SCHEDULE 14A
(RULE 14a-101)
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INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, For Use Of The
Commission Only (As Permitted
[X] Definitive Proxy Statement by Rule 14a-6(e)(2))
[_] Definitive Additional Materials
[_] Soliciting Material under Rule 14a-12
HANOVER COMPRESSOR COMPANY
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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[LOGO]
HANOVER
COMPRESSOR COMPANY
HANOVER COMPRESSOR COMPANY
12001 NORTH HOUSTON ROSSLYN
HOUSTON, TEXAS 77086
NOTICE OF 2003 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 15, 2003
To the Stockholders of Hanover Compressor Company:
Notice is hereby given that the 2003 Annual Meeting of Stockholders of
Hanover Compressor Company, a Delaware corporation (the "Company"), will be
held at 9:00 a.m. local time on Thursday, May 15, 2003, at the Wyndham
Greenspoint Hotel, 12400 Greenspoint Drive, Houston, Texas 77060, for the
following purposes:
(1) to elect nine directors to serve until the next Annual Meeting of
Stockholders or until their successors are duly elected and qualified;
(2) to ratify the reappointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for fiscal year 2003;
(3) to approve the Hanover Compressor Company 2003 Stock Incentive Plan; and
(4) to transact such other business as may properly come before the meeting.
The Board of Directors has fixed the close of business on April 4, 2003, as
the record date for determining the stockholders that are entitled to notice of
and to vote at the meeting and any postponements or adjournments thereof. A
complete list of the stockholders entitled to vote at the meeting will be
available for examination by any stockholder for any purpose germane to the
meeting (a) at the Wyndham Greenspoint Hotel, 12400 Greenspoint Drive, Houston,
Texas 77060, on the day of the 2003 Annual Meeting of Stockholders and (b) for
at least 10 days prior to the meeting at the principal executive offices of the
Company, 12001 North Houston Rosslyn, Houston, Texas 77086.
By Order of the Board of Directors,
/s/ Victor E. Grijalva
Victor E. Grijalva
Chairman of the Board
Houston, Texas
April 15, 2003
YOUR VOTE IS IMPORTANT
THE BOARD OF DIRECTORS EXTENDS A CORDIAL INVITATION TO ALL STOCKHOLDERS TO
ATTEND THE MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT AS PROMPTLY AS
POSSIBLE IN THE ENCLOSED REPLY ENVELOPE OR USE THE ELECTRONIC VOTING
ALTERNATIVES INDICATED ON THE PROXY CARD. IF YOU ATTEND THE MEETING, YOU MAY
REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU DESIRE TO DO SO.
HANOVER COMPRESSOR COMPANY
12001 NORTH HOUSTON ROSSLYN
HOUSTON, TEXAS 77086
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 15, 2003
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies by and on behalf of the Board of Directors of Hanover Compressor
Company, a Delaware corporation ("Hanover" or the "Company"), for use at the
2003 Annual Meeting of Stockholders of the Company. The meeting will be held
for the purposes set forth in the accompanying Notice of 2003 Annual Meeting of
Stockholders. The meeting will commence at 9:00 a.m. local time on Thursday,
May 15, 2003, at the Wyndham Greenspoint Hotel, 12400 Greenspoint Drive,
Houston, Texas 77060, and at any postponement(s) or adjournment(s) thereof (the
"2003 Stockholders' Meeting"). The Company's principal executive offices are
located at 12001 North Houston Rosslyn, Houston, Texas 77086, and its telephone
number is (281) 447-8787. This Proxy Statement and the accompanying proxy are
first being sent or given to stockholders on or about April 15, 2003.
THE MEETING
VOTING AT THE MEETING
Stockholders with shares registered in their names with Mellon Investor
Services LLC, the Company's transfer agent and registrar ("stockholders of
record" or "record holders") at the close of business on April 4, 2003, are
entitled to notice of and to vote at the 2003 Stockholders' Meeting. At the
close of business on such date, there were 80,589,713 shares of common stock,
$.001 par value per share, of the Company (the "Common Stock") issued and
outstanding held by 728 stockholders of record. Each share of the Common Stock
issued and outstanding on April 4, 2003, entitles the holder thereof to one
vote on all matters submitted to a vote of stockholders at the 2003
Stockholders' Meeting.
Quorum and Required Votes. A quorum of stockholders is necessary for a
valid meeting. The presence in person or by proxy of the holders of a majority
of the outstanding shares of the Common Stock will constitute a quorum for the
2003 Stockholders' Meeting.
The affirmative vote of the holders of a plurality of the Common Stock
present in person or by proxy and entitled to vote at the 2003 Stockholders'
Meeting at which a quorum is present is required for the election of directors
(Proposal 1). The affirmative vote of the holders of a majority of the Common
Stock represented at the 2003 Stockholders' Meeting at which a quorum is
present is required for the ratification of the reappointment of
PricewaterhouseCoopers LLP as the Company's independent accountants for fiscal
year 2003 (Proposal 2) and for the approval of the Hanover Compressor Company
2003 Stock Incentive Plan (Proposal 3); provided that the total votes cast on
Proposal 3 must represent over 50 percent of all voting stock entitled to vote
on the proposal.
Abstentions, Broker Non-votes, and Withheld Authority. Abstentions will be
included in determining the number of shares of the Common Stock present at the
2003 Stockholders' Meeting for the purpose of determining the presence of a
quorum. Abstentions are treated as votes cast and thus will have the same
effect as a vote against a proposal other than the election of directors.
Also, broker non-votes will be included in determining the number of shares
of the Common Stock present at the 2003 Stockholders' Meeting for purposes of
determining the presence of a quorum. (A broker non-vote
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occurs under stock exchange rules when a broker is not permitted to vote on a
matter without instructions from the beneficial owner of the shares and no
instructions are given.) Under the rules of the New York Stock Exchange
("NYSE") in effect at the time this Proxy Statement was printed, if you hold
your shares through a bank or broker, your broker is permitted to vote your
shares on all three of the proposals being submitted for stockholder approval
at the 2003 Stockholders' Meeting if the broker does not receive instructions
from you. The NYSE has proposed changes to its rules regarding brokers'
discretionary voting authority, which may limit your brokers' ability to vote
on the Hanover Compressor Company 2003 Stock Incentive Plan (Proposal 3) unless
you provide your broker with voting instructions. If these proposed changes to
the NYSE rules become effective prior to the 2003 Stockholders' Meeting, your
broker would not be able to vote your shares on the approval of the Hanover
Compressor Company 2003 Stock Incentive Plan (Proposal 3) without receiving
instructions from you.
Where a stockholder withholds authority from his proxy to vote on a
particular matter, the proxy may not vote such shares at the 2003 Stockholders'
Meeting. The withholding of a proxy's authority will have no effect on the
outcome of (i) the vote on the election of directors (Proposal 1), since
directors are elected by a plurality of the votes cast at the meeting; or (ii)
the vote on the selection of PricewaterhouseCoopers LLP as the Company's
independent accountants (Proposal 2), since the ratification of the selection
requires the affirmative vote of a majority of the shares of the Common Stock
represented at the meeting. However, approval of the Hanover Compressor Company
2003 Stock Incentive Plan (Proposal 3) requires the affirmative vote of a
majority of the shares of the Common Stock represented at the meeting; provided
that the total votes cast on the proposal represent at least 50% of all voting
stock entitled to vote at the meeting. Therefore, the withholding of a proxy's
authority will effect the outcome of the vote on Proposal 3 for the purpose of
determining whether the total votes cast on the proposal are over 50% of all
voting stock entitled to vote at the meeting.
Thrift Plan Holdings. Shares of the Common Stock held through The Hanover
Companies Retirement and Savings Plan (the "Hanover 401(k) Plan") will be voted
by the Plan Trustee, Invesco Retirement, Inc., as directed by the participants
in the plan. If a participant does not provide specific voting instructions,
the shares held by the participant will not be voted by the Plan Trustee and
will not be considered present for purposes of establishing a quorum.
PROXIES AND PROXY SOLICITATION
Proxies. Because many stockholders cannot attend the 2003 Stockholders'
Meeting in person, it is necessary that a large number of stockholders be
represented by proxy. Voting will be conducted over the Internet, by a
toll-free telephone number or completing a proxy card and mailing it in the
postage-paid envelope provided with this Proxy Statement. Please refer to your
proxy card or the information forwarded by your bank, broker or other nominee
to determine which options are available to you. The Internet and telephone
voting facilities for eligible stockholders of record will close at 11:00 p.m.
EDT on May 14, 2003.
You can revoke your proxy at any time before it is exercised in any of three
ways: (i) by submitting written notice to the Corporate Secretary of the
Company before the 2003 Stockholders' Meeting that you have revoked your proxy;
(ii) by timely delivery of a properly executed, later-dated proxy (including an
Internet or telephone vote); or (iii) by voting in person at the 2003
Stockholders' Meeting, provided you have a valid proxy to do so if you are not
the record holder of the shares. The Corporate Secretary may be contacted at
the following address: Hanover Compressor Company, 12001 North Houston Rosslyn
Road, Houston, Texas 77086, Attention: Corporate Secretary.
The Internet and telephone voting procedures are designed to authenticate
stockholders by use of a control number and to allow you to confirm that your
instructions have been properly recorded.
The method by which you vote will in no way limit your right to vote at the
2003 Stockholders' Meeting if you later decide to attend in person. If your
shares are held in the name of a bank, broker or other nominee, you must obtain
a proxy, executed in your favor, from the stockholder of record, to be able to
vote in person at the 2003 Stockholders' Meeting.
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All shares of the Common Stock represented by properly executed proxies
(including Internet or telephone proxies), and received by the Company prior to
the 2003 Stockholders' Meeting, will be voted at the meeting in accordance with
the directions made in the proxies. If no directions are made in a proxy, the
shares will be voted (i) FOR the election of each nominee for director named
below under "NOMINEES FOR ELECTION AS DIRECTORS", (ii) FOR the ratification of
the reappointment of PricewaterhouseCoopers LLP as the Company's independent
accountants, and (iii) FOR approval of the Hanover Compressor Company 2003
Stock Incentive Plan.
If any other matters are properly presented for consideration at the 2003
Stockholders' Meeting, including, among other things, consideration of a motion
to adjourn the meeting to another time or place in order to solicit additional
proxies in favor of the recommendations of the Board of Directors, the persons
named as proxies and acting thereunder will have discretion to vote on those
matters according to their best judgment to the same extent as the person
delivering the proxy would be entitled to vote. As of the date of this Proxy
Statement, the Company does not anticipate that any other matters would be
raised at the 2003 Stockholders' Meeting.
Proxy Solicitation. The Company will pay the cost of soliciting proxies.
Proxies are being solicited by mail and may be solicited by telephone,
telegram, facsimile, or in person by employees of the Company, who will not
receive additional compensation for any such solicitation. Georgeson
Shareholder Communications, Inc. has been retained to assist in the
solicitation of proxies at a fee of approximately $7,000, plus reimbursement
for out-of-pocket expenses. The Company will also request brokers and other
fiduciaries to forward proxy soliciting material to the beneficial owners of
shares of the Common Stock that are held of record by such brokers and
fiduciaries and will reimburse such persons for their reasonable out-of-pocket
expenses.
NOMINEES FOR ELECTION AS DIRECTORS
Information concerning the position and background of the nominees for
election to the Board of Directors is set forth below. Ages are stated as of
March 31, 2003.
I. Jon Brumley, 64, has served as a director of the Company since February
2002. Mr. Brumley is Chairman, Chief Executive Officer and director of Encore
Acquisition Company, an independent energy company located in Fort Worth,
Texas. Prior to founding Encore Acquisition Company in 1998, Mr. Brumley served
as Chairman and Chief Executive Officer of MESA, Inc., which merged with Parker
& Parsley in 1997 to become Pioneer Natural Resources Company. Mr. Brumley has
spent over thirty years in the oil and gas industry, including having
previously served as Chairman of Cross Timbers Oil Company and Southland
Royalty Company.
Ted Collins, Jr., 64, has served as a director of the Company since April
1992. Mr. Collins has been in private investments, primarily energy related,
since June 2000. From January 1988 to July 2000, he was President of Collins &
Ware, Inc., an independent oil and gas company. From July 1982 through December
1987, Mr. Collins served as President of Enron Oil & Gas Co. Mr. Collins also
serves on the Board of Directors of Encore Acquisition Company.
Chad C. Deaton, 50, was elected President, Chief Executive Officer and
director in August 2002. From 1976 through 1984, Mr. Deaton served in a variety
of positions with the Dowell Division of Dow Chemical Company. Following
Schlumberger's acquisition of Dowell in 1984, Mr. Deaton served in management
positions with Schlumberger in Europe, Russia and the United States. Mr. Deaton
was Executive Vice President of Schlumberger Oilfield Services from 1998 to
1999. From September 1999 to September 2001, Mr Deaton served as a Senior
Advisor to Schlumberger Oilfield Services. Mr. Deaton also serves as an officer
and director of certain of the Company's subsidiaries.
Robert R. Furgason, 67, has served as a director of the Company since May
1995. Dr. Furgason has served as the President of Texas A&M University Corpus
Christi since 1990. He was Vice Chancellor of Academic
3
Affairs and Professor of Chemical Engineering at the University of Nebraska
from 1984 to 1990 and previously held a series of faculty and administrative
positions at various universities. Dr. Furgason is the former President of the
Accreditation Board for Engineering and Technology Board of Directors, and he
also serves on a number of other accreditation, policy and civic boards.
Victor E. Grijalva, 64, has served as a director of the Company since
February 2002 and Chairman of the Board since March 2002. From August 2 to
August 19, 2002, Mr. Grijalva served as interim President and CEO of the
Company. Mr. Grijalva began his career with Schlumberger in 1964 as a senior
development engineer and, after a number of overseas assignments, served as
President of Wireline and Testing in North America and Executive Vice President
of Oilfield Services Worldwide before being appointed Vice Chairman of
Schlumberger in 1998. Mr. Grijalva retired from Schlumberger on December 31,
2001. Mr. Grijalva is also a director of Transocean, Inc.
Gordon T. Hall, 44, has served as a director of the Company since March
2002. Prior to his election as a director, Mr. Hall was a Managing Director at
Credit Suisse First Boston. While at Credit Suisse First Boston, Mr. Hall
served as Senior Oil Field Services Analyst and Co-head of the global energy
group. Mr. Hall joined the First Boston Corporation in 1987 as a technology
analyst. Prior to joining First Boston Corporation, Mr. Hall was an engineer
with Raytheon Corporation. Mr. Hall is also a director of Hydril Company and is
a director of certain privately held companies.
Melvyn N. Klein, 61, has served as a director of the Company since May 1991.
Mr. Klein is the sole stockholder of JAKK Holding Corp., which is a general
partner of GKH Partners, L.P., which is the general partner of GKH Investments,
L.P. Mr. Klein has been an attorney and counselor-at-law since 1968. Mr. Klein
is also a director of Anixter International Inc. and certain privately held
companies.
Michael A. O'Connor, 67, was named Chairman Emeritus in March 2002. Mr.
O'Connor retired in March 2002 from his position as Chairman of the Board of
the Company, having served since January 1992. Prior to joining the Company,
Mr. O'Connor was a private investor from January 1987 through December 1991 and
served as President of Gas Compressors Inc. from 1965 through 1986.
Alvin V. Shoemaker, 64, has served as a director of the Company since May
1991. Mr. Shoemaker has been a private investor since his retirement as
Chairman of the Board of the First Boston Corporation and First Boston, Inc. in
January 1989, a position he assumed in 1983. Mr. Shoemaker is also a director
of Wynn Resorts and certain privately held companies.
INFORMATION REGARDING CORPORATE GOVERNANCE,
THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Company's directors are elected at each annual meeting of stockholders
to serve until the next annual meeting of the Company and until their
respective successors are duly elected and qualified. The Board of Directors
has designated an Audit Committee, a Finance Committee, a Nominating and
Corporate Governance Committee, and a Management Development and Compensation
Committee to assist in the discharge of the Board's responsibilities. The
Executive Committee of the Board was eliminated prior to year-end 2002.
Typically, members of each committee are elected by the Board at its first
meeting following the annual meeting of stockholders and serve for one-year
terms. However, during 2002 changes in Board composition warranted changes in
committee membership.
In December 2002, in an effort to improve governance practices at the
Company, the Board completed a review of its committees and approved new
committee charters. Following this review, the membership of certain committees
was reconstituted. The Board also approved in December 2002, a new code of
ethics that is applicable to all employees, as well as governance principles
and committee charters to aid in governing the Board and the Board committees.
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Audit Committee
During the first quarter of 2002, the Audit Committee was comprised of Jon
Brumley, Ted Collins, Robert Furgason and Alvin Shoemaker. On March 19, 2002,
in light of the appointment of new members to the Company's Board, the Audit
Committee membership changed and was comprised of Jon Brumley (chairman),
Gordon Hall and Alvin Shoemaker, all of whom the Board has determined are
independent, as such term is defined in the NYSE listing standards. A Report of
the Audit Committee is included in this Proxy Statement at page 22.
The composition, purpose and responsibilities of the Audit Committee are set
forth in the Audit Committee's charter, which is attached to this Proxy
Statement as Appendix A. In general, the Audit Committee has been appointed by
the Board to help ensure the integrity of the Company's financial statements,
the independence, qualifications and performance of the Company's independent
accountants, including the approval of audit and permitted non-audit functions
performed by the independent accountants, and the effectiveness of the
Company's internal audit function.
Finance Committee
The current members of the Finance Committee are Gordon Hall (Co-Chair),
Alvin Shoemaker (Co-Chair), Melvyn Klein, Michael O'Connor, and Rene Huck (who
is not standing for re-election). During fiscal year 2002, the Finance
Committee was comprised of Alvin Shoemaker (Chairman), Gordon Hall, and William
Goldberg (until his resignation in August).
The composition, purpose and responsibilities of the Finance Committee are
set forth in a charter adopted by the Board. In general, the Finance Committee
has been charged with responsibility to assist the Board in its oversight of
debt and equity offerings, dividend policy, capital management, foreign
currency management and other financial matters.
Nominating and Corporate Governance Committee
The current members of the Nominating and Corporate Governance Committee
(the "Governance Committee") are Victor Grijalva (Chairman), Ted Collins and
Robert Furgason.
The composition, purpose and responsibilities of the Governance Committee
are set forth in a charter adopted by the Board in December 2002. In general,
the Governance Committee has been appointed by the Board to identify qualified
individuals to become Board members, determine whether existing Board members
should be nominated for re-election, review the composition and compensation of
the Board and its committees, and review and implement the Company's corporate
governance guidelines and policies. Any stockholder wishing to recommend a
director nominee should submit the recommendation in writing to the Corporate
Secretary of the Company for consideration by the Governance Committee,
indicating the nominee's qualifications and other relevant biographical
information, and providing confirmation of the nominee's willingness to serve
as a director.
Management Development and Compensation Committee
The current members of the Management Development and Compensation Committee
(the "Compensation Committee") are Robert Furgason (Chairman), Jon Brumley, Ted
Collins and Victor Grijalva. During fiscal year 2002, the Compensation
Committee was comprised of Robert Furgason (Chairman), Ted Collins and Gordon
Hall (with Mr. Hall serving from March through December). Alvin Shoemaker was a
member of the Compensation Committee during the first quarter of 2002 only.
