As Filed With the Securities and Exchange Commission on February 27, 2001
Registration No. 333-54942
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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.
$150,000,000
[LOGO]
HANOVER COMPRESSOR COMPANY
% Convertible Senior Notes due March , 2008
-----------
You may convert the convertible notes into shares of common stock of Hanover
Compressor Company at any time prior to their maturity or their redemption by
us. The conversion rate is shares per each $1,000 principal amount of
convertible notes, subject to adjustment in certain circumstances. This is
equivalent to a conversion price of approximately $ per share. On February
26, 2001, the last reported sale price for the common stock on the New York
Stock Exchange was $37.69 per share. The common stock is listed under the
symbol "HC".
We will pay interest on the convertible notes on March and September of
each year. The first such payment will be made on September , 2001. The
convertible notes are equal in right of payment to all of our senior
indebtedness. The convertible notes will be issued only in denominations of
$1,000 and integral multiples of $1,000.
On or after March , 2004, we have the option to redeem all or a portion of
the convertible notes which have not been previously converted, at the
redemption prices set forth in the prospectus. You have the option, subject to
certain conditions, to require us to repurchase any convertible note held by
you in the event of a change in control, as described in the prospectus, at a
price equal to 100% of its principal amount plus accrued interest to the date
of repurchase.
Concurrent with this offering of convertible notes, we and certain selling
stockholders are offering 10,000,000 shares of common stock. Neither offering
is contingent on the other.
See "Risk Factors" beginning on page 14 to read about factors you should
consider before buying the convertible notes.
-----------
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 Note Total
-------- -----
Initial public offering price................................... % $
Underwriting discount........................................... % $
Proceeds, before expenses, to Hanover........................... % $
The initial public offering price set forth above does not include accrued
interest, if any. Interest on the convertible notes will accrue from the date
of original issuance of the notes, expected to be March , 2001.
To the extent that the underwriters sell more than $150,000,000 principal
amount of convertible notes, the underwriters have the option to purchase up to
an additional $22,500,000 principal amount of convertible notes at the initial
public offering price less the underwriting discount.
-----------
The underwriters expect to deliver the convertible notes in book-entry form
only through the facilities of The Depository Trust Company against payment in
New York, New York on March , 2001.
Goldman, Sachs & Co. Salomon Smith Barney
Credit Suisse First Boston JP Morgan
-----------
Prospectus dated March , 2001.
----------------
You should rely only on this prospectus. We 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
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
4
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.
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.
5
. 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 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.
6
. 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 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
Securities offered................ $150,000,000 aggregate principal amount of
% convertible notes due March , 2008.
We have also granted the underwriters an
over-allotment option to purchase up to an
additional $22,500,000 aggregate principal
amount of convertible notes.
Offering price.................... 100% of the principal amount of the
convertible notes, plus accrued interest,
if any, from the date of original issuance
of the convertible notes, which we expect
to be March , 2001.
Interest payable.................. We will pay interest on the convertible
notes semi-annually on March and
September of each year, commencing
September , 2001.
Conversion........................ The convertible notes are convertible at
the option of the holder into shares of our
common stock, at any time before the close
of business on the business day immediately
preceding the maturity date, unless we have
previously redeemed or repurchased the
notes, at a conversion rate of shares
of common stock per $1,000 principal amount
of convertible notes. The conversion rate
is subject to anti-dilution adjustment in
certain events.
Optional redemption by us......... On or after March , 2004, we have the
right at any time to redeem some or all of
the convertible notes at the redemption
prices set forth in this prospectus plus
accrued and unpaid interest to the
redemption date.
Repurchase at the option of
holders upon a change in If we experience a specified change in
control.......................... control, a holder of convertible notes will
have the right, subject to certain
conditions and restrictions, to require us
to repurchase, with cash or common stock,
some or all of the convertible notes at a
price equal to 100% of the principal amount
plus accrued and unpaid interest to the
repurchase date.
Ranking........................... The convertible notes are our general
unsecured obligations and will rank equally
in right of payment with all of our other
unsecured senior debt. The convertible
notes will be effectively subordinated to
all existing and future liabilities of our
subsidiaries. As of September 30, 2000, our
subsidiaries had approximately $201.6
million of debt outstanding and were
responsible for substantially all of our
other liabilities.
8
Use of proceeds..................... We intend to use the net proceeds we
receive from this offering and our
concurrent common stock offering for
working capital and general corporate
purposes, including potential acquisitions.
Initially, we intend to use most of the
proceeds to repay indebtedness.
Common Stock Offering.............. Concurrent with this offering, we are
offering 2,500,000 shares of common stock,
together with 7,500,000 shares being
offered by certain selling stockholders, in
an underwritten public offering. Neither
this offering nor the concurrent common
stock offering is contingent on the other.
Events of default.................. Events of default include:
. failure to pay principal of or premium,
if any, on any of the convertible
notes when due;
. failure to pay interest on any of the
convertible notes within 30 days after
payment becomes due;
. failure to perform or comply with
certain covenants in the indenture
with respect to the convertible notes,
and such failure is not cured within
60 days after we are given notice of
such failure;
. failure by us or any of our
subsidiaries to pay when due, or the
acceleration of the due date of, more
than $10 million of indebtedness for
money borrowed, and such failure
continues for 60 days after we are
given notice of such failure as
provided in the indenture;
. certain events of bankruptcy,
insolvency or reorganization of our
company; and
. failure to provide the required notice
of any change in control or to pay the
repurchase price in connection with a
change in control.
Listing of convertible notes....... The convertible notes will not be listed on
and securities exchange or any automated
quotation system. the underwriters have
advised us that they currently intend to
make a market in the convertible notes.
However, the underwriters are not obligated
to do so, and any such market making may be
discontinued at any time at the sole
discretion of the underwriters without
notice.
9
Global note; book-entry system..... We will issue the convertible notes only in
book-entry form, registered in the name of
DTC or its nominee. Purchasers will not
receive individually certificated notes.
Instead, the convertible notes will be
evidenced by a global note, in fully
registered form and without coupons, and
deposited with the trustee, as custodian
for DTC. The interest of any holder in the
global note will be shown on, and transfers
of that interest will be effected only
through, records maintained by DTC and its
direct and indirect participants.
Governing law...................... The indenture and the convertible notes
will be governed by the laws of the State
of New York.
Risk factors....................... You should read the "Risk Factors" section,
beginning on page 14, as well as the other
cautionary statements described in this
prospectus so that you understand the risks
associated with an investment in the
convertible notes.
10
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 to 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."
11
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
Ratio of earnings to
fixed charges(7)...... 2.88x 3.76x 3.68x 3.52x 2.74x
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
12
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
Ratio of earnings to fixed charges(7)......... 2.47x 2.92x
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.
(7) For purposes of computing the ratio of earnings to fixed charges:
"earnings" consist of income before taxes plus fixed charges and "fixed
charges" consist of interest expense (including amortization of debt
discount and expense), leasing expense and the estimated interest factor
attributable to rentals. During 1996 and 1995, the ratio of earnings to
combined fixed charges and preferred dividends was 1.29x and 1.87x,
respectively. There was no preferred stock outstanding during 1999, 1998,
1997 or the nine months ended September 30, 2000 and 1999.
13
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.
Risks Related to Our Business
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 common stock 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.
14
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 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
15
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 have obtained insurance against
liability for personal injury, wrongful death and property damage, but we
cannot assure you that the 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
16
material adverse effect on our business, results of operations, or financial
condition. We cannot be certain, however, 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
the concurrent common stock offering, will own approximately 25.6% of our
common stock. GKH is, and following completion of the concurrent common stock
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 the concurrent common stock offering. The remaining
shares issued in the Dresser-Rand transaction were registered on
17
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 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 the concurrent common stock offering. Certain stockholders,
including the selling stockholders, who own (after giving effect to the
concurrent common stock offering and assuming no exercise of the underwriters'
over-allotment option) an aggregate of approximately 27,105,000 shares have
agreed with the underwriters of the concurrent common stock offering 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 the prospectus relating to that offering 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
that prospectus, except with the prior written consent of the representatives
of the underwriters of the concurrent common stock offering.
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.
Risks Related to the Convertible Notes
Holding Company--We are a holding company which has no operations and will
depend on our operating subsidiaries for cash to make payments on the
convertible notes.
As a holding company, we do not hold any significant assets other than our
direct and indirect interests in our subsidiaries. Accordingly, our cash flow
depends upon the cash flow of our operating subsidiaries and the payment of
funds by these operating subsidiaries to us. These operating subsidiaries may
not be able to make funds available to us, and this could adversely affect our
ability to satisfy our obligations to you as a holder of the convertible notes.
