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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K/A-2
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended December 31, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 1-3071
Hanover Compressor Company
(Exact name of registrant as specified in its charter)
Delaware 76-0625124
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
12001 North Houston Rosslyn, Houston, Texas 77086
(Address of principal executive offices)
(281) 447-8787
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Common Stock, $.001 par value
Name of each exchange in which registered: New York Stock Exchange, Inc.
Securities registered pursuant to 12(g) of the Act:
Title of class: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock of the registrant held by
nonaffiliates as of March 30, 2001: $1,580,100,000. This calculation does not
reflect a determination that such persons are affiliates for any other purpose.
Number of shares of the Common Stock of the registrant outstanding as of
March 30, 2001: 69,022,512 shares.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders held on May 17, 2001 (filed on April 17, 2001) are incorporated by
reference into Part III, as indicated herein.
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EXPLANATORY NOTE
Hanover Compressor Company (the "Company") is filing this amendment to its
Annual Report on Form 10-K for the year ended December 31, 2000 in order to
restate the Consolidated Financial Statements and make appropriate conforming
revisions to "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
In April 2002, the Company restated its financial statements based upon an
investigation that was conducted by counsel under the direction of the Audit
Committee. The net effect of this restatement was as follows: (i) a decrease in
revenues of $37.7 million, from $603.8 million to $566.1 million; (ii) a
decrease in income before income taxes of $12.0 million, from $93.5 million to
$81.5 million; (iii) a decrease in net income of $7.5 million, from $58.7
million to $51.2 million; and (iv) a decrease in earnings per common share of
$0.12 basic and $0.11 diluted for the year ended December 31, 2000. While the
Company did not believe any additional matters would require restatement when
it made its April 2002 restatement, and although the amounts involved in the
November 2002 restatement are small in the context of the Company's overall
revenues and net income, additional information came to light as part of the
investigation conducted by a special committee of the Board since the April
2002 restatement that made the November 2002 restatement appropriate under the
circumstances.
Subsequent to the April 2002 restatement, a special committee of the Board
of Directors, together with the Audit Committee of the Board and company
management, aided by outside legal counsel, completed an extensive
investigation of certain transactions recorded during 2001, 2000 and 1999,
including those transactions restated by the Company in April 2002. As a result
of this investigation, the Company determined, with the concurrence of its
independent accountants, to restate its 2001, 2000 and 1999 financial
statements for several transactions, including one that was the subject of the
April 2002 restatement. The net effect of this restatement for the year ended
December 31, 2001 was as follows: (i) a decrease in revenues of $7.5 million,
from $1,078.2 million to $1,070.7 million; (ii) a decrease in income before
income taxes of $0.4 million, from $117.4 million to $117.0 million; (iii) a
decrease in net income of $0.2 million, from $72.6 million to $72.4 million;
and (iv) a decrease in diluted earnings per common share of $0.01. The net
effect of this restatement for the year ended December 31, 2000 was as follows:
(i) a decrease in revenues of $3.3 million, from $566.1 million to $562.8
million; (ii) a decrease in income before income taxes of $2.5 million, from
$81.5 million to $79.0 million; (iii) a decrease in net income of $1.6 million,
from $51.2 million to $49.6 million; and (iv) a decrease in earnings per common
share of $0.03 basic and $0.02 diluted. The net effect of this restatement for
the year ended December 31, 1999 was as follows: (i) a decrease in revenues of
$5.1 million, from $323.2 million to $318.1 million; (ii) a decrease in income
before income taxes of $3.1 million, from $63.6 million to $60.5 million; (iii)
a decrease in net income of $1.9 million, from $40.4 million to $38.5 million;
and (iv) a decrease in earnings per common share of $0.04 basic and $0.03
diluted. For additional detail concerning the transactions involved in the
restatements and their impact on the 2000 and 1999 Consolidated Financial
Statements, see Notes 19 and 20 of the Notes to Consolidated Financial
Statements.
The Company has provided, and will continue to provide, information
concerning its internal investigations to the Securities and Exchange
Commission.
1
HANOVER COMPRESSOR COMPANY
TABLE OF CONTENTS
Page
----
PART II
ITEM 6
Selected Financial Data............................................................... 3
ITEM 7
Management's Discussion and Analysis of Financial Condition and Results of Operations. 5
ITEM 8
Financial Statements and Supplementary Data........................................... 10
PART IV
ITEM 14
Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 11
2
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA (HISTORICAL)
(Dollars and shares in thousands, except per share data)
The following table presents certain selected financial data for the Company
for each of the five years in the period ended December 31, 2000. The selected
financial data have been derived from the audited consolidated financial
statements of the Company. The following information should be read together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements of the Company.
Year Ended December 31,
-----------------------------------------------
2000(1)(2) 1999(2) 1998 1997 1996
---------- -------- -------- -------- --------
Restated Restated
Income Statement Data:
Revenues:
Rentals........................................................ $253,837 $192,655 $147,609 $100,685 $ 72,897
Parts, service and used equipment.............................. 129,366 39,130 29,538 10,808 8,269
Compressor fabrication......................................... 90,270 52,531 67,453 49,764 28,764
Production and processing equipment fabrication................ 79,121 27,255 37,466 37,052 26,903
Gain on sale of other assets................................... 1,888 4,062 1,278 189 74
Gain on change in interest in non-consolidated affiliate....... 864 -- -- -- --
Other.......................................................... 7,440 2,497 3,007 895 637
-------- -------- -------- -------- --------
Total revenues.............................................. 562,786 318,130 286,351 199,393 137,544
-------- -------- -------- -------- --------
Expenses:
Rentals........................................................ 87,992 64,949 49,386 35,113 26,012
Parts, service and used equipment.............................. 88,294 26,504 21,735 6,955 6,321
Compressor fabrication......................................... 76,754 43,663 58,144 41,584 24,657
Production and processing equipment fabrication................ 62,684 20,278 25,781 26,375 19,574
Selling, general and administrative............................ 54,632 33,782 26,626 21,514 16,711
Depreciation and amortization.................................. 52,882 37,337 37,154 28,439 20,722
Lease expense.................................................. 45,484 22,090 6,173 -- --
Interest expense............................................... 8,685 8,786 11,716 10,728 6,594
Distributions on mandatorily redeemable convertible preferred
Securities.................................................... 6,369 278 -- -- --
-------- -------- -------- -------- --------
Total expenses.............................................. 483,776 257,667 236,715 170,708 120,591
-------- -------- -------- -------- --------
Income before income taxes........................................ 79,010 60,463 49,636 28,685 16,953
Provision for income taxes........................................ 29,371 22,008 19,259 11,043 6,730
-------- -------- -------- -------- --------
Net income........................................................ 49,639 38,455 30,377 17,642 10,223
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment........................ (146) (463) 152 -- --
-------- -------- -------- -------- --------
Comprehensive income.............................................. $ 49,493 $ 37,992 $ 30,529 $ 17,642 $ 10,223
======== ======== ======== ======== ========
Net income available to common stockholders:
Net Income..................................................... $ 49,639 $ 38,455 $ 30,377 $ 17,642 $ 10,223
Dividends on Series A and Series B preferred stock............. -- -- -- -- (1,773)
Series A preferred stock exchange.............................. -- -- -- -- (3,794)
Series B preferred stock conversion............................ -- -- -- -- (1,400)
-------- -------- -------- -------- --------
Net income available to common stockholders....................... $ 49,639 $ 38,455 $ 30,377 $ 17,642 $ 3,256
======== ======== ======== ======== ========
Weighted average common and common equivalent shares:
Basic(3)....................................................... 61,831 57,048 56,936 51,246 40,996
-------- -------- -------- -------- --------
Diluted(3)..................................................... 66,366 61,054 60,182 54,690 44,046
-------- -------- -------- -------- --------
Earnings per common share:
Basic(3)....................................................... $ 0.80 $ 0.67 $ 0.53 $ 0.34 $ 0.08
======== ======== ======== ======== ========
Diluted(3)(4).................................................. $ 0.75 $ 0.63 $ 0.50 $ 0.32 $ 0.07
======== ======== ======== ======== ========
3
Year Ended December 31,
---------------------------------------------------
2000(1)(2) 1999(2) 1998 1997 1996
---------- -------- -------- --------- --------
Restated Restated
Other Data:
EBITDA(5)................................................ $ 192,430 $128,954 $104,679 $ 67,852 $ 44,269
Cashflows provided by (used in):
Operating activities..................................... $ 29,746 $ 71,610 $ 31,147 $ 32,219 $ 20,276
Investing activities..................................... (67,481) (95,502) (14,699) (164,490) (87,683)
Financing activities..................................... 77,589 18,218 (9,328) 129,510 71,740
Balance Sheet Data (end of period):
Working capital.......................................... $ 282,730 $103,431 $113,264 $ 58,027 $ 41,513
Net property, plant and equipment........................ 574,703 498,877 392,498 394,070 266,406
Total assets............................................. 1,246,172 753,387 614,590 506,452 341,387
Long-term debt........................................... 110,935 69,681 156,943 158,838 122,756
Mandatorily redeemable convertible preferred securities.. 86,250 86,250 -- -- --
Common stockholders' equity.............................. 628,947 365,928 315,470 287,028 176,113
- --------
(1) April 2002 Restatement--In conjunction with a review of our joint ventures
and other transactions conducted by counsel under the direction of the
Audit Committee, we restated our financial statements for the year ended
December 31, 2000. The net effect of the restatement made in April 2002 for
the year ended December 31, 2000 was as follows: (i) a decrease in revenues
of $37.7 million, from $603.8 million to $566.1 million; (ii) a decrease in
income before income taxes of $12.0 million, from $93.5 million to $81.5
million; (iii) a decrease in net income of $7.5 million, from $58.7 million
to $51.2 million; and (iv) a decrease in earnings per common share of $0.12
basic and $0.11 diluted. See Note 19 of the Notes to Consolidated Financial
Statements. See Note 20 of the Notes to Consolidated Financial Statements
for information regarding the further restatement of the 2000 Financial
Statements.
(2) November 2002 Restatement--Subsequent to the April 2002 restatement, a
special committee of the Board of Directors, together with the Audit
Committee and company management, aided by outside legal counsel, completed
an extensive investigation of certain transactions recorded during 2001,
2000 and 1999, including those transactions restated by the Company in
April 2002. As a result of this investigation, the Company determined, with
the concurrence of its independent accountants, to restate its financial
statements for several transactions, including one that was the subject of
the April 2002 restatement. The net effect of this restatement for the year
ended December 31, 2000 was as follows: (i) a decrease in revenues of $3.3
million, from $566.1 million to $562.8 million; (ii) a decrease in income
before income taxes of $2.5 million from $81.5 million to $79.0 million;
(iii) a decrease in net income of $1.6 million, from $51.2 million to $49.6
million; and (iv) a decrease in earnings per common share of $0.03 basic
and $0.02 diluted. The net effect of this restatement for the year ended
December 31, 1999 was as follows: (i) a decrease in revenues of $5.1
million, from $323.2 million to $318.1 million; (ii) a decrease in income
before income taxes of $3.1 million, from $63.6 million to $60.5 million;
(iii) a decrease in net income of $1.9 million, from $40.4 million to $38.5
million; and (iv) a decrease in earnings per common share of $0.04 basic
and $0.03 diluted. See Notes 19 and 20 of the Notes to Consolidated
Financial Statements.
(3) In June 2000, the Company completed a 2-for-1 stock split effected in the
form of a 100% stock dividend. All weighted average and common equivalent
shares and earnings per common share information have been restated for all
periods presented to reflect this stock split.
(4) Diluted earnings per share in 1996 was $.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.
(5) EBITDA consists of the sum of consolidated net income before interest
expense, lease expense, distributions on mandatorily redeemable convertible
preferred securities, income tax, and depreciation and amortization. The
Company believes that EBITDA is a meaningful measure of its operating
performance and is also used to measure the Company's ability to meet debt
service requirements. EBITDA should not be considered as an alternative
performance measure prescribed by generally accepted accounting principles.
4
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion has been updated to reflect the restated results of
operations, cash flows and financial position, see Notes 19 and 20 in "Notes to
Consolidated Financial Statements" for details regarding the restatement.
Management's discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto.
General
The Company is 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, the
Company operates the largest compressor rental fleet, in terms of horsepower,
in the gas compression industry and provides its services on a rental, contract
compression, maintenance and acquisition leaseback basis. In conjunction with
the Company's maintenance business, the Company has developed its parts and
service business to provide solutions to customers that own their own
compression equipment but want to outsource their operations. The Company's
compression services are complemented by its compressor and oil and gas
production equipment fabrication operations and gas processing and treating,
gas measurement and power generation services, which broaden the Company's
customer relationships both domestically and internationally. The Company's
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.
In September 2000, the Company 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
have resulted in an increase in the purchase price to approximately $194
million due to increases in net assets acquired. In July 2000, the Company
acquired PAMCO Services International for approximately $58 million in cash and
notes. In June 2000, the Company acquired Applied Process Solutions, Inc. for
2,303,294 newly issued shares of the Company's common stock. These acquisitions
were included in the results of operations from their respective acquisition
dates. In addition, the Company completed a two-for-one 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.
