As Filed With the Securities and Exchange Commission on February 27, 2001
Registration No. 333-54944
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HANOVER COMPRESSOR COMPANY
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0625124
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
12001 North Houston Rosslyn
Houston, Texas 77086
(281) 447-8787
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Michael J. McGhan
President and Chief Executive Officer
Hanover Compressor Company
12001 North Houston Rosslyn
Houston, Texas 77086
(281) 447-8787
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
----------------
Copies To:
Richard S. Meller, Esq. John J. Sabl, Esq.
Latham & Watkins Sidley & Austin
233 South Wacker Drive Bank One Plaza
Suite 5800 10 South Dearborn Street
Chicago, Illinois 60606 Chicago, Illinois 60603
(312) 876-7700 (312) 853-7000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated February 27, 2001.
10,000,000 Shares
HANOVER COMPRESSOR COMPANY
Common Stock
-----------
Hanover Compressor Company is offering 2,500,000 of the shares to be sold in
the offering. The selling stockholders identified in this prospectus are
offering an additional 7,500,000 shares. Hanover Compressor Company will not
receive any of the proceeds from the sale of the shares being sold by the
selling stockholders.
The common stock is listed on the New York Stock Exchange under the symbol
"HC". The last reported sale price of the common stock on February 26, 2001 was
$37.69 per share.
Concurrent with this offering of common stock, we are offering $150,000,000
aggregate principal amount at maturity of convertible senior notes due 2008.
The convertible notes will be offered pursuant to a separate prospectus.
Neither offering is contingent upon the other.
See "Risk Factors" beginning on page 12 to read about factors you should
consider before buying shares of common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
Per Share Total
--------- -----
Initial price to public........................................ $ $
Underwriting discount.......................................... $ $
Proceeds, before expenses, to Hanover.......................... $ $
Proceeds, before expenses, to the selling stockholders......... $ $
To the extent that the underwriters sell more than 10,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
1,500,000 shares from the selling stockholders at the initial price to public
less the underwriting discount.
-----------
The underwriters expect to deliver the shares against payment in New York,
New York on March , 2001.
Goldman, Sachs & Co. Credit Suisse First Boston
Salomon Smith Barney JP Morgan
Dain Rauscher Wessels
First Union Securities, Inc.
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Prospectus dated March , 2001.
----------------
You should rely only on this prospectus. We have not, and the selling
stockholders have not, authorized any other person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not, and the selling
stockholders are not, making an offer to sell these securities in any
jurisdiction where the offer of sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
----------------
2
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully. The information provided in
this prospectus gives effect to a two-phase restructuring of Hanover Compressor
Company (the "Restructuring") completed in 1999 and 2000. The sole purpose of
the Restructuring was to create a holding company, and the Restructuring has
had no effect on our business. Pursuant to the Restructuring, substantially all
of our assets and operations are now at a subsidiary level. Share numbers and
per share amounts reflect a 2-for-1 split of our common stock effected in June
2000. Except as described in this paragraph and unless the context requires
otherwise, "Hanover," "we," "us," "our" or similar terms in this prospectus
refer to "new" Hanover Compressor Company and its subsidiaries following
completion of the Restructuring.
The Company
We are a leading provider of a broad array of natural gas compression, gas
handling and related services in the United States and select international
markets. Founded in 1990 and publicly held since 1997, we operate the largest
compressor rental fleet, in terms of horsepower, in the gas compression
industry and provide our services on a rental, contract compression,
maintenance and acquisition leaseback basis. Our maintenance business supplies
parts and services to customers that own their own compression equipment but
want to outsource their compression operations. Our compression services are
complemented by our compressor and oil and gas production equipment fabrication
operations and gas processing, gas treatment, gas measurement and power
generation services, which broaden our customer relationships both domestically
and internationally. Our products and services are essential to the production,
gathering, processing, transportation and storage of natural gas and are
provided primarily to independent and major producers and distributors of
natural gas.
As of December 31, 2000, we had a fleet of 4,840 compression rental units
with an aggregate capacity of 2,151,000 horsepower, up from 117,000 horsepower
in 1992, which represents a 44% compound annual growth rate ("CAGR"). From 1992
through 1999, revenues have grown from $33.1 million to $317.0 million, or a
CAGR of 38%; earnings before interest, leasing expense, taxes, distributions on
mandatorily redeemable convertible preferred securities and depreciation and
amortization ("EBITDA") have grown from $7.3 million to $132.1 million, or a
CAGR of 51%; net income has grown from $1 million to $40.4 million, or a CAGR
of 70%; and earnings per share have grown from $0.06 to $0.66, or a CAGR of
35%. From the nine months ended September 30, 1999 to the nine months ended
September 30, 2000, revenues grew from $227.8 million to $370.2 million, or by
63%; EBITDA grew from $94.8 million to $139.4 million, or by 47%; net income
grew from $27.5 million to $39.3 million, or by 43%; and earnings per share
grew from $0.45 to $0.61, or by 35%. Further, we have maintained average
horsepower utilization of approximately 93% from 1994 to 2000, compared to
industry rates that we believe have been 80% to 85% for this period.
Through internal growth and a series of strategic acquisitions, we have
become the largest operator of rental compression horsepower capacity in the
United States. We began international operations in 1995 and have become one of
the largest providers of compression services in the rapidly growing Latin
American and Canadian markets. As of December 31, 2000, our compression rental
fleet included the following:
Units Horsepower
----- ----------
U.S............................................................ 4,410 1,741,000
International.................................................. 430 410,000
----- ---------
Total Fleet.................................................. 4,840 2,151,000
===== =========
3
In addition to our business of providing natural gas compression services,
we fabricate gas compressors for sale to third parties and for inclusion in our
rental fleet. We also fabricate equipment used by, and provide treatment
services to, oil and gas producers to separate and treat oil and gas in order
to facilitate further processing, transportation and sale. Oil and gas
production equipment is typically installed at the wellhead immediately before
beginning large-scale production and remains at the site for the life of the
well. For the nine months ended September 30, 2000, compression rental and
service represented approximately 66% of total revenues, while compressor
fabrication and oil and gas equipment fabrication represented 16% and 15% of
revenues, respectively. Compression rental and service operations generated
over 86% of gross margin for the nine months ended September 30, 2000, while
compressor and oil and gas equipment fabrication represented 6% and 7%,
respectively.
Industry Overview
We compete primarily in the market for transportable natural gas
compression units of up to 4,450 horsepower. We believe that aggregate domestic
natural gas compression horsepower grew from approximately 8.8 million
horsepower at the end of 1992 to approximately 14.9 million horsepower at the
end of 1999, reflecting a CAGR of 8%. We believe that the domestic gas
compression market will continue to grow due to increasing consumption of
natural gas, continued aging of the natural gas reserve base and the attendant
decline of wellhead pressures and discovery of new reserves.
We believe that the rental portion of the domestic gas compression market
grew from approximately 1.8 million horsepower at the end of 1992 to
approximately 4.8 million horsepower at the end of 1999, reflecting a CAGR of
15%. We believe that the growth in rental compression capacity in the United
States has been driven primarily by the trend toward outsourcing by energy
producers and processors. Internationally, we believe that similar growth
opportunities for compressor rental and sales exist due to anticipated
increases in energy consumption worldwide, new international environmental and
conservation laws and increased outsourcing by energy producers and processors.
As worldwide gas consumption continues to grow, we believe that there will also
be a continued demand for the purchase and sale of gas compression units.
We believe that several factors are contributing to the strong demand for
compression equipment and related services: (1) domestic natural gas
consumption is projected to grow at a CAGR of approximately 3% over the next
five years; (2) growing natural gas consumption is served by a universe of
maturing natural gas fields that increasingly require compression to maintain
economic levels of production; (3) the trend toward outsourcing of compression
services by producers and processors of natural gas is continuing; (4)
customers are consolidating the number of service providers they are using and
are increasingly looking for preferred compressor services vendors; and (5) the
compression sector has been consolidating into larger companies that can more
effectively serve the needs of large oil and gas producers by offering a wider
range of compression and related services across a larger geographic area. For
example, the five largest acquisition transactions announced in the compression
industry during 2000 represented a total of approximately 1.8 million
horsepower.
Unlike most other energy service sectors, the domestic gas compression
industry is relatively insensitive to fluctuations in natural gas commodity
prices, due in large part to the demand characteristics of the industry. Demand
for compression services is driven by the consumption of natural gas, and
compression services are essential to all phases of the production and
transportation of natural gas. The oil and gas production equipment industry is
more sensitive than the gas compression industry to the volatility of oil and
natural gas prices, as the growth of this industry is likely to more closely
track oil and gas exploration activity.
4
Growth Strategy
Our business strategy is to continue building on our reputation as the
premier operating company in natural gas compression and to grow our rental
fleet and other related businesses in accordance with a proven growth strategy.
From January 1, 1996 through December 31, 1999, our revenue, EBITDA,
earnings (before charges relating to redeemable preferred stock) and earnings
per share (before charges relating to redeemable preferred stock) growth have
averaged 33%, 44%, 58% and 46% per year, respectively. During this same period,
the rental compression market, driven by growth in consumption and the trend
toward outsourcing, has consistently grown at approximately 15% per year, while
the overall natural gas industry has been quite volatile. For example, from
January 1, 1996 through December 31, 2000, average domestic natural gas prices
have ranged from around $2.34 per thousand cubic feet to around $10.53 per
thousand cubic feet, while drilling activity, measured by domestic Gulf of
Mexico active rig counts, has ranged from approximately 700 to 1,110.
We intend to build on our results to date by continuing to pursue our
growth strategy, which includes the following key elements:
. Continue to Expand in our Existing Domestic Markets: Since 1992,
approximately 50% of the aggregate horsepower added by the oil and gas
industry has been outsourced to third party rental companies like us.
Consequently, the percentage of aggregate compression horsepower
outsourced by the industry has increased from nearly 20% in 1992 to 31%
in 1999. This move to outsourcing has been driven by several factors,
including: (1) a desire to maximize production revenue by improving
mechanical run-time and reducing equipment maintenance and personnel
costs; (2) a desire to increase capital available for other uses; and (3)
a desire to improve operating flexibility by exploiting the rental
company's greater asset base and extensive field service organization to
efficiently resize compressor units to meet changing reservoir
conditions. We believe the breadth and quality of our services, the depth
of our customer relationships and our presence throughout the gas
producing regions of the United States position us to capture additional
outsourced business.
. Exploit International Opportunities: While approximately 65% of worldwide
compression capacity is located in the United States, the region
represents only 31% of worldwide gas consumption, 5% of total population
and 3% of total worldwide proven gas reserves. Traditionally, oil and gas
producers in international markets have satisfied their compression needs
through the purchase of compression equipment rather than outsourcing.
However, over the last ten years, international oil and gas producers
have become more receptive to outsourcing their compression needs. We
have a strong presence in Latin America with leading market shares in
Colombia, Bolivia, Argentina, Mexico and Venezuela. Canada is also an
important growth market for us and the industry. In addition, we have
operations in Indonesia and the Gulf of Thailand and are exploring
opportunities to further expand our presence in Southeast Asia, and we
are developing our presence in Europe, the Middle East, Australia and
North and West Africa. We typically see higher pricing relative to the
domestic market in international contracts. For the nine months ended
September 30, 2000, we had 384,000 horsepower in service internationally,
or 18% of total horsepower, generating 32% of rental revenue.
. Capture Acquisition Leaseback Opportunities: We believe that as of
December 31, 1999, U.S. energy producers, transporters and processors
directly owned and operated approximately 10 million horsepower of
compression units, representing about 69% of the total U.S. compression
market. In recent years, many major oil and gas companies have been
divesting
5
domestic energy reserves to independent energy producers who more
frequently outsource their compressor needs in order to reduce operating
costs. We offer energy producers the opportunity to outsource their
operations and reallocate capital to core activities through our
acquisition leaseback program, whereby we purchase in-place compression
equipment and lease the equipment back to the former owner under long-term
operating and maintenance contracts. We believe that our extensive
geographic reach and our experience with a wide range of compression
equipment and conditions give us a competitive advantage in capturing
acquisition leaseback opportunities. Between January 1, 1997 and December
31, 2000, we executed acquisition leaseback transactions for approximately
500 compression units totaling 286,000 horsepower.
. Selectively Pursue Industry Acquisitions: Since 1992, we have acquired
over three dozen small, well-established regional companies providing
compressor rental and related services while delivering superior
financial results. In addition, in 2000 we completed two sizable
acquisitions of compression companies, PAMCO Services International and
the compression services division of Dresser-Rand Company, and entered
into an agreement to acquire OEC Compression Corporation, a transaction
we expect to close in March 2001. We also pursue acquisitions, such as
our acquisition of Applied Process Solutions, Inc. in June 2000, to
expand our offerings of related products and services and geographic
scope. We continue to actively seek additional acquisitions.
. Offer Broad-Based Solutions: We believe that we are the only company in
our industry that offers outsourced rental compression as well as
compressor and oil and gas production equipment fabrication and related
services. By offering a broad range of services that complement our
historic strengths, we believe that we can offer more complete solutions
to our customers and thereby drive growth in each of our businesses.
--Our leading position in the design and fabrication of compressors for
sale helps us to meet our rental fleet growth requirements as well as
the needs of energy industry participants who need to resize or replace
existing units on existing projects or obtain compression products and
services for new projects.
--Our compressor services business supplies parts and services and
manages compression units for customers who own their units, thereby
helping us to develop relationships for future outsourcing business.
--We design and fabricate oil and gas production equipment and provide
related services essential to the operation of recently completed oil
and gas wells, all of which enhance our opportunity to deliver
compression services and equipment to customers as the need develops
over a well's useful life.
As our customers look to us to provide an ever-widening array of
outsourced services from wellhead to end-user, we continue to build our
core business with emerging business opportunities, such as turnkey gas
treating, gas measurement and power generation sales and services. As
with compression, these emerging businesses are increasingly being
outsourced by industry participants and represent an additional
opportunity to gain incremental revenue from current and potential
customers.
. Focus on High Horsepower Units: The high horsepower compression segment,
made up of units of greater than 500 horsepower, is the fastest growing
segment of the rental compression market. These units are typically
installed on larger wells, gathering systems
6
and processing and treating facilities that, because of their size and
generally more attractive unit economics, tend to be more insulated from
declining commodity prices. As a result, compressors in this segment tend
to realize higher utilization rates. The greater technical requirements of
these larger systems enable us to differentiate our compression products
and services and offer related products and services. In addition, most
compressors installed internationally are high horsepower units. As of
December 31, 2000, approximately 70% of our aggregate horsepower consists
of high horsepower compression units. We believe the breadth of our
experience, the quality of our service and of our compressor, production
and treating equipment fabrication operations and our international
experience will enable us to continue to be successful in this segment of
the market.
. Capitalize on our Decentralized Management and Operating Structure: We
use a decentralized management and operational structure to provide
superior customer service in a relationship-driven, service-intensive
industry. We believe that we benefit from our regionally-based network,
local presence, experience and in-depth knowledge of customers' operating
needs and growth plans, providing us with significant competitive
advantages and internally-driven growth. In order to maintain this
regional strength and to create incentives to attract, motivate and
retain an entrepreneurial, highly experienced management team, since 1992
we have offered equity ownership and stock option programs for
approximately 400 of our employees who have purchased, or have options to
purchase, over 15% of our common stock.
We believe the successful execution of our growth strategy, combined with
our focus on and leadership position in the compression industry, will enable
us to continue to differentiate our company and drive future growth and
profitability.
Our principal executive office is located at 12001 North Houston Rosslyn,
Houston, Texas 77086, Telephone (281) 447-8787.
Recent Developments
On February 27, 2001, we announced that we expect to report cash flow and
earnings per share results that are within the range of analysts' consensus
estimates for the fourth quarter ended December 31, 2000. Analysts who follow
Hanover Compressor Company have projected EBITDA (income before income taxes,
interest expense, leasing expense, distributions on mandatorily redeemable
convertible preferred securities, and depreciation and amortization) of between
$62 million and $68 million for the fourth quarter of 2000. These analysts have
also estimated our earnings per fully diluted share to be between $0.26 and
$0.28. We plan to issue our results for the fourth quarter and full year 2000
after the markets close on March 8th.
7
The Offering
Common stock offered by:
Hanover Compressor Company............ 2,500,000 shares
Selling stockholders.................. 7,500,000 shares(1)
Total offering........................ 10,000,000 shares(1)
Common stock to be outstanding after
the offering......................... 68,887,496 shares
Use of proceeds....................... We intend to use the net proceeds we
receive from this offering and our
concurrent notes offering for working
capital and general corporate purposes,
including potential acquisitions.
Initially, we intend to use most of the
proceeds to repay indebtedness.
New York Stock Exchange symbol........ HC
--------
(1)Assumes that the underwriters' option to purchase an additional 1,500,000
shares is not exercised.
8
Summary Consolidated Financial Data
In the table below, we have provided you with our summary historical
consolidated financial data and pro forma combined condensed financial data.
The historical consolidated financial data for each of the fiscal years in the
five-year period ended December 31, 1999 were derived from our audited
consolidated financial statements. Certain financial data for the years
presented have been restated as described in Note 18 to the audited
consolidated financial statements included in this prospectus. The net effect
of the restatement on the periods presented was an increase in selling, general
and administrative expenses of $732,000, $272,000, and $1,013,000; a decrease
in net income of $461,000, $158,000, and $624,000; and a decrease in earnings
per common share of basic: $.01, $.00 and $.03 and diluted: $.01, $.01, and
$.02 for the years ended December 31, 1997, 1996 and 1995, respectively. The
historical consolidated financial data as of and for the nine months ended
September 30, 2000 and 1999 were derived from our unaudited condensed
consolidated financial statements. In the opinion of management, such unaudited
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position and
results of operations of such interim periods.
As of September 2000, we acquired the compression services division of
Dresser-Rand Company for approximately $177 million in cash and common stock,
subject to certain post-closing adjustments pursuant to the acquisition
agreement which to date have resulted in an increase in the purchase price to
approximately $194 million due to increases in net assets acquired. The pro
forma combined condensed financial data present our pro forma results of
operations as if this acquisition had occurred on January 1, 1999 and were
derived from the pro forma combined condensed statements of operations for the
nine months ended September 30, 2000 and the year ended December 31, 1999
included in this prospectus. The pro forma financial data does not reflect the
pro forma effect of our acquisitions of Applied Process Solutions, Inc.,
completed in June 2000, PAMCO Services International, completed in July 2000,
or OEC Compression Corporation, which we expect to complete in March 2001. The
pro forma financial data does not purport to be indicative of the results which
would actually have been obtained had the acquisition been completed on the
date indicated or which may be obtained in the future.
The information in this section should be read along with our consolidated
financial statements, accompanying notes and other financial information, the
combined financial statements of the compression services division of Dresser-
Rand Company and related pro forma financial data that are included or
incorporated by reference in this prospectus. See "Where You Can Find More
Information."
9
Year Ended December 31,
-------------------------------------------------------------
1999 1999 1998 1997(1) 1996(1) 1995(1)(2)
--------- -------- -------- --------- -------- ----------
Pro forma
(in thousands, except per share amounts)
INCOME STATEMENT DATA:
Total revenues:......... $476,134 $317,028 $281,957 $ 198,798 $136,011 $ 95,964
-------- -------- -------- --------- -------- --------
Expenses:
Operating.............. 269,943 151,169 150,652 109,432 75,031 56,256
Selling, general and
administrative........ 47,105 33,782 26,626 21,514 16,711 13,555
Depreciation and
amortization(3)....... 45,760 37,337 37,154 28,439 20,722 13,494
Lease expense.......... 22,090 22,090 6,173 -- -- --
Interest expense....... 17,153 8,786 11,716 10,728 6,594 4,560
Distributions on
mandatorily
redeemable
convertible preferred
securities............ 278 278 -- -- -- --
-------- -------- -------- --------- -------- --------
Total expenses....... 402,329 253,442 232,321 170,113 119,058 87,865
-------- -------- -------- --------- -------- --------
Income before income
taxes.................. 73,805 63,586 49,636 28,685 16,953 8,099
Provision for income
taxes.................. 26,865 23,145 19,259 11,043 6,730 3,109
-------- -------- -------- --------- -------- --------
Net income.............. $ 46,940 $ 40,441 $ 30,377 $ 17,642 $ 10,223 $ 4,990
======== ======== ======== ========= ======== ========
Net income available to
common stockholders:
Net income............. $ 46,940 $ 40,441 $ 30,377 $ 17,642 $ 10,223 $ 4,990
Dividends on Series A
and Series B
preferred stock....... -- -- -- -- (1,773) (832)
Series A preferred
stock exchange........ -- -- -- -- (3,794) --
Series B preferred
stock conversion...... -- -- -- -- (1,400) --
-------- -------- -------- --------- -------- --------
Net income available
to common
stockholders.......... $ 46,940 $ 40,441 $ 30,377 $ 17,642 $ 3,256 $ 4,158
======== ======== ======== ========= ======== ========
Weighted average common
and common equivalent
shares outstanding:
Basic(4)............... 59,968 57,048 56,936 51,246 40,996 28,746
-------- -------- -------- --------- -------- --------
Diluted(4)............. 63,974 61,054 60,182 54,690 44,046 30,716
-------- -------- -------- --------- -------- --------
Earnings per common
share:
Basic(4)............... $ .78 $ .71 $ .53 $ .34 $ .08 $ .14
======== ======== ======== ========= ======== ========
Diluted(4)(5).......... $ .73 $ .66 $ .50 $ .32 $ .07 $ .14
======== ======== ======== ========= ======== ========
OTHER DATA:
EBITDA(6).............. $132,077 $104,679 $ 67,852 $ 44,269 $ 26,153
CASH FLOWS PROVIDED BY
(USED IN):
Operating activities... $ 68,222 $ 31,147 $ 32,219 $ 20,276 $ 9,088
Investing activities... (92,114) (14,699) (164,490) (87,683) (68,474)
Financing activities... 18,218 (9,328) 129,510 71,740 62,206
BALANCE SHEET DATA (END
OF PERIOD):
Cash and cash
equivalents........... $ 5,756 $ 11,503 $ 4,561 $ 7,322 $ 2,989
Working capital........ 107,966 113,264 58,027 41,513 23,270
Net property, plant
and equipment......... 497,465 392,498 394,070 266,406 198,074
Total assets........... 756,510 614,590 506,452 341,387 252,313
Long-term debt......... 69,681 156,943 158,838 122,756 50,451
Mandatorily redeemable
convertible preferred
securities............ 86,250 -- -- -- --
Preferred
stockholders'
equity................ -- -- -- -- 26,894
Common stockholders'
equity................ 367,914 315,470 287,028 176,113 138,678
10
Nine Months Ended
September 30,
------------------------------
2000 2000 1999
--------- ---------- --------
Pro forma
INCOME STATEMENT DATA:
Total revenues:................................ $426,686 $ 370,222 $227,838
-------- ---------- --------
Expenses:
Operating..................................... 238,675 196,326 108,837
Selling, general and administrative........... 41,102 34,481 24,232
Depreciation and amortization................. 42,588 36,830 28,536
Lease expense................................. 29,596 29,596 14,727
Interest expense.............................. 11,138 5,560 7,841
Distributions on mandatorily redeemable
convertible preferred securities............. 4,776 4,776 --
-------- ---------- --------
Total expenses.............................. 367,875 307,569 184,173
-------- ---------- --------
Income before income taxes..................... 58,811 62,653 43,665
Provision for income taxes..................... 21,876 23,305 16,156
-------- ---------- --------
Net income..................................... $ 36,935 $ 39,348 $ 27,509
======== ========== ========
Weighted average common and common equivalent
shares outstanding:
Basic(4)...................................... 62,937 60,324 56,966
-------- ---------- --------
Diluted(4).................................... 67,232 64,619 60,974
-------- ---------- --------
Earnings per common share:
Basic(4)...................................... $ .59 $ .65 $ .48
======== ========== ========
Diluted(4).................................... $ .55 $ .61 $ .45
======== ========== ========
OTHER DATA:
EBITDA(6)..................................... $ 139,415 $ 94,769
CASH FLOWS PROVIDED BY (USED IN):
Operating activities.......................... $ 7,491 $ 41,427
Investing activities.......................... (162,614) (12,386)
Financing activities.......................... 162,453 (31,376)
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents..................... $ 13,042 $ 9,090
Working capital............................... 224,684 129,866
Net property, plant and equipment............. 688,588 426,527
Total assets.................................. 1,271,468 683,980
Long-term debt................................ 173,835 124,540
Mandatorily redeemable convertible preferred
securities................................... 86,250 --
Common stockholders' equity................... 618,595 347,571
--------
(1) Restated as discussed in note 18 to the Consolidated Financial Statements.