Our operating subsidiaries are separate and distinct legal entities and are
not obligated to make funds available for the payment of the convertible notes
in the form of loans, distributions or otherwise. Their ability to make any
such loans, distributions or other payments to us will depend on their
earnings, business and tax considerations and legal restrictions. In addition,
covenants in the instruments governing our subsidiaries' indebtedness may
restrict their ability to make any such
18
loans, distributions or other payments to us. For example, our bank credit
agreement prohibits our subsidiaries from paying any dividends or making any
other distributions to us except for certain specified purposes, such as
payments on the convertible notes. Any restrictions on our subsidiaries'
ability to make payments to us could adversely impact our ability to pay
interest and the principal due on the convertible notes.
Structural Subordination--Because of our holding company structure, the
convertible notes will be structurally subordinated to all liabilities of our
subsidiaries.
Because we are a holding company that has no significant assets or
independent operations other than equity interests in our subsidiaries, the
convertible notes are effectively subordinated to all existing and future
indebtedness and obligations of Hanover Compression Limited Partnership and our
other direct and indirect subsidiaries. This means that in the event of the
bankruptcy, dissolution or liquidation of a subsidiary, that subsidiary's
creditors will have the right to receive payment from the subsidiary's assets
before us, and following such payment, that subsidiary may not have sufficient
assets remaining to make any payments to us as an equity holder or otherwise.
In addition, if we caused a subsidiary to pay a dividend to enable us to make
payments in respect of the convertible notes, and that dividend was deemed to
be a fraudulent transfer or unlawful distribution, the holders of the
convertible notes could be required to return the payment to or for the benefit
of that subsidiary's creditors. This could adversely affect our ability to make
payments to you as a holder of the convertible notes. In addition, the
convertible notes are unsecured and therefore will be effectively subordinated
to any future secured indebtedness we may incur to the extent of the value of
the assets securing such indebtedness. As of September 30, 2000, our
subsidiaries had approximately $201.6 million of debt outstanding and were
responsible for substantially all of our other liabilities. The indenture under
which the convertible notes will be issued does not limit our ability or the
ability of any of our subsidiaries to incur indebtedness, including senior
debt.
No Prior Trading Market--There currently exists no public market for the
convertible notes, and we cannot assure you that one will develop.
Prior to this offering, there has been no trading market for the
convertible notes. Although the underwriters have advised us that they
currently intend to make a market in the convertible notes, they are not
obligated to do so and may discontinue their market-making activities at any
time, at their sole discretion and without notice to us. Consequently, we
cannot assure you that any market for the convertible notes will develop or, if
one does develop, that it will continue for any period of time. If an active
market for the convertible notes fails to develop or continue, this failure
could adversely affect the trading price of the convertible notes. We do not
intend to apply for listing of the convertible notes on any securities exchange
or automated quotation system.
Repayment or Repurchase of Notes--We may be unable to repay or, following a
change in control, repurchase the convertible notes.
There is no sinking fund with respect to the convertible notes, and at
maturity the entire outstanding principal amount of the convertible notes will
become due and payable. In addition, if we experience a change in control of
the type described under "Description of Convertible Notes," you may require us
to repurchase all or a portion of your convertible notes prior to maturity. We
cannot assure you that we will have sufficient funds or that we will be able to
arrange for additional financing to repay the convertible notes at maturity or
to repurchase the convertible notes tendered to us following a change in
control. Under the terms of the indenture relating to the convertible notes, we
may elect, subject to certain conditions, to pay the repurchase price with
shares of common stock. Our failure to repurchase any tendered convertible
notes or to repay the convertible notes upon maturity would constitute an event
of default under the indenture and, upon acceleration of the convertible notes
in accordance with the indenture, would cause a default under the terms of our
bank credit agreement.
19
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.
20
USE OF PROCEEDS
We estimate that the net proceeds from our sale of convertible notes will
be approximately $144.9 million, 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 approximately
$89.8 million estimated net proceeds from our concurrent common stock offering
(based on an assumed offering price to the public of $37.69 per share) 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). We
have used the amounts borrowed under our bank credit agreement to fund working
capital needs, capital expenditures and acquisitions. Our bank credit agreement
gives us $200 million of revolving credit and matures in December 2002. 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 common stock offering in
investment-grade, interest-bearing securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table contains our consolidated ratios of earnings to fixed
charges for the periods indicated:
Nine Months
Ended
September 30, Year Ended December 31,
------------- -----------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ----- ----- ----- ----- -----
Ratio of earnings to fixed
charges.......................... 2.47x 2.92x 2.88x 3.76x 3.68x 3.52x 2.74x
Ratio of earnings to fixed charges
and preferred dividends.......... 2.47x 2.92x 2.88x 3.76x 3.68x 1.29x 1.87x
For purposes of computing the ratio of earnings to fixed charges: (i)
"earnings" consist of income before income taxes plus fixed charges and (ii)
"fixed charges" consist of interest expense (including amortization of debt
discount and expense), leasing expense and the estimated interest factor
attributable to rentals. There was no preferred stock outstanding during 1999,
1998 or 1997 or the nine months ended September 30, 2000 and 1999.
COMMON STOCK OFFERING
Concurrent with this offering, we are offering 2,500,000 shares of common
stock, together with 7,500,000 shares being offered by certain selling
stockholders, in an underwritten public offering. The shares of common stock
will be offered pursuant to a separate prospectus. Neither this offering nor
the concurrent common stock offering is contingent on the other.
21
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.
22
CAPITALIZATION
The following table sets forth our total capitalization at September 30,
2000 and as adjusted to give effect to this offering and as further adjusted to
give effect to our concurrent common stock 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 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 As Further
Adjusted Adjusted
for this for the Common
Actual Offering Stock 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 $ 20,100 $ --
Convertible notes(1)...................... -- 150,000 150,000
Other..................................... 8,835 8,835 8,835
-------- -------- --------
Total long-term debt........................ 173,835 178,935 158,835
-------- -------- --------
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 and as
adjusted; 68,786,496 shares issued and
outstanding, as further adjusted......... 66 66 69
Additional paid-in capital................ 481,465 481,465 571,262
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........... 618,595 618,595 708,395
-------- -------- --------
Total capitalization........................ $878,680 $883,780 $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.
23
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.
24
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
25
million during the nine months ended September 30, 1999. During the nine months
ended 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.
26
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
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.
27
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.
28
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
29
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 753,000 horsepower to the rental fleet. At December
31, 2000, the rental fleet consisted of 1,741,000
30
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.
31
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.
32
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.
33
The advent of rental and contract compression roughly 40 years ago made it
possible for natural gas producers, transporters and processors to improve the
efficiency and financial performance of their operations. Compressors leased
from specialists generally have a higher rate of mechanical reliability and
typically generate greater productivity than those owned by oil and gas
operators. Furthermore, because compression needs of a well change over time,
outsourcing of compression equipment enables an oil and gas operator to better
match variable compression requirements to the production needs throughout the
life of the well. Also, certain major domestic oil companies are seeking to
streamline their operations and reduce their capital expenditures and other
costs. To this end, they have sold certain domestic energy reserves to
independent energy producers and are outsourcing facets of their operations.
Such initiatives, in 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.
34
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
35
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.
36
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.
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
37
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 substance" into
the environment. These persons include the owner or operator of the facility or
38
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.
39
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 also 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.
40
DESCRIPTION OF CONVERTIBLE NOTES
Description of Convertible Notes
The convertible notes constitute a series of debt securities we will issue
under an indenture between us and Wilmington Trust Company, as trustee. This
section summarizes selected provisions of the indenture and the convertible
notes. It does not, however, describe certain exceptions and qualifications
contained in those documents. If you would like more detailed information on
the provisions of the indenture, you should review the full text of the form of
indenture, a copy of which we have filed as an exhibit to the registration
statement of which this prospectus forms a part.
General
The convertible notes will be our general unsecured obligations, will rank
equally in right of payment with all of our other unsecured senior debt and
will be limited to $150,000,000 aggregate principal amount (or $172,500,000 if
the underwriters' over-allotment option is exercised in full). Payment in full
of the principal amount of the convertible notes will be due at maturity on
March , 2008.
The convertible notes will bear interest at the annual rate shown on the
front cover of this prospectus from March , 2001, or from the most recent
date to which interest has been paid or provided for, payable on March and
September of each year, commencing September , 2001 until the principal is
paid or made available for payment, to the person in whose name the convertible
note is registered at the close of business on the preceding March or
September , as the case may be.
The convertible notes will be convertible into shares of our common stock
initially at the conversion rate stated on the front cover of this prospectus
at any time following the initial issue date of the convertible notes and
before the close of business on the business day immediately preceding March
, 2008, unless previously redeemed or repurchased by us. The conversion rate
will be subject to adjustment upon the occurrence of certain events described
below under "--Conversion Rights."
The convertible notes are redeemable at our option at any time on or after
March , 2004, in whole or in part, at the redemption prices set forth below
under "--Optional Redemption by the Company," plus accrued and unpaid interest
to the date of redemption. The convertible notes are also subject to repurchase
by us at the option of the holders upon a change of control of our company, as
described below under "--Repurchase at Option of Holders Upon a Change in
Control."
