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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

Filed by the Registrant þ
Filed by a Party other than the Registrant o

Check the appropriate box:

o Preliminary Proxy Statement

o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ Definitive Proxy Statement

o Definitive Additional Materials

o Soliciting Material Pursuant to §240.14a-12

(Name of Registrant as Specified In Its Charter)

HANOVER COMPRESSOR COMPANY

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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SEC 1913 (04-05)		Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

 

 

HANOVER COMPRESSOR COMPANY

 

Dear Fellow Stockholder:

 

You are invited to attend the 2006 Annual Meeting of Stockholders of Hanover Compressor Company on May 11, 2006, in Houston, Texas. Your attendance at the meeting will give you the opportunity to meet members of your Board of Directors as well as the senior management team.

 

The formal notice of the Annual Meeting and Proxy Statement and form of proxy that follows provides information regarding the matters to be voted on at the meeting as well as information on other items of interest to our stockholders.

 

Your vote is important. Regardless of the size of your stockholdings, we want to see your shares represented at the Annual Meeting. Please vote your shares by one of the methods offered and explained in the Proxy Statement and on the enclosed proxy card. If you have access to the internet, we urge you to vote your shares electronically.

 

Thank you for your continued support, and we hope to see you at the 2006 Annual Meeting.

 

Sincerely,

 

 

Gordon T. Hall

Chairman of the Board

 

March 24, 2006

 

To the Stockholders of Hanover Compressor Company:

 

The 2006 Annual Meeting of Stockholders of Hanover Compressor Company, a Delaware corporation, will be held at 9:00 a.m. local time on Thursday, May 11, 2006, at the Omni Hotel, Four Riverway, Houston, Texas 77056, for the following purposes:

 

 

The Board of Directors has set the close of business on March 20, 2006, as the record date for determining the stockholders that are entitled to notice of and to vote at the meeting and at any postponement or adjournment of the meeting.

 

We encourage you to sign and return your proxy card, use the telephone or internet voting procedures, or attend the meeting in person so that your shares are represented.

 

By Order of the Board of Directors,

 

Gary M. Wilson

Corporate Secretary

 

Houston, Texas

March 24, 2006

 

2006 PROXY STATEMENT

 

TABLE OF CONTENTS

 

PROXY STATEMENT
FOR
2006 ANNUAL MEETING OF STOCKHOLDERS
MAY 11, 2006

 

HANOVER COMPRESSOR COMPANY

12001 North Houston Rosslyn

Houston, Texas 77086

 

The Board of Directors has sent these proxy materials to you to solicit your vote at the 2006 Annual Meeting of Stockholders (the “2006 Stockholders’ Meeting”). The meeting will begin promptly at 9:00 a.m. local time on Thursday, May 11, 2006, at the Omni Hotel, Four Riverway, Houston, Texas 77056. This Proxy Statement and form of proxy is first being mailed to stockholders on or about March 28, 2006, and is accompanied by our 2005 Annual Report. Hanover Compressor Company, a Delaware corporation, is also referred to in this Proxy Statement as “we,” “us,” “our,” “Hanover” or the “Company.”

 

The 2006 Stockholders’ Meeting will be held for the following purposes:

 

1. to elect nine directors to serve until the next Annual Meeting of Stockholders or until their successors are duly elected and qualified;

 

2. to ratify the reappointment of PricewaterhouseCoopers LLP as Hanover Compressor Company’s independent registered public accounting firm for fiscal year 2006;

 

3. to approve the Hanover Compressor Company 2006 Stock Incentive Plan; and

 

4. to transact such other business as may properly come before the meeting.

 

All of these items are discussed in more detail in this Proxy Statement.

 

Owners of the Company’s common stock, $.001 par value per share (the “Common Stock”), at the close of business on March 20, 2006, are entitled to notice of and to vote at the 2006 Stockholders’ Meeting. At the close of business on March 20, 2006, there were 102,104,223 shares of Common Stock of the Company issued and outstanding. Each share of Common Stock entitles the holder to one vote on all matters submitted to a vote at the 2006 Stockholders’ Meeting and any adjournment or postponement of the meeting. A complete list of the stockholders entitled to vote will be available for examination at the meeting and for at least 10 days prior to the meeting at the principal executive offices of Hanover Compressor Company, 12001 North Houston Rosslyn, Houston, Texas 77086.

 

A quorum of stockholders is necessary for a valid meeting. The presence in person or by proxy of the holders of a majority of the outstanding shares of our Common Stock will constitute a quorum for the 2006 Stockholders’ Meeting. Under the Company’s Amended and Restated Bylaws and under Delaware law, abstentions and “broker non-votes” are counted as present in determining whether the quorum requirement is satisfied. A “broker non-vote” occurs when a broker holding shares for a beneficial owner does not vote on a particular proposal because the broker does not have discretionary voting power for that proposal and has not received instructions from the beneficial owner. Under the current rules of the New York Stock Exchange (“NYSE”), if you hold your shares through a bank or broker, your broker is permitted to vote your shares on the election of directors and ratification of the Company’s independent registered public accounting firm even if the broker has not received instructions from you; however, your broker cannot vote your shares with respect to the Hanover Compressor Company 2006 Stock Incentive Plan if the broker has not received instructions from you.

The table below shows the vote required to approve each of the proposals described in this Proxy Statement.

 

 

For any other matters that may be properly presented for consideration at the 2006 Stockholders’ Meeting, the persons named as proxies will have discretion to vote on those matters according to their best judgment to the same extent as the person delivering the proxy would be entitled to vote. As of the date of this Proxy Statement, we do not anticipate that any other matters will be properly presented for consideration at the 2006 Stockholders’ Meeting.

 

Shares of our Common Stock held through The Hanover Companies Retirement and Savings Plan (the “Hanover 401(k) Plan”) will be voted by the Trustee, AMVESCAP Retirement, Inc., as directed by the participants in the Hanover 401(k) Plan. If a participant does not provide specific voting instructions, the shares held by the participant will not be voted by the Trustee of the Hanover 401(k) Plan and will not be considered present for purposes of establishing a quorum.

 

Because many stockholders cannot attend the 2006 Stockholders’ Meeting in person, it is necessary that a large number of stockholders be represented by proxy. You can vote your proxy by the following three methods:

 

 

You may receive more than one proxy card depending on how you hold your shares. You should complete and return each proxy provided to you. Please refer to your proxy card or the information forwarded by your bank, broker or other nominee to determine which options are available for voting the proxy. The internet and telephone

voting procedures are designed to authenticate stockholders by use of a control number and to allow you to confirm that your instructions have been properly recorded.

 

A proxy may be revoked at any time before it is voted by sending written notice of revocation to the Company’s Corporate Secretary, by delivering a later dated proxy (by one of the methods described above) or by voting in person at the meeting.

 

The Corporate Secretary may be contacted at the following address: Hanover Compressor Company, 12001 North Houston Rosslyn, Houston, Texas 77086, Attention: Corporate Secretary.

 

We will pay the cost of soliciting proxies. Proxies are being solicited by mail and may be solicited by telephone, telegram, facsimile, or in person by our employees, who will not receive additional compensation for any such solicitation. D.F. King & Co., Inc. has been retained to assist in the solicitation of proxies at a fee of approximately $7,500, plus reimbursement for out-of-pocket expenses. We will also request brokers and other fiduciaries to forward proxy soliciting material to the beneficial owners of shares of our Common Stock that are held of record by such brokers and fiduciaries and we will reimburse their reasonable out-of-pocket expenses.

 

At the 2006 Stockholders’ Meeting, nine directors are nominated to be elected to the Board of Directors, to hold office until our next Annual Meeting of Stockholders or until their respective successors are duly elected and qualified. Each nominee has consented to serve as a director if elected.

 

Nominees for Director

 

Information concerning the name, age, and background of the nominees for election to the Board of Directors is set forth below. Ages are stated as of March 20, 2006. With the exception of Mr. Sheikh, each of the nominees named below was elected a director at the 2005 Annual Stockholders’ Meeting.

 

I. Jon Brumley, 67, has served as a director of the Company since February 2002. Mr. Brumley is Chairman and director of Encore Acquisition Company, an independent energy company located in Fort Worth, Texas. Prior to founding Encore Acquisition Company in 1998, Mr. Brumley served as Chairman and Chief Executive Officer of MESA, Inc., which merged with Parker & Parsley in 1997 to become Pioneer Natural Resources Company. Mr. Brumley has spent over thirty years in the oil and gas industry, including having previously served as Chairman of XTO Energy Inc. (formerly Cross Timbers Oil Company) and President and Chief Executive Officer of Southland Royalty Company.