5
The following table summarizes revenues, expenses and gross profit
percentages for each of the Company's business segments (Dollars in millions):
Year ended December 31,
------------------------
Restated Restated
2000 1999 1998
-------- -------- ------
Revenues:
Rentals--Domestic............................... $172.5 $136.5 $107.4
Rentals--International.......................... 81.3 56.2 40.2
Parts, service and used equipment............... 129.4 39.1 29.5
Compressor fabrication.......................... 90.3 52.5 67.5
Production and processing equipment fabrication. 79.1 27.3 37.5
Other........................................... 10.2 6.5 4.3
------ ------ ------
Total....................................... $562.8 $318.1 $286.4
====== ====== ======
Expenses:
Rentals--Domestic............................... $ 60.3 $ 46.2 $ 36.6
Rentals--International.......................... 27.7 18.8 12.8
Parts, service and used equipment............... 88.3 26.5 21.7
Compressor fabrication.......................... 76.8 43.7 58.1
Production and processing equipment fabrication. 62.7 20.3 25.8
------ ------ ------
Total....................................... $315.8 $155.5 $155.0
====== ====== ======
Gross profit percentage:
Rentals--Domestic............................... 65.0% 66.1% 66.0%
Rentals--International.......................... 66.0% 66.6% 68.1%
Parts, service and used equipment............... 31.7% 32.3% 26.4%
Compressor fabrication.......................... 15.0% 16.9% 13.8%
Production and processing equipment fabrication. 20.8% 25.6% 31.1%
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues
The Company's total revenues increased by $244.7 million, or 77%, to $562.8
million during 2000 from $318.1 million during 1999. The increase resulted from
growth of the Company's natural gas compressor rental fleet and acquisitions
completed during 2000.
Revenues from rentals increased by $61.1 million, or 32%, to $253.8 million
during 2000 from $192.7 million during 1999. Domestic revenues from rentals
increased by $36.0 million, or 26%, to $172.5 million during 2000 from $136.5
million during 1999. International revenues from rentals increased by $25.1
million, or 45%, to $81.3 million during 2000 from $56.2 million during 1999.
At December 31, 2000 the compressor rental fleet consisted of approximately
2,151,000 horsepower, a 48% increase over the 1,458,000 horsepower in the
rental fleet at December 31, 1999. Domestically, the rental fleet increased by
560,000 horsepower, or 47%, during 2000 and internationally by 133,000
horsepower, or 48%. The increase in both domestic and international rental
revenues resulted primarily from expansion of the Company's rental fleet.
Revenues from parts, service and used equipment increased by $90.3 million,
or 231% to $129.4 million during 2000 from $39.1 million during 1999. This
increase is due primarily to increased marketing focus and partially from
expansion of business activities through recent acquisitions. Revenues from
compressor fabrication increased by $37.8 million, or 72%, to $90.3 million
during 2000 from $52.5 million during 1999. An
6
aggregate of 166,000 horsepower was sold during 2000. In addition, 168,000
horsepower was fabricated and placed in the rental fleet during 2000. The
increase in horsepower produced during 2000 resulted from an increased demand
for compression equipment due to higher natural gas prices.
Revenues from production and processing equipment fabrication increased by
$51.8 million, or 190%, to $79.1 million during 2000 from $27.3 million during
1999. The increase in revenues from production equipment fabrication is due
primarily to the acquisition of Applied Process Solutions Inc. in June 2000.
The Company recognized gains on sales of other assets of $1.9 million during
2000 and $4.1 million during 1999. Equity in earnings in subsidiaries increased
by $2.3 million during 2000 to $3.5 million from $1.2 million during 1999. This
increase was primarily due to our investment in Hanover Measurement Services
Company, LP which was formed in September 1999. During 2000 the Company
recorded a change in interest gain of $0.9 million resulting from an
unconsolidated subsidiary stock offering to third parties. Other revenues
increased by $2.6 million, or 200% to $3.9 million during 2000 from $1.3
million during 1999.
Expenses
Operating expenses of the rentals segments increased by $23.0 million, or
35% to $88.0 million during 2000 from $65.0 million during 1999. The increase
resulted primarily from the corresponding 32% increase in revenues from rentals
over the corresponding period in 1999. The gross profit percentage from rentals
was 65% during 2000 and 66% during 1999.
Operating expenses of parts, service and used equipment increased $61.8
million, or 233% to $88.3 million during 2000 from $26.5 million during 1999,
which relates to the 231% increase in parts and service revenue. The gross
profit percentage from parts, service and used equipment was 32% during 2000
and 1999. Operating expenses of compressor fabrication increased by $33.1
million, or 76% to $76.8 million from $43.7 million during 1999. The gross
profit margin on compression fabrication was 15% during 2000 and 17% during
1999. The decrease in gross profit margin for compression fabrication was
attributable to the acquisition of the compression services division of
Dresser-Rand Company. Production and processing equipment fabrication operating
expenses increased by $42.4 million, or 209%, during 2000 to $62.7 million from
$20.3 million during 1999. The gross profit margin attributable to production
and processing equipment fabrication decreased to 21% during 2000, from 26%
during 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 the Company
has historically experienced.
Selling, general and administrative expenses increased by $20.9 million, or
62% to $54.6 million during 2000. The increase is attributable to increased
personnel and other administrative and selling expenses associated with the
acquisitions in 2000 and the increase in operating activity in the Company's
rentals business segments as described above.
Depreciation and amortization expense increased by $15.5 million, or 42%
during 2000 to $52.9 million. The increase in depreciation from the additions
to the rental fleet was offset by a decrease in depreciation expense as a
result of the equipment leases entered into in June 1999 and during 2000.
Interest expense decreased by $.1 million, or 1% during 2000 to $8.7
million. The decrease in interest expense was due in part to utilization of
proceeds from the equipment leases which was used to reduce indebtedness under
the Company's credit facility and the capitalization of interest expense on
assets that are under construction.
7
The Company incurred compression equipment lease expense of $45.5 million
during 2000 and $22.1 million during 1999. The increase is due to having a full
year of lease expense on the equipment lease entered into in June 1999 and the
new equipment leases entered into during 2000.
Income Taxes
The provision for income taxes increased by $7.4 million, or 33%, to $29.4
million during 2000 from $22.0 million during 1999. The increase resulted
primarily from the corresponding increase in income before taxes. The Company's
effective income tax rate was approximately 37.2% during 2000 and 36.4% during
1999. The increase in the effective rate was primarily the result of increased
income in foreign tax jurisdictions.
Net Income and Earnings Per Share
Net income increased $11.1 million, or 29%, to $49.6 million for 2000 from
$38.5 million in 1999 for the reasons discussed above.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues
The Company's total revenues increased by $31.7 million, or 11%, to $318.1
million during 1999 from $286.4 million during 1998. The increase resulted from
growth of the Company's natural gas compressor rental fleet but was 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 the Company's rental fleet.
Revenues from parts, service and used equipment increased by $9.6 million,
or 32% to $39.1 million during 1999 from $29.5 million during 1998. Revenues
from compressor 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 156,000 horsepower was sold during 1999.
In addition, 164,000 horsepower was fabricated and placed in the rental fleet
during 1999. The Company believes the revenue decrease during 1999 was due in
part to a project where a customer supplied its own engines, which are
typically provided by the Company, and in part due to lower energy prices in
1999, which reduced the demand for compressors thereby adversely impacting
sales prices.
Revenues from fabrication and sale of production and processing equipment
fabrication decreased by $10.2 million, or 27%, to $27.3 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.
The Company recognized gains on sales of other assets of $4.1 million during
1999 compared to $1.3 million during the 1998.
8
Expenses
Operating expenses of the rentals 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, service
and used equipment increased $4.8 million, or 22% to $26.5 million during 1999
from $21.7 million during 1998. The gross profit percentage from parts, service
and used equipment increased to 32% during 1999 from 26% 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 and
processing equipment fabrication operating expenses decreased by $5.5 million,
or 21%, during 1999 to $20.3 million from $25.8 million during 1998. The
decrease in operating expenses is reflective of the corresponding change in
production and processing equipment fabrication revenues during 1999. The gross
profit margin attributable to production and processing equipment fabrication
decreased to 26% during 1999, from 31% during 1998.
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 the Company's rentals business segments as
described above.
Depreciation and amortization expense increased by $0.2 million, or 1%
during 1999 to $37.3 million. The increase in depreciation from the additions
to the rental fleet was offset by a decrease in depreciation expense as a
result of the equipment leases entered into in July 1998 and June 1999.
The Company incurred compression equipment lease expense of $22.1 million
during 1999 and $6.2 million during 1998.
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, which was used to reduce indebtedness under
the Bank Credit Agreement and the capitalization of interest expense on assets
that are under construction.
Income Taxes
The provision for income taxes increased by $2.7 million, or 14%, to $22.0
million during 1999 from $19.3 million during 1998. The increase resulted
primarily from the corresponding increase in income before taxes. The Company's
effective income tax rate was approximately 36.4% during 1999 and 38.8% during
1998. The decrease in average effective income tax rates is due to expected
benefits from a foreign sales corporation established in 1998.
Net Income and Earnings Per Share
Net income increased $8.1 million, or 27%, to $38.5 million for 1999 from
$30.4 million in 1998 for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance amounted to $45.5 million at December 31, 2000
compared to $5.8 million at December 31, 1999. Primary sources of cash during
2000 were proceeds of $372.6 million from the equipment leases, approximately
$40.4 million of borrowings under the Company's credit facility and proceeds of
$59.4 million from a private placement of 2 million newly issued shares of
restricted common stock to an institutional investor. Principal uses of cash
during the year ended December 31, 2000 were capital expenditures and business
acquisitions of $469.8 million.
9
Working capital increased to $282.7 million at December 31, 2000 from $103.4
million at December 31, 1999, primarily as a result of increases in accounts
receivable, inventories and costs in excess of billings. The increase in these
balances is due to an increased level of activity in the Company's lines of
business over 1999 and the recent acquisitions. These increases were partially
offset by an increase in current liabilities.
The amount invested in property, plant and equipment including business
acquisitions during 2000 was $477.7 million which resulted in the addition of
approximately 693,000 horsepower to the rental fleet. At December 31, 2000, the
rental fleet consisted of 1,741,000 horsepower domestically and 410,000 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 March 2001, the Company completed its purchase of OEC
Compression Corporation for approximately 1,141,000 shares of the Company's
common stock and the assumption of approximately $61.9 million in debt.
Historically, the Company has funded capital expenditures with a combination
of internally generated cash flow, borrowings under the revolving credit
facility, equipment lease transactions and raising additional equity. As of
December 31, 2000, the Company had approximately $80 million of credit capacity
remaining on its $200 million bank credit agreement (7.5% rate at December 31,
2000). In March 2001, the Company received net proceeds of approximately $186
million before expenses from the sale of $192 million aggregate principal
amount of the Company's seven-year convertible senior notes. The notes bear
interest at 4.75% and are convertible into shares of the Company's common stock
at a conversion price of approximately $43.94 per share. Concurrent with the
convertible senior notes, the Company issued and sold 2.5 million shares of its
common stock with net proceeds to the Company of approximately $84 million
before expenses.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133, as amended by SFAS
137 and SFAS 138, 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. The Company adopted SFAS 133 beginning January 1,
2001, and the initial adoption of SFAS 133 did not have a material effect on
the Company's results of operations, cash flows or financial position. However,
the impact on our results of operations in the first quarter of 2001 and
subsequent periods could be material due to fluctuations in the fair value of
an option held by the counterparty to our interest rate swaps which will be
recorded in our results of operations until this option is exercised or expires
in July 2001.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB No. 101"), Revenue Recognition in
Financial Statements. SAB No. 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in the
financial statements. The statement was effective for the Company's fourth
quarter of 2000. The Company is in compliance with the provisions of SAB No.
101.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary information specified by this
Item are presented following Item 14 of this report.
10
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as a part of this report.
1. Financial Statements. The following financial statements are filed as
a part of this report.