The principal of, premium, if any, and interest on the convertible notes
will be payable, and the convertible notes may be surrendered for registration
of transfer, exchange and conversion, at the office or agency of the trustee in
Manhattan, New York. See "--Payment and Conversion." Payments, transfers,
exchanges and conversions relating to beneficial interests in convertible notes
issued in book-entry form will be subject to the procedures applicable to
global notes described below. We may not impose any service charge, other than
payment of a sum sufficient to cover any applicable tax or other governmental
charge, on the transfer or exchange of any convertible note.
We will initially appoint the trustee as the paying agent, transfer agent,
registrar and conversion agent for the convertible notes. In these capacities,
the trustee will be responsible for:
. maintaining a record of the aggregate holdings of convertible notes
represented by the global note described below and accepting convertible
notes for exchange and registration of transfer;
41
. ensuring that payments of principal, premium, if any, and interest
received by the trustee from us in respect of the convertible notes are
duly paid to The Depository Trust Company, or DTC, or its nominees;
. transmitting to us any notices from holders of the convertible notes;
. accepting conversion notices and related documents and transmitting the
relevant items to us; and
. delivering certificates representing the common stock issued upon
conversion of the convertible notes.
We will cause each transfer agent to act as a registrar and will cause each
transfer agent to keep a register at their office in which, subject to any
reasonable regulations we may prescribe, we will provide for registration of
transfers of convertible notes. We may vary or terminate the appointment of any
paying agent, transfer agent or conversion agent, or appoint additional or
other agents, or approve any change in the office through which any agent acts.
However, we will at all times maintain a paying agent, transfer agent and a
conversion agent in Manhattan, New York. We will cause notice of any
resignation, termination or appointment of the trustee or any paying agent,
transfer agent or conversion agent, and of any change in the office through
which any agent acts, to be provided to holders of the convertible notes.
Form, Denomination, Transfer, Exchange and Book-Entry Procedures
The convertible notes will be issued only in fully registered form, without
interest coupons, in minimum denominations of $1,000 and integral multiples in
excess of $1,000.
The convertible notes initially will be represented by one or more notes in
registered, global form, referred to as global notes. The global notes will be
deposited upon issuance with the trustee as custodian for DTC, New York, New
York, and registered in the name of DTC or its nominee, for credit to an
account of a direct or indirect participant in DTC as described below.
Transfers of beneficial interests in the global notes will be subject to
the applicable rules and procedures of DTC and its direct or indirect
participants, which may change from time to time.
Except as set forth below, the global notes may be transferred, in whole
and not in part, only to DTC, its nominees and their successors. Beneficial
interests in the global notes may not be exchanged for notes in certificated
form, except in the limited circumstances described below under "--Exchange of
Book-Entry Notes for Certificated Notes."
Exchange of Book-Entry Notes for Certificated Notes
We will issue a convertible note in certificated form in exchange for a
beneficial interest in a global note only if:
. DTC notifies us that it is unwilling or unable to continue as depositary
for the global note or if DTC ceases to be a clearing agency registered
under applicable law and, in either case, we fail to appoint a successor
depositary within 90 days after we become aware of such event; or
. at our option, we notify the trustee in writing that we elect to cause
the issuance of all of the convertible notes in certificated form; or
. an event of default under the indenture has occurred and is continuing
and the registrar has received a request from DTC to issue securities in
definitive form.
42
In all cases, certificated notes delivered in exchange for a beneficial
interest in a global note will be registered in the names, and issued in any
approved denominations, requested by or on behalf of the depositary, in
accordance with its customary procedures.
Certain Book-Entry Procedures for Global Notes
Beneficial interests in global notes will be shown on, and transfers of
global notes will be made only through, records maintained by DTC and its
participants. If you are not a participant in DTC, you may beneficially own
convertible notes held by DTC only through a participant.
The descriptions of the operations and procedures of DTC that follow are
provided solely as a matter of convenience. These operations and procedures are
solely within DTC's control and are subject to changes by DTC from time to
time. We take no responsibility for these operations and procedures and urge
you to contact DTC or its participants directly to discuss these matters.
DTC has provided us the following information:
. DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code
and a "clearing agency" registered under the provisions of Section 17A
of the Securities Exchange Act of 1934.
. DTC was created to hold securities for its participants and to
facilitate the settlement among participants of securities transactions,
such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in participants' accounts,
thereby eliminating the need for physical movement of securities
certificates.
. Participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations.
. DTC is owned by a number of its participants and by The New York Stock
Exchange, Inc., the American Stock Exchange LLC and the National
Association of Securities Dealers, Inc.
. Access to the DTC system is also available to others such as securities
brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly.
. The rules applicable to DTC and its participants are on file with the
SEC.
As long as DTC, or its nominee, is the registered holder of a global note,
we and the trustee will treat DTC or such nominee as the sole owner of the
convertible notes represented by such global note for all purposes. Except in
the limited circumstances described above under "--Exchanges of Book-Entry
Notes for Certificated Notes," owners of beneficial interests in a global note:
. will not be entitled to have any portion of the convertible notes
represented by that global note registered in their names;
. will not receive or be entitled to receive physical delivery of the
convertible notes in certificated form; and
. will not be considered the owners or holders of the global note, or the
convertible notes represented by that global note, under the indenture
or the convertible notes.
Accordingly, each person owning a beneficial interest in a global note must
rely on the procedures of DTC and, if such person is not a participant, those
of the participant through which that person owns its interest, in order to
exercise any rights of a holder under the indenture or the convertible notes.
43
The laws of some states require that certain persons take physical delivery
of securities that they own in definitive form. The ability to transfer
beneficial interests in a global note to those persons may be limited because
global notes are not represented by physical certificates. Since DTC can act
only on behalf of its participants, which in turn act on behalf of indirect
participants and certain banks, the lack of a physical certificate may also
adversely affect the ability of a person owning a beneficial interest in a
global note to pledge their interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of those
interests.
On each relevant payment date, we will wire transfer the principal of,
premium or interest on, or redemption or repurchase price to DTC or its
nominee, as the case may be, as the registered owner of the global note.
Accordingly, we, the trustee and any paying agent will have no direct
responsibility or liability to pay amounts due on the global notes to owners of
beneficial interests in the global notes.
DTC has advised us that its current practice, upon receipt of any payment
of principal, premium, interest or the redemption or repurchase price, is to
credit participants' accounts on the payment date in amounts proportionate to
their respective beneficial interests in the global note as shown on DTC's
records. In addition, it is DTC's current practice to assign any consenting or
voting rights to participants whose accounts are credited with convertible
notes on a record date, by using an omnibus proxy. Payments by participants to
owners of beneficial interests in the global notes and voting by participants
will be governed by standing instructions and customary practices between the
participants and owners of beneficial interests, as is the case with
convertible notes held for the account of customers registered in "street
name." But payments will be the responsibility of the participants and not of
DTC, the trustee or us.
Redemption notices will be sent to DTC or its nominee. If less than all of
the convertible notes are being redeemed, DTC's practice is to determine by lot
the amount of the holdings of each participant in the issue to be redeemed.
DTC has advised us that it will take any action permitted to be taken by a
holder of convertible notes, including the presentation of convertible notes
for exchange as described below and the conversion of convertible notes:
. only at the direction of one or more participants to whose account with
DTC beneficial interests in the global notes are credited; and
. only in respect of the portion of the aggregate principal amount of the
convertible notes as to which the participant or participants has or
have given that direction.
However, if there is an event of default under the convertible notes, DTC
reserves the right to exchange the global notes for convertible notes in
certificated form and to distribute the convertible notes to its participants.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of beneficial ownership interests in the global notes among
participants, it is under no obligation to perform or to continue to perform
those procedures, and those procedures may be discontinued at any time.
None of us, the trustee or any of our respective agents will have any
responsibility for the performance by DTC or its participants of their
respective obligations under the rules and procedures governing its operations,
including maintaining, supervising or reviewing the records relating to, or
payments made on account of, beneficial ownership interests in global notes.
44
Payment and Conversion
The principal of the convertible notes will be paid in U.S. dollars,
against surrender of the convertible notes at the office or agency of the
trustee in Manhattan, New York, by dollar check or by transfer to a dollar
account maintained by the holder with a bank in New York City. Payment of
interest on a convertible note may be made by dollar check mailed to the person
entitled to the interest at that person's address as it appears in our security
register, or, upon written application by the holder to the security registrar
not later than the relevant record date, by transfer to a dollar account
maintained by the holder with a bank in the United States. Transfers to dollar
accounts will be made only to holders of an aggregate principal amount of
convertible notes in excess of $2,000,000.