 

Ted Collins, Jr., 67, has served as a director of the Company since April 1992. Mr. Collins has been a private investor, primarily energy related, since June 2000. From January 1988 to July 2000, he was President of Collins & Ware, Inc., an independent oil and gas company. From July 1982 through December 1987, Mr. Collins served as President of Enron Oil & Gas Co. Mr. Collins also serves on the Board of Directors of Encore Acquisition Company and Energy Transfer Partners, LLC.

 

Margaret K. Dorman, 42, has served as a director of the Company since February 2004. Ms. Dorman is Senior Vice President, Chief Financial Officer and Treasurer of Smith International, Inc., a position she has held since 1999. While at Smith International, Ms. Dorman also served as Vice President, Controller and Assistant Treasurer from 1998 to 1999 and as Director of Financial Planning and Reporting from 1995 to 1998. Prior to joining Smith International, Ms. Dorman was Corporate Controller at Landmark Graphics Corporation from 1992 to 1995. Ms. Dorman began her career in 1985 as an auditor with Ernst & Young LLP.

 

Robert R. Furgason, 70, has served as a director of the Company since May 1995. In January 2005, Dr. Furgason assumed the role of Director of the Harte Research Institute for Gulf of Mexico Studies at Texas

A&M University — Corpus Christi after having served as the President of Texas A&M University — Corpus Christi since 1990. He was Vice Chancellor of Academic Affairs and Professor of Chemical Engineering at the University of Nebraska from 1984 to 1990 and previously held a series of faculty and administrative positions at various universities and has held positions with B.F. Goodrich Chemical Co., Escuela Politecnica Nacional Universidad, Quito, Ecuador, Martin-Marietta (Lockhead-Martin) and Phillips Petroleum. Dr. Furgason is the former President of the Accreditation Board for Engineering and Technology Board of Directors, serves on a number of other accreditation, policy and civic boards, and is a director of American Bank in Corpus Christi.

 

Victor E. Grijalva, 67, has served as a director of the Company since February 2002 and served as Chairman of the Board from 2002 to May 2005. From August 2 to August 19, 2002, Mr. Grijalva also served as interim President and Chief Executive Officer of the Company. Mr. Grijalva began his career with Schlumberger in 1964 as a senior development engineer and, after a number of overseas assignments, served as President of Wireline and Testing in North America and Executive Vice President of Oilfield Services Worldwide before being appointed Vice Chairman of Schlumberger in 1998. Mr. Grijalva retired from Schlumberger on December 31, 2001. Mr. Grijalva is also a director of Transocean, Inc.

 

Gordon T. Hall, 46, has served as a director of the Company since March 2002 and Chairman of the Board since May 19, 2005. Prior to his election as a director, Mr. Hall was a Managing Director at Credit Suisse First Boston. While at Credit Suisse First Boston, Mr. Hall served as Senior Oil Field Services Analyst and Co-Head of the Global Energy Group. Mr. Hall joined the First Boston Corporation in 1987 as a technology analyst. Prior to joining First Boston Corporation, Mr. Hall was an engineer with Raytheon Corporation. Mr. Hall is also a director of Hydril Company, is a member of the Advisory Board for Legacy Partners Group LLC, and serves as a director of a privately held company and several non-profit organizations.

 

John E. Jackson, 47, has been a director since July 2004 and has served as President and Chief Executive Officer of the Company since October 2004. Mr. Jackson joined the Company in January 2002 as Senior Vice President and Chief Financial Officer. Previously, Mr. Jackson was Vice President and Chief Financial Officer of Duke Energy Field Services, a joint venture of Duke Energy and ConocoPhillips (formerly Phillips Petroleum). Mr. Jackson joined Duke Energy Field Services as Vice President and Controller in April 1999 and was named Chief Financial Officer in February 2001. Prior to joining Duke Energy Field Services, Mr. Jackson served in a variety of treasury, controller and accounting positions at Union Pacific Resources between June 1981 and April 1999.

 

Stephen M. Pazuk, 62, has served as a director of the Company since February 2004. Mr. Pazuk is the Chief Financial Officer and Treasurer of Drive Thru Technology, a position he has held since 2000. He has also been involved in venture capital investments and real estate development in Boston, Massachusetts, and Fresno and Clovis, California, since his retirement as Senior Vice President, Treasurer and Partner of Wellington Management Company, LLP in June 2000. Mr. Pazuk started his career with Wellington in 1968 and held various positions during his tenure, including Treasurer of Wellington Trust Company NA and President of Wellington Sales Company. He worked as a senior tax professional with Price Waterhouse & Co. from 1965 to 1968. Mr. Pazuk currently serves on the board of several privately-held companies.

 

L. Ali Sheikh, 57, was elected a director of the Company effective March 20, 2006. Mr. Sheikh is President, Chief Operating Officer, and co-founder of SND Energy Company, Inc. (since 1989) and SND Energy Acquisition, L.P. (since 1996) and also serves as director and limited partner, respectively. In addition, Mr. Sheikh has served since 2000 as President, Chief Operating Officer, co-founder and member of Topcat Oilfield Services, LLC and Topcat Wells Services, LLC. Mr. Sheikh began his career as a geologist and from 1991 to 1993, was Vice President and Manager of Golden Spike Indonesia, a subsidiary of Union Pacific Resources, and from 1979 to 1989, was a Vice President of Sun Exploration and Production Company, managing various aspects of operations in the Far East, Africa, and South America.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR
ELECTION OF THE NOMINEES TO THE BOARD OF DIRECTORS.

 

The Board of Directors has designated an Audit Committee, a Finance Committee, a Nominating and Corporate Governance Committee, and a Management Development and Compensation Committee to assist in the discharge of the Board’s responsibilities. Members of each committee are elected by the Board at its first meeting following the annual meeting of stockholders and serve for one-year terms. The Board and the committees of the Board are governed by the Company’s Code of Ethics, Governance Principles and Committee Charters, which are reviewed by the Board annually and are available to the public on our web site at www.hanover-co.com or in print by submitting a written request to Hanover Compressor Company, 12001 North Houston Rosslyn, Houston, Texas 77086, Attention: Corporate Secretary.

 

The Board annually evaluates the independence and financial expertise of the members of the Board and has determined that all directors are independent with the exception of Ted Collins, Jr. and John E. Jackson. Although Mr. Collins meets the New York Stock Exchange’s guidelines for independence, the Board, in its discretion, determined in July 2005 that the level of commercial transactions between Hanover and Energy Transfer Group, LLC (“ETG”), which is approximately 15% owned by Mr. Collins, had increased during 2005 to a level that warranted such determination. Mr. Collins’ interest in ETG is more fully described in this Proxy Statement in “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” on page 24. Mr. Jackson is not independent by virtue of his role as President and Chief Executive Officer of the Company. The Board’s determination relating to the independence and financial expertise of its members is based on applicable laws, regulations, the Company’s Governance Principles, the rules of the New York Stock Exchange and a review of any direct or indirect relationships between each director or his or her immediate family and the Company. The Board’s standards for independence are included in the Governance Principles and are attached to this Proxy Statement as Appendix B.

 

Victor Grijalva served as Chairman of the Board and lead independent director through May 19, 2005. Upon Mr. Grijalva’s retirement from these positions, he was succeeded by Gordon Hall. As Chairman and lead independent director, Mr. Hall presides over the executive sessions of the Board, which are attended by non-management directors only and are held at every regularly scheduled Board meeting.

 

Stockholders may communicate with the entire Board or any individual member of the Board by writing to us at the following address: Hanover Compressor Company, 12001 North Houston Rosslyn, Houston, Texas 77086, Attention: Corporate Secretary. All written inquiries will be immediately forwarded to the Chairman of the Board.

 

Audit Committee

 

Purpose.  The Audit Committee has been appointed by the Board to help ensure the accuracy and completeness of our financial statements; to evaluate the independence, qualifications and performance of our independent registered public accounting firm, including the approval of audit and permitted non-audit services (including fees) performed by the independent auditors; and to review with management Hanover’s plan to evaluate the effectiveness of our internal control over financial reporting, our internal audit function and our disclosure

controls and procedures. The Audit Committee operates under a Board-approved written charter, a copy of which is available as indicated in the section titled “Governance” above.

