences of such series.
On August 7 and September 29, 1995, the Company issued the Series A
Preferred Stock in an aggregate amount of 21,602 shares at $1,000 per share,
bearing a 6.5% annual cumulative dividend. Dividends on the Series A Preferred
Stock are payable in additional shares of Series A Preferred Stock during the
initial three years after issuance, and in cash thereafter. Each share of
Series A Preferred Stock carries with it a detachable warrant to purchase 0.1667
shares of Common Stock at $1.00 per share, which warrants vest 20% at the time
of issuance and, thereafter, incrementally on a monthly basis over the
subsequent three years. Upon exercise of the warrants, the holders of the
Common Stock underlying the warrants have so-called "piggy-back" registration
rights with respect thereto. In addition, the holders of the Series A Preferred
Stock have special voting rights along with the holders of the Series B
Preferred Stock with respect to certain enumerated transactions. All holders of
the Series A Preferred Stock have entered into the Stockholders' Agreement. See
"Offering -- Stockholders' Agreement."
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On August 7, 1995, the Company issued the Series B Preferred Stock to
JEDI in an aggregate amount of 10,000 shares at $1,000 per share, bearing a 6.5%
cumulative dividend. The 6.5% per share per annum dividend on the Series B
Preferred Stock is payable in additional shares of Series B Preferred Stock
during the initial three years after issuance, and in cash thereafter. The
Series A Preferred Stock is not redeemable by the Company until (i) any
"Redemption Event" (e.g., sale of all of the Company's assets, a merger in which
the Company is not the surviving corporation or GKH not owning more than 50% of
the outstanding Common Stock) or (ii) the third anniversary of the initial
issuance thereof, and thereafter is redeemable at a price which is based on the
initial purchase price and which varies based on the timing of such redemption.
Upon the occurrence of a Redemption Event, the holders of the Preferred Stock
have the right to require the Company to redeem all or any portion of its Series
B Preferred Stock at $1,000 per share plus accrued but unpaid dividends thereon.
The Series B Preferred Stock is redeemable by the Company and the holders
thereof on the same terms on which the Series A Preferred Stock may be redeemed.
Following the third anniversary of the issuance of the Series B Preferred Stock
or upon a Redemption Event, JEDI is permitted to convert the Series B Preferred
Stock into shares of Common Stock at a conversion price equal to the greater of
(i) $2,100 and (ii) the product of (A) 6.4 and (B) a per share calculation of
the Company's earnings before interest, taxes, depreciation and amortization for
a given period, less the Company's consolidated long term debt and liquidation
preference of the Preferred Stock (without premium) at a given time. The
conversion price of the Series B Preferred Stock is also subject to standard
anti-dilution adjustments. In addition, the holders of the Series B Preferred
Stock have special voting rights along with the holders of the Series A
Preferred Stock (as defined below) with respect to certain enumerated
transactions.
Options
The Company currently has outstanding options to purchase 322.5 shares
of Common Stock at $1.00 per share. Of these options, 172.5 were issued to
certain executive officers in connection with the 1992 Stock Plan and 75 were
issued to each of Glen Wind and Kurt Wind (150 total) in connection with their
purchase of Common Stock as of January 24, 1996. The options issued in
connection with the 1992 Stock Plan expire at various times in 2007 and the
options issued to each of Glen Wind and Kurt Wind on January 24, 2006.
The Company currently has outstanding options to purchase 10,918.50
shares of Common Stock at $725 per share. Of these options, 850.5 were issued
to certain executive officers in connection with the 1992 Stock Plan, 1,514 were
issued to certain members of the Company's management in connection with the
1993 Option Plan and 8,554 were issued to Company management in connection with
the Incentive Option Plan. The options issued pursuant to the 1992 Stock Plan
expire at various times in 2007, the options issued pursuant to the 1993 Option
Plan expire on June 29, 2003 and the options issued pursuant to the Incentive
Option Plan expire on July 20, 2005.
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The Company currently has outstanding options to purchase 2,583.89
shares of Common Stock at $833.75 per share. All such options were issued to
certain executive officers in connection with the Senior Executive Plan. With
respect to these options, 1,937.92 will expire June 29, 2003 and 645.97 will
expire May 15, 2005.
The Company currently has outstanding options to purchase 83.33 shares
of Common Stock at $1,100 per share. All such options were granted under the
1995 Management Option Plan and will expire on July 7, 2005.
The Company currently has outstanding options to purchase 766.12
shares of Common Stock at $1,500 per share. With respect to these options,
575.67 were granted under the 1995 Employee Option Plan and will expire on
August 31, 2005 and 190.45 were granted to Walter Rode in connection with the
acquisition of PGN and will expire on September 8, 2005.
The Company currently has outstanding options to purchase 89 shares of
Common Stock at $1,551 per share. These options were issued to Don DeVille on
terms substantially similar to terms governing the options granted under the
1995 Employee Offering and will expire on January 19, 2006.
As long as the options remain unexercised and outstanding, the holders
thereof will have the opportunity to profit from an increase in the value of the
Common Stock, if any, without assuming the risk of ownership.
Special Provisions of the Certificate of Incorporation and Delaware Law
Limitation of Director Liability
Section 102(b)(7) of the Delaware General Corporation Law ("Section
102(b)") 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. The Company's Certificate
of Incorporation limits the liability of directors to the Company or its
stockholders (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by Section 102(b). Specifically,
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. The
Certificate of Amendment provides for mandatory indemnification of directors and
officers of the Company and also
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includes a provision regarding compromises or arrangements between the Company
and its creditors.
Indemnification
To the maximum extent permitted by law, the Company's Certificate of
Incorporation and Bylaws provide for mandatory indemnification of directors and
permit indemnification of officers, employees and agents of the Company 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 the Company. In addition, the Company must advance or reimburse
directors, and may advance or reimburse officers, employees and agents for
expenses incurred by them in connection with indemnifiable claims.
ADDITIONAL INFORMATION
The Company intends to supply its stockholders on an annual basis with
a copy of its audited financial statements.
Each prospective investor and/or his purchaser or other
representatives are hereby granted access to, and are invited to review, all
materials available to the Company relating to this offering or anything set
forth in this Offering Memorandum.
The Company will answer all inquiries from prospective investors or
their representatives relating to the transactions contemplated hereunder and
will afford prospective investors and their representatives the opportunity to
obtain any additional information (to the extent that the Company possesses such
information or can acquire it without unreasonable effort or expense) necessary
to verify the accuracy of the information set forth in this Offering Memorandum.
Each prospective investor should use this opportunity to communicate
directly with his own legal counsel, accountants and other professional advisors
who can help the prospective investor evaluate the merits and risks of a
purchase of the Shares and the tax and legal aspects thereof.
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EXHIBIT 4.2
HANOVER COMPRESSOR COMPANY
1996 EMPLOYEE STOCK OFFERING
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT (this "Agreement") dated as of March 21, 1996,
between Hanover Compressor Company, a Delaware corporation (the "Company"), and
the individual named on the signature page hereof under the heading "PURCHASER"
("Purchaser").
W I T N E S S E T H
WHEREAS, Purchaser desires to subscribe for and purchase from the Company,
and the Company desires to issue and to sell to Purchaser (i) for cash out of
Purchaser's own funds, the number of shares (the "Cash Shares") of common stock,
$.001 par value ("Common Stock"), of the Company set forth next to the heading
"Cash Shares" on Schedule A attached hereto, and (ii) out of the proceeds of a
four year loan (a "Four Year Loan") to be made to Purchaser by the Company in
accordance with the terms of a loan agreement (the "Loan Agreement") and a
secured promissory note (the "Four Year Note"), each substantially in the form
attached as Exhibits C and D to the Confidential Offering Memorandum dated
March 21, 1996 (the "Memorandum"), previously delivered to Purchaser, the number
of shares (the "Four Year Loan Shares") forth next to the heading "Four Year
Loan Shares" on Schedule A each case upon the terms and conditions hereinafter
set in set forth. The Four Year Loan Shares and the Cash Shares are sometimes
collectively referred to herein as the "Shares"; and
WHEREAS, this Agreement is one of several agreements, including, without
limitation those agreements and instruments attached as Exhibits to the
Memorandum ("Other Purchaser Agreements") being entered into concurrently
herewith by the Company and certain members of the management of the Company in
connection with the offering (the "Offering") made pursuant to the Memorandum.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby acknowledge, agree and understand the
following:
1. Subscription. Subject only to the provisions of Section 8 hereof, Purchaser
hereby irrevocably subscribes for the Shares under terms and conditions set
forth herein. The purchase price (the "Purchase Price") for each Share shall be
$1,800. The parties agree that notwithstanding anything herein to the contrary,
the Company reserves the absolute right (i) to reject any subscription for any
reason and (ii) to terminate or modify the Offering at any time for any reason.
<PAGE>
2. The Closing. The closing of the purchase and sale of the Shares (the
"Closing") shall take place at the principal offices of the Company, 12001 North
Houston Rosslyn, Houston, Texas 77086 at 10:00 a.m., Houston time on Thursday,
April 25, 1996, or (i) at such later date or time as the Company in its sole
discretion may determine without the consent of or notice to Purchaser, but in
no event later than May 31, 1996 (the "Termination Date"), and (ii) at such
other place as shall be agreed upon by the parties hereto. The date of the
Closing is sometimes hereinafter referred to as the "Closing Date."
3. Deliveries by Purchaser.
(a) Stockholders' Agreement. Concurrently with Purchaser's execution and
delivery of this Agreement, Purchaser shall deliver to the Company two executed
counterparts to that certain Amended and Restated Stockholders' Agreement, dated
as of August 7, 1995, among the Company, GKH Partners, L.P., GKH Investments,
L.P. and the other stockholders of the Company parties thereto (the
"Stockholders' Agreement"), attached to the Memorandum as Exhibit B.
(b) Additional Deliveries. At or prior to the Closing, upon the terms
and subject to the conditions of this Agreement, Purchaser shall execute where
appropriate and deliver to the Company:
(i) a certified or bank cashier's check in the amount of the
aggregate Purchase Price for the Cash Shares;
(ii) to the extent any of the Shares subscribed for pursuant to
this Agreement are Four Year Loan Shares:
(A) a duly executed Loan Agreement;
(B) a duly executed Four Year Note in an original principal
amount equal to the aggregate Purchase Price for all such Four Year
Loan Shares to be funded by the proceeds of the Four Year Note and
subscribed for by Purchaser pursuant to this Agreement;
(C) two executed counterparts of that certain pledge
agreement (the "Pledge Agreement") between the Purchaser and the
Company effecting a pledge of all of the shares of Common Stock of the
Company owned or thereafter acquired by the Purchaser, substantially
in the form attached to the Memorandum as Exhibit E; and
(D) a stock power with respect to the Shares (the "Stock
Power") duly executed in blank;
(iii) two executed counterparts of that certain stock option
agreement (the "Option Agreement") between the Purchaser and the
Company, substantially in the form attached to the Memorandum as
Exhibit G, which Stock Option Agreement shall be
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<PAGE>
governed in accordance with the terms of the Hanover Compressor
Company 1996 Employee Stock option Plan (substantially in the form
attached to the Memorandum as Exhibit G) as such plan may be amended
from time to time;
(iv) a fully completed and executed IRS Form W-9;
(v) two executed counterparts of this Agreement (including a fully
completed Schedule A, notary page and Spousal Consent (if
applicable)); and
(vi) two fully executed counterparts of the letter agreement
attached to the Memorandum as Exhibit H.
(c) Document Delivery; Escrow. All documents and funds (the "Funds")
delivered to the Company prior to the Closing Date shall be delivered by
Purchaser to Hanover Compressor Company, 12001 North Houston Rosslyn, Houston,
Texas 77086, Attention: Curtis Bedrich. All such documents and Funds will be
deemed to be held in escrow until the Closing. The Funds shall be promptly
deposited in an interest bearing, segregated account and such Funds may be
invested in treasury bills or other cash equivalents, as determined in the sole
and absolute discretion of the Company. If, prior to the Termination Date,
acceptable subscriptions for a minimum aggregate of one share of Common Stock is
received and the other conditions set forth herein and in the Memorandum
(collectively, the "Offering Conditions") are satisfied, all Funds will be
transferred from the segregated bank account to the Company, together with all
interest, if any, accrued or paid thereon. In the event the Offering Conditions
have not been satisfied in full prior to the Termination Date, the Offering will
be terminated and all Funds will be returned to the Purchaser together with a
pro rata share of interest earned thereon. Interest on Funds shall be calculated
on the basis of the amount of Funds invested by the Purchaser and the length of
time interest on such Funds was earned.
4. Deliveries by the Company. At the Closing, upon the terms and subject
to the conditions of this Agreement, the Company shall deliver to Purchaser a
certificate or certificates representing the Shares duly executed and
authenticated by the Company; provided, however, that if any portion of the
Shares are being purchased with the proceeds of a Four Year Loan, the Company
shall retain possession of all of the Shares in accordance with the terms of the
Pledge Agreement. Following the Closing, the Company shall deliver to the
Purchaser a copy of the fully executed Adoption Agreement (the original of which
will be retained at the offices of the Company) and fully executed counterparts
of the Other Purchaser Agreements executed by the Company.
5. Representations and Warranties of Purchaser. Purchaser hereby
represents and warrants to the Company as follows:
(a) Investment Intention; No Resales. Purchaser is acquiring the Shares
for investment solely for his own account and not with a view to, or for resale
in connection with, the distribution or other disposition thereof. Purchaser
agrees and acknowledges that all dispositions of the Shares by Purchaser (other
than involuntary transfers) will comply with the
3
<PAGE>
provisions of this Agreement, the provisions of the Stockholders' Agreement and
the Pledge Agreement and applicable provisions of state and federal securities
laws.
(b) Certain information Not Material. Purchaser has not received
individualized information relative to the compensation of the management of the
Company, which information is acknowledged by Purchaser as not being material to
Purchaser in forming a basis for making an investment in the Shares or for any
other purpose in connection herewith.
(c) Shares Unregistered. Purchaser acknowledges and represents that he
has been advised by the Company that:
(i) the offer and sale of the Shares have not been registered under
the Securities Act of 1933, as amended (the "Securities Act"), or any
state securities laws;
(ii) the Shares must be held indefinitely and Purchaser must
continue to bear the economic risk of the investment in the Shares
unless the offer and sale of such Shares is subsequently registered
under the Securities Act and all applicable state securities laws or
an exemption from such registration is available to the Purchaser with
respect to the Shares;
(iii) there is no established market for the Shares and it is not
anticipated that there will be any public market for the Shares in the
foreseeable future;
(iv) the Company is under no obligation to register the Shares
under the Securities Act on behalf 6f Purchaser, to assist Purchaser
in complying with any exemption from registration or to consent to the
transfer of the Shares;
(v) Rule 144 promulgated under the Securities Act may not be
presently available with respect to the sale of any securities of the
Company, and the Company has made no covenant to make such Rule
available;
(vi) when and if the Shares may be disposed of without registration
under the Securities Act in reliance on Rule 144, such disposition may
be made only in limited amounts in accordance with the terms and
conditions of such Rule;
(vii) a restrictive legend in the form set forth in Section 6(f)
hereof shall be placed on the certificates representing the Shares;
and
(viii) a notation shall be made in the appropriate records of the
Company indicating that the Shares are subject to restrictions on
transfer and appropriate stop-transfer instructions will be issued
with respect to the Shares.
(d) Additional Investment Representations.
(i) Purchaser has carefully reviewed, is familiar with and
understands the Memorandum, the Other Purchaser Agreements and the
other documents, records and
4
<PAGE>
information, if any, requested by Purchaser or otherwise supplied by
the Company in connection with the Offering;
(ii) All documents, records and information pertaining to an
investment in the Company which have been requested by Purchaser have
been made available or delivered to Purchaser, except to the extent
otherwise addressed in the Memorandum;
(iii) Purchaser is fully familiar with the business and operations
of the Company and has had an opportunity to ask questions of and
receive answers from the Company concerning the terms and conditions
of Purchaser's investment and the financial condition, operations and
prospects of the Company;
(iv) No oral or written statement, printed material or inducement
given or made by the Company or any of the Company's affiliates is
contrary to the information contained in this Agreement, the
Memorandum or the Other Purchase Agreements, and Purchaser
acknowledges and agrees that in making his decision to purchase the
Shares he has relied solely on such documents and the independent
investigations made by him and, to the extent believed by Purchaser to
be appropriate, Purchaser's representatives, including Purchaser's own
professional, financial, legal, tax and other advisors;
(v) Purchaser acknowledges that the Company, in reliance upon
certain federal and state securities law exemptions, has provided
Purchaser with less or different information than Purchaser would have
received if an information memorandum complying with Rule 502(b)(2) of
Regulation D promulgated pursuant to the Securities Act had been
prepared and made available to Purchaser or if the Shares had been
registered pursuant to the Securities Act. The foregoing
notwithstanding, the information provided to Purchaser is sufficient
to allow Purchaser to make a knowledgeable and informed decision
regarding his investment in the Shares;
(vi) Purchaser (A) has adequate means of providing for Purchaser's
current financial needs and possible personal contingencies and has no
need for liquidity in Purchaser's investment in the Shares, (B) can
bear the economic risk of losing Purchaser's entire investment in the
Shares, (C) has such knowledge and experience in financial matters
that Purchaser is capable of evaluating the relative risks and merits
of Purchaser's purchase of the Shares, (D) is familiar with the nature
of, and risks attendant to, Purchaser's purchase of the Shares, and
(E) has determined that the purchase of the Shares is consistent with
Purchaser's financial objectives;
(vii) Purchaser realizes that Purchaser may not be able to sell or
dispose of the Shares even in the event of a personal emergency.
Purchaser's overall commitment to investments which are not readily
marketable (including Purchaser's investment in the Shares) is not
disproportionate to Purchaser's net worth;
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<PAGE>
(viii) The address set forth on the signature page hereof is
Purchaser's true and correct residence, and Purchaser has no present
intention of becoming a domiciliary of any other state or
jurisdiction;
(ix) Purchaser has no reason to anticipate any change in
Purchaser's circumstances, financial or otherwise, which may cause or
require any sale or disposition by Purchaser of any of the Shares;
(x) Each of this Agreement and the Other Purchaser Agreements has
been duly and validly executed and delivered by Purchaser and each
constitutes the valid and binding obligation of Purchaser enforceable
against Purchaser, Purchaser's successors and assigns, including, but
not limited to, Purchaser's estate and Purchaser's spouse, in
accordance with its terms;
(xi) Assuming the due execution and delivery of each of this
Agreement and the Other Purchaser Agreements (to which the Company is
a party) by the Company, each of this Agreement and the Other
Purchaser Agreements is a valid and binding obligation of the
Purchaser, enforceable against the Purchaser in accordance with its
terms, except as such enforcement may be subject to (A) bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors rights generally and (B)
general principles of equity (regardless of whether such enforcement
is considered in a proceeding in equity or at law); and
(xii) The Company has not guaranteed, represented or warranted to
Purchaser either that (A) the Company will be profitable or that
Purchaser will realize profits as a result of his investment in the
Shares or (B) the past performance or experience on the part of any
officer, director, stockholder, employee, agent, representative or
affiliate thereof, or any employee, agent, representative or affiliate
of the Company will in any way indicate the predict able results of
ownership of the Shares.
(e) Residence-Specific Representations.
(i) If Purchaser is a resident of the State of Texas, the aggregate
Purchase Price for the Shares subscribed for by Purchaser hereunder
does not exceed 20% of Purchaser's net worth (or joint net worth with
Purchaser's spouse, if applicable) as of the date hereof; and
(ii) If Purchaser is a resident of the State of Louisiana, the
aggregate Purchase Price for the Shares subscribed for by Purchaser
hereunder does not exceed 25% of Purchaser's net worth (or joint net
worth with Purchaser's spouse, if applicable) as of the date hereof.
6. Representations and Warranties of the Company. The Company represents and
warrants to Purchaser as follows:
6
<PAGE>
(a) Organization; Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company is duly qualified and in good standing as a foreign
corporation and is licensed, admitted or approved to do business as a foreign
corporation in each jurisdiction wherein the character of the properties owned
or held by it under lease, or the nature of the business conducted by it, makes
such qualification necessary, except where the failure to so qualify would not
have a material adverse effect on the Company, and would not have any adverse
effect on the enforceability of this Agreement.
(b) Authority. The Company has the requisite corporate power and
authority and full legal right to enter into this Agreement and the other
Purchaser Agreements to which it is a party, to perform, observe and comply with
all of its agreements and obligations hereunder and thereunder and to issue the
Shares to Purchaser.
(c) Due Authorization. The execution and delivery by the Company of this
Agreement and the Other Purchaser Agreements to which it is a party, the
performance by it of all of its agreements and obligations under this Agreement
and the Other Purchaser Agreements to which it is a party, and the issuance of
the Shares, have been duly authorized by all necessary corporate action on the
part of the Company.
(d) Binding Obligation. Each of this Agreement and the Other Purchaser
Agreements to which the Company is a party has been duly and validly executed
and delivered by the Company and, assuming the due execution and delivery of
each such document by Purchaser, is a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except as
such enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors, rights generally and (ii) general principles of equity (regardless of
whether such enforcement is considered in a proceeding in equity or at law).
(e) Capitalization. At the Closing Date, the authorized capital stock of
the Company will consist of 500,000 shares of Common Stock and 200,000 shares of
preferred stock. No other class or series of capital stock of the Company is
authorized. All of the outstanding shares of Common Stock, including the Shares,
will, at the time of issuance, have been duly authorized and issued and, upon
receipt by the Company of the Purchase Price for the Shares subscribed for
hereunder, the Shares will be fully paid and nonassessable. There are no pre-
emptive rights relating to the capital stock of the Company other than those
granted pursuant to (i) the Stockholders, Agreement, (ii) that certain
Stockholders, Agreement, dated as of March 8, 1995, among the Company and
certain of its stockholders, (iii) that certain Stockholders' Agreement, dated
as of August 7, 1995, among the Company, Joint Energy Development Investments
Limited Partnership and certain other stockholders of the Company and (iv) that
certain Stockholders, Agreement, dated as of December 6, 1995, among the Company
and certain of its stockholders.
(f) Legend. Each certificate representing the Shares shall bear a legend
substantially to the following effect:
7
<PAGE>
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
SUCH ACT, OR UNLESS SUCH OFFER, SALE, TRANSFER, PLEDGE OR
HYPOTHECATION IS EXEMPT FROM REGISTRATION OR IS OTHERWISE IN
COMPLIANCE WITH SUCH ACT. THE TRANSFERABILITY OF THIS SECURITY IS ALSO
SUBJECT TO RESTRICTIONS CONTAINED IN A STOCKHOLDERS AGREEMENT WHICH
AGREEMENT THE COMPANY WILL FURNISH TO THE HOLDER OF THIS SECURITY UPON
REQUEST.
A STATEMENT SUMMARIZING THE VOTING POWERS, DESIGNATIONS, PREFERENCES,
LIMITATIONS, RESTRICTIONS AND RELATIVE RIGHTS OF THE VARIOUS CLASSES
OF STOCK OR SERIES THEREOF MAY BE OBTAINED BY THE STOCKHOLDERS OF THE
COMPANY, WITHOUT CHARGE, FROM THE PRINCIPAL OFFICES OF THE COMPANY.
7. Conditions to Obligations of Purchaser. The obligation of Purchaser to
consummate the transactions contemplated by this Agreement shall be subject to
the satisfaction (or waiver by the Purchaser) on or prior to the Closing Date of
the following conditions:
(a) Performance of Obligations. The Company shall have performed and
complied in all material respects with all obligations and agreements required
to be performed and complied with by it hereunder on or prior to the Closing
Date;
(b) Representations and Warranties. The representations and warranties
of the Company contained in this Agreement shall be true and correct in all
material respects as of the Closing Date as if made as of such date;
(c) Loans. The Company shall have made available to Purchaser at the
Closing, as a loan (or loans), that portion of the Purchase Price attributable
to the Four Year Loan Shares subscribed for hereunder as agreed to by Purchaser
and the Company; and
(d) Section 4 Obligations. The Company shall have fully complied with
all of its obligations under the first sentence of Section 4 hereof.
8
<PAGE>
8. Conditions to Obligations of the Company. The obligation of the Company to
consummate the transactions contemplated by this Agreement shall be subject to
the satisfaction (or waiver by the Company) on or prior to the Closing Date of
the following conditions:
(a) Performance of Obligations. Purchaser shall have performed and
complied in all material respects with all obligations and agreements required
to be performed and complied with by Purchaser hereunder on or prior to the
Closing Date;
(b) Representations and Warranties. The representations and warranties
of Purchaser contained in this Agreement shall be true and correct in all
material respects as of the Closing Date as if made as of such date;
(c) Offering. The Offering shall not have been terminated by the
Company; and
(d) Section 3 (b) Obligations. Purchaser shall have fully complied with
all of its obligations under Section 3 (b) hereof.
9. Indemnification.
(a) Indemnification of the Company and the Company Affiliates. From and
after the date hereof, Purchaser shall indemnify and hold harmless the Company
and its predecessors, successors, officers, directors, employees,
representatives, agents and affiliates (collectively, the "Indemnitees") from
and against any loss, damage or expense, including, without limitation,
reasonable attorneys' and consultants' fees, disbursements and expenses,
suffered by any one or more of the Indemnitees arising out of or resulting from
any inaccuracy in or breach of any of the representations, warranties, covenants
or agreements made by Purchaser herein.
(b) Indemnification of Purchaser. From and after the date hereof, the
Company shall indemnify and hold harmless Purchaser from and against any loss,
damage or expense, including, without limitation, reasonable attorneys, and
consultants' fees, disbursements and expenses suffered by Purchaser arising out
of or resulting from any inaccuracy in or breach of any of the representations,
warranties, covenants or agreements made by the Company herein. The foregoing
notwithstanding, the Company's obligation to indemnify Purchaser under this
Section 10(b) shall not exceed the Purchase Price.
(c) Procedure for Claims. Within thirty days after obtaining written
notice of any claim or demand which has given rise to, or could reasonably give
rise to, a claim for indemnification hereunder, the party seeking
indemnification shall give written notice of such claim ("Notice of Claim") to
the other party. Failure to give such notice by the party seeking
indemnification within said thirty-day period shall not relieve the indemnifying
party of its obligations hereunder, unless and only to the extent that the
failure to so notify the indemnifying party actually results in damage or
prejudice to such indemnifying party. The Notice of Claim shall set forth a
brief description of the facts giving rise to such claim and the amount (or a
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<PAGE>
reasonable estimate) of the loss, damage or expense suffered, or which may be
suffered, by the party seeking indemnification.
Upon receiving the Notice of Claim, the indemnifying party shall resist,
settle or otherwise dispose of such claim in such manner as it shall deem
appropriate, including the employment of counsel, and shall be responsible for
the payment of all expenses, including the reasonable fees and expenses of such
counsel. The indemnified party shall have the right to employ separate counsel
in any such action and to participate in or assume the defense thereof, but the
fees and expenses of such counsel shall be at the indemnified party's expense
unless (i) the employment has been specifically authorized by the indemnifying
party in writing, (ii) the indemnifying party has failed to assume the defense
and employ counsel in a timely manner or (iii) the named parties to any. action
(including any impleaded parties) include both Purchaser and the Company, and
the indemnified party has been advised by such counsel that representation of
the Company and the Purchaser by the same counsel would be inappropriate under
applicable standards of professional conduct due to actual or potential
differing interests between them (in which case, if the indemnified party
notifies the indemnifying party in writing that the indemnified party elects to
employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall have neither the right nor the obligation to assume the
defense of such action on behalf of the indemnified party).
(d) Third Party Beneficiaries. Nothing contained in this Section 10
shall confer any rights upon, or inure to the benefit of, any third party other
than those parties specified in Sections 10(a) and 10(b) above, it being
understood that such specified parties, to the extent not actually parties
hereto, shall be third party beneficiaries.
10. Miscellaneous.
(a) Notices. All notices, offers or other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be considered as properly given or made on the earliest to occur of (i) personal
delivery, (ii) two days after being delivered to a nationally recognized
overnight mail delivery or courier service, (iii) five days after being mailed
by certified mail, return receipt requested, postage prepaid, or (iv) delivery
by prepaid telegram or facsimile transmission (with written confirmation of
receipt). All notices given or made pursuant hereto shall be addressed to the
Company at its principal office and to Purchaser at his address appearing on
the signature page hereof under the heading "PURCHASER". The address of any
party hereto may be changed by a notice in writing given in accordance with the
provisions hereof.
(b) Effect and Interpretation. This Agreement shall be construed in
accordance with and governed by the laws of the State of Delaware without regard
to the conflicts of laws provisions thereof.
(c) Entire Agreement. This Agreement, the Memorandum and the Other
Purchase Agreements and any Exhibits or Schedules attached hereto or thereto,
which documents are incorporated herein by this reference, constitute the entire
agreement between the parties hereto with respect to the subject matter hereof
and may be amended only by a writing executed
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by all parties hereto. This Agreement and the other documents and instruments
specified in this Section 10(c) and the information contained herein and therein
expressly supersede all understandings and agreements of the parties, whether
written or oral, between the parties with respect to the subject matter hereof.
(d) Successors. This Agreement and all the terms and provisions hereof
shall be binding upon and shall inure to the benefit of the parties hereto, and
their respective heirs, legal representatives, permitted successors and
permitted assigns.
(e) Pronouns and Headings. As used herein, all pronouns shall include
the masculine, feminine, neuter, singular and plural wherever the context and
facts require such construction. The descriptive headings in the sections of
this Agreement are inserted for convenience of reference only and shall not
control or affect the meaning or construction of any of the provisions hereof.
(f) Severability. If any provision of this Agreement is held by a court
of competent jurisdiction to be invalid, illegal or unenforceable, such
provision shall be severed and enforced to the extent possible or modified in
such a way as to make it enforceable, and the invalidity, illegality or
unenforceability thereof shall not affect the validity, legality or
enforceability of the remaining provisions of this Agreement.
(g) Certain Tax Matters. Under section 1445(e) of the Internal Revenue
Code of 1986, as amended, a corporation, partnership, trust or estate must
withhold tax with respect to certain transfers of property if a holder of the
interest in the entity is a foreign person. To inform the Company that no
withholding is required with respect to any of the Shares, Purchaser hereby
certifies as follows: (1) he is not a nonresident alien for purposes of U.S.
income taxation; (2) his social security number is as set forth on the signature
page hereto; and (3) his home address is as set forth an the signature page
hereto. Purchaser understands under penalties of perjury that this certification
may be disclosed to the Internal Revenue Service and that any false statement he
has made herein could be punished by fine, imprisonment or both. The Purchaser
has completed and submitted herewith a Form W-9 relative to his taxpayer
identification number and other matters and does hereby represent and warrant
that such form is complete, true and correct.
(h) Counterparts. This Agreement may be executed simultaneously in one
or more counterparts each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(i) Assignment. This Agreement and the rights and obligations of the
parties hereunder may be assigned or otherwise delegated by the Company, but may
not be assigned by Purchaser without the Company's prior written consent, which
consent may be withheld in the Company's sole discretion.
(j) Consent of Spouse; Insertion in Will. Purchaser if married, or, if
currently unmarried, each Purchaser upon his marriage, agrees to obtain the
consent and approval of his spouse to all of the terms and provisions of this
Agreement by the execution hereof by such spouse. Purchaser agrees to insert in
his last will and testament, or other similar instrument, or to
11
<PAGE>
execute a codicil thereto, directing and authorizing his personal
representatives to fulfill and comply with the provisions hereof.
(k) Effectiveness; Termination. In the event this Agreement is
terminated for any reason, the parties hereto shall have no further obligations
to each other, except that in the event of a complete or partial performance of
the terms hereof which occurs prior to any termination hereof, (i) Purchaser
shall promptly return to the Company all certificates in his possession
representing the Shares, if any, and (ii) the Company shall promptly refund the
Purchase Price to Purchaser, if and to the extent paid.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE COMPANY:
HANOVER COMPRESSOR COMPANY, a
Delaware corporation
By:
--------------------------------
William S. Goldberg
Executive Vice President
12
<PAGE>
1996 EMPLOYEE STOCK OFFERING
SUBSCRIPTION AGREEMENT
PURCHASER SIGNATURE PAGE
PURCHASER:
------------------------------------
Print Name:
-------------------------
Social Security No.
-----------------
Home Address:
------------------------------------
------------------------------------
------------------------------------
SPOUSAL CONSENT
The undersigned, being the spouse of Purchaser who is a party to the
foregoing Subscription Agreement, hereby consents to the execution of the
foregoing Subscription Agreement pursuant to the Offering and the consummation
of the transactions contemplated thereby by his or her spouse, and to the extent
the undersigned has acquired or hereafter acquires an interest in and to the
property and subject matter of the Subscription Agreement, hereby agrees to be
bound by the terms of such Subscription Agreement.
Date:
----------------------- -----------------------------------
Print Name
13
<PAGE>
NOTARY PAGE
STATE OF _______________)
)
COUNTY OF ______________)
I, , a Notary Public in and for said County, in the State
aforesaid, do hereby certify that appeared before me this day in
person, and acknowledged and swore that he signed, sealed, and delivered the
said instrument as his respective free and voluntary act and deed for the uses
and purposes therein set forth, and that the statements contained therein are
true.
Given under my hand and notarial seal as of the day of day of
, 1996.
My Commission expires:
- ------------------------------- -------------------------------------
Notary Public
14
<PAGE>
SCHEDULE A
Shares Subscribed For
<TABLE>
<CAPTION>
==================================================================================================
Type of Share Number of Shares Consideration
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Shares(a)
- --------------------------------------------------------------------------------------------------
Four-Year Loan Shares(b)
- --------------------------------------------------------------------------------------------------
Total
==================================================================================================
</TABLE>
(a) Purchaser must subscribe for a minimum of one Share hereunder. There is no
maximum subscription.
(b) Purchaser may subscribe for Four Year Loan Shares purchased with the
proceeds of a Four Year Note in any amount up to twice the number of Cash
Shares subscribed for pursuant to the Offering. Additional information with
respect to the maximum number of Four Year Loan Shares may be obtained from
Curtis Bedrich at the Company's principal office.
15
<PAGE>
EXHIBIT 4.3
DATED: NOVEMBER 5, 1996
CONFIDENTIAL OFFERING MEMORANDUM
HANOVER COMPRESSOR COMPANY
Up to 10,870 shares. of Common Stock, $.001 par value
$2,300 PER SHARE
MINIMUM INVESTMENT OF FOUR SHARES
================================================================================
Hanover Compressor Company, a Delaware corporation (the "Company"), is
offering to sell up to 10,870 shares (the "Shares") of its common stock, $.001
par value (the "Common Stock"). The Shares are being offered only to certain
existing stockholders of the Company who meet certain suitability standards. See
"The Offering."
To date, there has been no public market for the Common Stock, and no such
public market is anticipated to exist in the foreseeable future. See
"Determination of Offering Price" for a discussion of the factors considered in
determining the offering price of the Shares.
THESE SECURITIES INVOLVE A SIGNIFICANT DEGREE OF RISK.
See "Risk Factors" herein and in the accompanying draft Registration
Statement for a discussion of certain factors that should be considered. in
evaluating an investment in the Shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
OFFERING MEMORANDUM. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The offering price per share of $2,300 (the "Offering Price") is payable in
cash upon subscription. The minimum purchase by an investor is four (4) shares
(for a total of $9,200) and the maximum aggregate purchase by all investors is
10,870 shares (for a total of $25,001,000). See "The Offering."
THIS OFFERING MEMORANDUM CONSTITUTES AN OFFER ONLY IF A NAME APPEARS IN THE
SPACE BELOW MARKED "NAME OF OFFEREE" AND CONSTITUTES AN OFFER ONLY TO SUCH NAMED
OFFEREE.
===============================================================================
Name of Offeree: ______________________ Memorandum Number: ____________________
--------------------
<PAGE>
THIS MEMORANDUM IS SUBMITTED IN CONNECTION WITH THE OFFERING OF THE SHARES
PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") AND/OR REGULATION D PROMULGATED PURSUANT THERETO AND PURSUANT
TO AVAILABLE EXEMPTIONS UNDER STATE SECURITIES LAWS, AND MAY NOT BE REPRODUCED
OR USED FOR ANY OTHER PURPOSE. ANY ACTION CONTRARY TO THESE RESTRICTIONS MAY
INVOLVE A VIOLATION OF CERTAIN FEDERAL OR STATE SECURITIES LAWS.
------------------
THE COMPANY HAS AGREED TO MAKE AVAILABLE, PRIOR TO THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED HEREIN, TO EACH OFFEREE OF SHARES OR HIS
REPRESENTATIVE(S) OR BOTH, THE OPPORTUNITY TO ASK QUESTIONS OF, AND RECEIVE
ANSWERS FROM IT OR ANY PERSON ACTING ON ITS BEHALF CONCERNING THE TERMS AND
CONDITIONS OF THIS OFFERING, AND TO OBTAIN ANY ADDITIONAL INFORMATION, TO THE
EXTENT IT POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE
EFFORT OR EXPENSE, NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION SET FORTH
HEREIN.
------------------
PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS MEMORANDUM
OR ANY PRIOR OR SUBSEQUENT COMMUNICATION FROM THE COMPANY, ITS AFFILIATES,
DIRECTORS, OFFICERS, EMPLOYEES OR ANY PROFESSIONAL ASSOCIATED WITH THIS OFFERING
AS LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD CONSULT HIS OWN PERSONAL COUNSEL,
ACCOUNTANT AND OTHER ADVISERS AS TO LEGAL, TAX, ECONOMIC AND RELATED MATTERS
CONCERNING THE INVESTMENT DESCRIBED HEREIN AND ITS SUITABILITY FOR HIM.
------------------
NO DISTRIBUTION OF THIS MEMORANDUM IN WHOLE OR IN PART, OR THE DISCLOSURE
OF ANY OF ITS CONTENTS, IS PERMITTED UNLESS AUTHORIZED. EXCEPT FOR INFORMATION
CONTAINED HEREIN OR AUTHORIZED BY THE COMPANY, NO OFFERING LITERATURE OR
ADVERTISING IN WHATEVER FORM SHALL BE EMPLOYED IN THE OFFERING OF THE SHARES. NO
PERSON HAS BEEN AUTHORIZED TO MAKE REPRESENTATIONS, OR GIVE ANY INFORMATION,
WITH RESPECT TO THE SHARES, EXCEPT THE INFORMATION CONTAINED HEREIN.
------------------
ii
<PAGE>
INVESTMENT IN THE SHARES IS SUITABLE ONLY FOR INVESTORS WHO MEET THE
SUITABILITY STANDARDS DESCRIBED UNDER "THE OFFERING - SUITABILITY."
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANYONE IN
ANY STATE OR IN ANY OTHER JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS
NOT AUTHORIZED.
------------------
THE COMPANY WILL NOT BE REQUIRED TO DELIVER AN ANNUAL REPORT TO
STOCKHOLDERS PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
HOWEVER, THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH A COPY OF THE
COMPANY'S AUDITED FINANCIAL STATEMENTS ON AN ANNUAL BASIS.
------------------
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE
INCLUDING, WITHOUT LIMITATION, THE PROVISIONS OF ONE OR MORE STOCKHOLDER
AGREEMENTS BETWEEN THE PURCHASER AND THE COMPANY, AND MAY NOT BE TRANSFERRED OR
RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND THE APPLICABLE STATE
SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM AND IN
ACCORDANCE WITH SUCH AGREEMENTS. INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.
FOR TEXAS RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE TEXAS SECURITIES ACT, AS
AMENDED (TM "TEXAS ACT"), AND ARE OFFERED AND SOLD PURSUANT TO AN EXEMPTION
THEREFROM. THE SHARES CANNOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION
WHICH IS EXEMPT UNDER THE TEXAS ACT, OR PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE TEXAS ACT OR IN A TRANSACTION WHICH IS OTHERWISE IN
COMPLIANCE WITH THE TEXAS ACT.
iii
<PAGE>
CONFIDENTIAL OFFERING MEMORANDUM
HANOVER COMPRESSOR COMPANY
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BACKGROUND OF THE OFFERING..................................... 1
THE OFFERING................................................... 2
RISK FACTORS................................................... 4
DETERMINATION OF OFFERING PRICE................................ 5
PLAN OF OFFERING............................................... 5
DILUTION....................................................... 6
CAPITALIZATION................................................. 7
RECENT DEVELOPMENTS............................................ 9
ADDITIONAL INFORMATION......................................... 10
</TABLE>
Exhibit A - Draft dated August 5, 1996 of the Company's Registration Statement
on Form S-1
Exhibit B - Letter Dated August 13, 1996 from Goldman, Sachs & Co. to the
Company Together With a Subsequent Analysis Subscription Agreement
Exhibit C - Subscription Agreement
iv
<PAGE>
BACKGROUND OF THE OFFERING
The Company contemplated offering shares of its Common Stock in an initial
public offering (the "IPO") this past summer. In connection with the IPO, which
was ultimately postponed for the reasons described below, the Company prepared a
draft registration statement on Form S-I dated August 5, 1996 (the
"Registration Statement"), which was prepared but not filed with the Securities
and Exchange Commission (the "SEC") under the Securities Act. A copy of the most
recent draft of the Registration Statement is attached hereto as Exhibit A and
you are urged to review the following specific sections thereof. "The Company",
"Summary Historical and Pro Forma Financial and Operating Information", "Risk
Factors", "Dividend Policy", "Selected Financial Information", "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Business", "Management", "Certain Transactions", "Principal and Selling
Stockholders", "Description of Capital Stock", and the "Company's Consolidated
Financial Statements for the three years ended December 31, 1995", To the extent
information in this Offering Memorandum conflicts with information set forth in
the Registration Statement, the information in this Offering Memorandum shall
govern.
In anticipation of the IPO, the Company interviewed several underwriting
firms and ultimately selected Goldman, Sachs & Co., CS First Boston and Salomon
Brothers Inc as the underwriters for the IPO (collectively, the "Underwriters").
In presenting their initial indications of value to the Company in June 1996,
each of the Underwriters estimated that the fully distributed net common equity
value was in the range of $425 million to $450 million and that the price to the
public in the IPO for the Company's Common Stock would be in the range of
$2,753-$3,096 per share without regard to a 10% IPO discount.
The Company, the Underwriters and their advisers began drafting the
Registration Statement and anticipated filing the Registration Statement with
the SEC by the end of July or early August. During this period, conditions in
the stock market in general and in the IPO market in particular became unstable.
The Underwriters, having conducted further due diligence, focused on the market
conditions, the Company's capital structure and projected net income (calculated
in accordance with generally accepted accounting principles ("GAAP")), and
comparisons to comparable companies, did not believe that the market would
support a value consistent with their original estimates. Thus, they
significantly reduced their estimate of the fully distributed net common equity
value to be in the range of $322 million to $361 million or $2,212-$2,473 per
share without regard to a 15% IPO discount.
By letter dated August 13, 1996 (the "August Letter"), Robert B. Tudor,
III, of Goldman, Sachs & Co., the lead Underwriter, set forth various reasons
which the Underwriters' believed justified delaying the IPO. A copy of the
August Letter is attached hereto as Exhibit B together with an analysis provided
subsequently by Goldman, Sachs & Co. As a result of the Underwriters' reduced
estimation of the fully distributed net common equity value and increased IPO
discount to levels which were unsatisfactory to the Company, the Company decided
to abandon the IPO and to pursue instead the offering described herein to
existing stockholders of the Company who meet certain suitability standards (the
"Offering"). The Offering is being made by the Company in reliance on exemptions
from the registration requirements found in Section 4(2) of the Securities Act
and/or Regulation D promulgated pursuant thereto. The Company
1
<PAGE>
currently intends to use the proceeds of the Offering either to repay
indebtedness and/or for general corporate purposes, including working capital.
In spite of the reduction in the Underwriters' estimation of the fully
distributed net common equity value of the Company's Common Stock, the Company
believes that each Share being offered in this Offering has a value of at least
$2,300 per Share, which value is within the range originally presented by the
Underwriters. See "Determination of the Offering Price." Accordingly, the
Company now desires to offer an aggregate of 10,870 Shares at an Offering Price
of $2,300 to existing stockholders of the Company who meet certain suitability
standards.
Hanover Compressor Company is a corporation organized under the laws of the
State of Delaware. The principal executive office of the Company is located at
12001 North Houston Rosslyn, Houston, Texas 77086, and the Company's telephone
number is 713/447-8787.
THE OFFERING
Prospective purchasers of Shares should carefully consider the factors set
forth under "Risk Factors" herein and in the accompanying Registration
Statement.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Shares of Common Stock offered: Up to 10,870
Shares of Common Stock to be outstanding 141,032.93 (maximum), including 198.40 shares
after the Offering: held by the Company as treasury shares
Use of Proceeds: Repayment of indebtedness and/or general
corporate purposes, including working capital
</TABLE>
GENERAL
Subject to adjustment for over-subscription, each offeree may subscribe to
purchase for cash as many of the Shares as such offeree may desire, subject to a
minimum subscription for four (4) Shares. The maximum aggregate number of Shares
which may be subscribed for pursuant to this Offering is 10,870. If the offerees
subscribe for more than such number of Shares, each offeree's subscription will
be reduced proportionately based on the relationship between the number of
Shares subscribed for by such offeree and the aggregate number of Shares
subscribed for by all offerees. For information regarding the method of
subscribing for Shares, see "Plan of Offering" and the Subscription Agreement
attached hereto as Exhibit C (the "Subscription Agreement").
This Offering is being made only to existing stockholders of the Company
who meet certain suitability standards described below. To the extent the Shares
being offered in this Offering are purchased by a stockholder of the Company who
is currently a party to one or more stockholders' agreements with the Company,
such Shares will be subject to the terms of such agreements including, without
limitation, the restrictions on transferability set forth therein.
2
<PAGE>
The Company reserves the right to withdraw this Offering and return all
subscriptions or modify this Offering at any time on or before the Termination
Date. Subscriptions for Shares may be accepted or rejected by the Company in its
sole discretion. All cash received by the Company in respect of subscriptions
for the Shares (the "Funds") shall be promptly deposited in an interest bearing,
segregated account and such Funds may be invested in treasury bills or other
short-term investment grade securities, as determined in the sole and absolute
discretion of the Company. Funds deposited in the segregated account may not be
withdrawn by subscribers. The deposit of Funds in such account does not
constitute acceptance by the Company of all or any portion of any offeree's
subscription. If acceptable subscriptions for a minimum aggregate of at least
8,153 Shares are not received by the Company on or before November 25, 1996 or
such later date as the Company in its sole discretion may determine without
consent of or notice to the offerees, but in no event later than January 31,
1997 (the "Termination Date"), or in the event all conditions have not been
satisfied in full prior to the Termination Date or the Company in its sole
discretion and without the consent of or notice to the offerees, terminates this
Offering, this Offering will be terminated and all Funds will be returned to
subscribing offerees with a "r = share of interest earned thereon, if any,
calculated on the basis of the amount of Funds invested by each subscribing
offeree and the length of time such Funds were on deposit. See "Plan of
Offering."
SUITABILITY
Investment in the Shares offered hereby involves a significant degree of
risk. See "Risk Factors" herein and in the Registration Statement. This Offering
is a private offering made only by delivery of a copy of this Offering
Memorandum (together with all Exhibits hereto) to the existing stockholder of
the Company whose name appears hereon. The Shares have not been registered under
the Securities Act, or any applicable state securities laws. The Shares are
being offered pursuant to one or more exemptions from the registration
requirements of the Securities Act, including the exemption afforded by Section
4(2) thereof and/or Regulation D promulgated thereunder, and pursuant to
available exemptions under state securities laws, only to certain existing
stockholders of the Company for investment purposes only. Each person who
subscribes for Shares and whose subscription is accepted by the Company (each an
"Investor," collectively, the "Investors") will be required to represent that he
is an "accredited investor" as such term is defined in Rule 501 promulgated
pursuant to the Securities Act and that he is acquiring the Shares for his own
account, for investment, and without any intention of making a distribution or
resale thereof, either in whole or in part. The Shares may not be resold or
transferred except in accordance with the provisions of the Securities Act, the
rules and regulations thereunder, and any applicable state securities laws. As a
result of the foregoing, investment in the Shares is suitable only for persons
who have adequate financial means separate and apart from their investment in
the Shares, who have no need for liquidity with respect to such investment, and
who can withstand the loss of their entire investment in the Shares.
Offerees who desire to subscribe for Shares should read and discuss with
their advisors this Offering Memorandum (together with all Exhibits hereto), the
Subscription Agreement, and the other documents relative to the foregoing
regarding the appropriateness of an investment in the Shares. The desirability
of an investment in the Common Stock depends upon a number of factors including,
among others, (i) the factors set forth under the caption "Risk Factors" herein
3
<PAGE>
and in the Registration Statement, (H) the nature of the Company's business,
(iii) the possibility of a decline in value of the Common Stock, (iv) the
various restrictions on transferability of the Common Stock and the possible
continued illiquidity of the investment, (v) the desirability to the offeree of
a long-term investment, (vi) the likelihood that the Company will not pay
dividends on the Common Stock in the foreseeable future and the likelihood of
restrictions imposed on the Company's ability to pay dividends under the terms
of the agreements governing the Company's senior secured indebtedness and the
Series A and Series B Preferred Stock (as defined in the Registration
Statement), (vii) the control of the Company by its principal stockholders,
(viii) the relationship between such offeree's investment and such offeree's net
worth, and (ix) other relevant personal circumstances of each offeree.
RISK FACTORS
Investors should consider the specific risk factors set forth below and in
the accompanying Registration Statement as well as the other information set
forth in this Offering Memorandum and the accompanying Registration Statement.
Neither the following risk factors nor those set forth in the accompanying
Registration Statement is an exhaustive list of all of the potential risks
associated with an investment in the Shares.
RESTRICTIONS IMPOSED BY THE TERMS OF THE COMPANY'S INDEBTEDNESS; EFFECT OF
DEFAULT
The terms of the Company's existing credit agreement dated December 19,
1995 (the "Bank Credit Agreement") among the Company, Chemical Bank, as agent,
and the other banks party thereto and the loan agreement dated as of December
19, 1995 (the "JEDI Loan Agreement") among the Company, Joint Energy Development
Investments Limited Partnership ("JEW) as agent and the financial institutions
named therein impose a variety of restrictions on the Company's operations,
including, without limitation, limiting the Company's ability to incur
additional indebtedness, grant or suffer liens or other encumbrances on its
property, make investments, loans or advances except under certain enumerated
circumstances, make capital expenditures above specified levels, enter into
sale/leaseback arrangements as a seller/lessee, dispose of its assets or extend
guarantees. Such restrictions may limit the Company's ability to exploit fully
certain business opportunities. In addition, under the terms of the Bank Credit
Agreement and the JEDI Loan Agreement, the Company may not declare or pay any
dividend on or make any payment for the purchase, redemption or acquisition of
any shares of Common Stock other than repurchases of Common Stock from employees
of the Company which do not exceed a cumulative aggregate of $2,500,000. In
addition, the failure of the Company to maintain certain financial ratios may
cause the Company to be in default under the agreements governing its
indebtedness and such default, if uncured, may ultimately entitle its creditors
to foreclose on all of the assets of the Company.
LIMITED PREEMPTIVE RIGHTS
Although Delaware law does not generally provide for preemptive rights,
Astra Resources has a preemptive right to subscribe for shares of Common Stock
sufficient for it to maintain ownership of at least 20% of the outstanding
Common Stock subject to a specified threshold, which right will apply to this
Offering. See "Certain Transactions - Stockholders'
4
<PAGE>
Agreements - JEDI Stockholders' Agreement" and "- Astra Stockholders' Agreement"
in the Registration Statement. Furthermore, in connection with the Offering, the
Basic Stockholders' Agreement (as defined in the Registration Statement) has
been amended to provide that the pre-emptive rights set forth therein are not
available where the Company, in its sole discretion, determines that they would
prevent it from relying upon any exemption from the registration requirements of
the Securities Act in connection with an offering of securities. Not all parties
to the Basic Stockholders' Agreement meet the suitability standards of the
exemption(s) upon which the Company intends to rely in connection with this
Offering. Accordingly, the pre-emptive rights set forth in the Basic
Stockholders' Agreement do not apply to this Offering.
NO PUBLIC MARKET FOR COMMON STOCK; RESTRICTION ON TRANSFERABILITY
Each subscribing offeree will be required to represent that he is
purchasing the Shares for investment purposes for his own account and not with a
view towards resale or distribution. Additionally, each potential investor in
this Offering is currently a stockholder of the Company and, as such, is a party
to one or more stockholders' agreements with the Company, which agreements
contain certain transferability restrictions which will apply to Shares
purchased in this Offering. Furthermore, there is currently no public market for
the Shares. Thus, any potential investor must be able and willing to bear the
risk of his investment for an indefinite period.
DILUTION
Assuming all of the Shares are issued, the value of the Shares purchased
pursuant to this Offering will be subject to immediate dilution in the net
tangible book value of $961 per Share from the adjusted net tangible book value
as of August 31, 1996.
DETERMINATION OF OFFERING PRICE
The Offering Price of $2,300 per Share was determined solely by the
Company's Board of Directors based on a number of factors, including the
Underwriters' original estimation of the fully distributed net common equity
value of the Company in connection with the abandoned IPO and a comparison of
the Company's 1994 and 1995 financial performance to the financial performance
and corresponding per share market multiples of a select group of public
companies involved in the natural gas compressor leasing and fabrication and
energy services industries. By virtue of the nature of this Offering, the
Offering Price was not determined pursuant to arm's length negotiations with a
third party, and there can be no assurance that such price is indicative of the
fair market value of the Shares.
PLAN OF OFFERING
The minimum purchase per subscribing offeree is four (4) Shares for a
minimum aggregate purchase price of $9,200. The minimum aggregate purchase for
all Investors is 8,153 Shares for a minimum aggregate purchase price of
$18,751,900. The Company reserves the right (i) to reject any subscription for
any reason and (ii) to make non-material modifications to or terminate this
Offering at any time for any reason.
5
<PAGE>
Each offeree who desires to subscribe for Shares must on or before
November 25, 1996, execute and return* to the Company, % Curtis Bedrich, one
copy and one extra signature page of the Subscription Agreement included
herewith (including Schedule A attached thereto), together with a certified or
cashier's check in an amount equal to the product of (i) the number of Shares
subscribed for and (ii) $2,300.
All Funds received by the Company shall be promptly deposited in an
interest bearing, segregated account and such Funds may be invested in treasury
bills or other short-term investment grade securities, as determined in the sole
and absolute discretion of the Company. If acceptable subscriptions for a
minimum of 8,153 Shares are not received by the Company on or before November
25, 1996 or such later date as the Company in its sole discretion may determine
without consent of or notice to the offerees, but in no event later than the
Termination Date, or in the event all conditions have not been satisfied in full
prior to the Termination Date or the Company in its sole discretion and without
the consent of or notice to the offerees, terminates this Offering, this
Offering will be terminated and all Funds will be returned to subscribing
offerees with a pro rata share of interest earned thereon, if any, calculated on
the basis of the amount of Funds invested by each subscribing offeree and the
length of time such Funds were on deposit.
DILUTION
As of August 31, 1996, the Company had adjusted net tangible book value
(defined as total stockholders' equity less goodwill) of $163,577,772, or $1,259
per share of Common Stock,. Adjusted net tangible book value per share of Common
Stock is determined by dividing the actual net tangible book value by the number
of shares of its Common Stock and treating all such Common Stock as having been
issued for cash which would have been outstanding as of December 31, 1995. After
giving effect to the sale of the Shares and the application by the Company of
the estimated net proceeds therefrom as described in "Use of Proceeds" in the
Registration Statement, the pro forma net tangible book value of the Company as
of August 31, 1996 would have been $188,578,772, or $1,339 per share of Common
Stock. This value represents an immediate increase in the adjusted net tangible
book value of $80 per share of Common Stock to the current stockholders and an
immediate dilution in net tangible book value of $961 per Share to purchasers of
the Shares. Dilution per share is determined by subtracting the pro forma
adjusted net tangible book value per share of Common Stock after the completion
of this Offering from the per share price paid by purchasers of the Shares. The
following table illustrates this per share dilution:
<TABLE>
<S> <C>
Price per share pursuant to this Offering....................................... $2,300
Adjusted net tangible book value per share of August 31, 1996................ $1,259
Increase in adjusted net tangible book value per share attributable to the
Offering.................................................................... $ 80
Pro forma adjusted net tangible book value per share after this Offering........ $1,339
Dilution per share to purchasers of the Shares.................................. $ 961
</TABLE>
6
<PAGE>
- ------------
(1) Assumes that all of the Sham are subscribed for and excludes shares of
Common Stock reserved for issuance pursuant to options which have
previously been granted to certain members of management. To the extent
such options are exercised, the value of Shams purchased by Investors will
be subject to further dilution. See "Capitalization" herein.
The following table sets forth as of August 31, 1996 (calculated on the
same basis as the preceding paragraph and rounded for purposes of this
presentation) the number of shares of Common Stock purchased from the Company,
the value of the total consideration received, the average price per share paid
by the existing stockholders of the Company and the price per Share to be paid
by purchasers:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- ---------------------------- Avg. Price
Number % Amount $ Per Share
--------- ------- ------------------ ------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 129,964 92.28 $144,232,693.80(1) 84.80 $1,072.99
Investors...................... 10.870 7.72 $ 25,001,000.00 15.20 2,300.00
(maximum)
Total.......................... 140,834 100.00 $169,233,693.80(1) 100.00 $1,167.69
</TABLE>
- ------------
(1) Unaudited information based on records readily available to the Company and
certain stockholders.
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of August 31, 1996 and as adjusted to reflect the consummation of this Offering
(assuming all 10,870 Shares are subscribed for) after the anticipated
application of the estimated net proceeds therefrom.
7
<PAGE>
<TABLE>
<CAPTION>
As Adjusted for the
Actual Offering
------------------------ --------------------
<S> <C> <C>
Current installments of long-term debt........................ $ 314,974 $314.974
Long-term debt, less current positions........................ 88,017,622 63,016,622
Stockholders' Equity:.........................................
Undesignated Preferred Stock, $.01 par value, 135,000
shares authorized, 0 shares issued and outstanding...... - -
Series A Preferred Stock $.01 par value, 50,000 shares
authorized, 23,002 issued and outstanding............... 230 230
Series B Preferred Stock, $.01 par value, 15,000 shares
authorized, 10,637 issued and outstanding............... 106 106
Common Stock, $.001 par value, 200,000 shares
authorized, 130,162.93 issued and outstanding,
141,032.93 issued and outstanding after the Offering.... 130 130
Additional paid-in capital.................................... 166,305,108 191,306,097
Retained earnings............................................. 13,265,812 13,265,812
Less:
Notes receivable from officers and employees for
purchase of Common Stock................................ 6,789,234 6,789,234
198.40 Treasury shares, at cost.......................... 218,240 218,240
Net stockholders' equity................................. 172,563,912 197,564,912
Total capitalization..................................... 260,896,508 260,896,508
</TABLE>
- --------
(1) Includes 198.40 treasury shares, but excludes an aggregate of 15,190.97
shares of Common Stock subject to options previously granted to executive
officers and other members of management of the Company pursuant to the
1992 Stock Plan, the 1993 Option Plan, the Senior Executive Plan, the 1995
Management Option Plan, the 1995 Employee Option Plan, the Incentive Option
Plan and the 1996 Employee Stock Option Plan.
8
<PAGE>
RECENT DEVELOPMENTS
Redemption of Series B Preferred Stock
The Company is currently in the process of negotiating with representatives
of JEDI the terms upon which all of the shares of Series B Preferred Stock held
by JEDI will be converted earlier than currently permitted and in accordance
with the terms of the conversion formula set forth in the applicable Certificate
of Designations. In addition, the Company has agreed to pay JEDI approximately
$1.4 million as an early conversion payment. The early conversion is anticipated
to close simultaneously with the consummation of this Offering.
AMENDMENT OF FOREIGN INVESTMENT COVENANTS
Both the Bank Credit Agreement and the JEDI Loan Agreement currently
restrict the amount of the Company's investments in foreign countries to an
aggregate of 30% of the Company's consolidated net worth and further prohibit
the Company from investing more than 15% in any one country. Absent amendment of
these covenants, after December 31, 1996, the individual country limit will be
reduced to 10% of the Company's consolidated net worth. At the present time, the
Company currently has approximately $20 million of its consolidated net worth
invested in Argentina and $30 million invested in other countries. In
anticipation of the increasing demand for the Company's compression services in
foreign countries, the Company plans to seek to amend and anticipates receiving
approval from each of Chemical Bank and JEDI to amend the foreign investment
covenants of each of the Bank Credit Agreement and the JEDI Loan Agreement. In
the event the Company is not able to amend such agreements, its ability to
pursue further investment opportunities in foreign countries will be severely
restrained absent the availability of non-recourse financing for its foreign
investments. In the event the Company sells the maximum number of Shares being
offered hereunder in this Offering, it anticipates having approximately 27% of
its consolidated net worth available for investment in foreign countries.
ELIMINATION OF VOTING TRUST
In anticipation of an initial public offering of the Company's Common Stock
at some future time, the Company's Board of Directors has agreed to terminate
the voting trust agreement dated October 13, 1995. This termination is currently
expected to be effective concurrently with the closing of this Offering.
AMENDMENT OF STOCKHOLDERS' AGREEMENTS
In anticipation of an initial public offering of the Company's Common Stock
at some future time, the Company's Board of Directors and the parties to the
stockholders' agreements have orally agreed to terminate the director voting
provisions set forth in each of the stockholders' agreements among stockholders
of the Company. Such termination will be effective concurrently with the closing
of this Offering.
9
<PAGE>
OTHER TRANSACTIONS
The Company is engaged in ongoing evaluations of and discussions with third
parties regarding possible transactions and plans to continue to do so.
Transactions currently being contemplated include sale/leasebacks, acquisitions
of other compressor companies for cash and Company stock and joint ventures in
Europe and Central and South America. The Company currently has no definitive
agreements with respect to any such transactions.
ADDITIONAL INFORMATION
The Company intends annually to supply its stockholders with a copy of its
audited financial statements.
The Company will answer all inquiries from prospective investors or their
representatives relating to the Offering and will afford prospective investors
and their representatives the opportunity to obtain any additional information
(to the extent that the Company possesses such information or can acquire it
without unreasonable effort or expense) necessary to verify the accuracy of the
information set forth in this Offering Memorandum.
10
<PAGE>
Exhibit 4.4
================================================================================
Dated: June 20, 1995
CONFIDENTIAL OFFERING MEMORANDUM
HANOVER COMPRESSOR COMPANY
Up to 250 shares of Common Stock, $.001 par value
$5,500 Minimum Investment
================================================================================
All of the 250 shares (the "Shares") of common stock, $.001 par value (the
"Common Stock"), offered hereby are being sold by Hanover Compressor Company, a
Delaware corporation (the "Company"). The Shares are being offered only to
certain directors and employees of the Company and its subsidiaries and are
offered together with options to purchase shares which will be granted to
investors. See "The Offering."
There has been no public market for the Common Stock, and no such public
market is anticipated to exist in the foreseeable future. See "Determination of
Offering Price" for a discussion of the factors considered in determining the
offering price.
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Common Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
OFFERING MEMORANDUM. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================
Fees and Proceeds to the
Offering Price (1) Commissions (2) Company (2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................... $ 1,100 $ 0.00 $ 1,100
- -------------------------------------------------------------------------------------------------------
Maximum Total................. $ 275,000 $ 0.00 $ 275,000
=======================================================================================================
</TABLE>
(1) Payable in cash upon subscription (except for shares to be purchased with
proceeds of loans made by the Company). The minimum purchase per investor is
five Shares (for a total of $5,500), not including Shares purchased with the
proceeds of four year loans to be made by the Company, and the maximum
aggregate purchase by all investors is 250 Shares (for a total of $275,000),
including Shares purchased with the proceeds of four year loans to be made
by the Company. See "The Offering." Notwithstanding the foregoing, the
Company, in its sole discretion, may accept smaller subscriptions, subject
to applicable securities laws. See "Plan of Offering."
(2) The Shares are being offered directly by the Company which will pay no
commissions but will utilize a portion of the proceeds to pay legal,
accounting and other expenses of the offering estimated to be $25,000.
THIS OFFERING MEMORANDUM CONSTITUTES AN OFFER ONLY IF A NAME APPEARS IN THE
SPACE BELOW MARKED "NAME OF OFFEREE" AND CONSTITUTES AN OFFER ONLY TO SUCH NAMED
OFFEREE.
Name of Offeree: Memorandum Number:
TIME SECURITIES INVOLVE A SIGNIFICANT DEGREE OF RISK
1
<PAGE>
__________
THIS MEMORANDUM IS SUBMITTED IN CONNECTION WITH THE OFFERING OF THESE
SECURITIES PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933, AS AMENDED
(THE `SECURITIES ACT'), REGULATION D AND/OR SECTION 701 PROMULGATED UNDER THE
SECURITIES ACT AND PURSUANT TO AVAILABLE EXEMPTIONS UNDER STATE SECURITIES LAWS,
AND MAY NOT BE REPRODUCED OR USED FOR ANY OTHER PURPOSE. ANY ACTION CONTRARY TO
THESE RESTRICTIONS MAY INVOLVE A VIOLATION OF CERTAIN FEDERAL OR STATE
SECURITIES LAWS.
__________
THE COMPANY HAS AGREED TO MAKE AVAILABLE, PRIOR TO THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED HEREIN, TO EACH OFFEREE OF COMMON STOCK OR HIS
REPRESENTATIVE(S) OR BOTH, THE OPPORTUNITY TO ASK QUESTIONS OF, AND RECEIVE
ANSWERS FROM IT OR ANY PERSON ACTING ON ITS BEHALF CONCERNING THE TERMS AND
CONDITIONS OF THIS OFFERING, AND TO OBTAIN ANY ADDITIONAL INFORMATION, TO THE
EXTENT IT POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE
EFFORT OR EXPENSE, NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION SET FORTH
HEREIN.
__________
PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS MEMORANDUM
OR ANY PRIOR OR SUBSEQUENT COMMUNICATION FROM THE COMPANY, ITS AFFILIATES,
DIRECTORS, OFFICERS AND EMPLOYEES OR ANY PROFESSIONAL ASSOCIATED WITH THIS
OFFERING AS LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD CONSULT HIS OWN PERSONAL
COUNSEL, ACCOUNTANT AND OTHER ADVISERS AS TO LEGAL, TAX, ECONOMIC AND RELATED
MATTERS CONCERNING THE INVESTMENT DESCRIBED HEREIN AND ITS SUITABILITY FOR HIM.
__________
NO DISTRIBUTION OF THIS MEMORANDUM IN WHOLE OR IN PART, OR THE DISCLOSURE
OF ANY OF ITS CONTENTS. IS PERMITTED UNLESS AUTHORIZED. EXCEPT FOR INFORMATION
CONTAINED HEREIN OR AUTHORIZED BY THE COMPANY, NO OFFERING LITERATURE OR
ADVERTISING IN WHATEVER FORM SHALL BE EMPLOYED IN THE OFFERING OF THE SHARES. NO
PERSON HAS BEEN AUTHORIZED TO MAKE REPRESENTATIONS, OR GIVE ANY INFORMATION,
WITH RESPECT TO THE SHARES, EXCEPT THE INFORMATION CONTAINED HEREIN AND IN THE
SUMMARY OF THE OFFERING PREPARED BY THE COMPANY.
__________
INVESTMENT IN THE COMMON STOCK IS SUITABLE ONLY FOR INVESTORS WHO MEET THE
SUITABILITY STANDARDS DESCRIBED UNDER "THE OFFERING -- SUITABILITY."
ii
<PAGE>
__________
THE COMMON STOCK OFFERED HEREBY MAY NOT BE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM REGISTRATION.
__________
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANYONE IN
ANY STATE OR IN ANY OTHER JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS
NOT AUTHORIZED.
__________
THE COMPANY WILL NOT BE REQUIRED TO DELIVER AN ANNUAL REPORT TO
STOCKHOLDERS PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
HOWEVER, THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS ANNUALLY WITH A COPY OF
THE COMPANY'S AUDITED FINANCIAL STATEMENTS.
__________
FOR LOUISIANA RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR THE
LOUISIANA SECURITIES LAWS. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE SOLD OR TRANSFERRED FOR VALUE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
OF THEM UNDER THE SECURITIES ACT AND/OR THE LOUISIANA SECURITIES LAWS OR AN
OPINION OF COUNSEL TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
SUCH ACT OR LAWS.
__________
FOR TEXAS RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE TEXAS SECURITIES ACT, AS
AMENDED (THE "TEXAS ACT"), AND ARE OFFERED AND SOLD PURSUANT TO AN EXEMPTION
THEREFROM. THE SHARES CANNOT BE SOLD OR TRANSFERRED EXCEPT IN -A TRANSACTION
WHICH IS EXEMPT UNDER THE TEXAS ACT, OR PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE TEXAS ACT OR IN A TRANSACTION WHICH IS OTHERWISE IN
COMPLIANCE WITH THE TEXAS ACT.
__________
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE
AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES
ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR
THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
iii
<PAGE>
CONFIDENTIAL OFFERING MEMORANDUM
HANOVER COMPRESSOR COMPANY
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF THE OFFERING................................................................ 1
THE COMPANY............................................................................ 1
THE OFFERING........................................................................... 1
FEDERAL INCOME TAX CONSEQUENCES........................................................ 6
RISK FACTORS........................................................................... 9
DETERMINATION OF OFFERING PRICE........................................................ 15
PLAN OF OFFERING....................................................................... 15
USE OF PROCEEDS........................................................................ 16
DILUTION............................................................................... 16
CAPITALIZATION......................................................................... 17
DIVIDEND POLICY........................................................................ 18
SELECTED FINANCIAL INFORMATION......................................................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................ 19
BUSINESS............................................................................... 21
MANAGEMENT............................................................................. 30
PRINCIPAL STOCKHOLDERS................................................................. 37
DESCRIPTION OF CERTAIN INDEBTEDNESS.................................................... 40
DESCRIPTION OF CAPITAL STOCK........................................................... 42
ADDITIONAL INFORMATION................................................................. 44
</TABLE>
iv
<PAGE>
EXHIBITS:
- --------
Exhibit A - Subscription Agreement
Exhibit B - Stockholders' Agreement
Exhibit C - Form of Loan Agreement
Exhibit D - Form of Four Year Note
Exhibit E - Form of Pledge Agreement
Exhibit F - Form of 1995 Management Stock Option Plan
Exhibit G - Form of Option Agreement under 1995 Management Stock Option Plan
v
<PAGE>
SUMMARY OF THE OFFERING
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Offering Memorandum and the Exhibits
attached hereto. Prospective investors of the Shares should carefully consider
the factors set forth under "Risk Factors."
The Company
The Company was organized in October 1990 for the purpose of acquiring,
manufacturing,' selling, leasing, maintaining and refurbishing compressors
utilized by the natural gas industry. For a more detailed description of the
Company's business, see "Business."
The Offering
Shares of Common Stock offered: 250, including Shares to be acquired for cash
out of the subscribing offeree's own funds or
by delivery of a four year note, but not
including shares which may be acquired
pursuant to options granted under the
Management Option Plan. See "The Offering."
Shares of Common Stock
outstanding after the offering: 83,956.19, not including (i) shares issuable
upon exercise of options and (ii) 156.40
shares of Common Stock which were repurchased
by the Company as of March 16, 1995.
Use of Proceeds: All of the net proceeds of this offering will
be used for general corporate purposes,
including working capital.
The Company reserves the right to withdraw this offering and return all
subscriptions or modify this offering at any time during the term of this
offering. Subscriptions for Shares may be accepted or rejected by the Company in
its sole discretion. All cash received by the Company in respect of
subscriptions for the Shares (the "Funds") shall be promptly deposited in an
interest bearing, segregated account and such Funds may be invested in treasury
bills or other cash equivalents, as determined in the sole and absolute
discretion of the Company. If acceptable subscriptions for a minimum of an
aggregate of 100 Shares are received by the Company on or before June 26, 1995
or such later date as the Company in its sole discretion may determine without
consent of or notice to the offerees. but in no event later than July 7, 1995
("the Termination Date"), all subscriptions will be transferred from the
segregated bank account to the Company, together with all interest, if any,
earned thereon. The minimum subscription per subscribing offeree is five Shares
(not including any Shares to be acquired pursuant to a four year loan made by
the Company) for an aggregate of $5,500; however, the Company in its sole
discretion may accept subscriptions for a lesser number of Shares, subject to
applicable securities laws. In the event all conditions have not been satisfied
in full prior to the Termination Date or the Company withdraws this offering,
this offering will be terminated and all Funds will be returned to subscribing
offerees with a pro rata share of interest earned thereon, if any, calculated on
--------
the basis of the amount of Funds invested by each subscribing offeree and the
length of time interest on such Funds was earned. See "Plan of Offering."
1
<PAGE>
Summary Financial Information
See "Selected Financial Information" for a summary of certain relevant
financial information.
Risk Factors
For a discussion of certain factors that should be considered in evaluating
an investment in the Shares, including, among others, (i) the Company's limited
operating history, (ii) the short terms of compressor leases and the possible
inability of the Company to re-lease its compressors, (iii) competition, (iv)
factors regarding the natural gas compressor leasing industry, (v) potential
liability and insurance, (vi) environmental liability risks, (vii) governmental
regulation, (viii) restrictions imposed by the terms of the Company's
indebtedness and the effect of a default thereunder, (ix) dependence upon
internally generated funds and the contemplated offering of Preferred Stock to
certain investors subsequent to this offering, (x) limited preemptive rights,
(xi) no public market for the Common Stock and restrictions on transferability,
(xii) dividends, (xiii) control by principal stockholders, (xiv) capital demands
due to recent expansion activity, (xv) dilution and (xvi) Federal income task
risks, see "Risk Factors."
2
<PAGE>
THE COMPANY
Hanover Compressor Company is a corporation organized under the laws of the
State of Delaware. The principal executive office of the Company is located at
12001 North Houston Rosslyn, Houston, Texas 77086, and the Company's telephone
number is (713) 447-8787.
THE OFFERING
This offering is made only to certain directors and employees of the
Company and its subsidiaries for the purpose of providing such persons with the
opportunity to obtain an equity interest in the Company. The Company reserves
the right to withdraw this offering and return all subscriptions or make non-
material modifications to the offering at any time during the term of the
offering. All Funds shall be promptly deposited in an interest bearing,
segregated account and such Funds may be invested in treasury bills or other
cash equivalents, as determined in the sole and absolute discretion of the
Company. Funds deposited in the segregated account may not be withdrawn by
subscribers unless the offering terminates as described herein. The deposit of
Funds in such account does not constitute acceptance of all or any portion of
any offeree's subscription by the Company.
General
Subject to adjustment for over subscription, each offeree may subscribe to
purchase for cash as many of the Shares as such offeree may desire. Upon such
subscription, the Company will, at the request and option of each subscribing
offeree, loan (the "Four Year Loan") such subscribing offeree sufficient funds,
on a full recourse and secured basis, to purchase two additional Shares (all
such Shares hereinafter the "Loan Shares") for each Share subscribed for
hereunder for cash (the "Cash Shares"). See "- The Four Year Loan." For each
Share acquired by a subscribing offeree hereunder, the Company will grant such
subscribing offeree an option to purchase one-third of one share of Common Stock
pursuant to the terms of the 1995 Management Stock Option Plan, substantially in
the form attached hereto as Exhibit F (the "Management Option Plan"). The
---------
exercise price for such options will be $1,100 per share (subject to adjustment
for stock splits, stock dividends and other similar events as described in the
Management Option Plan). See "- Options - Management Option Plan."
Offerees who desire to subscribe for Shares will be required to become
parties to the Supplemental Stockholders' Agreement attached hereto as Exhibit B
---------
(the "Stockholders' Agreement"). The Stockholders' Agreement restricts the sale
of Common Stock held by the parties thereto and provides for, among other
things, (i) the right of Investors (as hereinafter defined) to participate in a
sale by GKH Partners, L.P., a Delaware limited partnership ("Partners"), -and
GKH Investments, L.P., a Delaware limited partnership (together with Partners,
"GKH"), of at least 50% of the Common Stock owned by GKH, (ii) the right of GKH
to require all Investors to sell their stock in certain transactions for the
same consideration to be received by GKH and (iii) the right of the Company or
its affiliates to purchase all of an Investor's Common Stock upon the
termination of such Investor's employment with the Company and its subsidiaries
and affiliates. The purchase price for such stock varies depending on the
circumstances and, in cases where an Investor is terminated for cause or
voluntarily terminates his employment without good reason (each as more fully
defined in the Stockholders' Agreement), such purchase price may be
substantially below the fair market value of such Common Stock. See "--
Stockholders' Agreement."
The maximum aggregate number of shares which may be subscribed for pursuant
to this offering is 250, which number does not include any shares of Common
Stock to be issued upon exercise of
1
<PAGE>
options granted under the Management Option Plan. If the offerees subscribe for
more than such number of shares of Common Stock, each offeree's subscription
will be reduced proportionately based on the relationship between the number of
shares subscribed for by such offeree and the aggregate number of shares
subscribed for by all offerees.
For information regarding the method of subscribing for Shares, see "Plan
of Offering" and the Subscription Agreement attached hereto as Exhibit A (the
---------
"Subscription Agreement").
Suitability
Investment in the Shares offered hereby involves a significant degree of
risk. See "Risk Factors." This offering is a private offering made only by
delivery of a copy of this Offering Memorandum to the director or employee of
the Company or its subsidiaries whose name appears hereon. The Shares have not
been registered under the Securities Act, or any applicable state securities
laws. The Shares are being offered pursuant to one or more exemptions from the
registration requirements of the Securities Act, including the exemption
afforded by Section 4(2) thereof, Regulation D and/or Section 701 promulgated
thereunder, and pursuant to available exemptions under state securities laws,
only to certain directors and employees for investment only. Each person who
subscribes for Shares and whose subscription is accepted by the Company (each an
"Investor," collectively, the "Investors") will be required to represent that he
is acquiring the Shares for his own account, for investment, and without any
intention of making a distribution or resale thereof, either in whole or in
part. The Shares may not be resold or transferred except in accordance with the
provisions of the Securities Act, the rules and regulations thereunder, any
applicable state securities laws and the terms and conditions of the
Stockholders' Agreement. As a result of the foregoing, investment in the Shares
is suitable only for persons of adequate financial means apart from their
investment in the Shares, and who have no need for liquidity with respect to
such investment.
Offerees; who desire to subscribe for Shares should read and discuss with
their advisors this Offering Memorandum, the Subscription Agreement, the
Stockholders' Agreement, the Loan Agreement (as defined below), the Four Year
Note (as defined below), the Pledge Agreement (as defined below), the Management
Option Plan and the other documents relative to the foregoing regarding the
appropriateness of an investment in the Shares. The desirability of an
investment in the Common Stock depends upon a number of factors including, among
others, (i) the factors set forth under the caption "Risk Factors," (ii) the
nature of the Company's business, (iii) the possibility of a decline in value of
the 'Common Stock, (iv) the various restrictions on transferability of the
Common Stock, including those contained in the Stockholders' Agreement, and the
present essential illiquidity of the investment, (v) the desirability to the
offeree of a long-term investment, (vi) the likelihood that the Company will not
pay dividends on the Common Stock in the foreseeable future and the likelihood
of restrictions imposed on the Company's ability to pay dividends under the
terms of the agreements governing the Company's senior secured indebtedness and
the Preferred Stock Issuance (as defined below), (vii) the control of the
Company by its principal stockholders, (viii) the relationship between such
offeree's investment (including the investment pursuant to the Four Year Loan)
and such offerees' net worth, (ix) the employment goals of the offeree and the
right of the Company to purchase such offeree's Common Stock upon the
termination of his employment with the Company, in some instances at a purchase
price equal to or less than the offeree's cost thereof, even if such cost is
less than the fair market value of such Common Stock, and (x) other relevant
personal circumstances of each offeree.
2
<PAGE>
The Four Year Loan
Each Investor may, but is not required to, request from the Company a Four
Year Loan to purchase the Loan Shares. Inasmuch as the Four Year Loan will be
made on a full recourse and secured basis, each Investor should consider
carefully the additional risk that he or she will undertake by obtaining the
Four Year Loan to purchase Shares.
The Four Year Loan will bear interest at the prime rate as announced from
time to time by Chemical Bank ("Prime Rate"), will be made pursuant to a loan
agreement substantially in the form of Exhibit C hereto (the "Loan Agreement"),
---------
evidenced by a secured promissory note substantially in the form of Exhibit D
---------
hereto (the "Four Year Note"). Any amount of principal and/or accrued interest
on the Four Year Note which is not paid when due will bear interest at the Prime
Rate plus 2 %, except that upon the failure to make the required payments
following (i) the sale of Common Stock or receipt by the Investor of dividends
on Common Stock, (ii) termination for Cause (as defined below) and (iii)
voluntary termination without Good Reason (as defined below), the outstanding
principal and accrued and unpaid interest will bear interest at 15 % per annum,
compounded monthly, or the highest rate of interest allowable under applicable
law, whichever is less. Interest on the Four Year Note will be payable in cash
annually on December 31 (each an "Interest Payment Date") to the extent of 66.7
% of the accrued interest to such date (the "Minimum Interest Payment"), and all
accrued interest which is not paid as of an Interest Payment Date will be
automatically added to the principal amount of the Four Year Note. Each Minimum
Interest Payment must be paid to the extent of bonus payments, if any, less an
allowance equal to 33.3% of such bonus payment for federal and state income tax
(the "Net Bonus"), paid to the Investor by the Company on or before each
Interest Payment Date (including amounts paid in such calendar year which relate
to a previous calendar year and were not taken into consideration in such prior
calendar year), provided that nothing herein or in the Loan Agreement or the
Four Year Note shall create any obligation on the part of the Company to pay any
bonus. In the event the Net Bonus is insufficient to pay the Minimum Interest
Payment, the Investor shall be required to pay the difference between such Net
Bonus and the Minimum Interest Payment. The Company will have the right to
withhold from the Investor all or any portion of a Net Bonus payable by the
Investor in respect of interest under the Four Year Loan, which amounts will be
deemed to have been paid to the Investor and subsequently repaid by the Investor
to the Company. All principal and accrued and unpaid interest will be due upon
maturity, which will be 48 months from the date of the Loan Agreement, provided
that such date may be accelerated upon the occurrence of an Event of Default (as
defined below) or under other circumstances more fully described in the Loan
Agreement and the Four Year Note.
The Four Year Note will be secured by a pledge of (i) all of the shares and
rights to acquire shares of Common Stock owned by the Investor as of the date of
the Four Year Loan, or which are acquired by the Investor subsequent to the date
of the Four Year Loan and (ii) all proceeds received by an Investor thereon,
including dividends and additional shares received in stock distributions, all
as more fully set forth in the pledge agreement attached hereto as Exhibit E
---------
(the "Pledge Agreement"). The Four Year Note will provide for mandatory
prepayment upon and to the extent of dividends or other distributions paid to
the Investor on the Common Stock and proceeds from the sale of the Common Stock,
and upon termination of the Investor's employment by the Investor without Good
Reason (as defined below) or by the Company for Cause (as defined below).
The Four Year Note, the Loan Agreement, the Pledge Agreement and any other
documents that are executed in connection therewith (collectively, the "Loan
Documents") will be assignable by the Company to any of its affiliates,
including GKH, or to any third party financial institution or commercial
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lender to which the Company is or becomes indebted. The Loan Documents cannot be
assigned by an Investor without the Company's prior written consent.
"Cause," when capitalized and with reference to the termination of the
Investor's employment with the Company, means (i) the commission of an act of
fraud, embezzlement or willful breach of a fiduciary duty to the Company
(including the unauthorized disclosure of confidential or proprietary material
information of the Company), (ii) a conviction (or a plea of nolo conteridere in
---- -----------
lieu thereof) for a felony or a crime involving fraud, dishonesty or moral
turpitude, (iii) willful misconduct as an employee of the Company, (iv) the
willful failure to render services to the Company in accordance with such
Investor's employment, which failure amounts to a material neglect of his duties
to the Company or (v) substantial dependence, as determined by the Board of
Directors of the Company (the "Board"), on alcohol or any controlled substance.
"Good Reason," when capitalized, means, with reference to the voluntary
termination of the Investor's employment with the Company by the Investor, where
such termination (i) promptly follows a material reduction of such Investor's
duties and responsibilities or a permanent change in such Investor's duties and
responsibilities which are materially inconsistent with the type of duties and
responsibilities of such Investor then in effect, (ii) promptly follows a
material reduction in annual base salary (without regard to bonus compensation,
if any), (iii) promptly follows a material reduction in such Investor's employee
benefits (without regard to bonus compensation, if any) if such reduction
results in such Investor receiving benefits which are, in the aggregate,
materially less than the benefits received by other comparable employees of the
Company generally or (iv) the Board otherwise determines that a voluntary
termination by such Investor is for "Good Reason" under the circumstances then
prevailing.
An "Event of Default". when capitalized and with reference to the Four Year
Loan includes, without limitation, (i) the failure to pay principal or interest
when due, which failure has continued for 10 days after written notice from the
Company, (ii) any representation or warranty contained in the Loan Documents or
the Subscription Agreement being incorrect in any material respect on or as of
the date made or deemed made, (iii) the default with respect to any covenant
contained in the Loan Documents, which default is not curable by the Investor
or. if curable, has continued uncured for 10 days after written notice from the
Company, (iv) the failure of the Investor to make any payment when due under, or
other default of the Investor which permits acceleration of, any other material
indebtedness of the Investor and (v) the occurrence of certain bankruptcy-
related events with respect to the Investor which continue for 60 days or are
otherwise consented to by the Investor.
Options
Management Option Plan
For each share of Common Stock acquired by an Investor hereunder, the
Company will grant such Investor an option to purchase one-third of one share of
Common Stock (subject to adjustment for stock splits, stock dividends and other
similar events as described in the Management Option Plan) at a purchase price
of $1,100 per share. Such options will vest ratably over a five year period
beginning on the first anniversary of the Management Option Plan (subject to (i)
acceleration upon termination of employment due to death or permanent disability
and upon the occurrence of a Capital Event (as defined in the Management Option
Plan) and (ii) forfeiture upon termination for Cause) and be governed by the
terms of the Management Option Plan and individual option agreements (the
"Management Option Agreements") between the Company and each Investor, forms of
which are attached hereto as Exhibits F and G, respectively. The term of the
---------- -----
options will be 10 years, subject to a limited exercise period for
4
<PAGE>
vested options in the event of the termination of employment of the Investor
(other than for Cause). An option may not be exercised during any period in
which the Investor is in default under the terms of any loan or other obligation
that the Investor may have to the Company. The shares of Common Stock acquired
upon exercise of the options will be subject to the terms of the Stockholders'
Agreement. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an Investor, such options
may be exercised only by the Investor. The options granted under the Management
Option Plan are nonstatutory options and are not intended to qualify as
"incentive stock options" under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and each Investor should consult his tax advisors
for information regarding the tax treatment of such options.
Pursuant to the Management Option Agreements, each Investor will agree that
he will not during the term of such agreement and for a period of one year
thereafter, (i) compete with any business of the Company or its subsidiaries or
affiliates and (ii) without the Company's express written consent, disclose to
persons outside the Company confidential information concerning the Company or
any of its subsidiaries or affiliates.
Stockholders' Agreement
As a condition to the acceptance by the Company of a subscribing offeree's
subscription for Shares, such subscribing offeree is required to become a party
to the Stockholders' Agreement. The summary of the Stockholders' Agreement set
forth below is not intended to be a complete recitation of the provisions
thereof, and each offeree should read and understand all the provisions of the
Stockholders' Agreement before making a determination whether to invest in the
Shares.
Restrictions on Transfer
The Stockholders' Agreement contains substantial restrictions on the
disposition of an Investor Common Stock. In general, an Investor will be
permitted to transfer some or all shares of his Common Stock to affiliates,
including certain relatives and controlled entities, provided each affiliate
agrees to bound by the terms of the Stockholders' Agreement. An Investor will
also be permitted to transfer a (but not less than all) of his shares of Common
Stock to a bona fide third party purchaser if such purchaser agrees to be bound
by the terms of the Stockholders' Agreement, but only after such Common Stock is
offered first to the Company and then to GKH on the same terms as offered to the
bona fide third patty purchaser. The Investor will be required to comply with
certain mechanical provisions regarding such transfer, including (i) timely
notice to the Company and GKH of their respective rig of refusal and (ii)
consummation of any transfer within a specified period.
Rights to Compel Disposition
GKH will have the right to compel each Investor to dispose of all of his
shares of Common Stock and make certain representations with respect to his
ownership of such Common Stock in the event G seeks to transfer all, but not
less than all, of its Common Stock. If GKH exercises its right to compel the
disposition of the Investors' Common Stock, the consideration for such Common
Stock will be the same per share consideration on the same terms to be received
by GKH for its shares of Common Stock.
Rights of Inclusion
Each Investor will have the right to sell his Common Stock on the same
terms as GKH in a transaction pursuant to which GKH sells at least 50% of the
outstanding Common Stock of the Company
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<PAGE>
then owned by GKH. Investors who desire to participate in such sale will be
required to deliver notice on a timely basis and comply with other mechanical
provisions in connection with such transfer.
Preemptive Rights
Although Delaware law does not generally provide for preemptive rights, in
the event the Company offers an existing stockholder who is party to the
Stockholders' Agreement the opportunity to purchase additional shares of Common
Stock, the other parties to the Stockholders' Agreement will have the right to
acquire their respective pro rata share of such Common Stock on the same terms
--- ----
and conditions offered to such stockholder, except that such right shall not
apply to (i) shares issuable in connection with a merger, acquisition or similar
transaction, (ii) shares issuable upon the exercise of any options, warrants or
other convertible securities or (iii) shares offered by the Company to employees
and directors of the Company.
Transfers upon Termination
The Company will have the right to purchase all of the Common Stock of an
Investor in the event such Investor ceases to be an employee of the Company or
any of its subsidiaries or affiliates. The purchase price for such Common Stock
will be (i) in the event such Investor's employment is terminated for Cause, the
lower of the Investor's cost for his Common Stock on a share by share basis and
80% of fair market value thereof, (ii) in the event such employment is
voluntarily terminated without Good Reason, the lower of cost and fair market
value and (iii) in the event such Investor's employment is terminated by death,
retirement, permanent disability, without Cause or voluntarily with Good Reason,
the fair market value of such Common Stock. The purchase price for such Common
Stock will be payable (a) in cash (and/or by the delivery of a term note with
the shortest term permissible if required by any agreement to which the Company
is then subject) if such Investor's employment is terminated with Good Reason or
upon death, retirement, permanent disability or without Cause, or voluntarily
without Good Reason more than three years after the date of the Stockholders'
Agreement, and (b) by delivery of a seven year term note if such employment is
terminated for Cause, or voluntarily without Good Reason on or prior to the
third anniversary of the Stockholders' Agreement. Any note delivered in
connection with the foregoing will bear interest. payable annually, at the Prime
Rate.
Cost, fair market value. retirement. permanent disability and voluntary
termination are each defined in the Stockholders' Agreement.
FEDERAL INCOME TAX CONSEQUENCES
THE DISCUSSION SET FORTH BELOW PROVIDES GENERAL INFORMATION AS TO CERTAIN
ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH SUBSCRIPTION FOR THE
SHARES AND OPTIONS HEREUNDER. EACH INVESTOR SHOULD CONSULT HIS TAX ADVISOR AS TO
THE SPECIFIC TAX CONSEQUENCES OF HIS SUBSCRIPTION, INCLUDING THE APPLICATION OF
POSSIBLE OF STATE AND LOCAL TAX LAWS.
Restricted Stock
Code Section 83 governs transfers of property to persons (whether employees
or independent contractors) in exchange for services. Under that section, a
person receiving property as compensation for services must report (as
compensation income) the excess of the fair market value of the property
6
<PAGE>
received over the amount paid in exchange therefor (such excess referred to
herein as "In-Kind Compensation").
In determining when a recipient of In-Kind Compensation must report income
attributable thereto, Code Section 83(a) provides that the value of such In-Kind
Compensation (without regard to any restriction other than a restriction which
by its terms will never lapse) is includible in the recipient's income at the
first time that the recipient's rights in the property are substantially vested.
For such purposes, property is considered to be substantially vested when it is
either (a) transferable or (b) not subject to a substantial risk of forfeiture.
A substantial risk of forfeiture is generally considered to exist when the
recipient's rights to the property are predicated upon the future performance of
services or upon the occurrence of a condition related to the transfer. Further,
an interest in restricted property is transferable only if the subsequent
transferee's rights in the property are not subject to a substantial risk of
forfeiture.
Alternatively, Code Section 83(b) provides each recipient of In-Kind
Compensation the ability to include such amounts in income in the year in which
he receives them, rather than the year in which the In-Kind Compensation becomes
substantially vested. Under that section, a taxpayer may elect, within 30 days
of the transfer of property, to include in income the value of any In-Kind
Compensation (as determined without regard to the restrictions thereon).
Taxpayers who include In-Kind Compensation in income under Code Section 83(b)
but later forfeit the property received are denied a deduction for any portion
of the In-Kind Compensation reported by the taxpayer.
Once includible in the income of the recipient, In-Kind Compensation is
considered payment of wages subject to withholding of income tax and deposits
pursuant to the Federal Insurance Contributions Act (FICA). Upon the subsequent
sale of the transferred stock or other property, the taxpayer will recognize
income to the extent that the amounts realized on sale exceed the sum of (a) the
amount includible in his income under Code Section 83 and (b) the amount paid
for the property.
Offerees who desire to subscribe for Shares will be required to become
parties to the Stockholders' Agreement. Pursuant to the Stockholders' Agreement,
each Investor may be required, in the event his employment terminates for Cause
or without Good Reason, to sell his Shares back to the Company for an amount
equal to the lower of (a) cost or (b) a percentage (either 100% or 80%) of fair
market value. Any transferee of an Investor nay be required to sell the
transferred Shares to the Company upon similar terms in the event that the
Investor's employment is terminated for Cause or without Good Reason. Such
restrictions lapse with respect to any Investor on the earliest to occur of (a)
the Investor's death, retirement, permanent disability, or involuntary
termination of employment without Cause, (b) the Investor's voluntary
termination of employment with Good Reason, or (c) the failure of the Company to
exercise its rights to purchase the Investor's Shares in a timely fashion
following the termination of his employment for Cause or without Good Reason
(each such event referred to as a "Lapse Event"). See "The Offering -
Stockholders' Agreement."
The Company believes that, in light of various provisions of the
Stockholders' Agreement, each Investor subscribing for Shares hereunder will
acquire such Shares subject to a substantial risk of forfeiture. Further, the
Company believes that the Shares subscribed for hereunder are not transferable
within the meaning of Code Section 83. As such, to the extent that the fair
market value of any Share exceeds the amount paid therefor, no Investor should
be required to include in income the In-Kind Compensation attributable thereto
until the restrictions lapse at the occurrence of a Lapse Event. Nevertheless,
any Investor may elect, under Code Section 83(b), to include the value of the
In-Kind Compensation in the year in which he purchases Shares pursuant to this
Offering.
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<PAGE>
Stock Options
Taxpayers receiving compensatory, nonstatutory stock options (i.e., options
other than "qualified options" taxable under Code Section 421) generally do not
recognize income as a result of the grant of such options. Unless the granted
options have a readily ascertainable fair market value within the meaning of
Code Section 83 as of the date of grant, the taxpayer realizes income only on
the date he exercises or disposes of such options. At that time, he realizes
compensation income equal to the difference between the market value of the
stock and the price paid to acquire and exercise the option. However, where the
optionee's rights in the property transferred pursuant to the exercise of such
option are not substantially vested (within the meaning of Code Section 83), the
optionee does not realize income until the first time that his rights in that
property become substantially vested. See "- Restricted Stock."
When an option is not regularly traded on an established market, it does
not have a readily ascertainable market value unless its value can be determined
with "reasonable accuracy." For such purposes, the value of an option cannot be
determined with reasonable accuracy unless all of the following conditions
exist:
(i) The option is transferable;
(ii) The option is exercisable immediately in full;
(iii) The option is not subject to any restriction or condition which has a
significant effect upon its value; and
(iv) The value of the option privilege is readily ascertainable.
For each Share Stock acquired by an Investor hereunder, the Company will
grant such Investor an option to purchase one-third of one sham of Common Stock
(subject to certain adjustments) at a purchase price of $ 1, 100 per share. Such
options will vest ratably over a five-year period commencing on the first
anniversary of the Management Option Plan. will be nontransferable (except by
will or the laws of descent and distribution) and, during the life of the
Investor, may be exercised solely by the Investor. See "The Offering - Options -
Management Option Plan." Once exercised, the shares of Common Stock acquired
pursuant to such exercise will become subject to the Stockholders' Agreement,
including its restrictions and repurchase rights vested in the Company. The
options will not be actively traded on an established market as of the date the
Company grants them.
The Company believes that, since the options are neither exercisable
immediately in full nor transferable (except at death), the value of options may
not be determined with reasonable accuracy. As the options should not have a
readily ascertainable market value within the meaning of Code Section 83, the
Company believes that they should not be compensation income to the optionee on
the date of grant (notwithstanding that their value may later become readily
ascertainable). Further, since the property acquired pursuant to the exercise of
such options (i.e., shares of Common Stock) will be subject to the Stockholders'
Agreement, the Company believes that an Investor exercising an option granted
hereunder will acquire property in which his rights are not substantially vested
within the meaning of Code Section 83. Accordingly, the Company believes that an
Investor should not have compensation income until the date that the
restrictions on the Common Stock acquired pursuant to such exercise lapse (i.e.,
at the occurrence of a Lapse Event under the Stockholders' Agreement). At that
time, the Investor should recognize compensation income in an amount equal to
the excess of the market value of the stock as of such date over the price paid
to exercise and acquire the applicable option. Any Investor may, however, choose
to accelerate the recognition of income to the date he exercises an option
provided he makes the election under Code Section 83(b).
8
<PAGE>
RISK FACTORS
Investors should consider the specific factors set forth below as well as
the other information set forth in this Offering Memorandum. The following is
not necessarily a comprehensive list of all of the possible risk factors
associated with an investment in the Common Stock.
Limited Operating History
The Company's products are well-established in the marketplace, and the
Company has experienced net profits in three of its four full fiscal years of
operation. However, there can be no assurance that the Company will remain
profitable in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Short Lease Terms; Possible Inability to Re-lease Compressors
The Company has historically leased its compressors under leases with an
average fixed term of six months and which continue thereafter on a month to
month basis. Historically, lessees have renewed their leases on a month to month
basis for an average -period of 24 months. Based on the average cost of new
compressors and the average lease price, the Company generally does not recoup
its investment in the compressors until after its receipt of at least 48 months
of lease payments. Accordingly, the Company assumes substantial risk of not
recovering its entire investment in the equipment it purchases. Although the
Company has historically been successful in re-leasing units in its inventory,
there can be no assurance that the Company will continue to be able to do so or
that a substantial portion of its lessees will not terminate their leases at
approximately the same time, thereby causing an adverse accumulation of unleased
compressors in the Company's inventory. The inability of the Company to lease a
substantial portion of its compressors for any reason would have a material
adverse effect upon the Company's financial condition and its results of
operations. See "Business."
Competition
The natural gas compression industry and the oil and gas production
equipment business are highly competitive. The Company competes with several
large national and international companies which, like the Company, offer a wide
range of compressors and production equipment for purchase or lease. There can
be no assurance that such competitors will not substantially increase the
resources devoted to the development and marketing of products competitive with
those of the Company or that new competitors will not enter the industry. See
"Business - Competition."
Natural Gas Compressor Industry Considerations
The Company's profitability is, in part, dependent upon the current demand
for natural gas. Natural gas demand, aided by competitive pricing and interstate
pipeline deregulation, has increased at a rate of approximately 2% per year from
1986 through 1994. The Company's management estimates that demand for Gas
compression has increased approximately 10 % per year during this time frame.
This increase is a result of increased production from lower reservoir-pressured
areas and the increased amount of coal-seam and tight-gas drilling in certain
geographic areas.
Depressed natural gas prices tend to decrease efforts to discover and
develop new natural gas reserves domestically. This places a greater reliance
upon older, developed reserves which requires additional compression to deliver
the remaining natural gas to market. A significant decline in the price
9
<PAGE>
of natural gas could result in the widespread failure of independent producers
and increased pricing pressure for compressor rental companies. This would have
a material adverse effect on the Company's financial condition and results of
operations. See "Business."
Potential Liability and Insurance
Natural gas operations are subject to certain risks, including explosions,
uncontrollable flows of gas or well fluids, fires, pollution and other
environmental risks. These risks could expose the Company to substantial
liability for injury and loss of life, property damage, pollution and other
environmental damages, and consequential damages, if such damages resulted from
an alleged compressor defect or from the Company's negligence in maintaining,
servicing or refurbishing its compressors.
Although the Company has obtained certain insurance, no assurance can be
given that such insurance is adequate to cover the Company's operations, will be
generally available in the future or, if available, that premiums will be
commercially justifiable. If the Company were to incur a substantial liability
and such damages were not covered by insurance or were in excess of policy
limits, or if the Company were to incur such liability at a time when it is no
longer able to obtain liability insurance, its financial condition could be
materially adversely affected. The Company, consistent with industry trends, may
find it difficult to obtain adequate insurance coverage against possible
liabilities that may be incurred in connection with the conduct of its business.
There can be no assurance that all possible types of liabilities that may be
incurred by the Company will be covered by its insurance or that the dollar
amount of such liabilities will not exceed the Company's policy limits. A
partially or completely uninsured claim, if successful and of sufficient
magnitude, could have a material adverse effect on the Company audits financial
condition.
Environmental Liability Risks
In addition to liability which may arise as a result of an alleged
compressor defect or alleged Company negligence, if environmental damage is
found to have occurred as a result of the Company's operating activities, the
Company could incur substantial liability. In such event, the Company could be
liable for all costs of remediation, as well as certain other costs. Under the
Comprehensive Response, Compensation and Liability Act ("CERCLA"), the Company
may also be liable for all costs of remediation of any property of which it is
deemed to be the owner or operator. Various Preliminary Environmental (Phase 1)
Site Assessments were conducted in 1990 and 1991 with respect to certain
properties owned or operated by the Company and its subsidiaries. Such
assessments identified potential sources of ground contamination. Although
remediation efforts have been undertaken by the previous owners, no assurances
can be given that such remediation efforts will be successful or that the
Company will not incur costs in remediating such contamination or discover
additional sources of enumerated contamination. In addition, pursuant to the HPC
Merger (as defined below), the Company acquired certain potential environmental
liabilities estimated at December 31, 1992 to be between $139,000 and $200,000.
See "Business - Company History" for a description of the HPC Merger.
In June 1993, a Phase I and Phase H Environmental Assessment was conducted
on the Company's 20 acre headquarters/fabrication facility in Houston, which
Assessment indicated that such site has minimal apparent risk with respect to
environmental liability. In addition, the company maintains a professionally
designed Spill Prevention Control and Countermeasure Plan (the "SPCC Plan") with
respect to its Fort Smith, Arkansas maintenance facility, which is designed to
prevent oil spills and waste releases and to describe protocols for immediate
coordination of necessary activities to minimize any harmful effects should a
spill or other release occur. Although the Fort Smith facility does not
routinely
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<PAGE>
generate hazardous waste, the SPCC Plan includes waste release measures given
that during an oil spill event, certain characteristic hazardous waste from
spill residue may be generated. Moreover, the Company is currently implementing
a Site Remediation and Clean Up Proposal regarding real property located in
Columbus, Texas with respect to which the Company acquired a lease and purchase
option pursuant to the February 1995 acquisition by the Company of substantially
all of the assets of Smith Industries, Incorporated. See "Business- Company
History."
Governmental Regulation
The Company is subject to various federal, state and local laws and
regulatory standards in the areas of safety, health and the environment,
including regulations regarding emission controls. The Company believes that it
is in substantial compliance with such laws and regulations and that the phasing
in of emission controls and other known standards at the rate currently
contemplated by such laws and regulations will not have a material adverse
effect on the Company's financial condition or results of operations. However,
various state and federal agencies from time to time consider adopting new laws
and regulations or amending existing laws and regulations regarding
environmental protection. While the Company may be able to pass on the
additional costs of complying with such laws, there can be no assurances that
attempts to do so would be successful. Accordingly, new laws Or regulations or
amendments to existing laws or regulations could require the Company to
undertake significant capital expenditures and could otherwise have a material
adverse effect on the Company's financial condition and results of operations.