As previously stated, payments in respect of the principal of, and premium,
if any, and interest on, any global note registered in the name of DTC or its
nominee will be payable by the trustee to DTC or its nominee, as the case may
be, in its capacity as the registered holder under the indenture. Under the
terms of the indenture, we and the trustee will treat the persons in whose
names the convertible notes, including the global notes, are registered as the
owners of those notes for the purpose of receiving payments and for any and all
other purposes. Consequently, we, the trustee and any paying agent will have no
responsibility or liability for:
. any aspect of DTC's records or any participant's records relating to, or
payments made on account of, beneficial ownership interests in the
global notes;
. maintaining, supervising or reviewing any of DTC's records or any
participant's records relating to the beneficial ownership interests in
the global notes; or
. any other matter relating to the actions and practices of DTC or any of
its participants.
Any payment on a convertible note due on any day that is not a business day
may be made the next succeeding business day with the same force and effect as
if made on the due date, and no interest will accrue on the payment for the
period from and after that date.
Convertible notes may be surrendered for conversion at the office or agency
of the trustee in Manhattan, New York. In the case of global notes, conversion
will be effected by DTC upon notice from the holder of a beneficial interest in
a global note in accordance with its rules and procedures. Convertible notes
surrendered for conversion must be accompanied by a conversion notice and any
payments in respect of interest, as applicable, as described below under "--
Conversion Rights."
All money for the payment of principal of, and premium, if any, or interest
on, any convertible note that is deposited with the trustee or any paying agent
or then held by us in trust which remains unclaimed at the end of two years
after the payment has become due and payable may be repaid to us. Thereafter,
the holder of such convertible note will look only to us for payment and no
interest will accrue on the amount that we hold.
Conversion Rights
The holder of any outstanding convertible note will have the option to
convert all or any portion of the principal amount of the convertible note that
is an integral multiple of $1,000 into shares of our common stock at any time
before the close of business on the business day immediately preceding the
maturity date, unless the note has been previously redeemed or repurchased by
us. The conversion rate will be equal to the number of shares per $1,000
principal amount of convertible notes shown on the front cover of this
prospectus and is subject to adjustment in certain events as described below.
The right to convert a convertible note called for redemption or delivered for
repurchase will terminate at the close of business on the business day
immediately preceding the
45
redemption or repurchase date, as the case may be, for that note, unless we
default in making the payment due upon redemption or repurchase.
A holder may exercise the right of conversion by delivering the convertible
note at the office or agency of the trustee in Manhattan, New York, accompanied
by a properly signed and completed notice of conversion, a copy of which may be
obtained from the trustee. A holder of a convertible note will cease to have
any further rights as a holder of such note at the time of conversion. The
conversion date will be the date on which the convertible note and the properly
signed and completed notice of conversion are so delivered. As promptly as
practicable after the conversion date, we will issue and deliver to the trustee
a certificate or certificates for the number of full shares of our common stock
issuable upon conversion, together with payment in lieu of any fraction of a
share, which will then be sent by the trustee to the conversion agent for
delivery to the holder. Shares of our common stock issuable upon conversion of
the convertible notes, in accordance with the provisions of the indenture, will
be fully paid and nonassessable and will rank equally with the other shares of
our common stock outstanding from time to time. If a convertible note is
surrendered for partial conversion, we will also issue to the holder of that
note a new convertible note in a principal amount equal to the unconverted
portion of the surrendered convertible note.
Except as described below, holders that surrender convertible notes for
conversion on a date that is not an interest payment date under the indenture
are not entitled to receive any interest for the period from the next preceding
interest payment date to the date of conversion. However, holders of
convertible notes on a regular record date, including convertible notes
surrendered for conversion after such date, will receive the interest payable
on the convertible notes on the next succeeding interest payment date.
Accordingly, any convertible note surrendered for conversion during the period
from the close of business on a regular record date to the opening of business
on the next succeeding interest payment date must be accompanied by payment of
an amount equal to the interest payable on that interest payment date on the
principal amount of the convertible notes being surrendered for conversion.
However, no payment will be required upon the conversion of any convertible
note, or portion thereof, that has been called for redemption or that is
eligible for repurchase if, as a result, the right to convert such convertible
note would terminate during the period between the regular record date and the
close of business on the next succeeding interest payment date.
No other payment or adjustment for interest will be made upon conversion.
Holders of our common stock issued upon conversion will not be entitled to
receive any dividends payable to holders of our common stock as of any record
date before the close of business on the conversion date. We will not issue any
fractional shares upon conversion but, instead, will pay an appropriate amount
in cash based on the market price of our common stock at the close of business
on the trading day immediately preceding the conversion date.
A holder surrendering a convertible note for conversion will not be
required to pay any taxes or duties in respect of the issue or delivery of our
common stock upon conversion. However, we will not be required to pay any tax
or duty that may be payable in respect of any transfer involved in the issue or
delivery of our common stock in a name other than that of the holder of the
convertible note so surrendered, and we will not issue or deliver certificates
representing shares of our common stock unless the person requesting such issue
has paid to us the amount of any such tax or duty or has established to our
satisfaction that any such tax or duty has been paid.
The conversion rate may be adjusted in certain events, including:
. the payment of a dividend or other distribution in shares of our common
stock to holders of our common stock;
46
. the issuance to all holders of our common stock of rights, options or
warrants entitling them to subscribe for or purchase shares of our
common stock, or securities convertible into shares of our common stock,
at a price per share less than the then current market price of our
common stock;
. the subdivision, combination or reclassification of our common stock;
. the distribution to all holders of our common stock of cash, evidences
of our indebtedness, shares of our capital stock or other property,
including securities, but excluding those dividends, distributions,
rights, options and warrants referred to in the first two bullet points
above, dividends and distributions paid exclusively in cash and
distributions upon mergers or consolidations to which the next bullet
point applies;
. the distribution to all holders of our common stock consisting
exclusively of cash, excluding any cash portion of distributions
referred to in the immediately preceding bullet point, or cash
distributed upon a merger or consolidation to which the next bullet
point applies, in an aggregate amount that, combined together with:
-- other all cash distributions made within the 12 months preceding
the date of payment in respect of which no adjustment has been
made; and
-- any cash and the fair market value of other consideration payable
in respect of any tender offer by us or any of our subsidiaries
for our common stock concluded within the 12 months preceding the
date of payment in respect of which no adjustment has been made;
exceeds 10% of our market capitalization, being the product of the current
market price per share of our common stock on the record date for that
distribution and the number of shares of our common stock then outstanding; and
. the successful completion of a tender offer made by us or any of our
subsidiaries for our common stock which involves an aggregate
consideration that, combined together with:
-- any cash and the fair market value of other consideration payable
in respect of any other tender offer by us or any of our
subsidiaries for our common stock expiring within the 12 months
preceding the expiration of the tender offer in respect of which
no adjustment has been made; and
-- the aggregate amount of any all cash distributions referred to in
the immediately preceding bullet point to all holders of our
common stock within the 12 months preceding the expiration of the
tender offer in respect of which no adjustment has been made;
exceeds 10% of our market capitalization on the expiration of such tender
offer.
We reserve the right to make any additional adjustments in the conversion
rate as we consider necessary in order that any event treated for U.S. federal
income tax purposes as a dividend of stock or stock rights will not be taxable
to the recipients. No adjustment of the conversion rate will be required until
the cumulative adjustments amount to 1.0% or more of the conversion rate. We
will compute any adjustments to the conversion rate as provided in the
indenture and will give notice of such adjustments to the holders of
convertible notes then outstanding.
In the case of any consolidation or merger of our company with or into
another person or upon the sale or conveyance of all or substantially all of
our property and assets to another person, each convertible note then
outstanding will become convertible only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or conveyance by a holder of the number of shares of common stock into
which the convertible note was convertible
47
immediately prior to such event, assuming such holder failed to exercise any
rights of election and that such convertible note was then convertible. The
provision described in the preceding sentence will not apply, however, to a
consolidation or merger in which we are the surviving corporation and which
does not result in any reclassification, conversion, exchange or cancellation
of our common stock.
We may from time to time increase the conversion rate for any period of at
least 20 days if our board of directors determines that an increase would be in
our best interests, which determination will be conclusive. We will give at
least 15 days' prior notice of the increase to the holders of the convertible
notes then outstanding. No increase shall be taken into account for purposes of
determining whether the closing price of our common stock exceeds the
conversion price by 105% in connection with an event which would otherwise be a
change in control.
If we make a distribution of property to our stockholders that would be
taxable to them as a dividend for U.S. federal income tax purposes, and, under
the anti-dilution provisions of the indenture, the number of shares of common
stock into which convertible notes are convertible is increased, that increase
will be deemed for U.S. federal income tax purposes to be the payment of a
taxable dividend to holders of convertible notes. This might occur with
distributions of our evidences of indebtedness or assets, but generally would
not occur with stock dividends on common stock or rights to subscribe for
common stock. See "Certain U.S. Federal Income Tax Consequences--U.S. Holders."