 

 

The Board has determined that each member of the Audit Committee is independent, possesses the requisite financial literacy to serve on the committee, and does not serve on the audit committee of more than two public companies. Based on Ms. Dorman’s position as Chief Financial Officer of Smith International and Mr. Hall’s prior experience as an analyst with Credit Suisse First Boston, the Board determined that Ms. Dorman and Mr. Hall both qualify as an “audit committee financial expert” as that term is defined by the Securities and Exchange Commission. A Report of the Audit Committee is included in this Proxy Statement at page 25.

 

Finance Committee

 

Purpose.  The Finance Committee has been charged with the responsibility to assist the Board in its oversight of debt and equity offerings, capital management, foreign currency management and other financial matters.

 

 

Management Development and Compensation Committee

 

Purpose.  The Management Development and Compensation Committee (the “Compensation Committee”) has been appointed by the Board to oversee the development and implementation of the Company’s compensation philosophy and strategy with the goals of attracting the executive talent required to achieve corporate objectives and linking pay and performance. A Report of the Compensation Committee is included in this Proxy Statement at page 26.

 

 

The Board has determined each member of the Compensation Committee to be independent.

 

Nominating and Corporate Governance Committee

 

Purpose.  The Nominating and Corporate Governance Committee (“Governance Committee”) has been appointed by the Board to identify qualified individuals to become Board members, determine whether existing Board members should be nominated for re-election, review the composition and compensation of the Board and its committees, and review and implement the Company’s Governance Principles.

 

 

The Board has determined each member of the Governance Committee to be independent. Ted Collins served on the Governance Committee until July 2005, at which time the Board determined he was no longer independent.

 

The Board and its committees held the following number of meetings during 2005:

 

 

 

 

We expect members of the Board to attend all meetings. The directors (as a group) attended 97% of the aggregate number of meetings of the Board and Board committees on which they served during 2005. All directors standing for re-election individually attended at least 93% of the aggregate number of meetings of the Board and Board committees on which they served during 2005. Although attendance is mandatory only for the Chairman of the Board, directors are also encouraged to attend the annual meeting of stockholders, and all directors attended the annual stockholders’ meeting held on May 19, 2005.

 

 

For fiscal year 2005, the Governance Committee recommended and the Board approved remuneration for non-employee members of the Board that was composed of cash, restricted stock and stock options. The directors (other than John Jackson) receive a cash retainer in the annual amount of $30,000 (payable in four equal quarterly installments) plus the reimbursement of expenses incurred for attendance at the meetings of the Board and its committees. The chair of the Audit Committee also receives an annual retainer of $10,000 (payable in four equal quarterly installments) and the chairmen of the Compensation, Finance and Governance Committees each receive an annual retainer of $5,000 (payable in four equal quarterly installments). From January through May 2005, directors (other than the Chairman of the Board and John Jackson) also received $1,000 per in person meeting attended and $1,000 per telephone meeting attended (if such meeting exceeded one hour in duration), with meeting fees subject to a maximum payment of $1,000 per day. In July 2005, the meeting fees were adjusted to $1,000 per meeting attended, whether in person or by telephone, without regard to duration, and with no per diem cap.

 

In addition to the annual $30,000 retainer paid to directors described above, Gordon Hall also receives $120,000 per year (payable in four equal quarterly installments) for his services as Chairman of the Board. The Chairman of the Board is not paid for meeting attendance.

 

On July 8, 2005, each non-employee director was granted 5,000 shares of restricted stock as well as non-qualified options to purchase 6,000 shares of Common Stock at a price of $11.98 per share, the closing market price on the grant date. Such restricted stock and stock options vest at the rate of one-third per year beginning on the first anniversary of the grant date (subject to accelerated vesting upon a change of control of the Company). Directors are required to retain their restricted stock (except for sales to provide for the payment of taxes due upon vesting) until their service as a director concludes.

 

John Jackson receives compensation for his services as an executive officer of the Company and does not receive additional compensation for his services as a director.

 

Set forth below is a summary of the dollar values of the total annual compensation attributable to each non-employee director’s service to Hanover during 2005. Excluding the $120,000 cash retainer fee paid to the Chairman of the Board, the average director’s cash compensation is approximately 32% and long-term incentive compensation is approximately 68% of the average of our directors’ total compensation. By providing a substantial portion of total compensation in the form of equity, director pay is more strongly linked to Company performance. The actual value of stock options and restricted stock ultimately realized by each director will vary based on fluctuations in the market price of our Common Stock.

 

Total Non-Employee Director Compensation — 2005

 

 

 

 

Stockholders may propose director nominees to the Governance Committee (for consideration for election at the 2007 Annual Meeting of Stockholders) by submitting, within the time frame set forth in this Proxy Statement on page 34, the names and supporting information (including confirmation of the nominee’s willingness to serve as a director) to: Hanover Compressor Company, 12001 North Houston Rosslyn, Houston, Texas 77086; Attention: Corporate Secretary.

 

Any stockholder-recommended nominee will be evaluated in the context of our director qualification standards, the existing size and composition of the Board and Board balance interests. The Governance Committee believes that all Board members should, at a minimum, possess the following qualifications: (i) the highest personal and professional ethics and integrity and outstanding judgment, skill and expertise in matters relevant to our business; (ii) competence in areas of particular importance to us such as finance, accounting, international business, and relevant technical expertise; (iii) a commitment to enhancing the long-term interests of our stockholders as a whole and not biased toward the interests of any particular segment of the stockholder or employee population; and (iv) the willingness to devote sufficient time to carrying out their duties and responsibilities effectively. Board members should also be prepared to travel to personally attend meetings of the Board and its committees and should

be ready to dedicate sufficient time to prepare in advance of such meetings to allow them to make an effective contribution to the meeting. Further, Board members should ensure that they are not otherwise committed to other activities which would make a commitment to Hanover’s Board impractical or unadvisable and should satisfy the independence, qualification and composition requirements of the Board and its committees, as required by law or the rules of the NYSE, our certificate of incorporation and bylaws and our Governance Principles.

 

The members of the Compensation Committee of the Board of Directors during the last completed fiscal year were Jon Brumley, Robert Furgason, Victor Grijalva, and Stephen Pazuk. There are no matters relating to interlocks or insider participation that we are required to report.

 

The following table provides information about beneficial owners known to the Company as of March 20, 2006, of more than 5% of the outstanding Common Stock (“5% Stockholders”). Unless otherwise noted in the footnotes to the table, the 5% Stockholders named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them. This information is based upon statements that have been filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(d) or Section 13(g) under the Securities Exchange Act of 1934 or other information provided to the Company.

 

 

 

 

The following table provides information, as of March 20, 2006, regarding the beneficial ownership of our Common Stock by each of our directors, each of our executive officers named in the “Summary Compensation Table” appearing on page 20 of this Proxy Statement, and all of our current directors and executive officers as a group. Unless otherwise noted in the footnotes to the table, the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them.

 

 

 

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and persons who beneficially own more than 10% of our Common Stock to file reports with the SEC and the Company disclosing their initial beneficial ownership of Common Stock and changes in such ownership. Based upon a review of such reports furnished to us and certifications from our directors and executive officers, we believe that during 2005, all of our directors, executive officers and beneficial owners of more than 10% of our Common Stock complied with all Section 16(a) filing requirements applicable to them.

 

We intend to engage PricewaterhouseCoopers LLP to audit our financial statements for fiscal year 2006. PricewaterhouseCoopers LLP audited our financial statements for fiscal year 2005 and the decision to retain PricewaterhouseCoopers LLP has been approved by the Audit Committee and the Board of Directors.

 

Fees Paid to the Independent Registered Public Accounting Firm

 

The following table presents fees for professional services rendered by our independent registered public accounting firm, PricewaterhouseCoopers LLP, and the member firms of PricewaterhouseCoopers and their respective affiliates (collectively, “PwC”) that were charged or allocated to us for 2005 and 2004:

 

 

 

 

To safeguard the continued independence of the independent registered public accounting firm, the Audit Committee has adopted a policy to prevent our independent registered public accounting firm from providing services to us that are prohibited under Section 10A(g) of the Securities Exchange Act of 1934, as amended. This policy provides that independent registered public accounting firms are only permitted to provide services to us that have been pre-approved by the Audit Committee. Under this policy, all audit services require advance approval by the Audit Committee. All other services by the independent registered public accounting firm that fall within certain designated dollar thresholds have been pre-approved under the policy. Different dollar thresholds apply to the four categories of pre-approved services specified in the policy (Audit, Audit-Related, Tax and Other services). All services that exceed the dollar thresholds must be approved in advance by the Audit Committee. All services performed by independent registered public accounting firms under engagements in 2005 were either approved by the Audit Committee or approved pursuant to its pre-approval policy, and none was approved pursuant to the de minimus exception to the rules and regulations of the SEC on pre-approval.