The net effect of the restatement on the periods presented was an increase
in selling, general and administrative expenses of $732,000, $272,000, and
$1,013,000; a decrease in net income of $461,000, $158,000, and $624,000;
and a decrease in earnings per common share of basic: $.01, $.00 and $.03
and diluted: $.01, $.01, and $.02 for the years ended December 31, 1997,
1996 and 1995, respectively.
(2) The historical financial information includes the results of operations of
Hanover Compressor Company and its wholly-owned subsidiaries. During 1995,
we acquired Astra Resources Compression, Inc., a significant subsidiary.
(3) In order to more accurately reflect the estimated useful lives of natural
gas compressor units in the rental fleet, effective January 1, 1996 we
changed the lives over which these units are depreciated from 12 to 15
years. The effect of this change was a decrease in depreciation expense of
$2.6 million and an increase in net income of $1.5 million ($.03 per
diluted common share) for the year ended December 31, 1996.
(4) In June 2000, we completed a 2-for-1 stock split effected in the form of a
100% stock dividend. All weighted average and common equivalent shares and
earnings per common share information have been restated for all periods
presented to reflect this stock split.
(5) Diluted earnings per share in 1996 was $.23 per share before the effects of
charging retained earnings for $1.8 million relating to dividends on
redeemable preferred stock and one-time charges to retained earnings for
(i) $3.8 million related to the exchange of all Series A preferred stock
for subordinated notes and (ii) $1.4 million related to the conversion of
all Series B preferred stock to common stock.
(6) EBITDA consists of the sum of consolidated net income before interest
expense, lease expense, distributions on mandatorily redeemable convertible
preferred securities, income tax and depreciation and amortization. We
believe that EBITDA is a meaningful measure of our operating performance
and is also used to measure our ability to meet debt service requirements.
EBITDA should not be considered as an alternative performance measure
prescribed by generally accepted accounting principles.
11
RISK FACTORS
An investment in our common stock involves risks. You should carefully
consider and evaluate all of the information in this prospectus, including the
following risk factors, before investing.
Industry Conditions--A prolonged, substantial reduction in oil or gas prices
could adversely affect our business.
Our operations depend upon the levels of activity in natural gas
development, production, processing and transportation. In recent years, oil
and gas prices and the level of drilling and exploration activity have been
extremely volatile. For example, from mid-1998 to mid-1999, oil and gas
exploration and development activity and the number of well completions
declined due to a significant reduction in oil and gas prices. As a result, the
demand for our gas compression and oil and gas production equipment was
adversely affected. Any future significant, prolonged decline in oil and gas
prices could have a material adverse effect on our business, results of
operations and financial condition.
Short Lease Terms--Many of our compressor leases have short initial terms, and
we cannot be sure that the compressors will stay out on location after the end
of the initial lease term.
The length of our leases varies based on operating conditions and customer
needs. In most cases, under currently prevailing lease rates, the initial lease
terms are not long enough to enable us to fully recoup the average cost of
acquiring or manufacturing the compressors. We cannot assure you that a
substantial number of our lessees will continue to renew their leases or that
we will be able to re-lease the compressors to new customers or that any
renewals or re-leases will be at comparable lease rates. An inability to renew
or re-lease a substantial portion of our compressor rental fleet would have a
material adverse effect upon our business, results of operations and financial
condition.
Substantial Capital Requirements--We require a substantial amount of capital to
expand our compressor rental fleet and our complementary businesses.
We plan to continue to make substantial capital investments to expand our
compressor rental fleet and our complementary businesses. Including business
acquisitions, we invested approximately $374.5 million in capital expenditures
during the nine months ended September 30, 2000. We expect to invest
approximately $318 million in capital expenditures during 2001 (without giving
effect to any new material acquisitions). The amount of these expenditures may
vary depending on their expected rate of return, conditions in the natural gas
industry and whether we make any significant acquisitions. Historically, we
have funded our capital expenditures through internally generated funds, sale
and leaseback transactions and debt and equity financing. While we believe that
cash flow from our operations, borrowings under our existing $200 million bank
credit agreement and the proceeds of this offering and our concurrent offering
of convertible notes will provide us with sufficient cash to fund these
expenditures in 2001, we cannot assure you that these sources will be
sufficient.
As part of our business strategy, we will continue to pursue the
acquisition of other companies, assets and product lines that either complement
or expand our business. If we were to complete an acquisition of significant
size, it is likely that we would need to issue a substantial amount of new debt
and/or equity securities, the availability and terms of which cannot be
determined at this time.
As of December 31, 2000, we had approximately $78 million of credit
capacity remaining on our $200 million bank credit agreement (7.5% rate at
December 31, 2000). Failure to generate
12
sufficient cash flow, together with the absence of alternative sources of
capital, could have a material adverse effect on our growth, results of
operations and financial condition.
International Operations--There are many risks associated with conducting
operations in international markets.
We operate in many different geographic markets, some of which are outside
the United States. Changes in local economic or political conditions,
particularly in Latin America or Canada, could have a material adverse effect
on our business, results of operations and financial condition. Additional
risks inherent in our international business activities include the following:
. difficulties in managing international operations;
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers which may restrict our ability to enter
into new markets;
. potentially adverse tax consequences;
. restrictions on repatriation of earnings;
. the burden of complying with foreign laws; and
. fluctuations in currency exchange rates and the value of the U.S.
dollar.
Acquisition Strategy--We may not be able to find suitable acquisition
candidates or successfully integrate acquired companies into our business.
As part of our business strategy, we continue to pursue the acquisition of
other companies, assets and product lines that either complement or expand our
business. Each acquisition involves potential risks, such as the diversion of
management's attention away from current operations, problems in integrating
acquired businesses and possible short-term adverse effects on our operations
as a result of that process. We actively review acquisition opportunities on an
ongoing basis, and we may make a new acquisition at any time. Given our
selective approach to acquisitions, we are unable to predict whether or when we
will find suitable acquisition candidates or whether we will be able to
complete a material acquisition. Depending on the size of our potential
acquisitions, we may seek to finance acquisitions with cash or through the
issuance of new debt and/or equity securities. If we were to complete an
acquisition of significant size, it is likely that we would need to issue a
substantial amount of new debt and/or equity securities, the availability and
terms of which cannot be determined at this time.
Competition--We operate in a highly competitive industry and compete against
some larger companies with greater financial resources.
We compete with several large national and multinational companies that
provide compression services to third parties, some of which have greater
financial and other resources than we do. If our competitors were to
substantially increase the resources they devote to the development and
marketing of competitive products and services, we cannot assure you that we
will have sufficient resources to respond accordingly.
Potential Liability and Insurance--Natural gas operations entail inherent risks
that may result in substantial liability to us.
Natural gas operations entail inherent risks, including equipment defects,
malfunctions and failures and natural disasters, which could result in
uncontrollable flows of gas or well fluids, fires and explosions. These risks
may expose us, as an equipment operator or fabricator, to liability for
personal injury, wrongful death, property damage, pollution and other
environmental damage. We
13
have obtained insurance against liability for personal injury, wrongful death
and property damage, but we cannot assure you that insurance will be adequate
to cover our liability. Similarly, we cannot assure you that we will be able to
obtain insurance in the future at a reasonable cost or at all. Our business,
results of operations and financial condition could be adversely affected if we
incur substantial liability and the damages are not covered by insurance or are
in excess of policy limits.
Governmental Regulation--Our business is subject to a variety of governmental
regulations relating to the environment, health and safety.
Our business is subject to a variety of federal, state, local and foreign
laws and regulations relating to the environment, health and safety. These laws
and regulations are complex, change frequently and have tended to become more
stringent over time. Failure to comply with these laws and regulations may
result in a variety of civil and criminal enforcement measures, including
assessment of monetary penalties, imposition of remedial requirements and
issuance of injunctions as to future compliance. As part of the regular overall
evaluation of both our current operations and newly acquired operations, we are
in the process of applying for or updating certain facility permits with
respect to stormwater discharges, waste handling and air emissions relating to
painting and blasting. In addition, certain of our customer service
arrangements may require us to operate, on behalf of a specific customer,
petroleum storage units such as underground tanks or pipelines and other
regulated units, all of which may impose additional compliance obligations. We
are evaluating the impact on our operations of recently promulgated air
emission regulations relating to non-road engines. We intend to implement any
equipment upgrades or permit modifications required by these air emission
regulations according to the required schedule. We do not anticipate, however,
that any changes or updates in response to such regulations, or any other
anticipated permit modifications (for stormwater, other air emission sources or
otherwise) or anticipated ongoing regulatory compliance obligations will have a
material adverse effect on our operations either as a result of any enforcement
measures or through increased capital costs. Based on our experience to date,
we believe that the future cost of compliance with existing laws and
regulations will not have a material adverse effect on our business, results of
operations or financial condition. However, future events, such as compliance
with more stringent laws and regulations, a major expansion of our operations
into more heavily regulated activities, more vigorous enforcement policies by
regulatory agencies or stricter or different interpretations of existing laws
and regulations could require us to make material expenditures.
We have conducted preliminary environmental site assessments with respect
to some, but not all, properties currently owned or leased by us, usually in a
pre-acquisition context. Some of these assessments have revealed that soils
and/or groundwater at some of our facilities are contaminated with
hydrocarbons, heavy metals and various other regulated substances. With respect
to newly acquired properties, we do not believe that our operations caused or
contributed to any such contamination and we are not currently under any orders
or directives to undertake any remedial activity. We typically will develop a
baseline of site conditions so we can establish conditions at the outset of our
operations on such property. However, the handling of petroleum products and
other regulated substances is a normal part of our operations, and we have
experienced occasional minor spills or incidental leakage in connection with
our operations. Certain properties previously owned or leased by us were
determined to be impacted by soil contamination. Where such contamination was
identified, we have since conducted remedial activities at these previously-
held properties as we believed necessary to meet regulatory standards and
either sold the owned properties to third parties or returned the leased
properties to the lessors. We are not currently aware of any further remedial
obligations at such previously-held properties. Based on our experience to
date, and the relatively minor nature of the types of contamination we have
identified to date, we believe that the future cost of necessary investigation
or remediation on our current properties will not have a material adverse
effect on our business, results of operations, or financial condition. We
cannot be certain, however,
14
that cleanup standards will not become more stringent, or that we will not be
required to undertake any remedial activities involving any substantial costs
on any of these current or previously-held properties in the future or that the
discovery of unknown contamination or third-party claims made with respect to
current or previously owned or leased properties may not result in substantial
costs.
Concentrated Ownership--A significant amount of our stock is owned by one
stockholder.
Our largest stockholder, GKH Investments, L.P. ("GKH"), owned approximately
33.6% of our common stock as of January 31, 2001 and, following completion of
this offering, will own approximately 25.6% of our common stock. GKH is, and
following completion of this offering will continue to be, in a position to
exert substantial influence over the outcome of most corporate actions
requiring stockholder approval, including the election of directors, additional
issuances of our common stock or other securities and transactions involving a
change of control. The interests of GKH could conflict with the interests of
our other stockholders.
GKH has advised us that it intends to liquidate or distribute substantially
all of its assets, including shares of our common stock owned by GKH, to its
partners on or before January 31, 2002. We cannot predict whether the partners
of GKH who may receive a distribution of shares of our common stock from GKH
would continue to hold those shares or, if they decide to sell, when they might
sell those shares. Any sale of a substantial number of shares of our common
stock could have a material adverse effect on the prevailing market price for
our common stock.
Anti-Takeover Provisions--Our certificate of incorporation and by-laws contain
certain provisions that could make a takeover more difficult.
Certain provisions of our certificate of incorporation and by-laws could
make it more difficult for a third party to acquire control of our company,
even if such a change in control would benefit our stockholders. Our
certificate of incorporation allows us to issue preferred stock without
stockholder approval and our by-laws limit who may call special stockholder
meetings. These provisions could make it more difficult for a third party to
acquire us and may discourage acquisition bids or limit the price that
investors might be willing to pay in the future for shares of our common stock.
The ownership of a substantial number of our shares of common stock by GKH and
our officers, directors, employees and their affiliates also could discourage
acquisition bids. In addition, we are subject to various provisions of Delaware
law that could delay or make difficult a merger, tender offer or proxy contest.
Please read the "Description of Capital Stock" section of this prospectus.
Shares Eligible for Future Sale--The market price of our common stock could be
depressed by future sales.
Future sales of a substantial number of shares of our common stock, or the
perception that these sales could occur, could adversely affect the market
price of our common stock. We cannot assure you as to when or how many of the
shares of our common stock will be sold or as to the effect those sales may
have on the market price of our common stock. In addition, we may issue
additional shares of common stock in connection with future acquisitions or
other transactions. In 2000, we issued 2,000,000 shares of common stock to
certain Janus funds, which shares were registered on Form S-3, effective
January 16, 2001; we completed the acquisition of Applied Process Solutions,
Inc. in an all stock transaction for an aggregate of 2,303,294 shares of common
stock, which shares were registered on Form S-3, effective January 3, 2001; and
we acquired the compression services division of Dresser-Rand Company for cash
and an aggregate of 2,919,681 shares of our common stock, 1,040,497 shares of
which are included in this offering. The remaining shares issued in the
Dresser-Rand transaction were registered on Form S-3, effective February 7,
2001. In addition, we have entered into a definitive agreement to acquire OEC
Compression Corporation in an all stock transaction. Upon consummation of the
OEC transaction, which we expect
15
to occur in March 2001, the shares of our common stock issued to the OEC
stockholders will be registered for sale to the public. The actual number of
shares that will be issued pursuant to the OEC agreement will not be determined
until that transaction is consummated; however, the maximum number of shares
that may be issued is 1,235,359 and the minimum number of shares that may be
issued is 1,140,331. Any sale of a substantial number of shares of our common
stock could have a material adverse effect on the prevailing market price for
our common stock.
Pursuant to an agreement between us and certain of our stockholders,
including GKH Investments, L.P., we may be obligated to effect a registration
of shares of common stock owned by these stockholders. These stockholders also
have the right to be notified when we register securities, subject to certain
exceptions, and to participate in such registration if they choose to do so. As
of January 31, 2001, these stockholders owned in the aggregate approximately
29,541,000 shares of our outstanding common stock, including 6,139,503 shares
included in this offering. Certain stockholders, including the selling
stockholders, who own (after giving effect to this offering and assuming no
exercise of the underwriters' over-allotment option) an aggregate of
approximately 27,105,000 shares have agreed with the underwriters not to
dispose of or hedge any of their common stock or securities convertible into or
exchangeable for shares of our common stock, subject to certain exceptions,
during the period from the date of this prospectus and continuing through the
date that is 120 days (90 days in the case of Ingersoll-Rand Company and
holders other than the selling stockholders) after the date of this prospectus,
except with the prior written consent of the representatives of the
underwriters.
Payment of Dividends--We may not be able to pay dividends on our common stock.
We have no obligation to pay dividends on our common stock. The declaration
and payment of dividends on our common stock is subject to and will depend
upon, among other things:
. our future earnings and financial condition, liquidity, and capital
requirements;
. our ability and the ability of our subsidiaries to pay dividends under
our bank credit agreement;
. the general economic and regulatory climate; and
. other factors deemed relevant by our board of directors.
16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this prospectus are "forward-looking
statements" intended to qualify for the safe harbors from liability established
by the Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as "believes," "anticipates," "expects,"
"estimates," or words of similar import. Similarly, statements that describe
our future plans, objectives or goals are also forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those anticipated as of
the date of this prospectus. The risks and uncertainties include:
. the loss of market share through competition;
. the introduction of competing technologies by other companies;
. a prolonged, substantial reduction in oil and gas prices which would
cause a decline in the demand for our compression and oil and gas
production equipment;
. new governmental safety, health and environmental regulations which
could require us to make significant capital expenditures;
. inability to successfully integrate acquired businesses; and
. changes in economic or political conditions in the countries in which we
operate.
The forward-looking statements included herein are only made as of the date
of this prospectus, and we undertake no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
17
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 2,500,000 shares of
common stock will be approximately $89.8 million, based on an assumed offering
price to the public of $37.69 per share and after deducting the estimated
underwriters' discounts and commissions and estimated offering expenses payable
by us.
We expect to use the net proceeds of this offering and the $144.9 million
estimated net proceeds from our concurrent notes offering for general corporate
purposes and working capital, including potential acquisitions. We cannot
assure you that we will make any acquisitions, and we have no current
agreements or commitments with respect to any acquisition that would use any
material portion of the net proceeds from this offering. Initially, we intend
to use most of the proceeds to repay indebtedness outstanding under our
existing bank credit agreement and any amounts that may be borrowed under our
contemplated $50 million supplemental credit facility. Any amounts we borrow
under our bank credit agreement bear interest at the prime rate or a negotiated
rate (approximately 7.5% at December 31, 2000). Our bank credit agreement gives
us $200 million of revolving credit and matures in December 2002. We have used
the amounts borrowed under our bank credit agreement to fund working capital
needs, capital expenditures and acquisitions. As of December 31, 2000, we had
approximately $78 million of credit capacity remaining on our bank credit
agreement. Pending these uses, we intend to invest the proceeds of this
offering and the concurrent notes offering in investment-grade, interest-
bearing securities. We will not receive any proceeds from the sale of shares of
common stock by the selling stockholders.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We intend to retain
earnings to finance the growth and development of our business and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. In addition, our bank credit agreement contains provisions limiting our
ability to pay dividends on our common stock. Any future change in our dividend
policy would be made at the discretion of our board of directors in light of
our financial condition, capital requirements, earnings and prospects, any
restrictions under credit agreements and any other factors our board of
directors may deem relevant. Please read the "Description of Capital Stock"
section of this prospectus.
CONVERTIBLE NOTES OFFERING
Concurrent with this offering, we are offering $150 million aggregate
principal amount ($172.5 million if the underwriters' over-allotment option is
exercised in full) of convertible senior notes due 2008. The notes will be
offered pursuant to a separate prospectus. Neither this offering nor the
concurrent notes offering is contingent on the other.
18
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the New York Stock Exchange under the symbol
"HC". The following table sets forth, for the periods indicated, the high and
low intraday sales prices for our common stock as reported on the New York
Stock Exchange.
1999 High Low
---- ------- -------
First Quarter.................................................. $14.000 $ 9.625
Second Quarter................................................. 17.781 13.063
Third Quarter.................................................. 19.063 15.688
Fourth Quarter................................................. 19.188 14.031
2000 High Low
---- ------- -------
First Quarter.................................................. $28.438 $16.906
Second Quarter................................................. 38.000 22.719
Third Quarter.................................................. 40.688 25.250
Fourth Quarter ................................................ 46.063 28.938
2001
----
First Quarter (through February 26, 2001)...................... $44.375 $33.125
On February 26, 2001, the closing sale price of our common stock as
reported on the New York Stock Exchange was $37.69 per share.
19
CAPITALIZATION
The following table sets forth our total capitalization at September 30,
2000 and as adjusted to give effect to this offering (based on an assumed
offering price to the public of $37.69 per share and after deducting estimated
underwriters' discounts and commissions and estimated offering expenses payable
by us) and as further adjusted to give effect to the concurrent convertible
notes offering and the application of the net proceeds therefrom as described
under "Use of Proceeds". You should read this table in conjunction with our
consolidated financial statements and notes thereto, which are included in this
prospectus.
As Further
As Adjusted
Adjusted for the
for this Convertible
Actual Offering Notes Offering
-------- -------- --------------
(Unaudited)
(Dollar amounts in thousands)
Current maturities of long-term debt........ $ 27,769 $ 27,769 $ 27,769
======== ======== ========
Long-term debt:
Bank credit agreement..................... $165,000 $ 75,200 $ --
Convertible notes(1)...................... -- -- 150,000
Other..................................... 8,835 8,835 8,835
-------- -------- --------
Total long-term debt........................ 173,835 84,035 158,835
-------- -------- --------
Company obligated mandatorily redeemable
convertible preferred securities........... 86,250 86,250 86,250
-------- -------- --------
Common stockholders' equity:(2)
Common stock, $.001 par value, 200,000,000
shares authorized; 66,286,496 shares
issued and outstanding, actual;
68,786,496 shares issued and outstanding,
as adjusted and as further adjusted...... 66 69 69
Additional paid-in capital................ 481,465 571,262 571,262
Notes receivable--employee stockholders... (1,738) (1,738) (1,738)
Accumulated other comprehensive income
(loss)................................... (465) (465) (465)
Retained earnings......................... 139,544 139,544 139,544
Treasury stock--29,227 common shares, at
cost..................................... (277) (277) (277)
-------- -------- --------
Total common stockholders' equity........... 618,595 708,395 708,395
-------- -------- --------
Total capitalization........................ $878,680 $878,680 $953,480
======== ======== ========
--------
(1) This table assumes no exercise of the underwriters' over-allotment option
to purchase additional convertible notes.
(2) Does not include shares of common stock issuable upon exercise of employee
stock options or exercise of warrants to purchase common stock.
We have completed four sale and leaseback transactions of compression
equipment through December 31, 2000, from which we received aggregate proceeds
of approximately $772.6 million. The leaseback of the equipment is recorded as
an operating lease. The transactions, completed in 1998, 1999 and 2000, have a
five-year term and require quarterly rental payments based on the London
Interbank Offered Rate. We continue to utilize the equipment and have the
option to repurchase the equipment at any time at fair market value. We have
guaranteed the residual value of the equipment, which is approximately $641
million.
We have negotiated, and expect to enter into, an approximately $50 million
supplemental credit facility.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of the financial condition and results
of operations of Hanover Compressor Company should be read in conjunction with
our consolidated financial statements and related notes thereto included in
this prospectus.