Restrictions Imposed by the Terms of the Company's Indebtedness; Effect of
Default
The terms of the Company's existing credit agreement dated June 29, 1993,
as amended (the "Credit Agreement") among the Company, Chemical Bank, as agent,
and the other banks party thereto impose a variety of restrictions on the
Company's operations, including, without limitation, limiting the Company's
ability to incur additional indebtedness, grant or suffer liens or other
encumbrances on its property, make investments, loans or advances except under
certain enumerated circumstances, make capital expenditures above specified
levels, enter into sale/leaseback arrangements as a seller/lessee, dispose of
its assets or extend guarantees. Such restrictions may limit the Company's
ability to exploit fully certain business opportunities. In addition, under the
terms of the Credit Agreement, the Company may not declare or pay any dividend
or make any payment for the purchase, redemption or acquisition of any shares of
Common Stock other than repurchases of Common Stock from employees of the
Company which do not exceed an aggregate of $1,500,000. In addition, the failure
of the Company to maintain certain financial ratios may cause the Company to be
in default under the agreements governing its indebtedness and such default, if
uncured, may ultimately entitle its creditors to foreclose on all of the assets
of the Company. See "Description of Certain Indebtedness."
Dependence on Internally Generated Funds; Capital Needs
The compressor leasing business and the oil and gas production equipment
business in which the AW Company is involved are capital intensive businesses,
and the inability of the Company to continue to have access to sufficient
capital could have a material adverse effect on the Company's ability to finance
compressor purchases and production equipment materials purchases arid, thus,
maintain its future leasing revenues and profitability. Company growth has
historically been financed through (i) sales of Common Stock, including the sale
of approximately $15,000,000 of Common Stock to certain executive officers and
then existing stockholders of the Company in 1992 (the "1992 Offering"), the
sale of approximately $2,500,000 of Common Stock to certain members of the
Company's management in
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1993 (the "1993 Offering") and the sale of approximately $16,000,000 of Common
Stock to GICH in 1993, (ii) internally generated funds and (iii) borrowings
under the Credit Agreement, which provides for a revolving credit facility with
a commitment of $35,000,000 and three term loans in the original principal
amounts of $15,000,000 (the "Original Term Loan"), $10,000,000 (the "B Tranche
Loan") and $4,000,000 (the "C Tranche Loan"), respectively. In addition, on June
6, 1995, the Company borrowed $12,000,000 (the "Subordinated Loan") from GKH and
an affiliate of certain existing stockholders of the Company pursuant to the
terms of a Subordinated Loan Agreement (the "Subordinated Loan Agreement"). The
Subordinated Loan is, by its terms, subordinate and junior in right of payment
to the obligations of the Company under the Credit Agreement.
It is currently contemplated that subsequent to this offering, the Company
will issue new equity most likely in the form of (i) approximately $30,000,000
of Preferred Stock to investors with warrants to purchase new shares of Common
Stock (the *Preferred Stock Issuance") and (ii) additional Common Stock to
certain members of management of the Company and its subsidiaries, although the
Company reserves the right in its sole discretion to amend or cancel such
offerings. See *Description of Certain Indebtedness." However, the consummation
of such transactions are not a condition to the consummation of this offering
and there can be no assurance that any or all of such transactions will be
consummated.
In addition, although the Company believes that it will have sufficient
capital resources based on internally generated funds, the amounts available
under the Credit Agreement, the Subordinated Loan, the proceeds of the Preferred
Stock Issuance and other proposed private placements of equity to fund its
anticipated capital needs for at least the next 5 years, there can be no
assurance that the Company will meet its projected earnings and that sufficient
cash flow will be generated. Failure to generate sufficient cash flow together
with the absence of alternative sources of capital could have a material adverse
effect on the financial condition, operations and expected growth of the
Company. See "Management's Discussion of and Analysis of Financial Condition and
Results of Operations."
Limited Preemptive Rights
Although Delaware law does not generally provide for preemptive rights, in
the event the Company offers any party to the Stockholders' Agreement the
opportunity to purchase additional shares of Common Stock, all other parties to
the Stockholders' Agreement will have the right to acquire their respective pro
---
rata share of such Common Stock on the same term and conditions offered to such
- ----
other stockholder, except that such right shall not apply to (i) shares issuable
in connection with a merger, acquisition or similar transaction, (ii) shares
issuable upon the exercise of any options, warrants or other convertible
securities or (iii) shares offered by the Company to employees and directors of
the Company. See "The Offering - Stockholders' Agreement - Preemptive Rights"
and "Description of Capital Stock." Similarly, subject to these same exceptions,
the parties to the 1993 Stockholders' Agreement (as defined below) would have
the right to purchase a pro rata amount of Common Stock if the Company were to
--- ----
offer any party to the 1993 Stockholders' Agreement the right to purchase
additional shares of Common Stock. In addition, in the event the Company sells
or otherwise issues any shares of Common Stock to GKH, the non-GKH parties to
the Gale Force Stockholders' Agreement (as defined below) will have the right to
acquire their respective pro rata amount of Common Stock on the same terms and
--- ----
conditions as such Common Stock is sold or otherwise issued to GKH. See
"Principal Stockholders -Stockholders' Agreements - 1993 Stockholders'
Agreement;" and " -- Gale Force Stockholders' Agreement."
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<PAGE>
No Public Market for Common Stock; Restriction on Transferability
Each subscribing offeree will be required to represent that he is
purchasing the Shares for investment purposes for his own account but not with a
view to resale or distribution. There is no public market for the Shares, and an
Investor's ability to transfer his Common Stock will be significantly restricted
by the terms of the Stockholders' Agreement. In addition, the Stockholders'
Agreement (i) gives GKH the right to cause all Investors to sell their Common
Stock in certain transactions and (ii) gives the Company or certain of its
affiliates the right, but not the obligation, to purchase all of the Common
Stock of an Investor upon the termination of such Investor's employment with the
Company. The purchase price for such stock varies depending on the circumstances
and, in cases where an Investor is terminated for Cause or voluntarily
terminates his employment without Good Reason, such purchase price may be
substantially below the fair market value of such Common Stock. See "The
Offering - Stockholders' Agreement." Any potential Investor must be able and
willing to bear the risk of his investment for an indefinite period.
Dividends
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
ability of the Company to pay dividends will be limited by the terms of the
Credit Agreement, the Subordinated Loan Agreement and the contemplated Preferred
Stock Issuance. See "Description of Certain Indebtedness."
Control by Principal Stockholders
Prior to the consummation of this offering, approximately 79% of the
Company's outstanding Common Stock (not including shares issuable pursuant to
existing option programs) was owned by GKH. Subsequent to this offering, GKH
will continue to own a majority of the Common Stock of the Company. By
maintaining such majority ownership, GKH will continue to have the power to
determine the policies of the Company and its subsidiaries, the persons
constituting the directors and officers thereof (subject to the terms of (i) the
1993 Stockholders' Agreement, (ii) the Gale Force Stockholders' Agreement, (iii)
the Hanna Stockholders' Agreement and (iv) the HEHC Stockholders' Agreement) and
the outcome of various corporate actions requiring stockholder approval (subject
to the terms of the HEHC Stockholders' Agreement). See "Principal Stockholders -
Stockholders' Agreements" for a description of these agreements.
Recent Expansion Activity
Through its acquisition of the production equipment business of Smith
Industries, Incorporated (the "Smith Business;" See "Business - Company
History"), the Company substantially expanded its oil and gas production
equipment fabrication operations. The Company is now in the process of
integrating the Smith Business into its current operations. Given the size of
this acquisition, there can be no assurance that the integration will be
successful or that additional capital will not be required to operate the
Company's oil and gas production equipment business. In addition, the Company
has also made certain other acquisitions, which management believes will enhance
the Company's competitive position in the natural gas compression industry,
which is generally experiencing a considerable amount of consolidation. See
"Business - Company History." However, there can be no assurance that such
acquisitions will bring the desired results.
13
<PAGE>
Dilution
Assuming all of the Shares are issued, the value of the Shares purchased
pursuant to this offering will be subject to immediate dilution in the net
tangible book value of $455.55 per Share from the adjusted net tangible book
value as of March 31, 1995.
Federal Income Tax Risks
The following discussion summarizes certain federal income tax risks
associated with an investment in the Shares and the exercise of options acquired
therewith. As the following does not purport to be a complete discussion of all
relevant tax issues, prospective investors should consult their own tax advisors
for advice regarding the impact of a subscription for Shares and options upon
their individual tax positions, including the application of state and local
income tax law, if any.
Treatment of Compensation Income, Receipt of Shares
The Company believes that. as a result of the Company's repurchase rights
under the Stockholders' Agreement, each Investor's rights in the Shares acquired
hereunder should not be considered "substantially vested" within the meaning of
Code Section 83. Accordingly, the Company believes that no Investor should
realize compensation income at the time of such subscription, notwithstanding
that the fair market value of the Shares acquired exceeds the Investor's
purchase price therefor. No assurance can be given however that the Internal
Revenue Service ("IRS") will consider the provisions of the Stockholders'
Agreement to be sufficient to render such Shares nontransferable and each
Investor's rights therein to be subject to a substantial risk of forfeiture
within the meaning of Code Section 83. Further, no assurance can be given that a
court of competent jurisdiction would agree with the conclusions of the Company.
In the event that the IRS considers the provisions of the Stockholders'
Agreement to be insufficient for such purpose, it will consider each Investor to
have compensation income (as of the date he acquires Shares) in an amount equal
to the difference between the fair market value of such Shares and the
Investor's purchase price. Each Investor may thus be required to pay federal
income and FICA tax on such income, plus interest and penalties as applicable.
Further, the Company may be required to pay federal unemployment and other taxes
on the compensation deemed to be transferred to each Investor, plus interest and
penalties as applicable, which tax may indirectly effect the value of each
Investor's Shares.
Treatment of Compensation Income, Receipt of Options
The Company also believes that the Company's repurchase rights render the
rights of any Investor in shares of Common Stock acquired pursuant to the
exercise of any option not to be substantially vested within the meaning of Code
Section 83. No assurance can be given however that the IRS (or any court) would
agree that an Investor acquiring Common Stock pursuant to the exercise of any
option is subject to a substantial risk of forfeiture with respect to such Stock
and such Stock is nontransferable under Section 83 of the Code. As such, an
Investor exercising options granted hereunder may realize compensation income at
the date he exercises an option in an amount equal to the difference between the
fair market value of the Common Stock on that date over the price paid to
exercise and acquire the applicable option. An Investor may thus be required to
pay federal income and FICA tax (and interest and penalties, as applicable) with
respect to such compensation income. Similarly, the Company may be required to
pay federal unemployment and other taxes (including penalties and interest)
which payment may indirectly effect the value of each Investor's Common Stock.
14
<PAGE>
Election under Code Section 83(b)
Any Investor may make an election to include amounts in income on the date
he acquires shares of Common Stock (whether ' at subscription the exercise of
any option granted hereunder). Electing Investors will thus not recognize
additional compensation income upon the occurrence of a Lapse Event under the
Stockholders' Agreement. However, since each electing Investor accelerates the
recognition of income from the time at which the Company believes it would
otherwise be first recognizable (i.e., the date of any Lapse Event), each
electing Investor must bear certain market risks associated with the value of
his Shares. If the value of an electing Investor's Shares does not exceed the
value of such Shares on the date that the Investor acquired them, such electing
Investor will have included amounts in income which would not have otherwise
have been includible had he not made the election under Code Section 83(b). Such
electing Investor will not be entitled to deduct any amounts attributable to
that income acceleration.
Further, in the event that an electing Investor is required to sell Shares
of Common Stock back to the Company (e.g., pursuant to the exercise of the
Company's rights to repurchase such Shares in the Stockholders' Agreement), that
Investor will not be allowed any deduction for any portion of the basis in such
Shares that he acquired as a result of a Section 83(b) election.
DETERMINATION OF OFFERING PRICE
The offering price of $1,100 per Share was determined solely by the Board
based on a number of factors, including the date of the Company's hiring of the
offerees and a comparison of the Company's 1994 and projected 1995 financial
performance to the financial performance and corresponding per share market
multiples of a select group of public companies involved in the natural gas
compressor leasing and fabrication and energy services industries. By virtue of
the nature of this offering, the offering price was not determined pursuant to
arm's length negotiations with a third party, and there can be no assurance that
such price is indicative of the fair market value of the Shares.
PLAN OF OFFERING
The minimum purchase per subscribing offeree is five Shares (excluding
Shares to be acquired by delivery of a Four Year Note) for a minimum aggregate
purchase price of $5,500, provided that the Company, in its sole discretion and
subject to applicable securities laws, may accept smaller subscriptions. The
minimum aggregate purchase for all Investors is 100 Shares (excluding Shares to
be purchased by delivery of a Four Year Note) for a minimum aggregate purchase
price of $110,000. The Company reserves the right (i) to reject any subscription
for any reason and (ii) to make non-material modifications to or terminate this
offering at any time for any reason.
Each offeree who desires to subscribe for Shares must (i) on or before
Monday, June 26, 1995, call Curtis Bedrich (at 713-447-8787) to communicate the
number of Cash Shares and Loan Shares for which such offeree desires to
subscribe and (ii) prior to Friday, June 30, 1995, execute and return to the
Company, c/o Curtis Bedrich, (a) one copy and one extra signature page of the
Subscription Agreement included herewith (including Schedule A attached
thereto), and (b) one copy and one extra signature page of the Stockholders'
Agreement included herewith (including the spousal consent, if applicable).
Upon oral confirmation of the number and type of Shares subscribed for by a
subscribing offeree, the Company will prepare and distribute for execution to
such subscribing offeree (i) one execution copy of each of the Loan Agreement
and Four Year Note, if applicable, (ii) two copies of the
15
<PAGE>
Pledge Agreement, if applicable, (iii) two copies of the Management Option
Agreement, (iv) an assignment separate from certificate, if the subscribing
offeree has requested a Four Year Loan and (v) an IRS Form W-9. In addition to
the Subscription Agreement and the Stockholders' Agreement previously delivered,
each subscribing offeree must then, prior to July 7. 1995, return to the
Company, c/o Curtis Bedrich, to the extent applicable, (i) the executed Loan
Agreement and Four Year Note, (ii) two executed counterparts of the Pledge
Agreement. (iii) two executed counterparts of the Management Option Agreement,
(iv) the assignment separate from certificate, executed in blank, (v) the fully
completed and executed Form W-9 and (vi) if applicable. a check in an amount
equal to the product of (a) the number of Cash Shares subscribed for and (b)
$1.100.
The foregoing deadlines are summarized as follows:
<TABLE>
<CAPTION>
========================================================================================================
Event Deadline
- ----- --------
- --------------------------------------------------------------------------------------------------------
<S> <C>
Orally contact Curtis Bedrich (at 713-447-8787) to Monday, June 26
indicate the number of shares you wish to subscribe
for
- --------------------------------------------------------------------------------------------------------
Deliver one executed copy and one extra executed Friday, June 30
counterpart of (i) the Subscription Agreement
(including Schedule A attached thereto) and (ii) the
Stockholders' Agreement (including the spousal
consent, if applicable)
- --------------------------------------------------------------------------------------------------------
Deliver, as applicable, (i) one copy of each of the Friday, July 7
Loan Agreement and Four Year Note, (ii) one executed NOTE: These documents will be delivered to
copy and one extra executed counterpart of the Pledge you Wednesday, June 28 if you orally contact
Agreement, (iii) one executed copy and one extra Curtis Bedrich with your subscription by
executed counterpart of the Management Option Monday, June 26.
Agreement, (iv) an assignment separate from
certificate executed in blank and (v) and IRS Form W-9
========================================================================================================
</TABLE>
All Funds shall be promptly deposited in an interest bearing, segregated
account and such Funds may be invested in treasury bills or other cash
equivalents, as determined in the sole and absolute discretion of the Company.
If acceptable subscriptions for a minimum of an aggregate of 100 Shares are
received by the Company on or before June 30, 1995, or such later time as
determined in the sole and absolute discretion of the Company without notice to
or consent of the offerees, but in no event later than the Termination Date, all
Funds will be transferred from the segregated bank account to the Company,
together with all interest, if any, earned thereon. In the event such condition
has not been satisfied on or before the Termination Date or this offering is
withdrawn by the Company, this offering will be terminated and all Funds will be
returned to the subscribing offerees with a pro rata share of interest earned
thereon, calculated on the basis of the amount of Funds invested by each
subscribing offeree and the length of time interest on such Funds was earned.
USE OF PROCEEDS
Assuming all of the Shares are issued. the net proceeds of the offering,
estimated to be $275,000, will be used for general corporate purposes. including
working capital.
DILUTION
As of March 31, 1995, the Company had adjusted net tangible book value
(defined as total stockholders' equity less goodwill) of $53,931,805, or $643.09
per share of Common Stock. Adjusted net
16
<PAGE>
tangible book value per share of Common Stock is determined by dividing the
actual net tangible book value by the number of shares of its Common Stock and
treating all such Common Stock as having been issued for cash which would have
been outstanding as of March 31, 1995. After giving effect to the sale of the
Shares and the application by the Company of the estimated net proceeds
therefrom as described in "Use of Proceeds," the pro forma net tangible book
value of the Company as of March 31, 1995 would have been $54,206,805, or
$644.45 per share of Common Stock. This value represents an immediate increase
in the adjusted net tangible book value of $1.36 per share of Common Stock to
the current shareholders and an immediate dilution in net tangible book value of
$455.55 per Share to purchasers of the Shares. Dilution per share is determined
by subtracting the pro forma adjusted net tangible book value per share of
Common Stock after the completion of this offering from the per share price paid
by purchasers of the Shares. The following table (1) illustrates this per share
dilution:
<TABLE>
<S> <C>
Price per share pursuant to this offering.............................................. $1,100.00
Adjusted net tangible book value per share as of March 31, 1995....... $ 643.09
Increase in adjusted net tangible book value per share
attributable to the offering(2)....................................... $ 1.36
Pro forma adjusted net tangible book value per share after this offering............... $ 644.45
Dilution per share to purchasers of the Shares......................................... $ 455.55
</TABLE>
(1) Assumes that all of the Shares are subscribed for and excludes shares of
Common Stock reserved for issuance pursuant to options which have
previously been granted to certain members of management. To the extent
such options are exercised, the value of Shares purchased by investors may
be subject to further dilution. See "Capitalization," "The Offering - Stock
Options" and "Description of Capital Stock- Options."
(2) Does not reduce stockholders' equity for the aggregate amount of all Four
Year Loans.
The following table sets forth as of March 31, 1995 (calculated on the same
basis as the preceding paragraph and rounded for purposes of this presentation)
the number of shares of Common Stock purchased from the Company, the value of
the total consideration received, the average price per share paid by the
existing shareholders of the Company and the price per share to be paid by
Investors:
<TABLE>
<CAPTION>
=========================================================================================================================
Shares Purchased Total Consideration Avg. Price
- --------------------------------------------------------------------------------------------------------
Per
Number % Amount % Share
------ --- ------ --- -----
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders 83,863 99.7 $58,088,390 99.5 $ 692.66
- -------------------------------------------------------------------------------------------------------------------------
Investors 250 0.3 275,000 0.5 1,100.00
- -------------------------------------------------------------------------------------------------------------------------
Total 84,113 100.0 $58,363,390 100.0 $ 693.87
=========================================================================================================================
</TABLE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of March 31, 1995 and as adjusted to reflect the consummation of this offering
(assuming all 250 Shares are subscribed for) after the anticipated application
of the estimated net proceeds therefrom.
17
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
As Adjusted for
Actual the Offering
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Current installments of long-term debt(1).............................. $ 3,125,000 $ 3,125,000
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current portions(1)............................... 59,522,647 59,522,647
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
- -------------------------------------------------------------------------------------------------------------------------
Preferred Stock, $.01 par value, 100,000 shares authorized, 0
shares issued and outstanding....................................... -- --
- -------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, 200,000 shares authorized,
83,862.59 issued and outstanding, 84,112.59 issued and
outstanding after the offering(2)................................... 84 84
- -------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital............................................. 50,830,570 51,105,570
- -------------------------------------------------------------------------------------------------------------------------
Retained earnings...................................................... 5,367,843 5,367,843
- -------------------------------------------------------------------------------------------------------------------------
Less:
- -------------------------------------------------------------------------------------------------------------------------
Notes receivable from officers and employees for purchase of
Common Stock........................................................ (2,094,652) (2,277,985)
- -------------------------------------------------------------------------------------------------------------------------
156.40 Treasury shares, at cost..................................... (172,040) (172,040)
Net stockholders' equity............................................ 53,931,805 54,023,472
Total capitalization......................................... 116,579,452 116,671,119
=========================================================================================================================
</TABLE>
(1) See Note 4 of the Notes to the consolidated financial statements of the
Company.
(2) Includes 156.40 treasury shares. but excludes an aggregate of 5,162.89
shares of Common Stock subject to options previously granted to executive
officers and other members of management of the Company pursuant to the
1992 Stock Plan, the 1993 Option Plan and the Senior Executive Plan (see
"Management - Options"). and all options to be granted to Investors
pursuant to the Management Option Plan.
DIVIDEND POLICY
The Company has not paid dividends since its inception. The Company
currently intends to retain all earnings, if any, to fund the expansion of its
business and therefore does not anticipate paying any dividends on the Common
Stock in the foreseeable future. In addition, the ability of the Company to pay
dividends is limited by the term of the Credit Agreement and the Subordinated
Loan Agreement, and may be further limited by the terms of the contemplated
Preferred Stock Issuance.
18
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected financial data presented below for the years ended December
31, 1994 and 1993 is derived from the audited financial statements of the
Company. The selected financial data set forth below as of March 31, 1995 and
March 31, 1994 were derived from the Company's unaudited financial statements.
Interim results are not necessarily indicative of the results for the full year.
The data set forth herein should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
Year Ended Year Ended March 31, March 31,
December 31, December 31, 1995 1994
State of Income Data 1994 1993 (unaudited) (unaudited)
- -------------------- ---- ---- ----------- -----------
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
- ---------------------------------------------------------------------------------------------------------
Leasing and Maintenance...................... $32,024,912 $25,722,662 $10,082,116 $7,302,325
- ---------------------------------------------------------------------------------------------------------
Compressor Packaging......................... 16,201,887 14,034,275 6,047,896 1,256,348
- ---------------------------------------------------------------------------------------------------------
Production Equipment......................... 7,271,641 3,178,386 2,707,137 1,000,826
- ---------------------------------------------------------------------------------------------------------
Other........................................ 581,526 411,298 72,569 26,311
- ---------------------------------------------------------------------------------------------------------
Total revenues............................. 56,079,966 43,346,621 18,909,718 9,585,810
- ---------------------------------------------------------------------------------------------------------
Cost and expenses:
- ---------------------------------------------------------------------------------------------------------
Leasing and Maintenance...................... 11,077,891 9,739,248 3,633,852 2,592,651
- ---------------------------------------------------------------------------------------------------------
Compressor packaging......................... 13,732,736 12,130,915 4,861,195 1,282,072
- ---------------------------------------------------------------------------------------------------------
Production Equipment......................... 5,798,521 2,671,178 2,321,440 813,913
- ---------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses. 8,427,020 7,413,158 2,813,918 1,685,291
- ---------------------------------------------------------------------------------------------------------
Depreciation and amortization................ 8,108,596 5,757,381 2,619,086 1,729,779
- ---------------------------------------------------------------------------------------------------------
Interest expense............................. 2,027,414 1,366,297 997,597 342,053
- ---------------------------------------------------------------------------------------------------------
Total costs and expenses................... 49,102,178 39,078,177 17,247,088 8,445,759
- ---------------------------------------------------------------------------------------------------------
Income before income taxes..................... 6,977,788 4,268,444 1,662,630 1,140,051
- ---------------------------------------------------------------------------------------------------------
Income tax expense............................. 2,590,000 1,597,000 616,627 444,240
- ---------------------------------------------------------------------------------------------------------
Net income..................................... $ 4,387,788 $ 2,671,444 $1,046,0003 $ 695,811
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
March 31, 1995
Balance Sheet Data December 31, 1994 December 31, 1993 (unaudited)
- ------------------ ----------------- ----------------- -----------
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total current assets................................ $ 21,484,358 $10,696,270 $ 29,294,767
- ---------------------------------------------------------------------------------------------------------
Net property, plant and equipment................... 88,391,054 61,722,508 105,724,104
- ---------------------------------------------------------------------------------------------------------
Other assets........................................ 4,738,740 4,360,547 6,314,837
- ---------------------------------------------------------------------------------------------------------
114,614,152 76,779,325 141,333,708
- ---------------------------------------------------------------------------------------------------------
Total current liabilities........................... 20,489,078 9,734,146 20,516,518
- ---------------------------------------------------------------------------------------------------------
Long-term debt and other liabilities................ 42,792,233 20,100,126 66,885,385
- ---------------------------------------------------------------------------------------------------------
Stockholders' equity................................ 51,332,841 46,945,053 53,931,805
- ---------------------------------------------------------------------------------------------------------
$114,614,152 $76,779,325 $141,333,708
=========================================================================================================
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The Company's primary operations consist of three business segments. The
principal segment consists of the leasing and maintenance of the Company's
natural gas compressor units ("Leasing and
19
<PAGE>
Maintenance"), and the other segments consist of the design, engineering and
fabrication of natural gas compressor units ("Compressor Packaging") and the
design, engineering and fabrication of oil and gas production equipment
("Production Equipment"). See "Business - Operations."
The Company commenced operations during the latter part of 1990 with the
acquisition of three regional compression leasing companies. In addition, a
compression leasing and fabricating operation was acquired in July, 1991. A
machine shop operation acquired by the Company in 1990, Precision Welding &
Machine, Inc., a Texas corporation ("PWMI"), was sold by the Company in November
1993. See "Business - Company History." The compression rental fleet has been
expanded significantly since the Company's inception, and amounted to 926 units
aggregating 258,979 horsepower at March 31., 1995. This growth has been funded
by a combination of internally generated cash flow, bank financing and
additional equity in the form of Common Stock sold to the Company's management
group and existing shareholders in 1992 and 1993, as well as the commencement of
Production Equipment activities in 1993. As discussed elsewhere herein, the
operation of the Production Equipment segment has been significantly enhanced by
the Smith Acquisition. See "Business - Company History."
Liquidity and Capital Resources
Earnings before depreciation and amortization and income taxes amounted to
$15.1 million during 1994. Other significant sources of funds during 1994 were
amounts available under the Credit Agreement. Significant uses of funds included
the repayment of debt under the Credit Agreement and net capital expenditures
aggregating $31.8 million during 1994.
The financing necessary to support the Company's historical operations has
principally been provided from borrowings under the Credit Agreement and sales
of Common Stock.
For a discussion of the Company's anticipated capital expenditures for the
next two years, see "Business - Business Strategy."
Historically, inflation has not had a significant impact on the operations
of the Company.
Results of Operations
Year ended December 31, 1994 compared to year ended December 31, 1993
Revenues
Revenues from Leasing and Maintenance increased by $6.3 million, or 25%,
from $25.7 million in 1993 to $32.0 million in 1994. This increase resulted
primarily from the addition of 168 compression units, aggregating 84,060
horsepower, to the compressor rental fleet. Monthly horsepower utilization of
94% to 96% during 1994 was consistently in excess of the industry average.
Revenues from Compressor Packaging increased by $2.2 million, or 15%, from
$14.0 million in 1993 to $16.2 million in 1994. This increase resulted from an
increase in the volume of Compressor Packaging during 1994 following the move in
August, 1993, to an expanded fabrication facility. Compressor Packaging
operations generated operating profit (earnings before depreciation and
amortization expense and interest expense) of $1,270,000 during 1994, as
compared to $814,000 during 1993.
20
<PAGE>
Revenues from Production Equipment increased by $4.1 million, or 129%, from
$3.2 million in 1993 to $7.3 million in 1994. This increase resulted from an
increase in the volume of production equipment fabrication as well as 1994 being
the first full year for production equipment packaging, the operations of which
commenced in March, 1993. Production Equipment operations resulted in an
operating profit (earnings before depreciation and amortization expense and
interest expense) of $364,000 during 1994, as compared to an operating loss of
$130,000 during 1993.
Expenses
Leasing and Maintenance expenses increased by $1.3 million, or 13%, from
$9.7 million in 1993 to $11.0 million in 1994. *This increase resulted from
additions to the compressor rental fleet as reflected by a 25% increase in
Leasing and Maintenance revenue.
Costs and expenses of Compressor Packaging increased by $1.6 million, or
13%, from $12.1 million in 1993 to $13.7 million in 1994. This increase is
attributable to the increase in Compressor Packaging operations.
Costs and expenses of Production Equipment increased by $3.1 million, or
117%, from $2.7 million in 1993 to $5.8 million in 1994. This increase resulted
from an increase in the volume of production equipment fabrication and the
inclusion of a full year of operations in 1994.
Selling, general and administrative expenses increased by $1.0 million, or
14% from $7.4 million in 1993 to $8.4 million in 1994. This increase resulted
from the expanded level of activity in each of the Company's business segments.
Depreciation and amortization increased $2.3 million, or 41%, from $5.8
million in 1993 to $8.1 million in 1994. This increase resulted from additions
to the rental fleet and other capital expenditures which aggregated $31.8
million during 1994.
Interest expense increased $700,000, or 56%, from $1.3 million in 1993 to
$2.0 million in 1994 as a result of borrowings under the Credit Agreement which
was utilized to finance additions to the compressor rental fleet.
The Company's effective income tax rate approximates the statutory income
tax rate during 1994 and 1993. Accordingly, the $1.0 million increase, or 62%,
from $1.6 million in 1993 to $2.6 million in 1994 results from a comparable 63%
increase in income before income taxes from 1993 to 1994.
BUSINESS
Company History
The Company was incorporated in Delaware in October 1990 as a majority-
owned subsidiary of Hanover Energy Inc., a Texas corporation ("HEI"). In
November and December 1990, the Company acquired all of the capital stock of
Guerra Engineering, Inc., a Texas corporation ("GEI"), Energy Recovery Systems,
Inc., a Texas corporation ("ERSI"), and PVIMI, and substantially all of the
assets of C&B Compression Sales and Service, Inc., a Louisiana corporation
("C&B"), which acquisitions were accounted for using the purchase method of
accounting.
21
<PAGE>
In May 1991, HEI was acquired by Hanover Energy Holding Corporation, a
Delaware corporation ("HEHC"), the principal stockholders of which were GKH.
In July 1991, HEHC acquired all of the common stock of Maintech
Enterprises, Inc., a Texas corporation ("MEI"), through a subsidiary created
solely for that purpose. Such subsidiary was subsequently merged into MEI, and
HEHC contributed the stock of MEI to the Company in April 1992 in connection
with the refinancing of the Company's then current senior credit facility. As a
result of the acquisition of MEI, the Company acquired a 50% interest in a joint
venture, the operations of which consisted of leasing natural gas compressor
units. The remaining interest in the joint venture was acquired by the Company
effective April 1, 1993 and the joint venture was liquidated shortly thereafter.
Effective December 31, 1992, HEI merged into HEHC, and as a result thereof,
the Company became a direct majority-owned subsidiary of HEHC. Also effective as
of December 31, 1992, GEI and ERSI merged into the Company and. as a result
thereof, the separate existence of GEI and ERSI ceased and all of their
respective assets and liabilities became vested in the Company.
On June 24, 1993, Hanover Pipeline Company, a Delaware corporation and a
wholly-owned subsidiary of HEHC ("HPC), was merged with and into the Company
(the "HPC Merger"). - Pursuant to the HPC Merger, the Company issued to HEHC
2,381. 11 shares of Common Stock. HPC's assets consisted of 16 natural gas
compressors. HPC had certain potential environmental liabilities estimated at
December 31, 1992 to be between $139,000 and $200,000; however, pursuant to the
merger agreement, HEHC agreed to indemnify the Company for any diminution in
value to the HPC common stock caused by the incurrence by HPC of any
environmental liability.
On October 7, 1993, the Company acquired all of the issued and outstanding
stock of Hanna Compressor Group, Inc., an Arkansas corporation ("Hanna
Compressor"), from Hanna Investment Group, an Arkansas general partnership
("HIG"), in exchange for 1,875 shares of Common Stock (the "Hanna Acquisition").
Hanna Compressor's assets consisted of (i) six natural gas compressor units,
(ii) a 4,000 foot combination division office and maintenance facility situated
on five acres of land in Pocola, Oklahoma and (iii) cash. In connection with the
Hanna Acquisition, the Company, HEHC, GKH and HIG entered into the Hanna
Stockholders' Agreement. See "Principal Stockholders - Stockholders' Agreements
- - Hanna Stockholders' Agreement." Effective as of February 9, 1994, Hanna
Compressor was merged into the Company and, as a result thereof, the separate
existence of Hanna Compressor ceased and all of its assets and liabilities
became vested in the Company.
On November 5, 1993, the Company sold all of the issued and outstanding
capital stock of PWMI to a corporation (the "PWMl Purchaser") controlled by two
former employees of PWMI (the "PWMI Employees") for a purchase price equal to
$500,000. The purchase price was paid in the form of two secured promissory
notes, one in the principal amount of $475,000 and the other in the principal
amount of $25,000, each of which bear interest at 8% per annum. The $475,000
note has a ten year amortization, and is payable to the Company in equal monthly
installments of principal and interest beginning on December 1, 1993, with the
entire outstanding balance due and payable December 1, 1996. The PWMI Purchaser
has missed a number of payments under the promissory notes, and the Company and
the PWMI Purchaser are currently in the process of negotiating a new payment
schedule under the notes. The obligations of the PWMI Purchaser under the notes
are guaranteed jointly and severally by the PWMI Employees, which guarantee is
secured by a pledge to the Company of the PWMI capital stock, as well as a
security interest in certain assets of PWMI.
22
<PAGE>
On January 27, 1995. HEHC was merged with and into the Company (the "HEHC
Merger") and, as a result thereof, the separate existence of HEHC ceased and all
of its assets and liabilities became vested in the Company. Pursuant to the HEHC
Merger, the Company issued to the stockholders of HEHC in the aggregate 59,053.
11 shares of Common Stock, which was equal to the number of shares of Common
Stock owned by HEHC immediately prior to the HEHC Merger. In connection
therewith, the Company, GKH and the other stockholders of HEHC immediately prior
to the Merger entered into the HEHC Stockholders' Agreement. See "Principal
Stockholders - Stockholders' Agreements - HEHC Stockholders' Agreement" for a
discussion of the term of the HEHC Stockholders' Agreement. In addition, each
former stockholder of HEHC agreed to indemnify the Company for (i) the breach or
inaccuracy of any representation or warranty made by HEHC or such stockholder
under the HEHC Merger Agreement and (ii) the breach or default of any agreement
by HEHC or such stockholder under the HEHC Merger Agreement, payable in shares
of Common Stock issued in the HEHC Merger.
Effective as of January 1, 1995, the Company acquired from CBC Compression,
an Oklahoma general partnership ("CBC"), 40 natural gas compressor units and
certain related equipment for a purchase price of $3,025,000 plus five percent
of rental amounts (exclusive of sales tax, freight and installation charges)
received by the Company under the related Master Gas Compression Agreement
described below. Pursuant to an agreement (the 'Master Gas Compression
Agreement") with AnSon Company, a sister partnership of CBC ("AnSon"), the
Company agreed to lease the 40 compressors back to AnSon, along with at least 25
additional compressors, for an initial term of 24 months. The Master Gas
Compression Agreement is scheduled to continue for an additional 24-month period
beyond the initial 24-month period; however, the rental price during such period
has not been established. AnSon, CBC and the Company have also entered into a
48-month "most favored vendor" relationship whereby AnSon and CBC have agreed to
purchase or lease production equipment from the Company so long as the Company's
price is equal to or less than other bidders. Similarly, the Company has agreed
to retain trucking services from MB Oilfield Service (an affiliate of CBC and
AnSon) during such 48-month period so long as MB Oilfield Service's price is not
higher than other bidders for such services.
Effective as of February 1, 1995, the Company purchased from Gale Force
Compression Services, Inc. ("Gale Force") 107 natural gas compressors, certain
furniture, fixtures, equipment and other fixed assets, vehicles, the name "Gale
Force", and equipment leases for an aggregate purchase price of $9,782,800 plus
1, 150 shares of Common Stock (the "Gale Force Acquisition"). The compressors
are located primarily in Oklahoma and most are currently leased by the Company
pursuant to leases transferred in the sale. Concurrently with the Gale Force
Acquisition, the Company entered into a four year alliance agreement with Ward
Petroleum, an affiliate of Gale Force, for gas compression services to be
provided by the Company. In connection with the Gale Force Acquisition, the
Company, GKH and those persons who acquired Common Stock pursuant to the
transaction entered into the Gale Force Stockholders' Agreement. See "Principal
Stockholders - Stockholders' Agreements - Gale Force Stockholders' Agreement"
for a discussion of the terms of the Gale Force Stockholders' Agreement. Also in
connection with this transaction, the Company entered into an employment
agreement with Alan D. Lavenue, a Gale Force affiliate, for a two year term.
On February 24, 1995, the Company, through its wholly-owned subsidiary,
Hanover/Smith, Inc. ("Hanover/Smith"), acquired (the "Smith Acquisition")
substantially all of the operating assets of the oil and V6 gas production
equipment division of Smith Industries, Incorporated, a Delaware corporation
("Smith"), which has been in the fabrication of oil and gas production equipment
industry since its inception in 1927. The assets acquired include real property
located in Corpus Christi, Texas, a lease and purchase option on real property
located in Columbus, Texas. manufacturing equipment used in the fabrication of
oil and gas production equipment, vehicles. inventory, the name "Smith
Industries" and
23
<PAGE>
Smith's logo. Smith filed for protection under the United States Bankruptcy
Code, 11 U.S.C. (S)101 et seq., in May 1994, in the United States Bankruptcy
-- ----
Court for the Southern District of Texas, Houston Division, in a Case styled In
Re: Smith Industries, Incorporated, No. 94-43705-H3-1 1. The Bankruptcy Court
approved the necessary orders authorizing the acquisition. The total acquisition
price after various credits and adjustments was $2,595,714. The oil and gas
production equipment operations of Smith acquired by Hanover/Smith have been
consolidated with the existing oil and gas production equipment fabricating
operations of the Company and will operate as Hanover/Smith.
Industry
Natural gas compressors generally do not suffer significant technological
obsolescence, so that the useful life of a compressor is based primarily on its
mechanical integrity. The useful life of a compressor may also be extended by
refurbishing or overhauling the compressor at regular intervals of approximately
five to six years. Refurbished or overhauled compressors may be leased at prices
substantially similar to new compressors.
The gas compressor industry services both independent producers and major
integrated natural gas producers, as well as pipeline, gas processing and
gathering and transmission companies, and is substantially dependent on the
natural gas industry. The Company believes that independent producers currently
account for a substantial portion of the natural gas industry. The Company also
believes that independent gas producers are now accounting for an increasing
portion of the natural gas produced in the United States relative to that
produced by major integrated energy producers and that independent producers are
more likely to lease compressors from third parties such as the Company as a
result of restraints on their ability to make the large capital expenditures
necessary to purchase compressors. In addition, many major gas producers are
directing their capital investments overseas and allowing their U.S. capital
base to decline, thus resulting in further increased demand for rental
compressors. Moreover, the market for contract compression services has been
expanding as gas producers and pipeline companies strive to lower operating
costs and improve efficiency by outsourcing their gas handling requirements.
The Company believes that the market for natural gas compressors is driven
by a variety of factors, including, without limitation, (i) the demand for
natural gas, (ii) the age of particular gas wells, (iii) the relative price of
natural gas to the price of oil or other alternative energy sources and (iv) the
season. All other things being equal, the gas compression industry is generally
benefited by either an increase in gas prices, which generally results in the
development of new wells, fields and pipeline systems and a corresponding
increase in demand for compression, or, up to a point, by a decrease in natural
gas prices, which results in outsourcing by independent producers and an
increase in the need for leased compression. Increases in the age of natural gas
wells also has a positive impact on the gas compression industry since older
wells generally experience a decline in their reservoir pressure and require
compressors to increase their productivity. In contrast, a number of factors
would potentially have an adverse effect on the gas compressor industry. See
"Risk Factors - Natural Gas Compressor Industry Considerations."
Conversely, all other things being equal, a relative decrease in the price
of oil or other energy sources as compared to natural gas generally will have an
adverse effect on the natural gas compression industry since such circumstances
encourage energy users to switch from natural gas to alternative fuel sources
thereby decreasing demand for natural gas.
24
<PAGE>
The Company believes that the natural gas compressor industry is also
affected by seasonality, with the highest demand for compression in winter
months when natural gas is in greater demand. As a result of such seasonality,
the Company generally experiences slightly decreased revenues for its Leasing
and Maintenance segment during the months of May through August.
In addition, the Company believes that as environmental considerations
become more important due 'to the Federal Clean Air Act and related legislative
and social considerations, natural gas, as a cleaner burning fuel than either
oil or coal, will nuke up a greater share of the domestic energy market.
However, there can be no assurance that such increased use of natural gas will
come to pass.
Market Position
Leasing and Maintenance
The Company believes that the market for the leasing of natural gas
compressors may be distinguished from the market for the sale of natural gas
compressors since the decision to lease a compressor is generally made prior to
a customer's entrance into the marketplace. Generally, lessees are customers who
anticipate only a short term need for the compressor which is substantially less
than the estimated useful life of the unit or customers who are unable to or
otherwise choose not to internally finance the purchase of such units.
The Company believes that the natural gas compressor leasing industry may
be divided into categories based on the compressor horsepower and that market
share of the participants in the industry may be determined based on either (i)
the number of units leased by such participants or (ii) the total horsepower
leased by such participants.
The Company's compressor fleet as of March 31, 1995 was divided by
horsepower as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
Units Total Horsepower
Category (by Horsepower) (% of Fleet) (% of fleet)
------------------------ ------------ --------------
----------------------------------------------------------------
<S> <C> <C>
0 - 44 86 (9%) 2,573 (1%)
----------------------------------------------------------------
45 - 60 93 (10%) 5,272 (2%)
----------------------------------------------------------------
61 - 100 177 (19%) 14,342 (6%)
----------------------------------------------------------------
101 - 200 224 (24%) 31,557 (12%)
----------------------------------------------------------------
201 - 500 183 (20%) 56,505 (22%)
----------------------------------------------------------------
501 - 800 79 (9%) 51,322 (20%)
----------------------------------------------------------------
801 - 1100 45 (5%) 43,247 (16%)
----------------------------------------------------------------
1100+ 39 (4%) 54,161 (21%)
-- ---- ------ -----
----------------------------------------------------------------
TOTAL 926 (100%) 258,979 (100%)
----------------------------------------------------------------
</TABLE>
Based on industry statistics, the Company believes that the U.S. natural
gas compressor leasing industry is a highly fragmented business nude up of in
excess of 50 companies aggregating approximately 2,200,000 horsepower. Based on
information available to the Company, the Company believes that it is the fourth
largest compressor leasing company in the U.S. based on total units and the
third largest compressor leasing company in the U.S. based on total operating
horsepower.
25
<PAGE>
Compressor Packaging
The Compressor Packaging business, carried on primarily through MEI,
competes with other manufacturers of compressor units. The Compressor Packaging
business is dominated by a few major competitors, several of whom also compete
with the Company in the compressor leasing business. Although sufficient
information is not available to definitively estimate the Company's relative
position in the Compressor Packaging market, management believes that the
Company is the seventh largest Compressor Packaging company in the U.S. based on
estimated 1994 revenues of the Company's competitors in such business.
Production Equipment
The Production Equipment business is a highly fragmented business with
approximately five substantial competitors. The Company believes that, with the
Smith Acquisition, it is among the top five major competitors in the business.
Business Strategy
The Company's primary focus will be continued expansion of the compression
rental fleet. Anticipated levels of capital expenditures, from internally
generated cash flow and bank financing, relating to the rental fleet amount to
approximately $27 million during 1995 and $17 million during 1996. If the
Company is successful in raising the additional growth capital which it
anticipates during 1995, management estimates that capital expenditures related
to the rental fleet will amount to approximately $37 million and $36 million
during 1995 and 1996, respectively. The rental fleet consisted of 926 units
aggregating 258,979 horsepower at March 31, 1995. With the level of capital
expenditures contemplated, assuming the additional growth capital is raised,
management believes that the Company's rental fleet should grow to approximately
300,000 horsepower by year end 1995. In addition, the contribution of the
Production Equipment segment is expected to increase, both in terms of revenues
and operating income, in light of the Smith Acquisition. However, there can be
no assurances that the above projections will actually be met.
The Company does not anticipate making any significant expenditures for
product research and development inasmuch as the Company's Leasing and
Maintenance, Compressor Packaging and Production Equipment segments do not
generally require such expenditures.
Operations
The following tables show (i) the revenues and operating profit (loss) for
each of the years ended December 31, 1994 and December 31, 1993 and for the
periods ended March 31, 1995 and March 3 1, 1994 and (ii) the assets of the
Company for the years ended December 31, 1994 and December 31, 1993 and the
period ended March 31, 1995, in each case for each of the Leasing and
Maintenance segment, the Compressor Packaging segment, the Production Equipment
segment and the Company's other revenue sources:
26
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================================
Year Ended Year Ended Period Ended Period Ended
December 31, December 31, March 31, March 31,
1994 1993 1995 1994
---- ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
- ------------------------------------------------------------------------------------------------------------------------
Leasing and Maintenance $32,024,912 $25,722,662 $10,082,116 47,302,325
- ------------------------------------------------------------------------------------------------------------------------
Compressor Packaging 16,201,887 14,034,275 76,047,896 1,256,348
- ------------------------------------------------------------------------------------------------------------------------
Production Equipment 7,271,641 3,178,386 2,707,137 1,000,826
- ------------------------------------------------------------------------------------------------------------------------
Other 582,526 411,298 72,569 26,311
- ------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $56,079,966 $43,346,621 $18,909,718 $ 9,585,810
- ------------------------------------------------------------------------------------------------------------------------
Operating profit (loss)(1):
- ------------------------------------------------------------------------------------------------------------------------
Leasing and Maintenance $17,070,138 $12,775,114 $ 5,412,878 $ 3,815,685
- ------------------------------------------------------------------------------------------------------------------------
Compressor Packaging 1,270,314 813,868 823,316 (179,635)
- ------------------------------------------------------------------------------------------------------------------------
Production Equipment 363,851 (130,492) (422,067) (1,018)
- ------------------------------------------------------------------------------------------------------------------------
Other (2) (1,590,505) (2,066,368) (534,814) (423,149)
- ------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING PROFIT $17,113,798 $11,392,122 $ 5,279,313 $ 3,211,883
========================================================================================================================
</TABLE>
(1) Determined by subtracting expenses from revenues for each segment and
adding back the corresponding portion of depreciation and amortization
expense and interest expense.
(2) Consists primarily of corporate administrative expenses.
<TABLE>
<CAPTION>
=============================================================================================================
Year Ended Year Ended Period Ended
December 31, 1994 December 31, 1993 March 31, 1995
----------------- ----------------- --------------
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
- -------------------------------------------------------------------------------------------------------------
Leasing and Maintenance $100,428,593 $70,807,541 $121,731,913
- -------------------------------------------------------------------------------------------------------------
Compressor Packaging 8,453,184 3,535,761 9,630,371
- -------------------------------------------------------------------------------------------------------------
Production Equipment 5,562,940 2,140,545 8,876,132
- -------------------------------------------------------------------------------------------------------------
Other 169,435 295,478 1,095,292
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $114,614,152 $76,779,325 $141,333,708
=============================================================================================================
</TABLE>
Leasing and Maintenance
The Company provides natural gas compression equipment, on a rental basis,
primarily to natural gas production and transmission companies. These rental
units are utilized to compress natural gas when the reservoir pressure for a
natural gas field is less than the pressure for the natural gas pipeline
transporting the gas. The Company also provides maintenance of customer-owned
compressor units as well as compressor parts sales to third parties.
As of March 31, 1995, the Company's gas compressor fleet consisted of 926
units, ranging from 25 to 3,000 horsepower, of which 94% of available horsepower
and 92% of the available units were being utilized. Leases for the compressor
units provide for fixed monthly payments for an average term of approximately
six months and continue thereafter on a monthly basis. Based on the Company's
historical operations, the Company estimates that the terms of its leases have
extended for an average of approximately 24 months.
Although natural gas compressors generally do not suffer significant
technological obsolescence, they do require routine maintenance and periodic
refurbishing to prolong their useful life. In general, the Company anticipates
refurbishing its compressor units approximately every five to six years.
27
<PAGE>
The Company's compressor leasing activities are located in Texas, Oklahoma,
Arkansas, Louisiana, New Mexico, Mississippi, Alabama, Kansas and offshore Gulf
of Mexico, and the Company is considering expansion into international markets.
In this regard, the Company presently leases a gas compressor to a company in
Trinidad pursuant to a 24-month lease which provides for payments of $7,800 per
month and two 12-month extension periods. In addition, the Company currently
owns four compressors under lease with Corpoven, S.A., the Venezuelan natural
gas company.
Compressor Packaging
The Company's Compressor Packaging segment, operated primarily through MEI,
designs, engineers and assembles compression units for sale to third parties as
well as for placement in its compressor fleet. In general, units to be sold to
third parties are assembled according to such customer's specifications and sold
on a turnkey basis. Components for such compressor units are acquired from third
party suppliers. At March 31, 1995, backlog of fabrication of compressor units
amounted to $6.1 million.
Production Equipment
The Company designs and fabricates a broad range of oil and gas production
equipment designed to heat, separate, dehydrate and measure crude oil and
natural gas. The product line includes line heaters, oil and gas separators,
glycol dehydration units and skid mounted production packages designed for both
onshore and offshore production facilities. At March 31, 1995, backlog of
production equipment fabrication amounted to $3.6 million.
Customers
No amounts received from any individual customer equaled more than 10% of
the Company's consolidated revenues during 1993 or 1994.
Competition
Leasing and Maintenance
The natural gas compressor leasing business is highly competitive. Overall,
the Company experiences considerable competition from larger companies with
significantly greater financial resources and, on a regional basis, several
smaller companies compete directly with the Company. Based on information
available to the Company, the Company ranks among the top four companies
providing compressor units on a rental basis based on the number of units and
among the top three based on total available horsepower. See "- Market
Position."
The Company believes that it competes in the Leasing and Maintenance
segment on the basis of price, customer service, including the availability of
personnel in remote locations, flexibility in meeting customer needs and quality
and reliability of its compressors. Although the Company believes that it is
competitive in terms of price and quality, it also focuses on customer service
and flexibility in meeting customer needs.
Compressor Packaging
The Company believes that it competes in the Compressor Packaging segment
based on price and quality and that the Company is competitive in both areas.
28
<PAGE>
Production Equipment
The Company believes that it competes in the Compressor Packaging segment
based on price and quality and that the Company is competitive in both areas.
Competition in the Production Equipment segment is also based on the ability to
service customers' needs. The Company believes that with the Smith Acquisition,
it is among the top five major competitors in the Production Equipment market.
Employees
As of March 31, 1995, the Company employed approximately 398 people, of
which 15 were administrative, 18 were sales, 84 were Compressor Packaging, 110
were Production Equipment and 171 in field service locations. No employees are
represented by labor unions, and the Company believes that its relations with
its employees is satisfactory.
Insurance
Natural gas operations are subject to certain risks, including explosions,
uncontrollable flows of gas or well fluids, fires, pollution and other
environmental risks. These risks could expose the Company to substantial
liability for injury and loss of life, property damage, pollution and other
environmental damages, and consequential damages, if such damages resulted from
a compressor defect or from the Company's negligence in maintaining, servicing
or refurbishing its compressors.
The Company believes that is has obtained adequate insurance to cover such
risks; however, no assurance can be given that such insurance will be adequate
to cover the Company's operations in the event the Company incurs liability in
excess of anticipated potential levels or that such insurance will be generally
available in the future or, if available, that premiums will be commercially
reasonable. See "Risk Factors - Potential Liability and Insurance."
Properties and Assets
As of March 31, 1995, the Company's rental fleet consisted of 926
compressor units, 6 of which are leased and the remainder of which are owned by
the Company, with a total of 258,979 horsepower and an average of 280
horsepower. The Company also owns those assets acquired in the Gale Force
Acquisition and the Smith Acquisition. See 'Business - Company History."
The Company owns its corporate offices in Houston, Texas, which are housed
in a combination corporate office and compressor fabrication facility consisting
of approximately 190,000 square feet plant capacity located on twenty acres.
This facility is anticipated to provide the Company with sufficient space and
capacity for at least the next three years. The Company also owns (i) a 6,400
square foot combination office and maintenance shop located on two acres in
Oklahoma City, Oklahoma, (ii) a 4,000 foot combination division office and
maintenance facility situated on five acres of land in Pocola, Oklahoma, (iii)
its maintenance facilities in Midland, Texas and Fort Smith, Arkansas, (iv) real
property located in Corpus Christi,-Texas and (v) a lease and purchase option
regarding the 212,000 square feet manufacturing facility located on 83 acres in
Columbus, Texas. In addition, the Company leases its fill maintenance facilities
in Victoria, Texas and Lafayette, Louisiana under ten-year leases.
29
<PAGE>
Litigation
The Company is not a party to any litigation that, in the judgment of
management, would have a material adverse effect on the Company's operations or
financial condition if adversely determined.
Governmental Regulation
The Company is subject to various federal and state laws and regulations
relating to environmental protection, including regulations regarding emission
controls. The Company believes that it is in substantial compliance with such
laws and regulations and that the phasing in of emission controls and other
known standards at the rate currently contemplated by such laws and regulations
will not have a material adverse effect on the Company's financial condition or
results of operations. However, various state and federal agencies from tune to
time consider adopting new laws and regulations or amending existing laws and
regulations regarding environmental protection. While the Company may be able to
pass on the additional costs of complying with such laws, there can be no
assurance that attempts to do so would be successful. Accordingly, new laws or
regulations or amendments to existing laws or regulations could require the
Company to undertake significant capital expenditures and could otherwise have a
material adverse effect on the Company's financial condition and results of
operations.
From time to time since President Clinton took office, his administration
has proposed various taxes with respect to the energy industry, none of which
have been enacted and all of which have received significant scrutiny from
various industry lobbyists. At the present time, given the uncertainties
regarding the proposed taxes, including the uncertainties regarding the terms
which the proposed taxes might ultimately contain and the industries and persons
who may ultimately be subject to any such tax, it is not possible to determine
whether any such tax will have a material adverse effect on the Company.
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are set forth below.
Positions with the Company include positions with the Company's predecessors.
All directors hold office until the annual meeting of the stockholders following
their election or until their successors are duly elected and qualified.
Officers are appointed by and serve at the discretion of the Board.
- --------------------------------------------------------------------------
Name Age Position
- ---- --- --------
Michael A. O'Connor 60 Chairman of the Board; Director
- --------------------------------------------------------------------------
Michael J. McGhan 40 President and Chief Executive Officer;
Director
- --------------------------------------------------------------------------
Curtis Bedrich 52 Chief Financial Officer and Treasurer
- --------------------------------------------------------------------------
William S. Goldbert 37 Executive Vice President; Director
- --------------------------------------------------------------------------
Charles d. Erwin 35 Vice President, Sales
- --------------------------------------------------------------------------
William C. Bryant 42 Vice President, Sales-Mid Continent
- --------------------------------------------------------------------------
Maxwell C. McDonald 47 Vice President, Sales-Southeast
- --------------------------------------------------------------------------
Cullen Spitzer 34 Vice President, Sales-South Texas
- --------------------------------------------------------------------------
Luis Guerra 43 Vice President, Operations-South Texas
- --------------------------------------------------------------------------
Joe Bradford 36 Vice President, Operations-Western
Division
- --------------------------------------------------------------------------
Richard S. Meller 37 Secretary
- --------------------------------------------------------------------------
Jeri Howell 42 Assistant Secretary
- --------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------
Ted Collins, Jr. 56 Director
- --------------------------------------------------
Robert Wasielewski 30 Director
- --------------------------------------------------
Melvyn N. Klein 53 Director
- --------------------------------------------------
Alvin V. Shoemaker 56 Director
- --------------------------------------------------
James Hanna 61 Director
- --------------------------------------------------
Andrew Richards 33 Director
- --------------------------------------------------
Robert R. Furgason 59 Director
- --------------------------------------------------
Michael O'Connor has served as Chairman of the Board and a director of the
Company since January 1992. Prior thereto, Mr. O'Connor served as president of
Gas Compressors Inc. from 1965 through 1986 and was a private investor from
January 1, 1987 through January 1, 1992. Mr. O'Connor also serves as a director
of certain affiliates of the Company.
Michael J. McGhan has served as President and Chief Executive Officer of
the Company since October 1991 and served as Chief Operating Officer of the
Company from December 1990 through October 1991. Mr. McGhan has served as a
director of the Company since March, 1992. Prior thereto, Mr. McGhan was sales
manager of Energy Industries, Inc. ("Ell"). Mr. McGhan has been involved in the
gas compression industry for 16 years. Mr. McGhan also serves as a director of
other affiliates of the Company.
Curtis Bedrich has served as Chief Financial Officer and Treasurer of the
Company since November 199 1. Mr. Bedrich served as Vice President of Adobe
Resources Corporation from 1980 until 1991. Mr. Bedrich has been involved in the
oil and gas industry for 17 years.
William S. Goldberg has served as Executive Vice President and director of
the Company since May 1991. Mr. Goldberg has been employed by GKH since 1988 and
has served as Managing Director of GKH since June 1990. Mr. Goldberg also serves
as a director of certain affiliates of the Company.
Charles D. Erwin has served as a Vice President of the Company since
October 1990 and served as a sales representative of Ell from 1985 until October
1990. Mr. Erwin has been involved in the gas compression industry for 10 years.
William C. Bryant has served as a Vice President of the Company since
October 1990 and served as a sales representative of EII from 1988 until October
1990. Mr. Bryant has been involved in the gas compression industry for 20 years.
Maxwell C. McDonald has served as a Vice President of the Company since
December 1990 and served as President of C&B from 1985 until its acquisition by
the Company in 1990. Mr. McDonald has been involved in the gas compression
industry for 22 years.
Cullen Spitzer has served as a Vice President of the Company since July
1991 and served as President of MEI from 1982 until its acquisition by the
Company in July 1991. Mr. Spitzer has been involved in the gas compression
industry for 14 years. Mr. Spitzer has informed the Company that he will resign
from his position as Vice President effective as of June 30, 1995.
Luis Guerra has served as a Vice President of the Company since December
1990. Prior thereto, Mr. Guerra was a principal stockholder and Vice President
of GEL Mr. Guerra has been involved in the gas compression industry for 20
years.
31
<PAGE>
Joe Bradford has served as a Vice President of the Company since March 1993
and served as Operations Manager from January 1, 1991 until March 1993. Mr.
Bradford served as mechanic supervisor of HEI from 1987 until January 1991. Mr.
Bradford has been involved in the oil and gas industry for 20 years.
Richard S. Meller has served as Secretary of the Company since October
1991.
Jeri Howell has served as Assistant Secretary of the Company since May 15,
1995.
Ted Collins, Jr. has served as a director of the Company since April 1992.
Mr. Collins is the President of Collins & Ware Properties, Inc., a natural gas
producer. Mr. Collins has 35 years of experience in the oil and gas industry.
Robert Wasielewski has served as a director of the Company since May 15,
1995. Mr. Wasielewski has served as an Associate of GKH since October 1991.
Prior to that time, Mr. Wasielewski was a Vice President of Citicorp's leveraged
capital division. Mr. Wasielewski also serves as a director of certain
affiliates of the Company.
Melvyn N. Klein has served as a director of the Company since May 1991. Mr.
Klein is the sole stockholder of a corporation which is a general partner of GKH
Partners, L.P. Mr. Klein has been an attorney and counselor-at-law since 1968.
Mr. Klein serves as a director of Bayou Steel Corporation, Itel Corporation,
Santa Fe Energy Resources. Inc., Savoy Pictures Entertainment, Inc. and certain
privately held companies. Mr. Klein is also a principal of Questor Partners
Fund, L.P.
Alvin V. Shoemaker has served as a director of the Company since May 1991
and has been a private investor since his retirement as chairman of the board of
The First Boston Corporation in January 1989.
James Hanna has served as a director of the Company since May 15, 1995. Mr.
Hanna is the President of Hanna Oil and Gas Company. and a director of the
Independent Petroleum Association of America and the Merchants National Bank of
Fort Smith, Arkansas. Mr. Hanna has 35 years of experience in the oil and gas
industry.
Andrew Richards has served as a director of the Company since May 15, 1995.
Mr. Richards is also a Vice President of William E. Simon & Sons, a private
investment company based in Morristown, New Jersey, where he oversees
investments in the specialty food, oil and gas, and maritime shipping
industries. Prior to joining William E. Simon & Sons, Mr. Richards was an
Executive Staff Member of the Presidential Task Force on Market Mechanisms, the
Presidential commission appointed by Ronald Reagan to investigate the 1987 Wall
Street crash. Prior to that, Mr. Richards was a financial analyst in corporate
finance at PaineWebber, Inc., specializing in initial public offerings.
Robert R. Furgason has served as a director of the Company since May 15,
1995. Mr. Furgason is the President of Texas A&M University - Corpus Christi,
and has held a series of faculty and administrative positions at various
universities. Mr. Furgason is the former President of the Accreditation Board
for Engineering and Technology Board of Directors, and also serves on a number
of other accreditation and policy boards.
32
<PAGE>
Compensation of Directors
Non-employee directors of the Company generally do not receive any
compensation for serving on the Board but are entitled to reimbursement for
expenses incurred in connection with their attendance at Board meetings. The
foregoing notwithstanding, the Company has agreed to pay Mr. Furgason an annual
director's fee equal to $15,000, plus $2,500 per Board meeting attended in
person by Mr. Furgason, subject to an annual cap of $20,000.
Options
1992 Stock Plan
In April 1992, the Board adopted the Company's Stock Compensation Plan (the
"1992 Stock Plan"), which provides for the granting of options to executive
officers, directors, employees or advisors of the Company. The 1992 Stock Plan
permits the Board to issue options with respect to a maximum of 15 % of the
total shares of Common Stock outstanding, computed on a fully diluted basis and
including shares which are issuable under the 1992 Stock Plan, at the time of
the grant of an option. As of March 31, 1995, options with respect to 1;065
shares of Common Stock were outstanding, 670.5 of which were presently vested,
and the remainder of which will generally vest ratably over the next two years.
214.5 of such options are exercisable at SLOO per share and 850.5 are
exercisable at $725 per share. Options granted under the 1992 Stock Plan are
nonstatutory options and are not classified as "incentive stock options" within
the meaning of Section 422 of the Code.
The exercise price for additional options which may be granted under the
1992 Stock Plan would be determined by a committee appointed by the Board (the
"Committee"), which Committee is currently comprised of the members of the
Board, and nay be less than the fair market value of the Common Stock on the
date of grant. Other than the maximum number of shares available under the 1992
Stock Plan, there is no minimum or maximum number of shares that may be granted
to any person. Options granted under the 1992 Stock Plan generally expire within
a specified number of days of the termination of employment of an optionee who
is an employee. Options granted under the 1992 Stock Plan fully vest and become
exercisable for a specified number of days upon the death or permanent
disability of the optionee and are forfeited upon the termination for cause of
the optionee. In addition, options granted under the 1992 Stock Plan My vest and
become exercisable upon the occurrence of a change in control accompanied by a
constructive termination of employment of such optionee, all as more fully
described in the 1992 Stock Plan.
Options may not be transferred other than by will or the laws of descent
and distribution, and during the lifetime of an optionee may be exercised only
the optionee. The term of each option granted under the 1992 Stock Plan may not
exceed fifteen years from the date the option is granted. Options may become
exercisable in whole at grant or in installments over time, as determined by the
Committee. Under the terms of the 1992 Stock Plan, payment upon the exercise of
an option may be in cash, by delivery of shares of Common Stock with a fair
market value equal to the aggregate exercise price or, if the optionee's stock
option agreement so provides, by delivery of a promissory note with such terms
as the Committee may approve.
The acceleration of options in the event of a change of control could be
seen as an anti takeover provision and may have the effect of discouraging a
proposal for merger or other efforts to purchase or sell control of the Company.
33
<PAGE>
1993 Option Plan
In connection with the 1993 Offering, the Board adopted the 1993 Management
Stock Option Plan (the "1993 Option Plan") pursuant to which members of the
Company's management who purchased Common Stock in the 1993 Offering were issued
options to purchase one-third of one share of Common Stock at a purchase price
of $725 per share (subject to adjustment for stock splits, stock dividends and
other similar events) for each share of Common Stock owned by such persons or
purchased by such persons in the 1993 Offering. Such options vest ratably over a
five year period which began on June 23, 1993 and are governed by the terms of
the 1993 Option Plan and individual option agreements (the "1993 Option
Agreements"). As of March 31, 1995, options with respect to 1,514 shares of
Common Stock were outstanding, and options with respect to 302.80 were presently
vested. Other than with respect to the applicable exercise price and the actual
vesting and expiration dates, the 1993 Option Plan and the 1993 Option
Agreements are substantially the same as the Management Option Plan and the
Management Option Agreements, respectively.
Senior Executive Plan
In connection with the 1993 Offering, Messrs. O'Connor and McGhan were
granted options pursuant to the Company's Senior Executive Stock Option Plan
(the "Senior Executive Plan") to purchase up to 1,291.95 and 645.97 shares of
Common Stock, respectively, at an exercise price of $833.75 per share (subject
to adjustment for stock splits, stock dividends and similar events). Such
options vest ratably over a seven year period which began on June 29, 1993 and
will fully vest upon an optionee's death or permanent disability or upon the
occurrence of a Capital Event (as defined in the Senior Executive Plan)
resulting in a compounded annual return of 20% actually realized on the shares
of Common Stock purchased in the 1993 Offering. In addition, on May 15, 1995,
Messrs. McGhan and Bedrich were granted 215.32 and 430.65 options respectively,
under the Senior Executive Plan. Such options have the same terms as those
issued to Messrs. O'Connor and McGhan in connection with the 1993 Offering,
except that such options will vest ratably over a seven year period which began
on May 15, 1995.
Options granted under the Senior Executive Plan generally expire within a
specified number of days of the termination of employment of an optionee, and
such options will be forfeited upon the termination for Cause of an optionee.
The term of each option may not exceed 10 years from the date the option is
granted. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee. Options granted under the Senior Executive Plan
are nonstatutory options and are not classified as "incentive stock options"
within the meaning of Section 422 of the Code.
Pursuant to the agreements executed in connection with the grant of options
under the Senior Executive Plan, each of Messrs. O'Connor, McGhan and Bedrich
agreed that he will not during the term of such agreement and for a period of
one year thereafter, (i) compete with any business of the Company and (ii)
without the Company's consent, disclose to persons outside the Company
confidential information concerning the Company.
Incentive Option Plan
In connection with the 1993 Offering, the Board adopted the Company's
Incentive Option Plan (the "Incentive Option Plan"), participation in which is
open to members of management who participated in the 1993 Offering and who are
employed by the Company or any of its subsidiaries or
34
<PAGE>
affiliates at the time of a Capital Event (as defined below) (each a "1993
Eligible Participant"). Given that the options which may be issued under the
Incentive Option Plan are based on the actual return realized by the controlling
stockholder, the Company plans to replace the Incentive Option Plan with a
another option plan which would include the 1993 Eligible Participants. However,
the Investors will not be eligible to participate in the Incentive Option Plan,
except to the extent of their pro rata participation, if any, in the 1993
Offering. Nonetheless, a brief description of the Incentive Option Plan follows.
Pursuant to the Incentive Option Plan as presently constituted, the Company
may grant 1993 Eligible Participants who are employees of the Company or any of
its subsidiaries or affiliates and who own shares of Common Stock at the time of
a Capital Event (as defined in the Incentive Option Plan) options to acquire a
specified percentage of the shares of outstanding Common Stock (determined on a
fully diluted basis) based on the actual return realized by the controlling
stockholder upon (i) the disposition (other than to affiliates) by GKH of at
least 50% of its Common Stock, (ii) the date all or substantially all of the
assets or property of the Company are sold, leased or otherwise transferred to
an unrelated third party, (iii) the effective date of a merger or consolidation
in which the Company, any of its subsidiaries or any affiliate of the Company is
not the surviving entity or the surviving entity is not controlled by GKH or
(iv) the dissolution or liquidation of the Company (the first occurrence of the
events set forth in items (i) through (iv) is referred to herein as the "Capital
Event").
The options granted under the Incentive Option Plan would be nonstatutory
options - and the exercise price for such options would be $725 per share. The
options would vest fully upon the occurrence of the Capital Event. Each.
participant in the Incentive Option Plan will receive a pro rata share of the
total options actually issued pursuant to the Incentive Option Plan (the
"Incentive Option Plan Shares") determined by multiplying the Incentive Option
Plan Shares by a fraction, the numerator of which is equal to the lesser of (i)
the number of shares of Common Stock subscribed for by such 1993 Eligible
Participant pursuant to the 1993 Offering or (ii) the number of shares of Common
Stock owned by the 1993 Eligible Participant at the time of the Capital Event
and the denominator of which is equal to the total number of shares of Common
Stock subscribed for by all 1993 Eligible Participants pursuant to the 1993
Offering. 1993 Eligible Participants who cease to be employed by the Company for
any reason prior to a Capital Event or who cease to own shares of Common Stock
would not be eligible to participate in the Incentive Option Plan.
Options granted under the Incentive Option Plan generally would expire
within a specified number of days of the termination of employment of an
optionee. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee. The term of each option granted under the
Incentive Option Plan may not exceed 10 years from the date the option is
granted.
Summary Compensation Table
The following table sets forth the total compensation that was awarded to,
earned by or paid to Michael J. McGhan (the chief executive officer of the
Company), and Michael O'Connor, Curtis Bedrich, A61 Maxwell McDonald and Cullen
Spitzer (who has informed the Company that he will resign from his position as a
Vice President of the Company effective as of June 30, 1995) (the four other
most highly paid executive officers) as a group during the year ended December
31, 1994.
35
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================================
Long Term
Compensation
Annual Compensation Awards All Other
Salary Bonus Option Grants Compensation (1)
-------- --------- ------------- ----------------
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CEO and four other most highly
compensated executive officers.... $500,000 $361,650 -- $3,680
=======================================================================================================
</TABLE>
(1) Consisting of life insurance premiums.
Option Grants in Last Fiscal Year
No options were granted in the during the year ended December 31, 1994. The
Company has not, to date, granted any stock appreciation rights.
Fiscal Year End Option Values
Shown below is information with respect to unexercised options to purchase
Common Stock in effect in 1994, all of which were granted pursuant to the
existing option plans of the Company as described in this Offering Memorandum.
See "Management - Options." None of such options have been exercised.
<TABLE>
<CAPTION>
=======================================================================================================
Number of Unexercised Options Value of Unexercised in-the-Money
December 31, 1994 Options at December 31, 1994(1)
----------------------------- -------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CEO and four other most highly
compensated executive officers...... 1,103.43 2,904.49 $585,315 $2,113,244
=======================================================================================================
</TABLE>
Employment Contracts and Other Agreements
In connection with the Company's acquisition of the capital stock of MEI in
1992, the Company entered into an employment agreement with Cullen Spitzer which
by its terms expires in July 1996. However, Mr. Spitzer has informed the Company
that he will resign from his position as a Vice President of the Company
effective as of June 30, 1995.
In connection with the Gale Force Acquisition, the Company entered into an
employment agreement with Alan D. Lavenue for a two year term.
Compensation Committee and Insider Participation
The Compensation Committee of the Board consists of Messrs. Goldberg,
Shoemaker, O'Connor and Furgason. All decisions with respect to compensation are
made by the Board after consideration of the advice of the Compensation
Committee. From time to time, Mr. McGhan will participate in the deliberations
regarding compensation of the other executive officers of the Company.
Certain Relationships and Related Transactions
GKH and certain other stockholders of the Company own substantially all of
the common stock of Combustion Control Corporation, a Delaware corporation
("Combustion"). Combustion is in the
36
<PAGE>
business of refurbishing existing natural gas compressors to bring them into
compliance with certain environmental emissions regulations. On March 21, 1995,
the Company borrowed $500,000 from Combustion in order to fund certain working
capital needs. The loan is evidenced by a demand promissory note of the Company
payable to the order of Combustion. In addition, it is presently contemplated
that Combustion will be merged into the Company.
Mr. Collins, one of the Company's directors and minority stockholders,
controls a corporation which owns a 50% interest in a joint venture to which the
Company leases compressors pursuant to a long-term lease which provides for
monthly payments of $89,900.
Mr. Hanna, one of the Company's directors and minority stockholders, is the
President of Hanna Oil and Gas Company, to which the Company leases compressors
pursuant to month-to-month leases which provide for aggregate monthly payments
of $29.600.
PRINCIPAL STOCKHOLDERS
Principal Stockholders
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of March 31, 1995 (i) by each
person who is known by the Company to own beneficially mom than 5 % of any class
of the outstanding Common Stock, (ii) by each director and the chief executive
officer and the four other most highly compensated executive officers of the
Company and (iii) by all of the Company's directors and executive officers as a
group.
<TABLE>
<CAPTION>
===================================================================================================
Stock Beneficially Percentage of Stock
Name of Person or Group Owned Beneficially Owned(1)
----------------------- ----- ---------------------
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
GKH Investments, L.P. (2) 63,809.93 76.23%
- ---------------------------------------------------------------------------------------------------
Ted Collins, Jr. 855 1.021%
- ---------------------------------------------------------------------------------------------------
William S. Goldberg(3) -- --
- ---------------------------------------------------------------------------------------------------
Robert Wasielewski -- --
- ---------------------------------------------------------------------------------------------------
Melvyn N. Klein(4) - --
- ---------------------------------------------------------------------------------------------------
Michael J. McGhan 528.02 *
- ---------------------------------------------------------------------------------------------------
Michael A. O'Connor 1,843.16 2.201%
- ---------------------------------------------------------------------------------------------------
Alvin V. Shoemaker(5) 1,622.09 1.937%
- ---------------------------------------------------------------------------------------------------
Maxwell C. McDonald 754.94 *
- ---------------------------------------------------------------------------------------------------
Curtis Bedrich 439.87 *
- ---------------------------------------------------------------------------------------------------
Cullen Spitzer(6) -- --
- ---------------------------------------------------------------------------------------------------
James Hanna 1,875 2.24%
- ---------------------------------------------------------------------------------------------------
Andrew Richards -- --
- ---------------------------------------------------------------------------------------------------
Robert A. Furgason -- --
- ---------------------------------------------------------------------------------------------------
All directors and officers as a 7,918.08 9.46%
group(7)
===================================================================================================
</TABLE>
*Represents less than 1% of the outstanding Common Stock.
(1) There are 156.40 treasury shares issued, which shares were not counted as
outstanding in calculating the beneficial ownership percentages.
37
<PAGE>
(2) Does not include 2,410.49 shares of Common Stock (2.879% of the outstanding
shares) owned by GKH Partners, L.P.. a Delaware limited partnership, as
nominee for GKH Private Limited, a Singapore corporation. GKH Partners.
L.P. is the general partner of GKH Investments, L.P.
(3) Does not include 254.11 shares of Common Stock (less than I % of the
outstanding shares) owned by Mr. Goldberg's wife, Nancy K. Goldberg, not
individually, but solely as trustee of the Nancy K. Goldberg Declaration of
Trust. Mr. Goldberg disclaims beneficial ownership of such shares.
(4) Mr. Klein, who is a director of the Company, is the sole stockholder of a
corporation which is a general partner of GKH Partners, L.P. Mr. Klein
disclaims beneficial ownership of all shares owned by GKH Partners, L.P.
and GKH Investments, L.P. and such shares are not included in the number of
shares owned by Mr. Klein or by all directors and officers as a group.
(5) Mr. Shoemaker disclaims beneficial ownership of shares owned indirectly by
his affiliates.
(6) Does not include 116.04 shares of Common Stock (less than 1% of the
outstanding shares) owned by Mr. Spitzer as trustee of the Cullen Spitzer
Family Trust. Mr. Spitzer disclaims beneficial ownership of such shares.
Mr. Spitzer has informed the Company that he will resign from his position
as a Vice President of the Company effective as of June 30, 1995.
(7) Does not include shares owned by all directors and officers as a group or
their affiliates for which such directors and officers disclaim beneficial
ownership.
Stockholders' Agreements
1992 Stockholders' Agreement
In connection with the 1992 Offering, the persons participating therein,
the Company, HEI, GKH and certain other present and former stockholders of the
Company entered into that certain Stockholders' Agreement dated April 10, 1992
(the "1992 Stockholders' Agreement"). The 1992 Stockholders' Agreement restricts
the sale of Common Stock held by the parties thereto and provides for, among
other things, (i) the right of first refusal of the Company and the right of
second refusal of the other parties thereto with respect to any proposed
transfer of Common Stock (except transfers to affiliates) by a party thereto
other than GKH, (ii) the right of the parties thereto who own a majority of the
shares of Common Stock held by all parties thereto to compel the other parties
thereto to sell their Common Stock upon the sale by such majority of all of
their Common Stock and (iii) the right of each party thereto to participate in
the sale by one or more parties thereto of more than 50% of the outstanding
Common Stock held by all parties thereto. The 1992 Stockholders' Agreement does
not contain provisions regarding the ability of the Company to redeem all of a
stockholder's Common Stock upon the termination of his employment with the
Company.
Upon consummation of the 1993 Offering, certain persons who purchased
Common Stock pursuant thereto entered into that certain -1993 Stockholders
Agreement (the "1993 Stockholders' Agreement") which substantially superseded
the 1992 Stockholders' Agreement as among the Company and each person who
executed the 1993 Stockholders' Agreement. However, the 1992 Stockholders'
Agreement remains in full force and effect as among the parties thereto which
still own shares of Common Stock. See "- 1993 Stockholders' Agreement."
38
<PAGE>
1993 Stockholders' Agreement
In connection with the 1993 Offering, certain of the persons participating
therein, the Company, HEHC and GKH entered into the 1993 Stockholders'
Agreement. The terms of 1993 Stockholders' Agreement are substantially the same
as the Stockholders' Agreement, except that there is no right of second refusal
in GKH with respect to transfers of Common Stock to bona fide third party
purchasers. See "The Offering - Stockholders' Agreement."
Hanna Stockholders' Agreement
In connection with the Hanna Acquisition, the Company, GKH, HEHC and HIG
entered into that certain Supplemental Stockholders' Agreement dated as of
October 8, 1993 (the "Hanna Stockholders' Agreement"). The Hanna Stockholders'
Agreement restricts the sale of Common Stock held by the parties thereto and
provides for, among other things, (i) the right of first refusal of the Company
with respect to any proposed transfer of Common Stock (except transfers to
affiliates by HIG), (ii) the right of GKH to compel HIG to sell its Common Stock
upon the sale by GKH of all of its Common Stock and (iii) the right of HIG to
participate in the sale by GKH of more than fifty percent of the outstanding
Common Stock then owned by GKH. The Hanna Stockholders' Agreement. would
terminate six months after 10% or more of the issued and outstanding Common
Stock is listed on a nationally recognized exchange or quoted on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ").
HEHC Stockholders' Agreement
In connection with the HEHC Merger, the Company, GKH and the other former
stockholders of HEHC (the "HEHC Stockholders") entered into that certain
Supplemental Stockholders' Agreement dated as of January 27, 1995 (the "HEHC
Stockholders' Agreement"). The HEHC Stockholders' Agreement restricts the sale
of Common Stock held by the parties thereto (subject to certain exceptions for
dispositions pursuant to an effective registration statement under the
Securities Act or pursuant to any public distribution pursuant to Rule 144 of
the Securities Act, and except for dispositions of Common Stock by GKH to its
partners) and provides for, among other things, (i) the right of first refusal
of GKH with respect to any proposed transfer of Common Stock (except transfers
to affiliates) by an HEHC Stockholder, (ii) the right of GKH to compel the HEHC
Stockholders to sell their Common Stock upon the sale by GKH of all of its
Common Stock and (iii) the right of each HEHC Stockholder to participate in the
sale by GKH of any or all of its Common Stock. Ime HEHC Stockholders' Agreement
also contains provisions regarding the right of the HEHC Stockholders to
designate a maximum of two members of the Board (the "HEHC Designees"), as well
as a requirement that such HEHC Designees approve certain transactions and acts
engaged in by the Company. Each party to the HEHC Stockholders' Agreement also
agrees to notify the Board if it or any of its affiliates engages in or makes an
investment in any business or entity competitive with the business then being
conducted by the Company or any subsidiary thereof. The HEHC Stockholders'
Agreement would terminate upon the consummation of a publicly registered
offering of twenty-five percent or more of the Common Stock. The parties to the
HEHC Stockholders' Agreement are also parties to the Amended and Restated
Registration Rights Agreement. See "- Registration Rights Agreement."
Gale Force Stockholders' Agreement
In connection with the Gale Force Acquisition, the Company, GKH, and
certain persons who acquired Common Stock pursuant to the Gale Force Acquisition
(the "Gale Force Stockholders") entered
39
<PAGE>
into that certain Supplemental Stockholders' Agreement, dated as of March 8,
1995 (the "Gale Force Stockholders' Agreement"). like Gale Force Stockholders'
Agreement restricts the sale of Common Stock held by the parties thereto and
provides for, among other things, (i) the right of first refusal of the Company
and the right of second refusal of GKH with respect to any proposed transfer of
Common Stock (except transfers to affiliates) by a Gale Force Stockholder, (ii)
the right of GKH to compel the Gale Force Stockholders to sell their Common
Stock upon the sale by GKH of all of its Common Stock and (iii) the right of
each Gale Force Stockholder to participate in the sale by (a) GKH of more than
fifty percent of the outstanding Common Stock then owned by GKH or (b) by GKH
and other stockholders of the Company of more than fifty percent of the
outstanding Common Stock of the Company. The Gale Force Stockholders' Agreement
also contains provisions whereby the Gale Force Stockholders agree to vote their
shares in order to ensure the election to the Board of Messrs. O'Connor and
McGhan and such other individuals as nominated by GKH. In addition, in the event
the Company offers GKH the opportunity to purchase additional shares of Common
Stock, the Gale Force Stockholders will have the right to acquire their
respective pro rata share of such Common Stock on the same terms and conditions
offered to GKH. The Gale Force Stockholders' Agreement will terminate upon ten
percent or more of the Company's Common Stock being listed on a nationally
recognized exchange or quoted on the NASDAQ. The parties to the Gale Force
Stockholders' Agreement are also parties to the Amended and Restated
Registration Rights Agreement. See "- Registration Rights Agreement."
Registration Rights Agreement
The Company, GKR and the other parties to the HEHC Stockholders' Agreement
and the Gale Force Stockholders' Agreement (GKH and such stockholders,
hereinafter "Holders") are party to that certain Amended and Restated
Registration Rights Agreement, dated as of March 8, 1995 (the "Registration
Rights Agreement"). The Registration Rights Agreement generally provides that in
the event the Company proposes to register under the Securities Act shares of
its capital stock or any other securities, then upon the request of those
Holders owning in the aggregate at least 5 % of the Common Stock or derivatives
thereof (the "Registrable Securities") then held by all of the Holders, the
Company must use its reasonable best efforts to cause the Registrable Securities
so requested by the Holders to be included in the applicable registration
statement. The Company is generally not obligated to include a particular
Holder's Registrable Securities in more than one registration, and the Holders'
right to have their Registrable Securities so included is limited in the event
and to the extent that the managing underwriter(s) of the registration in
question are of the opinion that the inclusion of the number of Registrable
Securities held by Holders requesting inclusion in the applicable registration
statement would materially interfere with the underwriters' ability to
effectuate the registration and sale of securities proposed to be offered and
sold pursuant to such registration statement. The Company agrees to pay all
registration expenses in connection with registrations of Registrable Securities
effected pursuant to the Registration Rights Agreement; however, all fees and
expenses relating to the distribution of such Registrable Securities are borne
by the Company and each Holder RM rata based on the number of Registrable
Securities included in the registration for the account of the Company and each
Holder.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summaries relate to (i) certain provisions of the Credit
Agreement, (ii) certain provisions of the Subordinated Loan Agreement and (iii)
the anticipated terms of the Preferred Stock Issuance. The summary of the
provisions relating to the Credit Agreement and the Subordinated Loan Agreement
do not purport to be complete and are qualified in their entirety by reference
to the relevant agreements (including all amendments) relating thereto, copies
of which are available for review at the principal offices of the Company. The
summary of the terms of the Preferred Stock Issuance is based on
40
<PAGE>
the anticipated terms thereof. The Company reserves the right in its sole and
absolute discretion without notice to or consent of any Investor to accept
changes to such proposed terms without affecting this offering.
The Credit Agreement
Pursuant to the Credit Agreement the Company has borrowed $15,000,000 under
the Original Term Loan, of which $12,750,000 was outstanding as of March 31,
1995, and $10,000,000 and $4,000,000 under the B Tranche Loan and the C Tranche
Loan, respectively, all of which was outstanding as of March 31, 1995. The
Original Term Loan bears interest at a rate equal to LIBOR plus 1.25%, and the B
Tranche Loan bears interest at a rate equal to LIBOR plus 2.0%, and such Loans
mature (absent acceleration) on December 31, 1998 and March 31, 2001,
respectively. In addition to the Term Loans, the Credit Agreement provides for a
five year reducing commitment revolving credit facility (the "Revolver") which
provides for an initial maximum commitment of $35,000,000. Amounts outstanding
under the Revolver bear interest at a rate equal to LIBOR plus 1.0% and the
Revolver matures (absent acceleration) on December 31, 1999. As of March 31,
1995, $35,000,000 was outstanding under the Revolver.
The Credit Agreement contains certain restrictive covenants that impose
limitations (subject to certain exceptions) on the Company, including, among
others, limitations with respect to (i) maintaining certain ratios, including
ratios with respect to (a) consolidated indebtedness to consolidated
capitalization, (b) consolidated earnings before income tax, depreciation and
amortization to consolidated interest expense and (c) current assets to current
liabilities, (ii) incurring additional indebtedness, (iii) creating, incurring
assuming or suffering to exist any mortgage, pledge, lien or other encumbrance
or security interest, (iv) creating, incurring, assuming or suffering to exist
any guarantee or similar obligation, (v) effecting certain fundamental changes,
including any merger or sale of all or substantially all of the Company's
assets, (vi) selling any of the Company's assets except in the ordinary course
of business or as otherwise permitted, (vii) increasing lease expense in excess
of certain limits, (viii) declaring or paying dividends, (ix) making capital
expenditures in excess of certain prescribed limits, (x) making any advance,
loan or similar investment in any person, (xi) making optional payments or
prepayments or amending the terms of any indebtedness, (xii) entering into any
transaction with affiliates, (xiii) the sale and leaseback of any of the
Company's real or personal property, (xiv) change the Company's fiscal year and
(xv) entering into any agreement which prohibits the Company from creating liens
or other restrictions on its assets.
The Credit Agreement contains certain default provisions, including, among
others, (i) failure of the Company to pay any principal or interest thereunder
when due, (ii) breach by the Company or any of its subsidiaries or affiliates
which are parties to the Credit Agreement of any representation or warranty made
therein or in the other documents contemplated thereby, (iii) default by the
Company or any of its subsidiaries in the observance or performance of any
covenant or agreement contained therein or in the other documents contemplated
thereby, (iv) cessation of the security agreement and related documents kW
executed thereunder to be in full force and effect, (v) default by the Company
or any of its subsidiaries in the payment of any indebtedness or guarantee in
excess of $1,000,000, which default remains in effect for 30 days, or any other
breach under agreements with respect to such indebtedness or guarantees which
causes such indebtedness or guarantee to be accelerated, (vi) occurrence of
certain bankruptcy related events, (vii) occurrence of certain events related to
ERISA obligations, (viii) entering of one or more judgements or decrees against
the Company or any of its subsidiaries involving an aggregate liability of
$1,000,000 or more, (ix) the incurrence by the Company or any of its
subsidiaries of liability for remediation or environmental compliance (or
penalty with respect thereto) in excess of
41
<PAGE>
$1,000,000 and (x) the cessation of GKH to own directly or indirectly 45 % of
the issued and outstanding Common Stock of the Company.
The Subordinated Loan Agreement
Pursuant to the terms of the Subordinated Loan Agreement, the Company has
borrowed $12,000,000 on an unsecured basis, all of which was drawn down as of
June 6, 1995. The Subordinated Loan bears interest at the Prime Rate plus 5%,
matures (absent acceleration) on March 31, 2002 and is subject to mandatory
prepayment under certain specified circumstances.
The Subordinated Loan Agreement incorporates the restrictive covenants of
the Credit Agreement by reference and contains default provisions similar to
those in the Credit Agreement.
The Subordinated Loan Agreement, by its terms, provides that any payments
due to the subordinated lenders thereunder are subordinate and junior to the
rights of the lender under the Credit Agreement.
Preferred Stock Issuance
It is presently anticipated that the Company will raise new equity capital,
most likely through the issuance of one or more series of Preferred Stock (the
"Preferred Stock") which may under certain circumstances be redeemable and/or
convertible or carry with it warrants to purchase newly issued shares of Common
Stock, although the Company reserves the right, in its sole discretion, to amend
or cancel such offering. Negotiations are presently under way to establish the
economic and other substantive terms of the Preferred Stock, including
redemption, conversion, dividends, approval rights over certain corporate
actions, related warrants and "piggy-back" registration rights with respect to
the Common Stock underlying the Preferred Stock and warrants. It is expected
that all holders of the Preferred Stock would be required to enter into a
stockholders agreement with the Company, containing, among other provisions,
certain restrictions on transfer and disposition.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 200,000 shares of
Common Stock and 100,000 shares of Preferred Stock, $.01 par value per share
("Preferred Stock"). Assuming all Shares are subscribed for, the Company
anticipates that 83,956.19 shares of Common Stock and no shares of Preferred
Stock will be issued and outstanding (not including 156.40 treasury shares held
by the Company) and an additional 19,723.24 shares of Common Stock will be
reserved for issuance pursuant to options, exclusive of options which may be
granted under the Incentive Option Plan.
The following summary description relating to the capital stock does not
purport to be complete. For a detailed description, reference is made to the
Certificate of Incorporation of the Company, as amended (the "Certificate").
which is available at the Company for review.
Common Stock
As of March 31, 1995, there were 83,706.19 shares of Common Stock
outstanding held of record by 51 stockholders (not including 156.40 treasury
shares held by the Company). 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 Preferred Stock
which may be issued, holders
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of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board out of legally available funds. In the event of a
liquidation, dissolution, sale or winding up of the Company, holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and satisfaction of preferential rights and have no rights to
convert their Common Stock into any other securities. Holders of Common Stock
have no preemptive or subscription rights unless (i) they are a party to the
Gale Force Stockholders' Agreement, (ii) they are a party to the 1993
Stockholders' Agreement or (iii) they become a party to the Stockholders'
Agreement, and then only to the extent provided in each such agreement. See
"Principal Stockholders - Stockholders' Agreements" and "The Offering -
Stockholders' Agreement - Preemptive Rights." There are no redemption or
conversion rights with respect to any shares of Common Stock. The outstanding
shares of Common Stock are, and the Common Stock to be outstanding upon
completion of the offering will be, fully paid and nonassessable.
Preferred Stock
The Company currently has no shares of Preferred Stock outstanding. The
Board has the authority to cause the Company to issue without any further vote
or action by the stockholders, up to the authorized number of shares of
Preferred Stock in one or more series, to designate the number of shares
constituting any series, and to fix the rights, preferences, privileges. and
restrictions thereof, including dividend rights, conversion rights, voting
rights, rights and terms of redemption, redemption price or prices and
liquidation preferences of such series. The Company is currently contemplating
issuing shares of Preferred Stock subsequent to this offering in accordance with
the Preferred Stock Issuance. See "Description of Certain Indebtedness -
Preferred Stock Issuance."
Options
The Company currently has outstanding options to purchase 214.5 shares of
Common Stock at $1.00 per share. All such options were issued to certain
executive officers in connection with the 1992 Stock Plan. The options expire at
various times in 2007.
The Company currently has outstanding options to purchase 2,364.5 shares of
Common Stock at $725 per share. Of these options, 850.5 were issued to certain
executive officers in connection with the 1992 Stock Plan, and 1,514 were issued
to certain members of the Company's management in connection with the 1993
Option Plan. The options issued pursuant to the 1992 Stock Plan expire at
various times in 2007, and the options issued pursuant to the 1993 Option Plan
expire on June 29, 2003.
The Company currently has outstanding options to purchase 2,583.89 shares
of Common Stock at $833.75 per share. All such options were issued to certain
executive officers in connection with the Senior Executive Plan. 1,937.92 of
such options will expire June 29, 2003 and 645.97 of such options will expire
May 15, 2005.
As long as the options remain unexercised and outstanding, the holders
thereof will have the opportunity to profit from an increase in the value of the
Common Stock, if any, without assuming the risk of ownership.
Special Provisions of the Certificate of Incorporation and Delaware Law
Limitation of Director Liability
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Section 102(b)(7) of the Delaware General Corporation Law ("Section
102(b)") 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. The Company's Certificate
of Incorporation limits the liability of directors to the Company or its
stockholders (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by Section 102(b). Specifically,
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders (H) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.
Indemnification
To the maximum extent permitted by law, the Company's Certificate of
Incorporation and Bylaws provide for mandatory indemnification of directors and
permit indemnification of officers, employees and agents of the Company 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 the Company. In addition, the Company must advance or reimburse
directors, and may advance or reimburse officers, employees and agents for
expenses incurred by them in connection with indemnifiable claims.
ADDITIONAL INFORMATION
The Company intends to supply its stockholders on an annual basis with a
copy of its audited financial statements.
Each prospective investor and/or his purchaser or other representatives are
hereby granted access to, and are invited to review, all materials available to
the Company relating to this offering or anything set forth in this Offering
Memorandum.
The Company will answer all inquiries from prospective investors or their
representatives relating to the transactions contemplated hereunder and will
afford prospective investors and their representatives the opportunity to obtain
any additional information (to the extent that the Company possesses such
information or can acquire it without unreasonable effort or expense) necessary
to verify the accuracy of the information set forth in this Offering Memorandum.
Each prospective investor should use this opportunity to communicate
directly with his own legal counsel, accountants and other professional advisors
who can help the prospective investor evaluate the merits and risks of a
purchase of the Shares and the tax and legal aspects thereof.
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EXHIBIT 4.5
HANOVER COMPRESSOR COMPANY
1995 MANAGEMENT STOCK OFFERING
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT (this "Agreement") dated as of June __, 1995,
between Hanover Compressor Company, a Delaware corporation (the "Company"), and
the individual named on the signature page hereof under the heading "PURCHASER"
("Purchaser").
W I T N E S S E T H:
WHEREAS, Purchaser desires to subscribe for and purchase from the Company,
and the Company desires to issue and to sell to Purchaser M for cash out of
Purchaser's own funds, the number of shares (the "Cash Shares") of common stock,
$.001 par value ("Common Stock"), of the Company set forth next to the heading
%W "Cash Shares" on Schedule A attached hereto, and (ii) out of the proceeds of
a four year loan (a "Four Year Loan") to be made to Purchaser by the Company in
accordance with the terms of a loan agreement (the "Loan Agreement") and a
secured promissory note (the "Four Year Note"), each substantially in the form
attached as Exhibits C and D to the Confidential Offering Memorandum (the
"Memorandum") dated June 20, 1995, previously delivered to Purchaser, the number
of shares (the "Four Year Loan Shares") set forth next to the heading "Four Year
Loan Shares" on Schedule A, in each case upon the terms and conditions
hereinafter set forth. The Four Year Loan Shares and the Cash Shares are
sometimes collectively referred to herein as the "Shares"; and
WHEREAS, this Agreement is one of several agreements ("Other Purchaser
Agreements") being entered into concurrently herewith by the Company and certain
members of the management of the Company in connection with the offering (the
"Offering") made pursuant to the Memorandum.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby acknowledge, agree and understand the
following:
1. Subscription. Subject only to the provisions of Sections 7 and 9 hereof,
Purchaser hereby irrevocably subscribes for the Shares under terms and
conditions set forth herein. The purchase price (the "Purchase Price") for each
Share shall be $1,100. The parties agree that notwithstanding anything herein to
the contrary, the Company reserves the absolute right (i) to reject any
subscription for any reason and (ii) to terminate or modify the offering at any
time for any reason.
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2. The Closing. The closing of the purchase and sale of the Shares (the
"Closing") shall take place at the principal offices of the Company, 12001 North
Houston Rosslyn, Houston, Texas 77086 at 10:00 a.m., Houston time on June 30,
1995, or (i) at such later date or time as the Company in its sole discretion
may determine without the consent of or notice to Purchaser, but in no event
later than July 7, 1995 (the "Termination Date"), and (ii) at such other place
as shall be agreed upon by the parties hereto. The date of the Closing is
sometimes hereinafter referred to as the "Closing Date."
3. Deliveries by Purchaser.
(a) Stockholders' Agreement. Concurrently with his execution and
delivery of this Agreement, Purchaser shall deliver to the Company two executed
counterparts to the Stockholders' Agreement (the "Stockholders' Agreement")
among the Company, GKH Partners, L.P., GKH Investments, L.P. and the other
stockholders of the Company parties thereto;
(b) Additional Deliveries. At or prior to the Closing, upon the terms
and subject to the conditions of this Agreement, Purchaser shall execute where
appropriate and deliver to the Company:
(i) certified or bank cashier's check in the amount of the
aggregate Purchase Price for the Cash Shares;
(ii) to the extent any of the Shares subscribed for pursuant to
this Agreement are Four Year Loan Shares:
(A) a duly executed Loan Agreement;
(B) a duly executed Four Year Note in an original principal
amount equal to the aggregate Purchase Price for all such Four Year
Loan Shares to be funded by the proceeds of the Four Year Note and
subscribed for by Purchaser pursuant to this Agreement;
(C) two executed counterparts of that certain pledge agreement
(the "Pledge Agreement") between the Purchaser and the Company
effecting a pledge of all of the shares of Common Stock of the Company
owned or thereafter acquired by the Purchaser, substantially in the
form attached to the Memorandum as Exhibit E; and
(D) a Stock Power (the "Stock Power") duly executed in blank;
(iii) two executed counterparts of the Stock Option Agreement (the
"Option Agreement") between the Purchaser and the Company pursuant to the
Hanover Compressor Company 1995 Management Stock Option Plan;
(iv) a fully completed and executed IRS Form W9; and
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(v) two executed counterparts of this Agreement (including a fully
completed Schedule A, notary page and Spousal Consent (if applicable)).
(c) Document Delivery; Escrow. All documents and funds (the "Funds")
delivered to the Company prior to the Closing Date (as hereinafter defined)
shall be delivered by Purchaser to Hanover Compressor Company, 12001 North
Houston Rosslyn, Houston, Texas 77086, Attention: Curtis Bedrich. All such
documents and Funds will be deemed to be held in escrow until the Closing. The
Funds shall be promptly deposited in an interest bearing, segregated account and
such Funds may be invested in treasury bills or other cash equivalents, as
determined in the sole and absolute discretion of the Company. If prior to the
Closing Date acceptable subscriptions for a minimum aggregate of 100 shares of
Common Stock are received and the other conditions set forth herein and in the
Memorandum (collectively, the "Offering Conditions") are satisfied, all Funds
will be transferred from the segregated bank account to the Company, together
with all interest, if any, accrued or paid thereon. In the event the Offering
Conditions have not been satisfied in full prior to the Termination Date, the
Offering will be terminated and all Funds will be returned to the Purchaser with
a pro rata of interest earned thereon. Interest on Funds shall be calculated on
the basis of the amount of Funds invested by the Purchaser and the length of
time interest on such Funds was earned.
4. Deliveries by the Company. At the Closing, upon the terms and subject to
the conditions of this Agreement, the Company shall deliver to Purchaser W a
certificate or certificates representing the Shares duly executed and
authenticated by the Company; provided, however, that if any portion of the
Shares are being purchased with the proceeds of a Four Year Loan, the Company
shall retain possession of all of the Shares in accordance with the terms of the
Pledge Agreement, (ii) a copy of the fully executed Stockholders' Agreement (the
original of which will be retained at the offices of the Company) and (iii) a
fully executed counterpart of Purchaser's option Agreement.
5. Representations and Warranties of Purchaser. Purchaser hereby represents
and warrants to the Company as follows:
(a) Investment Intention; No Resales. Purchaser is acquiring the Shares
for investment solely for his own account and not with a view to, or for resale
in connection with, the distribution or other disposition thereof. Purchaser
agrees and acknowledges that all dispositions of the Shares by Purchaser (other
than involuntary transfers) will comply with the provisions of this Agreement,
the provisions of the Stockholders' Agreement and the Pledge Agreement and
applicable provisions of state and federal securities laws.
(b) Certain Information Not Material. Purchaser has not received
individualized information relative to the compensation of the management of the
Company, which information is acknowledged by Purchaser as not being material to
Purchaser in forming a basis for making an investment in the Shares or for any
other purpose in connection herewith.
(c) Shares Unregistered. Purchaser acknowledges and represents that he
has been advised by the Company that:
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(i) the offer and sale of the Shares have not been registered under
the Securities Act of 1933, as amended (the "Securities Act"), or any state
securities laws;
(ii) the Shares must be held indefinitely and Purchaser must
continue to bear the economic risk of the investment in the Shares unless
the offer and sale of such Shares is subsequently registered under the
Securities Act and all applicable state securities laws or an exemption
from such registration is available;
(iii) there is no established market for the Shares and it is not
anticipated that there will be any public market for the Shares in the
foreseeable future;
(iv) the Company is under no obligation to register under the
Securities Act the Shares on behalf of Purchaser, to assist Purchaser in
complying with any exemption from registration or to consent to the
transfer of the Shares;
(v) Rule 144 promulgated under the Securities Act may not be
presently available with respect to the sale of any securities of the
Company, and the Company has made no covenant to make such Rule available;
(vi) when and if the Shares may be disposed of without registration
under the Securities Act in reliance on Rule 144, such disposition may be
made only in limited amounts in accordance with the terms and conditions of
such Rule;
(vii) a restrictive legend in the form hereafter set forth shall be
placed on the certificates representing the Shares; and
(viii) a notation shall be made in the appropriate records of the
Company indicating that the Shares are subject to restrictions on transfer
and appropriate stop transfer instructions will be issued with respect to
the Shares.
(d) Additional Investment Representations.