 

Vote Regarding the Ratification of the Reappointment of the
Independent Registered Public Accounting Firm

 

Stockholder approval of the selection of PricewaterhouseCoopers LLP is not required by the Company’s charter or bylaws. Our Board is requesting stockholder ratification as a matter of good corporate practice. If the stockholders do not ratify the selection, the Audit Committee will reconsider whether or not to retain PricewaterhouseCoopers LLP. Even if the selection is ratified, the Audit Committee in its discretion may change the appointment at any time during the year if they determine that such change would be in the best interests of the Company and its stockholders. A representative of PricewaterhouseCoopers LLP is expected to attend the 2006 Stockholders’ Meeting and will have the opportunity to make a statement, if he or she so desires, and will be available to respond to appropriate questions of stockholders.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR
RATIFICATION OF THE REAPPOINTMENT OF PRICEWATERHOUSECOOPERS LLP.

 

At the 2006 Stockholders’ Meeting, the stockholders are asked to approve the adoption of the Hanover Compressor Company 2006 Stock Incentive Plan (the “2006 Plan”), a copy of which is included in this Proxy Statement as Appendix C.

 

The Board of Directors unanimously adopted the 2006 Plan on January 20, 2006, subject to stockholder approval. Upon stockholder approval of the 2006 Plan, the Board has determined to terminate the authority to make future grants under all existing equity plans. If the 2006 Plan is not approved by the stockholders of the Company, awards will continue to be made from the Company’s existing equity plans and no awards will be granted under the 2006 Plan.

 

The 2006 Plan is designed to enable the Company and its affiliates to provide a means to attract and retain highly qualified directors and employees with incentives that provide an opportunity to acquire and maintain stock ownership, thereby encouraging and rewarding individual performance designed to improve operating results and enhance stockholder value. Accordingly, the 2006 Plan provides for discretionary grants of Options, Restricted

Stock, Restricted Stock Units, Stock Appreciation Rights, or Performance Awards, hereinafter referred to as an “Award.”

 

Below is information on the Company’s prior equity plans and a summary of the terms of the 2006 Plan, which is qualified in its entirety by reference to the full text of the 2006 Plan. No benefits or amounts have been granted, awarded or received under the 2006 Plan. Awards under the 2006 Plan are discretionary; therefore, no Awards are determinable at this time. Since the Company’s directors and executive officers are eligible to receive Awards under the 2006 Plan, such directors and executive officers may be considered to have an interest in the approval of the 2006 Plan.

 

Stockholder approval of the 2006 Plan is required for listing of the shares for trading on the NYSE and as a condition to the effectiveness of the 2006 Plan. Stockholder approval is also required so that incentive stock options under the 2006 Plan will qualify under section 422 of the Internal Revenue Code (the “Code”) and so that certain Awards under the 2006 Plan will qualify as performance-based compensation under section 162(m) of the Code. If the stockholders approve the 2006 Plan, the Company intends to register the shares issuable pursuant to the 2006 Plan under the Securities Act of 1933 as soon as practicable.

 

The equity compensation plans and agreements discussed in this section are referred to collectively as the “Equity Compensation Plans.” The table below provides information as of December 31, 2005 with respect to shares of our Common Stock that may be issued under the following Equity Compensation Plans of the Company: the 1997 Stock Option Plan, the 1998 Stock Option Plan, the December 9, 1998 Stock Option Plan, the 1999 Stock Option Plan, the 2001 Equity Incentive Plan and the 2003 Stock Incentive Plan. The table also includes information with respect to shares of our Common Stock subject to outstanding options that were granted prior to our initial public offering in 1997 under the 1996 Employee Stock Option Plan and a Stock Option Agreement entered into by and between Hanover and Glenn Wind (the “Wind Agreement”). The Company terminated authority to make grants under all non-shareholder approved plans in May 2003, and currently the Compensation Committee has authority to make future grants only under the 1997 Stock Option Plan, the 2001 Equity Incentive Plan and the 2003 Stock Incentive Plan.

 

 

 

 

As of March 20, 2006, there was an aggregate of 2,808,171 shares of Common Stock subject to options that were outstanding under the Company’s Equity Compensation Plans, at a weighted average exercise price of $11.94 per share with a weighted average term to expiration of 5.2 years. In addition, 1,308,502 shares of restricted stock have been issued under the Company’s Equity Compensation Plans.

 

As indicated in footnote (3) of the table above, upon approval of the 2006 Plan, the Board of Directors will terminate any existing authority to make future grants under the 1997 Stock Option Plan, the 2001 Equity Incentive Plan and the 2003 Stock Incentive Plan. As of March 20, 2006, there were 1,275,691 shares of Common Stock under these plans available for issuance that were not subject to outstanding awards.

 

The Equity Compensation Plans that have not been approved by security holders are described below. The 1996 Employee Stock Option Plan, the 1998 Stock Option Plan, the December 9, 1998 Stock Option Plan, and the 1999 Stock Option Plan have the following material features: (1) awards under such plans are limited to stock options and were made, depending on the terms of each plan, to the Company’s officers, directors, employees, advisors and consultants; (2) unless otherwise set forth in any applicable stock option agreement and depending on the terms of each plan, the stock options vest over a period of up to five years; (3) the term of the stock options granted under the plans may not exceed 10 years; and (4) no additional grants may be made under these plans. The Wind Agreement has the following material features: (1) awards are limited to stock options and were made to the specific person named in the agreement; (2) the stock options vest over a period of five years from the date of the agreement; (3) the term of the stock options granted under the agreement is 10 years; and (4) no additional grants may be made under the agreement.

 

Additional information as of December 31, 2005 about the Equity Compensation Plans that have not been approved by stockholders is provided in the following table.

 

 

 

 

This summary is qualified in its entirety by reference to the full text of the 2006 Plan, which is attached to this Proxy Statement as Appendix C.

 

Number of Shares Subject to the 2006 Plan and Award Limits

 

The maximum number of shares of Common Stock that will be available for issuance under the 2006 Plan is 6,000,000 shares. Any shares of Common Stock issued or reserved for issuance under the 2006 Plan will be counted

against this limit. If Awards under the 2006 Plan expire or are cancelled, forfeited, settled in cash or otherwise terminated without issuing the underlying shares of Common Stock, such shares will again become available for future Awards under the 2006 Plan. Further, if issued but unvested shares of Restricted Stock are forfeited, such shares will again become available for future Awards under the 2006 Plan. Shares of Common Stock withheld to satisfy tax withholding obligations or to pay the exercise price of an Option will be counted against the above-referenced limit and will not become available for future grants under the 2006 Plan. The maximum number of shares of Common Stock that may be subject to Awards granted to any one individual during any calendar year may not exceed 500,000 shares. The maximum amount of compensation that may be paid under all Awards granted to any one individual during a calendar year may not exceed $5,000,000. As of March 20, 2006, the closing price of the Common Stock of the Company as quoted on the NYSE was $16.65.

 

Administration

 

The 2006 Plan will be administered by the Management Development and Compensation Committee (the “Committee”), which will have full authority, subject to the terms of the 2006 Plan, to make all determinations necessary or advisable for administering the 2006 Plan. The Committee may delegate to an officer of the Company the authority to grant Awards to employees who are not subject to Section 16(b) of the Securities Exchange Act of 1934. The Committee will delegate to the Governance Committee of the Board the authority to make Awards to directors.

 

With respect to any director or employee who is resident outside of the United States, the Committee may amend or vary the terms of the 2006 Plan to conform such terms to the requirements of local law and to meet the goals and objectives of the 2006 Plan. In addition, the Committee may establish administrative rules and procedures to facilitate the operation of the 2006 Plan in such non-U.S. jurisdictions. The Committee may establish one or more sub-plans of the 2006 Plan for these purposes.

 

Eligibility

 

Subject to its delegation of power to the Governance Committee, the Committee in its sole discretion may from time to time grant Awards to any individual who, at the time of grant, is an employee or director. As of December 31, 2005, approximately 6,250 employees (including employee directors and executive officers) and 8 non-employee directors of the Company would have been eligible to participate in the 2006 Plan if the plan had been in effect as of that date.