Optional Redemption by the Company
On or after March , 2004, we may redeem the convertible notes, in whole
or in part, at the prices set forth below. If we elect to redeem all or any
part of the convertible notes, we will give at least 30, but no more than 60,
days prior notice to each holder of the convertible notes to be redeemed.
The redemption price, expressed as a percentage of principal amount, is as
follows for the 12-month periods beginning on:
Date Redemption Price
---- ----------------
March , 2004................................................. %
March , 2005................................................. %
March , 2006................................................. %
March , 2007................................................. %
and thereafter is equal to 100% of the principal amount, in each case together
with accrued interest to the date of redemption.
No sinking fund is provided for the convertible notes, which means that the
indenture does not require us to redeem or retire the convertible notes
periodically.
We may, to the extent permitted by applicable law, purchase convertible
notes at any time in the open market, by tender at any price or by private
agreement. Any convertible note that we purchase may, to the extent permitted
by applicable law and subject to the restrictions contained in the underwriting
agreement with the underwriters, be re-issued or resold or may, at our option,
be surrendered to the trustee for cancellation. Any convertible notes
surrendered for cancellation may not be re-issued or resold and will be
canceled promptly.
48
Repurchase at Option of Holders Upon a Change in Control
Within 30 days after the occurrence of a change in control, we must deliver
to all holders of convertible notes then outstanding, with a copy to the
trustee, written notice of the change in control and of the resulting
repurchase right described below. The holder of any outstanding convertible
note will then have the right to require us to repurchase all or any portion of
the convertible note that is an integral multiple of $1,000 not previously
called for redemption. To exercise this right, the holder must deliver to the
trustee irrevocable written notice of such exercise, together with the
convertible note, on or before the 30th day after the date on which we notified
the holders of such change in control. The repurchase price will be equal to
100% of the principal amount of the convertible note to be repurchased,
together with interest accrued to the repurchase date.
A change in control will be deemed to have occurred if at any time after
the original issue date of the convertible notes any of the following occurs:
. the acquisition, directly or indirectly, through a purchase, merger or
other acquisition transaction or series of transactions, by any person,
other than us, any of our subsidiaries or any of our employee benefit
plans, of beneficial ownership of shares of our capital stock entitling
that person to exercise 50% or more of the total voting power of all
shares of our capital stock entitled to vote generally in elections of
directors; or
. the consolidation or merger of our company with or into any other
entity, any merger of another entity into us, or any conveyance,
transfer, sale, lease or other disposition of all or substantially all
of our properties and assets to another person or entity, other than:
-- any transaction (x) that does not result in any reclassification,
conversion, exchange or cancellation of our outstanding shares of
capital stock and (y) pursuant to which holders of our common
stock immediately prior to such transaction are entitled to
exercise, directly or indirectly, 50% or more of the total voting
power of all shares of the capital stock entitled to vote
generally in the election of directors of the continuing or
surviving entity immediately after such transaction, and
-- any merger which is effected solely to change our jurisdiction of
incorporation and results in a reclassification, conversion or
exchange of outstanding shares of common stock solely into shares
of common stock of the surviving entity.
"Beneficial owner" will be determined in accordance with Rule 13d-3 promulgated
by the SEC under the Securities Exchange Act. "Person" includes any syndicate
or group which would be deemed to be a "person" under Section 13(d)(3) of the
Securities Exchange Act.
However, a change in control will not be deemed to have occurred if either:
. the closing sales price per share of our common stock for any five
trading days within the period of 10 consecutive trading days ending
immediately after the later of the change in control or the public
announcement of the change in control, in the case of a change in
control under the first bullet point above, or the period of 10
consecutive trading days ending immediately before the change in
control, in the case of a change in control under the second bullet
point above, equals or exceeds 105% of the conversion price in effect on
each such trading day; or
. all of the consideration, excluding cash payments for fractional shares
and cash payments made pursuant to dissenters' appraisal rights, in a
merger or consolidation otherwise constituting a change in control under
the first or second bullet point in the preceding paragraph above
consists of shares of common stock traded on a national securities
exchange or quoted on the Nasdaq National Market, or will be so traded
or quoted
49
immediately following such merger or consolidation, and as a result of
such merger or consolidation the convertible notes become convertible
solely into such common stock.
For purposes of these provisions, the conversion price is equal to $1,000
divided by the conversion rate.
We may, at our option, in lieu of paying the repurchase price in cash, pay
it in shares of our common stock valued at 95% of the average of the closing
sales prices of our common stock for the five trading days immediately
preceding and including the third trading day prior to the date of repurchase.
However, payment may not be made in common stock unless we satisfy certain
conditions prior to the repurchase date as provided in the indenture.
Rule 13e-4 under the Securities Exchange Act requires that we disseminate
certain information to security holders in the event of an issuer tender offer
and this requirement may apply in the event that the repurchase option becomes
available to holders of the convertible notes. We will comply with this rule to
the extent applicable at that time.
Ranking
The convertible notes will be our general unsecured obligations, ranking
equally with all of our other unsecured senior debt. However, because we are a
holding company and conduct substantially all of our operations through our
subsidiaries, the convertible notes will be structurally subordinated to all of
our subsidiaries' indebtedness and other liabilities, including trade payables
and lease obligations. Our rights to receive any assets of any of our
subsidiaries upon its liquidation or reorganization, and the resulting right of
the holders of convertible notes to participate in those assets, will be
effectively subordinated to the claims of that subsidiary's creditors,
including trade creditors, except to the extent that we are recognized as a
creditor of that subsidiary. If we are recognized as a creditor of that
subsidiary, our claims would still be subordinate to any security interest in
the assets of that subsidiary and any indebtedness of that subsidiary senior to
us. As of September 30, 2000, our subsidiaries had approximately $201.6 million
of debt outstanding and were responsible for substantially all of our other
liabilities.
The indenture does not limit our ability or the ability of any of our
subsidiaries to incur indebtedness, including senior debt.
Consolidation, Merger or Sale of Assets
We may not consolidate or merge with or into any other person or entity or
sell or transfer all or substantially all of our property and assets to any
other person or entity, unless:
. the entity formed by such consolidation or merger, or the person or
entity to which our property and assets are sold or transferred, is a
corporation, limited liability company, partnership or trust organized
and existing under the laws of the United States, any state thereof or
the District of Columbia and expressly assumes our obligations under the
indenture; and
. immediately after such transaction, no event of default, and no event
which, after notice or lapse of time or both, would become an event of
default, shall have occurred and be continuing.
Upon any permitted consolidation, merger or sale, we will be discharged
from, and the surviving or successor corporation will succeed to, all of our
obligations under the indenture and the convertible notes.
Events of Default
Each of the following will be an "event of default" under the indenture
with respect to the convertible notes:
. failure to pay principal of or premium, if any, on any convertible note
when due;
50
. failure to pay interest on any convertible note when due, continuing for
a period of 30 days;
. failure to comply with any of our other agreements contained in the
indenture or in the convertible notes, continuing for a period of 60
days after written notice to us by the trustee or the holders of at
least 25% in aggregate principal amount of the outstanding convertible
notes;
. failure to pay when due the principal of, or acceleration of, any debt
for money borrowed by us or any subsidiary in excess of $10 million if
such debt is not discharged, or such acceleration is not remedied, cured
or waived, within 30 days after written notice to us by the trustee or
the holders of at least 25% in aggregate principal amount of the
outstanding convertible notes;
. certain events of bankruptcy, insolvency or reorganization of our
company or certain of our subsidiaries; and
. failure to provide a notice to holders of outstanding convertible notes
in the event of a change in control or failure to pay the repurchase
price in connection with a change of control.
In general, the trustee is required to give notice of a default with
respect to the convertible notes to the holders of those notes. However, the
trustee may withhold notice of any such default (except a default in payment of
principal of or interest on any convertible note) if the trustee determines it
is in the best interest of the holders of the convertible notes to do so.
If there is a continuing event of default with respect to the convertible
notes, then the trustee or the holders of at least 25% in principal amount of
the outstanding convertible notes may accelerate the maturity of all
convertible notes. However, the holders of a majority in principal amount of
the outstanding convertible notes may, under certain circumstances provided in
the indenture, rescind and annul the acceleration and waive any past defaults.
A continuing default in payment of principal of, or premium, if any, or
interest on the convertible notes may be waived only by all holders of
outstanding convertible notes. For more information on waivers of defaults, see
"--Modification and Waiver" below.
Prior to an event of default, the trustee is required to perform only the
specific duties stated in the indenture, and after an event of default, the
trustee must exercise the same degree of care as a prudent individual would
exercise or use under the circumstances in the conduct of his or her own
affairs.
Except during the continuance of an event of default, the trustee may
refuse to exercise any of its rights or powers at the request or direction of
any of the holders of convertible notes, unless those holders have offered to
the trustee satisfactory security or indemnity. Subject to certain limitations
specified in the indenture, the holders of a majority in principal amount of
the convertible notes will have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the trustee with
respect to the convertible notes.
