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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K/A
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(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1999
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 1-3071
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Hanover Compressor Company
(Exact name of registrant as specified in its charter)
Delaware 76-0625124
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
12001 North Houston Rosslyn, Houston, Texas 77086
(Address of principal executive offices)
(281) 447-8787
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange in which registered
------------------- -----------------------------------------
Common Stock, $.001 par value New York Stock Exchange, Inc.
Securities registered pursuant to 12(g) of the Act:
Title of class
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the Common Stock of the registrant held by
nonaffiliates as of March 24, 2000: $648,119,000. This calculation does not
reflect a determination that such persons are affiliates for any other purpose.
Number of shares of the Common Stock of the registrant outstanding as of
March 24, 2000: 57,661,652 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 2000 (to be filed on or before April 30,
2000) are incorporated by reference into Part II, as indicated herein.
The Index to Exhibits is on page E-1.
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EXPLANATORY NOTE
Hanover Compressor Company (the "Company") is filing this amendment to its
Annual Report on Form 10-K for the year ended December 31, 1999 in order to
restate the Financial Statements and revise the Management's Discussion and
Analysis of Financial Condition and Results of Operations. The Company
determined that its obligation to GKH Partners, L.P. for services performed
should have been accrued as a liability over the life of the agreement. The net
effect, after adjusting for income tax of $271,000, is a $461,000 decrease in
net income from $18,103,000 to $17,642,000 for the year ended December 31,
1997, a $782,000 reduction in retained earnings at January 1, 1997 and a
corresponding $1,243,000 reduction in retained earnings at December 31, 1999
and 1998. See Note 18 of the Notes to Consolidated Financial Statements.
2
HANOVER COMPRESSOR COMPANY
TABLE OF CONTENTS
Page
----
PART II
ITEM 6
Selected Financial Data................................................. 4
ITEM 7
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 5
ITEM 8
Financial Statements and Supplementary Data............................. 10
PART IV
ITEM 14
Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 10
3
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA (HISTORICAL)
(Dollars and shares in thousands, except per share data)
The following table presents certain selected financial data for the Company
for each of the five years in the period ended December 31, 1999. Certain
financial data for the years presented have been restated as described in Note
18 to the Consolidated Financial Statements. The selected financial data have
been derived from the audited consolidated financial statements of the Company.
The following information should be read together with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company.
Year Ended December 31,
-------------------------------------------------
1999 1998 1997(6) 1996(6) 1995(1)(6)
-------- -------- -------- ------- ----------
Income Statement Data:
Revenues:
Rentals.................... $192,655 $147,609 $100,685 $72,897 $43,859
Parts and service.......... 34,461 23,870 10,254 6,458 4,495
Compressor fabrication..... 52,531 67,453 49,764 28,764 29,593
Production equipment
fabrication............... 28,037 37,466 37,052 26,903 16,960
Gain on sale of property,
plant & equipment......... 5,927 2,552 148 352 412
Other...................... 3,417 3,007 895 637 645
-------- -------- -------- ------- -------
Total revenues........... 317,028 281,957 198,798 136,011 95,964
======== ======== ======== ======= =======
Expenses:
Rentals.................... 64,949 49,386 35,113 26,012 13,691
Parts and service.......... 21,724 17,341 6,360 4,788 4,122
Compressor fabrication..... 43,663 58,144 41,584 24,657 25,265
Production equipment
fabrication............... 20,833 25,781 26,375 19,574 13,178
Selling, general and
administrative............ 33,782 26,626 21,514 16,711 13,555
Depreciation and
amortization(2)........... 37,337 37,154 28,439 20,722 13,494
Leasing expense............ 22,090 6,173
Interest expense........... 8,786 11,716 10,728 6,594 4,560
Distributions on
mandatorily redeemable
convertible preferred
securities................ 278
-------- -------- -------- ------- -------
Total expenses........... 253,442 232,321 170,113 119,058 87,865
-------- -------- -------- ------- -------
Income before income taxes.. 63,586 49,636 28,685 16,953 8,099
Provision for income taxes.. 23,145 19,259 11,043 6,730 3,109
-------- -------- -------- ------- -------
Net income.................. $ 40,441 $ 30,377 $ 17,642 $10,223 $ 4,990
-------- -------- -------- ------- -------
Other comprehensive income
(loss), net of tax:
Foreign currency
translation adjustment.... (463) 152
-------- -------- -------- ------- -------
Comprehensive income........ $ 39,978 $ 30,529 $ 17,642 $10,223 $ 4,990
======== ======== ======== ======= =======
Net income available to
common stockholders:
Net Income................. $ 40,441 $ 30,377 $ 17,642 $10,223 $ 4,990
Dividends on Series A and
Series B preferred
stock..................... (1,773) (832)
Series A preferred stock
exchange.................. (3,794)
Series B preferred stock
conversion................ (1,400)
-------- -------- -------- ------- -------
Net income available to
common stockholders........ $ 40,441 $ 30,377 $ 17,642 $ 3,256 $ 4,158
======== ======== ======== ======= =======
Weighted average common and
common equivalent shares
outstanding:
Basic(5)................... 57,048 56,936 51,246 40,996 28,746
-------- -------- -------- ------- -------
Diluted(5)................. 61,054 60,182 54,690 44,046 30,716
-------- -------- -------- ------- -------
Earnings per common share:
Basic(5)................... $ 0.71 $ 0.53 $ 0.34 $ 0.08 $ 0.14
======== ======== ======== ======= =======
Diluted(5)................. $ 0.66 $ 0.50 $ 0.32 $ 0.07(3) $ 0.14
======== ======== ======== ======= =======
4
Year Ended December 31,
--------------------------------------------------
1999 1998 1997(6) 1996(6) 1995(1)(6)
-------- -------- -------- -------- ----------
Other Data:
EBITDA (4)................ $132,077 $104,679 $ 67,852 $ 44,269 $ 26,153
======== ======== ======== ======== ========
Cashflows provided by (used
in):
Operating activities...... $ 68,222 $ 31,147 $ 32,219 $ 20,276 $ 9,088
Investing activities...... (92,114) (14,699) (164,490) (87,683) (68,474)
Financing activities...... 18,218 (9,328) 129,510 71,740 62,206
Balance Sheet Data (end of
period):
Working capital........... $107,966 $113,264 $ 58,027 $ 41,513 $ 23,270
Net property, plant and
equipment................ 497,465 392,498 394,070 266,406 198,074
Total assets.............. 756,510 614,590 506,452 341,387 252,313
Long-term debt............ 69,681 156,943 158,838 122,756 50,451
Mandatorily redeemable
convertible preferred
securities............... 86,250
Preferred stockholders'
equity................... 26,894
Common stockholders'
equity................... 367,914 315,470 287,028 176,113 138,678
- --------
(1) The selected historical financial information includes the results of
operations of the Company and its wholly-owned subsidiaries. During 1995,
the Company acquired Astra Resources Compression, Inc., a significant
subsidiary.
(2) In order to more accurately reflect the estimated useful lives of natural
gas compressor units in the rental fleet; effective January 1, 1996 the
Company changed the lives over which these units are depreciated from 12
to 15 years. The effect of this change was a decrease in depreciation
expense of $2.6 million and an increase in net income of $1.5 million
($.03 per diluted common share) for the year ended December 31, 1996.
(3) Diluted earnings per share in 1996 was $.23 per share before the effects
of charging retained earnings for $1.8 million relating to dividends on
redeemable preferred stock and one time charges to retained earnings for
(i) $3.8 million related to the exchange of all Series A preferred stock
for subordinated notes and (ii) $1.4 million related to the conversion of
all Series B preferred stock to Common Stock.
(4) EBITDA consists of the sum of consolidated net income before interest
expense, lease expense, distributions on mandatorily redeemable
convertible preferred securities, income tax, and depreciation and
amortization. The Company believes that EBITDA is a meaningful measure of
its operating performance and is also used to measure the Company's
ability to meet debt service requirements. EBITDA should not be considered
as an alternative performance measure prescribed by generally accepted
accounting principles.
(5) In June 2000, we completed a 2-for-1 stock split effected in the form of a
100% stock dividend. All weighted average and common equivalent shares and
earnings per common share information have been restated for all periods
presented to reflect this stock split.
(6) Restated as discussed in Note 18 to the Consolidated Financial Statements.
The net effect of the restatement on the periods presented was an increase
in selling, general and administrative expenses of $732,000, $272,000, and
$1,013,000; a decrease in net income of $461,000, $158,000, and $624,000;
and a decrease in earnings per common share of basic: $.01, $.00 and $.03
and diluted: $.01, $.01, and $.02 for the years ended December 31, 1997,
1996 and 1995, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto.
GENERAL
The Company's operations consist of providing gas compression services
through renting, maintaining and operating natural gas compressors and
engineering, fabricating and selling gas compression and oil and gas
production equipment. See "Business".
5
The following table summarizes revenues, expenses and gross profit
percentages for each of the Company's business segments (Dollars in millions):
Year ended December
31,
----------------------
1999 1998 1997
------ ------ ------
Revenues:
Rentals--Domestic..................................... $136.5 $107.4 $ 78.7
Rentals--International................................ 56.2 40.2 22.0
Compressor fabrication................................ 52.5 67.5 49.8
Production equipment fabrication...................... 28.0 37.5 37.1
Other................................................. 43.8 29.4 11.2
------ ------ ------
Total............................................... $317.0 $282.0 $198.8
====== ====== ======
Expenses:
Rentals--Domestic..................................... $ 46.2 $ 36.6 $ 27.5
Rentals--International................................ 18.8 12.8 7.6
Compressor fabrication................................ 43.7 58.1 41.6
Production equipment fabrication...................... 20.8 25.8 26.4
Other................................................. 21.7 17.4 6.3
------ ------ ------
Total............................................... $151.2 $150.7 $109.4
====== ====== ======
Gross profit percentage:
Rentals--Domestic..................................... 66.1% 65.9% 65.1%
Rentals--International................................ 66.6% 68.2% 65.5%
Compressor fabrication................................ 16.8% 13.8% 16.5%
Production equipment fabrication...................... 25.7% 31.2% 28.8%
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
Revenues
The Company's total revenues increased by $35.0 million, or 12%, to $317.0
million during 1999 from $282.0 million during 1998. The increase resulted from
growth of the Company's natural gas compressor rental fleet but was offset by
decreases in compressor fabrication and production equipment fabrication
revenues.
Revenues from rentals increased by $45.1 million, or 31%, to $192.7 million
during 1999 from $147.6 million during 1998. Domestic revenues from rentals
increased by $29.1 million, or 27%, to $136.5 million during 1999 from $107.4
million during 1998. International revenues from rentals increased by $16.0
million, or 40%, to $56.2 million during 1999 from $40.2 million during 1998.
At December 31, 1999 the compressor rental fleet consisted of approximately
1,458,000 horsepower, a 37% increase over the 1,067,000 horsepower in the
rental fleet at December 31, 1998. Domestically, the rental fleet increased by
289,000 horsepower, or 32%, during 1999 and internationally by 103,000
horsepower, or 59%. The increase in both domestic and international rental
revenues resulted primarily from expansion of the Company's rental fleet.
Revenue from parts and service increased by $10.6 million, or 44% to $34.5
million during 1999 from $23.9 million during 1998. Revenues from the
fabrication and sale of compressor equipment to third parties decreased by
$15.0 million, or 22%, to $52.5 million during 1999 from $67.5 million during
1998. An aggregate of 147,000 horsepower was sold during 1999. In addition,
130,000 horsepower was fabricated and placed in the rental fleet during 1999.
The Company believes the revenue decrease during 1999 was due in part to a
project where a customer supplied its own engines, which are typically provided
by the Company, and in part to lower energy prices earlier in 1999, which
reduced the demand for compressors thereby adversely impacting sales prices.
Revenues from the fabrication and sale of production equipment decreased by
$9.5 million, or 25%, to $28.0 million during 1999 from $37.5 million during
1998 primarily due to the decline in well completions resulting from lower
energy prices during the first half of 1999.
6
The Company recognized gains on sales of property, plant and equipment of
$5.9 million during 1999 compared to $2.6 million during the 1998. The increase
is primarily due to the increase in horsepower sold from the rental fleet to
customers exercising options to purchase equipment they previously had rented.
During 1999 the Company sold approximately 20,000 horsepower compared to 14,000
horsepower during 1998.
Expenses
Operating expenses of the rentals segments increased by $15.6 million, or
32% to $65.0 million during 1999 from $49.4 million during 1998. The increase
resulted primarily from the corresponding 31% increase in revenues from rentals
over the corresponding period in 1998. The gross profit percentage from rentals
was 66% during 1999 and 67% during 1998. Operating expenses of parts and
service increased $4.4 million, or 25% to $21.7 million during 1999 from $17.3
million during 1998, which relates to the 44% increase in parts and service
revenue. The gross profit percentage from parts and service increased to 37%
during 1999 from 27% in 1998. Operating expenses of compressor fabrication
decreased by $14.4 million, or 25% to $43.7 million from $58.1 million during
1998. The gross profit margin on compression fabrication increased to 17%
during 1999, from 14% during 1998. Production equipment fabrication operating
expenses decreased by $5.0 million, or 19%, during 1999 to $20.8 million from
$25.8 million during 1998. The decrease in operating expenses is reflective of
the corresponding change in production equipment fabrication revenues during
1999. The gross profit margin attributable to production equipment fabrication
decreased to 26% during 1999, from 31% during 1998.
Selling, general and administrative expenses increased by $7.2 million, or
27% to $33.8 million during 1999. The increase is attributable to increased
personnel and other administrative and selling expenses associated with the
increase in operating activity in the Company's rentals business segments, as
described above.
Depreciation and amortization expense increased by $0.2 million, or 1%
during 1999 to $37.3 million. The increase in depreciation on the additions to
the rental fleet was offset by the decrease in depreciation as a result of the
equipment leases entered into in July 1998 and June 1999.
Interest expense decreased by $2.9 million, or 25% during 1999 to $8.8
million. The decrease in interest expense was due in part to utilization of
proceeds from the equipment lease which was used to reduce indebtedness under
the Bank Credit Agreement and the capitalization of interest expense on assets
that are under construction.
The Company incurred compression equipment lease expense of $22.1 million
during 1999 and $6.2 million during 1998. As a result of the Equipment Leases,
the Company expects to incur annual operating leasing expense of approximately
$30 million.
Income Taxes
The provision for income taxes increased by $3.8 million, or 20%, to $23.1
million during 1999 from $19.3 million during 1998. The increase resulted
primarily from the corresponding increase in income before taxes. The Company's
effective income tax rate was approximately 36.4% during 1999 and 38.8% during
1998. The decrease in average effective income rates is due to expected
benefits from a foreign sales corporation established in 1998.
Net Income and Earnings Per Share
Net income increased $10.1 million, or 33%, to $40.4 million for 1999 from
$30.4 million in 1998 for the reasons discussed above.
7
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Revenues from rentals increased by $46.9 million, or 47% to $147.6 million
due to growth in the rental fleet. At December 31, 1998 the compressor rental
fleet consisted of approximately 1,067,000 horsepower, a 37% increase over the
781,000 horsepower in the rental fleet at December 31, 1997. Domestically, the
rental fleet increased by 224,000 horsepower, or 34%, during 1998 and
internationally by 61,000 horsepower, or 54%. Revenue from parts and service
increased by $13.6 million, or 133% to $23.9 million as a result of increased
marketing focus on parts and services and the increase in growth in the rental
fleet. Revenues from compressor fabrication amounted to $67.5 million,
increasing by 36% over 1997. An aggregate of 113,000 horsepower was sold during
1998. In addition, 88,000 horsepower was fabricated and placed in the rental
fleet during 1998. Revenues from the fabrication of production equipment
remained relatively unchanged with an increase of $0.4 million from 1997, or 1%
to $37.5 million during 1998. The change in 1998 production equipment revenue
was negligible as a result of declining well completions.
Expenses
Operating expenses of the rentals segments increased by $14.3 million, or
41% to $49.4 million during 1998. The gross profit percentage from rentals
increased to 67% during 1998 from 65% in 1997. Operating expenses of parts and
service increased $11.0 million, or 173% to $17.3 million during 1998, which
relates to the 133% increase in parts and service revenue. The gross profit
percentage from parts and service decreased to 27% during 1998 from 38% in
1997. Operating expenses of compressor fabrication increased by $16.5 million,
or 40% to $58.1 million, which relates to the 36% increase in compression
fabrication revenue achieved during 1998. In addition, the gross profit margin
on compression fabrication decreased to 14% during 1998, from 16% during 1997.
Production equipment fabrication operating expenses decreased by $0.6 million,
or 2%, during 1998 to $25.8 million. The decrease in operating expenses is
reflective of the corresponding change in production equipment fabrication
revenues during 1998. The gross profit margin attributable to production
equipment fabrication increased to 31% during 1998, up from 29% during 1997.
Selling, general and administrative expenses increased by $5.1 million, or
24% to $26.6 million during 1998. The increase is attributable to increased
personnel and other administrative and selling expenses associated with the
increase in operating activity in the Company's rentals and compression
fabrication operating segments as well as increased administrative costs
relating to being a public reporting entity. Depreciation and amortization
expense increased by $8.7 million, or 31% during 1998 to $37.1 million as the
Company continued to expand its rental fleet with capital expenditures and net
business acquisitions that amounted to approximately $212.0 million. In
addition, the company sold certain compression equipment with a book value of
approximately $158.0 million in July, 1998 under a sale and lease back
arrangement. See "LIQUIDITY AND CAPITAL RESOURCES" for a description of the
Equipment Lease. Consequently, the Company incurred compression equipment lease
expense of $6.2 million during 1998. As a result of the Equipment Lease, the
Company expects to incur annual operating lease expense of approximately $14
million. Interest expense increased by $1.0 million, or 9% during 1998 to $11.7
million.
Income Taxes
The Company's effective income tax rate was approximately 39% during 1998
and during 1997. Accordingly, the provision for income taxes increased by $8.2
million, or 74%, during 1998 to $19.3 million as a result of income before
income taxes increasing by 73% during 1998 over 1997.
Net Income and Earnings Per Share
Net income increased $12.8 million, or 72%, to $30.4 million for 1998 from
$17.6 million in 1997 for the reasons discussed above. Weighted average shares
outstanding was affected by the additional shares issued in conjunction with
the Company's initial public offering which were outstanding for all of 1998.
8
LIQUIDITY AND CAPITAL RESOURCES
In June 1999 and in July 1998, the Company completed two individual $200
million sale and lease back transactions of certain compression equipment. The
transactions are recorded as a sale and lease back of the equipment and are
recorded as operating leases. Under both agreements, the equipment was sold and
leased back by the Company for a 5 year period and will continue to be deployed
by the Company under its normal operating procedures. At any time, the Company
has options to repurchase the equipment at fair market value. The Company has
substantial residual value guarantees under the agreements (approximately $333
million for both transactions) that are due upon termination of the leases and
which may be satisfied by a cash payment or the exercise of the Company's
purchase options. The equipment sold in the June 1999 transaction had a book
value of approximately $162 million and resulted in a gain of approximately $38
million. The equipment sold in the July 1998 transaction had a book value of
$158 million and resulted in a gain of approximately $42 million. Both gains
are deferred until the end of the respective lease terms.
In December 1999, the Company issued $86.3 million of 7.25% Convertible
Preferred Securities through Hanover Compressor Capital Trust, a Delaware
business trust and subsidiary of the Company. The Convertible Preferred
Securities have a liquidation amount of $50 per unit. The Convertible Preferred
Securities mature in 30 years but may be redeemed partially or in total any
time on or after December 20, 2002.
The Company's cash balance amounted to $5.8 million at December 31, 1999
compared to $11.5 million at December 31, 1998. Primary sources of cash during
1999 were cash provided by internal operations of $68.2 million, net proceeds
of $200 million from the sale of compression equipment under the Equipment
Lease and net proceeds of $82.9 million from the private offering of the
Convertible Preferred Securities. Principal uses of cash during the year ended
December 31, 1999 were capital expenditures of $282.9 million, business
combinations and investments in unconsolidated entities of $40.2 million and
$72.8 million repayment of long-term debt.
Total current assets increased from $165.1 million at December 31, 1998 to
$192.5 million at December 31, 1999 primarily as a result of increases in
accounts receivable and inventories. Accounts receivable at December 31, 1999
increased by $23.5 million to $93.7 million. The increase corresponds with 18%
increase in total revenue of $94.3 million realized by the Company during the
three months ended December 31, 1999 compared to $79.8 million during the three
months ended December 31, 1998. In addition, inventories increased by $3.5
million to $66.5 million at December 31, 1999. The increase in inventories
reflects increases in parts and supplies, work in progress and finished goods
as the level of activity in the Company's domestic and international rentals
increased over 1998. Working capital at December 31, 1999 was also affected by
an $32.8 million increase in total current liabilities at December 31, 1999 to
$84.6 million. The 63% increase in total current liabilities results largely
from the increase in vendor accounts payable caused by the expansion of the
Company's operating activities and also due to the Subordinated Notes in the
aggregate principal amount of $15.4 million becoming due on December 31, 2000.
The amounts invested in property, plant and equipment and business
combinations during 1999 was $318.3 million which resulted in the addition of
approximately 391,000 horsepower to the rental fleet. At December 31, 1999, the
rental fleet consisted of 1,181,000 horsepower domestically and 277,000 in the
international rental fleet. Current plans are to spend in excess of $250
million during 2000, exclusive of any major acquisition, in continued expansion
of the rental fleet. Historically, the Company has funded capital expenditures
with a combination of internally generated cash flow, borrowings under the
revolving credit facility, lease transactions and raising additional equity. As
of December 31, 1999 the Company had approximately $138 million of credit
capacity remaining on its $200 million Bank Credit Agreement (7.7% rate at
December 31, 1999). In March 2000, the Company finalized a third sale and lease
back transaction. Under the agreement, the Company received $100 million
proceeds from the sale of the compression equipment at closing and may sell an
additional $100 million of equipment to the Trust during the next twelve
months. The equipment sold will be leased back by the Company for a five-year
period and will continue to be deployed by
9
the Company under its normal operating procedures. Hanover has the option to
repurchase the equipment from the Trust at any time. The Company feels it has
adequate capital resources to fund its estimated level of capital expenditures
for the year 2000.
Impact of Year 2000
The Company did not experience any material problems during the rollover to
the year 2000 that affected operations and does not anticipate any year 2000
compliance problems in the future. The Company completed its year 2000
readiness in conjunction with normal expansion and upgrades of its computer
systems and hardware. The costs related to the year 2000 were not material to
the Company's operating results, cash flows or financial position.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that, upon
adoption, all derivative instruments (including certain derivative instruments
embedded in other contracts) be recognized in the balance sheet at fair value,
and that changes in such fair values be recognized in earnings unless specific
hedging criteria are met. Changes in the values of derivatives that meet these
hedging criteria will ultimately offset related earnings effects of the hedged
item pending recognition in earnings. SFAS 133 is effective for the Company
beginning in 2001. The impact of SFAS 133 on the Company's financial
statements will depend on a variety of factors, including future interpretive
guidance from the FASB, the future level of actual foreign currency
transactions, the extent of our hedging activities, the type of hedging
instruments used and the effectiveness of such instruments. However management
does not believe the effect of adoption will have a material effect on the
Company's results of operations, cash flows or financial position.
Item 8. Financial Statements and Supplementary Data
In this report, the consolidated financial statements and supplementary
data appearing on pages F-1 through F-22 are incorporated in this item 8 by
reference. See Index to the Financial Statements at 19.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS--The financial statements listed in the
accompanying Index to Consolidated Financial Statements are filed as
part of this annual report and such Index to Consolidated Financial
Statements is incorporated herein by reference.
2. FINANCIAL STATEMENT SCHEDULES--All schedules are omitted because the
required information is inapplicable or the information is presented
in the Consolidated Financial Statements or related notes.
3. EXHIBITS--The exhibits listed on the accompanying Index to Exhibits
are filed as part of this annual report and such Index to Exhibits
is incorporated herein by reference.
10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Hanover Compressor Company
/s/ Michael J. McGhan
By: _________________________________
Michael J. McGhan
President and Chief Executive
Officer
Date: February 2, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael J. McGhan President and Chief February 2, 2001
______________________________________ Executive Officer
Michael J. McGhan (Principal Executive
Officer and Director)
/s/ William S. Goldberg Chief Financial Officer February 2, 2001
______________________________________ and Treasurer (Principal
William S. Goldberg Financial and Accounting
Officer)
/s/ Ted Collins, Jr. Director February 2, 2001
______________________________________
Ted Collins, Jr.
/s/ Robert R. Furgason Director February 2, 2001
______________________________________
Robert R. Furgason
/s/ Melvyn N. Klein Director February 2, 2001
______________________________________
Melvyn N. Klein
/s/ Michael A. O'Connor Director February 2, 2001
______________________________________
Michael A. O'Connor
/s/ Alvin V. Shoemaker Director February 2, 2001
______________________________________
Alvin V. Shoemaker
11
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of the Hanover Compressor Holding Co.(9)
3.2 Certificate of Amendment of Certificate of Incorporation of Hanover
Compressor Holding Co. dated December 9, 1999.(9)
3.3 By-laws of Hanover Compressor Company(9)
4.1 Third Amended and Restated Registration Rights Agreement, dated as of
December 5, 1995, among the Company, GKH Partners, L.P., GKH
Investments, L.P., Astra Resources, Inc. and other stockholders of the
Company party thereto (1) [4.1]
4.10 Form of Warrant Agreement (1) [4.10]
4.11 Specimen Stock Certificate (1) [4.11]
4.12 Form of Second Amended and Restated Stockholders Agreement of Hanover
Compressor Company dated as of June, 1997 (1) [4.12]
4.13 Form of Amended and Restated Stockholders Agreement (JEDI) dated as of
May, 1997 (1) [4.13]
4.14 Form of Amended and Restated Stockholders Agreement (Westar Capital,
Inc.) dated as of May, 1997 (1) [4.14]
4.15 Form of Amended and Restated Stockholders Agreement (HEHC) dated as of
May, 1997 (1) [4.15]
10.1 Credit Agreement, dated as of December 15, 1997, by and between the
Company, The Chase Manhattan Bank, a New York banking corporation as
Administrative Agent and several banks and other financial
institutions that are parties thereto (2) [10.30]
10.2 Subsidiaries' Guarantee, dated as of December 15, 1997, by certain of
the Company's subsidiaries in favor of The Chase Manhattan Bank, as
agent (2) [10.31]
10.3 Management Fee Letter, dated November 14, 1995 between GKH Partners,
L.P. and the
Company (1) [10.3]
10.4 Hanover Compressor Company Senior Executive Stock Option Plan (1)
[10.4]
10.5 1993 Hanover Compressor Company Management Stock Option Plan (1)
[10.5]
10.6 Hanover Compressor Company Incentive Option Plan (1) [10.6]
10.7 Amendment and Restatement of Hanover Compressor Company Incentive
Option Plan (1) [10.7]
10.8 Hanover Compressor Company 1995 Employee Stock Option Plan (1) [10.8]
10.9 Hanover Compressor Company 1995 Management Stock Option Plan (1)
[10.9]
10.10 Hanover Compressor Company 1996 Employee Stock Option Plan (1) [10.10]
10.11 OEM Sales and Purchase Agreement, between Hanover Compressor Company
and the Waukesha Engine Division of Dresser Industries, Inc. (1)
[10.11]
10.12 Distribution Agreement, dated February 23, 1995, between Ariel
Corporation and Maintech Enterprises, Inc. (1) [10.12]
10.13 Exclusive Distribution Agreement, dated as of February 23, 1995 by and
between Hanover/Smith, Inc. and Uniglam Resources, Ltd. (1) [10.13]
E-1
Exhibit
Number Description
------- -----------
10.14 Lease Agreement, dated December 4, 1990, between Hanover Compressor
Company and Ricardo J. Guerra and Luis J. Guerra as amended (1)
[10.15]
10.15 Indemnification Agreement, dated as of December 5, 1995, between
Hanover Compressor Company and Western Resources (formerly Astra
Resources, Inc.) (1) [10.18]
10.16 Put Agreement, dated December 5th, 1995, by and between Western
Resources, Inc. (formerly Astra Resources, Inc.) an Hanover Compressor
Company and Hanover Acquisition Corporation (formerly Astra Resources
Compression, Inc.) (1) [10.19]
10.17 Exchange and Subordinated Loan Agreement dated as of December 23,
1996, among the Company and GKH Partners, L.P., GK December 23, 1996,
among the Company and GKH Partners, L.P., GK Investments, L.P., IPP95,
L.P., Hanna Investment Group, Ott Candies, Inc., Phyllis S. Hojel, Ted
Collins, Jr. and L.O. Ward (1) [10.20]
10.18 1997 Stock Option Plan, as amended (1) [10.23]
10.19 1997 Stock Purchase Plan (1) [10.24]
10.20 Exchange Agreement by and between Hanover Compressor Company and JEDI,
dated December 23, 1996 (1) [10.27]
10.21 Lease dated as of July 20, 1998 between Hanover Equipment Trust 1998A
(the "Trust") and the Company. (3) [10.1]
10.22 Guarantee dated as of July 22, 1998 and made by the Company,
Hanover/Smith, Inc., Hanover Maintech, Inc. and Hanover Land Company.
(3) [10.2]
10.23 Lessee's and Guarantor's Consent dated as of July 20, 1998 made by the
Company, Hanover/Smith, Inc., Hanover Maintech, Inc. and Hanover Land
Company. (3) [10.3]
10.24 Participation Agreement dated as of July 22, 1998 among the Company,
the Trust, The Chase Manhattan Bank, as agent, Societe General &
Financial Corporation, and Wilmington Trust Company. (3) [10.4]
10.25 Security Agreement dated as of July 22, 1998 made by the Trust in
favor of The Chase Manhattan Bank, as agent, with the Company joining
by Joinder of Lessee. (3) [10.5]
10.26 Lease Supplement No. 1 dated as of July 22, 1998 between the Trust and
the Company. (3) [10.6]
10.27 1998 Stock Option Plan (4) [10.7]
10.28 December 10, 1998 Stock Option Plan (5)
10.29 1999 Stock Option Plan (5)
10.30 1998 Amendments to Credit Agreement, dated as of December 15, 1997,
with the Chase Manhattan Bank, a New York banking corporation as
Administrative Agent and several banks and other financial
institutions that are parties thereto (7)[10.35]
10.31 Lease dated as of June 15, 1999 between Hanover Equipment Trust 1999
and the Company. (8)[10.36]
10.32 Guarantee dated as of June 15, 1999 and made by the Company,
Hanover/Smith, Inc., Hanover Maintech, Inc. and Hanover Land Company.
(8) [10.37]
10.33 Participation Agreement dated as of June 15, 1999 among the Company,
the Trust, Societe Generale Financial Corporation and FTBC Leasing
Corp., The Chase Manhattan Bank, as agent, and Wilmington Trust
Company. (8) [10.38]
10.34 Security Agreement dated as of June 15, 1999 made by the Trust in
favor The Chase Manhattan Bank, as agent. (8) [10.39]
10.35 Lease supplement No. 1 dated June 15, 1999 between the Trust and the
Company. (8) [10.40]
10.36 Lessee's and Guarantor's Consent dated as of June 15, 1999 made by the
Company, Hanover/Smith, Inc. Hanover Maintech, Inc. and Hanover Land
Company. (8) [10.41]
E-2
Exhibit
Number Description
------- -----------
10.37 Amended and Restated Declaration of Trust of Hanover Compressor
Capital Trust, dated as of December 15, 1999, among Hanover Compressor
Company, as sponsor, Wilmington Trust Company, as property trustee,
and Richard S. Meller, William S. Goldberg and Curtis A. Bedrich, as
administrative trustees. (6)[4.5]
10.38 Indenture for the Convertible Junior Subordinated Indentures due 2029,
dated as of December 15, 1999 among Hanover Compressor Company, as
issuer, and Wilmington Trust Company, as trustee. (6)[4.6]
10.39 Form of Hanover Compressor Capital Trust 7 1/4% Convertible Preferred
Securities. (6)[4.8]
10.40 Form of Hanover Compressor Company Convertible Subordinated Junior
Debentures due 2029. (6)[4.9]
10.41 Preferred Securities Guarantee, dated as of December 15, 1999, between
Hanover Compressor Company, as guarantor, and Wilmington Trust
Company, as guarantee trustee. (6)[4.10]
10.42 Common Securities Guarantee dated as of December 15, 1999, by Hanover
Compressor Company, as guarantor. (6)[4.11]
10.43 Lease dated as of March 13, 2000 between Hanover Equipment Trust 2000A
and the Hanover Compression Inc.
10.44 Guarantee dated as of March 13, 2000 and made by the Company, Hanover
Compression Inc. and certain of their Subsidiaries.
10.45 Participation Agreement dated as of March 13, 2000 among the Company,
the Hanover Equipment Trust 2000A and various banks.
10.46 Security Agreement dated as of March 13, 2000 made by the Trust in
favor The Chase Manhattan Bank, as agent.
10.47 Assignment of leases, rents and Guarantee from Hanover Equipment Trust
2000A to The Chase Manhattan Bank dated as of March 13, 2000.
12.1 Computation of ratio of earnings to fixed charges*
21.1 List of Subsidiaries(9)
23.1 Consent of PricewaterhouseCoopers LLP*
27.1 Financial Data Schedule*
- --------
(1) Such exhibit previously filed as an exhibit to the registration Statement
(File No. 333-27953) on Form S-1, as amended, under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
(2) Such exhibit previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the Year Ended 1997 under the exhibit number indicated in
brackets [ ], and is incorporated by reference.
(3) Such exhibit previously filed as an exhibit to the Company's Current Report
on Form 8-K dated July 22, 1998, under the exhibit number indicated in
brackets [ ], and is incorporated by reference.
(4) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Third Quarter of 1998, under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
(5) Compensatory plan or arrangement required to be filed.
(6) Such exhibit previously filed as an exhibit to the Registration Statement
(File No. 333-30344) on Form S-3 under the exhibit number indicated in
brackets [ ], and is incorporated by reference.
(7) Such exhibit previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the Year Ended 1998 under the exhibit number indicated in
brackets [ ], and is incorporated by reference.
(8) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Second Quarter of 1999, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
(9) Such exhibit previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the Year Ended 1999 and is incorporated by reference.
*Filed herewith.
E-3
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.................................... F-1
Consolidated Balance Sheet........................................... F-2
Consolidated Statement of Income and Comprehensive Income............ F-3
Consolidated Statement of Cash Flows................................. F-4,F-5
Consolidated Statement of Common Stockholders' Equity................ F-6
Notes to Consolidated Financial Statements........................... F-7
Selected Quarterly Financial Data (unaudited)........................ F-22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Hanover Compressor Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and comprehensive income, of cash flows and
of common stockholders' equity present fairly, in all material respects, the
financial position of Hanover Compressor Company and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 18, the December 31, 1997 consolidated financial
statements have been restated to record a liability to a stockholder.
PricewaterhouseCoopers LLP
Houston, Texas
March 8, 2000, except as to
the stock split described in
Note 16 which is as of
June 14, 2000, and except for
Note 18 as to which the date
is February 1, 2001
F-1
HANOVER COMPRESSOR COMPANY
Consolidated Balance Sheet
December 31, 1999 and 1998
Restated
(See Note 18)
------------------
1999 1998
-------- --------
(in thousands of
dollars, except
for par value and
share amounts)
ASSETS
Current assets:
Cash and cash equivalents................................ $ 5,756 $ 11,503
Accounts receivable, net................................. 93,715 70,205
Inventory................................................ 66,562 63,044
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 4,782 7,871
Prepaid taxes............................................ 16,430 9,466
Other current assets..................................... 5,287 2,967
-------- --------
Total current assets................................... 192,532 165,056
-------- --------
Property, plant and equipment:
Compression equipment and facilities..................... 520,403 422,896
Land and buildings....................................... 19,000 15,044
Transportation and shop equipment........................ 27,616 21,667
Other.................................................... 10,029 11,119
-------- --------
577,048 470,726
Accumulated depreciation................................. (79,583) (78,228)
-------- --------
Net property, plant and equipment...................... 497,465 392,498
-------- --------
Intangible and other assets................................ 66,513 57,036
-------- --------
$756,510 $614,590
======== ========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt..................... $ 15,967 $ 444
Accounts payable, trade.................................. 32,308 23,361
Accrued liabilities...................................... 22,065 17,599
Advance billings......................................... 13,328 9,694
Billings on uncompleted contracts in excess of costs and
estimated earnings...................................... 898 694
-------- --------
Total current liabilities.............................. 84,566 51,792
Long-term debt............................................. 69,681 156,943
Other liabilities.......................................... 82,566 44,875
Deferred income taxes...................................... 65,533 45,510
-------- --------
Total liabilities...................................... 302,346 299,120
-------- --------
Mandatorily redeemable convertible preferred securities.... 86,250
Commitments and contingencies (Note 15)
Common stockholders' equity:
Common stock, $.001 par value; 200 million shares
authorized; 57,505,874 and 57,180,944 shares issued and
outstanding, respectively............................... 58 57
Additional paid-in capital............................... 272,944 268,977
Notes receivable--employee stockholders.................. (3,387) (10,146)
Accumulated other comprehensive income................... (311) 152
Retained earnings........................................ 100,196 59,755
Treasury stock--167,394 and 351,094 common shares,
respectively, at cost................................... (1,586) (3,325)
-------- --------
Total common stockholders' equity...................... 367,914 315,470
-------- --------
$756,510 $614,590
======== ========
The accompanying notes are an integral part of these financial statements.
F-2
HANOVER COMPRESSOR COMPANY
Consolidated Statement of Income and Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
-------- -------- -------------
Restated
(See Note 18)
(in thousands, except
per share amounts)
Revenues:
Rentals..................................... $192,655 $147,609 $100,685
Parts and service........................... 34,461 23,870 10,254
Compressor fabrication...................... 52,531 67,453 49,764
Production equipment fabrication............ 28,037 37,466 37,052
Gain on sale of property, plant and
equipment.................................. 5,927 2,552 148
Other....................................... 3,417 3,007 895
-------- -------- --------
317,028 281,957 198,798
-------- -------- --------
Expenses:
Rentals..................................... 64,949 49,386 35,113
Parts and service........................... 21,724 17,341 6,360
Compressor fabrication...................... 43,663 58,144 41,584
Production equipment fabrication............ 20,833 25,781 26,375
Selling, general and administrative......... 33,782 26,626 21,514
Depreciation and amortization............... 37,337 37,154 28,439
Leasing expense............................. 22,090 6,173
Interest expense............................ 8,786 11,716 10,728
Distributions on mandatorily redeemable
convertible preferred securities........... 278
-------- -------- --------
253,442 232,321 170,113
-------- -------- --------
Income before income taxes.................... 63,586 49,636 28,685
Provision for income taxes.................... 23,145 19,259 11,043
-------- -------- --------
Net income.................................... 40,441 30,377 17,642
-------- -------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment..... (463) 152
-------- -------- --------
Comprehensive income.......................... $ 39,978 $ 30,529 $ 17,642
======== ======== ========
Net income available to common stockholders... $ 40,441 $ 30,377 $ 17,642
======== ======== ========
Weighted average common and common equivalent
shares outstanding
Basic....................................... 57,048 56,936 51,246
======== ======== ========
Diluted..................................... 61,054 60,182 54,690
======== ======== ========
Earnings per common share
Basic....................................... $ 0.71 $ 0.53 $ 0.34
======== ======== ========
Diluted..................................... $ 0.66 $ 0.50 $ 0.32
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-3
HANOVER COMPRESSOR COMPANY
Consolidated Statement of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
-------- -------- -------------
Restated
(See Note 18)
(in thousands of dollars)
Cash flows from operating activities:
Net income.................................. $ 40,441 $ 30,377 $ 17,642
Adjustments:
Depreciation and amortization.............. 37,337 37,154 28,439
Amortization of debt issuance costs and
debt discount............................. 884 852 892
Bad debt expense........................... 1,475 349 594
Gain on sale of property, plant and
equipment................................. (5,927) (2,552) (148)
Equity in income of nonconsolidated
affiliates................................ (1,188) (1,369) 206
Deferred income taxes...................... 11,396 12,358 5,962
Changes in assets and liabilities, net of
effects of business combinations:
Accounts receivable....................... (23,974) (28,337) (13,604)
Inventory................................. (1,918) (24,169) (14,726)
Costs and estimated earnings versus
billings on uncompleted contracts........ 3,293 (3,000) 2,929
Accounts payable and other liabilities.... 11,969 14,358 7,728
Advance billings.......................... 3,634 2,942 51
Other..................................... (9,200) (7,816) (3,746)
-------- -------- --------
Net cash provided by operating
activities.............................. 68,222 31,147 32,219
-------- -------- --------
Cash flows from investing activities:
Capital expenditures........................ (282,940) (169,498) (150,995)
Proceeds from sale of property, plant and
equipment.................................. 223,037 208,644 2,887
Cash used for business acquisitions, net.... (35,311) (42,581) (6,287)
Cash returned from unconsolidated
subsidiary................................. 8,000
Cash used to acquire investments in
unconsolidated subsidiaries................ (4,900) (11,264) (10,095)
-------- -------- --------
Net cash used in investing activities.... (92,114) (14,699) (164,490)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) on revolving
credit facility............................ (64,400) (4,700) 63,681
Proceeds from issuance of long-term debt.... 2,825 5,000
Issuance of common stock, net............... 92,088
Equity issuance costs....................... (687)
Proceeds from mandatorily redeemable
convertible preferred securities, net...... 82,940
Proceeds from warrant conversions and stock
option exercises........................... 545 121
Repayment of long-term debt................. (8,357) (2,226) (31,757)
Purchase of treasury stock.................. (5,950)
Repayments of shareholder notes............. 7,490 602 1,185
-------- -------- --------
Net cash provided by (used in) financing
activities.............................. 18,218 (9,328) 129,510
-------- -------- --------
Effect of exchange rate changes on cash and
equivalents................................. (73) (178)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. (5,747) 6,942 (2,761)
Cash and cash equivalents at beginning of
year........................................ 11,503 4,561 7,322
-------- -------- --------
Cash and cash equivalents at end of year..... $ 5,756 $ 11,503 $ 4,561
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-4
HANOVER COMPRESSOR COMPANY
Consolidated Statement of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------- -------- -------
(in thousands of
dollars)
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized amounts......... $ 7,897 $ 10,992 $10,069
======= ======== =======
Income taxes paid................................. $12,065 $ 2,249 $ 5,857
======= ======== =======
Supplemental disclosure of noncash transactions:
Debt issued for property, plant and equipment..... $ 379
=======
Property sold in exchange for note receivable..... $ 3,538 $ 1,500
======= ========
Common stock issued in exchange for notes
receivable....................................... $ 731 $ 5,163
======= =======
Acquisitions of businesses:
Property, plant and equipment acquired............ $39,105 $ 31,015
======= ========
Other noncash assets acquired..................... $ 9,711 $ 25,000
======= ========
Liabilities assumed............................... $(1,578) $ (1,261)
======= ========
Deferred taxes.................................... $(8,627) $(12,174)
======= ========
Common stock issued............................... $(3,300) $ (3,300)
======= ========
The accompanying notes are an integral part of these financial statements.
F-5
HANOVER COMPRESSOR COMPANY
Consolidated Statement of Common Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
(in thousands of dollars, except share data)
Accumulated Notes
Common Stock Additional Other Receivable--
----------------- Paid-in Comprehensive Treasury Employee Retained
Shares Amount Capital Income Stock Stockholders Earnings
---------- ------ ---------- ------------- -------- ------------ -------------
Restated
(See Note 18)
Balance at January 1,
1997................... 45,877,082 $46 $171,319 $ (218) $(6,770) $ 11,736
Issuance of common
stock.................. 10,327,686 10 92,078
Issuance of common stock
to employees........... 529,570 1 5,162 (5,163)
Repayment of employee
shareholder notes...... 1,185
Net income.............. 17,642
---------- --- -------- ------- ------- --------
Balance at December 31,
1997................... 56,734,338 57 268,559 (218) (10,748) 29,378
Conversion of warrants.. 396,960
Exercise of stock
options................ 49,646 120
Other comprehensive
income................. $ 152
Purchase of 588,400
treasury shares, at
cost................... (5,950)
Issuance of 300,000
treasury shares at
$11.00 per share....... 457 2,843
Repayment of employee
shareholder notes...... 602
Other................... (159)
Net income.............. 30,377
---------- --- -------- ----- ------- ------- --------
Balance at December 31,
1998................... 57,180,944 57 268,977 152 (3,325) (10,146) 59,755
Conversion of warrants.. 52,678 1
Exercise of stock
options................ 197,352 545
Other comprehensive
loss................... (463)
Issuance of common stock
to employees........... 74,900 731 (731)
Issuance of 183,700
treasury shares at
$17.96 per share....... 1,561 1,739
Repayment of employee
shareholder notes...... 7,490
Income tax benefit from
stock options
exercised.............. 1,176
Other................... (46)
Net income.............. 40,441
---------- --- -------- ----- ------- ------- --------
Balance at December 31,
1999................... 57,505,874 $58 $272,944 $(311) $(1,586) $(3,387) $100,196
========== === ======== ===== ======= ======= ========
The accompanying notes are an integral part of these financial statements.
F-6
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
1. The Company, Business and Significant Accounting Policies
Hanover Compressor Company and its subsidiaries ("Hanover" or the "Company")
is a leading provider of a broad array of natural gas compression rental,
operations, parts and maintenance services in the United States and select
international markets. Hanover's compression services are complemented by its
compressor and oil and gas production equipment fabrication operations. Hanover
is a Delaware corporation originally formed on October 17, 1990. In December
1999, the Company adopted a holding company structure and merged into the new
holding company that assumed the name of Hanover Compressor Company. The
charter and by-laws of the new holding company are substantially the same as
the old Company.
On June 6, 1997, the Board of Directors approved an increase of authorized
shares of preferred stock and common stock to 3,000,000 and 100,000,000 shares,
respectively. In addition, the Board of Directors approved a 158-for-1 stock
split of the Company's common stock. The stock split has been effected in the
form of a stock dividend. All share and per share information included herein
reflects the stock split.
On June 30, 1997, Hanover issued 10,317,382 shares of common stock for cash
of $92,020,000 (net of approximately $1,771,000 of equity issuance costs) in
connection with the Company's initial public offering (the Offering).
Principles of Consolidation
The accompanying consolidated financial statements include Hanover and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets, liabilities, revenues
and expenses, as well as the disclosures of contingent assets and liabilities.
Because of the inherent uncertainties in this process, actual future results
could differ from those expected at the reporting date. Management believes
that the estimates are reasonable.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Revenue Recognition
Revenue from equipment rentals is recorded when earned over the period of
rental and maintenance contracts which generally range from one month to five
years. Parts and service revenue is recorded as products are delivered or
services are performed for the customer.
Compressor and production equipment fabrication revenue is recognized using
the percentage-of-completion method. The Company estimates percentage-of-
completion for compressor fabrication on a direct labor hour-to-total labor
hour basis. Production equipment fabrication percentage-of-completion is
estimated using the cost-to-total cost basis.
F-7
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents and accounts receivable.
The Company believes that the credit risk in temporary cash investments that
the Company has with financial institutions is minimal. Trade accounts
receivable are due from companies of varying size engaged principally in oil
and gas activities in the United States, Canada and South America. The Company
reviews the financial condition of customers prior to extending credit and
generally does not obtain collateral for receivables. Payment terms are on a
short-term basis and in accordance with industry standards. Trade accounts
receivable are recorded net of estimated doubtful accounts of $1,730,000 and
$1,212,000 at December 31, 1999 and 1998, respectively. The Company considers
this credit risk to be limited due to these companies financial resources.
Inventory
Inventory consists of parts used for fabrication or maintenance of natural
gas compression units and production equipment, and also includes compression
units and production equipment that are held for sale. Inventory is stated at
the lower of cost or market using the average-cost method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated using
the straight-line method over their estimated useful lives as follows:
Compression equipment and facilities........................ 4 to 25 years
Buildings................................................... 30 years
Transportation, shop equipment and other.................... 3 to 12 years
Major improvements that extend the useful life of an asset are capitalized.
Repairs and maintenance are expensed as incurred. When property, plant and
equipment is sold, retired or otherwise disposed of, the cost and related
accumulated depreciation are eliminated and the gain or loss is recognized.
Depreciation expense was $34,696,000, $35,768,000 and $27,789,000 in 1999, 1998
and 1997, respectively.
Assets under construction of $18,937,000 and $6,984,000 are included in
compression equipment at December 31, 1999 and 1998, respectively. Interest is
capitalized in connection with the compression equipment and facilities that
are constructed for the Company's use in its rental operations. The capitalized
interest is recorded as part of the assets to which it relates and is amortized
over the asset's estimated useful life. In 1999, $1,533,000 of interest cost
was capitalized. No interest was capitalized for 1998 and 1997.
Long-Lived Assets
The Company reviews for the impairment of long-lived assets, including
property, plant and equipment, and goodwill whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss exists when estimated undiscounted cash flows
expected to result from the use of the asset and its eventual disposition are
less than its carrying amount. The impairment loss recognized represents the
excess of the assets carrying value as compared to its estimated fair market
value.
Intangible and Other Assets
Investments in affiliated corporations in which the Company does not have a
controlling interest are accounted for using the equity method. The excess of
cost over net assets of acquired businesses is recorded as
F-8
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
goodwill and amortized on a straight-line basis over 15 years commencing on the
dates of the respective acquisitions. Accumulated amortization was $3,822,000
and $1,810,000 at December 31, 1999 and 1998, respectively.
Included in intangible and other assets are debt issuance costs, net of
accumulated amortization, totaling $1,099,000 and $1,186,000 at December 31,
1999 and 1998, respectively. Such costs are amortized over the period of the
respective debt agreements.
Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123 (FAS
123) "Accounting for Stock-Based Compensation," the Company measures
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed in APB Opinion No. 25 (APB 25), "Accounting
for Stock Issued to Employees," and has provided in Note 12, pro forma
disclosures of the effect on net income and earnings per share as if the fair
value-based method prescribed by FAS 123 had been applied in measuring
compensation expense.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, all expected future events are considered other than enactments
of changes in the tax law or rates.
Foreign Currency Translation
The financial statements of subsidiaries outside the U.S., except those
located in highly inflationary economies, are measured using the local currency
as the functional currency. Assets, including goodwill, and liabilities of
these subsidiaries are translated at the rates of exchange at the balance sheet
date. Income and expense items are translated at average monthly rates of
exchange. The resulting gains and losses from the translation of accounts are
included in accumulated other comprehensive income. For subsidiaries located in
highly inflationary economies, translation gains and losses are included in net
income. The resulting translation adjustment for the year ended December 31,
1997 was not significant.
Earnings Per Common Share
Basic earnings per common share is computed using the weighted average
number of shares outstanding for the period. Diluted earnings per common share
is computed using the weighted average number of shares outstanding adjusted
for the incremental shares attributed to outstanding options and warrants to
purchase common stock.
Included in diluted shares are common stock equivalents relating to options
of 3,296,000, 2,460,000 and 2,306,000 in 1999, 1998 and 1997, respectively, and
warrants of 712,000, 786,000 and 1,138,000 in 1999, 1998 and 1997,
respectively. The common stock equivalents excluded from the computation of
diluted earnings per share as the effect would be anti-dilutive were
approximately 212,000 and 292,000 in 1999 and 1998. No common stock equivalents
were anti-dilutive in 1997.
F-9
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Comprehensive Income
Components of comprehensive income are net income and all changes in equity
during a period except those resulting from transactions with owners.
Accumulated other comprehensive income consists of the foreign currency
translation adjustment.
Financial Instruments
The Company utilizes off-balance sheet derivative financial instruments with
the principal objective being to minimize the risks and/or costs associated
with financial and global operating activities by managing its exposure to
interest rate fluctuation on a portion of its variable rate debt and leasing
obligations. The Company does not utilize derivative financial instruments for
trading or other speculative purposes. The Company designates and assigns the
financial instruments as hedges of specific assets, liabilities or anticipated
transactions. The cash flow from hedges is classified in the Consolidated
Statements of Cash Flows under the same category as the cash flows from the
underlying assets, liabilities or anticipated transactions. The carrying
amounts reported in the balance sheet for all financial instruments approximate
fair value. See Notes 7 and 8.
Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 1999 financial statement classification. These
reclassifications have no impact on net income.
2. Business Combinations
Acquisitions were accounted for under the purchase method of accounting.
Results of operations of companies acquired are included from the dates of such
acquisitions. The Company allocates the cost of the acquired business to the
assets acquired and the liabilities assumed based upon fair value estimates
thereof. These estimates are revised during the allocation period as necessary
when information regarding contingencies becomes available to define and
quantify assets acquired and liabilities assumed. The allocation period varies
for each acquisition but does not exceed one year. To the extent contingencies
are resolved or settled during the allocation period, such items are included
in the revised purchase price allocation. After the allocation period, the
effect of changes in such contingencies is included in results of operations in
the periods the adjustments are determined. The Company's management does not
believe potential deviations between its fair value estimates and actual fair
values to be material.
Year Ended December 31, 1999
In July 1999, the Company purchased preferred stock and a purchase option
for the common stock of CDI Holdings, Inc. and its subsidiary Compressor
Dynamics, Inc. ("CDI"). In August 1999, the Company exercised its option to
purchase CDI. The total cost for CDI was approximately $18,525,000 in cash.
In August 1999, the Company purchased the stock of Victoria Compression
Services, Inc., Contract Engineering and Operating, Inc. and Unit Partners,
Inc. ("CEO") for approximately $16,786,000 in cash, 183,700 shares of the
Company's treasury stock valued at $3,300,000 and notes payable of
approximately $452,000.
Year Ended December 31, 1998
In June 1998, the Company purchased the stock of Arkoma Compression
Services, Inc. for approximately $17,245,000 in cash. In October 1998, the
Company purchased the stock of Eureka Energy Systems, Inc. for approximately
$25,335,000 in cash.
F-10
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
The pro forma information set forth below assumes acquisitions in 1999 and
1998 are accounted for had the purchases occurred at the beginning of 1998. The
pro forma information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would have
been achieved had the acquisitions been consummated at that time (in thousands,
except per share amounts):
Years Ended December 31,
---------------------------
1999 1998
------------ ------------
(unaudited) (unaudited)
Revenue..................................... $ 323,002 $ 308,870
Net income.................................. 40,412 31,391
Earnings per common share--basic............ $ 0.71 $ 0.55
Earnings per common share--diluted.......... $ 0.66 $ 0.52
Year Ended December 31, 1997
In September 1997, Hanover purchased Wagner Equipment, Inc. and Gas Tech
Compression Services, Inc. for approximately $6,287,000 in cash. Results of
operations for 1997 were not materially impacted by the transaction.
3. Inventory
Inventory consisted of the following amounts (in thousands):
December 31,
----------------
1999 1998
-------- -------
Parts and supplies....................................... $ 44,058 $32,808
Work in progress......................................... 18,677 19,962
Finished goods........................................... 3,827 10,274
-------- -------
$ 66,562 $63,044
======== =======
4. Compressor and Production Equipment Fabrication Contracts
Costs, estimated earnings and billings on uncompleted contracts are as
follows (in thousands):
December 31,
----------------
1999 1998
------- -------
Costs incurred on uncompleted contracts................. $11,041 $18,605
Estimated earnings...................................... 2,150 3,488
------- -------
13,191 22,093
Less--billings to date.................................. (9,307) (14,916)
------- -------
$ 3,884 $ 7,177
======= =======
Presented in the accompanying financial statements as follows (in
thousands):
December 31,
---------------
1999 1998
------- ------
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ $ 4,782 $7,871
Billings on uncompleted contracts in excess of costs
and estimated earnings............................... (898) (694)
------- ------
$ 3,884 $7,177
======= ======
F-11
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
5. Intangible and Other Assets
Intangible and other assets consisted of the following (in thousands)
December 31,
-----------------
1999 1998
-------- -------
Goodwill.............................................. $ 33,613 $26,686
Investments in unconsolidated subsidiaries............ 18,892 24,104
Deferred debt issuance and other transaction costs.... 10,317 4,957
Notes receivable...................................... 9,214 3,799
Other................................................. 1,862 3,237
-------- -------
73,898 62,783
Accumulated amortization.............................. (7,385) (5,747)
-------- -------
$ 66,513 $57,036
======== =======
Amortization of goodwill and other intangible assets totaled $2,641,000,
$1,386,000 and $650,000 in 1999, 1998 and 1997, respectively.
At December 31, 1999 and 1998, the Company's investments in unconsolidated
subsidiaries included a 35% interest in Collicutt Mechanical Services, Ltd.; a
35% interest in the Consortium Cosacol/Hanover (the "Consortium"); and a non-
controlling 60% interest in the Hanover/Enron Joint Venture. In September 1999,
the Company acquired a 20% interest in Meter Acquisition Company LP, LLLP for
approximately $2,200,000 and a non-controlling 52.5% interest in Hanover
Measurement Services Company, LP for approximately $2,700,000. The Company had
a 33% interest in a joint venture with Wartsila Diesel International Ltd., OY
that was dissolved in 1999. There were no distributions or dividends received
during the years ended December 31, 1998 and 1999. Equity in income of joint
ventures was $1,188,000 and $1,369,000 for 1999 and 1998, respectively and a
loss of $206,000 for 1997 and is included in other revenues.
In December 1998, the Company restructured its relationship in the
Consortium. The Company purchased all of the capitalized construction from the
Consortium for 300,000 shares of Hanover common stock valued at $3,300,000. The
capitalized construction was transferred to property, plant and equipment in
1999. In addition, the Company acquired a 10% interest in Cosacol for
$2,000,000 in cash.
In December 1998, the Company advanced $8,000,000 to Transportadora de Gas
del Sur S.A., an Argentina company for a 25% interest in a joint venture. In
1999, the Company withdrew from the joint venture and the $8,000,000 was
repaid.
In November 1997, Hanover acquired 35% of the common stock of Collicutt
Mechanical Services, Ltd. for approximately $5,608,000 in cash. The investment
is accounted for using the equity method of accounting. The excess of the
Company's investment over the underlying net equity of $703,000 is being
amortized on a straight-line basis over ten years and is included in other
assets at December 31, 1999 and 1998.
The notes receivable result primarily from customers for sales of equipment
or advances to other parties in the ordinary course of business. The notes vary
in length, are non-interest bearing or bear interest at rates ranging from
prime to 15% and are collateralized by equipment.
F-12
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
6. Accrued Liabilities
Accrued liabilities are comprised of the following (in thousands):
December 31,
---------------
1999 1998
------- -------
Accrued salaries and wages............................... $ 224 $ 1,055
Accrued bonuses.......................................... 1,669 1,539
Accrued income and other taxes........................... 8,033 6,105
Accrued leasing expense.................................. 3,496 2,336
Accrued other............................................ 8,643 6,564
------- -------
$22,065 $17,599
======= =======
7. Long-Term Debt
Long-term debt consisted of the following (in thousands):
December 31,
------------------
1999 1998
-------- --------
Revolving credit facility........................... $ 62,100 $126,500
Subordinated promissory notes, net of unamortized
discount of $289 and $855.......................... 15,364 22,648
Real estate mortgage, interest at 7.5%,
collateralized by certain land and buildings,
payable through 2002............................... 4,250 4,583
Other, interest at various rates, collateralized by
equipment and other assets, net of unamortized
discount........................................... 3,934 3,656
-------- --------
85,648 157,387
Less--current maturities............................ (15,967) (444)
-------- --------
$ 69,681 $156,943
======== ========
The Company's primary credit agreement provides for a $200,000,000 revolving
credit facility that matures on December 17, 2002. Advances bear interest at
the bank's prime or a negotiated rate (7.7% and 6.9% at December 31, 1999 and
1998, respectively). A commitment fee of 0.35% per annum on the average
available commitment is payable quarterly.
The credit agreement contains certain financial covenants and limitations
on, among other things, indebtedness, liens, leases and sales of assets. The
credit agreement also limits the payment of cash dividends on the Company's
common stock to 25% of net income for the respective period.
The subordinated promissory notes mature on December 31, 2000 and bear
interest at 7%, payable semi-annually.
Maturities of long-term debt at December 31, 1999 are (in thousands): 2000--
$15,967; 2001--$722; 2002--$66,093; 2003--$380; 2004--$328 and $2,158
thereafter.
In January 1998 and in connection with the revolving credit facility, the
Company entered into a two-year interest rate swap transaction to manage
interest rate exposure with a notional amount of $75,000,000 and a strike rate
of 5.43%. The differential paid or received on the swap transaction was
recognized as an adjustment to interest expense. This swap transaction was
cancelled in July 1998.