Report of Independent Accountants.......................... F-1
Consolidated Balance Sheet................................. F-2
Consolidated Statement of Income and Comprehensive Income.. F-3
Consolidated Statement of Cash Flows....................... F-4, F-5
Consolidated Statement of Stockholders' Equity............. F-6
Notes to Consolidated Financial Statements................. F-7
Selected Quarterly Financial Data (unaudited).............. F-33
2. Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts............. S-1
3. Exhibits.
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation of the Hanover Compressor Holding Co. (14) [3.1]
3.2 Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co. dated
December 8, 1999 (14) [3.2]
3.3 Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co. dated
July 11, 2000 (14) [3.3]
3.4 By-laws of Hanover Compressor Company (9) [3.3]
4.1 Third Amended and Restated Registration Rights Agreement, dated as of December 5, 1995, among
the Company, GKH Partners, L.P., GKH Investments, L.P., Astra Resources, Inc. and other
stockholders of the Company party thereto (1) [4.1]
4.10 Form of Warrant Agreement (1) [4.10]
4.11 Specimen Stock Certificate (1) [4.11]
4.12 Form of Second Amended and Restated Stockholders Agreement of Hanover Compressor Company
dated as of June, 1997 (1) [4.12]
4.13 Form of Amended and Restated Stockholders Agreement (JEDI) dated as of May, 1997 (1) [4.13]
4.14 Form of Amended and Restated Stockholders Agreement (Westar Capital, Inc.) dated as of May,
1997 (1) [4.14]
4.15 Form of Amended and Restated Stockholders Agreement (HEHC) dated as of May, 1997 (1) [4.15]
10.1 Credit Agreement, dated as of December 15, 1997, by and between the Company, The Chase
Manhattan Bank, a New York banking corporation as Administrative Agent and several banks and
other financial institutions that are parties thereto (2) [10.30]
10.2 Subsidiaries' Guarantee, dated as of December 15, 1997, by certain of the Company's subsidiaries in
favor of The Chase Manhattan Bank, as agent (2) [10.31]
10.3 Management Fee Letter, dated November 14, 1995 between GKH Partners, L.P. and the
Company (1) [10.3]
10.4 Hanover Compressor Company Senior Executive Stock Option Plan (1) [10.4]
10.5 1993 Hanover Compressor Company Management Stock Option Plan (1) [10.5]
11
Exhibit
Number Description
- ------- -----------
10.6 Hanover Compressor Company Incentive Option Plan (1) [10.6]
10.7 Amendment and Restatement of Hanover Compressor Company Incentive Option Plan (1) [10.7]
10.8 Hanover Compressor Company 1995 Employee Stock Option Plan (1) [10.8]
10.9 Hanover Compressor Company 1995 Management Stock Option Plan (1) [10.9]
10.10 Hanover Compressor Company 1996 Employee Stock Option Plan (1) [10.10]
10.11 OEM Sales and Purchase Agreement, between Hanover Compressor Company and the Waukesha
Engine Division of Dresser Industries, Inc. (1) [10.11]
10.12 Distribution Agreement, dated February 23, 1995, between Ariel Corporation and Maintech
Enterprises, Inc. (1) [10.12]
10.13 Exclusive Distribution Agreement, dated as of February 23, 1995 by and between Hanover/Smith,
Inc. and Uniglam Resources, Ltd. (1) [10.13]
10.14 Lease Agreement, dated December 4, 1990, between Hanover Compressor Company and Ricardo J.
Guerra and Luis J. Guerra as amended (1) [10.15]
10.15 Indemnification Agreement, dated as of December 5, 1995, between Hanover Compressor Company
and Western Resources (formerly Astra Resources, Inc.) (1) [10.18]
10.16 Put Agreement, dated December 5th, 1995, by and between Western Resources, Inc. (formerly Astra
Resources, Inc.) an Hanover Compressor Company and Hanover Acquisition Corporation (formerly
Astra Resources Compression, Inc.) (1) [10.19]
10.17 Exchange and Subordinated Loan Agreement dated as of December 23, 1996, among the Company
and GKH Partners, L.P., GK December 23, 1996, among the Company and GKH Partners, L.P., GK
Investments, L.P., IPP95, L.P., Hanna Investment Group, Ott Candies, Inc., Phyllis S. Hojel, Ted
Collins, Jr. and L.O. Ward (1) [10.20]
10.18 1997 Stock Option Plan, as amended (1) [10.23]
10.19 1997 Stock Purchase Plan (1) [10.24]
10.20 Exchange Agreement by and between Hanover Compressor Company and JEDI, dated December 23,
1996 (1) [10.27]
10.21 Lease dated as of July 20, 1998 between Hanover Equipment Trust 1998A (the "Trust") and the
Company. (3) [10.1]
10.22 Guarantee dated as of July 22, 1998 and made by the Company, Hanover/Smith, Inc., Hanover
Maintech, Inc. and Hanover Land Company. (3) [10.2]
10.23 Lessee's and Guarantor's Consent dated as of July 20, 1998 made by the Company, Hanover/Smith,
Inc., Hanover Maintech, Inc. and Hanover Land Company. (3) [10.3]
10.24 Participation Agreement dated as of July 22, 1998 among the Company, the Trust, The Chase
Manhattan Bank, as agent, Societe General & Financial Corporation, and Wilmington Trust
Company. (3) [10.4]
10.25 Security Agreement dated as of July 22, 1998 made by the Trust in favor of The Chase Manhattan
Bank, as agent, with the Company joining by Joinder of Lessee. (3) [10.5]
10.26 Lease Supplement No. 1 dated as of July 22, 1998 between the Trust and the Company. (3) [10.6]
and various banks (9) [10.45]
10.27 1998 Stock Option Plan (4) [10.7]
10.28 December 10, 1998 Stock Option Plan (5)
10.29 1999 Stock Option Plan (5)
12
Exhibit
Number Description
- ------- -----------
10.30 1998 Amendments to Credit Agreement, dated as of December 15, 1997, with the Chase Manhattan
Bank, a New York banking corporation as Administrative Agent and several banks and other
financial institutions that are parties thereto (7) [10.35]
10.31 Lease dated as of June 15, 1999 between Hanover Equipment Trust 1999 and the Company
(8) [10.36]
10.32 Guarantee dated as of June 15, 1999 and made by the Company, Hanover/Smith, Inc., Hanover
Maintech, Inc. and Hanover Land Company (8) [10.37]
10.33 Participation Agreement dated as of June 15, 1999 among the Company, the Trust, Societe Generale
Financial Corporation and FTBC Leasing Corp., The Chase Manhattan Bank, as agent, and
Wilmington Trust Company. (8) [10.38]
10.34 Security Agreement dated as of June 15, 1999 made by the Trust in favor The Chase Manhattan
Bank, as agent. (8) [10.39]
10.35 Lease supplement No. 1 dated June 15, 1999 between the Trust and the Company. (8) [10.40]
10.36 Lessee's and Guarantor's Consent dated as of June 15, 1999 made by the Company, Hanover/Smith,
Inc. Hanover Maintech, Inc. and Hanover Land Company. (8) [10.41]
10.37 Amended and Restated Declaration of Trust of Hanover Compressor Capital Trust, dated as of
December 15, 1999, among Hanover Compressor Company, as sponsor, Wilmington Trust
Company, as property trustee, and Richard S. Meller, William S. Goldberg and Curtis A. Bedrich, as
administrative trustees. (6) [4.5]
10.38 Indenture for the Convertible Junior Subordinated Indentures due 2029, dated as of December 15,
1999 among Hanover Compressor Company, as issuer, and Wilmington Trust Company, as trustee.
(6) [4.6]
10.39 Form of Hanover Compressor Capital Trust 7 1/4% Convertible Preferred Securities. (6) [4.8]
10.40 Form of Hanover Compressor Company Convertible Subordinated Junior Debentures due 2029.
(6) [4.9]
10.41 Preferred Securities Guarantee, dated as of December 15, 1999, between Hanover Compressor
Company, as guarantor, and Wilmington Trust Company, as guarantee trustee. (6) [4.10]
10.42 Common Securities Guarantee dated as of December 15, 1999, by Hanover Compressor Company,
as guarantor (6) [4.11]
10.43 Lease dated as of March 13, 2000 between Hanover Equipment Trust 2000A and the Hanover
Compression Inc. (9) [10.43]
10.44 Guarantee dated as of March 13, 2000 and made by the Company, Hanover Compression Inc. and
certain of their Subsidiaries (9) [10.44]
10.45 Participation Agreement dated as of March 13, 2000 among the Company, the Hanover Equipment
Trust 2000A and various banks (9) [10.45]
10.46 Security Agreement dated as of March 13, 2000 made by the Trust in favor The Chase Manhattan
Bank, as agent. (9) [10.46]
10.47 Assignment of leases, rents and Guarantee from Hanover Equipment Trust 2000A to The Chase
Manhattan Bank dated as of March 13, 2000. (9) [10.47]
10.48 Agreement and Plan of Merger by and among Hanover Compressor Company, APSI Acquisition
Corporation and Applied Process Solutions, Inc. dated as of May 3, 2000. (10)[10.48]
10.49 Amendment to Agreement and Plan of Merger by and among Hanover Compressor Company, APSI
Acquisition Corporation and Applied Process Solutions, Inc. dated as of May 31, 2000. (10)[10.49]
13
Exhibit
Number Description
- ------- -----------
10.50 Amendment No. 2 dated as of October 24, 2000, to Agreement and Plan of Merger by and among
Hanover Compressor Company, APSI Acquisition Corporation and Applied Process Solutions, Inc.
(12)[10.50]
10.51 Purchase Agreement dated as of July 11, 2000 among Hanover Compressor Company, Hanover
Compression Inc., Dresser-Rand Company and Ingersoll-Rand Company (11) [99.2]
10.52 Agreement and Plan of Merger dated as of July 13, 2000 by and among Hanover Compressor
Company, Caddo Acquisition Corporation and OEC Compression Corporation. (12)[10.51]
10.53 Voting and Disposition Agreement dated as of July 13, 2000 by and among Hanover Compressor
Company and the holders of common stock of OEC Compression Corporation named therein.
(12)[10.52]
10.54 Amendment No. 1 to Agreement and Plan of Merger dated as of November 14, 2000 and by and
among Hanover Compressor Company. Caddo Acquisition Corporation and OEC Compression
Corporation (13)[10.51]
10.55 Management Agreement (13)[10.52]
10.56 Asset Purchase Agreement made on July 10, 2000 by and among Hanover Compressor Company and
Stewart & Stevenson Services, Stewart & Stevenson Power, Inc. and PAMCO Services International,
Inc. (13)[10.53]
10.57 Lease dated as of October 27, 2000 between Hanover Equipment Trust 2000B and Hanover
Compression Inc. (13)[10.54]
10.58 Guarantee dated as of October 27, 2000 made by Hanover Compressor Company, Hanover
Compression Inc. and certain subsidiaries (13)[10.55]
10.59 Participation Agreement dated as of October 27, 2000 among Hanover Compression Inc., Hanover
Equipment Trust 2000B, The Chase Manhattan Bank, National Westminster Bank plc, Citibank
N.A., Credit Suisse First Boston and the Industrial Bank of Japan as co-agents; Bank Hapoalim B.M.
and FBTC Leasing Corp., as investors, Wilmington Trust Company and various lenders (13)[10.56]
10.60 Security Agreement dated as of October 27, 2000 made by Hanover Equipment Trust 2000B in favor
of The Chase Manhattan Bank as agent for the lenders (13)[10.57]
10.61 Assignment of Leases, Rents and Guarantee dated as of October 27, 2000, made by Hanover
Equipment Trust 2000B in favor of The Chase Manhattan Bank as agent for the lenders (13)[10.58]
10.62 Amendment No. 1 to Management Agreement (15)[10.62]
12.1 Computation of ratio of earnings to fixed charges and ratio of earnings to combined fixed charges
and preferred dividends*
21.1 List of Subsidiaries (15)[21.1]
23.1 Consent of PricewaterhouseCoopers LLP*
- --------
(1) Such exhibit previously filed as an exhibit to the registration Statement
(File No. 333-27953) on Form S-1, as amended, under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
(2) Such exhibit previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the Year Ended 1997 under the exhibit number indicated in
brackets [ ], and is incorporated by reference.
(3) Such exhibit previously filed as an exhibit to the Company's Current
Report on Form 8-K dated July 22, 1998, under the exhibit number indicated
in brackets [ ], and is incorporated by reference.
(4) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Third Quarter of 1998, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
(5) Compensatory plan or arrangement required to be filed.
14
(6) Such exhibit previously filed as an exhibit to the Registration Statement
(File No. 333-30344) on Form S-3 under the exhibit number indicated in
brackets [ ], and is incorporated by reference.
(7) Such exhibit previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the Year Ended 1998 under the exhibit number indicated in
brackets [ ], and is incorporated by reference.
(8) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Second Quarter of 1999, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
(9) Such exhibit previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the Year Ended 1999 under the exhibit number indicated in
brackets [ ], and is incorporated by reference.
(10) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Second Quarter of 2000, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
(11) Such exhibit previously filed as an exhibit to the Company's Current
Report on Form 8-K dated August 31, 2000, under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
(12) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Third Quarter of 2000, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
(13) Such exhibit previously filed as an exhibit to the Registration Statement
(File No. 333-50836) on Form S-4, as amended, under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
(14) Such exhibit previously filed as an exhibit to the Company's Current
Report on Form 8-K dated February 5, 2001, under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
(15) Such exhibit previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
* Filed herewith.
3. Reports on Form 8-K
(1) A report on Form 8-K was filed on November 9, 2000, which reported
under the caption "Item 5--Other Events" Hanover Compressor Company's financial
results for the third quarter of 2000. This report included a consolidated
statement of income for the company for the three- and nine-month periods ended
September 30, 2000 and 1999.
(2) A report on Form 8-K was filed on November 9, 2000, which reported
under the caption "Item 5--Other Events" that Hanover Compressor Company
believes that the Wall Street consensus estimates of the company's earnings of
$.89 per share for 2000 and $.28 per share for the fourth quarter of 2000 are
realizable.
(3) A report on Form 8-K/A was filed on November 13, 2000, which reported
under the caption "Item 7--Financial Statements and Exhibits" the audited
historical financial statements of the compression services division of
Dresser-Rand Company acquired by the Company in August 2000 and the pro forma
financial statements for the business acquired.
(4) A report on Form 8-K was filed on November 22, 2000, which reported
under the caption "Item 7--Financial Statements and Exhibits" certain pro forma
financial information, selected historical financial data and pro forma
combined condensed financial data of the company giving effect to the company's
purchase of the compressor services division of Dresser-Rand Company for the
nine months ended September 30, 2000 and the year ended December 31, 1999.
Other
Contemporaneous with the filing of this Form 10-K/A for the year ended
December 31, 2000, the Company has provided to the Securities and Exchange
Commission the certifications of the chief executive officer and the chief
financial officer pursuant to 18 U.S.C. Section 1359, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HANOVER COMPRESSOR COMPANY
/S/ CHAD C. DEATON
By: __________________________________
Chad C. Deaton
President and Chief Executive
Officer
Date: December 23, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ CHAD C. DEATON President and Chief Executive December 23, 2002
- ----------------------------- Officer (Principal
Chad C. Deaton Executive Officer and
Director)
/S/ JOHN E. JACKSON Chief Financial Officer December 23, 2002
- ----------------------------- (Principal Financial and
John E. Jackson Accounting Officer)
/S/ VICTOR E. GRIJALVA Director December 23, 2002
- -----------------------------
Victor E. Grijalva
/S/ TED COLLINS, JR. Director December 23, 2002
- -----------------------------
Ted Collins, Jr.