 

Term of 2006 Plan

 

The 2006 Plan will become effective upon the date of stockholder approval. Notwithstanding any provision in the 2006 Plan, no Award will be granted prior to stockholder approval. No additional Awards may be granted under the 2006 Plan after 10 years from the effective date of the 2006 Plan. The 2006 Plan will remain in effect until all Awards granted thereunder have been exercised or expired, vested or forfeited, and/or satisfied or expired.

 

Options

 

Stock options entitle the participant to purchase shares of Common Stock at a price no less than the fair market value of the Company’s Common Stock on the date of grant. Options may be either incentive stock options or non-qualified stock options, provided that only employees may be granted incentive stock options and such options will be subject to the applicable restrictions on such type of option. The Award notice may specify that the option price is payable (a) in cash, (b) by a check acceptable to the Company, (c) by the delivery of a number of already-owned shares of the Common Stock having a fair market value equal to such option price, provided such shares have been owned for more than six months by the participant, (d) by execution of a “cashless broker exercise”, or (e) any combination of the foregoing. No stock option may be exercised more than 10 years from the date of grant. Each grant may specify a period of continuous employment or service with the Company that is necessary before the stock option or any portion thereof will become exercisable.

Restricted Stock

 

Restricted Stock awarded under the 2006 Plan results in the immediate transfer of stock, subject to certain restrictions on disposition, by the Company to the participant. The participant is immediately entitled to voting, dividend and other ownership rights in such shares, except that: (a) the Company will retain custody of the Restricted Stock until the restrictions have expired; (b) the participant may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the Restricted Stock until the restrictions have expired; and (c) a breach of the terms and conditions established by the Committee pursuant to the Award notice will cause a forfeiture of the Restricted Stock. For restrictions to lapse, one or more of the following conditions must be met, as determined by the Committee: (a) the attainment of one or more performance measures; (b) the participant’s continued employment with the Company and its affiliates or continued service as a director for a specified period of time; (c) the occurrence of any event or the satisfaction of any other condition specified by the Committee in its sole discretion; or (d) a combination of any of the foregoing. Each grant of Restricted Stock may have different restrictions as established in the sole discretion of the Committee.

 

Restricted Stock Units

 

Restricted Stock Units will be subject to a restriction on disposition by the participant and an obligation of the participant to forfeit the Restricted Stock Units under certain circumstances, and any other restrictions determined by the Committee, in its sole discretion, on the date of grant; provided, however, that such restrictions will lapse upon: (a) the attainment of one or more performance measures; (b) the participant’s continued employment with the Company and its affiliates or continued service as a director for a specified period of time; (c) the occurrence of any event or the satisfaction of any other condition specified by the Committee in its sole discretion; or (d) a combination of any of the foregoing. Each Award of Restricted Stock Units may have different restrictions as established in the sole discretion of the Committee. The participant will not be entitled to vote the shares of Common Stock underlying the Restricted Stock Units or enjoy any other stockholder rights unless and until the restrictions have lapsed and the shares have been registered in the participant’s name. Upon the lapse of the restrictions described in the Award notice, the participant will then receive the shares of stock or will receive a payment equal to the fair market value of the shares of Common Stock underlying the Restricted Stock Units on the vesting date, less applicable withholding. Settlement of Restricted Stock Units awarded may be in the form of shares of Common Stock, cash, other equity compensation, or a combination thereof, as determined by the Committee.

 

Stock Appreciation Rights

 

Stock Appreciation Rights will be subject to a restriction on disposition by the participant and an obligation of the participant to forfeit the Stock Appreciation Rights under certain circumstances, and any other restrictions determined by the Committee, in its sole discretion, on the date of grant; provided, however, that such restrictions will lapse upon: (a) the attainment of one or more performance measures; (b) the participant’s continued employment with the Company and its affiliates or continued service as a director for a specified period of time; (c) the occurrence of any event or the satisfaction of any other condition specified by the Committee in its sole discretion; or (d) a combination of any of the foregoing. Each Award of Stock Appreciation Rights may have different restrictions as established in the sole discretion of the Committee.

 

The exercise price of the Stock Appreciation Rights will not be less than the fair market value of the shares of Common Stock underlying the Stock Appreciation Rights on the date of grant. Upon exercise of the Stock Appreciation Rights, the participant will then be entitled to receive payment in an amount equal to: (i) the difference between the fair market value of the underlying shares of Common Stock subject to the Stock Appreciation Rights on the date of exercise and the exercise price; times (ii) the number of shares of Common Stock with respect to which the Stock Appreciation Rights are exercised; less (iii) any applicable withholding taxes. Settlement of Stock Appreciation Rights awarded may be in the form of shares of Common Stock or cash, or a combination thereof, as determined by the Committee.

 

Performance Awards

 

The Committee will establish, with respect to and at the time of each Performance Award, the maximum value of the Performance Award and the performance period over which the performance applicable to the Performance

Award will be measured. A Performance Award will be contingent upon future performance of the Company or any affiliate, division, or department thereof during the performance period. With respect to any Performance Award intended to qualify as performance-based compensation under Section 162(m) of the Code, the Committee will establish the performance measures applicable to such performance either (a) prior to the beginning of the performance period or (b) within 90 days after the beginning of the performance period if the outcome of the performance targets is substantially uncertain at the time such targets are established, but not later than the date that 25% of the performance period has elapsed. The vesting of the Performance Award will be based upon the participant’s continued employment with the Company and its affiliates or continued service as a director for a specified period of time and (i) the attainment of one or more performance measures; (ii) the occurrence of any event or the satisfaction of any other condition specified by the Committee in its sole discretion; or (iii) a combination of any of the foregoing. Following the end of the performance period, the holder of a Performance Award will be entitled to receive payment of an amount not exceeding the maximum value of the Performance Award, based on the achievement of the performance measures for such performance period, as determined and certified in writing by the Committee. Payment of a Performance Award may be made in cash, Common Stock, Options or other equity compensation, or a combination thereof, as determined by the Committee. If a Performance Award covering shares of Common Stock is to be paid in cash, such payment will be based on the fair market value of a share of Common Stock on the payment date.

 

Acceleration of Vesting

 

If a participant’s termination of service is due to his or her death or disability, all then outstanding Awards will immediately vest in full and all restrictions applicable to such Awards will terminate as of such date with all performance criteria, if any, applicable to such Awards deemed met at 100% of target. Upon a participant’s retirement, all Options then outstanding will immediately vest in full. The Committee may, in its discretion and as of a date determined by the Committee, fully vest any portion or all of a participant’s Awards under the 2006 Plan (other than Awards designed to meet the exception for performance-based compensation under Section 162(m) of the Code).

 

Adjustments and Corporate Change

 

If there is any change in the Company’s Common Stock by reason of a stock split, consolidation, stock dividend, recapitalization, reorganization, merger, spin-off, exchange of shares or other similar event or any distribution to the stockholders of Common Stock other than a regular cash dividend, the Committee shall have the authority to adjust or substitute the number of or class of shares which may be issued under the 2006 Plan and further shall adjust or substitute the number, class, price or terms of the shares underlying any outstanding Awards as it deems appropriate.

 

In the event of a corporate change, including (but not limited to) a merger, consolidation, or reorganization of the Company or the sale, lease or other disposition of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole (other than to an entity wholly-owned, either directly or indirectly, by the Company), any outstanding Awards under the 2006 Plan shall become fully vested and immediately exercisable or payable at 100% of their respective target levels.

 

Amendments

 

The Board in its discretion may terminate the 2006 Plan (except with respect to Awards that are then outstanding) at any time except that it may not, without approval of the stockholders, increase the maximum number of shares issuable (except to reflect changes in capitalization as discussed above), change the class of individuals eligible to receive Awards, or amend any outstanding Award notice to lower the exercise price or replace any outstanding Award with an Award having a lower exercise price.

 

Run Rate

 

Run rate, a means of measuring annual stock dilution, shows how rapidly a company is deploying its shares reserved for issuance under its equity plans. Run rate is calculated as the number of shares of Common Stock subject

to awards granted in a given year divided by the number of shares of Common Stock outstanding. The higher the run rate, the greater the dilution. In the last three fiscal years, the Company’s average annual run rate has been 1.6%. If the stockholders approve and adopt the 2006 Plan, the Company expects its future run rate will be approximately the same as the historic rate.