(i) Purchaser has carefully reviewed, is familiar with and
understands the Memorandum, the Stockholders, Agreement, the Four Year
Note, the Pledge Agreement, the Option Agreement and the other documents,
records and information, if any, requested by Purchaser or otherwise
supplied by the Company in connection with the offering;
(ii) All documents, records and information pertaining to an
investment in the Company which have been requested by Purchaser have been
made available or delivered to Purchaser, except to the extent otherwise
addressed in the Memorandum;
(iii) Purchaser is fully familiar with the business and operations
of the Company and has had an opportunity to ask questions of and receive
answers from the
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Company concerning the terms and conditions of his investment and the
financial condition, operations and prospects of the Company;
(iv) No oral or written statement, printed material or inducement
given or made by the Company or any of the Company's affiliates is contrary
to the information contained in this Agreement, the Memorandum, the
Stockholders, Agreement, the Four Year Note or the Pledge Agreement, and
Purchaser acknowledges and agrees that in making his decision to purchase
the Shares he has relied solely on such documents and the independent
investigations made by him and, to the extent believed by Purchaser to be
appropriate, his representatives, including his own professional,
financial, legal, tax and other advisors;
(v) Purchaser acknowledges that the Company, in reliance upon
certain federal and state securities law exemptions, has provided Purchaser
with less or different information than Purchaser would have received if an
information memorandum complying with Rule 502(b)(2) of Regulation D
promulgated pursuant to the Securities Act had been prepared and made
available to Purchaser or if the Shares had been registered pursuant to the
Securities Act. The foregoing notwithstanding, the information provided to
Purchaser is sufficient to allow Purchaser to make a knowledgeable and
informed decision regarding his investment in the Shares;
(vi) Purchaser (A) has adequate means of providing for his current
financial needs and possible personal contingencies and has no need for
liquidity in his investment in the Shares, (B) can bear the economic risk
of losing his entire investment in the Shares, (C) has such knowledge and
experience. in financial matters that he is capable of evaluating the
relative risks and merits of his purchase of the Shares, (D) is familiar
with the nature of, and risks attendant to, his purchase of the Shares, and
(E) has determined that the purchase of the Shares is consistent with
Purchaser's financial objectives;
(vii) Purchaser realizes that he may not be able to sell or dispose
of the Shares even in the event of a personal emergency. Purchaser's
overall commitment to investments which are not readily marketable
(including his investment in the Shares) is not disproportionate to his net
worth;
(viii) The address set forth on the signature page hereof is
Purchaser's true and correct residence, and Purchaser has no present
intention of becoming a domiciliary of any other state or jurisdiction;
(ix) Purchaser has no reason to anticipate any change in his
circumstances, financial or otherwise, which may cause or require any sale
or disposition by him of any of the Shares;
(x) The aggregate Purchase Price for the Shares subscribed for-by
Purchaser hereunder does not exceed 20% of Purchaser's net worth (or joint
net worth with Purchaser's spouse, if applicable) as of the date hereof;
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(xi) Each of this Agreement and the Stockholders' Agreement has
been duly and validly executed and delivered by Purchaser and each
constitutes the valid and binding obligation of Purchaser enforceable
against him, his successors and assigns, including, but not limited to, his
estate and his spouse, in accordance with its terms;
(xii) Assuming the due execution and delivery of each of this
Agreement and the Stockholders' Agreement by the Company, each of this
Agreement and the Stockholders' Agreement is a valid and binding obligation
of the Purchaser, enforceable against the Purchaser in accordance with its
terms, except as such enforcement may be subject to (A) bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors rights generally and (B) general
principles of equity (regardless of whether such enforcement is considered
in a proceeding in equity or at law); and
(xiii) The Company has not guaranteed, represented or warranted to
Purchaser either that (A) the Company will be profitable or that Purchaser
will realize profits, as a result of his investment in the Shares or (B)
the past performance or experience on the part of any officer, director,
stockholder, employee, agent, representative or affiliate thereof, or any
employee, agent, representative or affiliate of the Company will in any way
indicate the predictable results of ownership of the Shares.
6. Representations and Warranties of the Company. The Company represents
and warrants to Purchaser as follows:
(a) Organization; Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company is duly qualified and in good standing as a foreign
corporation and is licensed, admitted or approved to do business as a foreign
corporation in each jurisdiction wherein the character of the properties owned
or held under lease by it, or the nature of the business conducted by it, makes
such qualification necessary, except where the failure to qualify would not have
a material adverse effect on the Company, and would not have any adverse effect
on the enforceability of this Agreement.
(b) Authority. The Company has the requisite corporate power and
authority and full legal right to enter into this Agreement, to perform, observe
and comply with all of its agreements and obligations hereunder and to issue the
Shares to Purchaser.
(c) Due Authorization. The execution and delivery by the Company of
this Agreement, the performance by it of all of its agreements and obligations
under this Agreement and the option Agreement, and the issuance of the Shares,
have been duly authorized by all necessary corporate action on the part of the
Company.
(d) Binding Obligation. This Agreement, the Stockholders' Agreement and
the Option Agreement have each been duly and validly executed and delivered by
the Company, and, assuming the due execution and delivery of each such document
by Purchaser, each is a valid and binding obligation of the Company, enforceable
against the Company in accordance
6
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with its terms, except as such enforcement may be subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors, rights generally and (ii) general principles of
equity (regardless of whether such enforcement is considered in a proceeding in
equity or at law).
(e) Capitalization. At the Closing Date, the authorized capital stock
of the Company will consist of 200,000 shares of Common Stock and 100,000
shares of preferred stock. No other class or series of capital stock of the
Company is authorized. All of the outstanding shares of Common Stock,
including the Shares, will, at the time of issuance, have been duly
authorized and issued and, upon receipt by the Company of the Purchase
Price for the Shares subscribed for hereunder will be fully paid and non-
assessable. There are no pre-emptive rights relating to the capital stock
of the Company other than those granted pursuant to the Stockholders,
Agreement and that certain Stockholders, Agreement, dated as of June 29,
1993, among the Company and certain of its stockholders.
(f) Legend. Each certificate representing the Shares shall bear a
legend substantially to the following effect:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE
SECURITIES LAWS. THE SHARES OF COMMON STOCK HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES OF COMMON STOCK UNDER THE
SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES LAWS OR AN
OPINION OF COUNSEL TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
IN ADDITION, THE SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THE SHARES
EVIDENCED BY THIS CERTIFICATE IS RESTRICTED BY THE TERMS OF THAT CERTAIN
SUPPLEMENTAL STOCKHOLDERS' AGREEMENT DATED AS OF ___________ ___, 1995
AMONG THE COMPANY AND EACH OF THE STOCKHOLDERS SPECIFIED THEREIN, WHICH
SUPPLEMENTAL STOCKHOLDERS' AGREEMENT MAY BE EXAMINED AT THE PRINCIPAL
OFFICES OF THE COMPANY. THE SHARES OF COMMON STOCK REPRESENTED BY THIS
CERTIFICATE MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN
ACCORDANCE WITH (I) SAID SECURITIES LAWS OR AN APPLICABLE EXEMPTION
THEREFROM AND (II) SAID SUPPLEMENTAL STOCKHOLDERS' AGREEMENT.
7. Conditions to Obligations of Purchaser. The obligation of Purchaser to
consummate the transactions contemplated by this Agreement shall be subject to
the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
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(a) Performance of Obligations. The Company shall have performed and
complied in all material respects with all obligations and agreements required
to be performed and complied with by it hereunder on or prior to the Closing
Date;
(b) Representations and Warranties. The representations and warranties
of the Company contained in this Agreement shall be true and correct in all
material respects as of the Closing Date as if made as of such date;
(c) Loans. The Company shall have made available to Purchaser at the
Closing, as a loan (or loans), such portion of the Purchase Price for the Four
Year Loan Shares subscribed for hereunder as agreed to by Purchaser and the
Company. Any such loan shall be evidenced by Purchaser's delivery to the Company
of duly executed copies of the Loan Agreement and the Four Year Note, and
Purchaser's obligations thereunder shall be secured by Purchaser's execution,
delivery and performance of the Pledge Agreement; and
(d) Section 4 Obligations. The Company shall have fully complied with
all of its obligations under Section 4 hereof.
8. Conditions to Obligations of the Company. The obligation of the Company
to consummate the transactions contemplated by this Agreement shall be subject
to the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Performance of Obligations. Purchaser shall have performed and
complied in all material respects with all obligations and agreements required
to be performed and complied with by him hereunder on or prior to the Closing
Date;
(b) Representations and Warranties. The representations and warranties
of Purchaser contained in this Agreement shall be true and correct in all
material respects as of the Closing Date as if made as of such date;
(c) Offering. The Offering shall not have been terminated by the
Company; and
(d) Section 3 (b) Obligations. Purchaser shall have fully complied with
all of its obligations under Section 3 (b) hereof.
9. Mutual Conditions. The obligations of either party to consummate the
transactions contemplated by this Agreement shall be subject to the satisfaction
or waiver on or prior to the Closing Date of each of the Offering Conditions.
10. Indemnification.
(a) Indemnification of the Company and the Company Affiliates. From and
after the date hereof, Purchaser shall indemnify and hold harmless the Company
and its predecessors, successors, officers, directors, employees,
representatives and agents (collectively, the "Indemnitees") from and against
any loss, damage or expense, including, without limitation,
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reasonable attorneys, and consultants, fees, disbursements and expenses,
suffered by any one or more of the Indemnitees arising out of or resulting from
any inaccuracy in or breach of any of the representations, warranties, covenants
or agreements made by Purchaser herein.
(b) Indemnification of Purchaser. From and after the date hereof, the
Company shall indemnify and hold harmless Purchaser from and against any loss,
damage or expense, including, without limitation, reasonable attorneys, and
consultants' fees, disbursements and expenses suffered by Purchaser arising out
of or resulting from any inaccuracy in or breach of any of the representations,
warranties, covenants or agreements made by the Company herein.
(c) Procedure for Claims. Within thirty days after obtaining written
notice of any claim or demand which has given rise to, or could reasonably give
rise to, a claim for indemnification hereunder, the party seeking
indemnification shall give written notice of such claim ("Notice of Claim") to
the other party. The Notice of Claim shall set forth a brief description of the
facts giving rise to such claim and the amount (or a reasonable estimate) of the
loss, damage or expense suffered, or which may be suffered, by the party seeking
indemnification.
Upon receiving the Notice of Claim, the indemnifying party shall resist,
settle or otherwise dispose of such claim in such manner as it shall deem
appropriate, including the employment of counsel, and shall be responsible for
the payment of all expenses, including the reasonable fees and expenses of such
counsel. The indemnified party shall have the right to employ separate counsel
in any such action and to participate in or assume the defense thereof, but the
fees and expenses of such counsel shall be at the indemnified party's expense
unless (i) the employment has been specifically authorized by the indemnifying
party in writing, (ii) the indemnifying party has failed to assume the defense
and employ counsel in a timely manner or (iii) the named parties to any action
(including any impleaded parties) include both Purchaser and the company, and
the indemnified party has been advised by such counsel that representation of
the Company and the Purchaser by the same counsel would be inappropriate under
applicable standards of professional conduct due to actual or potential
differing interests between them (in which case, if the indemnified party
notifies the indemnifying party in writing that the indemnified party elects to
employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall have neither the right nor the obligation to assume the
defense of such action on behalf of the indemnified party).
(d) Third Party Beneficiaries. Nothing contained in this Section 10
shall confer any rights upon, or inure to the benefit of, any third party other
than those parties specified in Sections 10-(a) and 10(b) above, it being
understood that such specified parties, to the extent not actually parties
hereto, shall be third party beneficiaries.
11. Miscellaneous.
(a) Notices. All notices, offers or other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be considered as properly given or made on the earliest to occur of (i) personal
delivery, (ii) two days after being delivered to a nationally recognized
overnight mail delivery or courier service, (iii) five days after being
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mailed by certified mail, return receipt requested, postage prepaid, or
(iv) delivery by prepaid telegram or facsimile transmission (with written
confirmation of receipt). All notices given or made pursuant hereto shall be
addressed to the Company at its principal office and to Purchaser at his address
appearing on the signature page hereof under the heading "PURCHASER". The
address of any party hereto may be changed by a notice in writing given in
accordance with the provisions hereof.
(b) Effect and Interpretation. This Agreement shall be construed in
accordance with and governed by the laws of the State of Delaware without regard
to the conflicts of laws provisions thereof.
(c) Entire Agreement. This Agreement and the additional documents
listed on Schedule B hereto and any Exhibits or Schedules attached hereto or
thereto (the "Additional Documents"), which documents are incorporated herein by
this reference, constitute the entire agreement between the parties hereto with
respect to the subject matter hereof and may be amended only by a writing
executed by all parties hereto. This Agreement and the Additional Documents and
the information contained herein and therein expressly supersede all
understandings and agreements of the parties, whether written or oral, between
the parties with respect to the subject matter hereof.
(d) Successors. This Agreement and all the terms and provisions hereof
shall be binding upon and shall inure to the benefit of the parties hereto, and
their respective heirs, legal representatives, permitted successors and
permitted assigns. Notwithstanding anything herein to the contrary, respective
rights and obligations of the parties may not be assigned without the written
consent of the other party.
(e) Pronouns and Headings. As used herein, all pronouns shall include
the masculine, feminine, neuter, singular and plural wherever the context and
facts require such construction. The descriptive headings in the sections of
this Agreement are inserted for convenience of reference only and shall not
control or affect the meaning or construction of any of the provisions hereof.
(f) Severability. If any provision of this Agreement is held by a court
of competent jurisdiction to be invalid, illegal or unenforceable, such
provision shall be severed and enforced to the extent possible or modified in
such a way as to make it enforceable, and the invalidity, illegality or
unenforceability thereof shall not affect the validity, legality or
enforceability of the remaining provisions of this Agreement.
(g) Certain Tax Matters. Under section 1445(e) of the Internal Revenue
Code of 1986, as amended, a corporation, partnership, trust or estate must
withhold tax with respect to certain transfers of property if a holder of the
interest in the entity is a foreign person. To inform the Company that no
withholding is required with respect to any of the Shares, Purchaser hereby
certifies as follows: (1) he is not a nonresident alien for purposes of U.S.
income taxation; (2) his social security number is as set forth on the signature
page hereto; and (3) his home address is as set forth an the signature page
hereto. Purchaser understands under penalties of perjury that this certification
may be disclosed to the Internal Revenue Service and that any false statement he
has
10
<PAGE>
made here could be punished by fine, imprisonment or both. The Purchaser has
completed and submitted herewith a Form W-9 relative to his taxpayer
identification number and other matters and does hereby represent and warrant
that such form is complete, true and correct.
(h) Counterparts. This Agreement may be executed simultaneously in one
or more counterparts each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(i) Assignment. This Agreement and the rights and obligations of the
parties hereunder may be assigned or otherwise delegated by the Company, but may
not be assigned by Purchaser without the Company's prior written consent, which
consent may be withheld in the Company's sole discretion.
(j) Consent of Spouse; Insertion in Will. Purchaser if married, or, if
currently unmarried, each Purchaser upon his marriage, agrees to obtain the
consent and approval of his spouse to all of the terms and provisions of this
Agreement by the execution hereof by such spouse. Purchaser agrees to insert in
his last will and testament, or other similar instrument, or to execute a
codicil thereto, directing and authorizing his personal representatives to
fulfill and comply with the provisions hereof.
(k) Effectiveness; Termination. In the event this Agreement is
terminated for any reason, the parties hereto shall have no further
obligations to each other, except that in the event of a complete or partial
performance of the terms hereof which occurs prior to any termination hereof,
(i) Purchaser shall promptly return to the Company all certificates in his
possession representing the Shares, if any, and (ii) the Company shall promptly
refund the Purchase Price to Purchaser, if and to the extent paid.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE COMPANY:
HANOVER COMPRESSOR COMPANY,
a Delaware corporation
By:_________________________________
William S. Goldberg
Executive Vice President
11
<PAGE>
1995 MANAGEMENT STOCK OFFERING
SUBSCRIPTION AGREEMENT
PURCHASER SIGNATURE PAGE
PURCHASER:
__________________________________
Print Name:_______________________
Social Security No._______________
Home Address:
__________________________________
__________________________________
__________________________________
SPOUSAL CONSENT
The undersigned, the spouse of Purchaser who is a party to the foregoing
Subscription Agreement, hereby consents to the execution of the foregoing
Subscription Agreement pursuant to the offering and the consummation of the
transactions contemplated thereby by her spouse, and to the extent the
undersigned has acquired or hereafter acquires an interest in and to the
property and subject matter of the Subscription Agreement, hereby agrees to be
bound by the terms of such Subscription Agreement.
Date: ____________________ _____________________________
Print Name:__________________
12
<PAGE>
NOTARY PAGE
STATE OF________________)
COUNTY OF_______________)
I, _____________________, a Notary Public in and for said County, in the
State aforesaid, do hereby certify that __________________________ appeared
before me this day in person, and acknowledged and swore that he signed, sealed,
and delivered the said instrument as his respective free and voluntary act and
deed for the uses and purposes therein set forth, and that the statements
contained therein are true.
Given under my hand and notarial seal as of the ______ day of
_____________, 1995.
My Commission expires:
____________________________ ____________________________
Notary Public
13
<PAGE>
SCHEDULE A
Shares Subscribed For
Type of Share Number of Shares Consideration
- ----------------------------------------------------------------------------
Cash Shares(a)
- ----------------------------------------------------------------------------
Four-Year Loan Shares(b)
- ----------------------------------------------------------------------------
Total
- ------------------------
(a) Purchaser must subscribe for a minimum of 5 Shares hereunder, unless
otherwise specifically authorized by the Company in its sole discretion.
There is no maximum subscription.
(b) Purchaser may subscribe for Four Year Loan Shares purchased with the
proceeds of a Four Year Note in any amount up to twice the number of Cash
Shares subscribed for pursuant to the Offering. Additional information
with respect to the maximum number of Four Year Loan Shares may be
obtained from Curtis Bedrich at the Company's principal office.
14
<PAGE>
SCHEDULE B
Additional Documents
A - Stockholders' Agreement
B - Form of Loan Agreement
C - Form of Four Year Secured Promissory Note
D - Form of Pledge Agreement
E - Confidential Offering Memorandum
F - 1995 Management Stock Option Plan
G - Form of Stock Option Agreement Under the 1995 Management Stock Option Plan
15
<PAGE>
EXHIBIT 4.6
================================================================================
Dated: August 2, 1995
CONFIDENTIAL OFFERING MEMORANDUM
HANOVER COMPRESSOR COMPANY
Up to 2,000 shares of Common Stock, $.001 par value
$1,500 Minimum Investment
================================================================================
All of the 2,000 shares (the "Shares") of common stock, $.001 par value
(the "Common Stock"), offered hereby are being sold by Hanover Compressor
Company, a Delaware corporation (the "Company"). The Shares are being offered
only to certain employees of the Company and its subsidiaries and are offered
together with options to purchase shares which will be granted to investors. See
"The Offering."
There has been no public market for the Common Stock, and no such public
market is anticipated to exist in the foreseeable future. See "Determination of
Offering Price" for a discussion of the factors considered in determining the
offering price.
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Common Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
OFFERING MEMORANDUM. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=====================================================================================================
Offering Price (1) Fees and Commissions (2) Proceeds to the Company (2)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................. $ 1,500 $0.00 $ 1,500
- -----------------------------------------------------------------------------------------------------
Maximum Total............. $3,000,000 $0.00 $3,000,000
=====================================================================================================
</TABLE>
(1) Payable in cash upon subscription (except for shares to be purchased with
proceeds of loans made by the Company). The minimum purchase per investor
is one Share (for a total of $1,500), not including Shares purchased with
the proceeds of four year loans to be made by the Company, and the maximum
aggregate purchase by all investors is 2,000 Shares (for a total of
$3,000,000), including Shares purchased with the proceeds of four year
loans to be made by the Company. See "The Offering."
(2) The Shares are being offered directly by the Company which will pay no
commissions but will utilize a portion of the proceeds to pay legal,
accounting and other expenses of the offering estimated to be $25,000.
THIS OFFERING MEMORANDUM CONSTITUTES AN OFFER ONLY IF A NAME APPEARS IN THE
SPACE BELOW MARKED "NAME OF OFFEREE" AND CONSTITUTES AN OFFER ONLY TO SUCH NAMED
OFFEREE.
Name of Offeree: Memorandum Number:
THESE SECURITIES INVOLVE A SIGNIFICANT DEGREE OF RISK
<PAGE>
__________________________________
THIS MEMORANDUM IS SUBMITTED IN CONNECTION WITH THE OFFERING OF THESE
SECURITIES PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT-), REGULATION D AND/OR SECTION 701 PROMULGATED UNDER THE
SECURITIES ACT AND PURSUANT TO AVAILABLE EXEMPTIONS UNDER STATE SECURITIES LAWS,
AND MAY NOT BE REPRODUCED OR USED FOR ANY OTHER PURPOSE. ANY ACTION CONTRARY TO
THESE RESTRICTIONS MAY INVOLVE A VIOLATION OF CERTAIN FEDERAL OR STATE
SECURITIES LAWS.
__________________________________
THE COMPANY HAS AGREED TO MAKE AVAILABLE, PRIOR TO THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED HEREIN, TO EACH OFFEREE OF COMMON STOCK OR HIS
REPRESENTATIVE(S) OR BOTH, THE OPPORTUNITY TO ASK QUESTIONS OF, AND RECEIVE
ANSWERS FROM IT OR ANY PERSON ACTING ON ITS BEHALF CONCERNING THE TERMS AND
CONDITIONS OF THIS OFFERING, AND TO OBTAIN ANY ADDITIONAL INFORMATION, TO THE
EXTENT IT POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE
EFFORT OR EXPENSE, NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION SET FORTH
HEREIN.
__________________________________
PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS MEMORANDUM
OR ANY PRIOR OR SUBSEQUENT COMMUNICATION FROM THE COMPANY, ITS AFFILIATES,
DIRECTORS, OFFICERS AND EMPLOYEES OR ANY PROFESSIONAL ASSOCIATED WITH THIS
OFFERING AS LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD CONSULT HIS OWN PERSONAL
COUNSEL, ACCOUNTANT AND OTHER ADVISERS AS TO LEGAL, TAX, ECONOMIC AND RELATED
MATTERS CONCERNING THE INVESTMENT DESCRIBED HEREIN AND ITS SUITABILITY FOR HIM.
__________________________________
NO DISTRIBUTION OF THIS MEMORANDUM IN WHOLE OR IN PART, OR THE DISCLOSURE
OF ANY OF ITS CONTENTS, IS PERMITTED UNLESS AUTHORIZED. EXCEPT FOR INFORMATION
CONTAINED HEREIN OR AUTHORIZED BY THE COMPANY, NO OFFERING LITERATURE OR
ADVERTISING IN WHATEVER FORM SHALL BE EMPLOYED IN THE OFFERING OF THE SHARES. NO
PERSON HAS BEEN AUTHORIZED TO MAKE REPRESENTATIONS, OR GIVE ANY INFORMATION,
WITH RESPECT TO THE SHARES, EXCEPT THE INFORMATION CONTAINED HEREIN AND IN THE
SUMMARY OF THE OFFERING PREPARED BY THE COMPANY.
ii
<PAGE>
__________________________________
INVESTMENT IN THE COMMON STOCK IS SUITABLE ONLY FOR INVESTORS WHO MEET THE
SUITABILITY STANDARDS DESCRIBED UNDER "THE OFFERING -- SUITABILITY."
__________________________________
THE COMMON STOCK OFFERED HEREBY MAY NOT BE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM REGISTRATION.
__________________________________
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANYONE IN
ANY STATE OR IN ANY OTHER JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS
NOT AUTHORIZED.
__________________________________
THE COMPANY WILL NOT BE REQUIRED TO DELIVER AN ANNUAL REPORT TO
STOCKHOLDERS PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
HOWEVER, THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS ANNUALLY WITH A COPY OF
THE COMPANY'S AUDITED FINANCIAL STATEMENTS.
__________________________________
FOR ALABAMA RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE ALABAMA SECURITIES ACT, AS
AMENDED (THE "ALABAMA ACT"), AND ARE OFFERED AND SOLD PURSUANT TO AN EXEMPTION
THEREFROM. THE SHARES CANNOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION
WHICH IS EXEMPT UNDER THE ALABAMA ACT, OR PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ALABAMA ACT OR IN A TRANSACTION WHICH IS OTHERWISE IN
COMPLIANCE WITH THE ALABAMA ACT.
__________________________________
FOR ARKANSAS RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE ARKANSAS SECURITIES ACT, AS
AMENDED (THE "ARKANSAS ACT"), AND ARE OFFERED AND SOLD PURSUANT TO AN EXEMPTION
THEREFROM. THE SHARES CANNOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION
WHICH IS EXEMPT UNDER THE ARKANSAS ACT, OR PURSUANT TO AN EFFECTIVE REGISTRATION
iii
<PAGE>
STATEMENT UNDER THE ARKANSAS ACT OR IN A TRANSACTION WHICH IS OTHERWISE IN
COMPLIANCE WITH THE ARKANSAS ACT.
__________________________________
FOR LOUISIANA RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR THE
LOUISIANA SECURITIES LAWS. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE SOLD OR TRANSFERRED FOR VALUE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
OF THEM UNDER THE SECURITIES ACT AND/OR THE LOUISIANA SECURITIES LAWS OR AN
OPINION OF COUNSEL TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
SUCH ACT OR LAWS.
__________________________________
FOR NEW MEXICO RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE NEW MEXICO SECURITIES ACT OF
1986, AS AMENDED (THE -NEW MEXICO ACT-), AND ARE OFFERED AND SOLD PURSUANT TO AN
EXEMPTION THEREFROM. THE SHARES CANNOT BE SOLD OR TRANSFERRED EXCEPT IN A
TRANSACTION WHICH IS EXEMPT UNDER THE NEW MEXICO ACT, OR PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE NEW MEXICO ACT OR IN A TRANSACTION
WHICH IS OTHERWISE IN COMPLIANCE WITH THE NEW MEXICO ACT.
__________________________________
FOR OKLAHOMA RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE OKLAHOMA SECURITIES ACT, AS
AMENDED (THE "OKLAHOMA ACT"), AND ARE OFFERED AND SOLD PURSUANT TO AN EXEMPTION
THEREFROM. THE SHARES CANNOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION
WHICH IS EXEMPT UNDER THE OKLAHOMA ACT, OR PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE OKLAHOMA ACT OR IN A TRANSACTION WHICH IS OTHERWISE IN
COMPLIANCE WITH THE OKLAHOMA ACT.
__________________________________
FOR TEXAS RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE TEXAS SECURITIES ACT, AS
AMENDED (THE -TEXAS ACT-), AND ARE OFFERED AND SOLD PURSUANT TO AN EXEMPTION
THEREFROM. THE SHARES CANNOT BE SOLD OR
iv
<PAGE>
TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER THE TEXAS ACT, OR
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE TEXAS ACT OR IN A
TRANSACTION WHICH IS OTHERWISE IN COMPLIANCE WITH THE TEXAS ACT.
__________________________________
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE
AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES
ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR
THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
v
<PAGE>
CONFIDENTIAL OFFERING MEMORANDUM
HANOVER COMPRESSOR COMPANY
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF THE OFFERING....................................................................... 1
THE COMPANY................................................................................... 1
THE OFFERING.................................................................................. 1
THE COMPANY................................................................................... 3
THE OFFERING.................................................................................. 3
FEDERAL INCOME TAX CONSEQUENCES............................................................... 9
RISK FACTORS.................................................................................. 12
CERTAIN CONTEMPLATED TRANSACTIONS............................................................. 19
DETERMINATION OF OFFERING PRICE............................................................... 21
PLAN OF OFFERING.............................................................................. 21
USE OF PROCEEDS............................................................................... 23
DILUTION...................................................................................... 23
CAPITALIZATION................................................................................ 24
DIVIDEND POLICY............................................................................... 25
SELECTED FINANCIAL INFORMATION................................................................ 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 26
BUSINESS...................................................................................... 28
MANAGEMENT.................................................................................... 38
PRINCIPAL STOCKHOLDERS........................................................................ 46
DESCRIPTION OF CERTAIN INDEBTEDNESS........................................................... 52
DESCRIPTION OF CAPITAL STOCK.................................................................. 54
ADDITIONAL INFORMATION........................................................................ 56
</TABLE>
vi
<PAGE>
EXHIBITS:
- --------
Exhibit A - Subscription Agreement
Exhibit B - Stockholders' Agreement
Exhibit C - Form of Loan Agreement
Exhibit D - Form of Four Year Note
Exhibit E - Form of Pledge Agreement
Exhibit F - Form of 1995 Employee Stock Option Plan
Exhibit G - Form of Option Agreement under 1995 Employee Stock Option Plan
Exhibit H - Proposed Amended and Restated Certificate of Incorporation
vii
<PAGE>
SUMMARY OF THE OFFERING
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Offering Memorandum and the Exhibits
attached hereto. Prospective investors of the Shares should carefully consider
the factors set forth under "Risk Factors."
The Company
The Company was organized in October 1990 for the purpose of acquiring,
manufacturing, selling, leasing, maintaining and refurbishing compressors
utilized by the natural gas industry. For a more detailed description of the
Company's business, see "Business."
The Offering
Shares of Common Stock offered: 2,000, including Shares to be acquired for
cash out of the subscribing offeree's own
funds or by delivery of a four year note,
but not including shares which may be
acquired pursuant to options granted under
the Employee Option Plan. See "The
Offering."
Shares of Common Stock 85,956.19, not including (i) shares issuable
outstanding after the offering: upon exercise of options and (ii) 198.40
shares of Common Stock which are held by the
Company as treasury shares.
Use of Proceeds: All of the net proceeds of this offering
will be used for general corporate purposes,
including working capital.
The Company reserves the right to withdraw this offering and return all
subscriptions or modify this offering at any time during the term of this
offering. Subscriptions for Shares may be accepted or rejected by the Company in
its sole discretion. All cash received by the Company in respect of
subscriptions for the Shares (the "Funds") shall be promptly deposited in an
interest bearing, segregated account and such Funds may be invested in treasury
bills or other cash equivalents, as determined in the sole and absolute
discretion of the Company. If acceptable subscriptions for a minimum of an
aggregate of two hundred Shares are received by the Company on or before August
8, 1995 or such later date as the Company in its sole discretion may determine
without consent of or notice to the offerees, but in no event later than August
31, 1995 (the "Termination Date"), all subscriptions will be transferred from
the segregated bank account to the Company, together with all interest, if any,
earned thereon. The minimum subscription per subscribing offeree is one Share
(not including any Shares to be acquired pursuant to a four year loan made by
the Company) for an aggregate of $1,500; however, the Company in its sole
discretion may accept subscriptions for a lesser number of Shares, subject to
applicable securities laws. In the event all conditions have not been satisfied
in full prior to the Termination Date or the Company withdraws this offering,
this offering will be terminated and all Funds will be returned to subscribing
offerees; with a pro rata share of interest earned thereon,
1
<PAGE>
if any, calculated on the basis of the amount of Funds invested by each
subscribing offeree and the length of time interest on such Funds was earned.
See "Plan of Offering."
Summary Financial Information
See "Selected Financial Information" for a summary of certain relevant
financial information.
Risk Factors
For a discussion of certain factors that should be considered in evaluating
an investment in the Shares, including, among others, (i) the Company's limited
operating history, (ii) the short terms of compressor leases and the possible
inability of the Company to re-lease its compressors, (iii) competition, (iv)
factors regarding the natural gas compressor leasing industry, (v) potential
liability and insurance, (vi) environmental liability risks, (vii) governmental
regulation, (viii) restrictions imposed by the terms of the Company's
indebtedness and the effect of a default thereunder, (ix) dependence upon
internally generated funds and the contemplated offering of Preferred Stock to
certain investors subsequent to this offering, (x) limited preemptive rights,
(xi) no public market for the Common Stock and restrictions on transferability,
(xii) dividends, (xiii) control by principal stockholders, (xiv) capital demands
due to recent expansion activity, (xv) dilution and (xvi) Federal income task
risks, see "Risk Factors."
2
<PAGE>
THE COMPANY
Hanover Compressor Company is a corporation organized under the laws of the
State of Delaware. The principal executive office of the Company is located at
12001 North Houston Rosslyn, Houston, Texas 77086, and the Company's telephone
number is (713) 447-8787.
THE OFFERING
This offering is made only to certain employees of the Company and its
subsidiaries for the purpose of providing such persons with the opportunity to
obtain an equity interest in the Company. The Company reserves the fight to
withdraw this offering and return all subscriptions or make non-material
modifications to the offering at any time during the term of the offering. All
Funds shall be promptly deposited in an interest bearing, segregated account and
such Funds may be invested in treasury bills or other cash equivalents, as
determined in the sole and absolute discretion of the Company. Funds deposited
in the segregated account may not be withdrawn by subscribers unless the
offering terminates as described herein. The deposit of Funds in such account
does not constitute acceptance of all or any portion of any offeree's
subscription by the Company.
General
Subject to adjustment for over subscription, each offeree may subscribe to
purchase for cash as many of the Shares as such offeree may desire. Upon such
subscription, the Company will, at the request and option of each subscribing
offeree, loan (the "Four Year Loan") such subscribing offeree sufficient funds,
on a full recourse and secured basis, to purchase two additional Shares (all
such Shares hereinafter the "Loan Shares") for each Share subscribed for
hereunder for cash (the "Cash Shares"). See "- The Four Year Loan." For each
Share acquired by a subscribing offeree hereunder, the Company will grant such
subscribing offeree an option to purchase one-third of one share of Common Stock
pursuant to the terms of the 1995 Employee Stock Option Plan, substantially in
the form attached hereto as Exhibit (the "Employee Option Plan"). The exercise
price for such options will be $1,500 per share (subject to adjustment for stock
splits, stock dividends and other similar events as described in the Employee
Option Plan). See "-Options - Employee Option Plan."
Offerees who desire to subscribe for Shares will be required to become
parties to the Amended and Restated Stockholders' Agreement of Hanover
Compressor Company attached hereto as Exhibit B (the "Stockholders' Agreement").
The Stockholders' Agreement restricts the sale of Common Stock held by the
parties thereto and provides for, among other things, (i) the right of Investors
(as hereinafter defined) to participate in a sale by GKH Partners, L.P., a
Delaware limited partnership ("Partners"), and GKH Investments, L.P., a Delaware
limited partnership (together with Partners, "GKH"), of at least 50% of the
Common Stock owned by GKH, (ii) the right of GKH to require all Investors to
sell their stock in certain transactions for the same consideration to be
received by GKH and (iii) the right of the Company or its affiliates to purchase
all of an Investor's Common Stock upon the termination of such Investor's
employment with the Company and its subsidiaries and affiliates. The purchase
price for such stock varies depending on the circumstances and, in cases where
an Investor is terminated for
3
<PAGE>
cause or voluntarily terminates his employment without good reason (each as more
fully defined in the Stockholders' Agreement), such purchase price may be
substantially below the fair market value of such Common Stock. See "-
Stockholders' Agreement."
The maximum aggregate number of shares which may be subscribed for pursuant
to this offering is 2,000, which number does not include any shares of Common
Stock to be issued upon exercise of options granted under the Employee Option
Plan. If the offerees; subscribe for more than such number of shares of Common
Stock, each offeree's subscription will be reduced proportionately based on the
relationship between the number of shares subscribed for by such offeree and the
aggregate number of shares subscribed for by all offerees.
For information regarding the method of subscribing for Shares, see "Plan
of Offering" and the Subscription Agreement attached hereto as Exhibit A (the
"Subscription Agreement").
Suitability
Investment in the Shares offered hereby involves a significant degree of
risk. See "Risk Factors." This offering is a private offering made only by
delivery of a copy of this Offering Memorandum to employee of the Company or its
subsidiaries whose name appears hereon. The Shares have not been registered
under the Securities Act, or any applicable state securities laws. The Shares
are being offered pursuant to one or more exemptions from the registration
requirements of the Securities Act, including the exemption afforded by Section
4(2) thereof, Regulation D and/or Section 701 promulgated thereunder, and
pursuant to available exemptions under state securities laws, only to certain
employees for investment only. Each person who subscribes for Shares and whose
subscription is accepted by the Company (each an "Investor," collectively, the
"Investors") will be required to represent that he is acquiring the Shares for
his own account, for investment, and without any intention of making a
distribution or resale thereof, either in whole or in part. The Shares may not
be resold or transferred except in accordance with the provisions of the
Securities Act, the rules and regulations thereunder, any applicable state
securities laws and the terms and conditions of the Stockholders' Agreement. As
a result of the foregoing, investment in the Shares is suitable only for persons
of adequate financial means apart from their investment in the Shares, and who
have no need for liquidity with respect to such investment.
Offerees who desire to subscribe for Shares should read and discuss with
their advisors this Offering Memorandum, the Subscription Agreement, the
Stockholders' Agreement, the Loan Agreement (as defined below), the Four Year
Note (as defined below), the Pledge Agreement (as defined below), the Employee
Option Plan and the other documents relative to the foregoing regarding the
appropriateness of an investment in the Shares. The desirability of an
investment in the Common Stock depends upon a number of factors including, among
others, (i) the factors set forth under the caption "Risk Factors," (ii) the
nature of the Company's business, (iii) the possibility of a decline in value of
the Common Stock, (iv) the various restrictions on transferability of the Common
Stock, including those contained in the Stockholders' Agreement, and the present
essential illiquidity of the investment, (v) the desirability to the offeree of
a long-term investment, (vi) the likelihood that the Company will not pay
dividends on the
4
<PAGE>
Common Stock in the foreseeable future and the likelihood of restrictions
imposed on the Company's ability to pay dividends under the terms of the
agreements governing the Company's senior secured indebtedness and the
Additional Issuances (as defined below), (vii) the control of the Company by its
principal stockholders, (viii) the relationship between such offeree's
investment (including the investment pursuant to the Four Year Loan) and such
offerees' net worth, (ix) the employment goals of the offeree and the right of
the Company to purchase such offeree's Common Stock upon the termination of his
employment with the Company, in some instances at a purchase price equal to or
less than the offeree's cost thereof, even if such cost is less than the fair
market value of such Common Stock, and (x) other relevant personal circumstances
of each offeree.
The Four Year Loan
Each Investor may, but is not required to, request from the Company a Four
Year Loan to purchase the Loan Shares. Inasmuch as the Four Year Loan will be
made on a full recourse and secured basis, each Investor should consider
carefully the additional risk that he or she will undertake by obtaining the
Four Year Loan to purchase Shares.
The Four Year Loan will bear interest at the prime rate as announced from
time to time by Chemical Bank ("Prime Rate"), will be made pursuant to a loan
agreement substantially in the form of Exhibit C hereto (the "Loan Agreement"),
evidenced by a secured promissory note substantially in the form of Exhibit D
hereto (the "Four Year Note"). Any amount of principal and/or accrued interest
on the Four Year Note which is not paid when due will bear interest at the Prime
Rate plus 2%, except that upon the failure to make the required payments
following (i) the sale of Common Stock or receipt by the Investor of dividends
on Common Stock, (ii) termination for Cause (as defined below) and (iii)
voluntary termination without Good Reason (as defined below), the outstanding
principal and accrued and unpaid interest will bear interest at 15% per annum,
compounded monthly, or the highest rate of interest allowable under applicable
law, whichever is less. Interest on the Four Year Note will be payable in cash
annually on December 31 (each an "Interest Payment Date") to the extent of 66.7%
of the accrued interest to such date (the "Minimum Interest Payment"), and all
accrued interest which is not paid as of an Interest Payment Date will be
automatically added to the principal amount of the Four Year Note. Each Minimum
Interest Payment must be paid to the extent of bonus payments, if any, less an
allowance equal to 33.3% of such bonus payment for federal and state income tax
(the "Net Bonus"), paid to the Investor by the Company on or before each
Interest Payment Date (including amounts paid in such calendar year which relate
to a previous calendar year and were not taken into consideration in such prior
calendar year), provided that nothing herein or in the Loan Agreement or the
Four Year Note shall create any obligation on the part of the Company to pay any
bonus. In the event the Net Bonus is insufficient to pay the Minimum Interest
Payment, the Investor shall be required to pay the difference between such Net
Bonus and the Minimum Interest Payment. The Company will have the right to
withhold from the Investor all or any portion of a Net Bonus payable by the
Investor in respect of interest under the Four Year Loan, which amounts will be
deemed to have been paid to the Investor and subsequently repaid by the Investor
to the Company. All principal and accrued and unpaid interest will be due upon
maturity, which will be 48 months from the date of the Loan Agreement, provided
that such date
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may be accelerated upon the occurrence of an Event of Default (as defined below)
or under other circumstances more fully described in the Loan Agreement and the
Four Year Note.
The Four Year Note will be secured by a pledge of (i) all of the shares and
rights to acquire shares of Common Stock owned by the Investor as of the date of
the Four Year Loan, or which are acquired by the Investor subsequent to the date
of the Four Year Loan and (ii) all proceeds received by an Investor thereon,
including dividends and additional shares received in stock distributions, all
as more fully set forth in the pledge agreement attached hereto as Exhibit E
(the "Pledge Agreement"). The Four Year Note will provide for mandatory
prepayment upon and to the extent of dividends or other distributions paid to
the Investor on the Common Stock and proceeds from the sale of the Common Stock,
and upon termination of the Investor's employment by the Investor without Good
Reason (as defined below) or by the Company for Cause (as defined below).
The Four Year Note, the Loan Agreement, the Pledge Agreement and any other
documents that are executed in connection therewith (collectively, the "Loan
Documents") will be assignable by the
Company to any of its affiliates, including GKH, or to any third party
financial institution or commercial lender to which the Company is or becomes
indebted. The Loan Documents cannot be assigned by an Investor without the
Company's prior written consent.
"Cause," when capitalized and with reference to the termination of the
Investor's employment with the Company, means (i) the commission of an act of
fraud, embezzlement or willful breach of a fiduciary duty to the Company
(including the unauthorized disclosure of confidential or proprietary material
information of the Company), (ii) a conviction (or a plea of nolo contendere in
lieu thereof) for a felony or a crime involving fraud, dishonesty or moral
turpitude, (iii) willful misconduct as an employee of the Company, (iv) the
willful failure to render services to the Company in accordance with such
Investor's employment, which failure amounts to a material neglect of his duties
to the Company or (v) substantial dependence, as determined by the Board of
Directors of the Company (the "Board"), on alcohol or any controlled substance.
"Good Reason," when capitalized, means, with reference to the voluntary
termination of the Investor's employment with the Company by the Investor, where
such termination (i) promptly follows a material reduction of such Investor's
duties and responsibilities or a permanent change in such Investor's duties and
responsibilities which are materially inconsistent with the type of duties and
responsibilities of such Investor then in effect, (ii) promptly follows a
material reduction in annual base salary (without regard to bonus compensation,
if any), (iii) promptly follows a material reduction in such Investor's employee
benefits (without regard to bonus compensation, if any) if such reduction
results in such Investor receiving benefits which are, in the aggregate,
materially less than the benefits received by other comparable employees of the
Company generally or (iv) the Board otherwise determines that a voluntary
termination by such Investor is for "Good Reason" under the circumstances then
prevailing.
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An "Event of Default". when capitalized and with reference to the Four Year
Loan includes, without limitation, (i) the failure to pay principal or interest
when due, which failure has continued for 10 days after written notice from the
Company, (ii) any representation or warranty contained in the Loan Documents or
the Subscription Agreement being incorrect in any material respect on or as of
the date made or deemed made, (iii) the default with respect to any covenant
contained in the Loan Documents, which default is not curable by the Investor
or, if curable, has continued uncured for 10 days after written notice from the
Company, (iv) the failure of the Investor to make any payment when due under, or
other default of the Investor which permits acceleration of, any other material
indebtedness of the Investor and (v) the occurrence of certain bankruptcy-
related events with respect to the Investor which continue for 60 days or are
otherwise consented to by the Investor.
Options
Employee Option Plan
For each share of Common Stock acquired by an Investor hereunder, the
Company will grant such Investor an option to purchase one-third of one share of
Common Stock (subject to adjustment for stock splits, stock dividends and other
similar events as described in the Employee Option Plan) at a purchase price of
$1,500 per share. Such options will vest ratably over a five year period
beginning on the first anniversary of the Employee Option Plan (subject to (i)
acceleration upon termination of employment due to death or permanent disability
and upon the occurrence of a Capital Event (as defined in the Employee Option
Plan) and (ii) forfeiture upon termination for Cause) and be governed by the
terms of the Employee Option Plan and individual option agreements (the
"Employee Option Agreements") between the Company and each Investor, forms of
which are attached hereto as Exhibits F and G, respectively. The term of the
options will be 10 years, subject to a limited exercise period for vested
options in the event of the termination of employment of the Investor (other
than for Cause). An option may not be exercised during any period in which the
Investor is in default under the terms of any loan or other obligation that the
Investor may have to the Company. The shares of Common Stock acquired upon
exercise of the options will be subject to the terms of the Stockholders'
Agreement. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an Investor, such options
may be exercised only by the Investor. The options granted under the Employee
Option Plan are nonstatutory options and are not intended to qualify as
"incentive stock options" under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and each Investor should consult his tax advisors
for information regarding the tax treatment of such options.
Pursuant to the Employee Option Agreements, each Investor will agree that
he will not during the term of such agreement and for a period of one year
thereafter, (i) compete with any business of the Company or its subsidiaries or
affiliates and (ii) without the Company's express written consent, disclose to
persons outside the Company confidential information concerning the Company or
any of its subsidiaries or affiliates.
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Stockholders' Agreement
As a condition to the acceptance by the Company of a subscribing offeree's
subscription for Shares, such subscribing offeree is required to become a party
to the Stockholders' Agreement. The summary of the Stockholders' Agreement set
forth below is not intended to be a complete recitation of the provisions
thereof, and each offeree should read and understand all the provisions of the
Stockholders' Agreement before making a determination whether to invest in the
Shares.
Restrictions on Transfer
The Stockholders' Agreement contains substantial restrictions on the
disposition of an Investor's Common Stock. In general, an Investor will be
permitted to transfer some or all shares of his Common Stock to affiliates,
including certain relatives and controlled entities, provided each affiliate
agrees to be bound by the terms of the Stockholders' Agreement. An Investor will
also be permitted to transfer all (but not less than all) of his shares of
Common Stock to a bona fide third party purchaser if such purchaser agrees to be
bound by the terms of the Stockholders' Agreement, but only after such Common
Stock is offered first to the Company and then to GKH on the same terms as
offered to the bona fide third party purchaser. The Investor will be required to
comply with certain mechanical provisions regarding such transfer, including (i)
timely notice to the Company and GKH of any proposed transfer and (ii)
consummation of any transfer within a specified period.
Rights to Compel Disposition
GKH will have the right to compel each Investor to dispose of all of his
shares of Common Stock and make certain representations with respect to his
ownership of such Common Stock in the event GKH seeks to transfer all, but not
less than all, of its Common Stock. If GKH exercises its right to compel the
disposition of the Investors' Common Stock, the consideration for such Common
Stock will be the same per share consideration on the same terms to be received
by GKH for its shares of Common Stock.
Rights of Inclusion
Each Investor will have the right to sell his Common Stock on the same
terms as GKH in a transaction pursuant to which GKH sells at least 50% of the
outstanding Common Stock of the Company then owned by GKH. Investors who desire
to participate in such sale will be required to deliver notice on a timely basis
and comply with other mechanical provisions in connection with such transfer.
Preemptive Rights
Although Delaware law does not generally provide for preemptive rights, in
the event the Company offers an existing stockholder who is party to the
Stockholders' Agreement the opportunity to purchase additional shares of Common
Stock, the other parties to the Stockholders' Agreement will have the right to
acquire their respective pro rata share of
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such Common Stock on the same terms and conditions offered to such stockholder,
except that such right shall not apply to (i) shares issuable in connection with
a merger, acquisition or similar transaction, (ii) shares issuable upon the
exercise of any options, warrants or other convertible securities, (iii) shares
offered by the Company to employees and directors of the Company or (d) shares
issuable in connection with preemptive rights granted to other stockholders of
the Company in connection with a merger, acquisition or similar transaction, or
in connection with the issuance by the Company of its Series B Preferred Stock
(as defined below).
Transfers upon Termination
The Company will have the right to purchase all of the Common Stock of an
Investor in the event such Investor ceases to be an employee of the Company or
any of its subsidiaries or affiliates. The purchase price for such Common Stock
will be (i) in the event such Investor's employment is terminated for Cause, the
lower of the Investor's cost for his Common Stock on a share by share basis and
80% of fair market value thereof, (ii) in the event such employment is
voluntarily terminated without Good Reason, the lower of cost and fair market
value and (iii) in the event such Investor's employment is terminated by death,
retirement, permanent disability, without Cause or voluntarily with Good Reason,
the fair market value of such Common Stock. The purchase price for such Common
Stock will be payable (a) in cash (and/or by the delivery of a term note with
the shortest term permissible if required by any agreement to which the Company
is then subject) if such Investor's employment is terminated with Good Reason or
upon death, retirement, permanent disability or without Cause, or voluntarily
without Good Reason more than three years after the date of the Stockholders'
Agreement, and (b) by delivery of a seven year term note if such employment is
terminated for Cause, or voluntarily without Good Reason on or prior to the
third anniversary of the Stockholders' Agreement. Any note delivered in
connection with the foregoing will bear interest, payable annually, at the Prime
Rate.
Cost, fair market value, retirement, permanent disability and voluntary
termination are each defined in the Stockholders' Agreement.
FEDERAL INCOME TAX CONSEQUENCES
THE DISCUSSION SET FORTH BELOW PROVIDES GENERAL INFORMATION AS TO CERTAIN
ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH SUBSCRIPTION FOR THE
SHARES AND OPTIONS HEREUNDER. EACH INVESTOR SHOULD CONSULT HIS TAX ADVISOR AS TO
THE SPECIFIC TAX CONSEQUENCES OF I-US SUBSCRIPTION, INCLUDING THE APPLICATION OF
POSSIBLE OF STATE AND LOCAL TAX LAWS.
Restricted Stock
Code Section 83 governs transfers of property to persons (whether employees
or independent contractors) in exchange for services. Under that section, a
person receiving property as compensation for services must report (as
compensation income) the excess of the fair market value of the property
received over the amount paid in exchange therefor (such excess referred to
herein as "In-Kind Compensation").
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In determining when a recipient of In-Kind Compensation must report income
attributable thereto, Code Section 83(a) provides that the value of such In-Kind
Compensation (without regard to any restriction other than a restriction which
by its terms will never lapse) is includible in the recipient's income at the
first time that the recipient's rights in the property are substantially vested.
For such purposes, property is considered to be substantially vested when it is
either (a) transferable or (b) not subject to a substantial risk of forfeiture.
A substantial risk of forfeiture is generally considered to exist when the
recipient's rights to the property are predicated upon the future performance of
services or upon the occurrence of a condition related to the transfer. Further,
an interest in restricted property is transferable only if the subsequent
transferee's rights in the property are not subject to a substantial risk of
forfeiture.
Alternatively, Code Section 83(b) provides each recipient of In-Kind
Compensation the ability to include such amounts in income in the year in which
he receives them, rather than the year in which the In-Kind Compensation becomes
substantially vested. Under that section, a taxpayer may elect, within 30 days
of the transfer of property, to include in income the value of any In-Kind
Compensation (as determined without regard to the restrictions thereon).
Taxpayers who include In-Kind Compensation in income under Code Section 83(b)
but later forfeit the property received are denied a deduction for any portion
of the In-Kind Compensation reported by the taxpayer.
Once includible in the income of the recipient, In-Kind Compensation is
considered payment of wages subject to withholding of income tax and deposits
pursuant to the Federal Insurance Contributions Act (FICA). Upon the subsequent
sale of the transferred stock or other property, the taxpayer will recognize
income to the extent that the amounts realized on sale exceed the sum of (a) the
amount includible in his income under Code Section 83 and (b) the amount paid
for the property.
Offerees who desire to subscribe for Shares will be required to become
parties to the Stockholders' Agreement. Pursuant to the Stockholders' Agreement,
each Investor may be required, in the event his employment terminates for Cause
or without Good Reason, to sell his Shares back to the Company for an amount
equal to the lower of (a) cost or (b) a percentage (either 100% or 80%) of fair
market value. Any transferee of an Investor may be required to sell the
transferred Shares to the Company upon similar terms in the event that the
Investor's employment is terminated for Cause or without Good Reason. Such
restrictions lapse with respect to any Investor on the earliest to occur of (a)
the Investor's death, retirement, permanent disability, or involuntary
termination of employment without Cause, (b) the Investor's voluntary
termination of employment with G&A Reason, or (c) the failure of the Company to
exercise its rights to purchase the Investor's Shares in a timely fashion
following the termination of his employment for Cause or without Good Reason
(each such event referred to as a "Lapse Event"). See "The Offering -
Stockholders' Agreement."
The Company believes that, in light of various provisions of the
Stockholders' Agreement, each Investor subscribing for Shares hereunder will
acquire such Shares subject to a substantial risk of forfeiture. Further, the
Company believes that the Shares subscribed for hereunder are not transferable
within the meaning of Code Section 83. As such, to the extent that
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the fair market value of any Share exceeds the amount paid therefor, no Investor
should be required to include in income the In-Kind Compensation attributable
thereto until the restrictions lapse at the occurrence of a Lapse Event.
Nevertheless, any Investor may elect, under Code Section 83(b), to include the
value of the In-Kind Compensation in the year in which he purchases Shares
pursuant to this Offering.
Stock Options
Taxpayers receiving compensatory, nonstatutory stock options (i.e., options
other than "qualified options" taxable under Code Section 421) generally do not
recognize income as a result of the grant of such options. Unless the granted
options have a readily ascertainable fair market value within the meaning of
Code Section 83 as of the date of grant, the taxpayer realizes income only on
the date he exercises or disposes of such options. At that time, he realizes
compensation income equal to the difference between the market value of the
stock and the price paid to acquire and exercise the option. However, where the
optionee's rights in the property transferred pursuant to the exercise of such
option are not substantially vested (within the meaning of Code Section 83), the
optionee does not realize income until the first time that his rights in that
property become substantially vested. See "- Restricted Stock."
When an option is not regularly traded on an established market, it does
not have a readily ascertainable market value unless its value can be determined
with "reasonable accuracy." For such purposes, the value of an option cannot be
determined with reasonable accuracy unless all of the following conditions
exist:
(i) The option is transferable;
(ii) The option is exercisable immediately in full;
(iii) The option is not subject to any restriction or condition which
has a significant effect upon its value; and
(iv) The value of the option privilege is readily ascertainable.
For each Share Stock acquired by an Investor hereunder, the Company will
grant such Investor an option to purchase one-third of one share of Common Stock
(subject to certain adjustments) at a purchase price of $1,500 per share. Such
options will vest ratably over a five-year period commencing on the first
anniversary of the Employee Option Plan, will be nontransferable (except by will
or the laws of descent and distribution) and, during the life of the Investor,
may be exercised solely by the Investor. See "The Offering - Options - Employee
Option Plan." Once exercised, the shares of Common Stock acquired pursuant to
such exercise will become subject to the Stockholders' Agreement, including its
restrictions and repurchase rights vested in the Company. The options will not
be actively traded on an established market as of the date the Company grants
them.
The Company believes that, since the options are neither exercisable
immediately in full nor transferable (except at death), the value of options may
not be determined with reasonable
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accuracy. As the options should not have a readily ascertainable market value
within the meaning of Code Section 83, the Company believes that they should not
be compensation income to the optionee on the date of grant (notwithstanding
that their value may later become readily ascertainable). Further, since the
property acquired pursuant to the exercise of such options (i.e., shares of
Common Stock) will be subject to the Stockholders' Agreement, the Company
believes that an Investor exercising an option granted hereunder will acquire
property in which his rights are not substantially vested within the meaning of
Code Section 83. Accordingly, the Company believes that an Investor should not
have compensation income until the date that the restrictions on the Common
Stock acquired pursuant to such exercise lapse (i.e., at the occurrence of a
Lapse Event under the Stockholders' Agreement). At that time, the Investor
should recognize compensation income in an amount equal to the excess of the
market value of the stock as of such date over the price paid to exercise and
acquire the applicable option. Any Investor may, however, choose to accelerate
the recognition of income to the date he exercises an option provided he makes
the election under Code Section 83(b).
RISK FACTORS
Investors should consider the specifications set forth below as well as the
other information set forth in this Offering Memorandum. The following is not
necessarily a comprehensive list of all of the possible risk factors associated
with an investment in the Common Stock.
Limited Operating History
The Company's products are well-established in the marketplace, and the
Company has experienced net profits in three of its four full fiscal years of
operation. However, there can be no assurance that the Company will remain
profitable in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Short Lease Terms; Possible Inability to Re-lease Compressors
The Company has historically leased its compressors under leases with an
average fixed term of six months and which continue thereafter on a month to
month basis. Historically, lessees have renewed their leases on a month to month
basis for an average period of 24 months. Based on the average cost of new
compressors and the average lease price, the Company generally does not recoup
its investment in the compressors until after its receipt of at least 48 months
of lease payments. Accordingly, the Company assumes substantial risk of not
recovering its entire investment in the equipment it purchases. Although the
Company has historically been successful in re-leasing units in its inventory,
there can be no assurance that the Company will continue to be able to do so or
that a substantial portion of its lessees will not terminate their leases at
approximately the same time, thereby causing an adverse accumulation of unleased
compressors in the Company's inventory. The inability of the Company to lease a
substantial portion of its compressors for any reason would have a material
adverse effect upon the Company's financial condition and its results of
operations. See "Business."
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Competition
The natural gas compression industry and the oil and gas production
equipment business are highly competitive. The Company competes with several
large national and international companies which, like the Company, offer a wide
range of compressors and production equipment for purchase or lease. There can
be no assurance that such competitors will not substantially increase the
resources devoted to the development and marketing of products competitive with
those of the Company or that new competitors will not enter the industry. See
"Business - Competition."
Natural Gas Compressor Industry Considerations
The Company's profitability is, in part, dependent upon the current demand
for natural gas. Natural gas demand, aided by competitive pricing and interstate
pipeline deregulation, has increased at a rate of approximately 2% per year from
1986 through 1994. The Company's management estimates that demand for Gas
compression has increased approximately 10% per year during this time frame.
This increase is a result of increased production from lower reservoir-pressured
areas and the increased amount of coal-seam and tight-gas drilling in certain
geographic areas.
Depressed natural gas prices tend to decrease efforts to discover and
develop new natural gas reserves domestically. This places greater reliance upon
older, developed reserves which requires additional compression to deliver the
remaining natural gas to market. A significant decline in the price of natural
gas could result in the widespread failure of independent producers and
increased pricing pressure for compressor rental companies. This would have a
material adverse effect on the Company's financial condition and results of
operations. See "Business."
Potential Liability and Insurance
Natural gas operations are subject to certain risks, including explosions,
uncontrollable flows of gas or well fluids, fires, pollution and other
environmental risks. These risks could expose the Company to substantial
liability for injury and loss of life, property damage, pollution and other
environmental damages, and consequential damages, if such damages resulted from
an alleged compressor defect or from the Company's negligence in maintaining,
servicing or refurbishing its compressors. Although the Company has obtained
certain insurance, no assurance can be given that such insurance is adequate to
cover the Company's operations, will be generally available in the future or, if
available, that premiums will be commercially justifiable. If the Company were
to incur a substantial liability and such damages were not covered by insurance
or were in excess of policy limits, or if the Company were to incur such
liability at a time when it is no longer able to obtain liability insurance, its
financial condition could be materially adversely affected. The Company,
consistent with industry trends, may find it difficult to obtain adequate
insurance coverage against possible liabilities that may be incurred in
connection with the conduct of its business. There can be no assurance that all
possible types of liabilities that may be incurred by the Company will be
covered by its insurance or that the dollar amount of such liabilities will not
exceed the Company's policy limits. A partially or
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completely uninsured claim, if successful and of sufficient magnitude, could
have a material adverse effect on the Company and its financial condition.
Environmental Liability Risks
In addition to liability which may arise as a result of an alleged
compressor defect or alleged Company negligence, if environmental damage is
found to have occurred as a result of the Company's operating activities, the
Company could incur substantial liability. In such event, the Company could be
liable for all costs of remediation, as well as certain other costs. Under the
Comprehensive Response, Compensation and Liability Act ("CERCLA"), the Company
may also be liable for all costs of remediation of any property of which it is
deemed to be the owner or operator. Various Preliminary Environmental (Phase I)
Site Assessments were conducted in 1990 and 1991 with respect to certain
properties owned or operated by the Company and its subsidiaries. Such
assessments identified potential sources of ground contamination. Although
remediation efforts have been undertaken by the previous owners, no assurances
can be given that such remediation efforts will be successful or that the
Company will not incur costs in remediating such contamination or discover
additional sources of enumerated contamination. In addition, pursuant to the HPC
Merger (as defined below), the Company acquired certain potential environmental
liabilities estimated at December 31, 1992 to be between $139,000 and $200,000.
See "Business - Company History" for a description of the HPC Merger.
In June 1993, a Phase I and Phase II Environmental Assessment was conducted
on the Company's 20 acre headquarters/fabrication facility in Houston, which
Assessment indicated that such site has minimal apparent risk with respect to
environmental liability. In addition, the company maintains a professionally
designed Spill Prevention Control and Countermeasure Plan (the "SPCC Plan") with
respect to its Fort Smith, Arkansas maintenance facility, which is designed to
prevent oil spills and waste releases and to describe protocols for immediate
coordination of necessary activities to minimize any harmful effects should a
spill or other release occur. Although the Fort Smith facility does not
routinely generate hazardous waste, the SPCC Plan includes waste release
measures given that during an oil spill event, certain characteristic hazardous
waste from spill residue may be generated. Moreover, the Company is currently
implementing a Site Remediation and Clean Up Proposal regarding real property
located in Columbus, Texas with respect to which the Company acquired a lease
and purchase option pursuant to the February 1995 acquisition by the Company of
substantially all of the assets of Smith Industries, Incorporated. See "Business
- - Company History."
Governmental Regulation
The Company is subject to various federal, state and local laws and
regulatory standards in the areas of safety, health and the environment,
including regulations regarding emission controls. The Company believes that it
is in substantial compliance with such laws and regulations and that the phasing
in of emission controls and other known standards at the rate currently
contemplated by such laws and regulations will not have a material adverse
effect on the Company's financial condition or results of operations. However,
various state and federal agencies from time to time consider adopting new laws
and regulations or amending existing
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laws and regulations regarding environmental protection. While the Company may
be able to pass on the additional costs of complying with such laws, there can
be no assurances that attempts to do so would be successful. Accordingly, new
laws or regulations or amendments to existing laws or regulations could require
the Company to undertake significant capital expenditures and could otherwise
have a material adverse effect on the Company's financial condition and results
of operations.
Restrictions Imposed by the Terms of the Company's Indebtedness; Effect of
Default
The terms of the Company's existing credit agreement dated June 29, 1993,
as amended (the "Credit Agreement") among the Company, Chemical Bank, as agent,
and the other banks party thereto impose a variety of restrictions on the
Company's operations, including, without limitation, limiting the Company's
ability to incur additional indebtedness, grant or suffer liens or other
encumbrances on its property, make investments, loans or advances except under
certain enumerated circumstances, make capital expenditures above specified
levels, enter into sale/leaseback arrangements as a seller/lessee, dispose of
its assets or extend guarantees. Such restrictions may limit the Company's
ability to exploit fully certain business opportunities. In addition, under the
terms of the Credit Agreement, the Company may not declare or pay any dividend
or make any payment for the purchase, redemption or acquisition of any shares of
Common Stock other dun repurchases of Common Stock from employees of the Company
which do not exceed an aggregate of $1,500,000. In addition. the failure of the
Company to maintain certain financial ratios may cause the Company to be in
default under the agreements governing its indebtedness and such default, if
uncured, may ultimately entitle its creditors to foreclose on all of the assets
of the Company. See "Description of Certain Indebtedness."
Dependence on Internally Generated Funds; Capital Needs
The compressor leasing business and the oil and gas production equipment
business in which the Company is involved are capital intensive businesses, and
the inability of the Company to continue to have access to sufficient capital
could have a material adverse effect on the Company's ability to finance
compressor purchases and production equipment materials purchases arid, thus,
maintain its future leasing revenues and profitability. Company growth has
historically been financed through (i) sales of Common Stock, including the sale
of approximately $15,000,000 of Common Stock to certain executive officers and
then existing stockholders of the Company in 1992 (the "1992 Offering"), the
sale of approximately $2,500,000 of Common Stock to certain members of the
Company's management in 1993 (the "1993 Offering"), the sale of approximately
$16,000,000 of Common Stock to GKH in 1993 and the sale of $275,000 of Common
Stock to certain employees of the Company in July 1995 (the "1995 Management
Offering"), (ii) internally generated funds and (iii) borrowings under the
Credit Agreement, which provides for a revolving credit facility with a
commitment of $35,000,000 and three term loans in the original principal amounts
of $15,000,000 (the "Original Term Loan"), $10,000,000 (the "B Tranche Loan")
and $4,000,000 (the "C Tranche Loan"), respectively. In addition, on June 6,
1995, the Company borrowed $12,000,000 (the "Subordinated Loan") from GKH and an
affiliate of certain existing stockholders of the Company pursuant to the terms
of a Subordinated Loan Agreement (the "Subordinated Loan
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Agreement"). The Subordinated Loan is, by its terms, subordinate and junior in
right of payment to the obligations of the Company under the Credit Agreement.
It is currently contemplated that at or about the time of this offering,
the Company will (i) issue new equity most likely in the form of (a) shares of
6.5% Cumulative Redeemable Series A Preferred Stock along with warrants to
purchase new shares of Common Stock and (b) shares of Common Stock and 6.5 %
Cumulative Redeemable Convertible Series B Preferred Stock to certain third-
party investors (the transactions described in (a) and (b) above, hereinafter
the "Additional Issuances") and (ii) enter into an agreement regarding a
$100,000,000 stand-by long term credit facility. See "Certain Contemplated
Transactions". However, the consummation of such transactions are not a
condition to the consummation of this offering and there can be no assurance
that any or all of such transactions will be consummated.
In addition, although the Company believes that it will have sufficient
capital resources based on internally generated funds, the amounts available
under the Credit Agreement and the Subordinated Loan, the proceeds of the
Additional Issuances and other proposed private placements of equity to fund its
anticipated capital needs for at least the next 5 years, there can be no
assurance that the Company will meet its projected earnings and that sufficient
cash flow will be generated. Failure to generate sufficient cash flow together
with the absence of alternative sources of capital could have a material adverse
effect on the financial condition, operations and expected growth of the
Company. See "Management's Discussion of and Analysis of Financial Condition and
Results of Operations."
Limited Preemptive Rights
Although Delaware law does not generally provide for preemptive rights, in
the event the Company offers any party to the Stockholders' Agreement the
opportunity to purchase additional shares of Common Stock, all other parties to
the Stockholders' Agreement will have the right to acquire their respective pro
rata share of such Common Stock on the same terms and conditions offered to such
other stockholder, except that such right shall not apply to (i) shares issuable
in connection with a merger, acquisition or similar transaction, (ii) shares
issuable upon the exercise of any options, warrants or other convertible
securities or (iii) shares offered by the Company to employees of the Company.
See "The Offering - Stockholders' Agreement - Preemptive Rights" and
"Description of Capital Stock."
Similarly, subject to these same exceptions, the parties to the 1993
Stockholders' Agreement and the 1995 Management Stockholders' Agreement (each as
defined below) would have the right to purchase a pro rata amount of Common
Stock if the Company were to offer any party to either respective Stockholders'
Agreement the right to purchase additional shares of Common Stock. In addition,
in the event the Company sells or otherwise issues any shares of Common Stock to
GKH, the non-GKH parties to the Gale Force Stockholders' Agreement (as defined
below) will have the right to acquire their respective pro rata amount of Common
Stock on the same terms and conditions as such Common Stock is sold or otherwise
issued to GKH. See "Principal Stockholders - Stockholders' Agreements - 1993
Stockholders' Agreement," "-- Gale Force Stockholders' Agreement;" and "- 1995
Management Stockholders' Agreement."
16
<PAGE>
No Public Market for Common Stock; Restriction on Transferability
Each subscribing offeree will be required to represent that he is
purchasing the Shares for investment purposes for his own account but not with a
view to resale or distribution. There is no public market for the Shares, and an
Investor's ability to transfer his Common Stock will be significantly restricted
by the terms of the Stockholders' Agreement. In addition, the Stockholders'
Agreement (i) gives GKH the right to cause all Investors to sell their Common
Stock in certain transactions and (ii) gives the Company or certain of its
affiliates the right, but not the obligation, to purchase all of the Common
Stock of an Investor upon the termination of such Investor's employment with the
Company. The purchase price for such stock varies depending on the circumstances
and, in cases where an Investor is terminated for Cause or voluntarily
terminates his employment without Good Reason, such purchase price may be
substantially below the fair market value of such Common Stock. See "The
Offering -Stockholders' Agreement." Any potential Investor must be able and
willing to bear the risk of his investment for an indefinite period.
Dividends
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
ability of the Company to pay dividends will be limited by the terms of the
Credit Agreement, the Subordinated Loan Agreement and the contemplated Stand-by
Credit Facility, Series B Preferred Stock Issuance and Series A Preferred Stock
Issuance. See "Description of Certain Indebtedness," and "Certain Contemplated
Transactions."
Control by Principal Stockholders
Prior to the consummation of this offering, approximately 79% of the
Company's outstanding Common Stock (not including shares issuable pursuant to
existing option programs) was owned by GKH. Subsequent to this offering, GKH
will continue to own a majority of the Common Stock of the Company. By
maintaining such majority ownership, GKH will continue to have the power to
determine the policies of the Company and its subsidiaries, the persons
constituting the directors and officers thereof (subject to the terms of (i) the
1993 Stockholders' Agreement, (ii) the Gale Force Stockholders' Agreement, (iii)
the Hanna Stockholders' Agreement, (iv) the HEHC Stockholders' Agreement, (v)
the 1995 Management Stockholders' Agreement and (vi) the Stockholders'
Agreement) and the outcome of various corporate actions requiring stockholder
approval (subject to the terms of the HEHC Stockholders' Agreement). See
"Principal Stockholders - Stockholders' Agreements" for a description of these
agreements.
Recent Expansion Activity
Through its acquisition of the production equipment business of Smith
Industries, Incorporated (the "Smith Business;" See "Business - Company
History"), the Company substantially expanded its oil and gas production
equipment fabrication operations. The Company is now in the process of
integrating the Smith Business into its current operations. Given the size of
this acquisition, there can be no assurance that the integration will be
successful
17
<PAGE>
or that additional capital will not be required to operate the Company's oil and
gas production equipment business. In addition, the Company has also made
certain other acquisitions, which management believes will enhance the Company's
competitive position in the natural gas compression industry, which is generally
experiencing a considerable amount of consolidation. See "Business - Company
History." However, there can be no assurance that such acquisitions will bring
the desired results.
Dilution
Assuming all of the Shares are issued, the value of the Shares purchased
pursuant to this offering will be subject to immediate dilution in the net
tangible book value of $455.55 per Share from the adjusted net tangible book
value as of March 31, 1995.
Federal Income Tax Risks
The following discussion summarizes certain federal income tax risks
associated with an investment in the Shares and the exercise of options acquired
therewith, and should be read in conjunction with "Federal Income Tax
Consequences." As the following does not purport to be a complete discussion of
all relevant tax issues, prospective investors should consult their own tax
advisors for advice regarding the impact of a subscription for Shares and
options upon their individual tax positions, including the application of state
and local income tax law, if any.
Treatment of Compensation Income; Receipt of Shares
No assurance can be given that the Internal Revenue Service ("IRS") will
consider the provisions of the Stockholders' Agreement to be sufficient to
render Shares subscribed for hereunder to be nontransferable and each Investor's
rights therein to be subject to a substantial risk of forfeiture within the
meaning of Code Section 83. Further, no assurance can be given that a court of
competent jurisdiction would agree with the conclusions of the Company. In the
event that the IRS considers the provisions of the Stockholders' Agreement to be
insufficient for such purpose, it will consider each Investor to have
compensation income (as of the date he acquires Shares) in an amount equal to
the difference between the fair market value of such Shares and the Investor's
purchase price. Each Investor may thus be required to pay federal income and
FICA tax on such income, plus interest and penalties as applicable. Further, the
Company may be required to pay federal unemployment and other taxes on the
compensation deemed to be transferred to each Investor, plus interest and
penalties as applicable, which tax may indirectly effect the value of each
Investor's Shares.
Treatment of Compensation income; Receipt of Options
No assurance can be given that the IRS (or any court) will agree that an
Investor acquiring Common Stock pursuant to the exercise of any option is
subject to a substantial risk of forfeiture with respect to such Stock and such
Stock is nontransferable under Section 83 of the Code. As such, an Investor
exercising options granted hereunder may realize compensation income at the date
he exercises an option in an amount equal to the difference between the fair
market value of the Common Stock on that date over the price paid to exercise
and acquire the
18
<PAGE>
applicable option. An Investor may thus be required to pay federal income and
FICA tax (and interest and penalties, as applicable) with respect to such
compensation income. Similarly, the Company may be required to pay federal
unemployment and other taxes (including penalties and interest) which payment
may indirectly effect the value of each Investor's Common Stock.
Election under Code Section 83(b)
Any Investor may make an election to include amounts in income on the date
he acquires shares of Common Stock (whether at subscription for Shares or upon
the exercise of any option granted hereunder). Electing Investors will thus not
recognize additional compensation income upon the occurrence of a Lapse Event
under the Stockholders' Agreement. However, since each electing Investor
accelerates the recognition of income from the time at which the Company
believes it would otherwise be first recognizable (i.e., the date of any Lapse
Event), each electing Investor must bear certain market risks associated with
the value of his Shares. If the value of an electing Investor's Shares does not
exceed the value of such Shares on the date that the Investor acquired them,
such electing Investor will have included amounts in income which would not have
otherwise have been includible had he not made the election under Code Section
83(b). Such electing Investor will not be entitled to deduct any amounts
attributable to that income acceleration.
Further, in the event that an electing Investor is required to sell Shares
of Common Stock back to the Company (e.g., pursuant to the exercise of the
Company's rights to repurchase such Shares in the Stockholders' Agreement), that
Investor will not be allowed any deduction for any portion of the basis in such
Shares that he acquired as a result of a Section 83(b) election.
CERTAIN CONTEMPLATED TRANSACTIONS
The following summary of the terms of certain contemplated transactions of
the Company is based on the anticipated terms thereof. The Company reserves the
right in its sole and absolute discretion without notice to or consent of any
Investor to accept changes to such anticipated terms, and to cancel any or all
of such transactions, without affecting this offering.
Enron Investment and Stand-by Credit Facility
On June 26, 1995, the Company entered into a non-binding letter of
understanding with Enron Capital & Trade Resources Corp., a Delaware corporation
("Enron"), with respect to (a) the investment by Enron (and/or its affiliates or
designees which are acceptable to the Company) (each an "Enron Entity") in newly
issued shares of Common Stock and Preferred Stock for an aggregate purchase
price of $30,000,000 and (b) the commitment by an Enron Entity to make available
to the Company a $100,000,000 stand-by long term credit facility (the "Stand-by
Credit Facility").
As currently contemplated, an Enron Entity will purchase $20,000,000 of
Common Stock at $1,800 per share and $ 10,000,000 of 6.5% Cumulative Redeemable
Convertible Series B Preferred Stock (the "Series B Preferred Stock") at $1,000
per share (the "Series B Preferred Stock Issuance"). Such Enron Entity would
hold its Common Stock and Series B Preferred Stock
19
<PAGE>
subject to the terms of a stockholders' agreement containing terms substantially
similar to those contained in the Stockholders' Agreement, except that (i) until
the earlier to occur of the Company having satisfied all of its obligations to
the Enron Entity under the Stand-by Credit Facility and a public offering of the
Common Stock, the Enron Entity would have the right with respect to certain
equity offerings of the Company (each a "Rights Offering") (a) to subscribe for
the first fifteen percent of such Rights Offering on an exclusive basis, (b)
subscribe for its pro rata share of the remaining equity under the Rights
Offering and (c) cause its duly licensed affiliate to underwrite all of such
rights offering in the event the Enron Entity and the Company can mutually agree
on the terms of such underwriting, (ii) so long as the Enron Entity owns 7.5 %
of the outstanding Common Stock (on a fully diluted basis) and generally does
not hold an equity interest in a competitor of the Company, the Enron Entity
would have certain rights regarding notice of and attendance at meetings of the
Board or would have the right to elect one member of the Board and (iii) the
right of inclusion of the Non-GKH stockholders parties thereto would be
triggered only in the event that GKH proposes to sell all of its Common Stock
and Preferred Stock. In addition, the agreement would terminate upon the earlier
of certain events, including the consummation of a publicly registered offering
of 20% or more of the Common Stock or August 1, 2005.
The 6.5 % per share per annum dividend on the Series B Preferred Stock
would be payable in additional shares of Series B Preferred Stock during the
initial three years after issuance, and in cash thereafter. The Series B
Preferred Stock would not be redeemable by the Company until (i) any "Redemption
Event" (e.g. sale of all of the Company's assets, a merger in which the Company
is not the surviving corporation or GKH not owning more than 50% of the
outstanding Common Stock) or (ii) the third anniversary of the initial issuance
thereof, and thereafter would be redeemable at a price which is based on the
initial purchase price and which would vary based on when such redemption
occurred. The Enron Entity would upon the occurrence of a Redemption Event have
the right to require the Company to redeem all or any portion of its Series B
Preferred Stock at $1,000 per share plus accrued but unpaid dividends thereon.
Following the third anniversary of the issuance of the Series B Preferred Stock
or upon a Redemption Event, the Enron Entity would be permitted to convert the
Series B Preferred Stock into shares of Common Stock at a conversion price equal
to the greater of (i) $2, 100 and (ii) the product of (A) 6.4 and (B) a per
share calculation of the Company's earnings before interest, taxes, depreciation
and amortization for a given period, less the Company's consolidated long term
debt and liquidation preference of the Preferred Stock (without premium) at a
given time. The conversion price of the Series B Preferred Stock is also subject
to standard anti-dilution adjustments. In addition, the holders of the Series B
Preferred Stock would have special voting rights along with the holders of the
Series A Preferred Stock (as defined below) with respect to certain enumerated
transactions.
As presently contemplated, the Stand-by Credit Facility would permit long
term borrowings up to $100,000,000 in $10,000,000 minimum increments. It is
contemplated that absent default, up to $20,000,000 of the Stand-by Credit
Facility would be available to the Company for working capital purposes without
satisfaction of any financial tests and up to $80,000,000 would be available for
general corporate purposes, including acquisitions, but subject to satisfaction
of certain financial tests. The Standby Credit Facility would be secured
20
<PAGE>
pari passu with the Company's other Senior Lenders and is subject to a
- ---- -----
commitment fee ranging from 0.5% to 0.25% of undrawn amounts, as well as an
annual fee of $100,000.
Series A Preferred Stock Issuance
It is currently anticipated that the Company will issue (the "Series A
Preferred Stock Issuance") shares of 6.5 % Cumulative Redeemable Series A
Preferred Stock (the "Series A Preferred Stock") in an aggregate amount which is
yet unspecified at $1,000 per share. Dividends on the Series A Preferred Stock
will be payable in additional shares of Series A Preferred Stock during the
initial three years after issuance, and in cash thereafter. The Series A
Preferred Stock would be redeemable by the Company and the holders thereof on
the same terms on which the Series B Preferred Stock may be redeemed. Each share
of Series A Preferred Stock will carry with it a detachable warrant to purchase
0. 1667 shares of Common Stock at $1.00 per share, which warrants will vest 20%
at the time of issuance and, thereafter, incrementally on a monthly basis over
the subsequent three years. Upon exercise of the warrants the holders of the
Common Stock underlying the warrants would have so-called "piggy-back"
registration rights with respect thereto. In addition, the holders of the Series
A Preferred Stock would have special voting rights along with the holders of the
Series B Preferred Stock with respect to certain enumerated transactions, and it
is currently anticipated that all holders of the Series A Preferred Stock will
be required to enter into the Stockholders' Agreement. See "Offering -
Stockholders' Agreement."
DETERMINATION OF OFFERING PRICE
The offering price of $1,500 per Share was determined solely by the Board
based on a number of factors, including the date of the Company's hiring of the
offerees and a comparison of the Company's 1994 and projected 1995 financial
performance to the financial performance and corresponding per share market
multiples of a select group of public companies involved in the natural gas
compressor leasing and fabrication and energy services industries. By virtue of
the nature of this offering, the offering price was not determined pursuant to
arm's length negotiations with a third party, and there can be no assurance that
such price is indicative of the fair market value of the Shares.
PLAN OF OFFERING
The minimum purchase per subscribing offeree is one Share (excluding Shares
to be acquired by delivery of a Four Year Note) for a minimum aggregate purchase
price of $1,500. The minimum aggregate purchase for all Investors is two hundred
Shares (excluding Shares to be purchased by delivery of a Four Year Note) for a
minimum aggregate purchase price of $300,000. The Company reserves the right (i)
to reject any subscription for any reason and (ii) to make non-material
modifications to or terminate this offering at any time for any reason.
Each offeree who desires to subscribe for Shares must (i) on or before
Tuesday, August 8, 1995, call Curtis Bedrich (at 713-447-8787) to communicate
the number of Cash Shares and Loan Shares for which such offeree desires to
subscribe and (ii) on or prior to Friday, August 11, 1995, execute and return to
the Company, c/o Curtis Bedrich, (a) one copy and one extra signature page of
the Subscription Agreement included herewith (including Schedule A attached
21
<PAGE>
thereto), and (b) one copy and one extra signature page of the Stockholders'
Agreement included herewith (including the spousal consent, if applicable).
Upon oral confirmation of the number and type of Shares subscribed for by a
subscribing offeree, the Company will prepare and distribute for execution to
such subscribing offeree (i) one execution copy of each of the Loan Agreement
and Four Year Note, if applicable, (ii) two copies of the Pledge Agreement, if
applicable, (iii) two copies of the Employee Option Agreement, (iv) an
assignment separate from certificate, if the subscribing offeree has requested a
Four Year Loan and (v) an IRS Form W-9. In addition to the Subscription
Agreement and the Stockholders' Agreement previously delivered, each subscribing
offeree must then, prior to Friday, August 25, 1995, return to the Company, c/o
Curtis Bedrich, to the extent applicable, (i) the executed Loan Agreement and
Four Year Note, (ii) two executed counterparts of the Pledge Agreement, (iii)
two executed counterparts of the Employee Option Agreement, (iv) the assignment
separate from certificate, executed in blank, (v) the fully completed and
executed Form W-9 and (vi) if applicable, a check in an amount equal to the
product of (a) the number of Cash Shares subscribed for and (b) $1,500.
The foregoing deadlines are summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Event Deadline
- ----- --------
- ----------------------------------------------------------------------------------------------------
<S> <C>
Orally contact Curtis Bedrich (at 713-447-8787) to Tuesday, August 8, 1995
indicate the number of shares you wish to subscribe for
- ----------------------------------------------------------------------------------------------------
Deliver one executed copy and one extra executed Friday, August 11, 1995
counterpart of (i) the Subscription Agreement
(including Schedule A attached thereto and, if
applicable, the spousal consent) and (ii) the
Stockholders 9 Agreement (including the spousal
consent, if applicable)
- ----------------------------------------------------------------------------------------------------
Deliver, as applicable, (i) one copy of each of the Loan Friday, August 25, 1995
Agreement and Four Year Note, (ii) one executed copy NOTE: These documents will be
and one extra executed counterpart of the Pledge delivered to you Monday, August 14
Agreement, (iii) one executed copy and one extra if you orally contact Curtis
executed counterpart of the Employee Option Agreement, Bedrich with your subscription by
(iv) an assignment separate from certificate executed Tuesday, August 8.
in blank, (v) an IRS Form W-9 and (vi) a check in the
proper amount
- ----------------------------------------------------------------------------------------------------
</TABLE>
All Funds shall be promptly deposited in an interest bearing, segregated
account and such Funds may be invested in treasury bills or other cash
equivalents, as determined in the sole and absolute discretion of the Company.
If acceptable subscriptions for a minimum of an aggregate of two hundred Shares
are received by the Company on or before August 11, 1995, or such later time as
determined in the sole and absolute discretion of the Company without notice to
or consent of the offerees, but in no event later than the Termination Date, all
Funds will be transferred from the segregated bank account to the Company,
together with all interest, if any, earned thereon. In the event such condition
has not been satisfied on or before the Termination
22
<PAGE>
Date or this offering is withdrawn by the Company, this offering will be
terminated and all Funds will be returned to the subscribing offerees with a pro
rata share of interest earned thereon, calculated on the basis of the amount of
Funds invested by each subscribing offeree and the length of time interest on
such Funds was earned.
USE OF PROCEEDS
Assuming all of the Shares are issued, the net proceeds of the offering,
estimated to be $2,975,000, will be used for general corporate purposes,
including working capital.
DILUTION
As of March 31, 1995, the Company had adjusted net tangible book value
(defined as total stockholders' equity less goodwill) of $54,206,805, or $644.45
per share of Common Stock (after giving effect to the 1995 Management Offering).
Adjusted net tangible book value per share of Common Stock is determined by
dividing the actual net tangible book value by the number of shares of its
Common Stock and treating all such Common Stock as having been issued for cash
which would have been outstanding as of March 31, 1995 (after giving effect to
the 1995 Management Offering). After giving effect to the sale of the Shares and
the application by the Company of the estimated net proceeds therefrom as
described in "Use of Proceeds" (and after giving effect to the 1995 Management
Offering), the pro forma net tangible book value of the Company as of March 31,
1995 would have been $57,206,805, or $664.32 per share of Common Stock. This
value represents an immediate increase in the adjusted net tangible book value
of $19.87 per share of Common Stock to the current shareholders and an immediate
dilution in net tangible book value of $835.68 per Share to purchasers of the
Shares. Dilution per share is determined by subtracting the pro forma adjusted
net tangible book value per share of Common Stock after the completion of this
offering from the per share price paid by purchasers of the Shares. The
following table (1) illustrates this per share dilution:
<TABLE>
<S> <C>
Price per share pursuant to this offering.................................... $1,500.00
Adjusted net tangible book value per share as of March 31, 1995
(after giving effect to the 1995 Management Offering)...................... $ 644.45
Increase in adjusted net tangible book value per share
attributable to the offering(2)............................................ $ 19.87
Pro forma adjusted net tangible book value per share after this offering..... $ 664.32
Dilution per share to purchasers of the Shares............................... $ 835.68
</TABLE>
(1) Assumes that all of the Shares are subscribed for and excludes shares of
Common Stock reserved for issuance pursuant to options which have
previously been granted to certain members of management. To the extent
such options are exercised, the value of Shares purchased by Investors may
be subject to further dilution. See "Capitalization," "The Offering - Stock
Options" and "Description of Capital Stock - Options."
23
<PAGE>
(2) Does not reduce stockholders' equity for the aggregate amount of all Four
Year Loans.
The following table sets forth as of March 31, 1995 (after giving effect to
the 1995 Management Offering; calculated on the same basis as the preceding
paragraph and rounded for purposes of this presentation) the number of shares of
Common Stock purchased from the Company, the value of the total consideration
received, the average price per share paid by the existing shareholders of the
Company and the price per share to be paid by Investors:
- -------------------------------------------------------------------------------
Avg. Price
Shares Purchased Total Consideration Per Share
---------------- ------------------- ----------
- ------------------------------------------------------------------
Number % Amount %
-------- ----- ----------- -----
- -------------------------------------------------------------------------------
Existing stockholders 84,113 97.7 $58,363,390 95.1 $ 693.87
- -------------------------------------------------------------------------------
Investors 2,000 2.3 $ 3,000,000 4.9 1,500.00
- -------------------------------------------------------------------------------
Total 86,113 100.0 $61,363,390 100.0 $ 712.59
===============================================================================
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of March 31, 1995 and as adjusted to reflect (i) the 1995 Management Offering
and (ii) the consummation of this offering (assuming all 2,000 Shares are
subscribed for) after the anticipated application of the estimated net proceeds
therefrom.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Actual As Adjusted for the
Offering
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current installments of long-term debt(1).............................. $ 3,125,000 $ 3,125,000
- -------------------------------------------------------------------------------------------------------------
Long-term debt, less current portions(1)............................... 59,522,647 59,522,647
- -------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
- -------------------------------------------------------------------------------------------------------------
Preferred Stock, $.01 par value, 100,000 shares authorized,
0 shares issued and outstanding................................... -- --
- -------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, 200,000 shares authorized,
83,956.19 issued and outstanding, 85,956.19 issued and
outstanding after the offering(2)................................. 84 86
- -------------------------------------------------------------------------------------------------------------
Additional paid-in capital............................................. 51,105,570 54,105,568
- -------------------------------------------------------------------------------------------------------------
Retained earnings...................................................... 5,367,843 5,367,843
- -------------------------------------------------------------------------------------------------------------
Less:
- -------------------------------------------------------------------------------------------------------------
Notes receivable from officers and employees for purchase
of Common Stock................................................... (2,277,985) (4,277,985)
- -------------------------------------------------------------------------------------------------------------
156.40 Treasury shares, at cost................................... (172,040) (172,040)
- -------------------------------------------------------------------------------------------------------------
Net stockholders' equity.......................................... 54,023,472 55,023,472
- -------------------------------------------------------------------------------------------------------------
Total capitalization....................................... 116,671,119 117,671,119
=============================================================================================================
</TABLE>
(1) See Note 4 of the Notes to the consolidated financial statements of the
Company.
24
<PAGE>
(2) Includes 156.40 treasury shares, but excludes (i) 42 shares of Common Stock
repurchased by the Company as of June 30, 1995 in connection with the
resignation of Cullen Spitzer from his position as a Vice President of the
Company, (ii) an aggregate of 5,245.33 shares of Common Stock subject to
options previously granted to executive officers and other members of
management of the Company pursuant to the 1992 Stock Plan, the 1993 Option
Plan, the Senior Executive Plan and the 1995 Management Option Plan (see
"Management - Options"), and all options to be granted to Investors
pursuant to the Employee Option Plan.
DIVIDEND POLICY
The Company has not paid dividends since its inception. The Company
currently intends to retain all earnings, if any, to fund the expansion of its
business and therefore does not anticipate paying any dividends on the Common
Stock in the foreseeable future. In addition, the ability of the Company to pay
dividends is limited by the terms of the Credit Agreement and the Subordinated
Loan Agreement, and may be further limited by the terms of the contemplated
Stand-by Credit Facility, Series B Preferred Stock Issuance and Series A
Preferred Stock Issuance.
SELECTED FINANCIAL INFORMATION
The selected financial data presented below for the years ended December
31, 1994 and 1993 is derived from the audited financial statements of the
Company. The selected financial data set forth below as of March 31, 1995 and
March 31, 1994 were derived from the Company's unaudited financial statements.
Interim results are not necessarily indicative of the results for the full year.
The data set forth herein should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Three Months Three Months
Year Ended Year Ended Ended Ended
December 31, December 31, March 31, 1995 March 31, 1994
Statement of Income Data 1994 1993 (unaudited) (unaudited)
- ------------------------ ---- ---- --------- ---------
- ------------------------------------------------------------------------------------------------------------
Revenues:
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leasing and Maintenance............... $32,024,912 $25,722,662 $10,082,116 $ 7,302,325
- ------------------------------------------------------------------------------------------------------------
Compressor Packaging.................. 16,201,887 14,034,275 6,047,896 1,256,348
- ------------------------------------------------------------------------------------------------------------
Production Equipment.................. 7,271,641 3,178,386 2,707,137 1,000,826
- ------------------------------------------------------------------------------------------------------------
Other................................. 581,526 411,298 72,569 26,311
- ------------------------------------------------------------------------------------------------------------
Total revenues..................... 56,079,966 43,346,621 18,909,718 9,585,810
- ------------------------------------------------------------------------------------------------------------
Costs and expenses:
- ------------------------------------------------------------------------------------------------------------
Leasing and Maintenance............... 11,007,891 9,739,248 3,633,852 2,592,651
- ------------------------------------------------------------------------------------------------------------
Compressor packaging.................. 13,732,736 12,130,915 4,861,195 1,282,072
- ------------------------------------------------------------------------------------------------------------
Production Equipment.................. 5,798,521 2,671,178 2,321,440 813,913
- ------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Selling, general and administrative 8,427,020 7,413,158 2,813,918 1,685,291
expenses..............................
- ------------------------------------------------------------------------------------------------------------
Depreciation and amortization......... 8,108,596 5,757,381 2,619,086 1,729,779
- ------------------------------------------------------------------------------------------------------------
Interest expense...................... 2,072,414 1,366,297 997,597 342,053
- ------------------------------------------------------------------------------------------------------------
Total costs and expenses........... 49,102,178 39,078,177 17,247,088 8,445,759
- ------------------------------------------------------------------------------------------------------------
Income before income taxes.............. 6,977,788 4,268,444 1,662,630 1,140,051
- ------------------------------------------------------------------------------------------------------------
Income tax expense...................... 2,590,000 1,597,000 616,627 444,240
- ------------------------------------------------------------------------------------------------------------
Net income.............................. $ 4,387,788 $ 2,671,444 $ 1,046,003 $ 695,811
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
March 31, 1995
Balance Sheet Data December 31, 1994 December 31, 1993 (unaudited)
- ------------------ ----------------- ----------------- ---------
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total current assets................... $ 21,484,358 $10,696,270 $ 29,294,767
- ------------------------------------------------------------------------------------------------------------
Net property, plant and equipment...... 88,391,054 61,722,508 105,724,104
- ------------------------------------------------------------------------------------------------------------
Other assets........................... 4,738,740 4,360,547 6,314,837
- ------------------------------------------------------------------------------------------------------------
114,614,152 76,779,325 141,333,708
- ------------------------------------------------------------------------------------------------------------
Total current liabilities.............. 20,489,078 9,734,146 20,516,518
- ------------------------------------------------------------------------------------------------------------
Long-Term debt and other liabilities... 42,792,233 20,100,126 66,885,385
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity................... 51,332,841 46,945,053 53,931,805
- ------------------------------------------------------------------------------------------------------------
$114,614,1522 $76,779,325 $141,333,708
- ------------------------------------------------------------------------------------------------------------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's primary operations consist of three business segments. The
principal segment consists of the leasing and maintenance of the Company's
natural gas compressor units ("Leasing and Maintenance"), and the other segments
consist of the design, engineering and fabrication of natural gas compressor
units ("Compressor Packaging") and the design, engineering and fabrication of
oil and gas production equipment ("Production Equipment"). See "Business -
Operations."
The Company commenced operations during the latter part of 1990 with the
acquisition of three regional compression leasing companies. In addition, a
compression leasing and fabricating operation was acquired in July, 1991. A
machine shop operation acquired by the Company in 1990, Precision Welding &
Machine, Inc., a Texas corporation ("PWMI"), was sold by the Company in November
1993. See "Business - Company History." The compression rental fleet has been
expanded significantly since the Company's inception, and amounted to 926 units
aggregating 258,979 horsepower at March 31, 1995. This growth has been funded by
a combination of internally generated cash flow, bank financing and additional
equity in the form of Common Stock sold to the Company's management group and
existing shareholders in 1992 and 1993, as well as the commencement of
Production Equipment activities in 1993. As
26
<PAGE>
discussed elsewhere herein, the operation of the Production Equipment segment
has been significantly enhanced by the Smith Acquisition. See "Business -
Company History."
Liquidity and Capital Resources
Earnings before depreciation and amortization and income taxes amounted to
$15.1 million during 1994. Other significant sources of funds during 1994 were
amounts available under the Credit Agreement. Significant uses of funds included
the repayment of debt under the Credit Agreement and net capital expenditures
aggregating $31.8 million during 1994.
The financing necessary to support the Company's historical operations has
principally been provided from borrowings under the Credit Agreement and sales
of Common Stock.
For a discussion of the Company's anticipated capital expenditures for the
next two years, see "Business - Business Strategy."
Historically, inflation has not had a significant impact on the operations
of the Company.
Results of Operations
Year ended December 31, 1994 compared to year ended December 31, 1993
Revenues
Revenues from Leasing and Maintenance increased by $6.3 million, or 25%,
from $25.7 million in 1993 to $32.0 million in 1994. This increase resulted
primarily from the addition of 168 compression units, aggregating 84,060
horsepower, to the compressor rental fleet. Monthly horsepower utilization of
94% to 96% during 1994 was consistently in excess of the industry average.
Revenues from Compressor Packaging increased by $2.2 million, or 13%, from
$14.0 million in 1993 to $16.2 million in 1994. This increase resulted from an
increase in the volume of Compressor Packaging during 1994 following the move in
August, 1993, to an expanded fabrication facility. Compressor Packaging
operations generated operating profit (earnings before depreciation and
amortization expense and interest expense) of $1,270,000 during 1994, as
compared to $814,000 during 1993.
Revenues from Production Equipment increased by $4.1 million, or 129%, from
$3.2 million in 1993 to $7.3 million in 1994. This increase resulted from an
increase in the volume of production equipment fabrication as well as 1994 being
the first full year for production equipment packaging, the operations of which
commenced in March, 1993. Production Equipment operations resulted in an
operating profit (earnings before depreciation and amortization expense and
interest expense) of $364,000 during 1994, as compared to an operating loss of
$130,000 during 1993.
27
<PAGE>
Expenses
Leasing and Maintenance expenses increased by $1.3 million, or 13%, from
$9.7 million in 1993 to $11.0 million in 1994. This increase resulted from
additions to the compressor rental fleet as reflected by a 25 % increase in
Leasing and Maintenance revenue.
Costs and expenses of Compressor Packaging increased by $1.6 million, or 13
%, from $12. 1 million in 1993 to $13.7 million in 1994. This increase is
attributable to the increase in Compressor Packaging operations.
Costs and expenses of Production Equipment increased by $3. 1 million, or
117 %, from $2.7 million in 1993 to $5.8 million in 1994. This increase resulted
from an increase in the volume of production equipment fabrication and the
inclusion of a full year of operations in 1994.
Selling, general and administrative expenses increased by $1.0 million, or
14% from $7.4 million in 1993 to $8.4 million in 1994. This increase resulted
from the expanded level of activity in each of the Company's business segments.
Depreciation and amortization increased $2.3 million, or 41%, from $5.8
million in 1993 to $8.1 million in 1994. This increase resulted from additions
to the rental fleet and other capital expenditures which aggregated $31.8
million during 1994.
Interest expense increased $700,000, or 56%, from $1.3 million in 1993 to
$2.0 million in 1994 as a result of borrowings under the Credit Agreement which
was utilized to finance additions to the compressor rental fleet.
The Company's effective income tax rate approximates the statutory income
tax rate during 1994 and 1993. Accordingly, the $1.0 million increase, or 62%,
from $1.6 million in 1993 to $2.6 million in 1994 results from a comparable 63 %
increase in income before income taxes from 1993 to 1994.
BUSINESS
Company History
The Company was incorporated in Delaware in October 1990 as a majority-
owned subsidiary of Hanover Energy Inc., a Texas corporation ("HEV). In November
and December 1990, the Company acquired all of the capital stock of Guerra
Engineering, Inc., a Texas corporation ("GEI"), Energy Recovery Systems, Inc., a
Texas corporation ("ERSI"), and PWMI, and substantially all of the assets of C&B
Compression Sales and Service, Inc., a Louisiana corporation ("C&B"), which
acquisitions were accounted for using the purchase method of accounting.
In May 1991, HEI was acquired by Hanover Energy Holding Corporation, a
Delaware corporation ("HEHC"), the principal stockholders of which were GKH.
28
<PAGE>
In July 1991, HEHC acquired all of the common stock of Maintech
Enterprises, Inc., a Texas corporation ("MEV), through a subsidiary created
solely for that purpose. Such subsidiary was subsequently merged into MEI, and
HEHC contributed the stock of MEI to the Company in April 1992 in connection
with the refinancing of the Company's then current senior credit facility. As a
result of the acquisition of MEL the Company acquired a 50 % interest in a joint
venture, the operations of which consisted of leasing natural gas compressor
units. The remaining interest in the joint venture was acquired by the Company
effective April 1. 1993 and the joint venture was liquidated shortly thereafter.
Effective December 31, 1992, HEI merged into HEHC, and as a result thereof,
the Company became a direct majority-owned subsidiary of HEHC. Also effective as
of December 31, 1992, GEI and ERSI merged into the Company and, as a result
thereof, the separate existence of GEI and ERSI ceased and all of their
respective assets and liabilities became vested in the Company.
On June 24, 1993, Hanover Pipeline Company, a Delaware corporation and a
wholly-owned subsidiary of HEHC ("HPC"), was merged with and into the Company
(the "HPC Merger"). Pursuant to the HPC Merger, the Company issued to HEHC 2,38
1. 11 shares of Common Stock. HPC's assets consisted of 16 natural gas
compressors. HPC had certain potential environmental liabilities estimated at
December 31, 1992 to be between $139,000 and $200,000; however, pursuant to the
merger agreement, HEHC agreed to indemnify the Company for any diminution in
value to the HPC common stock caused by the incurrence by HPC of any
environmental liability.
On October 7, 1993, the Company acquired all of the issued and outstanding
stock of Hanna Compressor Group, Inc., an Arkansas corporation ("Hanna
Compressor"), from Hanna Investment Group, an Arkansas general partnership
("HIG"), in exchange for 1,875 shares of Common Stock (the "Hanna Acquisition").
Hanna Compressor's assets consisted of (i) six natural gas compressor units,
(ii) a 4,000 foot combination division office and maintenance facility situated
on five acres of land in Pocola, Oklahoma and (iii) cash. In connection with the
Hanna Acquisition, the Company, HEHC, GKH and HIG entered into the Hanna
Stockholders' Agreement. See "Principal Stockholders - Stockholders' Agreements
- - Hanna Stockholders' Agreement." Effective as of February 9, 1994, Hanna
Compressor was merged into the Company and, as a result thereof, the separate
existence of Hanna Compressor ceased and all of its assets and liabilities
became vested in the Company.
On November 5, 1993, the Company sold all of the issued and outstanding
capital stock of PWMI to a corporation (the "PWMI Purchaser") controlled by two
former employees of PWMI (the "PWMI Employees") for a purchase price equal to
$500,000. The purchase price was. paid in the form of two secured promissory
notes, one in the principal amount of $475,000 and the other in the principal
amount of $25,000, each of which bear interest at 8% per annum. The $475,000
note has a ten year amortization, and is payable to the Company in equal monthly
installments of principal and interest beginning on December 1, 1993, with the
entire outstanding balance due and payable December 1, 1996. The PWMI Purchaser
has missed a number of payments under the promissory notes, and the Company and
the PWMI Purchaser are currently
29
<PAGE>
in the process of negotiating a new payment schedule under the notes. The
obligations of the PWMI Purchaser under the notes are guaranteed jointly and
severally by the PWMI Employees, which guarantee is secured by a pledge to the
Company of the PWMI capital stock, as well as a security interest in certain
assets of PWML.
On January 27, 1995, HEHC was merged with and into the Company (the "HEHC
Merger") and, as a result thereof, the separate existence of HEHC ceased and all
of its assets and liabilities became vested in the Company. Pursuant to the HEHC
Merger, the Company issued to the stockholders of HEHC in the aggregate 59,053.
11 shares of Common Stock, which was equal to the number of shares of Common
Stock owned by HEHC immediately prior to the HEHC Merger. In connection
therewith, the Company, GKH and the other stockholders of HEHC immediately prior
to the Merger entered into the HEHC Stockholders' Agreement. See "Principal
Stockholders - Stockholders' Agreements - HEHC Stockholders' Agreement" for a
discussion of the terms of the HEHC Stockholders' Agreement. In addition, each
former stockholder of HEHC agreed to indemnify the Company for (i) the breach or
inaccuracy of any representation or warranty made by HEHC or such stockholder
under the HEHC Merger Agreement and (ii) the breach or default of any agreement
by HEHC or such stockholder under the HEHC Merger Agreement, payable in shares
of Common Stock issued in the HEHC Merger.
Effective as of January 1, 1995, the Company acquired from CBC Compression,
an Oklahoma general partnership ("CBC"), 40 natural gas compressor units and
certain related equipment for a purchase price of $3,025,000 plus five percent
of rental amounts (exclusive of sales tax, freight and installation charges)
received by the Company under the related Master Gas Compression Agreement
described below. Pursuant to an agreement (the "Master Gas Compression
Agreement") with AnSon Company, a sister partnership of CBC ("AnSon"), the
Company agreed to lease the 40 compressors back to AnSon, along with at least 25
additional compressors, for an initial term of 24 months. The Master Gas
Compression Agreement is scheduled to continue for an additional 24-month period
beyond the initial 24-month period; however, the rental price during such period
has not been established. AnSon, CBC and the Company have also entered into a
48-month "most favored vendor" relationship whereby AnSon and CBC have agreed to
purchase or lease production equipment from the Company so long as the Company's
price is equal to or less than other bidders. Similarly, the Company has agreed
to retain trucking services from MB Oilfield Service (an affiliate of CBC and
AnSon) during such 48-month period so long as MB Oilfield Service's price is not
higher than other bidders for such services.
Effective as of February 1, 1995, the Company purchased from Gale Force
Compression Services, Inc. ("Gale Force") 107 natural gas compressors, certain
furniture, fixtures, equipment and other fixed assets, vehicles, the name "Gale
Force". and equipment leases for an aggregate purchase price of $9,782,800 plus
1, 150 shares of Common Stock (the "Gale Force Acquisition"). The compressors
are located primarily in Oklahoma and most are currently leased by the Company
pursuant to leases transferred in the sale. Concurrently with the Gale Force
Acquisition, the Company entered into a four year alliance agreement with Ward
Petroleum, an affiliate of Gale Force, for gas compression services to be
provided by the Company. In connection with the Gale Force Acquisition, the
Company, GKH and those persons who acquired
30
<PAGE>
Common Stock pursuant to the transaction entered into the Gale Force
Stockholders' Agreement. See "Principal Stockholders - Stockholders'
Agreements - Gale Force Stockholders' Agreement" for a discussion of the terms
of the Gale Force Stockholders' Agreement. Also in connection with this
transaction, the Company entered into an employment agreement with Alan D.