General
We are a leading provider of a broad array of natural gas compression, gas
handling and related services in the United States and select international
markets. Founded in 1990 and publicly held since 1997, we operate the largest
compressor rental fleet, in terms of horsepower, in the gas compression
industry and provide our services on a rental, contract compression,
maintenance and acquisition leaseback basis. In conjunction with our
maintenance business, we have developed our parts and service business to
provide solutions to customers that own their compression equipment but want to
outsource their operations. Our compression services are complemented by our
compressor and oil and gas production equipment fabrication operations and gas
processing and treating, gas measurement and power generation services, which
broaden our customer relationships both domestically and internationally. Our
products and services are essential to the production, gathering, processing,
transportation and storage of natural gas and are provided primarily to
independent and major producers and distributors of natural gas.
As of September 2000, we acquired the compression services division of
Dresser-Rand Company for $177 million in cash and common stock, subject to
certain post-closing adjustments pursuant to the acquisition agreement which to
date have resulted in an increase in the purchase price to approximately $194
million due to increases in net assets acquired. In July 2000, we acquired
PAMCO Services International for approximately $58 million in cash and notes.
In June 2000, we acquired Applied Process Solutions, Inc. for 2,303,294 newly
issued shares of our common stock. These acquisitions were included in the
results of operations from their respective acquisition dates. In addition, we
completed a 2-for-1 stock split effected in the form of a 100% stock dividend
in June 2000. Accordingly, common stock, additional paid-in capital and all
earnings per share information have been restated for all periods presented.
21
The following table summarizes revenues, expenses and gross profit
percentages for each of our business segments (Dollars in millions):
Nine Months
Ended Year Ended December
September 30, 31,
-------------- ----------------------
2000 1999 1999 1998 1997
------ ------ ------ ------ ------
Revenues:
Rentals--Domestic..................... $122.8 $ 98.5 $136.5 $107.4 $ 78.7
Rentals--International................ 57.4 39.2 56.2 40.2 22.0
Compressor fabrication................ 60.1 35.4 52.5 67.5 49.8
Production equipment fabrication...... 53.9 21.2 28.0 37.5 37.1
Other................................. 76.0 33.5 43.8 29.4 11.2
------ ------ ------ ------ ------
Total............................... $370.2 $227.8 $317.0 $282.0 $198.8
====== ====== ====== ====== ======
Expenses:
Rentals--Domestic..................... $ 42.2 $ 32.4 $ 46.2 $ 36.6 $ 27.5
Rentals--International................ 19.9 13.1 18.8 12.8 7.6
Compressor fabrication................ 50.1 29.1 43.7 58.1 41.6
Production equipment fabrication...... 41.9 15.7 20.8 25.8 26.4
Other................................. 42.2 18.6 21.7 17.4 6.3
------ ------ ------ ------ ------
Total............................... $196.3 $108.9 $151.2 $150.7 $109.4
====== ====== ====== ====== ======
Gross profit percentage:
Rentals--Domestic..................... 65.7% 67.1% 66.1% 65.9% 65.1%
Rentals--International................ 65.3% 66.7% 66.6% 68.2% 65.5%
Compressor fabrication................ 16.7% 17.9% 16.8% 13.8% 16.5%
Production equipment fabrication...... 22.2% 26.0% 25.7% 31.2% 28.8%
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999.
Revenues
Our total revenues increased by $142.4 million, or 62%, to $370.2 million
during the nine months ended September 30, 2000 from $227.8 million during the
nine months ended September 30, 1999. The increase resulted primarily from
growth of our natural gas compressor rental fleet as well as due to recent
acquisitions.
Revenues from rentals increased by $42.5 million, or 31%, to $180.2 million
during the nine months ended September 30, 2000 from $137.7 million during the
nine months ended September 30, 1999.
Domestic revenues from rentals increased by $24.3 million, or 25%, to
$122.8 million during the nine months ended September 30, 2000 from $98.5
million during the nine months ended September 30, 1999. International rental
revenues increased by $18.2 million, or 46%, to $57.4 million during the nine
months ended September 30, 2000 from $39.2 million during the nine months ended
September 30, 1999. The increase in both domestic and international rental
revenue resulted from expansion of our rental fleet.
Revenue from parts, service and used equipment increased by $36.9 million,
or 135%, to $64.3 million during the nine months ended September 30, 2000 from
$27.4 million during the nine months ended September 30, 1999. The increase is
due in part to increased marketing focus and expansion of business through
recent acquisitions. Revenues from compressor fabrication increased by $24.6
million, or 70%, to $60.1 million during the nine months ended September 30,
2000 from $35.5 million during the nine months ended September 30, 1999. During
the nine months ended
22
September 30, 2000, an aggregate of approximately 205,000 horsepower of
compression equipment was fabricated compared to approximately 194,000
horsepower fabricated during the nine months ended September 30, 1999. The
increase in horsepower produced during the nine months ended September 30, 2000
resulted from an increased demand for compression equipment due to higher
natural gas prices. In addition, during the nine months ended September 30,
1999, a customer supplied its own engines for a project where the engines would
typically be provided by us, which lowered revenues from third party sales
without reducing the amount of horsepower fabricated during that quarter.
Revenues from production and processing equipment fabrication increased by
$32.7 million, or 154%, to $53.9 million during the nine months ended September
30, 2000 from $21.2 million during the nine months ended September 30, 1999.
The increase is due primarily to the acquisition of Applied Process Solutions,
Inc. in June 2000.
We recognized gains on sales of other assets of $4.2 million during the
nine months ended September 30, 2000, compared to $3.9 million during the nine
months ended September 30, 1999. During the third quarter of 2000, we obtained
certain oil and gas interests and related assets from a customer as payment for
trade receivables. We exchanged those oil and gas interests with another third
party for ownership of certain compression equipment. This exchange resulted in
the recognition of a $1.9 million gain.
Other revenues during the nine months ended September 30, 2000 amounted to
$7.5 million compared to $2.1 million during the nine months ended September
30, 1999, an increase of $5.4 million. The increase is due primarily to the
sale of 50% of our ownership interest in a consolidated subsidiary for cash and
notes receivable resulting in a gain on disposition of approximately $2.1
million.
Expenses
Operating expenses of the rental segments increased by $16.6 million, or
37%, to $62.1 million during the nine months ended September 30, 2000 from
$45.5 million during the nine months ended September 30, 1999. The increase
resulted primarily from the corresponding 31% increase in revenues from rentals
over the corresponding period in 1999. The gross profit percentage from rentals
was 66% during the nine months ended September 30, 2000 and 67% during the nine
months ended September 30, 1999. Operating expenses of parts, service and used
equipment increased by $23.6 million, or 127%, to $42.2 million from $18.6
million during the nine months ended September 30, 1999. The increase resulted
from the corresponding 135% increase in parts, service and used equipment
revenue. The gross profit margin from parts, service and used equipment was 34%
during the nine months ended September 30, 2000 and 32% during the nine months
ended September 30, 1999. Operating expenses of compressor fabrication
increased by $21.0 million, or 72%, to $50.1 million during the nine months
ended September 30, 2000 from $29.1 million during the nine months ended
September 30, 1999 commensurate with the corresponding increase in compressor
fabrication revenue. The gross profit margin on compression fabrication was 17%
during the nine months ended September 30, 2000 and 18% during the nine months
ended September 30, 1999. The operating expenses attributable to production
equipment fabrication increased by $26.2 million, or 168%, to $41.9 million
during the nine months ended September 30, 2000 from $15.7 million during the
nine months ended September 30, 1999. The gross profit margin attributable to
production and processing equipment fabrication was 22% during the nine months
ended September 30, 2000 and 26% during the nine months ended September 30,
1999. The decrease in gross profit margin for production and processing
equipment fabrication was attributable to the acquisition of Applied Process
Solutions, Inc. in June 2000, which has lower gross margins than we have
historically experienced.
23
Selling, general and administrative expenses increased $10.3 million, or
42%, to $34.5 million during the nine months ended September 30, 2000 from
$24.2 million during the nine months ended September 30, 1999. The increase is
attributable to increased personnel and other administrative and selling
expenses associated with increased activity in our rentals, parts, service and
used equipment and compressor equipment fabrication business segments as
described above as well as recent acquisitions.
We believe that earnings before interest, leasing expense, distributions on
mandatorily redeemable convertible preferred securities, income taxes and
depreciation and amortization ("EBITDA") is a standard measure of financial
performance used for valuing companies in the compression industry. EBITDA is a
useful common yardstick as it measures the capacity of companies to generate
cash without reference to how they are capitalized, how they account for
significant non-cash charges for depreciation and amortization associated with
assets used in the business (the bulk of which are long-lived assets in the
compression industry) or what their tax attributes may be. Additionally, since
EBITDA is a basic source of funds not only for growth but also to service
indebtedness, lenders in both the private and public debt markets use EBITDA as
a primary determinant of borrowing capacity. EBITDA for the nine months ended
September 30, 2000 increased 47% to $139.4 million from $94.8 million for the
nine months ended September 30, 1999 primarily due to the increase in our
rental revenue for reasons previously discussed. EBITDA should not be
considered in isolation from, or as a substitute for, net income, cash flows
from operating activities or other consolidated income or cash flow data
prepared in accordance with generally accepted accounting principles.
Depreciation and amortization increased by $8.3 million to $36.8 million
during the nine months ended September 30, 2000, compared to $28.5 million
during the nine months ended September 30, 1999. The increase in depreciation
was due to the additions to the rental fleet which were partially offset by the
sale of compressor equipment in the equipment leases. The increase in
amortization was due to the goodwill recorded from business acquisitions
completed during 2000.
We incurred leasing expense of $29.6 million during the nine months ended
September 30, 2000 compared to $14.7 million during the nine months ended
September 30, 1999 resulting from the equipment leases entered into in July
1998, June 1999 and March 2000.
Interest expense decreased by $2.2 million to $5.6 million during the nine
months ended September 30, 2000 from $7.8 million for the nine months ended
September 30, 1999. The decrease in interest expense was due in part to
utilization of proceeds from the equipment lease and from the private stock
offering to reduce indebtedness under our bank credit agreement.
Income Taxes
The provision for income taxes increased by $7.1 million, or 44%, to $23.3
million during the nine months ended September 30, 2000 from $16.2 million
during the nine months ended September 30, 1999. The increase resulted
primarily from the corresponding increase in income before income taxes. The
average effective income tax rates during the nine months ended September 30,
2000 and 1999 were 37.2% and 37.0%, respectively.
Net Income
Net income increased $11.8 million, or 43%, to $39.3 million during the
nine months ended September 30, 2000 from $27.5 million during the nine months
ended September 30, 1999 for the reasons discussed above.
24
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
Revenues
Our total revenues increased by $35.0 million, or 12%, to $317.0 million
during 1999 from $282.0 million during 1998. The increase resulted from growth
of our natural gas compressor rental fleet but was partially offset by
decreases in compressor fabrication and production equipment fabrication
revenues.
Revenues from rentals increased by $45.1 million, or 31%, to $192.7 million
during 1999 from $147.6 million during 1998. Domestic revenues from rentals
increased by $29.1 million, or 27%, to $136.5 million during 1999 from $107.4
million during 1998. International revenues from rentals increased by $16.0
million, or 40%, to $56.2 million during 1999 from $40.2 million during 1998.
At December 31, 1999, the compressor rental fleet consisted of approximately
1,458,000 horsepower, a 37% increase over the 1,067,000 horsepower in the
rental fleet at December 31, 1998. Domestically, the rental fleet increased by
289,000 horsepower, or 32%, during 1999 and internationally by 103,000
horsepower, or 59%. The increase in both domestic and international rental
revenues resulted primarily from expansion of our rental fleet.
Revenue from parts and service increased by $10.6 million, or 44%, to $34.5
million during 1999 from $23.9 million during 1998. Revenues from the
fabrication and sale of compressor equipment to third parties decreased by
$15.0 million, or 22%, to $52.5 million during 1999 from $67.5 million during
1998. An aggregate of 147,000 horsepower was sold during 1999. In addition,
130,000 horsepower was fabricated and placed in the rental fleet during 1999.
We believe the revenue decrease during 1999 was due in part to a project where
a customer supplied its own engines, where the engines would typically be
provided by us, and in part to lower energy prices earlier in 1999, which
reduced the demand for compressors, thereby adversely impacting sales prices.
Revenues from the fabrication and sale of production equipment decreased by
$9.5 million, or 25%, to $28.0 million during 1999 from $37.5 million during
1998 primarily due to the decline in well completions resulting from lower
energy prices during the first half of 1999.
We recognized gains on sales of assets of $5.9 million during 1999 compared
to $2.6 million during 1998. The increase was primarily due to the increase in
horsepower sold from the rental fleet to customers exercising options to
purchase equipment they previously had rented. During 1999 we sold
approximately 20,000 horsepower compared to 14,000 horsepower during 1998.
Expenses
Operating expenses of the rental segments increased by $15.6 million, or
32%, to $65.0 million during 1999 from $49.4 million during 1998. The increase
resulted primarily from the corresponding 31% increase in revenues from rentals
over the corresponding period in 1998. The gross profit percentage from rentals
was 66% during 1999 and 67% during 1998. Operating expenses of parts and
service increased $4.4 million, or 25%, to $21.7 million during 1999 from $17.3
million during 1998, which relates to the 44% increase in parts and service
revenue. The gross profit percentage from parts and service increased to 37%
during 1999 from 27% in 1998. Operating expenses of compressor fabrication
decreased by $14.4 million, or 25%, to $43.7 million from $58.1 million during
1998. The gross profit margin on compression fabrication increased to 17%
during 1999 from 14% during 1998. Production equipment fabrication operating
expenses decreased by $5.0 million, or 19%, during 1999 to $20.8 million from
$25.8 million during 1998. The decrease in operating expenses is reflective of
the corresponding change in production equipment fabrication revenues during
1999. The gross profit margin attributable to production equipment fabrication
decreased to 26% during 1999 from 31% during 1998.
25
Selling, general and administrative expenses increased by $7.2 million, or
27%, to $33.8 million during 1999. The increase is attributable to increased
personnel and other administrative and selling expenses associated with the
increase in operating activity in our rentals business segments, as described
above.
Depreciation and amortization expense increased by $.2 million during 1999
to $37.3 million. The increase in depreciation on the additions to the rental
fleet was offset by the decrease in depreciation as a result of the equipment
leases entered into in July 1998 and June 1999.
Interest expense decreased by $2.9 million, or 25%, during 1999 to $8.8
million. The decrease in interest expense was due in part to utilization of
proceeds from the equipment lease to reduce indebtedness under our credit
agreement and the capitalization of interest expense on assets that are under
construction.
We incurred compression equipment lease expense of $22.1 million during
1999 and $6.2 million during 1998.
Income Taxes
The provision for income taxes increased by $3.8 million, or 20%, to $23.1
million during 1999 from $19.3 million during 1998. The increase resulted
primarily from the corresponding increase in income before taxes. Our effective
income tax rate was approximately 36.4% during 1999 and 38.8% during 1998. The
decrease in average effective income rates is due to expected benefits from a
foreign sales corporation established in 1998.
Net Income
Net income increased $10.1 million, or 33%, to $40.4 million in 1999 from
$30.4 million in 1998 for the reasons discussed above.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
Revenues
Revenues from rentals increased by $46.9 million, or 47%, to $147.6 million
due to growth in the rental fleet. At December 31, 1998, the compressor rental
fleet consisted of approximately 1,067,000 horsepower, a 37% increase over the
781,000 horsepower in the rental fleet at December 31, 1997. Domestically, the
rental fleet increased by 224,000 horsepower, or 34%, during 1998 and
internationally by 61,000 horsepower, or 54%. Revenue from parts and service
increased by $13.6 million, or 133%, to $23.9 million as a result of increased
marketing focus on parts and services and the increase in growth in the rental
fleet. Revenues from compressor fabrication amounted to $67.5 million,
increasing by 36% over 1997. An aggregate of 113,000 horsepower was sold during
1998. In addition, 88,000 horsepower was fabricated and placed in the rental
fleet during 1998. Revenues from the fabrication of production equipment
remained relatively unchanged with an increase of $.4 million from 1997, or 1%,
to $37.5 million during 1998. The change in 1998 production equipment revenue
was negligible as a result of declining well completions.
Expenses
Operating expenses of the rental segments increased by $14.3 million, or
41%, to $49.4 million during 1998. The gross profit percentage from rentals
increased to 67% during 1998 from 65% in 1997. Operating expenses of parts and
service increased $11.0 million, or 173%, to $17.3 million during 1998, which
relates to the 133% increase in parts and service revenue. The gross profit
26
percentage from parts and service decreased to 27% during 1998 from 38% in
1997. Operating expenses of compressor fabrication increased by $16.5 million,
or 40%, to $58.1 million, which relates to the 36% increase in compression
fabrication revenue achieved during 1998. In addition, the gross profit margin
on compression fabrication decreased to 14% during 1998 from 16% during 1997.
Production equipment fabrication operating expenses decreased by $.6 million,
or 2%, during 1998 to $25.8 million. The decrease in operating expenses is
reflective of the corresponding change in production equipment fabrication
revenues during 1998. The gross profit margin attributable to production
equipment fabrication increased to 31% during 1998, up from 29% during 1997.
Selling, general and administrative expenses increased by $5.1 million, or
24%, to $26.6 million during 1998. The increase is attributable to increased
personnel and other administrative and selling expenses associated with the
increase in operating activity in our rentals and compression fabrication
operating segments as well as increased administrative costs related to being a
public reporting entity. Depreciation and amortization expense increased by
$8.7 million, or 31%, during 1998 to $37.1 million as we continued to expand
our rental fleet with capital expenditures and net business acquisitions that
amounted to approximately $212.0 million. In addition, we sold certain
compression equipment with a book value of approximately $158.0 million in July
1998 under a sale and leaseback arrangement. Consequently, we incurred
compression equipment lease expense of $6.2 million during 1998. As a result of
the equipment lease, we expect to incur annual operating lease expense of
approximately $14 million. Interest expense increased by $1.0 million, or 9%,
during 1998 to $11.7 million.
Income Taxes
Our effective income tax rate was approximately 39% during 1998 and during
1997. Accordingly, the provision for income taxes increased by $8.2 million, or
74%, during 1998 to $19.3 million as a result of income before income taxes
increasing by 73% during 1998 over 1997.
Net Income
Net income increased $12.8 million, or 72%, to $30.4 million for 1998 from
$17.6 million in 1997 for the reasons discussed above. Weighted average shares
outstanding was affected by the additional shares issued in conjunction with
our initial public offering which were outstanding for all of 1998.
Liquidity and Capital Resources
Our cash balance amounted to $13.0 million at September 30, 2000 compared
to $5.8 million at December 31, 1999. Primary sources of cash during the nine
months ended September 30, 2000 were proceeds of $200.0 million from the
equipment leases, approximately $102.9 million of borrowings under our credit
agreement and proceeds of $59.4 million from a private placement of 2,000,000
newly-issued shares of restricted common stock to an institutional investor.
Principal uses of cash during the nine months ended September 30, 2000 were
capital expenditures and business acquisitions of $374.5 million.
Working capital increased to $224.7 million at September 30, 2000 from
$108.0 million at December 31, 1999, primarily as a result of increases in
accounts receivable, inventories and costs in excess of billings. The increase
in the balances is due to an increased level of activity in our lines of
business over 2000 as well as from recent acquisitions. These increases were
partially offset by an increase in current liabilities.
The amount invested in property, plant and equipment during the nine months
ended September 30, 2000 was approximately $199.7 million which resulted in the
addition of approximately
27
753,000 horsepower to the rental fleet. At December 31, 2000, the rental fleet
consisted of 1,741,000 horsepower domestically and 410,000 horsepower in the
international rental fleet. Current plans are to spend approximately $318.3
million for capital expenditures during 2001, exclusive of any major
acquisitions. In addition, we have entered into a definitive agreement to
acquire OEC Compression Corporation in an all stock transaction. We expect to
close this transaction in March 2001. In anticipation of our acquisition of OEC
Compression Corporation, in February 2001, we purchased from The Prudential
Insurance Company of America for $22.7 million, two senior subordinated notes
of OEC Compression Corporation and a warrant to purchase up to 1,000,000 shares
of OEC Compression Corporation common stock.
Historically, we have funded capital expenditures with a combination of
internally generated cash flow, borrowings under the revolving credit
agreement, lease transactions and debt and/or equity financing. As of December
31, 2000, we had approximately $78 million of credit capacity remaining on our
$200 million bank credit agreement (7.5% rate at December 31, 2000).
In addition, we have negotiated, and expect to enter into, an approximately
$50 million supplemental credit facility.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that, upon
adoption, all derivative instruments (including certain derivative instruments
embedded in other contracts) be recognized in the balance sheet at fair value
and that changes in such fair values be recognized in earnings unless specific
hedging criteria are met. Changes in the values of derivatives that meet these
hedging criteria will ultimately offset related earnings effects of the hedged
item pending recognition in earnings. We adopted SFAS 133 beginning January 1,
2001, and the adoption of SFAS 133 did not have a material effect on our
results of operations, cash flows or financial position.
28
BUSINESS
General
We are a leading provider of a broad array of contract natural gas
compression, gas handling and related services in the United States and select
international markets. As of December 31, 2000, we operated a fleet of 4,840
compression rental units with an aggregate capacity of approximately 2,151,000
horsepower. Our compression services are complemented by our compressor and oil
and gas production equipment fabrication operations and gas processing, gas
treatment, gas measurement and power generation services.
We believe that we are currently the largest natural gas compression
company in the United States on the basis of aggregate rental horsepower with
4,410 rental units having an aggregate capacity of approximately 1,741,000
horsepower at December 31, 2000. Internationally, we estimate we are one of the
largest providers of compression services in the rapidly growing Latin American
and Canadian markets, operating 430 units with approximately 410,000 horsepower
at December 31, 2000.
Our products and services are essential to the production, processing,
transportation and storage of natural gas and are provided primarily to energy
producers and distributors of natural gas. Our decentralized operating
structure, technically experienced personnel and high quality compressor fleet
allow us to successfully provide reliable and timely customer service. As a
result, we have experienced substantial growth over the past five years and
have developed and maintained a number of long-term customer relationships.
This has enabled us to maintain an average horsepower utilization rate of
approximately 93% from 1994 to 2000, compared to industry rates, which we
believe to have been 80% to 85% for this period.
We currently compete primarily in the market for transportable natural gas
compression units of up to 4,450 horsepower. This market, which includes rental
and owner operated units, accounted for approximately 14.9 million horsepower
in the United States in 1999 and is believed to have grown at a compound annual
rate of 8% since 1992. We believe that the growth in the domestic gas
compression market will continue due to the increased consumption of natural
gas, the continued aging of the natural gas reserve base and the attendant
decline of wellhead pressures, and the discovery of new reserves.