 

Overhang

 

Overhang is an analysis of potential dilution to stockholders from the equity being transferred to employees via equity plans. Overhang is calculated by dividing (a) the number of shares of Common Stock subject to issued and outstanding Awards under the Company’s equity plans plus the number of shares of Common Stock available for future grant under the Company’s equity plans by (b) the number of shares described in clause (a) plus the total number of shares of Common Stock outstanding. On approval of the 2006 Plan and termination of any existing authority to make future grants under the existing equity plans other than the 2006 Plan, the Company’s overhang is expected to be approximately 10% in the event all reserved shares were to be used for full value awards.

 

Federal Income Tax Aspects of the 2006 Plan

 

The following is a brief summary of the U.S. federal income tax consequences applicable to Awards granted under the 2006 Plan based on U.S. federal income tax laws in effect as of the date of this Proxy Statement. This summary is not intended to be exhaustive and does not address all matters which may be relevant to a particular participant based on his or her specific circumstances.

 

Non-Qualified Options.  Non-Qualified Options granted under the 2006 Plan will not be taxable to a participant at grant, but generally will result in taxation at exercise. At such time, the participant will recognize ordinary income in an amount equal to the difference between the exercise price and the fair market value of the shares of Common Stock on the exercise date. The Company will be entitled to deduct a corresponding amount as a business expense in the year the participant recognizes this income.

 

Incentive Stock Options.  Generally, a participant will not recognize ordinary income at the time of grant or exercise of an Incentive Stock Option so long as he or she has been an employee of the Company or its U.S. affiliates from the date the Incentive Stock Option was granted until three months before the date of exercise. However, the amount by which the fair market value of the shares on the exercise date exceeds the exercise price is an adjustment in computing the participant’s alternative minimum tax in the year of exercise. If the participant holds the shares of Common Stock received on exercise of an Incentive Stock Option for one year after the date of exercise and for two years from the date of grant, any difference between the amount realized upon the disposition of the shares and the amount paid for the shares will be treated as long-term capital gain (or loss, if applicable) to the participant. If the participant exercises an Incentive Stock Option and satisfies these holding period requirements, the Company may not deduct any amount in connection with the Incentive Stock Option.

 

If a participant exercises an Incentive Stock Option but engages in a “disqualifying disposition” by selling the shares acquired on exercise before the expiration of the one-year and two-year holding periods described in the previous paragraph, the participant generally will recognize ordinary income in the year of the disqualifying disposition equal to the difference between the fair market value of the shares on the date of exercise and the exercise price. Any excess of the amount realized on the disposition over the fair market value on the date of exercise will be taxed as long-term or short-term capital gain (as applicable). If, however, the amount realized on the disposition on the date of the disqualifying disposition is less than the fair market value of the shares on the date of exercise, the participant will recognize ordinary income equal to the difference between the amount realized on the disqualifying disposition and the exercise price. In either event, the Company will be entitled to deduct an amount equal to the amount constituting ordinary income to the participant in the year of the disqualifying disposition.

 

Restricted Stock.  In general, a participant who receives an award of Restricted Stock will not recognize taxable income at the time of grant. Instead, a participant will recognize taxable ordinary income in the first taxable year that the participant’s interest in the shares becomes either: (a) freely transferable; or (b) no longer subject to a substantial risk of forfeiture. The amount of taxable ordinary income is equal to the fair market value of the shares less the amount (if any) paid for the shares. In certain circumstances, a participant may elect to recognize taxable income at the time of grant in an amount equal to the fair market value of the Restricted Stock (less any amount paid for the shares) at the

time of grant. The Company will be entitled to a compensation expense deduction equal to the ordinary income recognized by the participant in the taxable year in which the participant recognizes such taxable income.

 

Restricted Stock Units.  In general, a participant who receives an award of Restricted Stock Units will not recognize taxable income at the time of grant. Instead, a participant will recognize taxable ordinary income in the year in which the participant becomes vested in the Restricted Stock Units. The taxable amount will equal the fair market value of the shares issued to the participant (or the amount of cash paid to the participant where the Restricted Stock Units are settled in cash). The Company will be entitled to a compensation expense deduction equal to the ordinary income recognized by the participant in the taxable year in which the participant recognizes such taxable income.

 

Stock Appreciation Rights.  There are no tax consequences to a participant upon the grant or vesting of SARs. Upon exercise, the participant will recognize as compensation income the fair market value of the shares of Common Stock or the cash received, as the case may be. The Company will be entitled to deduct the same amount as a business expense in the year of exercise.

 

Performance Awards.  An individual who has been granted a Performance Award will not be taxable at the time of grant, but will be taxable on the fair market value of the shares of Common Stock, or cash, as the case may be, at the time the Award becomes vested and is paid to the participant. Generally, the Company will be entitled to deduct as a business expense the amount the participant includes as income in the year of payment.

 

Section 162(m) of the Code.  Section 162(m) of the Code, in general, precludes a public corporation from taking a deduction for annual compensation in excess of $1 million paid to its chief executive officer or any of its four other highest-paid officers. However, compensation that qualifies under Section 162(m) of the Code as “performance-based” is specifically exempt from the deduction limit. Based on Section 162(m) of the Code and the regulations issued thereunder, the Company’s ability to deduct compensation income generated in connection with the exercise of Options and Stock Appreciation Rights granted under the 2006 Plan should not be limited by Section 162(m) of the Code. Further, the Company believes that compensation income generated in connection with other types of Awards granted under the 2006 Plan generally should not be limited by Section 162(m) of the Code provided the vesting of such Awards are based solely on the achievement of performance targets established for such grants. The 2006 Plan has been designed to provide flexibility with respect to the performance criteria that may be used in establishing performance targets for these Awards. The 2006 Plan is not qualified under Section 401(a) of the Code.

 

Deferred Compensation.  Any deferrals made under the 2006 Plan, including Awards granted under the plan that are considered to be deferred compensation, must satisfy the requirements of Section 409A of the Code to avoid adverse tax consequences to participants. These requirements include limitations on election timing, acceleration of payments and the timing of distributions. The Company intends to structure any Awards under the 2006 Plan to avoid the application of 409A.

 

Miscellaneous

 

Awards shall not be transferable otherwise than (i) by will or the laws of descent and distribution, (ii) a qualified domestic relations order, or (iii) if vested, with the consent of the Committee, provided that any such transfer is permitted under the applicable securities laws. Based upon current law and published interpretations, the Company does not believe that the 2006 Plan is subject to any of the provisions of the Employee Retirement Income Security Act of 1974, as amended.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR
APPROVAL OF THE HANOVER COMPRESSOR COMPANY 2006 STOCK INCENTIVE PLAN.

 

The following table sets forth certain information with respect to compensation paid by the Company during the past three fiscal years to all persons who held the position of Chief Executive Officer and our four other most highly compensated executive officers during 2005 (collectively, the “Named Executive Officers”).

 

SUMMARY COMPENSATION TABLE

 

 

 

 

Time-vested restricted stock is subject to vesting at no less than three years following the original date of grant, with the exception of a grant made to Mr. Mckay. The Company immediately vested one-third of restricted stock grants for all international employees under the Company’s 2005 Long-Term Incentive Plan on July 8, 2005, the date of grant, to allow such employees to meet the tax obligations in international jurisdictions. Therefore, 3,000 shares of restricted stock were immediately vested from the total grant of 9,000 shares made to Mr. Mckay on July 8, 2005. Restricted stock awards are subject to accelerated vesting in the event of a change of control of the Company.

 

In last year’s (2005) Proxy Statement, this column of the Summary Compensation Table also included the number and value of shares of performance-based restricted stock awarded to the Named Executive Officers under the Company’s 2004 Long-Term Incentive Plan. Such restricted stock is subject to three year cliff vesting based on the achievement of pre-determined performance criteria.

 

Under the SEC rules, the Company is allowed, but not required, to report performance-based restricted stock awards in the Summary Compensation Table. In this Proxy Statement, for ease of stockholder reference, information on all performance awards made under the Company’s Long-Term Incentive Plans (including the 2004 awards previously reported in the Summary Compensation Table under the column “Restricted Stock Awards”) are now included in the table captioned “Long-Term Incentive Plans — Awards In Last Three Fiscal Years” (“LTIP Table”) on page 23. The amount of performance-based restricted stock that was previously reported in the Summary Compensation Table for 2004 and now reported in the LTIP Table is provided in column (f) of the table below. The aggregate number of shares and value as of December 31, 2005 of all

outstanding restricted stock held by the Named Executive Officers are provided in columns (h) and (i), respectively, of the following table.