Lavenue, a Gale Force affiliate, for a two year term.
On February 24, 1995, the Company, through its wholly-owned subsidiary,
Hanover/Smith, Inc. ("Hanover/Smith"), acquired (the "Smith Acquisition")
substantially all of the operating assets of the oil and gas production
equipment division of Smith Industries, Incorporated, a Delaware corporation
("Smith"), which has been in the fabrication of oil and gas production equipment
industry since its inception in 1927. The assets acquired include real property
located in Corpus Christi, Texas, a lease and purchase option on real property
located in Columbus, Texas, manufacturing equipment used in the fabrication of
oil and gas production equipment, vehicles, inventory, the name "Smith
Industries" and Smith's logo. Smith filed for protection under the United States
Bankruptcy Code, 11 U. S. C. (S) 101 et seq., in May 1994, in the United States
-- ----
Bankruptcy Court for the Southern District of Texas, Houston Division, in a Case
styled In Re: Smith Industries, Incorporated, No. 94-43705-H3-11. The
Bankruptcy Court approved the necessary orders authorizing the acquisition. The
total acquisition price after various credits and adjustments was $2,595,714.
The oil and gas production equipment operations of Smith acquired by
Hanover/Smith have been consolidated with the existing oil and gas production
equipment fabricating operations of the Company and will operate as
Hanover/Smith.
Industry
Natural gas compressors generally do not suffer significant technological
obsolescence, so that the useful life of a compressor is based primarily on its
mechanical integrity. The useful life of a compressor may also be extended by
refurbishing or overhauling the compressor at regular intervals of approximately
five to six years. Refurbished or overhauled compressors may be leased at prices
substantially similar to new compressors.
The gas compressor industry services both independent producers and major
integrated natural gas producers, as well as pipeline, gas processing and
gathering and transmission companies, and is substantially dependent on the
natural gas industry. The Company believes that independent producers currently
account for a substantial portion of the natural gas industry. The Company also
believes that independent gas producers are now accounting for an increasing
portion of the natural gas produced in the United States relative to that
produced by major integrated energy producers and that independent producers are
more likely to lease compressors from third parties such as the Company as a
result of restraints on their ability to make the large capital expenditures
necessary to purchase compressors. In addition, many major gas producers are
directing their capital investments overseas and allowing their U.S. capital
base to decline, thus resulting in further increased demand for rental
compressors. Moreover, the market for contract compression services has been
expanding as gas producers and pipeline companies strive to lower operating
costs and improve efficiency by outsourcing their gas handling requirements.
31
<PAGE>
The Company believes that the market for natural gas compressors is driven
by a variety of factors, including, without limitation, (i) the demand for
natural gas, (ii) the age of particular gas wells, (iii) the relative price of
natural gas to the price of oil or other alternative energy sources and (iv) the
season. All other things being equal, the gas compression industry is generally
benefited by either an increase in gas prices, which generally results in the
development of new wells, fields and pipeline systems and a corresponding
increase in demand for compression, or, up to a point, by a decrease in natural
gas prices, which results in outsourcing by independent producers and an
increase in the need for leased compression. Increases in the age of natural gas
wells also has a positive impact on the gas compression industry since older
wells generally experience a decline in their reservoir pressure and require
compressors to increase their productivity. In contrast, a number of factors
would potentially have an adverse effect on the gas compressor industry. See
"Risk Factors - Natural Gas Compressor Industry Considerations."
Conversely, all other things being equal, a relative decrease in the price
of oil or other energy sources as compared to natural gas generally will have an
adverse effect on the natural gas compression industry since such circumstances
encourage energy users to switch from natural gas to alternative fuel sources
thereby decreasing demand for natural gas.
The Company believes that the natural gas compressor industry is also
affected by seasonality, with the highest demand for compression in winter
months when natural gas is in greater demand. As a result of such seasonality,
the Company generally experiences slightly decreased revenues for its Leasing
and Maintenance segment during the months of May through August.
In addition, the Company believes that as environmental considerations
become more important due to the Federal Clean Air Act and related legislative
and social considerations, natural gas, as a cleaner burning fuel than either
oil or coal, will make up a greater share of the domestic energy market.
However, there can be no assurance that such increased use of natural gas will
come to pass.
Market Position
Leasing and Maintenance
The Company believes that the market for the leasing of natural gas
compressors may be distinguished from the market for the sale of natural gas
compressors since the decision to lease a compressor is generally made prior to
a customer's entrance into the marketplace. Generally, lessees are customers who
anticipate only a short term need for the compressor which is substantially less
than the estimated useful life of the unit or customers who are unable to or
otherwise choose not to internally finance the purchase of such units.
The Company believes that the natural gas compressor leasing industry may
be divided into categories based on the compressor horsepower and that market
share of the participants in the industry may be determined based on either (i)
the number of units leased by such participants or (ii) the total horsepower
leased by such participants.
32
<PAGE>
The Company's compressor fleet as of March 31, 1995 was divided by
horsepower as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Category (by Horsepower) Units (% of Fleet) Total Horsepower (% of fleet)
- ------------------------ ------------------ -----------------------------
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0-44 86 (9%) 2,574 (1%)
- -------------------------------------------------------------------------------------------------
45-60 93 (10%) 5,272 (2%)
- -------------------------------------------------------------------------------------------------
61-100 177 (19%) 14,342 (6%)
- -------------------------------------------------------------------------------------------------
101-200 224 (24%) 31,557 (12%)
- -------------------------------------------------------------------------------------------------
201-500 183 (20%) 56,505 (22%)
- -------------------------------------------------------------------------------------------------
501-800 79 (9%) 51,322 (20%)
- -------------------------------------------------------------------------------------------------
801-1100 45 (5%) 43,247 (15%)
- -------------------------------------------------------------------------------------------------
1100+ 39 (4%) 54,161 (21%)
-- ----
- -------------------------------------------------------------------------------------------------
TOTAL 926 (100%) 258,979 (100%)
- -------------------------------------------------------------------------------------------------
</TABLE>
Based on industry statistics, the Company believes that the U.S. natural
gas compressor leasing industry is a highly fragmented business made up of in
excess of 50 companies aggregating approximately 2,200,000 horsepower. Based on
information available to the Company, the Company believes that it is the fourth
largest compressor leasing company in the U.S. based on total units and the
third largest compressor leasing company in the U.S. based on total operating
horsepower.
Compressor Packaging
The Compressor Packaging business, carried on primarily through MEI,
competes with other manufacturers of compressor units. The Compressor Packaging
business is dominated by a few major competitors, several of whom also compete
with the Company in the compressor leasing business. Although sufficient
information is not available to definitively estimate the Company's relative
position in the Compressor Packaging market, management believes that the
Company is the seventh largest Compressor Packaging company in the U.S. based on
estimated 1994 revenues of the Company's competitors in such business.
Production Equipment
The Production Equipment business is a highly fragmented business with
approximately five substantial competitors. The Company believes that, with the
Smith Acquisition, it is among the top five major competitors in the business.
Business Strategy
The Company's primary focus will be continued expansion of the compression
rental fleet. Anticipated levels of capital expenditures, from internally
generated cash flow and bank financing, relating to the rental fleet amount to
approximately $27 million during 1995 and $17 million during 1996. If the
Company is successful in raising the additional growth capital which it
anticipates during 1995, management estimates that capital expenditures related
to the rental
33
<PAGE>
fleet will amount to approximately $37 million and $36 million during 1995 and
1996, respectively. The rental fleet consisted of 926 units aggregating 258,979
horsepower at March 31, 1995. With the level of capital expenditures
contemplated, assuming the additional growth capital is raised, management
believes that the Company's rental fleet should grow to approximately 300,000
horsepower by year end 1995. In addition, the contribution of the Production
Equipment segment is expected to increase, both in terms of revenues and
operating income, in light of the Smith Acquisition. However, there can be no
assurances that the above projections will actually be met.
The Company does not anticipate making any significant expenditures for
product research and development inasmuch as the Company's Leasing and
Maintenance, Compressor Packaging and Production Equipment segments do not
generally require such expenditures.
Operations
The following tables show (i) the revenues and operating profit (loss) for
each of the years ended December 31, 1994 and December 31, 1993 and for the
periods ended March 31, 1995 and March 31, 1994 and (ii) the assets of the
Company for the years ended December 31, 1994 and December 31, 1993 and the
period ended March 31, 1995, in each case for each of the Leasing and
Maintenance segment, the Compressor Packaging segment, the Production Equipment
segment and the Company's other revenue sources:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Period Ended Period Ended
December 31, December 31, March 31, March 31,
1994 1993 1995 1994
---- ---- ---- ----
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
- -------------------------------------------------------------------------------------------------------------
Leasing and Maintenance $ 32,024,912 $ 25,722,662 $ 10,082,116 $ 7,302,325
- -------------------------------------------------------------------------------------------------------------
Compressor Packaging 16,201,887 14,034,275 6,047,896 1,256,348
- -------------------------------------------------------------------------------------------------------------
Production Equipment 7,271,641 3,178,386 2,707,137 1,000,826
- -------------------------------------------------------------------------------------------------------------
Other 581,526 411,298 72,569 26,311
- -------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 56,079,966 $ 43,346,621 $ 18,909,718 $ 9,585,810
- -------------------------------------------------------------------------------------------------------------
Operating profit (loss)(1):
- -------------------------------------------------------------------------------------------------------------
Leasing and Maintenance $ 17,070,138 $ 12,775,114 $ 5,412,878 $ 3,815,685
- -------------------------------------------------------------------------------------------------------------
Compressor Packaging 1,270,314 813,868 823,316 (179,635)
- -------------------------------------------------------------------------------------------------------------
Production Equipment 363,851 (130,492) (422,067) (1,018)
- -------------------------------------------------------------------------------------------------------------
Other (2) $ 17,113,798 $ 11,392,122 $ 5,279,313 $ 3,211,883
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined by subtracting expenses from revenues for each segment and
adding back the corresponding portion of depreciation and amortization
expense and interest expense.
(2) Consists primarily of corporate administrative expenses.
34
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Period Ended
December 31, 1994 December 31, 1993 March 31, 1995
----------------- ----------------- --------------
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
- -------------------------------------------------------------------------------------------------------------
Leasing and Maintenance $ 100,428,593 $ 70,807,541 $ 121,731,913
- -------------------------------------------------------------------------------------------------------------
Compressor Packaging 8,453,184 3,535,761 9,630,371
- -------------------------------------------------------------------------------------------------------------
Production Equipment 5,562,940 2,140,545 8,876,132
- -------------------------------------------------------------------------------------------------------------
Other 168,435 295,478 1,095,292
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 114,614,152 $ 76,779,325 $ 141,333,708
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Leasing and Maintenance
The Company provides natural gas compression equipment, on a rental basis,
primarily to natural gas production and transmission companies. These rental
units are utilized to compress natural gas when the reservoir pressure for a
natural gas field is less than the pressure for the natural gas pipeline
transporting the gas. The Company also provides maintenance of customer-owned
compressor units as well as compressor parts sales to third parties.
As of March 31, 1995, the Company's gas compressor fleet consisted of 926
units, ranging from 25 to 3,000 horsepower, of which 94% of available horsepower
and 92% of the available units were being utilized. Leases for the compressor
units provide for fixed monthly payments for an average term of approximately
six months and continue thereafter on a monthly basis. Based on the Company's
historical operations, the Company estimates that the terms of its leases have
extended for an average of approximately 24 months.
Although natural gas compressors generally do not suffer significant
technological obsolescence, they do require routine maintenance and periodic
refurbishing to prolong their useful life. In general, the Company anticipates
refurbishing its compressor units approximately every five to six years.
The Company's compressor leasing activities are located in Texas, Oklahoma,
Arkansas, Louisiana, New Mexico, Mississippi, Alabama, Kansas and offshore Gulf
of Mexico, and the Company is considering expansion into international markets.
In this regard, the Company presently leases a gas compressor to a company in
Trinidad pursuant to a 24-month lease which provides for payments of $7,800 per
month and two 12-month extension periods. In addition, the Company currently
owns four compressors under lease with Corpoven, S.A., the Venezuelan natural
gas company.
Compressor Packaging
The Company's Compressor Packaging segment, operated primarily through MEI,
designs, engineers and assembles compression units for sale to third parties as
well as for placement in its compressor fleet. In general, units to be sold to
third parties are assembled according to such customer's specifications and sold
on a turnkey basis. Components for such
35
<PAGE>
compressor units are acquired from third party suppliers. At March 31, 1995,
backlog of fabrication of compressor units amounted to $6.1 million.
Production Equipment
The Company designs and fabricates a broad range of oil and gas production
equipment designed to heat, separate, dehydrate and measure crude oil and
natural gas. The product line includes line heaters, oil and gas separators,
glycol dehydration units and skid mounted production packages designed for both
onshore and offshore production facilities. At March 31, 1995, backlog of
production equipment fabrication amounted to $3.6 million.
Customers
No amounts received from any individual customer equaled more than 10% of
the Company's consolidated revenues during 1993 or 1994.
Competition
Leasing and Maintenance
The natural gas compressor leasing business is highly competitive. Overall,
the Company experiences considerable competition from larger companies with
significantly greater financial resources and, on a regional basis, several
smaller companies compete directly with the Company. Based on information
available to the Company, the Company ranks among the top four companies
providing compressor units on a rental basis based on the number of units and
among the top three based on total available horsepower. See "- Market
Position."
The Company believes that it competes in the Leasing and Maintenance
segment on the basis of price, customer service, including the availability of
personnel in remote locations, flexibility in meeting customer needs and quality
and reliability of its compressors. Although the Company believes that it is
competitive in terms of price and quality, it also focuses on customer service
and flexibility in meeting customer needs.
Compressor Packaging
The Company believes that it competes in the Compressor Packaging segment
based on price and quality and that the Company is competitive in both areas.
Production Equipment
The Company believes that it competes in the Compressor Packaging segment
based on price and quality and that the Company is competitive in both areas.
Competition in the Production Equipment segment is also based on the ability to
service customers' needs. The Company believes that with the Smith Acquisition,
it is among the top five major competitors in the Production Equipment market.
Employees
36
<PAGE>
As of March 31, 1995, the Company employed approximately 398 people, of
which 15 were administrative, 18 were sales, 84 were Compressor Packaging, 110
were Production Equipment and 171 in field service locations. No employees are
represented by labor unions, and the Company believes that its relations with
its employees is satisfactory.
Insurance
Natural gas operations are subject to certain risks, including explosions,
uncontrollable flows of gas or well fluids, fires, pollution and other
environmental risks. These risks could expose the Company to substantial
liability for injury and loss of life, property damage, pollution and other
environmental damages, and consequential damages, if such damages resulted from
a compressor defect or from the Company's negligence in maintaining, servicing
or refurbishing its compressors.
The Company believes that is has obtained adequate insurance to cover such
risks; however, no' assurance can be given that such insurance will be adequate
to cover the Company's operations in the event the Company incurs liability in
excess of anticipated potential levels or that such insurance will be generally
available in the future or, if available, that premiums will be commercially
reasonable. See "Risk Factors - Potential Liability and Insurance."
Properties and Assets
As of March 31, 1995, the Company's rental fleet consisted of 926
compressor units, 6 of which are leased and the remainder of which are owned by
the Company, with a total of 258,979 horsepower and an average of 280
horsepower. The Company also owns those assets acquired in the Gale Force
Acquisition and the Smith Acquisition. See "Business - Company History."
The Company owns its corporate offices in Houston, Texas, which are housed
in a combination corporate office and compressor fabrication facility consisting
of approximately 190,000 square feet plant capacity located on twenty acres.
This facility is anticipated to provide the Company with sufficient space and
capacity for at least the next three years. The Company also owns (i) a 6,400
square foot combination office and maintenance shop located on two acres in
Oklahoma City, Oklahoma, (ii) a 4,000 foot combination division office and
maintenance facility situated on five acres of land in Pocola, Oklahoma, (iii)
its maintenance facilities in Midland, Texas and Fort Smith, Arkansas, (iv) real
property located in Corpus Christi, Texas and (v) a lease and purchase option
regarding the 212,000 square feet manufacturing facility located on 83 acres in
Columbus, Texas. In addition, the Company leases its maintenance facilities in
Victoria, Texas and Lafayette, Louisiana under ten-year leases.
Litigation
The Company is not a party to any litigation that, in the judgment of
management, would have a material adverse effect on the Company's operations or
financial condition if adversely determined.
37
<PAGE>
Governmental Regulation
The Company is subject to various federal and state laws and regulations
relating to environmental protection, including regulations regarding emission
controls - The Company believes that it is in substantial compliance with such
laws and regulations and that the phasing in of emission controls and other
known standards at the rate currently contemplated by such laws and regulations
will not have a material adverse effect on the Company's financial condition or
results of operations. However, various state and federal agencies from time to
time consider adopting new laws and regulations or amending existing laws and
regulations regarding environmental protection. While the Company may be able to
pass on the additional costs of complying with such laws, there can be no
assurance that attempts to do so would be successful. Accordingly, new laws or
regulations or amendments to existing laws or regulations could require the
Company to undertake significant capital expenditures and could otherwise have a
material adverse effect on the Company's financial condition and results of
operations.
From time to time since President Clinton took office, his administration
has proposed various taxes with respect to the energy industry, none of which
have been enacted and all of which have received significant scrutiny from
various industry lobbyists. At the present time, given the uncertainties
regarding the proposed taxes, including the uncertainties regarding the terms
which the proposed taxes might ultimately contain and the industries and persons
who may ultimately be subject to any such tax, it is not possible to determine
whether any such tax will have a material adverse effect on the Company.
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are set forth below.
Positions with the Company include positions with the Company's predecessors.
All directors hold office until the annual meeting of the stockholders following
their election or until their successors are duly elected and qualified.
Officers are appointed by and serve at the discretion of the Board.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Name Age Position
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael A. O'Connor 60 Chairman of the Board; Director
- --------------------------------------------------------------------------------------------------
Michael J. McGhan 40 President and Chief Executive Officer; Director
- --------------------------------------------------------------------------------------------------
Curtis Bedich 52 Chief Financial Officer and Treasurer
- --------------------------------------------------------------------------------------------------
William S. Goldberg 37 Executive Vice President; Director
- --------------------------------------------------------------------------------------------------
Charles D. Erwin 35 Vice President, Sales
- --------------------------------------------------------------------------------------------------
William C. Bryant 42 Vice President, Sales-Mid Continent
- --------------------------------------------------------------------------------------------------
Maxwell C. McDonald 47 Vice President, Sales-Southeast
- --------------------------------------------------------------------------------------------------
Luis Guerra 43 Vice President, Operations-South Texas
- --------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
Joe Bradford 36 Vice President, Operations-Western Division
- --------------------------------------------------------------------------------------------------
Richard S. Meller 37 Secretary
- --------------------------------------------------------------------------------------------------
Jeri Howell 42 Assistant Secretary
- --------------------------------------------------------------------------------------------------
Ted Collins, Jr. 56 Director
- --------------------------------------------------------------------------------------------------
Robert Wasielewski 30 Director
- --------------------------------------------------------------------------------------------------
Melvyn N. Klein 53 Director
- --------------------------------------------------------------------------------------------------
Alvin V. Shoemaker 56 Director
- --------------------------------------------------------------------------------------------------
James Hanna 61 Director
- --------------------------------------------------------------------------------------------------
Andrew Richards 33 Director
- --------------------------------------------------------------------------------------------------
Robert R. Furgason 59 Director
==================================================================================================
</TABLE>
Michael O'Connor has served as Chairman of the Board and a director of the
Company since January 1992. Prior thereto, Mr. O'Connor served as president of
Gas Compressors Inc. from 1965 through 1986 and was a private investor from
January 1, 1987 through January 1, 1992. Mr. O'Connor also serves as a director
of certain affiliates of the Company.
Michael J. McGhan has served as President and Chief Executive Officer of
the Company since October 1991 and served as Chief Operating Officer of the
Company from December 1990 through October 1991. Mr. McGhan has served as a
director of the Company since March, 1992. Prior thereto, Mr. McGhan was sales
manager of Energy Industries, Inc. ("Ell"). Mr. McGhan has been involved in the
gas compression industry for 16 years. Mr. McGhan also serves as a director of
other affiliates of the Company.
Curtis Bedrich has served as Chief Financial Officer and Treasurer of the
Company since November 1991. Mr. Bedrich served as Vice President of Adobe
Resources Corporation from 1980 until 1991. Mr. Bedrich has been involved in the
oil and gas industry for 17 years.
William S. Goldberg has served as Executive Vice President and director of
the Company since May 1991. Mr. Goldberg has been employed by GKH since 1988 and
has served as Managing Director of GKH since June 1990. Mr. Goldberg also serves
as a director of certain affiliates of the Company.
Charles D. Erwin has served as a Vice President of the Company since
October 1990 and served as a sales representative of Ell from 1985 until October
1990. Mr. Erwin has been involved in the gas compression industry for 10 years.
William C. Bryant has served as a Vice President of the Company since
October 1990 and served as a sales representative of EII from 1988 until October
1990. Mr. Bryant has been involved in the gas compression industry for 20 years.
39
<PAGE>
Maxwell C. McDonald has served as a Vice President of the Company since
December 1990 and served as President of C&B from 1985 until its acquisition by
the Company in 1990. Mr. McDonald has been involved in the gas compression
industry for 22 years.
Luis Guerra has served as a Vice President of the Company since December
1990. Prior thereto, Mr. Guerra was a principal stockholder and Vice President
of GEL Mr. Guerra has been involved in the gas compression industry for 20
years.
Joe Bradford has served as a Vice President of the Company since March 1993
and served as Operations Manager from January 1, 1991 until March 1993. Mr.
Bradford served as mechanic supervisor of HEI from 1987 until January 1991. Mr.
Bradford has been involved in the oil and gas industry for 20 years.
Richard S. Meller has served as Secretary of the Company since October
1991. Mr. Meller is a partner of the law firm of Neal Gerber & Eisenberg, which
provides legal services to the Company and GKH.
Jeri Howell has served as Assistant Secretary of the Company since May 15,
1995.
Ted Collins, Jr. has served as a director of the Company since April 1992.
Mr. Collins is the President of Collins & Ware Properties, Inc., a natural gas
producer. Mr. Collins has 35 years of experience in the oil and gas industry.
Robert Wasielewski has served as a director of the Company since May 15,
1995. Mr. Wasielewski has served as an Associate of GKH since October 1991.
Prior to that time, Mr. Wasielewski was a Vice President of Citicorp's leveraged
capital division. Mr. Wasielewski also serves as a director of certain
affiliates of the Company.
Melvyn N. Klein has served as a director of the Company since May 199 1.
Mr. Klein is the sole stockholder of a corporation which is a general partner of
GKH Partners, L.P. Mr. Klein has been an attorney and counselor-at-law since
1%8. Mr. Klein serves as a director of Bayou Steel Corporation, Itel
Corporation, Santa Fe Energy Resources, Inc., Savoy Pictures Entertainment, Inc.
and certain privately held companies. Mr. Klein is also a principal of Questor
Partners Fund, L.P.
Alvin V. Shoemaker has served as a director of the Company since May 1991
and has been a private investor since his retirement as chairman of the board of
The First Boston Corporation in January 1989.
James Hanna has served as a director of the Company since May 15, 1995. Mr.
Hanna is the President of Hanna Oil and Gas Company, and a director of the
Independent Petroleum Association of America and the Merchants National Bank of
Fort Smith, Arkansas. Mr. Hanna has 35 years of experience in the oil and gas
industry.
Andrew Richards has served as a director of the Company since May 15, 1995.
Mr. Richards is also a Vice President of William E. Simon & Sons, a private
investment company
40
<PAGE>
based in Morristown, New Jersey, where he oversees investments in the specialty
food, oil and gas, and maritime shipping industries. Prior to joining William E.
Simon & Sons, Mr. Richards was an Executive Staff Member of the Presidential
Task Force on Market Mechanisms, the Presidential commission appointed by Ronald
Reagan to investigate the 1987 Wall Street crash. Prior to that, Mr. Richards
was a financial analyst in corporate finance at PaineWebber, Inc., specializing
in initial public offerings.
Robert R. Furgason has served as a director of the Company since May 15.
1995. Mr. Furgason is the President of Texas A&M University - Corpus Christi,
and has held a series of faculty and administrative positions at various
universities. Mr. Furgason is the former President of the Accreditation Board
for Engineering and Technology Board of Directors, and also serves on a number
of other accreditation and policy boards.
Compensation of Directors
Non-employee directors of the Company generally do not receive any
compensation for serving on the Board but are entitled to reimbursement for
expenses incurred in connection with their attendance at Board meetings. The
foregoing notwithstanding, the Company has agreed to pay Mr. Furgason an annual
director's fee equal to $15,000, plus $2,500 per Board meeting attended in
person by Mr. Furgason, subject to an annual cap of $20,000.
Options
1992 Stock Plan
In April 1992, the Board adopted the Company's Stock Compensation Plan (the
"1992 Stock Plan"), which provides for the granting of options to executive
officers, directors, employees or advisors of the Company. The 1992 Stock Plan
permits the Board to issue options with respect to a maximum of 15 % of the
total shares of Common Stock outstanding, computed on a fully diluted basis and
including shares which are issuable under the 1992 Stock Plan, at the time of
the grant of an option. As of March 31, 1995, options with respect to 1,065
shares of Common Stock were outstanding, 670.5 of which were presently vested,
and the remainder of which will generally vest ratably over the next two years.
214.5 of such options are exercisable at $1.00 per share and 850.5 are
exercisable at $725 per share. Options granted under the 1992 Stock Plan are
nonstatutory options and are not classified as "incentive stock options" within
the meaning of Section 422 of the Code.
The exercise price for additional options which may be granted under the
1992 Stock Plan would be determined by a committee appointed by the Board (the
"Committee"), which Committee is currently comprised of the members of the
Board, and may be less than the fair market value of the Common Stock on the
date of grant. Other than the maximum number of shares available under the 1992
Stock Plan, there is no minimum or maximum number of shares that may be granted
to any person. Options granted under the 1992 Stock Plan generally expire within
a specified number of days of the termination of
41
<PAGE>
employment of an optionee who is an employee. Options granted under the 1992
Stock Plan fully vest and become exercisable for a specified number of days upon
the death or permanent disability of the optionee and are forfeited upon the
termination for cause of the optionee. In addition, options granted under the
1992 Stock Plan fully vest and become exercisable upon the occurrence of a
change in control accompanied by a constructive termination of employment of
such optionee, all as more fully described in the 1992 Stock Plan.
Options may not be transferred other than by will or the laws of descent
and distribution, and during the lifetime of an optionee may be exercised only
the optionee. The term of each option granted under the 1992 Stock Plan may not
exceed fifteen years from the date the option is granted. Options may become
exercisable in whole at grant or in installments over time, as determined by the
Committee. Under the terms of the 1992 Stock Plan, payment upon the exercise of
an option may be in cash, by delivery of shares of Common Stock with a fair
market value equal to the aggregate exercise price or, if the optionee's stock
option agreement so provides, by delivery of a promissory note with such terms
as the Committee may approve.
The acceleration of options in the event of a change of control could be
seen as an anti-takeover provision and may have the effect of discouraging a
proposal for merger or other efforts to purchase or sell control of the Company.
1993 Option Plan
In connection with the 1993 Offering, the Board adopted the 1993 Management
Stock Option Plan (the " 1993 Option Plan") pursuant to which members of the
Company's management who purchased Common Stock in the 1993 Offering were issued
options to purchase one-third of one share of Common Stock at a purchase price
of $725 per share (subject to adjustment for stock splits, stock dividends and
other similar events) for each share of Common Stock owned by such persons or
purchased by such persons in the 1993 Offering. Such options vest ratably over a
five year period which began on June 23, 1993 and are governed by the terms of
the 1993 Option Plan and individual option agreements (the " 1993 Option
Agreements"). As of March 31, 1995, options with respect to 1,514 shares of
Common Stock were outstanding, and options with respect to 302.80 were presently
vested. Other than with respect to the applicable exercise price and the actual
vesting and expiration dates, the 1993 Option Plan and the 1993 Option
Agreements are substantially the same as the Employee Option Plan and the
Employee Option Agreements, respectively.
Senior Executive Plan
In connection with the 1993 Offering, Messrs. O'Connor and McGhan were
granted options pursuant to the Company's Senior Executive Stock Option Plan
(the "Senior Executive Plan") to purchase up to 1,291.95 and 645.97 shares of
Common Stock, respectively, at an exercise price of $833.75 per share (subject
to adjustment for stock splits, stock dividends and similar events). Such
options vest ratably over a seven year period which began on June 29, 1993 and
will fully vest upon an optionee's death or permanent disability or upon the
occurrence of a Capital Event (as defined in the Senior Executive Plan)
resulting in a compounded annual return of 20% actually realized on the shares
of Common Stock purchased in the 1993 Offering. In
42
<PAGE>
addition, on May 15, 1995, Messrs. McGhan and Bedrich were granted 215.32 and
430.65 options, respectively, under the Senior Executive Plan. Such options have
the same terms as those issued to Messrs. O'Connor and McGhan in connection with
the 1993 Offering, except that such options will vest ratably over a seven year
period which began on May 15, 1995.
Options granted under the Senior Executive Plan generally expire within a
specified number of days of the termination of employment of an optionee, and
such options will be forfeited upon the termination for Cause of an optionee.
The term of each option may not exceed 10 years from the date the option is
granted. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee. Options granted under the Senior Executive Plan
are nonstatutory options and are not classified as "incentive stock options"
within the meaning of Section 422 of the Code.
Pursuant to the agreements executed in connection with the grant of options
under the Senior Executive Plan, each of Messrs. O'Connor, McGhan and Bedrich
agreed that he will not during the term of such agreement and for a period of
one year thereafter, (i) compete with any business of the Company and (ii)
without the Company's consent, disclose to persons outside the Company
confidential information concerning the Company.
1995 Management Option Plan
In connection with the 1995 Management Offering, the Board adopted the 1995
Management Stock Option Plan (the " 1995 Management Option Plan"), pursuant to
which members of the Company's management who purchased Common Stock in the 1995
Management Offering were issued options to purchase one-third of one share of
Common Stock at a purchase price of $1,100 per share (subject to adjustment for
stock splits, stock dividends and other similar events) for each share of Common
Stock purchased by such persons in the 1995 Management Offering. Such options
vest ratably over a five year period which began on July 7, 1995, and are
governed by the terms of the 1995 Management Option Plan and individual option
agreements (the "1995 Management Option Agreements"). As of the date of this
Offering Memorandum, options with respect to 83.33 shares of Common Stock were
outstanding, none of which were presently vested. Other than with respect to the
applicable exercise price and the actual vesting and expiration dates, the 1995
Management Option Plan and the 1995 Management Option Agreements are
substantially the same as the Employee Option Plan and the Employee Option
Agreements, respectively.
Incentive Option Plan
In connection with the 1993 Offering, the Board adopted the Company's
Incentive Option Plan (the "Incentive Option Plan"), participation in which is
open to members of management who participated in the 1993 Offering and who are
employed by the Company or any of its subsidiaries or affiliates at the time of
a Capital Event (as defined below) (each a "1993 Eligible Participant"). Given
that the options which may be issued under the Incentive Option Plan are based
on the actual return realized by the controlling stockholder, the Company plans
to replace the Incentive Option Plan with a another option plan which would
include the 1993 Eligible Participants. However, the Investors will not be
eligible to participate in the Incentive
43
<PAGE>
Option Plan, except to the extent of their pro rata participation, if any, in
the 1993 Offering. Nonetheless, a brief description of the Incentive Option Plan
follows.
Pursuant to the Incentive Option Plan as presently constituted, the Company
may grant 1993 Eligible Participants who are employees of the Company or any of
its subsidiaries or affiliates and who own shares of Common Stock at the time of
a Capital Event (as defined in the Incentive Option Plan) options to acquire a
specified percentage of the shares of outstanding Common Stock (determined on a
fully diluted basis) based on the actual return realized by the controlling
stockholder upon (i) the disposition (other than to affiliates) by GKH of at
least 50% of its Common Stock, (ii) the date all or substantially all of the
assets or property of the Company are sold, leased or otherwise transferred to
an unrelated third party, (iii) the effective date of a merger or consolidation
in which the Company, any of its subsidiaries or any affiliate of the Company is
not the surviving entity or the surviving entity is not controlled by GKH or
(iv) the dissolution or liquidation of the Company (the first occurrence of the
events set forth in items (i) through (iv) is referred to herein as the "Capital
Event").
The options granted under the Incentive Option Plan would be nonstatutory
options and the exercise price for such options would be $725 per share. The
options would vest fully upon the occurrence of the Capital Event. Each
participant in the Incentive Option Plan will receive a Mr rata share of the
total options actually issued pursuant to the Incentive Option Plan (the
"Incentive Option Plan Shares") determined by multiplying the Incentive Option
Plan Shares by a fraction, the numerator of which is equal to the lesser of (i)
the number of shares of Common Stock subscribed for by such 1993 Eligible
Participant pursuant to the 1993 Offering or (ii) the number of shares of Common
Stock owned by the 1993 Eligible Participant at the time of &.e Capital Event
and the denominator of which is equal to the total number of shares of Common
Stock subscribed for by all 1993 Eligible Participants pursuant to the 1993
Offering. 1993 Eligible Participants who cease to be employed by the Company for
any reason prior to a Capital Event or who cease to own shares of Common Stock
would not be eligible to participate in the Incentive Option Plan.
Options granted under the Incentive Option Plan generally would expire
within a specified number of days of the termination of employment of an
optionee. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee. The term of each option granted under the
Incentive Option Plan may not exceed 10 years from the date the option is,
granted.
Summary Compensation Table
The following table sets forth the total compensation that was awarded to,
earned by or paid to Michael J. McGhan (the chief executive officer of the
Company), and Michael O'Connor, Curtis Bedrich, Maxwell McDonald and Cullen
Spitzer (who resigned from his position as a Vice President of the Company as of
June 30, 1995) (the four other most highly paid executive officers) as a group
during the year ended December 31, 1994.
44
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================
Long Term
Compensation
Annual Compensation Awards All Other
Salary Bonus Option Grants Compensation(1)
------ ----- ------------- ---------------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CEO and four other most highly
compensation executive
officers $500,000 $361,650 -- $ 3,680
===================================================================================================================
</TABLE>
(1) Consisting of life insurance premiums.
Option Grants in Last Fiscal Year
No options were granted in the during the year ended December 31, 1994. The
Company has not, to date, granted any stock appreciation rights.
Fiscal Year End Option Values
Shown below is information with respect to unexercised options to purchase
Common Stock in effect in 1994, all of which were granted pursuant to the
existing option plans of the Company as described in this Offering Memorandum.
See "Management - Options." None of such options have been exercised.
<TABLE>
<CAPTION>
=========================================================================================================================
Number of Unexercised Options Value of Unexercised in the Money
December 31, 1994 Options at December 31, 1994 (1)
----------------- --------------------------------
Execisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CEO and four other most highly
compensatied executive officers 1,103.43 2,904.49 $ 585,315 $ 2,113,244
=========================================================================================================================
</TABLE>
Employment Contracts and Other Agreements
In connection with the Gale Force Acquisition, the Company entered into an
employment agreement with Alan D. Lavenue for a two year term.
Compensation Committee and Insider Participation
The Compensation Committee of the Board consists of Messrs. Goldberg,
Shoemaker, O'Connor and Furgason. All decisions with respect to compensation are
made by the Board after consideration of the advice of the Compensation
Committee. From time to time, Mr. McGhan will participate in the deliberations
regarding compensation of the other executive officers of the Company.
Certain Relationships and Related Transactions
GKH and certain other stockholders of the Company own substantially all of
the common stock of Combustion Control Corporation, a Delaware corporation
("Combustion"). ` Combustion is in the business of refurbishing existing natural
gas compressors to bring them into compliance with certain environmental
emissions regulations. On March 21, 1995, the Company
45
<PAGE>
borrowed $500,000 from Combustion in order to fund certain working capital
needs. The loan is evidenced by a demand promissory note of the Company payable
to the order of Combustion. In addition, it is presently contemplated that
Combustion will be merged into the Company.
Pursuant to the terms of the Subordinated Loan Agreement, the Company has
borrowed $12,000,000 on an unsecured basis from GKH and an affiliate of certain
existing stockholders of the Company. See "Description of Certain Indebtedness."
It is currently anticipated that certain existing stockholders of the
Company and/or affiliates of certain existing stockholders of the Company will
purchase shares of the Series A Preferred Stock. See "Certain Contemplated
Transactions - Series A Preferred Stock Issuance. "
Mr. Collins, one of the Company's directors and minority stockholders,
controls a corporation which owns a 50% interest in a joint venture to which the
Company leases compressors pursuant to a long-term lease which provides for
monthly payments of $89,900.
Mr. Hanna, one of the Company's directors and minority stockholders, is the
President of Hanna Oil and Gas Company, to which the Company leases compressors
pursuant to month-to-month leases which provide for aggregate monthly payments
of $29,600.
PRINCIPAL STOCKHOLDERS
Principal Stockholders
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of March 31, 1995 (i) by each
person who is known by the Company to own beneficially more than 5% of any class
of the outstanding Common Stock, (ii) by each director and the chief executive
officer and the four other most highly compensated executive officers of the
Company and (iii) by all of the Company's directors and executive officers as a
group.
46
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================
Percentage of Stock
Name of Person or Group Stock Beneficially Owned Beneficially Owned(1)
----------------------- ------------------------ ---------------------
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
GKH Investments, L.P.(2) 63,809.93 76.00%
- -----------------------------------------------------------------------------------------------------
Ted Collins, Jr. 855 1.02%
- -----------------------------------------------------------------------------------------------------
William S. Goldberg(3) - -
- -----------------------------------------------------------------------------------------------------
Robert Wasielewski - -
- -----------------------------------------------------------------------------------------------------
Melvyn N. Klein(4) - -
- -----------------------------------------------------------------------------------------------------
Michael J. McGhan 528.02 *
- -----------------------------------------------------------------------------------------------------
Michael A. O'Connor 1,843.16 2.20%
- -----------------------------------------------------------------------------------------------------
Alvin V. Shoemaker(5) 1,622.09 1.93%
- -----------------------------------------------------------------------------------------------------
Maxwell C. McDonald 754.94 *
- -----------------------------------------------------------------------------------------------------
Curtis Bedrich 439.87 *
- -----------------------------------------------------------------------------------------------------
Cullen Spitzer(6) - -
- -----------------------------------------------------------------------------------------------------
James Hanna 1,875 2.23%
- -----------------------------------------------------------------------------------------------------
Andrew Richards - -
- -----------------------------------------------------------------------------------------------------
Robert A. Furgason - -
- -----------------------------------------------------------------------------------------------------
All directors and officers as a 7,918.08 9.43%
Group(7)
=====================================================================================================
</TABLE>
________________________
* Represents less than I % of the outstanding Common Stock.
(1) There are presently 198.40 treasury shares issued, which shares were not
counted as outstanding in calculating the beneficial ownership percentages.
(2) Does not include 2,410.49 shares of Common Stock (2.879% of the outstanding
shares) owned by GKH Partners, L.P., a Delaware limited partnership, as
nominee for GKH Private Limited, a Singapore corporation. GKH Partners,
L.P. is the general partner of GKH Investments, L.P.
(3) Does not include 254. 11 shares of Common Stock (less than I % of the
outstanding shares) owned by Mr. Goldberg's wife, Nancy K. Goldberg, not
individually, but solely as trustee of the Nancy K. Goldberg Declaration of
Trust. Mr. Goldberg disclaims beneficial ownership of such shares.
(4) Mr. Klein, who is a director of the Company, is the sole stockholder of a
corporation which is a general partner of GKH Partners, L.P. Mr. Klein
disclaims beneficial
47
<PAGE>
ownership of all shares owned by GKH Partners, L.P. and GKH Investments,
L.P. and such shares are not included in the number of shares owned by Mr.
Klein or by all directors and officers as a group.
(5) Mr. Shoemaker disclaims beneficial ownership of shares owned indirectly by
his affiliates.
(6) Does not include 116.04 shares of Common Stock (less than I % of the
outstanding shares) owned by Mr. Spitzer as trustee of the Cullen Spitzer
Family Trust. Mr. Spitzer disclaims beneficial ownership of such shares.
Mr. Spitzer resigned from his position as a Vice President of the Company
as of June 30, 1995.
(7) Does not include shares owned by all directors and officers as a group or
their affiliates for which such directors and officers disclaim beneficial
ownership.
Stockholders' Agreements
With respect to the stockholders' agreements described below, the Company
currently anticipates that all such stockholders' agreements, other than the
1992 Stockholders' Agreement and the HEHC Stockholders' Agreement, will be
superseded as among the parties thereto by the Stockholders' Agreement. However,
there can be no assurance that each party to such stockholders' agreements will
become a party to the Stockholders' Agreement, and any such party not becoming a
party to the Stockholders' Agreement would remain a party to and be bound by the
terms of the stockholders's agreement to which they are presently a party.
1992 Stockholders' Agreement
In connection with the 1992 Offering, the persons participating therein,
the Company, HEI, GKH and certain other present and former stockholders of the
Company entered into that certain Stockholders' Agreement dated April 10, 1992
(the "1992 Stockholders' Agreement"). The 1992 Stockholders' Agreement restricts
the sale of Common Stock held by the parties thereto and provides for, among
other things, (i) the right of first refusal of the Company and the right of
second refusal of the other parties thereto with respect to any proposed
transfer of Common Stock (except transfers to affiliates) by a party thereto
other than GKH, (ii) the right of the parties thereto who own a majority of the
shares of Common Stock held by all parties thereto to compel the other parties
thereto to sell their Common Stock upon the sale by such majority of all of
their Common Stock and (iii) the right of each party thereto to participate in
the sale by one or more parties thereto of more than 50% of the outstanding
Common Stock held by all parties thereto. The 1992 Stockholders' Agreement does
not contain provisions regarding the ability of the Company to redeem all of a
stockholder's Common Stock upon the termination of his employment with the
Company.
Upon consummation of the 1993 Offering, the Company, HEHC, GKH and certain
persons who purchased Common Stock pursuant thereto entered into that certain
Stockholders' Agreement, dated as of June 29, 1993 (the "1993 Stockholders'
Agreement") which substantially superseded the 1992 Stockholders' Agreement as
among the Company and each
48
<PAGE>
person who executed the 1993 Stockholders' Agreement. However, the 1992
Stockholders' Agreement remains in full force and effect as among the parties
thereto which still own shares of Common Stock. See "- 1993 Stockholders'
Agreement."
1993 Stockholders' Agreement
In connection with the 1993 Offering, certain of the persons participating
therein, the Company, FIEFIC and GKH entered into the 1993 Stockholders'
Agreement. The terms of 1993 Stockholders' Agreement are substantially the same
as the Stockholders' Agreement, except that with respect to transfers of Common
Stock, there is a right of first refusal only in the Company. See "The Offering
- -Stockholders' Agreement."
Hanna Stockholders' Agreement
In connection with the Hanna Acquisition, the Company, GKH, HEHC and HIG
entered into that certain Supplemental Stockholders' Agreement dated as of
October 8, 1993 (the "Hanna Stockholders' Agreement"). The Hanna Stockholders'
Agreement restricts the sale of Common Stock held by the parties thereto and
provides for, among other things, (i) the right of first refusal of the Company
with respect to any proposed transfer of Common Stock (except transfers to
affiliates by HIG), (ii) the right of GKH to compel HIG to sell its Common Stock
upon the sale by GKH of all of its Common Stock and (iii) the right of HIG to
participate in the sale by GKH of more than fifty percent of the outstanding
Common Stock then owned by GKH. The Hanna Stockholders' Agreement would
terminate six months after 10% or more of the issued and outstanding Common
Stock is listed on a nationally recognized exchange or quoted on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ").
HEHC Stockholders' Agreement
In connection with the HEHC Merger, the Company, GKH and the other former
stockholders of HEFIC (the "FIEFIC Stockholders") entered into that certain
Supplemental Stockholders' Agreement dated as of January 27, 1995 (the "FIEFIC
Stockholders' Agreement"). The FIEFIC Stockholders' Agreement restricts the sale
of Common Stock held by the parties thereto (subject to certain exceptions for
dispositions pursuant to an effective registration statement under the
Securities Act or pursuant to any public distribution pursuant to Rule 144 of
the Securities Act, and except for dispositions of Common Stock by GKH to its
partners) and provides for, among other things, (i) the right of first refusal
of GKH with respect to any proposed transfer of Common Stock (except transfers
to affiliates) by an FIEFIC Stockholder, (ii) the right of GKH to compel the
HEHC Stockholders to sell their Common Stock upon the sale by GKH of all of its
Common Stock and (iii) the right of each FIEFIC Stockholder to participate in
the sale by GKH of any or all of its Common Stock. The HEHC Stockholders'
Agreement also contains provisions regarding the right of the FIEFIC
Stockholders to designate a maximum of two members of the Board (the "FIEFIC
Designees"), as well as a requirement that such FIEFIC Designees approve certain
transactions and acts engaged in by the Company. Each party to the FIEFIC
Stockholders' Agreement also agrees to notify the Board if it or any of its
affiliates engages in or makes an investment in any business or entity
competitive with the business then being conducted by the Company or any
subsidiary thereof. The HEFIC
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Stockholders' Agreement would terminate upon the consummation of a publicly
registered offering of twenty-five percent or more of the Common Stock. The
parties to the HEFIC Stockholders' Agreement are also parties to the Amended and
Restated Registration Rights Agreement. See "-Registration Rights Agreements."
Gale Force Stockholders' Agreement
In connection with the Gale Force Acquisition, the Company, GKH, and
certain persons who acquired Common Stock pursuant to the Gale Force Acquisition
(the "Gale Force Stockholders") entered into that certain Supplemental
Stockholders' Agreement, dated as of March 8, 1995 (the "Gale Force
Stockholders' Agreement"). The Gale Force Stockholders' Agreement restricts the
sale of Common Stock held by the parties thereto and provides for, among other
things, (i) the right of first refusal of the Company and the right of second
refusal of GKH with respect to any proposed transfer of Common Stock (except
transfers to affiliates) by a Gale Force Stockholder, (ii) the right of GKH to
compel the Gale Force Stockholders to sell their Common Stock upon the sale by
GKH of all of its Common Stock and (iii) the right of each Gale Force
Stockholder to participate in the sale by (a) GKH of more than fifty percent of
the outstanding Common Stock then owned by GKH or (b) by GKH and other
stockholders of the Company of more than fifty percent of the outstanding Common
Stock of the Company. The Gale Force Stockholders' Agreement also contains
provisions whereby the Gale Force Stockholders agree to vote their shares in
order to ensure the election to the Board of Messrs. O'Connor and McGhan and
such other individuals as nominated by GKH. In addition, in the event the
Company offers GKH the opportunity to purchase additional shares of Common
Stock, the Gale Force Stockholders will have the right to acquire their
respective pro rata share of such Common Stock on the same terms and conditions
offered to GKH. The Gale Force Stockholders' Agreement will terminate upon ten
percent or more of the Company's Common Stock being listed on a nationally
recognized exchange or quoted on the NASDAQ. The parties to the Gale Force
Stockholders' Agreement are also parties to the Amended and Restated
Registration Rights Agreement. See "- Registration Rights Agreements. "
1995 Management Offering Stockholders' Agreement
In connection with the 1995 Management Offering, the Company, GKH and those
persons who acquired stock pursuant to the 1995 Management Offering entered into
that certain Supplemental Stockholders' Agreement, dated as of July 7, 1995 (the
" 1995 Management Stockholders' Agreement"), the terms of which are
substantially the same as those of the Stockholders' Agreement. See "The
Offering - Stockholders' Agreement."
Brenda K. Phillips Stockholders' Agreement
In connection with the resignation of Brenda K. Phillips ("Phillips"), a
former employee and current stockholder of the Company, Phillips, the Company,
HEHC and GKH entered into that certain Supplemental Stockholders' Agreement,
dated November 19, 1993, the terms of which are similar to those of the Hanna
Stockholders' Agreement.
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Registration Rights Agreements
Of the registration rights agreements described below, only the Amended and
Restated Registration Rights Agreement is currently in effect. The Company
currently anticipates that the Amended and Restated Registration Rights
Agreement (as defined below) will be superseded by the Second Amended and
Restated Registration Rights Agreement. However, there can be no assurance that
each party to the Amended and Restated Registration Rights Agreement will become
a party to the Second Amended and Restated Registration Rights Agreement, and
any such party not becoming a party to the Second Amended and Restated
Registration Rights Agreement would remain a party to and be bound by the
Amended and Restated Registration Rights Agreement.
Amended and Restated Registration Rights Agreement
The Company, GKH and the other parties to the HEHC Stockholders' Agreement
and the Gale Force Stockholders' Agreement (GKH and such stockholders,
hereinafter "Holders") are party to that certain Amended and Restated
Registration Rights Agreement, dated as of March 8, 1995 (the "Amended and
Restated Registration Rights Agreement"). The Amended and Restated Registration
Rights Agreement generally provides that in the event the Company proposes to
register under the Securities Act shares of its capital stock or any other
securities, then upon the request of those Holders owning in the aggregate at
least 5 % of the Common Stock or derivatives thereof (the "Registrable
Securities") then held by all of the Holders, the Company must use its
reasonable best efforts to cause the Registrable Securities so requested by the
Holders to be included in the applicable registration statement. The Company is
generally not obligated to include a particular Holder's Registrable Securities
in more than one registration, and the Holders' right to have their Registrable
Securities so included is limited in the event and to the extent that the
managing underwriter(s) of the registration in question are of the opinion that
the inclusion of the number of Registrable Securities held by Holders requesting
inclusion in the applicable registration statement would materially interfere
with the underwriters' ability to effectuate the registration and sale of
securities proposed to be offered and sold pursuant to such registration
statement. The Company agrees to pay all registration expenses in connection
with registrations of Registrable Securities effected pursuant to the Amended
and Restated Registration Rights Agreement; however, all fees and expenses
relating to the distribution of such Registrable Securities are borne by the
Company and each Holder pro rata based on the number of Registrable Securities
--- ----
included in the registration for the account of the Company and each Holder.
Second Amended and Restated Registration Rights Agreement
The terms of the Second Amended and Restated Registration Rights Agreement
are substantially similar to those of the Amended and Restated Registration
Rights Agreement, with certain exceptions, including the following: (i) in the
event that the Company proposes to register any of its capital stock or other
securities under the Securities Act, Holders (GKH and the other stockholder
parties thereto) owning at least 2.5% of the outstanding Registrable Securities
are able to trigger the Company's obligation to cause the Registrable Securities
so requested to be
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included in the applicable registration statement, (ii) there is no restriction
on the Company's obligation to include Registrable Securities in more than one
registration and (iii) the Company, in connection with filing a registration
statement in accordance with the Agreement, would also have the obligation to
apply for listing and use its reasonable best efforts to list the Registrable
Securities being registered on any national exchange on which a class of the
Company's equity securities is listed, or if there is no class of Company equity
security so listed, then to use its reasonable best efforts to qualify such
Registrable Securities for inclusion on the NASDAQ.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summaries relate to (i) certain provisions of the Credit
Agreement and (ii) certain provisions of the Subordinated Loan Agreement. The
summary of the provisions relating to the Credit Agreement and the Subordinated
Loan Agreement do not purport to be complete and are qualified in their entirety
by reference to the relevant agreements (including all amendments) relating
thereto, copies of which are available for review at the principal offices of
the Company.
The Credit Agreement
Pursuant to the Credit Agreement the Company has borrowed $15,000,000 under
the Original Term Loan, of which $12,750,000 was outstanding as of March 31,
1995, and $10,000,000 and $4,000,000 under the B Tranche Loan and the C Tranche
Loan, respectively, all of which was outstanding as of March 31, 1995. The
Original Term Loan bears interest at a rate equal to LIBOR plus 1.25%, and the B
Tranche Loan bears interest at a rate equal to LIBOR plus 2.0%, and such Loans
mature (absent acceleration) on December 31, 1998 and March 31, 2001,
respectively. In addition to the Term Loans, the Credit Agreement provides for a
five year reducing commitment revolving credit facility (the "Revolver") which
provides for an initial maximum commitment of $35,000,000. Amounts outstanding
under the Revolver bear interest at a rate equal to LIBOR plus 1.0% and the
Revolver matures (absent acceleration) on December 31, 1999. As of March 31,
1995, $35,000,000 was outstanding under the Revolver.
The Credit Agreement contains certain restrictive covenants that impose
limitations (subject to certain exceptions) on the Company, including, among
others, limitations with respect to (i) maintaining certain ratios, including
ratios with respect to (a) consolidated indebtedness to consolidated
capitalization, (b) consolidated earnings before income tax, depreciation and
amortization to consolidated interest expense and (c) current assets to current
liabilities, (ii) incurring additional indebtedness, (iii) creating, incurring
assuming or suffering to exist any mortgage, pledge, lien or other encumbrance
or security interest, (iv) creating, incurring, assuming or suffering to exist
any guarantee or similar obligation, (v) effecting certain fundamental changes,
including any merger or sale of all or substantially all of the Company's
assets, (vi) selling any of the Company's assets except in the ordinary course
of business or as otherwise permitted, (vii) increasing lease expense in excess
of certain limits, (viii) declaring or paying dividends, (ix) making capital
expenditures in excess of certain prescribed limits, (x) making any advance,
loan or similar investment in any person, (xi) making optional payments or
prepayments or amending the terms of any indebtedness, (xii) entering into any
transaction with
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affiliates, (xiii) the sale and leaseback of any of the Company's real or
personal property, (xiv) change the Company's fiscal year and (xv) entering into
any agreement which prohibits the Company from creating liens or other
restrictions on its assets.
The Credit Agreement contains certain default provisions, including, among
others, (i) failure of the Company to pay any principal or interest thereunder
when due, (ii) breach by the Company or any of its subsidiaries or affiliates
which are parties to the Credit Agreement of any representation or warranty made
therein or in the other documents contemplated thereby, (iii) default by the
Company or any of its subsidiaries in the observance or performance of any
covenant or agreement contained therein or in the other documents contemplated
thereby, (iv) cessation of the security agreement and related documents executed
thereunder to be in full force and effect, (v) default by the Company or any of
its subsidiaries in the payment of any indebtedness or guarantee in excess of
$1,000,000, which default remains in effect for 30 days, or any other breach
under agreements with respect to such indebtedness or guarantees which causes
such indebtedness or guarantee to be accelerated, (vi) occurrence of certain
bankruptcy related events, (vii) occurrence of certain events related to ERISA
obligations, (viii) entering of one or more judgements or decrees against the
Company or any of its subsidiaries involving an aggregate liability of
$1,000,000 or more, (ix) the incurrence by the Company or any of its
subsidiaries of liability for remediation or environmental compliance (or
penalty with respect thereto) in excess of $1,000,000 and (x) the cessation of
GKH to own directly or indirectly 45 % of the issued and outstanding Common
Stock of the Company.
It is currently anticipated that the Company will use all or a portion of
the proceeds of the sale of shares of Series B Preferred Stock to the Enron
Entity and the sales of the shares of the Series A Preferred Stock to pay down
all or a portion of the term loans currently outstanding under the Credit
Agreement. In addition, it is anticipated that the Company will refinance its
obligations under the Revolver and enter into an expanded revolving facility.
However, there can be no assurance that such transactions will be consummated.
The Subordinated Loan Agreement
Pursuant to the terms of the Subordinated Loan Agreement, the Company has
borrowed $12,000,000 on an unsecured basis. all of which was drawn down as of
June 6, 1995. The Subordinated Loan bears interest at the Prime Rate plus 5 %,
matures (absent acceleration) on March 3 1. 2002 and is subject to mandatory
prepayment under certain specified circumstances.
The Subordinated Loan Agreement incorporates the restrictive covenants of
the Credit Agreement by reference and contains default provisions similar to
those in the Credit Agreement.
The Subordinated Loan Agreement, by its terms, provides that any payments
due to the subordinated lenders thereunder are subordinate and junior to the
rights of the lender under the Credit Agreement.
It is currently anticipated that all of the holders of the Subordinated
Loan will convert their debt securities into shares of Series A Preferred Stock.
There can, however, be no assurance that such conversion will take place.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of 200,000
shares of Common Stock and 100,000 shares of Preferred Stock, $.01 par value per
share ("Preferred Stock"). However, the Board has approved an amendment to the
Certificate of Incorporation of the Company, a copy of which is attached hereto
as Exhibit H (the "Certificate Amendment"). which would, among other things,
increase the number of authorized shares of Common Stock and Preferred Stock to
500,000 and 200,000, respectively, and permit the Board to fix the terms of the
Preferred Stock. Assuming that all Shares are subscribed for and that the equity
transactions with the Enron Entity close on or about the date that the sale of
the Shares is consummated, the Company anticipates that 97,067.30 shares of
Common Stock and 10,000 shares of Series B Preferred Stock will be issued and
outstanding (not including 198.40 treasury shares held by the Company) and an
additional 26,266.57 shares of Common Stock will be reserved for issuance
pursuant to options, exclusive of options which may be granted under the
Incentive Option Plan, and pursuant to conversion of the Series B Preferred
Stock.
The following summary description relating to the capital stock does not
purport to be complete. For a detailed description, reference is made to the
Certificate of Incorporation of the Company, as amended (the "Certificate"),
which is available at the Company for review.
Common Stock
As of March 31, 1995, there were 83,706.19 shares of Common Stock
outstanding held of record by 51 stockholders (not including 156.40 treasury
shares then held by the Company). 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 Preferred Stock
which may be issued, holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the Board out of legally available funds.
In the event of a liquidation, dissolution, sale or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and satisfaction of preferential rights and have no
rights to convert their Common Stock into any other securities. Holders of
Common Stock have no preemptive or subscription rights unless (i) they are a
party to the Gale Force Stockholders' Agreement, the 1993 Stockholders'
Agreement or the 1995 Management Stockholders' Agreement or (ii) they become a
party to the Stockholders' Agreement, and then only to the extent provided in
each such agreement. See "Principal Stockholders - Stockholders' Agreements" and
"The Offering - Stockholders' Agreement - Preemptive Rights." There are no
redemption or conversion rights with respect to any shares of Common Stock. The
outstanding shares of Common Stock are, and the Common Stock to be outstanding
upon completion of the offering will be, fully paid and nonassessable.
Preferred Stock
The Company currently has no shares of Preferred Stock outstanding. The
Board has the authority to cause the Company to issue without any further vote
or action by the stockholders, up to the authorized number of shares of
Preferred Stock in one or more series, to designate the number of shares
constituting any series, and to fix the rights, preferences, privileges and
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restrictions thereof, including dividend rights, conversion rights, voting
rights, rights and terms of redemption, redemption price or prices and
liquidation preferences of such series. The Company is currently contemplating
issuing shares of Preferred Stock at or about the time of this offering in
accordance with the Series B Preferred Stock Issuance and the Series A Preferred
Stock Issuance. See "Certain Contemplated Transactions."
Options
The Company currently has outstanding options to purchase 172.5 shares of
Common Stock at $1.00 per share. All such options were issued to certain
executive officers in connection with the 1992 Stock Plan. The options expire at
various times in 2007.
The Company currently has outstanding options to purchase 2,364.5 shares of
Common Stock at $725 per share. Of these options, 850.5 were issued to certain
executive officers in connection with the 1992 Stock Plan, and 1,514 were issued
to certain members of the Company's management in connection with the 1993
Option Plan. The options issued pursuant to the 1992 Stock Plan expire at
various times in 2007, and the options issued pursuant to the 1993 Option Plan
expire on June 29, 2003.
The Company currently has outstanding options to purchase 2,583-89 shares
of Common Stock at $833.75 per share. All such options were issued to certain
executive officers in connection with the Senior Executive Plan. 1,937.92 of
such options will expire June 29, 2003 and 645.97 of such options will expire
May 15, 2005.
The Company currently has outstanding options to purchase 83.33 shares of
Common Stock at $1,100 per share. All such options were granted under the 1995
Management Option Plan and will expire on July 7, 2005.
As long as the options remain unexercised and outstanding, the holders
thereof will have the opportunity to profit from an increase in the value of the
Common Stock, if any, without assuming the risk of ownership.
Special Provisions of the Certificate of Incorporation and Delaware Law
Limitation of Director Liability
Section 102(b)(7) of the Delaware General Corporation Law ("Section
102(b)") 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. The Company's Certificate
of Incorporation limits the liability of directors to the Company or its
stockholders (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by Section 102(b). Specifically,
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders (ii) for acts or omissions not in
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good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
or (iv) for any transaction from which the director derived an improper personal
benefit. The Certificate Amendment, if and when filed with the Secretary of
State of the State of Delaware, will provide for mandatory indemnification of
directors and officers of the Company and also would include a provision
regarding compromises or arrangements between the Company and its creditors.
Indemnification
To the maximum extent permitted by law, the Company's Certificate of
Incorporation and Bylaws provide for mandatory indemnification of directors and
permit indemnification of officers, employees and agents of the Company 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 the Company. In addition, the Company must advance or reimburse
directors, and may advance or reimburse officers, employees and agents for
expenses incurred by them in connection with indemnifiable claims.
ADDITIONAL INFORMATION
The Company intends to supply its stockholders on an annual basis with a
copy of its audited financial statements.
Each prospective investor and/or his purchaser or other representatives are
hereby granted access to, and are invited to review, all materials available to
the Company relating to this offering or anything set forth in this Offering
Memorandum.
The Company will answer all inquiries from prospective investors or their
representatives relating to the transactions contemplated hereunder and will
afford prospective investors and their representatives the opportunity to obtain
any additional information (to the extent that the Company possesses such
information or can acquire it without unreasonable effort or expense) necessary
to verify the accuracy of the information set forth in this Offering Memorandum.
Each prospective investor should use this opportunity to communicate
directly with his own legal counsel, accountants and other professional advisors
who can help the prospective investor evaluate the merits and risks of a
purchase of the Shares and the tax and legal aspects thereof.
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EXHIBIT 4.7
HANOVER COMPRESSOR COMPANY
1995 EMPLOYEE STOCK OFFERING
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT (this "Agreement") dated as of August 7, 1995,
between Hanover Compressor Company, a Delaware corporation (the "Company"), and
the individual named on the signature page hereof under the heading "PURCHASER"
("Purchaser").
W I T N E S S E T H:
WHEREAS, Purchaser desires to subscribe for and purchase from the Company,
and the Company desires to issue and to sell to Purchaser (i) for cash out of
Purchaser's own funds, the number of shares (the "Cash Shares") of common stock,
$.001 par value ("Common Stock"), of the Company set forth next to the heading
"Cash Shares" on Schedule A attached hereto, and (ii) out of the proceeds of a
four year loan (a "Four Year Loan") to be made to Purchaser by the Company in
accordance with the terms of a loan agreement (the "Loan Agreement") and a
secured promissory note (the "Four Year Note"), each substantially in the form
attached as Exhibits C and D to the Confidential Offering Memorandum (the
"Memorandum") dated August 2, 1995, previously delivered to Purchaser, the
number of shares (the "Four Year Loan Shares") set forth next to the heading
"Four Year Loan Shares" on Schedule A, in each case upon the terms and
conditions hereinafter set forth. The Four Year Loan Shares and the Cash Shares
are sometimes collectively referred to herein as the "Shares"; and
WHEREAS, this Agreement is one of several agreements ("Other Purchaser
Agreements") being entered into concurrently herewith by the Company and certain
members of the management of the Company in connection with the offering (the
"Offering") made pursuant to the Memorandum.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby acknowledge, agree and understand the
following:
1. Subscription. Subject only to the provisions of Sections 7 and 9
hereof, Purchaser hereby irrevocably subscribes for the Shares under terms and
conditions set forth herein. The purchase price (the "Purchase Price") for each
Share shall be $1,500. The parties agree that notwithstanding anything herein to
the contrary, the Company reserves the absolute right (i) to reject any
subscription for any reason and (ii) to terminate or modify the Offering at any
time for any reason.
2. The Closing. The closing of the purchase and sale of the Shares (the
"Closing") shall take place at the principal offices of the Company, 12001 North
Houston Rosslyn, Houston, Texas 77086 at 10:00 a.m., Houston time on August 25,
1995, or (i) at such later date or time as the Company in its sole discretion
may determine without the consent of or notice to Purchaser,
<PAGE>
but in no event later than August 30, 1995 (the "Termination Date"), and (ii) at
such other place as shall be agreed upon by the parties hereto. The date of the
Closing is sometimes hereinafter referred to as the "Closing Date."
3. Deliveries by Purchaser.
(a) Stockholders' Agreement. Concurrently with his execution and
delivery of this Agreement, Purchaser shall deliver to the Company two
executed counterparts to the Stockholders' Agreement (the "Stockholders'
Agreement") among the Company, GKH Partners, L.P., GKH Investments, L.P.
and the other stockholders of the Company parties thereto;
(b) Additional Deliveries. At or prior to the Closing, upon the
terms and subject to the conditions of this Agreement, Purchaser shall
execute where appropriate and deliver to the Company:
(i) a certified or bank cashier's check in the amount of
the aggregate Purchase Price for the Cash Shares;
(ii) to the extent any of the Shares subscribed for
pursuant to this Agreement are Four Year Loan Shares:
(A) a duly executed Loan Agreement;
(B) a duly executed Four Year Note in an
original principal amount equal to the aggregate
Purchase Price for all such Four Year Loan Shares to be
funded by the proceeds of the Four Year Note and
subscribed for by Purchaser pursuant to this Agreement;
(C) two executed counterparts of that certain
pledge agreement (the "Pledge Agreement") between the
Purchaser and the Company effecting a pledge of all of
the shares of Common Stock of the Company owned or
thereafter acquired by the Purchaser, substantially in
the form attached to the Memorandum as Exhibit E; and
(D) a Stock Power (the "Stock Power") duly
executed in blank;
(iii) two executed counterparts of the Stock Option
Agreement (the "Option Agreement") between the Purchaser and the
Company pursuant to the Hanover Compressor Company 1995 Employee
Stock Option Plan;
(iv) a fully completed and executed IRS Form W-9; and
(v) two executed counterparts of this Agreement
(including a fully completed Schedule A, notary page and Spousal
Consent (if applicable)).
(c) Document Delivery; Escrow. All documents and funds (the
"Funds") delivered to the Company prior to the Closing Date (as
hereinafter defined) shall be
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delivered by Purchaser to Hanover Compressor Company, 12001 North
Houston Rosslyn, Houston, Texas 77086, Attention: Curtis Bedrich. All
such documents and Funds will be deemed to be held in escrow until the
Closing. The Funds shall be promptly deposited in an interest bearing,
segregated account and such Funds may be invested in treasury bills or
other cash equivalents, as determined in the sole and absolute
discretion of the Company. If prior to the Closing Date acceptable
subscriptions for a minimum aggregate of [___] shares of Common Stock
are received and the other conditions set forth herein and in the
Memorandum (collectively, the "Offering Conditions") are satisfied, all
Funds will be transferred from the segregated bank account to the
Company, together with all interest, if any, accrued or paid thereon. In
the event the Offering Conditions have not been satisfied in full prior
to the Termination Date, the Offering will be terminated and all Funds
will be returned to the Purchaser with a pro rata share of interest
earned thereon. Interest on Funds shall be calculated on the basis of
the amount of Funds invested by the Purchaser and the length of time
interest on such Funds was earned.
4. Deliveries by the Company. At the Closing, upon the terms and subject
to the conditions of this Agreement, the Company shall deliver to Purchaser
(i) a certificate or certificates representing the Shares duly executed and
authenticated by the Company; provided, however, that if any portion of the
Shares are being purchased with the proceeds of a Four Year Loan, the Company
shall retain possession of all of the Shares in accordance with the terms of the
Pledge Agreement, (ii) a copy of the fully executed Stockholders' Agreement (the
original of which will be retained at the offices of the Company) and (iii) a
fully executed counterpart of Purchaser's Option Agreement.
5. Representations and Warranties of Purchaser. Purchaser hereby
represents and warrants to the Company as follows:
(a) Investment Intention; No Resales. Purchaser is acquiring the
Shares for investment solely for his own account and not with a view to,
or for resale in connection with, the distribution or other disposition
thereof. Purchaser agrees and acknowledges that all dispositions of the
Shares by Purchaser (other than involuntary transfers) will comply with
the provisions of this Agreement, the provisions of the Stockholders'
Agreement and the Pledge Agreement and applicable provisions of state
and federal securities laws.
(b) Certain Information Not Material. Purchaser has not received
individualized information relative to the compensation of the
management of the Company, which information is acknowledged by
Purchaser as not being material to Purchaser in forming a basis for
making an investment in the Shares or for any other purpose in
connection herewith.
(c) Shares Unregistered. Purchaser acknowledges and represents
that he has been advised by the Company that:
(i) the offer and sale of the Shares have not been registered
under the Securities Act of 1933, as amended (the "Securities Act"), or
any state securities laws;
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(ii) the Shares must be held indefinitely and Purchaser must
continue to bear the economic risk of the investment in the Shares
unless the offer and sale of such Shares is subsequently registered
under the Securities Act and all applicable state securities laws or an
exemption from such registration is available;
(iii) there is no established market for the Shares and it is
not anticipated that there will be any public market for the Shares in
the foreseeable future;
(iv) the Company is under no obligation to register under the
Securities Act the Shares on behalf of Purchaser, to assist Purchaser in
complying with any exemption from registration or to consent to the
transfer of the Shares;
(v) Rule 144 promulgated under the Securities Act may not be
presently available with respect to the sale of any securities of the
Company, and the Company has made no covenant to make such Rule
available ;
(vi) when and if the Shares may be disposed of without
registration under the Securities Act in reliance on Rule 144, such
disposition may be made only in limited amounts in accordance with the
terms and conditions of such Rule;
(vii) a restrictive legend in the form hereafter set forth shall
be placed on the certificates representing the Shares; and
(viii) a notation shall be made in the appropriate records of
the Company indicating that the Shares are subject to restrictions on
transfer and appropriate stop-transfer instructions will be issued with
respect to the Shares.
(d) Additional Investment Representations.
(i) Purchaser has carefully reviewed, is familiar with and
understands the Memorandum, the Stockholders' Agreement, the Four Year
Note, the Pledge Agreement, the Option Agreement and the other
documents, records and information, if any, requested by Purchaser or
otherwise supplied by the Company in connection with the Offering;
(ii) All documents, records and information pertaining to an
investment in the Company which have been requested by Purchaser have
been made available or delivered to Purchaser, except to the extent
otherwise addressed in the Memorandum;
(iii) Purchaser is fully familiar with the business and
operations of the Company and has had an opportunity to ask questions of
and receive answers from the Company concerning the terms and conditions
of his investment and the financial condition, operations and prospects
of the Company;
(iv) No oral or written statement, printed material or
inducement given or made by the Company or any of the Company's
affiliates is contrary to the information contained in this Agreement,
the Memorandum, the Stockholders' Agreement, the Four
4
<PAGE>
Year Note or the Pledge Agreement, and Purchaser acknowledges and agrees
that in making his decision to purchase the Shares he has relied solely
on such documents and the independent investigations made by him and, to
the extent believed by Purchaser to be appropriate, his representatives,
including his own professional, financial, legal, tax and other
advisors;
(v) Purchaser acknowledges that the Company, in reliance upon
certain federal and state securities law exemptions, has provided
Purchaser with less or different information than Purchaser would have
received if an information memorandum complying with Rule 502(b)(2) of
Regulation D promulgated pursuant to the Securities Act had been
prepared and made available to Purchaser or if the Shares had been
registered pursuant to the Securities Act. The foregoing
notwithstanding, the information provided to Purchaser is sufficient to
allow Purchaser to make a knowledgeable and informed decision regarding
his investment in the Shares;
(vi) Purchaser (A) has adequate means of providing for his
current financial needs and possible personal contingencies and has no
need for liquidity in his investment in the Shares, (B) can bear the
economic risk of losing his entire investment in the Shares, (C) has
such knowledge and experience in financial matters that he is capable of
evaluating the relative risks and merits of his purchase of the Shares,
(D) is familiar with the nature of, and risks attendant to, his purchase
of the Shares, and (E) has determined that the purchase of the Shares is
consistent with Purchaser's financial objectives;
(vii) Purchaser realizes that he may not be able to sell or
dispose of the Shares even in the event of a personal emergency.
Purchaser's overall commitment to investments which are not readily
marketable (including his investment in the Shares) is not
disproportionate to his net worth;
(viii) The address set forth on the signature page hereof is
Purchaser's true and correct residence, and Purchaser has no present
intention of becoming a domiciliary of any other state or jurisdiction;
(ix) Purchaser has no reason to anticipate any change in his
circumstances, financial or otherwise, which may cause or require any
sale or disposition by him of any of the Shares;
(x) Each of this Agreement and the Stockholders' Agreement has
been duly and validly executed and delivered by Purchaser and each
constitutes the valid and binding obligation of Purchaser enforceable
against him, his successors and assigns, including, but not limited to,
his estate and his spouse, in accordance with its terms;
(xi) Assuming the due execution and delivery of each of this
Agreement and the Stockholders' Agreement by the Company, each of this
Agreement and the Stockholders' Agreement is a valid and binding
obligation of the Purchaser, enforceable against the Purchaser in
accordance with its terms, except as such enforcement may be subject to
(A) bankruptcy, insolvency, reorganization, moratorium
5
<PAGE>
or other similar laws now or hereafter in effect relating to creditors
rights generally and (B) general principles of equity (regardless of
whether such enforcement is considered in a proceeding in equity or at
law); and
(xii) The Company has not guaranteed, represented or warranted
to Purchaser either that (A) the Company will be profitable or that
Purchaser will realize profits, as a result of his investment in the
Shares or (B) the past performance or experience on the part of any
officer, director, stockholder, employee, agent, representative or
affiliate thereof, or any employee, agent, representative or affiliate
of the Company will in any way indicate the predictable results of
ownership of the Shares.
(e) Residence-Specific Representations.
(i) If Purchaser is a resident of the State of Texas or the
State of Arkansas, the aggregate Purchase Price for the Shares
subscribed for by Purchaser hereunder does not exceed 20% of Purchaser's
net worth (or joint net worth with Purchaser's spouse, if applicable) as
of the date hereof;
(ii) If Purchaser is a resident of the State of Louisiana, the
aggregate Purchase Price for the Shares subscribed for by Purchaser
hereunder does not exceed 25% of Purchaser's net worth (or joint net
worth with Purchaser's spouse, if applicable) as of the date hereof; and
(iii) If Purchaser is a resident of the State of New Mexico, the
aggregate Purchase Price for the Shares subscribed for by Purchaser
hereunder does not exceed 10% of Purchaser's net worth (or joint net
worth with Purchaser's spouse, if applicable) as of the date hereof.
6. Representations and Warranties of the Company. The Company represents
and warrants to Purchaser as follows:
(a) Organization; Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of
the State of Delaware. The Company is duly qualified and in good
standing as a foreign corporation and is licensed, admitted or approved
to do business as a foreign corporation in each jurisdiction wherein the
character of the properties owned or held under lease by it, or the
nature of the business conducted by it, makes such qualification
necessary, except where the failure to qualify would not have a material
adverse effect on the Company, and would not have any adverse effect on
the enforceability of this Agreement.
(b) Authority. The Company has the requisite corporate power and
authority and full legal right to enter into this Agreement, to perform,
observe and comply with all of its agreements and obligations hereunder
and to issue the Shares to Purchaser.
(c) Due Authorization. The execution and delivery by the Company
of this Agreement, the performance by it of all of its agreements and
obligations under this
6
<PAGE>
Agreement and the Option Agreement, and the issuance of the Shares, have
been duly authorized by all necessary corporate action on the part of
the Company.
(d) Binding Obligation. This Agreement, the Stockholders'
Agreement and the Option Agreement have each been duly and validly
executed and delivered by the Company, and, assuming the due execution
and delivery of each such document by Purchaser, each is a valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms, except as such enforcement may be subject to
(i) bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights generally
and (ii) general principles of equity (regardless of whether such
enforcement is considered in a proceeding in equity or at law).
(e) Capitalization. At the Closing Date, the authorized capital
stock of the Company will consist of 500,000 shares of Common Stock and
200,000 shares of preferred stock. No other class or series of capital
stock of the Company is authorized. All of the outstanding shares of
Common Stock, including the Shares, will, at the time of issuance, have
been duly authorized and issued and, upon receipt by the Company of the
Purchase Price for the Shares subscribed for hereunder will be fully
paid and non-assessable. There are no pre-emptive rights relating to the
capital stock of the Company other than those granted pursuant to (i)
the Stockholders' Agreement, (ii) that certain Stockholders' Agreement,
dated as of June 29, 1993, among the Company and certain of its
stockholders (iii) that certain Stockholders' Agreement, dated as of
March 8, 1995, among the Company and certain of its stockholders, and
(iv) that certain Stockholders' Agreement, dated as of July 7, 1995,
among the Company and certain of its stockholders.
(f) Legend. Each certificate representing the Shares shall bear
a legend substantially to the following effect:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR UNDER ANY STATE SECURITIES LAWS. THE SHARES OF COMMON
STOCK HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR
OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SHARES OF COMMON STOCK UNDER THE SECURITIES
ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES LAWS OR AN
OPINION OF COUNSEL TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED. IN ADDITION, THE SALE, TRANSFER, PLEDGE OR OTHER
DISPOSITION OF THE SHARES EVIDENCED BY THIS CERTIFICATE IS
RESTRICTED BY THE TERMS OF THAT CERTAIN SUPPLEMENTAL
STOCKHOLDERS' AGREEMENT DATED AS OF _________ ___, 1995 AMONG
THE COMPANY AND EACH OF THE STOCKHOLDERS SPECIFIED THEREIN,
WHICH SUPPLEMENTAL STOCKHOLDERS' AGREEMENT MAY BE EXAMINED AT
THE PRINCIPAL OFFICES OF THE COMPANY. THE SHARES OF COMMON STOCK
REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF
7
<PAGE>
EXCEPT IN ACCORDANCE WITH (I) SAID SECURITIES LAWS OR AN
APPLICABLE EXEMPTION THEREFROM AND (II) SAID SUPPLEMENTAL
STOCKHOLDERS' AGREEMENT.
7. Conditions to Obligations of Purchaser. The obligation of Purchaser
to consummate the transactions contemplated by this Agreement shall be subject
to the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Performance of Obligations. The Company shall have performed
and complied in all material respects with all obligations and
agreements required to be performed and complied with by it hereunder on
or prior to the Closing Date;
(b) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement shall be true and
correct in all material respects as of the Closing Date as if made as of
such date;
(c) Loans. The Company shall have made available to Purchaser at
the Closing, as a loan (or loans), such portion of the Purchase Price
for the Four Year Loan Shares subscribed for hereunder as agreed to by
Purchaser and the Company. Any such loan shall be evidenced by
Purchaser's delivery to the Company of duly executed copies of the Loan
Agreement and the Four Year Note, and Purchaser's obligations thereunder
shall be secured by Purchaser's execution, delivery and performance of
the Pledge Agreement; and
(d) Section 4 Obligations. The Company shall have fully complied
with all of its obligations under Section 4 hereof.
8. Conditions to Obligations of the Company. The obligation of the
Company to consummate the transactions contemplated by this Agreement shall be
subject to the satisfaction or waiver on or prior to the Closing Date of the
following conditions:
(a) Performance of Obligations. Purchaser shall have performed
and complied in all material respects with all obligations and
agreements required to be performed and complied with by him hereunder
on or prior to the Closing Date;
(b) Representations and Warranties. The representations and
warranties of Purchaser contained in this Agreement shall be true and
correct in all material respects as of the Closing Date as if made as of
such date;
(c) Offering. The Offering shall not have been terminated by the
Company; and
(d) Section 3(b) Obligations. Purchaser shall have fully
complied with all of its obligations under Section 3(b) hereof.
9. Mutual Conditions. The obligations of either party to consummate the
transactions contemplated by this Agreement shall be subject to the satisfaction
or waiver on or prior to the Closing Date of each of the Offering Conditions.
8
<PAGE>
10. Indemnification.
(a) Indemnification of the Company and the Company Affiliates. From and
after the date hereof, Purchaser shall indemnify and hold harmless the Company
and its predecessors, successors, officers, directors, employees,
representatives and agents (collectively, the "Indemnitees") from and against
any loss, damage or expense, including, without limitation, reasonable
attorneys' and consultants' fees, disbursements and expenses, suffered by any
one or more of the Indemnitees arising out of or resulting from any inaccuracy
in or breach of any of the representations, warranties, covenants or agreements
made by Purchaser herein.
(b) Indemnification of Purchaser. From and after the date hereof, the
Company shall indemnify and hold harmless Purchaser from and against any loss,
damage or expense, including, without limitation, reasonable attorneys' and
consultants' fees, disbursements and expenses suffered by Purchaser arising out
of or resulting from any inaccuracy in or breach of any of the representations,
warranties, covenants or agreements made by the Company herein.
(c) Procedure for Claims. Within thirty days after obtaining written
notice of any claim or demand which has given rise to, or could reasonably give
rise to, a claim for indemnification hereunder, the party seeking
indemnification shall give written notice of such claim ("Notice of Claim") to
the other party. The Notice of Claim shall set forth a brief description of the
facts giving rise to such claim and the amount (or a reasonable estimate) of the
loss, damage or expense suffered, or which may be suffered, by the party seeking
indemnification.
Upon receiving the Notice of Claim, the indemnifying party shall resist,
settle or otherwise dispose of such claim in such manner as it shall deem
appropriate, including the employment of counsel, and shall be responsible for
the payment of all expenses, including the reasonable fees and expenses of such
counsel. The indemnified party shall have the right to employ separate counsel
in any such action and to participate in or assume the defense thereof, but the
fees and expenses of such counsel shall be at the indemnified party's expense
unless (i) the employment has been specifically authorized by the indemnifying
party in writing, (ii) the indemnifying party has failed to assume the defense
and employ counsel in a timely manner or (iii) the named parties to any action
(including any impleaded parties) include both Purchaser and the Company, and
the indemnified party has been advised by such counsel that representation of
the Company and the Purchaser by the same counsel would be inappropriate under
applicable standards of professional conduct due to actual or potential
differing interests between them (in which case, if the indemnified party
notifies the indemnifying party in writing that the indemnified party elects to
employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall have neither the right nor the obligation to assume the
defense of such action on behalf of the indemnified party).
(d) Third Party Beneficiaries. Nothing contained in this Section 10
shall confer any rights upon, or inure to the benefit of, any third party other
than those parties specified in Sections 10(a) and 10(b) above, it being
understood that such specified parties, to the extent not actually parties
hereto, shall be third party beneficiaries.
9
<PAGE>
11. Miscellaneous.
(a) Notices. All notices, offers or other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be considered as properly given or made on the earliest to occur of (i) personal
delivery, (ii) two days after being delivered to a nationally recognized
overnight mail delivery or courier service, (iii) five days after being mailed
by certified mail, return receipt requested, postage prepaid, or (iv) delivery
by prepaid telegram or facsimile transmission (with written confirmation of
receipt). All notices given or made pursuant hereto shall be addressed to the
Company at its principal office and to Purchaser at his address appearing on the
signature page hereof under the heading "PURCHASER". The address of any party
hereto may be changed by a notice in writing given in accordance with the
provisions hereof.
(b) Effect and Interpretation. This Agreement shall be construed in
accordance with and governed by the laws of the State of Delaware without regard
to the conflicts of laws provisions thereof.
(c) Entire Agreement. This Agreement and the additional documents listed
on Schedule B hereto and any Exhibits or Schedules attached hereto or thereto
(the "Additional Documents"), which documents are incorporated herein by this
reference, constitute the entire agreement between the parties hereto with
respect to the subject matter hereof and may be amended only by a writing
executed by all parties hereto. This Agreement and the Additional Documents and
the information contained herein and therein expressly supersede all
understandings and agreements of the parties, whether written or oral, between
the parties with respect to the subject matter hereof.
(d) Successors. This Agreement and all the terms and provisions hereof
shall be binding upon and shall inure to the benefit of the parties hereto, and
their respective heirs, legal representatives, permitted successors and
permitted assigns. Notwithstanding anything herein to the contrary, respective
rights and obligations of the parties may not be assigned without the written
consent of the other party.
(e) Pronouns and Headings. As used herein, all pronouns shall include
the masculine, feminine, neuter, singular and plural wherever the context and
facts require such construction. The descriptive headings in the sections of
this Agreement are inserted for convenience of reference only and shall not
control or affect the meaning or construction of any of the provisions hereof.
(f) Severability. If any provision of this Agreement is held by a court
of competent jurisdiction to be invalid, illegal or unenforceable, such
provision shall be severed and enforced to the extent possible or modified in
such a way as to make it enforceable, and the invalidity, illegality or
unenforceability thereof shall not affect the validity, legality or
enforceability of the remaining provisions of this Agreement.
(g) Certain Tax Matters. Under section 1445(e) of the Internal Revenue
Code of 1986, as amended, a corporation, partnership, trust or estate must
withhold tax with respect to certain transfers of property if a holder of the
interest in the entity is a foreign
10
<PAGE>
person. To inform the Company that no withholding is required with respect to
any of the Shares, Purchaser hereby certifies as follows: (1) he is not a non-
resident alien for purposes of U.S. income taxation; (2) his social security
number is as set forth on the signature page hereto; and (3) his home address is
as set forth an the signature page hereto. Purchaser understands under penalties
of perjury that this certification may be disclosed to the Internal Revenue
Service and that any false statement he has made here could be punished by fine,
imprisonment or both. The Purchaser has completed and submitted herewith a Form
W-9 relative to his taxpayer identification number and other matters and does
hereby represent and warrant that such form is complete, true and correct.
(h) Counterparts. This Agreement may be executed simultaneously in one
or more counterparts each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(i) Assignment. This Agreement and the rights and obligations of the
parties hereunder may be assigned or otherwise delegated by the Company, but may
not be assigned by Purchaser without the Company's prior written consent, which
consent may be withheld in the Company's sole discretion.
(j) Consent of Spouse; Insertion in Will. Purchaser if married, or, if
currently unmarried, each Purchaser upon his marriage, agrees to obtain the
consent and approval of his spouse to all of the terms and provisions of this
Agreement by the execution hereof by such spouse. Purchaser agrees to insert in
his last will and testament, or other similar instrument, or to execute a
codicil thereto, directing and authorizing his personal representatives to
fulfill and comply with the provisions hereof.
(k) Effectiveness; Termination. In the event this Agreement is
terminated for any reason, the parties hereto shall have no further obligations
to each other, except that in the event of a complete or partial performance of
the terms hereof which occurs prior to any termination hereof, (i) Purchaser
shall promptly return to the Company all certificates in his possession
representing the Shares, if any, and (ii) the Company shall promptly refund the
Purchase Price to Purchaser, if and to the extent paid.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE COMPANY:
HANOVER COMPRESSOR COMPANY, a
Delaware corporation
By:________________________________
William S. Goldberg
Executive Vice President
11
<PAGE>
1995 EMPLOYEE STOCK OFFERING
SUBSCRIPTION AGREEMENT
PURCHASER SIGNATURE PAGE
PURCHASER:
___________________________________
Print Name:________________________
Social Security No. _______________
Home Address:
___________________________________
___________________________________
___________________________________
SPOUSAL CONSENT
The undersigned, the spouse of Purchaser who is a party to the foregoing
Subscription Agreement, hereby consents to the execution of the foregoing
Subscription Agreement pursuant to the Offering and the consummation of the
transactions contemplated thereby by her spouse, and to the extent the
undersigned has acquired or hereafter acquires an interest in and to the
property and subject matter of the Subscription Agreement, hereby agrees to be
bound by the terms of such Subscription Agreement.
Date: ___________________ ______________________________
Print Name:___________________
12
<PAGE>
NOTARY PAGE
STATE OF ___________)
)
COUNTY OF___________)
I, ______________________, a Notary Public in and for said County, in the
State aforesaid, do hereby certify that _________________________________
appeared before me this day in person, and acknowledged and swore that he
signed, sealed, and delivered the said instrument as his respective free and
voluntary act and deed for the uses and purposes therein set forth, and that the
statements contained therein are true.
Given under my hand and notarial seal as of the ____ day of ________, 1995.
My Commission expires:
_____________________________ _______________________________
Notary Public
13
<PAGE>
SCHEDULE A
Shares Subscribed For
Type of Share Number of Shares Consideration
- --------------------------------------------------------------------------------
Cash Shares(a)
- --------------------------------------------------------------------------------
Four-Year Loan Shares(b)
- --------------------------------------------------------------------------------
Total
================================================================================
- ------------
a Purchaser must subscribe for a minimum of one Share hereunder. There is no
maximum subscription.
b Purchaser may subscribe for Four Year Loan Shares purchased with the
proceeds of a Four Year Note in any amount up to twice the number of Cash
Shares subscribed for pursuant to the Offering. Additional information with
respect to the maximum number of Four Year Loan Shares may be obtained from
Curtis Bedrich at the Company's principal office.
14
<PAGE>
SCHEDULE B
Additional Documents
A - Stockholders' Agreement
B - Form of Loan Agreement
C - Form of Four Year Secured Promissory Note
D - Form of Pledge Agreement
E - Confidential Offering Memorandum
F - 1995 Employee Stock Option Plan
G - Form of Stock Option Agreement Under the 1995 Employee Stock Option Plan
15
<PAGE>
EXHIBIT 4.8
================================================================================
Dated: June 21, 1993
CONFIDENTIAL OFFERING MEMORANDUM
HANOVER COMPRESSOR COMPANY
Up to 3,448 shares of Common Stock, $.001 par value
$5,075 Minimum Investment
================================================================================
All of the 3,448 shares (the "Shares") of common stock, $.001 par value
(the "Common Stock"), offered hereby are being sold by Hanover Compressor
Company, a Delaware corporation (the "Company"). The Shares are being offered
only to certain members of management of the Company and are offered together
with options to purchase shares which will be granted to investors. See "The
Offering."
There has been no public market for the Common Stock of the Company, and no
such public market is anticipated to exist in the foreseeable future. See
"Determination of Offering Price" for a discussion of the factors considered in
determining the offering price.
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Common Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS OFFERING MEMORANDUM.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENCE.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Fees and Proceeds to the
Offering Price (1) Commissions (2) Company (2)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................... $ 725 $0.00 $ 725
-----------------------------------------------------------------------------------------------------------
Maximum Total.................. $2,499,800 $0.00 $2,499,800
-----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Payable in cash upon subscription (except for shares to be purchased
with proceeds of loans made by the Company). The minimum purchase per investor
is seven Shares (for a total of $5,075), not including Shares purchased with the
proceeds of four year loans to be made by the Company, and the minimum aggregate
purchase by all investors is 2,069 Shares (for a total of $1,500,025), including
Shares purchased with the proceeds of four year loans to be made by the Company.
See "The Offering." Notwithstanding the foregoing, the Company, in its sole
discretion, may accept smaller subscriptions, subject to applicable securities
laws. See "Plan of Offering."
(2) The Shares are being offered directly by the Company which will pay no
commissions but will utilize a portion of the proceeds to pay legal,
accounting and other expenses of the offering estimated to be $80,000.
THIS OFFERING MEMORANDUM CONSTITUTES AN OFFER ONLY IF A NAME APPEARS IN THE
SPACE BELOW MARKED "NAME OF OFFEREE" AND CONSTITUTES AN OFFER ONLY TO SUCH NAMED
OFFEREE.
Name of Offeree:____________________ Memorandum Number:_____________________
THESE SECURITIES INVOLVE A SIGNIFICANT DEGREE OF RISK
<PAGE>
CONFIDENTIAL OFFERING MEMORANDUM
HANOVER COMPRESSOR COMPANY
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF THE OFFERING...................................................................... 1
THE COMPANY.................................................................................. 3
THE OFFERING................................................................................. 3
RISK FACTORS................................................................................. 13
CONTEMPORANEOUS EVENTS AND CONDITIONS........................................................ 18
DETERMINATION OF OFFERING PRICE.............................................................. 20
PLAN OF OFFERING............................................................................. 20
USE OF PROCEEDS.............................................................................. 21
DILUTION..................................................................................... 21
- --------
CAPITALIZATION............................................................................... 22
DIVIDEND POLICY.............................................................................. 23
SELECTED FINANCIAL INFORMATION............................................................... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 25
BUSINESS..................................................................................... 29
MANAGEMENT................................................................................... 36
PRINCIPAL STOCKHOLDERS....................................................................... 42
DESCRIPTION OF CERTAIN INDEBTEDNESS.......................................................... 44
DESCRIPTION OF CAPITAL STOCK................................................................. 46
EXPERTS AND LEGAL MATTERS.................................................................... 48
ADDITIONAL INFORMATION....................................................................... 49
</TABLE>
EXHIBITS:
- ---------
Exhibit A - Subscription Agreement
Exhibit B - 1993 Stockholders' Agreement
Exhibit C - Form of Loan Agreement
Exhibit D - Form of Four Year Note
Exhibit E - Form of 90-day Note
Exhibit F - Form of Pledge Agreement
Exhibit G - Form of 1993 Management Stock Option Plan
Exhibit H - Form of Option Agreement under 1993 Management Stock Option Plan
Exhibit I - Form of Incentive Plan
i
<PAGE>
_______________________
THIS MEMORANDUM IS SUBMITTED IN CONNECTION WITH THE OFFERING OF THESE
SECURITIES PURSUANT TO SECTION 4(2) AND/OR REGULATION D PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE REPRODUCED OR USED FOR ANY
OTHER PURPOSE. ANY ACTION CONTRARY TO THESE RESTRICTIONS MAY INVOLVE A VIOLATION
OF CERTAIN FEDERAL OR STATE SECURITIES LAWS.
_______________________
THE COMPANY HAS AGREED TO MAKE AVAILABLE, PRIOR TO THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED HEREIN, TO EACH OFFEREE OF COMMON STOCK OR HIS
REPRESENTATIVE(S) OR BOTH, THE OPPORTUNITY TO ASK QUESTIONS OF, AND RECEIVE
ANSWERS FROM IT OR ANY PERSON ACTING ON ITS BEHALF CONCERNING THE TERMS AND
CONDITIONS OF THIS OFFERING, AND TO OBTAIN ANY ADDITIONAL INFORMATION, TO THE
EXTENT IT POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE
EFFORT OR EXPENSE, NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION SET FORTH
HEREIN.
_______________________
PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS MEMORANDUM
OR ANY PRIOR OR SUBSEQUENT COMMUNICATION FROM THE COMPANY, ITS AFFILIATES,
DIRECTORS, OFFICERS AND EMPLOYEES OR ANY PROFESSIONAL ASSOCIATED WITH THIS
OFFERING AS LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD CONSULT HIS OWN PERSONAL
COUNSEL, ACCOUNTANT AND OTHER ADVISERS AS TO LEGAL, TAX, ECONOMIC AND RELATED
MATTERS CONCERNING THE INVESTMENT DESCRIBED HEREIN AND ITS SUITABILITY FOR HIM
OR HER.
_______________________
NO DISTRIBUTION OF THIS MEMORANDUM IN WHOLE OR IN PART, OR THE DIVULGENCE
OF ANY OF ITS CONTENTS, IS PERMITTED UNLESS AUTHORIZED. EXCEPT FOR INFORMATION
CONTAINED HEREIN OR AUTHORIZED BY THE COMPANY, NO OFFERING LITERATURE OR
ADVERTISING IN WHATEVER FORM SHALL BE EMPLOYED IN THE OFFERING OF THE SHARES. NO
PERSON HAS BEEN AUTHORIZED TO MAKE REPRESENTATIONS, OR GIVE ANY INFORMATION,
WITH RESPECT TO THE SHARES, EXCEPT THE INFORMATION CONTAINED HEREIN AND IN THE
SUMMARY OF THE OFFERING PREPARED BY THE COMPANY.
_______________________
INVESTMENT IN THE COMMON STOCK IS SUITABLE ONLY FOR INVESTORS WHO MEET THE
SUITABILITY STANDARDS DESCRIBED UNDER "THE OFFERING -- SUITABILITY."
ii
<PAGE>
_______________________
THE COMMON STOCK OFFERED HEREBY MAY NOT BE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM REGISTRATION.
_______________________
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANYONE IN
ANY STATE OR IN ANY OTHER JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS
NOT AUTHORIZED.
_______________________
THE COMPANY WILL NOT BE REQUIRED TO DELIVER AN ANNUAL REPORT TO
STOCKHOLDERS PURSUANT TO THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED
(THE "EXCHANGE ACT"). HOWEVER, THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS
ANNUALLY WITH A COPY OF THE COMPANY'S AUDITED FINANCIAL STATEMENTS.
_______________________
FOR ARKANSAS RESIDENTS ONLY:
THE SHARES ARE OFFERED PURSUANT TO A CLAIM OF EXEMPTION UNDER SECTION
14(b)(9) OF THE ARKANSAS SECURITIES ACT. A REGISTRATION STATEMENT RELATING TO
THE SHARES HAS NOT BEEN FILED WITH THE ARKANSAS SECURITIES DEPARTMENT OR WITH
THE SECURITIES AND EXCHANGE COMMISSION. NEITHER THE DEPARTMENT NOR THE
COMMISSION HAS PASSED UPON THE VALUE OF THE SHARES, MADE ANY RECOMMENDATION AS
TO THEIR PURCHASE, APPROVED OR DISAPPROVED THE OFFERING, OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
_______________________
FOR OKLAHOMA RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE
OKLAHOMA SECURITIES ACT. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE SOLD OR TRANSFERRED FOR VALUE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
OF THEM UNDER THE SECURITIES ACT OF 1933 AND/OR THE OKLAHOMA SECURITIES ACT OR
AN OPINION OF COUNSEL TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER SUCH ACT OR ACT.
_______________________
iii
<PAGE>
FOR TEXAS RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE TEXAS SECURITIES ACT, AS
AMENDED THE "TEXAS ACT"), AND ARE OFFERED AND SOLD PURSUANT TO AN EXEMPTION
THEREFROM. THE SHARES CANNOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION
WHICH IS EXEMPT UNDER THE TEXAS ACT, OR PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE TEXAS ACT OR IN A TRANSACTION WHICH IS OTHERWISE IN
COMPLIANCE WITH THE TEXAS ACT.
_______________________
FOR NEW MEXICO RESIDENTS ONLY:
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE
AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.
iv
<PAGE>
SUMMARY OF THE OFFERING
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Offering Memorandum and the Exhibits attached hereto.
Prospective investors of the Shares should carefully consider the factors set
forth under `Risk Factors. ~
The Company
Hanover Compressor Company, a Delaware corporation (the "Company"), was
organized in October 1990 for the purpose of acquiring, manufacturing, selling,
leasing, maintaining and. refurbishing compressors utilized by the natural gas
industry. For a more detailed description of the i Company's business, see
"Business."
The Offering
Shares of Common Stock offered: 3,448, including Shares to be acquired for
cash out of the subscribing offeree's own
funds or by delivery of a 90-day note and
Shares to be acquired by delivery of a four
year note, but not including shares which
may be acquired pursuant to options granted
under the 1993 Management Stock Option
Plan, the Incentive Option Plan and the
Senior Executive Stock Option Plan. See
"The Offering."
Shares of Common Stock 81,082, including 24,603 shares of Common
outstanding after the offering: Stock estimated to be issued in connection
with certain transactions which are
conditions precedent to the consummation of
this offering, but not including shares
issuable upon exercise of options. See
"Contemporaneous Events and Conditions."
Use of Proceeds: All of the net proceeds of this offering
will be used for general corporate
purposes, including working capital.
The Company reserves the right to withdraw this offering and return all
subscriptions or modify this offering at any time during the term of this
offering. Subscriptions for Shares may be accepted or rejected by the Company in
its sole discretion. All cash received by the Company in respect of
subscriptions for the Shares (the "Funds") shall be promptly deposited in an
interest bearing, segregated account and such Funds may be invested in treasury
bills or other cash equivalents, as determined in the sole and absolute
discretion of the Company. If (i) acceptable subscriptions for a minimum of an
aggregate of 2,069 Shares are received by the Company, (ii) the existing
stockholders purchase a minimum of $15 million of Common Stock, (iii) a binding
agreement relative to the replacement of the Company's existing credit agreement
with Chemical Bank, N.A. ("Chemical") is entered into on terms not materially
less favorable than the terms outlined in "Contemporaneous Events and Conditions
- -- Stockholder Investment and
1
<PAGE>
Refinancing" and "Description of Certain Indebtedness," as determined in the
sole and absolute discretion of the Company, and (iv) the merger of Hanover
Pipeline Company, a Delaware corporation, with and into the Company is
consummated pursuant to the terms set forth in "Contemporaneous Events and
Conditions-- The Merger," in each case on or before June 30, 1993 or such later
date as the Company in its sole discretion may determine without consent of or
notice to investors, but in no event later than August 15, 1993 (the
"Termination Date"), all subscriptions will be transferred from the segregated
bank account to the Company, together with all interest, if any, earned thereon.
See "Contemporaneous Events and Conditions." The minimum subscription per
subscribing offeree is seven Shares (not including any Shares to be acquired
pursuant to a four year loan made by the Company) for an aggregate of $5,075;
however, the Company in its sole discretion may accept subscriptions for a fewer
number of Shares, subject to applicable securities laws. In the event all
conditions have not been satisfied in full prior to the Termination Date, this
offering will be terminated and all funds will be returned to subscribing
offerees with a pro rata share of interest earned thereon, if any, calculated on
--------
the basis of the amount of Funds invested by each subscribing offeree and the
length of time interest on such Funds was earned. See "Plan of Offering."
Summary Financial Information
See "Selected Financial Information" for a summary of certain relevant
financial information and the financial statements attached hereto for a
complete analysis thereof.
Risk Factors
For a discussion of certain factors that should be considered in evaluating
an investment in the Shares, including, among others, (i) the Company's limited
operating history and prior operating losses, (ii) factors regarding the natural
gas compressor leasing industry, (iii) product liability and insurance, (iv)
environmental liability risks, (v) restrictions imposed by the terms of the
Company's indebtedness and the effect of a default thereunder, (vi) the short
terms of compressor leases and the possible inability of the Company to re-lease
its compressors, (vii) competition, (viii) the refinancing and dependence upon
internally generated funds, (ix) limited preemptive rights, (x) no public market
for common stock and restrictions on transferability, (xi) dividends, (xii)
control by principal stockholders and (xiii) dilution, see "Risk Factors."
2
<PAGE>
THE COMPANY
Hanover Compressor Company is a corporation organized under the laws of the
State of Delaware. The principal executive office of the Company is located at
4245 N. Central Expressway, Suite 350, Dallas, Texas 75205, and the Company's
telephone number is (214) 528-9270.
THE OFFERING
This offering is made only to certain members of management of the Company
for the purpose of providing such persons with the opportunity to obtain an
equity interest in the Company. The Company reserves the right to withdraw this
offering and return all subscriptions or make non-material modifications to the
offering at any time during the term of the offering. Cash deposited in the
segregated account may not be withdrawn by subscribers unless the offering
terminates as described herein. The deposit of subscription funds in such
account does not constitute acceptance of all or any portion of any offeree
subscription by the Company.
General
Subject to adjustment for over subscription, each management offeree may
subscribe to purchase for cash or by delivery of a 90-day promissory note (the
"90-day Note") as many Shares as such offeree may desire. Upon such
subscription, the Company will, at the request and option of each subscribing
offeree, loan (the "Four Year Loan") such subscribing offeree sufficient funds,
on a full recourse basis, to purchase two additional Shares (i) for each Share
subscribed for hereunder for cash (the "Cash Shares") or by the delivery of a
90-day Note (the "90--day Loan Shares") and (ii) for each share of Common Stock
which such subscribing offeree owns or has the fully vested right to acquire.
See "-- The Loans." For each Share acquired by a subscribing offeree hereunder
and for each share of Common Stock, if any, currently owned by such offeree, the
Company will grant such subscribing offeree an option to purchase one-third of
one share of Common Stock pursuant to the terms of the 1993 Management Stock
Option Plan, substantially in the form attached hereto as Exhibit G (the
"Management Option Plan"). The exercise price for such options will be $725 per
share (subject to adjustment for stock splits, stock dividends and other similar
events as described in the Management Option Plan). See %- Options -- Management
Option Plan." In addition, each subscribing offeree who is an employee of the
Company or any of its subsidiaries and who owns shares of Common Stock upon the
occurrence of a Capital Event (as defined under "- Options -- Incentive Plan")
will be eligible to participate in the Company's Incentive Option Plan (the
"Incentive Plan"). Pursuant to the Incentive Plan, participants will be granted
options to acquire a specified percentage of outstanding Common Stock
(determined on a fully diluted basis) based on the return earned by Hanover
Energy Holding Corporation, a Delaware corporation and the principal stockholder
of the Company ("HEHC"), upon the first occurrence of a Capital Event. See "-
Incentive Plan." Also in connection with this offering, Mr. O'Connor and Mr.