The rental portion of the domestic gas compression market at December 31,
1999 was estimated to comprise approximately 4.8 million horsepower amounting
to 31% of aggregate U.S. horsepower. Growth of rental compression capacity in
the U.S. market is primarily driven by the increasing trend toward outsourcing
by energy producers and processors. We believe that outsourcing provides the
customer greater financial and operating flexibility by minimizing the
customer's investment in equipment and enabling the customer to more
efficiently resize compression units to meet changing reservoir conditions. In
addition, we also believe that outsourcing typically provides the customer with
more timely and technically proficient service and necessary maintenance which
often reduces operating costs. Internationally, we believe similar growth
opportunities for compressor rental and sales exist due to (1) increased
worldwide energy consumption, (2) implementation of international environmental
and conservation laws preventing the flaring of natural gas, and (3) increased
outsourcing by energy producers and processors.
29
Compressor Rental Fleet
The size and horsepower of our compressor rental fleet owned or operated
under lease on December 31, 2000 is summarized in the following table.
Number Aggregate
of Horsepower % of Total
Range of Horsepower per Unit Units (in thousands) Horsepower
---------------------------- ------ -------------- ----------
0-99........................................... 1,531 124 5.75
100-199........................................ 1,110 156 7.27
200-499........................................ 869 300 13.96
500-799........................................ 395 280 13.00
800-1199....................................... 410 424 19.72
1200-2699...................................... 496 757 35.21
2700-UP........................................ 29 110 5.09
----- ----- ------
Total........................................ 4,840 2,151 100.00
===== ===== ======
Industry Overview
Gas Compression
Typically, compression is required several times during the natural gas
production cycle: at the wellhead, at the gathering lines, into and out of gas
processing facilities, into and out of storage and throughout the intrastate
and interstate pipelines.
Over the life of an oil or gas well, natural reservoir pressure and
deliverability typically decline as reserves are produced. As the natural
reservoir pressure of the well declines below the line pressure of the gas
gathering or pipeline system used to transport the gas to market, gas no longer
naturally flows into the pipeline. It is at this time that compression
equipment is applied to economically boost the well's production levels and
allow gas to be brought to market.
In addition to such gas field gathering activities, natural gas compressors
are utilized in a number of other applications, all of which are intended to
enhance the productivity of oil and gas wells, gas transportation lines and
processing plants. Compressors are used to increase the efficiency of a low
capacity gas field by providing a central compression point from which the gas
can be removed and injected into a pipeline for transmission to facilities for
further processing. As gas is transported through a pipeline, compression
equipment is applied to allow the gas to continue to flow in the pipeline to
its destination. Additionally, compressors are utilized to re-inject associated
gas to lift liquid hydrocarbons artificially which increases the rate of crude
oil production from oil and gas wells. Furthermore, compression enables gas to
be stored in underground storage reservoirs for subsequent extraction during
periods of peak demand. Finally, compressors are often utilized in combination
with oil and gas production equipment to process and refine oil and gas into
higher value added and more marketable energy sources.
Changing well and pipeline pressures and conditions over the life of a well
often require producers to reconfigure their compressor units to optimize the
well production or pipeline efficiency. Due to the technical nature of the
equipment, a dedicated local parts inventory, a diversified fleet of natural
gas compressors and a highly trained staff of field service personnel are often
necessary to perform such functions in the most economic manner. These
requirements, however, have typically proven to be an extremely inefficient use
of capital and manpower for independent natural gas producers and have caused
such firms, as well as natural gas processors and transporters, to increasingly
outsource their non-core compression activities to specialists such as Hanover.
The advent of rental and contract compression roughly 40 years ago made it
possible for natural gas producers, transporters and processors to improve the
efficiency and financial performance of their operations. Compressors leased
from specialists generally have a higher rate of
30
mechanical reliability and typically generate greater productivity than those
owned by oil and gas operators. Furthermore, because compression needs of a
well change over time, outsourcing of compression equipment enables an oil and
gas operator to better match variable compression requirements to the
production needs throughout the life of the well. Also, certain major domestic
oil companies are seeking to streamline their operations and reduce their
capital expenditures and other costs. To this end, they have sold certain
domestic energy reserves to independent energy producers and are outsourcing
facets of their operations. Such initiatives, in our opinion, are likely to
contribute to increased rental of compressor equipment.
Natural gas compressor fabrication involves the design, fabrication and
sale of compressors to meet the unique specifications dictated by the well
pressure, production characteristics and the particular applications for which
compression is sought. Compressor fabrication is essentially an assembly
operation in which an engine, compressor, control panel, cooler and necessary
piping are attached to a frame called a "skid." A fabricator typically
purchases the various compressor components from third party manufacturers but
employs its own engineers and design and labor force.
In order to meet customers' needs, gas compressor fabricators typically
offer a variety of services to their customers including: (1) engineering,
fabrication and assembly of the compressor unit; (2) installation and testing
of the unit; (3) ongoing performance review to assess the need for a change in
compression; and (4) periodic maintenance and replacement parts supply.
Production Equipment
Oil and gas reserves are generally not commercially marketable as produced
at the wellhead. Typically, such reserves must be refined before they can be
transported to market. Oil and gas production equipment is utilized to separate
and treat such oil and gas immediately after it is produced in order to
facilitate further processing, transportation and sale of such fuels and
derivative energy sources. Oil and gas production equipment is typically
installed at the wellhead immediately prior to commencing the large scale
production phase of a well and remains at the site throughout the life of the
well.
Market Conditions
We believe that the most fundamental force driving the demand for gas
compression and production equipment is the growing consumption of natural gas.
As more gas is consumed, the demand for compression and production equipment
increases.
Additionally, although natural gas has historically been a more significant
source of energy in the United States than in the rest of the world, we believe
that aggregate foreign natural gas consumption (excluding the former Soviet
Union) has recently grown. Despite significant growth in energy demand, most
non-U.S. energy markets, until recently, have typically lacked the
infrastructure necessary to transport natural gas to local markets, and natural
gas historically has been flared at the wellhead. Given recent environmental
legislation and the construction of numerous natural gas-fueled power plants
built to meet international energy demand, we believe that international
compression markets are experiencing growth.
Natural gas is considered to be the "fuel of the future" because it
provides the best mix of environmental soundness, economy and availability of
any energy source. Rising worldwide energy demand, environmental
considerations, the further development of the natural gas pipeline
infrastructure and the increasing use of natural gas as a fuel source in power
generation are the principal reasons for this steady growth.
31
While gas compression and production equipment typically must be highly
engineered to meet demanding and unique customer specifications, the
fundamental technology of such equipment has been stable and has not been
subject to significant technological change.
Business Segments
Our revenues and income are derived from four business segments (comprising
three operating divisions)--domestic compression rentals, international
compression rentals, compressor fabrication and production equipment
fabrication. The domestic and international compression rentals segments have
operations primarily in the United States, Canada and South America. For
financial data relating to our divisions, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the notes to our
consolidated financial statements included in this prospectus.
Compression Services and Fabrication
We provide our customers with a full range of compressor rental,
maintenance and contract compression services. As of December 31, 2000, our
compressor fleet consisted of 4,840 units, ranging from 24 to 5,000 horsepower
per unit. The size, type and geographic diversity of this rental fleet enable
us to provide our customers with a range of compression units that can serve a
wide variety of applications and to select the correct equipment for the job,
rather than trying to "fit" the job to its fleet of equipment.
We base our gas compressor rental rates on several factors, including the
cost and size of the equipment, the type and complexity of service desired by
the customer, the length of the contract, and the inclusion of any other
services desired, such as installation, transportation and the degree of daily
operation. Substantially all of our units are operated pursuant to "contract
compression" or "rental with full maintenance" contracts under which we perform
all maintenance and repairs on such units while under contract. In the U.S.
onshore market, compression rental fleet units are generally leased under
contract with minimum terms of six months to two years, which convert to month-
to-month at the end of the stipulated minimum period. Historically, the
majority of our customers have extended the length of their contracts, on a
month-to-month basis, well beyond the initial term. Typically, our compression
rental units utilized in offshore and international applications carry
substantially longer lease terms than those for onshore domestic applications.
An essential element to our success is our ability to provide compression
services to customers with contractually committed compressor run-times of
between 95% and 98%. Historically, run-time credits have been insignificant,
due largely to our rigorous preventive maintenance program and extensive field
service network which permits us to promptly address maintenance requirements.
Our rental compressor maintenance activities are conducted at 13 facilities and
staffed by over 700 experienced and factory-trained maintenance personnel both
at these facilities and in the field. Such maintenance facilities are situated
in close proximity to actual rental fleet deployment to permit superior service
response times.
All rental fleet units are serviced at manufacturers' recommended
maintenance intervals, modified as required by the peculiar characteristics of
each individual job and the actual operating experience of each compressor
unit. Prior to the conclusion of any rental job, our field management evaluates
the condition of the equipment and, where practical, corrects any problems
before the equipment is shipped out from the job site. Although natural gas
compressors generally do not suffer significant technological obsolescence,
they do require routine maintenance and periodic refurbishing to prolong their
useful life. Routine maintenance includes alignment, compression checks and
other parametric checks which indicate a change in the condition of the
equipment. In addition, oil and wear-particle analysis is performed on all
units prior to their redeployment at specific compression
32
rental jobs. Overhauls are done on a condition-based interval instead of a
time-based schedule. In our experience, these rigorous procedures maximize
component life and unit availability and minimize avoidable downtime.
Typically, we overhaul each rental compressor unit for general refurbishment
every 36 to 48 months and anticipate performing a comprehensive overhaul of
each rental compressor unit every 60 to 72 months. This maintenance program has
provided us with a highly reliable fleet of compressors in excellent condition.
Our field service mechanics provide all operating and maintenance services
for each of our compression units leased on a contract compression or full
maintenance basis and are on-call 24 hours a day. Such field personnel receive
regular mechanical and safety training both from us and our vendors. Each of
our field mechanics is responsible for specific compressor unit installations
and has at his disposal a dedicated local parts inventory. Additionally, each
field mechanic operates from a fully-equipped service vehicle. Each mechanic's
field service vehicle is radio or cellular telephone equipped which allows that
individual to be our primary contact with the customer's field operations staff
and to be contacted at either his residence or mobile phone 24 hours a day.
Accordingly, our field service mechanics are given the responsibility to
promptly respond to customer service needs as they arise based on the
mechanic's trained judgment and field expertise.
We consider ourselves to be unique in our industry in that our sales and
field service organizations enjoy managerial parity within the company,
enabling these two vital organizations to work together in a highly coordinated
fashion in order to deliver maximum customer service, responsiveness and
reliability. The foundation for our successful field operations effort is the
experience and responsiveness of our over 700 member compressor rental field
service and shop staff of factory-trained and field-tested compressor
mechanics. Our field service mechanics are coordinated and supported by
regional operations managers who have supervisory responsibility for specific
geographic areas.
Our compressor fabrication subsidiary, doing business as Hanover Maintech,
designs, engineers and assembles compression units for sale to third parties as
well as for placement in our compressor rental fleet. As of September 30, 2000,
we had a compressor unit fabrication backlog for sale to third parties of $23.8
million compared to $10.1 million as of September 30, 1999. Substantially all
backlog is expected to be produced within 90 to 120 days. In general, units to
be sold to third parties are assembled according to each customer's
specifications and sold on a turnkey basis. Components for such compressor
units are acquired from third party suppliers.
Oil and Gas Production Equipment
We, through our wholly-owned subsidiary doing business as Hanover Smith,
design, engineer, fabricate and either sell or rent 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. We generally
maintain standard product inventories in excess of $5 million and are therefore
able to meet most customers' rapid response requirements and minimize customer
downtime. As of September 30, 2000, we had a production equipment fabrication
backlog of $37.6 million compared to $4.3 million as of September 30, 1999.
Substantially all backlog is expected to be produced within 90 to 120 days. We
also purchase and recondition used production equipment which is then sold or
rented. As our customers look to us to provide an ever-widening array of
outsourced services from wellhead to end-user, we continue to build on our core
business with emerging business opportunities such as turnkey gas treating, gas
measurement and power generation sales and services.
33
Market and Customers
Our customer base consists of approximately 1,200 U.S. and international
companies engaged in all aspects of the oil and gas industry, including major
integrated oil and gas companies, large and small independent producers and
natural gas processors, gatherers and pipelines. Additionally, we have
negotiated more than 15 strategic alliances or preferred vendor relationships
with key customers pursuant to which we receive preferential consideration in
customer compressor and oil and gas production equipment procurement decisions
in exchange for enhanced product availability, product support, automated
procurement practices and limited pricing concessions. No individual customer
accounted for more than 10% of our consolidated revenues during 1999 or 2000.
Our domestic compressor leasing activities are currently located in Texas,
Oklahoma, Arkansas, Louisiana, New Mexico, Mississippi, Alabama, Kansas,
Colorado, California, Utah, Wyoming, Illinois, Kentucky, Missouri, Montana,
Nebraska, Nevada, New York, Pennsylvania, Tennessee, Virginia, West Virginia
and offshore Gulf of Mexico. International locations include Argentina,
Venezuela, Colombia, Trinidad, Bolivia, Mexico, Indonesia and Canada. As of
December 31, 2000, approximately 14% and 17% of our compressor horsepower was
being used in offshore and international applications, respectively.
Sales and Marketing
Our more than 70 salespeople report to three sales vice presidents. The
sales vice presidents report to the Senior Vice President of Sales. Our
salespeople aggressively pursue the rental and sale market in their respective
territories for compressors and production equipment. Each salesperson is
assigned a customer list on the basis of the experience and personal
relationships of the salesperson and the individual service requirements of the
customer. This customer and relationship-focused strategy is communicated
through frequent direct contact, technical presentations, print literature,
print advertising and direct mail. Our advertising and promotion strategy is a
"concentrated" approach, tailoring specific messages into a very focused
presentation methodology.
Additionally, our salespeople coordinate with each other to effectively
pursue customers who operate in multiple regions. The salespeople maintain
intensive contact with our operations personnel in order to promptly respond to
and satisfy customer needs. Our sales efforts concentrate on demonstrating our
commitment to enhancing the customer's cash flow through superior product
design, fabrication, installation, customer service and after-market support.
Upon receipt of a request for proposal or bid by a customer, we assign a
team of sales, operations and engineering personnel to analyze the application
and prepare a quotation, including selection of the equipment, pricing and
delivery date. The quotation is then delivered to the customer, and, if we are
selected as the vendor, final terms are agreed upon and a contract or purchase
order is executed. Our engineering and operations personnel also often provide
assistance on complex compressor applications, field operations issues or
equipment modifications.
Competition
The natural gas compression services and fabrication business is highly
competitive. Overall, we experience considerable competition from companies
with significantly greater financial resources and, on a regional basis, from
several smaller companies which compete directly with us. We believe that we
are currently the largest natural gas compression company in the United States
on the basis of aggregate rental horsepower.
34
Compressor industry participants can achieve significant advantages through
increased size and geographic breadth. As the number of rental units increases
in a rental fleet, the number of sales, engineering, administrative and
maintenance personnel required does not increase proportionately. As a result,
companies such as Hanover with larger rental fleets have relatively lower
operating costs and higher margins than smaller companies due to economies of
scale.
One of the significant cost items in the compressor rental business is the
amount of inventory required to service rental units. Each rental company must
maintain a minimum amount of inventory to stay competitive. As the size of the
rental fleet increases, the required amount of inventory does not increase in
the same proportion. The larger rental fleet companies can generate cost of
capital savings through improved purchasing power and vendor support.
We believe that we compete effectively on the basis of price, customer
service, including the availability of personnel in remote locations,
flexibility in meeting customer needs and quality and reliability of our
compressors and related services.
Our compressor fabrication business competes with other fabricators of
compressor units. The compressor fabrication business is dominated by a few
major competitors, several of which also compete with us in the compressor
rental business. We believe that we are the largest compressor fabrication
company in the United States.
The production equipment business is a highly fragmented business with
approximately eight substantial U.S. competitors. Although sufficient
information is not available to definitively estimate our relative position in
this market, we believe that we are among the top three oil and gas production
equipment fabricators in the United States.
Government Regulation
We are subject to various federal, state, local and foreign laws and
regulations relating to the environment, health and safety, including
regulations regarding air emissions, wastewater and stormwater discharges, as
well as waste handling and disposal. In addition, certain of our customer
service arrangements may require us to operate, on behalf of a specific
customer, petroleum storage units such as underground tanks, or pipelines and
other regulated units, all of which may impose additional compliance
obligations. Certain states have or are considering, and the federal government
has recently passed, more stringent air emission controls on off-road engines.
These laws and regulations may affect the costs of our operations. As with any
owner of property, we are also subject to clean-up costs and liability for
hazardous materials, asbestos or any other toxic or hazardous substance that
may exist on or under any of our properties.
We believe that we are in substantial compliance with environmental laws
and regulations and that the phasing in of recent non-road engine air emission
controls and other known regulatory requirements at the rate currently
contemplated by such laws and regulations will not have a material adverse
effect on our financial condition, results of operations or cash flows.
Notwithstanding, we may not be in compliance with certain environmental
requirements for recently acquired facilities, in part because of our rapid
growth through acquisitions. With respect to newly-acquired facilities, it is
our practice to investigate environmental compliance issues and address any
issues promptly. We cannot be certain, however, that all such issues are
completely resolved in accordance with applicable environmental regulations
prior to our taking over operations, although it is our goal to correct any
deficiencies as quickly as possible.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on persons who are
considered to be responsible for the release of a "hazardous
35
substance" into the environment. These persons include the owner or operator of
the facility or disposal site or sites where the release occurred and companies
that disposed or arranged for the disposal of the hazardous substances. Under
CERCLA, and similar state laws, such persons may be subject to joint and
several liability for the costs of cleaning up the hazardous substances that
have been released into the environment, for damages to natural resources, and
for the costs of certain health studies. Furthermore, it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by hazardous substances or other
pollutants released into the environment. We are not currently under any order
requiring that we undertake or pay for any cleanup activities, nor are we aware
of any current environmental claims by the government or private parties
against us demanding remedial costs or alleging that we are liable for such
costs. However, we cannot be certain that we will not receive any such claims
in the future.
The Resource Conservation and Recovery Act ("RCRA"), and regulations
promulgated thereunder, govern the generation, storage, transfer and disposal
of hazardous wastes. We must comply with RCRA regulations for any of our
operations that involve the generation, management or disposal of hazardous
wastes (such as painting activities or the use of solvents). In addition, to
the extent we operate underground tanks on behalf of specific customers, such
operations may be regulated under RCRA. We believe we are in substantial
compliance with RCRA and are not aware of any current claims against us
alleging RCRA violations. We cannot be certain, however, that we will not
receive such notices of potential liability in the future.
Stricter standards in environmental legislation that may affect us may be
imposed in the future, such as more stringent air emission requirements or
proposals to make hazardous wastes subject to more stringent and costly
handling, disposal and clean-up requirements. While we may be able to pass on
the additional costs of complying with such laws to our customers, there can be
no assurance that attempts to do so will be successful. Accordingly, new laws
or regulations or amendments to existing laws or regulations might require us
to undertake significant capital expenditures and otherwise have a material
adverse effect on our business, results of operations, cash flows and financial
condition.
Employees
As of December 31, 2000, we had approximately 2,700 employees,
approximately 100 of whom are represented by a labor union. We believe that our
relations with our employees are satisfactory.
36
MANAGEMENT
The following sets forth, as of February 1, 2001, the name, age and
business experience for the last five years of each of our executive officers.
Name Age Position
---- --- --------
Michael A. O'Connor........ 65 Chairman of the Board; Director
Michael J. McGhan.......... 46 President and Chief Executive Officer; Director
William S. Goldberg........ 42 Chief Financial Officer, Treasurer and Executive
Vice President; Director
Charles D. Erwin........... 40 Senior Vice President--Sales and Marketing
Joe C. Bradford............ 43 Senior Vice President--Worldwide Operations
Development
Robert O. Pierce........... 41 Senior Vice President--Operations--Fabrication
MICHAEL A. O'CONNOR has served as Chairman of the Board and a director
since January 1992. Mr. O'Connor also serves as an officer and a director of
certain of our subsidiaries.
MICHAEL J. MCGHAN has served as President and Chief Executive Officer since
October 1991. Mr. McGhan has served as a director since March 1992. Mr. McGhan
also serves as an officer and a director of certain of our subsidiaries.
WILLIAM S. GOLDBERG has served as Chief Financial Officer since May 2000.
Mr. Goldberg has served as Executive Vice President and director since May
1991. Mr. Goldberg has been employed by GKH Investments, L.P., a Delaware
limited partnership, and GKH Private Limited since 1988 and has served as
Managing Director of both entities since June 1990. GKH Investments, L.P. is
our largest stockholder. Mr. Goldberg also serves as an officer and a director
of certain of our affiliates. In addition, Mr. Goldberg is a director of DVI,
Inc.
CHARLES D. ERWIN has served as Senior Vice President--Sales and Marketing
since May 2000. Prior to being named Senior Vice President, Mr. Erwin had
served as a Vice President since October 1990.
JOE C. BRADFORD has served as Senior Vice President--Worldwide Operations
Development since May 2000. Prior to being named Senior Vice President, Mr.
Bradford had served as a Vice President since March 1993.
ROBERT O. PIERCE has served as Senior Vice President--Operations--
Fabrication since May 2000. Prior to being named Senior Vice President, Mr.
Pierce had served as a Vice President since April 1995.
37
SELLING STOCKHOLDERS
The following table sets forth, with respect to each of the selling
stockholders (i) the number of shares of common stock owned as of January 31,
2001, (ii) the number of shares of common stock which may be sold in this
offering, (iii) the number of shares of common stock which will be owned after
the offering, and (iv) the percentage of outstanding common stock that will be
owned after the offering.
Number of Percentage of
Shares of Number of Number of Shares Shares of
Common Stock Shares of of Common Stock to Common Stock to be
Owned Prior Common Stock be Owned Owned
Selling Stockholder to the Offering Offered Hereby (1) After the Offering After the Offering
------------------- --------------- ------------------ ------------------ ------------------
GKH Investments,
L.P.(2)................ 22,337,090 4,729,853 17,607,237 25.6%
GKH Partners, L.P.(3)... 843,864 176,306 667,558 *
Joint Energy Development
Investments Limited
Partnership............ 5,523,900 1,173,344 4,350,556 6.3%
Ingersoll-Rand
Company(4)............. 2,919,681 1,040,497 1,879,184 2.7%
Michael A. O'Connor(5).. 2,034,090 150,000 1,884,090 2.7%
Nancy K. Goldberg(6).... 163,308 50,000 113,308 *
Charles D. Erwin(7)..... 470,310 70,000 400,310 *
Joe C. Bradford(8)...... 419,634 40,000 379,634 *
Robert O. Pierce(9)..... 172,654 10,000 162,654 *
Alvin V. Shoemaker(10).. 323,966 40,000 283,966 *
Ted Collins, Jr.(11).... 348,631 20,000 328,631 *
--------
(1) Assumes that the underwriters' option to purchase an additional 1,500,000
shares is not exercised. If the underwriters exercise their option for the
full 1,500,000 shares, GKH Investments, L.P. will sell an additional
1,167,000 shares, GKH Partners, L.P. will sell an additional 43,500 shares
and Joint Energy Development Investments Limited Partnership will sell an
additional 289,500 shares.
(2) Excludes 843,864 shares of common stock owned by GKH Partners, L.P., the
general partner of GKH Investments, L.P.
(3) Excludes 22,337,090 shares of common stock owned by GKH Investments, L.P.