/S/ ROBERT R. FURGASON Director December 23, 2002
- -----------------------------
Robert R. Furgason
/S/ MELVYN N. KLEIN Director December 23, 2002
- -----------------------------
Melvyn N. Klein
/S/ MICHAEL A. O'CONNOR Director December 23, 2002
- -----------------------------
Michael A. O'Connor
/S/ ALVIN V. SHOEMAKER Director December 23, 2002
- -----------------------------
Alvin V. Shoemaker
/S/ I. JON BRUMLEY Director December 23, 2002
- -----------------------------
I. Jon Brumley
/S/ GORDON HALL Director December 23, 2002
- -----------------------------
Gordon Hall
/S/ RENE HUCK Director December 23, 2002
- -----------------------------
Rene Huck
16
Certifications
I, Chad C. Deaton, certify that:
1. I have reviewed this annual report on Form 10-K/A of Hanover
Compressor Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: December 23, 2002
By: /s/ CHAD C. DEATON
-------------------------
Name: Chad C. Deaton
Title: President and Chief
Executive Officer
(Principal Executive
Officer)
I, John E. Jackson, certify that:
1. I have reviewed this annual report on Form 10-K/A of Hanover
Compressor Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: December 23, 2002
By: /s/ JOHN E. JACKSON
-------------------------
Name: John E. Jackson
Title: Senior Vice President and
Chief Financial Officer
(Principal
Financial and Accounting
Officer)
17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Hanover Compressor Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 11, present fairly, in all material
respects, the financial position of Hanover Compressor Company and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index appearing under Item 14(a)(2) on page
11, presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule 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 Notes 19 and 20, the December 31, 2000 and 1999 consolidated
financial statements have been restated for certain revenue recognition matters.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 30, 2001, except for Notes 19 and 20, as to which the dates are April 15,
2002 and November 18, 2002, respectively.
F-1
HANOVER COMPRESSOR COMPANY
CONSOLIDATED BALANCE SHEET
December 31,
-----------------------
Restated Restated
(See Notes (See
19 and 20) Note 20)
2000 1999
ASSETS ---------- --------
(in thousands,
except for par value and
share amounts)
Current assets:
Cash and cash equivalents..................................................... $ 45,484 $ 5,756
Accounts receivable, net...................................................... 221,059 88,625
Inventory..................................................................... 144,692 67,117
Costs and estimated earnings in excess of billings on uncompleted contracts... 24,976 4,782
Prepaid taxes................................................................. 19,948 16,430
Other current assets.......................................................... 12,384 5,287
---------- --------
Total current assets...................................................... 468,543 187,997
Property, plant and equipment, net............................................... 574,703 498,877
Goodwill, net.................................................................... 138,673 29,791
Intangible and other assets...................................................... 64,253 36,722
---------- --------
Total assets........................................................... $1,246,172 $753,387
========== ========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.......................................... $ 2,423 $ 15,967
Short-term notes payable...................................................... 10,073 --
Accounts payable, trade....................................................... 88,651 32,308
Accrued liabilities........................................................... 46,705 22,065
Advance billings.............................................................. 32,292 13,328
Billings on uncompleted contracts in excess of costs and estimated earnings... 5,669 898
---------- --------
Total current liabilities................................................. 185,813 84,566
Long-term debt................................................................... 110,935 69,681
Other liabilities................................................................ 132,895 82,566
Deferred income taxes............................................................ 101,332 64,396
---------- --------
Total liabilities......................................................... 530,975 301,209
---------- --------
Commitments and contingencies (Note 16)
Mandatorily redeemable convertible preferred securities.......................... 86,250 86,250
Common stockholders' equity:
Common stock, $.001 par value; 200,000,000 shares authorized; 66,454,703 and
57,505,874 shares issued, respectively...................................... 66 58
Additional paid-in capital.................................................... 483,737 272,944
Notes receivable--employee stockholders....................................... (1,531) (3,387)
Accumulated other comprehensive income........................................ (457) (311)
Retained earnings............................................................. 147,849 98,210
Treasury stock--75,739 and 167,394 common shares, respectively, at cost....... (717) (1,586)
---------- --------
Total common stockholders' equity......................................... 628,947 365,928
---------- --------
Total liabilities and common stockholders' equity...................... $1,246,172 $753,387
========== ========
The accompanying notes are an integral part of these financial statements.
F-2
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31,
------------------------------------
Restated Restated
(See Notes 19 (See Note 20)
and 20) 2000 1999 1998
------------- ------------- --------
(in thousands,
except per share amounts)
Revenues and other:
Rentals....................................................... $253,837 $192,655 $147,609
Parts, service and used equipment............................. 129,366 39,130 29,538
Compressor fabrication........................................ 90,270 52,531 67,453
Production and processing equipment fabrication............... 79,121 27,255 37,466
Gain on sale of other assets.................................. 1,888 4,062 1,278
Equity in income of non-consolidated affiliates............... 3,518 1,188 1,369
Gain on change in interest in non-consolidated affiliate...... 864 -- --
Other......................................................... 3,922 1,309 1,638
-------- -------- --------
562,786 318,130 286,351
-------- -------- --------
Expenses:
Rentals....................................................... 87,992 64,949 49,386
Parts, service and used equipment............................. 88,294 26,504 21,735
Compressor fabrication........................................ 76,754 43,663 58,144
Production and processing equipment fabrication............... 62,684 20,278 25,781
Selling, general and administrative........................... 54,632 33,782 26,626
Depreciation and amortization................................. 52,882 37,337 37,154
Leasing expense............................................... 45,484 22,090 6,173
Interest expense.............................................. 8,685 8,786 11,716
Distributions on mandatorily redeemable convertible preferred
securities.................................................. 6,369 278 --
-------- -------- --------
483,776 257,667 236,715
-------- -------- --------
Income before income taxes....................................... 79,010 60,463 49,636
Provision for income taxes....................................... 29,371 22,008 19,259
-------- -------- --------
Net income....................................................... 49,639 38,455 30,377
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment....................... (146) (463) 152
-------- -------- --------
Comprehensive income............................................. $ 49,493 $ 37,992 $ 30,529
======== ======== ========
Weighted average common and common equivalent shares outstanding:
Basic......................................................... 61,831 57,048 56,936
======== ======== ========
Diluted....................................................... 66,366 61,054 60,182
======== ======== ========
Earnings per common share:
Basic......................................................... $ 0.80 $ 0.67 $ 0.53
======== ======== ========
Diluted....................................................... $ 0.75 $ 0.63 $ 0.50
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-3
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31,
-------------------------------------
Restated Restated
(See Notes 19 (See Note 20)
and 20) 2000 1999 1998
------------- ------------- ---------
(in thousands)
Cash flows from operating activities:
Net income.................................................................. $ 49,639 $ 38,455 $ 30,377
Adjustments:
Depreciation and amortization........................................... 52,882 37,337 37,154
Amortization of debt issuance costs and debt discount................... 1,050 884 852
Bad debt expense........................................................ 3,198 1,475 349
Gain on sale of property, plant and equipment........................... (10,421) (3,951) (2,552)
Equity in income of nonconsolidated affiliates.......................... (3,518) (1,188) (1,369)
Gain on change in interest in non-consolidated affiliate................ (864) -- --
Deferred income taxes................................................... 27,907 10,259 12,358
Changes in assets and liabilities, excluding business
combinations:.........................................................
Accounts receivable.................................................. (90,749) (18,884) (28,337)
Inventory............................................................ (36,869) (2,473) (24,169)
Costs and estimated earnings versus billings on
uncompleted contracts.............................................. (7,964) 3,293 (3,000)
Accounts payable and other liabilities............................... 44,259 11,969 14,358
Advance billings..................................................... (4,031) 3,634 2,942
Other................................................................ 5,227 (9,200) (7,816)
--------- --------- ---------
Net cash provided by operating activities........................ 29,746 71,610 31,147
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures........................................................ (274,823) (282,940) (169,498)
Payments for deferred lease transaction costs............................... (4,547) -- --
Proceeds from sale of property, plant and equipment......................... 410,915 219,649 208,644
Cash used for business acquisitions, net.................................... (194,955) (35,311) (42,581)
Cash returned from unconsolidated subsidiary................................ -- 8,000 --
Cash used to acquire investments in unconsolidated subsidiaries............. (4,071) (4,900) (11,264)
--------- --------- ---------
Net cash used in investing activities............................ (67,481) (95,502) (14,699)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on revolving credit facility.................... 40,400 (64,400) (4,700)
Proceeds from issuance of long-term debt.................................... -- -- 2,826
Issuance of common stock, net............................................... 59,400 -- --
Proceeds from mandatorily redeemable convertible preferred
securities, net........................................................... -- 82,940 --
Proceeds from warrant conversions and stock options exercises............... 3,608 545 120
Repayment of long-term debt and short-term notes............................ (27,695) (8,357) (2,226)
Purchase of treasury stock.................................................. -- -- (5,950)
Repayments of shareholder notes............................................. 1,876 7,490 602
--------- --------- ---------
Net cash provided by (used in) financing activities.............. 77,589 18,218 (9,328)
--------- --------- ---------
Effect of exchange rate changes on cash and equivalents........................ (126) (73) (178)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........................... 39,728 (5,747) 6,942
Cash and cash equivalents at beginning of year................................. 5,756 11,503 4,561
--------- --------- ---------
Cash and cash equivalents at end of year....................................... $ 45,484 $ 5,756 $ 11,503
========= ========= =========
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,
------------------------------------
Restated Restated
(See Notes 19 (See Note 20)
and 20) 2000 1999 1998
------------- ------------- --------
(in thousands)
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized amounts.............. $ 8,874 $ 7,897 $ 10,992
========= ======= ========
Income taxes paid...................................... $ 1,639 $12,065 $ 2,249
========= ======= ========
Supplemental disclosure of noncash transactions:
Debt issued for property, plant and equipment.......... $ 12,922
=========
Assets sold in exchange for note receivable............ $ 2,783 $ 3,538 $ 1,500
========= ======= ========
Common stock issued in exchange for notes receivable... $ 731
=======
Acquisitions of businesses:
Property, plant and equipment acquired................. $ 202,893 $39,105 $ 31,015
========= ======= ========
Other assets acquired, net of cash acquired............ $ 93,116 $ 2,784 $ 7,621
========= ======= ========
Goodwill............................................... $ 113,962 $ 6,927 $ 20,680
========= ======= ========
Liabilities assumed.................................... $ (66,113) $(1,578) $ (1,261)
========= ======= ========
Deferred taxes......................................... $ (9,029) $(8,627) $(12,174)
========= ======= ========
Treasury and common stock issued....................... $(139,874) $(3,300) $ (3,300)
========= ======= ========
The accompanying notes are an integral part of these financial statements.
F-5
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
Accumulated Notes Restated (See
Common stock Additional other receivable- Notes 19 and 20)
----------------- paid-in comprehensive Treasury employee Retained
Shares Amount capital income stock stockholders earnings
---------- ------ ---------- ------------- -------- ------------ ----------------
(in thousands, except share data)
Balance at January 1, 1998......... 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......................... -- -- -- -- -- -- 38,455
---------- --- -------- ----- ------- -------- --------
Balance at December 31, 1999....... 57,505,874 58 272,944 (311) (1,586) (3,387) 98,210
Conversion of warrants............. 684,770 -- -- -- -- -- --
Exercise of stock options.......... 994,572 1 3,607 -- -- -- --
Other comprehensive loss........... -- -- -- (146) -- -- --
Issuance of common stock, net...... 2,000,000 2 59,398 -- -- -- --
Issuance of common stock for
acquisitions...................... 5,269,487 5 136,569 -- -- -- --
Issuance of 91,727 treasury shares
at $35.98 per share............... -- -- 2,431 -- 869 -- --
Repayment of employee
shareholder notes................. -- -- -- -- -- 1,876 --
Income tax benefit from stock
options exercised................. -- -- 8,813 -- -- -- --
Other.............................. -- -- (25) -- -- (20) --
Net income......................... -- -- -- -- -- -- 49,639
---------- --- -------- ----- ------- -------- --------
Balance at December 31, 2000....... 66,454,703 $66 $483,737 $(457) $ (717) $ (1,531) $147,849
========== === ======== ===== ======= ======== ========
F-6
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
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, gas handling
and related services in the United States and international markets. Hanover
provides compressor fabrication and oil and gas production equipment
fabrication operations in addition to gas processing, gas treatment, gas
measurement and power generation services to complement its compression
services. Hanover was founded in 1990 and is a Delaware corporation. 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.
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. Investments in affiliated
entities in which the Company owns more than a 20% interest and does not have a
controlling interest are accounted for using the equity method.
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, service and used equipment revenue is recorded as products are
delivered or services are performed for the customer.
Compressor, production and processing equipment fabrication revenue is
recognized using the percentage-of-completion method. The Company estimates
percentage-of-completion for compressor and processing equipment 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. The
average duration of these projects is four to six months.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents, accounts receivable and
notes 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 throughout the
F-7
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
world. 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. The Company considers this credit risk to be limited due to these
companies' financial resources. Trade accounts receivable is recorded net of
estimated doubtful accounts of $2,659,000 and $1,730,000 at December 31, 2000
and 1999, respectively.