McGhan will be granted options under the Company's Senior Executive Stock Option
Plan (the "Senior Executive Plan") if they subscribe for a specified number of
Shares hereunder. See `-- Options -- Senior Executive Plan."
Notwithstanding the foregoing, executive officers of the Company who were
granted options under the Company's Stock Compensation Plan in 1992 (the "1992
Stock Plan") will, if
3
<PAGE>
they participate in this offering, be required to surrender a portion of the
options granted to them thereunder upon (i) the termination of their employment
with the Company, (ii) the sale of some or all of their Common Stock or (iii)
the exercise by them of any options granted to them in connection with this
offering or previously granted to them under the 1992 Stock Plan. See "--
Options -- Management Option Plan."
Offerees who desire to subscribe for Shares will be required to become
parties to the 1993 Stockholders' Agreement. The 1993 Stockholders' Agreement
will provide for, among other things, (i) the right of minority stockholders to
participate in a sale by GKH Partners, L.P., a Delaware limited partnership
("Partners"), GKH Investments, L.P., a Delaware limited partnership (together
with Partners, `PGKH"), and HEHC of at least 50% of the Common Stock owned by
GKH and HEHC collectively, (ii) the right of HEHC and GKH collectively to
require all minority stockholders to sell their stock in certain transactions
for the same consideration to be received by HEHC and GKH and (iii) the right of
the Company or its affiliates to purchase all of an employee stockholder's
Common Stock upon the termination of such stockholder's employment with the
Company and its subsidiaries and affiliates. The purchase price for such stock
varies depending on the circumstances and, in cases where a stockholder is
terminated for cause or voluntarily terminates his employment without good
reason, such purchase price may be substantially below the fair market value of
such Common Stock. See "-- 1993 Stockholders' Agreement."
The maximum aggregate number of shares which may be subscribed for pursuant
to this offering is 3,448, which number does not include any shares of Common
Stock to be issued upon exercise of options granted under the Management Option
Plan, the Incentive Option Plan or the Senior Executive Plan. If the offerees
subscribe to more than such number of shares, each offeree's subscription will
be reduced proportionately based on the relationship between the number of
shares subscribed for by such offeree and the aggregate number of shares
subscribed for by all offerees.
For information regarding the method of subscribing for Shares, see "Plan
of Offering" and the Subscription Agreement attached hereto as Exhibit A (the
"Subscription Agreement").
Who Should Consider Investing
Investment in the Common Stock offered hereby involves a significant degree
of risk. See "Risk Factors." This offering is a private offering made only by
delivery of a copy of this Offering Memorandum to the member of management whose
name appears hereon. The Shares have not been registered under the Securities
Act of 1933, as amended (the "Federal Securities Act"), or any applicable state
securities laws. The Shares are being offered pursuant to an exemption from the
registration requirements of the Federal Securities Act afforded by Section 4(2)
thereof and/or Regulation D promulgated under the Federal Securities Act only to
certain members of management for investment only. Each person who subscribes
for Shares and whose subscription is accepted by the Company (collectively, the
"Investors") will be required to represent that he or she is acquiring shares
for his or her own account, for investment, and not with any intention of making
a distribution or resale thereof, either in whole or in part. The Shares may not
be resold or transferred except in accordance with the provisions of the Federal
Securities Act, the rules and regulations thereunder, any applicable state
securities laws and the
4
<PAGE>
terms and conditions of the 1993 Stockholders' Agreement. As a result of the
foregoing, investment in the Shares is suitable only for persons of adequate
financial means, apart from their investment in the Shares, and who have no need
for liquidity with respect to their investment.
Offerees who desire to subscribe for Shares should read and discuss with
their advisors this Offering Memorandum, the Subscription Agreement, the 1993
Stockholders' Agreement, the Loan Agreement, the Four Year Note, the 90-day
Note, the pledge agreement to be executed in connection therewith (the "Pledge
Agreement"), the Management Option Plan, the Incentive Option Plan, and the
other documents relative to the foregoing regarding the appropriateness of an
investment in the Shares. The desirability of an investment in the Common Stock
depends upon a number of factors including, among others, (i) the factors set
forth under the caption "Risk Factors," (ii) the nature of the Company's
business, (iii) the possibility of a decline in value of the Common Stock, (iv)
the various restrictions on transferability of Common Stock, including those
contained in the 1993 Stockholders' Agreement, and the present essential
illiquidity of the investment, (v) the desirability to the offeree of a long-
term investment, (vi) the likelihood that the Company will not pay dividends in
the foreseeable future and the likelihood of restrictions imposed on the
Company's ability to pay dividends under the terms of the agreements governing
the Revolving Credit Agreement and the Senior Notes, (vii) the control of the
Company by the principal stockholders, (viii) the relationship between such
offeree's investment (including the investment pursuant to the Four Year Loan
and the 90-day Loan) and such offerees' net worth, (ix) whether such offeree
received options under the 1992 Stock Plan and the effect that participating in
this offering will have on such options, (x) the employment goals of the offeree
and the right of the Company to purchase such offeree's Common Stock upon the
termination of his employment with the Company, in some instances at a purchase
price equal to or less than the offeree's cost thereof, even if such cost is
less than the fair market value of such Common Stock, and (xi) other relevant
personal circumstances of each offeree.
The Loans
Each Investor may, but is not required, to request from the Company a 90-
day Loan to purchase the 90-day Loan Shares and a Four Year Loan to purchase the
Four Year Loan Shares. Inasmuch as the Four Year Loan and the 90-day Loan
(collectively the "Loans") will be made on a full recourse basis, an Investor
should consider carefully the additional risk that he will undertake by
obtaining the Loans to purchase Shares. Investors who purchased shares in the
1992 Offering by delivery of a two year note (the "1992 Note") and Investors who
purchase Shares in this offering pursuant to a Four Year Loan will be permitted
to borrow a sufficient additional mount under the Four Year Loan to repay the
mounts outstanding under the 1992 Note thereby effectively extending the term of
such obligation and receiving the benefit of more liberal interest payment
terms.
The 90-day Loan will bear interest at the rate announced from time to time
by the New York, New York office of Chemical Bank, N.A. ("Chemical") as its
prime rate (the "Prime Rate") and will be evidenced by the 90-day Note. Upon the
occurrence of any default under the 90-day Note, the outstanding principal and
interest will bear interest at the Prime Rate plus 2%. All principal and accrued
interest will be payable 90 days from the date of the 90-day Note, except that
upon termination of the borrower's employment with the Company and any of its
<PAGE>
subsidiaries and affiliates for any reason, such principal and accrued interest
will be payable within 30 days of such termination.
The Four Year Loan will be bear interest at the Prime Rate, will be made
pursuant to a loan agreement (the "Loan Agreement"), evidenced by a four year
secured promissory note (the "Four Year Note"). Upon the occurrence of any
default under the Loan Agreement or the Four Year Note, the outstanding
principal and accrued interest will bear interest at the Prime Rate plus 2%,
except that upon the failure to make the required payments following termination
for Cause (as hereinafter defined) or voluntary termination without Good Reason
(as hereinafter defined), the outstanding principal and interest will bear
interest at 15 % per annum, compounded monthly, or the highest rate of interest
allowable under applicable law, whichever is less. Interest will be payable to
the extent of bonus payments, if any, less an allowance equal to 33.3 % of such
bonus payment for federal and state income tax (the "Net Bonus "), paid to the
Investor by the Company on or before December 31 of each year that the Four Year
Loan is outstanding (including amounts paid in such calendar year which relate
to a previous calendar year and were not taken into consideration in such prior
calendar year), provided that nothing herein shall create any obligation on the
part of the Company to pay any bonus. In the event the Net Bonus is
insufficient to pay at least 66.7% of the interest then accrued, the Investor
shall be required to pay the difference between such Net Bonus and 66.7% of the
interest then accrued out of the Investor's own funds and the remaining 33.3% of
the interest then owing will be added to the principal outstanding under the
Four year Loan. The Company will have the right to withhold from the Investor
any and all mounts payable by the Investor in respect of interest under the Four
Year Loan, which amounts will be deemed to have been paid to the Investor and
subsequently repaid by the Investor to the Company. All principal and accrued
and unpaid interest will be due upon maturity, which will be 48 months from the
date of such Loan, provided that such date may be accelerated upon the
occurrence of an Event of Default (as defined below) or certain types of
terminations.
The Four Year Note and the 90-day Note (collectively, the "Notes") will
each be secured by a pledge of (i) all of the shares of Common Stock owned by
the borrower, including all Common Stock evened prior to the Investor's purchase
of the Shares, all stock received upon exercise of options granted under the
1992 Stock Plan, the Management Option Plan, the Company's Incentive Plan and
the Senior Executive Plan, and (ii) all proceeds received by an Investor
thereon, including dividends and additional shares received in stock
distributions. The Notes will each provide for mandatory prepayment upon (i)
termination for Cause, (ii) the disposition of any shares of Common Stock to the
extent of the proceeds received thereon and (iii) the payment of dividends or
other distributions on the Common Stock.
The Notes will be assignable by the Company to any of its affiliates,
including GIG-I, to any affiliate of GKH and to any third party bank or
financial institution which is a lender to the Company or any of its
subsidiaries or affiliates, The Notes will not be assignable by the Investor,
"Cause", when capitalized, means the termination of the Investor's
employment with the Company due to (i) the commission of an act of fraud,
embezzlement or willful breach of a fiduciary duty to the Company (including the
unauthorized disclosure of confidential or proprietary material information of
the Company), (ii) a conviction (or a plea of nolo contendere in lieu thereof)
----------------
for a felony or a crime involving fraud, dishonesty or moral turpitude, (iii)
willful
6
<PAGE>
misconduct as an employee of the Company, (iv) the willful failure to render
services to the Company in accordance with such Investor's employment, which
failure amounts to a material neglect of his or her duties to the Company or (v)
substantial dependence, as determined by the Board of Directors of the Company,
on alcohol or any controlled substance.
"Good Reason", when capitalized, means the voluntary termination of the
Investor's employment with the Company by the Investor if such termination (i)
promptly follows a material reduction of such Investor's duties and
responsibilities or a permanent change in such Investor's duties and
responsibilities which are materially inconsistent with the type of duties and
responsibilities of such Investor then in effect, (ii) promptly follows a
material reduction in annual base salary, (iii) promptly follows a material
reduction in such Investor's employee benefits if such reduction results in such
Investor receiving benefits which are, in the aggregate, materially less than
the benefits received by other comparable employees of the Company generally or
(iv) the Board of Directors of the Company otherwise determines that a voluntary
termination by such Investor is for "Good Reason" under the circumstances then
prevailing.
An "Event of Default", when capitalized includes, without limitation, (i)
the failure to pay the principal or interest when due, which failure has
continued for 10 days after written notice from the Company, (ii) the breach by
borrower of any representation or warranty contained in the Loan Agreement, the
Pledge Agreement or the Subscription Agreement, (iii) the default with respect
to any covenant contained in the Loan Agreement, the Pledge Agreement or the
Notes, (iv) the material failure of borrower to make any payment when due under
any other indebtedness of the borrower to the Company, (v) the occurrence of
certain bankruptcy-related events with respect to the borrower which continue
for 60 days or are otherwise consented to by the borrower.
Options
Management Option Plan
For each share of Common Stock acquired by an Investor hereunder and, if
any, owned by the investor as of the date hereof, the Company will grant such
Investor an option to purchase one-third of one share of Common Stock (subject
to adjustment for stock splits, stock dividends and other similar events as
described in the Management Option Plan) at a purchase price of $725 per share.
Such options will vest ratably over a five year period beginning on the
anniversary of their issuance (subject to acceleration upon death or permanent
disability and forfeiture upon termination for Cause) and be governed by the
terms of the Management Option Plan and individual option agreements (the
"Management Option Agreements") between the Company and each Investor, forms of
which are attached hereto as Exhibits G and H, respectively. The term of the
options will be 10 years, subject to a limited exercise period for vested
options in the event of the termination of employment of the optionee. The
options granted under the Management Option Plan and the shares of Common Stock
acquired upon exercise thereof will be subject to repurchase by the Company
under the terms of (i) the Management Option Plan and the agreements entered
into in connection therewith and (ii) the 1993 Stockholders' Agreement. Options
may not be transferred other than by will or the laws of descent and
distribution, and during the lifetime of an optionee, such options may be
exercised only by the optionee. The options granted under the Management Option
Plan are nonstatutory
7
<PAGE>
options and are not classified as "incentive stock options" under Section 422 of
the Internal Revenue Code of 1986, as mended (the "Code"), and Investors should
consult their tax advisors for information regarding the tax treatment of such
options.
Pursuant to the Management Option Agreements, each Investor will agree that
he will not (i) during the term of such agreement and for a period of one year
thereafter compete with any business of the Company or its subsidiaries or
affiliates unless he is terminated without Cause or voluntarily terminates his
employment with Good Reason and (ii) without the Company's consent, disclose to
persons outside the Company confidential information concerning the Company or
any of its subsidiaries or affiliates.
Notwithstanding the foregoing, offerees who participate in this offering
and who participated in the 1992 Stock Plan will, at the time such participant
(i) ceases to be employed by the Company, (ii) disposes of any of his or her
Common Stock other than to certain permitted transferees or (iii) exercises any
of his or her options granted hereunder or under the 1992 Stock Plan, be
required to surrender stock options granted under the 1992 Stock Plan sufficient
to acquire Common Stock which has a value (as determined in accordance with the
Management Option Plan) equal to (a) 90% of the total number of shares of Common
Stock which may be acquired pursuant to options granted under the 1992 Stock
Plan (as adjusted for any stock splits or similar transactions) multiplied by
Co) $725; provided, that at no time will such person be required to surrender
options to acquire shares of Common Stock in excess of 90% of the total number
of shares subject to options granted pursuant to the 1992 Stock Plan (as
adjusted for stock splits). The effect of this adjustment is to raise the
exercise price 0f90% of the options granted any 1992 Stock Plan to $725 per
share from $1.00 per share.under the
By way of clarification and for purposes of illustration only, if an
Investor received options to acquire 100 shares of Common Stock pursuant to the
1992 Stock Plan and subscribes for any Shares a q - this offering such Investor
would be required to surrender options to acquire Common Stock with a value
equal to $65,250 (90% x 100 x $725) upon any of the foregoing triggering events.
Thus, with if the Investor sought to sell his Common Stock at a price of $1,000
per share, he would be obligated at such time to surrender options to acquire
65.25 shares of Common Stock ($65,250 divided by $1,000 per share). Similarly,
if such Investor were terminated at a time when the value of the Common Stock
was $652.50, he would be required to surrender options to acquire 90 shares of
Common Stock ($65,250 divided by $652.50 per share, limited by 90 shares). On
the other hand, if such Investor (i) owned 100 shares of Common Stock, (ii) had
vested options to acquire an additional 25 shares of Common Stock and (iii)
subscribed for the minimum of seven Cash Shares or 90-day Loan Shares, then by
participating in this offering such Investor (a) would be entitled to receive a
Four Year Loan to purchase an additional 266 Shares (a total of 133 shares which
the Investor owned, had the right to acquire and subscribed for multiplied by
2), Co) would, assuming he purchased all 266 Four Year Loan Shares, receive
options under the Management Option Plan to purchase an additional 124 shares of
Common Stock (one-third of 373 (the sum of 273 Cash Shares and Loan Shares
purchased in this offering and 100 previously owned shares of Common Stock)) and
(c) would be eligible to participate in the Incentive Plan provided he is
employed by the Company or any of its subsidiaries or affiliates upon the
occurrence of a Capital Event.
8
<PAGE>
The foregoing adjustment Provisions will only affect the persons who were
-------------------------------------------------------------------------
granted options under the 1992 Stock Plan and who participate in this offering.
- -------------------------------------------------------------------------------
and such persons should consider carefully the economic impact of investing in
- ------------------------------------------------------------------------------
this offering
- -------------
Incentive Plan
In addition to the foregoing, members of management who participate in this
offering and who are employed by the Company or any of its subsidiaries or
affiliates at the time of the Capital Event will also be eligible to participate
in the Incentive Plan. Pursuant to the Incentive Plan, the Company will grant
Investors who are employees of the Company or any of its subsidiaries or
affiliates and who own shares of Common Stock at the time of the Capital Event
options to acquire a specified percentage of the shares of outstanding Common
Stock (determined on a fully diluted basis) based on the actual return realized
by HEHC upon (i) the disposition (other than to affiliates) by GKH and HEHC of
at least 50% of their Common Stock, (ii) the date all or substantially all of
the assets or property of the Company are sold, leased or otherwise transferred
to an unrelated third party, (iii) the effective date of a merger or
consolidation in which the Company, any of its subsidiaries or any affiliate of
the Company or HEHC is not the surviving entity or the surviving entity is not
controlled by HEHC or GKH either individually or collectively or (iv) the
dissolution or liquidation of the Company (the first occurrence of the events
set forth in items (i) through (iv) is referred to herein as the "Capital
Event"). The total number of shares available under the Incentive Plan,
expressed as a percentage of the total number of shares of Common Stock
outstanding at the time of the Capital Event, is based on internal rate of
return (the "IRR") earned by the HEHC as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Annual Compounded Return on Investment ("IRR") Aggregate Percentage of Fully-Diluted Shares Outstanding
--------------------------------------------- --------------------------------------------------------
<S> <C>
26% 0.25%
- ------------------------------------------------------------------------------------------------------------------
27% 0.50%
- ------------------------------------------------------------------------------------------------------------------
28% 0.75%
- ------------------------------------------------------------------------------------------------------------------
29% 1.00%
- ------------------------------------------------------------------------------------------------------------------
30% 1.50%
- ------------------------------------------------------------------------------------------------------------------
31% 2.00%
- ------------------------------------------------------------------------------------------------------------------
32% 2.50%
- ------------------------------------------------------------------------------------------------------------------
33% 3.00%
- ------------------------------------------------------------------------------------------------------------------
34% 3.50%
- ------------------------------------------------------------------------------------------------------------------
35% 4.00%
- ------------------------------------------------------------------------------------------------------------------
36% 4.50%
- ------------------------------------------------------------------------------------------------------------------
37% 5.00%
- ------------------------------------------------------------------------------------------------------------------
38% 5.50%
- ------------------------------------------------------------------------------------------------------------------
39% 6.00%
- ------------------------------------------------------------------------------------------------------------------
40% 6.25%
- ------------------------------------------------------------------------------------------------------------------
41% 6.50%
- ------------------------------------------------------------------------------------------------------------------
42% 6.75%
- ------------------------------------------------------------------------------------------------------------------
43% 7.00%
- ------------------------------------------------------------------------------------------------------------------
44% 7.25%
- ------------------------------------------------------------------------------------------------------------------
45% 7.50%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
- -----------------------------------------------------------------------------
46% 7.75%
- -----------------------------------------------------------------------------
47% 8.00%
- -----------------------------------------------------------------------------
48% 8.25%
- -----------------------------------------------------------------------------
49% 8.50%
- -----------------------------------------------------------------------------
50% 8.75%
- -----------------------------------------------------------------------------
The IRR is the discount rate, calculated on a compounded monthly basis,
which would cause the per share price received by HEHC upon a Capital Event to
equal $725 per share. By way of clarification and for purposes of illustration
only, if a Capital Event took place on the fifth anniversary of this offering
which established a fully-diluted value for the Shares of $2,900/share (e.g.
four times the $725/Share offering price), HEHC would have received an IRR of
31.95% based on the $725/Share offering price from the time of this offering
through the time of the Capital Event (a compounded IRR of 2.38 % per month over
the 60 month elapsed investment holding period) based on the above-referenced
definition of lRg- In this case and consistent with this illustration, if the
Company had 100,000 shares of Common Stock outstanding on a fully-diluted basis
(e.g. taking into account all Shares issuable by the Company upon the conversion
or. exchange of all convertible preferred stock, convertible debt, outstanding
vested and unvested options including options under the Incentive Plan and any
other contingent shares or similar securities) at the time of the Capital Event,
the Company would issue options to acquire 2,000 shares of Common Stock (2.00%
of the fully-diluted shares outstanding) to all participants in the incentive
Plan. In this case and consistent with this illustration, if all had purchased
3,448 Shares in this offering and a particular Investor had purchased 1,000 of
the 3,448 Shares so purchased, the Company would issue to that particular
Investor options to purchase 580 shares ((1,000/3,448) x 2,000) at an exercise
price of $725/share.
The options granted under the Incentive Plan will be nonstatutory options
and the exercise price for such options will be $725 per share. The options will
vest fully upon the occurrence of the Capital Event. Each participant in the
Incentive Plan will receive a pro rata share of the total options actually
issued pursuant to the Incentive Plan (the "Incentive Plan Shares") determined
by multiplying the Incentive Plan Shares by a factor equal to (i) the lower of
(a) the number of Cash Shares and Loan Shares purchased by such Investor
pursuant to this offering and (b) the number of shares of Common Stock owned by
the Investor at the time of the Capital Event divided by (ii) the total number
of such shares owned by all participants in the Incentive Plan. Investors who
cease to be employed by the Company for any reason prior to the Capital Event or
who cease to own shares of Common Stock will not be eligible to participate in
the Incentive Plan.
Options granted under the Incentive Plan generally expire within a
specified number of days of the termination of employment of an optionee.
Options may not be transferred other than by will or the laws of descent and
distribution, and during the lifetime of an optionee may be exercised only by
the optionee. The term of each option granted under the Incentive Plan may not
exceed 10 years from the date the option is granted.
Senior Executive Plan
In addition to the foregoing, Messrs. O'Connor and McGhan will, upon
consummation of this offering, be granted options pursuant to the Senior
Executive Plan with respect to an
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aggregate of up to 1.50% and 0.75%, respectively, of the total number of
outstanding shares of Common Stock if they subscribe for 1,380 and 276 Shares,
respectively. The exercise price for such options will be $833.75 per share.
Such options will vest ratably over a seven year period beginning on the
anniversary of their issuance and will fully vest upon their death or permanent
disability or upon the occurrence of a Capital Event resulting in an IRR to HEHC
of 20%. Options granted under the Senior Executive Plan to an optionee will be
forfeited upon the termination for Cause of such optionee.
The Senior Executive Plan will provide for the issuance of an additional
0.75% of the total number of outstanding shares of Common Stock (determined on a
fully diluted basis) to senior executives of the Company in the discretion of
the Board of Directors of the Company (the "Board"). Options granted under the
Senior Executive Plan will be nonstatutory options and will not be classified as
"incentive stock options" within the meaning of Section 422 of the Code. The
exercise price for options granted under the Senior Executive Plan is $833.75
per share (subject to adjustment for stock splits, stock dividends and similar
events). Other than the maximum number of shares available under the Senior
Executive Plan, there is no minimum or maximum number of shares that may be
granted to any person. Options granted under the Senior Executive Plan generally
expire within a specified number of days of the termination of employment of an
optionee. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee. The term of each option granted under the Senior
Executive Plan may not exceed 10 years from the date the option is granted. The
unallocated options with respect to 0.75 % of the Common Stock of the Company
may become exercisable in whole at grant or in installments over time, as
determined by the Board or a committee appointed by the Board.
Pursuant to the agreements which must be executed in connection with the
grant of options under the Incentive Plan, each optionee thereunder will agree
that he will not (i) during the term of such agreement and for a period of one
year thereafter compete with any business of the Company unless he is terminated
without Cause or voluntarily terminates his employment with Good Reason and (ii)
without the Company's consent, disclose to persons outside the Company
confidential information concerning the Company or any of its subsidiaries or
affiliates.
1993 Stockholders' Agreement
As a condition to the acceptance by the Company of a subscribing offeree's
subscription for Shares, such subscribing offeree is required to become a party
to the 1993 Stockholders' Agreement. The summary of the 1993 Stockholders'
Agreement set forth below is not intended to be a complete recitation of the
provisions thereof, and each Investor should read and understand all the
provisions of the 1993 Stockholders' Agreement before making a determination
whether to invest in the Shares.
Restrictions on Transfer
The 1993 Stockholders' Agreement will contain substantial restrictions on
the disposition of an Investor's Common Stock. In general, an Investor will be
permitted to transfer some or all shares of his Common Stock (i) to affiliates,
including certain relatives and controlled entities,
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provided such affiliate agrees to be bound by the terms of the 1993
Stockholders' Agreement, and (ii) to a bona fide third party purchaser who is
already a party to the 1993 Stockholders' Agreement.
An Investor will also be permitted to transfer all (but not less than all)
of his shares of Common Stock to a bona fide third party purchaser if such
purchaser agrees to be bound by the terms of the 1993 Stockholders' Agreement
but only after such Common Stock is offered first to the Company and then, if
the Company does not exercise its right to purchase such Common Stock, to HEHC
and its affiliates, in each case on the same terms as offered to the bona fide
third party purchaser. The Investor will be required to comply with certain
mechanical provisions regarding such transfer, including (i) timely notice to
the Company and HEHC of their respective rights of refusal and (ii) consummation
of any transfer within a specified period.
Rights to Compel Disposition
HEHC and GKH will have the right to compel each Investor to dispose of all
of his shares of Common Stock and make certain representations with respect to
his ownership of such Common Stock in the event HEHC and GKH seek to transfer
all, but not less than all, of their Common Stock. If HEHC and GKH exercise
their right to compel the disposition of the Investors' Common Stock, the
consideration for such Common Stock will be the same per share consideration on
the same terms to be received by GKH and HEHC for their shares of Common Stock.
Rights of Inclusion
Each Investor will have the right to sell his Common Stock on the same
terms as GKH and HEHC in the event GKH and HEHC sell Common Stock in a
transaction pursuant to which they sell at least 50% of the outstanding Common
Stock of the Company then owned by them collectively. Investors who desire to
participate in such sale will be required to deliver notice on a timely basis
and comply with other mechanical provisions in connection with such transfer.
Preemptive Rights
Although Delaware law does not generally provide for preemptive rights, in
the event the Company offers existing stockholders the opportunity to purchase
additional shares of Common Stock, the parties to the 1993 Stockholders'
Agreement will have the right to acquire their respective pro rata share of such
--- ----
Common Stock on the same terms and conditions offered to other existing
stockholders of the Company, except that such right shall not apply to (a)
shares issuable in connection with a merger, acquisition or similar transaction,
(b) shares issuable upon the exercise of any options, warrants or other
convertible securities, (c) shares offered by the Company to employees and
directors of the Company or (d) shares offered to investors who are not already
stockholders of the Company.
Transfers upon Termination
The Company will have the right to purchase all of the Common Stock of an
Investor in the event such Investor ceases to be an employee of the Company or
any of its subsidiaries or affiliates. The purchase price for such Common Stock
will be (i) in the event such Investor's
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employment is terminated for Cause, the lower of the Investor's cost for his
Common Stock on a Share by Share basis and 80% of fair market value thereof,
(ii) in the event such employment is voluntarily terminated without Good Reason,
the lower of cost and fair market value and (iii) in the event such Investor's
employment is terminated by death, retirement, permanent disability, without
Cause or with Good Reason, the fair market value of such Common Stock. The
purchase price for such Common Stock will be payable (i) in cash (and/or by the
delivery of a term note with the shortest term permissible if required by any
agreement to which the Company is subject) if such Investor's employment is
terminated voluntarily with Good Reason or upon death, retirement, permanent
disability or without Cause and (ii) by delivery of a seven year term note if
such employment is terminated for Cause or without Good Reason. Any note
delivered in connection with the foregoing will bear interest, payable annually,
at the Prime Rate.
Cost, fair market value, retirement, permanent disability and voluntary
termination are each defined in the 1993 Stockholders' Agreement.
Other Terms
The 1993 Stockholders' Agreement will govern the relationship among each of
the stockholders who are parties thereto and the Company. The 1993 Stockholders'
Agreement will supersede the original stockholders agreement dated April 10,
1992 (the " 1992 Stockholders' Agreement") among the Company and the
stockholders party thereto with respect to the relationship among the persons
who executed the 1992 Stockholders' Agreement and who also execute the 1993
Stockholders' Agreement; however, the 1992 Stockholders' Agreement will continue
to govern the relationship between each person who is a party thereto and each
person who is a party thereto who does not become a party to the 1993
Stockholders' Agreement.
RISK FACTORS
Investors should consider the specific factors set forth below as well as
the other information set forth in this Offering Memorandum. The following is
not necessarily a comprehensive list of all the possible risk factors associated
with this investment.
Limited Operating History; Prior Operating Losses
Although the Company's products are well-established in the marketplace,
the Company has had limited operating history and has experienced net profits
only in its most recent fiscal year. Prior thereto, the Company experienced
substantial operating losses, and there can be no assurance that the Company
will remain profitable in the future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations. "
Natural Gas Compressor Industry Considerations
The Company's profitability is, in part, dependent upon the current market
for natural gas. Since 1982, there has been an over-supply of natural gas and,
consequently, inflation adjusted prices have declined significantly since such
time and remain at relatively low levels. In general, future prices of natural
gas are dependent upon numerous factors beyond the control of the Company,
including competition, conservation efforts and various economic, political and
regulatory developments. The current unsettled energy market, highlighted by
ongoing political
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events in the Middle East and elsewhere, make it difficult to estimate future
prices of natural gas. Although declines in natural gas prices tend to decrease
efforts to discover and develop new natural gas reserves, thus placing greater
reliance upon older, developed natural gas reserves (which reliance requires
additional compression in order to deliver the remaining natural gas reserves to
market), a significant decline in the price of natural gas could result in the
widespread failure of natural gas producers and would likely have a material
adverse effect on the Company's financial condition and results of operations.
Similarly, a relative decrease in the price of alternative fuels such as oil
could adversely affect demand for natural gas and would likely have a material
adverse effect on the Company's financial condition and results of operation.
See "Business."
Potential Liability and Insurance
Natural gas operations are subject to certain risks, including explosions,
uncontrollable flows of gas or well fluids, fires, pollution and other
environmental risks. These risks could expose the Company to substantial
liability for injury and loss of life, property damage, pollution and other
environmental damages, and consequential damages, if such damages resulted from
an alleged compressor defect or from the Company's negligence in maintaining,
servicing or refurbishing its compressors.
Although the Company has obtained certain insurance, no assurance can be
given that such insurance is adequate to cover the Company's operations, will be
generally available in the future or, if available, that premiums will be
commercially justifiable. If the Company were to incur a substantial liability
and such damages were not covered by insurance or were in excess of policy
limits, or if the Company were to incur such liability at a time when it is no
longer. able to obtain liability insurance, its financial condition could be
materially adversely affected. The Company, consistent with industry trends, may
find it difficult to obtain adequate insurance coverage against possible
liabilities that may be incurred in connection with the conduct of its business.
There can be no assurance that all possible types of liabilities that may be
incurred by the Company will be covered by its insurance or that the dollar
amount of such liabilities will not exceed the Company's policy limits. A
partially or completely uninsured claim, if successful and of sufficient
magnitude, could have a material adverse effect on the Company and its financial
condition.
Environmental Liability Risks
In addition to liability which may arise as a result of an alleged
compressor defect or Company negligence, if environmental damage is found to
have occurred as a result of the Company's operating activities, the Company
could incur substantial liability. In such event, the Company could be liable
for all costs of remediation, as well as certain other costs. Under the
Comprehensive Response, Compensation and Liability Act ("CERCLA"), the Company
may also be liable for all costs of remediation of any property which it is
deemed to be the owner or operator. Various Preliminary Environmental (Phase 1)
Site Assessments were conducted in 1990 and 1991 with respect to certain
properties owned or operated by the Company and its subsidiaries. Such
assessments identified potential sources of ground contamination. Although
remediation efforts have been undertaken by the previous owners, no assurances
can be given
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that such remediation efforts will be successful or that the Company will not
incur costs in remediating such contamination or discover additional sources of
enumerated contamination.
Governmental Regulation
The Company is subject to various federal and state laws and regulations
relating to environmental protection, including regulations regarding emission
controls. The Company believes that it is in substantial compliance with such
laws and regulations and that the phasing in of emission controls and other
known standards at the rate currently contemplated by such laws and regulations
will not have a material adverse effect on the Company's financial condition or
results of operations. However, various state and federal agencies from time to
time consider adopting new laws and regulations or amending existing laws and
regulations regarding environmental protection. While the Company may be able to
pass on the additional costs of complying with such laws, there can be no
assurances that attempts to do so would be successful. Accordingly, new laws or
regulations or amendments to existing laws or regulations could require the
Company to undertake significant capital expenditures and could otherwise have a
material adverse effect on the Company's financial condition and results of
operations.
Restrictions Imposed by the Terms of the Company's Indebtedness; Effect of
Default
The terms of the Company's existing credit agreement dated April 10, 1992
(the "Existing Credit Agreement") among the Company, certain of its affiliates,
Chemical, as agent, and the other banks party thereto impose a variety of
restrictions on the Company's operations including, without limitation, limiting
the Company's ability to incur additional indebtedness, make capital
expenditures above specified levels, dispose of its assets or extend guarantees.
Such restrictions may limit the Company's ability to exploit fully certain
business opportunities. In addition, under the terms of its existing
indebtedness, the Company may not declare or pay any dividend or make any
payment for the purchase, redemption or acquisition of any shares of Common
Stock. While the consummation of the refinancing of the Company's existing
indebtedness on terms outlined in "Contemporaneous Events and Conditions" and
"Description of Certain Indebtedness" will alleviate these restrictions to some
degree, the Company will continue to be required to satisfy similar, although in
some instances less restrictive, covenants. In addition, the failure of the
Company to maintain certain financial ratios may cause the Company to be in
default under the agreements governing its indebtedness and such default, if
uncured, may ultimately entitle its creditors to foreclose on all of the assets
of the Company. See "Contemporaneous Events and Conditions" and "Description of
Certain Indebtedness."
Short Lease Terms; Possible Inability to Re-lease Compressors
The Company has historically leased its compressors under leases with an
average fixed term of seven months and which continue thereafter on a month to
month basis. Historically, lessees have renewed their leases on a month to month
basis for an average period of 22 months. Based on the average cost of new
compressors and the average lease price, the Company generally does not recoup
its investment in the compressors until after its receipt of at least 48 months
of lease payments. Accordingly, the Company assumes substantial risk of not
recovering its entire investment in the equipment it purchased. Although the
Company has historically been successful in re-leasing units in its inventory,
there can be no assurance that the Company will
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<PAGE>
continue to be able to do so or that a substantial portion of its lessees will
not terminate their leases at approximately the same time, thereby causing an
adverse accumulation of unleased compressors in the Company's inventory. The
inability of the Company to lease a substantial portion of its compressors for
any reason would have a material adverse effect upon the Company's financial
condition and its results of operations. See "Business."
Competition
The natural gas compression industry is highly competitive. The Company
competes with several large national and international companies which, like the
Company, offer a wide range of compressors for purchase or lease. A number of
the Company's competitors are significantly larger than the Company and have
substantially greater financial and other resources at their disposal. There can
be no assurance that such competitors will not substantially increase the
resources devoted to the development and marketing of products competitive with
those of the Company. See "Business - Competition."
The Refinancing; Dependence on Internally Generated Funds
The compressor leasing business in which the Company is involved is a
capital intensive business, and the inability of the Company to continue to have
access to sufficient capital could have a material adverse effect on the
Company's ability to finance compressor purchases and, thus, maintain its future
leasing revenues and profitability. Company growth has historically been
financed through (i) sales of Common Stock, including the sale of approximately
$15 million of Common Stock to certain executive officers and existing
stockholders of the Company in 1992 (the " 1992 Offering") (ii) internally
generated funds and (iii) borrowings under the Existing Credit Agreement which
provides for both a term loan and a revolving credit facility in the aggregate
amount of $35 million. The Company has engaged in negotiations with Chemical to
refinance the Existing Credit Agreement (the "Refinancing") and currently
contemplates that the Existing Credit Agreement will be replaced by (i) a new
$20 million revolving credit facility (the "Revolving Credit Facility") and (ii)
the issuance by the Company of $15 million of its senior notes (the "Senior
Notes"). As a condition to the Refinancing, Chemical has indicated that it will
require certain existing stockholders of the Company to invest a minimum of an
additional $15 million in the Company, and the Company believes that such
stockholders intend to invest $16 million in the Company by purchasing
additional shares of Common Stock. See "Contemporaneous Events and Conditions. "
While the investment by the principal stockholders of at least $15 million and
the execution of a definitive agreement with respect to the Revolving Credit
Facility are conditions to the consummation of this offering, the issuance by
the Company of the Senior Notes is not a condition. Although there can be no
assurance, in the event the Company is unable to consummate the issuance of the
Senior Notes, the Company believes that, based on indications by Chemical, the
Company will be able to expand the Revolving Credit Facility to $35 million, the
possible modification of such terms as may be agreed to by the Company and
Chemical. See "Contemporaneous Events and Conditions -- Stockholder Investment
and Refinancing."
In addition, although the Company believes that after consummation of the
Refinancing it will have sufficient capital resources based on internally
generated funds and the amounts available under the Revolving Credit Agreement
and the proceeds of the sale of the Senior Notes
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to fund its anticipated capital needs for at least the next five years, there
can be no assurance that the Company will meet its projected earnings and that
sufficient cash flow will be generated. Failure to generate sufficient cash flow
together with the absence of alternative sources of capital could have a
material adverse effect on the financial condition, operations and expected
growth of the Company. See "Management's Discussion of and Analysis of Financial
Condition and Results of Operations."
Limited Preemptive Rights
Although Delaware law does not generally provide for preemptive rights, in
the event the Company offer existing stockholders the opportunity to purchase
additional shares of Common Stock, the parties to the 1993 Stockholders'
Agreement will have the right to acquire for their respective pro rata share of
--- ----
such Common Stock on the same terms and conditions offered to other existing
stockholders of the Company, except that such right shall not apply to (a)
shares issuable in connection with a merger, acquisition or similar transaction,
(b) shares issuable upon the exercise of any options, warrants or other
convertible securities, (c) shares offered by the Company to employees and
directors of the Company or (d) shares offered to investors who are not already
stockholders of the Company. See "The Offering -1993 Stockholders' Agreement -
Preemptive Rights " and "Description of Capital Stock."
No Public Market for Common Stock; Restriction on Transferability
Each subscribing offeree will be required to represent that he is
purchasing the Shares for investment purposes for his own account but not with a
view to resale or distribution. There is no public market for the Shares, and a
stockholder's ability to transfer his Common Stock will be significantly
restricted by the terms of the 1993 Stockholders' Agreement. In addition, the
1993 Stockholders' Agreement will (i) give HEHC and GKH, collectively, the right
to cause all stockholders to sell their Common Stock in certain transactions and
(ii) give the Company or certain of its affiliates the right, but not the
obligation, to purchase all of the Common Stock of an employee stockholder upon
the termination of such employee's employment with the Company. The purchase
price for such stock varies depending on the circumstances and, in cases where a
stockholder is terminated for Cause or voluntarily terminates his employment
without Good Reason, such purchase price may be substantially below the fair
market value of such Common Stock. See "The Offering -- 1993 Stockholders'
Agreement." Any potential investor must be able and willing to bear the risk of
his investment for an indefinite period.
Dividends
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
ability of the Company to pay dividends will be limited by the terms of the
agreements governing the Revolving Credit Facility and the Senior Notes. See
"Dividend Policy."
Control by Principal Stockholders
Prior to the consummation of this offering and described under the heading
"Contemporaneous Events and Conditions," approximately 65.25% of the Company's
outstanding Common Stock was owned by HEHC, and an additional 28.77% was owned
directly
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by GKH, the controlling stockholders of HEHC. Subsequent to this offering and
the Contemporaneous Events, HEHC will continue to own a majority of the Common
Stock of the Company. By maintaining such majority ownership, HEHC and,
indirectly, GKH will continue to have the power to determine the policies of the
Company and its subsidiaries, the persons constituting the directors and
officers thereof and the outcome of various corporate actions requiring
stockholder approval.
Dilution
Assuming (i) all of the Shares are issued and (ii) all of the Offering
Conditions (as defined under the heading "Contemporaneous Events and
Conditions") are consummated as currently contemplated (including the issuance
of 2,566 shares of Common Stock in connection with the Merger and the issuance
of 22,096 shares of Common Stock pursuant to the investment by certain existing
stockholders), the value of the Shares purchased pursuant to this offering will
be subject to immediate dilution in the net tangible book value of $133.15 per
share from the adjusted net tangible book value as of March 31, 1993.
CONTEMPORANEOUS EVENTS AND CONDITIONS
Contemporaneous with this offering, the Company intends to (i) obtain an
additional equity investment of approximately $16 million from certain of its
existing non-management stockholders, (ii) execute a definitive agreement with
respect to the Revolving Credit Facility, terminate the Existing Credit
Agreement and continue to take such actions as may be necessary to issue the
Senior Notes, and (iii) consummate the Merger. The investment by existing
stockholders of at least $15 million, the execution of a definitive agreement
relative to the Revolving Credit Facility (but not the Senior Notes) and the
consummation of the Merger, together with the minimum subscription requirements
of this offering, are conditions to this offering and all collectively referred
to herein as the "Offering Conditions." Subsequent to this offering and as part
of the Refinancing, the Company anticipates issuing up to $15 million of Senior
Notes to banks and other financial institutions; however, the consummation of
such transaction is not a condition to the consummation of this offering. The
Offering Conditions and the issuance of the Senior Notes are collectively
referred to herein as the "Contemporaneous Events. Additional information with
respect to each of the Contemporaneous Events is set forth below.
Stockholder Investment and Refinancing
The Company has offered to sell to certain of its existing non-management
stockholders up to an additional 23,026 shares of Common Stock at a purchase
price of $725 per share and expects to receive subscriptions for 22,096 shares
for a total of approximately $16 million such existing stockholders will not
receive additional options and will not be entitled to purchase such shares with
the proceeds of loans from the Company. The proceeds of such transaction will be
used to repay in substantial part amounts outstanding under the Existing Credit
Agreement. The Company intends to replace the amounts available under the
Existing Credit Agreement with (i) the Revolving Credit Facility and (ii) the
proceeds of the Senior Notes. The execution of a definitive agreement with
respect to the Revolving Credit Facility (the "Revolving Credit Agreement") is a
condition to this offering, but the issuance of the Senior Notes is not a
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<PAGE>
condition to this offering. Although no assurance can be given, in the event the
Company is unable to consummate the issuance of the Senior Notes, the Company
believes that, based on indications given by Chemical, it will be able to expand
the Revolving Credit Facility by an additional $15 million, subject to the
possible modification of such terms as may be agreed upon by the Company and
Chemical.
The Company believes that the Revolving Credit Facility and the Senior
Notes will provide the Company with greater flexibility with respect to its
working capital needs.
For additional information with respect to the Existing Credit Agreement,
see "Description of Certain Indebtedness -- Existing Credit Agreement."
For additional information with respect to the minimum financing terms of
the Revolving Credit Facility, see "Description of Certain Indebtedness --
Revolving Credit Facility."
For additional information with respect to the anticipated terms of the
Senior Notes, see "Description of Certain Indebtedness - Senior Notes."
Merger
The Company intends to enter into a Merger Agreement (the "Merger
Agreement") with HEHC and Hanover Pipeline Company, a Delaware corporation and a
wholly owned subsidiary of HEHC ("HPC"), pursuant to which the Company will (i)
issue to HEHC an additional 2,069 shares of Common Stock in consideration for
all of the issued and outstanding capital stock of HPC and (ii) issue to HEHC
and all of the holders of the Common Stock purchased in the 1992 Offering an
aggregate of 465 shares of Common Stock in consideration for the Series A
Preferred Stock of the Company held by HPC. Pursuant to the Merger Agreement,
HPC will be merged with and into the Company, with the Company as the surviving
corporation.
HPC currently owns 16 compressors which it acquired in connection with the
sale and exchange of all of its assets to Stellar Energy Corp. ("Stellar") and
certain of Stellar's affiliates. HPC has certain potential environmental
liabilities estimated at December 31, 1992 to be between $139,000 and $200,000;
however, HEHC has agreed to indemnify the Company for any loss incurred by the
Company as a result of such environmental liabilities or any other environmental
liability of HPC arising out of or related to the Merger. The value of HPC's
compressors which was used to calculate the number of shares to be issued to
HEHC was determined solely by the Boards of Directors of such companies and
unanimously approved by a special committee of the Board of Directors of the
Company comprised of Ted Collins, Jr., who has no affiliation with HEHC or HPC,
Michael A. O'Connor, who is an officer and director of the Company, and William
S. Goldberg, who is an officer and director of the Company, HPC and HEHC. See
"Management." The number of shares of Common Stock to be issued in consideration
for the Series A Preferred Stock was determined by agreement among the Board and
the stockholders of the Company not receiving such Common Stock.
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DETERMINATION OF OFFERING PRICE
The offering price of $725 per Share was determined solely by the Board
based on a number of factors, including a comparison of the Company's 1992 and
projected 1993 financial performance to the financial performance and
corresponding per share market multiples of a select group of public companies
involved in the natural gas compressor leasing and fabrication and energy
services industries. By virtue of the nature of this offering, the offering
price was not determined pursuant to arms' length negotiations with a third
party, and there can be no assurance that such price is indicative of the fair
market value of the Shares.
PLAN OF OFFERING
The minimum purchase per subscribing offeree is seven Shares (excluding
Shares to be acquired by delivery of a Four Year Note) for a minimum aggregate
purchase price of $5,075, provided that the Company in its sole discretion and
subject to applicable securities laws, may accept smaller subscriptions. The
minimum aggregate purchase for all investors is 2,069 Shares (including shares
to be purchased by delivery of a Four Year Note) for a minimum aggregate
purchase price of $1,500,025. The Company reserves the right (i) to reject any
subscription for any reason and (ii) to make non-material modifications to or
terminate this offering at any time for any reason.
Each offeree who desires to subscribe for Shares must (i) on or before
Friday, June 25, 1993, call Curtis Bedrich (at 214 528-9270) to communicate the
number of Cash Shares and Loan Shares for which such offeree desires to
subscribe and whether such offeree will be purchasing the Cash Shares with a 90-
day Loan and (ii) prior to Monday, June 28, 1993, execute and return to the
Company, c/o Curtis Bedrich, (a) one copy and one extra signature page of the
Subscription Agreement included herewith, and (b) one copy and one extra
signature page of the 1993 Stockholders' Agreement included herewith.
Upon oral confirmation of the number and type of Shares subscribed for by a
subscribing offeree, the Company will prepare and distribute for execution to
such subscribing offeree (i) one execution copy of each of the 90-day Note and
the Four Year Note, if applicable, (ii) two copies of the Pledge Agreement, if
applicable, (iii) two copies of the agreement under the Management Option Plan,
(iv) an assignment separate from certificate, if the subscribing offeree has
requested a Loan, and (y) an IRS Form W-9. In addition to the Subscription
Agreement and the 1993 Stockholders' Agreement previously delivered, the
subscribing offeree must then, prior to June 29, 1993, return to the Company,
c/o Curtis Bedrich, to the extent applicable, (i) the executed Notes, (ii) two
executed counterparts of the Pledge Agreement, (iii) two executed counterparts
of the agreement under the Management Option Plan, (iv) the assignment separate
from certificate, executed in blank, (v) the fully completed and executed Form
W-9 and (vi) if applicable, a certified or cashier's check in the amount of (a)
the number of Cash Shares subscribed for by the offeree multiplied by (b) $725.
The foregoing deadlines are summarized as follows:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------
Event Deadline
- ----- --------
- ---------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------
Orally contact Curtis Bedrich (at Friday, June 25
214-528-9270) to indicate the number of shares
you wish to subscribe for
- ---------------------------------------------------------------------------------
Deliver one execution copy and one extra Monday, June 28
counterpart of (i) the Subscription Agreement
(including Schedule A attached thereto) and 00
the 1993 Stockholders' Agreement (including the
spousal consent, if relevant)
- ---------------------------------------------------------------------------------
Deliver, as relevant, (i) one copy of each of Tuesday, June 29
the 90-day Note and the Four Year Note, (ii)
one execution copy and one extra counterpart of NOTE: These documents will be
the Pledge Agreement, (iii) one execution copy delivered to you Monday, June
and one extra counterpart of the agreement under 28 if you orally contact Curtis
the Management Option Plan, (iv) an assignment Bedrich with your subscription
separate from certificate and (y) and IRS Form by Friday, June 25.
W-9 I
- ---------------------------------------------------------------------------------
</TABLE>
All cash received by the Company in respect of subscriptions for the Shares
(the "Funds") shall be promptly deposited in an interest bearing, segregated
account and such Funds may be invested in treasury bills or other cash
equivalents, as determined in the sole and absolute discretion of the Company.
If acceptable subscriptions for the Shares are received by the Company and if
the Offering Conditions are satisfied on or before June 30, 1993, or such later
time as determined in the sole and absolute discretion of the Company without
notice to or consent of offerees, but in no event later than August 15, 1993
(the "Termination Date"), all Funds will be transferred from the segregated bank
account to the Company, together with all income, if any, earned thereon. See
"Contemporaneous Events and Conditions." In the event the Offering Conditions
have not been satisfied on or before the Termination Date, this offering will be
terminated and all funds will be returned to the subscribing offerees with a pro
rata share of interest earned thereon, calculated on the basis of the amount of
Funds invested by each subscribing offerees and the length of time interest on
such Funds was earned.
USE OF PROCEEDS
Assuming all the Shares are issued, the net proceeds of the offering,
estimated to be $2,419,800, will be used for general corporate purposes,
including working capital.
DILUTION
--------
As of March 31, 1993, the Company had adjusted net tangible book value
(defined as total stockholders' equity less goodwill adjusted to give effect to
the consummation of the Offering Conditions) of $45,488,431, or $585.93 per
share of Common Stock. Adjusted net tangible book value per share of Common
Stock is determined by adjusting the actual net tangible book value of the
Company for the consummation of the offering conditions and dividing such amount
by the number of shares of its Common Stock and treating all such Common Stock
as having been issued for cash which would have been outstanding as of March
21
<PAGE>
31, 1993. After giving effect to the sale of the Shares and the application by
the Company of the estimated net proceeds therefrom as described in "Use of
Proceeds," the pro forma net tangible book value of the Company as of March 31,
1993 would have been $47,988,231, or $591.85 per share of Common Stock. This
value represents an immediate increase in the adjusted net tangible book value
of $5.92 per share of Common Stock to the current shareholders and an immediate
dilution in net tangible book value of $133.15 per share of Common Stock to
purchasers of the Shares. Dilution per share is determined by subtracting the
pro forma adjusted net tangible book value per share of Common Stock after the
completion of this offering from the per share price paid by purchasers of the
Shares. The following table (1) illustrates this per share dilution:
<TABLE>
<S> <C>
Price per share pursuant to this offering................................. $725.00
Adjusted net tangible book value per share as of March 31, 1993......... $585.93
Increase in adjusted net tangible book value per share
attributable to the offering(2)......................................... $ 5.92
-------
Pro forma adjusted net tangible book value per share after this offering.. $591.85
Dilution per share to purchasers of the Shares.............................. $133.15
</TABLE>
(1) Assumes that all of the Shares are subscribed for and excludes shares of
Common Stock reserved for issuance pursuant to options which have
previously been granted to certain members of management. To the extent
such options are exercised, the value of Shares purchased by Investors may
be subject to further dilution. See "Capitalization," "The Offering --
Stock Options" and "Description of Capital Stock -- Options."
(2) Does not reduce stockholders' equity for the amount of the Loans.
The following table sets forth as of March 31, 1993 (calculated on the same
basis as the preceding paragraph) the number of shares of Common Stock purchased
from the Company, the total consideration paid, the average price per share paid
by the existing shareholders of the Company and the price per share to be paid
by Investors:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
---------------- -------------------
- ---------------------------------------------------------------------------------------
Avg. Price
Number % Amount $ Per Share
------ ------- ----------- ------- ----------
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 77,634 95.7 $52,598,995 95.5 $677.53
- ---------------------------------------------------------------------------------------
Investors................ 3,448 4.3 $ 2,499,800 4.5 $725.00
- ---------------------------------------------------------------------------------------
Total.................... 81,082 100.0 $55,048,795 100.00 $678.93
=======================================================================================
</TABLE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of March 31, 1993 and as adjusted to reflect (i) the consummation of this
offering (assuming all 3,448 Shares are subscribed for) and Offering Conditions
(assuming the existing stockholders subscribe for
22
<PAGE>
22,069 shares of Common Stock) and (ii) the consummation of this offering and
the Contemporaneous Events, in each case after the anticipated application of
the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
March 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------
As Adjusted As Adjusted
for the for the
Offering Contemporaneous
Actual Conditions Offering
----------- -------------- --------
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Notes payable and current installments of long-term debt(1)..... $ 3,015,751 $ _ $ _
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current positions..........................
- ------------------------------------------------------------------------------------------------------------------------------
Existing Credit Agreement.................................. $16,800,150 _ _
- ------------------------------------------------------------------------------------------------------------------------------
Revolving Credit Facility.................................. - 3,615,676 -
- ------------------------------------------------------------------------------------------------------------------------------
Senior Notes............................................... - - 15,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity............................................
- ------------------------------------------------------------------------------------------------------------------------------
Preferred Stock, $.01 par value, 100,000 shares
authorized, 80,000 shares of Series A Preferred Stock
issued and outstanding prior to the Merger and 0
shares issued and outstanding as adjusted for the
Offering Conditions and Contemporaneous Events............. 800 - -
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, 200,000 shares
authorized, 53,051 issued and outstanding, 81,082
issued and outstanding after the Offering Conditions
and Contemporaneous Events(2).............................. 53 81 81
- ------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital...................................... 35,082,372 49,597,519 49,597,519
- ------------------------------------------------------------------------------------------------------------------------------
Retained earnings............................................... (2,073,981) (1,502,047) (1,502,047)
- ------------------------------------------------------------------------------------------------------------------------------
Less:
- ------------------------------------------------------------------------------------------------------------------------------
Notes receivable from officers and employees for
purchase of Common Stock................................... (1,073,322) (2,407,022) (2,407,022)
- ------------------------------------------------------------------------------------------------------------------------------
Net stockholders' equity................................... 32,901,922 45,688,531 45,688,531
- ------------------------------------------------------------------------------------------------------------------------------
Total capitalization..................................... 52,717,823 49,304,307 60,688,531
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See Note 4 of the Notes to the Consolidated Financial Statements.
(2) Excludes an aggregate of 1,200 shares of Common Stock subject to options
previously granted to executive officers of the Company pursuant to the
1992 Stock Plan and all options granted to Investors pursuant to the
Management Option Plan, the Senior Executive Plan and the Incentive Plan.
DIVIDEND POLICY
The Company has not paid dividends since its inception. The Company
currently intends to retain all earnings, if any, to fund the expansion of its
business and therefore does not anticipate paying any dividends in the
foreseeable future. In addition, the ability of the Company
23
<PAGE>
to pay dividends is limited by the terms of the Existing Credit Agreement, and
it is anticipated that similar limitations, although less restrictive, will be
contained in the agreements governing the Revolving Credit Facility and the
Senior Notes.
SELECTED FINANCIAL INFORMATION
The selected financial data presented below is derived from the financial
statements of the Company, which statements for the years ended December 31,
1992 and 1991 have been audited by Price Waterhouse, independent auditors. The
balance sheets as of December 31, 1992 and December 31, 199 1, and the
statements of operations for each such year, are included elsewhere in this
Offering Memorandum. The selected financial data set forth below as of March 31,
1993 and March 31, 1992 were derived from the Company's unaudited financial
statements. Interim results are not necessarily indicative of the results for
the full year. The data set forth herein should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements and notes thereto appearing
elsewhere in this Offering Memorandum.
<TABLE>
<CAPTION>
=============================================================================================================================
Quarter Quarter
Ended Ended
Year Ended Year Ended March 31, March 31,
December 31, December 31, 1993 1992
Statement of Income Date 1992 1991 (unaudited) (unaudited)
------------------------ ---- ---- ----------- -----------
- -----------------------------------------------------------------------------------------------------------------------------
Revenues:
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Compressor leasing and maintenance............ $21,215,442 $18,085,932 $ 5,467,994 $5,280,058
- -----------------------------------------------------------------------------------------------------------------------------
Compressor packaging.......................... 10,838,393 3,384,026 5,202,518 2,498,348
- -----------------------------------------------------------------------------------------------------------------------------
Equity in income of MEI Joint
Venture....................................... 429,296 143,088 87,121 98,576
- -----------------------------------------------------------------------------------------------------------------------------
Other......................................... 156,089 21,758,758 10,788,068 7,983,364
----------- ----------- ----------- ----------
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues........................... 32,639,220 21,758,758 10,788,068 7,983,364
- -----------------------------------------------------------------------------------------------------------------------------
Costs and expenses
- -----------------------------------------------------------------------------------------------------------------------------
Compressor leasing and maintenance............ 9,889,374 7,596,676 2,409,824 2,285,300
- -----------------------------------------------------------------------------------------------------------------------------
Compressor packaging.......................... 9,336,005 3,477,294 4,565,763 2,081,656
- -----------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative
expenses...................................... 6,129,664 5,277,616 1,568,247 1,664,493
- -----------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization................. 3,554,207 2,871,098 1,056,806 1,050,884
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense.............................. 1,658,925 3,076,220 353,064 608,273
- -----------------------------------------------------------------------------------------------------------------------------
Other expenses................................ 97,120 539,084 23,253 31,682
----------- ----------- ----------- ----------
- -----------------------------------------------------------------------------------------------------------------------------
Total costs and expenses................. 30,665,295 22,837,988 9,976,957 7,722,288
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations, before
taxes.............................................. 1,973,925 (1,079,230) 811,111 261,076
- -----------------------------------------------------------------------------------------------------------------------------
Income tax expense................................. 494,532 -- 261,634 --
- -----------------------------------------------------------------------------------------------------------------------------
Discontinued operations, net of tax benefits....... (287,946) (2,553,304) (457) (45,538)
----------- ----------- ----------- ----------
=============================================================================================================================
</TABLE>
24
<PAGE>
<TABLE>
=============================================================================================================================
<S> <C> <C> <C> <C>
Income (loss) before extraordinary item............ 1,191,447 (3,632,534) 549,020 215,638
- -----------------------------------------------------------------------------------------------------------------------------
Realization of net operating loss carry
forward............................................ 400,811 -- -- --
-----------
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss).................................. $ 1,592,258 $(3,632,534) $ 549,020 $ 215,638
----------- ----------- ----------- ----------
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================================================
March 31, 1993
--------------
Balance Sheet Data December 31, 1992 December 31, 1991 (unaudited)
- ------------------ ----------------- ----------------- -----------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total current assets............................... $11,933,077 $ 8,465,254 $11,451,030
- -----------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment.................. 39,621,534 34,092,430 43,299,852
- -----------------------------------------------------------------------------------------------------------------------------
Other assets....................................... 4,418,589 4,295,003 3,718,741
$55,973,200 $46,852,687 $58,469,613
----------- ----------- -----------
- -----------------------------------------------------------------------------------------------------------------------------
Total current...................................... $ 7,159,178 $5,390.184 $ 6,512,803
- -----------------------------------------------------------------------------------------------------------------------------
Long-Term debt and other liabilities............... 16,468,879 28,893,542 19,054,888
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity............................... 32,345,143 12,568,961 32,901,922
$55,973,200 $46,852,687 $58,469,613
=============================================================================================================================
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF'
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's primary operations consist of two business segments. The
principal segment consists of the leasing and maintenance of the Company's
natural gas compressor units ("Leasing and Maintenance"), and the second segment
consists of designing, engineering and assembling natural gas compressor units
and, commencing in 1993, other oil and gas production equipment ("Compressor
Packaging"). See "Business -- Operations."
The year ended December 31, 1991 was the first full year of operations of
the Company, following the acquisition in late 1990 of all of the capital stock
of Guerra Engineering, Inc., a Texas corporation ("GEV), Energy Recovery
Systems, Inc., a Texas corporation ("ERSI"), and Precision Welding & Machine,
Inc., a Texas corporation ("PWMI"), and substantially all of the assets of C&B
Compression Sales, Inc., a Louisiana corporation ("C&B"). These acquisitions
were accounted for using the purchase method of accounting. Accordingly, the
operations of each respective entity is included from the date of its
acquisition. In addition, HEHC acquired all of the stock of Maintech
Enterprises, Inc., a Texas corporation ("MEV), in July 1991 and contributed the
stock of MEI to the Company in April 1992. The contribution was reflected as a
reorganization of entities under common control, and the 1991 results of
operations of the Company include MEI from the date of its acquisition by HEHC.
See "Business -- Company History." The results of operations and acquisition
costs in excess of estimated net realizable value of PWMI are reflected as
discontinued operations in the Company's Consolidated Financial Statements.
25
<PAGE>
Pursuant to the acquisition of MEI, the Company acquired a 50% interest in
a joint venture, the operations of which joint venture consist of leasing
natural gas compressors. Results of operations of the joint venture are recorded
using the equity method of accounting. The remaining interest in the joint
venture was acquired by the Company effective April 1, 1993 for an aggregate
cost of $2.2 million. Such acquisition will be accounted for using the purchase
method of accounting and the results of operations of the entire operations of
the joint venture will be included in Leasing and Maintenance subsequent to such
date.
Liquidity and Capital Resources
Earnings from continuing operations, before depreciation and amortization,
amounted to $5.5 million. during 1992. Other significant sources of funds during
1992 were proceeds of $15 million from sales of Common Stock pursuant to the
1992 Offering and amounts available under the Existing Credit Agreement.
Significant uses of funds included the repayment of a substantial portion of
debt under the Existing Credit Agreement and capital expenditures aggregating
$9.6 million.
The financing necessary to support the Company's historical operations has
principally been provided from borrowings under the Existing Credit Agreement
and prior sales of Common Stock. Pursuant to the Refinancing, the Existing
Credit Agreement will be replaced with the Revolving Credit Facility, the
consummation of which is a condition to this offering, and the issuance of the
Senior Notes, the consummation of which is not a condition to this offering.
Although no assurances can be given, in the event the Company is unable to
consummate the issuance of the Senior Notes, based on indications by Chemical,
the Company believes that it will be able to expand the limit under the
Revolving Credit Facility from $20 million to $35 million to provide the
additional financing necessary for the Company's anticipated operations.
For a discussion of the Company's anticipated capital expenditures for the
next three years, see "Business -- Business Strategy."
Inflation has not had a significant impact on the operations of the
Company.
Results of Operations
Year ended December 31, 1992 compared to year ended December 31, 1991
Revenues
Revenues from Leasing and Maintenance increased by $3.1 million, or 17%,
from $18.1 million in 1991 to $21.2 million in 1992. This increase resulted
primarily from the addition to the compressor fleet of 50 compressor units (with
a total horsepower of 16,000). Monthly horsepower utilization of 91 % to 96 % in
1992 was consistently in excess of the estimated industry average.
Revenues from Compressor Packaging increased by $7.4 million, or 217%, from
$3.4 million in 1991 to $10.8 million in 1992. This increase resulted from an
increase in the volume of compressor fabrication and the inclusion of a full
year of operations of MEL The financial results for 1992 include the operations
of MEI for the entire year, while financial results for 1991
26
<PAGE>
include the operations of MEI from its acquisition in July. Compressor Packaging
operations resulted in an operating profit (i.e., net earnings before
depreciation and amortization expense and interest expense) of $171,000 during
1992, as compared to an operating loss of $508,000 during 1991.
Expenses
Leasing and Maintenance operating expenses increased by $2.3 million, or
30%, from $7.6 million in 1991 to $9.9 million in 1992. This increase resulted
primarily from the increase in the size of the Company's compressor fleet and an
increase in maintenance services performed for third parties.
Operating expenses for the Compressor Packaging segment increased by $5.8
million, or 166%, from $3.5 million in 1991 to $9.3 million in 1992. This
increase resulted from the increase in compressor fabrication and the inclusion
of a full year of operations of MEI.
Selling, general and administrative expenses increased by $852,000, or 16%,
from $5.3 million for 1991 to $6.1 million for 1992. This increase is
attributable primarily to the inclusion of operations of MEI for the entire
twelve months of 1992 as compared to only six months during 1991.
Depreciation and amortization increased $700,000, or 24%, from $2.9 million
in 1991 to $3.6 million in 1992 as a result of capital expenditures during 1992
of 9.5 million. This increase resulted primarily from an increase in size of the
Company's compressor fleet and other capital expenditures which together
aggregated to $9.5 million.
Interest expense decreased $1.4 million, or 45%, from $3. 1 million in 1991
to $1.7 million in 1992. This decrease resulted from the repayment in April 1992
of a substantial portion of the amount outstanding and a negotiated reduction in
the rate of interest charged under the Existing Credit Agreement with the
proceeds of the 1992 Offering.
Income Tax
The Company generated income for financial reporting purposes in 1992 and
incurred a loss for tax purposes primarily due to differences in depreciation
methods utilized for financial reporting purposes as compared to tax purposes.
Accordingly, income tax expense of $494,000 reflected for financial reporting
purposes is offset for tax purposes by an extraordinary item of $401,000
resulting from the utilization of net operating losses and a tax benefit of
$93,000 from discontinued operations. At December 31, 1992, the Company had tax
net operating losses of approximately $9 million available to reduce future
taxable income.
Net Income
As a result of the foregoing factors, net income increased in 1992 by $5.2
million, from a loss in 1991 of $3.6 million to a gain in 1992 of $1.6 million.
Quarter ended March 31, 1993 compared to quarter ended March 31, 1992
27
<PAGE>
Revenues
Leasing and Maintenance revenue increased $200,000, or 4%, from $5.3
million for the quarter ended March 31, 1992 to $5.5 million for the quarter
ended March 31, 1993. This increase resulted from the addition to the compressor
fleet of 16,000 horsepower from March 31, 1992 to March 31, 1993. Average
horsepower utilization amounted to 95.1% and 94.3% for the quarters ended
March 31, 1992 and 1993, respectively.
Compressor Packaging revenue increased $2.7 million, or 108%, from $2.5
million for the quarter ended March 31, 1992 to $5.2 million for the quarter
ended March 31, 1993. This increase resulted from an increase in compressor
fabrication volume from the 1992 to the 1993 quarter and from the initiation of
production equipment fabrication in March 1993.
Expenses
Leasing and Maintenance operating expense increased $100,000, or 5%, from
$2.3 million for the quarter ended Much 31, 1992 to $2.4 million for the quarter
ended March 31, 1993. This increase resulted from the Company's compressor fleet
expansion.
Compressor Packaging operating expense increased $2.5 million, or 119%,
from $2.1 million for the quarter ended March 31, 1992 to $4.6 million for the
quarter ended March 31, 1993. This increase resulted from the increase in
compressor fabrication volume for the quarter ended March 31, 1993 compared to
1992.
Selling, general and administrative expense decreased $100,000, or 6% from
$1.7 million for the quarter ended March 31, 1992 to $1.6 million for the
quarter ended March 31, 1993. This decrease resulted from various general and
administrative reduction measures implemented in 1992.
Interest expenses decreased $200,000, or 42%, from $600,000 to $400,000 for
the quarters ended March 31, 1992 and 1993, respectively. This decrease results
from the substantial repayment of the amount outstanding under the Existing
Credit Agreement with the net proceeds of the 1992 Offering.
Income Tax
Effective January 1, 1993, the Company adopted Financial Accounting
Standard (FAS) 109 which revised the method by which the Company accounts for
income taxes. The income tax expense recognized for the quarter ended March 31,
1993 results primarily due to the adoption of FAS 109.
Stockholders' Equity
Stockholders' Equity increased $19.7 million, from $12.6 million in 1991 to
$32.3 million in 1992 primarily as a result of the sale of Common Stock in the
1992 Offering.
BUSINESS
28
<PAGE>
Company History
The Company was incorporated in Delaware in October 1990 as a majority-
owned subsidiary of Hanover Energy Inc., a Texas corporation and a predecessor
in interest to HEHC ("HEI"). In November and December 1990, the Company acquired
all of the capital stock of GEI, ERSI and PWMI and substantially all of the
assets of C&B, which acquisitions were accounted for using the purchase method
of accounting.
In July 1991, HEHC acquired all of the common stock of MEI through a
subsidiary created solely for that purpose. Such subsidiary was subsequently
merged into MEI, and HEHC contributed the stock of MEI to the Company in April
1992 in connection with the refinancing of the Existing Credit Agreement. The
contribution was reflected as a reorganization of entities under common control,
and the Company's 1991 results of operations include the operations of MEI from
the date of acquisition by HEHC.
As a result of the acquisition of MET, the Company acquired a 50% interest
in a joint venture, the operations of which joint venture consist of leasing
natural gas compressor units. The remaining interest in the joint venture was
acquired by the Company effective April 1, 1993 and the joint venture was
liquidated shortly thereafter.
In May 1991, HEI was acquired by HEHC, the principal stockholders of which
are GKH. See "Principal Stockholders." Effective December 31, 1992, HEI merged
into HEHC, and as a result thereof, the Company became a direct majority-owned
subsidiary of HEHC.
Also effective as of December 31, 1992, GET and ERSI merged into the
Company and, as a result thereof, the separate existence of GET and ERSI ceased
and all of their respective assets and liabilities became vested in the Company.
Such merger had no effect on the consolidated financial statements or results of
operations of the Company.
Industry
Natural gas compressors generally do not suffer significant technological
obsolescence, so that the useful life of a compressor is based primarily on its
mechanical integrity. The useful life of a compressor may also be extended by
refurbishing or overhauling the compressor at regular intervals of approximately
five to six years. Refurbished or overhauled compressors may be leased at prices
substantially similar to new compressors.
The gas compressor industry services both independent producers and major
natural gas producers, as well as pipeline, gathering and transmission
companies, and is substantially dependent on the natural gas industry. The
Company believes that independent producers currently account for a substantial
portion of the natural gas industry. The Company also believes that independent
gas producers are now accounting for an increasing portion of the natural gas
produced in the United States relative to that produced by major integrated
energy producers and that independent producers are more likely to lease
compressors from third parties such as the Company as a result of restraints on
their ability to make the large capital expenditures necessary to purchase
compressors.
29
<PAGE>
The Company believes that the market for natural gas compressors is driven
by a variety of factors, including, without limitation, (i) the price of natural
gas, (ii) the age of particular gas wells, (iii) the relative price of natural
gas to the price of oil or other alternative energy sources and (iv) the season.
All other things being equal, the gas compression industry is generally
benefited by either an increase in gas prices, which generally results in the
development of new wells, fields and pipeline systems and a corresponding
increase in demand for compression, or by a decrease in natural gas prices,
which results in outsourcing by independent producers and an increase in the
need for leased compression. Increases in the age of natural gas wells also has
a positive impact on the gas compression industry since older wells generally
experience a decline in their reservoir pressure and require compressors to
increase their productivity.
Conversely, all other things being equal, a relative decrease in the price
of oil or other energy sources as compared to natural gas generally will have an
adverse effect on the natural gas compression industry since such circumstances
encourage energy users to switch from natural gas to alternative fuel sources
thereby decreasing demand for natural gas.
The Company believes that the natural gas compressor industry is also
affected by seasonality, with the highest demand for compression in winter
months when natural gas is in greater demand. As a result of such seasonality,
the Company generally experiences slightly decreased revenues for its Leasing
and Maintenance segment during the months of May through August.
Market Position
Leasing and Maintenance
The Company believes that the market for the leasing of natural gas
compressors may be distinguished from the market for the sale of natural gas
compressors since the decision to lease a compressor is generally made prior to
such customer's entrance into the market place. Generally, lessees are customers
who anticipate only a short term need for the compressor which is substantially
less than the estimated useful life of the unit or customers who are unable to
obtain financing for the purchase of such units.
The Company believes that the natural gas compressor leasing industry may
be divided into categories based on the compressor horsepower and that market
share of the participants in the industry may be determined based on either (i)
the number of units leased by such participants or (ii) the total horsepower
leased by such participants.
The Company's compressor fleet as of March 31, 1993 was divided by
horsepower as follows:
===================================================================
Units Total Horsepower
----- ----------------
Category (by Horsepower) (% of Fleet) (% of fleet)
------------------------ ------------ ------------
-------------------------------------------------------------------
0 - 44 44 (9%) 1,437 (1%)
-------------------------------------------------------------------
45 - 60 66 (13%) 3,363 (3%)
-------------------------------------------------------------------
61- 100 101 (20%) 9,088 (8%)
-------------------------------------------------------------------
101 - 200 135 (26%) 18,830 (16%)
-------------------------------------------------------------------
201 - 500 95 (18%) 30,287 (25%)
===================================================================
30
<PAGE>
----------------------------------------------------------
501 - 800 40 (8%) 27,25 (23%)
----------------------------------------------------------
801 - 1100 30 (6%) 29,480 (24%)
----------------------------------------------------------
TOTAL 511 (100%) 119,710 (100%)
==========================================================
Based on industry statistics, the Company believes that the U.S. natural
gas compressor leasing industry is a highly fragmented business made up of in
excess of 50 companies aggregating 2,000,000 horsepower. Based on information
available to the Company, the Company believes that it is the eighth largest
compressor leasing company in the U.S. based on total units and the seventh
largest compressor leasing company in the U.S. based on total horsepower.
Compressor Packaging
The Compressor Packaging business, carried on primarily through MEI,
competes with other manufacturers of compressor units. The compressor packaging
business is dominated by a few major competitors, several of whom also compete
with the Company in the compressor leasing business.
Although sufficient information is not available to estimate the Company's
relative position in the compressor packaging market, several of the Company's
competitors in such business are larger and have greater resources than the
Company.
Business Strategy
During the last two years, the Company has dedicated substantial resources
to the integration of the operations it acquired in 1990. Based on these
activities and the substantial managerial infrastructure the Company has in
place, the Company's management believes that the Company can approximately
double its aggregate compressor horsepower available for lease without
significantly adding to its fixed operating overhead. Consistent with this
strategy, the Company has developed a three-year budget to serve as the
Company's business plan for such period (the "Plan"). The Plan includes
provision for capital expenditures for the purchase of new and used compressors
and the refurbishing of its existing compressors of $16.7 million in 1993 and
$20.0 million each in 1994 and 1995. Capital expenditures anticipated in 1993
are comprised of $1.2 million for refurbishing of existing units, $13.5 million
for the purchase of used compressors and $2.0 million for the purchase of new
compressors. The Company anticipates that internally generated funds and the
amounts available under the Revolving Credit Facility and pursuant to the sale
of the Senior Notes will be sufficient to enable the Company to meet its
operational needs and carry out the Plan at least through 1995; however, the
Company may desire to raise additional capital through the public markets or
otherwise.
In general, the Company does not anticipate making any expenditures for
product research and development inasmuch as neither the Company's Leasing and
Maintenance segment nor its Compressor Packaging segment require such
expenditures. The Company anticipates acquiring a new facility in Houston,
Texas, which will serve as its corporate offices and fabrication facility, and
certain other properties which will serve as regional offices and/or maintenance
facilities; however, the acquisition of such properties themselves are not
expected
31
<PAGE>
to have a material adverse impact on the results of operations of the Company.
See "- Properties."
Operations
The following tables show (i) the revenues and operating profit (loss) for
each of the years ended December 31, 1992 and December 31, 1991 and for the
quarters ended March 31, 1993 and March 3 1, 1992 and (ii) the assets of the
Company for the years ended December 31, 1992 and December 31, 1991 and the
quarter ended March 31, 1993, in each case for each of the Leasing and
Maintenance segment, the Compressor Packaging segment, and the Company's other
revenue sources:
<TABLE>
<CAPTION>
================================================================================================
Year Ended Year Ended Quarter Ended Quarter Ended
December 31, December 31, March 31, March 31,
1992 1991 1993 1992
---- ---- ---- ----
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
- ------------------------------------------------------------------------------------------------
Leasing and Maintenance $21,215,442 $18,085,932 5,467,994 5,280,058
- ------------------------------------------------------------------------------------------------
Compressor Packaging 10,838,393 3,384,026 5,202,518 2,498,348
- ------------------------------------------------------------------------------------------------
Other (1) 585,385 288,800 117,556 204,958
----------- ----------- ----------- ----------
- ------------------------------------------------------------------------------------------------
TOTAL REVENUES $32,639,220 $21,758,758 10,788,068 $7,983,364
- ------------------------------------------------------------------------------------------------
Operating profit loss (2):
- ------------------------------------------------------------------------------------------------
Leasing and Maintenance $ 6,528,020 $ 5,626,708 1,890,722 1,707,852
- ------------------------------------------------------------------------------------------------
Compressor Packaging 170,772 (508,336) 235,956 39,105
- ------------------------------------------------------------------------------------------------
Other 488,265 (250,284) 94,303 173,276
----------- ----------- ----------- ----------
- ------------------------------------------------------------------------------------------------
TOTAL OPERATING PROFIT $ 7,187,057 $ 4,868,088 $ 2,220,981 $1,920,233
----------- ----------- ----------- ----------
================================================================================================
</TABLE>
(1) Includes net income related to the MEI joint venture of $429,296 and
$143,088 in 1992 and 1991, respectively. Effective as of April 1, 1993 (as
a result of the acquisition by the Company of the remaining 50 % interest
in and liquidation of such joint venture), the income related to such
operations will be included in Leasing and Maintenance.
(2) Determined by subtracting expenses from revenues for each segment and
adding back the corresponding portion of depreciation and amortization
expense and interest expense.
<TABLE>
<CAPTION>
========================================================================================
Year Ended Year Ended Quarter Ended
December 31, 1992 December 31, 1991 March 31, 1993
----------------- ----------------- --------------
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
- ----------------------------------------------------------------------------------------
Leasing and Maintenance $50,991,670 $42,465,728 53,558,113
- ----------------------------------------------------------------------------------------
Compressor Packaging 4,124,051 3,804,986 4,042,492
- ----------------------------------------------------------------------------------------
Other 857,479 581,973 869,008
----------- ----------- -----------
- ----------------------------------------------------------------------------------------
TOTAL ASSETS $55,973,200 $46,852,687 $58,469,613
========================================================================================
</TABLE>
Leasing and Maintenance
32
<PAGE>
The Company provides natural gas compression equipment, on a rental basis,
primarily to natural gas production companies. These rental units are utilized
to compress natural gas when the reservoir pressure for a natural gas field is
less than the pressure for the natural gas pipeline transporting the gas. The
Company also provides maintenance of customer-owned compressor units as well as
compressor parts sales to third parties.
As of March 31, 1993, the Company's gas compressor fleet consisted of 511
units, ranging from 25 to 1,100 horsepower, of which 94% of available horsepower
and 90% of the available units were being utilized. Upon consummation of the
Merger, the Company will acquire an additional 16 compressor units, of which 77%
of available horsepower and 87% of available units were being utilized. Leases
for the compressor units provide for fixed monthly payments for an average term
of approximately seven months and continue thereafter on a monthly basis. Based
on the Company's historical operations, the Company estimates that the terms of
its leases have extended for an average of approximately 22 months.
Although natural gas compressors generally do not suffer significant
technological obsolescence, they do require routine maintenance and periodic
refurbishing to prolong their useful life. In general, the Company anticipates
refurbishing its compressor units approximately every five to six years.
The Company's compressor leasing activities are located in Texas, Oklahoma,
Arkansas, Louisiana, New Mexico, Mississippi, Alabama, Kansas and offshore Gulf
of Mexico, and the Company is considering expansion into international markets.
Compressor Packaging
The Company's Compressor Packaging segment, operated through MEI, designs,
engineers and assembles compression units for sale to third parties as well as
for placement in its compressor fleet. In general, units to be sold to third
parties are assembled according to such customer's specifications and sold on a
turnkey basis. Components for such compressor units are acquired from third
party suppliers. During March, 1993, the Company also commenced the assembly of
various other surface equipment involved in producing crude oil and natural gas.
At March 31, 1993 backlog of fabrication of compressor units and other
production equipment amounted to $5.8 million ($3.0 million of which related to
firm orders from third parties) and $550,000 (all of which related to firm
orders from third parties), respectively.
The Company is anticipating moving the operations of MEI to its new
facility in Houston, Texas. See "-- Properties." This new facility will provide
MEI with sufficient capacity to satisfy the Company's current estimated capital
expenditures for new compressors and to enable the Company to expand its
operations both in the United States and internationally as may be desirable.
See "-- Business Strategy."
Customers
No amounts received from any individual customer equaled more than 10% of
the Company's consolidated revenues during 1991 or 1992.
Competition
33
<PAGE>
The natural gas compressor business is highly competitive. Overall, the
Company experiences considerable competition from larger companies with
significantly greater financial resources and, on a regional basis, several
smaller companies compete directly with the Company. Based on information
available to the Company, the Company ranks among the top 8 companies providing
compressor units on a rental basis, based on both the number of units and total
available horsepower. See "-- Market Position."
The Company believes that it competes in the Leasing and Maintenance
segment on the basis of price, customer service, including the availability of
personnel in remote locations, flexibility in meeting customer needs and quality
and reliability of its compressors. Although the Company believes that it is
competitive in terms of price and quality, it also focuses on customer service
and flexibility in meeting customer needs.
The Company believes that it competes in the Compressor Packaging segment
based on price and quality and that the Company is competitive in both areas.
Employees
As of March 31, 1993, the Company employed approximately 210 people, of
which 18 were administrative, 14 were sales, 62 were compressor packaging and
116 in field locations. No employees are represented by labor unions, and the
Company believes that its relations with its employees is satisfactory.
Insurance
Natural gas operations are subject to certain risks, including explosions,
uncontrollable flows of gas or well fluids, fires, pollution and other
environmental risks. These risks could expose the Company to substantial
liability for injury and loss of life, property damage, pollution and other
environmental damages, and consequential damages, if such damages resulted from
a compressor defect or from the Company's negligence in maintaining, servicing
or refurbishing its compressors.
The Company believes that is has obtained adequate insurance to cover such
risks; however, no assurance can be given that such insurance will be adequate
to cover the Company's operations in the event the Company incurs liability in
excess of anticipated potential levels or that such insurance will be generally
available in the future or, if available, that premiums will be commercially
reasonable. See "Risk Factors -- Potential Liability and Insurance."
34
<PAGE>
Properties and Assets
As of March 31, 1993, the Company's rental fleet consisted of 511
compressor units, all of which are owned by the Company, with a total of 119,710
horsepower and an average of 234 horsepower. As a result of the Merger, the
Company will acquire an additional 16 units with a total horsepower of 4,350,
which units are currently owned by HPC. See "Contemporaneous Events and
Conditions -- The Merger." For information regarding the expected capital
expenditures for new and used compressors, see " -- Business Strategy."
The Company leases its corporate offices in Dallas, Texas pursuant to a
lease with a remaining term of approximately 2 years. In addition, the Company
leases its compressor packaging facility in Houston, Texas and its maintenance
facilities in Midland and Victoria, Texas; Fort Smith, Arkansas and Lafayette,
Louisiana under short-term leases.
The Company has executed contracts to acquire, subject to certain rights to
terminate prior to closing, facilities in Houston, Texas and Oklahoma City,
Oklahoma. The Houston location, to be acquired for $2,000,000, consists of
approximately 190,000 square feet plant capacity located on 20 acres. The
facility is to serve as a combination corporate office and compressor
fabrication facility and is anticipated to provide the Company with sufficient
space and capacity for at least the next five years. The Oklahoma City location,
to be acquired for $196,000, consists of 6,400 square feet located on two acres
and is to serve as a combination office and maintenance shop. The Company
intends to finance the acquisitions of such locations utilizing conventional
commercial real estate financing.
Litigation
The Company is not a party to any litigation that, in the judgment of
management, would have a material adverse effect on the Company's operations or
financial condition if adversely determined.
Governmental Regulation
The Company is subject to various federal and state laws and regulations
relating to environmental protection, including regulations regarding emission
controls. The Company believes that it is in substantial compliance with such
laws and regulations and that the phasing in of emission controls and other
known standards at the rate currently contemplated by such laws and regulations
will not have a material adverse effect on the Company's financial condition or
results of operations. However, various state and federal agencies from time to
time consider adopting new laws and regulations or amending existing laws and
regulations regarding environmental protection. While the Company may be able to
pass on the additional costs of complying with such laws, there can be no
assurances that attempts to do so would be successful. Accordingly, new laws or
regulations or amendments to existing laws or regulations could require the
Company to undertake significant capital expenditures and could otherwise have a
material adverse effect on the Company's financial condition and results of
operations.
From time to time since President Clinton took office, his administration
has proposed various taxes with respect to the energy industry, none of which
have been enacted and all of which have received significant scrutiny from
various industry lobbyists. At the present time,
35
<PAGE>
given the uncertainties regarding the proposed taxes, including the
uncertainties regarding the terms which the proposed taxes might ultimately
contain and the industries and persons who may ultimately be subject to any such
tax, it is not possible to determine whether any such tax will have a material
adverse effect on the Company.
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are set forth below.
Positions with the Company include positions with the Company's predecessors.
All directors hold office until the annual meeting of the stockholders following
their election or until their successors are duly elected and qualified.
Officers are appointed by and serve at the discretion of the Board of Directors.
- -------------------------------------------------------------------------------
Name Age Position
---- --- --------
Michael A. O'Connor Chairman of the Board; Director
- -------------------------------------------------------------------------------
Michael J. McGhan 38 President and Chief Executive Officer;
Director
- -------------------------------------------------------------------------------
Curtis Bedrich 50 Chief Financial Officer and Treasurer
- -------------------------------------------------------------------------------
William S. Goldberg 35 Executive Vice President; Director
- -------------------------------------------------------------------------------
Brenda K. Phillips 34 Vice President and Assistant Secretary
- -------------------------------------------------------------------------------
Charles D. Erwin 33 Vice President, Sales-West Texas
- -------------------------------------------------------------------------------
William C. Bryant 41 Vice President, Sales-Mid Continent
- -------------------------------------------------------------------------------
Maxwell C. McDonald 45 Vice President, Sales-Southeast
- -------------------------------------------------------------------------------
John J. Rowland 52 Vice President, Sales-Southeast
Compression
- -------------------------------------------------------------------------------
Cullen Spitzer 32 Vice President, Sales-South Texas
- ------------------------------------------------------------------------------
Luis Guerra 41 Vice President, Operations (South Texas)
- -------------------------------------------------------------------------------
Joe Bradford 35 Vice President, Operations (Western
Division)
- -------------------------------------------------------------------------------
Ted Collins, Jr. 55 Director
- -------------------------------------------------------------------------------
Frank G. Hayes 31 Director
- -------------------------------------------------------------------------------
Melvyn N. Klein 51 Director
- -------------------------------------------------------------------------------
Alvin V. Shoemaker 54 Director
- -------------------------------------------------------------------------------
Michael O'Connor has served as Chairman of the Board and a director of the
Company since January 1992. Prior thereto, Mr. O'Connor served as president of
Gas Compressors Inc. from 1965 through 1986 and was a private investor from
January 1, 1987 through January 1, 1992.
Michael J. McGhan has served as President and Chief Executive Officer of
the Company since October 1991 and served as Chief Operating Officer of the
Company from December 1990 through October 199 1. Mr. McGhan has served as a
director of the Company since March, 1992. Prior thereto, Mr. McGhan was sales
manager of Energy Industries, Inc. ("Ell"). Mr. McGhan has been involved in the
gas compressor industry for 14 years. Mr. McGhan also serves as a director of
other affiliates of the Company.
36
<PAGE>
Curtis Bedrich has served as Chief Financial Officer and Treasurer of the
Company since November 1991. Mr. Bedrich served as Vice President of Adobe
Resources Corporation from 1980 until 1991. Mr. Bedrich has been involved in the
oil and gas industry for 15 years.
William S. Goldberg has served as Executive Vice President and director of
the Company since May 1991. Mr. Goldberg has been employed by GKH since 1988 and
has served as Managing Director of GKH since June 1990. Mr. Goldberg also serves
as a director of HEHC and other affiliates of the Company.
Brenda K. Phillips has served as a Vice President of the Company since
October 1990 and served as Gas Accounting Manager of HEI from 1988 to 1990. Ms.
Phillips has been involved in the oil and gas industry for 12 years.
Charles D. Erwin has served as a Vice President of the Company since
October 1990 and served as sales representative of EU from 1985 until October
1990. Mr. Erwin has been involved in the gas compressor industry for 8 years.
William C. Bryant has served as a Vice President of the Company since
October 1990 and served as a sales representative of Ell from 1988 until October
1990. Mr. Bryant has been involved in the gas compressor industry for 18 years.
Maxwell C. McDonald has served as a Vice President of the Company since
December 1990 and served as President of C&B from 1985 until its acquisition by
the Company in 1990. Mr. McDonald has been involved in the gas compressor
industry for 20 years.
John J. Rowland has served as a Vice President of the Company since
December 1990 and served as President of ERSI from 1984 until its acquisition by
the Company in 1990. Mr. Rowland has been involved in the gas compressor
industry for 26 years.
Cullen Spitzer has served as a Vice President of the Company since July
1991 and served as President of MEI from 1982 until its acquisition by the
Company in July 1991. Mr. Spitzer has been involved in the gas compressor
industry for 12 years.
Luis Guerra has served as a Vice President of the Company since December
1990. Prior thereto, Mr. Guerra was a principal stockholder and Vice President
of GEL Mr. Guerra has been involved in the gas compressor industry for 18 years.
Joe Bradford has served as a Vice President of the Company since March 1993
and served as Operations Manager from January 1, 1991 until March 1993. Mr.
Bradford served as mechanic supervisor of HEI from 1987 until January 1991. Mr.
Bradford has been involved in the oil and gas industry for 18 years.
Ted Collins, Jr. has served as a director of the Company since April, 1992.
Mr. Collins is the President of Collins & Ware Properties, Inc., a natural gas
producer. Mr. Collins has 33 years of experience in the oil and gas industry.
37
<PAGE>
Frank G. Hayes has served as a director of the Company since May 1991. Mr.
Hayes has served as an Associate of GKH since February 1991. Prior to that time,
Mr. Hayes was an Assistant Vice
President of Citicorp's Leveraged Finance Division. Mr. Hayes also serves
as a director of HEHC and other affiliates of the Company.
Melvyn N. Klein has served as a director of the Company since May 1991. Mr.
Klein is the sole stockholder of a corporation which is a general partner of GKH
Partners, L.P. Mr. Klein has been an attorney and counselor-at-law since 1968.
Mr. Klein serves as a director of HEHC and other affiliates of the Company, as
well as of American Medical Holdings, Inc., Bayou Steel Corporation, Itel
Corporation, Santa Fe Energy Resources, Inc. and Savoy Pictures Entertainment,
Inc.
Alvin V. Shoemaker has served as a director of the Company since May 1991
and has been a private investor since his retirement as chairman of the board of
The First Boston Corporation in January 1990. Mr. Shoemaker serves as a director
of HEHC and other affiliates of the Company, as well as of Royal Group, Inc., a
national insurance company.
Compensation of Directors
Non-employee directors of the Company do not receive any compensation for
serving on the Board of Directors of the Company but are entitled to
reimbursement for expenses incurred in connection with their attendance at Board
of Directors meetings.
1992 Stock Plan
In April 1992, the Board of Directors of the Company (the "Board") adopted
the 1992 Stock Plan. The Plan provides for granting of options to executive
officers, directors, employee or advisors of the Company. The Plan permits the
Board to issue options with respect to a maximum of 15% of the total shares of
Common Stock outstanding, computed on a fully diluted basis and including shares
which are issuable under the 1992 Stock Plan, at the time of the grant of an
option. As of June 1, 1993, options with respect to 1,200 shares of Common Stock
were outstanding, and options with respect to 447 shares were presently vested.
Options granted under the 1992 Stock Plan are nonstatutory options and are not
classified as "incentive stock options" within the meaning of Section 422 of the
Code.
The exercise price for options granted under the 1992 Stock Plan are
determined by a committee determined by the Board, which committee is currently
comprised of the members of the Board (the "Committee") and may be less than the
fair market value of the Common Stock on the date of grant. Other than the
maximum number of shares available under the 1992 Stock Plan, there is no
minimum or maximum number of shares that may be granted to any person. Options
granted under the 1992 Stock Plan generally expire within a specified number of
days of the termination of employment of an optionee who is an employee. Options
granted under the 1992 Plan fully vest and become exercisable for a specified
number of days upon the death or permanent disability of the optionee and are
forfeited upon the termination for cause of the optionee. Options granted under
the 1992 Stock Plan also generally vest fully upon certain specified events
constituting a change in control or constructive termination, each as more fully
38
<PAGE>
described below. Options may not be transferred other than by will or the laws
of descent and distribution, and during the lifetime of an optionee may be
exercised only the optionee. The term of each option granted under the 1992
Stock Plan may not exceed fifteen years from the date the option is granted.
Options may become exercisable in whole at grant or in installments over time,
as determined by the Committee. To date, all of the options granted under the
1992 Stock Plan generally vest ratably over a five year period commencing upon
the date of grant.
Options granted under the 1992 Stock Plan fully vest and become exercisable
upon the occurrence of a change in control accompanied by a constructive
termination of employment of such optionee. A change in control is defined to
include (i) the acquisition by any person or group of persons of the direct or
indirect beneficial ownership of securities of the Company representing 50 % or
more of the combined voting power of the Company's then outstanding securities
or the power to manage or direct the operations of the Company, (ii) the
execution by the Company of an agreement to dispose of all or substantially of
its assets by means of a sale, merger, or other reorganization or liquidation in
which the Company is not the surviving corporation and (iii) the cessation of
the Board to consist of a majority of the directors comprising the Board at the
time the 1992 Stock Plan was adopted and other directors who were nominated,
appointed or approved by the directors continuing in office. Constructive
termination is defined under the 1992 Stock Plan to include (i) the assignment
of duties and responsibilities materially inconsistent with or of materially
lesser status than the employee's positions, duties, responsibilities and status
with the Company immediately prior to the first change in control, (ii) the
removal of the employee from, or any failure to re-elect the employee to any
office of the Company or any successor of the Company, except in connection with
his termination for cause, death, disability or retirement, (iii) a reduction by
the Company or any successor of the Company in the employee's annual base salary
in effect immediately prior to the first change in control of the Company that
occurred prior to such reduction or as the said salary may thereafter be
increased from time to time, (iv) the failure of the Company or any successor to
the Company to permit the employee to participate in incentive compensation and
benefit programs (other than stock-related plans or arrangements) comparable to
those in effect immediately prior to the first change in control of the Company
that occurred prior to such failure or (y) any purported termination of the
employee's employment for cause or permanent disability not in accordance with
the provisions of the 1992 Stock Plan with respect thereto.
The acceleration of options in the event of a merger or other similar event
may be seen as an anti-takeover provision and may have the effect of
discouraging a proposal for merger or other efforts to purchase or sell control
of the Company.
Under the terms of the Plan, payment upon the exercise of an option may be
in cash, by delivery of shares of Common Stock with a fair market value equal to
the aggregate exercise price or, if the optionee's stock option agreement so
provides, by delivery of a promissory note with such terms as the Committee may
approve.
Summary Compensation Table
The following table sets forth the total compensation that was awarded to,
earned by or paid to Michael J. McGhan (the chief executive officer of the
Company) and Michael O'Connor,
39
<PAGE>
John Rowland, Maxwell McDonald and Cullen Spitzer (the four other most highly
paid executive officers) as a group during the year ended December 31, 1992.
<TABLE>
<CAPTION>
=======================================================================================================
Long Term
Compensation
Annual Compensation Awards All Other
-------------------
Salary Bonus Option Grants Compensation(1)
------ ----- ------------- ---------------
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CEO and four other most highly
compensated executive officers...... $615,000 $86,000 $471,240(2) $17,793
=======================================================================================================
</TABLE>
(1) Includes payments for commissions in the aggregate amount of $15,000 and
life insurance premiums in the aggregate amount of $2,793.
(2) Does not reflect a reduction in the value of options granted to such
persons if such persons subscribe to this offering. if all such persons
subscribe to this offering, the aggregate value of such options based on
the value of the Common Stock at the time of grant will be $47,124.
Option Grants in Last Fiscal Year
The following table contains information concerning the grant of stock
options under the 1992 Stock Plan to the chief executive officer and the four
other most highly compensated executive officers as of December 31, 1992. The
Company has not, to date, granted any stock appreciation rights.
<TABLE>
<CAPTION>
====================================================================================================================================
Potential Realizable Value at Assumed
Annual Rates of Stock
Price Appreciation(1)
---------------------
- ------------------------------------------------------------------------------------------------------------------------------------
% of Total Market
Options Per Share Price on
Number of Granted to Exercise Date of Expiration
Options Employees Price(1) Grant Date 0% 5% 10%
------- --------- -------- ----- ---- -- -- ---
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CEO and four
other most
highly
compensated
executive
officers..... 720 60% $1.00 $655.50 Jan. 2007 $471,240 $1,029,509 $2,167,923
====================================================================================================================================
</TABLE>
(1) Does not reflect effective adjustment in exercise price to $725 per share
with respect to 90%, or 648 shares, of the options granted to such persons
if they subscribe to dm offering. Assuming all such persons subscribe to
this offering, the potential realizable value at assumed annual rates of
stock appreciation of each of 0 %, 5 % and 10 % is $47,124, 560,357 and
1,698,771, respectively.
Fiscal Year End Option Values
40
<PAGE>
Shown below is information with respect to unexercised options to purchase
Common Stock granted in 1992, all of which were granted pursuant to the 1992
Stock Plan. None of such options have been exercised.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Number of Unexercised Options Value of Unexercised in-the-Money
December 31, 1992(1) Options at December 31, 1992(1)
-------------------- -------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- -------------
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CEO and four other
most highly
compensated
executive officers 162 558 $117,288 $403,992
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes value of such Common Stock is $725 per share and does not give
effect to the effective adjustment in exercise price if such persons
subscribe to this offering. If all such persons subscribe to this offering,
there will effectively be 16.2 exercisable in-the-money options having an
aggregate value of $11,729 and 55.8 unexercisable in-the-money options
having an aggregate value of $40,400.
Employment Contracts and Other Agreements
In connection with the Company's acquisition of the capital stock of
Maintech Enterprises, Inc., the Company entered into an employment agreement
with Cullen Spitzer which provides for, among other things, the payment of Mr.
Spitzer's salary through July 1996.
In connection with the Company's acquisition of the capital stock of Energy
Recovery Systems, Inc., the Company entered into an employment agreement with
John Rowland which provides for, among other things, the payment of Mr.
Rowland's salary through December 4, 1993.
In connection with the Company's acquisition of the assets of C&B
Compression Services, Inc., the Company entered into an employment agreement
with Maxwell McDonald which provides for, among other things, the payment of Mr.
McDonald's salary through December 4, 1993.
Compensation Committee and Insider Participation
The Company does not have a separate Compensation Committee of the Board of
Directors. All decisions with respect to compensation are made by the Board of
Directors. From time to time, Mr. O'Connor and Mr. McGhan will participate in
the deliberations regarding compensation of the other executive officers of the
Company.
Certain Relationships and Related Transactions
GKH and certain other stockholders of the Company own substantially all of
the common stock of Combustion Control Corporation, a Delaware corporation
("Combustion"). Combustion is in the business of refurbishing compressors which
do not comply with certain environmental emissions regulations so that they will
comply with such regulations. Pursuant to a Services Agreement dated as of
September 11, 1992 (the "Services Agreement") between Combustion
41
<PAGE>
and the Company, Combustion engaged the Company to provide certain
administrative, operational and management services for a fee of $1,000 per
month until July 24, 1997. Also pursuant to the Services Agreement, Combustion
from time to time provides the Company with certain environmental consulting
services for a fee determined on a case by case basis. The Company also leases a
mobile testing facility to Combustion under a month to month lease providing for
payments of $3,500 per month to the Company.
Mr. Collins, one of the Company's directors and minority stockholders,
controls a corporation which owns a 50% interest in a joint venture to which the
Company leases compressors pursuant to a long-term lease and to which the
Company provided a loan of $600,000. The lease provides for (i) the repayment of
the loan and for additional monthly rental payments to the Company aggregating
approximately $54,700 per month until November 1, 1994, (ii) a balloon payment
in respect of the loan of approximately $200,000 at such time and (iii)
continued monthly loan and rental payments of approximately $48,000 per month
thereafter until November 1, 1997.
PRINCIPAL STOCKHOLDERS
Principal Stockholders
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of March 31, 1993 (i) by each
person who is known by the Company to own beneficially more than 5% of any class
of the outstanding Common Stock, (ii) by each director and the chief executive
officer and the four other most highly compensated executive officers of the
Company and (iii) by all of the Company's directors and executive officers as a
group.
<TABLE>
<CAPTION>
======================================================================================================
Stock Beneficially Percentage of Stock
Name of Person or Group(1) Owned Beneficially Owned
- -------------------------- ----- ------------------
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Hanover Energy Holding Corporation 34,603 65.25%
4245 N. Central Expressway
Suite 350
Dallas, TX 75205
- ------------------------------------------------------------------------------------------------------
GKH Investment, L.P.(2)(3) 14,702 27.72%
200 West Madison St.
Chicago, IL 60606
- ------------------------------------------------------------------------------------------------------
William S. Goldberg(4) -- --
200 West Madison St.
Chicago, EL 60606
- ------------------------------------------------------------------------------------------------------
Frank G. Hayes -- --
200 West Madison St.
Chicago, EL 60606
- ------------------------------------------------------------------------------------------------------
Melvyn N. Klein(5) -- --
- ------------------------------------------------------------------------------------------------------
Michael J. McGhan 113 *
- ------------------------------------------------------------------------------------------------------
Michael A. O'Connor 461 *
======================================================================================================
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C>
======================================================================================================
Alvin V. Shoemaker(6) -- --
- ------------------------------------------------------------------------------------------------------
John Rowland 155 *
- ------------------------------------------------------------------------------------------------------
Maxwell C. McDonald 548 1.03%
- ------------------------------------------------------------------------------------------------------
Cullen Spitzer -- *
- ------------------------------------------------------------------------------------------------------
All directors and officers as a group(7)(8) 2,380 5.92%
======================================================================================================
</TABLE>
_____________________
*Represents less than I % of the outstanding Common Stock.
(1) Does not include 80,000 shares of Series A Preferred Stock, constituting
all of the issued and outstanding stock of such class, held by HPC. In
connection with the Merger, the Series A Preferred Stock will be converted
into 465 shares of Common Stock and issued to HEHC and the holders of the
Common Stock purchased in the 1992 Offering.
(2) Does not include 554 shares of Common Stock (1. 04 % of the outstanding
shares) owned by GKH Partners, L.P., a Delaware limited partnership and the
general partner of GKH Investments, L.P.
(3) Does not include an indirect ownership of approximately 29,759 shares of
Common Stock (56.1 % of the outstanding shares) owned by GKH Partners, L.P.
and GKH Investments, L.P. by virtue of their interest in HEHC.
(4) Does not include an indirect ownership of approximately 149 shares of
Common Stock less than I % of the outstanding) owned by Mr. Goldberg by
virtue of his interest in HEHC.
(5) Mr. Klein, who is a director of the Company, is the sole stockholder of a
corporation which is the general partner of GKH Partners, L.P. Mr. Klein
disclaims beneficial ownership of all shares owned by GKH Partners, L.P.
and GKH Investments, L.P. and such shares are not included in the number of
shares owned by Mr. Klein or by all directors and officers as a group.
(6) Does not include an indirect ownership of approximately 1,615 shares of
Common Stock (3.0% of the outstanding shares) owned by Mr. Shoemaker by
virtue of his interest and the interest of certain of his affiliates in
HEHC. Mr. Shoemaker disclaims beneficial ownership of shares owned
indirectly by his affiliates.
(7) Does not include 115 shares of Common Stock less than I % of the
outstanding shares) owned by the Mr. Spitzer as trustee of the Cullen
Spitzer Family Trust. Mr. Spitzer disclaims beneficial ownership of such
shares.
(8) Does not include shares owned by all directors and officers as a group or
their affiliates (i) indirectly by virtue of their interests in HEHC or
(ii) for which such directors and officers disclaim beneficial ownership.