As the general partner of GKH Investments, GKH Partners may be deemed to be
the beneficial owner of stock held by GKH Investments. GKH Partners
expressly disclaims any such beneficial ownership. GKH Partners holds its
shares as nominee for GKH Private Limited.
(4) Ingersoll-Rand Company acquired its shares of common stock in connection
with Hanover Compressor Company's acquisition in September 2000 of the
compression services division of Dresser-Rand Company. Pursuant to certain
pre-existing arrangements relating to shares of common stock (other than
shares being sold in this offering), Ingersoll-Rand has sold 219,134 shares
of common stock since January 31, 2001 and expects to sell substantially
all of its remaining shares of common stock in March 2001.
(5) Includes 1,882,038 shares subject to options held by Mr. O'Connor which are
currently exercisable. Excludes 339,550 shares held by Goldman Sachs
Exchange Place Fund, L.P., in which Mr. O'Connor has an interest. Mr.
O'Connor disclaims beneficial ownership of such shares. Michael A. O'Connor
has served as Chairman of the Board and a director since January 1992.
Mr. O'Connor also serves as an officer and a director of certain of our
subsidiaries.
38
(6) Includes 80,832 shares owned by the Nancy K. Goldberg Declaration of Trust,
with respect to which Mrs. Goldberg is the sole trustee. Excludes 3,900
shares owned by the William S. Goldberg Children's Trust, with respect to
which Mrs. Goldberg's husband, William S. Goldberg, is the sole trustee,
87,200 shares owned by Mr. Goldberg, and 300,000 shares subject to options
held by Mr. Goldberg. Mrs. Goldberg disclaims beneficial ownership of all
such shares. Nancy K. Goldberg is the spouse of William S. Goldberg, who is
a director and serves as Executive Vice President and Chief Financial
Officer of Hanover Compressor Company. Mr. Goldberg also serves as Managing
Director of GKH Investments, L.P. and GKH Private Limited and serves as an
officer and a director of certain of our affiliates.
(7) Includes 352,302 shares subject to options held by Mr. Erwin. Charles D.
Erwin is Senior Vice President--Sales and Marketing of Hanover Compressor
Company.
(8) Includes 209,634 shares subject to options held by Mr. Bradford. Joe C.
Bradford is Senior Vice President--Worldwide Operations Development of
Hanover Compressor Company.
(9) Includes 132,600 shares subject to options held by Mr. Pierce. Robert O.
Pierce is Senior Vice President--Operations-Fabrications of Hanover
Compressor Company.
(10) Includes 10,292 shares owned by Shoemaker Family Partners, L.P. ("SFP").
Mr. Shoemaker is associated with SFP and may be deemed to be a beneficial
owner of such shares. Excludes shares beneficially owned directly or
indirectly by members of Mr. Shoemaker's family as to which Mr. Shoemaker
has no voting or investment power. Excludes 34,190 shares held by Goldman
Sachs Exchange Place Fund, L.P., in which Mr. Shoemaker has an interest.
Mr. Shoemaker disclaims beneficial ownership of such shares. Alvin V.
Shoemaker is a director of Hanover Compressor Company.
(11) Includes 2,095 shares which Mr. Collins has warrants to purchase at a
price of $0.05 per share. Excludes 4,000 shares held in trust for the
benefit of Mr. Collins's two minor children. Mr. Collins is the trustee of
such trusts but disclaims beneficial ownership of such shares.
Ted Collins, Jr. is a director of Hanover Compressor Company.
39
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock currently consists of 200,000,000 shares of
common stock, $.001 par value per share, and 3,000,000 shares of preferred
stock, $.01 par value per share. The following summary description relating to
the capital stock does not purport to be complete. For a detailed description,
reference is made to our certificate of incorporation.
Common Stock
As of January 16, 2001, 66,387,496 shares of common stock were issued and
held of record by approximately 350 holders. 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 our
preferred stock, holders of common stock are entitled to receive ratably any
dividends declared by our board of directors out of legally available funds. On
liquidation, dissolution, sale or winding up of Hanover, holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and satisfaction of preferential rights. Holders of common stock
have no preemptive or subscription rights. The outstanding shares of common
stock are, and the shares of common stock to be issued by us in this offering
and upon conversion of the preferred securities will be, fully paid and
nonassessable. We have never declared a dividend on our common stock, and our
bank credit agreement limits the payment of dividends on common stock without
the lenders' prior written consent. The payment of any such dividends also will
be subject to and may be limited by the terms of any preferred stock we may
issue in the future.
Transfer Agent And Registrar
The transfer agent and registrar for the common stock is Mellon Investor
Services.
Preferred Stock
We are authorized to issue 3,000,000 shares of preferred stock. Our board
of directors may establish, without stockholder approval, one or more classes
or series of preferred stock having the number of shares, designations,
relative voting rights, dividend rates, liquidation, and other rights,
preferences and limitations that the board of directors may designate. We
believe that this power to issue preferred stock provides flexibility in
connection with possible corporate transactions. The issuance of preferred
stock, however, could adversely affect the voting power of holders of common
stock and restrict their rights to receive payments upon liquidation of
Hanover. It could also have the effect of delaying, deferring or preventing a
change in control of Hanover.
Mandatorily Redeemable Convertible Preferred Securities
In December 1999, we issued $86,250,000 of unsecured 7 1/4% Mandatorily
Redeemable Convertible Preferred Securities through Hanover Compressor Capital
Trust, a Delaware business trust and subsidiary of Hanover. The Convertible
Preferred Securities have a liquidation amount of $50 per unit and mature in 30
years, but we may redeem them, in whole or in part, at any time on or after
December 20, 2002. The Convertible Preferred Securities provide for annual cash
distributions at the rate of 7 1/4%, payable quarterly in arrears; however,
payments may be deferred for up to 20 consecutive quarters subject to certain
restrictions. During any periods in which payments are deferred, in general, we
cannot pay any dividend or distribution on our capital stock or redeem,
purchase, acquire or make any liquidation on any of our capital stock. Each
Convertible Preferred Security is convertible into 2.7972 shares of our common
stock, subject to adjustment for certain events.
40
Special Provisions Of Our Certificate Of Incorporation And Delaware Law
Section 102(b)(7) of the Delaware General Corporation Law authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
directors' fiduciary duty of care. Although Section 102(b) does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. Our certificate of
incorporation limits the liability of directors (in their capacity as directors
but not in their capacity as officers) to us or our stockholders to the fullest
extent permitted by Section 102(b). Specifically, our directors will not be
personally liable for monetary damages for breach of a director's fiduciary
duty as a director, except for liability for (a) any breach of the director's
duty of loyalty to Hanover or our stockholders, (b) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (c) unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
or (d) any transaction from which the director derived an improper personal
benefit.
To the maximum extent permitted by law, our certificate of incorporation
and bylaws provide for mandatory indemnification of directors and officers and
permit indemnification of our officers, employees, and agents against all
expense, liability and loss to which they may become subject or which they may
incur as a result of being or having been a director, officer, employee or
agent of Hanover or our subsidiaries. In addition, we must advance or reimburse
directors and may advance or reimburse officers, employees and agents for
expenses incurred by them in connection with indemnifiable claims.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (a) before that
person became an interested stockholder, the corporation's board of directors
approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (b) upon
completion of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least
85% of the voting stock outstanding at the time the transaction commenced
(excluding stock held by directors who are also officers of the corporation and
by employee stock plans that do not provide employees with the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer); or (c) following the transaction in
which that person became an interested stockholder, the business combination is
approved by the corporation's board of directors and authorized at a meeting of
stockholders by the affirmative vote of the holders of at least two-thirds of
the outstanding voting stock not owned by the interested stockholder. Under
Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement
or notification of one of certain extraordinary transactions involving the
corporation and a person who was not an interested stockholder during the
previous three years or who became an interested stockholder with the approval
of a majority of the corporation's directors, if that extraordinary transaction
is approved or not opposed by a majority of the directors who were directors
before any person became an interested stockholder in the previous three years
or who were recommended for election or elected to succeed such directors by a
majority of such directors then in office. "Business combination" includes
mergers, assets sales and other transactions resulting in a financial benefit
to the stockholder. "Interested stockholder" is a person who, together with
affiliates and associates, owns (or, within three years, did own) 15% or more
of the corporation's voting stock.
41
UNDERWRITING
Hanover Compressor Company, the selling stockholders and the underwriters
for the offering named below have entered into an underwriting agreement with
respect to the shares being offered. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co., Credit Suisse First Boston
Corporation, Salomon Smith Barney Inc., J.P. Morgan Securities Inc, Dain
Rauscher Incorporated and First Union Securities, Inc. are the representatives
of the underwriters.
Number of
Underwriters Shares
------------ ----------
Goldman, Sachs & Co..............................................
Credit Suisse First Boston Corporation...........................
Salomon Smith Barney Inc. .......................................
J.P. Morgan Securities Inc.......................................
Dain Rauscher Incorporated.......................................
First Union Securities, Inc......................................
----------
Total.......................................................... 10,000,000
==========
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,500,000 shares from the selling stockholders to cover such sales. They may
exercise that option for 30 days. If any shares are purchased pursuant to this
option, the underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us and the selling
stockholders. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares.
Paid by Hanover
Compressor Paid by Selling
Company Stockholders
----------------- -----------------
No Full No Full
Exercise Exercise Exercise Exercise
-------- -------- -------- --------
Per Share................................... $ $ $ $
Total....................................... $ $ $ $
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to $ per share from the initial
price to public. If all the shares are not sold at the initial price to public,
the representatives may change the offering price and the other selling terms.
A prospectus in electronic format will be made available on the web sites
maintained by one or more of the representatives and may also be made available
on web sites maintained by other underwriters. The underwriters may agree to
allocate a number of shares for sale to their online brokerage account holders.
Internet distributions will be allocated by the representatives to underwriters
that may make Internet distributions on the same basis as other allocations.
42
We, our directors and executive officers and certain other stockholders
have agreed with the underwriters not to dispose of or hedge any shares of our
common stock or securities convertible into or exchangeable for shares of our
common stock during the period from the date of this prospectus continuing
through the date that is 90 days after the date of this prospectus, except with
the prior written consent of the representatives. This agreement does not apply
to any issuances by us under our existing employee benefit plans, upon
conversion of outstanding convertible securities or exercise of outstanding
warrants, or in connection with certain acquisitions. The selling stockholders
have entered into a 120-day lock-up agreement (90 days in the case of
Ingersoll-Rand Company), subject to certain exceptions, with the underwriters
with respect to their shares of common stock.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the other underwriters a portion of the
underwriting discount received by it because the representatives have
repurchased shares sold by or for the account of such underwriter in
stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the New York
Stock Exchange, in the over-the-counter market or otherwise.
We are paying all expenses of the offering other than underwriting
discounts and commissions related to the sale of shares of common stock by the
selling stockholders. We estimate that the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$650,000.
We and the selling stockholders have agreed to indemnify the several
underwriters against some liabilities, including liabilities under the
Securities Act of 1933.
In the ordinary course of business, some of the underwriters and their
affiliates have provided, and may in the future provide, investment banking,
commercial banking and other services to us for which they have received, and
may in the future receive, customary fees or other compensation. For example,
affiliates of some of the underwriters are part of the lending group under our
bank credit agreement or our contemplated supplemental credit facility. Most of
the proceeds from this offering and the concurrent notes offering will be used
to repay indebtedness under the bank credit agreement and any amounts that may
be borrowed under our contemplated $50 million supplemental credit facility.
See "Use of Proceeds." Because of the lending relationship between affiliates
of J.P. Morgan Securities Inc and First Union Securities, Inc., two of the
underwriters, and us and the contemplated use of proceeds to repay
indebtedness, this offering is being conducted in accordance with Rule
2710(c)(8) of the National Association of Securities Dealers, Inc.
LEGAL MATTERS
The validity of the common stock will be passed upon by Latham & Watkins,
Chicago, Illinois. Richard S. Meller, a partner of Latham & Watkins, is
Secretary of Hanover Compressor Company and owns 10,304 shares of our common
stock and options to purchase 20,000 shares of our common stock. In addition,
other partners of Latham & Watkins own or have an interest in additional
shares. Sidley & Austin, Chicago, Illinois, will pass upon certain legal
matters in connection with this offering for the underwriters.
43
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. These filings include
previous filings made by our predecessor, which was also called "Hanover
Compressor Company." You may also read and copy any document we file at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the SEC located at 7 World Trade Center, Suite
1300, New York, New York 10048 and at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You may obtain information on the operation of the
SEC's public reference room in Washington, D.C. by calling the SEC at
1-800-SEC-0330. We also file information with The New York Stock Exchange.
These reports, proxy statements and other information may be read and copied at
20 Broad Street, New York, New York 10005.
This prospectus, which constitutes a part of a registration statement on
Form S-3 that we filed with the SEC under the Securities Act of 1933, omits
certain information contained in the registration statement. Accordingly, you
should refer to the registration statement and its exhibits for further
information with respect to Hanover Compressor Company and the shares of common
stock offered hereby. Furthermore, statements contained in this prospectus or
in any document incorporated in this prospectus by reference regarding any
contract or other document are not necessarily complete, and, in each instance,
you should refer to the copy of the contract or other document filed with the
SEC as an exhibit to the registration statement.
In this prospectus we have incorporated by reference certain reports and
other information we and our predecessor have filed, or will file, with the
SEC. The information incorporated by reference is an important part of this
prospectus, and information that we file later with the SEC will automatically
update and supersede this information. We incorporate by reference the
documents listed below and any further filings made with the SEC under Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until all of
the securities are sold or this offering is terminated:
. our Annual Report on Form 10-K, as amended by Form 10-K/A, for the year
ended December 31, 1999;
. our Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, 2000; June 30, 2000; and September 30, 2000; and
. our Current Reports on Form 8-K filed with the SEC on May 5, 2000; May
23, 2000; June 7, 2000; July 13, 2000; July 19, 2000; September 14,
2000; November 9, 2000; November 13, 2000; November 22, 2000; February
5, 2001; and February 27, 2001.
You may request a copy of these filings at no cost by writing or
telephoning us at the following address:
Hanover Compressor Company, 12001 North Houston Rosslyn, Houston, Texas
77086, Attention: Corporate Secretary, Telephone: (281) 447-8787
EXPERTS
The audited consolidated financial statements of Hanover Compressor Company
as of December 31, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999 included in this prospectus and the audited historical
financial statements of the compression services division of Dresser-Rand
Company incorporated by reference to Item 7(a) of Hanover Compressor Company's
Current Report on Form 8-K/A filed on November 13, 2000 have been so included
or incorporated in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
44
INDEX TO FINANCIAL STATEMENTS
Page
Number
------
Year Ended December 31, 1999
Report of Independent Accountants..................................... F-2
Consolidated Balance Sheet............................................ F-3
Consolidated Statement of Income and Comprehensive Income............. F-4
Consolidated Statement of Cash Flows.................................. F-5
Consolidated Statement of Common Stockholders' Equity................. F-7
Notes to Consolidated Financial Statements............................ F-8
Nine Months Ended September 30, 2000
Condensed Consolidated Balance Sheet (unaudited)...................... F-24
Condensed Consolidated Statement of Income and Comprehensive
Income (unaudited)................................................... F-25
Condensed Consolidated Statement of Cash Flows (unaudited)............ F-26
Notes to Condensed Consolidated Financial Statements (unaudited)...... F-27
Pro Forma Combined Condensed Statements of Operations
Unaudited Pro Forma Combined Condensed Statement of Operations for the
Nine Months Ended September 30, 2000................................. F-33
Unaudited Pro Forma Combined Condensed Statement of Operations for the
Year Ended December 31, 1999......................................... F-34
Notes to Unaudited Pro Forma Combined Condensed Statements of
Operations........................................................... F-35
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Hanover Compressor Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and comprehensive income, of cash flows and
of common stockholders' equity present fairly, in all material respects, the
financial position of Hanover Compressor Company and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 18, the December 31, 1997 consolidated financial
statements have been restated to record a liability to a stockholder.
PricewaterhouseCoopers LLP
Houston, Texas
March 8, 2000, except as to the
stock split described in Note 16
which is as of June 14, 2000, and
except for Note 18 as to which the
date is February 1, 2001
F-2
HANOVER COMPRESSOR COMPANY
Consolidated Balance Sheet
December 31, 1999 and 1998
Restated
(See Note 18)
------------------
1999 1998
-------- --------
(in thousands of
dollars, except
for par value and
share amounts)
ASSETS
Current assets:
Cash and cash equivalents................................ $ 5,756 $ 11,503
Accounts receivable, net................................. 93,715 70,205
Inventory................................................ 66,562 63,044
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 4,782 7,871
Prepaid taxes............................................ 16,430 9,466
Other current assets..................................... 5,287 2,967
-------- --------
Total current assets................................... 192,532 165,056
-------- --------
Property, plant and equipment:
Compression equipment and facilities..................... 520,403 422,896
Land and buildings....................................... 19,000 15,044
Transportation and shop equipment........................ 27,616 21,667
Other.................................................... 10,029 11,119
-------- --------
577,048 470,726
Accumulated depreciation................................. (79,583) (78,228)
-------- --------
Net property, plant and equipment...................... 497,465 392,498
-------- --------
Intangible and other assets................................ 66,513 57,036
-------- --------
$756,510 $614,590
======== ========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt..................... $ 15,967 $ 444
Accounts payable, trade.................................. 32,308 23,361
Accrued liabilities...................................... 22,065 17,599
Advance billings......................................... 13,328 9,694
Billings on uncompleted contracts in excess of costs and
estimated earnings...................................... 898 694
-------- --------
Total current liabilities.............................. 84,566 51,792
Long-term debt............................................. 69,681 156,943
Other liabilities.......................................... 82,566 44,875
Deferred income taxes...................................... 65,533 45,510
-------- --------
Total liabilities...................................... 302,346 299,120
-------- --------
Mandatorily redeemable convertible preferred securities.... 86,250
Commitments and contingencies (Note 15)
Common stockholders' equity:
Common stock, $.001 par value; 200 million shares
authorized; 57,505,874 and 57,180,944 shares issued and
outstanding, respectively............................... 58 57
Additional paid-in capital............................... 272,944 268,977
Notes receivable--employee stockholders.................. (3,387) (10,146)
Accumulated other comprehensive income................... (311) 152
Retained earnings........................................ 100,196 59,755
Treasury stock--167,394 and 351,094 common shares,
respectively, at cost................................... (1,586) (3,325)
-------- --------
Total common stockholders' equity...................... 367,914 315,470
-------- --------
$756,510 $614,590
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
HANOVER COMPRESSOR COMPANY
Consolidated Statement of Income and Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
-------- -------- -------------
Restated
(See Note 18)
(in thousands, except
per share amounts)
Revenues:
Rentals..................................... $192,655 $147,609 $100,685
Parts and service........................... 34,461 23,870 10,254
Compressor fabrication...................... 52,531 67,453 49,764
Production equipment fabrication............ 28,037 37,466 37,052
Gain on sale of property, plant and
equipment.................................. 5,927 2,552 148
Other....................................... 3,417 3,007 895
-------- -------- --------
317,028 281,957 198,798
-------- -------- --------
Expenses:
Rentals..................................... 64,949 49,386 35,113
Parts and service........................... 21,724 17,341 6,360
Compressor fabrication...................... 43,663 58,144 41,584
Production equipment fabrication............ 20,833 25,781 26,375
Selling, general and administrative......... 33,782 26,626 21,514
Depreciation and amortization............... 37,337 37,154 28,439
Leasing expense............................. 22,090 6,173
Interest expense............................ 8,786 11,716 10,728
Distributions on mandatorily redeemable
convertible preferred securities........... 278
-------- -------- --------
253,442 232,321 170,113
-------- -------- --------
Income before income taxes.................... 63,586 49,636 28,685
Provision for income taxes.................... 23,145 19,259 11,043
-------- -------- --------
Net income.................................... 40,441 30,377 17,642
-------- -------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment..... (463) 152
-------- -------- --------
Comprehensive income.......................... $ 39,978 $ 30,529 $ 17,642
======== ======== ========
Net income available to common stockholders... $ 40,441 $ 30,377 $ 17,642
======== ======== ========
Weighted average common and common equivalent
shares outstanding
Basic....................................... 57,048 56,936 51,246
======== ======== ========
Diluted..................................... 61,054 60,182 54,690
======== ======== ========
Earnings per common share
Basic....................................... $ 0.71 $ 0.53 $ 0.34
======== ======== ========
Diluted..................................... $ 0.66 $ 0.50 $ 0.32
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-4
HANOVER COMPRESSOR COMPANY
Consolidated Statement of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
-------- -------- -------------
Restated
(See Note 18)
(in thousands of dollars)
Cash flows from operating activities:
Net income.................................. $ 40,441 $ 30,377 $ 17,642
Adjustments:
Depreciation and amortization.............. 37,337 37,154 28,439
Amortization of debt issuance costs and
debt discount............................. 884 852 892
Bad debt expense........................... 1,475 349 594
Gain on sale of property, plant and
equipment................................. (5,927) (2,552) (148)
Equity in income of nonconsolidated
affiliates................................ (1,188) (1,369) 206
Deferred income taxes...................... 11,396 12,358 5,962
Changes in assets and liabilities, net of
effects of business combinations:
Accounts receivable....................... (23,974) (28,337) (13,604)
Inventory................................. (1,918) (24,169) (14,726)
Costs and estimated earnings versus
billings on uncompleted contracts........ 3,293 (3,000) 2,929
Accounts payable and other liabilities.... 11,969 14,358 7,728
Advance billings.......................... 3,634 2,942 51
Other..................................... (9,200) (7,816) (3,746)
-------- -------- --------
Net cash provided by operating
activities.............................. 68,222 31,147 32,219
-------- -------- --------
Cash flows from investing activities:
Capital expenditures........................ (282,940) (169,498) (150,995)
Proceeds from sale of property, plant and
equipment.................................. 223,037 208,644 2,887
Cash used for business acquisitions, net.... (35,311) (42,581) (6,287)
Cash returned from unconsolidated
subsidiary................................. 8,000
Cash used to acquire investments in
unconsolidated subsidiaries................ (4,900) (11,264) (10,095)
-------- -------- --------
Net cash used in investing activities.... (92,114) (14,699) (164,490)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) on revolving
credit facility............................ (64,400) (4,700) 63,681
Proceeds from issuance of long-term debt.... 2,825 5,000
Issuance of common stock, net............... 92,088
Equity issuance costs....................... (687)
Proceeds from mandatorily redeemable
convertible preferred securities, net...... 82,940
Proceeds from warrant conversions and stock
option exercises........................... 545 121
Repayment of long-term debt................. (8,357) (2,226) (31,757)
Purchase of treasury stock.................. (5,950)
Repayments of shareholder notes............. 7,490 602 1,185
-------- -------- --------
Net cash provided by (used in) financing
activities.............................. 18,218 (9,328) 129,510
-------- -------- --------
Effect of exchange rate changes on cash and
equivalents................................. (73) (178)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. (5,747) 6,942 (2,761)
Cash and cash equivalents at beginning of
year........................................ 11,503 4,561 7,322
-------- -------- --------
Cash and cash equivalents at end of year..... $ 5,756 $ 11,503 $ 4,561
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-5
HANOVER COMPRESSOR COMPANY
Consolidated Statement of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------- -------- -------
(in thousands of
dollars)
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized amounts......... $ 7,897 $ 10,992 $10,069
======= ======== =======
Income taxes paid................................. $12,065 $ 2,249 $ 5,857
======= ======== =======
Supplemental disclosure of noncash transactions:
Debt issued for property, plant and equipment..... $ 379
=======
Property sold in exchange for note receivable..... $ 3,538 $ 1,500
======= ========
Common stock issued in exchange for notes
receivable....................................... $ 731 $ 5,163
======= =======
Acquisitions of businesses:
Property, plant and equipment acquired............ $39,105 $ 31,015
======= ========
Other noncash assets acquired..................... $ 9,711 $ 25,000
======= ========
Liabilities assumed............................... $(1,578) $ (1,261)
======= ========
Deferred taxes.................................... $(8,627) $(12,174)
======= ========
Common stock issued............................... $(3,300) $ (3,300)
======= ========
The accompanying notes are an integral part of these financial statements.