Inventory
Inventory consists of parts used for fabrication or maintenance of natural
gas compression equipment and facilities, processing 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, net of
accumulated depreciation is recorded in parts, service and used equipment
expenses. Sales proceeds are recorded in parts, service and used equipment
revenues. 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.
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.
Goodwill
The excess of cost over net assets of acquired businesses is recorded as
goodwill and amortized on a straight-line basis over 15 or 20 years commencing
on the dates of the respective acquisitions. Accumulated amortization was
$8,902,000 and $3,822,000 at December 31, 2000 and 1999, respectively.
Amortization of goodwill totaled $5,080,000, $2,048,000 and $981,000 in 2000,
1999 and 1998, respectively.
Sale and Leaseback Transactions
The Company from time to time enters into sale and leaseback transactions of
compression equipment with special purpose entities. Sale and leaseback
transactions of compression equipment are evaluated for lease classification in
accordance with Statement of Financial Accounting Standards No. 13 "Accounting
for Leases."
F-8
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The special purpose entities are not consolidated by the Company when the
owners of the special purpose entities have made a substantial residual equity
investment of at least three percent that is at risk during the entire term of
the lease.
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 13, 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
that would change the tax law or rates. A valuation allowance is recognized for
deferred tax assets if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
Foreign Currency Translation
The financial statements of subsidiaries outside the U.S., except those
located in Latin America and 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 Latin America and highly inflationary economies,
translation gains and losses are included in net income.
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 and convertible securities.
Included in diluted shares are common stock equivalents relating to options
of 4,258,000, 3,296,000 and 2,460,000 in 2000, 1999 and 1998, respectively,
warrants of 277,000, 712,000 and 786,000 in 2000, 1999 and 1998, 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.
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.
F-9
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
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 8 and 9.
Accounting for Derivatives
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137 and SFAS 138, 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. The Company adopted SFAS 133 beginning January 1,
2001, and the initial adoption of SFAS 133 did not have a material effect on
the Company's results of operations, cash flows or financial position. However,
the impact on our results of operations in the first quarter of 2001 and
subsequent periods could be material due to fluctuations in the fair value of
an option held by the counterparty to our interest rate swaps which will be
recorded in our results of operations until this option is exercised or expires
in July 2001.
Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 2000 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 estimates and actual values to be
material.
Year Ended December 31, 2000
In October 2000, the Company purchased the common stock of Servicios TIPSA
S.A. for approximately $7,750,000 in cash and a $7,750,000 note payable. The
note payable was repaid in January 2001.
F-10
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
In September 2000, the Company purchased the Dresser-Rand Company's
compression services ("DR") division for $177,000,000 including approximately
$1,200,000 of acquisition costs. Under the terms of the agreement, $95,000,000
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 estimated value of the stock issued was
approximately $80,539,000, based upon quoted market price for the Company's
common stock reduced by a discount due to the restriction on the stock's
marketability. The purchase price is subject to certain post-closing
adjustments pursuant to the acquisition agreement which have resulted in a
$16,562,000 increase in the purchase price due to increases in the net assets
acquired. The final purchase price is still subject to adjustments which the
Company expects will not exceed approximately $10,000,000. In connection with
the acquisition, the Company has agreed to purchase under normal business terms
$25,000,000 worth of products, goods and services from Dresser-Rand Company
over a three-year period beginning December 2001.
In September 2000, the Company acquired the common stock of Gulf Coast
Dismantling, Inc. for approximately $2,947,000 in cash and 9,512 shares of the
Company's treasury stock valued at $300,000.
In July 2000, the Company completed its acquisition of PAMCO Services
International's natural gas compressor assets for approximately $45,210,000 in
cash and a $12,922,000 note payable due on April 10, 2001. The note is payable
periodically as idle horsepower is contracted. Approximately $10,599,000 of the
note payable was repaid in 2000. In connection with the acquisition, the
Company agreed to purchase under normal business terms specified levels of
equipment over a three-year period beginning October 2000.
In June 2000, the Company purchased common stock of Applied Process
Solutions, Inc. ("APSI") for 2,303,294 shares of the Company's common stock and
assumption of $16,030,000 of APSI's outstanding debt. The estimated value of
the stock issued was approximately $54,816,000, based upon quoted market price
for the Company's common stock reduced by a discount due to the restriction on
the stock's marketability. The assumed debt has been repaid.
In July 2000, the Company purchased the assets of Rino Equipment, Inc. and
K&K Compression, Ltd. for approximately $15,679,000 in cash and 54,810 shares
of the Company's treasury stock valued at $2,000,000.
In July 2000, the Company purchased the common stock of Compression
Components Corporation for approximately $7,972,000 in cash and 27,405 shares
of the Company's treasury stock valued at $1,000,000.
In March 2000, the Company purchased the common stock of Southern
Maintenance Services, Inc. for approximately $1,500,000 in cash, 46,512 shares
of the Company's common stock valued at $1,000,000 and $1,000,000 in notes
payable that mature on March 1, 2003.
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. 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.
F-11
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
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.
Pro Forma Information
The pro forma information set forth below assumes the acquisitions of APSI
and DR in 2000 and the 1999 acquisitions are accounted for had the purchases
occurred at the beginning of 1999. The remaining acquisitions were not
considered material for pro forma purposes. 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,
-----------------------
Restated Restated
2000 1999
----------- -----------
(unaudited) (unaudited)
Revenue........................... $658,217 $557,094
Net income........................ 48,421 45,452
Earnings per common share--basic.. 0.75 0.73
Earnings per common share--diluted 0.70 0.69
3. Inventory
Inventory consisted of the following amounts (in thousands):
December 31,
-----------------
Restated Restated
2000 1999
-------- --------
Parts and supplies $ 92,558 $44,613
Work in progress.. 47,193 18,677
Finished goods.... 4,941 3,827
-------- -------
$144,692 $67,117
======== =======
4. Compressor and Production Equipment Fabrication Contracts
Costs, estimated earnings and billings on uncompleted contracts are as
follows (in thousands):
December 31,
-----------------
2000 1999
-------- -------
Costs incurred on uncompleted contracts $ 58,302 $11,041
Estimated earnings..................... 8,414 2,150
-------- -------
66,716 13,191
Less--billings to date................. (47,409) (9,307)
-------- -------
$ 19,307 $ 3,884
======== =======
F-12
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Presented in the accompanying financial statements as follows (in thousands):
December 31,
---------------
2000 1999
------- ------
Costs and estimated earnings in excess of billings on uncompleted contracts $24,976 $4,782
Billings on uncompleted contracts in excess of costs and estimated earnings (5,669) (898)
------- ------
$19,307 $3,884
======= ======
5. Property, plant and equipment
Property, plant and equipment consisted of the following (in thousands):
December 31,
------------------
Restated Restated
2000 1999
-------- --------
Compression equipment and facilities $577,435 $521,815
Land and buildings.................. 35,233 19,000
Transportation and shop equipment... 44,202 27,616
Other............................... 15,279 10,029
-------- --------
672,149 578,460
Accumulated depreciation............ (97,446) (79,583)
-------- --------
$574,703 $498,877
======== ========
Depreciation expense was $46,211,000, $34,696,000 and $35,768,000 in 2000,
1999 and 1998, respectively. Assets under construction of $66,203,000 and
$18,937,000 are included in compression equipment at December 31, 2000 and
1999, respectively. In 2000 and 1999, $1,823,000 and $1,533,000 of interest
cost was capitalized. No interest was capitalized for 1998.
6. Intangible and Other Assets
Intangible and other assets consisted of the following (in thousands):
December 31,
----------------
Restated
2000 1999
-------- -------
Investments in unconsolidated subsidiaries......... $26,452 $18,892
Deferred debt issuance and other transactions costs 16,091 10,317
Notes receivable................................... 14,975 9,214
Other.............................................. 12,150 1,862
------- -------
69,668 40,285
Accumulated amortization........................... (5,415) (3,563)
------- -------
$64,253 $36,722
======= =======
Amortization of intangible and other assets totaled $1,591,000, $593,000 and
$405,000 in 2000, 1999 and 1998, respectively, exclusive of amortization of
debt issuance costs.
F-13
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The Company holds a non-controlling 60% interest in the Hanover/Enron Joint
Venture. In June 2000, the Company sold 50% of the common stock of its
wholly-owned Venezuelan subsidiary, Servicompressores, to Gaspetrol
International S.A., an affiliate of Cosacol, for $3,133,000. The sale price was
comprised of $350,000 in cash and a note receivable of $2,783,000 that is
payable over 5 years at the greater of $300,000 per year or 50% of the profits
of Servicompressores. The balance is due in June 2005. The transaction resulted
in a gain of $2,133,000. In June 2000, the Company sold a 25% undivided
interest in a power generation plant for $5,000,000 resulting in a gain on
disposition of approximately $1,300,000.
In May 2000, the Company acquired 10% of the common stock of Aurion
Technologies, Inc. ("Aurion") for $2,511,000 in cash. Aurion sells and services
remote monitoring equipment and software. The investment is accounted for using
the cost method.
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.
In December 1998, the Company restructured its relationship in the
Consortium Cosacol/Hanover (the "Consortium"), a joint venture in which the
Company owned a 35% interest. 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. During 2000, the Company acquired the
remaining 65% interest in the Consortium for $600,000.
In November 1997, Hanover acquired 35% of the common stock of Collicutt
Mechanical Services, Ltd. ("CMS") 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, 2000 and 1999. During 2000, CMS sold additional shares
that reduced the Company's ownership percentage to approximately 24%,
accordingly, a change in interest gain of $864,000 was recorded in the
statement of income.
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, bear interest at rates ranging from prime to 15% and are
collateralized by equipment.
7. Accrued Liabilities
Accrued liabilities are comprised of the following (in thousands):
December 31,
---------------
2000 1999
------- -------
Accrued salaries, bonuses and other employee benefits $ 6,356 $ 1,893
Accrued leasing expense.............................. 3,389 3,496
Accrued warranty..................................... 1,607 758
Additional purchase price for DR (Note 2)............ 16,562 --
Accrued other........................................ 18,791 15,918
------- -------
$46,705 $22,065
======= =======
F-14
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
8. Long-Term Debt
Long-term debt consisted of the following (in thousands):
December 31,
------------------
2000 1999
-------- --------
Revolving credit facility...................................................... $102,500 $ 62,100
Subordinated promissory notes, net of unamortized discount of $0 and
$289......................................................................... -- 15,364
Real estate mortgage, interest at 7.5%, collateralized by certain land and
buildings, payable through 2002.............................................. 4,000 4,250
Other, interest at various rates, collateralized by equipment and other assets,
net of unamortized discount.................................................. 6,858 3,934
-------- --------
113,358 85,648
Less--current maturities....................................................... (2,423) (15,967)
-------- --------
$110,935 $ 69,681
======== ========
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 (7.5% and 7.7% at December 31, 2000 and
1999, 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 matured and were repaid on December 31,
2000. Approximately $11,191,000 of the subordinated promissory notes were owed
to related parties and the Company incurred interest to these parties of
$784,000 during 2000, 1999 and 1998.
Maturities of long-term debt at December 31, 2000 are (in thousands):
2001--$2,423; 2002--$107,456; 2003--$670; 2004--$600; 2005--$435 and $1,774
thereafter.
9. Leasing Transactions
In October 2000, the Company completed a $172,589,000 sale and leaseback of
certain compression equipment. In March 2000, the Company entered into a
separate $200,000,000 sale and leaseback of certain compression equipment.
Under the March agreement, the Company received $100,000,000 proceeds from the
sale of compression equipment at closing and in August 2000, the Company
completed the second half of the equipment lease and received an additional
$100,000,000 for the sale of additional compression equipment. In June 1999 and
in July 1998 the Company completed two other separate $200,000,000 sale and
leaseback transactions of certain compression equipment. All transactions are
recorded as a sale and leaseback of the equipment and are recorded as operating
leases. Under all the lease 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 lease agreements 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. Any gains on the sale of the
equipment are deferred until the end of the respective lease terms. Should the
Company not exercise its purchase options under the lease agreements, the
deferred gains will be recognized to the extent they exceed any residual value
guarantee payments and any other items required under
F-15
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
the lease agreements. The Company incurred transaction costs of approximately
$4,532,000, $1,799,000 and $1,423,000 for the 2000, 1999 and 1998 transactions,
respectively. These costs are included in intangible and other assets and are
being amortized over the respective lease terms. The following table summarizes
the proceeds, net book value of equipment sold, deferred gain on equipment sale
and the residual value guarantee for each equipment lease (in thousands of
dollars):
Sale Net Book Deferred Residual
Lease Proceeds Value Gain Value Guarantee
----- -------- -------- -------- ---------------
July 1998............ $200,000 $158,007 $41,993 $167,000
June 1999............ 200,000 166,356 33,644 166,000
March and August 2000 200,000 166,922 33,078 166,000
October 2000......... 172,589 155,692 16,897 142,299
The lease agreements call for variable quarterly rental payments that vary
with the London Interbank Offering Rate. The future minimum lease payments
under the leasing agreements exclusive of any residual value guarantee payments
(in thousands of dollars): 2001--$59,100; 2002--$60,100; 2003--$52,000;
2004--$36,600; 2005--$15,400.
In July 1998 and in connection with the 1998 lease agreement, the Company
entered into two 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. These swap transactions
expire in July 2001 unless they are extended for an additional two year term at
the option of the counterparty. 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. The fair value of these interest
rate swaps and the options to extend their maturity is approximately $241,000
at December 31, 2000.