No holder of any convertible note may institute any proceeding with respect
to the indenture or any remedy thereunder, unless:
. that holder has previously given to the trustee written notice of a
continuing event of default with respect to the convertible notes;
. the holders of at least 25% in aggregate principal amount of the
outstanding convertible notes have made written request, and offered
satisfactory indemnity, to the trustee to institute that proceeding as
trustee;
. the trustee shall not have received from the holders of a majority in
aggregate principal amount of the outstanding convertible notes a
direction inconsistent with such request; and
51
. the trustee shall have failed to institute such proceeding within 60
days after receipt of the written request and offer of indemnity.
However, these limitations do not apply to a suit for the enforcement of
payment of the principal of, or premium, if any, or interest on, a convertible
note on or after the respective due dates or of the right to convert a
convertible note.
We must furnish annually to the trustee an officers' certificate stating
whether or not, to the knowledge of the certifying officers in the course of
performance of their duties as officers, we are in compliance with the
requirements of the indenture and no default exists and, if a default has
occurred, identifying the nature of the default of which the officers are
aware.
Modification and Waiver
We may modify or amend certain of our rights and obligations and the rights
of the holders of convertible notes under the indenture, and certain past
defaults by us may be waived, with the consent of the holders of a majority in
aggregate principal amount of the outstanding convertible notes. But, we may
not make any modification or amendment without the consent of every holder of
outstanding convertible notes affected that would:
. change the stated maturity of the principal of, or premium, if any, or
any installment of interest on, any convertible note;
. reduce the amount of any principal of, or premium, if any, or interest
on, any convertible note payable upon redemption, repurchase or
repayment;
. change the city of any place of payment or the currency of payment of
principal of, or premium, if any, or interest on, any convertible note,
including any payment of the redemption or repurchase price in respect
of that convertible note;
. impair the right to institute suit for the enforcement of any payment on
or with respect to any convertible note;
. reduce the percentage in aggregate principal amount of outstanding
convertible notes required for modifications or amendments to the
indenture or required for a waiver of defaults; or
. adversely affect the right of holders to convert or to require us to
repurchase any convertible note other than as provided in the indenture,
except as otherwise allowed or contemplated by provisions concerning
consolidation, merger, sale or transfer of all or substantially all of
our property and assets.
In certain circumstances, we may modify or amend the indenture without the
consent of the holders of outstanding convertible notes to effect the
assumption of our obligations under the indenture by a successor corporation,
to impose additional restrictions and events of default with respect to the
convertible notes, to correct any mistakes or defects in the indenture, to add
a guarantor or for other specified purposes.
The indenture contains provisions for convening meetings of the holders of
the convertible notes to consider matters affecting their interests.
Notices
Notice to holders of the convertible notes will be given by mail to their
addresses as they appear in the security register. These notices will be deemed
to have been given on the date they are mailed.
Notice of a redemption of convertible notes will be given at least once not
less than 30 nor more than 60 days prior to the redemption date. A redemption
notice will be irrevocable and will specify the redemption date.
52
Replacement of Convertible Notes
We will replace convertible notes that become mutilated, destroyed, stolen
or lost at the expense of the holder upon delivery to the trustee of the
mutilated convertible notes or evidence of the loss, theft or destruction of
the convertible notes satisfactory to us and the trustee. In the case of a
lost, stolen or destroyed convertible note, indemnity satisfactory to the
trustee and us may be required at the expense of the holder of such convertible
note before a replacement convertible note will be issued.
Payment of Stamp and Other Taxes
We will pay all stamp and similar duties, if any, imposed by the United
States or any of its political subdivisions or taxing authorities with respect
to the issuance of the convertible notes. We will not be required to pay any
other tax, assessment or governmental charge imposed by any government or any
political subdivision or taxing authority.
Governing Law
The indenture and the convertible notes will be governed by and construed
in accordance with the laws of the State of New York.
The Trustee
The trustee for the holders of the convertible notes issued under the
indenture will be Wilmington Trust Company. Wilmington Trust Company also
serves as trustee under the indenture governing our 7 1/4% Convertible Junior
Subordinated Debentures due 2029. Subject to the Trust Indenture Act, the
trustee may engage in other transactions with us or any of our affiliates.
However, if the trustee becomes our creditor, the indenture and the Trust
Indenture Act limit the rights of the trustee to obtain payments of claims in
certain cases or to realize on certain property received in respect of any such
claim as security or otherwise, and if the trustee acquires any conflicting
interest as described in the Trust Indenture Act, it must eliminate that
conflict or resign.
If the trustee resigns or is removed as permitted under the indenture and a
successor trustee does not take office within 60 days thereafter, we, the
retiring trustee or the holders of at least 10% in aggregate principal amount
of the outstanding debt securities issued under the indenture may petition a
court for the appointment of a successor trustee. The resignation or removal of
the retiring trustee will become effective when:
. the successor trustee delivers to us and the retiring trustee written
acceptance of its appointment; and
. the retiring trustee, after payment of all sums then owing to it,
transfers to the successor trustee all property held by it in its
capacity as trustee with respect to the outstanding debt securities.
53
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
This section summarizes certain U.S. federal income tax considerations
relating to the purchase, ownership and disposition of the convertible notes
and the common stock into which the convertible notes may be converted. This
summary is based on existing legal authorities, including the Internal Revenue
Code of 1986, as amended (the "Code"), existing and proposed Treasury
Regulations and judicial decisions and administrative interpretations, as of
the date hereof, all of which are subject to change, possibly with retroactive
effect. There can be no assurance that the Internal Revenue Service (the "IRS")
will not challenge one or more of the tax results described herein, and we have
not obtained, nor do we intend to obtain, a ruling from the IRS with respect to
the United States federal tax consequences described below. This summary
generally applies only to "U.S. Holders" that purchase convertible notes in the
initial offering at their issue price and hold the convertible notes or common
stock as "capital assets" (generally, property held for investment). For this
purpose, U.S. Holders include citizens or residents of the United States,
corporations organized under the laws of the United States or any state and
estates, the income of which is subject to United States federal income
taxation regardless of its source. A trust is generally a U.S. Holder if its
administration is subject to the primary supervision of a U.S. court and one or
more U.S. persons have the authority to control all substantial decisions of
the trust. Special rules apply to "Non-U.S. Holders", including nonresident
alien individuals and foreign corporations, estates or trusts. This summary
describes some, but not all, of these special rules. Income earned through a
foreign or domestic partnership is subject to special rules that are generally
not discussed here. This discussion does not purport to address all tax
considerations that may be important to a particular holder in light of the
holder's circumstances, such as the alternative minimum tax provisions of the
Code, or to certain categories of investors that may be subject to special
rules, such as certain financial institutions, tax-exempt organizations,
dealers in securities, persons who hold convertible notes or common stock as
part of a hedge, conversion or constructive sale transaction, straddle or other
risk reduction transaction or persons who have ceased to be U.S. citizens or
taxed as resident aliens. Finally, this summary does not describe any tax
considerations arising under the laws of any applicable foreign, state or local
jurisdiction.
Investors considering the purchase of convertible notes should consult
their own tax advisors regarding the application of the U.S. federal income tax
laws to their particular situations and the consequences of federal estate or
gift tax laws, foreign, state or local laws and tax treaties.
U.S. Holders
Interest on Convertible Notes
U.S. Holders will be required to recognize as ordinary income any interest
paid or accrued on the convertible notes, in accordance with their regular
method of accounting for federal income tax purposes.
Sale, Exchange or Redemption of Convertible Notes
A U.S. Holder will generally recognize capital gain or loss if the holder
disposes of a convertible note in a sale, redemption or exchange other than a
conversion of the convertible note into common stock. The holder's gain or loss
will equal the difference between the proceeds received by the holder,
excluding any proceeds that are attributable to accrued interest which will be
recognized as ordinary interest income to the extent that the holder has not
previously included the accrued interest in income, and the holder's adjusted
tax basis in the convertible note. The proceeds received by the holder will
include the amount of any cash and the fair market value of any other property
received for the convertible note. The holder's tax basis in the convertible
note will generally equal the amount
54
the holder paid for the convertible note. The gain or loss will be long-term
capital gain or loss if the holder held the convertible note for more than one
year. Long-term capital gains of individuals, estates and trusts are generally
taxed at a maximum rate of 20%. The deductibility of capital losses may be
subject to limitation.
Adjustment of Conversion Rate
The terms of the convertible notes allow for changes in the conversion rate
of the convertible notes in certain circumstances. A change in conversion rate
that allows holders to receive more shares of common stock on conversion may
result in a taxable dividend to holders, although they would not actually
receive any cash or other property. A taxable dividend would result, for
example, if the conversion rate is adjusted to compensate holders for
distributions of cash or other property to our stockholders. However, not all
changes in the conversion rate that allow holders to receive more stock on
conversion will result in a taxable dividend to holders. For instance, a change
in the conversion rate may occur in order to prevent the dilution of the
holders' interests upon a stock split or other change in capital structure.