F-6
HANOVER COMPRESSOR COMPANY
Consolidated Statement of Common Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
(in thousands of dollars, except share data)
Accumulated Notes
Common Stock Additional Other Receivable--
----------------- Paid-in Comprehensive Treasury Employee Retained
Shares Amount Capital Income Stock Stockholders Earnings
---------- ------ ---------- ------------- -------- ------------ -------------
Restated
(See Note 18)
Balance at January 1,
1997................... 45,877,082 $46 $171,319 $ (218) $(6,770) $ 11,736
Issuance of common
stock.................. 10,327,686 10 92,078
Issuance of common stock
to employees........... 529,570 1 5,162 (5,163)
Repayment of employee
shareholder notes...... 1,185
Net income.............. 17,642
---------- --- -------- ------- ------- --------
Balance at December 31,
1997................... 56,734,338 57 268,559 (218) (10,748) 29,378
Conversion of warrants.. 396,960
Exercise of stock
options................ 49,646 120
Other comprehensive
income................. $ 152
Purchase of 588,400
treasury shares, at
cost................... (5,950)
Issuance of 300,000
treasury shares at
$11.00 per share....... 457 2,843
Repayment of employee
shareholder notes...... 602
Other................... (159)
Net income.............. 30,377
---------- --- -------- ----- ------- ------- --------
Balance at December 31,
1998................... 57,180,944 57 268,977 152 (3,325) (10,146) 59,755
Conversion of warrants.. 52,678 1
Exercise of stock
options................ 197,352 545
Other comprehensive
loss................... (463)
Issuance of common stock
to employees........... 74,900 731 (731)
Issuance of 183,700
treasury shares at
$17.96 per share....... 1,561 1,739
Repayment of employee
shareholder notes...... 7,490
Income tax benefit from
stock options
exercised.............. 1,176
Other................... (46)
Net income.............. 40,441
---------- --- -------- ----- ------- ------- --------
Balance at December 31,
1999................... 57,505,874 $58 $272,944 $(311) $(1,586) $(3,387) $100,196
========== === ======== ===== ======= ======= ========
The accompanying notes are an integral part of these financial statements.
F-7
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
1. The Company, Business and Significant Accounting Policies
Hanover Compressor Company and its subsidiaries ("Hanover" or the
"Company") is a leading provider of a broad array of natural gas compression
rental, operations, parts and maintenance services in the United States and
select international markets. Hanover's compression services are complemented
by its compressor and oil and gas production equipment fabrication operations.
Hanover is a Delaware corporation originally formed on October 17, 1990. In
December 1999, the Company adopted a holding company structure and merged into
the new holding company that assumed the name of Hanover Compressor Company.
The charter and by-laws of the new holding company are substantially the same
as the old Company.
On June 6, 1997, the Board of Directors approved an increase of authorized
shares of preferred stock and common stock to 3,000,000 and 100,000,000 shares,
respectively. In addition, the Board of Directors approved a 158-for-1 stock
split of the Company's common stock. The stock split has been effected in the
form of a stock dividend. All share and per share information included herein
reflects the stock split.
On June 30, 1997, Hanover issued 10,317,382 shares of common stock for cash
of $92,020,000 (net of approximately $1,771,000 of equity issuance costs) in
connection with the Company's initial public offering (the Offering).
Principles of Consolidation
The accompanying consolidated financial statements include Hanover and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets, liabilities, revenues
and expenses, as well as the disclosures of contingent assets and liabilities.
Because of the inherent uncertainties in this process, actual future results
could differ from those expected at the reporting date. Management believes
that the estimates are reasonable.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Revenue Recognition
Revenue from equipment rentals is recorded when earned over the period of
rental and maintenance contracts which generally range from one month to five
years. Parts and service revenue is recorded as products are delivered or
services are performed for the customer.
Compressor and production equipment fabrication revenue is recognized using
the percentage-of-completion method. The Company estimates percentage-of-
completion for compressor fabrication on a direct labor hour-to-total labor
hour basis. Production equipment fabrication percentage-of-completion is
estimated using the cost-to-total cost basis.
F-8
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and accounts
receivable. The Company believes that the credit risk in temporary cash
investments that the Company has with financial institutions is minimal. Trade
accounts receivable are due from companies of varying size engaged principally
in oil and gas activities in the United States, Canada and South America. The
Company reviews the financial condition of customers prior to extending credit
and generally does not obtain collateral for receivables. Payment terms are on
a short-term basis and in accordance with industry standards. Trade accounts
receivable are recorded net of estimated doubtful accounts of $1,730,000 and
$1,212,000 at December 31, 1999 and 1998, respectively. The Company considers
this credit risk to be limited due to these companies financial resources.
Inventory
Inventory consists of parts used for fabrication or maintenance of natural
gas compression units and production equipment, and also includes compression
units and production equipment that are held for sale. Inventory is stated at
the lower of cost or market using the average-cost method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated
using the straight-line method over their estimated useful lives as follows:
Compression equipment and facilities........................ 4 to 25 years
Buildings................................................... 30 years
Transportation, shop equipment and other.................... 3 to 12 years
Major improvements that extend the useful life of an asset are capitalized.
Repairs and maintenance are expensed as incurred. When property, plant and
equipment is sold, retired or otherwise disposed of, the cost and related
accumulated depreciation are eliminated and the gain or loss is recognized.
Depreciation expense was $34,696,000, $35,768,000 and $27,789,000 in 1999, 1998
and 1997, respectively.
Assets under construction of $18,937,000 and $6,984,000 are included in
compression equipment at December 31, 1999 and 1998, respectively. Interest is
capitalized in connection with the compression equipment and facilities that
are constructed for the Company's use in its rental operations. The capitalized
interest is recorded as part of the assets to which it relates and is amortized
over the asset's estimated useful life. In 1999, $1,533,000 of interest cost
was capitalized. No interest was capitalized for 1998 and 1997.
Long-Lived Assets
The Company reviews for the impairment of long-lived assets, including
property, plant and equipment, and goodwill whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss exists when estimated undiscounted cash flows
expected to result from the use of the asset and its eventual disposition are
less than its carrying amount. The impairment loss recognized represents the
excess of the assets carrying value as compared to its estimated fair market
value.
Intangible and Other Assets
Investments in affiliated corporations in which the Company does not have a
controlling interest are accounted for using the equity method. The excess of
cost over net assets of acquired
F-9
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
businesses is recorded as goodwill and amortized on a straight-line basis over
15 years commencing on the dates of the respective acquisitions. Accumulated
amortization was $3,822,000 and $1,810,000 at December 31, 1999 and 1998,
respectively.
Included in intangible and other assets are debt issuance costs, net of
accumulated amortization, totaling $1,099,000 and $1,186,000 at December 31,
1999 and 1998, respectively. Such costs are amortized over the period of the
respective debt agreements.
Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123 (FAS
123) "Accounting for Stock-Based Compensation," the Company measures
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed in APB Opinion No. 25 (APB 25), "Accounting
for Stock Issued to Employees," and has provided in Note 12, pro forma
disclosures of the effect on net income and earnings per share as if the fair
value-based method prescribed by FAS 123 had been applied in measuring
compensation expense.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, all expected future events are considered other than enactments
of changes in the tax law or rates.
Foreign Currency Translation
The financial statements of subsidiaries outside the U.S., except those
located in highly inflationary economies, are measured using the local currency
as the functional currency. Assets, including goodwill, and liabilities of
these subsidiaries are translated at the rates of exchange at the balance sheet
date. Income and expense items are translated at average monthly rates of
exchange. The resulting gains and losses from the translation of accounts are
included in accumulated other comprehensive income. For subsidiaries located in
highly inflationary economies, translation gains and losses are included in net
income. The resulting translation adjustment for the year ended December 31,
1997 was not significant.
Earnings Per Common Share
Basic earnings per common share is computed using the weighted average
number of shares outstanding for the period. Diluted earnings per common share
is computed using the weighted average number of shares outstanding adjusted
for the incremental shares attributed to outstanding options and warrants to
purchase common stock.
Included in diluted shares are common stock equivalents relating to options
of 3,296,000, 2,460,000 and 2,306,000 in 1999, 1998 and 1997, respectively, and
warrants of 712,000, 786,000 and 1,138,000 in 1999, 1998 and 1997,
respectively. The common stock equivalents excluded from the computation of
diluted earnings per share as the effect would be anti-dilutive were
approximately 212,000 and 292,000 in 1999 and 1998. No common stock equivalents
were anti-dilutive in 1997.
F-10
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Comprehensive Income
Components of comprehensive income are net income and all changes in equity
during a period except those resulting from transactions with owners.
Accumulated other comprehensive income consists of the foreign currency
translation adjustment.
Financial Instruments
The Company utilizes off-balance sheet derivative financial instruments
with the principal objective being to minimize the risks and/or costs
associated with financial and global operating activities by managing its
exposure to interest rate fluctuation on a portion of its variable rate debt
and leasing obligations. The Company does not utilize derivative financial
instruments for trading or other speculative purposes. The Company designates
and assigns the financial instruments as hedges of specific assets, liabilities
or anticipated transactions. The cash flow from hedges is classified in the
Consolidated Statements of Cash Flows under the same category as the cash flows
from the underlying assets, liabilities or anticipated transactions. The
carrying amounts reported in the balance sheet for all financial instruments
approximate fair value. See Notes 7 and 8.
Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 1999 financial statement classification. These
reclassifications have no impact on net income.
2. Business Combinations
Acquisitions were accounted for under the purchase method of accounting.
Results of operations of companies acquired are included from the dates of such
acquisitions. The Company allocates the cost of the acquired business to the
assets acquired and the liabilities assumed based upon fair value estimates
thereof. These estimates are revised during the allocation period as necessary
when information regarding contingencies becomes available to define and
quantify assets acquired and liabilities assumed. The allocation period varies
for each acquisition but does not exceed one year. To the extent contingencies
are resolved or settled during the allocation period, such items are included
in the revised purchase price allocation. After the allocation period, the
effect of changes in such contingencies is included in results of operations in
the periods the adjustments are determined. The Company's management does not
believe potential deviations between its fair value estimates and actual fair
values to be material.
Year Ended December 31, 1999
In July 1999, the Company purchased preferred stock and a purchase option
for the common stock of CDI Holdings, Inc. and its subsidiary Compressor
Dynamics, Inc. ("CDI"). In August 1999, the Company exercised its option to
purchase CDI. The total cost for CDI was approximately $18,525,000 in cash.
In August 1999, the Company purchased the stock of Victoria Compression
Services, Inc., Contract Engineering and Operating, Inc. and Unit Partners,
Inc. ("CEO") for approximately $16,786,000 in cash, 183,700 shares of the
Company's treasury stock valued at $3,300,000 and notes payable of
approximately $452,000.
Year Ended December 31, 1998
In June 1998, the Company purchased the stock of Arkoma Compression
Services, Inc. for approximately $17,245,000 in cash. In October 1998, the
Company purchased the stock of Eureka Energy Systems, Inc. for approximately
$25,335,000 in cash.
F-11
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
The pro forma information set forth below assumes acquisitions in 1999 and
1998 are accounted for had the purchases occurred at the beginning of 1998.
The pro forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that actually would
have been achieved had the acquisitions been consummated at that time (in
thousands, except per share amounts):
Years Ended December 31,
---------------------------
1999 1998
------------ ------------
(unaudited) (unaudited)
Revenue..................................... $ 323,002 $ 308,870
Net income.................................. 40,412 31,391
Earnings per common share--basic............ $ 0.71 $ 0.55
Earnings per common share--diluted.......... $ 0.66 $ 0.52
Year Ended December 31, 1997
In September 1997, Hanover purchased Wagner Equipment, Inc. and Gas Tech
Compression Services, Inc. for approximately $6,287,000 in cash. Results of
operations for 1997 were not materially impacted by the transaction.
3. Inventory
Inventory consisted of the following amounts (in thousands):
December 31,
----------------
1999 1998
-------- -------
Parts and supplies....................................... $ 44,058 $32,808
Work in progress......................................... 18,677 19,962
Finished goods........................................... 3,827 10,274
-------- -------
$ 66,562 $63,044
======== =======
4. Compressor and Production Equipment Fabrication Contracts
Costs, estimated earnings and billings on uncompleted contracts are as
follows (in thousands):
December 31,
----------------
1999 1998
------- -------
Costs incurred on uncompleted contracts................. $11,041 $18,605
Estimated earnings...................................... 2,150 3,488
------- -------
13,191 22,093
Less--billings to date.................................. (9,307) (14,916)
------- -------
$ 3,884 $ 7,177
======= =======
Presented in the accompanying financial statements as follows (in
thousands):
December 31,
---------------
1999 1998
------- ------
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ $ 4,782 $7,871
Billings on uncompleted contracts in excess of costs
and estimated earnings............................... (898) (694)
------- ------
$ 3,884 $7,177
======= ======
F-12
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
5. Intangible and Other Assets
Intangible and other assets consisted of the following (in thousands)
December 31,
-----------------
1999 1998
-------- -------
Goodwill.............................................. $ 33,613 $26,686
Investments in unconsolidated subsidiaries............ 18,892 24,104
Deferred debt issuance and other transaction costs.... 10,317 4,957
Notes receivable...................................... 9,214 3,799
Other................................................. 1,862 3,237
-------- -------
73,898 62,783
Accumulated amortization.............................. (7,385) (5,747)
-------- -------
$ 66,513 $57,036
======== =======
Amortization of goodwill and other intangible assets totaled $2,641,000,
$1,386,000 and $650,000 in 1999, 1998 and 1997, respectively.
At December 31, 1999 and 1998, the Company's investments in unconsolidated
subsidiaries included a 35% interest in Collicutt Mechanical Services, Ltd.; a
35% interest in the Consortium Cosacol/Hanover (the "Consortium"); and a non-
controlling 60% interest in the Hanover/Enron Joint Venture. In September 1999,
the Company acquired a 20% interest in Meter Acquisition Company LP, LLLP for
approximately $2,200,000 and a non-controlling 52.5% interest in Hanover
Measurement Services Company, LP for approximately $2,700,000. The Company had
a 33% interest in a joint venture with Wartsila Diesel International Ltd., OY
that was dissolved in 1999. There were no distributions or dividends received
during the years ended December 31, 1998 and 1999. Equity in income of joint
ventures was $1,188,000 and $1,369,000 for 1999 and 1998, respectively and a
loss of $206,000 for 1997 and is included in other revenues.
In December 1998, the Company restructured its relationship in the
Consortium. The Company purchased all of the capitalized construction from the
Consortium for 300,000 shares of Hanover common stock valued at $3,300,000. The
capitalized construction was transferred to property, plant and equipment in
1999. In addition, the Company acquired a 10% interest in Cosacol for
$2,000,000 in cash.
In December 1998, the Company advanced $8,000,000 to Transportadora de Gas
del Sur S.A., an Argentina company for a 25% interest in a joint venture. In
1999, the Company withdrew from the joint venture and the $8,000,000 was
repaid.
In November 1997, Hanover acquired 35% of the common stock of Collicutt
Mechanical Services, Ltd. for approximately $5,608,000 in cash. The investment
is accounted for using the equity method of accounting. The excess of the
Company's investment over the underlying net equity of $703,000 is being
amortized on a straight-line basis over ten years and is included in other
assets at December 31, 1999 and 1998.
The notes receivable result primarily from customers for sales of equipment
or advances to other parties in the ordinary course of business. The notes vary
in length, are non-interest bearing or bear interest at rates ranging from
prime to 15% and are collateralized by equipment.
F-13
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
6. Accrued Liabilities
Accrued liabilities are comprised of the following (in thousands):
December 31,
---------------
1999 1998
------- -------
Accrued salaries and wages............................... $ 224 $ 1,055
Accrued bonuses.......................................... 1,669 1,539
Accrued income and other taxes........................... 8,033 6,105
Accrued leasing expense.................................. 3,496 2,336
Accrued other............................................ 8,643 6,564
------- -------
$22,065 $17,599
======= =======
7. Long-Term Debt
Long-term debt consisted of the following (in thousands):
December 31,
------------------
1999 1998
-------- --------
Revolving credit facility........................... $ 62,100 $126,500
Subordinated promissory notes, net of unamortized
discount of $289 and $855.......................... 15,364 22,648
Real estate mortgage, interest at 7.5%,
collateralized by certain land and buildings,
payable through 2002............................... 4,250 4,583
Other, interest at various rates, collateralized by
equipment and other assets, net of unamortized
discount........................................... 3,934 3,656
-------- --------
85,648 157,387
Less--current maturities............................ (15,967) (444)
-------- --------
$ 69,681 $156,943
======== ========
The Company's primary credit agreement provides for a $200,000,000
revolving credit facility that matures on December 17, 2002. Advances bear
interest at the bank's prime or a negotiated rate (7.7% and 6.9% at December
31, 1999 and 1998, respectively). A commitment fee of 0.35% per annum on the
average available commitment is payable quarterly.
The credit agreement contains certain financial covenants and limitations
on, among other things, indebtedness, liens, leases and sales of assets. The
credit agreement also limits the payment of cash dividends on the Company's
common stock to 25% of net income for the respective period.
The subordinated promissory notes mature on December 31, 2000 and bear
interest at 7%, payable semi-annually.
Maturities of long-term debt at December 31, 1999 are (in thousands):
2000--$15,967; 2001--$722; 2002--$66,093; 2003--$380; 2004--$328 and $2,158
thereafter.
In January 1998 and in connection with the revolving credit facility, the
Company entered into a two-year interest rate swap transaction to manage
interest rate exposure with a notional amount of $75,000,000 and a strike rate
of 5.43%. The differential paid or received on the swap transaction was
recognized as an adjustment to interest expense. This swap transaction was
cancelled in July 1998.
F-14
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
8. Leasing Transactions
In June 1999 and in July 1998, the Company completed two individual
$200,000,000 sale and lease back transactions of certain compression equipment.
The transactions are recorded as a sale and lease back of the equipment and are
recorded as operating leases. Under both agreements, the equipment was sold and
leased back by the Company for a 5 year period and will continue to be deployed
by the Company under its normal operating procedures. At any time, the Company
has options to repurchase the equipment at fair market value. The Company has
substantial residual value guarantees under the agreements (approximately
$333,000,000 for both transactions) that are due upon termination of the leases
and which may be satisfied by a cash payment or the exercise of the Company's
purchase options. The equipment sold in the June 1999 transaction had a book
value of approximately $162,014,000 and resulted in a gain of approximately
$37,986,000. The equipment sold in the July 1998 transaction had a book value
of $158,007,000 and resulted in a gain of approximately $41,993,000. Both gains
are deferred until the end of the respective lease terms. Should the Company
not exercise its purchase options under the agreements, the deferred gains will
be recognized to the extent they exceed any required payments under the
residual value guarantees and any other requirements under the agreements. The
Company incurred transaction costs of approximately $1,799,000 and $1,423,000
for the 1999 and 1998 transactions, respectively. These costs are included in
intangible and other assets and are being amortized over the respective lease
terms.
Both lease agreements call for variable quarterly rental payments that vary
with the London Interbank Offered Rate. The following provides future minimum
lease payments under the leasing arrangement exclusive of any guarantee
payments (in thousands): 2000--$30,300; 2001--$30,700; 2002--$30,700; 2003--
23,300; 2004--$7,900.
In July 1998 and in connection with the 1998 leasing transaction, the
Company entered into two-year swap transactions to manage lease rental exposure
with notional amounts of $75,000,000 and $125,000,000 and strike rates of 5.51%
and 5.56%, respectively. The differential paid or received on the swap
transactions is recognized as an adjustment to leasing expense. The
counterparty to this contractual arrangement is a major financial institution
with which the Company also has other financial relationships. The Company is
exposed to credit loss in the event of nonperformance by this counterparty.
However, the Company does not anticipate nonperformance by this party and no
material loss would be expected from their nonperformance. The fair market
value of these interest rate swaps at December 31, 1999 is approximately
$2,900,000 based on market quotes.
9. Income Taxes
The components of income before income taxes were as follows (in
thousands):
Year ended December 31,
------------------------
1999 1998 1997
-------- ------- -------
Domestic......................................... $ 47,741 $39,160 $22,864
Foreign.......................................... 15,845 10,476 5,821
-------- ------- -------
$ 63,586 $49,636 $28,685
======== ======= =======
F-15
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
The provision for income taxes consisted of the following (in thousands):
Year Ended December 31,
-----------------------
1999 1998 1997
------- ------- -------
Current tax expense:
Federal........................................ $ 6,958 $ 3,421 $ 3,308
State.......................................... 1,412 1,741 1,281
Foreign........................................ 3,379 1,739 492
------- ------- -------
Total current................................ 11,749 6,901 5,081
------- ------- -------
Deferred tax expense:
Federal........................................ 10,670 10,312 4,272
State.......................................... 151 85 (23)
Foreign........................................ 575 1,961 1,713
------- ------- -------
Total deferred............................... 11,396 12,358 5,962
------- ------- -------
Total provision.................................. $23,145 $19,259 $11,043
======= ======= =======
The income tax expense for 1999, 1998 and 1997 resulted in effective tax
rates of 36.4%, 38.8% and 38.5%, respectively. The reasons for the differences
between these effective tax rates and the U.S. statutory rate of 35% are as
follows (in thousands):
Year Ended December 31,
------------------------
1999 1998 1997
------- ------- -------
Federal income tax at statutory rates......... $22,255 $17,373 $10,040
State income taxes, net of federal income tax
benefit...................................... 1,016 1,187 817
Foreign income taxes.......................... 211 33 226
Other, net.................................... (337) 666 (40)
------- ------- -------
$23,145 $19,259 $11,043
======= ======= =======
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
December 31,
-------------------
1999 1998
--------- --------
Deferred tax assets:
Net operating losses.............................. $ 7,490 $ 3,345
Alternative minimum tax carryforward.............. 19,005 13,276
Other............................................. 2,346 4,457
--------- --------
Gross deferred tax assets........................... 28,841 21,078
--------- --------
Deferred tax liabilities:
Property, plant and equipment..................... (82,764) (58,249)
Other............................................. (11,610) (8,339)
--------- --------
Gross deferred tax liabilities...................... (94,374) (66,588)
--------- --------
$(65,533) $(45,510)
========= ========
The Company has net operating loss carryforwards at December 31, 1999 of
$21,400,000 expiring in 2006 to 2018. In addition, the Company has an
alternative minimum tax credit carryforward of $19,005,000 that does not
expire.