10. Income Taxes
The components of income before income taxes were as follows (in thousands):
Years ended December 31,
-------------------------
Restated Restated
2000 1999 1998
-------- -------- -------
Domestic $58,746 $44,618 $39,160
Foreign. 20,264 15,845 10,476
------- ------- -------
$79,010 $60,463 $49,636
======= ======= =======
F-16
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The provision for income taxes consisted of the following (in thousands):
Years ended December 31,
-------------------------
Restated Restated
2000 1999 1998
-------- -------- -------
Current tax expense (benefit):
Federal.................... $ 3,526 $ 6,958 $ 3,421
State...................... 499 1,412 1,741
Foreign.................... (2,561) 3,379 1,739
------- ------- -------
Total current.......... 1,464 11,749 6,901
------- ------- -------
Deferred tax expense:
Federal.................... 16,309 9,533 10,312
State...................... -- 151 85
Foreign.................... 11,598 575 1,961
------- ------- -------
Total deferred......... 27,907 10,259 12,358
------- ------- -------
Total provision............... $29,371 $22,008 $19,259
======= ======= =======
The income tax expense for 2000, 1999 and 1998 resulted in effective tax
rates of 37.2%, 36.4% and 38.8%, respectively. The reasons for the differences
between these effective tax rates and the U.S. statutory rate of 35% are as
follows (in thousands):
Years ended December 31,
-------------------------
Restated Restated
2000 1999 1998
-------- -------- -------
Federal income tax at statutory rates................ $27,653 $21,163 $17,373
State income taxes, net of federal income tax benefit 324 1,016 1,187
Foreign income taxes................................. 1,241 211 33
Other, net........................................... 153 (382) 666
------- ------- -------
$29,371 $22,008 $19,259
======= ======= =======
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
December 31,
-------------------
Restated Restated
2000 1999
--------- --------
Deferred tax assets:
Net operating losses................. $ 32,222 $ 8,582
Alternative minimum tax carryforward. 14,623 19,005
Other................................ 3,384 2,391
--------- --------
Gross deferred tax assets............... 50,229 29,978
Deferred tax liabilities:
Property, plant and equipment........ (145,892) (82,764)
Other................................ (5,669) (11,610)
--------- --------
Gross deferred tax liabilities.......... (151,561) (94,374)
--------- --------
$(101,332) $(64,396)
========= ========
F-17
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The Company has net operating loss carryforwards at December 31, 2000 of
$92,084,000 expiring in 2006 to 2020. In addition, the Company has an
alternative minimum tax credit carryforward of $14,623,000 that does not expire.
In 2000, the Company recorded approximately $9,029,000 of additional
deferred income tax liabilities resulting from the 2000 acquisition
transactions. In 1999, the company recorded approximately $8,627,000 additional
deferred income tax liability resulting from the 1999 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.
11. Mandatorily Redeemable Convertible Preferred Securities
In December 1999, the Company issued $86,250,000 of unsecured Mandatorily
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 them
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 2000 and 1999, the Company
accrued distributions of approximately $6,253,000 and $278,000, respectively
related to Convertible Preferred Securities. Each Convertible Preferred
Security is convertible into 2.7972 shares of Hanover common stock, subject to
certain conditions. The Company has fully and unconditionally guaranteed the
Convertible Preferred Securities. The Company incurred transaction costs of
approximately $3,439,000 (net of $116,000 accumulated amortization at December
31, 2000) that are included in other assets. The transaction costs are being
amortized over the term of the Convertible Preferred Securities. The fair value
of the Convertible Preferred Securities is approximately $163,659,000 at
December 31, 2000.
12. Common Stockholders' Equity
Stock Offering
In May 2000, the Company completed a private placement of 2,000,000 newly
issued shares of common stock to an institutional investor for cash of
$59,400,000 (net of $600,000 of equity issuance costs).
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 have been restated for all periods
presented to reflect this stock split. In addition, the Board of Directors
approved an increase of authorized shares of common stock to 200,000,000.
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
F-18
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
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, 2000, warrants to purchase approximately 4,000 shares of
common stock at $.005 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.
See Notes 1, 2, 5 and 13 for a description of other common stock
transactions.
13. 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 with an
exercise price equal to the 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. No compensation expense related to stock options was recorded in
2000, 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 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%
In June 2000, the Company purchased APSI that had existing stock option
programs in place. The Company converted the outstanding APSI stock options
into the Company's stock options as of the purchase date at a conversion ratio
equal to the exchange ratio under the merger agreement. As a result, 127,813
options were converted at a weighted-average per share exercise price of
approximately $12.88. Approximately 60,307 of the options vested at acquisition
with the remaining options vesting at varying dates through 2003.
F-19
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The following is a summary of stock option activity for the years ended
December 31, 2000, 1999 and 1998:
Weighted average
Shares price per share
--------- ----------------
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 granted.................... -- --
APSI acquisition................... 127,813 12.88
Options canceled................... (11,562) 9.78
Options exercised.................. (994,572) 3.68
---------
Options outstanding, December 31, 2000 7,918,683 6.63
--------- -----
Options Outstanding at December 31, 2000
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 2000:
Options outstanding Options exercisable
---------------------------- ------------------
Weighted
average Weighted Weighted
remaining average average
life in exercise exercise
Range of exercise prices Shares years price Shares price
------------------------ --------- --------- -------- --------- --------
$0.01.............. 76,886 1.4 $ 0.01 76,886 $ 0.01
$2.30--$3.48....... 3,378,062 0.7 2.37 3,378,062 2.37
$4.57--$6.96....... 297,989 3.6 5.26 285,956 5.29
$9.57--$14.50...... 4,117,146 7.2 10.19 1,703,507 9.93
$20.09............. 48,600 9.3 20.09 8,598 20.09
--------- ---------
7,918,683 5,453,009
========= =========
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
and $4.16 per option during 1999 and 1998, respectively. The Company did not
grant any stock options in 2000. The fair value of options at date of grant was
estimated using the Black-Scholes model with the following weighted average
assumptions:
2000 1999 1998
---- ------- -------
Expected life. N/A 6 years 6 years
Interest rate. N/A 6.0% 4.8%
Volatility.... N/A 29.4% 32.6%
Dividend yield N/A 0% 0%
F-20
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Stock-based compensation costs computed in accordance with FAS 123, would
have reduced net income by $4,598,000, $2,194,000 and $825,000 in 2000, 1999
and 1998, respectively. The pro forma impact on net income would have reduced
basic and diluted earnings per share by $.07 in 2000 and basic and diluted
earnings per share of $.04 per share in 1999 and $.02 per share in 1998. The
pro forma effect on net income for 2000, 1999 and 1998 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.
14. 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 $594,000, $399,000
and $273,000 during the years ended December 31, 2000, 1999 and 1998,
respectively.
15. Related Party Transactions
Hanover and GKH Partners, L.P. ("GKH"), a major stockholder of the Company,
entered into an agreement whereby in exchange for investment banking and
financial advisory services rendered by the major stockholder, the Company
agreed to pay a fee to GKH. Approximately $2,048,000 of the fees payable to GKH
is included in accrued liabilities at December 31, 2000 and 1999. This
liability was paid in 2001 and the agreement is no longer in effect.
The Company has advanced cash to certain management employees in return for
notes. The notes receivable totaled $1,589,000, bear interest at the prime
rate, mature in June 2004 and are collateralized by Company common stock owned
by the employees with full recourse. The notes and related interest will be
forgiven over a four-year period should the employee continue their employment
with the Company. The forgiveness will accelerate upon a change in control of
the Company. During 2000, the Company recognized compensation expense related
to the forgiveness of these notes receivable that totaled $105,000.
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, 2000 and 1999 are $1,531,000 and $3,387,000,
respectively. Total interest accrued on the loans is $106,000 and $203,000 as
of December 31, 2000 and 1999, respectively.
The Company also leases compressors to affiliates of Enron Capital and Trade
Resources Corp. ("Enron"), an affiliate of a major stockholder of the Company.
Rentals of $18,586,000, $8,776,000 and $6,801,000 were paid by affiliates of
Enron in 2000, 1999 and 1998, respectively. The Company sold equipment of
approximately $5,289,000 to affiliates of Enron in 2000. Compression
fabrication of $6,320,000 was purchased by affiliates of Enron in 1999. An
affiliate of Enron also owns interest in Meter Acquisition Company LP, LLLP and
Hanover Measurement Services Company, L.P. ("HMS"). The Company charged HMS
$312,000 for general and administrative services during 2000.
In July 2000, the Company entered into a definitive merger agreement to
purchase the outstanding stock of OEC Compression Corporation. In the third
quarter of 2000, the Company and OEC entered into a management agreement under
which OEC engaged Hanover to provide day to day management services for OEC's
field and shop operations. In connection with the management agreement, the
Company billed and collected management fees that totaled $2,700,000 that are
included in parts and service revenue. See footnote 17 for subsequent events.
F-21
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The Company leases compressors to other companies owned or controlled by or
affiliated with related parties. Rental and maintenance revenues billed to
these related parties totaled $936,000, $902,000 and $859,000 during 2000, 1999
and 1998, respectively.
See Note 6 for related party investments and Note 12 for a description of
common stock transactions with related parties.
16. Commitments and Contingencies
Rent expense, excluding lease payments for the leasing transactions
described in Note 9 for 2000, 1999 and 1998 was approximately $2,159,000,
$1,320,000 and $455,000, respectively. Commitments for future minimum rental
payments exclusive of those disclosed in Note 9 under noncancelable operating
leases with terms in excess of one year at December 31, 2000 are (in
thousands): 2001--$2,951; 2002--$2,362; 2003--$2,156; 2004--$1,949;
2005--$1,574.
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.
17. Subsequent Events
In March 2001, the Company issued 2,500,000 shares of common stock for cash
of approximately $87,900,000 before issuance costs in connection with an equity
offering. In addition, the Company issued $192,000,000 of 4.75% Convertible
Senior Notes due March 15, 2008.
In March 2001, the Company completed its purchase of OEC Compression
Corporation for approximately 1.1 million shares of common stock and assumption
of approximately $61,900,000 in debt.
18. Industry Segments and Geographic Information
The Company manages its business segments primarily on the type of product
or service provided. The Company has five principal industry segments:
Rentals--Domestic, Rentals--International, Parts, Service and Used Equipment,
Compressor Fabrication and Production and Processing 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 and Processing
Equipment Fabrication Segment designs, fabricates and sells equipment utilized
in the production of crude oil and natural gas. Prior periods have been
restated to reflect the expansion in 2000 of the Parts, Service and Used
Equipment segment.
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
F-22
HANOVER COMPRESOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
redeemable convertible preferred securities and income taxes. Amounts defined
as "Other" include equity in income of nonconsolidated affiliates, results of
other insignificant operations and corporate related items primarily related to
cash management activities. Revenues include sales to external customers and
intersegment sales. Intersegment sales are accounted for at cost except for
compressor fabrication equipment sales which are accounted for on an arms
length basis, and the sales and resulting profits 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 $41,200,000 and
$32,300,000 of the Company's purchases in 2000 and 1998, respectively.
Industry Segments
Parts,
service Production
Domestic International and used Compressor equipment
rentals rentals equipment fabrication fabrication Other Eliminations Consolidated
-------- ------------- --------- ----------- ----------- ------- ------------ ------------
(in thousands)
2000: (Restated)
Revenues from external
customers.............. $172,517 $ 81,320 $129,366 $ 90,270 $ 79,121 $10,192 $ -- $ 562,786
Intersegment sales...... -- 1,200 31,086 89,963 3,653 7,413 (133,315) --
-------- -------- -------- -------- -------- ------- --------- ----------
Total revenues....... 172,517 82,520 160,452 180,233 82,774 17,605 (133,315) 562,786
Gross profit............ 112,181 53,664 41,072 13,516 16,437 10,192 -- 247,062
Identifiable assets..... 428,332 431,362 13,226 202,390 125,377 45,485 -- 1,246,172
Capital expenditures.... 214,425 58,801 -- 874 723 -- -- 274,823
Depreciation and
amortization........... 30,102 15,117 160 4,381 3,122 -- -- 52,882
1999: (Restated)
Revenues from external
customers.............. $136,430 $ 56,225 $ 39,130 $ 52,531 $ 27,255 $ 6,559 $ -- $ 318,130
Intersegment sales...... -- 1,200 38,656 75,139 4,821 -- (119,816) --
-------- -------- -------- -------- -------- ------- --------- ----------
Total revenues....... 136,430 57,425 77,786 127,670 32,076 6,559 (119,816) 318,130
Gross profit............ 90,246 37,460 12,626 8,868 6,977 6,559 -- 162,736
Identifiable assets..... 432,572 249,800 -- 41,252 24,007 5,756 -- 753,387
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 $ 29,538 $ 67,453 $ 37,466 $ 4,285 $ -- $ 286,351
Intersegment sales...... -- 1,200 7,792 54,369 2,902 -- (66,263) --
-------- -------- -------- -------- -------- ------- --------- ----------
Total revenues....... 107,420 41,389 37,330 121,822 40,368 4,285 (66,263) 286,351
Gross profit............ 70,850 27,373 7,803 9,309 11,685 4,285 -- 131,305
Identifiable assets..... 377,090 159,214 -- 41,189 25,594 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
F-23
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Geographic Data
United
States International Consolidated
-------- ------------- ------------
(in thousands)
2000: (Restated)
Revenues from external customers.. $440,799 $121,987 $ 562,786
Identifiable assets............... $760,105 $486,067 $1,246,172
1999: (Restated)
Revenues from external customers.. $257,992 $ 60,138 $ 318,130
Identifiable assets............... $500,414 $252,973 $ 753,387
1998:
Revenues from external customers.. $234,999 $ 51,352 $ 286,351
Identifiable assets............... $454,682 $159,908 $ 614,590
19. April 2002 Restatement
In conjunction with a review of our joint ventures and other transactions
conducted by counsel under the direction of the Audit Committee in early 2002,
the Company determined to restate its financial statements for the year ended
December 31, 2000. The net effect of the April 2002 restatement was as follows:
(i) a decrease in revenues of $37,748,000, from $603,829,000 to $566,081,000;
(ii) a decrease in income before income taxes of $11,999,000, from $93,470,000
to $81,471,000; (iii) a decrease in net income of $7,535,000, from $58,699,000
to $51,164,000; and (iv) a decrease in earnings per common share of $0.12 basic
and $0.11 diluted for the year ended December 31, 2000. See Note 20 for
information regarding the further restatement of the 2000 consolidated
financial statements.