 

 

 

* The number of shares ultimately earned at the end of a three year performance period and the value of the performance-based restricted stock awarded under the 2004 Long-Term Incentive Plan (the “2004 LTI Plan”) is dependent upon the achievement of predetermined performance objectives and fluctuations in the value of the Company’s Common Stock. Payouts will range from 0% to 125% of the target award; the amount shown is the maximum payable (125%) under the 2004 LTI Plan. See the LTIP Table on page 23 for potential payouts at various performance levels.

 

 

The following table provides information on grants of stock options by the Company during fiscal year 2005 to the Named Executive Officers. We have not granted stock appreciation rights to any Named Executive Officer.

 

STOCK OPTIONS GRANTED IN 2005

 

 

 

 

The following table provides information concerning the stock options exercised by the Named Executive Officers during fiscal year 2005 and the aggregate unexercised options held by the Named Executive Officers as of December 31, 2005.

 

AGGREGATED OPTION EXERCISES AND 2005 YEAR-END OPTION VALUES

 

 

 

 

The following table provides information concerning long-term incentives awarded to the Named Executive Officers during the last three fiscal years,which are payable contingent upon the achievement of predetermined performance objectives.

 

LONG-TERM INCENTIVE PLANS — AWARDS IN
LAST THREE FISCAL YEARS

 

 

 

 

 

 

In August 2001, we purchased Production Operators Corporation (“POC”) from Schlumberger Technology Company (“STC”), Camco International Inc (“CAMCO”), Schlumberger Surenco, S.A. (“Surenco”), Schlumberger Oilfield Holdings Limited (“SOHL”), and Operational Services, Inc. On July 8, 2005, we entered into Amendment No. 2 to the Purchase Agreement dated June 28, 2001 by and among Hanover, Hanover Compression Limited Partnership, and STC, for itself and as successor in interest to Camco, Surenco, and SOHL. STC, Surenco and SOHL, collectively are referred to as “Schlumberger Companies”’. Schlumberger Limited (Schlumberger Limited and the Schlumberger Companies, collectively are referred to as “Schlumberger”’) owns, directly or indirectly, all of the equity of the Schlumberger Companies. Pursuant to Amendment No. 2, Schlumberger agreed to eliminate its right to designate a director to serve on our Board of Directors in order for Schlumberger to position itself to have maximum flexibility in terms of its ownership of its shares of our Common Stock. Schlumberger previously had the right under the POC purchase agreement, so long as Schlumberger owned at least 5% of the Common Stock and subject to certain restrictions, to nominate one representative to sit on our Board of Directors. Schlumberger currently has no representative who sits on our Board of Directors. As of December 31, 2005, Schlumberger sold all of their Hanover Common Stock and is no longer considered a related party.

 

For the year ended December 31, 2005, Hanover did not realize revenue in business dealings with Schlumberger. Hanover made purchases of equipment and services of approximately $0.5 million from Schlumberger during 2005. In August 2001, we entered into a five-year strategic alliance with Schlumberger intended to result in the active support of Schlumberger in fulfilling certain of our business objectives. The principal components of the strategic alliance include (1) establishing Hanover as Schlumberger’s most favored supplier of compression, natural gas treatment and gas processing equipment worldwide, (2) Schlumberger’s coordination and cooperation in further developing Hanover’s international business by making Schlumberger’s offices in certain international markets available to Hanover personnel and (3) providing Hanover with access to consulting advice and technical assistance in enhancing its field automation capabilities.

 

Ted Collins, Jr., a director of the Company, owns 100% of Azalea Partners, which owns approximately 15% of Energy Transfer Group, LLC (“ETG”). For the year ended December 31, 2005, we recorded sales of approximately $25.5 million related to equipment leases and sales to ETG. In addition, Hanover and ETG are co-owners of a power generation facility in Venezuela. Under the agreement of co-ownership, each party is responsible for its obligations as a co-owner. In addition, Hanover is the designated manager of the facility. As manager, Hanover received revenues related to the facility and distributed to ETG its net share of the operating cash flow in the amount of $0.5 million during 2005.

 

Change of Control.  During 2005, the Management Development and Compensation Committee (the “Compensation Committee”) of our Board of Directors completed a review of all existing change of control agreements and arrangements with our executive officers. As a result of such review, the Compensation Committee approved new change of control agreements (“COC Agreements”), and on July 29, 2005, the Company entered into a COC Agreement with each of the Named Executive Officers as well as certain other key executives. The new COC Agreements must be affirmatively renewed each year and are therefore no longer evergreen. The COC Agreements provide severance to the executive in the event he or she is terminated without cause within 12 months after a change of control occurs, or if during that period, such executive terminates his or her employment for “good reason,” as that term is defined in the COC Agreements. In such event, each of Messrs. Beckelman, Matusek, Wilson, and Mckay would be entitled to a severance payment equal to two times the sum of his annual base salary and target bonus. In addition, the COC Agreements provide that the Company pay the executive his or her pro-rated target bonus for the current year and reimburse the executive for health insurance premiums for a period of up to eighteen months. If the executive is terminated for cause, or such executive terminates his or her employment without good reason, Hanover is not obligated to make any severance payments under the COC Agreement. None of the current

COC Agreements provide for tax gross up payments. Any prior agreement with each executive officer relating to change of control or severance has been terminated.

 

In addition to the benefits payable under the foregoing described agreements, in the event of a change of control of the Company, Hanover would accelerate for all employees the vesting of long-term incentives under the terms of the respective equity incentive plans as well as the Company’s match in the Hanover 401(k) Plan. In the event of a change of control, unvested performance awards would be deemed vested at target levels.

 

John E. Jackson.  On July 29, 2005, the Company also entered into a Change of Control and Severance Agreement with the Company’s President and Chief Executive Officer, John E. Jackson. Mr. Jackson’s agreement provides that if his employment is terminated without cause within 12 months after a change of control occurs, or if during that period, Mr. Jackson terminates his employment for “good reason,” as that term is defined in the COC Agreements, Mr. Jackson would be entitled to a severance payment equal to three times the sum of his annual base salary and target bonus. If Hanover terminates Mr. Jackson without cause at any time other than the 12 months following a change of control, Mr. Jackson would be entitled to a severance payment equal to his annual base salary and target bonus. In either of these circumstances, the agreement provides that the Company pay Mr. Jackson’s pro-rated target bonus for the current year and reimburse Mr. Jackson for health insurance premiums for a period of up to eighteen months. If Mr. Jackson is terminated for cause, or Mr. Jackson terminates his employment without good reason, Hanover is not obligated to make any severance payments to Mr. Jackson. The prior agreement with Mr. Jackson relating to change of control or severance has been terminated.

 

Gary M. Wilson.  The Board of Directors authorized the Company to enter into an agreement dated April 9, 2004, that provides for a two-year education allowance for Mr. Wilson’s children of $50,000 per annum for two years followed by $25,000 per annum for two years and an allowance for Mr. Wilson’s family to travel at full economy return rates between the United Kingdom and the United States. These allowances are grossed up to a maximum rate of approximately 33% (subject to annual review) and are also subject to currency exchange rate adjustments. The value of these benefits during 2005 is provided in the “Summary Compensation Table” on page 20.

 

Norman A. Mckay.  The Board of Directors authorized the Company to enter into an agreement dated March 31, 2005 (effective May 16, 2005), that in addition to a base salary of $275,000, provided a $50,000 signing bonus and an initial award of 10,000 shares of restricted stock. The restricted stock will vest at 33% per year beginning on the first anniversary of the grant date, May 19, 2005 (subject to accelerated vesting in the event of a change of control). In addition, the agreement provides for an international benefits package covering housing, schooling, auto, travel, medical and other benefits. The value of these benefits during 2005 is provided in the “Summary Compensation Table” on page 20.

 

The Audit Committee reviews Hanover’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls. The independent registered public accounting firm (the “independent auditors”) is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and to issue a report thereon. The Committee monitors these processes.

 

The Committee members are not professional accountants or auditors, and their functions are not intended to duplicate or to certify the activities of management and the independent auditors. The Committee serves a board-level oversight role, in which it provides advice, counsel and direction to management and the independent auditors on the basis of the information it receives, discussions with management and the independent auditors, and the experience of the Committee’s members in business, financial and accounting matters. The Committee has the authority to engage its own outside advisers, including experts in particular areas of accounting, as it determines appropriate, apart from counsel or advisers hired by management.