F-16
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
In 1999, the company recorded approximately $8,627,000 additional deferred
income tax liability resulting from the CDI and CEO acquisitions. See Note 2
for a description of the transactions.
The Company has not recorded a deferred income tax liability for additional
income taxes that would result from the distribution of earnings of its foreign
subsidiaries if they were actually repatriated. The Company intends to
indefinitely reinvest the undistributed earnings of its foreign subsidiaries.
10. Mandatorily Redeemable Convertible Preferred Securities
In December 1999, the Company issued $86,250,000 of unsecured 7.25%
Manditorily Redeemable Convertible Preferred Securities (the "Convertible
Preferred Securities") through Hanover Compressor Capital Trust, a Delaware
business trust and wholly owned finance subsidiary of the Company. The
Convertible Preferred Securities have a liquidation amount of $50 per unit. The
Convertible Preferred Securities mature in 30 years but the Company may redeem
the Convertible Preferred Securities partially or in total any time on or after
December 20, 2002. The Convertible Preferred Securities also provide for annual
cash distributions at the rate of 7.25%, payable quarterly in arrears, however,
payments may be deferred up to 20 quarters subject to certain restrictions.
During 1999, the Company accrued financing costs of approximately $288,000
related to Convertible Preferred Securities. Each Convertible Preferred
Security is convertible into 2.7972 shares of Hanover common stock, subject to
adjustment for certain events. The Company has fully and unconditionally
guaranteed the Convertible Preferred Securities. The Company incurred
transaction costs of approximately $3,310,000 which are included in other
assets and will be amortized over the term of the Convertible Preferred
Securities.
11. Common Stockholders' Equity
Notes Receivable-Employee Stockholders
Under various stock purchase plans, the Company's employees are eligible to
purchase shares of Hanover stock at fair market value in exchange for cash
and/or notes receivable. The notes are collateralized by the common stock and
the general credit of the employee, bear interest at a prime rate, and are
generally payable on demand or at the end of a four-year period. The notes have
been recorded as a reduction of common stockholders' equity.
In addition and in connection with the Company's initial public offering,
the Company issued 529,570 shares of common stock to employees at the Offering
price of $9.75 in exchange for employee notes receivable.
Other
As of December 31, 1999, warrants to purchase approximately 688,000 shares
of common stock at $.01 per share were outstanding. The warrants expire in
August 2005.
During 1998, the Company initiated a stock buyback program authorized to
repurchase up to 900,000 of the Company's outstanding shares to assist with
future business acquisitions and for general corporate purposes. In 1998, the
Company repurchased 588,400 shares at an average price of $10.11.
In February 1997, Hanover issued 10,304 shares of common stock for cash to
a trust for the benefit of a member of the Company's outside legal counsel.
See Notes 1, 2, 5 and 12 for a description of other common stock
transactions.
F-17
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
12. Stock Options
The Company has employee stock option plans that provide for the granting
of options to purchase common shares. The options are generally issued at fair
market value on the date of grant and are exercisable over a ten-year period.
Vesting of stock options issued prior to June 1997 was accelerated as a result
of completion of the initial public offering. Accordingly, during 1997 the
Company recognized a charge of $269,000 related to unamortized compensation
expense on options issued at less than fair market value on the date of grant.
No compensation expense was recorded in 1999 and 1998.
Of the options granted in 1999 and 1998, 700,000 vest 100% on July 1, 2001
and 320,000 vested immediately. The remaining options granted to employees vest
over the following schedule, which may accelerate upon a change in the
Company's controlling ownership.
Year 1............................................................... 10%
Year 2............................................................... 30%
Year 3............................................................... 60%
Year 4............................................................... 100%
The following is a summary of stock option activity for the years ended
December 31, 1999, 1998 and 1997:
Weighted Average
Shares Price Per Share
--------- ----------------
Options outstanding, December 31, 1996........ 4,800,348 $ 2.56
Options granted............................. 2,030,646 9.75
Options canceled............................ (2,276) 5.28
Options exercised...........................
---------
Options outstanding, December 31, 1997........ 6,828,718 4.70
---------
Options granted............................. 2,095,366 10.13
Options canceled............................ (84,008) 10.61
Options exercised........................... (49,646) 2.40
---------
Options outstanding, December 31, 1998........ 8,790,430 5.95
---------
Options granted............................. 272,156 13.79
Options canceled............................ (68,230) 9.72
Options exercised........................... (197,352) 2.76
---------
Options outstanding, December 31, 1999........ 8,797,004 6.24
---------
Options Outstanding December 31, 1999
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 1999:
Options
Options Outstanding Exercisable
-------------------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Exercise Prices Shares Life in Years Price Shares Price
------------------------ --------- ------------- -------- --------- --------
$0.01--$2.30............... 3,321,806 3.5 $2.23 3,321,806 $2.23
$2.31--$3.48............... 842,842 4.0 2.67 842,842 2.67
$3.49--$5.06............... 256,686 5.8 4.77 256,686 4.77
$5.07--$6.96............... 139,880 6.7 5.94 139,880 5.94
$9.75--$12.50.............. 4,004,458 8.2 10.18 1,008,594 9.82
$12.51--$14.50............. 231,332 9.9 14.50 0 0.00
--------- ---------
8,797,004 5,569,808
========= =========
F-18
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
The weighted average fair value at date of grant for options where the
exercise price equals the market price of the stock on the grant date was
$6.10, $4.16 and $4.29, per option during 1999, 1998 and 1997, respectively.
The fair value of options at date of grant was estimated using the Black-
Scholes model with the following weighted average assumptions:
1999 1998 1997
------- ------- -------
Expected life.................................. 6 years 6 years 6 years
Interest rate.................................. 6.0% 4.8% 6.7%
Volatility..................................... 29.36% 32.6% 30%
Dividend yield................................. 0% 0% 0%
Stock-based compensation costs computed in accordance with FAS 123, would
have reduced net income by $2,194,000, $825,000 and $842,000 in 1999, 1998 and
1997, respectively. The pro forma impact on net income would have reduced basic
and diluted earnings per share by $.04 in 1999 and $.02 per share in 1998 and
1997. The pro forma effect on net income for 1999, 1998 and 1997 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
13. Benefit Plans
The Company's 401(k) retirement plan provides for optional employee
contributions up to the IRS limitation and discretionary employer matching
contributions. The Company made matching contributions of $399,000 and $273,000
during the years ended December 31, 1999 and 1998, respectively. The Company
did not make a matching contribution for the year ended December 31, 1997.
14. Related Party Transactions
Hanover and GKH Partners, L.P., a major stockholder of the Company, have
entered into an agreement (the "GKH Agreement") whereby in exchange for
investment banking and financial advisory services rendered and to be rendered
by the major stockholder, the Company has agreed to pay a fee to GKH Partners,
L.P. equal to .75% of the equity value of the Company determined and payable at
such time as (1) a disposition of shares of the Company's common stock
resulting in GKH Partners, L.P. owning less than 25% of the outstanding common
stock or (2) any other transaction occurs resulting in the effective sale of
the Company or its business by the current owners (see Note 18).
In connection with stock offerings to management, the Company has received
notes from employees for shares purchased. The total amounts owed to the
Company at December 31, 1999 and 1998 are $3,387,000 and $10,146,000,
respectively. Total interest accrued on the loans is $203,000 and $548,000 as
of December 31, 1999 and 1998, respectively.
The Company had a credit agreement with Joint Energy Developments
Investments Limited Partnership ("JEDI"), a common stockholder, that was repaid
in 1997. Interest expense in 1997 was $1,388,000. The Company also leases
compressors to affiliates of Enron Capital and Trade Resources Corp., an
affiliate of JEDI. Rentals of $8,776,000, $6,801,000 and $1,034,000 were paid
by affiliates of Enron in 1999, 1998 and 1997, respectively. In addition,
compression fabrication of $6,320,000 was paid by affiliates of Enron in 1999.
An affiliate of Enron also owns interests in Meter Acquisition Company LP, LLLP
and Hanover Measurement Services Company, L.P.
The Company leases compressors to other companies owned or controlled by or
affiliated with related parties. Rental revenues billed to these related
parties totaled $902,000, $859,000 and $1,035,000 during 1999, 1998 and 1997,
respectively.
F-19
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
See Note 5 for related party investments and Note 11 for a description of
common stock transactions with related parties.
15. Commitments and Contingencies
Rent expense excluding lease payments for the leasing transactions
described in Note 8 for 1999, 1998 and 1997 was approximately $1,320,000,
$455,000 and $376,000, respectively. Commitments for future minimum rental
payments exclusive of those disclosed in Note 8 are not significant at December
31, 1999.
In the ordinary course of business the Company is involved in various
pending or threatened legal actions. While management is unable to predict the
ultimate outcome of these actions, it believes that any ultimate liability
arising from these actions will not have a material adverse effect on the
Company's consolidated financial position, operating results or cash flows.
The Company has no commitments or contingent liabilities which, in the
judgment of management, would result in losses that would materially affect the
Company's consolidated financial position, operating results or cash flows.
16. Subsequent Events
In March 2000, the Company completed a sale and leaseback of certain
compression equipment. The leaseback of the equipment will be recorded as an
operating lease. Under the agreement, the Company received $100 million
proceeds from the sale of the compression equipment at closing and may sell an
additional $100 million of equipment to the Trust during the next twelve
months. The equipment sold will be leased back by the Company for a five-year
period and will continue to be deployed by the Company under its normal
operating procedures. Hanover has the option to repurchase the equipment from
the Trust at any time and has substantial residual value guarantees.
In June 2000, the Company completed a 2-for-1 split of its common stock
effected in the form of a 100% stock dividend. The Company also increased the
number of authorized shares of common stock from 100,000,000 to 200,000,000.
All common stock, additional paid-in capital and per share information has been
restated for all periods presented to reflect the stock split.
17. Industry Segments and Geographic Information
The Company manages its business segments primarily on the type of product
or service provided. The Company has four principal industry segments:
Rentals--Domestic, Rentals--International, Compressor Fabrication and
Production Equipment Fabrication. The Rentals Segments provide natural gas
compression rental and maintenance services to meet specific customer
requirements. The Compressor Fabrication Segment involves the design,
fabrication and sale of natural gas compression units to meet unique customer
specifications. The Production Equipment Fabrication Segment designs,
fabricates and sells equipment utilized in the production of crude oil and
natural gas.
The Company evaluates the performance of its segments based on segment
gross profit. Segment gross profit for each segment includes direct operating
expenses. Costs excluded from segment gross profit include selling, general and
administrative, depreciation and amortization, leasing, interest, distributions
on mandatorily redeemable convertible preferred securities and income taxes.
Amounts defined as "Other" include sales of property, plant and equipment,
results of other insignificant operations, corporate related items primarily
related
F-20
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
to cash management activities and parts and service operations which are not
separately managed. Revenues include sales to external customers and
intersegment sales. Intersegment sales are accounted for at cost and are
eliminated in consolidation. Identifiable assets are tangible and intangible
assets that are identified with the operations of a particular segment or
geographic region, or which are allocated when used jointly. Capital
expenditures include fixed asset purchases.
No single customer accounts for 10% or more of the Company's revenues for
all periods presented. One vendor accounted for approximately $32,900,000 of
the Company's purchases in 1998.
The following tables present sales and other financial information by
industry segment and geographic region for the years ended December 31, 1999,
1998 and 1997.
Industry Segments
Production
Domestic International Compressor Equipment
Rentals Rentals Fabrication Fabrication Other Eliminations Consolidated
-------- ------------- ----------- ----------- ------- ------------ ------------
(in thousands of dollars)
1999:
Revenues from external
customers............ $136,430 $56,225 $52,531 $28,037 $43,805 $317,028
Intersegment sales.... 1,200 75,139 4,821 38,656 $(119,816) --
-------- ------- ------- ------- ------- --------- --------
Total revenues........ 136,430 57,425 127,670 32,858 82,461 (119,816) 317,028
Gross profit.......... 90,246 37,460 8,868 7,204 22,081 165,859
Identifiable assets... 529,667 149,968 47,608 23,511 5,756 756,510
Capital expenditures.. 180,593 99,535 1,469 1,343 282,940
Depreciation and
amortization......... 24,448 11,158 702 1,029 37,337
1998:
Revenues from external
customers............ $107,420 $40,189 $67,453 $37,466 $29,429 $281,957
Intersegment sales.... 1,200 54,369 2,902 10,735 $ (69,206) --
-------- ------- ------- ------- ------- --------- --------
Total revenues........ 107,420 41,389 121,822 40,368 40,164 (69,206) 281,957
Gross profit.......... 70,850 27,374 9,309 11,685 12,087 131,305
Identifiable assets... 422,026 129,628 33,578 17,855 11,503 614,590
Capital expenditures.. 111,289 54,830 2,524 855 169,498
Depreciation and
amortization......... 28,383 7,128 701 942 37,154
1997:
Revenues from external
customers............ $ 78,656 $22,029 $49,764 $37,052 $11,297 $198,798
Intersegment sales.... 1,200 48,072 462 7,775 $ (57,509) --
-------- ------- ------- ------- ------- --------- --------
Total revenues........ 78,656 23,229 97,836 37,514 19,072 (57,509) 198,798
Gross profit.......... 51,149 14,423 8,180 10,677 4,937 89,366
Identifiable assets... 360,362 98,421 30,088 13,020 4,561 506,452
Capital expenditures.. 109,540 36,545 993 3,917 150,995
Depreciation and
amortization......... 23,261 3,912 554 712 28,439
F-21
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Geographic Data
United
States International Consolidated
-------- ------------- ------------
(in thousands of dollars)
1999:
Revenues from external customers.......... $256,890 $ 60,138 $317,028
Identifiable assets....................... $603,368 $153,142 $756,510
1998:
Revenues from external customers.......... $230,605 $ 51,352 $281,957
Identifiable assets....................... $484,269 $130,321 $614,590
1997:
Revenues from external customers.......... $176,045 $ 22,753 $198,798
Identifiable assets....................... $406,602 $ 99,850 $506,452
18. Restatement
The Company has determined that its obligation to GKH Partners, L.P. for
services performed under the GKH Agreement (see Note 14) should have been
accrued as a liability over the life of the agreement. The net effect of this
restatement was as follows: (1) an increase in selling, general and
administrative expenses of $732,000; a decrease in net income of $461,000; and
a decrease in earnings per common share of $.01 basic and $.01 diluted for the
year ended December 31, 1997 and (2) a reduction in retained earnings at
January 1, 1997 for amounts applicable to prior periods of $782,000, net of
tax, and a resultant $1,243,000 reduction in retained earnings at December 31,
1999 and 1998.
F-22
HANOVER COMPRESSOR COMPANY
Selected Quarterly Financial Data (unaudited)
The table below sets forth selected unaudited financial information for
each quarter of the last two years:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share
amounts)
1999
Revenue...................................... $64,444 $73,799 $84,462 $94,323
Gross profit................................. 36,947 38,681 43,373 46,858
Net income................................... 8,639 8,482 10,388 12,932
Earnings per common and common equivalent
share:
Basic...................................... $ 0.15 $ 0.15 $ 0.18 $ 0.23
Diluted.................................... $ 0.14 $ 0.14 $ 0.17 $ 0.21
1998
Revenue...................................... $61,449 $68,933 $71,796 $79,779
Gross profit................................. 28,411 31,963 34,841 36,090
Net income................................... 6,251 6,972 8,048 9,106
Earnings per common and common equivalent
share:
Basic...................................... $ 0.11 $ 0.12 $ 0.14 $ 0.16
Diluted.................................... $ 0.10 $ 0.12 $ 0.13 $ 0.15
F-23
HANOVER COMPRESSOR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
(in thousands of dollars, except for par value and share amounts)
September 30, December 31,
2000 1999
ASSETS ------------- ------------
Current assets:
Cash and cash equivalents......................... $ 13,042 $ 5,756
Accounts receivable trade, net.................... 159,003 93,715
Inventory......................................... 143,122 66,562
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 37,446 4,782
Prepaid taxes..................................... 19,459 16,430
Other current assets.............................. 13,240 5,287
---------- --------
Total current assets............................. 385,312 192,532
---------- --------
Property, plant and equipment:
Compression equipment and facilities.............. 710,970 520,403
Land and buildings................................ 32,856 19,000
Transportation and shop equipment................. 38,335 27,616
Other............................................. 13,972 10,029
---------- --------
796,133 577,048
Accumulated depreciation.......................... (107,545) (79,583)
---------- --------
Net property, plant and equipment................ 688,588 497,465
---------- --------
Intangible and other assets......................... 197,568 66,513
---------- --------
$1,271,468 $756,510
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.............. $ 27,769 $ 15,967
Accounts payable, trade........................... 68,612 32,308
Accrued liabilities............................... 38,083 22,065
Advance billings.................................. 20,140 13,328
Billings on uncompleted contracts in excess of
costs and estimated earnings..................... 6,024 898
---------- --------
Total current liabilities........................ 160,628 84,566
Long-term debt...................................... 173,835 69,681
Other liabilities................................... 143,677 82,566
Deferred income taxes............................... 88,483 65,533
---------- --------
Total liabilities................................ 566,623 302,346
---------- --------
Mandatorily redeemable convertible preferred
securities......................................... 86,250 86,250
Commitments and contingencies
Common stockholders' equity:
Common stock, $.001 par value; 200 million shares
authorized; 66,286,496 and 57,505,874 shares
issued and outstanding, respectively............. 66 58
Additional paid-in capital........................ 481,465 272,944
Notes receivable--employee stockholders........... (1,738) (3,387)
Accumulated other comprehensive loss.............. (465) (311)
Retained earnings................................. 139,544 100,196
Treasury stock--29,227 and 167,394 common shares
respectively, at cost............................ (277) (1,586)
---------- --------
Total common stockholders' equity................ 618,595 367,914
---------- --------
$1,271,468 $756,510
========== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-24
HANOVER COMPRESSOR COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(in thousands of dollars, except per share amounts)
Nine Months Ended
September 30,
------------------
2000 1999
-------- --------
Revenues:
Rentals.................................................. $180,210 $137,749
Parts, service and used equipment........................ 64,293 27,403
Compressor fabrication................................... 60,146 35,441
Production and processing equipment fabrication.......... 53,870 21,177
Gain on sale of other assets............................. 4,172 3,927
Other.................................................... 7,531 2,141
-------- --------
370,222 227,838
-------- --------
Expenses:
Rentals.................................................. 62,104 45,454
Parts, service and used equipment........................ 42,202 18,617
Compressor fabrication................................... 50,082 29,102
Production and processing equipment fabrication.......... 41,938 15,664
Selling, general and administrative...................... 34,481 24,232
Depreciation and amortization............................ 36,830 28,536
Leasing expense.......................................... 29,596 14,727
Interest expense......................................... 5,560 7,841
Distributions on mandatorily redeemable convertible
preferred securities.................................... 4,776 0
-------- --------
307,569 184,173
-------- --------
Income before income taxes................................. 62,653 43,665
Provision for income taxes................................. 23,305 16,156
-------- --------
Net income................................................. 39,348 27,509
-------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment.................. (154) (481)
-------- --------
Comprehensive income....................................... $ 39,194 $ 27,028
======== ========
Weighted average common and common equivalent shares
outstanding:
Basic.................................................... 60,324 56,966
-------- --------
Diluted.................................................. 64,619 60,974
-------- --------
Earnings per common share:
Basic.................................................... $ 0.65 $ 0.48
-------- --------
Diluted.................................................. $ 0.61 $ 0.45
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-25
HANOVER COMPRESSOR COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(in thousands of dollars)
Nine Months Ended
September 30,
--------------------
2000 1999
--------- ---------
Cash flows from operating activities:
Net income.............................................. $ 39,348 $ 27,509
Adjustments:
Depreciation and amortization.......................... 36,830 28,536
Amortization of debt issuance costs and debt discount.. 479 725
Bad debt expense....................................... 840 723
Gain on sale of ownership interests and property, plant
and equipment......................................... (10,657) (4,799)
Equity in income of nonconsolidated affiliates......... (1,953) (647)
Deferred income taxes.................................. 7,783 10,248
Changes in assets and liabilities excluding the impact
of business acquisitions:
Accounts receivable.................................... (28,014) (16,995)
Inventory.............................................. (34,814) (1,434)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. (23,169) (21)
Accounts payable and other liabilities................. 25,171 2,317
Other current assets................................... (4,419) 2,826
Other.................................................. 66 (7,561)
--------- ---------
Net cash provided by operating activities................ 7,491 41,427
--------- ---------
Cash flows from investing activities:
Cash used for business acquisitions, net................ (174,827) (35,312)
Capital expenditures.................................... (199,676) (200,752)
Investment in unconsolidated subsidiaries............... (8,720) (4,906)
Cash returned from unconsolidated subsidiaries.......... -- 8,000
Proceeds from sale of property, plant and equipment..... 220,609 220,584
--------- ---------
Net cash used in investing activities.................... (162,614) (12,386)
--------- ---------
Cash flows from financing activities:
Net borrowings (repayment) on revolving credit
facility............................................... 102,900 (25,000)
Repayments of shareholder notes......................... 1,669 1,488
Issuance of common stock, net........................... 59,400 --
Proceeds from warrant conversions and stock option
exercises.............................................. 2,774 330
Repayment of long-term debt............................. (4,290) (8,194)
--------- ---------
Net cash provided by (used in) financing activities...... 162,453 (31,376)
--------- ---------
Effect of exchange rate changes on cash and equivalents.. (44) (78)
--------- ---------
Net increase in cash and cash equivalents................ 7,286 (2,413)
--------- ---------
Cash and cash equivalents at beginning of period......... 5,756 11,503
--------- ---------
Cash and cash equivalents at end of period............... $ 13,042 $ 9,090
========= =========
Supplemental disclosure of cash flow information:
Common stock issued in exchange for note receivable..... $ $ 753
Property and ownership interests sold in exchange for
note receivable........................................ $ 2,783 $ 3,480
Acquisitions of businesses:
Property, plant and equipment acquired.................. $ 190,521 $ 39,105
Other assets acquired................................... $ 199,682 $ 11,311
Liabilities assumed..................................... $ 60,343 $ 1,562
Deferred taxes.......................................... $ 15,167 $ 10,242
Common and treasury stock issued........................ $ 139,866 $ 3,300
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-26
HANOVER COMPRESSOR COMPANY
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Hanover Compressor Company (the "Company") included herein have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It is the
opinion of management that the information furnished includes all adjustments,
consisting only of normal recurring adjustments, which are necessary to present
fairly the financial position, results of operations, and cash flows of the
Company for the periods indicated. The financial statement information included
herein should be read in conjunction with the consolidated financial statements
and notes thereto for the year ended December 31, 1999. These interim results
are not necessarily indicative of results for a full year.