Changes of this type, if made by a bona fide, reasonable adjustment formula,
are not treated as taxable dividends.
Conversion of Convertible Notes
A U.S. Holder generally will not recognize any income, gain or loss on
converting a convertible note into common stock. If a holder receives cash in
lieu of a fractional share of stock, however, the holder will be treated as if
the holder received the fractional share and then had the fractional share
redeemed for the cash. The holder would recognize gain or loss equal to the
difference between the cash received and that portion of the holder's basis in
the stock attributable to the fractional share. The holder's aggregate basis in
the common stock will equal the holder's adjusted basis in the corresponding
convertible note, less any portion allocable to any fractional share. The
holder's holding period for the stock will include the holding period for the
corresponding convertible note.
Repurchase of Convertible Notes Upon a Change in Control Using Common Stock
If a holder exercises its right to require us to repurchase a convertible
note upon a change in control, we may, in lieu of paying the repurchase price
in cash, use our common stock to repurchase the convertible note if certain
conditions are met. In this event, the exchange of a convertible note for
common stock should constitute a tax-free recapitalization to holders because
the convertible notes should constitute "securities" within the meaning of the
Code provisions regarding tax-free reorganizations. However, no assurances can
be provided in this regard because the test as to whether a debt instrument is
a "security" is based on a number of facts and circumstances that involves an
overall evaluation of the nature of the debt instrument, with the term of the
debt instrument usually regarded as one of the most significant factors. Debt
instruments with a term of five years or less generally have not qualified as
"securities," whereas debt instruments with a term of ten years or more
generally have qualified as "securities."
If the exchange of convertible notes for common stock constitutes a tax-
free recapitalization, exchanging holders will not recognize any gain or loss,
except to the extent the common stock is attributable to accrued interest on
the convertible notes which will be recognized as ordinary interest income to
the extent the holder has not previously included the accrued interest in
income. A holder's tax basis in shares of common stock attributable to accrued
interest generally will equal the amount of such accrued interest included in
income and the holding period of such common stock will begin on the day
following the exchange date. For a discussion of the rules relating to the tax
treatment of fractional common shares, and the determination of the basis and
the holding period of the common stock received in exchange for the convertible
notes, see "--Conversion of Convertible Notes" above.
If the convertible notes were determined not to constitute "securities" for
federal income tax purposes, then an exchanging holder would recognize gain or
loss in accordance with the rules
55
described above under "--Sale, Exchange or Redemption of Convertible Notes." In
this event, a holder's initial tax basis in the common stock received would be
equal to its fair market value on the exchange date, and the holding period for
the common stock would begin on the day immediately after the exchange date.
Dividends on Common Stock
If, after a U.S. Holder converts a convertible note into common stock, we
make a distribution of cash or other property in respect of that stock, the
distribution will be treated as a dividend, taxable to the U.S. Holder as
ordinary income, to the extent it is paid from our current or accumulated
earnings and profits. If the distribution exceeds our current and accumulated
profits, the excess will be treated first as a tax-free return of the holder's
investment, up to the holder's basis in its common stock. Any remaining excess
will be treated as capital gain. If the U.S. Holder is a corporation, it may be
able to claim a deduction for a portion of any distribution received that is
considered a dividend.
Sale or Exchange of Common Stock
A U.S. Holder will generally recognize capital gain or loss on a sale or
exchange of common stock. The holder's gain or loss will equal the difference
between the proceeds received by the holder and the holder's adjusted tax basis
in the stock. The proceeds received by the holder will include the amount of
any cash and the fair market value of any other property received for the
stock. The gain or loss will be long-term capital gain or loss if the holder's
holding period for the stock is more than one year. Long-term capital gains of
individuals, estates and trusts are generally taxed at a maximum rate of 20%.
The deductibility of capital losses may be subject to limitation.
Information Reporting and Backup Withholding
Information reporting and backup withholding at a rate of 31% may apply to
payments of principal and interest on a convertible note, dividends on common
stock or the proceeds from the sale or other disposition of a convertible note
or common stock with respect to certain noncorporate
U.S. Holders. Such U.S. Holders generally will be subject to backup withholding
unless the U.S. Holder provides to the payor a correct taxpayer identification
number and certain other information, certified under penalties of perjury, or
otherwise establishes an exemption. Any amount withheld under the backup
withholding rules may be credited against the U.S. Holder's federal income tax
liability and any excess may be refundable provided the proper information is
provided to the IRS.
Non-U.S. Holders
Interest on Convertible Notes
Payments of interest on the convertible notes to Non-U.S. Holders will
generally qualify as "portfolio interest" and thus will be exempt from the
withholding of U.S. federal tax if the Non-U.S. Holder properly certifies as to
its foreign status as described below. The portfolio interest exception will
not apply to payments of interest to a Non-U.S. Holder that
. owns, directly or indirectly, at least 10% of our voting stock; or
. is a "controlled foreign corporation" that is related to us.
If the portfolio interest exception does not apply, then payments of interest
to a Non-U.S. Holder will generally be subject to U.S. federal income tax
withholding at a rate of 30%, unless reduced by an applicable tax treaty.
The portfolio interest exception and several of the special rules for Non-
U.S. Holders described below generally apply only if the Non-U.S. Holder
appropriately certifies as to its foreign status. A Non-U.S. Holder can
generally meet this certification requirement by providing a properly executed
Form W-8BEN or appropriate substitute form to us, or our paying agent. If the
holder holds the
56
convertible note through a financial institution or other agent acting on the
holder's behalf, the holder may be required to provide appropriate
documentation to the agent. The holder's agent will then generally be required
to provide appropriate certifications to us or our paying agent, either
directly or through other intermediaries. Special rules apply to foreign
partnerships, estates and trusts, and in certain circumstances certifications
as to foreign status of partners, trust owners or beneficiaries may have to be
provided to us or our paying agent.
Sale, Exchange or Redemption of Convertible Notes
Non-U.S. Holders generally will not be subject to U.S. federal income tax
on any gain realized on the sale, exchange or redemption of the convertible
notes. This general rule, however, is subject to several exceptions. For
example, the gain will be subject to U.S. federal income tax if:
. the gain is effectively connected with the conduct by the Non-U.S. Holder
of a U.S. trade or business;
. the Non-U.S. Holder is an individual that has been present in the United
States for 183 days or more in the taxable year of disposition and
certain other requirements are met;
. the Non-U.S. Holder was a citizen or resident of the United States and is
subject to special rules that apply to certain expatriates; or
. we are, or have been, a "United States real property holding corporation"
for federal income tax purposes at any time within the shorter of the
five-year period before the sale, exchange or redemption of the
convertible notes or such holder's holding period, and during such period
the holder actually or constructively owned more than five percent of our
common stock.
For these purposes, a Non-U.S. holder will be treated as owning the stock that
the holder could acquire on conversion of its convertible notes. We do not
believe that we currently are a "United States real property holding
corporation," and we do not intend to become a "United States real property
holding corporation."
Conversion of Convertible Notes
A Non-U.S. Holder generally will not recognize any income, gain or loss on
converting a convertible note into common stock. Any gain recognized as a
result of the holder's receipt of cash in lieu of a fractional share of stock
will generally not be subject to U.S. federal income tax. See "--Sale or
Exchange of Common Stock" below.
Dividends on Common Stock
Dividends paid to a Non-U.S. Holder will generally be subject to U.S.
federal income tax withholding at a 30% rate. The withholding tax might not
apply, however, or might apply at a reduced rate, under the terms of a tax
treaty between the United States and the Non-U.S. Holder's country of
residence. A Non-U.S. Holder must demonstrate its entitlement to treaty
benefits by satisfying applicable certification and other requirements.
Sale or Exchange of Common Stock
Non-U.S. Holders will generally not be subject to U.S. federal income tax
on any gain realized on the sale, exchange or other disposition of common
stock. This general rule, however, is subject to exceptions, as described under
"--Sale, Exchange or Redemption of Convertible Notes."
Income or Gain Effectively Connected With a U.S. Trade or Business
The preceding discussion of the tax consequences of the purchase, ownership
and disposition of convertible notes or common stock by a Non-U.S. Holder
assumes that the holder is not engaged in a U.S. trade or business. If any
interest on the convertible notes, dividends on common stock or gain from the
sale, exchange or other disposition of the convertible notes or common stock
57
is effectively connected with a U.S. trade or business conducted by the Non-
U.S. Holder, then the income or gain will be subject to U.S. federal income tax
at regular graduated income tax rates, but will not be subject to withholding
tax if certain certification requirements are satisfied. If the Non-U.S. Holder
is eligible for the benefits of a tax treaty between the United States and the
holder's country of residence, any "effectively connected" income or gain will
generally be subject to U.S. federal income tax only if it is also attributable
to a permanent establishment maintained by the holder in the United States. If
the Non-U.S. Holder is a corporation, that portion of its earnings and profits
that is effectively connected with its U.S. trade or business will generally be
subject to a "branch profits tax" at a 30% rate, although an applicable tax
treaty might provide for a lower rate.