F-13
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
8. Leasing Transactions
In June 1999 and in July 1998, the Company completed two individual
$200,000,000 sale and lease back transactions of certain compression equipment.
The transactions are recorded as a sale and lease back of the equipment and are
recorded as operating leases. Under both agreements, the equipment was sold and
leased back by the Company for a 5 year period and will continue to be deployed
by the Company under its normal operating procedures. At any time, the Company
has options to repurchase the equipment at fair market value. The Company has
substantial residual value guarantees under the agreements (approximately
$333,000,000 for both transactions) that are due upon termination of the leases
and which may be satisfied by a cash payment or the exercise of the Company's
purchase options. The equipment sold in the June 1999 transaction had a book
value of approximately $162,014,000 and resulted in a gain of approximately
$37,986,000. The equipment sold in the July 1998 transaction had a book value
of $158,007,000 and resulted in a gain of approximately $41,993,000. Both gains
are deferred until the end of the respective lease terms. Should the Company
not exercise its purchase options under the agreements, the deferred gains will
be recognized to the extent they exceed any required payments under the
residual value guarantees and any other requirements under the agreements. The
Company incurred transaction costs of approximately $1,799,000 and $1,423,000
for the 1999 and 1998 transactions, respectively. These costs are included in
intangible and other assets and are being amortized over the respective lease
terms.
Both lease agreements call for variable quarterly rental payments that vary
with the London Interbank Offered Rate. The following provides future minimum
lease payments under the leasing arrangement exclusive of any guarantee
payments (in thousands): 2000--$30,300; 2001--$30,700; 2002--$30,700; 2003--
23,300; 2004--$7,900.
In July 1998 and in connection with the 1998 leasing transaction, the
Company entered into two-year swap transactions to manage lease rental exposure
with notional amounts of $75,000,000 and $125,000,000 and strike rates of 5.51%
and 5.56%, respectively. The differential paid or received on the swap
transactions is recognized as an adjustment to leasing expense. The
counterparty to this contractual arrangement is a major financial institution
with which the Company also has other financial relationships. The Company is
exposed to credit loss in the event of nonperformance by this counterparty.
However, the Company does not anticipate nonperformance by this party and no
material loss would be expected from their nonperformance. The fair market
value of these interest rate swaps at December 31, 1999 is approximately
$2,900,000 based on market quotes.
9. Income Taxes
The components of income before income taxes were as follows (in thousands):
Year ended December 31,
------------------------
1999 1998 1997
-------- ------- -------
Domestic......................................... $ 47,741 $39,160 $22,864
Foreign.......................................... 15,845 10,476 5,821
-------- ------- -------
$ 63,586 $49,636 $28,685
======== ======= =======
F-14
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
The provision for income taxes consisted of the following (in thousands):
Year Ended December 31,
-----------------------
1999 1998 1997
------- ------- -------
Current tax expense:
Federal........................................ $ 6,958 $ 3,421 $ 3,308
State.......................................... 1,412 1,741 1,281
Foreign........................................ 3,379 1,739 492
------- ------- -------
Total current................................ 11,749 6,901 5,081
------- ------- -------
Deferred tax expense:
Federal........................................ 10,670 10,312 4,272
State.......................................... 151 85 (23)
Foreign........................................ 575 1,961 1,713
------- ------- -------
Total deferred............................... 11,396 12,358 5,962
------- ------- -------
Total provision.................................. $23,145 $19,259 $11,043
======= ======= =======
The income tax expense for 1999, 1998 and 1997 resulted in effective tax
rates of 36.4%, 38.8% and 38.5%, respectively. The reasons for the differences
between these effective tax rates and the U.S. statutory rate of 35% are as
follows (in thousands):
Year Ended December 31,
------------------------
1999 1998 1997
------- ------- -------
Federal income tax at statutory rates......... $22,255 $17,373 $10,040
State income taxes, net of federal income tax
benefit...................................... 1,016 1,187 817
Foreign income taxes.......................... 211 33 226
Other, net.................................... (337) 666 (40)
------- ------- -------
$23,145 $19,259 $11,043
======= ======= =======
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
December 31,
-------------------
1999 1998
--------- --------
Deferred tax assets:
Net operating losses.............................. $ 7,490 $ 3,345
Alternative minimum tax carryforward.............. 19,005 13,276
Other............................................. 2,346 4,457
--------- --------
Gross deferred tax assets........................... 28,841 21,078
--------- --------
Deferred tax liabilities:
Property, plant and equipment..................... (82,764) (58,249)
Other............................................. (11,610) (8,339)
--------- --------
Gross deferred tax liabilities...................... (94,374) (66,588)
--------- --------
$(65,533) $(45,510)
========= ========
The Company has net operating loss carryforwards at December 31, 1999 of
$21,400,000 expiring in 2006 to 2018. In addition, the Company has an
alternative minimum tax credit carryforward of $19,005,000 that does not
expire.
F-15
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
In 1999, the company recorded approximately $8,627,000 additional deferred
income tax liability resulting from the CDI and CEO acquisitions. See Note 2
for a description of the transactions.
The Company has not recorded a deferred income tax liability for additional
income taxes that would result from the distribution of earnings of its foreign
subsidiaries if they were actually repatriated. The Company intends to
indefinitely reinvest the undistributed earnings of its foreign subsidiaries.
10. Mandatorily Redeemable Convertible Preferred Securities
In December 1999, the Company issued $86,250,000 of unsecured 7.25%
Manditorily Redeemable Convertible Preferred Securities (the "Convertible
Preferred Securities") through Hanover Compressor Capital Trust, a Delaware
business trust and wholly owned finance subsidiary of the Company. The
Convertible Preferred Securities have a liquidation amount of $50 per unit. The
Convertible Preferred Securities mature in 30 years but the Company may redeem
the Convertible Preferred Securities partially or in total any time on or after
December 20, 2002. The Convertible Preferred Securities also provide for annual
cash distributions at the rate of 7.25%, payable quarterly in arrears, however,
payments may be deferred up to 20 quarters subject to certain restrictions.
During 1999, the Company accrued financing costs of approximately $288,000
related to Convertible Preferred Securities. Each Convertible Preferred
Security is convertible into 2.7972 shares of Hanover common stock, subject to
adjustment for certain events. The Company has fully and unconditionally
guaranteed the Convertible Preferred Securities. The Company incurred
transaction costs of approximately $3,310,000 which are included in other
assets and will be amortized over the term of the Convertible Preferred
Securities.
11. Common Stockholders' Equity
Notes Receivable-Employee Stockholders
Under various stock purchase plans, the Company's employees are eligible to
purchase shares of Hanover stock at fair market value in exchange for cash
and/or notes receivable. The notes are collateralized by the common stock and
the general credit of the employee, bear interest at a prime rate, and are
generally payable on demand or at the end of a four-year period. The notes have
been recorded as a reduction of common stockholders' equity.
In addition and in connection with the Company's initial public offering,
the Company issued 529,570 shares of common stock to employees at the Offering
price of $9.75 in exchange for employee notes receivable.
Other
As of December 31, 1999, warrants to purchase approximately 688,000 shares
of common stock at $.01 per share were outstanding. The warrants expire in
August 2005.
During 1998, the Company initiated a stock buyback program authorized to
repurchase up to 900,000 of the Company's outstanding shares to assist with
future business acquisitions and for general corporate purposes. In 1998, the
Company repurchased 588,400 shares at an average price of $10.11.
In February 1997, Hanover issued 10,304 shares of common stock for cash to a
trust for the benefit of a member of the Company's outside legal counsel.
See Notes 1, 2, 5 and 12 for a description of other common stock
transactions.
F-16
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
12. Stock Options
The Company has employee stock option plans that provide for the granting of
options to purchase common shares. The options are generally issued at fair
market value on the date of grant and are exercisable over a ten-year period.
Vesting of stock options issued prior to June 1997 was accelerated as a result
of completion of the initial public offering. Accordingly, during 1997 the
Company recognized a charge of $269,000 related to unamortized compensation
expense on options issued at less than fair market value on the date of grant.
No compensation expense was recorded in 1999 and 1998.
Of the options granted in 1999 and 1998, 700,000 vest 100% on July 1, 2001
and 320,000 vested immediately. The remaining options granted to employees vest
over the following schedule, which may accelerate upon a change in the
Company's controlling ownership.
Year 1............................................................... 10%
Year 2............................................................... 30%
Year 3............................................................... 60%
Year 4............................................................... 100%
The following is a summary of stock option activity for the years ended
December 31, 1999, 1998 and 1997:
Weighted Average
Shares Price Per Share
--------- ----------------
Options outstanding, December 31, 1996........ 4,800,348 $ 2.56
Options granted............................. 2,030,646 9.75
Options canceled............................ (2,276) 5.28
Options exercised...........................
---------
Options outstanding, December 31, 1997........ 6,828,718 4.70
---------
Options granted............................. 2,095,366 10.13
Options canceled............................ (84,008) 10.61
Options exercised........................... (49,646) 2.40
---------
Options outstanding, December 31, 1998........ 8,790,430 5.95
---------
Options granted............................. 272,156 13.79
Options canceled............................ (68,230) 9.72
Options exercised........................... (197,352) 2.76
---------
Options outstanding, December 31, 1999........ 8,797,004 6.24
---------
Options Outstanding December 31, 1999
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 1999:
Options
Options Outstanding Exercisable
-------------------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Exercise Prices Shares Life in Years Price Shares Price
------------------------ --------- ------------- -------- --------- --------
$0.01--$2.30............... 3,321,806 3.5 $2.23 3,321,806 $2.23
$2.31--$3.48............... 842,842 4.0 2.67 842,842 2.67
$3.49--$5.06............... 256,686 5.8 4.77 256,686 4.77
$5.07--$6.96............... 139,880 6.7 5.94 139,880 5.94
$9.75--$12.50.............. 4,004,458 8.2 10.18 1,008,594 9.82
$12.51--$14.50............. 231,332 9.9 14.50 0 0.00
--------- ---------
8,797,004 5,569,808
========= =========
F-17
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
The weighted average fair value at date of grant for options where the
exercise price equals the market price of the stock on the grant date was
$6.10, $4.16 and $4.29, per option during 1999, 1998 and 1997, respectively.
The fair value of options at date of grant was estimated using the Black-
Scholes model with the following weighted average assumptions:
1999 1998 1997
------- ------- -------
Expected life.................................. 6 years 6 years 6 years
Interest rate.................................. 6.0% 4.8% 6.7%
Volatility..................................... 29.36% 32.6% 30%
Dividend yield................................. 0% 0% 0%
Stock-based compensation costs computed in accordance with FAS 123, would
have reduced net income by $2,194,000, $825,000 and $842,000 in 1999, 1998 and
1997, respectively. The pro forma impact on net income would have reduced basic
and diluted earnings per share by $.04 in 1999 and $.02 per share in 1998 and
1997. The pro forma effect on net income for 1999, 1998 and 1997 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
13. Benefit Plans
The Company's 401(k) retirement plan provides for optional employee
contributions up to the IRS limitation and discretionary employer matching
contributions. The Company made matching contributions of $399,000 and $273,000
during the years ended December 31, 1999 and 1998, respectively. The Company
did not make a matching contribution for the year ended December 31, 1997.
14. Related Party Transactions
Hanover and GKH Partners, L.P., a major stockholder of the Company, have
entered into an agreement (the "GKH Agreement") whereby in exchange for
investment banking and financial advisory services rendered and to be rendered
by the major stockholder, the Company has agreed to pay a fee to GKH Partners,
L.P. equal to .75% of the equity value of the Company determined and payable at
such time as (1) a disposition of shares of the Company's common stock
resulting in GKH Partners, L.P. owning less than 25% of the outstanding common
stock or (2) any other transaction occurs resulting in the effective sale of
the Company or its business by the current owners (see Note 18).
In connection with stock offerings to management, the Company has received
notes from employees for shares purchased. The total amounts owed to the
Company at December 31, 1999 and 1998 are $3,387,000 and $10,146,000,
respectively. Total interest accrued on the loans is $203,000 and $548,000 as
of December 31, 1999 and 1998, respectively.
The Company had a credit agreement with Joint Energy Developments
Investments Limited Partnership ("JEDI"), a common stockholder, that was repaid
in 1997. Interest expense in 1997 was $1,388,000. The Company also leases
compressors to affiliates of Enron Capital and Trade Resources Corp., an
affiliate of JEDI. Rentals of $8,776,000, $6,801,000 and $1,034,000 were paid
by affiliates of Enron in 1999, 1998 and 1997, respectively. In addition,
compression fabrication of $6,320,000 was paid by affiliates of Enron in 1999.
An affiliate of Enron also owns interests in Meter Acquisition Company LP, LLLP
and Hanover Measurement Services Company, L.P.
The Company leases compressors to other companies owned or controlled by or
affiliated with related parties. Rental revenues billed to these related
parties totaled $902,000, $859,000 and $1,035,000 during 1999, 1998 and 1997,
respectively.
F-18
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
See Note 5 for related party investments and Note 11 for a description of
common stock transactions with related parties.
15. Commitments and Contingencies
Rent expense excluding lease payments for the leasing transactions described
in Note 8 for 1999, 1998 and 1997 was approximately $1,320,000, $455,000 and
$376,000, respectively. Commitments for future minimum rental payments
exclusive of those disclosed in Note 8 are not significant at December 31,
1999.
In the ordinary course of business the Company is involved in various
pending or threatened legal actions. While management is unable to predict the
ultimate outcome of these actions, it believes that any ultimate liability
arising from these actions will not have a material adverse effect on the
Company's consolidated financial position, operating results or cash flows.
The Company has no commitments or contingent liabilities which, in the
judgment of management, would result in losses that would materially affect the
Company's consolidated financial position, operating results or cash flows.
16. Subsequent Events
In March 2000, the Company completed a sale and leaseback of certain
compression equipment. The leaseback of the equipment will be recorded as an
operating lease. Under the agreement, the Company received $100 million
proceeds from the sale of the compression equipment at closing and may sell an
additional $100 million of equipment to the Trust during the next twelve
months. The equipment sold will be leased back by the Company for a five-year
period and will continue to be deployed by the Company under its normal
operating procedures. Hanover has the option to repurchase the equipment from
the Trust at any time and has substantial residual value guarantees.
In June 2000, the Company completed a 2-for-1 split of its common stock
effected in the form of a 100% stock dividend. The Company also increased the
number of authorized shares of common stock from 100,000,000 to 200,000,000.
All common stock, additional paid-in capital and per share information has been
restated for all periods presented to reflect the stock split.
17. Industry Segments and Geographic Information
The Company manages its business segments primarily on the type of product
or service provided. The Company has four principal industry segments:
Rentals--Domestic, Rentals--International, Compressor Fabrication and
Production Equipment Fabrication. The Rentals Segments provide natural gas
compression rental and maintenance services to meet specific customer
requirements. The Compressor Fabrication Segment involves the design,
fabrication and sale of natural gas compression units to meet unique customer
specifications. The Production Equipment Fabrication Segment designs,
fabricates and sells equipment utilized in the production of crude oil and
natural gas.
The Company evaluates the performance of its segments based on segment gross
profit. Segment gross profit for each segment includes direct operating
expenses. Costs excluded from segment gross profit include selling, general and
administrative, depreciation and amortization, leasing, interest, distributions
on mandatorily redeemable convertible preferred securities and income taxes.
Amounts defined as "Other" include sales of property, plant and equipment,
results of other insignificant operations, corporate related items primarily
related
F-19
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
to cash management activities and parts and service operations which are not
separately managed. Revenues include sales to external customers and
intersegment sales. Intersegment sales are accounted for at cost and are
eliminated in consolidation. Identifiable assets are tangible and intangible
assets that are identified with the operations of a particular segment or
geographic region, or which are allocated when used jointly. Capital
expenditures include fixed asset purchases.
No single customer accounts for 10% or more of the Company's revenues for
all periods presented. One vendor accounted for approximately $32,900,000 of
the Company's purchases in 1998.
The following tables present sales and other financial information by
industry segment and geographic region for the years ended December 31, 1999,
1998 and 1997.
Industry Segments
Production
Domestic International Compressor Equipment
Rentals Rentals Fabrication Fabrication Other Eliminations Consolidated
-------- ------------- ----------- ----------- ------- ------------ ------------
(in thousands of dollars)
1999:
Revenues from external
customers............ $136,430 $56,225 $52,531 $28,037 $43,805 $317,028
Intersegment sales.... 1,200 75,139 4,821 38,656 $(119,816) --
-------- ------- ------- ------- ------- --------- --------
Total revenues........ 136,430 57,425 127,670 32,858 82,461 (119,816) 317,028
Gross profit.......... 90,246 37,460 8,868 7,204 22,081 165,859
Identifiable assets... 529,667 149,968 47,608 23,511 5,756 756,510
Capital expenditures.. 180,593 99,535 1,469 1,343 282,940
Depreciation and
amortization......... 24,448 11,158 702 1,029 37,337
1998:
Revenues from external
customers............ $107,420 $40,189 $67,453 $37,466 $29,429 $281,957
Intersegment sales.... 1,200 54,369 2,902 10,735 $ (69,206) --
-------- ------- ------- ------- ------- --------- --------
Total revenues........ 107,420 41,389 121,822 40,368 40,164 (69,206) 281,957
Gross profit.......... 70,850 27,374 9,309 11,685 12,087 131,305
Identifiable assets... 422,026 129,628 33,578 17,855 11,503 614,590
Capital expenditures.. 111,289 54,830 2,524 855 169,498
Depreciation and
amortization......... 28,383 7,128 701 942 37,154
1997:
Revenues from external
customers............ $ 78,656 $22,029 $49,764 $37,052 $11,297 $198,798
Intersegment sales.... 1,200 48,072 462 7,775 $ (57,509) --
-------- ------- ------- ------- ------- --------- --------
Total revenues........ 78,656 23,229 97,836 37,514 19,072 (57,509) 198,798
Gross profit.......... 51,149 14,423 8,180 10,677 4,937 89,366
Identifiable assets... 360,362 98,421 30,088 13,020 4,561 506,452
Capital expenditures.. 109,540 36,545 993 3,917 150,995
Depreciation and
amortization......... 23,261 3,912 554 712 28,439
F-20
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Geographic Data
United
States International Consolidated
-------- ------------- ------------
(in thousands of dollars)
1999:
Revenues from external customers.......... $256,890 $ 60,138 $317,028
Identifiable assets....................... $603,368 $153,142 $756,510
1998:
Revenues from external customers.......... $230,605 $ 51,352 $281,957
Identifiable assets....................... $484,269 $130,321 $614,590
1997:
Revenues from external customers.......... $176,045 $ 22,753 $198,798
Identifiable assets....................... $406,602 $ 99,850 $506,452
18. Restatement
The Company has determined that its obligation to GKH Partners, L.P. for
services performed under the GKH Agreement (see Note 14) should have been
accrued as a liability over the life of the agreement. The net effect of this
restatement was as follows: (1) an increase in selling, general and
administrative expenses of $732,000; a decrease in net income of $461,000; and
a decrease in earnings per common share of $.01 basic and $.01 diluted for the
year ended December 31, 1997 and (2) a reduction in retained earnings at
January 1, 1997 for amounts applicable to prior periods of $782,000, net of
tax, and a resultant $1,243,000 reduction in retained earnings at December 31,
1999 and 1998.
F-21
HANOVER COMPRESSOR COMPANY
Selected Quarterly Financial Data (unaudited)
The table below sets forth selected unaudited financial information for each
quarter of the last two years:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share
amounts)
1999
Revenue...................................... $64,444 $73,799 $84,462 $94,323
Gross profit................................. 36,947 38,681 43,373 46,858
Net income................................... 8,639 8,482 10,388 12,932
Earnings per common and common equivalent
share:
Basic...................................... $ 0.15 $ 0.15 $ 0.18 $ 0.23
Diluted.................................... $ 0.14 $ 0.14 $ 0.17 $ 0.21
1998
Revenue...................................... $61,449 $68,933 $71,796 $79,779
Gross profit................................. 28,411 31,963 34,841 36,090
Net income................................... 6,251 6,972 8,048 9,106
Earnings per common and common equivalent
share:
Basic...................................... $ 0.11 $ 0.12 $ 0.14 $ 0.16
Diluted.................................... $ 0.10 $ 0.12 $ 0.13 $ 0.15
F-22