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Stockholders' Agreement
In connection with the 1992 Offering, the persons participating therein,
the Company, HEHC (as successor to HEI) and GKH entered into that certain
Stockholders' Agreement dated April 10, 1992 (the "1992 Stockholders'
Agreement"). The 1992 Stockholders' Agreement restricts the sale of Common Stock
held by the parties thereto and provides for, among other things, (i) the right
of first refusal of the Company and the right of second refusal of the other
stockholders with respect to any proposed transfer of Common Stock (except
transfers to affiliates) by a stockholder other than HEHC or GKH, (ii) the right
of a majority of the stockholders to compel the other stockholders to sell their
Common Stock upon the sale by such majority stockholders of all of their Common
Stock and (iii) the right of each stockholder to participate in the sale by one
or more stockholders of more than 50% of the outstanding Common Stock of the
Company. The 1992 Stockholders' Agreement does not contain provisions regarding
the ability of the Company to redeem all of a stockholder's Common Stock upon
the termination of his employment with the Company.
Upon consummation of the offering and the execution of the 1993
Stockholders' Agreement, the 1992 Stockholders' Agreement will be substantially
superseded as between the Company and each person who executes the 1993
Stockholders' Agreement. However, the 1992 Stockholders' Agreement will remain
in full force and effect between each person who is a party thereto and each
person who is a party thereto who does not become a party to the 1993
Stockholders' Agreement. See "The Offering -Stockholders' Agreement" for a
discussion of the terms of the 1993 Stockholders' Agreement.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summaries relate to (i) certain provisions of the Existing
Credit Agreement , (ii) the proposed minimum financing terms of the Revolving
Credit Agreement (together with such changes as the Company may, in its sole and
absolute discretion, deem necessary or desirable and not materially less
favorable to the Company, the "Minimum Financing Terms") and (iii) the
anticipated terms of the Senior Notes. The summary of the provisions relating to
the Existing Credit Agreement do not purport to be complete and are qualified in
their entirety by reference to the agreement relating thereto, a copy of which
is available for review at the principal offices of the Company. The summary of
the Minimum Financing Terms is based on the proposed terms discussed between
Chemical and the Company. The Company reserves the right in its sole and
absolute discretion without notice to or consent of the Subscribing Offeree to
accept changes to such proposed terms not deemed by it to be materially less
favorable than those set forth herein without affecting this offering. Such
changes shall be deemed to be part of the Minimum Financing Terms and the
execution of the Revolving Credit Agreement containing such terms shall be
deemed to satisfy the conditions therefor hereunder.
The Existing Credit Agreement
Pursuant to the Existing Credit Agreement, the Company borrowed an
aggregate of $27 million, $19 million of which was outstanding at April 30,
1993. Amounts outstanding under the Existing Credit Agreement bear interest at a
rate equal to LIBOR plus 214%.
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The Existing Credit Agreement contains certain restrictive covenants that
impose limitations (subject to certain exceptions) on the Company, including,
among others, limitations with respect to (i) maintaining ratios relating to the
Company's total indebtedness to total capitalization, its earnings before income
tax, its cash flow and its net worth, (ii) incurring additional indebtedness,
liens or guarantees, (iii) entering into any merger or consolidation or
otherwise effecting certain fundamental changes, (iv) incurring lease expenses
in excess of certain limits, (v) declaring or paying dividends or other
distributions, (vi) making capital expenditures in excess of certain prescribed
limits, (vii) making any advance, loan, extension of credit or capital
contribution or the purchase of any securities or assets constituting a business
unit, (viii) making any optional payment or prepayment on or redemption of any
indebtedness, (ix) transactions with affiliates, (x) the sale and leaseback of
any of the Company's real or personal property, (xi) amending its Certificate of
Incorporation, (xii) changing its fiscal year, (xiii) entering into any
agreement which prohibits the Company from creating liens or other restrictions
on its assets and (xiv) making any investment in or guaranteeing any
indebtedness of PWMI.
The Existing Credit Agreement contains certain default provisions,
including, among others, (i) failure of the Company to pay any principal or
interest thereunder when due, (ii) breach by the Company or any of its
subsidiaries or affiliates which are parties to the agreement of any
representation or warranty made therein or in the other documents contemplated
thereby, (iii) default by the Company or any of its subsidiaries in the
observance or performance of any covenant or agreement contained therein or in
the other documents contemplated thereby, (iv) cessation of the security
agreement executed thereunder to be in full force and effect, (v) default by the
Company or any of its subsidiaries in the payment of any indebtedness or
guarantee in excess of $1,000,000, which default remains in effect for 30 days,
or any other breach under agreements with respect to such indebtedness or
guarantees which causes such indebtedness or guarantee to be accelerated, (vi)
occurrence of certain bankruptcy related events, (vii) occurrence of certain
events related to ERISA obligations, (viii) entering of one or more judgments
or decrees against the Company or any of its subsidiaries involving an aggregate
liability of $1,000,000 or more, (ix) the incurrence by the Company or any of
its subsidiaries of liability for remediation or environmental compliance (or
penalty with respect thereto) in excess of $1,000,000 and (x) the cessation of
GKH and HEHC to own directly or indirectly 45% of the issued and outstanding
Common Stock of the Company.
The Company anticipates that as a result of the Contemporaneous Events, (i)
the Company will repay, in their entirety, all amounts outstanding under the
Existing Credit Agreement, (ii) the Existing Credit Agreement will be terminated
and (iii) the Company will enter into the Revolving Credit Agreement and the
Indenture relating to the Revolving Credit Facility and the Senior Notes,
respectively, the anticipated terms of which are summarized below.
The Revolving Credit Facility
It is anticipated that the Revolving Credit Facility will be a five year
reducing revolving credit facility funded in its entirety by Chemical and will
permit the Company to borrow up to $20,000,000 at a variable rate of interest in
excess of the London InterBank Offered Rate
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("LIBOR"). The commitment fee on amounts not drawn under the Revolving Credit
Facility is anticipated to be 3/8%.
Chemical has proposed that the Revolving Credit Facility contain certain
restrictive covenants that impose limitations (subject to certain exceptions) on
the Company, including, among others, limitations with respect to (i)
maintaining certain ratios, including ratios with respect to (a) consolidated
indebtedness to consolidated capitalization, (b) consolidated earnings before
income tax, depreciation and amortization to consolidated interest expense and
(c) current assets, (ii) incurring additional indebtedness, (iii) creating,
incurring assuming or suffering to exist any mortgage, pledge, lien or other
encumbrance or security interest, (iv) creating, incurring, assuming or
suffering to exist any guarantee or similar obligation, (v) effecting certain
fundamental changes, including any merger or sale of all or substantially all of
the Company's assets, (vi) selling any of the Company's assets except in the
ordinary course of business or as otherwise permitted, (vii) increasing lease
expense in excess of certain limits, (viii) declaring or paying dividends, (ix)
making capital expenditures in excess of certain prescribed limits, which limits
will not be as restrictive as under the Existing Credit Agreement, (x) making
any advance, loan or similar investment in any person, (xi) making optional
payments or prepayments or amending the terms of any indebtedness, (xii)
entering into any transaction with affiliates, (xiii) the sale and leaseback of
any of the Company's real or personal property, (xiv) change the Company's
fiscal year and (xv) entering into any agreement which prohibits the Company
from creating liens or other restrictions on its assets.
It is anticipated that the Revolving Credit Agreement will also provide for
events of default substantially similar to those contained in the Existing
Credit Agreement.
Senior Notes
It is anticipated that the $15 million Senior Notes will be 10 year
unsecured notes bearing interest at approximately 71h%. Annual payments of
principal of $3,750,000 will commence on the seventh anniversary of the issuance
of the Senior Notes and continue on an annual basis thereafter with the balance
of the principal due on the tenth anniversary.
The Senior Notes will provide for restrictive covenants not more
restrictive than those contained in the Revolving Credit Agreement.
It is anticipated that the Senior Notes will also provide for events of
default substantially similar to those contained in the Existing Credit
Agreement.
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering and the Contemporaneous Events, the
authorized capital stock of the Company will consist of 200,000 shares of Common
Stock and 100,000 shares of Preferred Stock, $.01 par value per share
("Preferred Stock"). Upon completion of such transactions and assuming all
Shares are subscribed for, the Company anticipates that 81,802 shares of Common
Stock and no shares of Preferred Stock will be issued and outstanding and an
additional 19,880 shares of Common Stock will be reserved for issuance pursuant
to options (not including options to be granted under the Incentive Plan).
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The following summary description relating to the capital stock does not
purport to be complete. For a detailed description, reference is made to the
Certificate of Incorporation of the Company, as amended (the "Certificate"),
which is available at the Company for review.
Common Stock
As of December 31, 1992, there were 53,031 shares of Common Stock
outstanding held of record by 16 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
Preferred Stock which may be issued, holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of legally available funds. In the event of a liquidation, dissolution, sale or
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities and satisfaction of
preferential rights and have no rights to convert their Common Stock into any
other securities. Holders of Common Stock have no preemptive or subscription
rights unless they become parties to the 1993 Stockholders' Agreement and then
only to the extent provided therein. See "The Offering -- 1993 Stockholders'
Agreement -Preemptive Rights." There are no redemption or conversion rights with
respect to any shares of Common Stock. The outstanding shares of Common Stock
are, and the Common Stock to be outstanding upon completion of the offering and
the Contemporaneous Events will be, fully paid and nonassessable.
Preferred Stock
The Company currently has outstanding 80,000 shares of Series A Preferred
Stock, $.01 par value (the "Series A Preferred Stock"), all of which is owned by
HPC. The Series A Preferred Stock has a liquidation preference of $100 per share
and is convertible on a share-for-share basis into Common Stock. Notwithstanding
the foregoing, in connection with the Merger, the Series A Preferred Stock will
be exchanged for 465 shares of Common Stock to be issued to HEHC and the holders
of the Common Stock issued pursuant to the 1992 Offering, and all of the Series
A Preferred Stock will be cancelled and restored to authorized but unissued
Preferred Stock.
The Board of Directors has the authority to cause the Company to issue
without any further vote or action by the stockholders, up to the authorized
number of shares of Preferred Stock in one or more series, to designate the
number of shares constituting any series, and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, redemption price or
prices and liquidation preferences of such series. The Company has no present
plans to issue any shares of Preferred Stock.
Options
The Company currently has outstanding options to purchase 1,200 shares of
Common Stock at $1.00 per share. All such options were issued to certain
executive officers in connection with the 1992 Stock Plan for executive
employees. The options expire at various times in 2007. Any person who received
options pursuant to the 1992 Stock Plan and who subscribes to this
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offering will be required, pursuant to the terms of the agreement to be executed
by them in connection with the Management Option Plan, to surrender Common Stock
or options to acquire Common Stock with a value equal to (a) 90% of the total
number of shares of Common Stock which may be acquired pursuant to options
granted under the 1992 Stock Plan (b) multiplied by $725, provided that at no
time will such persons be required to surrender options to acquire shares of
Common Stock in excess of 90% of the total number of shares of Common Stock
subject to options granted pursuant to the 1992 Stock Plan. Notwithstanding the
foregoing, as long as the options remain unexercised and outstanding, the
holders thereof will have the opportunity to profit from an increase in the
value of the Common Stock, if any, without assuming the risk of ownership.
Special Provisions of the Certificate of Incorporation and Delaware Law
Limitation of Director Liability. Section 102(b)(7) of the Delaware General
Corporation Law ("Section 102(b)") 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. The Company's Certificate of Incorporation limits the liability of
directors to the Company or its stockholders (in their capacity as directors but
not in their capacity as officers) to the fullest extent permitted by Section
102(b). Specifically, directors of the Company will not be personally -liable
for monetary damages for breach of a director's fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.
Indemnification. To the maximum extent permitted by law, the Company's
Certificate of Incorporation and Bylaws provide for mandatory indemnification of
directors and permit indemnification of officers, employees and agents of the
Company 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 the Company. In addition, the Company must advance or
reimburse directors, and may advance or reimburse officers, employees and agents
for expenses incurred by them in connection with indemnifiable claims.
EXPERTS AND LEGAL MATTERS
The consolidated financial statements of the Company as of December 31,
1992 and December 3 1, 1991 have been included in reliance on the report of
Price Waterhouse, independent accountants, given on their authority as experts
in accounting and auditing.
The law firm of Brill, Sinex and Stephenson, a Professional Corporation
("BS&S") has agreed to represent any prospective investor who desires such
representation in connection with certain legal aspects of this offering. "The
Company has agreed to pay the fees and expenses of BS&S up to a certain amount;
however, BS&S is not representing the Company in connection with this offering.
No prospective investor is obligated to become a client of BS&S in connection
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with this offering. Likewise, BS&S will only give advice to those prospective
investors who seek advice from such firm. Prospective investors may contact
James F. Stephenson, Jr. at (713) 739-9990 for more information.
ADDITIONAL INFORMATION
The Company intends to supply its stockholders on an annual basis with a
copy of its audited financial statements.
Each prospective investor and/or his purchaser or other representatives are
hereby granted access to, and are invited to review, all materials available to
the Company relating to this offering or anything set forth in this Memorandum.
The Company will answer all inquiries from prospective investors or their
representatives relating to the transactions contemplated hereunder and will
afford prospective investors and their representatives the opportunity to obtain
any additional information (to the extent that the Company possesses such
information or can acquire it without unreasonable effort or expense) necessary
to verify the accuracy of the information set forth in this Memorandum.
Each prospective investor should use this opportunity to communicate
directly with his own legal counsel, accountants and other professional advisors
who can help the prospective investor evaluate the merits and risks of a
purchase of the Shares and the tax and legal aspects thereof.
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EXHIBIT 4.9
HANOVER COMPRESSOR COMPANY
1993 MANAGEMENT STOCK OFFERING
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT (this "Agreement") dated as of June 29, 1993,
between Hanover Compressor Company, a Delaware corporation (the "Company"), and
the individual named on the signature page hereof under the heading "PURCHASER"
("Purchaser"),
WITNESSETH:
WHEREAS, Purchaser desires to subscribe for and purchase from the Company,
and the Company desires to issue and to sell to Purchaser (i) for cash out of
Purchaser's own funds, the number of shares (the "Cash Shares") of common stock,
$.01 par value ("Common Stock"), of the Company set forth under the heading
"Cash Shares" on Schedule A attached hereto, (ii) out of the proceeds of a four-
year loan (a "Four Year Loan") to be made to Purchaser by the Company in
accordance with the terms of a loan agreement and a secured promissory note (the
"Four Year Note"), each substantially in the form attached as Exhibits C and D
to the Confidential Offering Memorandum (the "Memorandum") dated June 21, 1993,
previously delivered to Purchaser, the number of shares (the "Four Year Loan
Shares") set forth under the heading "Four Year Loan Shares" on Schedule A, and
(iii) out of the proceeds of a 90-day loan (a "90-day Loan") to be made to
Purchaser by the Company pursuant to a secured promissory note (the "90-day
Note") substantially in the form of Exhibit E to the Memorandum, the number of
shares (the "90-day Loan Shares") set forth under the heading 90-day Loan Shares
on Schedule A, in each case upon the terms and conditions hereinafter set forth.
The Four Year Loan Shares and the 90-day Loan Shares are sometimes collectively
referred to herein as the "Loan Shares" and the Loan Shares and the Cash Shares
are sometimes, collectively referred to herein as the "Shares"; and
WHEREAS, this Agreement is one of several agreements ("Other Purchaser
Agreements") being entered into concurrently herewith by the Company and certain
members of the management of the Company in connection with the offering (the
"Offering") made pursuant to the Memorandum.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby acknowledge, agree and understand the
following:
<PAGE>
1. Subscription. Subject only to the provisions of Sections 7 and 9 hereof,
Purchaser hereby irrevocably subscribes for the Shares under terms and
conditions set forth herein. The purchase price (the "Purchase Price") for each
Share shall be $725. The parties agree that notwithstanding anything herein to
the contrary, the Company reserves the absolute right (i) to reject any
subscription for any reason and (ii) to terminate or modify the Offering at any
time for any reason.
2. The closing. The closing of the purchase and sale of the Shares (the
"Closing") shall take place at the offices of the Company, 4245 North Central
Expressway, Dallas, Texas 75202 at 10:00 a.m., Dallas time on June 29, 1993, or
at such other place or time as shall be agreed upon by the parties hereto. The
date of the Closing is sometimes hereinafter referred to as the "Closing Date."
3. Deliveries by Purchaser.
(a) 1993 Stockholders' Agreement. Concurrently with his execution and
delivery of this Agreement, Purchaser shall deliver to the Company two executed
counterparts to the 1993 Stockholders' Agreement (the 1993 Stockholders'
Agreement") among the Company, Hanover Energy Holding Corporation, GKH Partners,
L.P., GKH Investments, L.P. and the other stockholders of the Company parties
thereto;
(b) Additional Deliveries. At or prior to the Closing, upon the terms
and subject to the conditions of this Agreement, Purchaser shall execute where
appropriate and deliver to the Company:
(i) a certified or bank cashier's check in the amount of the
Purchase Price for the Cash Shares;
(ii) to the extent any of the Shares subscribed for pursuant to
this Agreement are Loan Shares:
(A) a duly executed 90-day Note in an original principal
amount equal to the total Purchase Price for all such 90-day Loan
Shares to be funded by the proceeds of the 90-day Note and subscribed
for by Purchaser pursuant to this Agreement;
(B) a duly executed Four-Year Note in an original principal
amount equal to the total Purchase Price for all such Four Year Loan
Shares to be funded by the proceeds of the Four-Year Note and
subscribed for by Purchaser pursuant to this Agreement;
(C) two executed counterparts of that certain pledge
agreement (the "Pledge Agreement") between the Purchaser and the
Company effecting a pledge of all of the shares of Common Stock of the
Company owned or thereafter acquired by the Purchaser, substantially in
the Form attached to the Memorandum as Exhibit F; and
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(D) a Stock Power (the "Stock Power") duly executed in blank;
(iii) two executed counterparts of the Stock Option Agreement (the
"Option Agreement") between the Purchaser and the Company pursuant to the
Hanover Compressor Company 1993 Management Stock Option Plan;
(iv) a fully completed and executed IRS Form W-9; and
(v) two executed counterparts of this Agreement (including a fully
completed Schedule notary page and Spousal Consent (if applicable).
(c) Document Delivery; Escrow. All documents and funds (the "Funds")
delivered to the Company prior to the Closing Date (as hereinafter defined)
shall be delivered by Purchaser to Hanover Compressor Company, 4245 N. Central
Parkway, Dallas, Texas 75207 Attention: Curtis Bedrich. All such documents
and Funds will be deemed to be held in escrow until the Closing (as hereinafter
defined). The Funds shall be promptly deposited in an interest bearing,
segregated account and such Funds may be invested in treasury bills or other
cash equivalents, as determined in the sole and absolute discretion of the
Company. If acceptable subscriptions for all of the shares of Common Stock
offered hereby are received prior to the Closing Date and if the other
conditions set forth herein and in the Memorandum (collectively, the "Offering
Conditions") are satisfied prior to such Closing Date, all subscriptions will be
transferred from the segregated bank account to the Company, together with all
interest, if any, accrued or paid thereon. In the event the Offering Conditions
have not been satisfied in full prior to the Closing Date, the offering will be
terminated and all Funds will be returned to the Purchaser with a pro rata share
of interest earned thereon. Interest on Funds shall be calculated on the
basis of the amount of Funds invested by the Purchaser and the length of time
interest on such Funds was earned.
4. Deliveries by the Company. At the closing, upon the terms and subject to
the conditions of this Agreement, the Company shall deliver to Purchaser (i) a
certificate or certificates representing the Shares duly executed and
authenticated by the company; provided, however, that if any portion of the
Shares are being purchased with the proceeds of a 90-day Loan or a Four-Year
Loan, the Company shall retain possession of all of the shares in accordance
with the terms of the Pledge Agreement (ii) a copy of the fully executed 1993
Stockholders' Agreement (the original of which will be retained at the offices
of the Company) and (iii) a fully executed counterpart of Purchaser's Option
Agreement.
5. Representations and Warranties of Purchaser. Purchaser hereby represents
and warrants to the Company as follows:
(a) Investment Intention: No Resales. Purchaser is acquiring the Shares
for investment solely for his own account and not with a view to, or for resale
in connection with, the distribution or other disposition thereof. Purchaser
agrees and acknowledges that all dispositions of the Shares by Purchaser (other
than involuntary transfers) will comply with the provisions of this Agreement,
the provisions of the 1993 Stockholders' Agreement and the Pledge Agreement and
applicable provisions of state and federal securities law.
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(b) Certain Information Not Material. Purchaser has not received
individualized information relative to the compensation of the management which
information is acknowledged by Purchaser as not being material to Purchaser in
forming a basis for making an investment in the Shares or for any other purpose
in connection herewith.
(c) Shares Unregistered. Purchaser acknowledges and represents that he
has been advised by the Company that:
(i) the offer and sale of the Shares have not been registered under
the Securities Act of 1933, as amended (the "Securities Act"), or any state
securities laws;
(ii) the Shares must be held indefinitely and Purchaser must
continue to bear the economic risk of the investment in the Shares unless
the offer and sale of such Shares is subsequently registered under the
Securities Act and all applicable state securities laws or an exemption
from such registration is available;
(iii) there is no established market for the Shares and it is not
anticipated that there will be any public market for the Shares in the
foreseeable future; and
(iv) Rule 144 promulgated under the Securities Act may
not be presently available with respect to the sale of any securities of
the Company, and the Company has made no covenant to make such Rule
available; and
(v) when and if the Shares may be disposed of without
registration under the Securities Act in reliance on Rule 144, such
disposition may be made only in limited amounts in accordance with the
terms and conditions of such Rule;
(vi) a restrictive legend in the form heretofore set forth shall be
placed on the certificates representing the Shares; and
(vii) a notation shall be made in the appropriate records of the
Company indicating that the Shares are subject to restrictions on transfer
and appropriate stop transfer instructions will be issued with respect to
the Shares.
(d) Additional Investment Representations.
(i) Purchaser has carefully reviewed, is familiar with and
understands the Memorandum, the 1993 Stockholders' Agreement, the Note, the
Pledge Agreement, the Option Agreement and the other documents, records and
information, if any, requested by Purchaser or otherwise supplied by the
Company in connection with the Offering;
(ii) All documents, records and information pertaining to an
investment in the Company which have been requested by Purchaser have been
made available or delivered to Purchaser, except to the extent otherwise
addressed in the Memorandum;
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(iii) Purchaser is fully familiar with the business and operations
of the Company and has had an opportunity to ask questions of and receive
answers from the Company concerning the terms and conditions of his
investment and the financial condition, operations and prospects of the
Company;
(iv) No oral or written statement, printed material or inducement
given or made by the Company or any of the Company's affiliates is contrary
to the information contained in this Agreement, the Memorandum, the 1993
Stockholders' Agreement, the Note or the Pledge Agreement, and Purchaser
acknowledges and agrees that in making his decision to purchase the Shares
he has relied solely on such documents and the independent investigations
made by him and, to the extent believed by Purchaser to be appropriate, his
representatives, including his own professional, financial, legal, tax and
other advisors;
(v) Purchaser (A) has adequate means of providing for his current
financial needs and possible personal contingencies and has no need for
liquidity in his investment in the Shares, (B) can bear the economic risk
of losing his entire investment in the Shares, (C) has such knowledge and
experience in financial matters that he is capable of evaluating the
relative risks and merits of his purchase of the Shares, (D) is familiar
with the nature of, and risks attendant to, his purchase of the Shares, and
(E) has determined that the purchase of the Shares is consistent with
Purchaser's financial objectives;
(vi) Purchaser realizes that he may not be able to sell or dispose
of the Shares even in the event of a personal emergency. Purchaser's
overall commitment to investments which are not readily marketable
(including his investment in the Shares) is not disproportionate to his net
worth;
(vii) The address set forth on the signature page hereof is
Purchaser's true and correct residence, and Purchaser has no present
intention of becoming a domiciliary of any other state or jurisdiction;
(viii) Purchaser has no reason to anticipate any change in his
circumstances, financial or otherwise, which may cause or require any sale
or disposition by him of any of the Shares;
(ix) This Agreement has been duly and validly executed and
delivered by Purchaser and constitutes the valid and binding obligation of
Purchaser enforceable against him, his successors and assigns, including,
but not limited to, his estate and his spouse, in accordance with its
terms;
(x) Assuming the due execution and delivery of this Agreement by
the Company, this Agreement is a valid and binding obligation of the
Purchaser, enforceable against the Purchaser in accordance with its terms,
except as such enforcement may be subject to (i) bankruptcy: insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors rights generally and (ii) general principles
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of equity (regardless of whether such enforcement is considered in a
proceeding in equity or at law); and
(xi) The Company has not guaranteed, represented or warranted to
Purchaser either that (A) the Company will be profitable or that Purchaser
will realize profits, as a result of his investment in the Shares or (B)
the past performance or experience on the part of any officer, director,
stockholder, employee, agent, representative or affiliate thereof, or any
employee, agent, representative or affiliate of the Company will in any way
indicate the predictable results of ownership of the Shares.
6. Representations and Warranties of the Company. The Company represents
and warrants to Purchaser as follows:
(a) Organization; Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company is duly qualified and in good standing as a foreign
corporation and is licensed, admitted or approved to do business as a foreign
corporation in each jurisdiction wherein the character of the it, or the nature
of the qualification necessary, except where the failure to qualify would not
have a material adverse effect on the Company, and would not have any adverse
effect on the enforceability of this Agreement, properties owned or held under
lease by business conducted by it, makes such qualification necessary, except
where the failure to qualify would not have a material adverse effect on the
Company, and would not have any adverse effect on the enforceability of this
Agreement.
(b) Authority. The Company has the requisite corporate power and
authority and full legal right to enter into this Agreement, to perform, observe
and comply with all of its agreements and obligations hereunder and to issue the
Shares to Purchaser.
(c) Due Authorization. The execution and delivery by the Company of
this Agreement, the performance by it of all of its agreements and obligations
under this Agreement and the Option Agreement, and the issuance of the Shares,
have been duly authorized by all necessary corporate action on the part of the
Company.
(d) Binding Obligation. Assuming the due execution and delivery of this
Agreement by Purchaser, this Agreement is a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except as
such enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally and (ii) general principles of equity (regardless of
whether such enforcement is considered in a proceeding in equity or at law).
(e) Capitalization. At the Closing Date, the authorized capital stock
of the Company will consist of 200,000 shares of Common Stock and 100,000 shares
of preferred stock. No other class or series of capital stock of the Company is
authorized. All of the outstanding shares of Common Stock, including the Shares,
will, at the time of issuance, have been duly authorized and issued and, upon
receipt by the Company of the Purchase Price for the Shares subscribed for
hereunder will be fully paid and non-assessable. There are no pre-emptive rights
relating to the
6
<PAGE>
capital stock of the Company other than those granted pursuant to the 1993
Stockholders' Agreement.
(f) Legend. Each certificate representing the Shares shall bear a
legend substantially to the following effect:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE
SECURITIES LAWS. THE SHARES OF COMMON STOCK HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES OF COMMON STOCK
UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL TO THE COMPANY THAT SUCH REGISTRATION IS
NOT REQUIRED. IN ADDITION, THE SALE, TRANSFER, PLEDGE OR OTHER
DISPOSITION OF THE SHARES EVIDENCED BY THIS CERTIFICATE IS RESTRICTED
BY THE TERMS OF THAT CERTAIN 1993 STOCKHOLDERS' AGREEMENT DATED AS OF
_____________, ________, 1993 AMONG THE COMPANY AND EACH OF THE
STOCKHOLDERS SPECIFIED THEREIN, WHICH 1993 STOCKHOLDERS' AGREEMENT MAY
BE EXAMINED AT THE PRINCIPAL OFFICES OF THE COMPANY. THE SHARES OF
COMMON STOCK REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH (I)
SAID SECURITIES LAWS OR AN APPLICABLE EXEMPTION THEREFROM AND (II)
WITH SAID 1993 STOCKHOLDERS' AGREEMENT.
7. Conditions to Obligations of Purchaser. The obligation of Purchaser to
consummate the transactions contemplated by this Agreement shall be subject to
the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Performance of Obligations. The Company shall have performed and
complied in all material respects with all obligations and agreements required
to be performed and complied with by it hereunder on or prior to the Closing
Date;
(b) Representations and Warranties. The representations and warranties
of the Company contained in this Agreement shall be true and correct in all
material respects as of the Closing Date as if made as of such date;
7
<PAGE>
(c) Loans. The Company shall have made available to Purchaser at the
Closing, as a loan (or loans), such portion of the Purchase Price for the Loan
Shares subscribed for hereunder as agreed to by Purchaser and the Company. Any
such loan shall be evidenced by Purchaser's delivery to the Company of the 90-
day Note and/or the Four-Year Note, as applicable, and Purchaser's obligations
thereunder shall be secured by Purchaser's execution, delivery and performance
of the Pledge Agreement; and
(d) Section 4 Obligations. The Company shall have fully complied with
all of its obligations under Section 4 hereof.
8. Conditions to Obligations of the Company. The obligation of the Company
to the transactions contemplated by this Agreement shall be subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Performance of Obligations. Purchaser shall have performed and
complied in all material respects with all obligations and agreements required
to be performed and complied with by him hereunder on or prior to the Closing
Date;
(b) Representations and Warranties. The representations and warranties
of Purchaser contained in this Agreement shall be true and correct in all
material respects as of the Closing Date as if made as of such date;
(c) Offering. The Offering shall not have been terminated by the
Company; and
(d) Section 3(b) Obligations. Purchaser shall have fully complied with
all of its obligations under Section 3(b) hereof.
9. Mutual Conditions. The obligations of either party to consummate the
transactions contemplated by this Agreement shall be subject to the satisfaction
or waiver on or prior to the Closing Date of each of the offering Conditions.
10. Indemnification.
(a) Indemnification of the Company and the Company Affiliates. From and
after the date hereof, Purchaser shall indemnify and hold harmless the Company
and its predecessors, successors, officers, directors, employees,
representatives and agents (collectively, the "Indemnitees") from and against
any loss, damage or expense, including, without limitation, reasonable
attorneys' and consultants' fees, disbursements and expenses, suffered by any
one or more of the Indemnitees arising out of or resulting from any inaccuracy
in or breach of any of the representations, warranties, covenants or agreements
made by Purchaser herein.
(b) Indemnification of Purchaser. From and after the date hereof, the
Company shall indemnify and hold harmless Purchaser from and against any loss,
damage or expense, including, without limitation, reasonable attorneys' and
consultants' fees, disbursements and expenses suffered by Purchaser arising out
of or resulting from any inaccuracy in or breach of any of the representations,
warranties, covenants or agreements made by the Company herein.
8
<PAGE>
(c) Procedure for Claims. Within thirty days after obtaining
written notice of any claim or demand which has given rise to, or could
reasonably give rise to, a claim for indemnification hereunder, the party
seeking indemnification shall give written notice of such claim ("Notice of
Claim") to the other party. The Notice of Claim shall set forth a brief
description of the facts giving rise to such claim and the amount (or a
reasonable estimate) of the loss, damage or expense suffered, or which may be
suffered, by the party seeking indemnification.
Upon receiving the Notice of Claim, the indemnifying party shall resist,
settle or otherwise dispose of such claim in such manner as it shall deem
appropriate, including the employment of counsel, and shall be responsible for
the payment of all expenses, including the reasonable fees and expenses of such
counsel. The indemnified party shall have the right to employ separate counsel
in any such action and to participate in or assume the defense thereof, but the
fees and expenses of such counsel shall be at the indemnified party's expense
unless (i) the employment has been specifically authorized by the indemnifying
party in writing, (ii) the indemnifying party has failed to assume the defense
and employ counsel in a timely manner or (iii) the named parties to any action
(including any impleaded parties) include both Purchaser and the Company, and
the indemnified party has been advised by such counsel that representation of
the Company and the Purchaser by the same counsel would be inappropriate under
applicable standards of professional conduct due to actual or potential
differing interests between them (in which case, if the indemnified party
notifies the indemnifying party in writing that the indemnified party elects to
employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall have neither the right nor the obligation to assume the
defense of such action on behalf of the indemnified party).
(d) Third Party Beneficiaries. Nothing contained in this Section 10
shall confer any rights upon, or inure to the benefit of, any third party other
than those parties specified in Sections 10(a) and 10(b) above, it being
understood that such specified parties, to the extent not actually parties
hereto, shall be third party beneficiaries.
11. Miscellaneous.
(a) Notices. All notices, offers or other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be considered as properly given or made on the earliest to occur of (i) personal
delivery, (ii) two days after being delivered to a nationally recognized
overnight mail delivery or courier service, (iii) five days after being mailed
by certified mail, return receipt requested, postage prepaid, or (iv) by prepaid
telegram or facsimile transmission (with written confirmation of receipt). All
notices given or made pursuant hereto shall be addressed to the Company at its
principal office and to Purchaser at his address appearing on the signature page
hereof under the heading "PURCHASER". The address of any party hereto may be
changed by a notice in writing given in accordance with the provisions hereof.
9
<PAGE>
(b) Effect and Interpretation. This Agreement shall be construed in
accordance with and governed by the laws of the State of Delaware without regard
to the conflicts of laws provisions thereof.
(c) Entire Agreement. This Agreement and the additional documents
listed on Schedule B and any Exhibits or Schedules attached hereto or thereto
(the "Additional Documents"), which documents are incorporated herein by this
reference, constitute the entire agreement between the parties hereto with
respect to the subject matter hereof any may be amended only by a writing
executed by all parties. This Agreement and the Additional Documents and the
information contained herein and therein expressly supersede all understandings
and agreements of the parties, whether written or oral, between the parties with
respect to the subject matter hereof.
(d) Successors. This Agreement and all the terms and provisions hereof
shall be binding upon and shall inure to the benefit of the parties hereto, and
their respective heirs, legal representatives, permitted successors and
permitted assigns. Notwithstanding anything herein to the contrary, respective
rights and obligations of the parties may not be assigned without the written
consent of the other party.
(e) Pronouns and Headings. As used herein, all pronouns shall include
the masculine, feminine, neuter, singular and plural wherever the context and
facts require such construction. The descriptive headings in the sections of
this Agreement are inserted for convenience of reference only and shall not
control or affect the meaning or construction of any of the provisions hereof.
(f) Severability. If any provision of this Agreement is held by a court
of competent jurisdiction to be invalid, illegal or unenforceable, such
provision shall be severed and enforced to the extent possible or modified in
such a way as to make it enforceable, and the invalidity, illegality or
unenforceability thereof shall not affect the validity, legality or
enforceability of the remaining provisions of this Agreement.
(g) Certain Tax Matters. Under section 1445(e) of the Internal Revenue
Code of 1986, as amended, a corporation, partnership, trust or estate must
withhold tax with respect to certain transfers of property if a holder of the
interest in the entity is a foreign person. To inform the Company that no
withholding is required with respect to any of the Shares, Purchaser hereby
certifies as follows: (1) he is not a nonresident alien for purposes of U.S.
income taxation; (2) his social security number is as set forth on the signature
page hereto; and (3) his home address is as set forth an the signature page
hereto. Purchaser understands under penalties of perjury that this certification
may be disclosed to the Internal Revenue Service and that any false statement he
has made here could be punished by fine, imprisonment or both. The Purchaser has
completed and submitted herewith a Form W-9 relative to his taxpayer
identification number and other matters and does hereby represent and warrant
that such form is complete, true and correct.
(h) Counterparts. This Agreement may be executed simultaneously in one
or more counterparts each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10
<PAGE>
(i) Consent of Spouse; Insertion in Will. Purchaser if married, or, if
currently unmarried, each Purchaser upon his marriage, agrees to obtain the
consent and approval of his spouse, to all of the terms and provisions of this
Agreement by the execution hereof by such spouse. Purchaser agrees to insert in
his last will and testament, or other similar instrument, or execute a codicil
thereto, directing and authorizing his personal representatives to fulfill and
comply with the provisions, hereof.
(j) Effectiveness; Termination. In the event this agreement is
terminated for any reason, the parties hereto shall have no further obligations
to each other, except that in the event of a complete or partial performance of
the terms hereof which occurs prior to any termination hereof, (i) Purchaser
shall promptly return to the Company all certificates in his possession
representing the Shares, if any, and (ii) the Company shall promptly refund the
Purchase Price to Purchaser, if paid.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE COMPANY:
-----------
HANOVER COMPRESSOR COMPANY, a
Delaware corporation
By:____________________________
William S. Goldberg
Executive Vice President
11
<PAGE>
1993 MANAGEMENT STOCK OFFERING
SUBSCRIPTION AGREEMENT
PURCHASER SIGNATURE PAGE
PURCHASER:
______________________________________
Name:_________________________________
Social Security No.___________________
Home Address:
______________________________________
______________________________________
______________________________________
SPOUSAL CONSENT
The undersigned, a spouse of one of Purchaser who is a party to the
foregoing Subscription Agreement, hereby consents to the execution of the
foregoing Subscription Agreement pursuant to the Offering and the consummation
of the transactions contemplated thereby by his/her spouse, and to the extent
the undersigned has or hereafter acquires a interest in and to the property and
subject matter of the Subscription Agreement hereby agrees to bound by the terms
of such Subscription Agreement.
Date:____________________ ___________________________
___________________________
Name:
12
<PAGE>
NOTARY PAGE
-----------
STATE OF________________)
COUNTY OF_______________)
I, _______________________________________, a Notary Public in and for
said County, in the State aforesaid, do hereby certify that
_____________________________ appeared before me this day in person, and
acknowledged and swore that he signed, sealed, and delivered the said instrument
as his respective free and voluntary act and deed for the uses and purposes
therein set forth, and that the statements contained therein are true.
Given under my hand and notarial seal as of the _______ day of ___________,
1993.
My Commission expires:
____________________________
13
<PAGE>
SCHEDULE A
Shares Subscribed For
- ------------------------------------------------------------------------
Type of Share Number of Shares Consideration
- ------------------------------------------------------------------------
Cash Shares/1/
- ------------------------------------------------------------------------
90-Day Loan Shares
- ------------------------------------------------------------------------
Four-Year Loan Shares/2/
- ------------------------------------------------------------------------
Total
- ------------------------------------------------------------------------
- ------------------------
/1/ Purchaser must subscribe for a minimum of 7 Shares hereunder, unless
otherwise specifically authorized by the Company in its sole discretion.
There is no maximum subscription.
/2/ Purchaser may subscribe for Four Year Loan Shares purchased with the
proceeds of a Four Year Note in any amount up to twice the sum of (i)
number of Cash Shares subscribed for pursuant to the Offering, (ii) the
number of 90-day Loan Shares purchased with the proceeds of a 90-day Note
subscribed for by Purchaser pursuant to the offerings, and (iii) the
number of shares of Common Stock currently owned by Purchaser and (iv) the
number of shares of Common Stock for which Purchaser has the vested option
to acquire. Additional information with respect to the maximum number of
Loan Shares may be obtained from
[_____________________________________________________]
14
<PAGE>
SCHEDULE B
Additional Documents
A - 1993 Stockholders' Agreement
B - Form of Loan Agreement
C - Form of Four Year Secured Promissory Note
D - Form of 90-Day Secured Promissory Note.
E - Form of Pledge Agreement
F - Confidential Offering Memorandum
G - 1993 Management Stock Option Plan
H - Form of Stock Option Agreement Under the 1993 Management Stock Option Plan
I - Form of 1993 Incentive option Plan
15
<PAGE>
EXHIBIT 4.10
HANOVER COMPRESSOR COMPANY
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT AND THE ACCOMPANYING MATERIALS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY A SECURITY IN
ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
AN OFFER OR SOLICITATION.
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF HANOVER COMPRESSOR COMPANY (THE "COMPANY"), ITS MANAGEMENT AND
THE TERMS OF THIS OFFERING, INCLUDING THE MERITS AND RISKS THEREOF. THE COMMON
STOCK HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION (THE "COMMISSION") NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF AN INVESTMENT IN THE COMMON STOCK, NOR UPON THE ACCURACY OR ADEQUACY
OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE, THE INFORMATION CONTAINED HEREIN IS LESS
DETAILED AND COMPLETE THAN AN INVESTOR WOULD RECEIVE IF THE COMMON STOCK WERE
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR IF AN
ALTERNATIVE EXEMPTION FROM SUCH REGISTRATION WERE RELIED UPON.
THE COMMON STOCK IS SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE
AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED HEREUNDER AND PURSUANT
TO THAT CERTAIN FORM OF STOCKHOLDERS' AGREEMENT, ATTACKED HERETO AS EXHIBIT A
(THE "STOCKHOLDERS' AGREEMENT"). INVESTORS SHOULD BE AWARE THAT THEY WILL BE
REQUIRED TO BEAR THE FINANCIAL RISK OF HIS OR ITS INVESTMENT FOR AN INDEFINITE
PERIOD OF TIME.
THIS AGREEMENT is made and entered into as of _________, _______, 1992 by
and among the party set forth on the signature page hereto (the "Investor") and
the Company.
WITNESSETH:
WHEREAS, the Company is a corporation organized under the laws of the State
of Delaware and is engaged in the business of selling, leasing, maintaining and
refurbishing compressors (the "Compressors") utilized by the natural gas
industry;
WHEREAS, the Company desires to offer (the "Offering") an aggregate of
22,884 shares of its Common Stock, $.01 par value (the "Common Stock") to
certain qualified subscribers, of which it is anticipated that 1525.6 shares of
such Common Stock will be
<PAGE>
purchased by the Company's management and 6102.4 shares will be purchased by
Hanover Energy Inc. ("HEI"), as hereinafter set forth;
WHEREAS, the Offering will terminate on April 1, 1992 or such subsequent
date, not later than April 20, 1992, as the Company may determine, in its sole
and absolute discretion, and without notice to or the consent of any Investor
(the "Termination Date"), unless the company shall have accepted subscriptions
for all of the shares of common Stock offered pursuant to the Offering and shall
have renegotiated the terms and conditions of its existing indebtedness extended
by Manufacturers Hanover (the "MH Indebtedness"), on terms not materially less
favorable than the terms (the "Minimum Financing Terms") described under the
heading "Recent Developments" contained in Exhibit B attached hereto, in each
case prior to such date;
WHEREAS, certain affiliates of the Company reserve the right to purchase
any unsold shares of Common Stock offered hereby for their own account. Such
Common Stock, if acquired by an affiliate of the Company, will be acquired on
the same terms as the Common Stock offered hereby and will be held in accordance
with applicable law. It is a condition to the closing of the Offering that
various members of the Company's management acquire not less than $1,000,000 of
the Common Stock (the "Management Stock") offered hereby. It is anticipated that
any unsold shares of Common Stock offered hereby will be acquired by either HEI,
which owns 95% of the Company's Common Stock, or by GKH Partners, L.P., a
Delaware limited partnership, or its affiliates (collectively, "GKH") which
own an aggregate of 64. 18% of the outstanding Common stock of Hanover Energy
Holding Corporation, which is the direct parent of HEI;
WHEREAS, the Investor has previously been given access to and an
opportunity to review the documents, agreements, information and reports
described in Schedule A attached hereto (the "Data");
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby acknowledge, agree and understand the
following:
THE COMMON STOCK HAS NOT BEEN REGISTERED UNDER THE ACT, NOR HAS THE COMMON
STOCK BEEN REGISTERED UNDER THE SECURITIES LAWS OF ANY STATE. THE SALE OF THE
COMMON STOCK IS BEING MADE BY THE COMPANY IN RELIANCE ON APPLICABLE EXCEPTIONS
UNDER THE ACT AND/OR THE RULES PROMULGATED THEREUNDER. AS A CONDITION TO ANY
SALE, THE COMPANY WILL BE RELYING ON CERTAIN REPRESENTATIONS AND WARRANTIES FROM
THE UNDERSIGNED AS SET FORTH IN THIS AGREEMENT TO THE EFFECT, AMONG OTHER
THINGS, THE UNDERSIGNED IS ACQUIRING HIS OR ITS COMMON STOCK SOLELY FOR HIS OR
ITS OWN ACCOUNT AND NOT WITH A VIEW TOWARD DISTRIBUTION OR FRACTIONALIZATION.
THERE IS NO PUBLIC OR OTHER MARKET FOR THE COMMON STOCK NOR IS SUCH MARKET
LIKELY TO DEVELOP. TRANSFER OF THE COMMON
2
<PAGE>
STOCK IS SPECIFICALLY RESTRICTED UNDER THIS SUBSCRIPTION AGREEMENT AND THE
STOCKHOLDERS' AGREEMENT. THE INVESTOR HAS NO RIGHT TO REQUIRE THE COMPANY TO
REGISTER HIS OR ITS COMMON STOCK UNDER THE ACTS FOR THESE REASONS THE
UNDERSIGNED WILL BE REQUIRED TO RETAIN OWNERSHIP OF HIS OR ITS COMMON STOCK AND
BEAR THE ECONOMIC RISK OF HIS OR ITS INVESTMENT FOR AN INDEFINITE PERIOD.
THE UNDERSIGNED SHOULD NOT CONSTRUE THE CONTENTS OF THIS AGREEMENT OR ANY
COMMUNICATION, WHETHER WRITTEN OR ORAL, FROM THE COMPANY, ITS OFFICERS,
DIRECTORS, COUNSEL OR AGENTS, AS LEGAL, TAX OR BUSINESS ADVICE, AND SHOULD
CONSULT HIS OR ITS OWN LEGAL COUNSEL, ACCOUNTANTS AND OTHER PROFESSIONAL
ADVISORS AS TO LEGAL, TAX, ACCOUNTING AND RELATED MATTERS CONCERNING HIS OR ITS
INVESTMENT.
INVESTMENT IN THE COMMON STOCK IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF
RISK. THIS INVESTMENT IS SUITABLE ONLY FOR PERSONS WHO CAN AFFORD TO LOSE THEIR
ENTIRE INVESTMENT.
THE COMPANY RESERVES THE RIGHT TO REJECT ANY SUBSCRIPTION MADE HEREUNDER IN
ITS ABSOLUTE DISCRETION AND FOR WHATEVER REASON.
1. Subscription. The Investor hereby irrevocably subscribes for the
number of shares of Common Stock set forth on the signature page of this
Subscription Agreement under the terms and conditions set forth below. The
Investor agrees to pay to the Company the sum set forth on the signature page as
the purchase price for the Common Stock subscribed for.
Subject to the terms and conditions hereof, the Investor hereby tenders two
executed copies of this Agreement, two executed copies of the Stockholders'
Agreement, a completed Form W-9 and a certified or cashier's check made payable
to the order of "Hanover Compressor Company" or other immediately available
funds (the "Funds") in an amount equal to $655.48 multiplied by the number of
shares of Common Stock subscribed for. The Company's acceptance hereof shall be
deemed acknowledgment of its receipt of such Funds and documents.
The Funds shall be promptly deposited in an interest bearing, segregated
account and such Funds may be invested in treasury bills or other cash
equivalents, as determined in the sole and absolute discretion of the Company.
If acceptable subscriptions for all of the shares of Common Stock offered hereby
are received prior to the Termination Date, if the Management Stock is
subscribed for and if a binding agreement amending the MH Indebtedness on terms
not materially less favorable than the Minimum Financing Terms has been entered
into prior to the Termination Date (together, the "Offering Conditions"), all
subscriptions will be transferred from the segregated bank account to the
Company, together with all income, if any, earned thereon. In the event the
Offering Conditions have not been satisfied in full prior to the Termination
Date, the offering will be terminated and all funds will be returned to
Investors with a pro rata share of
3
<PAGE>
interest earned thereon, calculated on the basis of the amount of Funds invested
by the Investor and the length of time interest on such Funds was earned.
2. Representation and Warranties of the Investor. The Investor hereby
represents and warrants to the Company as follows:
(a) The undersigned or his or its designated agents or consultants (the
"Representatives") have carefully reviewed, are familiar with and understand the
Data, the Stockholders' Agreement and Exhibit B attached hereto entitled "Recent
Company Developments," and confirm that the Data provided complies in full with
the description thereof set forth on Schedule A attached hereto.
(b) All documents, records and books pertaining to an investment in the
Company and requested by him or it have been made available or delivered to him
or it, subject to the terms and conditions of that certain Confidentiality
Agreement, previously executed by the Investor (the "Confidentiality
Agreement"). The undersigned or his or its Representatives have had an
opportunity to ask questions of and receive answers from the Company concerning
the terms and conditions of his or its investment and the financial condition,
operations and prospects of the Company. No statement, printed material or
inducement given or made by the Company or any of its affiliates, agents or
representatives is contrary to the information contained herein or contained in
the Data and the undersigned acknowledges and agrees that the undersigned has
relied solely on the Data in connection with his or its decision to acquire the
Common Stock. In addition, the undersigned acknowledges that in reliance upon
certain state and federal securities law exemptions, the Investor is receiving
less information than the undersigned would have received if an information
memorandum complying with Rule 502 (b) (2) of Regulation D promulgated pursuant
to the Act had been prepared and made available to him or it or if the Common
Stock had been registered pursuant to the Act.
(c) The undersigned: (i) has adequate means of providing for his or its
current needs and possible personal contingencies and has no need for liquidity
in his or its Common Stock; (ii) can bear the economic risk of losing his or its
entire investment therein; (iii) has, or in the case of a entity Investor, the
person making the decision to invest in the Common Stock has such knowledge and
experience in financial matters that he is capable of evaluating the relative
risks and merits of this investment; (iv) is, or in the case of a entity
Investor, the person making the decision to invest in the Common Stock is
familiar with the nature of, and risks attendant, investment in the Common Stock
and the natural gas compressor industry generally; and (v) has, or in the case
of a entity Investor, the person making the decision to invest in the Common
Stock has determined that the purchase of such Common Stock is consistent with
his or its financial objectives.
(d) The undersigned is an "accredited investor" as set forth on Schedule B
hereto.
(e) The address set forth below is the undersigned's true and correct
residence (or, if an entity, its principal business address), and the
undersigned has no present intention of becoming a domiciliary of any other
state or jurisdiction. If the undersigned is an individual, he
4
<PAGE>
is registered to vote in, and/or is the holder of a current driver's license
issued by, the state of his residence as set forth below.
(f) The undersigned acknowledges that the Common Stock will be sold (i)
pursuant to the applicable exemptions from registration under the securities
laws of certain states and (ii) that the Common Stock has not been registered
under the Act in reliance upon exemptions from registration provided thereunder
and, in connection therewith, the undersigned hereby covenants and agrees that
the undersigned will not offer, sell or otherwise transfer the Common Stock
except in accordance with this Agreement and with the terms and conditions of
the Stockholders' Agreement. The undersigned further agrees the Common Stock
will not be transferable (except in accordance with the procedures set forth in
the Stockholders' Agreement) without the prior written consent of the Company.
The undersigned understands and agrees that the Company will not consent to a
transfer of the Common Stock unless the transferee meets the financial and other
suitability standards required of an initial subscriber or unless such
conditions are waived by the Company in its sole discretion. The Company its
sole and absolute discretion, require the Investor to an opinion reasonably may,
in deliver of counsel (from a law firm and in form and substance satisfactory to
the Company) to the effect that any such transfer is exempt from the
registration requirements of the Act. The undersigned further understands that
the Company is under no obligation to register the Common Stock on his or its
behalf, to assist him or it in complying with any exemption from registration or
to consent to the transfer thereof.
(g) The Common Stock for which the undersigned hereby subscribes is being
acquired solely for his or its own account, for investment purposes only, and is
not being purchased with a view to or for the resale, distribution, subdivision
or fractionalization thereof; the undersigned has no present plans to enter into
any such contract, undertaking, agreement or arrangement. The undersigned has no
reason to anticipate any change in his or its circumstances, financial or
otherwise, which may cause or require any sale or disposition by him or it of
any of the Common Stock subscribed for. In order to induce the Company to issue
and sell the Common Stock subscribed for hereby to the undersigned Investor, it
is agreed that the Company will have no obligation to recognize the ownership,
beneficial or otherwise, of such Common Stock by anyone but the undersigned
Investor.
(h) This Agreement has been duly and validly executed and delivered by the
undersigned and constitutes the valid and binding obligation of the Investor
enforceable in accordance with its terms. If the undersigned is a corporation,
partnership, trust or other entity, the undersigned represents and warrants that
it is authorized and otherwise duly qualified to purchase and hold the Common
Stock, and such entity has not been formed for the specific purpose of acquiring
the Common Stock unless (in the case of a partnership or corporation) all of its
equity owners qualify as accredited individual investors under the standards set
forth in Schedule B hereto.
(i) All information which the undersigned has provided to the Company
concerning himself, his financial position and his knowledge of financial and
business matters, or in the case of a corporation, partnership, trust or other
entity, the information concerning the person making the investment decision on
behalf of such entity, including all information contained herein, is
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true, correct and complete as of the date set forth at the end hereof, and if
there should be any change in such information prior to this subscription being
accepted, the undersigned will immediately provide the Company with such
information.
(j) The undersigned obtained knowledge of this investment by personal
contact with an officer, director, shareholder, affiliate or agent of the
Company.
(k) None of the following has ever been represented, guaranteed or
warranted to him or it by the Company:
(i) that the Company will be profitable or that the undersigned will
realize tax benefits in connection with an investment in the Company, or
that the undersigned will realize profits or losses, as a result of his or
its investment in the Company; or
(ii) that the past performance or experience on the part of any
officer, director, shareholder, employee, agent or affiliate thereof, or
any employee, agent or affiliate of the Company will in any way indicate
the predictable results of ownership of Common Stock or of the overall
venture.
(1) The undersigned acknowledges, is aware of and understands the following
certain specific risks, which risks do not constitute an exhaustive delineation
of all material risks attendant an investment in the Company:
(i) Natural Gas Compressor Industry Considerations. The Company's
profitability is, in part, dependent upon the current market for natural
gas. Since 1982, there has been an over-supply of natural gas and,
consequently, prices have declined significantly and remain at relatively
low levels. In general, future prices of natural gas are dependent upon
numerous factors beyond the control of the company, including competition,
conservation efforts and various economic, political and regulatory
developments. The current unsettled energy market, highlighted by recent
political events in the Middle East and elsewhere, make it particularly
difficult to estimate future prices of natural gas. Although declines in
natural gas prices tend to decrease efforts to discover and develop new
natural gas reserves, thus placing greater reliance upon older, developed
natural gas reserves (which reliance requires additional compression in
order to deliver the remaining natural gas reserves to market) a
significant decline in the price of natural gas could result in the
widespread failure of natural gas producers and would likely have a
material adverse effect on the Company's financial condition and results of
operation.
(ii) Potential Liability and Insurance. Natural gas operations are
subject to certain risks, including explosions, uncontrollable flows of gas
or well fluids, fires, pollution and other environmental risks. These risks
could expose the Company to substantial liability for injury and loss of
life, property damage, pollution and other environmental damages, and
consequential damages, if such damages resulted from a Compressor defect or
from the Company's negligence in maintaining, servicing or refurbishing its
Compressors.
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Although the Company has obtained certain insurance, as described in
greater detail in the Data, no assurance can be given that such insurance
is adequate to cover the Company's intended operations, will be generally
available in the future or, if available, that premiums will be reasonable.
If the Company were to incur a substantial liability and such damages were
not covered by insurance or were in excess of policy limits, or if the
Company were to incur such liability at a time when it is no longer able to
obtain liability insurance, its financial condition could be materially
adversely affected. The Company, consistent with industry trends, may find
it difficult to obtain adequate insurance coverage against possible
liabilities that may be incurred in connection with the conduct of its
business. There can be no assurance that all possible types of liabilities
that may be incurred by the Company will be covered by its insurance or
that the dollar amount of such liabilities will not exceed the Company's
policy limits. A partially or completely uninsured claim, if successful
and of sufficient magnitude, could have a materially adverse effect on the
Company and its financial condition.
(iii) Additional Environmental Liability Risks. In addition to
liability which may arise as a result of an alleged Compressor defect or
Company negligence, if environmental damage is found to have occurred as a
result of the Company's operating activities, the Company could incur
substantial liability. In such event, the Company may be liable for all
costs of remediation, as well as certain other costs. Under the
Comprehensive Response, Compensation and Liability Act ("CERCLA"), the
Company may also be liable for all costs of remediation of any property
which it is deemed to be the owner or operator. Various Preliminary
Environmental (Phase I) Site Assessments have been conducted with respect
to certain properties owned by various subsidiaries of the Company. Such
Assessments have identified potential sources of ground contamination.
Although remediation efforts have been undertaken by the Company, investors
are strongly urged to carefully review such Assessments which are included
in the Data.
(iv) Restrictions Imposed by the Terms of the Company's Indebtedness.
The terms of the Company's existing indebtedness impose a variety of
restrictions on the Company's operations including, without limitation,
limiting the Company's ability to incur additional indebtedness, dispose of
its assets and extend guarantees. Such restrictions may limit the Company's
ability to fully exploit business opportunities. In addition, under the
terms of its existing indebtedness, the Company may not declare or pay any
dividend or make any payment for the purchase, redemption or acquisition of
any shares of Common Stock. While the Company's receipt of minimum
Financing Terms not materially less favorable than the terms described
under the heading "Recent Developments" is a condition to the Offering, the
Company's management and not an independent third party will determine, in
its sole reasonable discretion, whether the conditions to the release of
subscription funds shall have been satisfied. Deviations from financing
terms described under the heading "Recent Developments" which the Company
does not in its sole discretion dean material, will not provide a basis for
a return of subscription funds.
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(v) Control by Principal Stockholders. As of March 1, 1992,
approximately 95% of the Company's outstanding Common Stock was owned by
HEI. Concurrently with the Offering, HEI, GKH, certain affiliates of HEI
and various members of the Company's management have been given the
opportunity to subscribe for this Offering. It is anticipated that any
shares not acquired as a result of this Offering will be acquired either by
HEI or GKH. As a result of such ownership and certain agreements under the
Agreement, such persons will have the power to appoint not less than a
majority of the members of the Company's Board of Directors and thereby
control the operations, management and policies of the Company.
(vi) Factors Affecting Projections. The Company's projected financial
statements for the years 1992 through 1995 (the "Projections") included in
the Data were prepared by management of the Company in the ordinary course
and are based, in part, on assumptions concerning facts and events over
which the Company will have no control, and which could, if they change,
produce results significantly different from those set forth in the
Projections. Furthermore, such assumptions have not been reviewed by an
independent third party. There can be no assurance that the actual results
of operations will be comparable to those set forth in the Projections.
Investors are cautioned against undue reliance on the Projections and are
strongly urged to carefully scrutinize the assumptions upon which such
Projections are based.
(vii) Guarantee of Funds Used to Acquire Management Stock. It is a
condition to the closing of this Offering that an aggregate of $1,000,000
of the Common Stock will be purchased by certain members of the Company's
management team. It is anticipated that any such acquisition may be
financed through certain third party loans, 50% of the principal amount of
which would be guaranteed by the Company. Were such officers to default on
such loans, the Company would be required to repay a portion of such
amounts pursuant to its guarantee. The Projections assume that no default
shall occur with respect to such loans.
(viii) Transition of Management. Prior to October 1991, the
Company's Chief Executive Officer was William Pollock and its Vice
President - Financial was Brenda Phillips. Messrs. McGhan and Bedrich, the
current Chief Executive officer and Chief Financial officer, respectively,
of the Company, assumed their respective positions in October, 1991 and
November, 1992. Although Mr. McGhan served in various capacities for the
Company since 1990, including as Chief Operating officer thereof, and
although both Messrs. Bedrich and McGhan have extensive management
experience generally, Messrs. McGhan and Bedrich have served only briefly
in their current respective positions.
(m) The undersigned acknowledges, and is aware of and understands the
following intended uses for the proceeds of the Offering:
(i) Approximately $5,000,000 of the proceeds will be used to repay a
portion of the MH Indebtedness. Such repayment will permit the Company to
avoid technical
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<PAGE>
defaults of various financial covenants under documents relating to the MH
Indebtedness and obtain the Minimum Financing Terms.
(ii) Approximately $1,400,000 of the proceeds will be used to pay
existing accounts payable of the Company in order to establish the level of
trade support necessary to maintain the Company's current level of business
activity as well as projected growth.
(iii) Approximately $8,500,000 of the proceeds will be used for
general corporate purposes, including the purchase of additional natural
gas compressors, if such purchases are economically justified. While such
purchases, if any, should allow the Company to capitalize upon economies of
scale, no assurance can be given that demand for the Company's products and
services will be sufficient to justify any such acquisitions.
3. Irrevocability of this Agreement. Except as otherwise provided under
applicable law, the Investor agrees that the undersigned shall not cancel,
terminate or revoke this subscription Agreement and that this Subscription
Agreement shall survive the death, incapacity or disability of the Investor.
4. Indemnification. The Investor agrees to indemnify and hold harmless
the Company and anyone acting on his or its behalf from and against all damages,
losses, costs and expenses (including reasonable attorneys' fees) which may be
incurred by reason of the failure of the Investor to fulfill any of the terms
and conditions of this Subscription Agreement, or by reason of any breach of the
representations and warranties made by the Investor herein.
5. Miscellaneous.
(a) Notices to the Company. All notices or other communications given or
made hereunder shall be in writing and shall be delivered or mailed by
registered or certified mail, return receipt requested, postage prepaid, to the
Investor at his or its address set forth below and to Hanover Compressor
Company, 2911 Turtle Creek Boulevard, Suite 500, Dallas, Texas 75219, Attention:
Curtis Bedrich.
(b) Effect and Interpretation. Notwithstanding the place where this
Agreement may be executed by any of the parties hereto, the parties expressly
agree that all terms and provisions hereof shall be construed in accordance with
and governed by the laws of the State of Delaware without regard to the
conflicts of laws provisions thereof.
(c) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof any may be
amended only by a writing executed by all parties. This Agreement, and the
information contained herein expressly supersedes all understandings and
agreements of the parties (other than the Confidentiality Agreement which shall
survive execution hereof to the extent set forth therein), whether written or
oral, between the parties with respect to the subject matter hereof.
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<PAGE>
(d) Successors. This Subscription Agreement and all the terms and
provisions hereof shall be binding upon and shall inure to the benefit of the
parties hereto, and their respective heirs, legal representatives, successors
and assigns.
(e) Severability. In the event any one or more of the provisions contained
herein shall for any reason be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Subscription Agreement, but this Subscription
Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.
(f) Certain Tax Matters. Under Sections 1441 and 1442 of the Internal
Revenue Code, as amended, a corporation, partnership, trust or estate must
withhold tax with respect to certain transfers of property if a holder of the
interest in the entity is a foreign person. To inform the Company that no
withholding is required with respect to any distribution upon any shares of
Common Stock, the undersigned hereby certifies as follows: (1) the undersigned
is not a non-resident alien for purposes of U.S. income taxation; (2) his or its
social security number is as set forth on the signature page; and (3) his or its
home address is as set forth an the signature page. The Investor understands
under penalties of perjury that this certification may be disclosed to the
Internal Revenue Service and that any false statement which the Undersigned has
made here could be punished by fine, imprisonment or both.
The Investor has completed and submitted herewith a Form W-9 relative to
the Investor's taxpayer identification number and other matters and does hereby
represent and warrant that such form is complete, true and correct.
(g) Counterparts. This Subscription Agreement may be executed
simultaneously in one or more counterparts each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Subscription Agreement
as of the date first above written.
- ------------------------------------------------------------------------------
Residence Address
or if an Entity Investor,
address of principal Total
Signature(s) executive offices Subscription
- -------------------------------------------------------------------------------
(If signing in a
representative capacity,
please indicate nature
of such capacity)
- -------------------------------------------------------------------------------
$
- ------------------------ ------------------------- --------------------
-------------------------
-------------------------
- --------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------
$
- ------------------------ ------------------------- --------------------
-------------------------
-------------------------
- --------------------------------------------------------------------------------
Mailing Address Tax I.D. or Social
Please Print Name(s) If Different Security No. (s)
- --------------------------------------------------------------------------------
- ------------------------ ------------------------- --------------------
------------------------- --------------------
-------------------------
- --------------------------------------------------------------------------------
Date: __________________, 1992.
- --------------------------------------------------------------------------------
Phone:
(1) Office:______________ Ext. ______
Home:________________
(2) Office:______________ Ext. ______
Home:________________
___ Individual ____ Joint Tenants with _____ Corporation
Right Survivorship
(Both Parties Sign) Date Formed:
_____________
- --------------------------------------------------------------------------------
___ Tenants in Common _____ Partnership No.
(Both Parties Sign) of Partners
_____________
- --------------------------------------------------------------------------------
___ Community Property _____ Trust (___ Revocable)
(Both Parties Sign) (___ Irrevocable)
- --------------------------------------------------------------------------------
_____ Other (specify)
- --------------------------------------------------------------------------------
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(Individual Form)
STATE OF )
)
COUNTY OF )
I, _______________, a Notary Public in and for said County, in the State
aforesaid, do hereby certify that the person whose name is subscribed to above
appeared before me this day in person, and acknowledged and swore that he signed
and delivered the said instrument as his or its respective free and voluntary
act and deed for the uses and purposes therein set forth, and that the
statements contained therein are true.
Given under my hand and notarial seal as of the ____ day of
________________, 1992.
My commission expires:
__________________________ ________________________________
Notary Public
(Entity Form)
STATE OF )
)
COUNTY OF )
I, ______________________________________, a Notary Public in and for said
County, in the State aforesaid: do hereby certify that the person whose name is
subscribed to above, known to me to be the _____________________ of
____________________________ of (a corporation, partnership, limited
partnership, (other), appeared before me this day in person, and acknowledged
and swore that he signed and delivered the said instruments on behalf of said
entity for the uses and purposes therein set forth, and that the statements
contained therein are true.
Give under my hand and notarial seal as of the ____________ day of
______________, 1992.
My commission expires:
__________________________ ________________________________
Notary Public
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<PAGE>
ACCEPTANCE
The undersigned hereby accepts the foregoing subscription this ____ day of
__________, 1992. This subscription shall not be binding until accepted by
Hanover Compressor Company and shall become effective as of the date of such
acceptance.
HANOVER COMPRESSOR COMPANY
By: _____________________________________
Its: ____________________________________
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EXHIBIT
STOCKHOLDERS' AGREEMENT
THIS STOCKHOLDERS" AGREEMENT (the "Agreement") is made and entered into as
of _______________________, 1992 by and among HANOVER COMPRESSOR COMPANY, a
Delaware corporation (the "Company"), HANOVER ENERGY INC., a Texas corporation
("HEI"), and the other persons set forth on the signature pages hereof.
WHEREAS, the Company is authorized to issue 200,000 shares of common stock,
$.01 par value (the "Common Stock") and 100,000 shares of series A preferred
stock, $.01 par value (the "Preferred Stock");
WHEREAS, the parties hereto are stockholders (the "Stockholders") of the
Company and each owns the number of shares of Common Stock set forth opposite
his name on the signature page;
WHEREAS, the parties hereto wish to provide for the containment of
ownership of their shares of Common Stock amongst themselves and certain other
persons upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, hereby agree as follows:
ARTICLE I.
DEFINITIONS
1.01 Definitions. Except as otherwise herein expressly provided, the
following terms and phrases shall have the meanings set forth below:
"Affiliate" shall mean any Person who or which, directly or
indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with, any specified Person
(the term "control" for these purposes meaning the ability, whether by
ownership of shares or other equity interests, by contract or otherwise,
to elect a majority of the directors of a corporation, to select the
managing or general partner of a partnership, or otherwise to select, or
have the power to remove and then select, a majority of those persons
exercising governing authority over an entity, and, without limiting the
generality of the foregoing, shall conclusively be presumed in the case
of ownership of fifty percent (50%) or more of the equity interests of
such entity) and their Immediate Family. With respect to any Person
which is a trust, the term "Affiliate" shall mean the grantor of such
trust and the Immediate Family of the Person who is the grantor of such
trust and/or another trust for the benefit of such Person and/or such
Person's Immediate Family. No Party to this Agreement will be deemed to
be an Affiliate of another party hereto solely because they are
Stockholders.
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"Company Notice" shall have the meaning set forth in Section
3.01 hereof.
"Company Option" shall have the meaning set forth in Section
3.02 hereof.
"Company Option Period" shall have the meaning set forth in
Section 3.02 hereof.
"Divorce Transfer" shall mean, as to any Stockholder, the
execution by such Stockholder of a property settlement agreement, or the
entry of a final order of a court against such Stockholder from, which
there is no further right of appeal, in respect of a divorce or
dissolution of marriage proceeding, the effect of which is to grant
rights to all or any part of the Shares owned by such Stockholder to any
Person other than such Stockholder.
"Fair Market Value" shall mean, with respect to any Shares, that
price at which parties dealing at arm's length and without any
compulsion or duress to either purchase or sell such Shares would agree
to purchase and sell such Shares. In the event that the relevant parties
are unable to agree as to "Fair Market Value," Fair Market Value shall
be determined by an appraisal conducted by an appraiser acceptable to
the relevant parties. Such appraiser shall be experienced in making
appraisals of businesses or assets similar to those of the Company. Such
appraisal shall be final and binding upon the parties hereto and the
cost for such appraisal shall be borne equally by the parties in
dispute.
"Immediate Family" shall mean, with respect to any individual,
the spouse, parents or children of such individual (regardless of
whether legally adopted or biological).
"Insolvency" shall mean, with respect to any Person, (a) the
filing by such Person of any proceeding in bankruptcy or
reorganization, (b) the making of an assignment for the benefit of
creditors, (c) the failing to vacate, discharge or dismiss within sixty
(60) days of its initiation either (i) the filing of a proceeding in
bankruptcy against such Person or (ii) the appointment of a receiver or
trustee for all or any part of his or its assets or property or (d) the
attachment or levy, or attempted attachment or levy, against any Shares.
"Involuntarily offered shares" shall mean the following:
(a) if the offer Event results from the Insolvency or
death of, or the Unpermitted Transfer or attempted Unpermitted
Transfer of Shares by, a Stockholder, all of the Shares owned by
such Stockholder and, to the extent affected by a Permitted
Transferor's Insolvency, all or such affected portion of such
Permitted Transfer Shares; and
(b) if the Offer Event results from a Divorce Transfer,
all of the Shares subject to such Divorce Transfer.
"Legal Representative" shall mean and include any Person
empowered or entitled to act with respect to the property of any
Stockholder, including, but not limited to, any executors,
administrators, trustees or conservators of any insolvent, dissolved,
deceased or legally incompetent Stockholder.
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"Offer" shall have the meaning set forth in Section 3.01 hereof.
"Offer Event" shall mean any of the following:
(a) the Insolvency of a Stockholder or a Permitted
Transferor (other than a Significant Stockholder) where, under
applicable law, such Permitted Transferor's Insolvency affects
the Permitted Transfer Shares;
(b) any Unpermitted Transfer or attempted Unpermitted
Transfer of Shares by a Stockholder;
(c) the death of a natural Stockholder; or
(d) a Divorce Transfer relative to Shares.
"Offer Event Notice" shall have the meaning set forth in Section
4.01 hereof.
"Offering Stockholder" shall have the meaning set forth in
Section 3.01 hereof.
"Permitted Transfer Shares" shall have the meaning set forth in
Section 2.02 hereof.
"Permitted Transferee" shall mean, with respect to any
Stockholder, (a) an Affiliate of a Stockholder, (b) one or more members
of such Stockholder's Immediate Family, (c) a trust for the benefit of
such Stockholder and/or one or more members of such Stockholder's
Immediate Family and (d) the beneficiary of such Stockholder where such
Stockholder is a trust or one or more members of such beneficiary's
Immediate Family.
"Permitted Transferor" shall mean any Stockholder who transfers
all or a portion of his or its Shares to a Permitted Transferee pursuant
to the terms of subsection (a) of Section 2.02 hereof.
"Person" shall mean any individual, partnership, corporation,
trust, business association or other entity.
"Proposed Voluntary Transfer Consideration" shall have the
meaning set forth in Section 3.01 hereof.
"Purchase Price" shall have the meaning set forth in Section
5.01 hereof.
"Shares" shall mean any or all shares of Common Stock of the
Company outstanding from time to time and owned by the Stockholders.
"Significant Stockholder" shall mean any Stockholder which
directly or through its Affiliates owns greater than fifty percent (50%)
of the Shares.
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"Stockholder" shall mean each of the parties hereto and any
Persons to whom such Persons transfer their Shares pursuant to the terms
hereof or otherwise and who are bound by the provisions hereof.
"Stockholder Notice" shall have the meaning set forth in Section
3.02 hereof.
"Stockholder Option" shall have the meaning set forth in Section
3.03 hereof.
"Stockholder Option Period" shall have the meaning set forth in
Section 3.03 hereof.
"Third Party Purchaser" shall have the meaning set forth in
Section 3.06 hereof.
"Unpermitted Transfer" shall mean any disposition or transfer of
Shares other than in accordance with the terms and conditions of this
Agreement.
"Voluntarily Offered Shares" shall have the meaning set forth in
Section 3.01 hereof.
ARTICLE II.
DISPOSITION OF STOCK
2.01 Revocation of Earlier Agreements. This Agreement supersedes all
previous agreements made among any of the Stockholders and/or the Company,
whether written or oral, relating to the disposition of, or restrictions on the
disposition of, the Shares; and all such prior agreements are hereby revoked.
2.02 Restricted Disposition; Exceptions. No Stockholder or his or its
Legal Representative shall, directly or indirectly, voluntarily or
involuntarily, assign, sell, pledge, encumber, give or otherwise transfer,
dispose of or alienate to any Person by whatever means, any Shares now or at any
time hereafter owned by him or it except as follows:
(a) Each Stockholder shall have the right to transfer all or any
part of his or its Shares to one or more Permitted Transferees;
provided, however, that such transferred Shares (the "Permitted Transfer
Shares") shall remain subject to all of the terms and conditions of this
Agreement and such Permitted Transferee (s) shall first comply with the
provisions of Article VIII hereof;
(b) Each of the Stockholders shall have the right to transfer
all or a portion of his or its' Shares to any Person subject to the
restrictions of Article III hereof;
(c) The Shares of a Stockholder may be transferred subject to
the restrictions of Article IV hereof; and
(d) The Shares of a Significant Stockholder, together with the
Shares of his or its Permitted Transferees, may be transferred without
restriction hereunder (except for the restriction set forth in Section
3.05 hereof), but subject to applicable federal and state securities
laws.
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ARTICLE III.
OPTION UPON VOLUNTARY TRANSFER
3.01 Notice of Transfer. If a Stockholder (other than a Significant
Stockholder, which shall not, except as otherwise expressly set forth herein to
the contrary, be subject to the transfer restrictions set forth in this Article
III, but shall be entitled to participate in any sale or disposition pursuant to
Section 3.05 hereof) receives a bona fide written offer (the "Offer") from a
third party to purchase all or a portion of his or its Shares for cash (the
"Voluntarily offered Shares") and such Stockholder (the "Offering Stockholder")
desires to accept the offer, the Offering Stockholder shall give written notice
to the Company (the "Company Notice") of his or its intention to transfer the
Voluntarily Offered Shares. In addition to stating the intention to transfer the
Voluntarily Offered Shares, the Company Notice shall state (a) the name,
business address and residence address of the proposed transferee, (b) the
amount of the consideration to be paid (the "Proposed Voluntary Transfer
Consideration"), and (c) any material terms of the sale. The Company Notice
shall not be effective unless accompanied by a copy of the offer.
3.02 Company Option to Purchase. The Company shall have the option (the
"Company Option"), exercisable within fifteen (15) days of the date that the
Company Notice is deemed given hereunder (the "Company Option Period", to
purchase all or a portion of the Voluntarily Offered Shares upon the terms and
conditions set forth in Article V hereof. In the event that the Company desires
to exercise its Company Option, it shall promptly, but in no event later than
immediately prior to the expiration of the Company option Period, deliver
written notice of the same to the Offering Stockholder stating the number of
Voluntarily Offered Shares that it is willing to purchase pursuant to the
Company Option. In the event that the Company shall not elect to so purchase all
of the Voluntarily offered Shares, the Company shall promptly, but in no event
later than immediately prior to the expiration of the Company Option Period,
deliver written notice (the "Stockholder Notice") to the remaining
Stockholders of the number of Voluntarily Offered Shares that the Company does
not desire to purchase pursuant to the Company Option and a copy of the Company
Notice.
3.03 Stockholder Option to Purchase.
(a) In the event that the Company does not elect to purchase all of the
Voluntarily Offered Shares pursuant to the Company Option, each Stockholder
(other than the Offering Stockholder) shall have the option (the "Stockholder
Option"), exercisable within fifteen (15) days of the date that the Stockholder
Notice is deemed given hereunder (the "Stockholder Option Period"), to purchase,
upon the terms and conditions set forth in Article V hereof, that proportion of
the balance of the Voluntarily Offered Shares that equals a fraction, the
numerator of which is equal to the number of shares of stock of the Company
owned by such Stockholder at the time that the Stockholder Notice is deemed
given hereunder and the denominator of which is equal to the total number of
shares then owned by all of the Stockholders other than the Offering
Stockholder. Each Stockholder desiring to exercise his or its Stockholder Option
shall promptly, but in no event later than immediately prior to the expiration
of the Stockholder
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Option Period, deliver written notice to the Offering Stockholder stating the
number of Voluntarily Offered Shares that such Stockholder is willing to
purchase pursuant to the Stockholder Option.
(b) Within five (5) days after the Offering Stockholder has determined
which of the other Stockholders have elected to exercise the Stockholder Option,
the Offering Stockholder shall deliver a notice to each of the other
Stockholders indicating which other Stockholders have elected to purchase their
pro rata share of the Voluntarily Offered Shares and whether any of the other
Stockholders have declined their option to purchase their respective pro rata
share thereof and in the event that one or more other Stockholders have declined
to exercise such Stockholder Option, then the Offering Stockholder shall
pursuant to such notice grant to each Stockholder who or which has so elected to
purchase all of his or its pro rata share of the Voluntarily offered Shares the
additional right and option, but not the obligation, to purchase such amounts of
the remaining Voluntarily Offered Shares as may be mutually agreed upon by or
among such Stockholders, as the case may be, and in the event the Stockholders
are unable to agree as to such amount, each such Stockholder may purchase its
respective pro rata share (determined on a fully diluted basis) with respect to
the number of Shares of the Company held by each other Stockholder who or which
has exercised the Stockholder Option. Any Voluntarily Offered shares remaining
unpurchased under this Section 3.03(b) due to any such Stockholder electing to
purchase less than his or its respective pro rata share of such Voluntarily
Offered Shares may be purchased by the other exercising Stockholder(s) in such
amounts as may be mutually agreed. Each recipient of such additional Stockholder
Option may exercise the same by delivering to the Offering Stockholder written
notice to such effect within five (5) days of the Offering Stockholder's
delivery of notice granting such additional Stockholder Option. A Stockholder's
response to such additional Stockholder Option shall be final, binding and
conclusive as to such Stockholder.
3.04 Forfeiture of Options. If, at the expiration of the last applicable
option period, the eligible Persons have not elected to purchase all of the
Voluntarily Offered Shares, then and in such event all of the options shall be
deemed to have been unexercised, and the Offering Stockholder shall, subject to
Section 3.05 hereof, have the right to sell all of the Voluntarily offered
Shares to the party named in the Offer so long as (a) such sale is consummated
within sixty (60) days after the expiration of the last applicable option
period; (b) such sale is made strictly upon the terms set forth in the Offer and
none other; and (c) the proposed transferee agrees, in writing, prior to such
transfer, to be bound by the terms of this Agreement.
3.05 Rights of Inclusion. Notwithstanding anything to the contrary
contained herein, in the event one or more Stockholders propose to sell or
otherwise dispose of more than fifty percent (50%) of the outstanding Shares of
Common Stock pursuant to an Offer and in the event at the expiration of the last
applicable option period eligible Persons have not elected to purchase all of
the Voluntarily Offered Shares (if applicable), then in such event each
Stockholder shall have the right to sell, pursuant to the Offer, the number of
Shares of Common Stock equal to the product of (x) the total number of Shares to
be acquired pursuant to the offer, multiplied by (y) a
19
<PAGE>
fraction, the numerator of which shall be the total number of Shares of Common
Stock owned by such Stockholder, and the denominator of which shall be the total
number of Shares of Common Stock then outstanding; provided that the rights of
inclusion set forth in this Section 3.05 shall be applicable to those Shares of
Common Stock issued pursuant to the exercise of options granted under that
certain Hanover Compressor Company Stock Compensation Plan, including with
respect to those options which become exercisable pursuant to Section 4.1
thereof, on the same terms as are set forth in this Section 3.65. Such sale
shall occur on the terms and conditions set forth in the Offer. Simultaneously
with the consummation of such sale or other disposition of the Shares, the
Offering Stockholder shall remit to each Stockholder electing to sell pursuant
to this Section 3.05, the total sales price of the Shares of Common Stock sold
by such Stockholder and shall furnish such other evidence of completion of such
sale or other disposition and the terms thereof, as may be reasonably requested
by such Stockholder. Absent intentional misconduct or gross negligence on the
part of the offering Stockholder, the offering Stockholder shall have no
liability to any Stockholder with respect to the good faith allocation of
purchase price among Stockholders pursuant to the terms hereof. The right of a
Stockholder to participate in any sale or disposition of Common Stock pursuant
to this Section 3.05 shall be exercisable for a period of ten (10) days
following written notice thereof given by the Offering Stockholder and may be
exercised only by written notice to such effect. In the event any Stockholder
has not given the Offering Stockholder written notice of his or its desire to
participate in such sale within such ten (10) day period, such Stockholder will
be deemed to have waived any and all of his or its rights with respect to such
sale and the Offering Stockholder shall be entitled to sell all of the
Voluntarily Offered Shares to the party named in the offer on the terms set
forth in Section 3.04 hereof.
The provisions of this Section 3.05 shall not be applicable to any transfer
of Common Stock: (1) to any Permitted Transferee; (2) pursuant to an effective
registration statement under the Securities Act of 1933, as amended, or (3)
pursuant to Rule 144 or Rule 144A or any similar provisions then in effect.
3.06 Right to Compel Sale. In the event one or more Stockholders owning
more than fifty percent (50%) of the Shares propose to sell or otherwise dispose
of (including by means of a merger or stock-for-stock exchange) all of its or
their respective Shares of Common Stock pursuant to an Offer, then in addition
to the right of the remaining Stockholders to, under certain circumstances,
participate in such sale pursuant to the provisions of Section 3.05 hereof, the
Offering Stockholder may, at its option, require the remaining Stockholders to
sell or otherwise dispose of (and to vote their Shares of Common Stock in favor
of such transaction, to the extent required) all Shares of Common Stock hold by
him or it to the party named in the Offer for the same consideration per Share
and otherwise on the same terms and conditions set forth in the Offer. In the
event the Offering Stockholder elects to compel the sale of Common Stock
pursuant to this Section 3.06, the offering Stockholder shall send written
notice to each of the remaining Stockholders, setting forth the consideration
per Share to be paid and the other terms and conditions of Offer. Within thirty
(30) days following the date such notice is given, each of the remaining
Stockholders shall deliver to the Offering Stockholder certificates evidencing
all Shares of Common Stock held by such Stockholder, duly endorsed in blank,
together with all other documents reasonably required by the offering
Stockholder, in order to consummate such
20
<PAGE>
transaction. In the event that a Stockholder shall fail to deliver such
certificates as required hereunder, the Company is hereby authorized and
directed, and the Company agrees, to immediately thereafter reflect the transfer
on its books of such Shares to the party compelling sale thereof (which party
shall be deemed for all purposes to legally own such Shares as nominee for such
Stockholder with full irrevocable power and authority to vote and dispose of
such Shares) and to remit to such Stockholder his or its respective share of the
total sales price of the Shares sold pursuant to this Section 3.06 as
hereinafter set forth. Thereafter, the Shares held by such Stockholder shall
conclusively be presumed lost and of no value.
If within 120 days after the Offering Stockholder gives notice of their
intent to compel the disposition of Shares, they have not completed the sale of
all Shares of Common Stock in accordance with the term set forth in such notice,
the Offering Stockholder shall return to each Stockholder, all certificates
evidencing such Shares of Common Stock previously delivered for sale pursuant
hereto, and all of the restrictions contained herein shall continue in effect as
if no such notice had been given.
Promptly, but in no event later than two (2) business days following the
consummation of any transaction pursuant to this Section 3.06, the Offering
Stockholder shall remit to each of the remaining Stockholders the total sales
price of the Shares of Common Stock sold pursuant to this Section 3.06, and
shall furnish such other evidence of completion as may reasonably be requested
by such Stockholders. Absent intentional misconduct or gross negligence on the
part of the offering Stockholder, such Offering Stockholder shall have no
liability to any other Stockholder with respect to the good faith allocation of
purchase price pursuant to the terms hereof.
ARTICLE IV.
OPTION UPON INVOLUNTARY OR OTHER TRANSFER
4.01 Notice of Offer Event. Promptly, but in no event later than ten
(10) days, after the occurrence of an Offer Event, the Stockholder owning the
Involuntarily offered shares, or his or its Legal Representative, shall give the
Company written notice (the "Offer Event Notice") of the occurrence of the Offer
Event.
4.02 Options to Purchase in Case of Occurrence of Offer Event. In the
event of an of an Offer Event, the Company and the Stockholders (other than the
affected Stockholder) shall have the same options to purchase the Involuntarily
Offered Shares for the same time periods (commencing on the date that the Offer
Event Notice is deemed given hereunder), in the same relative amounts and,
except as set forth in Article V hereof, upon the same terms as are set forth in
Article III hereof.
4.03 Forfeiture of Option; Transfer. In the event that the eligible
Persons do not elect to purchase all of the Involuntarily Offered Shares within
the last applicable option period, then all acceptances shall be void and the
following shall occur:
21
<PAGE>
(a) if the Offer Event results from the Insolvency of a
Stockholder or the Permitted Transferor thereof, the Involuntarily
Offered Shares shall be transferred free of the terms of this Agreement;
(b) if the Offer Event results from an Unpermitted Transfer or
attempted Unpermitted Transfer, no transfer of the Involuntarily Offered
Shares shall occur, and the Unpermitted Transfer or attempted Unpermitted
Transfer of the Involuntarily Offered Shares shall be void for all
purposes;
(c) if the offer Event is triggered by the death of a
Stockholder, the Involuntarily Offered Shares shall be transferred
pursuant to the terms and conditions of the will, trust instrument or
laws of intestate succession, as appropriate, but in any event shall
remain subject to all of the provisions and restrictions of this
Agreement; and
(d) if the Offer Event results from a Divorce Transfer, the
Involuntarily Offered Shares shall be transferred to the transferee
subject to the provisions and restrictions of this Agreement.
ARTICLE V.
TERMS OF PURCHASE
The terms of a purchase pursuant to Articles III and IV shall be as
follows:
5.01 Purchase Price. The purchase price (the "Purchase Price") shall be
as follows:
(a) in the case of any purchase pursuant to Article III hereof,
the Proposed Voluntary Transfer Consideration;
(b) in the case of any purchase pursuant to Article IV hereof
(other than in the case of an Unpermitted Transfer or attempted
Unpermitted Transfer), the Fair Market Value of the Involuntarily
Offered Shares; and
(c) in the case of any purchase following an Unpermitted
Transfer or attempted Unpermitted Transfer, fifty percent (50%) of the
Fair Market Value of the Involuntarily offered Shares.
5.02 Payment. Each purchaser shall pay his proportionate share of the
Purchase Price, payable, in the event of a purchase pursuant to Article III
hereof, on the terms set forth in the Offer. Each purchaser's proportionate
share of the Purchase Price shall equal the proportion which the number of
Shares purchased by him or it bears to the total number of Shares purchased by
all of such purchasers. Each purchaser shall be liable only for his or its
respective proportionate share of the Purchase Price.
5.03 Time and Place of Closing. The closing shall occur at the principal
office of the Company on the date which is thirty (30) days following the
expiration of the last applicable
22
<PAGE>
option period; provided, however, that in the event that an appraisal is
required pursuant to the terms hereof, the closing shall take place within
fifteen (15) days after the results of such appraisal have been delivered to the
Company or the date set forth above, whichever is later.
ARTICLE VI.
DELIVERY OF CERTIFICATES
If the Shares of any Stockholder are purchased hereunder, the selling
Stockholder (or his or its Legal Representative) shall at closing endorse in
blank and deliver to the purchaser or purchasers all instruments evidencing such
purchased Shares, together with all other documents that may be required in the
sole opinion of the Company's attorneys to effect a complete transfer and
assignment of the Shares so purchased, free and clear of any lien, pledge,
community property rights or encumbrance whatsoever, except as created by the
pledge of the Shares pursuant to the terms of the Pledge Agreement. If the
selling Stockholder, or his Legal Representative, fails to endorse and deliver
all instruments representing the purchased Shares at closing, the instruments
representing the purchased Shares shall conclusively be presumed lost and of no
value. The officers of the Company are hereby authorized and directed, and the
Company agrees, to immediately thereafter reflect such transfer in the records
of the Company as of such date and issue new certificates to the purchaser of
such purchased Shares.
ARTICLE VII.
ENDORSEMENT ON STOCK CERTIFICATE
Upon the execution of this Agreement, the certificates evidencing the
Shares shall be surrendered to the Company and endorsed as follows:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Act"), or any state
securities laws and may not be sold, transferred or otherwise disposed
of except in accordance with the Act or laws or an applicable exemption
therefrom. The sale, transfer, pledge or other disposition of the shares
evidenced by this certificate is restricted by the terms of that certain
Stockholders' Agreement dated as of April ____, 1992 by and among
Hanover Compressor Company (the "Company") and each of the Stockholders
specified therein, which Stockholders, Agreement may be examined at the
principal offices of the Company, and any such shares may be sold,
transferred, pledged or otherwise disposed of only after compliance with
said Stockholders' Agreement."
Except for certificates issued as the result of the Insolvency of a
Stockholder or Permitted Transferor (which certificates shall contain only the
first sentence of the foregoing endorsement), and certificates issued after the
termination of this Agreement pursuant to Article X, all
23
<PAGE>
certificates evidencing Shares which are subsequently issued by the Company
shall bear the foregoing endorsement.
ARTICLE VIII.
RIGHTS OF TRANSFEREES
The disposition or transfer of Shares to any transferee pursuant to the
terms hereof (other than Shares transferred pursuant to an Offer Event resulting
from the Insolvency of a Stockholder or the Permitted Transferor thereof) shall
not be deemed to have been fully consummated until such time as the transferee
executes and delivers to the Company and each of the remaining Stockholders a
signed counterpart of this Agreement. Until this Agreement is executed and
delivered as herein provided, the transferee shall not be deemed to be a
Stockholder of the Company for any purpose.
ARTICLE IX.
SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF
Any Person against whom enforcement of this Agreement is sought hereby
declares that it is difficult to measure in money the damages which will occur
to a party hereto or a Legal Representative by reason of a failure to perform
any of the obligations under this Agreement, including, but not limited to, the
failure to transfer Shares to a purchasing Stockholder and the attempted
transfer of Shares to a Person in contravention of the terms of this Agreement.
Therefore, notwithstanding' any other provision of this Agreement, the parties
hereto hereby waive any claim or defense to an action to enforce the provisions
hereof or to enjoin the breach hereof of the nature that the party instituting
such action or proceeding has adequate remedy at law. Any Person against whom
such relief is sought also hereby agrees to waive any requirement that the party
instituting such action furnish a bond of any type.
ARTICLE X.
TERM
10.01 TERM. This Agreement shall commence on the date hereof and shall
continue until terminated upon the occurrence of any of the following events:
(a) dissolution of the Company;
(b) the voluntary agreement, in writing, of all of the
Stockholders;
(c) the consummation of a publicly registered offering of any
equity or convertible debt securities of the Company; and
24
<PAGE>
(d) whenever there is only one surviving Stockholder and all
obligations of such Stockholder and the estates of deceased
Stockholders, one to the other, have been satisfied.
10.02 Termination. Upon termination of this Agreement, the Company
shall, upon surrender to it by the Stockholders of the certificates representing
the outstanding Shares then held by the Stockholders, issue to the Stockholders
new certificates for an equal number of Shares but without the endorsement set
forth in Article VII hereof.
ARTICLE XI.
VOTING OF SHARES; NO PREEMPTIVE RIGHTS
11.01 Voting of Shares. Each Stockholder shall vote his or its Shares of
Common Stock at any regular or special meeting of Stockholders or in connection
with any written consent executed in lieu of such meeting and shall take all
action necessary to ensure that the Certificate of Incorporation and By-Laws of
the Company do not at any time, conflict with the provisions of this Agreement.
11.02 No Preemptive Rights. No Stockholder shall by reason of his or its
holding of the Shares have any preemptive or preferential rights to purchase or
subscribe to any shares of any class of the Company's stock, whether now or
hereafter authorized, or any notes, debentures, bonds or other securities
convertible into or carrying options or warrants to purchase shares of any class
of the Company's stock now or hereafter authorized, whether or not the issuance
of any such shares, notes, debentures, bonds or other securities, would
adversely affect the dividend or voting rights of the Stockholders.
ARTICLE XII.
MISCELLANEOUS
12.01 Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement or the application
thereof to any party or circumstance shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the minimal extent of
such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Agreement or the application
circumstances.
12.02 Governing Law. This Agreement shall be construed under the laws of
the State of Delaware (without regard to Delaware conflicts of law principles).
12.03 Counterparts. This Agreement may be executed in several
counterparts, each of which when so executed may be deemed to be an original.
25
<PAGE>
12.04 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Stockholders and their respective heirs, executors,
Legal Representatives and permitted assigns.
12.05 Notices. All notices required to be given under the terms of this
Agreement or which any of the parties may desire to give hereunder shall be in
writing and shall be deemed given upon personal delivery or three (3) days after
deposit in the United States mail, registered or certified, postage prepaid,
addressed to the party to be notified at the following address or at such other
address as the party to be notified may, from time to time in writing, furnish
to the other parties in the manner provided in this Section:
If to a Stockholder or At the last known address of the
his or its Legal Stockholder shown on the records
Representative: of the Company
If to HEI or the Company: 2911 Turtle Creek Boulevard
Suite 500
Dallas, Texas 75219
Attn: Curtis Bedrich
with a copy to: Neal Gerber & Eisenberg
Two North LasSalle Street
Suite 2200
Chicago, Illinois 60602
Attn: Richard S. Meller, Esq.
12.06 Pronouns, Singular and Plural. Where the context so requires, the
singular shall include the plural and the plural the singular; and all pronouns
shall include the masculine, feminine and neuter.
12.07 Headings. The headings, titles and subtitles herein are inserted
for convenience of reference only and are to be ignored in any construction of
the provisions hereof.
12.08 Amendments. Subject to Section 12.12 hereof, no amendments or
additions to this Agreement shall be binding unless in writing and signed by all
the parties hereto.
12.09 Third Party Beneficiaries. Nothing contained herein shall confer
any right or claim upon, or otherwise inure to the benefit of, any third party.
12.10 Entire Agreement. This Agreement constitutes the entire agreement
of the parties in respect of the within subject matter and supersedes all other
prior agreements, oral or written, with respect to the same.
12.11 Capacity and Authority. Each party hereby represents and warrants
that he or it has full power, capacity and authority to enter into this
Agreement and that his or its doing so is
26
<PAGE>
not in violation of any contract or agreement, whether written or oral, to which
he or it is a party or by which he or it is bound and will not violate or
interfere with the rights of any other Person.
12.12 Additional Stockholders. Additional Persons may become parties to
this Agreement at any time and from time to time without the consent of the
other Stockholders at such time, provided that the Company approves the same by
executing the signature page in respect of such new party.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
COMPANY: STOCKHOLDERS:
- ------- ------------
HANOVER COMPRESSOR COMPANY, HEI
---
a Delaware corporation
HANOVER ENERGY INC.,
a Texas corporation
By: _______________________ By: _____________________________
Its: _________________ Its: ________________________
Number of Shares:________
Additional Stockholders:
_________________________________
Number of Shares:________________
_________________________________
Number of Shares:________________
27
<PAGE>
EXHIBIT 4.11
================================================================================
Dated: March 21, 1996
CONFIDENTIAL OFFERING MEMORANDUM
HANOVER COMPRESSOR COMPANY
Up to 1,111 shares of Common Stock, $.001 par value
$1,800 Minimum Investment
================================================================================
All of the 1,111 shares (the "Shares") of common stock, $.001 par
value (the "Common Stock"), offered hereby are being sold by Hanover Compressor
Company, a Delaware corporation (the "Company"). The Shares are being offered
only to certain employees of the Company and its subsidiaries and are offered
together with options to purchase shares of Common Stock which will be granted
to investors. See "The Offering."
There has been no public market for the Common Stock, and no such
public market is anticipated to exist in the foreseeable future. See
"Determination of Offering Price" for a discussion of the factors considered in
determining the offering price.
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Common Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS OFFERING MEMORANDUM.
ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Fees and Proceeds to the
Offering Price (1) Commissions (2) Company (2)
- --------------------------------------------------------------------------------
Per Share................. $ 1,800 $0.00 $ 1,800
- --------------------------------------------------------------------------------
Maximum Total............. $1,999,800 $0.00 $1,999,800
================================================================================
(1) Payable in cash upon subscription (except for shares to be purchased with
proceeds of loans made by the Company). The minimum purchase per investor
is one Share (for a total of $1,800), not including Shares purchased with
the proceeds of four year loans to be made by the Company, and the maximum
aggregate purchase by all investors is 1,111 Shares (for a total of
$1,999,800), including Shares purchased with the proceeds of four year
loans to be made by the Company. See "The Offering."
(2) The Shares are being offered directly by the Company which will pay no
commissions but will utilize a portion of the proceeds to pay legal,
accounting and other expenses of the offering estimated to be $25,000.
THIS OFFERING MEMORANDUM CONSTITUTES AN OFFER ONLY IF A NAME APPEARS IN THE
SPACE BELOW MARKED "NAME OF OFFEREE" AND CONSTITUTES AN OFFER ONLY TO SUCH NAMED
OFFEREE.
Name of Offeree: Memorandum Number:
THESE SECURITIES INVOLVE A SIGNIFICANT DEGREE OF RISK
<PAGE>
______________________________
THIS MEMORANDUM IS SUBMITTED IN CONNECTION WITH THE OFFERING OF THESE
SECURITIES PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), REGULATION D AND/OR SECTION 701 PROMULGATED UNDER THE
SECURITIES ACT AND PURSUANT TO AVAILABLE EXEMPTIONS UNDER STATE SECURITIES LAWS,
AND MAY NOT BE REPRODUCED OR USED FOR ANY OTHER PURPOSE. ANY ACTION CONTRARY TO
THESE RESTRICTIONS MAY INVOLVE A VIOLATION OF CERTAIN FEDERAL OR STATE
SECURITIES LAWS.
______________________________
THE COMPANY HAS AGREED TO MAKE AVAILABLE, PRIOR TO THE CONSUMMATION OF
THE TRANSACTIONS CONTEMPLATED HEREIN, TO EACH OFFEREE OF COMMON STOCK OR HIS
REPRESENTATIVE(S) OR BOTH, THE OPPORTUNITY TO ASK QUESTIONS OF, AND RECEIVE
ANSWERS FROM IT OR ANY PERSON ACTING ON ITS BEHALF CONCERNING THE TERMS AND
CONDITIONS OF THIS OFFERING, AND TO OBTAIN ANY ADDITIONAL INFORMATION, TO THE
EXTENT IT POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE
EFFORT OR EXPENSE, NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION SET FORTH
HEREIN.
______________________________
PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS
MEMORANDUM OR ANY PRIOR OR SUBSEQUENT COMMUNICATION FROM THE COMPANY, ITS
AFFILIATES, DIRECTORS, OFFICERS AND EMPLOYEES OR ANY PROFESSIONAL ASSOCIATED
WITH THIS OFFERING AS LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD CONSULT HIS OWN
PERSONAL COUNSEL, ACCOUNTANT AND OTHER ADVISERS AS TO LEGAL, TAX, ECONOMIC AND
RELATED MATTERS CONCERNING THE INVESTMENT DESCRIBED HEREIN AND ITS SUITABILITY
FOR HIM.
______________________________
NO DISTRIBUTION OF THIS MEMORANDUM IN WHOLE OR IN PART, OR THE
DISCLOSURE OF ANY OF ITS CONTENTS, IS PERMITTED UNLESS AUTHORIZED. EXCEPT FOR
INFORMATION CONTAINED HEREIN OR AUTHORIZED BY THE COMPANY, NO OFFERING
LITERATURE OR ADVERTISING IN WHATEVER FORM SHALL BE EMPLOYED IN THE OFFERING OF
THE SHARES. NO PERSON HAS BEEN AUTHORIZED TO MAKE REPRESENTATIONS, OR GIVE ANY
INFORMATION,
-ii-
<PAGE>
WITH RESPECT TO THE SHARES, EXCEPT THE INFORMATION CONTAINED HEREIN AND IN THE
SUMMARY OF THE OFFERING PREPARED BY THE COMPANY.
______________________________
INVESTMENT IN THE COMMON STOCK IS SUITABLE ONLY FOR INVESTORS WHO MEET
THE SUITABILITY STANDARDS DESCRIBED UNDER "THE OFFERING -- SUITABILITY."
______________________________
THE COMMON STOCK OFFERED HEREBY MAY NOT BE TRANSFERRED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM REGISTRATION.
______________________________
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANYONE
IN ANY STATE OR IN ANY OTHER JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION
IS NOT AUTHORIZED.
______________________________
THE COMPANY WILL NOT BE REQUIRED TO DELIVER AN ANNUAL REPORT TO
STOCKHOLDERS PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
HOWEVER, THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS ANNUALLY WITH A COPY OF
THE COMPANY'S AUDITED FINANCIAL STATEMENTS.
______________________________
FOR LOUISIANA RESIDENTS ONLY:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR THE
LOUISIANA SECURITIES LAWS. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE SOLD OR TRANSFERRED FOR VALUE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
OF THEM UNDER THE SECURITIES ACT AND/OR THE LOUISIANA SECURITIES LAWS OR AN
OPINION OF COUNSEL TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
SUCH ACT OR LAWS.
______________________________
FOR TEXAS RESIDENTS ONLY:
-iii-
<PAGE>
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE TEXAS SECURITIES ACT, AS
AMENDED (THE "TEXAS ACT"), AND ARE OFFERED AND SOLD PURSUANT TO AN EXEMPTION
THEREFROM. THE SHARES CANNOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION
WHICH IS EXEMPT UNDER THE TEXAS ACT, OR PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE TEXAS ACT OR IN A TRANSACTION WHICH IS OTHERWISE IN
COMPLIANCE WITH THE TEXAS ACT.
______________________________
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
SECURITIES ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.
-iv-
<PAGE>
CONFIDENTIAL OFFERING MEMORANDUM
HANOVER COMPRESSOR COMPANY
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF THE OFFERING......................................... 1
THE COMPANY..................................................... 1
THE OFFERING.................................................... 1
FEDERAL INCOME TAX CONSEQUENCES................................. 10
RISK FACTORS.................................................... 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................... 13
DETERMINATION OF OFFERING PRICE................................. 21
PLAN OF OFFERING................................................ 21
USE OF PROCEEDS................................................. 23
DILUTION........................................................ 23
CAPITALIZATION.................................................. 25
DIVIDEND POLICY................................................. 26
SELECTED FINANCIAL INFORMATION.................................. 26
BUSINESS........................................................ 31
MANAGEMENT...................................................... 42
PRINCIPAL STOCKHOLDERS.......................................... 52
DESCRIPTION OF CERTAIN INDEBTEDNESS............................. 58
DESCRIPTION OF CAPITAL STOCK.................................... 59
ADDITIONAL INFORMATION.......................................... 63
</TABLE>
-v-
<PAGE>
[THIS PAGE WAS INTENTIONALLY LEFT BLANK]
-vi-
<PAGE>
EXHIBITS:
- ---------
Exhibit A - Subscription Agreement
Exhibit B - Stockholders' Agreement
Exhibit C - Form of Loan Agreement
Exhibit D - Form of Four Year Note
Exhibit E - Form of Pledge Agreement
Exhibit F - Form of 1996 Employee Stock Option Plan
Exhibit G - Form of Option Agreement under 1996 Employee Stock Option Plan
Exhibit H - Letter Agreement Relating to the Stockholders' Agreement
-vii-
<PAGE>
SUMMARY OF THE OFFERING
The following summary is qualified in its entirety by the more
detailed information appearing elsewhere in this Offering Memorandum and the
Exhibits attached hereto. Prospective investors of the Shares should carefully
consider the factors set forth under "Risk Factors."