U.S. Federal Estate Tax
The estates of nonresident alien individuals are subject to U.S. federal
estate tax on property with a U.S. situs. The convertible notes will not be
U.S. situs property as long as interest on the convertible notes paid
immediately before the death of the Non-U.S. Holder will have qualified as
portfolio interest under the rules described above. Because we are a U.S.
corporation, our common stock will be U.S. situs property, and therefore will
be included in the taxable estate of a nonresident alien individual, unless an
applicable estate tax or other treaty provides otherwise.
Information Reporting and Backup Withholding
In general, information reporting will apply to payments of interest and
principal on the convertible notes or dividends on the common stock, and backup
withholding at a rate of 31% will apply with respect to such payments unless
the Non-U.S. Holder appropriately certifies as to its foreign status or
otherwise establishes an exemption.
Information reporting requirements and backup withholding tax will not
apply to any payment of the proceeds of the sale of a convertible note or
common stock effected outside the United States by a foreign office of a
foreign "broker" (as defined in applicable Treasury regulations), provided that
such broker:
. derives less than 50% of its gross income for certain periods from the
conduct of a trade or business in the United States;
. is not a controlled foreign corporation for U.S. federal income tax
purposes; and
. is not a foreign partnership that, at any time during its taxable year,
has 50% or more of its income or capital interests owned by U.S. persons
or is engaged in the conduct of a U.S. trade or business.
Payment of the proceeds of a sale of a convertible note or common stock
effected outside the United States by a foreign office of any other broker will
not be subject to backup withholding tax or information reporting if such
broker has documentary evidence in its records that the beneficial owner is a
Non-U.S. Holder and certain other conditions are met, or the beneficial owner
otherwise establishes an exemption. Payment of the proceeds of a sale of a
convertible note or common stock effected by the U.S. office of a broker will
be subject to information reporting requirements and backup withholding tax
unless the Non-U.S. Holder properly certifies under penalties of perjury as to
its foreign status and certain other conditions are met or it otherwise
establishes an exemption.
Any amount withheld under the backup withholding rules may be credited
against the Non-U.S. Holder's U.S. federal income tax liability and any excess
may be refundable if the proper information is provided to the IRS.
The preceding discussion of certain U.S. federal income tax considerations
is for general information only and is not tax advice. Each prospective
investor should consult its own tax advisor regarding the particular U.S.
federal, state, local and foreign tax consequences of purchasing, holding and
disposing of our convertible notes or common stock, including the consequences
of any proposed change in applicable laws.
58
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 stockholders. The holders of common stock
are entitled to one vote for each share held of record on all matters submitted
to a vote of the stockholders. Subject to preferential rights with respect to
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, 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.
59
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.
60
UNDERWRITING
Hanover Compressor Company and the underwriters for the offering named
below have entered into an underwriting agreement with respect to the
convertible notes being offered. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of convertible notes
indicated in the following table.
Principal
Amount
Underwriters of Notes
------------ ------------
Goldman, Sachs & Co............................................ $
Salomon Smith Barney Inc.......................................
Credit Suisse First Boston Corporation.........................
J.P. Morgan Securities Inc.....................................
------------
Total........................................................ $150,000,000
============
If the underwriters sell more than $150,000,000 principal amount of
convertible notes, the underwriters have an option to buy up to an additional
$22,500,000 principal amount of convertible notes from us to cover such sales.
They may exercise that option for 30 days. If any convertible notes are
purchased pursuant to this option, the underwriters will severally purchase
convertible notes in approximately the same proportion as set forth in the
table above.
The following table shows the per convertible note and total underwriting
discounts and commissions to be paid to the underwriters by us. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional convertible notes.
Paid by Hanover
Compressor
Company
-----------------
No Full
Exercise Exercise
-------- --------
Per Note...................................................... % %
Total......................................................... $ $
Convertible notes sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the cover of this
prospectus. Any convertible notes sold by the underwriters to securities
dealers may be sold at a discount from the initial public offering price of up
to % of the principal amount of the convertible notes. Any such securities
dealers may resell any convertible notes purchased from the underwriters to
certain other brokers or dealers at a discount from the initial public offering
price of up to % of the principal amount of the convertible notes. If all the
convertible notes are not sold at the initial public offering price, the
underwriters 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 underwriters. The underwriters may agree to
allocate a number of convertible notes for sale to their online brokerage
account holders.
We have agreed with the underwriters not to dispose of or hedge any
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 underwriters. This agreement does not apply to any
issuances by us under
61
our existing employee benefit plans, upon conversion of outstanding convertible
securities or exercise of outstanding warrants, or in connection with certain
acquisitions.
The convertible notes are a new issue of securities with no established
trading market. We have been advised by the underwriters that the underwriters
intend to make a market in the convertible notes but are not obligated to do so
and may discontinue market making at any time without notice. No assurance can
be given as to the liquidity of the trading market for the convertible notes.
In connection with the offering, the underwriters may purchase and sell
convertible notes 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 convertible notes 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 convertible notes
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 other underwriters have
repurchased convertible notes 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 convertible notes. As a result, the price of the
convertible notes 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 in the over-
the-counter market or otherwise.
We are paying all expenses of the offering. We estimate that the total
expenses of the offering, excluding underwriting discounts and commissions,
will be approximately $580,000.
We 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 common stock 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 an affiliate of J.P. Morgan
Securities Inc, one of the underwriters, and us and the contemplated use of
proceeds to repay indebtedness, this offering is being conducted in accordance
with Rule 2720 of the National Association of Securities Dealers, Inc.
("NASD"). That rule requires that the yield at which the convertible notes are
to be distributed to the public can be no lower than that recommended by a
"qualified independent underwriter", as defined by the NASD. Goldman, Sachs &
Co. has served in that capacity and performed due diligence investigations and
reviewed and participated in the preparation of the registration statement of
which this prospectus forms a part. Goldman, Sachs & Co. has received $10,000
from us as compensation for such role.
62
LEGAL MATTERS
The validity of the convertible notes will be passed upon by Latham &
Watkins, Chicago, Illinois. Richard S. Meller, a partner at 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.
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
63
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.
64
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.
F-9
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Intangible and Other Assets
Investments in affiliated corporations in which the Company does not have a
controlling interest are accounted for using the equity method. The excess of
cost over net assets of acquired businesses is recorded as goodwill and
amortized on a straight-line basis over 15 years commencing on the dates of the
respective acquisitions. Accumulated amortization was $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 to cash management activities and
F-20
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
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 to 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 $ .78
Diluted............................. $ 0.66 $ .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 compressor services division of
Dresser-Rand Company ("DR" or "CSR-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
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
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 notes 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.
--------------
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 3
Risk Factors............................................................. 14
Special Note Regarding Forward-Looking Statements........................ 20
Use of Proceeds.......................................................... 21
Ratio of Earnings to Fixed Changes....................................... 21
Common Stock Offering.................................................... 21
Price Range of Common Stock.............................................. 22
Capitalization........................................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 32
Management............................................................... 40
Description of Convertible Notes......................................... 41
Certain U.S. Federal Income Tax Consequences............................. 54
Description of Capital Stock............................................. 59
Underwriting............................................................. 61
Legal Matters............................................................ 63
Where You Can Find More Information...................................... 63
Experts.................................................................. 64
Index to Financial Statements............................................ F-1
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
$150,000,000
Hanover Compressor Company
% Convertible Senior Notes
due March , 2008
--------------
[LOGO]
HANOVER COMPRESSOR COMPANY
--------------
Goldman, Sachs & Co.
Salomon Smith Barney
Credit Suisse First Boston
JP Morgan
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
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............................................ $ 43,125
National Association of Securities Dealers, Inc. filing fees.... 17,750
Trustee fees and expenses....................................... 13,000
Printing and engraving expenses ................................ 150,000
Legal fees and expenses......................................... 250,000
Accounting fees and expenses.................................... 100,000
Blue Sky and miscellaneous...................................... 6,125
--------
Total......................................................... $580,000
========
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).
4.4 Form of Indenture, including form of convertible note.
5.1 Opinion of Latham & Watkins as to the validity of the convertible
notes.
12.1 Statement regarding computation of earnings to fixed charges.*
12.2 Statement regarding computation of earnings to fixed changes and
preferred dividends.*
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).*
25.1 Form T-1.*
--------
* 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
II-2
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.
(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
------- ---------------------------------------------------------------------
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).
4.4 Form of Indenture, including form of convertible note.
5.1 Opinion of Latham & Watkins as to the validity of the convertible
notes.
12.1 Statement regarding computation of earnings to fixed charges.*
12.2 Statement regarding computation of earnings to fixed charges and
preferred dividends.*
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).*
25.1 Form T-1.*
--------
*Previously filed.