The composition, purpose and responsibilities of the Compensation Committee
are set forth in a charter adopted by the Board. In general, the Compensation
Committee has been appointed by the Board to assist in the
5
recruiting, development and retention of executive talent and to oversee the
creation and implementation of the Company's compensation philosophy and
strategy. A Report of the Compensation Committee is included in this Proxy
Statement at page 25.
Attendance at Meetings
During fiscal year 2002, the Board of Directors took action by unanimous
written consent once and met in person an additional thirteen times; the
Executive Committee took action by unanimous written consent once; the Audit
Committee met in person twelve times; the Compensation Committee took action by
unanimous written consent once and met in person an additional five times; the
Finance Committee met in person four times. The Governance Committee was
reconstituted in December 2002 and did not meet in person or take action by
written consent during fiscal year 2002. The directors (as a group) attended
92% of the aggregate number of meetings of the Board and all Board committees
on which they served during 2002. All directors individually attended at least
85% of the aggregate number of meetings of the Board and all Board committees
on which they served during 2002, except Mr. O'Connor who, due to health
reasons, attended 69% of the meetings of the Board.
Compensation Committee Interlocks and Insider Participation
Ted Collins is a director and member of the Compensation Committee of the
Company and owns 100% of Azalea Partners, which in turn owns 13% of Energy
Transfer Group, LLC ("ETG"). The Company owns a 10% interest in ETG and ETG
owns a 1% interest in Energy Transfer Hanover Ventures, LP ("Energy Ventures"),
a subsidiary of the Company. The Company advanced working capital to ETG in
2002 for certain costs incurred by ETG for the performance of services relating
to Energy Ventures' power generation business. During the fiscal year ended
December 31, 2002, the largest aggregate amount advanced under this arrangement
was $400,000. The advances do not bear interest. At December 31, 2002, the
Company had $400,000 in advances outstanding to ETG. In 2002, ETG billed the
Company $1,899,000 for services rendered and to reimburse ETG for expenses
incurred on behalf of Energy Ventures during the year. In 2002, the Company
recorded sales of approximately $470,000 related to equipment leases and parts
sales to ETG.
Mr. Grijalva, who is Chairman of the Board and a member of the Compensation
Committee, served as interim President and Chief Financial Officer from August
2 to August 19, 2002, but did not receive additional compensation for such
interim service.
Compensation of Directors
For fiscal year 2002, the Compensation Committee approved cash compensation
for the directors (other than Victor Grijalva and Chad Deaton) in the annual
amount of $30,000 (payable in four equal quarterly installments) plus the
reimbursement of expenses incurred for attendance at the meetings of the Board
and its committees. Melvyn Klein declined receipt of the directors' fee for the
first and second quarters of fiscal year 2002. In addition, on May 14, 2002,
each director (other than Victor Grijalva and Chad Deaton) was granted options
to purchase 6,185 shares of the Common Stock at a price of $14.55 per share,
the market closing price on the grant date. Such options vest 25% per year
beginning on the first anniversary of the grant date (subject to accelerated
vesting upon a change of control of the Company). Mr. O'Connor, as retired
Chairman of the Board, is also provided with medical benefits at the employee
rate.
In lieu of the amounts paid to directors described above, Victor Grijalva
receives $150,000 per year (payable in four equal quarterly installments) as a
fee for his services as Chairman of the Board of Directors. When Mr. Grijalva
was appointed Chairman on March 18, 2002, he was granted options to purchase
75,000 shares of the Common Stock at a price of $17.25 per share, the market
closing price on the grant date. These options will vest 33.3% per year
beginning on the first anniversary of the grant date (subject to accelerated
vesting upon a change of control of the Company). On December 10, 2002, Mr.
Grijalva was granted options to purchase 50,000 shares of the Common Stock at a
price of $9.81 per share, the market closing price on the grant
6
date. These options vest 25% per year beginning on the first anniversary of the
grant date (subject to accelerated vesting upon a change of control of the
Company). Mr. Grijalva also served as interim Chief Executive Officer from
August 2 to August 19, 2002, but received no additional compensation for such
interim service.
Chad Deaton receives compensation for his services as an executive officer
of the Company. Mr. Deaton does not receive additional compensation for his
services as a director of the Company.
Mr. Goldberg resigned as Chief Financial Officer in February 2002 and
resigned as Vice Chairman of the Board and as a member of the Board in August
2002. Mr. Goldberg received compensation from the Company in the form of stock
options for his service as Chief Financial Officer and Vice Chairman of the
Board. The Company reimbursed GKH Partners for certain travel and related
expenses incurred by Mr. Goldberg in connection with his efforts on the
Company's behalf. Pursuant to an agreement with GKH Partners, which provides
for compensation to GKH Partners for services, including Mr. Goldberg's
services as Chief Financial Officer, the Company paid a management fee of
$45,000 per month from November 2001 until the agreement terminated in February
2002.
7
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2003, the beneficial
ownership of the Common Stock by (i) each person who is known by the Company to
beneficially own more than 5% of the outstanding Common Stock ("5%
Stockholders"), (ii) each director of the Company, (iii) each executive officer
of the Company named in the Summary Compensation Table appearing on page 14 of
this Proxy Statement, and (iv) all current directors and executive officers of
the Company as a group. Unless otherwise noted, the persons named in the table
have sole voting and investment power with respect to all shares shown as
beneficially owned by them. As of March 31, 2003, 80,589,713 shares of the
Common Stock were issued and outstanding. Except as otherwise noted,
information on the 5% Stockholders is based upon statements that have been
filed with the Securities and Exchange Commission pursuant to Section 13(d) or
Section 13(g) under the Securities Exchange Act of 1934. All share numbers and
per share amounts in this Proxy Statement have been adjusted to reflect the
Company's two-for-one stock split in June 2000.
Number of Shares Approximate
Name Beneficially Owned Percent of Class
---- ------------------ ----------------
Melvyn N. Klein...................................................... 8,710,988 (1) 10.8%
Wells Fargo Tower, Suite 1940
615 North Upper Broadway
Corpus Christi, Texas 78477
GKH Investments, L.P................................................. 7,972,526 9.9%
200 West Madison
Chicago, Illinois 60606
GKH Partners, L.P.................................................... 302,269 (2) *
200 West Madison
Chicago, Illinois 60606
Schlumberger Limited................................................. 8,707,693 (3) 10.8%
153 East 53rd Street, 57th Floor
New York, New York 10022
Camco International, Inc............................................. 6,762,479 8.4%
153 East 53rd Street, 57th Floor
New York, New York 10022
Shapiro Capital Management Company, Inc.............................. 5,056,959 (4) 6.3%
3060 Peachtree Road, Suite 1555 N.W.
Atlanta, Georgia 30305
I. Jon Brumley....................................................... 32,546 (5) *
Ted Collins, Jr...................................................... 342,177 (6) *
Robert R. Furgason................................................... 16,746 (7) *
Victor E. Grijalva................................................... 85,000 (8) *
Gordon T. Hall....................................................... 53,146 (9) *
Rene Huck............................................................ 1,546 (10) *
Michael A. O'Connor.................................................. 1,938,042 (11) 2.3%
Alvin V. Shoemaker................................................... 291,512 (12) *
Michael J. McGhan.................................................... 488,746 (13) *
Chad C. Deaton....................................................... 15,100 *
John E. Jackson...................................................... 33,470 (14) *
Mark S. Berg......................................................... 33,334 (15) *
Robert O. Pierce..................................................... 137,168 (16) *
Peter J. Schreck..................................................... 3,819 (17) *
All current directors and executive officers as a group (15 persons). 11,697,928 (18) 14.1%
- --------
* Less than one percent
(1) Includes 1,546 shares that can be acquired immediately or within 60 days of
March 31, 2003, through the exercise of stock options held by Mr. Klein.
Includes (i) 7,972,526 shares of the Common Stock owned by
8
GKH Investments, L.P. ("GKH Investments"), (ii) 302,269 shares of the Common
Stock owned by GKH Partners, L.P. ("GKH Partners"), as nominee for GKH
Private Limited, and (iii) 426,944 shares of the Common Stock owned by JAKK
Holding Corp. GKH Partners is the general partner of GKH Investments. Mr.
Klein, who is a director of Hanover, is the sole stockholder of JAKK Holding
Corp., which is a general partner of GKH Partners. By virtue of his
relationship to GKH Partners, Mr. Klein may be deemed to share beneficial
ownership of the shares owned by GKH Investments and GKH Partners. Mr. Klein
disclaims beneficial ownership of all shares owned by GKH Investments and
GKH Partners.
(2) Excludes 7,972,526 shares of the Common Stock owned by GKH Investments. GKH
Partners is the general partner of GKH Investments. As the general partner
of GKH Investments, GKH Partners may be deemed to be the beneficial owner
of stock held by GKH Investments. GKH Partners disclaims such beneficial
ownership.
(3) Includes (i) 51,491 shares of the Common Stock owned by Schlumberger
Technology Corporation, (ii) 6,762,479 shares of the Common Stock owned by
Camco International, Inc., (iii) 1,430,304 shares of the Common Stock owned
by Schlumberger Surenco, S.A., (iv) 366,158 shares of the Common Stock
owned by Schlumberger Oilfield Holdings, Ltd. and (v) 97,261 shares of the
Common Stock owned by Operational Services, Inc. Schlumberger Limited, as
the direct or indirect owner of all these entities, may be deemed to
beneficially own all 8,707,693 shares of the Common Stock listed above.
(4) Shapiro Capital Management Company, Inc. is an investment adviser under the
Investment Advisers Act of 1940. One or more of its advisory clients is the
legal owner of the shares reported in the table. Pursuant to the investment
advisory agreements with its clients, Shapiro Capital Management has the
authority to dispose of the Common Stock. Some of its clients have the
right to receive dividends from the securities that Shapiro Capital
Management manages; however, no client has an interest relating to more
than 5% of the Common Stock. Mr. Shapiro is president, director and
majority stockholder of Shapiro Capital Management Company, Inc. By virtue
of his relationship with Shapiro Capital Management, he exercises
dispositive power over the 5,056,959 shares held by Shapiro Capital
Management. Mr. Shapiro, therefore, may be deemed to have indirect
beneficial ownership of the 5,056,959 shares held by Shapiro Capital
Management. He has no interest in dividends or proceeds from the sale of
such shares, owns no such securities for his own account, and disclaims
beneficial ownership of all the shares reported by Shapiro Capital
Management. Mr. Shapiro may also be deemed the beneficial owner of 75,000
shares owned by his wife.
(5) Includes 1,546 shares that can be acquired immediately or within 60 days of
March 31, 2003, through the exercise of stock options held by Mr. Brumley.
(6) Includes shares that can be acquired immediately or within 60 days of March
31, 2003, through the exercise of stock warrants (2,095 shares) and stock
options (1,546 shares) held by Mr. Collins. Includes 6,000 shares held in
trust for the benefit of Mr. Collins' two children. Mr. Collins is the
trustee of such trusts. Mr. Collins disclaims beneficial ownership of the
6,000 shares held in trust for his children.
(7) Includes 1,546 shares that can be acquired immediately or within 60 days of
March 31, 2003, through the exercise of stock options held by Dr. Furgason.
Includes 400 shares owned by Dr. Furgason's wife. Dr. Furgason disclaims
beneficial ownership of the 400 shares owned by his wife.
(8) Includes 25,000 shares that can be acquired immediately or within 60 days
of March 31, 2003, through the exercise of stock options held by Mr.
Grijalva.
(9) Includes 1,546 shares that can be acquired immediately or within 60 days of
March 31, 2003, through the exercise of stock options held by Mr. Hall.
(10) Includes 1,546 shares that can be acquired immediately or within 60 days
of March 31, 2003, through the exercise of stock options held by Mr. Huck.
9
(11) Includes 1,383,585 shares that can be acquired immediately or within 60
days of March 31, 2003, through the exercise of stock options held by Mr.
O'Connor and 500,000 shares that can be acquired immediately or within 60
days of March 31, 2003, through the exercise of stock options held by the
Michael A. O'Connor and Karen L. O'Connor Foundation. Includes 20,000
shares held in the O'Connor Trust. Excludes 307,145 shares held by Goldman
Sachs Exchange Place Fund, L.P., in which Mr. O'Connor has an interest.
Mr. O'Connor disclaims beneficial ownership of the shares held by Goldman
Sachs Exchange Place Fund, L.P.
(12) Includes 1,546 shares that can be acquired immediately or within 60 days
of March 31, 2003, through the exercise of stock options held by Mr.
Shoemaker. Includes 10,292 shares held by Shoemaker Family Partners L.P.
Mr. Shoemaker is associated with Shoemaker Family Partners L.P. and may be
deemed a beneficial owner of the shares held by the partnership. Excludes
34,190 shares held by Goldman Sachs Exchange Place Fund, L.P., in which
Mr. Shoemaker has an interest. Mr. Shoemaker disclaims beneficial
ownership of the shares held by Goldman Sachs Exchange Place Fund, L.P.
(13) Mr. McGhan resigned as President, Chief Executive Officer and director in
August 2002. Includes 150 shares of the Common Stock held by Mr. McGhan's
wife and 1,200 shares of the Common Stock held by Mr. McGhan's two minor
children. Also includes 411,914 shares which are held as collateral by the
Company for an outstanding loan with the Company.
(14) Includes (i) 33,334 shares that can be acquired immediately or within 60
days of March 31, 2003, through the exercise of stock options held by Mr.
Jackson, and (ii) 136 shares held in the Hanover 401(k) Plan as of
December 31, 2002.
(15) Includes 33,334 shares that can be acquired immediately or within 60 days
of March 31, 2003, through the exercise of stock options held by Mr. Berg.
(16) Includes (i) 133,941 shares that can be acquired immediately or within 60
days of March 31, 2003, through the exercise of stock options held by Mr.
Pierce, (ii) 277 shares held in the Hanover 401(k) Plan as of December 31,
2002, and (iii) 1,476 shares of restricted stock that vest over a
four-year period at the rate of 25% per year, beginning on April 22, 2003,
the first anniversary of the grant date.
(17) Includes (i) 727 shares that can be acquired immediately or within 60 days
of March 31, 2003, through the exercise of stock options held by Mr.
Schreck, (ii) 96 shares held in the Hanover 401(k) Plan as of December 31,
2002 and (iii) 996 shares of restricted stock that vest over a four-year
period at the rate of 25% per year, beginning on April 22, 2003, the first
anniversary of the grant date.
(18) Includes the share ownership of all current Named Executive Officers (as
defined below) and directors as reflected above in the table and includes
an additional 3,334 shares that can be acquired immediately or within 60
days of March 31, 2003, through the exercise of stock options by an
executive officer who is not a Named Executive Officer. Excludes shares
held by Mr. McGhan, a former executive officer of the Company.
10
EQUITY COMPENSATION PLAN INFORMATION
The equity compensation plans and agreements discussed in this section are
referred to collectively as the "Equity Compensation Plans." The following
table provides information as of December 31, 2002, with respect to shares of
the Common Stock that may be issued under the following Equity Compensation
Plans of the Company: the 1997 Stock Option Plan, the 1998 Stock Option Plan,
the December 9, 1998 Stock Option Plan, the 1999 Stock Option Plan, and the
2001 Equity Incentive Plan. The Compensation Committee has authority to make
future grants under these plans.
The table also includes information with respect to shares of the Common
Stock subject to outstanding options that were granted under (i) the following
Equity Compensation Plans adopted prior to the Company's initial public
offering in 1997, under which the authority to make additional grants has been
terminated: the 1992 Stock Compensation Plan, the Incentive Option Plan, the
1993 Management Stock Option Plan, the Senior Executive Stock Option Plan, the
1995 Employee Stock Option Plan, the 1995 Management Stock Option Plan, the
1996 Employee Stock Option Plan; and (ii) Stock Option Agreements entered into
by and between Hanover and the following individuals: Donald M. DeVille, Tom P.
McNeil III, Glenn Wind, and Kurt Wind. The plans listed in (i) above are
referred to as the "Pre-IPO Plans." The agreements listed in (ii) above are
referred to as the "Pre-IPO Agreements."
The table does not include information about the proposed 2003 Stock
Incentive Plan, which is being submitted for stockholder approval at the 2003
Stockholders' Meeting, under which no grants have yet been made.
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column a)
Plan category (a) (b) (c)
------------- -------------------------- ------------------------- -------------------------
Equity compensation plans approved
by security holders (1)......... 2,957,381 $11.32 0
Equity compensation plans not
approved by security holders
(2)(3).......................... 4,472,719(4) $ 5.67 175,929(5)
--------- -------
Total............................. 7,403,100 $ 8.16 175,929
========= =======
- --------
(1) Composed of the 2001 Equity Incentive Plan and the 1997 Stock Option Plan.
(2) Composed of all of the Equity Compensation Plans except the 2001 Equity
Incentive Plan and the 1997 Stock Option Plan (except as discussed in
footnote 4 below).
(3) The table does not include information for the Applied Process Solutions
Incorporated ("APSI") 1998 Stock Option Plan assumed by Hanover in
connection with its acquisition of APSI in May 2000. As of December 31,
2002, a total of 47,908 shares of the Common Stock were issuable upon
exercise of outstanding options under the assumed plan. The weighted
average exercise price of those outstanding options is $15.72 per share. No
additional awards may be granted under the plan.
(4) Includes 315,016 shares of the Common Stock to be issued upon exercise of
stock options approved for issuance by the Board of Directors in 1998 under
the 1997 Stock Option Plan but were not approved by the Company's security
holders.
(5) The Board has determined to terminate any existing authority to make future
grants under these plans subject to receipt, at the 2003 Annual
Stockholders' Meeting, of approval from the Company's stockholders of the
Hanover Compressor Company 2003 Stock Incentive Plan.
The Equity Compensation Plans that have not been approved by security
holders are described below. The Pre-IPO Plans and the 1997 Stock Option Plan,
the 1998 Stock Option Plan, the December 9, 1998 Stock Option
11
Plan, and the 1999 Stock Option Plan have the following material features: (i)
awards under such plans are limited to stock options and may be made, depending
on the terms of each plan, to the Company's officers, directors, employees,
advisors and consultants; (ii) unless otherwise set forth in any applicable
stock option agreement and depending on the terms of each plan, the stock
options vest over a period of up to five years; and (iii) the term of the stock
options granted under the plans may not exceed 10 years, except for the 1992
Stock Option Plan under which the term of the stock options may not exceed 15
years. The Pre-IPO Agreements have the following material features: (i) awards
under such agreements are limited to stock options and were made to the
specific person named in the agreement; (ii) the stock options vest over a
period of five years from the date of the agreement; (iii) the term of the
stock options granted under the agreements is 10 years; and (iv) no additional
grants may be made under these agreements.
Additional information as of December 31, 2002, about the Equity
Compensation Plans that have not been approved by stockholders is provided in
the following table.