The Company
The Company was organized in October 1990 for the purpose of
acquiring, manufacturing, selling, leasing, maintaining and refurbishing
compressors utilized by the natural gas industry. For a more detailed
description of the Company's business, see "Business."
The Offering
Shares of Common Stock offered: 1,111 including Shares to be acquired for
cash out of the subscribing offeree's own
funds or by delivery of a four year note,
but not including shares which may be
acquired pursuant to options granted under
the Employee Option Plan. See "The
Offering."
Shares of Common Stock outstanding 129,525.53 not including (i) shares
after the offering: issuable upon exercise of options and (ii)
198.40 shares of Common Stock which are held
by the Company as treasury shares.
Use of Proceeds: All of the net proceeds of this offering
will be used for general corporate purposes,
including working capital.
The Company reserves the right to withdraw this offering and return
all subscriptions or modify this offering at any time during the term of this
offering. Subscriptions for Shares may be accepted or rejected by the Company
in its sole discretion. All cash received by the Company in respect of
subscriptions for the Shares (the "Funds") shall be promptly deposited in an
interest bearing, segregated account and such Funds may be invested in treasury
bills or other cash equivalents, as determined in the sole and absolute
discretion of the Company. If acceptable subscriptions for a minimum aggregate
of one Share is received by the Company on or before March 28, 1996 or such
later date as the Company in its sole discretion may determine without consent
of or notice to the offerees, but in no event later than May 31, 1996 (the
"Termination Date"), all subscriptions will be transferred from the segregated
bank account to the Company, together with all interest, if any, earned thereon.
The minimum subscription per subscribing offeree is one Share (not including any
Shares to be acquired pursuant to a four year loan made by the Company) for an
aggregate of $1,800; however, the Company, in its sole discretion, may accept
subscriptions for a lesser number of Shares, subject to applicable
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securities laws. In the event all conditions have not been satisfied in full
prior to the Termination Date or the Company withdraws this offering, this
offering will be terminated and all Funds will be returned to subscribing
offerees with a pro rata share of interest earned thereon, if any, calculated on
the basis of the amount of Funds invested by each subscribing offeree and the
length of time interest on such Funds was earned. See "Plan of Offering."
Summary Financial Information
See "Selected Financial Information" for a summary of certain relevant
financial information.
Risk Factors
For a discussion of certain factors that should be considered in
evaluating an investment in the Shares, including, among others, (i) the
Company's limited operating history, (ii) the short terms of compressor leases
and the possible inability of the Company to re-lease its compressors, (iii)
competition, (iv) factors regarding the natural gas compressor leasing industry,
(v) potential liability and insurance, (vi) environmental liability risks, (vii)
governmental regulation, (viii) restrictions imposed by the terms of the
Company's indebtedness and the effect of a default thereunder, (ix) dependence
upon internally generated funds (x) limited preemptive rights, (xi) no public
market for the Common Stock and restrictions on transferability, (xii)
dividends, (xiii) control by principal stockholders, (xiv) capital demands due
to recent expansion activity, (xv) dilution and (xvi) Federal income task risks,
see "Risk Factors."
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THE COMPANY
Hanover Compressor Company is a corporation organized under the laws
of the State of Delaware. The principal executive office of the Company is
located at 12001 North Houston Rosslyn, Houston, Texas 77086, and the Company's
telephone number is (713) 447-8787.
THE OFFERING
This offering is made only to certain employees of the Company and its
subsidiaries for the purpose of providing such persons with the opportunity to
obtain an equity interest in the Company. The Company reserves the right to
withdraw this offering and return all subscriptions or make non-material
modifications to the offering at any time during the term of the offering. All
Funds shall be promptly deposited in an interest bearing, segregated account and
such Funds may be invested in treasury bills or other cash equivalents, as
determined in the sole and absolute discretion of the Company. Funds deposited
in the segregated account may not be withdrawn by subscribers unless the
offering terminates as described herein. The deposit of Funds in such account
does not constitute acceptance of all or any portion of any offeree's
subscription by the Company.
General
Subject to adjustment for over-subscription, each offeree may
subscribe to purchase for cash as many of the Shares as such offeree may desire.
Upon such subscription, the Company will, at the request and option of each
subscribing offeree, loan (the "Four Year Loan") such subscribing offeree
sufficient funds, on a full recourse and secured basis, to purchase two
additional Shares (all such Shares hereinafter the "Loan Shares") for each Share
subscribed for hereunder for cash (the "Cash Shares"). See "The Four Year
Loan." For each Share acquired by a subscribing offeree hereunder, the Company
will grant such subscribing offeree an option to purchase one-third of one share
of Common Stock pursuant to the terms of the 1996 Employee Stock Option Plan,
substantially in the form attached hereto as Exhibit F (the "Employee Option
Plan"). The exercise price for such options will be $1,800 per share (subject
to adjustment for stock splits, stock dividends and other similar events as
described in the Employee Option Plan). See "Options -- Employee Option Plan."
Offerees who desire to subscribe for Shares will be required to (i)
become parties to the Amended and Restated Stockholders' Agreement of Hanover
Compressor Company attached hereto as Exhibit B (the "Stockholders' Agreement")
and (ii) execute a letter agreement regarding the application of Section 3.5(d)
of the Stockholders' Agreement (the "Letter Agreement"). The Stockholders'
Agreement restricts the sale of Common Stock held by the parties thereto and
provides for, among other things, (i) the right of Investors (as hereinafter
defined) to participate in a sale by GKH Partners, L.P., a Delaware limited
partnership
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("Partners"), and GKH Investments, L.P., a Delaware limited partnership
(together with Partners, "GKH"), of at least 50% of the Common Stock owned by
GKH, (ii) the right of GKH to require all Investors to sell their stock in
certain transactions for the same consideration to be received by GKH and (iii)
the right of the Company or its affiliates to purchase all of an Investor's
Common Stock upon the termination of such Investor's employment with the Company
and its subsidiaries and affiliates. The purchase price for such stock varies
depending on the circumstances and, in cases where an Investor is terminated for
cause or voluntarily terminates his employment without good reason (each as more
fully defined in the Stockholders' Agreement), such purchase price may be
substantially below the fair market value of such Common Stock. See
"Stockholders' Agreement."
The maximum aggregate number of shares which may be subscribed for
pursuant to this offering is 1,111, which number does not include any shares of
Common Stock to be issued upon exercise of options granted under the Employee
Option Plan. If the offerees subscribe for more than such number of shares of
Common Stock, each offeree's subscription will be reduced proportionately based
on the relationship between the number of shares subscribed for by such offeree
and the aggregate number of shares subscribed for by all offerees.
For information regarding the method of subscribing for Shares, see
"Plan of Offering" and the Subscription Agreement attached hereto as Exhibit A
(the "Subscription Agreement").
Suitability
Investment in the Shares offered hereby involves a significant degree
of risk. See "Risk Factors." This offering is a private offering made only by
delivery of a copy of this Offering Memorandum to the employee of the Company or
its subsidiaries whose name appears hereon. The Shares have not been registered
under the Securities Act, or any applicable state securities laws. The Shares
are being offered pursuant to one or more exemptions from the registration
requirements of the Securities Act, including the exemption afforded by Section
4(2) thereof, Regulation D and/or Section 701 promulgated thereunder, and
pursuant to available exemptions under state securities laws, only to certain
employees for investment only. Each person who subscribes for Shares and whose
subscription is accepted by the Company (each an "Investor," collectively, the
"Investors") will be required to represent that he is acquiring the Shares for
his own account, for investment, and without any intention of making a
distribution or resale thereof, either in whole or in part. The Shares may not
be resold or transferred except in accordance with the provisions of the
Securities Act, the rules and regulations thereunder, any applicable state
securities laws and the terms and conditions of the Stockholders' Agreement. As
a result of the foregoing, investment in the Shares is suitable only for persons
of adequate financial means apart from their investment in the Shares, and who
have no need for liquidity with respect to such investment.
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Offerees who desire to subscribe for Shares should read and discuss
with their advisors this Offering Memorandum, the Subscription Agreement, the
Stockholders' Agreement, the Letter Agreement, the Loan Agreement (as defined
below), the Four Year Note (as defined below), the Pledge Agreement (as defined
below), the Employee Option Plan and the other documents relative to the
foregoing regarding the appropriateness of an investment in the Shares. The
desirability of an investment in the Common Stock depends upon a number of
factors including, among others, (i) the factors set forth under the caption
"Risk Factors," (ii) the nature of the Company's business, (iii) the possibility
of a decline in value of the Common Stock, (iv) the various restrictions on
transferability of the Common Stock, including those contained in the
Stockholders' Agreement, and the present essential illiquidity of the
investment, (v) the desirability to the offeree of a long-term investment, (vi)
the likelihood that the Company will not pay dividends on the Common Stock in
the foreseeable future and the likelihood of restrictions imposed on the
Company's ability to pay dividends under the terms of the agreements governing
the Company's senior secured indebtedness and the Series A and Series B
Preferred Stock (as defined below), (vii) the control of the Company by its
principal stockholders, (viii) the relationship between such offeree's
investment (including the investment pursuant to the Four Year Loan) and such
offeree's net worth, (ix) the employment goals of the offeree and the right of
the Company to purchase such offeree's Common Stock upon the termination of his
employment with the Company, in some instances at a purchase price equal to or
less than the offeree's cost thereof, even if such cost is less than the fair
market value of the Common Stock, and (x) other relevant personal circumstances
of each offeree.
The Four Year Loan
Each Investor may, but is not required to, request from the Company a
Four Year Loan to purchase the Loan Shares. Inasmuch as the Four Year Loan will
be made on a full recourse and secured basis, each Investor should consider
carefully the additional risk that he or she will undertake by obtaining the
Four Year Loan to purchase Shares.
The Four Year Loan will bear interest at the prime rate as announced
from time to time by Chemical Bank ("Prime Rate"), will be made pursuant to a
loan agreement substantially in the form of Exhibit C hereto (the "Loan
Agreement"), evidenced by a secured promissory note substantially in the form of
Exhibit D hereto (the "Four Year Note"). Any amount of principal and/or accrued
interest on the Four Year Note which is not paid when due will bear interest at
the Prime Rate plus 2%, except that upon the failure to make the required
payments following (i) the sale of Common Stock or receipt by the Investor of
dividends on Common Stock, (ii) termination for Cause (as defined below) and
(iii) voluntary termination without Good Reason (as defined below), the
outstanding principal and accrued and unpaid interest will bear interest at 15%
per annum, compounded monthly, or the highest rate of interest allowable under
applicable law, whichever is less. Interest on the Four Year Note will be
payable in cash annually on December 31 (each an "Interest Payment Date") to the
extent of 66.7% of the accrued interest to such date (the "Minimum Interest
Payment"), and all accrued interest which is not paid as of an Interest
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Payment Date will be automatically added to the principal amount of the Four
Year Note. Each Minimum Interest Payment must be paid to the extent of bonus
payments, if any, less an allowance equal to 33.3% of such bonus payment for
federal and state income tax (the "Net Bonus"), paid to the Investor by the
Company on or before each Interest Payment Date (including amounts paid in such
calendar year which relate to a previous calendar year and were not taken into
consideration in such prior calendar year), provided that nothing herein or in
the Loan Agreement or the Four Year Note shall create any obligation on the part
of the Company to pay any bonus. In the event the Net Bonus is insufficient to
pay the Minimum Interest Payment, the Investor shall be required to pay the
difference between such Net Bonus and the Minimum Interest Payment. The Company
will have the right to withhold from the Investor all or any portion of a Net
Bonus payable by the Investor in respect of interest under the Four Year Loan,
which amounts will be deemed to have been paid to the Investor and subsequently
repaid by the Investor to the Company. All principal and accrued and unpaid
interest will be due upon maturity, which will be 48 months from the date of the
Loan Agreement, provided that such date may be accelerated upon the occurrence
of an Event of Default (as defined below) or under other circumstances more
fully described in the Loan Agreement and the Four Year Note.
The Four Year Note will be secured by a pledge of (i) all of the
shares and rights to acquire shares of Common Stock owned by the Investor as of
the date of the Four Year Loan, or which are acquired by the Investor subsequent
to the date of the Four Year Loan and (ii) all proceeds received by an Investor
thereon, including dividends and additional shares received in stock
distributions, all as more fully set forth in the pledge agreement attached
hereto as Exhibit E (the "Pledge Agreement"). The Four Year Note will provide
for mandatory prepayment upon and to the extent of dividends or other
distributions paid to the Investor on the Common Stock and proceeds from the
sale of the Common Stock, and upon termination of the Investor's employment by
the Investor without Good Reason (as defined below) or by the Company for Cause
(as defined below).
The Four Year Note, the Loan Agreement, the Pledge Agreement and any
other documents that are executed in connection therewith (collectively, the
"Loan Documents") will be assignable by the Company to any of its affiliates,
including GKH, or to any third party financial institution or commercial lender
to which the Company is or becomes indebted. The Loan Documents cannot be
assigned by an Investor without the Company's prior written consent.
"Cause," when capitalized and with reference to the termination of the
Investor's employment with the Company, means (i) the commission of an act of
fraud, embezzlement or willful breach of a fiduciary duty to the Company
(including the unauthorized disclosure of confidential or proprietary material
information of the Company), (ii) a conviction (or a plea of nolo contendere in
lieu thereof) for a felony or a crime involving fraud, dishonesty or moral
turpitude, (iii) willful misconduct as an employee of the Company, (iv) the
willful failure to render services to the Company in accordance with such
Investor's employment, which failure
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amounts to a material neglect of his duties to the Company or (v) substantial
dependence, as determined by the Board of Directors of the Company (the
"Board"), on alcohol or any controlled substance.
"Good Reason," when capitalized, means, with reference to the
voluntary termination of the Investor's employment with the Company by the
Investor, where such termination (i) promptly follows a material reduction of
such Investor's duties and responsibilities or a permanent change in such
Investor's duties and responsibilities which are materially inconsistent with
the type of duties and responsibilities of such Investor then in effect, (ii)
promptly follows a material reduction in annual base salary (without regard to
bonus compensation, if any), (iii) promptly follows a material reduction in such
Investor's employee benefits (without regard to bonus compensation, if any) if
such reduction results in such Investor receiving benefits which are, in the
aggregate, materially less than the benefits received by other comparable
employees of the Company generally or (iv) the Board otherwise determines that a
voluntary termination by such Investor is for "Good Reason" under the
circumstances then prevailing.
An "Event of Default", when capitalized and with reference to the Four
Year Loan includes, without limitation, (i) the failure to pay principal or
interest when due, which failure has continued for 10 days after written notice
from the Company, (ii) any representation or warranty contained in the Loan
Documents or the Subscription Agreement being incorrect in any material respect
on or as of the date made or deemed made, (iii) the default with respect to any
covenant contained in the Loan Documents, which default is not curable by the
Investor or, if curable, has continued uncured for 10 days after written notice
from the Company, (iv) the failure of the Investor to make any payment when due
under, or other default of the Investor which permits acceleration of, any other
material indebtedness of the Investor and (v) the occurrence of certain
bankruptcy-related events with respect to the Investor which continue for 60
days or are otherwise consented to by the Investor.
Options
Employee Option Plan
For each share of Common Stock acquired by an Investor hereunder, the
Company will grant such Investor an option to purchase one-third of one share of
Common Stock (subject to adjustment for stock splits, stock dividends and other
similar events as described in the Employee Option Plan) at a purchase price of
$1,800 per share. Such options will vest ratably over a five year period
beginning on the first anniversary of the Employee Option Plan (subject to (i)
acceleration upon termination of employment due to death or permanent disability
and upon the occurrence of a Capital Event (as defined in the Employee Option
Plan) and (ii) forfeiture upon termination for Cause) and be governed by the
terms of the Employee Option Plan and individual option agreements (the
"Employee Option Agreements")
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between the Company and each Investor, forms of which are attached hereto as
Exhibits F and G, respectively. The term of the options will be 10 years,
subject to a limited exercise period for vested options in the event of the
termination of employment of the Investor (other than for Cause). An option may
not be exercised during any period in which the Investor is in default under the
terms of any loan or other obligation that the Investor may have to the Company.
The shares of Common Stock acquired upon exercise of the options will be subject
to the terms of the Stockholders' Agreement, as amended by the Letter Agreement.
Options may not be transferred other than by will or the laws of descent and
distribution, and during the lifetime of an Investor, such options may be
exercised only by the Investor. The options granted under the Employee Option
Plan are nonstatutory options and are not intended to qualify as "incentive
stock options" under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and each Investor should consult his tax advisors for
information regarding the tax treatment of such options.
Pursuant to the Employee Option Agreements, each Investor will agree
that he will not during the term of such agreement and for a period of one year
thereafter, (i) compete with any business of the Company or its subsidiaries or
affiliates and (ii) without the Company's express written consent, disclose to
persons outside the Company confidential information concerning the Company or
any of its subsidiaries or affiliates.
Stockholders' Agreement and Letter Agreement
As a condition to the acceptance by the Company of a subscribing
offeree's subscription for Shares, such subscribing offeree is required to
become a party to the Stockholders' Agreement and to execute the Letter
Agreement. The Letter Agreement provides that certain obligations of the
Company which arise upon an Investor's voluntary termination of employment from
the Company without Good Reason are determined by reference to the date of the
Subscription Agreement rather than August 7, 1995, the date of the Stockholders'
Agreement. The summary of the Stockholders' Agreement set forth below is not
intended to be a complete recitation of the provisions thereof, and each offeree
should read and understand all the provisions of the Stockholders' Agreement and
the Letter Agreement before making a determination whether to invest in the
Shares.
Restrictions on Transfer
The Stockholders' Agreement contains substantial restrictions on the
disposition of an Investor's Common Stock. In general, an Investor will be
permitted to transfer some or all shares of his Common Stock to affiliates,
including certain relatives and controlled entities, provided each affiliate
agrees to be bound by the terms of the Stockholders' Agreement. An Investor
will also be permitted to transfer all (but not less than all) of his shares of
Common Stock to a bona fide third party purchaser if such purchaser agrees to be
bound by the terms of the Stockholders' Agreement, but only after such Common
Stock is offered first to the Company
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and then to GKH on the same terms as offered to the bona fide third party
purchaser. The Investor will be required to comply with certain mechanical
provisions regarding such transfer, including (i) timely notice to the Company
and GKH of any proposed transfer and (ii) consummation of any transfer within a
specified period.
Rights to Compel Disposition
GKH will have the right to compel each Investor to dispose of all of
his shares of Common Stock and make certain representations with respect to his
ownership of such Common Stock in the event GKH seeks to sell all, but not less
than all, of its Common Stock. If GKH exercises its right to compel the
disposition of the Investors' Common Stock, the consideration for such Common
Stock will be the same per share consideration on the same terms to be received
by GKH for its shares of Common Stock.
Rights of Inclusion
Each Investor will have the right to sell his Common Stock on the same
terms as GKH in a transaction pursuant to which GKH sells at least 50% of the
Common Stock of the Company then owned by GKH. Investors who desire to
participate in such sale will be required to deliver notice on a timely basis
and comply with other mechanical provisions in connection with such transfer.
Preemptive Rights
Although Delaware law does not generally provide for preemptive
rights, in the event the Company offers an existing stockholder who is party to
the Stockholders' Agreement the opportunity to purchase additional shares of
Common Stock, the other parties to the Stockholders' Agreement will have the
right to acquire their respective pro rata share of such Common Stock on the
same terms and conditions offered to such stockholder, except that such right
shall not apply to (i) shares issuable in connection with a merger, acquisition
or similar transaction, (ii) shares issuable upon the exercise of any options,
warrants or other convertible securities, (iii) shares offered by the Company to
employees and directors of the Company or (iv) shares issuable in connection
with preemptive rights granted to other stockholders of the Company in
connection with a merger, acquisition or similar transaction, or in connection
with the issuance by the Company of its Series B Preferred Stock.
Transfers upon Termination
The Company will have the right to purchase all of the Common Stock of
an Investor in the event such Investor ceases to be an employee of the Company
or any of its subsidiaries or affiliates. The purchase price for such Common
Stock will be (i) in the event such Investor's employment is terminated for
Cause, the lower of the Investor's cost for his Common Stock on a share by share
basis and 80% of fair market value thereof, (ii) in the event
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such employment is voluntarily terminated without Good Reason, the lower of cost
and fair market value and (iii) in the event such Investor's employment is
terminated by death, retirement, permanent disability, without Cause or
voluntarily with Good Reason, the fair market value of such Common Stock. The
purchase price for such Common Stock will be payable (a) in cash (and/or by the
delivery of a term note with the shortest term permissible if required by any
agreement to which the Company is then subject) if such Investor's employment is
terminated with Good Reason or upon death, retirement, permanent disability or
without Cause, or voluntarily without Good Reason more than three years after
the date of the Subscription Agreement, and (b) by delivery of a seven year term
note if such employment is terminated for Cause, or voluntarily without Good
Reason on or prior to the third anniversary of the Subscription Agreement. Any
note delivered in connection with the foregoing will bear interest, payable
annually, at the Prime Rate.
Cost, fair market value, retirement, permanent disability and
voluntary termination are each defined in the Stockholders' Agreement.
FEDERAL INCOME TAX CONSEQUENCES
THE DISCUSSION SET FORTH BELOW PROVIDES GENERAL INFORMATION AS TO
CERTAIN ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH SUBSCRIPTION
FOR THE SHARES AND OPTIONS HEREUNDER. EACH INVESTOR SHOULD CONSULT HIS TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF HIS SUBSCRIPTION, INCLUDING THE
APPLICATION OF POSSIBLE STATE AND LOCAL TAX LAWS.
Restricted Stock
Code Section 83 governs transfers of property to persons (whether
employees or independent contractors) in exchange for services. Under that
section, a person receiving property as compensation for services must report
(as compensation income) the excess of the fair market value of the property
received over the amount paid in exchange therefor (such excess referred to
herein as "In-Kind Compensation").
In determining when a recipient of In-Kind Compensation must report
income attributable thereto, Code Section 83(a) provides that the value of such
In-Kind Compensation (without regard to any restriction other than a restriction
which by its terms will never lapse) is includible in the recipient's income at
the first time that the recipient's rights in the property are substantially
vested. For such purposes, property is considered to be substantially vested
when it is either (a) transferable or (b) not subject to a substantial risk of
forfeiture. A substantial risk of forfeiture is generally considered to exist
when the recipient's rights to the property are predicated upon the future
performance of services or upon the occurrence of a condition related
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to the transfer. Further, an interest in restricted property is transferable
only if the subsequent transferee's rights in the property are not subject to a
substantial risk of forfeiture.
Alternatively, Code Section 83(b) provides each recipient of In-Kind
Compensation the ability to include such amounts in income in the year in which
he receives them, rather than the year in which the In-Kind Compensation becomes
substantially vested. Under that section, a taxpayer may elect, within 30 days
of the transfer of property, to include in income the value of any In-Kind
Compensation (as determined without regard to the restrictions thereon).
Taxpayers who include In-Kind Compensation in income under Code Section 83(b)
but later forfeit the property received are denied a deduction for any portion
of the In-Kind Compensation reported by the taxpayer.
Once includible in the income of the recipient, In-Kind Compensation
is considered payment of wages subject to withholding of income tax and deposits
pursuant to the Federal Insurance Contributions Act (FICA). Upon the subsequent
sale of the transferred stock or other property, the taxpayer will recognize
income to the extent that the amounts realized on sale exceed the sum of (a) the
amount includible in his income under Code Section 83 and (b) the amount paid
for the property.
Offerees who desire to subscribe for Shares will be required to become
parties to the Stockholders' Agreement. Pursuant to the Stockholders'
Agreement, each Investor may be required, in the event his employment terminates
for Cause or without Good Reason, to sell his Shares back to the Company for an
amount equal to the lower of (a) cost or (b) a percentage (either 100% or 80%)
of fair market value. Any transferee of an Investor may be required to sell the
transferred Shares to the Company upon similar terms in the event that the
Investor's employment is terminated for Cause or without Good Reason. Such
restrictions lapse with respect to any Investor on the earliest to occur of (a)
the Investor's death, retirement, permanent disability, or involuntary
termination of employment without Cause, (b) the Investor's voluntary
termination of employment with Good Reason, or (c) the failure of the Company to
exercise its rights to purchase the Investor's Shares in a timely fashion
following the termination of his employment for Cause or without Good Reason
(each such event referred to as a "Lapse Event"). See "The
Offering -- Stockholders' Agreement."
The Company believes that, in light of various provisions of the
Stockholders' Agreement, each Investor subscribing for Shares hereunder will
acquire such Shares subject to a substantial risk of forfeiture. Further, the
Company believes that the Shares subscribed for hereunder are not transferable
within the meaning of Code Section 83. As such, to the extent that the fair
market value of any Share exceeds the amount paid therefor, no Investor should
be required to include in income the In-Kind Compensation attributable thereto
until the restrictions lapse at the occurrence of a Lapse Event. Nevertheless,
any Investor may elect, under Code Section 83(b), to include the value of the
In-Kind Compensation in the year in which he purchases Shares pursuant to this
Offering.
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Stock Options
Taxpayers receiving compensatory, nonstatutory stock options (i.e.,
options other than "qualified options" taxable under Code Section 421) generally
do not recognize income as a result of the grant of such options. Unless the
granted options have a readily ascertainable fair market value within the
meaning of Code Section 83 as of the date of grant, the taxpayer realizes income
only on the date he exercises or disposes of such options. At that time, he
realizes compensation income equal to the difference between the market value of
the stock and the price paid to acquire and exercise the option. However, where
the optionee's rights in the property transferred pursuant to the exercise of
such option are not substantially vested (within the meaning of Code Section
83), the optionee does not realize income until the first time that his rights
in that property become substantially vested. See "-- Restricted Stock."
When an option is not regularly traded on an established market, it
does not have a readily ascertainable market value unless its value can be
determined with "reasonable accuracy." For such purposes, the value of an
option cannot be determined with reasonable accuracy unless all of the following
conditions exist:
(i) The option is transferable;
(ii) The option is exercisable immediately in full;
(iii) The option is not subject to any restriction or condition which
has a significant effect upon its value; and
(iv) The value of the option privilege is readily ascertainable.
For each Share acquired by an Investor hereunder, the Company will
grant such Investor an option to purchase one-third of one share of Common Stock
(subject to certain adjustments) at a purchase price of $1,800 per share. Such
options will vest ratably over a five-year period commencing on the first
anniversary of the Employee Option Plan, will be nontransferable (except by will
or the laws of descent and distribution) and, during the life of the Investor,
may be exercised solely by the Investor. See "The Offering -- Options --
Employee Option Plan." Once exercised, the shares of Common Stock acquired
pursuant to such exercise will become subject to the Stockholders' Agreement, as
amended by the Letter Agreement, including its restrictions and repurchase
rights vested in the Company. The options will not be actively traded on an
established market as of the date the Company grants them.
The Company believes that, since the options are neither exercisable
immediately in full nor transferable (except at death), the value of options may
not be determined with reasonable accuracy. As the options should not have a
readily ascertainable market value within the meaning of Code Section 83, the
Company believes that they should not be compensation income to the optionee on
the date of grant (notwithstanding that their value may later become
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readily ascertainable). Further, since the property acquired pursuant to the
exercise of such options (i.e., shares of Common Stock) will be subject to the
Stockholders' Agreement, the Company believes that an Investor exercising an
option granted hereunder will acquire property in which his rights are not
substantially vested within the meaning of Code Section 83. Accordingly, the
Company believes that an Investor should not have compensation income until the
date that the restrictions on the Common Stock acquired pursuant to such
exercise lapse (i.e., at the occurrence of a Lapse Event under the Stockholders'
Agreement). At that time, the Investor should recognize compensation income in
an amount equal to the excess of the market value of the stock as of such date
over the price paid to exercise and acquire the applicable option. Any Investor
may, however, choose to accelerate the recognition of income to the date he
exercises an option provided he makes the election under Code Section 83(b).
RISK FACTORS
Investors should consider the specific factors set forth below as well
as the other information set forth in this Offering Memorandum. The following
is not necessarily a comprehensive list of all of the possible risk factors
associated with an investment in the Common Stock.
Limited Operating History
The Company's products are well-established in the marketplace, and
the Company has experienced net profits in four of its five full fiscal years of
operation. However, there can be no assurance that the Company will remain
profitable in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Short Lease Terms; Possible Inability to Re-lease Compressors
The Company has historically leased its compressors under leases with
an average fixed term of approximately six months and which continue thereafter
on a month to month basis. Historically, lessees have renewed their leases on a
month to month basis for an average period of approximately 24 months. Based on
the average cost of new compressors and the average lease price, the Company
generally does not recoup its investment in the compressors until after its
receipt of at least 48 months of lease payments. Accordingly, the Company
assumes substantial risk of not recovering its entire investment in the
equipment it purchases. Although the Company has historically been successful
in re-leasing units in its inventory, there can be no assurance that the Company
will continue to be able to do so or that a substantial portion of its lessees
will not terminate their leases at approximately the same time, thereby causing
an adverse accumulation of unleased compressors in the Company's inventory. The
inability of the Company to lease a substantial portion of its compressors for
any reason would have a material adverse effect upon the Company's financial
condition and its results of operations. See "Business."
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<PAGE>
Competition
The natural gas compression industry and the oil and gas production
equipment business are highly competitive. The Company competes with several
large national and international companies which, like the Company, offer a wide
range of compressors and oil and gas production equipment for purchase or lease.
There can be no assurance that such competitors will not substantially increase
the resources devoted to the development and marketing of products competitive
with those of the Company or that new competitors will not enter the industry.
See "Business -- Competition."
Natural Gas Compressor Industry Considerations
The Company's profitability is, in part, dependent upon the current
demand for natural gas. Natural gas demand, aided by competitive pricing and
interstate pipeline deregulation, has increased at a rate of approximately 2-3%
per year from 1986 through 1994. The Company's management estimates that demand
for gas compression has increased approximately 6-10% per year during this time
frame. This increase is a result of increased production from lower reservoir-
pressured areas and the increased amount of coal-seam and tight-gas drilling in
certain geographic areas.
Depressed natural gas prices tend to decrease efforts to discover and
develop new natural gas reserves domestically. This places greater reliance
upon older, developed reserves which requires additional compression to deliver
the remaining natural gas to market. A significant decline in the price of
natural gas could result in the widespread failure of independent producers and
increased pricing pressure and credit risk for compressor rental companies.
This would have a material adverse effect on the Company's financial condition
and results of operations. See "Business."
Potential Liability and Insurance
Natural gas operations are subject to certain risks, including
explosions, uncontrollable flows of gas or well fluids, fires, pollution and
other environmental risks. These risks could expose the Company to substantial
liability for injury and loss of life, property damage, pollution and other
environmental damages, and consequential damages, if such damages resulted from
an alleged compressor defect or from the Company's negligence in maintaining,
servicing or refurbishing its compressors.
Although the Company has obtained certain insurance, no assurance can
be given that such insurance is adequate to cover the Company's operations, will
be generally available in the future or, if available, that premiums will be
commercially justifiable. If the Company were to incur a substantial liability
and such damages were not covered by insurance or were in excess of policy
limits, or if the Company were to incur such liability at a time when it is no
longer able
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<PAGE>
to obtain liability insurance, its financial condition could be materially
adversely affected. The Company, consistent with industry trends, may find it
difficult to obtain adequate insurance coverage against possible liabilities
that may be incurred in connection with the conduct of its business. There can
be no assurance that all possible types of liabilities that may be incurred by
the Company will be covered by its insurance or that the dollar amount of such
liabilities will not exceed the Company's policy limits. A partially or
completely uninsured claim, if successful and of sufficient magnitude, could
have a material adverse effect on the Company and its financial condition.
Environmental Liability Risks
In addition to liability which may arise as a result of an alleged
compressor defect or alleged Company negligence, if environmental damage is
found to have occurred as a result of the Company's operating activities, the
Company could incur substantial liability. In such event, the Company could be
liable for all costs of remediation, as well as certain other costs. Under the
Comprehensive Response, Compensation and Liability Act ("CERCLA"), the Company
may also be liable for all costs of remediation of any property of which it is
deemed to be the owner or operator. Various Preliminary Environmental (Phase I)
Site Assessments were conducted in 1990 and 1991 with respect to certain
properties owned or operated by the Company and its subsidiaries. Such
assessments identified potential sources of ground contamination. Although
remediation efforts have been undertaken by the previous owners, no assurances
can be given that such remediation efforts will be successful or that the
Company will not incur costs in remediating such contamination or discover
additional sources of enumerated contamination. In addition, pursuant to the HPC
Merger (as defined below), the Company acquired certain potential environmental
liabilities estimated at December 31, 1995 to be between $139,000 and $200,000.
See "Business -- Company History" for a description of the HPC Merger.
As a result of the Company's acquisition of Astra Resources
Compression, Inc. ("Astra"), the Company, through a wholly owned subsidiary,
indirectly owns a 17 acre parcel of land which includes a lagoon at Astra's East
Bernard, Texas facility, formerly the site of a solid waste landfill. The
Company has been indemnified by Astra's former parent for any environmental
liability associated with the landfill in excess of $250,000 and has the right
to "put" the property to Astra's former parent for $150,000 under certain
circumstances.
In June 1993, a Phase I and Phase II Environmental Assessment was
conducted on the Company's 20 acre headquarters/fabrication facility in Houston,
which Assessment indicated that such site has minimal apparent risk with respect
to environmental liability. In addition, the company maintains a professionally
designed Spill Prevention Control and Countermeasure Plan (the "SPCC Plan") with
respect to its Fort Smith, Arkansas maintenance facility, which is designed to
prevent oil spills and waste releases and to describe protocols for immediate
coordination of necessary activities to minimize any harmful effects should a
spill or other release occur. Although the Fort Smith facility does not
routinely generate hazardous waste, the
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<PAGE>
SPCC Plan includes waste release measures given that during an oil spill event,
certain characteristic hazardous waste from spill residue may be generated.
Moreover, the Company is currently implementing a Site Remediation and Clean Up
Proposal regarding real property located in Columbus, Texas with respect to
which the Company acquired a lease and purchase option pursuant to the February
1995 acquisition by the Company of substantially all of the assets of Smith
Industries, Incorporated. See "Business -- Company History."
Governmental Regulation
The Company is subject to various federal, state and local laws and
regulatory standards in the areas of safety, health and the environment,
including regulations regarding emission controls. The Company believes that it
is in substantial compliance with such laws and regulations and that the phasing
in of emission controls and other known standards at the rate currently
contemplated by such laws and regulations will not have a material adverse
effect on the Company's financial condition or results of operations. However,
various state and federal agencies from time to time consider adopting new laws
and regulations or amending existing laws and regulations regarding
environmental protection. While the Company may be able to pass on the
additional costs of complying with such laws, there can be no assurances that
attempts to do so would be successful. Accordingly, new laws or regulations or
amendments to existing laws or regulations could require the Company to
undertake significant capital expenditures and could otherwise have a material
adverse effect on the Company's financial condition and results of operations.
Restrictions Imposed by the Terms of the Company's Indebtedness; Effect of
Default
The terms of the Company's existing credit agreement dated December
19, 1995 (the "Bank Credit Agreement") among the Company, Chemical Bank, as
agent, and the other banks party thereto and the loan agreement dated as of
December 19, 1995 (the "JEDI Loan Agreement") among the Company, Joint Energy
Development Investments Limited Partnership ("JEDI") as agent and the financial
institutions named therein impose a variety of restrictions on the Company's
operations, including, without limitation, limiting the Company's ability to
incur additional indebtedness, grant or suffer liens or other encumbrances on
its property, make investments, loans or advances except under certain
enumerated circumstances, make capital expenditures above specified levels,
enter into sale/leaseback arrangements as a seller/lessee, dispose of its assets
or extend guarantees. Such restrictions may limit the Company's ability to
exploit fully certain business opportunities. In addition, under the terms of
the Bank Credit Agreement and the JEDI Loan Agreement, the Company may not
declare or pay any dividend on or make any payment for the purchase, redemption
or acquisition of any shares of Common Stock other than repurchases of Common
Stock from employees of the Company which do not exceed an aggregate of
$2,500,000. In addition, the failure of the Company to maintain certain
financial ratios may cause the Company to be in default under the agreements
governing its
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<PAGE>
indebtedness and such default, if uncured, may ultimately entitle its creditors
to foreclose on all of the assets of the Company. See "Description of Certain
Indebtedness."
Dependence on Internally Generated Funds; Capital Needs
The compressor leasing business and the oil and gas production
equipment business in which the Company is involved are capital intensive
businesses, and the inability of the Company to continue to have access to
sufficient capital could have a material adverse effect on the Company's ability
to finance compressor purchases and production equipment materials purchases
and, thus, maintain its future leasing revenues and profitability. Company
growth has historically been financed through (i) sales of Common Stock,
including the sale of approximately $15,000,000 of Common Stock to certain
executive officers and then existing stockholders of the Company in 1992 (the
"1992 Offering"), the sale of approximately $2,500,000 of Common Stock to
certain members of the Company's management in 1993 (the "1993 Offering"), the
sale of approximately $16,000,000 of Common Stock to GKH in 1993, the sale of
$275,000 of Common Stock to certain employees of the Company at $1,100 per share
in 1995 (the "1995 Management Offering"), the sale of $2,590,500 of Common Stock
to certain employees of the Company at $1,500 per share in 1995 (the "1995
Employee Offering"), the sale of $20,000,000 of Common Stock and $10,000,000 of
Series B Preferred Stock to JEDI in 1995 and the sale of $21,602,000 of Series A
Prepared Stock to GKH, other existing investors in the Company and certain
others in 1995, (ii) internally generated funds, (iii) borrowings under the Bank
Credit Agreement, which provides for a revolving credit facility with a
commitment of $90,000,000 and borrowings under the JEDI Loan Agreement, which
provides for a revolving credit facility with a commitment of $100,000,000 and
(iv) a merger involving the acquisition of all of the outstanding shares of
Astra in exchange for cash consideration and 30,556 shares of Common Stock
issued to Astra's parent (the "Astra Merger").
In addition, although the Company believes that it will have
sufficient capital resources based on internally generated funds, the amounts
available under the Bank Credit Agreement and the JEDI Loan Agreement and other
potential placements of equity to fund its anticipated capital needs for at
least the next several years, there can be no assurance that the Company will
meet its projected earnings and that sufficient cash flow will be generated.
Failure to generate sufficient cash flow together with the absence of
alternative sources of capital could have a material adverse effect on the
financial condition, operations and expected growth of the Company. See
"Management's Discussion of and Analysis of Financial Condition and Results of
Operations."
Limited Preemptive Rights
Although Delaware law does not generally provide for preemptive
rights, in the event the Company offers any party to the Stockholders' Agreement
the opportunity to purchase additional shares of Common Stock, all other parties
to the Stockholders' Agreement will have
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<PAGE>
the right to acquire their respective pro rata share of such Common Stock on the
same terms and conditions offered to such other stockholder, except that such
right shall not apply to (i) shares issuable in connection with a merger,
acquisition or similar transaction, (ii) shares issuable upon the exercise of
any options, warrants or other convertible securities or (iii) shares offered by
the Company to employees of the Company. See "The Offering -- Stockholders'
Agreement -- Preemptive Rights" and "Description of Capital Stock." JEDI has the
right with respect to certain equity offerings of the Company to existing
Company stockholders (each a "Rights Offering") to (a) subscribe for the first
fifteen percent of such Rights Offering on an exclusive basis, and (b) subscribe
for its pro rata share of the remaining equity under the Rights Offering in the
event the Company offers additional shares in exchange for capital required to
satisfy certain covenants under the JEDI Credit Agreement. Astra Resources also
has a preemptive right to subscribe for shares of Common Stock sufficient for it
to maintain ownership of at least 20% of the outstanding Common Stock subject to
a specified threshold. In addition, in the event the Company sells or otherwise
issues any shares of Common Stock to GKH, the non-GKH parties to the Gale Force
Stockholders' Agreement (as defined below) will have the right to acquire their
respective pro rata amount of Common Stock on the same terms and conditions as
such Common Stock is sold or otherwise issued to GKH. See "Principal
Stockholders -- Stockholders' Agreements -- Gale Force Stockholders' Agreement,"
"-JEDI Stockholders' Agreement" and -"Astra Stockholders' Agreement".
No Public Market for Common Stock; Restriction on Transferability
Each subscribing offeree will be required to represent that he is
purchasing the Shares for investment purposes for his own account and not with a
view towards resale or distribution. There is no public market for the Shares
and an Investor's ability to transfer his Common Stock will be significantly
restricted by the terms of the Stockholders' Agreement. In addition, the
Stockholders' Agreement (i) gives GKH the right to cause all Investors to sell
their Common Stock in certain transactions and (ii) gives the Company or certain
of its affiliates the right, but not the obligation, to purchase all of the
Common Stock of an Investor upon the termination of such Investor's employment
with the Company. The purchase price for such stock varies depending on the
circumstances and, in cases where an Investor is terminated for Cause or
voluntarily terminates his employment without Good Reason, such purchase price
may be substantially below the fair market value of such Common Stock. See "The
Offering -- Stockholders' Agreement." Any potential Investor must be able and
willing to bear the risk of his investment for an indefinite period.
Dividends
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. In
addition, the ability of the Company to pay dividends will be limited by the
terms of the Bank Credit Agreement, the JEDI
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<PAGE>
Loan Agreement, the Series A Preferred Stock and the Series B Preferred Stock.
See "Description of Certain Indebtedness," and "Certain Contemplated
Transactions."
Control by Principal Stockholders
As of December 31, 1995, approximately 51.7% of the Company's
outstanding Common Stock (not including shares issuable pursuant to existing
option programs) was owned by GKH. Subsequent to this offering, GKH will
continue to own a majority of the Common Stock of the Company and by virtue of a
voting trust with certain members of management, will control a majority, on a
fully diluted basis, of the Common Stock. By maintaining such majority control,
GKH will continue to have the power to determine the policies of the Company and
its subsidiaries, the persons constituting the directors and officers thereof
(subject to the terms of (i) the Gale Force Stockholders' Agreement, (ii) the
Hanna Stockholders' Agreement, (iii) the HEHC Stockholders' Agreement, (iv) the
Astra Stockholders' Agreement and (v) the Stockholders' Agreement) and the
outcome of various corporate actions requiring stockholder approval (subject to
the terms of the HEHC Stockholders' Agreement). See "Principal Stockholders --
Stockholders' Agreements" for a description of these agreements.
Recent Expansion Activity
The Company recently acquired Astra thereby increasing its compressor
fleet by 12% and its work force by 10%. (See "Business -- Company History").
Through its acquisition of the production equipment business of Smith
Industries, Incorporated (the "Smith Business;" See "Business -- Company
History"), the Company substantially expanded its oil and gas production
equipment fabrication operations. The Company is now in the process of
integrating both of these acquisitions into its current operations. Given the
size of the acquisitions, there can be no assurance that the integration will be
successful or that additional capital will not be required to operate the
Company's oil and gas production equipment business or the compressor business.
As of September 8, 1995, HCC (through its wholly owned subsidiary
H.C.C. Compressor de Venezuela, C.A.) acquired 100% of the issued and
outstanding stock of Proyecto Gas Natural P.G.N., C.A., a Venezuelan corporation
("PGN"), from Walter Rode and Luis Zubillaga in exchange for cash, assumption of
certain liabilities of PGN and 104.6667 shares of Common Stock (to Mr. Rode
only). PGN is an owner and lessor of natural gas compression equipment in
Venezuela and provides natural gas compression services under contract to
Corpoven, S.A. and Bitumenes Orinoco, S.A. BITOR, both of which are
instrumentalities of the Venezuelan government. Mr. Rode continues to be
employed by HCC (or its affiliates) in connection with the operations of PGN.
In addition, the Company has also made certain other acquisitions,
which management believes will enhance the Company's competitive position in the
natural gas
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<PAGE>
compression industry, which is generally experiencing a considerable amount of
consolidation. See "Business -- Company History." However, there can be no
assurance that such acquisitions will effect the desired results.
Dilution
Assuming all of the Shares are issued, the value of the Shares
purchased pursuant to this offering will be subject to immediate dilution in the
net tangible book value of $546.79 per Share from the adjusted net tangible book
value as of December 31, 1995.
Federal Income Tax Risks
The following discussion summarizes certain federal income tax risks
associated with an investment in the Shares and the exercise of options acquired
therewith, and should be read in conjunction with "Federal Income Tax
Consequences." As the following does not purport to be a complete discussion of
all relevant tax issues, prospective investors should consult their own tax
advisors for advice regarding the impact of a subscription for Shares and
options upon their individual tax positions, including the application of state
and local income tax law, if any.
Treatment of Compensation Income; Receipt of Shares
No assurance can be given that the Internal Revenue Service ("IRS")
will consider the provisions of the Stockholders' Agreement to be sufficient to
render Shares subscribed for hereunder to be nontransferable and each Investor's
rights therein to be subject to a substantial risk of forfeiture within the
meaning of Code Section 83. Further, no assurance can be given that a court of
competent jurisdiction would agree with the conclusions of the Company. In the
event that the IRS considers the provisions of the Stockholders' Agreement to be
insufficient for such purpose, it may consider each Investor to have
compensation income (as of the date he acquires Shares) in an amount equal to
the difference between the fair market value of such Shares and the Investor's
purchase price. Each Investor may thus be required to pay federal income and
FICA tax on such income, plus interest and penalties as applicable. Further,
the Company may be required to pay federal unemployment and other taxes on the
compensation deemed to be transferred to each Investor, plus interest and
penalties as applicable, which tax may indirectly effect the value of each
Investor's Shares.
Treatment of Compensation Income; Receipt of Options
No assurance can be given that the IRS (or any court) will agree that
an Investor acquiring Common Stock pursuant to the exercise of any option is
subject to a substantial risk of forfeiture with respect to such Stock and such
Stock is nontransferable under Section 83 of the Code. As such, an Investor
exercising options granted hereunder may realize compensation income at the date
he exercises an option in an amount equal to the difference between the fair
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<PAGE>
market value of the Common Stock on that date over the price paid to exercise
and acquire the applicable option. An Investor may thus be required to pay
federal income and FICA tax (and interest and penalties, as applicable) with
respect to such compensation income. Similarly, the Company may be required to
pay federal unemployment and other taxes (including penalties and interest)
which payment may indirectly effect the value of each Investor's Common Stock.
Election under Code Section 83(b)
Any Investor may make an election to include amounts in income on the
date he acquires shares of Common Stock (whether at subscription for Shares or
upon the exercise of any option granted hereunder). Electing Investors will
thus not recognize additional compensation income upon the occurrence of a Lapse
Event under the Stockholders' Agreement. However, since each electing Investor
accelerates the recognition of income from the time at which the Company
believes it would otherwise be first recognizable (i.e., the date of any Lapse
Event), each electing Investor must bear certain market risks associated with
the value of his Shares. If the value of an electing Investor's Shares does not
exceed the value of such Shares on the date that the Investor acquired them,
such electing Investor will have included amounts in income which would not have
otherwise have been includible had he not made the election under Code Section
83(b). Such electing Investor will not be entitled to deduct any amounts
attributable to that income acceleration.
Further, in the event that an electing Investor is required to sell
Shares of Common Stock back to the Company (e.g., pursuant to the exercise of
the Company's rights to repurchase such Shares in the Stockholders' Agreement),
that Investor will not be allowed any deduction for any portion of the basis in
such Shares that he acquired as a result of a Section 83(b) election.
DETERMINATION OF OFFERING PRICE
The offering price of $1,800 per Share was determined solely by the
Board based on a number of factors, including the date of the Company's hiring
of the offerees and a comparison of the Company's 1994 and 1995 financial
performance to the financial performance and corresponding per share market
multiples of a select group of public companies involved in the natural gas
compressor leasing and fabrication and energy services industries. By virtue of
the nature of this offering, the offering price was not determined pursuant to
arm's length negotiations with a third party, and there can be no assurance that
such price is indicative of the fair market value of the Shares. However, the
Company's recent issuances of shares of Common Stock to each of JEDI on August
7, 1995 and Astra Resources on October 3, 1995 were effected at $1,800 per
share. See "Business -- Company History."
PLAN OF OFFERING
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The minimum purchase per subscribing offeree is one Share (excluding
Shares to be acquired by delivery of a Four Year Note) for a minimum aggregate
purchase price of $1,800. The minimum aggregate purchase for all Investors is
one Share (excluding Shares to be purchased by delivery of a Four Year Note) for
a minimum aggregate purchase price of $1,800. The Company reserves the right
(i) to reject any subscription for any reason and (ii) to make non-material
modifications to or terminate this offering at any time for any reason.
Each offeree who desires to subscribe for Shares must (i) on or before
Thursday, March 28, 1996, call Curtis Bedrich (at 713-447-8787) to communicate
the number of Cash Shares and Loan Shares for which such offeree desires to
subscribe and (ii) on or prior to Thursday, April 11, 1996, execute and return
to the Company, c/o Curtis Bedrich, (a) one copy and one extra signature page of
the Subscription Agreement included herewith (including Schedule A attached
thereto), (b) one copy and one extra signature page of the Stockholders'
Agreement included herewith (including the spousal consent, if applicable) and
(c) one copy and one extra signature page of the Letter Agreement included
herewith.
Upon oral confirmation of the number and type of Shares subscribed for
by a subscribing offeree, the Company will prepare and distribute for execution
to such subscribing offeree (i) one execution copy of each of the Loan Agreement
and Four Year Note, if applicable, (ii) two copies of the Pledge Agreement, if
applicable, (iii) two copies of the Employee Option Agreement, (iv) an
assignment separate from certificate, if the subscribing offeree has requested a
Four Year Loan and (v) an IRS Form W-9. In addition to the Subscription
Agreement, the Stockholders' Agreement and the Letter Agreement previously
delivered, each subscribing offeree must then, prior to Thursday, April 25,
1996, return to the Company, c/o Curtis Bedrich, to the extent applicable, (i)
the executed Loan Agreement and Four Year Note, (ii) two executed counterparts
of the Pledge Agreement, (iii) two executed counterparts of the Employee Option
Agreement, (iv) the assignment separate from certificate, executed in blank, (v)
the fully completed and executed Form W-9 and (vi) if applicable, a check in an
amount equal to the product of (a) the number of Cash Shares subscribed for and
(b) $1,800.
The foregoing deadlines are summarized as follows:
<TABLE>
<CAPTION>
=====================================================================================================
Event Deadline
=====================================================================================================
<S> <C>
Orally contact Curtis Bedrich (at 713-447-8787) to indicate Thursday, March 28, 1996
the number and type (Cash and/or Loan Shares) of shares you
wish to subscribe for
=====================================================================================================
</TABLE>
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<TABLE>
<CAPTION>
=====================================================================================================
Event Deadline
- -----------------------------------------------------------------------------------------------------
<S> <C>
Deliver one executed copy and one extra executed counterpart Thursday, April 11, 1996
of (i) the Subscription Agreement (including Schedule A
attached thereto and, if applicable, the spousal consent),
(ii) the Stockholders' Agreement (including the spousal
consent, if applicable) and (iii) the Letter Agreement
- -----------------------------------------------------------------------------------------------------
Deliver, as applicable, (i) one copy of each of the Loan Thursday, April 25, 1996
Agreement and Four Year Note, (ii) one executed copy and one
extra executed counterpart of the Pledge Agreement, (iii) NOTE: These documents will be
one executed copy and one extra executed counterpart of the delivered to you on or prior to
Employee Option Agreement, (iv) an assignment separate from Thursday, April 11, if you orally
certificate executed in blank, (v) an IRS Form W-9 and (vi) contact Curtis Bedrich with your
a check in the proper amount subscription by Thursday, March 28.
=====================================================================================================
</TABLE>
All Funds shall be promptly deposited in an interest bearing,
segregated account and such Funds may be invested in treasury bills or other
cash equivalents, as determined in the sole and absolute discretion of the
Company. If acceptable subscriptions for a minimum aggregate of one Share is
received by the Company on or before April 11, 1996, or such later time as
determined in the sole and absolute discretion of the Company without notice to
or consent of the offerees, but in no event later than the Termination Date, all
Funds will be transferred from the segregated bank account to the Company,
together with all interest, if any, earned thereon. In the event such condition
has not been satisfied on or before the Termination Date or this offering is
withdrawn by the Company, this offering will be terminated and all Funds will be
returned to the subscribing offerees with a pro rata share of interest earned
thereon, calculated on the basis of the amount of Funds invested by each
subscribing offeree and the length of time interest on such Funds was earned.
USE OF PROCEEDS
Assuming all of the Shares are issued, the net proceeds of the
offering, estimated to be $1,974,800, will be used for general corporate
purposes, including working capital.
DILUTION
As of December 31, 1995, the Company had adjusted net tangible book
value (defined as total stockholders' equity less goodwill) of $160,376,945, or
$1,248.48 per share of Common Stock . Adjusted net tangible book value per
share of Common Stock is determined by
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dividing the actual net tangible book value by the number of shares of its
Common Stock and treating all such Common Stock as having been issued for cash
which would have been outstanding as of December 31, 1995. After giving effect
to the sale of the Shares and the application by the Company of the estimated
net proceeds therefrom as described in "Use of Proceeds", the pro forma net
tangible book value of the Company as of December 31, 1995 would have been
$162,376,745, or $1,253.21 per share of Common Stock. This value represents an
immediate increase in the adjusted net tangible book value of $4.73 per share of
Common Stock to the current shareholders and an immediate dilution in net
tangible book value of $546.79 per Share to purchasers of the Shares. Dilution
per share is determined by subtracting the pro forma adjusted net tangible book
value per share of Common Stock after the completion of this offering from the
per share price paid by purchasers of the Shares. The following table (1)
illustrates this per share dilution:
<TABLE>
<S> <C>
Price per share pursuant to this offering................................. $1,800.00
Adjusted net tangible book value per share as of December 31, 1995........ $1,248.48
Increase in adjusted net tangible book value per share
attributable to the offering(2)........................................... $ 4.73
Pro forma adjusted net tangible book value per share after this offering.. $1,253.21
Dilution per share to purchasers of the Shares............................ $ 546.79
</TABLE>
(1) Assumes that all of the Shares are subscribed for and excludes shares of
Common Stock reserved for issuance pursuant to options which have
previously been granted to certain members of management. To the extent
such options are exercised, the value of Shares purchased by Investors may
be subject to further dilution. See "Capitalization," "The Offering --
Stock Options" and "Description of Capital Stock -- Options."
(2) Does not reduce stockholders' equity for the aggregate amount of all Four
Year Loans.
The following table sets forth as of December 31, 1995 (calculated on
the same basis as the preceding paragraph and rounded for purposes of this
presentation) the number of shares of Common Stock purchased from the Company,
the value of the total consideration received, the average price per share paid
by the existing shareholders of the Company and the price per share to be paid
by Investors:
<TABLE>
<CAPTION>
==============================================================================================================
Avg. Price Per
Share
Shares Purchased Total Consideration -----
- --------------------------------------------------------------------------------------------------------------
Number % Amount %
------ ------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders 128,458 99.14 $137,450,090 98.57 $1,070.00
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
Avg. Price Per
Share
Shares Purchased Total Consideration -----
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investors 1,111 0.86 $ 1,999,800 1.43 1800,00
- --------------------------------------------------------------------------------------------------------------
Total 129,569 100.00 $139,449,890 100.00 $1,076.26
==============================================================================================================
</TABLE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company
as of December 31, 1995 and as adjusted to reflect the consummation of this
offering (assuming all 1,111 Shares are subscribed for) after the anticipated
application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
===================================================================================================================================
As Adjusted for the
Actual Offering
===================================================================================================================================
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Current installments of long-term debt........................................ $ -0- $ -0-
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current portions......................................... 51,022,966 51,022,966
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
- -----------------------------------------------------------------------------------------------------------------------------------
Undesignated Preferred Stock, $.01 par value, 135,000 shares authorized,
0 shares issued and outstanding.......................................... -- --
Series A Preferred Stock $.01 par value, 50,000 shares authorized, 216 216
21,602 issued and outstanding............................................ 100 100
Series B Preferred Stock, $.01 par value, 15,000 shares authorized,
10,000 issued and outstanding............................................
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, 200,000 shares authorized, 128,458.03 issued 129 130
and outstanding, 129,569.03 issued and outstanding after the offering(1).....
- -----------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital.................................................... 161,146,137 163,145,936
- -----------------------------------------------------------------------------------------------------------------------------------
Retained earnings............................................................. 9,935,893 9,935,893
- -----------------------------------------------------------------------------------------------------------------------------------
Less:
- -----------------------------------------------------------------------------------------------------------------------------------
Notes receivable from officers and employees for purchase of Common Stock..... 4,668,702 6,000,702
- -----------------------------------------------------------------------------------------------------------------------------------
198.40 Treasury shares, at cost............................................... 218,240 218,240
- -----------------------------------------------------------------------------------------------------------------------------------
Net stockholders' equity...................................................... 166,195,533 166,863,333
Total capitalization..................................................... 217,218,499 217,886,299
===================================================================================================================================
</TABLE>
(1) Includes 198.40 treasury shares and 3.22 shares to be issued to William E.
Simon, Jr., as trustee for the benefit of William E. Simon Family S
Corporation Trust, f/b/o William E.
-25-
<PAGE>
Simon, Jr. u/a/d August 9, 1989, but excludes (i) an aggregate of 14,524.34
shares of Common Stock subject to options previously granted to executive
officers and other members of management of the Company pursuant to the
1992 Stock Plan, the 1993 Option Plan, the Senior Executive Plan, the 1995
Management Option Plan, the 1995 Employee Option Plan and the Incentive
Option Plan (see "Management --Options"), and all options to be granted to
Investors pursuant to the 1996 Employee Stock Option Plan, (ii) 15 shares
of Common Stock and options to purchase 75 shares of Common Stock issued to
each of Glen Wind and Kurt Wind as of January 24, 1996 and (iii) an
aggregate of 124.9 shares of Common Stock issued to John C. Oxley and New
Prospect Drilling Company, an Arkansas Corporation.
DIVIDEND POLICY
The Company has not paid dividends since its inception. The Company
currently intends to retain all earnings, if any, to fund the expansion of its
business and therefore does not anticipate paying any dividends on the Common
Stock in the foreseeable future. In addition, the ability of the Company to pay
dividends is limited by the terms of the Bank Credit Agreement and the JEDI Loan
Agreement, the Series A Preferred Stock and the Series B Preferred Stock.
SELECTED FINANCIAL INFORMATION
The selected financial data presented below for the years ended
December 31, 1994 and 1993 is derived from the audited financial statements of
the Company. The selected financial data set forth below as of December 31, 1995
was derived from the Company's unaudited financial statements. The data set
forth herein should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements and notes thereto.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 1995 Year Ended Year Ended
Statement of Income Data (unaudited) December 31, 1994 December 31, 1993
- ------------------------ ----------- ----------------- -----------------
================================================================================================================
<S> <C> <C> <C>
Revenues:
- ----------------------------------------------------------------------------------------------------------------
Leasing and Maintenance.................... $ 48,120,115 $32,024,912 $25,722,662
- ----------------------------------------------------------------------------------------------------------------
Compressor Packaging....................... 29,593,205 16,201,887 14,034,275
- ----------------------------------------------------------------------------------------------------------------
Production Equipment....................... 16,007,855 7,271,641 3,178,386
- ----------------------------------------------------------------------------------------------------------------
Other...................................... 776,161 581,526 411,298
- ----------------------------------------------------------------------------------------------------------------
Total revenues........................... 94,497,336 56,079,966 43,346,621
- ----------------------------------------------------------------------------------------------------------------
Costs and expenses:
- ----------------------------------------------------------------------------------------------------------------
Leasing and Maintenance...................... 16,851,706 11,007,891 9,739,248
- ----------------------------------------------------------------------------------------------------------------
Compressor packaging......................... 25,265,016 13,732,736 12,130,915
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
-26-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Production Equipment............................... 12,882,556 5,798,521 2,671,178
- ----------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses....... 12,331,603 8,427,020 7,413,158
- ----------------------------------------------------------------------------------------------------------------
Depreciation and amortization...................... 13,493,813 8,108,596 5,757,381
- ----------------------------------------------------------------------------------------------------------------
Interest expense................................... 4,560,133 2,027,414 1,366,297
- ----------------------------------------------------------------------------------------------------------------
Total costs and expenses 85,384,827 49,102,178 39,078,177
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes.......................... 9,112,509 6,977,788 4,268,444
- ----------------------------------------------------------------------------------------------------------------
Income tax expense.................................. 3,498,456 2,590,000 1,597,000
- ----------------------------------------------------------------------------------------------------------------
Net income.......................................... $ 5,614,053 $ 4,387,788 $ 2,671,444
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
=================================================================================================================
December 31, 1995
Balance Sheet Data (unaudited) December 31, 1994 December 31, 1993
- ------------------ ----------- ----------------- -----------------
<S> <C> <C> <C>
Total current assets................................ $ 49,959,988 $ 21,484,358 $10,696,270
- -----------------------------------------------------------------------------------------------------------------
Net property, plant and equipment................... 193,259,462 88,391,054 61,722,508
- -----------------------------------------------------------------------------------------------------------------
Other assets........................................ 9,186,862 4,738,740 4,360,547
- -----------------------------------------------------------------------------------------------------------------
Total............................................... $252,406,312 $114,614,152 $76,779,325
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities........................... $ 22,082,426 $ 20,489,078 $ 9,734,146
- -----------------------------------------------------------------------------------------------------------------
Long-Term debt and other liabilities................ 64,128,353 42,792,233 20,100,126
- -----------------------------------------------------------------------------------------------------------------
Stockholders' equity................................ 166,195,533 51,332,841 46,945,053
- -----------------------------------------------------------------------------------------------------------------
Total............................................. $252,406,312 $114,614,152 $76,779,325
=================================================================================================================
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's primary operations consist of three business segments.
The principal segment consists of the leasing and maintenance of the Company's
natural gas compressor units ("Leasing and Maintenance"), and the other segments
consist of the design, engineering and fabrication of natural gas compressor
units ("Compressor Packaging") and the design, engineering, fabrication and
rental of oil and gas production equipment ("Production Equipment"). See
"Business -- Operations."
The Company commenced operations during the latter part of 1990 with
the acquisition of three regional compression leasing companies. In addition, a
compression leasing and fabricating operation was acquired in July, 1991. A
machine shop operation acquired by the Company in 1990, Precision Welding &
Machine, Inc., a Texas corporation ("PWMI"), was sold
-27-
<PAGE>
by the Company in November 1993. See "Business -- Company History." The
compression rental fleet has been expanded significantly since the Company's
inception, and amounted to 1,215 units aggregating 418,480 horsepower at
December 31, 1995. This growth has been funded by a combination of internally
generated cash flow, bank financing, the acquisition of Astra primarily through
the issuance of Common Stock, additional equity in the form of Common Stock sold
to the Company's management group, certain employees and existing shareholders
in 1992, 1993 and 1995, additional Common Stock sold to JEDI in 1995, and the
sale of Series B Preferred Stock to JEDI and Series A Preferred Stock to certain
existing shareholders and two new investors in 1995, as well as the commencement
of Production Equipment activities in 1993. As discussed elsewhere herein, the
operation of the Production Equipment segment has been significantly enhanced by
the Smith Acquisition. See "Business -- Company History."
Liquidity and Capital Resources
Earnings before depreciation and amortization and income taxes
amounted to $27.2 million during 1995. Other significant sources of funds during
1995 were amounts available under the Bank Credit Agreement and the JEDI Loan
Agreement and proceeds from sales of Common Stock and Preferred Stock.
Significant uses of funds included the repayment of debt under the Bank Credit
Agreement and net capital expenditures aggregating $69 million during 1995.
The financing necessary to support the Company's historical operations
has principally been provided from borrowings under the Bank Credit Agreement
and sales of Common Stock.
For a discussion of the Company's anticipated capital expenditures for
the next two years, see "Business -- Business Strategy."
Historically, inflation has not had a significant impact on the
operations of the Company.
Results of Operations
Year ended December 31, 1995 compared to year ended December 31, 1994
Revenues
Revenues from Leasing and Maintenance increased by $16.1 million, or
50%, from $32.0 million in 1994 to $48.1 million in 1995. This increase resulted
primarily from the addition of 456 compression units, aggregating 189,853
horsepower, to the compressor rental fleet. Monthly horsepower utilization of
93% to 96% during 1995 was consistently in excess of the industry average.
-28-
<PAGE>
Revenues from Compressor Packaging increased by $13.4 million, or 83%,
from $16.2 million in 1994 to $29.6 million in 1995. Compressor Packaging
operations generated operating profit (earnings before depreciation and
amortization expense and interest expense) of $1,969,000 during 1995, as
compared to $1,270,000 during 1994.
Revenues from Production Equipment increased by $8.7 million, or 119%,
from $7.3 million in 1994 to $16.0 million in 1995. Production Equipment
operations resulted in an operating profit (earnings before depreciation and
amortization expense and interest expense) of $641,000 during 1995, as compared
to an operating profit of $364,000 during 1994.
Expenses
Leasing and Maintenance expenses increased by $5.9 million, or 54%,
from $11.0 million in 1994 to $16.9 million in 1995. This increase resulted from
additions to the compressor rental fleet as reflected by a 50% increase in
Leasing and Maintenance revenue.
Costs and expenses of Compressor Packaging increased by $11.5 million,
or 84%, from $13.7 million in 1994 to $25.2 million in 1995. This increase is
attributable to the increase in Compressor Packaging operations.
Costs and expenses of Production Equipment increased by $7.1 million,
or 122%, from $5.8 million in 1994 to $12.9 million in 1995. This increase
resulted from an increase in the volume of production equipment fabrication.
Selling, general and administrative expenses increased by $3.9
million, or 46% from $8.4 million in 1994 to $12.3 million in 1995. This
increase resulted from the expanded level of activity in each of the Company's
business segments.
Depreciation and amortization increased $5.4 million, or 67%, from
$8.1 million in 1994 to $13.5 million in 1995. This increase resulted from
expansion of the rental fleet and other capital expenditures.
Interest expense increased $2.6 million, or 130%, from $2.0 million in
1994 to $4.6 million in 1995 as a result of borrowings under the Bank Credit
Agreement and the JEDI Loan Agreement which was used for general corporate
purposes as well as to finance additions to the compressor rental fleet.
The Company's effective income tax rate approximates the statutory
income tax rate during 1995 and 1994. Accordingly, the $900,000 increase, or
35%, from $2.6 million in 1994 to $3.5 million in 1995 results from a comparable
31% increase in income before income taxes from 1994 to 1995.
-29-
<PAGE>
Year ended December 31, 1994 compared to year ended December 31, 1993
Revenues
Revenues from Leasing and Maintenance increased by $6.3 million, or
25%, from $25.7 million in 1993 to $32.0 million in 1994. This increase resulted
primarily from the addition of 168 compression units, aggregating 84,060
horsepower, to the compressor rental fleet. Monthly horsepower utilization of
94% to 96% during 1994 was consistently in excess of the industry average.
Revenues from Compressor Packaging increased by $2.2 million, or 15%,
from $14.0 million in 1993 to $16.2 million in 1994. This increase resulted from
an increase in the volume of Compressor Packaging during 1994 following the move
in August, 1993, to an expanded fabrication facility. Compressor Packaging
operations generated operating profit (earnings before depreciation and
amortization expense and interest expense) of $1,270,000 during 1994, as
compared to $814,000 during 1993.
Revenues from Production Equipment increased by $4.1 million, or 129%,
from $3.2 million in 1993 to $7.3 million in 1994. This increase resulted from
an increase in the volume of production equipment fabrication as well as 1994
being the first full year for production equipment packaging, the operations of
which commenced in March, 1993. Production Equipment operations resulted in an
operating profit (earnings before depreciation and amortization expense and
interest expense) of $364,000 during 1994, as compared to an operating loss of
$130,000 during 1993.
Expenses
Leasing and Maintenance expenses increased by $1.3 million, or 13%,
from $9.7 million in 1993 to $11.0 million in 1994. This increase resulted from
additions to the compressor rental fleet as reflected by a 25% increase in
Leasing and Maintenance revenue.
Costs and expenses of Compressor Packaging increased by $1.6 million,
or 13%, from $12.1 million in 1993 to $13.7 million in 1994. This increase is
attributable to the increase in Compressor Packaging operations.
Costs and expenses of Production Equipment increased by $3.1 million,
or 117%, from $2.7 million in 1993 to $5.8 million in 1994. This increase
resulted from an increase in the volume of production equipment fabrication and
the inclusion of a full year of operations in 1994.
Selling, general and administrative expenses increased by $1.0
million, or 14% from $7.4 million in 1993 to $8.4 million in 1994. This increase
resulted from the expanded level of activity in each of the Company's business
segments.
-30-
<PAGE>
Depreciation and amortization increased $2.3 million, or 41%, from
$5.8 million in 1993 to $8.1 million in 1994. This increase resulted from
additions to the rental fleet and other capital expenditures which aggregated
$31.8 million during 1994.
Interest expense increased $700,000, or 56%, from $1.3 million in 1993
to $2.0 million in 1994 as a result of borrowings under the Credit Agreement
which was utilized to finance additions to the compressor rental fleet.
The Company's effective income tax rate approximates the statutory
income tax rate during 1994 and 1993. Accordingly, the $1.0 million increase, or
62%, from $1.6 million in 1993 to $2.6 million in 1994 results from a comparable
63% increase in income before income taxes from 1993 to 1994.
BUSINESS
Company History
The Company was incorporated in Delaware in October 1990 as a
majority-owned subsidiary of Hanover Energy Inc., a Texas corporation ("HEI").
In November and December 1990, the Company acquired all of the capital stock of
Guerra Engineering, Inc., a Texas corporation ("GEI"), Energy Recovery Systems,
Inc., a Texas corporation ("ERSI"), and PWMI, and substantially all of the
assets of C&B Compression Sales and Service, Inc., a Louisiana corporation
("C&B"), which acquisitions were accounted for using the purchase method of
accounting.
In May 1991, HEI was acquired by Hanover Energy Holding Corporation, a
Delaware corporation ("HEHC"), the principal stockholders of which were GKH.
In July 1991, HEHC acquired all of the common stock of Maintech
Enterprises, Inc., a Texas corporation ("MEI"), through a subsidiary created
solely for that purpose. Such subsidiary was subsequently merged into MEI, and
HEHC contributed the stock of MEI to the Company in April 1992 in connection
with the refinancing of the Company's then current senior credit facility. As a
result of the acquisition of MEI, the Company acquired a 50% interest in a joint
venture, the operations of which consisted of leasing natural gas compressor
units. The remaining interest in the joint venture was acquired by the Company
effective April 1, 1993 and the joint venture was liquidated shortly thereafter.
Effective December 31, 1992, HEI merged into HEHC, and as a result
thereof, the Company became a direct majority-owned subsidiary of HEHC. Also
effective as of December 31, 1992, GEI and ERSI merged into the Company and, as
a result thereof, the separate existence of GEI and ERSI ceased and all of their
respective assets and liabilities became vested in the Company.
-31-
<PAGE>
On June 24, 1993, Hanover Pipeline Company, a Delaware corporation and
a wholly-owned subsidiary of HEHC ("HPC"), was merged with and into the Company
(the "HPC Merger"). Pursuant to the HPC Merger, the Company issued to HEHC
2,381.11 shares of Common Stock. HPC's assets consisted of 16 natural gas
compressors. HPC had certain potential environmental liabilities estimated at
December 31, 1992 to be between $139,000 and $200,000; however, pursuant to the
merger agreement, HEHC agreed to indemnify the Company for any diminution in
value to the HPC common stock caused by the incurrence by HPC of any
environmental liability.
On October 7, 1993, the Company acquired all of the issued and
outstanding stock of Hanna Compressor Group, Inc., an Arkansas corporation
("Hanna Compressor"), from Hanna Investment Group, an Arkansas general
partnership ("HIG"), in exchange for 1,875 shares of Common Stock (the "Hanna
Acquisition"). Hanna Compressor's assets consisted of (i) six natural gas
compressor units, (ii) a 4,000 foot combination division office and maintenance
facility situated on five acres of land in Pocola, Oklahoma and (iii) cash. In
connection with the Hanna Acquisition, the Company, HEHC, GKH and HIG entered
into the Hanna Stockholders' Agreement. See "Principal Stockholders --
Stockholders' Agreements -- Hanna Stockholders' Agreement." Effective as of
February 9, 1994, Hanna Compressor was merged into the Company and, as a result
thereof, the separate existence of Hanna Compressor ceased and all of its assets
and liabilities became vested in the Company.
On November 5, 1993, the Company sold all of the issued and
outstanding capital stock of PWMI to a corporation (the "PWMI Purchaser")
controlled by two former employees of PWMI (the "PWMI Employees") for a purchase
price equal to $500,000. The purchase price was paid in the form of two secured
promissory notes, one in the principal amount of $475,000 and the other in the
principal amount of $25,000, each of which bear interest at 8% per annum. The
$475,000 note has a ten year amortization, and is payable to the Company in
equal monthly installments of principal and interest beginning on December 1,
1993, with the entire outstanding balance due and payable December 1, 1996. The
PWMI Purchaser has missed a number of payments under the promissory notes, and
the Company and the PWMI Purchaser are currently in the process of negotiating a
new payment schedule under the notes. The obligations of the PWMI Purchaser
under the notes are guaranteed jointly and severally by the PWMI Employees,
which guarantee is secured by a pledge to the Company of the PWMI capital stock,
as well as a security interest in certain assets of PWMI. As of December 31,
1995, the promissory notes of PWMI Purchaser have been written down on the books
of the Company to $200,000.
On January 27, 1995, HEHC was merged with and into the Company (the
"HEHC Merger") and, as a result thereof, the separate existence of HEHC ceased
and all of its assets and liabilities became vested in the Company. Pursuant to
the HEHC Merger, the Company issued to the stockholders of HEHC in the aggregate
59,053.11 shares of Common Stock, which was equal to the number of shares of
Common Stock owned by HEHC immediately prior to the HEHC Merger. In connection
therewith, the Company, GKH and the other stockholders of HEHC
-32-
<PAGE>
immediately prior to the Merger entered into the HEHC Stockholders' Agreement.
See "Principal Stockholders -- Stockholders' Agreements -- HEHC Stockholders'
Agreement" for a discussion of the terms of the HEHC Stockholders' Agreement. In
addition, each former stockholder of HEHC agreed to indemnify the Company for
(i) the breach or inaccuracy of any representation or warranty made by HEHC or
such stockholder under the HEHC Merger Agreement and (ii) the breach or default
of any agreement by HEHC or such stockholder under the HEHC Merger Agreement,
payable in shares of Common Stock issued in the HEHC Merger.
Effective as of January 1, 1995, the Company acquired from CBC
Compression, an Oklahoma general partnership ("CBC"), 40 natural gas compressor
units and certain related equipment for a purchase price of $3,025,000 plus five
percent of rental amounts (exclusive of sales tax, freight and installation
charges) received by the Company under the related Master Gas Compression
Agreement described below. Pursuant to an agreement (the "Master Gas
Compression Agreement") with AnSon Company, a sister partnership of CBC
("AnSon"), the Company agreed to lease the 40 compressors back to AnSon, along
with at least 25 additional compressors, for an initial term of 24 months. The
Master Gas Compression Agreement is scheduled to continue for an additional 24-
month period beyond the initial 24-month period; however, the rental price
during such period has not been established. AnSon, CBC and the Company have
also entered into a 48-month "most favored vendor" relationship whereby AnSon
and CBC have agreed to purchase or lease production equipment from the Company
so long as the Company's price is equal to or less than other bidders.
Similarly, the Company has agreed to retain trucking services from MB Oilfield
Service (an affiliate of CBC and AnSon) during such 48-month period so long as
MB Oilfield Service's price is not higher than other bidders for such services.
Effective as of February 1, 1995, the Company purchased from Gale
Force Compression Services, Inc. ("Gale Force") 107 natural gas compressors,
certain furniture, fixtures, equipment and other fixed assets, vehicles, the
name "Gale Force", and equipment leases for an aggregate purchase price of
$9,782,800 plus 1,150 shares of Common Stock (the "Gale Force Acquisition").
The compressors are located primarily in Oklahoma and most are currently leased
by the Company pursuant to leases transferred in the sale. Concurrently with
the Gale Force Acquisition, the Company entered into a four year alliance
agreement with Ward Petroleum, an affiliate of Gale Force, for gas compression
services to be provided by the Company. In connection with the Gale Force
Acquisition, the Company, GKH and those persons who acquired Common Stock
pursuant to the transaction entered into the Gale Force Stockholders' Agreement.
See "Principal Stockholders -- Stockholders' Agreements -- Gale Force
Stockholders' Agreement" for a discussion of the terms of the Gale Force
Stockholders' Agreement. Also in connection with this transaction, the Company
entered into an employment agreement with Alan D. Lavenue, a Gale Force
affiliate, for a two year term.
On February 24, 1995, the Company, through its wholly-owned
subsidiary, Hanover/Smith, Inc. ("Hanover/Smith"), acquired (the "Smith
Acquisition") substantially all of
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<PAGE>
the operating assets of the oil and gas production equipment division of Smith
Industries, Incorporated, a Delaware corporation ("Smith"), which has been in
the fabrication of oil and gas production equipment industry since its inception
in 1927. The assets acquired include real property located in Corpus Christi,
Texas, a lease and purchase option on real property located in Columbus, Texas,
manufacturing equipment used in the fabrication of oil and gas production
equipment, vehicles, inventory, the name "Smith Industries" and Smith's logo.
Smith filed for protection under the United States Bankruptcy Code, 11 U.S.C. --
101 et seq., in May 1994, in the United States Bankruptcy Court for the Southern
District of Texas, Houston Division, in a Case styled In Re: Smith Industries,
Incorporated, No. 94-43705-H3-11. The Bankruptcy Court approved the necessary
orders authorizing the acquisition. The total acquisition price after various
credits and adjustments was $2,595,714. The oil and gas production equipment
operations of Smith acquired by Hanover/Smith have been consolidated with the
existing oil and gas production equipment fabricating operations of the Company
and will operate as Hanover/Smith.
On August 7, 1995, JEDI purchased $20,000,000 of Common Stock at
$1,800 per share and $10,000,000 of 6.5% Cumulative Redeemable Convertible
Series B Preferred Stock (the "Series B Preferred Stock") at $1,000 per share
(the "Series B Preferred Stock Issuance"). See "Description of Capital Stock --
Preferred Stock."
On August 7 and September 29, 1995, the Company issued 21,602 shares
of 6.5% Cumulative Redeemable Series A Preferred Stock (the "Series A Preferred
Stock") at $1,000 per share (the "Series A Preferred Stock Issuance"). See
"Description of Capital Stock -- Preferred Stock."
On September 8, 1995, in connection with the Company's acquisition of
PGN, the Company issued Walter Rode, a former shareholder of PGN, 571.34 shares
of Common Stock.
On October 13, 1995, in connection with the Astra Merger, the Company
issued 30,556 shares of Common Stock to Astra Resources.
On October 31, 1995, in connection with the merger of Combustion
Control Corporation, a Delaware corporation ("Combustion"), with and into the
Company, the Company issued 338.43 shares of Common Stock to former shareholders
of Combustion.
On January 24, 1996, each of Glen Wind and Kurt Wind purchased 15
shares of Common Stock (30 shares total) at $1,100 per share.
Industry
Natural gas compressors generally do not suffer significant
technological obsolescence, so that the useful life of a compressor is based
primarily on its mechanical integrity. The useful life of a compressor may also
be extended by refurbishing or overhauling
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<PAGE>
the compressor at regular intervals of approximately five to six years.
Refurbished or overhauled compressors may be leased at prices substantially
similar to new compressors.
The gas compressor industry services both independent producers and
major integrated natural gas producers, as well as pipeline, gas processing and
gathering and transmission companies, and is substantially dependent on the
natural gas industry. The Company believes that independent producers currently
account for a substantial portion of the natural gas industry. The Company also
believes that independent gas producers are now accounting for an increasing
portion of the natural gas produced in the United States relative to that
produced by major integrated energy producers and that independent producers are
more likely to lease compressors from third parties such as the Company as a
result of generally greater constraints on their ability to make the large
capital expenditures necessary to purchase compressors. In addition, many major
integrated gas producers are directing their capital investments overseas and
allowing their U.S. capital base to decline, thus resulting in further increased
demand for rental compressors. Moreover, the market for rental compression
services has been expanding as gas producers and pipeline companies strive to
lower operating costs and improve efficiency by outsourcing their gas handling
requirements.
The Company believes that the market for natural gas compressors is
driven by a variety of factors, including, without limitation, (i) the demand
for natural gas, (ii) the age of particular gas wells, (iii) the relative price
of natural gas to the price of oil or other alternative energy sources and (iv)
the season. All other things being equal, the gas compression industry is
generally benefited by either an increase in gas prices, which generally results
in the development of new wells, fields and pipeline systems and a corresponding
increase in demand for compression, or, up to a point, by a decrease in natural
gas prices, which results in outsourcing by independent producers and an
increase in the need for leased compression. Increases in the age of natural
gas wells also has a positive impact on the gas compression industry since older
wells generally experience a decline in their reservoir pressure and require
compressors to increase their productivity. In contrast, a number of factors
would potentially have an adverse effect on the gas compressor industry. See
"Risk Factors -- Natural Gas Compressor Industry Considerations."
Conversely, all other things being equal, a relative decrease in the
price of oil or other energy sources as compared to natural gas generally will
have an adverse effect on the natural gas compression industry since such
circumstances encourage energy users to switch from natural gas to alternative
fuel sources thereby decreasing demand for natural gas.
The Company believes that the natural gas compressor industry is also
affected by seasonality, with the highest demand for compression in winter
months when natural gas is in greater demand. As a result of such seasonality,
the Company generally experiences slightly decreased revenues for its Leasing
and Maintenance segment during the months of May through August.
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<PAGE>
In addition, the Company believes that as environmental considerations
become more important due to the Federal Clean Air Act and related legislative
and social considerations, natural gas, as a cleaner burning fuel than either
oil or coal, will make up a greater share of the domestic energy market.
Additionally, the continuing economic development of lesser developed countries
appears to be having a favorable impact on the demand for natural gas and
related gas handling projects. However, there can be no assurance that such
increased use of natural gas will occur.
Market Position
Leasing and Maintenance
The Company believes that the market for the leasing of natural gas
compressors may be distinguished from the market for the sale of natural gas
compressors since the decision to lease a compressor is generally made prior to
a customer's entrance into the marketplace. Generally, lessees are customers
who anticipate only a short term need for the compressor which is substantially
less than the estimated useful life of the unit or customers who are unable to
or otherwise choose not to internally finance the purchase of such units.
The Company believes that the natural gas compressor leasing industry
may be divided into categories based on the compressor horsepower and that
market share of the participants in the industry may be determined based on
either (i) the number of units leased by such participants or (ii) the total
horsepower leased by such participants.
The Company's compressor fleet as of December 31, 1995 was divided by
horsepower as follows:
====================================================================
Units Total Horsepower
Category (by Horsepower) (% of Fleet) (% of fleet)
------------------------ ------------ ------------
====================================================================
0 - 44 109 (9%) 3,482 (1%)
--------------------------------------------------------------------
45 - 60 102 (8%) 5,746 (1%)
--------------------------------------------------------------------
61 - 100 227 (19%) 18,350 (4%)
--------------------------------------------------------------------
101 - 200 272 (22%) 38,265 (9%)
--------------------------------------------------------------------
201 - 500 232 (19%) 72,559 (18%)
--------------------------------------------------------------------
501 - 800 95 (8%) 63,004 (15%)
--------------------------------------------------------------------
801 - 1100 83 (7%) 81,826 (20%)
--------------------------------------------------------------------
1100+ 95 (8%) 135,248 (32%)
--------------------------------------------------------------------
-36-
<PAGE>
----------------------------------------------------------------------
TOTAL 1,215 (100%) 418,480 (100%)
======================================================================
Based on industry statistics, the Company believes that the U.S.
natural gas compressor leasing industry is a highly fragmented business made up
of in excess of 50 companies aggregating approximately 2,200,000 horsepower.
Based on information available to the Company, the Company believes that it is
the fourth largest compressor leasing company in the U.S. based on total units
and the second largest compressor leasing company in the U.S. based on total
operating horsepower.
Compressor Packaging
The Compressor Packaging business, carried on primarily through MEI,
competes with other manufacturers of compressor units. The Compressor Packaging
business is dominated by a few major competitors, several of whom also compete
with the Company in the compressor leasing business. Although sufficient
information is not available to definitively estimate the Company's relative
position in the Compressor Packaging market, management believes that the
Company is the sixth largest Compressor Packaging company in the U.S. based on
estimated 1995 revenues of the Company's competitors in such business.
Production Equipment
The Production Equipment business is a highly fragmented business with
approximately eight substantial competitors. The Company believes that, with
the Smith Acquisition, it is among the top five major competitors in the
business.
Business Strategy
The Company's primary focus will be continued expansion of the
compression rental fleet. Anticipated levels of capital expenditures, from
internally generated cash flow and bank financing, relating to the rental fleet
amount to approximately $60 million during 1996 and $50 million during 1997.
The rental fleet consisted of 1,215 units aggregating 418,480 horsepower at
December 31, 1995. With the level of capital expenditures contemplated,
management believes that the Company's rental fleet should grow to approximately
525,000 horsepower by year end 1996. In addition, the contribution of the
Production Equipment segment is expected to increase, both in terms of revenues
and operating income, in light of the Smith Acquisition. However, there can be
no assurances that the above projections will actually be met.
The Company does not anticipate making any material expenditures for
product research and development inasmuch as the Company's Leasing and
Maintenance, Compressor Packaging and Production Equipment segments do not
generally require such expenditures.
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<PAGE>
Operations
The following tables show (i) the revenues and operating profit (loss)
for each of the years ended December 31, 1995, December 31, 1994 and December
31, 1993 and (ii) the assets of the Company as of December 31, 1995, December
31, 1994 and December 31, 1993, in each case for each of the Leasing and
Maintenance segment, the Compressor Packaging segment, the Production Equipment
segment and the Company's other revenue sources:
<TABLE>
<CAPTION>
===========================================================================================
Year Ended
December 31, 1995 Year Ended Year Ended
-----------------
(unaudited) December 31, 1994 December 31, 1993
----------------- -----------------
===========================================================================================
<S> <C> <C> <C>
Revenues:
- -------------------------------------------------------------------------------------------
Leasing and Maintenance $48,120,115 $32,024,912 $25,722,662
- -------------------------------------------------------------------------------------------
Compressor Packaging 29,593,205 16,201,887 14,034,275
- -------------------------------------------------------------------------------------------
Production Equipment 16,007,855 7,271,641 3,178,386
- -------------------------------------------------------------------------------------------
Other 776,161 581,526 411,298
- -------------------------------------------------------------------------------------------
TOTAL REVENUES $94,497,336 $56,079,966 $43,346,621
- -------------------------------------------------------------------------------------------
Operating profit (loss)(1):
- -------------------------------------------------------------------------------------------
Leasing and Maintenance $26,788,999 $17,070,138 $12,775,114
- -------------------------------------------------------------------------------------------
Compressor Packaging 1,969,070 1,270,314 813,868
- -------------------------------------------------------------------------------------------
Production Equipment 641,464 363,851 (130,492)
- -------------------------------------------------------------------------------------------
Other(2) (2,233,078) (1,590,505) (2,066,368)
- -------------------------------------------------------------------------------------------
TOTAL OPERATING PROFIT $27,166,455 $17,113,798 $11,392,122
===========================================================================================
</TABLE>
(1) Determined by subtracting expenses from revenues for each segment and
adding back the corresponding portion of depreciation and amortization
expense and interest expense.
(2) Consists primarily of corporate administrative expenses.
<TABLE>
<CAPTION>
========================================================================================
December 31, 1995
-----------------
(unaudited) December 31, 1994 December 31, 1993
----------------- -----------------
========================================================================================
<S> <C> <C> <C>
Assets:
- ----------------------------------------------------------------------------------------
Leasing and Maintenance $226,483,062 $100,428,593 $70,807,541
- ----------------------------------------------------------------------------------------
Compressor Packaging 8,832,811 8,453,184 3,535,761
- ----------------------------------------------------------------------------------------
Production Equipment 14,101,918 5,562,940 2,140,545
- ----------------------------------------------------------------------------------------
Other 2,988,521 169,435 295,478
- ----------------------------------------------------------------------------------------
</TABLE>
-38-
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------
TOTAL ASSETS $252,406,312 $114,614,152 $76,779,325
=========================================================================================
<S> <C> <C> <C>
</TABLE>
Leasing and Maintenance
The Company provides natural gas compression equipment, on a rental
basis, primarily to natural gas production and transmission companies. These
rental units are utilized to compress natural gas when the reservoir pressure
for a natural gas field is less than the pressure for the natural gas pipeline
transporting the gas. The Company also provides maintenance of customer-owned
compressor units as well as compressor parts sales to third parties.
As of December 31, 1995, the Company's gas compressor fleet consisted
of 1,215 units, ranging from 25 to 2,650 horsepower, of which 93.5% of available
horsepower and 91.6% of the available units were being utilized. Leases for the
compressor units provide for fixed monthly payments for an average term of
approximately six months and continue thereafter on a monthly basis. Based on
the Company's historical operations, the Company estimates that the terms of its
leases have extended for an average of approximately 24 months.
Although natural gas compressors generally do not suffer significant
technological obsolescence, they do require routine maintenance and periodic
refurbishing to prolong their useful life. In general, the Company anticipates
refurbishing its compressor units approximately every five to six years.
The Company's compressor leasing activities are located in Texas,
Oklahoma, Arkansas, Louisiana, New Mexico, Mississippi, Alabama, Kansas,
Colorado and offshore Gulf of Mexico, Trinidad, Venezuela and Argentina.
Compressor Packaging
The Company's Compressor Packaging segment, operated primarily through
MEI, designs, engineers and assembles compression units for sale to third
parties as well as for placement in its compressor fleet. In general, units to
be sold to third parties are assembled according to such customer's
specifications and sold on a turnkey basis. Components for such compressor
units are acquired from third party suppliers. At December 31, 1995, backlog of
fabrication of compressor units amounted to 7.5 million.
Production Equipment
The Company designs and fabricates and, to a lesser extent, rents a
broad range of oil and gas production equipment designed to heat, separate,
dehydrate and measure crude oil and natural gas. The product line includes line
heaters, oil and gas separators, glycol dehydration units and skid mounted
production packages designed for both onshore and offshore production
-39-
<PAGE>
facilities. At December 31, 1995, backlog of production equipment fabrication
amounted to $5.3 million.
Customers
No amounts received from any individual customer equaled more than 10%
of the Company's consolidated revenues during 1994 or 1995.
Competition
Leasing and Maintenance
The natural gas compressor leasing business is highly competitive.
Overall, the Company experiences considerable competition from larger companies
with significantly greater financial resources and, on a regional basis, several
smaller companies compete directly with the Company. Based on information
available to the Company, the Company ranks among the top four companies
providing compressor units on a rental basis based on the number of units and
among the top three based on total available horsepower. See "-- Market
Position."
The Company believes that it competes in the Leasing and Maintenance
segment on the basis of price, customer service, including the availability of
personnel in remote locations, flexibility in meeting customer needs and quality
and reliability of its compressors and related services.
Compressor Packaging
The Company believes that it competes in the Compressor Packaging
segment based on price and quality and that the Company is competitive in both
areas.
Production Equipment
The Company believes that it competes in the Compressor Packaging
segment based on price and quality and that the Company is competitive in both
areas. Competition in the Production Equipment segment is also based on the
ability to service customers' needs. The Company believes that with the Smith
Acquisition, it is among the top five major competitors in the Production
Equipment market.
Employees
As of December 31, 1995, the Company employed approximately 556
people, of which 28 were administrative, 27 were sales, 120 were Compressor
Packaging personnel, 157 were Production Equipment personnel and 224 were in
field service locations. No employees are
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<PAGE>
represented by labor unions and the Company believes that its relations with its
employees is satisfactory.
Insurance
Natural gas operations are subject to certain risks, including
explosions, uncontrollable flows of gas or well fluids, fires, pollution and
other environmental risks. These risks could expose the Company to substantial
liability for injury and loss of life, property damage, pollution and other
environmental damages, and consequential damages, if such damages resulted from
a compressor defect or from the Company's negligence in maintaining, servicing
or refurbishing its compressors.
The Company believes that is has obtained adequate insurance to cover
such risks; however, no assurance can be given that such insurance will be
adequate to cover the Company's operations in the event the Company incurs
liability in excess of anticipated potential levels or that such insurance will
be generally available in the future or, if available, that premiums will be
commercially reasonable. See "Risk Factors -- Potential Liability and
Insurance."
Properties and Assets
As of December 31, 1995, the Company's rental fleet consisted of 1,215
compressor units, five of which are leased and the remainder of which are owned
by the Company, with a total of 418,480 horsepower and an average of 344
horsepower. By virtue of the Smith Acquisition, the Company also owns
substantially all of the operating assets of the oil and gas production
equipment division of Smith. The assets acquired include real property located
in Corpus Christi, Texas, a lease and purchase option on real property located
in Columbus, Texas, manufacturing equipment used in the fabrication of oil and
gas production equipment, vehicles, inventory, the name "Smith Industries" and
Smith's logo.
The Company owns its corporate offices in Houston, Texas, which are
housed in a combination corporate office and compressor fabrication facility
consisting of approximately 190,000 square feet plant capacity located on
twenty-six acres. This facility (assuming the purchase of the adjacent land) is
anticipated to provide the Company with sufficient space and capacity for at
least the next three years. The Company also owns (i) a 6,400 square foot
combination office and maintenance shop located on two acres in Oklahoma City,
Oklahoma, (ii) a 4,000 foot combination division office and maintenance facility
situated on five acres of land in Pocola, Oklahoma, (iii) its maintenance
facilities in Midland, Texas and Fort Smith, Arkansas, (iv) real property
located in Corpus Christi, Texas, (v) a 13,000 square feet facility in East
Bernard, Texas which is being converted to a compressor maintenance and
refurbishment facility, and (vi) a lease and purchase option regarding the
212,000 square feet manufacturing facility located on 83 acres in Columbus,
Texas. In addition, the Company leases its maintenance facilities in Victoria,
Texas and Lafayette, Louisiana under ten-year leases.
-41-
<PAGE>
Litigation
The Company is not a party to any litigation that, in the judgment of
management, would have a material adverse effect on the Company's operations or
financial condition if adversely determined.
Governmental Regulation
The Company is subject to various federal and state laws and
regulations relating to environmental protection, including regulations
regarding emission controls. The Company believes that it is in substantial
compliance with such laws and regulations and that the phasing in of emission
controls and other known standards at the rate currently contemplated by such
laws and regulations will not have a material adverse effect on the Company's
financial condition or results of operations. However, various state and
federal agencies from time to time consider adopting new laws and regulations or
amending existing laws and regulations regarding environmental protection.
While the Company may be able to pass on the additional costs of complying with
such laws, there can be no assurance that attempts to do so would be successful.
Accordingly, new laws or regulations or amendments to existing laws or
regulations could require the Company to undertake significant capital
expenditures and could otherwise have a material adverse effect on the Company's
financial condition and results of operations.
From time to time since President Clinton took office, his
administration has proposed various taxes with respect to the energy industry,
none of which have been enacted and all of which have received significant
scrutiny from various industry lobbyists. At the present time, given the
uncertainties regarding the proposed taxes, including the uncertainties
regarding the terms which the proposed taxes might ultimately contain and the
industries and persons who may ultimately be subject to any such taxes, it is
not possible to determine whether any such tax will have a material adverse
effect on the Company.
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are set forth
below. Positions with the Company include positions with the Company's
predecessors. All directors hold office until the annual meeting of the
stockholders following their election or until their successors are duly elected
and qualified. Officers are appointed by and serve at the discretion of the
Board.
<TABLE>
<CAPTION>
===================================================================================================
Name Age Position
- ---- --- --------
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael A. O'Connor 60 Chairman of the Board; Director
- ----------------------------------------------------------------------------------------------------
Michael J. McGhan 41 President and Chief Executive Officer; Director
- ----------------------------------------------------------------------------------------------------
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================
Name Age Position
- ---- --- --------
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Curtis Bedrich 53 Chief Financial Officer and Treasurer
- ----------------------------------------------------------------------------------------------------
William S. Goldberg 37 Executive Vice President; Director
- ----------------------------------------------------------------------------------------------------
Charles D. Erwin 35 Vice President, Sales
- ----------------------------------------------------------------------------------------------------
William C. Bryant 42 Vice President, Sales-Mid Continent
- ----------------------------------------------------------------------------------------------------
Maxwell C. McDonald 47 Vice President, Sales-Southeast
- ----------------------------------------------------------------------------------------------------
Joseph Bradford 36 Vice President, Operations-Western Division
- ----------------------------------------------------------------------------------------------------
Donald M. DeVille 40 Vice President
- ----------------------------------------------------------------------------------------------------
Teddy J. Head 43 Vice President
- ----------------------------------------------------------------------------------------------------
Richard S. Meller 38 Secretary
- ----------------------------------------------------------------------------------------------------
Jeri Howell 43 Assistant Secretary
- ----------------------------------------------------------------------------------------------------
Ted Collins, Jr. 56 Director
- ----------------------------------------------------------------------------------------------------
Robert Wasielewski 33 Director
- ----------------------------------------------------------------------------------------------------
Melvyn N. Klein 53 Director
- ----------------------------------------------------------------------------------------------------
Alvin V. Shoemaker 56 Director
- ----------------------------------------------------------------------------------------------------
James Hanna 61 Director
- ----------------------------------------------------------------------------------------------------
William E. Simon, Jr. 44 Director
- ----------------------------------------------------------------------------------------------------
Robert R. Furgason 59 Director
- ----------------------------------------------------------------------------------------------------
Steven L. Kitchen 50 Director
- ----------------------------------------------------------------------------------------------------
C. Bob Cline 49 Director
- ----------------------------------------------------------------------------------------------------
Mark A. Ruelle 34 Director
====================================================================================================
</TABLE>
Michael O'Connor has served as Chairman of the Board and a director of
the Company since January 1992. Prior thereto, Mr. O'Connor served as president
of Gas Compressors Inc. from 1965 through 1986 and was a private investor from
January 1, 1987 through January 1, 1992. Mr. O'Connor also serves as a director
of certain affiliates of the Company.
Michael J. McGhan has served as President and Chief Executive Officer
of the Company since October 1991 and served as Chief Operating Officer of the
Company from December 1990 through October 1991. Mr. McGhan has served as a
director of the Company since March, 1992. Prior thereto, Mr. McGhan was sales
manager of Energy Industries, Inc. ("EII"). Mr. McGhan has been involved in the
gas compression industry for 17 years. Mr. McGhan also serves as a director of
certain affiliates of the Company.
-43-
<PAGE>
Curtis Bedrich has served as Chief Financial Officer and Treasurer of
the Company since November 1991. Mr. Bedrich served as Vice President of Adobe
Resources Corporation from 1980 until 1991. Mr. Bedrich has been involved in
the oil and gas industry for 18 years.
William S. Goldberg has served as Executive Vice President and
director of the Company since May 1991. Mr. Goldberg has been employed by GKH
since 1988 and has served as Managing Director of GKH since June 1990. Mr.
Goldberg also serves as a director of certain affiliates of the Company.
Charles D. Erwin has served as a Vice President of the Company since
October 1990 and served as a sales representative of EII from 1985 until October
1990. Mr. Erwin has been involved in the gas compression industry for 10 years.
William C. Bryant has served as a Vice President of the Company since
October 1990 and served as a sales representative of EII from 1988 until October
1990. Mr. Bryant has been involved in the gas compression industry for 20
years.
Maxwell C. McDonald has served as a Vice President of the Company
since December 1990 and served as President of C&B from 1985 until its
acquisition by the Company in 1990. Mr. McDonald has been involved in the gas
compression industry for 22 years.
Joe Bradford has served as a Vice President of the Company since March
1993 and served as Operations Manager from January 1, 1991 until March 1993.
Mr. Bradford served as mechanic supervisor of HEI from 1987 until January 1991.
Mr. Bradford has been involved in the oil and gas industry for 20 years.
Donald M. DeVille has served as a Vice President of the Company since
February 14, 1996. Mr. DeVille has been involved in the gas compression
industry for 16 years.
Teddy J. Head has served as a Vice President of the Company since
February 14, 1996. Mr. Head has been involved in the gas compression industry
for 22 years.
Richard S. Meller has served as Secretary of the Company since October
1991. Mr. Meller is a partner of the law firm of Neal, Gerber & Eisenberg,
which provides legal services to the Company and GKH.
Jeri Howell has served as Assistant Secretary of the Company since May
15, 1995.
Ted Collins, Jr. has served as a director of the Company since April
1992. Mr. Collins is the President of Collins & Ware Properties, Inc., a
natural gas producer. Mr. Collins has 35 years of experience in the oil and gas
industry.
-44-
<PAGE>
Robert Wasielewski has served as a director of the Company since May
15, 1995. Mr. Wasielewski has served as an Associate of GKH since October 1991.
Prior to that time, Mr. Wasielewski was a Vice President of Citicorp's leveraged
capital division. Mr. Wasielewski also serves as a director of certain
affiliates of the Company.
Melvyn N. Klein has served as a director of the Company since May
1991. Mr. Klein is the sole stockholder of a corporation which is a general
partner of GKH Partners, L.P. Mr. Klein has been an attorney and counselor-at-
law since 1968. Mr. Klein serves as a director of Bayou Steel Corporation,
Anixter International Corporation, Santa Fe Energy Resources, Inc., Savoy
Pictures Entertainment, Inc. and certain privately held companies. Mr. Klein is
also a founder and principal of Questor Partners Fund, L.P.
Alvin V. Shoemaker has served as a director of the Company since May
1991 and has been a private investor since his retirement as chairman of the
board of The First Boston Corporation in January 1989.
James Hanna has served as a director of the Company since May 15,
1995. Mr. Hanna is the President of Hanna Oil and Gas Company, and a director
of the Independent Petroleum Association of America and the Merchants National
Bank of Fort Smith, Arkansas. Mr. Hanna has 35 years of experience in the oil
and gas industry.
William E. Simon, Jr. has served as a director of the Company since
December 21, 1995. Mr. Simon is also the Executive Director of William E. Simon
& Sons, L.L.C., a private investment company based in Morristown, New Jersey and
is a former Assistant United States Attorney for the Southern District of New
York.
Robert R. Furgason has served as a director of the Company since May
15, 1995. Mr. Furgason is the President of Texas A&M University -- Corpus
Christi, and has held a series of faculty and administrative positions at
various universities. Mr. Furgason is the former President of the Accreditation
Board for Engineering and Technology Board of Directors, and also serves on a
number of other accreditation and policy boards.
Steven L. Kitchen has served as a director of the Company since March
1, 1996.
C. Bob Cline has served as a director of the Company since December
21, 1995. Mr. Cline is Chairman, President and Chief Executive Officer of
Westar Capital, Inc., a subsidiary of Western Resources, Inc. and a shareholder
of the Company. Mr. Cline has 24 years of experience in the oil and gas
industry.
Mark A. Ruelle has served as a director of the Company since December
31, 1995. Mr. Ruelle is also vice president, corporate development of Western
Resources, Inc. Mr. Ruelle has held various positions with Western Resources
Inc. in regulation, treasury, finance and planning since 1986.
-45-
<PAGE>
Compensation of Directors
Non-employee directors of the Company generally do not receive any
compensation for serving on the Board but are entitled to reimbursement for
expenses incurred in connection with their attendance at Board meetings. The
foregoing notwithstanding, the Company has agreed to pay Mr. Furgason an annual
director's fee equal to $15,000, plus $2,500 per Board meeting attended in
person by Mr. Furgason, subject to an annual cap of $20,000.
Options
1992 Stock Plan
In April 1992, the Board adopted the Company's Stock Compensation Plan
(the "1992 Stock Plan"), which provides for the granting of options to executive
officers, directors, employees or advisors of the Company. The 1992 Stock Plan
permits the Board to issue options with respect to a maximum of 15% of the total
shares of Common Stock outstanding, computed on a fully diluted basis and
including shares which are issuable under the 1992 Stock Plan, at the time of
the grant of an option. As of December 31, 1995, options with respect to 1,023
shares of Common Stock were outstanding, 945.60 of which were presently vested,
and the remainder of which will generally vest ratably over the next two years.