F-24
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The transactions involved in the April 2002 restatement, which are detailed
further below are: (i) the Cawthorne Channel project in Nigeria initially
conducted through the Hampton Roads Shipping Investors II, L.L.C. joint
venture; (ii) the acquisition of two compressors in a non-monetary exchange
transaction; (iii) a compressor sale transaction; and (iv) the sale of a
turbine engine. The impact of the restatement for the year ended December 31,
2000 is summarized below:
Cawthorne
Channel
Project in Acquisitions
Nigeria/ of
Hampton Compressors
Roads In Non- Compressor Sale of
Joint Monetary Sale Turbine
As Filed Venture Exchange Transaction Engine Restated
-------- ---------- ------------ ----------- ------- --------
(in thousands except per share amounts)
Revenues:
Rentals................................... $254,515 $ -- $ -- $ -- $ -- $254,515
Parts, service and used equipment......... 151,707 -- -- (12,004) (7,500) 132,203
Compressor fabrication.................... 96,838 (6,568) -- -- -- 90,270
Production and processing equipment
fabrication.............................. 88,572 (9,451) -- -- -- 79,121
Gain on sale of other assets.............. 4,113 -- (2,225) -- -- 1,888
Gain on change in interest in non-
consolidated affiliate................... 864 -- -- -- -- 864
Other..................................... 7,220 -- -- -- -- 7,220
-------- -------- ------- -------- ------- --------
Total revenues......................... 603,829 (16,019) (2,225) (12,004) (7,500) 566,081
-------- -------- ------- -------- ------- --------
Expenses:
Rentals................................... 87,992 -- -- -- -- 87,992
Parts, service and used equipment......... 103,276 -- -- (7,954) (6,194) 89,128
Compressor fabrication.................... 81,996 (5,242) -- -- -- 76,754
Production and processing equipment
fabrication.............................. 69,281 (6,597) -- -- -- 62,684
Selling, general and administrative....... 54,606 26 -- -- -- 54,632
Depreciation and amortization............. 52,882 -- -- -- -- 52,882
Lease expense............................. 45,484 -- -- -- -- 45,484
Interest expense.......................... 8,473 212 -- -- -- 8,685
Distributions on mandatorily redeemable
convertible preferred Securities......... 6,369 -- -- -- -- 6,369
-------- -------- ------- -------- ------- --------
Total expenses......................... 510,359 (11,601) -- (7,954) (6,194) 484,610
-------- -------- ------- -------- ------- --------
Income before income taxes.................... 93,470 (4,418) (2,225) (4,050) (1,306) 81,471
Provision for income taxes.................... 34,771 (1,644) (827) (1,507) (486) 30,307
-------- -------- ------- -------- ------- --------
Net income.................................... $ 58,699 $ (2,774) $(1,398) $ (2,543) $ (820) $ 51,164
======== ======== ======= ======== ======= ========
Earnings per common share:
Basic..................................... $ 0.95 $ 0.83
Diluted .................................. $ 0.88 $ 0.77
F-25
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Restatement
As filed Items Restated
---------- ----------- ----------
(in thousands)
Accounts receivable, net............................. $ 242,526 $(19,504) $ 223,022
Inventory............................................ 139,248 6,194 145,442
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 38,665 (13,689) 24,976
Property, plant and equipment, net................... 583,586 (9,990) 573,596
Intangible and other assets, net..................... 65,707 (776) 64,931
Total assets......................................... 1,289,521 (37,765) 1,251,756
Accrued liabilities.................................. 49,205 (2,500) 46,705
Other liabilities.................................... 158,661 (25,766) 132,895
Deferred income taxes................................ 105,369 (1,964) 103,405
Total liabilities.................................... 563,278 (30,230) 533,048
Retained earnings.................................... 158,895 (7,535) 151,360
Total liabilities and common stockholders' equity.... 1,289,521 (37,765) 1,251,756
Cawthorne Channel Project in Nigeria/Hampton Roads Joint Venture
Cawthorne Channel is a project to build, own and operate barge-mounted gas
compression and gas processing facilities to be stationed in a Nigerian coastal
waterway as part of the performance of a contract between Global Energy and
Refining Ltd. ("Global") and Shell Petroleum Development Company of Nigeria
Limited, the Nigerian operating unit of The Royal/Dutch Shell Group ("Shell").
The Company entered into a contract with Global in June 1999 to fabricate and
lease facilities to Global to assist Global in fulfilling its obligations under
its contract with Shell. Subsequently, the Company acquired a 10% interest in
Global in settlement of a $1.1 million debt owed by Global to the Company
stemming from Global's agreement to pay a delay penalty to the Company.
In September 2000, the Company and an unrelated third party formed a joint
venture known as Hampton Roads Shipping Investors II, L.L.C. ("Hampton Roads")
which was to own the gas processing facilities and lease them to Global. The
Company held a 25% interest in Hampton Roads, and the third party held the
remaining 75% interest. The Company's initial capital contribution to Hampton
Roads was $1,250,000 and the third party's initial capital contribution was
$3,750,000. The Company entered into a turnkey construction contract with
Hampton Roads to fabricate the barges for the Cawthorne Channel project for
$51,000,000. The barges were to be used pursuant to a 10-year contract with
Shell to commence September 30, 2001. During the first quarter of 2001, the
scope of the project was reduced requiring less costly gas processing
facilities of approximately $43,000,000 and the contract term was extended to
15 years with a projected start date of September 2003. Since the lease had not
started yet, the Company recorded no income attributable to its equity
ownership in the venture.
The Company accounted for the work performed under the turnkey construction
contract using the percentage of completion method of accounting, and recorded
75% of the revenue and net income, based on the third party's ownership share
of Hampton Roads. Based upon the discovery of a commitment by the Company to
loan Hampton Roads up to $43,500,000 for the purpose of paying the balance of
the turnkey construction contract and a guarantee by the Company to refund the
capital contributed by the third party should certain conditions not be met,
the Company concluded that it had retained substantial risk of ownership with
respect to the third party's interest. Accordingly, the Company determined to
treat the project as if the Company had owned 100% of the project from its
inception and reversed the revenue and net income previously recognized.
F-26
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
In February 2002, after the 75% interest in the venture was sold from one
third party to another, the Company purchased the 75% interest in Hampton Roads
that it did not own. The Company now owns 100% of the venture and will
recognize the rental revenues pursuant to its contract with Global once startup
begins.
Acquisition of Compressors In Non-Monetary Exchange
In the third quarter of 2000, the Company acquired two compressors in a
non-monetary exchange transaction with an independent oil and gas producer. In
the transaction, the Company acquired the two compressors in exchange for
certain gas reservoir rights that the Company had obtained in settlement of a
payment default by one of its customers. The Company accounted for the
transaction as an exchange of non-monetary assets and recorded $2,225,000 in
revenue and pre-tax income in 2000. In 2002, the Company discovered that it had
made certain guarantees with respect to the performance of the oil and gas
reservoir rights. Therefore, the Company concluded that the earnings process
was not complete in the third quarter of 2000 and that the Company retained an
ongoing risk of not recovering the fair value of the compressors received in
exchange for the oil and gas properties. Based on this analysis, the Company
restated its financial results for the third quarter of 2000 to reverse the
$2,225,000 in revenue it had originally recognized on the transaction.
Compressor Sale Transaction
The Company sold 33 gas compressors to a gas pipeline system then controlled
by Enron for $12,004,000 pursuant to invoices issued in December 2000. The
Company recorded $4,050,000 of pre-tax income from the transaction in the
fourth quarter of 2000. In January 2001, the Company entered into an agreement
with its customer to provide transition services and settle claims between the
parties arising from the operation of the compressors prior to their sale. The
agreement also provided for the issuance of a bill of sale. Upon further
evaluation of the transaction, the Company determined to recognize revenue and
net income in January 2001 when the bill of sale was issued.
Sale of Turbine Engine
In the fourth quarter of 2000, the Company entered the non-oil field power
generation market to take advantage of rising electricity demand and purchased
used turbines to carry out this effort. In connection with this effort, the
Company agreed to sell a turbine to a third party on extended credit and
recognized revenues of $7,500,000 and $1,306,000 of pre-tax income in the
fourth quarter of 2000. In early 2001, the third party assigned their interest
in the turbine to another unrelated third party. The Company was ultimately
paid for the turbine in December 2001. Based on the information provided to the
Company at the time of the April 2002 restatement, the Company determined that
revenue could be recognized for this transaction in the fourth quarter of 2001
when payment was received and collectability was assured. As a result of the
discovery of new information including a purchase of a turbine from the third
party to whom the turbine had been sold, the Company determined that the
transaction was more properly recorded as a like-kind exchange, and determined
to restate the sale of the turbine engine recorded in the fourth quarter of
2001.
Reclassification
The Company determined that the deferred gain related to the 1999 and 2000
leases was calculated in error. A reclassification between property, plant and
equipment and other liabilities has been made to correct this matter. This
reclassification had no impact on net income.
F-27
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
20. November 2002 Restatement
In October 2002, a special committee of the Board of Directors, together
with the Audit Committee of the Board and Company management, aided by outside
legal counsel, completed an extensive investigation of transactions recorded
during 2001, 2000 and 1999, including those transactions restated by the
Company in April 2002 (see Note 19). As a result of this investigation, the
Company determined, to restate its financial results further for the years
ended December 31, 2000 and 1999. The net effect of this restatement for the
year ended December 31, 2000 was as follows: (i) a decrease in revenues of
$3,295,000, from $566,081,000 to $562,786,000; (ii) a decrease in income before
income taxes of $2,461,000, from $81,471,000 to $79,010,000; (iii) a decrease
in net income of $1,525,000, from $51,164,000 to $49,639,000; and (iv) a
decrease in earnings per common share of $0.03 basic and $0.02 diluted. The net
effect of this restatement for the year ended December 31, 1999 was as follows:
(i) a decrease in revenues of $5,090,000, from $323,220,000 to $318,130,000;
(ii) a decrease in income before income taxes of $3,123,000, from $63,586,000
to $60,463,000; (iii) a decrease in net income of $1,986,000, from $40,441,000
to $38,455,000; and (iv) a decrease in earnings per common share of $0.04 basic
and $0.03 diluted.
The transactions involved in the November 2002 restatement, which are
detailed below, are: (i) sale of compression and production equipment; (ii) a
delay penalty; (iii) an agreement to provide technical assistance to an
Indonesian company; (iv) a scrap sale transaction; (v) the sale of certain used
compression equipment; and (vi) the recording of pre-acquisition revenues
associated with a business acquired by Hanover. In addition, the Company
restated the following transactions by reversing their impact from the quarter
originally recorded in 2000 and recording them in a subsequent quarter of 2000:
(i) the sale of an interest in a power plant in Venezuela; (ii) an agreement to
provide services to a company ultimately acquired by Hanover; and (iii) the
sale of four used compressors. These three transactions are not reflected in
the tables below because they had no impact on the overall financial results
for 2000 or 1999.