Number of
Shares
Plan or Agreement Name Issuable(#)
---------------------- -----------
Number of Shares
Reserved for Shares
Shares Previously Issuance Available
Issued Pursuant Upon the Exercise for
to Stock Option of Outstanding Weighted-Average Future
Exercises(#) Stock Options(#) Exercise Price($) Grants(#)
----------------- ----------------- ----------------- ---------
1992 Stock Compensation Plan.. 379,200 257,856 113,760 $ 2.06 *
Incentive Option Plan......... 2,703,064 1,014,891 1,688,172 $ 2.29 *
1993 Management Stock Option
Plan........................ 496,120 221,516 274,604 $ 2.29 *
Senior Executive Stock Option
Plan........................ 816,512 408,256 408,256 $ 2.64 *
1995 Employee Stock Option
Plan........................ 199,694 131,743 67,951 $ 4.75 *
1995 Management Stock Option
Plan........................ 26,332 18,324 7,900 $ 3.48 *
1996 Employee Stock Option
Plan........................ 116,920 18,264 96,484 $ 5.70 *
Donald M. DeVille Stock Option
Agreement................... 19,908 0 19,908 $ 5.06 *
Tom P. McNeil III Stock Option
Agreement................... 26,332 0 26,332 $ 6.96 *
Glenn Wind and Kurt Wind Stock
Option Agreements........... 47,400 19,322 28,078 $0.003 *
1997 Stock Option Plan(1)..... 315,016 0 315,016 $ 9.75 0
1998 Stock Option Plan........ 520,000 14,173 446,315 $13.40 59,512**
December 9, 1998 Stock Option
Plan........................ 700,000 179,774 443,726 $ 9.75 76,500**
1999 Stock Option Plan........ 600,000 23,866 536,217 $11.67 39,917**
- --------
* The authority to make future grants under these plans was terminated upon
the Company's initial public offering in 1997.
** The Board has determined to terminate the authority to make future grants
under these plans subject to receipt at the 2003 Annual Stockholders'
Meeting of approval from the Company's stockholders of the Hanover
Compressor Company 2003 Stock Incentive Plan.
(1) Represents 315,016 shares of the Common Stock to be issued upon exercise of
stock options approved for issuance by the Board of Directors in 1998 under
the 1997 Stock Option Plan but were not approved by the Company's security
holders.
12
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who beneficially own more than 10% of
the Common Stock to file reports with the Securities and Exchange Commission
and the Company disclosing their initial beneficial ownership of the Common
Stock and changes in such ownership.
At the request of the Company's new management, and in connection with
recent changes in Section 16(a) reporting requirements that accelerated many
filing deadlines to two days, the Company conducted an internal review of the
Section 16(a) filings made by the Company's directors, executive officers and
stockholders owning more than 10% of the Common Stock since the Company became
a public company in 1997 with the goal of identifying and correcting any filing
errors that may exist. As a consequence of the review, certain filing errors
with respect to the Company's current directors, executive officers and more
than 10% stockholders were identified. In each case, appropriate supplemental
filings have been made to correct these errors. These filings are as follows:
Mr. Collins filed one late report with respect to one transaction; Mr. Deaton
timely filed a Form 3 but filed a correction thereto on Form 5 to report 100
shares that were not included on the Form 3; Dr. Furgason filed one late report
with respect to four transactions; Mr. Huck filed one late report (Form 3); Mr.
Klein timely filed a Form 3 but did not describe certain holdings held by GKH
Partners, L.P., as nominee for GKH Private Limited, and GKH Investments, L.P.
(together "GKH") in that filing, and filed one late report relating to two
transactions by GKH that also included the necessary corrections relating to
his Form 3; Mr. O'Connor filed two late reports with respect to six
transactions; Mr. Shoemaker filed two late reports with respect to three
transactions; Mr. Pierce filed his Form 3 one day late and had one other late
filing with respect to one transaction; Mr. Schreck timely filed a Form 3 but
filed a correction thereto on Form 5 to report 96 shares held in the Company's
401(k) Plan that were not included on the Form 3; GKH Partners, L.P., a
beneficial owner of more than 10% of the Common Stock, filed two late reports
with respect to two transactions; and a related entity, GKH Investments L.P.,
filed two late reports, with respect to holdings that were reported only by GKH
Partners, L.P. but that should have also been reported on Form 3 by GKH
Investments, L.P., as well as two additional transactions.
The review also determined that, in connection with stock options granted by
the Company, each of Messrs. Grijalva, Berg, Jackson and York filed one late
report with respect to the option grant.
In addition, with respect to former executive officers and directors who
served during 2002, the review determined that Mr. McGhan filed one late report
with respect to one transaction; Mr. Bradford did not file a Form 3 and filed
one late report with respect to one transaction; Mr. Erwin did not file a Form
3 and filed one late report with respect to one transaction; and Mr. Goldberg
filed one late report with respect to one transaction.
The Company has implemented a compliance program with respect to the timely
filing of Section 16(a) reports. Under the program, each reporting person who
is an executive officer or director of the Company must contact the Company's
legal department prior to engaging in any transaction in equity securities of
the Company. Once contacted, the legal department will assist with the timely
filing of all necessary reports. The Company's management believes that its new
compliance program as well as heightened awareness of the requirements of
Section 16(a) of the Securities Exchange Act of 1934 will eliminate or
significantly reduce filing errors in the future.
13
INFORMATION REGARDING EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table sets forth certain information with respect to
compensation paid by the Company during the past three fiscal years to all
persons who held the position of Chief Executive Officer of the Company in
2002, and the Company's four other most highly compensated executive officers
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Long Term Compensation
- --------------------------
Annual Compensation Securities
---------------------------------------- Restricted Underlying All Other
Other Annual Stock Options Compensation
Name and Principal Position Year Salary($) Bonus($)(1) Compensation($)(2) Awards($)(1) (# of Shares) ($)(3)
(a) (b) (c) (d) (e) (f) (g) (i)
--------------------------- ---- --------- ----------- ------------------ ------------ ------------- ------------
Victor E. Grijalva (4)................. 2002 -- -- -- -- 125,000 $112,500
Chairman of the Board and Former 2001 N/A N/A N/A N/A N/A N/A
President and Chief Executive Officer 2000 N/A N/A N/A N/A N/A N/A
Chad C. Deaton (5)..................... 2002 $197,308 $172,175 -- -- 200,000 $ 300
President and Chief Executive 2001 N/A N/A N/A N/A N/A N/A
Officer 2000 N/A N/A N/A N/A N/A N/A
Michael J. McGhan (6).................. 2002 $260,000 -- -- $40,000 -- $168,207
Former President and Chief Executive 2001 $236,538 $ 60,000 -- -- -- $ 1,930
Officer 2000 $150,000 -- -- -- -- $ 2,606
John E. Jackson (7).................... 2002 $281,538 $240,329 -- -- 140,000 $211,720
Senior Vice President and 2001 N/A N/A N/A N/A N/A N/A
Chief Financial Officer 2000 N/A N/A N/A N/A N/A N/A
Mark S. Berg (8)....................... 2002 $196,154 $160,000 -- -- 140,000 $ 1,480
Senior Vice President, General Counsel 2001 N/A N/A N/A N/A N/A N/A
and Secretary 2000 N/A N/A N/A N/A N/A N/A
Robert O. Pierce (9)................... 2002 $203,846 $130,000 -- $28,000 13,415 $ 1,720
Senior Vice President-- 2001 $139,846 $ 42,000 -- -- -- $ 9,854
Manufacturing and Procurement 2000 $107,692 $ 50,000 -- -- -- $ 13,720
Peter G. Schreck (10).................. 2002 $161,250 $ 50,100 -- $19,000 7,275 $ 1,625
Vice President--Treasury and 2001 $135,000 $ 70,000 -- -- -- $ 41,509
Planning 2000 $ 44,654 $ 40,000 -- -- -- $ 15,790
- --------
(1) Annual bonus amounts represent amounts earned and accrued during 2002,
2001, and 2000, but paid subsequent to the end of the year. The restricted
stock awards vest 25% per year beginning on the first anniversary of the
grant date. Messrs. Deaton, Jackson and Berg have no restricted stock
holdings. Mr. McGhan's unvested restricted stock awards were forfeited upon
the termination of his employment with the Company in August 2002. The
number and value of the aggregate restricted stock holdings at December 31,
2002, for each of the Named Executive Officers follows: Mr. Pierce (1,476
shares valued at $14,000) and Mr. Schreck (996 shares valued at $9,000). If
the Company declares a dividend on shares of the Common Stock, holders of
restricted stock will be entitled to receive such dividends whether or not
such shares of restricted stock have vested.
(2) In accordance with the rules of the Securities and Exchange Commission, the
dollar value of perquisites and other personal benefits of Named Executive
Officers would be shown only to the extent that they exceed the lesser of
$50,000 or 10% of the total annual salary and bonus reported for each Named
Executive Officer.
(3) These amounts include other miscellaneous compensation described in the
footnotes below for each Named Executive Officer.
(4) Mr. Grijalva served as interim Chief Executive Officer from August 2 to
August 19, 2002. The amount set forth under "All Other Compensation" for
2002 reflects his compensation for service as Chairman of the Board. Mr.
Grijalva received no additional compensation for his service as interim
Chief Executive Officer.
14
(5) Mr. Deaton joined Hanover in August 2002. The amount set forth under "All
Other Compensation" represents the premiums paid by Hanover for group term
life and accidental death and disability in the amount of $300.
(6) Mr. McGhan resigned as an executive officer of Hanover in August 2002. The
amount set forth under "All Other Compensation" for 2002 includes (i)
consideration paid by Hanover of $166,667 for a
non-compete/non-solicitation agreement in connection with Mr. McGhan's
resignation (see "CERTAIN TRANSACTIONS--Transactions with Former Executive
Officers" for a discussion of his Separation Agreement), (ii) $1,000
company match in his account in the Hanover 401(k) Plan, and (iii) premiums
paid by Hanover for group term life and accidental death and disability
insurance in the amount of $540.
(7) Mr. Jackson joined Hanover in January 2002. The amount set forth under "All
Other Compensation" includes (i) a lump sum payment of $210,000 paid upon
Mr. Jackson's start date to compensate for bonus compensation and "in the
money" options that Mr. Jackson expected to receive from his previous
employer had he not accepted a position with Hanover, (ii) $1,000 company
match in his account in the Hanover 401(k) Plan, and (iii) premiums paid by
Hanover for group term life and accidental death and disability insurance
in the amount of $720.
(8) Mr. Berg joined Hanover in May 2002. The amount set forth under "All Other
Compensation" includes (i) $1,000 company match in his account in the
Hanover 401(k) Plan and (ii) premiums paid by Hanover for group term life
and accidental death and disability insurance in the amount of $480.
(9) The amount set forth under "All Other Compensation" for 2002 includes (i)
$1,000 company match in Mr. Pierce's account in the Hanover 401(k) Plan,
and (ii) premiums paid by Hanover for group term life and accidental death
and disability insurance in the amount of $720.
(10) Mr. Schreck joined Hanover in September 2000. The amount set forth under
"All Other Compensation" for 2002 includes (i) $1,000 company match in Mr.
Schreck's account in the Hanover 401(k) Plan, and (ii) premiums paid by
Hanover for group term life and accidental death and disability insurance
in the amount of $625.
Option Holdings
The following table includes information on grants of stock options by the
Company during fiscal year 2002 to the Named Executive Officers. Hanover's
stock option plans do not provide for the issuance of stock appreciation rights.
STOCK OPTIONS GRANTED IN 2002
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term
------------------------------------------------ -----------------------------
Number of Percent of
Securities Total Options Exercise
Underlying Granted To Price or
Options Employees in Base Expiration
Name Granted (#)(1) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
- ------------------ -------------- ------------- -------- ---------- ---------- ----------
Victor E. Grijalva 75,000(2) 5.01% $17.25 03-18-2012 $ 813,632 $2,061,904
50,000(3) 3.34% $ 9.81 12-10-2012 $ 308,473 $ 781,731
Chad C. Deaton.... 200,000(3) 13.35% $ 9.99 08-19-2012 $1,256,531 $3,184,297
Michael J. McGhan. -- -- -- -- -- --
Mark S. Berg...... 100,000(2) 6.68% $17.32 05-06-2012 $1,089,245 $2,760,362
40,000(3) 2.67% $ 9.81 12-10-2012 $ 246,778 $ 625,385
John E. Jackson... 50,000(2) 3.34% $13.98 01-22-2012 $ 439,597 $1,114,026
50,000(2) 3.34% $14.55 05-14-2012 $ 457,521 $1,159,448
40,000(3) 2.67% $ 9.81 12-10-2012 $ 246,778 $ 625,385
Robert O. Pierce.. 13,415(4) 0.90% $14.55 05-14-2012 $ 122,753 $ 311,080
Peter G. Schreck.. 7,275(4) 0.49% $14.55 05-14-2012 $ 66,569 $ 168,700
15
- --------
(1) These consist of non-qualified options to acquire shares of the Common
Stock.
(2) These options vest 33.3% per year beginning on the first anniversary of the
grant date and are subject to accelerated vesting upon a change of control
of the Company. In such event, the Company has agreed to acquire these
options by payment of the difference between the price per share of the
Common Stock established in the change of control transaction and the
exercise price.
(3) These options vest 25% per year beginning on the first anniversary of the
grant date and are subject to accelerated vesting upon a change of control
of the Company. In such event, the Company has agreed to acquire these
options by payment of the difference between the price per share of the
Common Stock established in the change of control transaction and the
exercise price.
(4) These options vest over a four year period at the rate of 10%, 20%, 30% and
40% on each respective anniversary of the grant date and bear no change of
control provisions.
The following table includes information concerning the stock options
exercised by the Named Executive Officers during fiscal year 2002 and the
unexercised options held by the Named Executive Officers as of December 31,
2002.
AGGREGATED OPTION EXERCISES AND 2002 YEAR-END OPTION VALUES
Number of Shares
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options at
Acquired December 31, 2002(#) December 31, 2002($)(1)
on Value (d) (e)
Name Exercise (#) Realized($) ------------------------- -------------------------
(a) (b) (c) Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ------------ ----------- ----------- ------------- ----------- -------------
Victor E. Grijalva -- -- -- 125,000 $ 0 $0
Chad C. Deaton.... -- -- -- 200,000 $ 0 $0
Michael J. McGhan. 944,032(2) $5,601,915 -- -- $ 0 $0
Mark S. Berg...... -- -- -- 140,000 $ 0 $0
John E. Jackson... -- -- -- 140,000 $ 0 $0
Robert O. Pierce.. -- -- 132,600 13,415 $13,109 $0
Peter G. Schreck.. -- -- -- 7,275 $ 0 $0
- --------
(1) Market value of securities underlying in-the-money positions at the end of
fiscal year 2002 (based upon $9.18 per share, the closing price of the
Common Stock on the NYSE on December 31, 2002, minus the exercise price).
(2) The net shares of the Common Stock received by Mr. McGhan pursuant to the
exercise of these stock options, totaling 411,914 shares, are held by the
Company as collateral for his outstanding loan with the Company according
to the terms of a Separation Agreement entered into with Mr. McGhan as of
August 1, 2002.
16
CERTAIN TRANSACTIONS
Transactions with GKH Entities
Melvyn N. Klein, a director of the Company, is the sole stockholder of JAKK
Holdings Corp., which is a general partner of GKH Partners. GKH Partners is the
general partner of GKH Investments. The Company and GKH Partners are parties to
a stockholders agreement that provides, among other things, for GKH
Investments' rights of visitation and inspection and the Company's obligation
to provide Rule 144A information to prospective transferees of the Common Stock.
GKH Partners and other stockholders (collectively, the "Holders"), who as of
March 31, 2003, together beneficially own approximately 11% of the outstanding
Common Stock, are parties to a Third Amended Registration Rights Agreement
dated December 5, 1995 (the "GKH Rights Agreement"). The GKH Rights Agreement
generally provides that if the Company proposes to register shares of its
capital stock or any other securities under the Securities Act of 1933, then
upon the request of those Holders owning in the aggregate at least 2.5% of the
Common Stock (the "Registrable Securities") then held by all of the Holders,
the Company will use its reasonable best efforts to cause the Registrable
Securities so requested by the Holders to be included in the applicable
registration statement, subject to underwriters' cutbacks. The Company is
required to pay all registration expenses in connection with registrations of
Registrable Securities effected pursuant to the GKH Rights Agreement.
William S. Goldberg, who was at the time a Managing Director of GKH
Partners, acted as Chief Financial Officer of the Company during 2001 and into
2002 and served as Vice Chairman of the Board in 2002. Mr. Goldberg resigned as
Chief Financial Officer in February 2002 and resigned as Vice Chairman of the
Board and as a member of the Board in August 2002. Mr. Goldberg received
compensation from the Company in the form of stock options for his service as
Chief Financial Officer and Vice Chairman of the Board. The Company reimbursed
GKH Partners for certain travel and related expenses incurred by Mr. Goldberg
in connection with his efforts on the Company's behalf.
Pursuant to an agreement with GKH Partners, which provides for compensation
to GKH Partners for services, including Mr. Goldberg's service as Chief
Financial Officer, the Company paid a management fee of $45,000 per month from
November 2001 until the agreement terminated in February 2002.
GKH Partners has advised the Company that it is in the process of dissolving
and "winding up" its affairs. On November 12, 2002, GKH Partners informed the
Company that GKH Partners has advised its limited partners that it is extending
the wind-up process of the partnership for an additional twelve months from
January 25, 2003 until January 25, 2004. On December 3, 2002, GKH Partners, as
nominee for GKH Private Limited, and GKH Investments, advised the Company that
they had made a partial distribution of 10,000,000 shares out of a total of
18,274,795 shares held by them to their respective limited and general
partners. As part of the wind-up process, GKH Partners and GKH Investments have
advised the Company that they may liquidate or distribute substantially all of
their respective assets, including the remaining shares of the Common Stock
held by them.
17
Transactions with Schlumberger Entities
In August 2001, the Company purchased Production Operators Corporation and
related assets (the "POI Acquisition") from the Schlumberger Companies (as
defined below). Schlumberger Limited (Schlumberger Limited and the Schlumberger
Companies, collectively are referred to as "Schlumberger") owns, directly or
indirectly, all of the equity of the Schlumberger Companies. Pursuant to the
Lock-Up, Standstill and Registration Rights Agreement, dated as of August 31,
2001 (the "Schlumberger Rights Agreement"), between Schlumberger Technology
Company, Camco International Inc., Schlumberger Surenco, S.A., Schlumberger
Oilfield Holdings Limited, Operational Services, Inc. (collectively, the
"Schlumberger Companies") and Hanover, Hanover granted to each of the
Schlumberger Companies certain registration rights in connection with shares of
the Common Stock received by the Schlumberger Companies as consideration in the
POI Acquisition (the "Hanover Stock"). The registration rights granted to the
Schlumberger Companies include (i) the right, subject to certain restrictions,
to register the Hanover Stock in any registration of securities initiated by
Hanover within the period of time beginning on the third anniversary of the
date of the Schlumberger Rights Agreement and ending on the tenth anniversary
of the date of the Schlumberger Rights Agreement (such period of time, the
"Registration Period"), and (ii) the right, subject to certain restrictions, to
demand up to five registrations of the Hanover Stock within the Registration
Period. Hanover is required to pay all registration expenses in connection with
registrations of Hanover Stock pursuant to the Schlumberger Rights Agreement.
For a period of three years from the date of the Schlumberger Rights Agreement,
the Schlumberger Companies are prohibited from, directly or indirectly, selling
or contracting to sell any of the Hanover Stock. The Schlumberger Rights
Agreement also provides that during such three-year period none of the
Schlumberger Companies shall, without Hanover's written consent, (i) acquire or
propose to acquire, directly or indirectly, greater than twenty-five percent
(25%) of the shares of the outstanding Common Stock, (ii) make any public
announcement with respect to, or submit a proposal for, any extraordinary
transaction involving Hanover, (iii) form or join in any group with respect to
the matters set forth in (i) above, or (iv) enter into discussions or
arrangements with any third party with respect to the matters set forth in (i)
above.