With respect to these options, 172.5 are exercisable at $1.00 per share and
850.5 are exercisable at $725 per share. Options granted under the 1992 Stock
Plan are nonstatutory options and are not classified as "incentive stock
options" within the meaning of Section 422 of the Code.
The exercise price for additional options which may be granted under
the 1992 Stock Plan would be determined by a committee appointed by the Board
(the "Committee"), which Committee is currently comprised of the members of the
Board, and may be less than the fair market value of the Common Stock on the
date of grant. Other than the maximum number of shares available under the 1992
Stock Plan, there is no minimum or maximum number of shares that may be granted
to any person. Options granted under the 1992 Stock Plan generally expire
within a specified number of days of the termination of employment of an
optionee who is an employee. Options granted under the 1992 Stock Plan fully
vest and become exercisable for a specified number of days upon the death or
permanent disability of the optionee and are forfeited upon the termination for
Cause of the optionee. In addition, options granted under the 1992 Stock Plan
fully vest and become exercisable upon the occurrence of a change in control
accompanied by a constructive termination of employment of such optionee, all as
more fully described in the 1992 Stock Plan.
Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee. The term of each option granted under the 1992
Stock Plan may not exceed fifteen years from the date the option is granted.
Options may become exercisable in whole at grant or in installments
-46-
<PAGE>
over time, as determined by the Committee. Under the terms of the 1992 Stock
Plan, payment upon the exercise of an option may be in cash, by delivery of
shares of Common Stock with a fair market value equal to the aggregate exercise
price or, if the optionee's stock option agreement so provides, by delivery of a
promissory note with such terms as the Committee may approve.
The acceleration of options in the event of a change of control could
be seen as an anti-takeover provision and may have the effect of discouraging a
proposal for merger or other efforts to purchase or sell control of the Company.
1993 Option Plan
In connection with the 1993 Offering, the Board adopted the 1993
Management Stock Option Plan (the "1993 Option Plan") pursuant to which members
of the Company's management who purchased Common Stock in the 1993 Offering were
issued options to purchase one-third of one share of Common Stock at a purchase
price of $725 per share (subject to adjustment for stock splits, stock dividends
and other similar events) for each share of Common Stock owned by such persons
or purchased by such persons in the 1993 Offering. Such options vest ratably
over a five year period which began on June 23, 1993 and are governed by the
terms of the 1993 Option Plan and individual option agreements (the "1993 Option
Agreements"). As of December 31, 1995, options with respect to 1,514 shares of
Common Stock were outstanding, and options with respect to 605.60 were presently
vested. Other than with respect to the applicable exercise price and the actual
vesting and expiration dates, the 1993 Option Plan and the 1993 Option
Agreements are substantially the same as the Employee Option Plan and the
Employee Option Agreements, respectively.
Senior Executive Plan
In connection with the 1993 Offering, Messrs. O'Connor and McGhan were
granted options pursuant to the Company's Senior Executive Stock Option Plan
(the "Senior Executive Plan") to purchase up to 1,291.95 and 645.97 shares of
Common Stock, respectively, at an exercise price of $833.75 per share (subject
to adjustment for stock splits, stock dividends and similar events). Such
options vest ratably over a seven year period which began on June 29, 1993 and
will fully vest upon an optionee's death or permanent disability or upon the
occurrence of a Capital Event (as defined in the Senior Executive Plan)
resulting in a compounded annual return of 20% actually realized on the shares
of Common Stock purchased in the 1993 Offering. In addition, on May 15, 1995,
Messrs. McGhan and Bedrich were granted options to purchase 215.32 and 430.65
shares of Common Stock, respectively, under the Senior Executive Plan. Such
options have the same terms as those issued to Messrs. O'Connor and McGhan in
connection with the 1993 Offering, except that such options will vest ratably
over a seven year period which began on May 15, 1995.
-47-
<PAGE>
Options granted under the Senior Executive Plan generally expire
within a specified number of days of the termination of employment of an
optionee, and such options will be forfeited upon the termination for Cause of
an optionee. The term of each option may not exceed 10 years from the date the
option is granted. Options may not be transferred other than by will or the
laws of descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee. Options granted under the Senior Executive Plan
are nonstatutory options and are not classified as "incentive stock options"
within the meaning of Section 422 of the Code.
Pursuant to the agreements executed in connection with the grant of
options under the Senior Executive Plan, each of Messrs. O'Connor, McGhan and
Bedrich agreed that he will not, during the term of such agreement and for a
period of one year thereafter, (i) compete with any business of the Company and
(ii) without the Company's consent, disclose to persons outside the Company
confidential information concerning the Company.
1995 Management Option Plan
In connection with the 1995 Management Offering at $1,100 per share,
the Board adopted the 1995 Management Stock Option Plan (the "1995 Management
Option Plan"), pursuant to which members of the Company's management and
employees who purchased Common Stock in the 1995 Management Offering were issued
options to purchase one-third of one share of Common Stock at a purchase price
of $1,100 per share (subject to adjustment for stock splits, stock dividends and
other similar events) for each share of Common Stock purchased by such persons
in the 1995 Management Offering. Such options vest ratably over a five year
period which began on July 7, 1995, and are governed by the terms of the 1995
Management Option Plan and individual option agreements (the "1995 Management
Option Agreements"). As of the date of this Offering Memorandum, options with
respect to 83.33 shares of Common Stock were outstanding, none of which were
presently vested. Other than with respect to the applicable exercise price and
the actual vesting and expiration dates, the 1995 Management Option Plan and the
1995 Management Option Agreements are substantially the same as the Employee
Option Plan and the Employee Option Agreements, respectively.
1995 Employee Option Plan
In connection with the 1995 Employee Offering at $1,500 per share, the
Board adopted the 1995 Employee Stock Option Plan (the "1995 Employee Option
Plan"), pursuant to which members of the Company's management who purchased
Common Stock in the 1995 Employee Offering were issued options to purchase one-
third of one share of Common Stock at a purchase price of $1,500 per share
(subject to adjustment for stock splits, stock dividends and other similar
events) for each share of Common Stock purchased by such persons in the 1995
Employee Offering. Such options vest ratably over a five year period which
began on August 31, 1995, and are governed by the terms of the 1995 Employee
Option Plan and individual
-48-
<PAGE>
option agreements (the "1995 Employee Option Agreements"). As of the date of
this Offering Memorandum, options with respect to 575.67 shares of Common Stock
were outstanding, none of which were presently vested. Other than with respect
to the applicable exercise price and the actual vesting and expiration dates,
the 1995 Employee Option Plan and the 1995 Employee Option Agreements are
substantially the same as the Employee Option Plan and the Employee Option
Agreements, respectively.
Rode Issuance
In connection with the Company's acquisition of PGN, the Company
granted Walter Rode, a former shareholder of PGN, options to purchase 190.45
shares of Common Stock at $1,500 per share. The terms of these options are
identical to the 1995 Employee Option Plan, except that the vesting period began
on September 8, 1995.
Winds Issuance
In connection with the issuance of 15 shares of Common Stock to each
of Glen Wind and Kurt Wind (30 shares total) as of January 24, 1996, the Company
granted to each of Glen Wind and Kurt Wind options to acquire 75 shares of
Common Stock (150 shares total) at $1 per share exercisable on terms
substantially similar to the terms of the options granted under the 1995
Employee Offering.
Incentive Option Plan
In connection with the 1993 Offering, the Board adopted the Company's
Incentive Option Plan, which was amended and restated as of July 20, 1995 (as
amended, the "Incentive Option Plan"), participation in which was open to
members of management who participated in the 1993 Offering and who are employed
by the Company or any of its subsidiaries or affiliates at the time of a Capital
Event (as defined in the Incentive Option Plan) (each a "1993 Eligible
Participant").
Pursuant to the Incentive Option Plan as presently constituted, the
Company granted certain employees options to purchase 8,554 shares of Common
Stock at an exercise price of $725 per share. The options vest ratably over a
five year period commencing July 20, 1995 and are governed by the Incentive
Option Plan and individual option agreements (the "Incentive Option
Agreements"). As of the date of this Offering Memorandum, options with respect
to 8,554 shares of Common Stock were outstanding, none of which are presently
vested. Other than with respect to the applicable exercise price and the actual
vesting and expiration dates, the Incentive Option Plan and the Incentive Option
Agreements are substantially the same as the Employee Option Plan and the
Employee Option Agreements.
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<PAGE>
Summary Compensation Table
The following table sets forth the total compensation that was awarded
to, earned by or paid to Michael J. McGhan, Michael O'Connor, Curtis Bedrich,
Maxwell McDonald and Charles Erwin (the five other most highly paid executive
officers) as a group during the year ended December 31, 1995.
<TABLE>
<CAPTION>
=================================================================================================================
Annual Compensation Long Term All Other
Compensation Awards Compensation(1)
Salary Bonus Option Grants
=================================================================================================================
<S> <C> <C> <C> <C>
CEO and four other most highly
compensated executive officers........... $500,000 $527,120 -- $4,326
=================================================================================================================
</TABLE>
(1) Consisting of life insurance premiums.
Option Grants in Last Fiscal Year
During the year ended December 31, 1995, the Company granted the
following number of Options: (i) 645.97 under the Senior Executive Plan, (ii)
83.33 under the 1995 Management Option Plan, (iii) 575.67 under the 1995
Employee Option Plan, (iv) 8,554 under the Incentive Option Plan and (v) 190.45
to Walter Rode in connection with the Company's acquisition of PGN. The Company
has not, to date, granted any stock appreciation rights.
Fiscal Year End Option Values
Shown below is information with respect to unexercised options to
purchase Common Stock in effect as of year-end 1995, all of which were granted
pursuant to the existing option plans of the Company as described in this
Offering Memorandum. See "Management -- Options." None of such options have
been exercised.
<TABLE>
<CAPTION>
=================================================================================================================
Number of Unexercised Options Value of Unexercised in-the-Money
December 31, 1995 Options at December 31, 1995
----------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CEO and four other most highly
compensated executive officers 1,893.66 9,468.33 $2,036,781 $9,836,610
==================================================================================================================
</TABLE>
Employment Contracts and Other Agreements
In connection with the Gale Force Acquisition, the Company entered
into an employment agreement with Alan D. Lavenue providing for a two year term.
In connection with the Astra acquisition, the Company adopted a severance plan
for Astra employees. Such
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severance plan for Astra employees. Such severance plan provides that if, within
12 months following the Astra acquisition, an Astra employee is terminated
without cause or his or her compensation is reduced by 5% or more as measured
relative to his or her compensation level at the effective time of the Astra
acquisition, such employee is entitled to receive a severance payment equal to
(i) the product of (a) 12 and (b) the employee's average compensation for the 12
month period preceding such employee's termination, less (ii) the amount of
compensation actually paid to such employee since the effective time of the
Astra acquisition.
Compensation Committee and Insider Participation
The Compensation Committee of the Board consists of Messrs. Goldberg,
Shoemaker, O'Connor and Furgason. All decisions with respect to compensation
are made by the Board after consideration of the advice of the Compensation
Committee. From time to time, Mr. McGhan will participate in the deliberations
regarding compensation of the other executive officers of the Company.
<TABLE>
<CAPTION>
====================================================================================================================================
OPTIONS ISSUED PURSUANT OPTIONS ISSUED PURSUANT OPTIONS ISSUED PURSUANT OPTIONS ISSUED PURSUANT
TO THE 1995 MANAGEMENT TO THE 1995 EMPLOYEE TO THE INCENTIVE OPTION TO THE SENIOR EXECUTIVE
OPTION PLAN STOCK OPTION PLAN PLAN PLAN
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CEO and four other most
highly compensated
executive officers 14.34 152.00 6,499.76 645.97
====================================================================================================================================
</TABLE>
Certain Relationships and Related Transactions
GKH and certain other stockholders of the Company formerly owned
substantially all of the common stock of Combustion. Combustion was in the
business of refurbishing existing natural gas compressors to bring them into
compliance with certain environmental emissions regulations. On March 21, 1995,
the Company borrowed $500,000 from Combustion in order to fund certain working
capital needs. This loan was evidenced by a demand promissory note of the
Company payable to the order of Combustion. On November 20, 1995, Combustion
merged with and into the Company and as a result thereof, the shareholders of
Combustion received 338.43 shares of Common Stock.
Mr. Collins, one of the Company's directors and minority stockholders,
controls a corporation which owns a 50% interest in a joint venture to which the
Company leases compressors pursuant to a long-term lease which provides for
monthly payments of $56,450.
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<PAGE>
Mr. Hanna, one of the Company's directors and minority stockholders,
is the President of Hanna Oil and Gas Company, to which the Company leases
compressors pursuant to month-to-month leases which provide for aggregate
monthly payments of $32,775.
GKH and the Company have entered into an agreement whereby in exchange
for investment banking and financial advisory services to be rendered by GKH,
the Company has agreed to pay GKH a fee equal to .75% of the value of the
Company determined and payable at such time (i) a capital transaction is
consummated resulting in GKH Investments, L.P. owning less than 25% of the
outstanding Common Stock or (ii) any other transaction occurs resulting in the
effective sale of the Company or its business by the current owners.
PRINCIPAL STOCKHOLDERS
Principal Stockholders
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company as of December 31, 1995
(i) by each person who is known by the Company to own beneficially more than 5%
of any class of the outstanding Common Stock, (ii) by each director and the
chief executive officer and the four other most highly compensated executive
officers of the Company and (iii) by all of the Company's directors and
executive officers as a group.
<TABLE>
<CAPTION>
==============================================================================================
Stock Beneficially Percentage of Stock
Name of Person or Group Owned Beneficially Owned(1)
- ---------------------- ----- ---------------------
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
GKH Investments, L.P.(2) 64,053.54 49.9405%
- ----------------------------------------------------------------------------------------------
Joint Energy Development Investments 11,111.11 8.6630%
Limited Partnership
- ----------------------------------------------------------------------------------------------
Astra Resources, Inc. (Westar Capital, Inc.) 30,555.56 23.8232%
- ----------------------------------------------------------------------------------------------
Ted Collins, Jr. 855 *
- ----------------------------------------------------------------------------------------------
William S. Goldberg(3) -- --
- ----------------------------------------------------------------------------------------------
Robert Wasielewski -- --
- ----------------------------------------------------------------------------------------------
Melvyn N. Klein(4) -- --
- ----------------------------------------------------------------------------------------------
Michael J. McGhan 648.51 *
- ----------------------------------------------------------------------------------------------
Michael A. O'Connor 2,055.07 1.6023%
- ----------------------------------------------------------------------------------------------
</TABLE>
-52-
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
Stock Beneficially Percentage of Stock
Name of Person or Group Owned Beneficially Owned(1)
- ---------------------- ----- ---------------------
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Alvin V. Shoemaker(5) 1,622.09 1.2647%
- ----------------------------------------------------------------------------------------------
Maxwell C. McDonald 754.94 *
- ----------------------------------------------------------------------------------------------
Curtis Bedrich 750.33 *
- ----------------------------------------------------------------------------------------------
James Hanna 1,875 1.4619%
- ----------------------------------------------------------------------------------------------
William E. Simon, Jr.(6) 1,827.66 1.4250%
- ----------------------------------------------------------------------------------------------
Robert A. Furgason -- --
- ----------------------------------------------------------------------------------------------
Charles D. Erwin 190.290 *
- ----------------------------------------------------------------------------------------------
William C. Bryant 240.940 *
- ----------------------------------------------------------------------------------------------
Joseph Bradford 103.290 *
- ----------------------------------------------------------------------------------------------
Donald M. DeVille 126.000 *
- ----------------------------------------------------------------------------------------------
All directors and officers as a group(7) 10,859.120 8.4623%
==============================================================================================
</TABLE>
- --------------------------------------------------------
*Represents less than 1% of the outstanding Common Stock.
(1) There are presently 198.40 treasury shares issued which are not counted as
outstanding in calculating the beneficial ownership percentages.
(2) Does not include 2,419.69 shares of Common Stock (1.882% of the outstanding
shares) owned by GKH Partners, L.P., a Delaware limited partnership, as
nominee for GKH Private Limited, a Singapore corporation. GKH Partners,
L.P. is the general partner of GKH Investments, L.P.
(3) Does not include 255.80 shares of Common Stock (less than 1% of the
outstanding shares) owned by Mr. Goldberg's wife, Nancy K. Goldberg, not
individually, but solely as trustee of the Nancy K. Goldberg Declaration of
Trust. Mr. Goldberg disclaims beneficial ownership of such shares.
(4) Mr. Klein, who is a director of the Company, is the sole stockholder of a
corporation which is a general partner of GKH Partners, L.P. Mr. Klein
disclaims beneficial ownership of all shares owned by GKH Partners, L.P.
and GKH Investments, L.P. and such shares are not included in the number of
shares owned by Mr. Klein.
-53-
<PAGE>
(5) Mr. Shoemaker disclaims beneficial ownership of shares owned indirectly by
his affiliates.
(6) Mr. Simon disclaims beneficial ownership of shares owned by his affiliates.
(7) Does not include shares owned by all directors and officers as a group or
their affiliates for which such directors and officers disclaim beneficial
ownership.
Stockholders' Agreements
1992 Stockholders' Agreement
In connection with the 1992 Offering, the persons participating
therein, the Company, HEI, GKH and certain other present and former stockholders
of the Company entered into that certain Stockholders' Agreement dated April 10,
1992 (the "1992 Stockholders' Agreement"). The 1992 Stockholders' Agreement
restricts the sale of Common Stock held by the parties thereto and provides for,
among other things, (i) the right of first refusal of the Company and the right
of second refusal of the other parties thereto with respect to any proposed
transfer of Common Stock (except transfers to affiliates) by a party thereto
other than GKH, (ii) the right of the parties thereto who own a majority of the
shares of Common Stock held by all parties thereto to compel the other parties
thereto to sell their Common Stock upon the sale by such majority of all of
their Common Stock and (iii) the right of each party thereto to participate in
the sale by one or more parties thereto of more than 50% of the outstanding
Common Stock held by all parties thereto. The 1992 Stockholders' Agreement does
not contain provisions regarding the ability of the Company to redeem all of a
stockholder's Common Stock upon the termination of his employment with the
Company.
Upon consummation of the 1993 Offering, the Company, HEHC, GKH and
certain persons who purchased Common Stock pursuant thereto entered into that
certain Stockholders' Agreement, dated as of June 29, 1993 (the "1993
Stockholders' Agreement") which substantially superseded the 1992 Stockholders'
Agreement as among the Company and each person who executed the 1993
Stockholders' Agreement. However, the 1992 Stockholders' Agreement remains in
full force and effect as among the parties thereto which still own shares of
Common Stock. See "-- 1993 Stockholders' Agreement."
Hanna Stockholders' Agreement
In connection with the Hanna Acquisition, the Company, GKH, HEHC and
HIG entered into that certain Supplemental Stockholders' Agreement dated as of
October 8, 1993 (the "Hanna Stockholders' Agreement"). The Hanna Stockholders'
Agreement restricts the sale of Common Stock held by the parties thereto and
provides for, among other things, (i) the right of first refusal of the Company
with respect to any proposed transfer of Common Stock (except transfers to
affiliates by HIG), (ii) the right of GKH to compel HIG to sell its Common Stock
-54-
<PAGE>
upon the sale by GKH of all of its Common Stock and (iii) the right of HIG to
participate in the sale by GKH of more than fifty percent of the Common Stock
then owned by GKH. The Hanna Stockholders' Agreement will terminate six months
after 10% or more of the Common Stock is listed on a nationally recognized
exchange or quoted on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ").
Brenda K. Phillips Stockholders' Agreement
In connection with the resignation of Brenda K. Phillips ("Phillips"),
a former employee and current stockholder of the Company, Phillips, the Company,
HEHC and GKH entered into that certain Supplemental Stockholders' Agreement,
dated November 19, 1993, the terms of which are similar to those of the Hanna
Stockholders' Agreement.
HEHC Stockholders' Agreement
In connection with the HEHC Merger, the Company, GKH and the other
former stockholders of HEHC (the "HEHC Stockholders") entered into that certain
Supplemental Stockholders' Agreement dated as of January 27, 1995 (the "HEHC
Stockholders' Agreement"). The HEHC Stockholders' Agreement restricts the sale
of Common Stock held by the parties thereto (subject to certain exceptions for
dispositions pursuant to an effective registration statement under the
Securities Act or pursuant to any public distribution pursuant to Rule 144 of
the Securities Act, and except for dispositions of Common Stock by GKH to its
partners) and provides for, among other things, (i) the right of first refusal
of GKH with respect to any proposed transfer of Common Stock (except transfers
to affiliates) by an HEHC Stockholder, (ii) the right of GKH to compel the HEHC
Stockholders to sell their Common Stock upon the sale by GKH of all of its
Common Stock and (iii) the right of each HEHC Stockholder to participate in the
sale by GKH of any or all of its Common Stock. The HEHC Stockholders' Agreement
also contains provisions regarding the right of the HEHC Stockholders to
designate a maximum of two members of the Board (the "HEHC Designees"), as well
as a requirement that such HEHC Designees approve certain transactions and acts
engaged in by the Company. Each party to the HEHC Stockholders' Agreement also
agrees to notify the Board if it or any of its affiliates engages in or makes an
investment in any business or entity competitive with the business then being
conducted by the Company or any subsidiary thereof. The HEHC Stockholders'
Agreement would terminate upon the consummation of a publicly registered
offering of twenty-five percent or more of the Common Stock. The parties to the
HEHC Stockholders' Agreement are also parties to the Amended and Restated
Registration Rights Agreement. See "-- Registration Rights Agreements."
Gale Force Stockholders' Agreement
In connection with the Gale Force Acquisition, the Company, GKH, and
certain persons who acquired Common Stock pursuant to the Gale Force Acquisition
(the "Gale Force
-55-
<PAGE>
Stockholders") entered into that certain Supplemental Stockholders' Agreement,
dated as of March 8, 1995 (the "Gale Force Stockholders' Agreement"). The Gale
Force Stockholders' Agreement restricts the sale of Common Stock held by the
parties thereto and provides for, among other things, (i) the right of first
refusal of the Company and the right of second refusal of GKH with respect to
any proposed transfer of Common Stock (except transfers to affiliates) by a Gale
Force Stockholder, (ii) the right of GKH to compel the Gale Force Stockholders
to sell their Common Stock upon the sale by GKH of all of its Common Stock and
(iii) the right of each Gale Force Stockholder to participate in the sale by (a)
GKH of more than fifty percent of the Common Stock then owned by GKH or (b) by
GKH and other stockholders of the Company of more than fifty percent of the
outstanding Common Stock of the Company. The Gale Force Stockholders' Agreement
also contains provisions whereby the Gale Force Stockholders agree to vote their
shares in order to ensure the election to the Board of Messrs. O'Connor and
McGhan and such other individuals as nominated by GKH. In addition, in the event
the Company offers GKH the opportunity to purchase additional shares of Common
Stock, the Gale Force Stockholders will have the right to acquire their
respective pro rata share of such Common Stock on the same terms and conditions
offered to GKH. The Gale Force Stockholders' Agreement will terminate upon ten
percent or more of the Common Stock being listed on a nationally recognized
exchange or quoted on the NASDAQ. The parties to the Gale Force Stockholders'
Agreement are also parties to the Amended and Restated Registration Rights
Agreement. See "--Registration Rights Agreements."
JEDI Stockholders' Agreement
In connection with the Series B Preferred Stock Issuance and the
issuance of Common Stock to JEDI, the Company, GKH and JEDI entered into that
certain Stockholders' Agreement dated as of August 7, 1995 (the "JEDI
Stockholders' Agreement"), containing terms substantially similar to those
contained in the Stockholders' Agreement, except that (i) until the earlier to
occur of the Company having satisfied all of its obligations to JEDI under the
JEDI Loan Agreement and a public offering of the Common Stock, JEDI has the
right with respect to certain equity offerings of the Company to existing
Company stockholders (each a "Rights Offering") (a) to subscribe for the first
fifteen percent of such Rights Offering on an exclusive basis, (b) subscribe for
its pro rata share of the remaining equity under the Rights Offering and (c)
cause its duly licensed affiliate to underwrite all of such Rights Offering in
the event JEDI and the Company can mutually agree on the terms of such
underwriting, (ii) so long as JEDI owns at least 7.5% of the outstanding Common
Stock (on a fully diluted basis) and generally does not hold an equity interest
in a competitor of the Company, JEDI has certain rights regarding notice of and
attendance at meetings of the Board and has the right to elect one member of the
Board and (iii) the right of inclusion of the non-GKH stockholders parties
thereto is triggered only in the event that GKH proposes to sell all of its
Common Stock and Preferred Stock. In addition, the agreement terminates upon
the earliest to occur of certain events, including the consummation of a
publicly registered offering of 20% or more of the Common Stock or August 1,
2005.
-56-
<PAGE>
Astra Stockholders' Agreement
In connection with the Astra merger, the Company, GKH and Astra
Resources entered into that certain stockholders' agreement dated as of December
6, 1995 (the "Astra Stockholders' Agreement") containing terms substantially
similar to those contained in the Stockholders' Agreement except that (i) in the
event the Company makes an equity offering of Common Stock, Astra has the right
to subscribe for such amount of Common Stock as to enable it to maintain a 20%
ownership interest in the Company, (ii) so long as Astra owns at least 15% of
the outstanding Common Stock and does not engage in a competitive business it
shall have the right to nominate that number of directors which would constitute
20% of the members of the Board, and (iii) the right of inclusion of the non-GKH
stockholders parties thereto is triggered only in the event that GKH proposes to
sell all of its Common Stock and Preferred Stock. In addition, the agreement
terminates upon the earliest to occur of certain events, including consummation
of a publicly registered offering of 20% or more of the Common Stock or August
1, 2005.
Registration Rights Agreements
The Company, GKH and the other parties to the HEHC Stockholders'
Agreement, the Gale Force Stockholders' Agreement, the JEDI Stockholders'
Agreement and the Astra Stockholders' Agreement (GKH and such stockholders,
hereinafter "Holders") are party to that certain Third Amended and Restated
Registration Rights Agreement, dated as of December 5, 1995 (the "Third Amended
and Restated Registration Rights Agreement"). The Third Amended and Restated
Registration Rights Agreement generally provides that in the event the Company
proposes to register under the Securities Act shares of its capital stock or any
other securities, then upon the request of those Holders owning in the aggregate
at least 2.5% of the Common Stock or derivatives thereof (the "Registrable
Securities") then held by all of the Holders, the Company must use its
reasonable best efforts to cause the Registrable Securities so requested by the
Holders to be included in the applicable registration statement; provided,
however, that the Holders' right to have their Registrable Securities so
included in a registration is limited in the event and to the extent that the
managing underwriter(s) of the registration in question are of the opinion that
the inclusion of the number of Registrable Securities held by Holders requesting
inclusion in the applicable registration statement would materially interfere
with the underwriters' ability to effectuate the registration and sale of
securities proposed to be offered and sold pursuant to such registration
statement. The Company agrees to pay all registration expenses in connection
with registrations of Registrable Securities effected pursuant to the Third
Amended and Restated Registration Rights Agreement; however, all fees and
expenses relating to the distribution of such Registrable Securities are to be
borne by the Company and each Holder pro rata based on the number of Registrable
Securities included in the registration for the account of the Company and each
Holder. The Company, in connection with filing a registration statement in
accordance with this agreement, would also have the obligation to apply for
listing and use its reasonable best efforts to list the Registrable Securities
being registered on any
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<PAGE>
national exchange on which a class of the Company's equity securities is listed,
or if there is no class of Company equity security so listed, then to use its
reasonable best efforts to qualify such Registrable Securities for inclusion on
the NASDAQ. In addition, after December 5, 1999, any single Holder of Common
Stock which owns 18% or more of the Common Stock has the right to demand the
registration of its Common Stock.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summaries relate to (i) certain provisions of the Bank
Credit Agreement and (ii) certain provisions of the JEDI Loan Agreement. The
summary of the provisions relating to the Bank Credit Agreement and the JEDI
Loan Agreement do not purport to be complete and are qualified in their entirety
by reference to the relevant agreements (including all amendments) relating
thereto, copies of which are available for review at the principal offices of
the Company.
The Bank Credit Agreement and the JEDI Loan Agreement
The Bank Credit Agreement provides for a four year revolving credit
facility which provides for a maximum commitment of $90,000,000. Amounts
outstanding under the Bank Credit Agreement bear interest at a rate equal to
LIBOR plus 0.5% to LIBOR plus 1.5% and matures (absent acceleration) on December
18, 1999. As of December 31, 1995, $16,900,000 was outstanding under the Bank
Credit Agreement.
The JEDI Loan Agreement provides for a revolving five year committed
availability (through December 19, 2000) of up to $100,000,000 with maturities
ranging from one to seven years. Amounts outstanding under the JEDI Loan
Agreement bear interest at a rate equal to, at the Company's option, either (i)
the sum of the U.S. Treasury Bill yield to maturity as set forth in the Wall
Street Journal plus a specified margin or (ii) the sum of the LIBOR Base Rate
(as defined in the JEDI Loan Agreement) plus a specified margin. As of December
31, 1995 principal of $30,000,000 was outstanding under the JEDI Loan Agreement.
Each of the Bank Credit Agreement and the JEDI Loan Agreement
(collectively, the "Loan Agreements") is secured pursuant to a collateral trust
agreement by all of the assets of the Company and its qualified subsidiaries and
contains certain restrictive covenants that impose limitations (subject to
certain exceptions) on the Company, including, among others, limitations with
respect to (i) maintaining certain ratios, including ratios with respect to (a)
consolidated indebtedness to consolidated capitalization, (b) consolidated
earnings before income tax, depreciation and amortization to consolidated
interest expense and (c) current assets to current liabilities, (ii) incurring
additional indebtedness, (iii) creating, incurring, assuming or suffering to
exist any mortgage, pledge, lien or other encumbrance or security interest, (iv)
creating, incurring, assuming or suffering to exist any guarantee or similar
obligation, (v) effecting certain fundamental changes, including any merger or
sale of all or substantially all of the Company's
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<PAGE>
assets, (vi) selling any of the Company's assets except in the ordinary course
of business or as otherwise permitted, (vii) increasing lease expense in excess
of certain limits, (viii) declaring or paying dividends, (ix) making capital
expenditures in excess of certain prescribed limits, (x) making any advance,
loan or similar investment in any person, (xi) making optional payments or
prepayments or amending the terms of any indebtedness, (xii) entering into any
transaction with affiliates, (xiii) the sale and leaseback of any of the
Company's real or personal property, (xiv) changing the Company's fiscal year
and (xv) entering into agreements which permits the Company to incur liens or
other restrictions on its assets.
Each of the Loan Agreements contains certain default provisions,
including, among others, (i) failure of the Company to pay any principal or
interest thereunder when due, (ii) breach by the Company or any of its
subsidiaries or affiliates which are parties to the Loan Agreements of any
representation or warranty made therein or in the other documents contemplated
thereby, (iii) default by the Company or any of its subsidiaries in the
observance or performance of any covenant or agreement contained therein or in
the other documents contemplated thereby, (iv) cessation of the security
agreements and related documents executed thereunder to be in full force and
effect, (v) default by the Company or any of its subsidiaries in the payment of
any indebtedness or guarantee in excess of specified amounts, which default
remains in effect for 30 days, or any other breach under agreements with respect
to such indebtedness or guarantees which causes such indebtedness or guarantee
to be accelerated, (vi) occurrence of certain bankruptcy related events, (vii)
occurrence of certain events related to ERISA obligations, (viii) entering of
one or more significant judgements or decrees against the Company or any of its
subsidiaries, (ix) the incurrence by the Company or any of its subsidiaries of
significant liability for remediation or environmental compliance (or penalty
with respect thereto) and (x) under the Bank Credit Agreement, the cessation of
GKH to own directly or indirectly 30% of the issued and outstanding Common
Stock.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of
500,000 shares of Common Stock and 200,000 shares of Preferred Stock, $.01 par
value per share, of which 50,000 shares have been designated as Series A
Preferred Stock, 15,000 shares have been designated as Series B Preferred Stock
and 135,000 shares remain undesignated ("Preferred Stock"). As of December 31,
1995, 128,259.63 shares of Common Stock are issued and outstanding, and 21,602
shares and 10,000 shares of Series A and Series B Preferred Stock, respectively,
are outstanding. An additional 22,887.29 shares of Common Stock are reserved
for issuance pursuant to options, warrants and the conversion of the Series B
Preferred Stock.
The following summary description relating to the capital stock does
not purport to be complete. For a detailed description, reference is made to
the Certificate of Incorporation of the Company, as amended (the "Certificate"),
which is available at the Company for review.
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<PAGE>
Common Stock
As of December 31, 1995, there were 128,259.63 shares of Common Stock
outstanding held of record by 100 stockholders (not including 198.40 treasury
shares then held by the Company). 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 the Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board out of legally available funds. In the event of a
liquidation, dissolution, sale or winding up of the Company, holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and satisfaction of preferential rights and have no rights to
convert their Common Stock into any other securities. Holders of Common Stock
have no preemptive or subscription rights unless (i) they are a party to the
Gale Force Stockholders' Agreement, the JEDI Stockholders' Agreement or the
Astra Stockholders' Agreement or (ii) they become a party to the Stockholders'
Agreement, and then only to the extent provided in each such agreement. See
"Principal Stockholders -- Stockholders' Agreements" and "The Offering --
Stockholders' Agreement -- Preemptive Rights." There are no redemption or
conversion rights with respect to any shares of Common Stock. The outstanding
shares of Common Stock are, and the shares of Common Stock to be issued pursuant
to this offering will be, fully paid and nonassessable.
Preferred Stock
The Company currently has 21,602 shares of Series A and 10,000 shares
of Series B Preferred Stock outstanding. In addition, the Board has the
authority to cause the Company to issue without any further vote or action by
the stockholders, up to the remaining authorized and unissued number of shares
of Preferred Stock in one or more series, to designate the number of shares
constituting any series, and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, rights and terms of redemption, redemption price or prices and
liquidation preferences of such series.
On August 7 and September 29, 1995, the Company issued the Series A
Preferred Stock in an aggregate amount of 21,602 shares at $1,000 per share,
bearing a 6.5% annual cumulative dividend. Dividends on the Series A Preferred
Stock are payable in additional shares of Series A Preferred Stock during the
initial three years after issuance, and in cash thereafter. Each share of
Series A Preferred Stock carries with it a detachable warrant to purchase 0.1667
shares of Common Stock at $1.00 per share, which warrants vest 20% at the time
of issuance and, thereafter, incrementally on a monthly basis over the
subsequent three years. Upon exercise of the warrants, the holders of the
Common Stock underlying the warrants have so-called "piggy-back" registration
rights with respect thereto. In addition, the holders of the Series A Preferred
Stock have special voting rights along with the holders of the Series B
Preferred Stock with respect to certain enumerated transactions. All holders of
the Series A Preferred Stock have entered into the Stockholders' Agreement. See
"Offering -- Stockholders' Agreement."
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<PAGE>
On August 7, 1995, the Company issued the Series B Preferred Stock to
JEDI in an aggregate amount of 10,000 shares at $1,000 per share, bearing a 6.5%
cumulative dividend. The 6.5% per share per annum dividend on the Series B
Preferred Stock is payable in additional shares of Series B Preferred Stock
during the initial three years after issuance, and in cash thereafter. The
Series A Preferred Stock is not redeemable by the Company until (i) any
"Redemption Event" (e.g., sale of all of the Company's assets, a merger in which
the Company is not the surviving corporation or GKH not owning more than 50% of
the outstanding Common Stock) or (ii) the third anniversary of the initial
issuance thereof, and thereafter is redeemable at a price which is based on the
initial purchase price and which varies based on the timing of such redemption.
Upon the occurrence of a Redemption Event, the holders of the Preferred Stock
have the right to require the Company to redeem all or any portion of its Series
B Preferred Stock at $1,000 per share plus accrued but unpaid dividends thereon.
The Series B Preferred Stock is redeemable by the Company and the holders
thereof on the same terms on which the Series A Preferred Stock may be redeemed.
Following the third anniversary of the issuance of the Series B Preferred Stock
or upon a Redemption Event, JEDI is permitted to convert the Series B Preferred
Stock into shares of Common Stock at a conversion price equal to the greater of
(i) $2,100 and (ii) the product of (A) 6.4 and (B) a per share calculation of
the Company's earnings before interest, taxes, depreciation and amortization for
a given period, less the Company's consolidated long term debt and liquidation
preference of the Preferred Stock (without premium) at a given time. The
conversion price of the Series B Preferred Stock is also subject to standard
anti-dilution adjustments. In addition, the holders of the Series B Preferred
Stock have special voting rights along with the holders of the Series A
Preferred Stock (as defined below) with respect to certain enumerated
transactions.
Options
The Company currently has outstanding options to purchase 322.5 shares
of Common Stock at $1.00 per share. Of these options, 172.5 were issued to
certain executive officers in connection with the 1992 Stock Plan and 75 were
issued to each of Glen Wind and Kurt Wind (150 total) in connection with their
purchase of Common Stock as of January 24, 1996. The options issued in
connection with the 1992 Stock Plan expire at various times in 2007 and the
options issued to each of Glen Wind and Kurt Wind on January 24, 2006.
The Company currently has outstanding options to purchase 10,918.50
shares of Common Stock at $725 per share. Of these options, 850.5 were issued
to certain executive officers in connection with the 1992 Stock Plan, 1,514 were
issued to certain members of the Company's management in connection with the
1993 Option Plan and 8,554 were issued to Company management in connection with
the Incentive Option Plan. The options issued pursuant to the 1992 Stock Plan
expire at various times in 2007, the options issued pursuant to the 1993 Option
Plan expire on June 29, 2003 and the options issued pursuant to the Incentive
Option Plan expire on July 20, 2005.
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The Company currently has outstanding options to purchase 2,583.89
shares of Common Stock at $833.75 per share. All such options were issued to
certain executive officers in connection with the Senior Executive Plan. With
respect to these options, 1,937.92 will expire June 29, 2003 and 645.97 will
expire May 15, 2005.
The Company currently has outstanding options to purchase 83.33 shares
of Common Stock at $1,100 per share. All such options were granted under the
1995 Management Option Plan and will expire on July 7, 2005.
The Company currently has outstanding options to purchase 766.12
shares of Common Stock at $1,500 per share. With respect to these options,
575.67 were granted under the 1995 Employee Option Plan and will expire on
August 31, 2005 and 190.45 were granted to Walter Rode in connection with the
acquisition of PGN and will expire on September 8, 2005.
The Company currently has outstanding options to purchase 89 shares of
Common Stock at $1,551 per share. These options were issued to Don DeVille on
terms substantially similar to terms governing the options granted under the
1995 Employee Offering and will expire on January 19, 2006.
As long as the options remain unexercised and outstanding, the holders
thereof will have the opportunity to profit from an increase in the value of the
Common Stock, if any, without assuming the risk of ownership.
Special Provisions of the Certificate of Incorporation and Delaware Law
Limitation of Director Liability
Section 102(b)(7) of the Delaware General Corporation Law ("Section
102(b)") 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. The Company's Certificate
of Incorporation limits the liability of directors to the Company or its
stockholders (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by Section 102(b). Specifically,
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. The
Certificate of Amendment provides for mandatory indemnification of directors and
officers of the Company and also
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includes a provision regarding compromises or arrangements between the Company
and its creditors.
Indemnification
To the maximum extent permitted by law, the Company's Certificate of
Incorporation and Bylaws provide for mandatory indemnification of directors and
permit indemnification of officers, employees and agents of the Company 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 the Company. In addition, the Company must advance or reimburse
directors, and may advance or reimburse officers, employees and agents for
expenses incurred by them in connection with indemnifiable claims.
ADDITIONAL INFORMATION
The Company intends to supply its stockholders on an annual basis with
a copy of its audited financial statements.
Each prospective investor and/or his purchaser or other
representatives are hereby granted access to, and are invited to review, all
materials available to the Company relating to this offering or anything set
forth in this Offering Memorandum.
The Company will answer all inquiries from prospective investors or
their representatives relating to the transactions contemplated hereunder and
will afford prospective investors and their representatives the opportunity to
obtain any additional information (to the extent that the Company possesses such
information or can acquire it without unreasonable effort or expense) necessary
to verify the accuracy of the information set forth in this Offering Memorandum.
Each prospective investor should use this opportunity to communicate
directly with his own legal counsel, accountants and other professional advisors
who can help the prospective investor evaluate the merits and risks of a
purchase of the Shares and the tax and legal aspects thereof.
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EXHIBIT 4.12
HANOVER COMPRESSOR COMPANY
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT (this "Agreement") dated as of May 29, 1996, between
Hanover Compressor Company, a Delaware corporation (the "Company"), and the
individual named on the signature page hereof under the heading "PURCHASER"
("Purchaser").
W I T N E S S E T H:
WHEREAS, Purchaser desires to subscribe for and purchase from the Company,
and the Company desires to issue and to sell to Purchaser (i) for cash out of
Purchaser's own funds, the number of shares (the "Cash Shares") of common stock,
$.001 par value ("Common Stock"), of the Company set forth next to the heading
"Cash Shares" on Schedule A attached hereto, and (ii) out of the proceeds of a
four year loan (a "Four Year Loan") to be made to Purchaser by the Company in
accordance with the terms of a loan agreement (the "Loan Agreement") and a
secured promissory note (the "Four Year Note"), each substantially in the form
attached as Exhibits C and D, respectively, to the Confidential Offering
Memorandum dated March 21, 1996 (the "Memorandum"), previously delivered to
Purchaser, the number of shares (the "Four Year Loan Shares") set forth next to
the heading "Four Year Loan Shares" on Schedule, in each case upon the terms
and conditions hereinafter set forth. The Four Year Loan Shares and the Cash
Shares are sometimes collectively referred to herein as the "Shares";
WHEREAS, this Agreement is one of several agreements, including, without
limitation those agreements and instruments attached as Exhibits to the
Memorandum ("Other Purchaser Agreements") being entered into concurrently
herewith by the Company and Purchaser in connection with the offering (the
"Offering") of the Shares to Purchaser; and
WHEREAS, the Offering shall be made pursuant to terms and conditions
substantially similar to those set forth in the Memorandum with the exception
that (i) options ("Options") to acquire shares of Common Stock being offered to
Purchaser in connection with Purchaser's subscription of the Shares hereunder
are not being offered pursuant to the 1996 Employee Stock Option Plan of the
Company or any other stock option plan of the Company and (ii) the offering
price of Common Stock hereunder is $1,598.25 per share and (iii) and the
exercise price of the Options hereunder is $1,598.25 per share.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby acknowledge, agree and understand the
following:
1. Subscription. Subject only to the provisions of Section 7 hereof,
Purchaser hereby irrevocably subscribes for the Shares under terms and
conditions set forth herein. The
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purchase price (the "Purchase Price") for each Share shall be $1,598.25.
The parties agree that notwithstanding anything herein to the contrary, the
Company reserves the absolute right (i) to reject Purchaser's subscription
for any reason and (ii) to terminate or modify the Offering at any time for
any reason.
2. The Closing. The closing of the purchase and sale of the Shares
(the "Closing") shall take place at the principal offices of the Company,
12001 North Houston Rosslyn, Houston, Texas 77086 at 10:00 a.m., Houston
time on Monday, June 17, 1996, or (i) at such later date or time as the
Company in its sole discretion may determine without the consent of or
notice to Purchaser, but in no event later than June 30, 1996 (the
"Termination Date") and (ii) at such other place as shall be agreed upon by
the parties hereto. The date of the Closing is sometimes hereinafter
referred to as the "Closing Date."
3. Deliveries by Purchaser.
(a) Stockholders' Agreement. Concurrently with Purchaser's execution and
delivery of this Agreement, Purchaser shall deliver to the Company two executed
counterparts to that certain Amended and Restated Stockholders' Agreement, dated
as of August 7, 1995, among the Company, GKH Partners, L.P., GKH Investments,
L.P. and the other stockholders of the Company parties thereto (the
"Stockholders' Agreement"), attached to the Memorandum as Exhibit B;
(b) Additional Deliveries. At or prior to the Closing, upon the terms
and subject to the conditions of this Agreement, Purchaser shall execute where
appropriate and deliver to the Company:
(i) a certified or bank cashier's check in the amount of the
aggregate Purchase Price for the Cash Shares;
(ii) to the extent any of the Shares subscribed for pursuant to
this Agreement are Four Year Loan Shares:
(A) two executed counterparts of the Loan Agreement;
(B) a duly executed Four Year Note in an original
principal amount equal to the aggregate Purchase Price for all
such Four Year Loan Shares to be funded by the proceeds of the
Four Year Note and subscribed for by Purchaser pursuant to this
Agreement;
(C) two executed counterparts of that certain pledge
agreement (the "Pledge Agreement") between Purchaser and the
Company effecting a pledge of all of the shares of Common Stock
of the Company owned or thereafter acquired by Purchaser,
substantially in the form attached to the Memorandum as Exhibit
E; and
(D) a stock power with respect to the Shares (the "Stock
Power") duly executed in blank;
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(iii) two executed counterparts of that certain stock option
agreement (the "Option Agreement") between Purchaser and the Company,
substantially in the form attached to the Memorandum as Exhibit F;
(iv) a fully completed and executed IRS Form W-9;
(v) two executed counterparts of this Agreement (including a
fully completed Schedule A, notary page and Spousal Consent (if
applicable)); and
(vi) two executed counterparts of the letter agreement relating
to the Stockholders I Agreement, attached to the Memorandum as Exhibit
H.
4. Deliveries by the Company. At the Closing, upon the terms and subject
to the conditions of this Agreement, the Company shall deliver to Purchaser a
certificate or certificates representing the Shares duly executed and
authenticated by the Company; provided, however, that if any portion of the
Shares are being purchased with the proceeds of a Four Year Loan, the Company
shall retain possession of all of the Shares in accordance with the terms of the
Pledge Agreement. Following the Closing, the Company shall deliver to Purchaser
a fully executed copy of this Agreement and the Other Purchaser Agreements
(other than the Four Year Note).
5. Representations and Warranties of Purchaser. Purchaser hereby
represents and warrants to the Company as follows:
(a) Investment Intention No Resales. Purchaser is acquiring the
Shares for investment solely for his own account and not with a view to,
or for resale in connection with, the distribution or other disposition
thereof. Purchaser agrees and acknowledges that all dispositions of the
Shares by Purchaser (other than involuntary transfers) will comply with
the provisions of this Agreement, the Stockholders' Agreement and the
Pledge Agreement and applicable provisions of state and federal
securities laws.
(b) Certain Information Not Material. Purchaser has not received
individualized information relative to the compensation of the
management of the Company, which information is acknowledged by
Purchaser as not being material to Purchaser in forming a basis for
making an investment in the Shares or for any other purpose in
connection herewith.
(c) Shares Unregistered. Purchaser acknowledges and represents
that he has been advised by the Company that:
(i) the offer and sale of the Shares have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities laws;
(ii) the Shares must be held indefinitely and Purchaser
must continue to bear the economic risk of the investment in the
Shares unless the offer and sale of such Shares is
subsequently registered under the Securities Act and all
applicable state securities laws or an exemption from such
registration is available to the Purchaser with respect to the
Shares;
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(iii) there is no established market for the Shares and
it is not anticipated that there will be any public market for
the Shares in the foreseeable future;
(iv) the Company is under no obligation to register the
Shares under the Securities Act on behalf of Purchaser, to
assist Purchaser in complying with any exemption from
registration or to consent to the transfer of the Shares;
(v) Rule 144 promulgated under the Securities Act may
not be presently available with respect to the sale of any
securities of the Company, and the Company has made no covenant
to make such Rule available;
(vi) when and if the Shares may be disposed of without
registration under the Securities Act in reliance on Rule 144,
such disposition may be made only in limited amounts in
accordance with the terms and conditions of such Rule;
(vii) a restrictive legend in the form set forth in
Section 6(f) hereof shall be placed on the certificates
representing the Shares; and
(viii) a notation shall be made in the appropriate
records of the Company indicating that the Shares are subject to
restrictions on transfer and appropriate stoptransfer
instructions will be issued with respect to the Shares.
(d) Additional Investment Representations.
(i) Purchaser has carefully reviewed, is familiar with
and understands the Memorandum, the Other Purchaser Agreements
and the other documents, records and information, if any,
requested by Purchaser or otherwise supplied by the Company in
connection with the Offering and further understands that
certain information set forth in the Memorandum is inapplicable
to the Offering hereunder including, without limitation, certain
information regarding the offering price of shares of Common
Stock and the exercise price of Options and all provisions
therein regarding the 1996 Employee Stock Option Plan;
(ii) Purchaser acknowledges that (w) the company has
previously conducted an offering of its Common Stock pursuant to
the terms and conditions set forth in the Memorandum (the 111996
Offering"), (x) certain terms and conditions of the Offering are
different than those which governed the 1996 Offering, (y) the
Purchase Price at which the Shares are being offered to
Purchaser is different than the purchase price offered to
offerees of the 1996 Offering and (z) to the extent Purchaser is
granted Options, such options shall not be granted to Purchaser
pursuant to the Company 1996 Employee Stock Option Plan (the
1996 Plan"), and accordingly, Purchaser shall have no right to
participate in the 1996 Plan, any reference to the 1996 Plan in
the Memorandum, including any reference to Purchaser becoming a
party to a Stock Option Agreement under the 1996 Plan, being
inapplicable to the Offering;
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<PAGE>
(iii) All documents, records and information pertaining
to an investment in the Company which have been requested by
Purchaser have been made available or delivered to Purchaser,
except to the extent otherwise addressed in the Memorandum;
(iv) Purchaser is fully familiar with the business and
operations of the Company and has had an opportunity to ask
questions of and receive answers from the Company concerning the
terms and conditions of Purchaser's investment and the financial
condition, operations and prospects of the Company;
(v) No oral or written statement, printed material or
inducement given or made by the Company or any of the Company's
affiliates is contrary to the information contained in this
Agreement, the Memorandum or the Other Purchaser Agreements, and
Purchaser acknowledges and agrees that in making Purchaser's
decision to purchase the Shares, Purchaser has relied solely on
such documents and the independent investigations made by
Purchaser and, to the extent believed by Purchaser to be
appropriate, Purchaser's representatives, including Purchaser's
own professional, financial, legal, tax and other advisors;
(vi) Purchaser acknowledges that the Company, in
reliance upon certain federal and state securities law
exemptions, has provided Purchaser with less or different
information than Purchaser would have received if an information
memorandum complying with Rule 502(b)(2) of Regulation D
promulgated pursuant to the Securities Act had been prepared and
made available to Purchaser or if the Shares had been registered
pursuant to the Securities Act. The foregoing notwithstanding,
the information provided to Purchaser is sufficient to allow
Purchaser to make a knowledgeable and informed decision
regarding Purchaser's investment in the Shares;
(vii) Purchaser (A) has adequate means of providing for
Purchaser's current financial needs and possible personal
contingencies and has no need for liquidity in Purchaser's
investment in the Shares, (B) can bear the economic risk of
losing Purchaser's entire investment in the Shares, (C) has such
knowledge and experience in financial matters that Purchaser is
capable of evaluating the relative risks and merits of
Purchaser's purchase of the Shares, (D) is familiar with the
nature of, and risks attendant to, Purchaser's purchase of the
Shares, and (E) has determined that the purchase of the Shares
is consistent with Purchaser's financial objectives;
(viii) Purchaser realizes that Purchaser may not be able
to sell or dispose of the Shares even in the event of a personal
emergency. Purchaser's overall commitment to investments which
are not readily marketable (including Purchaser's investment in
the Shares) is not disproportionate to Purchaser's net worth;
(ix) The address set forth on the signature page hereof
is Purchaser's true and correct residence, and Purchaser has no
present intention of becoming a domiciliary of any other state
or jurisdiction;
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(x) Purchaser has no reason to anticipate any change in
Purchaser's circumstances, financial or otherwise, which may
cause or require any sale or disposition by Purchaser of any of
the Shares;
(xi) Each of this Agreement and the Other Purchaser
Agreements has been duly and validly executed and delivered by
Purchaser and each constitutes the valid and binding obligation
of Purchaser enforceable against Purchaser, Purchaser's
successors and assigns, including, but not limited to,
Purchaser's estate and Purchaser's spouse, in accordance with
its terms;
(xii) Assuming the due execution and delivery of each of
this Agreement and the Other Purchaser Agreements (to which the
Company is a party) by the Company, each of this Agreement and
the Other Purchaser Agreements is a valid and binding obligation
of the Purchaser, enforceable against the Purchaser in
accordance with its terms, except as such enforcement may be
subject to (A) bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect
relating to creditors rights generally and (B) general
principles of equity (regardless of whether such enforcement is
considered in a proceeding in equity or at law); and
(xiii) The Company has not guaranteed, represented or
warranted to Purchaser either that (A) the Company will be
profitable or that Purchaser will realize profits as a result of
his investment in the Shares or (B) the past performance or
experience on the part of any officer, director, stockholder,
employee, agent, representative or affiliate thereof, or any
employee, agent, representative or affiliate of the Company will
in any way indicate the predictable results of ownership of the
Shares.
(e) Residence-Specific Representations.
(i) If Purchaser is a resident of the State of Texas, the
aggregate Purchase Price for the Shares subscribed for by Purchaser
hereunder does not exceed 20% of Purchaser's net worth (or joint net
worth with Purchaser's spouse, if applicable) as of the date hereof; and
(ii) If Purchaser is a resident of the State of Louisiana, the
aggregate Purchase Price for the Shares subscribed for by Purchaser
hereunder does not exceed 25% of Purchaser's net worth (or joint net
worth with Purchaser's spouse, if applicable) as of the date hereof.
6. Representations and Warranties of the Company. The Company represents
and warrants to Purchaser as follows:
(a) Organization; Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of
the State of Delaware. The Company is duly qualified and in good
standing as a foreign corporation and is licensed, admitted or approved
to do business as a foreign corporation in each jurisdiction wherein the
character of the properties owned or held by it under lease, or the
nature of the business
6
<PAGE>
conducted by it, makes such qualification necessary, except where the
failure to so qualify would not have a material adverse effect on the
Company, and would not have any adverse effect on the enforceability of
this Agreement.
(b) Authority. The Company has the requisite corporate power and
authority and full legal right to enter into this Agreement and the
Other Purchaser Agreements to which it is a party, to perform, observe
and comply with all of its agreements and obligations hereunder and
thereunder and to issue the Shares to Purchaser.
(c) Due Authorization. The execution and delivery by the Company
of this Agreement and the Other Purchaser Agreements to which it is a
party, the performance by it of all of its agreements and obligations
under this Agreement and the Other Purchaser Agreements to which it is a
party, and the issuance of the Shares, have been duly authorized by all
necessary corporate action on the part of the Company.
(d) Binding Obligation. Each of this Agreement and the Other
Purchaser Agreements to which the Company is a party has been duly and
validly executed and delivered by the Company and, assuming the due
execution and delivery of each such document by Purchaser, is a valid
and binding obligation of the Company, enforceable against the Company
in accordance with its terms, except as such enforcement may be subject
to (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights
generally and (ii) general principles of equity (regardless of whether
such enforcement is considered in a proceeding in equity or at law).
(e) Capitalization. At the Closing Date, the authorized capital
stock of the Company will consist of 500,000 shares of Common Stock and
200,000 shares of preferred stock. No other class or series of capital
stock of the Company is authorized. All of the outstanding shares of
Common Stock, including the Shares, will, at the time of issuance, have
been duly authorized and issued and, upon receipt by the Company of the
Purchase Price for the Shares subscribed for hereunder, the Shares will
be fully paid and nonassessable. There are no pre-emptive rights
relating to the capital stock of the Company other than those granted
pursuant to (i) the Stockholders' Agreement, (ii) that certain
Stockholders' Agreement, dated as of March 8, 1995, among the Company
and certain of its stockholders, (iii) that certain Stockholders'
Agreement, dated as of August 7, 1995, among the Company, Joint Energy
Development Investments Limited Partnership and certain other
stockholders of the Company and (iv) that certain Stockholders'
Agreement, dated as of December 6, 1995, among the Company and certain
of its stockholders.
(f) Legend. Each certificate representing the Shares shall bear
a legend substantially to the following effect:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED
UNDER SUCH ACT, OR UNLESS SUCH OFFER, SALE, TRANSFER, PLEDGE OR
HYPOTHECATION IS EXEMPT FROM REGISTRATION OR IS OTHERWISE IN
COMPLIANCE WITH SUCH ACT. THE TRANSFERABILITY OF THIS SECURITY
IS ALSO SUBJECT TO RESTRICTIONS CONTAINED IN A STOCKHOLDERS
AGREEMENT WHICH AGREEMENT THE COMPANY WILL FURNISH TO THE HOLDER
OF THIS SECURITY UPON REQUEST.
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A STATEMENT SUMMARIZING THE VOTING POWERS, DESIGNATIONS,
PREFERENCES, LIMITATIONS, RESTRICTIONS AND RELATIVE RIGHTS OF
THE VARIOUS CLASSES OF STOCK OR SERIES THEREOF MAY BE OBTAINED
BY THE STOCKHOLDERS OF THE COMPANY, WITHOUT CHARGE, FROM THE
PRINCIPAL OFFICES OF THE COMPANY.
7. Conditions to Obligations of Purchaser. The obligation of Purchaser
to consummate the transactions contemplated by this Agreement shall be subject
to the satisfaction (or waiver by the Purchaser) on or prior to the Closing Date
of the following conditions:
(a) Performance of Obligations. The Company shall have performed
and complied in all material respects with all obligations and
agreements required to be performed and complied with by it hereunder on
or prior to the Closing Date;
(b) Representations and Warranties. The representations and
warranties of the company contained in this Agreement shall be true and
correct in all material respects as of the Closing Date as if made as of
such date;
(c) Loans. The Company shall have made available to Purchaser at
the Closing, as a loan (or loans), that portion of the Purchase Price
attributable to the Four Year Loan Shares subscribed for hereunder as
agreed to by Purchaser and the Company; and
(d) Section 4 Obligations. The Company shall have fully complied
with all of its obligations under the first sentence of Section 4
hereof.
8. Conditions to obligations of the Company. The obligation of the
Company to consummate the transactions contemplated by this Agreement shall be
subject to the satisfaction (or waiver by the Company) on or prior to the
Closing Date of the following conditions:
(a) Performance of Obligations. Purchaser shall have performed
and complied in all material respects with all obligations and
agreements required to be performed and complied with by Purchaser
hereunder on or prior to the Closing Date;
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(b) Representations and Warranties. The representations and
warranties of Purchaser contained in this Agreement shall be true and
correct in all material respects as of the Closing Date as if made as of
such date;
(c) Offering. The offering shall not have been terminated by the
Company; and
(d) Section 3(b) Obligations. Purchaser shall have fully
complied with all of its obligations under Section 3(b) hereof.
9. Indemnification.
(a) Indemnification of the Company and the Company Affiliates. From and
after the date hereof, Purchaser shall indemnify and hold harmless the Company
and its predecessors, successors, officers, directors, employees,
representatives, agents and affiliates (collectively, the "Indemnitees") from
and against any loss, damage or expense, including, without limitation,
reasonable attorneys' and consultants' fees, disbursements and expenses,
suffered by any one or more of the Indemnitees arising out of or resulting from
any inaccuracy in or breach of any of the representations, warranties, covenants
or agreements made by Purchaser herein.
(b) Indemnification of Purchaser. From and after the date hereof, the
Company shall indemnify and hold harmless Purchaser from and against any loss,
damage or expense, including, without limitation, reasonable attorneys' and
consultants' fees, disbursements and expenses suffered by Purchaser arising out
of or resulting from any inaccuracy in or breach of any of the representations,
warranties, covenants or agreements made by the company herein. The foregoing
notwithstanding, the Company's obligation to indemnify Purchaser under this
Section 9 (b) shall not exceed the Purchase Price.
(c) Procedure for Claims. Within thirty days after obtaining written
notice of any claim or demand which has given rise to, or could reasonably give
rise to, a claim for indemnification hereunder, the party seeking
indemnification shall give written notice of such claim ("Notice of Claim") to
the other party. Failure to give such notice by the party seeking
indemnification within said thirty-day period shall not relieve the indemnifying
party of its obligations hereunder, unless and only to the extent that the
failure to so notify the indemnifying party actually results in damage or
prejudice to such indemnifying party. The Notice of Claim shall set forth a
brief description of the facts giving rise to such claim and the amount (or a
reasonable estimate) of the loss, damage or expense suffered, or which may be
suffered, by the party seeking indemnification.
Upon receiving the Notice of Claim, the indemnifying party shall resist,
settle or otherwise dispose of such claim in such manner as it shall deem
appropriate, including the employment of counsel, and shall be responsible for
the payment of all expenses, including the reasonable fees and expenses of such
counsel. The indemnified party shall have the right to employ separate counsel
in any such action and to participate in or assume the defense thereof, but the
fees and expenses of such counsel shall be at the indemnified party's expense
unless (i)
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the employment has been specifically authorized by the indemnifying party in
writing, (ii) the indemnifying party has failed to assume the defense and employ
counsel in a timely manner or (iii) the named parties to any action (including
any impleaded parties) include both Purchaser and the Company, and the
indemnified party has been advised by such counsel that representation of the
Company and the Purchaser by the same counsel would be inappropriate under
applicable standards of professional conduct due to actual or potential
differing interests between them (in which case, if the indemnified party
notifies the indemnifying party in writing that the indemnified party elects to
employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall have neither the right nor the obligation to assume the
defense of such action on behalf of the indemnified party).
(d) Third Party Beneficiaries. Nothing contained in this Section 9 shall
confer any rights upon, or inure to the benefit of, any third party other than
those parties specified in Sections 9(a) and 9(b) above, it being understood
that such specified parties, to the extent not actually parties hereto, shall be
third party beneficiaries.
10. Miscellaneous.
(a) Notices. All notices, offers or other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be considered as properly given or made on the earliest to occur of (i) personal
delivery, (ii) two days after being delivered to a nationally recognized
overnight mail delivery or courier service, (iii) five days after being mailed
by certified mail, return receipt requested, postage prepaid, or (iv) delivery
by prepaid telegram or facsimile transmission (with written confirmation of
receipt). All notices given or made pursuant hereto shall be addressed to the
Company at its principal office and to Purchaser at his address appearing on the
signature page hereof under the heading "PURCHASER". The address of any party
hereto may be changed by a notice in writing given in accordance with the
provisions hereof.
(b) Effect and Interpretation. This Agreement shall be construed in
accordance with and governed by the laws of the State of Delaware without regard
to the conflicts of laws provisions thereof.
(c) Entire Agreement. This Agreement, the Memorandum (to the extent
qualified by Section 5(d)(ii) hereof) and the Other Purchase Agreements and any
Exhibits or Schedules attached hereto or thereto, which documents are
incorporated herein by this reference, constitute the entire agreement between
the parties hereto with respect to the subject matter hereof and may be amended
only by a writing executed by all parties hereto. This Agreement and the other
documents and instruments specified in this section 10(c) and the information
contained herein and therein expressly supersede all understandings and
agreements of the parties, whether written or oral, between the parties with
respect to the subject matter hereof.
(d) Successors. This Agreement and all the terms and provisions hereof
shall be binding upon and shall inure to the benefit of the parties hereto, and
their respective heirs, legal representatives, permitted successors and
permitted assigns.
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(e) Pronouns and Headings. As used herein, all pronouns shall include
the masculine, feminine, neuter, singular and plural wherever the context and
facts require such construction. The descriptive headings in the sections of
this Agreement are inserted for convenience of reference only and shall not
control or affect the meaning or construction of any of the provisions hereof.
(f) Severability. If any provision of this Agreement is held by a court
of competent jurisdiction to be invalid, illegal or unenforceable, such
provision shall be severed and enforced to the extent possible or modified in
such a way as to make it enforceable, and the invalidity, illegality or
unenforceability thereof shall not affect the validity, legality or
enforceability of the remaining provisions of this Agreement.
(g) Certain Tax Matters. Under section 1445(e) of the Internal Revenue
Code of 1986, as amended, a corporation, partnership, trust or estate must
withhold tax with respect to certain transfers of property if a holder of the
interest in the entity is a foreign person. To inform the Company that no
withholding is required with respect to any of the Shares, Purchaser hereby
certifies as follows: (1) Purchaser is not a nonresident alien for purposes of
U.S. income taxation; (2) Purchaser's social security number is as set forth on
the signature page hereto; and (3) Purchaser's home address is as set forth an
the signature page hereto. Purchaser understands under penalties of perjury that
this certification may be disclosed to the Internal Revenue Service and that any
false statement Purchaser has made herein could be punished by fine,
imprisonment or both. Purchaser has completed and submitted herewith a Form W-9
relative to Purchaser's taxpayer identification number and other matters and
does hereby represent and warrant that such form is complete, true and correct.
(h) Counterparts. This Agreement may be executed simultaneously in one
or more counterparts each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(i) Assignment. This Agreement and the rights and obligations of the
parties hereunder may be assigned or otherwise delegated by the Company, but
may not be assigned by Purchaser without the Company's prior written consent,
which consent may be withheld in the Company's sole discretion.
(j) Consent of Spouse; Insertion in Will. Purchaser, if married, or, if
currently unmarried, upon Purchaser's marriage, agrees to obtain the consent and
approval of Purchaser's spouse to all of the terms and provisions of this
Agreement by the execution hereof by such spouse. Purchaser agrees to insert in
Purchaser's last will and testament, or other similar instrument, or to execute
a codicil thereto, directing and authorizing Purchaser's personal
representatives to fulfill and comply with the provisions hereof.
(k) Effectiveness; Termination. In the event this Agreement is
terminated for any reason, the parties hereto shall have no further obligations
to each other, except that in the event of a complete or partial performance of
the terms hereof which occurs prior to any termination hereof, (i) Purchaser
shall promptly return to the Company all certificates in his
11
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possession representing the Shares, if any, and (ii) the Company shall promptly
refund the Purchase Price to Purchaser, if and to the extent paid.
(REMINDER OF PAGE INTENTIONALLY LEFT BLANK]
12
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE COMPANY:
HANOVER COMPRESSOR COMPANY, a
Delaware corporation
By: _______________________________________
Curtis A. Bedrich
Chief Financial Officer and Treasurer
13
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PURCHASER SIGNATURE PAGE
PURCHASER:
__________________________________________
Donald M. DeVille
Social Security No. ______________________
Home Address:
__________________________________________
__________________________________________
__________________________________________
SPOUSAL CONSENT
The undersigned, the spouse of Purchaser who is a party to the foregoing
Subscription Agreement, hereby consents to the execution of the foregoing
Subscription Agreement pursuant to the offering and the consummation of the
transactions contemplated thereby by his or her spouse, and to the extent the
undersigned has acquired or hereafter acquires an interest in and to the
property and subject matter of the Subscription Agreement, hereby agrees to be
bound by the terms of such Subscription Agreement.
Date: ___________________________ _______________________________
_______________________________
Print Name:
14
<PAGE>
PURCHASER SIGNATURE PAGE
PURCHASER:
__________________________________________
Donald M. DeVille
Social Security No. ______________________
Home Address:
__________________________________________
__________________________________________
__________________________________________
SPOUSAL CONSENT
The undersigned, the spouse of Purchaser who is a party to the foregoing
Subscription Agreement, hereby consents to the execution of the foregoing
Subscription Agreement pursuant to the offering and the consummation of the
transactions contemplated thereby by his or her spouse, and to the extent the
undersigned has acquired or hereafter acquires an interest in and to the
property and subject matter of the Subscription Agreement, hereby agrees to be
bound by the terms of such Subscription Agreement.
Date: ____________________ ________________________________
Print Name: ____________________
15
<PAGE>
NOTARY PAGE
STATE OF ____________)
)
COUNTY OF ___________)
I, ________________ a Notary Public in and for said County, in the State
aforesaid, do hereby certify that ____________________________ appeared before
me this day in person, and acknowledged and swore that he signed, sealed, and
delivered the said instrument as his respective free and voluntary act and deed
for the uses and purposes therein set forth, and that the statements contained
therein are true.
Given an under my hand and notarial seal as of the 11 day of
______________, 1996.
My Commission expires:
___________________________ ______________________________
Notary Public
16
<PAGE>
SCHEDULE A
Shares Subscribed For
================================================================================
TYPE OF SHARE NUMBER OF SHARES CONSIDERATION
- --------------------------------------------------------------------------------
Cash Shares 63 $100,689.75
- --------------------------------------------------------------------------------
Four-Year Loan Shares 126 $201,379.50
- --------------------------------------------------------------------------------
Total 189 $302,069.25
================================================================================
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EXHIBIT 4.13
1997 STOCK PURCHASE PLAN
1. PURPOSE
The Hanover 1997 Stock Purchase Plan (the "Plan") is intended to
promote the long-term growth and financial success of Hanover Compressor Company
(the "Company") in the interests of the Company and its stockholders and to
strengthen the link between management and stockholders by:
. providing officers, directors, consultants and employees of the
Company and its Subsidiaries (as hereinafter defined) with an
opportunity to significantly increase their ownership of Common
Stock (as hereinafter defined) coupled with incentive awards based
in part on the performance of the Common Stock relative to the
Index Stocks (as hereinafter defined) and the increase in the
earnings of the Company, and
. providing this opportunity in a manner that places these
individuals at risk in the event of poor Company performance.
2. DEFINITIONS
Except where the content otherwise indicates, the following
definitions apply:
"Agreement" means the written agreement entered into between the
Company and a Participant to carry out the Plan with respect to the Participant
concerning a particular Purchase Award in accordance with the Plan's terms and
conditions. The Agreements need not be identical and shall be in the form
approved by the Committee.
"Average Market Price" of a Security means, for a given period, the
sum of the Market Prices of such Security for each Trading Day in the relevant
period divided by the number of Trading Days in such period.
"Board" means Board of Directors of the Company.
"Cause" means (i) the commission by such Participant of an act of
fraud, embezzlement or willful breach of a fiduciary duty to the Company
(including the unauthorized disclosure of confidential or proprietary material
information of the Company), (ii) a conviction of such Participant (or a plea of
nolo contendere in lieu thereof) for a felony or a crime involving fraud,
dishonesty or moral turpitude, (iii) willful failure of a Participant to follow
the written directive of the chief executive officer of the Company or the Board
in the case of executive officers of the Company, (iv) willful misconduct as an
employee of the Company, (v) the willful failure of such Participant to render
services to the Company in accordance with his employment or consulting
arrangement, which failure amounts to a material neglect of his duties to the
Company or (vi) substantial dependence, as determined by the Board, on alcohol
or any drug,
<PAGE>
immediate precursor or other substance listed in Schedule I-V of
the Federal Comprehensive Drug Abuse Prevention and Control Act of 1970, as
amended, as determined in the sole discretion of the Committee.
"Change of Control" means the occurrence of any one of the following
events:
(a) any (A) consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or which
contemplates that all or substantially all of the business and/or assets of
the Company shall be controlled by another corporation or (B) a
recapitalization (including an exchange of Company equity securities by the
holders thereof), in either case, in which any "Person" (as such term is
used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than the
Controlling Shareholders, becomes the beneficial owner (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of securities of the
Company representing more than 50% of the combined voting power of the
Company's then outstanding securities ordinarily having the right to vote
in the election of directors;
(b) any sale, lease, exchange or transfer (in one transaction or
series of related transactions) of all or substantially all of the assets
of the Company and its Subsidiaries;
(c) approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company, unless such
plan or proposal is abandoned within 60 days following such approval; or
(d) any "Person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Exchange Act), other than the Controlling Shareholders, shall become
the beneficial owner of securities of the Company representing more than
50% of the combined voting power of the Company's then outstanding
securities ordinarily having the right to vote in the election of
directors.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Committee" means the Compensation Committee of the Board or such
other committee of the Board, composed of not less than two persons who qualify
as disinterested persons" as defined in Rule 16b-3(c)(2), as promulgated by the
Commission under the 1934 Act, or any successor definition adopted by the
Commission, and as outside directors" within the meaning of Section 162(m) of
the Code.
"Committee Certification" means with respect to the Earnings Incentive
Award, the certificate of the Committee that the Earnings Return Percentage is
at least 15% or higher, and with respect to the Shareholder Return Incentive
Award, the certification of the Committee as to the Comparative Performance
Percentile and that the Company is in the 75th Comparative Performance
Percentile or higher. The Committee shall meet to determine such certification
not later than the 60th day following the end of the Final Plan Year with
respect to such Participant
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or, in the case of a Change of Control, not later than the later of (i) the 60th
day following the Final Plan Year or (ii) the 30th day following the Change of
Control.
"Common Stock" means the Common Stock, $.001 par value per share, of
the Company.
"Comparative Performance Percentile" shall be calculated by (i)
calculating the Total Shareholder Return of each Index Stock; (ii) ranking the
Index Stocks according to Total Shareholder Return, (iii) ranking the Company
amongst such Index Stocks according to the Total Shareholder Return of the
Company, (iv) dividing (x) that number of Index Stocks with lower Total
Shareholder Returns than the Total Shareholder Return of the Company by (y) the
number of Index Stocks plus 1, and (v) multiplying such quotient by 100.
"Controlling Stockholders" means GKH Investments, L.P., GKH Partners,
L.P., and the partners therein.
"Designated Award Amount" means, on any date, the original Purchase
Price plus the Interest Spread.
"Designated Payment Date" means the date designated by the Company for
payment of a Shareholder Performance Award, which date shall be not more than
thirty (30) days following the Committee Certification with respect to such
Performance Award and in any event no later than the September 1 following the
Final Plan Year or, in the case of a Change of Control, no later than sixty (60)
days following the Change of Control.
"Disability" means being entitled to disability benefits under the
terms of the Company's long term disability plan.
"Earnings Incentive Award" means the amount of cash, if any, payable
to the Participant calculated pursuant to Section 8(b).
"Earnings Return Percentage" is the increase in the compounded annual
growth of EBITDA expressed as a percentage from the Initial Measurement Period
through the Final Measurement Period calculated on a monthly basis.
"EBITDA" means earnings of the Company determined before interest,
taxes, depreciation and amortization.
"Effective Date" means the date the Plan is approved by the
stockholders of the Company.
"Final Plan Year" means the earliest of (i) the Plan Year containing
the fourth anniversary of the Participant's Purchase Date, (ii) the Plan Year in
which such Participant's Termination of Service occurs, or (iii) the last
completed Plan Year prior to a Change of Control.
"Final Measurement Period" means the Plan Quarter containing the
fourth anniversary of the Participant's Purchase Date; provided, however, that
(i) for purposes of
3
<PAGE>
Section 8(e)(ii), the Final Measurement Period shall mean the last completed
Plan Quarter prior to the date of such Participant's Termination of Service and
(ii) for purposes of Section 8(f), the Final Measurement Period shall mean the
average of the ten (10) Trading Days ending on the 10th Trading Day prior to the
date of the Change of Control.
"Index Stock" means the common stock of any corporation (other than
the Company) included in the Market Index on each Trading Day during the Initial
Measurement Period and the Final Measurement Period.
"Initial Measurement Period" means, with respect to each Participant,
the last completed Plan Quarter prior to such Participant's Purchase Date,
except that for those Participants whose Purchase Date occurs prior to September
1, 1997, the Initial Measurement Period shall mean July 1, 1997.
"Interest Rate" means the "applicable federal rate" in effect on the
Purchase Date for loans with a maturity of four years, with interest compounded
annually, as determined by Section 1274(d) of the Code, compounded annually.
"Interest Spread" means, at the time of determination, interest
accrued at the Interest Rate on the Purchase Price.
"Market Index" shall mean those companies set forth on Exhibit A.
"Market Price" with respect to a given Security shall mean, for any
given date (or in the event such date is not a Trading Day with respect to such
Security, the last Trading Day prior to such date), the closing sale price of
such Security on such date, as reported as the New York Stock Exchange-Composite
Transactions for such day in The Wall Street Journal, mid-west edition, or, if
such Security is not listed on such exchange, as reported on the principal
national securities exchange or national automated stock quotation system on
which such Security is traded or quoted. In the event an Index Stock ceases to
exist by merger or otherwise, or ceases to be traded on a securities exchange or
national automated stock quotation system, the Market Price for such Index Stock
shall be calculated through the date such Index Stock ceased to exist or be so
traded and then adjusted by the mean increase or decrease in price for the Index
Stocks on the Market Index which remain traded on a securities exchange or
national automated stock quotation system.
"1934 Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"Participant" means each eligible employee of the Company or any of
its Subsidiaries who is designated by the Committee to receive a Purchase Award.
"Performance Award" means the opportunity to receive cash incentive
payments pursuant to Section 8.
4
<PAGE>
"Performance Period" means, with respect to each Purchase Award, the
period of time beginning on the date set forth in the Agreement with respect to
such Purchase Award and ending on the last day of the Plan Quarter containing
the fourth anniversary of the Purchase Date.
"Plan Quarter" means any of the three month periods beginning on
January 1, April 1, July 1, or October 1 of any year.
"Plan Year" means the twelve-month period commencing each July 1 and
ending the following June 30.
"Purchase Award" means an award to a Participant permitting such
Participant to purchase shares of Common Stock pursuant to Section 6 at the
Purchase Price, together with related Purchase Loan and Performance Award rights
upon exercise of the Purchase Award.
"Purchase Date" means the date a Participant purchases shares of
Common Stock pursuant to a Purchase Award.
"Purchase Loan" means an extension of credit to the Participant by the
Company evidenced by the Purchase Note and secured by a pledge of the shares of
Common Stock purchased by the Participant under the Plan or subsequently
acquired by the Participant through exercise of options granted to the
Participant pursuant to the Stock Option Plan.
"Purchase Note" means a full recourse promissory note including the
terms set forth in Section 7(a).
"Purchase Price" of the Common Stock.
(a) If shares of Common Stock are listed or admitted to unlisted
trading privileges on any national or regional securities exchange, the
last reported sale price, regular way, on the composite tape of that
exchange on the day the Purchase Price is to be determined;
(b) If the Common Stock is not listed or admitted to unlisted
trading privileges as provided in paragraph (a), and if sales prices for
shares of Common Stock are reported by the National Association of
Securities Dealers, Inc. Automated Quotations, Inc. National Market System
("NASDAQ System"), then the last sale price for Common Stock reported as of
the close of business on the day the Purchase Price is to be determined, or
if no such sale takes place on that day, the average of the high bid and
low asked prices so reported; if Common Stock is not traded on that day,
the next preceding day on which such stock was traded; or
(c) If trading of the Common Stock is not reported by the NASDAQ
System or on a stock exchange, the Purchase Price will be determined by the
Committee in its discretion based upon the best available data.
5
<PAGE>
"Retirement" means the date the Participant retires from the Company
on or after attaining age [_______].
"Security" shall mean the Common Stock or an Index Stock.
"Shareholder Return Incentive Award" means the amount of cash, if any,
payable to the Participant calculated pursuant to Section 8(c).
"Stock option Plan" means the Hanover Compressor Company 1997 Stock
Option Plan.
"Subsidiary" means a corporation (or partnership, joint venture or
other enterprise) of which the Company owns or controls, directly or indirectly,
50% or more of the outstanding shares of stock normally entitled to vote for the
election of directors (or comparable equity participation and voting power).
"Tax Rate" means, at the time of determination, the maximum marginal
effective combined federal and state tax rates on ordinary income or capital
gains, as the ease may be, to which such individual is subject.
"Termination of Service" means,
(a) with respect to an employee when the employee's employment
relationship with the Company and all of its Subsidiaries is terminated,
regardless of any severance arrangements. A transfer from the Company to a
Subsidiary or affiliate, or vice versa is not a termination of employment
for purposes of this Plan;
(b) with respect to a consultant when the consultant's consulting
relationship with the Company is terminated either due to the termination
of any consulting agreement, or otherwise, regardless of the fact that no
employment relationship exists;
(c) with respect to an officer or director when such individual
is no longer serving as an officer or director of the Company, as a
consultant to or employee of the Company and any of its Subsidiaries.
"Total Purchase Price" means, with respect to each Participant, the
Purchase Price multiplied by the number of shares of Common Stock purchased
pursuant to the Purchase Award.
"Total Shareholder Return" on a Security shall be calculated by (i)
assuming that one share of such Security is purchased on the Purchase Date at
the Average Market Price of such Security during the Initial Measurement Period,
(ii) assuming that additional shares (or fractions of shares) of such Security
are purchased upon the payment of dividends or other distributions to holders of
such Security on the initial share of such Security and on shares accumulated
through the assumed reinvestment of dividends and other distributions at a price
6
<PAGE>
equal to the Market Price of such Security on the date such dividends or
distributions are paid, (iii) calculating the number of shares (including
fractions of shares) of such Security that would be accumulated over the
Performance Period (or such shorter period as provided in the Plan), adjusting,
as necessary, for any stock split or similar events, (iv) multiplying the number
of shares of such Security (including fractions of shares) determined in clause
(iii) by the Average Market Price during the Final Measurement Period, and (v)
determining the annual compound rate of growth during the Performance Period (or
such shorter period) based upon the value determined in clause W and the value
determined in clause (iv) for such Security calculated in each case on a monthly
basis. To the extent any noncash dividend or distribution is made to holders of
a Security, the Committee shall, in its sole discretion, determine the fair
market value of such dividend or distribution, which amount shall be assumed to
be reinvested in the manner provided in clause (ii) above.
"Trading Day" means, with respect to a Security, a day on which such
Security is publicly traded.
3. SHARES SUBJECT TO THE PLAN
The aggregate number of shares of Common Stock that may be issued
under the Plan and granted as options under the Stock Option Plan shall not
exceed 1,365,062 shares and no Participant shall be awarded a Purchase Award
with respect to more than 60,000 shares; provided, however, that in the event
that at any time after the Effective Date a stock dividend, stock split,
recapitalization, merger, consolidation, or other change in capitalization, or a
sale by the Company of all or part of its assets, or any separation from the
Company, including any spin-off or other distribution to stockholders other than
an ordinary cash dividend, results in (a) the outstanding shares of Common
Stock, or any securities exchanged therefor or received in their place, being
exchanged for a different number or class of shares of stock or other securities
of the Company, or for shares of stock or other Securities of any other
corporation; or (b) new, different or additional shares or other securities of
the Company or of any other corporation being received by the holders of
outstanding shares of Common Stock, then the total number of shares of Common
Stock authorized under this Plan, and the maximum number of shares with respect
to which a Purchase Award may be awarded to a participant, shall be
appropriately adjusted by the Committee in its discretion. Shares of Common
Stock that have been included in a Purchase Award but not purchased by a
Participant on the Purchase Date may again be available for award under the Plan
or as options under the Stock Option Plan.
4. TERM OF THE PLAN
The Plan shall become effective upon the approval by the stockholders
of the Company. Prior to the Effective Date, the Committee may, in its
discretion, grant or authorize the making of Purchase Awards under the Plan as
if the Effective Date had occurred, provided that the exercise of Purchase
Awards so granted or made shall be expressly subject to the occurrence of the
Effective Date. The Plan shall be terminated on June 30, 2001; provided, that
Performance Awards and Purchase Loans outstanding as of such date shall not be
affected or impaired by the termination of the Plan.
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<PAGE>
5. ELIGIBLE PARTICIPANTS
All officers, directors and consultants of the Company and other key
employees of the Company and its Subsidiaries who, in the opinion of the
Committee, can materially influence the long-term performance of the Company
and/or its Subsidiaries are eligible to receive a Purchase Award. The Committee
shall have the power and complete discretion to select those eligible employees
who are to receive Purchase Awards.
6. STOCK PURCHASE
(a) Grant of Purchase Award. The number of shares of Common Stock
purchasable under a Purchase Award for any Participant and the Purchase
Date shall be determined by the Committee. The Committee shall, with
respect to each Purchase Award, give written notice prior to the Purchase
Date to each Participant receiving such Purchase Award stating (i) the
maximum and minimum number (which numbers may be identical) of shares of
Common Stock that may be purchased under the Purchase Award, (ii) the
Purchase Date and (iii) the Interest Rate and other terms pertaining to the
Purchase Loan.
(b) Exercise of Purchase Award. A Participant shall exercise a
Purchase Award by delivering to the Company on or prior to the Purchase
Date M a notice stating the number of shares (not less than the minimum
number and not more than the maximum number specified in the Purchase
Award) such Participant elects to purchase on the Purchase Date, and (ii)
an executed Agreement, Purchase Note and any other documents required
pursuant to the Plan, or in lieu of a Purchase Note, a Participant may
deliver cash in the amount of the Total Purchase Price for the shares of
Common Stock purchased pursuant to the Purchase Award. Any Participant who
does not elect to purchase at least the minimum number of shares under the
Purchase Award on or prior to the Purchase Date shall forfeit any rights
under the Plan with respect to such Purchase Award, including, without
limitation, any right to receive a Purchase Loan or Performance Award
related to such Purchase Award.
(c) Closing Time. The exercise of the Purchase Award, the delivery of
the Total Purchase Price and the issuance by the Company of the Common
Stock purchased pursuant to the Purchase Award shall be effective at 1:00
p.m., central time, on the Purchase Date (the Closing Time). After the
Closing Time, such Participant shall be deemed a stockholder of the Company
and shall be entitled (i) to dividends and distributions on such Common
Stock owned or pledged, (ii) to exercise all voting rights with respect to
the Common Stock, and (iii) subject to the terms of the Plan, the
Agreement, the Purchase Loan and related documents, to transfer the Common
Stock. Notwithstanding anything herein to the contrary, the Committee shall
have the absolute right, in its sole discretion, to revoke any Purchase
Award, including, without limitation, any right to receive a Purchase Loan
or Performance Award related to such Purchase Award, prior to the Closing
Time.
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7. LOAN PROVISIONS
(a) General. At the election of the Participant, the Company shall
extend a Purchase Loan to a Participant upon exercise of a Purchase Award
subject to the terms and conditions set forth in this Section 7. The
original principal amount of the Purchase Loan shall be equal to the Total
Purchase Price. Such Purchase Loan shall be evidenced by the Purchase Note
with full recourse against the maker. The obligations of each Participant
under a Purchase Note shall be unconditional and absolute and, without
limiting the generality of the foregoing, shall not be released, discharged
or otherwise affected by any change in the existence, structure or
ownership of the Company, or any insolvency, bankruptcy, reorganization or
other similar proceeding affecting the Company or its assets or the market
value of the Common Stock or any resulting release or discharge of any
obligation of the Company or the existence of any claim, set-off or other
rights which any Participant may have at any time against the Company or
any other person, whether in connection with the Plan or with any unrelated
transactions, provided that nothing herein shall prevent the assertion of
any such claim by separate suit or counterclaim.
Notwithstanding anything to the contrary in this Section 7, the
Company shall not be required to make any Purchase Loan to a Participant if the
making of such Purchase Loan will M cause the Company to violate any covenant or
similar provision in any indenture, loan agreement or other agreement, or (ii)
violate any applicable federal, state or local law, provided, that the failure
to make such Purchase Loan shall be deemed to revoke the exercise of the related
Purchase Award unless the Participant pays the Total Purchase Price in cash.
(b) Security. Payment of the Purchase Note shall be secured by a
pledge of all of the shares of Common Stock acquired by the Participant
upon the exercise of the Purchase Award to which the Purchase Loan relates
or subsequently acquired by the Participant through exercise of options
granted to the Participant pursuant to the Stock Option Plan. The
Participant shall effect such pledge by delivering to the Company (i) the
certificate or certificates for the shares of Common Stock, accompanied by
a duly executed stock power in blank, (ii) a properly executed stock pledge
agreement, and (iii) such other documents as may be required by the
Committee. Prior to payment in full of the outstanding balance on the
Purchase Note (including accrued and unpaid interest), no shares of Common
Stock or other collateral pledged to the Company under the stock pledge
agreement shall be transferable by the Participant. A transfer of a
Participant's shares of Common Stock to a revocable trust as to which the
Participant retains voting and investment power (which powers of
revocation, voting and investment may be shared with the Participant's
spouse) or a transfer to joint ownership with such Participant's spouse
shall not be deemed a transfer for purposes of this Section 7(b) or Section
8(c), although such shares shall remain pledged to secure the Purchase Loan
pursuant to Section 7(b) and, solely for the purposes of this Plan, shall
be deemed to be owned by the Participant.
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(c) Interest. Interest on the principal balance of the Purchase Loan
will accrue annually, in arrears, at the Interest Rate. Except as provided
in subsections (e), (f), (g) and (h) of this Section 7, M accrued interest
shall not be payable during the Performance Period but shall be added to
the principal balance of the Purchase Loan and (ii) interest that accrues
after the end of the Performance Period shall be paid annually in arrears.
(d) Term. The term of the Purchase Loan for any Participant shall
begin on such Participant's Purchase Date and, subject to prepayment as
provided in subsections (e), (f), (g) and (h) of this Section 7, have a
final maturity date on the last day of the Plan Quarter containing the
fourth anniversary of the Purchase Date at which time the principal balance
of the Purchase Loan (including accrued but unpaid interest) outstanding
after the prepayment pursuant to Section 7(e)(ii) following the end of the
Performance Period, if any (the `Remaining Balance"), shall be immediately
due and payable.
(e) Prepayment obligations Other than Termination of Service or Change
of Control.
(i) Dividends and Distributions. To the extent the Participant
receives cash dividends or other distributions paid in cash on Common Stock
purchased under the Plan, the Participant shall prepay the Purchase Loan by
the full pre-tax amount, net of any required tax withholding on such
dividends or other distribution, of such dividend or distribution received
within ten (10) days of receipt.
(ii) Performance Award. To the extent the Participant receives any
Earnings Incentive Award or Shareholder Return Incentive Award prior to the
earliest of (i) Termination of Service due to death or Disability, (ii) a
Change of Control or (iii) the end of the Performance Period, the
Participant shall immediately prepay the Purchase Loan by the full pre-tax
amount of such award upon receipt thereof. In the event the Participant
receives any Earnings Incentive Award or Shareholder Return Incentive Award
after the earliest of M Termination of Service due to death or Disability,
(ii) a Change of Control or (iii) the end of the Performance Period, the
Participant shall immediately prepay the Purchase Loan by the full after-
tax amount of such award upon receipt thereof, based upon the Tax Rate.
(iii) Optional Prepayments. The Participant may prepay all or any
portion of the Purchase Loan at any time without penalty.
(iv) Application of Prepayments. All prepayments made to the
Company pursuant to this Section 7(e) shall first be applied to pay accrued
interest on the Purchase Loan and then to reduce the principal balance due
on the Purchase Loan.
(f) Prepayment obligations for Termination of Service During the
Performance Period.
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(i) other Termination of Service. Except as provided in Section
7(h), in the event of a Participant's Termination of Service for any
reason, except death or Disability, prior to the end of the Performance
Period except following a Change of Control, any outstanding balance
(including accrued and unpaid interest) of the Purchase Loan shall be due
and payable immediately upon such Termination of Service.
(ii) Death or Disability. Except as provided in Section 7(h), in
the event a Participant's Termination of Service during the Performance
Period due to death or Disability, any outstanding balance (including
accrued and unpaid interest) of the Purchase Loan shall be due and payable
upon the Designated Payment Date.
(g) Prepayment Upon a Change of Control During the Performance Period.
Upon a Change of Control prior to the earlier of the Participant's
Termination of Service or the end of the Performance Period, any
outstanding balance (including accrued and unpaid interest) of the
Participant's Purchase Loan (subject to any prepayments pursuant to Section
7(e)) shall become due and payable upon of the date of such Change of
Control. Interest on the unpaid principal balance of such Purchase Loan
during such three-year period shall accrue at the Interest Rate and shall
be payable annually, in arrears, on each such anniversary.
(h) Prepayment obligations for Termination of Service for Cause. Upon
a Termination of Service for Cause following the end of the Performance
Period, any outstanding balance on the Purchase Loan (including any accrued
and unpaid interest) shall become immediately due and payable.
8. PERFORMANCE AWARD, PAYMENT OF EARNINGS INCENTIVE AWARD AND SHAREHOLDER
RETURN INCENTIVE AWARD
(a) Performance Award. The Company shall extend a Performance Award to
a Participant upon exercise of a Purchase Award, subject to the terms and
conditions set forth in this Section 8. The maximum amount payable to any
Participant pursuant to a Performance Award consisting of an Earnings
Incentive Award and a Shareholder Return Incentive Award shall equal the
Designated Award Amount at the time such cash award payments are made.
Notwithstanding any provision of the Plan to the contrary, no Performance
Award is payable under this Section 8 unless there has been a Committee
Certification with respect to such Earnings Incentive Award or Shareholder
Return Incentive Award.
(b) Earnings Incentive Award. The Earnings Incentive Award with
respect to any Purchase Award shall equal 50% of the Designated Award
Amount on the Designated Payment Date, multiplied by the Earnings Incentive
Award Percentage, subject to the Committee Certification. Except as set
forth in Section 8(e) the portion of the Earnings Incentive Award earned as
a percentage of the Designated Award Amount at the time such Earnings
Incentive Award is made pursuant to Section 8(e) will vary in accordance
with Table A that follows:
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TABLE A
EARNINGS INCENTIVE AWARD SCHEDULE
Earnings Incentive Award Percentage
Earnings Return Percentage Award Percentage
- -------------------------- -----------------------------------
Below 15%................................................. 0%
30% or more............................................... 100%
Payments for performance between the listed percentages will be interpolated on
a straight-line basis.
(c) Shareholder Return Incentive Award. The Shareholder Return
Incentive Award with respect to a particular Purchase Award shall equal 50%
of the Designated Award Amount on the Designated Payment Date, multiplied
by the Shareholder Incentive Percentage, subject to the Committee
Certification. Except as set forth in Section 8(e), the portion of the
Shareholder Return Incentive Award earned as a percentage of the Designated
Loan Amount at the time such Shareholder Return Incentive Award is made
pursuant to Section 8(e) will vary in accordance with Table B that follows:
TABLE B
SHAREHOLDER RETURN INCENTIVE AWARD SCHEDULE
Comparative Performance Percentile Shareholder Incentive Percentage
- ---------------------------------- --------------------------------
Below 75th......................................... 0%
100th.............................................. 100%
Payments for performance between the listed percentiles will be interpolated on
a straight-line basis.
(d) Timing of Payment. Payment of any Earnings Incentive Award and/or
Shareholder Return Incentive Award shall be made on the Designated Payment
Date following the earliest of the end of the Performance Period, a
Termination of service due to death or Disability or a Change of Control;
provided, however, that any payment of a Earnings Incentive Award and/or
Shareholder Return Incentive Award shall be applied to prepay the Purchase
Loan in accordance with Section 7(e)(ii).
(e) Treatment of a Termination of Service.
(i) Upon a Termination of Service prior to the end of the
Performance Period for any reason except death, Disability, or Retirement a
Participant shall not be entitled to receive any Earnings Incentive Award
nor any Shareholder Return Incentive Award.
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(ii) In the event of a Termination of Service prior to the end of
the Performance Period due to death, Disability, or Retirement the
Participant will be entitled to a potential payment under the Participant's
Earnings Incentive Award based on the Earnings Return Percentage and
Shareholder Return Incentive Award based on the Comparative Performance
Percentile both as measured from the Initial measurement Period through and
including the Final Measurement Period.
(f) Change of Control. Upon a Change of Control of the Company prior
to the Termination of Service of a Participant, the Participant shall be
entitled to the right to receive a potential Earnings Incentive Award
and/or shareholder Return Incentive Award based upon the Earnings Return
and Comparative Performance Percentile as measured from the Initial
Measurement Period through and including the Final Measurement Period.
9. PLAN ADMINISTRATION
The Plan shall be administered by the Committee. If at any time no
Committee shall be in office, the functions of the Committee specified in the
Plan shall be exercised by the "disinterested directors" on the Board (as
defined in Rule 16b-3 (c) (2) under the 1934 Act) who are also "outside
directors" within the meaning of Section 162(m) of the Code. Subject to the
provisions of the Plan, the Committee shall interpret the Plan and make such
rules as it deems necessary for the proper administration of the Plan, shall
make all other determinations necessary or advisable for the administration of
the Plan and shall correct any defect or supply any omission or reconcile any
inconsistency in the Plan in the manner and to the extent that the Committee
deems desirable to carry the Plan into effect. Performance Awards under Section
8 are intended to qualify as performance-based compensation within the meaning
of Section 162(m) of the Code, and these provisions shall be interpreted
accordingly. Among other things, the Committee shall have the authority, subject
to the terms of the Plan, to determine (i) the individuals to whom the Purchase
Awards are granted, (ii) the time or times the Purchase Awards are granted,
(iii) the Purchase Dates for such Purchase Awards, (iv) the basis for any
Termination of Service, including whether or not it was for Cause, Disability or
otherwise (which determination shall be reasonable), (v) the calculation of
Total shareholder Return, (vi) the Comparative Performance Percentile, (vii) the
calculation of Earnings Return, (viii) the Committee Certification, and (ix) the
forms, terms and provisions of the Agreement and any other documents under the
Plan. Any action taken or determination made by the Committee pursuant to this
paragraph and the other paragraphs of the Plan in which the Committee is given
discretion shall be final and conclusive on all parties. The act or
determination of a majority of the Committee shall be deemed to be the act or
determination of the entire Committee. The Committee may consult with counsel,
who may be counsel to the Company, and such other advisors as the Committee may
deem necessary and/or desirable, and the members of the Committee shall not
incur any liability for any action taken in good faith in reliance upon the
advice of counsel or any other advisor.
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10. AMENDMENT AND DISCONTINUANCE OF THE PLAN
The Board, upon the recommendation of the Committee, may amend,
suspend or terminate the Plan at any time, subject to the provisions of this
Section 10. No amendment, suspension or termination of the Plan may cause the
Plan to fail to meet the requirements of Rule 16b-3 promulgated under the 1934
Act, or such successor rule as may hereinafter be in effect, or Section 162(m)
of the Code or may, without the consent of the Participant, adversely affect
such Participant's rights under the Plan in any material respect. In addition,
no such amendment shall be made without the approval of the Company's
stockholders to the extent such approval is required by Rule 16b-3, law or
agreement.
11. MISCELLANEOUS PROVISIONS
(a) Unsecured Status of Claim. Participants and their beneficiaries,
heirs, successors and assigns shall have no legal or equitable rights,
interests or claims in any specific property or assets of the Company. No
assets of the Company shall be held under any trust for the benefit of
Participants, their beneficiaries, heirs, successors or assigns, or held in
any way as collateral security for the fulfillment of the Company's
obligations under the Plan.
Any and all of the Company's assets shall be, and shall remain, the
general unpledged and unrestricted assets of the Company as they relate to this
Plan. The Company's obligations under the Plan shall be merely that of an
unfunded and unsecured promise of the Company to pay employee compensation
benefits in the future.
(b) Employment Not Guaranteed. Nothing contained in the Plan nor any
related Agreement nor any action taken in the administration of the Plan
shall be construed as a contract of employment or as giving a Participant
any right to be retained in the Service of the Company.
(c) Nonassignability. Except as specifically provided herein, no
person shall have any right to commute, sell, assign, transfer, pledge,
anticipate, mortgage or otherwise encumber, hypothecate or convey in
advance of actual receipt any Performance Award, if any, payable under the
Plan, or any part thereof, or any interest therein, which are, and all
rights to which are, expressly declared to be unassignable and
nontransferable. No portion of the amounts payable shall, prior to actual
payment, be subject to seizure, attachment, lien or sequestration for the
payment of any debts, judgments, alimony or separate maintenance owed by a
Participant or any other person, nor be transferable by operation of law in
the event of the Participant's or any other person's bankruptcy or
insolvency. Any such transfer or attempted transfer in violation of the
preceding provisions shall be considered null and void. In addition, no
derivative security (as defined in Rule 16a-l(c), as promulgated by the
Commission under the 1934 Act, or any successor definition adopted by the
Commission) issued under the Plan shall be transferable by a Participant
(to the extent transferable under the Plan) other than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations
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order as defined by the Code, or Title I of the Employee Retirement Income
Securities Act of 1974 or the rules promulgated thereunder.
(d) Separability, Validity. This Plan is intended to qualify under
Rule 16b-3 of the 1934 Act. If any of the terms or provisions of this Plan
conflict with the requirements of Rule 16b-3, then such terms and
provisions shall be deemed inoperative to the extent they so conflict with
such requirements. In the event that any provision of the Plan or any
related Agreement is held to be invalid, void or unenforceable, the same
shall not affect, in any respect whatsoever, the validity of any other
provision of the Plan or any related Agreement.
(e) Withholding Tax. The Company shall withhold from all benefits due
under the Plan an amount sufficient to satisfy any federal, state and local
tax withholding requirements.
(f) Applicable Law. The Plan and any related Agreements shall be
governed in accordance with the laws of the State of Delaware without
regard to the application of the conflicts of law provisions thereof. The
obligation of the Company with respect to the grant and exercise of
Purchase Awards shall be subject to all applicable laws rules and
regulations and such approvals by any governmental agencies as may be
required, including, without limitation, the effectiveness of any
registration statement required under the Securities Act of 1933, as
amended, and the rules and regulations of any securities exchange on which
the Common Stock may be listed.
(g) Inurement of Rights and obligations. The rights and obligations
under the Plan and any related Agreements shall inure to the benefit of,
and shall be, binding upon, the Company, its successors and assigns, and
the Participants and their beneficiaries.
(h) Notice. All notices and other communications required or permitted
to be given under this Plan shall be in writing and shall be deemed to have
been duly given if delivered personally or mailed first class, postage
prepaid, as follows: (A) if to the Company - at its principal business
address to the attention of the Secretary; (B) if to any Participant - at
the last address of the Participant known to the sender at the time the
notice or other communication is sent.
(i) Exclusion from Pension and Other Benefit Plan Computation. By
exercise of a Purchase Award, each Participant shall be deemed to have
agreed that such Purchase Award and any Service Incentive Award and
Shareholder Return Incentive Award payable under Section 8 hereof, as
applicable, is special incentive compensation that will not be taken into
account, in any manner, as salary, compensation or bonus in determining the
amount of any payment under any pension, retirement or other employee
benefit plan of the Company or any of its Subsidiaries. In addition, each
beneficiary of a deceased Participant shall be deemed to have agreed that
such Purchase Award and any Service Incentive Award and Shareholder Return
Incentive Award, as applicable, will not affect the amount of any life
insurance coverage, if any, provided by the Company or any
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<PAGE>
of its Subsidiaries on the life of the Participant which is payable to such
beneficiary under any life insurance plan covering employees of the Company
or any of its Subsidiaries.
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[LETTERHEAD OF LATHAM & WATKINS]
EXHIBIT 5.1
March 8, 2000
Hanover Compressor Company
12001 North Houston Rosslyn
Houston, Texas 77086
Re: Registration Statement on Form S-8
Ladies and Gentlemen:
In connection with the preparation and filing by Hanover Compressor
Company, a Delaware Corporation (the "Company") with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"), of a Registration Statement on Form S-8 (the "Registration Statement")
relating to the issuance by the Company of 1,456,763 shares of the Company's
Common Stock, par value $.001 per share (the "Shares"), pursuant to the 1996
Employee Stock Offering, the December 23, 1996 Common Stock Offering, the 1995
Management Stock Offering, the 1995 Employee Stock Offering, the 1993 Management
Stock Offering, the 1992 Stock Offering and the Subscription Agreement between
Hanover Compressor Company and Donald M. DeVille and the 1997 Stock Purchase
Plan (collectively, the "Stock Offerings"), you have requested our opinion with
respect to the matters set forth below.
In our capacity as your counsel in connection with such registration,
we are familiar with the proceedings taken by the Company and its predecessor in
connection with the authorization, issuance and sale of the Shares. In
addition, we have made such legal and factual examinations and inquires,
including an examination of originals or copies certified or otherwise
<PAGE>
Hanover Compressor Company
March 7, 2000
Page 2
identified to our satisfaction of such documents, corporate records and
instruments, as we have deemed necessary or appropriate for purposes of this
opinion.
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the
conformity to authentic original documents of all documents submitted to us as
copies.
We are opining herein as to the effect of the subject transaction only
of the General Corporation Law of the State of Delaware, and we express no
opinion with respect to the applicability thereto, or the effect thereon, of the
laws of any other jurisdiction or any other Delaware laws, or as to any matters
of municipal law or the laws of any local agency within the state.
Subject to the foregoing, it is our opinion that the Shares have been
duly authorized, validly issued, and are fully paid and nonassessable.
We consent to your filing this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ LATHAM & WATKINS
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Registration Statement of our report dated
February 25, 1999, which report is included in Hanover Compressor Company's
Quartely Report on form 10-K dated March 31, 1999.
/s/ PricewaterhouseCoopers LLP