F-28
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The impact of the November 2002 restatement for the year ended December 31,
1999 is summarized below:
Sale of
Compression
and
Production Delay
As Filed Equipment Penalty Restated
-------- ----------- ------- --------
(in thousands, except per share amounts)
Revenues:
Rentals............................................. $192,655 $ -- $ -- $192,655
Parts, service and used equipment................... 42,518 (3,388) -- 39,130
Compressor fabrication.............................. 52,531 -- -- 52,531
Production and processing equipment fabrication..... 28,037 (782) -- 27,255
Equity in income of non-consolidated affiliate...... 1,188 -- -- 1,188
Other............................................... 6,291 -- (920) 5,371
-------- ------- ----- --------
Total revenues.................................. 323,220 (4,170) (920) 318,130
-------- ------- ----- --------
Expenses:
Rentals............................................. 64,949 -- -- 64,949
Parts, service and used equipment................... 27,916 (1,412) -- 26,504
Compressor fabrication.............................. 43,663 -- -- 43,663
Production and processing equipment fabrication..... 20,833 (555) -- 20,278
Selling, general and administrative................. 33,782 -- -- 33,782
Depreciation and amortization....................... 37,337 -- -- 37,337
Lease expense....................................... 22,090 -- -- 22,090
Interest expense.................................... 8,786 -- -- 8,786
Distributions on mandatorily redeemable convertible
preferred Securities.............................. 278 -- -- 278
-------- ------- ----- --------
Total expenses.................................. 259,634 (1,967) -- 257,667
-------- ------- ----- --------
Income before income taxes............................. 63,586 (2,203) (920) 60,463
Provision for income taxes............................. 23,145 (802) (335) 22,008
-------- ------- ----- --------
Net income............................................. $ 40,441 $(1,401) $(585) $ 38,455
======== ======= ===== ========
Earnings per common share:
Basic............................................... $ 0.71 $ 0.67
Diluted ............................................ $ 0.66 $ 0.63
Restatement
As filed Items Restated
-------- ----------- --------
(in thousands)
Accounts receivable, net............................. $ 93,715 $(5,090) $ 88,625
Inventory............................................ 66,562 555 67,117
Property, plant and equipment, net................... 497,465 1,412 498,877
Total assets......................................... 756,510 (3,123) 753,387
Deferred income taxes................................ 65,533 (1,137) 64,396
Total liabilities.................................... 302,346 (1,137) 301,209
Retained earnings.................................... 100,196 (1,986) 98,210
Total liabilities and common stockholders' equity.... 756,510 (3,123) 753,387
F-29
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The impact of the November 2002 restatement for the year ended December 31,
2000 is summarized below:
Sale of
Indonesia Compression
Technical Sale of Used Pre- and
As Filed Assistance Scrap Sale Compression Acquisition Production Delay
April 2002 Revenue Transaction Equipment Revenue Equipment Penalty Restated
---------- ---------- ----------- ------------ ----------- ----------- ------- --------
(in thousands, except per share amounts)
Revenues:
Rentals........................... $254,515 $(678) $ -- $ -- $ -- $ -- $ -- $253,837
Parts, service and used
equipment....................... 132,203 -- -- -- (2,527) (310) -- 129,366
Compressor fabrication............ 90,270 -- -- -- -- -- -- 90,270
Production and processing
equipment fabrication........... 79,121 -- -- -- -- -- -- 79,121
Gain on sale of other assets...... 1,888 -- -- -- -- -- -- 1,888
Equity in income of non-
consolidated affiliates......... 3,518 -- -- -- -- -- -- 3,518
Gain on change in interest in
non-consolidated affiliate...... 864 -- -- -- -- -- -- 864
Other............................. 3,702 -- (700) -- -- -- 920 3,922
-------- ----- ----- ----- ------- ----- ---- --------
Total revenues................ 566,081 (678) (700) -- (2,527) (310) 920 562,786
-------- ----- ----- ----- ------- ----- ---- --------
Expenses:
Rentals........................... 87,992 -- -- -- -- -- -- 87,992
Parts, service and used
equipment....................... 89,128 -- -- 600 (1,434) -- -- 88,294
Compressor fabrication............ 76,754 -- -- -- -- -- -- 76,754
Production and processing
equipment fabrication........... 62,684 -- -- -- -- -- -- 62,684
Selling, general and
administrative.................. 54,632 -- -- -- -- -- -- 54,632
Depreciation and amortization..... 52,882 -- -- -- -- -- -- 52,882
Lease expense..................... 45,484 -- -- -- -- -- -- 45,484
Interest expense.................. 8,685 -- -- -- -- -- -- 8,685
Distributions on mandatorily
redeemable convertible preferred
Securities...................... 6,369 -- -- -- -- -- -- 6,369
-------- ----- ----- ----- ------- ----- ---- --------
Total expenses................ 484,610 -- -- 600 (1,434) -- -- 483,776
-------- ----- ----- ----- ------- ----- ---- --------
Income before income taxes......... 81,471 (678) (700) (600) (1,093) (310) 920 79,010
Provision for income taxes......... 30,307 (258) (266) (228) (415) (118) 349 29,371
-------- ----- ----- ----- ------- ----- ---- --------
Net income......................... $ 51,164 $(420) $(434) $(372) $ (678) $(192) $571 $ 49,639
======== ===== ===== ===== ======= ===== ==== ========
Earnings per common share:
Basic............................. $ 0.83 $ 0.80
Diluted .......................... $ 0.77 $ 0.75
Restatement
As filed Items Restated
---------- ----------- ----------
(in thousands)
Accounts receivable, net............................. $ 223,022 $(1,963) $ 221,059
Inventory............................................ 145,442 (750) 144,692
Property, plant and equipment, net................... 573,596 1,107 574,703
Goodwill............................................. 141,973 (3,300) 138,673
Intangible and other assets, net..................... 64,931 (678) 64,253
Total assets......................................... 1,251,756 (5,584) 1,246,172
Deferred income taxes................................ 103,405 (2,073) 101,332
Total liabilities.................................... 533,048 (2,073) 530,975
Retained earnings.................................... 151,360 (3,511) 147,849
Total liabilities and common stockholders' equity.... 1,251,756 (5,584) 1,246,172
F-30
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Sale of Compression and Production Equipment
In the fourth quarter of 1999, the Company recorded three transactions
totaling $4,170,000 in revenue from the sale of used compression and production
equipment. An additional $310,000 in revenue was recorded on one of the
transactions in the second quarter of 2000. Based on further evaluation of the
terms of the three transactions, the Company determined that the sales were in
the nature of consignment sales and should not have recognized revenue or
income on these transactions. The receivables recorded by the Company in 1999
in two of the transactions were cleared in 2000 when the Company purchased the
buyer of the compression and production equipment in business acquisition
transactions. The Company ultimately repurchased the equipment sold in the
third transaction back from the buyer. In the second quarter of 2001, the
Company resold a portion of the compression equipment originally recorded as
sold in 1999 and should have recorded an additional $716,000 pre-tax expense on
the sale.
Delay Penalty
In July 1999, the Company entered into a Contract Gas Processing Master
Equipment and Operating Agreement (the "Agreement") with a customer. The
customer failed to satisfy certain conditions of the Agreement for which it
later agreed to pay up to $1,100,000 as a delay penalty. The Company and the
customer executed an addendum to the original Agreement effective February 25,
2000 whereby the customer acknowledged the amount of penalty that would be
paid. In 1999, the Company recognized and recorded $920,000 of this penalty as
revenue. The Company determined that the penalty should not have been
recognized until it had executed the addendum to the Agreement in February
2000. Later in 2000, the Company entered into a Stock Issuance Agreement with
the customer whereby the Company received an equity interest in the customer in
exchange for the amount the customer owed to the Company for the delay payment.
Indonesian Technical Assistance Revenue
In the second quarter of 2000, the Company entered into an agreement to
provide technical assistance services to an independent oil and gas producer in
Indonesia. Under the agreement, the Company purchased for $1.1 million an
option to acquire a controlling interest in the Indonesian company as well as
certain inventory. Based on the agreement, the Company recognized revenue of
$378,000 in the first quarter of 2000, $300,000 in the second quarter of 2000,
$138,000 in the second quarter of 2001, and $138,000 in the third quarter of
2001. The Company has determined, following a review of the transaction, that
the payments made to the Company are more properly characterized as a return of
the Company's investment in the option rather than as payments for the
provision of services. Accordingly, the Company determined that the payments
received from the Indonesian company should be recorded as a return of
investment in the option instead of revenue.
Scrap Sale Transaction
In the third quarter of 2000, the Company recorded $700,000 of revenue from
the sale of scrap inventory to an independent salvage metal company, pursuant
to invoices issued in September 2000. Based upon the evaluation of when the
scrap inventory was delivered and paid for in connection with this transaction,
the Company has determined that no revenue should have been recorded in 2000
and that it should have recognized $264,000 in revenue on this transaction in
the fourth quarter of 2001. Accordingly, the $700,000 of revenue was reversed
in 2000.
F-31
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Sale of Used Compression Equipment
In the fourth quarter of 2000, the Company recognized $1,500,000 in revenue
and $1,200,000 in pre-tax income from the sale of used compression equipment by
a Company subsidiary. The compression equipment was acquired as a result of the
acquisition of a subsidiary by the Company less than six months prior to the
sale of the equipment. Upon further evaluation of the transaction, the Company
determined that the compression equipment should have been valued at $900,000
(instead of $300,000) in the allocation of the purchase price and the gain on
the sale should be reduced by $600,000 with a corresponding adjustment made to
reduce goodwill.
Pre-Closing Revenue
In the second quarter of 2000, the Company completed negotiations for the
acquisition of used equipment companies. The Company entered into acquisition
agreements with effective dates of June 1, 2000 which were not completed until
July 2000. The Company recorded $2,085,000 in revenue and $965,000 in pre-tax
income in the second quarter of 2000 and $442,000 in revenue and $128,000 in
pre-tax income in the third quarter of 2000, reflecting the results of the
acquired entities for the period between the effective date of the acquisitions
and the closing of the acquisitions. Upon further evaluation of this matter,
the Company determined that these pre-closing results should not have been
recorded.
Power Plant Sale
In the second quarter of 2000, the Company sold a 25% interest in a
Venezuelan power plant to Energy Transfer Group, LLC ("ETG") in an exchange of
non similar assets. The Company accounted for the transaction as a sale and
recorded a gain on sale of other assets of $1,250,000 in the second quarter of
2000. In 2000, the Company and ETG also discussed the possible purchase by the
Company of an interest in a power generation facility in Florida with the
Company making a payment toward that purchase in the second quarter of 2000. In
the fourth quarter of 2000, these discussions resulted in the purchase by
Hanover of a 10% interest in ETG. Upon further evaluation of this transaction,
the Company determined that the revenue and pre-tax income from the exchange of
the interest in the Venezuelan power plant should be moved from the second
quarter of 2000 to the fourth quarter of 2000 to align with the completion of
the exchange.
Management Fee Transaction
In the second quarter of 2000 the Company recorded $450,000 in revenue for
management services provided to Ouachita Energy Corporation, a compression
services company, pursuant to an invoice dated June 30, 2000. In the third
quarter of 2000, the Company reversed the revenue, because the management fee
was not agreed to by both parties until the fourth quarter of 2000. Upon
further evaluation of the transaction, the Company determined that the reversal
of revenue should have occurred in the second quarter of 2000.
Compressor Sale Transaction
In connection with the sale of four compressors, the Company recorded
revenue of $1,486,000 and pre-tax income of $1,081,000 in the first quarter of
2000, and revenue of $750,000 and pre-tax income of $468,000 in the third
quarter of 2000. Based upon further examination of the transaction, the Company
has determined that it should have recognized the income from this transaction
in the fourth quarter of 2000, when title to the equipment was transferred,
rather than in the first and third quarters of 2000.
F-32
HANOVER COMPRESSOR COMPANY
SELECTED QUARTERLY UNAUDITED FINANCIAL DATA
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)
2000: (Restated)
Revenue(2)....................................... $89,611 $112,689 $147,470 $213,016
Gross profit(2).................................. 47,787 52,656 63,899 82,720
Net income(2).................................... 10,832 10,743 11,870 16,194
Earnings per common and common equivalent share:
Basic(1)(2).................................. $ 0.19 $ 0.18 $ 0.19 $ 0.24
Diluted(1)(2)................................ $ 0.17 $ 0.17 $ 0.17 $ 0.23
1999: (Restated)
Revenue(3)....................................... $66,694 $ 73,875 $ 87,269 $ 90,292
Gross profit(3).................................. 36,947 38,681 43,373 43,735
Net income(3).................................... 8,639 8,482 10,388 10,946
Earnings per common and common equivalent share:
Basic(1)(3).................................. $ 0.15 $ 0.15 $ 0.18 $ 0.19
Diluted(1)(3)................................ $ 0.14 $ 0.14 $ 0.17 $ 0.18
- --------
(1) In June 2000, the Company completed a 2-for-1 stock split effected in the
form of a 100% stock dividend. All weighted average and common equivalent
shares and earnings per common share information have been restated for all
periods presented to reflect this stock split.
(2) The Company restated the 2000 quarters for certain revenue recognition
matters as disclosed in Note 19 and 20. The aggregate impact of the April
and November 2002 restatements on the quarters was as follows:
1st 2nd 3rd 4th
quarter quarter quarter quarter
---------- ---------- ---------- ----------
Increase/ Increase/ Increase/ Increase/
(Decrease) (Decrease) (Decrease) (Decrease)
---------- ---------- ---------- ----------
Revenue........................................ $ (946) $(4,395) $(15,111) $(20,591)
Gross profit................................... (539) (3,275) (5,740) (4,668)
Net income..................................... (333) (2,030) (3,540) (3,157)
Earnings per common and common equivalent share
Basic....................................... $ -- $ (0.03) $ (0.05) $ (0.05)
Diluted..................................... $(0.01) $ (0.03) $ (0.06) $ (0.04)
(3) The Company restated the fourth quarter of 1999 for certain revenue
recognition matters as disclosed in Note 20. The net effect of this
restatement for the three months ended December 31, 1999 was as follows:
(i) a decrease in revenues of $5.1 million, from $95.4 million to $90.3
million; (ii) a decrease in gross profit of $3.2 million, from $46.9
million to $43.7 million; (iii) a decrease in net income of $2.0 million,
from $12.9 million to $10.9 million; and (iv) a decrease in earnings per
common share of $0.04 basic and $0.03 diluted.
F-33
SCHEDULE II
HANOVER COMPRESSOR COMPANY
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
----------- ------------ ---------- ---------- ----------
Allowance for doubtful accounts deducted from
accounts receivable in the balance sheet--
2000...................................... $1,729,953 $3,197,877 $2,268,541(1) $2,659,289
1999...................................... 1,212,365 1,475,601 958,013(1) 1,729,953
1998...................................... 971,747 348,627 108,009(1) 1,212,365
- --------
(1) Uncollectible accounts written off, net of recoveries.
S-1