Schlumberger has the right under the purchase and sale agreement entered
into with respect to the POI Acquisition, so long as Schlumberger owns at least
5% of the Common Stock and subject to certain restrictions, to nominate one
representative to sit on the Company's Board of Directors. In August 2001,
Schlumberger designated Mr. Rene Huck, a Vice President of Schlumberger
Limited, as a nominee to serve on the Company's Board of Directors.
Schlumberger has advised the Company that it will not designate a nominee for
2003 and thus Mr. Huck will not stand for re-election. For the year ended
December 31, 2002, Hanover generated revenues of approximately $6,034,000 in
business dealings with Schlumberger. In addition, Hanover made purchases of
equipment and services of approximately $7,599,000 from Schlumberger during
2002.
As part of the purchase and sale agreement entered into with respect to the
POI Acquisition, the Company was required to make a payment of up to $58
million plus interest from the proceeds of and due upon the completion of a
financing of PIGAP II, a South American joint venture project, a 30% interest
in which was acquired by Hanover as part of the POI Acquisition. Because the
joint venture failed to execute the financing on or before December 31, 2002,
the Company had the right to put its interest in the joint venture back to
Schlumberger in exchange for a return of the purchase price allocated to the
joint venture, plus the net amount of any capital contributions by the Company
to the joint venture. In January 2003, the Company exercised its right to put
its interest in the joint venture back to Schlumberger. If not exercised, the
put right would have expired as of February 1, 2003. The consummation of the
transfer of the Company's interest in the joint venture back to Schlumberger is
subject to receipt of necessary consents. Hanover is currently in discussions
with Schlumberger to explore the possibility of entering into a new agreement
under which Hanover would retain the 30% ownership interest in the joint
venture. In light of the ongoing discussions between Hanover and Schlumberger
relating to the put, the parties agreed to postpone the closing date of the
transfer to no later than May 31, 2003.
In connection with the POI Acquisition, the Company issued a $150 million
subordinated acquisition note to Schlumberger, which matures December 15, 2005.
Interest on the note accrues and is payable-in-kind at the rate
18
of 8.5% annually for the first six months after issuance and periodically
increases in increments of 1% to 2% per annum to a maximum interest rate 42
months after issuance of 15.5%. In the event of an event of default under the
note, interest will accrue at a rate of 2% above the then applicable rate. The
note is subordinated to all of the Company's indebtedness other than certain
indebtedness to fund future acquisitions. In the event that the Company
completes an offering of equity securities, the Company is required to apply
the proceeds of the offering to repay amounts outstanding under the note as
long as no default exists or would exist under the Company's other indebtedness
as a result of such payment.
In August 2001, the Company entered into a five-year strategic alliance with
Schlumberger intended to result in the active support of Schlumberger in
fulfilling certain of the Company's business objectives. The principal
components of the strategic alliance include (1) establishing the Company as
Schlumberger's most favored supplier of compression, natural gas treatment and
gas processing equipment worldwide, (2) Schlumberger's coordination and
cooperation in further developing the Company's international business by
placing Hanover personnel in Schlumberger's offices in six top international
markets and (3) providing the Company with access to consulting advice and
technical assistance in enhancing its field automation capabilities.
Other Related Party Transactions
In January 2002, Hanover advanced cash of $100,000 to Robert O. Pierce,
Senior Vice President-- Manufacturing and Procurement, in return for a
promissory note. The note bore interest at 4.0%, matured on September 30, 2002,
and was unsecured. On September 18, 2002, the Board of Directors approved the
purchase of 30,054 shares of the Common Stock from Mr. Pierce at $9.60 per
share for a total of $288,500. The price per share was determined by reference
to the closing price quoted on the NYSE on September 18, 2002. The Board of
Directors determined to purchase the shares from Mr. Pierce because it was
necessary for him to sell shares to timely repay his promissory note with the
Company as well as a loan with a third party. The loans matured during a
blackout period under the Company's insider trading policy, and therefore Mr.
Pierce could not sell such shares in the open market to repay the loans without
being in violation of the policy. Mr. Pierce's loan from the Company was repaid
in full in September 2002.
In connection with the restatements announced by the Company in 2002,
certain officers and directors have been named as defendants in putative
stockholder class actions, stockholder derivative actions and have been
involved with the investigation being conducted by the Staff of the Securities
and Exchange Commission. Pursuant to the indemnification provisions of the
Company's articles of incorporation and bylaws, the Company has advanced legal
fees to certain employees, officers and directors involved in these
proceedings. In this connection, expenses incurred on behalf of indemnified
officers and directors during 2002 total $1,085,000 in the aggregate. Of this
amount, $375,000 was incurred on behalf of former director William S. Goldberg;
$316,000 was incurred on behalf of former officer Michael J. McGhan; $59,000 on
behalf of former officer Charles D. Erwin; and $86,000 on behalf of former
officer Joe S. Bradford; $149,000 was incurred on behalf of directors Ted
Collins, Jr., Robert R. Furgason, Rene Huck, Melvyn N. Klein, Michael A.
O'Connor, and Alvin V. Shoemaker, who were serving during 2001; and $83,000 was
incurred on behalf of directors I. Jon Brumley, Victor E. Grijalva, and Gordon
T. Hall.
See the description of transactions involving Ted Collins, a director of the
Company, under "INFORMATION REGARDING CORPORATE GOVERNANCE, THE BOARD OF
DIRECTORS AND COMMITTEES OF THE BOARD--Compensation Committee Interlocks and
Insider Participation."
Employment Arrangements with Management
Chad C. Deaton. The Company entered into an employment arrangement,
effective August 19, 2002, with Mr. Deaton, who serves as the Company's
President and Chief Executive Officer. The arrangement provides for Mr. Deaton
to receive an annual base salary of $540,000. In addition, Mr. Deaton has the
opportunity to receive an annual bonus payment of up to 100% of his annual base
salary based upon personal performance compared with agreed upon objectives and
subjective measures as well as the Company's performance. In connection with
his agreement to join the Company, Mr. Deaton was granted non-qualified stock
options to purchase 200,000 shares of the Common Stock at an exercise price
equal to $9.99 per share, the market closing price on the grant date (August
19, 2002). Such options will vest 25% per year beginning on the first
anniversary on the grant date (subject to accelerated vesting upon a change of
control of the Company).
19
If the Company terminates Mr. Deaton within 12 months after a change of
control occurs, or during that period Mr. Deaton terminates his employment for
good reason, Mr. Deaton would be entitled to a severance payment equal to three
times his annual base salary. If the Company terminates Mr. Deaton without
cause at any time other than the 12 months following a change of control, Mr.
Deaton would be entitled to a severance payment equal to his annual base
salary. In either of these circumstances, the Company would reimburse Mr.
Deaton for his health insurance premiums for a period of up to eighteen months
following his termination. If the Company terminates Mr. Deaton for cause, or
Mr. Deaton terminates his employment without good reason, the Company is not
obligated to make any severance payments to Mr. Deaton.
John E. Jackson. The Company entered into an employment arrangement,
effective January 22, 2002, with Mr. Jackson, who serves as the Company's
Senior Vice President and Chief Financial Officer. The arrangement provides for
Mr. Jackson to receive an annual base salary of $300,000. In addition, Mr.
Jackson has the opportunity to receive an annual bonus payment of up to 100% of
his annual base salary based upon personal performance compared with agreed
upon objectives and subjective measures as well as the Company's performance.
Upon Mr. Jackson's employment start date, Mr. Jackson received a lump sum
payment of $210,000 to compensate him for his bonus compensation and "in the
money" options that Mr. Jackson expected to receive from his previous employer
had he not accepted a position with the Company. In connection with his
agreement to join the Company, Mr. Jackson was granted non-qualified stock
options to purchase 50,000 shares of the Common Stock at an exercise price
equal to $13.98 per share, the market closing price on the grant date
(January 22, 2002). Such options will vest 33.33% per year beginning on the
first anniversary of the grant date (subject to accelerated vesting upon a
change of control of the Company).
If the Company terminates Mr. Jackson within 12 months after a change of
control occurs, or during that period Mr. Jackson terminates his employment for
good reason, Mr. Jackson would be entitled to a severance payment equal to one
and one-half times the sum of his annual salary and bonus compensation. If the
Company terminates Mr. Jackson with cause, or Mr. Jackson terminates his
employment without good reason, the Company is not obligated to make any
severance payments to Mr. Jackson.
Mark S. Berg. The Company entered into an employment arrangement, effective
May 6, 2002, with Mr. Berg, who serves as the Company's Senior Vice President,
General Counsel and Secretary. The arrangement provides for Mr. Berg to receive
an annual base salary of $300,000. In addition, Mr. Berg has the opportunity to
receive an annual bonus of up to 100% of his annual base salary based upon
personal performance compared with agreed upon objectives and subjective
measures as well as the Company's performance. In connection with his agreement
to join the Company, Mr. Berg was granted non-qualified stock options to
purchase 100,000 shares of the Common Stock at an exercise price equal to
$17.32 per share, the closing price on the grant date (May 6, 2002). Such
options will vest 33.33% per year beginning on the first anniversary of the
grant date (subject to accelerated vesting upon a change of control of the
Company).
If the Company terminates Mr. Berg within 12 months after a change of
control occurs, or during that period Mr. Berg terminates his employment for
good reason, Mr. Berg would be entitled to a severance payment equal to one and
one-half times the sum of his annualized salary and average bonus compensation
for the past two years. If the Company terminates Mr. Berg without cause in the
absence of a change of control, or Mr. Berg terminates his employment for good
reason, Mr. Berg would be entitled to a severance payment equal to one times
the sum of his annualized salary and average bonus compensation for the past
two years. In both cases, Mr. Berg would be entitled to the continuation of
certain health benefits for a period of 18 months following termination. If the
Company terminates Mr. Berg with cause, or Mr. Berg terminates his employment
without good reason, the Company is not obligated to make any severance
payments to Mr. Berg.
Peter G. Schreck. The Company entered into an employment arrangement,
effective September 1, 2000, with Mr. Schreck, who serves as the Company's Vice
President - Treasury & Planning. The arrangement initially provided for Mr.
Schreck to receive an annual base salary of $135,000. In addition, Mr. Schreck
has the opportunity to receive an annual bonus payment of up to 40% of his
annual base salary based upon personal
20
performance compared with agreed upon objectives and subjective measures as
well as the Company's performance.
If the Company terminates Mr. Schreck within 12 months after a change of
control occurs, or during that period Mr. Schreck terminates his employment for
good reason, Mr. Schreck would be entitled to a severance payment equal to one
and one-half times the sum of his annual salary and bonus compensation. If the
Company terminates Mr. Schreck with cause, or Mr. Schreck terminates his
employment without good reason, the Company is not obligated to make any
severance payments to Mr. Schreck.
Transactions with Former Executive Officers
Michael J. McGhan. Mr. McGhan served as Chief Executive Officer and
President of the Company since October 1991 and served as a director of the
Company since March 1992. Mr. McGhan also served as an officer and director of
certain Hanover subsidiaries during his tenure. Mr. McGhan resigned from all
positions held with the Company and its subsidiaries on August 1, 2002.
In 2001, the Company advanced cash of $2,200,000 to Mr. McGhan, in return
for promissory notes. The notes bear interest at 4.88%, mature on April 11,
2006, and are collateralized by personal real estate and shares of Common Stock
with full recourse (as of March 31, 2003, 411,914 shares of the Common Stock
owned by Mr. McGhan were held by the Company as collateral for these promissory
notes). In January 2002, the Company advanced additional cash of $400,000 to
Mr. McGhan in return for a promissory note. The note bore interest at 4% and
was repaid in full in September 2002. During the fiscal year ended December 31,
2002, the largest aggregate amount outstanding under all of these notes was
$2,600,000. At March 31, 2003, $2,193,000 plus accrued interest was outstanding
under the notes issued in 2001.
On July 29, 2002, the Company purchased 147,322 shares of the Common Stock
from Mr. McGhan for $8.96 per share for a total of $1,320,000. The price per
share was determined by reference to the closing price quoted on the NYSE on
July 29, 2002. The Board of Directors determined to purchase the shares from
Mr. McGhan because he was subject to a margin call during a blackout period
under the Hanover insider trading policy, and therefore could not sell such
shares in the open market to cover the margin call without being in violation
of the policy.
On August 1, 2002, the Company entered into a Separation Agreement with Mr.
McGhan. The Separation Agreement sets forth a mutual agreement to sever the
relationships between Mr. McGhan and Hanover, including the employment
relationships of Mr. McGhan with Hanover and its subsidiaries. In the
Separation Agreement, the parties also documented their understandings with
respect to: (i) the posting of additional collateral by Mr. McGhan to secure
repayment of loans owed by Mr. McGhan to Hanover; and (ii) certain waivers and
releases by Mr. McGhan. In the Separation Agreement, Mr. McGhan made certain
representations as to the status of the outstanding loans payable by Mr. McGhan
to Hanover, the documentation for the loans and the enforceability of his
obligations under the loan documents. The loans were not modified and must be
repaid in accordance with their original terms. In addition, the Separation
Agreement provided that Mr. McGhan may exercise his vested stock options
pursuant to the post-termination exercise periods set forth in the applicable
equity compensation plan under which the options were originally granted. Since
the date of the Separation Agreement, Mr. McGhan has exercised all such vested
stock options and the net shares from such exercise have been posted as
collateral for his outstanding indebtedness to the Company. In addition, Mr.
McGhan agreed, among other things, not to compete with Hanover and not to
solicit Hanover employees or customers under terms described in the Separation
Agreement for a period of twenty-four months after the effective date of the
Separation Agreement. In consideration for this non-compete/non-solicitation
provision, Hanover agreed to pay Mr. McGhan $33,333 per month for a period of
eighteen months after the effective date of the Separation Agreement.
Charles D. Erwin. Mr. Erwin served as Chief Operating Officer of the
Company since April 2001 and served as Senior Vice President--Sales and
Marketing since May 2000. Mr. Erwin resigned from these positions
21
on August 2, 2002. In 2000, the Company advanced $824,087 to Mr. Erwin in
return for a promissory note. The note bore interest at prime rate. In May
2002, according to the terms of the original note, the Company forgave $207,382
of such indebtedness (which included $42,565 of accrued interest). During the
fiscal year ended December 31, 2002, the largest amount outstanding under the
note was $631,800. In December 2002, Mr. Erwin repaid this note in full.
On August 2, 2002, the Company entered into a Separation Agreement with Mr.
Erwin. The Separation Agreement sets forth a mutual agreement to sever the
relationships between Mr. Erwin and Hanover, including the employment
relationships of Mr. Erwin with Hanover and its subsidiaries. In the Separation
Agreement, the parties also documented their understandings with respect to:
(i) the posting of additional collateral by Mr. Erwin to secure repayment of an
outstanding loan owed by Mr. Erwin to Hanover; (ii) certain waivers and
releases by Mr. Erwin; and (iii) the payment of a reasonable and customary
finders fee for certain proposals Mr. Erwin brings to Hanover's attention
during the twenty-four month period after the effective date of the Separation
Agreement. In the Separation Agreement, Mr. Erwin made certain representations
as to the status of an outstanding loan payable by Mr. Erwin to Hanover, the
documentation for the loan and the enforceability of his obligations under the
loan documents. The loan was not modified and as noted above was repaid in full
in December 2002. In addition, the Separation Agreement provides that Mr. Erwin
may exercise his vested stock options pursuant to the post-termination exercise
periods set forth in the applicable equity compensation plan under which the
options were originally issued. Since the date of the Separation Agreement, Mr.
Erwin has exercised all such vested stock options. Mr. Erwin's unvested stock
options were forfeited as of August 2, 2002. In addition, Mr. Erwin agreed,
among other things, not to compete with Hanover and not to solicit Hanover
employees or customers under terms described in the agreement for a period of
twenty-four months after the effective date of the Separation Agreement. In
consideration for this non-compete/non-solicitation provision, Hanover agreed
to pay Mr. Erwin $20,611 per month for a period of eighteen months after the
effective date of the Separation Agreement.
Joe C. Bradford. In August 2002, the Company's Board of Directors did not
reappoint Mr. Bradford to the position of Senior Vice President--Worldwide
Operations Development, which he held since May 2000. On September 27, 2002,
Mr. Bradford resigned his employment with Hanover. In 2000, the Company
advanced $764,961 to Mr. Bradford in return for a promissory note. The note
bears interest at prime rate and matures in June 2004. In May 2002, according
to the terms of the original note, the Company forgave $192,504 of such
indebtedness (which included $39,512 of accrued interest). During the fiscal
year ended December 31, 2002, the largest aggregate amount of indebtedness
outstanding under this note was $579,845, with a 4.3% weighted average rate of
interest as of December 31, 2002. As of March 31, 2003, $535,473, plus accrued
interest, was outstanding on this note.
REPORT OF THE AUDIT COMMITTEE
The following is the report of the Audit Committee for the year ended
December 31, 2002. The information contained in this report shall not be deemed
to be "soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent that the Company specifically incorporates it by
reference in such filing.
The Audit Committee is comprised of three directors who meet the
independence standards of the NYSE. The committee operates under a written
charter, which was updated and approved by the Board in December 2002. A copy
of the charter is attached to this Proxy Statement as Appendix A.
Management has primary responsibility for the Company's financial statements
and the overall financial reporting process, including the Company's system of
internal controls. In May 2002, the Audit Committee approved the selection of
Deloitte & Touche LLP to conduct a risk assessment within the operational and
functional areas of the Company and to create an internal audit plan for the
remainder of fiscal year 2002 and for fiscal year 2003. At the 2002 Annual
Meeting of Stockholders, upon recommendation of the Audit Committee
22
and the full Board of Directors, PricewaterhouseCoopers LLP was approved by the
stockholders to serve as the Company's independent accountants for 2002.
The Audit Committee met with management periodically during the year to
consider the adequacy of the Company's internal controls and the objectivity of
its financial reporting. The Audit Committee also discussed these matters with
PricewaterhouseCoopers LLP, Deloitte & Touche LLP, and the appropriate
financial and management personnel at the Company. In addition, the Audit
Committee discussed with PricewaterhouseCoopers LLP, Deloitte & Touche LLP, and
the Company's senior management, the process used for making the certifications
by the Company's Chief Executive Officer and Chief Financial Officer required
by the Sarbanes-Oxley Act of 2002 for certain of the Company's filings with the
Securities and Exchange Commission.
The information provided in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002, gives effect to various internal restructuring
transactions that the Company and its subsidiaries completed in 1999, 2000 and
2001. As a result of these restructuring transactions, substantially all of the
Company's assets and operations are owned or conducted by the Company's
principal operating subsidiary, Hanover Compression Limited Partnership and its
subsidiaries. In April 2002, the Company restated its financial statements for
the year ended December 31, 2000, based upon an investigation that was
conducted by the Audit Committee. Subsequent to the April 2002 restatement, a
special committee of the Board of Directors, together with the Audit Committee
and management, 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 information
provided in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, takes these restatements into account.
PricewaterhouseCoopers LLP audited the 2002 annual financial statements
prepared by management, expressed an opinion as to whether those financial
statements fairly present the financial position, results of operations and
cash flow of the Company in conformity with generally accepted accounting
principles, and was given the opportunity to discuss with the Audit Committee
any issues they believed should be raised with the Audit Committee. The Audit
Committee reviewed and discussed the 2002 audited financial statements with
management.
Deloitte & Touche LLP has performed internal audit services for the Company
during the year ended December 31, 2002. The internal audit services were
performed under the supervision of the Audit Committee and the Company, which
had responsibility of approving each project, its objectives, and the nature
and scope of the procedures to be performed. These projects included a
corporate-wide risk assessment, development of the internal audit plan and
execution of the internal audit plan at both corporate and branch locations.
The Audit Committee discussed with PricewaterhouseCoopers LLP the matters
required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees) of the Auditing Standards Board of the
American Institute of Certified Public Accountants to the extent applicable.
Such matters included, among other items, matters related to the conduct of the
audit of the Company's consolidated financial statements.
The Audit Committee has also received and reviewed the written disclosures
and the letter from PricewaterhouseCoopers LLP required by Independence
Standards Board Standard No. 1 (Independence Discussions with Audit Committees)
and has discussed with PricewaterhouseCoopers LLP their independence in
relation to the Company.
Based on the reviews and discussions referred to above, the Audit Committee
recommended to the Board of Directors (and the Board approved) that the
Company's audited consolidated financial statements for the three
23
years ended December 31, 2002, be included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002. After reviewing the
firm's performance and independence from the Company's management, the Audit
Committee and the Board have also recommended, subject to stockholder
ratification, the selection of PricewaterhouseCoopers LLP as the Company's
independent accountants for 2003.
Submitted by the Audit Committee
of the Board of Directors
I. Jon Brumley, Chair
Gordon T. Hall
Alvin V. Shoemaker
24
REPORT OF THE MANAGEMENT DEVELOPMENT
AND COMPENSATION COMMITTEE
The following is the report of the Management Development and Compensation
Committee (the "Compensation Committee") for the fiscal year ended December 31,
2002. The information contained in this report shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or the Securities and Exchange
Act of 1934, except to the extent that the Company specifically incorporates it
by reference in such filing.
Responsibilities and Membership
The Compensation Committee of the Board of Directors administers the
Company's executive compensation program. The Compensation Committee's
responsibilities during 2002 included the review and approval of annual base
salaries and annual bonuses for all executive officers, approval of awards
under, and administration of, the Company's various stock option plans and
administration of such other employee benefit plans as may be adopted from time
to time by the Company. Membership of the Compensation Committee is set forth
on page 5 of this Proxy Statement.
General Compensation Policies
The Company's compensation program for executive officers currently
consists, in general, of three principal components: an annual base salary, an
annual cash bonus, and periodic grants of stock options and/or restricted stock
awards. These components are designed to attract, motivate and retain highly
qualified executive management both by rewarding individual achievement and by
providing an opportunity for members of executive management to share in the
risks and rewards of the Company's financial performance. The Compensation
Committee believes it is important for the Company's compensation program to
balance short-term and long-term incentives.
The Compensation Committee annually establishes each executive officer's
base salary, including the Chief Executive Officer's salary, based on its
evaluation of the officer's performance and contribution in the previous year
and on competitive pay practices. The Compensation Committee also determines
the annual cash bonus and stock options and/or restricted stock to be awarded
to each executive officer, including the Chief Executive Officer. Cash bonuses
for 2002 performance were paid in early 2003. The cash bonuses and awards of
stock options and/or restricted stock are determined in recognition of a
variety of factors, including job responsibilities undertaken and efforts
expended on behalf of the Company, contributions to the Company, leadership
qualities, and compensation paid to executive officers of competitors (based on
the best available data from as many competitor companies as practicable). In
determining the compensation of Chad C. Deaton (President and Chief Executive
Officer), Mark S. Berg (Senior Vice President, General Counsel and Secretary)
and John E. Jackson (Senior Vice President and Chief Financial Officer), each
of whom was hired in 2002, the Compensation Committee considered each
executive's prior experience, job responsibilities and the market rate for
comparable positions. In the selection of and setting the compensation for
Messrs. Deaton and Berg, the Board engaged the services of and received
recommendations from executive search firms with expertise in executive
placement and compensation.
The Compensation Committee does not apply any particular formula or assign
any particular weight to any of the factors it considers in determining an
executive's compensation. Instead, the Compensation Committee considers all of
these factors together and makes a subjective determination with respect to
executive compensation. The annual base salary, cash bonus and stock awards
paid or awarded in the last three fiscal years for the Company's Chief
Executive Officer and the Company's four most highly compensated executive
officers other than the Company's Chief Executive Officer is set forth in
summary form in the Summary Compensation Table on page 14 of this Proxy
Statement. Pursuant to Securities and Exchange Commission rule, this data
25
is also provided for Michael McGhan, who resigned from his position as
director, President and Chief Executive Officer on August 1, 2002, and Mr.
Grijalva, the Company's Chairman of the Board, who served as interim President
and Chief Executive Officer from August 2 to August 19, 2002. Mr. Grijalva
received no additional compensation for such interim service.
Stock Ownership
Although the Company has not adopted stock ownership guidelines, the
Compensation Committee believes that it is important that the executive
officers of the Company hold equity positions in the Company in order to align
their financial incentives with the Company's performance. In addition, because
of the nature of the Company's operations, the Company's management believes,
and the Compensation Committee agrees, that it is important that stock options
be granted to executive officers as well as to certain other employees so that
the long-term interests of its executive officers and such employees are
aligned with those of its stockholders.
Prior to its initial public offering, which was consummated on July 1, 1997,
the Company had adopted and maintained several stock option plans pursuant to
which options to purchase shares of the Common Stock had been granted to
executive officers and other employees of the Company. All options awarded and
outstanding under such plans as of June 30, 1997, became fully vested and
exercisable, and such plans were terminated as to future grants upon
consummation of the Company's initial public offering.
Since the Company's initial public offering, the Board of Directors has
adopted the 1997 Stock Option Plan, the 1998 Stock Option Plan, the December 9,
1998 Stock Option Plan, the 1999 Stock Option Plan and the 2001 Equity
Incentive Plan (collectively, the "Plans"). The Plans permit the Committee to
issue options and, with respect to the 2001 Equity Incentive Plan only,
restricted stock awards, to executive officers and employees. The Plans are
administered by the Compensation Committee. The Board is recommending that the
stockholders of the Company approve the Hanover Compressor Company 2003 Stock
Incentive Plan (Proposal 3) at the 2003 Annual Meeting of Stockholders. Upon
stockholder approval of the 2003 Stock Incentive Plan, the Board has determined
to terminate the authority to make future grants under all existing equity
plans except for those that have been approved by the Company's stockholders.
CEO Compensation
On August 19, 2002, the Board of Directors elected Chad C. Deaton to the
Board of Directors and President and Chief Executive Officer of the Company.
The Compensation Committee determined to enter into an employment arrangement
with Mr. Deaton which provides for an annual base salary of $540,000 and an
opportunity to receive an annual bonus payment of up to 100% of his annual base
salary based upon personal performance compared with agreed upon objectives and
subjective measures as well as the Company's performance. The agreement further
provides for a grant of non-qualified stock options to purchase 200,000 shares
of the Common Stock at an exercise price equal to $9.99 per share, the market
closing price on August 19, 2002, the date of grant. These options will vest
25% per year beginning on the first anniversary of the grant date (subject to
accelerated vesting upon a change of control of the Company). The agreement
also provides that if the Company terminates Mr. Deaton within 12 months after
a change of control occurs, or during that period Mr. Deaton terminates his
employment for good reason, he would be entitled to a severance payment equal
to three times his annual base salary. If the Company terminates Mr. Deaton
without cause at any time other than the 12 months following a change of
control, Mr. Deaton would be entitled to a severance payment equal to his
annual base salary. In either of these circumstances, the agreement provides
that the Company would reimburse Mr. Deaton for his health insurance premiums
for a period of up to eighteen months. If the Company were to terminate Mr.
Deaton with cause, or Mr. Deaton terminates his employment without good reason,
the Company would not be obligated to make any severance payments to Mr.
Deaton. In setting the terms of Mr. Deaton's employment agreement, the
Compensation Committee considered Mr. Deaton's considerable industry
experience, the job responsibilities incident to the position of President and
Chief Executive Officer and the market rate compensation for similar positions.
26
Since Mr. Deaton is a new employee, the Company's past performance was not a
factor in determining the terms of his employment agreement. In December 2002,
the Compensation Committee determined to award Mr. Deaton a bonus of $172,125
in recognition of Mr. Deaton's performance. Since he recently joined the
Company, the Compensation Committee did not apply any particular weight to any
of the above-described factors in determining Mr. Deaton's compensation and
bonus award for 2002. Instead, the Compensation Committee considered all of
these factors together and made a subjective determination with respect to this
compensation.
With respect to Mr. McGhan, after consideration of Mr. McGhan's performance
and contribution in the previous year and competitive pay practices, the
Compensation Committee determined not to change Mr. McGhan's base salary in
2002. After consideration of a variety of factors, including job
responsibilities undertaken and efforts expended on behalf of the Company,
contributions to the Company, and compensation paid to executive officers of
competitors (based on the best available data from as many competitor companies
as practicable), the Compensation Committee awarded Mr. McGhan 40,000 shares of
restricted stock in March 2002. This award was to vest 25% per year beginning
on the first anniversary of the date of grant. In setting the amount of the
award, the Company's performance was not a major factor. The Compensation
Committee believed that since the amount Mr. McGhan would ultimately receive
with respect to the award would be based upon the performance of the Common
Stock, the award sufficiently aligned Mr. McGhan's interest with improving
Company performance and with the interests of the Company's stockholders. The
Compensation Committee did not apply any particular formula or assign any
particular weight to any of the above-described factors in making its
determination with respect to Mr. McGhan's base salary or restricted stock
award. Instead, the Compensation Committee considered all of these factors
together and made a subjective determination with respect to his compensation.
Pursuant to the terms of the plan under which it was awarded, the restricted
stock award described above was forfeited by Mr. McGhan on his date of
resignation.
Compliance with Section 162(m)
As one of the factors in its review of compensation matters, the
Compensation Committee considers the anticipated tax treatment to the Company
and to the executive officers of various payments and benefits. Section 162(m)
of the Internal Revenue Code of 1986, as amended (the "Code"), generally
disallows a tax deduction to public corporations for compensation in excess of
$1 million for any fiscal year paid to any of the Named Executive Officers.
However, Section 162(m) also provides that qualifying performance-based
compensation will not be subject to the deduction limit if certain requirements
are met. The Compensation Committee has reviewed this provision and has
concluded that the Company is not currently impacted by Section 162(m) because
compensation paid to any executive officer does not currently exceed $1
million. Accordingly, no changes to any of the compensation plans are
contemplated at this time. However, to the extent necessary in the future, the
Compensation Committee will consider various alternatives to preserving the
deductibility of compensation payments and benefits to the extent reasonably
practicable and to the extent consistent with its other compensation objectives.
Submitted by the Management
Development and
Compensation Committee of the Board
of Directors
Robert R. Furgason, Chair
Ted Collins, Jr.
Gordon T. Hall
Alvin V. Shoemaker (with respect to
matters determined while he served
on the Compensation Committee)
27
PERFORMANCE GRAPH
The performance graph below shows the cumulative total stockholder return on
the Common Stock compared to the S&P 500 Composite Stock Price Index (the "S&P
500 Index"), the Russell 2000 Index, and the Oilfield Service Index (the "OSX")
over the five-year period beginning December 31, 1997. Hanover is introducing
the OSX to its performance graph, and will not include the Russell 2000 Index
in its performance graph on a going forward basis. Management believes the OSX
reflects a more comparable mix of companies for purposes of an evaluation of
the Company's performance.
The results are based on an investment of $100 in each of the Common Stock,
the S&P 500 Index, the Russell 2000 Index, and the OSX. The graph assumes the
reinvestment of dividends and adjusts all closing prices and dividends for
stock splits.
[CHART]
Hanover S&P 500 Russell 2000 OSX
--------- --------- ------------- -----------
12/31/97 $100.00 $100.00 $100.00 $100.00
03/31/98 $122.30 $113.90 $110.30 $96.10
06/30/98 $132.40 $117.70 $105.30 $78.50
09/30/98 $118.40 $106.00 $84.00 $51.30
12/31/98 $125.70 $128.50 $97.70 $45.40
03/31/99 $129.70 $134.90 $92.40 $59.80
06/30/99 $157.20 $144.40 $106.80 $69.60
09/30/99 $155.70 $135.40 $100.00 $67.10
12/31/99 $184.70 $155.50 $118.60 $76.20
03/31/00 $278.30 $159.10 $127.00 $102.20
06/30/00 $371.90 $154.80 $122.20 $106.80
09/29/00 $322.30 $153.30 $123.60 $118.10
12/29/00 $436.10 $141.40 $115.10 $111.00
03/30/01 $310.20 $124.60 $107.60 $102.10
06/29/01 $323.80 $131.90 $122.90 $88.70
09/28/01 $211.80 $112.60 $97.60 $58.40
12/31/01 $247.20 $124.60 $118.20 $77.90
03/29/02 $176.10 $125.00 $122.90 $91.70
06/28/02 $132.10 $108.30 $112.60 $82.20
09/30/02 $81.20 $89.60 $88.50 $68.50
12/31/02 $89.80 $97.20 $94.00 $78.00
There can be no assurance that the Company's stock performance will continue
into the future with the same or similar trends depicted in the performance
graph. Hanover does not make or endorse any predictions as to the future
performance of its stock. The information contained in the performance graph
shall not be deemed to be "soliciting material" or to be "filed" with the
Securities and Exchange Commission, nor shall such information be incorporated
by reference into any future filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates it by reference in such filing.
28
OVERVIEW OF PROPOSALS
This Proxy Statement contains three proposals requiring stockholder action.
Proposal 1 requests the election of nine directors to the Company's Board of
Directors. Proposal 2 requests ratification of the reappointment of
PricewaterhouseCoopers LLP as the Company's independent accountants for 2003.
Proposal 3 requests approval of the Hanover Compressor Company 2003 Stock
Incentive Plan. Each of the proposals is discussed in more detail in the pages
that follow.
ELECTION OF DIRECTORS
Proposal 1 on Proxy Card
At the 2003 Stockholders' Meeting, nine directors are to be elected to the
Board of Directors, to hold office until the next Annual Meeting of
Stockholders of the Company and until their respective successors are duly
elected and qualified. The Board of Directors has nominated, and unless
otherwise directed by stockholders in their proxy card, it is the intention of
the persons named in the enclosed proxy to vote FOR the election of each
nominee named below. Each nominee has consented to serve as a director if
elected. In the event any of such nominees becomes unable or unwilling to serve
as a director, shares represented by valid proxies will be voted for the
election of such other person as the Board may nominate, or the number of
directors that constitutes the full Board may be reduced to eliminate the
vacancy.
The Board's nine nominees for election at the 2003 Stockholders' Meeting are
I. Jon Brumley, Ted Collins, Jr., Chad C. Deaton, Robert R. Furgason, Victor E.
Grijalva, Gordon T. Hall, Melvyn N. Klein, Michael A. O'Connor, and Alvin V.
Shoemaker.
Required Vote For Election of Directors
The affirmative vote of the holders of a plurality of the Common Stock
present in person or by proxy and entitled to vote at the 2003 Stockholders'
Meeting at which a quorum is present is required to approve the election of the
above-named nominees.
The Board of Directors recommends that stockholders vote FOR re-election of
I. Jon Brumley, Ted Collins, Jr., Chad C. Deaton, Robert R. Furgason, Victor E.
Grijalva, Gordon T. Hall, Melvyn N. Klein, Michael A. O'Connor, and Alvin V.
Shoemaker.
RATIFICATION OF REAPPOINTMENT OF INDEPENDENT ACCOUNTANTS
Proposal 2 on Proxy Card
The Company intends to engage PricewaterhouseCoopers LLP to audit the
Company's financial statements for fiscal year 2003. PricewaterhouseCoopers LLP
audited the Company's financial statements for fiscal year 2002 and the
decision to retain PricewaterhouseCoopers LLP has been approved by the Audit
Committee and the Board of Directors.
A representative of PricewaterhouseCoopers LLP is expected to attend the
2003 Stockholders' Meeting and will have the opportunity to make a statement,
if he or she so desires, and will be available to respond to appropriate
questions of stockholders.
Fees Paid to the Independent Accountants
Audit Fees. The aggregate fees for the audit of the Company's 2002
consolidated financial statements and review of its quarterly financial
information were $1,683,500. This amount includes fees related to the
restatement of the Company's 1999, 2000, and 2001 financial statements.
29
Financial Information Systems Design and Implementation Fees. No financial
information systems design and implementation services were rendered to the
Company by PricewaterhouseCoopers LLP in fiscal year 2002.
All Other Fees. The Company paid an aggregate of $1,877,000 to
PricewaterhouseCoopers LLP for other professional services rendered in fiscal
year 2002. These services rendered by PricewaterhouseCoopers LLP consisted of:
$1,253,000 for tax planning and compliance services, $13,000 for accounting
consultations, $103,000 for statutory audits, $492,000 for security offerings
and related registration statements, and $16,000 for the audit of benefit plans.
The Audit Committee of the Board of Directors considered the services listed
above to be compatible with maintaining PricewaterhouseCoopers LLP's
independence.
Required Vote for Ratification of Reappointment of Independent Accountants
The affirmative vote of the holders of a majority of the Common Stock
represented at the 2003 Stockholders' Meeting at which a quorum is present is
required to ratify the reappointment of PricewaterhouseCoopers LLP as the
Company's independent accountants.
Stockholder approval of the selection of PricewaterhouseCoopers LLP is not
required by the Company's charter or bylaws. The Company's directors are
requesting stockholder ratification as a matter of good corporate practice. If
the stockholders do not ratify the selection, the Audit Committee and the Board
of Directors will reconsider whether or not to retain PricewaterhouseCoopers
LLP. Even if the selection is ratified, the directors in their discretion may
change the appointment at any time during the year if they determine that such
change would be in the best interests of the Company and its stockholders.
The Board of Directors recommends that the stockholders vote FOR
ratification of the reappointment of PricewaterhouseCoopers LLP.
APPROVAL OF HANOVER COMPRESSOR COMPANY
2003 STOCK INCENTIVE PLAN
Proposal 3 on Proxy Card
At the 2003 Stockholders' Meeting, the stockholders will be asked to approve
the adoption of the Hanover Compressor Company 2003 Stock Incentive Plan (the
"2003 Plan"), a copy of which is attached hereto as Appendix B.
The Board of Directors unanimously adopted the 2003 Plan on March 24, 2003,
subject to stockholder approval at the 2003 Stockholders' Meeting. Upon
stockholder approval of the 2003 Plan, the Board has determined to terminate
the authority to make future grants under all existing equity plans except for
those that have been approved by the Company's stockholders. If the 2003 Plan
is not approved by the stockholders of the Company, then no awards will be
granted under the 2003 Plan. Since the Company's directors and executive
officers are eligible to receive awards under the 2003 Plan, such directors and
executive officers may be considered to have an interest in the approval of the
2003 Plan.
The 2003 Plan is designed to enable the Company and its affiliates to
provide a means to attract and retain highly qualified directors and employees
by providing such individuals with incentive and reward opportunities through a
program whereby those individuals can acquire and maintain stock ownership.
Accordingly, the 2003 Plan provides for discretionary grants of (a) stock
options ("Options") to purchase shares of the Common Stock, (b) shares of the
Common Stock that are subject to restrictions on disposition and forfeiture to
the Company under certain
30
circumstances and any other restrictions determined by the Compensation
Committee on the date of grant ("Restricted Stock"), and (c) cash denominated
awards (payable in cash and/or shares of the Common Stock), that may be earned
based on the satisfaction of various performance measures ("Performance
Awards").
Below is a summary of the terms of the 2003 Plan that is qualified in its
entirety by reference to the full text of the 2003 Plan, which is attached to
this Proxy Statement as Appendix B. No benefits or amounts have been granted,
awarded or received under the 2003 Plan. Since awards under the 2003 Plan are
discretionary, no awards are determinable at this time. As soon as practicable
following stockholder approval of the 2003 Plan, the Company intends to
register the shares issuable pursuant to the plan under the Securities Act of
1933.
Number of Shares Subject to the 2003 Plan and Award Limits
The aggregate maximum number of shares of the Common Stock that may be
issued under the 2003 Plan will be three million shares. The maximum number of
shares of the Common Stock that may be subject to Options and Restricted Stock
awards granted to any one individual during any year may not exceed five
hundred thousand shares of the Common Stock with respect to each type of award.
Both limits are subject to adjustment in the event of certain changes in the
capitalization of the Company. The maximum amount of compensation that may be
paid to any one individual during any calendar year under all Performance
Awards (including the fair market value of any shares of Common Stock paid in
satisfaction of such Performance Awards) granted to such individual may not
exceed three million dollars. As of April 4, 2003, the closing price of the
Common Stock as quoted on the NYSE was $7.05.
Administration
The 2003 Plan will be administered by the Compensation Committee, which will
have full authority, subject to the terms of the 2003 Plan, to establish rules
and regulations for the proper administration of the 2003 Plan, to select the
employees and directors to whom awards are granted, and to set the date of
grant, the type of award that shall be made and the other terms of the awards.
The Compensation Committee may delegate to an officer of the Company the
authority to issue awards to employees who are not executive officers.
Eligibility
All employees of the Company and its affiliates and all non-employee
directors of the Company are eligible to participate in the 2003 Plan. As of
December 31, 2002, approximately 4,700 employees and 8 non-employee directors
were potentially eligible to participate in the 2003 Plan.
Term of 2003 Plan
Assuming the stockholders approve the 2003 Plan at the 2003 Stockholders'
Meeting, the 2003 Plan will have become effective as of March 24, 2003. No
further awards may be granted under the 2003 Plan after March 24, 2013, and the
2003 Plan will terminate thereafter once all awards have been satisfied,
exercised or expire. The Board in its discretion may terminate the 2003 Plan at
any time with respect to any shares of Common Stock for awards not yet granted.
Options
The term of each Option shall be as specified in an option agreement, notice
or certificate, but in any case may not exceed a period of ten years. Each
Option shall be evidenced by an option agreement in such form and containing
such provisions consistent with the provisions of the 2003 Plan. An option
agreement, notice or certificate, may provide for the payment of the option
price, in whole or in part, by cash, a check acceptable to the Company, the
delivery of a number of already-owned shares of the Common Stock (plus cash if
necessary)
31
having a fair market value equal to such option price, provided such shares
have been owned for more than six months by the holder of the Option, a
"cashless broker exercise" of the Option through procedures established or
approved by the Compensation Committee with respect thereto, or any combination
of the foregoing or any other manner approved by the Compensation Committee.
Further, an option agreement, notice or certificate may provide, in the sole
discretion of the Compensation Committee, for the surrender of the right to
purchase shares of the Common Stock under the Option in return for a payment in
cash or shares of the Common Stock or a combination thereof equal in value to
the excess of the fair market value of the shares with respect to which the
right to purchase is surrendered over the option price therefor, on such terms
and conditions as the Compensation Committee in its sole discretion may
prescribe.
The price at which a share of Common Stock may be purchased upon exercise of
an Option shall be determined by the Compensation Committee but, subject to
adjustment in certain circumstances, such purchase price may not be less than
the fair market value of a share of the Common Stock on the date such Option is
granted.
Corporate Change and Other Adjustments
The 2003 Plan provides that, upon a Corporate Change, such as a sale of all
of the Company's assets, a merger or dissolution of the Company, certain
corporate changes of control or other events, all as defined and described in
the 2003 Plan, the Compensation Committee may accelerate the vesting of awards,
cancel awards and cause the Company to make payments in respect thereof in
cash, or adjust the outstanding awards, as appropriate to reflect such
Corporate Change.
Amendments
The Board of Directors may amend, suspend, or terminate the 2003 Plan
(except with respect to awards that are then outstanding) at any time except
that it may not, without approval of the stockholders, increase the maximum
number of shares issuable (except to reflect changes in capitalization as
discussed above), change the class of individuals eligible to receive awards,
or cancel or replace any outstanding option contract with an Option having a
lower option price.
Federal Income Tax Aspects of the 2003 Plan
Incentive Stock Options. Subject to special alternative minimum tax rules,
no federal income tax is imposed on the optionee upon the grant or the exercise
of an Option that qualifies as an incentive stock option ("ISO") under section
422 of the Internal Revenue Code (the "Code"). If the optionee does not dispose
of the shares acquired pursuant to the exercise within the two-year period
beginning on the date the Option was granted or within the one-year period
beginning on the date the Option was exercised (collectively, the "Holding
Period"), any appreciation of the shares above the exercise price should
constitute capital gain. However, if an optionee disposes of shares of the
Common Stock prior to the end of the Holding Period, the optionee will be
treated as having received, at the time of disposition, compensation taxable as
ordinary income equal to the excess of the fair market value of the shares at
the time of exercise (or in the case of a sale in which a loss would be
recognized, the amount realized on the sale if less) over the exercise price;
any amount realized in excess of the fair market value of the shares at the
time of exercise would be treated as short-term or long-term capital gain,
depending on the holding period of the shares.
Non-statutory Stock Options and Stock Appreciation Rights. No federal
income tax is imposed on the optionee upon the grant of an Option that is not
an ISO (a "Non-statutory Stock Option"), whether or not the Non-statutory Stock
Option includes a stock appreciation right. Generally, upon the exercise of a
Non-statutory Stock Option, the optionee will be treated as receiving
compensation taxable as ordinary income in the year of exercise in an amount
equal to the excess of the fair market value of the shares of Common Stock
received at the time of exercise over the option price paid for such shares. In
the case of the exercise of a stock appreciation
32
right, the optionee will be treated as receiving compensation taxable as
ordinary income in the year of exercise in an amount equal to the cash received
plus the fair market value of the shares distributed to the optionee.
Restricted Stock. In general, the recipient of a Restricted Stock award
will not realize taxable income at the time of grant, assuming that the
restrictions constitute a substantial risk of forfeiture for federal income tax
purposes. When the risk of forfeiture with respect to the Common Stock subject
to the award lapses, the holder will be treated as having received compensation
taxable as ordinary income in an amount equal to the fair market value of the
shares of Common Stock at such time. All dividends and distributions (or the
cash equivalent thereof) with respect to a Restricted Stock award paid to the
holder before the risk of forfeiture lapses will also be compensation income to
the holder when paid.
Performance Awards. An individual who has been granted a Performance Award
generally will not be treated as having received taxable income at the time of
grant, but will be treated as having received compensation taxable as ordinary
income at the time the award becomes vested and paid.
Company Tax Deduction. Subject to section 162(m) of the Code, the Company
will generally be entitled to a tax deduction with respect to an award at the
time, and in the same amount, that the participant is treated as having
received compensation as described above with respect to the award, provided
the Company complies with applicable reporting requirements with respect to the
compensation.
Section 162(m) of the Code. Section 162(m) of the Code, in general,
precludes a public corporation from taking a deduction for annual compensation
in excess of $1 million paid to its chief executive officer or any of its four
other highest-paid officers. However, compensation that qualifies under section
162(m) of the Code as "performance-based" is specifically exempt from the
deduction limit. Based on section 162(m) of the Code and the regulations issued
thereunder, the Company's ability to deduct compensation income generated in
connection with the exercise of Options granted under the 2003 Plan should not
be limited by section 162(m) of the Code. Further, the Company believes that
compensation income generated in connection with Restricted Stock or
Performance Awards granted under the 2003 Plan generally should not be limited
by section 162(m) of the Code provided the vesting of such awards are based
solely on the achievement of performance targets established for such grants.
The 2003 Plan has been designed to provide flexibility with respect to the
performance criteria that may be used in establishing performance targets for
these awards. The performance targets will be based on one or more of the
following: (1) the price of a share of the Common Stock, (2) the Company's
earnings per share, (3) the Company's market share, (4) the market share of a
business unit of the Company designated by the Compensation Committee, (5) the
Company's sales, (6) the sales of a business unit of the Company designated by
the Compensation Committee, (7) the net income (before or after taxes) of the
Company or any business unit of the Company designated by the Compensation
Committee, (8) the cash flow return on investment of the Company or any
business unit of the Company designated by the Compensation Committee, (9) the
earnings before or after interest (leasing expense), taxes, depreciation,
distributions on mandatorily redeemable preferred stock, and/or amortization of
the Company or any business unit of the Company designated by the Compensation
Committee, (10) the economic value added, (11) the return on stockholders'
equity achieved by the Company, or (12) the total stockholders' return achieved
by the Company, or (13) any combination of the foregoing. However, compensation
expense deductions relating to Restricted Stock awards or Performance Awards
will be subject to the section 162(m) deduction limitation if the award becomes
vested based upon any other criteria set forth in such award (such as the
occurrence of a change of control, death, disability or vesting based upon
continued service with the Company). The income generated in connection with
all options, if any, granted under the 2003 Plan by the officer to whom the
Compensation Committee has delegated this power will not qualify as
performance-based compensation and, accordingly, the Company's deduction for
such compensation may be limited by section 162(m) of the Code.
The 2003 Plan is not qualified under section 401(a) of the Code.
33
The comments set forth in the above paragraphs are only a summary of certain
of the Federal income tax consequences relating to the 2003 Plan. No
consideration has been given to the effects of state, local, or other tax laws
on the 2003 Plan or award recipients.
Inapplicability of ERISA
Based upon current law and published interpretations, the Company does not
believe that the 2003 Plan is subject to any of the provisions of the Employee
Retirement Income Security Act of 1974, as amended.
Required Vote for Approval of 2003 Plan
The affirmative vote of the holders of a majority of the Common Stock
represented at the Annual Meeting of Stockholders at which a quorum is present
is required for the approval of the 2003 Plan; provided that the total votes
cast on the proposal must represent over 50 percent of all voting stock
entitled to vote on the proposal.
Stockholder approval of the 2003 Plan is required for listing of the shares
for trading on the NYSE and as a condition to the effectiveness of the 2003
Plan. Stockholder approval is also required so that incentive stock options
under the 2003 Plan will qualify under section 422 of the Code and so that
certain awards under the 2003 Plan will qualify as performance-based
compensation under section 162(m) of the Code.
The Board of Directors recommends that the stockholders vote FOR approval of
the Hanover Compressor Company 2003 Stock Incentive Plan.
GENERAL INFORMATION
2004 Annual Meeting Of Stockholders
Any proposals of stockholders that are intended for inclusion in the
Company's Proxy Statement for its 2004 Annual Meeting of Stockholders must be
received by the Corporate Secretary of the Company no later than December 17,
2003. Notice of a stockholder proposal submitted for consideration at the 2004
Annual Meeting but not for inclusion in the Company's Proxy Statement must be
received no later than March 1, 2004. If a stockholder proposal is received by
the Company after March 1, 2004, the Company's proxy for the 2004 Annual
Meeting may confer discretionary authority to vote on such matter without any
discussion of such matter in the Proxy Statement for the 2004 Annual Meeting.
Stockholder proposals must be in writing and delivered to the Company's
principal executive offices at 12001 North Houston Rosslyn, Houston, Texas
77086 Attention: Corporate Secretary.
Annual Reports
The Company's 2002 Annual Report to Stockholders and Annual Report on Form
10-K is being mailed to the Company's stockholders with this Proxy Statement.
The Company agrees to provide, without charge, to each person to whom this
Proxy Statement is delivered, upon written or oral request, by first class mail
or other equally prompt means within one business day of receipt of such
request, a copy of the Company's annual report on Form 10-K for the year ended
December 31, 2002. Please direct any such requests to the attention of the
Corporate Secretary, Hanover Compressor Company, 12001 North Houston Rosslyn,
Houston, Texas 77086 or by telephone at (281) 405-5175. Such document is also
readily available at the website of the Securities and Exchange Commission,
which can be found at http://www.sec.gov.
34
Appendix A
Audit Committee Charter
The Board of Directors of Hanover Compressor Company recognizes the critical
need to ensure the accuracy and completeness of the financial statements and
reports of the Company in preserving the integrity of the public markets for
the Company's securities. To this end, the Board seeks to empower the audit
committee with sufficient authority and responsibility to achieve these goals
and the other purposes set forth in this charter.
Composition
The audit committee of the Board of Directors of Hanover Compressor Company
shall consist of a minimum of three Directors. Members of the committee shall
be appointed by the independent members of the Board of Directors upon the
recommendation of the nominating and corporate governance committee and may be
removed by the Board of Directors in its discretion.
All members of the committee shall, as soon as practicable and no later than
the applicable effective dates: be "independent" as defined under applicable
law, regulation and by the New York Stock Exchange; be "financially literate"
and satisfy any additional standards (other than independence) which may be
imposed by the New York Stock Exchange or other law or regulation; and have
sufficient financial experience and ability to enable them to discharge their
responsibilities. In addition, at least one member shall, under the timeframe
required by the New York Stock Exchange and the Securities and Exchange
Commission, be a "financial expert" as defined by the New York Stock Exchange
and the Securities and Exchange Commission. No member of the audit committee
may simultaneously serve on the audit committees of more than two other public
companies without first obtaining a determination of the Board that such
member's service on the audit committee would not be impaired by such
simultaneous service.
Purpose
The primary purposes of the committee shall be to assist the Board in its
oversight of: the integrity of the financial statements of the Company, the
Company's compliance with legal and regulatory requirements, the independence,
qualifications and performance of the independent auditor, approval of audit
and non-audit services, and the performance of the Company's internal audit
function. In carrying out these purposes, the committee shall provide an open
avenue of communication among the independent accountants, financial and senior
management, the internal auditing department and Board of Directors.
Authority and Responsibilities
The committee shall have the following authority and responsibilities:
1. To discuss with management and the independent auditor, before filing,
the annual audited financial statements and quarterly financial
statements, including matters required to be reviewed under applicable
legal, regulatory or New York Stock Exchange requirements.
2. To discuss with management and the independent auditor, as
appropriate, earnings press releases and financial information and
earnings guidance provided to the public, analysts and to rating
agencies.
3. To recommend, for stockholder approval, the independent auditor to
examine the Company's accounts, controls and financial statements. The
committee shall have the sole authority and responsibility to select,
evaluate and if necessary replace the independent auditor. The
committee shall have the sole authority to approve all audit
engagement fees and terms (including proposed
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budgets) and the committee, or a member of the committee, must
pre-approve any non-audit service provided to the Company by the
Company's independent auditor.
4. To discuss with management and the independent auditor, as
appropriate, any audit problems or difficulties and management's
response, and the Company's risk assessment and risk management
policies, including the Company's major financial risk exposure and
steps taken by management to monitor and mitigate such exposure.
5. To review the Company's financial reporting and accounting standards
and principles, significant changes in such standards or principles or
in their application and the key accounting decisions affecting the
Company's financial statements, including alternatives to, and the
rationale for, the decisions made.
6. To review and approve the internal audit functions, including: (i)
purpose, authority and organizational reporting lines; (ii) annual
audit plan, budget and staffing; and (iii) concurrence in the
appointment, compensation and rotation of internal audit staff
managers. To the extent that the internal audit function is performed
under the direction of a general auditor that is a Company employee,
the committee shall ensure that the head of the internal audit
department reports directly to the committee, which shall be
responsible for reviewing and approving the individual's compensation.
To the extent that the internal audit function is outsourced, the
committee shall ensure that the engagement is managed under the
direction of the committee with applicable fees and costs being
approved by the committee.
7. To review with appropriate individuals the Company's plan for
reviewing its internal controls, the Company's disclosure control
procedures, the internal system of controls and the results of
internal audits, including any material weaknesses or significant
deficiencies found and management's response and corrective actions
implemented.
8. To obtain and review at least annually a report from the independent
auditor describing: the auditing firm's internal quality-control
procedures; any material issues raised by the most recent internal
quality-control reviews, by peer reviews of the firm, or by any
governmental or other inquiry or investigation relating to any audit
conducted by the firm and any steps taken to deal with any such
issues. Also, in order to assess auditor independence, the committee
will review at least annually all relationships between the
independent auditor and the Company.
9. To prepare and publish an annual committee report in the Company's
proxy statement. The committee shall review at least annually the
adequacy of this charter and recommend any proposed changes to the
Board for approval.
10. To set policies for the hiring of employees or former employees of the
Company's independent auditor.
11. To review all Director and officer questionnaires and all transactions
or relationships between the Company and any Director, officer or
stockholder owning more than 5% of the Company's stock (including any
family members of the foregoing), to make recommendations to the Board
of Directors as to whether any such transactions or relationships
should continue, and to assure that all such transactions and
relationships are appropriately disclosed in the Company's Securities
and Exchange Commission filings.
12. To establish procedures for the (i) receipt, retention and treatment
of complaints regarding accounting, internal accounting controls, or
auditing matters and (ii) confidential anonymous submission by
employees of concerns regarding questionable accounting or auditing
matters.
13. To evaluate and take appropriate action with respect to information
provided by the CEO and CFO in connection with their certifications
under Section 302 of the Sarbanes-Oxley Act of 2002.
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The committee shall meet separately at least quarterly with management, with
the corporate audit staff and also with the Company's independent auditors.
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Outside Advisors
The committee shall have authority to retain such outside counsel, experts
and other advisors as the committee may deem appropriate in its sole
discretion. The committee shall have sole authority to approve related fees and
retention terms.
Reporting and Evaluation
The committee shall report its recommendations to the Board after each
committee meeting and shall conduct and present to the Board an annual
performance evaluation of the committee. The committee shall review at least
annually the adequacy of this charter and recommend any proposed changes to the
Board for approval.
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Appendix B
HANOVER COMPRESSOR COMPANY
2003 STOCK INCENTIVE PLAN
I. PURPOSE
The purpose of the HANOVER COMPRESSOR COMPANY 2003 STOCK INCENTIVE PLAN is
to provide a means through which HANOVER COMPRESSOR COMPANY, a Delaware
corporation, and its Affiliates may attract highly qualified persons to serve
as Directors or to enter the employ of the Company and its Affiliates and to
provide a means whereby those individuals upon whom the responsibilities of the
successful administration and management of the Company and its Affiliates
rest, and whose present and potential contributions to the Company and its
Affiliates are of importance, can acquire and maintain stock ownership, thereby
strengthening their concern for the welfare of the Company and its Affiliates.
A further purpose of the Plan is to provide such individuals with additional
incentive and reward opportunities designed to enhance the profitable growth of
the Company and its Affiliates. Accordingly, the Plan provides for granting
Options, Restricted Stock Awards, and Performance Awards, or any combination of
the foregoing, as is best suited to the circumstances of the particular
Employee or Director as provided herein.
II. DEFINITIONS
The following definitions shall be applicable throughout the Plan unless
specifically modified by any paragraph:
(a) "Affiliate" means any corporation, partnership, limited liability
company or partnership, association, trust or other organization which,
directly or indirectly, controls, is controlled by, or is under common control
with, the Company. For purposes of the preceding sentence, "control"
(including, with correlative meanings, the terms "controlled by" and "under
common control with"), as used with respect to any entity or organization,
shall mean the possession, directly or indirectly, of the power (i) to vote
more than 50% of the securities having ordinary voting power for the election
of directors of the controlled entity or organization, or (ii) to direct or
cause the direction of the management and policies of the controlled entity or
organization, whether through the ownership of voting securities or by contract
or otherwise.
(b) "Award" means, individually or collectively, any Option, Restricted
Stock Award or Performance Award.
(c) "Board" means the Board of Directors of the Company.
(d) "Cause" means (i) the commission by such Participant of an act of
fraud, embezzlement or willful breach of a fiduciary duty to the Company or an
Affiliate (including the unauthorized disclosure of confidential or proprietary
material information of the Company or an Affiliate), (ii) a conviction of such
Participant (or a plea of nolo contendere in lieu thereof) for a felony or a
crime involving fraud, dishonesty or moral turpitude, (iii) willful failure of
a Participant to follow the written directions of the chief executive officer
of the Company or the Board in the case of executive officers of the Company;
(iv) willful misconduct as an Employee of the Company or an Affiliate; (v) the
willful failure of such Participant to render services to the Company or an
Affiliate in accordance with his employment arrangement, which failure amounts
to a material neglect of his duties to the Company or an Affiliate or (vi)
substantial dependence, as determined by the Committee, on any drug, immediate
precursor or other substance listed on Schedule IV of the Federal Comprehensive
Drug Abuse Prevention and Control Act of 1970, as amended, as determined in the
sole discretion of the Committee.
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(e) "Code" means the Internal Revenue Code of 1986, as amended. Reference
in the Plan to any section of the Code shall be deemed to include any
amendments or successor provisions to such section and any regulations under
such section.
(f) "Committee" means the Management Development and Compensation Committee
of the Board or such other committee, if any, that may be designated by the
Board to administer the Plan.
(g) "Common Stock" means the common stock, par value $.001 per share, of
the Company, or any security into which such common stock may be changed by
reason of any transaction or event of the type described in Paragraph X.
(h) "Company" means Hanover Compressor Company, a Delaware corporation.
(i) "Corporate Change" shall have the meaning assigned to such term in
Paragraph X(c) of the Plan.
(j) "Director" means an individual elected to the Board by the stockholders
of the Company or by the Board under applicable corporate law who is serving on
the Board on the date the Plan is adopted by the Board or is elected to the
Board after such date.
(k) "Disability" means being entitled to long-term disability benefits
under the Company's long-term disability plan.
(l) An "Employee" means any person who is an employee of the Company or any
Affiliate. If an entity ceases to be an Affiliate of the Company, Participants
employed by such entity shall be deemed to have terminated their employment
with the Company and its Affiliates and shall cease to be Employees under the
Plan.
(m) "Fair Market Value" means, as of any specified date, the closing sales
price of the Common Stock reported (i) on the New York Stock Exchange composite
tape on that date or (ii) if the Common Stock is listed on any other national
stock exchange, reported on the stock exchange composite tape on that date (or,
in either case, such other reporting service approved by the Committee); or, in
either case, if no prices are reported on that date, on the last preceding date
on which such prices of the Common Stock are so reported. If the Common Stock
is traded over the counter at the time a determination of its fair market value
is required to be made hereunder, its fair market value shall be deemed to be
equal to the average between the reported high and low or closing bid and asked
prices of Common Stock on the most recent date on which Common Stock was
publicly traded. In the event Common Stock is not publicly traded at the time a
determination of its value is required to be made hereunder, the determination
of its fair market value shall be made by the Committee in such manner as it
deems appropriate.
(n) "Incentive Stock Option" means an incentive stock option within the
meaning of section 422 of the Code.
(o) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(p) "Option" means an Award granted under Paragraph VII of the Plan and
includes both Incentive Stock Options to purchase Common Stock and Options that
do not constitute Incentive Stock Options to purchase Common Stock.
(q) "Option Agreement" means an agreement, notice or certificate setting
forth the terms of a Participant's rights with respect to an Option.
(r) "Participant" means an Employee or Director who has been granted an
Award.
(s) "Performance Award" means an Award granted under Paragraph IX of the
Plan.
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(t) "Performance Award Agreement" means an agreement, notice or certificate
setting forth the terms of a Participant's rights with respect to a Performance
Award.
(u) "Plan" means the Hanover Compressor Company 2003 Stock Incentive Plan,
as amended from time to time.
(v) "Restricted Stock" means an Award granted under Paragraph VII of the
Plan.
(w) "Restricted Stock Agreement" means an agreement, notice or certificate
setting forth a Participant's rights with respect to a Restricted Stock Award.
(x) "Restricted Stock Award" means an Award granted under Paragraph VIII of
the Plan.
(y) "Retirement" means a Termination of Service, other than due to Cause or
death, on or after the Participant's reaching (i) age 65 or (ii) age 55 and
terminating with the written consent of the Committee.
(z) "Rule 16b-3" means SEC Rule 16b-3 promulgated under the 1934 Act, as
such may be amended from time to time, and any successor rule, regulation or
statute fulfilling the same or a similar function.
(aa) "Termination of Service" means a Participant ceases to be an Employee
and/or a Director, as the case may be. A Participant who is both a Director and
an Employee and ceases to be one, but not the other, shall not have a
Termination of Service until the Participant also ceases to be the other.
III. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective upon the date of its adoption by the Board,
provided the Plan is approved by the stockholders of the Company within 12
months thereafter. Notwithstanding any provision in the Plan, no Option shall
be exercisable and no Performance Award or Restricted Stock Award shall vest or
become satisfiable prior to such stockholder approval. No further Awards may be
granted under the Plan after 10 years from the date the Plan is adopted by the
Board. The Plan shall remain in effect until all Options granted under the Plan
have been exercised or expired, all Restricted Stock Awards granted under the
Plan have vested or been forfeited, and all Performance Awards have been
satisfied or expired.
IV. ADMINISTRATION
(a) Composition of Committee. The Plan shall be administered by the
Committee; provided, however, Awards may be granted to individuals who are
subject to Section 16(b) of the 1934 Act only if the Committee is comprised
solely of two or more "Non-Employee Directors" as defined in Rule 16b-3.
(b) Powers. Subject to the express provisions of the Plan, the Committee
shall have authority, in its discretion, to determine which Employees or
Directors shall receive an Award, the time or times when such Award shall be
made, the type of Award that shall be made, the number of shares to be subject
to each Option or Restricted Stock Award and the value of each Performance
Award. In making such determinations, the Committee shall take into account the
nature of the services rendered by the respective Employees or Directors, their
present and potential contribution to the Company's success and such other
factors as the Committee in its sole discretion shall deem relevant.
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(c) Additional Powers. The Committee shall have such additional powers as
are delegated to it by the other provisions of the Plan. Subject to the express
provisions of the Plan, this shall include the power to construe the Plan and
the respective agreements, notices or certificates executed hereunder, to
prescribe rules and regulations relating to the Plan, and to determine the
terms, restrictions and provisions of the agreement, notice or certificate
relating to each Award, including such terms, restrictions and provisions as
shall be requisite in the judgment of the Committee to cause designated Options
to qualify as Incentive Stock Options, and to make all other determinations
necessary or advisable for administering the Plan. The Committee may correct
any defect or supply any omission or reconcile any inconsistency in the Plan or
in any agreement relating to an Award in the manner and to the extent it shall
deem expedient to carry it into effect. The determinations of the Committee on
the matters referred to in this Paragraph IV shall be conclusive.
(d) Delegation of Powers. The Committee may delegate to one or more
officers of the Company the authority to make Option grants to Employees who
are not subject to Section 16(b) of the 1934 Act. Such delegation may contain
such limitations and restrictions as the Committee may provide and shall comply
in all respects with the requirements of applicable law, including the Delaware
General Corporation Law.
V. SHARES SUBJECT TO THE PLAN; AWARD LIMITS; GRANT OF AWARDS
(a) Shares Subject to the Plan and Award Limits. Subject to adjustment in
the same manner as provided in Paragraph X with respect to shares of Common
Stock subject to Options then outstanding, the aggregate number of shares of
Common Stock that may be issued under the Plan shall not exceed 3,000,000
shares. Shares shall be deemed to have been issued under the Plan only to the
extent actually issued and delivered pursuant to an Award. To the extent that
an Award lapses or the rights of its holder terminate, any shares of Common
Stock subject to such Award shall again be available for the grant of an Award
under the Plan. Notwithstanding any provision in the Plan to the contrary, the
maximum number of shares of Common Stock that may be subject to Options and
Restricted Stock Awards granted to any one individual during any calendar year
(such limitation shall apply separately to each of those Awards and not to
those Awards in the aggregate) may not exceed 500,000 shares of Common Stock
(subject to adjustment in the same manner as provided in Paragraph X with
respect to shares of Common Stock subject to Options then outstanding), and the
maximum amount of compensation that may be paid to any Participant in any year
under all Performance Awards (including the Fair Market Value of any shares of
Common Stock paid in satisfaction of such Performance Awards) may not exceed
three million dollars. The limitations set forth in the preceding sentence
shall be applied in a manner that will permit compensation generated under the
Plan to constitute "performance-based" compensation for purposes of section
162(m) of the Code, including, without limitation, counting against such
maximum number of shares, to the extent required under section 162(m) of the
Code.
(b) Grant of Awards. The Committee may from time to time grant Awards to
one or more Employees or Directors determined by it to be eligible for
participation in the Plan in accordance with the terms of the Plan.
(c) Stock Offered. Subject to the limitations set forth in Paragraph V(a),
the stock to be offered pursuant to the grant of an Award may be authorized but
unissued Common Stock or Common Stock previously issued and outstanding and
reacquired by the Company. Any of such shares which remain unissued and which
are not subject to outstanding Awards at the termination of the Plan shall
cease to be subject to the Plan but, until termination of the Plan, the Company
shall at all times make available a sufficient number of shares to meet the
requirements of the Plan.
VI. ELIGIBILITY
Awards may be granted only to persons who, at the time of grant, are
Employees or Directors. An Award may be granted on more than one occasion to
the same person, and, subject to the limitations set forth in the Plan, such
Award may include an Incentive Stock Option, an Option that is not an Incentive
Stock Option, a Restricted Stock Award, a Performance Award, or any combination
thereof.
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VII. STOCK OPTIONS
(a) Option Period. Except as otherwise provided in subparagraph (c) below
or such shorter term as may be provided in an Option Agreement, each Option
shall expire 10 years from its date of grant and, unless provided otherwise in
the Option Agreement, shall be subject to earlier termination as follows:
Options, to the extent vested as of the date a Participant incurs a Termination
of Service may be exercised only within three months of such date, unless such
termination results from (i) death, Retirement or Disability of the
Participant, in which case all vested Options held by such Participant may be
exercised by the Participant, the Participant's legal representative, heir or
devisee, as the case may be, within two years from the date of the
Participant's termination, or (ii) Cause, in which event all outstanding vested
Options held by such Participant shall be automatically forfeited unexercised
on such termination; provided, however, that notwithstanding the foregoing no
such termination event shall extend the expiration date of an Option beyond the
10th anniversary of its date of grant or, such shorter period, if any, as may
be provided in the Option Agreement.
(b) Vesting. Unless otherwise provided in a Participant's Option Agreement
and subject to the further provisions of the Plan, Options shall vest and
become exercisable as to one-fourth of the shares subject to such Option on the
first anniversary of the Option's date of grant and with respect to an
additional one-fourth of such shares on each subsequent anniversary date
thereof until fully vested. A Participant may not exercise an Option except to
the extent it has become vested. Unless otherwise provided in a Participant's
Option Agreement, all unvested Options shall automatically become fully vested
upon a Participant's Termination of Service due to his or her death, Disability
or Retirement. Options that are not vested on a Participant's Termination of
Service shall automatically terminate and be canceled unexercised on such date.
(c) Special Limitations on Incentive Stock Options. An Incentive Stock
Option may be granted only to an individual who is employed by the Company or
any parent or subsidiary corporation (as defined in section 424 of the Code) at
the time the Option is granted. To the extent that the aggregate Fair Market
Value (determined at the time the respective Incentive Stock Option is granted)
of Common Stock with respect to which Incentive Stock Options are exercisable
for the first time by an individual during any calendar year under all
incentive stock option plans of the Company and its parent and subsidiary
corporations exceeds $100,000, such Incentive Stock Options shall be treated as
Options which do not constitute Incentive Stock Options. The Committee shall
determine, in accordance with applicable provisions of the Code, any applicable
treasury regulations and other administrative pronouncements, which of a
Participant's Incentive Stock Options will not constitute Incentive Stock
Options because of such limitation and shall notify the Participant of such
determination as soon as practicable after such determination. No Incentive
Stock Option shall be granted to an individual if, at the time the Option is
granted, such individual owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or of its parent
or subsidiary corporation, within the meaning of section 422(b)(6) of the Code,
unless (i) at the time such Option is granted the option price is at least 110%
of the Fair Market Value of the Common Stock subject to the Option and (ii)
such Option by its terms is not exercisable after the expiration of five years
from the date of grant. An Incentive Stock Option shall not be transferable
otherwise than by will or the laws of descent and distribution, and shall be
exercisable during the Participant's lifetime only by such Participant or the
Participant's guardian or legal representative.
(d) Option Agreement. Each Option shall be evidenced by an Option
Agreement in such form and containing such provisions not inconsistent with the
provisions of the Plan as the Committee from time to time shall approve,
including, without limitation, provisions to qualify an Incentive Stock Option
under section 422 of the Code. An Option Agreement may provide for the payment
of the option price, in whole or in part, by cash, a check acceptable to the
Company, the delivery of a number of already-owned shares of Common Stock (plus
cash if necessary) having a Fair Market Value equal to such option price,
provided such shares have been owned for more than six months by the
Participant, a "cashless broker exercise" of the Option through procedures
established or approved by the Committee with respect thereto, or any
combination of the foregoing or any other manner approved by the Committee.
Further, an Option Agreement may provide, in the sole discretion of the
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Committee, for the surrender of the right to purchase shares under the Option
in return for a payment in cash or shares of Common Stock or a combination of
cash and shares of Common Stock equal in value to the excess of the Fair Market
Value of the shares with respect to which the right to purchase is surrendered
over the option price therefor, on such terms and conditions as the Committee
in its sole discretion may prescribe. In the case of any such right that is
granted in connection with an Incentive Stock Option, such right shall be
exercisable only when the Fair Market Value of the Common Stock exceeds the
price specified therefor in the Option or the portion thereof to be
surrendered. The terms and conditions of the respective Option Agreements need
not be identical. Subject to the consent of the Participant, the Committee may,
in its sole discretion, amend an outstanding Option Agreement from time to time
in any manner that is not inconsistent with the provisions of the Plan
(including, without limitation, an amendment that accelerates the time at which
the Option, or a portion thereof, may be exercisable).
(e) Option Price and Payment. The price at which a share of Common Stock
may be purchased upon exercise of an Option shall be determined by the
Committee but, subject to adjustment as provided in Paragraph X, such purchase
price shall not be less than the Fair Market Value of a share of Common Stock
on the date such Option is granted. The Option or portion thereof may be
exercised by delivery of an irrevocable notice of exercise to the Company, as
specified by the Committee. The purchase price of the Option or portion thereof
and any required withholding taxes shall be paid in full in the manner
prescribed by the Committee. Separate stock certificates shall be issued by the
Company for those shares acquired pursuant to the exercise of an Option.
(f) Restrictions on Repricing of Options. Except as provided in Paragraph
X, the Committee may not, without approval of the stockholders of the Company,
amend any outstanding Option Agreement to lower the option price (or cancel and
replace any outstanding Option Agreement with Option Agreements having a lower
option price).
(g) Stockholder Rights and Privileges. The Participant shall be entitled
to all the privileges and rights of a stockholder only with respect to such
shares of Common Stock as have been purchased under the Option and for which
certificates of stock have been registered in the Participant's name.
(h) Options in Substitution for Options Granted by Other
Employers. Options may be granted under the Plan from time to time in
substitution for options held by individuals providing services to corporations
or other entities who become Employees or Directors as a result of a merger or
consolidation or other business transaction with the Company or any Affiliate.
VIII. RESTRICTED STOCK AWARDS
(a) Forfeiture Restrictions To Be Established by the Committee. Shares of
Common Stock that are the subject of a Restricted Stock Award shall be subject
to restrictions on disposition by the Participant and an obligation of the
Participant to forfeit and surrender the shares to the Company under certain
circumstances and any other restrictions determined by the Committee on the
date of grant (the "Restrictions"). The Restrictions shall be determined by the
Committee in its sole discretion, and the Committee may provide that the
Restrictions shall lapse upon (i) the attainment of one or more performance
measures established by the Committee that are based on (1) the price of a
share of Common Stock, (2) the Company's earnings per share, (3) the Company's
market share, (4) the market share of a business unit of the Company designated
by the Committee, (5) the Company's sales, (6) the sales of a business unit of
the Company designated by the Committee, (7) the net income (before or after
taxes) of the Company or any business unit of the Company designated by the
Committee, (8) the cash flow return on investment of the Company or any
business unit of the Company designated by the Committee, (9) the earnings
before or after interest (leasing expense), taxes, depreciation, distributions
on mandatorily redeemable preferred stock, and/or amortization of the Company
or any business unit of the Company designated by the Committee, (10) the
economic value added, (11) the return on stockholders' equity achieved by the
Company, or (12) the total stockholders' return achieved by the Company,
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(ii) the Participant's continued employment with the Company and its Affiliates
or continued service as a Director for a specified period of time, (iii) the
occurrence of any event or the satisfaction of any other condition specified by
the Committee in its sole discretion, or (iv) a combination of any of the
foregoing. The performance measures described in clause (i) of the preceding
sentence may be subject to adjustment for changes in accounting standards
required by the Financial Accounting Standards Board after the goal is
established, specified significant extraordinary items or events, and may be
absolute, relative to one or more other companies, or relative to one or more
indexes, and may be contingent upon future performance of the Company or any
Affiliate, division, or department thereof. Each Restricted Stock Award may
have different Restrictions, in the discretion of the Committee.
(b) Other Terms and Conditions. Common Stock awarded pursuant to a
Restricted Stock Award shall be represented by a stock certificate registered
in the name of the Participant. Unless provided otherwise in a Restricted Stock
Agreement, the Participant shall have the right to receive dividends with
respect to Common Stock subject to a Restricted Stock Award, to vote Common
Stock subject thereto and to enjoy all other stockholder rights, except that
(i) the Participant shall not be entitled to delivery of the stock certificate
until the Restrictions have expired, (ii) the Company shall retain custody of
the stock until the Restrictions have expired, (iii) the Participant may not
sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the stock
until the Restrictions have expired, and (iv) a breach of the terms and
conditions established by the Committee pursuant to the Restricted Stock
Agreement shall cause a forfeiture of the Restricted Stock Award. At the time
of such Award, the Committee may, in its sole discretion, prescribe additional
terms, conditions or restrictions relating to Restricted Stock Awards,
including, but not limited to, rules pertaining to the termination of
employment or service as a Director (by retirement, disability, death or
otherwise) of a Participant prior to expiration of the Restrictions. Such
additional terms, conditions or restrictions shall be set forth in a Restricted
Stock Agreement made in conjunction with the Award.
(c) Payment for Restricted Stock. The Committee shall determine the amount
and form of any payment for Common Stock received pursuant to a Restricted
Stock Award, provided that in the absence of such a determination, a
Participant shall not be required to make any payment for Common Stock received
pursuant to a Restricted Stock Award, except to the extent otherwise required
by law.
(d) Committee's Discretion to Accelerate Vesting of Restricted Stock
Awards. The Committee may, in its discretion and as of a date determined by
the Committee, fully vest any or all Common Stock awarded to a Participant
pursuant to a Restricted Stock Award and, upon such vesting, all restrictions
applicable to such Restricted Stock Award shall terminate as of such date. Any
action by the Committee pursuant to this Subparagraph may vary among individual
Participants and may vary among the Restricted Stock Awards held by any
individual Participant. Notwithstanding the preceding provisions of this
Subparagraph, the Committee may not take any action described in this
Subparagraph with respect to a Restricted Stock Award that has been granted to
a "covered employee" (within the meaning of Treasury Regulation section
1.162-27(c)(2)) if such Award has been designed to meet the exception for
performance-based compensation under section 162(m) of the Code; provided,
however, this prohibition shall not apply to an acceleration due to death or
disability of the Participant.
(e) Restricted Stock Agreements. At the time any Award is made under this
Paragraph VIII, the Company and the Participant shall enter into a Restricted
Stock Agreement setting forth each of the matters contemplated hereby and such
other matters as the Committee may determine to be appropriate. The terms and
provisions of the respective Restricted Stock Agreements need not be identical.
Subject to the consent of the Participant and the restriction set forth in the
last sentence of Subparagraph (d) above, the Committee may, in its sole
discretion, amend an outstanding Restricted Stock Agreement from time to time
in any manner that is not inconsistent with the provisions of the Plan.
B-7
IX. PERFORMANCE AWARDS
(a) Performance Period. The Committee shall establish, with respect to and
at the time of each Performance Award, the maximum value of the Performance
Award and the performance period over which the performance applicable to the
Performance Award shall be measured.
(b) Performance Measures. A Performance Award shall be awarded to a
Participant contingent upon future performance of the Company or any Affiliate,
division, or department thereof during the performance period. With respect to
Performance Awards intended to qualify as performance based compensation under
Section 162(m) of the Code, the Committee shall establish the performance
measures applicable to such performance either (i) prior to the beginning of
the performance period or (ii) within 90 days after the beginning of the
performance period if the outcome of the performance targets is substantially
uncertain at the time such targets are established, but not later than the date
that 25% of the performance period has elapsed; provided such measures may be
made subject to adjustment for specified significant extraordinary items or
events, including changes in accounting standards required by the Financial
Accounting Standards Board after the goal is established. The performance
measures may be absolute, relative to one or more other companies, or relative
to one or more indexes. The Committee may provide that the vesting of the
Performance Award may be based upon (i) the attainment of performance measures
based on (1) the price of a share of Common Stock, (2) the Company's earnings
per share, (3) the Company's market share, (4) the market share of a business
unit of the Company designated by the Committee, (5) the Company's sales, (6)
the sales of a business unit of the Company designated by the Committee, (7)
the net income (before or after taxes) of the Company or any business unit of
the Company designated by the Committee, (8) the cash flow return on investment
of the Company or any business unit of the Company designated by the Committee,
(9) the earnings before or after interest (leasing expense), taxes,
depreciation, distributions on mandatorily redeemable preferred stock, and/or
amortization of the Company or any business unit of the Company designated by
the Committee, (10) the economic value added, (11) the return on stockholders'
equity achieved by the Company, (12) the total stockholders' return achieved by
the Company, or (13) a combination of any of the foregoing, (ii) the occurrence
of any event or the satisfaction of any other condition specified by the
Committee in its sole discretion, or (iii) a combination of any of the
foregoing. The Committee, in its sole discretion, may provide for an adjustable
Performance Award value based upon the level of achievement of performance
measures.
(c) Awards Criteria. In determining the value of Performance Awards, the
Committee shall take into account a Participant's responsibility level,
performance, potential, other Awards, and such other considerations as it deems
appropriate. The Committee, in its sole discretion, may provide for a reduction
in the value of a Participant's Performance Award during the performance period.
(d) Payment. Following the end of the performance period, the holder of a
Performance Award shall be entitled to receive payment of an amount not
exceeding the maximum value of the Performance Award, based on the achievement
of the performance measures for such performance period, as determined and
certified in writing by the Committee. Payment of a Performance Award may be
made in cash, Common Stock, or a combination thereof, as determined by the
Committee. Payment shall be made in a lump sum or in installments as prescribed
by the Committee. If a Performance Award covering shares of Common Stock is to
be paid in cash, such payment shall be based on the Fair Market Value of the
Common Stock on the payment date.
(e) Termination of Award. A Performance Award shall terminate if the
Participant does not remain continuously in the employ of the Company and its
Affiliates or does not continue to perform services as a Director at all times
during the applicable performance period, except as set forth in the
Performance Award Agreement or as otherwise may be determined by the Committee.
(f) Performance Award Agreements. At the time any Award is made under this
Paragraph IX, the Company and the Participant shall enter into a Performance
Award Agreement setting forth each of the matters contemplated hereby, and such
additional matters as the Committee may determine to be appropriate. The terms
and provisions of the respective Performance Award Agreements need not be
identical.
B-8
X. RECAPITALIZATION OR REORGANIZATION
(a) No Effect on Right or Power. The existence of the Plan and the Awards
granted hereunder shall not affect in any way the right or power of the Board
or the stockholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's or any
Affiliate's capital structure or its business, any merger or consolidation of
the Company or any Affiliate, any issue of debt or equity securities ahead of
or affecting Common Stock or the rights thereof, the dissolution or liquidation
of the Company or any Affiliate or any sale, lease, exchange or other
disposition of all or any part of its assets or business or any other corporate
act or proceeding.
(b) Subdivision or Consolidation of Shares; Stock Dividends. The shares
with respect to which Awards may be granted are shares of Common Stock as
presently constituted, but if, and whenever, prior to the expiration of an
Award theretofore granted, the Company shall effect a subdivision or
consolidation of shares of Common Stock or the payment of a stock dividend on
Common Stock without receipt of consideration by the Company, the number of
shares of Common Stock with respect to which such Award may thereafter be
exercised or satisfied, as applicable (i) in the event of an increase in the
number of outstanding shares shall be proportionately increased, and the
purchase price per share shall be proportionately reduced, and (ii) in the
event of a reduction in the number of outstanding shares shall be
proportionately reduced, and the purchase price per share shall be
proportionately increased. Any fractional share resulting from such adjustment
shall be rounded up to the next whole share.
(c) Recapitalizations and Corporate Changes. If the Company recapitalizes,
reclassifies its capital stock, or otherwise changes its capital structure (a
"recapitalization"), the number and class of shares of Common Stock covered by
an Award theretofore granted shall be adjusted so that such Award shall
thereafter cover the number and class of shares of stock and securities to
which the Participant would have been entitled pursuant to the terms of the
recapitalization if, immediately prior to the recapitalization, the Participant
had been the holder of record of the number of shares of Common Stock then
covered by such Award. If (i) the Company sells, leases or exchanges all or
substantially all of its assets to any other person or entity (other than to an
entity wholly owned, directly or indirectly, by the Company), (ii) there is
consummated a merger, consolidation, or other similar business combination
involving the Company, other than one in which more than 50% of the total
voting power of the surviving entity (or parent entity of the surviving entity)
outstanding immediately after such transaction is beneficially owned by the
holders of the outstanding voting securities of the Company immediately prior
to such transaction, with the voting power of each such continuing holder
relative to other such continuing holders not substantially altered in the
transaction, (iii) the Company is to be dissolved and liquidated, (iv) any
person or entity, including a "group" as contemplated by Section 13(d)(3) of
the 1934 Act, other than an employee benefit plan maintained solely by the
Company and its Affiliates, acquires or gains ownership or control (including,
without limitation, power to vote) of more than 50% of the outstanding shares
of the Company's voting stock (based upon voting power), but excluding any such
acquisition pursuant to a merger, consolidation or similar business combination
involving the Company, or (v) as a result of or in connection with a contested
election of Directors, the persons who were Directors of the Company before
such election shall cease to constitute a majority of the Board (each such
event is referred to herein as a "Corporate Change"), no later than (x) 10 days
after the approval by the stockholders of the Company of such merger,
consolidation, reorganization, sale, lease or exchange of assets or dissolution
or such election of Directors or (y) 30 days after a Corporate Change of the
type described in clause (iv) the Committee, acting in its sole discretion
without the consent or approval of any Participant, may, except as provided
otherwise in an Award Agreement, effect one or more of the following
alternatives, which alternatives may vary among individual Participants and
which may vary among Awards held by any individual Participant: (1) accelerate
the time at which Awards then outstanding may be exercised and, with respect to
Awards that are not exercisable, accelerate the time at which such Awards
become vested and payable, e.g., providing that Options may be exercised in
full for a limited period of time on or before a specified date (before or
after such Corporate Change) fixed by the Committee, after which specified date
all unexercised Options and all rights of Participants thereunder shall
terminate, (2) require the mandatory surrender to the Company by selected
Participants of some or all of the outstanding Awards held by such
B-9
Participants (irrespective of whether such Awards are then exercisable or
vested under the provisions of the Plan) as of a date, before or after such
Corporate Change, specified by the Committee, in which event the Committee
shall thereupon cancel such Awards and the Company shall pay (or cause to be
paid) to each Participant an amount of cash per share equal to the excess, if
any, of the amount calculated in Subparagraph (d) below (the "Change of Control
Value") of the shares subject to such Award over the exercise price(s), if any,
under such Awards for such shares, (3) make such adjustments to Awards then
outstanding as the Committee deems appropriate to reflect such Corporate Change
(provided, however, that the Committee may determine in its sole discretion
that no adjustment is necessary to Awards then outstanding), including, without
limitation, adjusting an Award to provide that the number and class of shares
of Common Stock covered by such Award shall be adjusted so that such Award
shall thereafter cover securities of the surviving or acquiring corporation or
other property (including, without limitation, cash) as determined by the
Committee in its sole discretion or (4) require the mandatory surrender to the
Company by all or selected Participants of some or all of their outstanding
Awards the vesting or payment of which are subject to the achievement of
specified performance criteria as of a date, before, on, or after such
Corporate Change, specified by the Committee, in which event the Committee
shall thereupon cancel such Awards and the Company shall pay (or cause to be
paid) to each Participant an amount of cash equal to the maximum value of such
Award which, in the event the applicable performance or vesting period set
forth in such Award agreement has not been completed, may, in the discretion of
the Committee, be multiplied by a fraction, the numerator of which is the
number of days during the period beginning on the first day of the applicable
performance or vesting period and ending on the date of the surrender, and the
denominator of which is the aggregate number of days in the applicable
performance or vesting period.
(d) Change of Control Value. For the purposes of clause (2) in
Subparagraph (c) above, the "Change of Control Value" shall equal the amount
determined in clause (i), (ii) or (iii), whichever is applicable, as follows:
(i) the per share price offered to stockholders of the Company in any such
merger, consolidation, sale of assets or dissolution transaction, (ii) the
price per share offered to stockholders of the Company in any tender offer or
exchange offer whereby a Corporate Change takes place, or (iii) if such
Corporate Change occurs other than pursuant to a tender or exchange offer, the
fair market value per share of the shares into which such Awards being
surrendered are exercisable or payable, as determined by the Committee as of
the date determined by the Committee to be the date of cancellation and
surrender of such Awards. In the event that the consideration offered to
stockholders of the Company in any transaction described in this Subparagraph
(d) or Subparagraph (c) above consists of anything other than cash, the
Committee shall determine the fair cash equivalent of the portion of the
consideration offered which is other than cash.
(e) Other Changes in the Common Stock. In the event of changes in the
outstanding Common Stock by reason of recapitalizations, reorganizations,
mergers, consolidations, combinations, split-ups, split-offs, spin-offs,
exchanges or other relevant changes in capitalization or distributions to the
holders of Common Stock occurring after the date of the grant of any Award and
not otherwise provided for by this Paragraph X, such Award and any agreement
evidencing such Award shall be subject to adjustment by the Committee at its
sole discretion as to the number and price of shares of Common Stock or other
consideration subject to such Award. In the event of any such change in the
outstanding Common Stock or distribution to the holders of Common Stock, or
upon the occurrence of any other event described in this Paragraph X, the
aggregate number of shares available under the Plan and the maximum number of
shares that may be subject to Awards granted to any one individual may be
appropriately adjusted to the extent, if any, determined by the Committee,
whose determination shall be conclusive.
(f) No Adjustments unless Otherwise Provided. Except as hereinbefore
expressly provided, the issuance by the Company of shares of stock of any class
or securities convertible into shares of stock of any class, for cash,
property, labor or services, upon direct sale, upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares or obligations of
the Company convertible into such shares or other securities, and in any case
whether or not for fair value, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number of shares of Common Stock
subject to Awards theretofore granted or the purchase price per share, if
applicable.
B-10
XI. AMENDMENT AND TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with respect
to any shares of Common Stock for which Awards have not theretofore been
granted. The Board shall have the right to alter or amend the Plan or any part
thereof from time to time; provided that no change in the Plan may be made that
would impair the rights of a Participant with respect to an Award theretofore
granted without the consent of the Participant, and provided, further, that the
Board may not, without approval of the stockholders of the Company, (a) amend
the Plan to increase the maximum aggregate number of shares that may be issued
under the Plan or change the class of individuals eligible to receive Awards
under the Plan, (b) amend or delete Paragraph VII(f) or (c) amend this
Paragraph XI to delete items (a) or (b).
XII. MISCELLANEOUS
(a) No Right To An Award. Neither the adoption of the Plan nor any action
of the Board or of the Committee shall be deemed to give any individual any
right to be granted an Option, a right to a Restricted Stock Award, a right to
a Performance Award, or any other rights hereunder except as may be evidenced
by an Award agreement duly executed on behalf of the Company, and then only to
the extent and on the terms and conditions expressly set forth therein. The
Plan shall be unfunded. The Company shall not be required to establish any
special or separate fund or to make any other segregation of funds or assets to
assure the performance of its obligations under any Award.
(b) No Employment/Membership Rights Conferred. Nothing contained in the
Plan or any Award shall (i) confer upon any employee any right with respect to
continuation of employment with the Company or any Affiliate or (ii) interfere
in any way with the right of the Company or any Affiliate to terminate his or
her employment or consulting or advisory relationship at any time. Nothing
contained in the Plan shall confer upon any Director any right with respect to
continuation of membership on the Board.
(c) Other Laws; Withholding. The Company shall not be obligated to issue
any Common Stock pursuant to any Award granted under the Plan at any time when
the shares covered by such Award have not been registered under the Securities
Act of 1933, as amended, and such other state and federal laws, rules and
regulations as the Company or the Committee deems applicable and, in the
opinion of legal counsel for the Company, there is no exemption from the
registration requirements of such laws, rules and regulations available for the
issuance and sale of such shares. No fractional shares of Common Stock shall be
delivered, nor shall any cash in lieu of fractional shares be paid. The Company
shall have the right to deduct from a Participant's salary or Award proceeds
any taxes required by law to be withheld to enable it to satisfy its
withholding.
(d) No Restriction on Corporate Action. Nothing contained in the Plan
shall be construed to prevent the Company or any Affiliate from taking any
action which is deemed by the Company or such Affiliate to be appropriate or in
its best interest, whether or not such action would have an adverse effect on
the Plan or any Award made under the Plan. No Participant, beneficiary or other
person shall have any claim against the Company or any Affiliate as a result of
any such action.
(e) Restrictions on Transfer. An Award (other than an Incentive Stock
Option, which shall be subject to the transfer restrictions set forth in
Paragraph VII(c)) shall not be transferable otherwise than (i) by will or the
laws of descent and distribution, (ii) pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended, or the rules thereunder, or (iii) if
vested, with the consent of the Company, in its sole discretion.
(f) Governing Law. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without regard to conflicts
of laws principles thereof.
B-11
Please [ ]
Mark Here
for Address
Change or
Comments
SEE REVERSE SIDE
This proxy, when properly executed, will be voted in the manner directed herein. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR ALL OF THE BOARD OF DIRECTORS NOMINEES, FOR RATIFICATION OF PRICEWATERHOUSECOOPERS LLP AS HANOVER COMPRESSOR COMPANY'S
INDEPENDENT ACCOUNTANTS FOR 2003 and FOR APPROVAL OF THE HANOVER COMPRESSOR COMPANY 2003 STOCK INCENTIVE PLAN
WITHHOLD
1. Election of FOR ALL NOMINEES AUTHORITY 2. Ratification of Reappointment of 3. Approval of the Hanover Compressor
Directors (except as to vote for all PricewaterhouseCoopers LLP Company 2003 Stock Incentive Plan
indicated below) nominees FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
[ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
NOMINEES FOR ONE-YEAR TERM EXPIRING AT
2004 ANNUAL MEETING OF STOCKHOLDERS:
01 I. Jon Brumley 02 Ted Collins, Jr. 03 Chad C. Deaton MARK HERE IF YOU PLAN TO [ ]
04 Robert R. Furgason 05 Victor E. Grijalva 06 Gordon T. Hall ATTEND THE MEETING
07 Melvyn N. Klein 08 Michael A. O'Connor 09 Alvin V. Shoemaker
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL 4. In their discretion, the proxies
NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME ABOVE.) are authorized to vote upon such
other business as may properly
come before the meeting or at any
postponement(s) or adjournment(s)
thereof.
Dated: ________________________, 2003
_____________________________________
(Signature)
_____________________________________
(Signature)
Please sign exactly as name appears
on stock certificate(s). Joint owners
should each sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give full
title as such.
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FOLD AND DETACH HERE
Vote by Internet or Telephone or Mail
24 Hours a Day, 7 Days a Week
Internet and telephone voting is available through 11PM Eastern Time
the day prior to annual meeting day.
Your Internet or telephone vote authorizes the named proxies to vote your shares
in the same manner as if you marked, signed and returned your proxy card.
Internet Telephone Mail
http://www.eproxy.com/hc 1-800-435-6710
Use the Internet to vote your proxy. Use any touch-tone telephone to Mark, sign and date
Have your proxy card in hand when vote your proxy. Have your proxy your proxy card
you access the web site. You will card in hand when you call. You and return it in the
be prompted to enter your control OR will be prompted to enter your OR enclosed postage-paid
number, located in the box below, control number, located in the envelope.
to create and submit an electronic box below, and then follow the
ballot. directions given.
If you vote your proxy by Internet or by telephone, you do
NOT need to mail back your proxy card.
HANOVER COMPRESSOR COMPANY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
HANOVER COMPRESSOR COMPANY
The undersigned, having received the Notice of Annual Meeting and Proxy
Statement, hereby appoints Victor E. Grijalva and Chad C. Deaton, and each of
them, proxies with full power of substitution, for and in the name of the
undersigned, to vote all shares of Common Stock of Hanover Compressor Company
owned of record by the undersigned at the 2003 Annual Meeting of Stockholders to
be held at 9:00 a.m. local time on Thursday, May 15, 2003, at the Wyndham
Greenspoint Hotel, 12400 Greenspoint Drive, Houston, Texas 77060, and any
adjournments or postponements thereof, in accordance with the discretion marked
on the reverse side hereof.
You are encouraged to specify your choices by marking the appropriate boxes (see
reverse side), but you need not mark any boxes if you wish to vote in accordance
with the Board of Directors recommendations. The proxies cannot vote your shares
unless you sign and return this card.
(SEE REVERSE SIDE)
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Address Change/Comments (Mark the corresponding box on the reverse side)
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FOLD AND DETACH HERE