In December 1999, the Company issued $86,250,000 of unsecured 7.25%
Mandatorily Redeemable Convertible Preferred Securities (the "Preferred
Securities") through Hanover Compressor Capital Trust, a wholly owned finance
subsidiary of the Company. The Company has fully and unconditionally guaranteed
the Preferred Securities.
Stock Split
In June 2000, the Company completed a 2-for-1 stock split effected in the
form of a 100% stock dividend. All common stock, additional paid-in capital and
earnings per common share information has been restated for all periods
presented to reflect this stock split.
Stock Offering
In May 2000, the Company completed a private placement of 2 million newly
issued shares of restricted common stock to an institutional investor.
Earnings Per Common Share
Basic earnings per common share is computed using the weighted average
number of shares outstanding for the period. Diluted earnings per common share
is computed using the weighted average number of shares outstanding adjusted
for the incremental shares attributed to outstanding options and warrants to
purchase common stock. Included in diluted shares are common stock equivalents
relating to options of 3,927,000 and 3,290,000 and warrants of 368,000 and
718,000 for the nine months ended September 30, 2000 and 1999, respectively.
The mandatorily redeemable convertible preferred securities were excluded from
the diluted shares because they were antidilutive.
Reclassifications
Certain amounts in the prior periods financial statements have been
reclassified to conform to the 2000 financial statement classification. These
reclassifications have no impact on net income.
F-27
HANOVER COMPRESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. BUSINESS COMBINATIONS
In September 2000, the company purchased the Dresser-Rand Company's
compression services division for $177 million, including approximately $1.2
million of acquisition costs. Under the terms of the agreement, $95 million of
the purchase price was paid in cash with the balance being paid through the
issuance to Ingersoll-Rand of 2,919,681 shares of the Company's newly issued
restricted common stock. The purchase price is subject to certain post-closing
adjustments pursuant to the acquisition agreement which to date have resulted
in an increase in the purchase price to approximately $194 million due to
increases in net assets acquired. The estimated fair value of the stock issued
is $80.8 million, based on the quoted market price for the Company's common
stock reduced by a discount due to the restrictions on the stock's
marketability. The discount applied was based on an appraisal obtained from an
investment bank. The acquisition was accounted for under the purchase method of
accounting and resulted in the recognition of approximately $18 million in
goodwill.
In July 2000, the Company completed its acquisition of PAMCO Services
International's natural gas compressor assets for approximately $45 million in
cash and $13 million in notes payable. The acquisition was accounted for under
the purchase method of accounting.
In June 2000, the Company purchased the stock of Applied Process Solutions,
Inc. ("APSI") for 2,303,294 restricted shares of Hanover common stock and
assumption of APSI's outstanding debt which was repaid. The total value of the
stock and debt was approximately $74 million. The acquisition was accounted for
under the purchase method of accounting and resulted in the recognition of
approximately $52.1 million in goodwill.
The results of operations for all acquired businesses have been included in
the statement of income from their respective acquisition dates. The pro forma
information set forth below assumes that the acquisitions completed in 2000 and
1999 are accounted for as if the purchases had occurred at the beginning of
1999. The pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that would have
been achieved had the acquisitions been consummated at that time (in thousands,
except per share amounts):
Nine Months Ended
September 30,
-----------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
Revenue.............................................. $469,909 $415,681
Net Income........................................... 39,869 34,821
Earnings per common share--basic..................... $ 0.64 $ 0.56
Earnings per common share--diluted................... 0.60 0.53
3. INVENTORIES
Inventory consisted of the following amounts (in thousands):
September 30, December 31,
2000 1999
------------- ------------
Parts and supplies................................ $ 92,116 $44,058
Work in progress.................................. 44,206 18,677
Finished goods.................................... 6,800 3,827
-------- -------
$143,122 $66,562
======== =======
F-28
HANOVER COMPRESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. GAINS ON SALES OF OTHER ASSETS AND OTHER REVENUES
During the third quarter of 2000, the Company obtained certain oil and gas
interests and related assets from a customer as payment for trade receivables.
The Company exchanged those oil and gas interests with another third party for
ownership of certain compression equipment. This exchange resulted in the
recognition of a $1.9 million gain which is included in gain on sale of other
assets on the statement of income.
In June 2000, the Company sold a 25 percent undivided ownership interest in
a power generation plant owned by the Company to a third party for $5 million.
The transaction resulted in a gain on sale of approximately $1.3 million which
was recorded in Gain on Sale of Assets in the condensed consolidated statement
of income and comprehensive income. Also in June 2000, the Company sold 50% of
the common stock of its wholly owned Venezuelan subsidiary, Servicompressores,
to a third party for approximately $3.1 million. The sale price was paid
$350,000 in cash and approximately $2.8 million in a note receivable from the
purchaser. The resulting gain of approximately $2.1 million was recorded in
Other Revenues in the condensed consolidated statement of income and
comprehensive income.
5. SALES AND LEASE BACK OF EQUIPMENT
In March 2000, the Company completed a $200 million 5-year sale and lease
back of certain compression equipment (the "Equipment Lease"). Under the
agreement, the Company received $100 million proceeds from the sale of
compression equipment at closing and may sell an additional $100 million of
compression equipment during the next twelve months. In August 2000, the
Company completed the second half of the Equipment Lease and received an
additional $100 million for the sale of additional compression equipment. In
June 1999 and in July 1998 the Company completed two other separate $200
million sale and lease back transactions of certain compression equipment. The
Company has substantial residual value guarantees under all the lease
agreements totalling approximately $495 million. Total deferred gains on these
transactions totaled approximately $139 million. The lease agreements call for
variable quarterly payments that fluctuate with the London Interbank Borrowing
Rate. The following future minimum lease payments are due under the leasing
arrangements exclusive of any guarantee payments (in thousands): 2000--$12,000;
2001--$49,300; 2002--$50,600; 2003--$42,200; 2004--$25,300; 2005--$4,200.
In July 1998 and in connection with the 1998 leasing transaction, the
Company entered into two-year swap transactions to manage lease rental exposure
with notional amounts of $75,000,000 and $125,000,000 and strike rates of 5.51%
and 5.56%, respectively. The differential paid or received on the swap
transactions is recognized as an adjustment to leasing expense. The
counterparty to this contractual arrangement is a major financial institution
with which the Company also has other financial relationships. The Company is
exposed to credit loss in the event of nonperformance by this counterparty.
However, the Company does not anticipate nonperformance by this party and no
material loss would be expected from their nonperformance. The fair market
value of these interest rate swaps is based on market quotes and is
approximately $2.1 million at September 30, 2000.
6. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business the Company is involved in various
pending or threatened legal actions. While management is unable to predict the
ultimate outcome of these actions, it believes that any ultimate liability
arising from these actions will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
F-29
HANOVER COMPRESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. REPORTABLE SEGMENTS
The Company manages its business segments primarily on the type of product
or service provided. The Company has four principal reportable segments:
Rentals--Domestic, Rentals--International, Compressor Fabrication and
Production and Processing Equipment Fabrication. The Rental segments provide
natural gas compression rental and maintenance services to meet specific
customer requirements. The Compressor Fabrication segment involves the design,
fabrication and sale of natural gas compression units to meet unique customer
specifications. The Production and Processing Equipment Fabrication segment
designs, fabricates and sells equipment utilized in the production of crude oil
and natural gas.
The Company evaluates the performance of its segments based on segment
gross profit. Segment gross profit for each segment includes direct operating
expenses. Costs excluded from segment gross profit include selling, general and
administrative, depreciation and amortization, leasing, interest and income
taxes. Amounts defined as "Other" include sales of property, plant and
equipment, results of other insignificant operations, corporate related items
primarily related to cash management activities and parts and service
operations which are not separately managed. Revenues include sales to external
customers and intersegment sales. Intersegment sales are accounted for at cost
and are eliminated in consolidation. Identifiable assets are tangible and
intangible assets that are identified with the operations of a particular
reportable segment, or which are allocated when used jointly.
F-30
HANOVER COMPRESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents sales and other financial information by
reportable segment for the nine months ended September 30, 2000 and 1999 (in
thousands).
Production
Domestic International Compressor Equipment
Rentals Rentals Fabrication Fabrication Other Eliminations Consolidated
-------- ------------- ----------- ----------- -------- ------------ ------------
September 30, 2000:
Revenues from external
customers.............. $122,761 $57,449 $ 60,146 $53,870 $ 75,996 -- $370,222
Intersegment sales...... -- 900 68,943 1,747 24,632 $ (96,222) --
-------- ------- -------- ------- -------- --------- --------
Total revenues......... 122,761 58,349 129,089 55,617 100,628 (96,222) 370,222
Gross Profit............ 80,592 37,514 10,064 11,932 33,794 -- 173,896
September 30,1999:
Revenues from external
customers.............. $ 98,514 $39,235 $ 35,441 $21,177 $ 33,471 -- $227,838
Intersegment sales...... -- 900 45,256 2,990 17,955 $ (67,101) --
-------- ------- -------- ------- -------- --------- --------
Total revenues......... 98,514 40,135 80,697 24,167 51,426 (67,101) 227,838
Gross Profit............ 66,119 26,176 6,339 5,513 14,854 -- 119,001
8. SUBSEQUENT EVENTS
In October 2000, the Company completed a $176.5 million sale and lease back
of certain compression equipment. Under the agreement, the Company received
$176.5 million proceeds from the sale of compression equipment. Under the
agreement, the equipment was sold and leased back by the Company for a 5 year
period and will continue to be deployed by the Company under its normal
operating procedures. At any time, the Company has the option to repurchase the
equipment at fair market value.
In July 2000, the Company and OEC Compression Corporation ("OEC") signed a
definitive merger agreement pursuant to which the Company will acquire OEC in
an all-stock transaction. The transaction is subject to approval by OEC
shareholders and is expected to close in March 2001.
F-31
HANOVER COMPRESSOR COMPANY
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
In September 2000, Hanover Compressor Company (the "Company") acquired the
compression services division of Dresser-Rand Company ("CSD-DR") from
Ingersoll-Rand Company for approximately $177 million of the Company's common
stock and cash, subject to certain post-closing adjustments pursuant to the
acquisition agreement which to date have resulted in an increase in the
purchase price to approximately $194 million due to increases in net assets
acquired (the "DR Acquisition"). The DR Acquisition was accounted for as a
purchase and the results of operations for the acquired business have been
included in the Company's historical financial statements commencing September
1, 2000. The pro forma financial data is not adjusted to reflect the pro forma
effect of our acquisitions of Applied Process Solutions, Inc., completed in
June 2000, PAMCO Services International, completed in July 2000, or OEC
Compression Corporation, which we expect to close in March 2001.
The accompanying pro forma combined condensed statements of operations for
the nine months ended September 30, 2000 and for the year ended December 31,
1999 present the pro forma results of operations of the Company as if the
acquisition had occurred on January 1, 1999. A pro forma combined condensed
balance sheet has not been provided because the impact of the acquisition of
CSD-DR is already reflected in the Company's historical consolidated balance
sheet at September 30, 2000. The accompanying pro forma combined condensed
statements of operations should be read in conjunction with the Company's
Consolidated Financial Statements and related notes thereto for the year ended
December 31, 1999 and the nine months ended September 30, 2000.
F-32
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(in thousands, except per share amounts)
Historical Pro Forma
---------------- -----------------------
HCC DR Adjustments Combined
-------- ------- ----------- --------
Revenues.............................. $370,222 $61,056 $ (4,592)(a) $426,686
-------- ------- -------- --------
Expenses:
Operating........................... 196,326 52,263 (5,368)(a) 238,675
(3,418)(b)
(1,128)(c)
Selling, general and
administrative..................... 34,481 7,578 (957)(b) 41,102
Depreciation and amortization....... 36,830 4,375 (b) 42,588
(4,375)(d)
4,606 (e)
1,152 (f)
Leasing expense..................... 29,596 29,596
Interest expense.................... 5,560 1,774 (1,774)(d) 11,138
5,578 (g)
Distributions on mandatorily
redeemable convertible preferred
securities......................... 4,776 4,776
-------- ------- -------- --------
307,569 61,615 (1,309) 367,875
-------- ------- -------- --------
Income before income taxes............ 62,653 (559) (3,283) 58,811
Provision for income taxes............ 23,305 200 (1,629)(h) 21,876
-------- ------- -------- --------
Net income............................ $ 39,348 $ (759) $ (1,654) $ 36,935
======== ======= ======== ========
Weighted average common equivalent
shares outstanding:
Basic............................... 60,324 2,613 (i) 62,937
Diluted............................. 64,619 2,613 (i) 67,232
Earnings per common share
Basic............................... $ 0.65 $ 0.59
Diluted............................. $ 0.61 $ 0.55
F-33
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share amounts)
Historical Pro Forma
----------------- ----------------------
HCC DR Adjustments Combined
-------- -------- ----------- --------
Revenues.............................. $317,028 $167,633 $(8,527)(a) $476,134
-------- -------- ------- --------
Expenses:
Operating........................... 151,169 132,909 (7,667)(a) 269,943
(4,863)(b)
(1,605)(c)
Selling, general and
administrative..................... 33,782 13,483 (160)(b) 47,105
Depreciation and amortization....... 37,337 5,023 (b) 45,760
(5,023)(d)
6,695 (e)
1,728 (f)
Leasing expense..................... 22,090 22,090
Interest expense.................... 8,786 1,953 (1,953)(d) 17,153
8,367 (g)
Distributions on mandatorily
redeemable convertible preferred
securities......................... 278 278
-------- -------- ------- --------
253,442 148,345 542 402,329
-------- -------- ------- --------
Income before income taxes............ 63,586 19,288 (9,069) 73,805
Provision for income taxes............ 23,145 6,779 (3,059)(h) 26,865
-------- -------- ------- --------
Net income............................ $ 40,441 $ 12,509 $(6,010) $ 46,940
======== ======== ======= ========
Weighted average common equivalent
shares outstanding:
Basic............................... 57,048 2,920 (i) 59,968
Diluted............................. 61,054 2,920 (i) 63,974
Earnings per common share
Basic............................... $ 0.71 $ 0.78
Diluted............................. $ 0.66 $ 0.73
F-34
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENTS OF OPERATIONS
The accompanying unaudited pro forma combined condensed statements of
operations for Hanover Compressor Company ("HCC" or the "Company") have been
prepared based upon certain pro forma adjustments to the historical
consolidated financial statements of the Company for the year ended December
31, 1999 and the historical unaudited condensed consolidated financial
statements for the nine months ended September 30, 2000 included in this
prospectus. The historical information for the compression services division of
Dresser-Rand Company ("CSD-DR" or "DR") is for the eight months ended August
31, 2000 and the year ended December 31, 1999. Historical financial statements
for CSD-DR as of June 30, 2000 and December 31, 1999 have been included in the
Company's Current Report on Form 8-K/A dated November 13, 2000.
The Pro Forma Statements of Operations are based on certain assumptions and
preliminary estimates that are subject to change. The Pro Forma Statements of
Operations do not purport to be indicative of the results which would actually
have been obtained had the acquisition been completed on the date indicated or
which may be obtained in the future.
The pro forma adjustments which have been made to the accompanying Pro
Forma Statements of Operations are described below:
a) Reflects the adjustment to CSD-DR's historical revenue and operating
expenses to conform to the Company's accounting policy to recognize
revenue from compressor fabrication utilizing the percentage-of-
completion method. CSD-DR recognized revenue from compressor
fabrication when the compressor was shipped to the customer.
b) Reflects reclassification of CSD-DR's depreciation expense to conform
to the Company's financial statement presentation.
c) Reflects the reversal of certain CSD-DR's historical operating
expenses to conform to the Company's accounting policies for
capitalization of fixed assets.
d) Reflects the elimination of CSD-DR's historical depreciation and
amortization expense and interest expense.
e) Reflects the depreciation expense on the fair value of CSD-DR's
property, plant and equipment that is estimated to be approximately
$121 million. For the purposes of this adjustment, the Company
utilized a fifteen-year average depreciable life and a twenty-percent
salvage value. This estimate is consistent with the Company's current
estimates for similar equipment and facilities.
f) Reflects the amortization of approximately $35 million of goodwill
recorded by the Company in its preliminary purchase price allocation.
The goodwill is being amortized over a 20-year period on a straight-
line basis.
g) Reflects the interest expense resulting from approximately $112
million of debt incurred in connection with the acquisition. The
interest rate in effect at the date of acquisition was approximately
7.5% and is utilized in the calculation of this adjustment.
h) Reflects the adjustment to the pro forma combined provision for income
taxes to reflect the Company's effective income tax rate of 37.2% and
36.4% for the nine months ended September 30, 2000 and the year ended
December 31, 1999, respectively.
i) Reflects the additional weighted average common and common equivalent
shares outstanding as if the common stock had been issued for the
acquisition on January 1, 1999.
F-35
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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
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TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 3
Risk Factors............................................................. 12
Special Note Regarding Forward-Looking Statements........................ 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Convertible Notes Offering............................................... 18
Price Range of Common Stock.............................................. 19
Capitalization........................................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 29
Management............................................................... 37
Selling Stockholders..................................................... 38
Description of Capital Stock............................................. 40
Underwriting............................................................. 42
Legal Matters............................................................ 43
Where You Can Find More Information...................................... 44
Experts.................................................................. 44
Index to Financial Statements............................................ F-1
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10,000,000 Shares
Hanover Compressor Company
Common Stock
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HANOVER COMPRESSOR COMPANY
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Goldman, Sachs & Co.
Credit Suisse First Boston
Salomon Smith Barney
JP Morgan
Dain Rauscher Wessels
First Union Securities, Inc.
Representatives of the Underwriters
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection with
the distribution of the securities covered by this Registration Statement. All
of the expenses will be borne by Hanover Compressor Company.
SEC Registration fee............................................ $107,727
National Association of Securities Dealers, Inc. filing fees.... 30,500
New York Stock Exchange listing fees ........................... 3,500
Printing expenses............................................... 150,000
Legal fees and expenses......................................... 225,000
Accounting fees and expenses.................................... 100,000
Transfer agent and registrar fees and expenses.................. 20,000
Blue Sky and miscellaneous...................................... 13,273
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Total......................................................... $650,000
========
Item 15. Indemnification of Directors and Officers.
We are empowered by Section 145 of the Delaware General Corporation Law
(the "DGCL"), subject to the procedures and limitations stated therein, to
indemnify any person who was or is a party, or is threatened to be made a
party, to any threatened, pending or completed action, suit or proceeding by
reason of the fact that such person is or was a director, officer, employee or
agent of the company, or is or was serving at the request of the company as a
director, officer, employee or agent of another corporation or other
enterprise, against reasonable expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually incurred by him in connection
with such action, suit or proceeding, if such director, officer, employee or
agent acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the company and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. We are required by Section 145 to indemnify any person against
reasonable expenses (including attorneys' fees) actually incurred by him in
connection with an action, suit or proceeding in which he is a party because he
is or was a director, officer, employee or agent of the company or is or was
serving at the request of the company as a director, officer, employee or agent
of another corporation or other enterprise, if he has been successful, on the
merits or otherwise, in the defense of the action, suit or proceeding. Section
145 also allows a corporation to purchase and maintain insurance on behalf of
any such person against any liability asserted against him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145. In addition, Section 145 provides that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any bylaw, agreement,
vote of shareholders or disinterested directors, or otherwise.
Article Eight of our charter provides that we shall indemnify and hold
harmless all of our officers and directors and advance expenses reasonably
incurred by such officers and directors in defending any civil, criminal,
administrative or investigative action, suit or proceeding, in accordance with
and to the fullest extent permitted by Section 145 of the DGCL. We maintain
directors and officers insurance covering them for certain liabilities,
including liabilities under the securities laws.
II-1
Item 16. Exhibits.
The following documents are filed as exhibits to this Registration
Statement, including those exhibits incorporated herein by reference to a prior
filing of Hanover Compressor Company under the Securities Act or the Exchange
Act as indicated in parenthesis:
Exhibit
No. Description
------- ---------------------------------------------------------------------
1.1 Form of Underwriting Agreement.
4.1 Certificate of Incorporation of Hanover Compressor Holding Co., as
amended (incorporated by reference to Exhibit 3.1 to Hanover
Compressor Company's Current Report on Form 8-K dated February 5,
2001).
4.2 Bylaws of Hanover Compressor Company (incorporated by reference to
Exhibit No. 3.3 to Hanover Compressor Company's Annual Report on Form
10-K for the year ended December 31, 1999).
4.3 Form of Hanover Compressor Company common stock certificate
(incorporated by reference to Exhibit 4.11 to Hanover Compressor
Company's Registration Statement on Form S-1 (File No. 333-27953), as
amended).
5.1 Opinion of Latham & Watkins as to the validity of the common stock.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.3 Consent of Latham & Watkins (included in the opinion filed as Exhibit
5.1).
24.1 Powers of Attorney (included on the signature page of this
Registration Statement).*
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* Previously filed.
Item 17. Undertakings
(a) The registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(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 the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(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 the undertakings set forth in
clauses (i) and (ii) above do not apply if the information required to
be included in a post-effective amendment by those clauses is
contained in periodic reports filed with or furnished to the
Securities and Exchange Commission by Hanover Compressor Company
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the registration
statement.
II-2
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of Hanover Compressor
Company's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(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 provisions set forth in Item 15 or otherwise,
the registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a
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 the question of whether such indemnification is against
public policy as expressed in the Act to a court of appropriate jurisdiction
and will be governed by the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Hanover Compressor Company certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on February 27, 2001.
Hanover Compressor Company
/s/ Michael J. McGhan
By: _________________________________
Michael J. McGhan
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities indicated on the 27th day of February, 2001.
Signature Title
--------- -----
/s/ Michael J. McGhan President and Chief Executive Officer and
______________________________________ Director (Principal Executive Officer)
Michael J. McGhan
/s/ William S. Goldberg Chief Financial Officer and Director
______________________________________ (Principal Financial and Accounting
William S. Goldberg Officer)
* Director
______________________________________
Ted Collins, Jr.
* Director
______________________________________
Robert R. Furgason
* Director
______________________________________
Melvyn N. Klein
* Director
______________________________________
Michael A. O'Connor
* Director
______________________________________
Alvin V. Shoemaker
/s/ Michael J. McGhan
*By:________________________
Attorney-in-fact
II-4
EXHIBIT INDEX
Exhibit
No. Description
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1.1 Form of Underwriting Agreement.
4.1 Certificate of Incorporation of Hanover Compressor Holding Co., as
amended (incorporated by reference to Exhibit 3.1 to Hanover
Compressor Company's Current Report on Form 8-K dated February 5,
2001).
4.2 Bylaws of Hanover Compressor Company (incorporated by reference to
Exhibit No. 3.3 to Hanover Compressor Company's Annual Report on Form
10-K for the year ended December 31, 1999).
4.3 Form of Hanover Compressor Company Common Stock certificate
(incorporated by reference to Exhibit 4.11 to Hanover Compressor
Company's Registration Statement on Form S-1 (File No. 333-27953), as
amended).
5.1 Opinion of Latham & Watkins as to the validity of the common stock.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.3 Consent of Latham & Watkins (included in the opinion filed as Exhibit
5.1).
24.1 Powers of Attorney (included on the signature page of this
Registration Statement).*
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*Previously filed.