 

In this context, the Committee met and held discussions with management and the independent auditors. Management represented to the Committee that the Company’s consolidated financial statements were prepared in

accordance with accounting principles generally accepted in the United States, and the Committee reviewed and discussed the consolidated financial statements with management and the independent auditors. The Committee also discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61 (Codification of Statements on Auditing Standards, AU 380), as amended.

 

In addition, the Committee discussed with the independent auditors the auditors’ independence from the Company and its management, and the independent auditors provided to the Committee the written disclosures and letter required by the Independence Standards Board Standard No. 1 (Independence Discussions With Audit Committees). The Committee discussed with the Company’s internal and independent auditors the overall scope and plans for their respective audits. The Committee met with the internal and independent auditors, with and without management present, to discuss the results of their examinations, their evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting.

 

During fiscal year 2005, management completed its documentation, testing and evaluation of the adequacy of the Company’s system of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules and regulations. The Committee was apprised of the progress of the evaluation by both management and the independent auditors, and provided oversight and advice to management during this process. At the conclusion of this process, management reviewed with the Committee its report on the effectiveness of the Company’s internal control over financial reporting. The Committee also received the report from the independent auditors on management’s assessment of the Company’s internal control over financial reporting.

 

Based on the reviews and discussions referred to above, the Committee recommended to the Board of Directors, and the Board has approved, that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, for filing with the Securities and Exchange Commission; concluded that the independent auditors meet the requirements for independence; and directed that the appointment of the independent auditors for 2006 be submitted to the stockholders for ratification.

 

 

 

Submitted by the Audit Committee
of the Board of Directors

 

 

Margaret K. Dorman, Chair
I. Jon Brumley
Gordon T. Hall
Alvin V. Shoemaker

 

This report is required by rules established by the SEC and provides specific information regarding compensation for the Company’s Chief Executive Officer and the other Named Executive Officers listed in the “Summary Compensation Table” on page 20.

 

Compensation Philosophy and Objectives of Executive Compensation Programs

 

The Management Development and Compensation Committee is comprised of independent, non-employee directors and works closely with the entire Board of Directors in the execution of its duties.

 

It is the philosophy of Hanover and the Committee that compensation plays a vital role in achieving short and long-term business objectives that ultimately drive long-term success. Our compensation programs are designed to:

 

 

Hanover’s compensation programs include base salaries, annual performance-based incentives and long-term incentives for key employees and executives.

 

In keeping with our pay for performance philosophy, a substantial percentage of our executive officers’ compensation is variable, based on pre-determined financial targets set at the corporate level as well as individual performance objectives. The variable pay components at target levels are generally set to be competitive within the marketplace.

 

The Committee has retained a third-party consultant to assist the Committee with maintaining an awareness of best practices in executive compensation, to assist in developing the Company’s compensation programs, and to assist in completing a competitive review of compensation in the marketplace. (During 2005, the third-party consultant was paid $65,285 for services provided to the Committee.)

 

In considering the appropriate levels of compensation, the Committee also engages in a discretionary review of total compensation and uses as a reference published compensation surveys, information obtained from compensation consultants, and compensation data contained in the proxy statements for companies which the Committee has identified as energy services industry peers. While the Committee considers this information in their decision-making process, performance is the primary factor in determining the compensation of the Company’s executive officers.

 

Elements of Executive Compensation

 

The Company’s compensation program for key employees and executives includes base salary, annual performance-based incentives, and long-term incentives. Each of these compensation components is further described below.

 

Base Salaries

 

The Committee reviews and recommends to the independent members of the Board of Directors the base salaries for executive officers. The review is based on each executive officer’s performance, scope of responsibilities, his or her future potential, experience and competitive market pay levels. Messrs. Beckelman and Matusek, who are Named Executive Officers, each received a substantial increase in base salary during 2005 due to a significant promotion and increase in job responsibilities, which also positioned both individuals as executive officers for the first time in 2005. The base salary of the CEO is discussed in more detail below.

 

Annual Performance-Based Incentive Compensation

 

The Company’s annual incentive plan is structured to provide cash incentives to key employees based on the achievement of corporate and individual objectives. Under the plan, the target award opportunity for eligible employees is established as a percentage of eligible earnings (an employee’s base salary, prorated, if applicable) and is based on the market data previously described as well as a consideration of internal position alignment within the Company. For 2005, annual incentive compensation was based on the following:

 

Annual Performance Objectives — 2005

 

 

Actual incentives paid to executive officers (excluding the CEO) under the annual incentive plan averaged 46.7% of eligible individuals’ earnings. The performance level achieved on the corporate performance objectives described above was 93.2% of target, and the portion of awards based on individual performance objectives varied according to the individual results achieved by each executive.

 

Long-Term Incentive Compensation

 

The Committee and the Company believe that its executive officers and other key employees should have an ongoing stake in the success of the Company and that these individuals should have a meaningful portion of their total compensation tied to the Company’s financial and operational performance.

 

Under the Company’s current stock incentive plans, the Committee has the authority to provide long-term incentives to executive officers and other key employees through the award of cash, stock options and restricted stock. In order to provide a strong focus on creating value and at the same time aligning the interests of executive officers and other key employees with those of stockholders, the Committee chose to provide long-term incentives in 2005 to executives (excluding the CEO) as follows:

 

 

The size of awards granted to executive officers is based on the Committee’s assessment of individual responsibility, performance, future potential, experience, prior long-term incentive awards and market compensation data previously described.

Change of Control and Severance Arrangements

 

The Company has entered into change of control agreements with each of the Company’s Named Executive Officers and certain other key executives. These agreements provide for continued employment of the executive for a period of time following a change of control and are designed to ensure continuity of management in the event of a threatened change of control. During 2005, the Committee reviewed existing change of control arrangements and completed an analysis of competitive data and best practices. As a result of its review, the Committee approved new agreements that must be affirmatively renewed each year and are therefore no longer evergreen. The agreements provide that if the executive is terminated within 12 months after an actual change of control occurs, or if during that period the executive terminates his employment for “good reason,” as defined in the agreements, he or she would be entitled to a severance payment equal to a multiple ranging from one to three times the executive’s annual base salary and target bonus. None of the current agreements provide for tax gross up payments. Each executive voluntarily relinquished his or her prior arrangement for a new agreement, effective July 29, 2005.

 

In addition to change of control protection, Mr. Jackson’s agreement also provides that if the Company terminates Mr. Jackson without cause in a period other than the 12 months following a change of control, Mr. Jackson would be entitled to a severance payment equal to one times his annual base salary and target bonus. A description of the material terms of the change of control and severance agreements currently in effect is provided on page 24.

 

Chief Executive Officer Compensation

 

John E. Jackson joined Hanover in January 2002 as Senior Vice President and Chief Financial Officer. On July 29, 2004, Mr. Jackson was elected to the Board of Directors, and effective on October 25, 2004, Mr. Jackson was elected President and Chief Executive Officer of the Company. The Committee entered into an employment arrangement with Mr. Jackson dated October 5, 2004, which provided for an initial annual base salary of $540,000 and target bonus of 100% of base salary, which can be adjusted based upon Company and personal performance compared with agreed upon objectives. The Committee met with the independent members of the Board in executive session and applied the philosophy and methodology described earlier in this report to determine Mr. Jackson’s 2005 compensation. The Committee also considered the challenges faced by Mr. Jackson in making significant progress to restructure the Company’s balance sheet and return the Company to a positive earnings position. Mr. Jackson’s 2005 compensation includes the following:

 

Base Salary.  Under the agreement entered into with Mr. Jackson upon his election in 2004 as President and Chief Executive Officer, Mr. Jackson received no increase in base salary during 2005.

 

Annual Incentive Award.  Based on the Company’s performance with respect to the measures described under the “Annual Performance-Based Incentive Compensation” section above and personal objectives approved by the Committee, Mr. Jackson was paid an annual incentive bonus of $600,000 for 2005. This award represents 111% of target and was determined as follows:

 

 

 

 

Long-Term Incentives.  The Committee recommended and the independent members of the Board approved on July 8, 2005, the following long-term incentive award for Mr. Jackson:

 

 

This award is intended to provide an incentive for retention, ensure a greater ownership stake in the Company by the executive, improve operating results and grow stockholder value.

 

Value of Total Compensation Earned in 2005

 

Set forth below is a summary of the dollar values of the total annual compensation provided to each of the Named Executive Officers for 2005: