As filed with the Securities and Exchange Commission on December 21, 2001
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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Hanover Equipment Trust 2001A
Hanover Compressor Company
Hanover Compression Limited Partnership
(Exact names of registrants as specified in their charters)
Delaware 7359 51-6523441
Delaware 7359 76-0625124
Delaware 7359 75-2344249
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Numbers)
incorporation or organization) Classification Code Numbers)
c/o Wilmington Trust Company 12001 N. Houston Rosslyn
Rodney Square North Houston, Texas 77086
1100 North Market Street (281) 447-8787
Wilmington, Delaware 19890
(302) 651-1000
(Address, including zip code, and telephone number, including area (Address, including zip code, and telephone number, including
code, of principal executive office of Hanover Equipment Trust 2001A) area code, of principal executive offices of Hanover
Compressor Company and Hanover Compression
Limited Partnership)
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David A. Vanaskey, Jr. Michael J. McGhan
Vice President President and Chief Executive Officer
Wilmington Trust Company Hanover Compressor Company
Rodney Square North 12001 N. Houston Rosslyn
1100 North Market Street Houston, Texas 77086
Wilmington, Delaware 19890 (281) 447-8787
(302) 651-1000
(Name, address, including zip code, and telephone number, including (Name, address, including zip code, and telephone number,
area code, of agent for service of Hanover Equipment Trust 2001A) including area code, of principal executive offices
of Hanover Compressor Company and Hanover
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Copies to:
Richard Meller, Esq. Lewis Ledyard, Esq.
Latham & Watkins Morris, James, Hitchens & Williams LLP
233 South Wacker Drive, Suite 5800 222 Delaware Avenue, 10th Floor
Chicago, Illinois 60606 Wilmington, Delaware 19801
(312) 876-7700 (302) 888-6869
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed
Maximum Amount
Offering Proposed Maximum Of
Title of Each Class of Amount to be Price per Aggregate Offering Registration
Securities to be Registered Registered New Note Price(1)(2) Fee(1)(2)
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8.50% Senior Secured Notes Due 2008........ $300,000,000 100% $300,000,000 $71,700
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Lease Obligations of Hanover Compression
Limited Partnership (3).................... -- -- -- --
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Guarantee Obligations of Hanover Compressor
Company and Hanover Compression Limited
Partnership (4).......................... -- -- -- --
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(1) The registration fee has been calculated pursuant to Rule 457(a), Rule
457(f)(2) and Rule 457(n) under the Securities Act of 1933. The Proposed
Maximum Aggregate Offering Price is estimated solely for the purpose of
calculating the registration fee.
(2) The Proposed Maximum Aggregate Offering Price is based on the book value of
the notes, as of December 19, 2001, in the absence of a market for them as
required by Rule 457(f)(2) under the Securities Act of 1933.
(3) Represents the obligations of Hanover Compression Limited Partnership under
an operating lease, the proceeds of which are the source of funds from
which the Issuer intends to make interest and principal payments on the
8.50% Senior Secured Notes due 2008. No separate consideration will be
received for the Lease Obligations.
(4) Includes the guarantee by Hanover Compressor Company of the Lease
Obligations and the guarantee by Hanover Compressor Company and Hanover
Compression Limited Partnership with respect to the 8.50% Senior Secured
Notes due 2008. No separate consideration will be received for the
Guarantee Obligations.
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The registrants hereby amend this registration statement on such date or
dates as may be necessary to delay its effective date until the registrants
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities, and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, December 21, 2001
PROSPECTUS
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OFFER TO EXCHANGE
8.50% Senior Secured Notes Due 2008
that have been registered under the Securities Act of 1933
for
All outstanding unregistered 8.50% Senior Secured Notes Due 2008
($300,000,000 principal amount outstanding)
of
Hanover Equipment Trust 2001A
payable from lease obligations of and guaranteed by
Hanover Compression Limited Partnership
which lease obligations and notes are guaranteed by
Hanover Compressor Company
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Hanover Equipment Trust 2001A, a special purpose Delaware business trust
(which we refer to as the "Issuer"), is offering to exchange $300,000,000
aggregate principal amount of its new 8.50% Senior Secured Notes due 2008
(which we refer to as the "new notes" or the "notes") that have been registered
under the Securities Act of 1933 for the same aggregate principal amount of its
outstanding 8.50% Senior Secured Notes due 2008 (which we refer to as the "old
notes") that were issued and sold on August 30, 2001 in a transaction exempt
from registration under the Securities Act. The terms of the new notes are
identical to the terms of the old notes, except that the new notes are
registered under the Securities Act of 1933, are freely transferable, and do
not have exchange or registration rights. The Issuer used the proceeds from the
sale of the old notes, together with equity financing raised by the Issuer, to
finance the purchase of domestic gas compression equipment from Hanover
Compression Limited Partnership (which we refer to as "HCLP") and certain of
its subsidiaries. HCLP is an indirect wholly owned subsidiary of Hanover
Compressor Company (which we refer to as "Hanover"). The Issuer then leased the
equipment to HCLP for a seven-year term under an operating lease (which we
refer to as the "Lease"). The payments under the Lease are the source of funds
from which the Issuer intends to make interest and principal payments under the
notes. The Lease is a senior subordinated obligation of HCLP. HCLP's
obligations under the Lease are fully and unconditionally guaranteed, on a
senior subordinated basis, by Hanover. In addition, the Issuer's obligations
under the new notes are jointly and severally guaranteed, unconditionally and
on a senior subordinated basis, by Hanover and HCLP for an amount up to 77.33%
of the aggregate principal balance of notes outstanding, which is equal to the
final rent payment under the Lease. If there is an event of default under the
Lease, Hanover and HCLP guarantee, jointly and severally, on a senior
subordinated basis, all of the Issuer's obligations under the new notes.
*Please consider the following:
. Our offer to exchange old notes for new notes will be open until 5:00
p.m., New York City time, on , 2002, unless we extend the offer.
. You should carefully review the procedures for tendering the old notes
beginning on page 33 of this prospectus.
. If you fail to tender your old notes, you will continue to hold
unregistered securities and your ability to transfer them could be
adversely affected.
. No public market currently exists for the new notes. We do not intend to
list the new notes on any securities exchange and, therefore, no active
public market is anticipated.
You should carefully review the Risk Factors beginning on page 20 of this
prospectus.
We are not asking you for a proxy and you are requested not to send us a
proxy.
We are not making the exchange offer in any state or jurisdiction where it
is not permitted.
Each broker-dealer that receives new notes for its own account pursuant to
this exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933. This prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer in connection with resales of
new notes received in exchange for old notes where such old notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. The Issuer has agreed that, for a period of 180 days after the date
this exchange offer expires, it will make this prospectus available to any
broker-dealer for use in connection with any such resale. See the Plan of
Distribution beginning on page 144 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the new notes to be distributed in
the exchange offer or has determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
TABLE OF CONTENTS
Page
----
WHERE YOU CAN FIND MORE INFORMATION.................................... ii
INCORPORATION OF DOCUMENTS BY REFERENCE................................ iii
PROSPECTUS SUMMARY..................................................... 1
RISK FACTORS........................................................... 20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS...................... 30
THE EXCHANGE OFFER..................................................... 31
USE OF PROCEEDS........................................................ 42
CAPITALIZATION OF HANOVER COMPRESSOR COMPANY AND HANOVER
COMPRESSION LIMITED PARTNERSHIP....................................... 43
CAPITALIZATION OF HANOVER EQUIPMENT TRUST 2001A........................ 45
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA OF HANOVER COMPRESSOR
COMPANY AND HANOVER COMPRESSION LIMITED PARTNERSHIP.................. 46
SELECTED HISTORICAL FINANCIAL DATA OF HANOVER EQUIPMENT TRUST 2001A.... 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF HANOVER COMPRESSOR COMPANY AND HANOVER COMPRESSION
LIMITED PARTNERSHIP.................................................. 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF HANOVER EQUIPMENT TRUST 2001A....................... 64
BUSINESS OF HANOVER COMPRESSOR COMPANY AND HANOVER COMPRESSION
LIMITED PARTNERSHIP................................................... 66
HANOVER COMPRESSION LIMITED PARTNERSHIP................................ 78
HANOVER EQUIPMENT TRUST 2001A.......................................... 79
DESCRIPTION OF NOTES................................................... 80
SUMMARY OF PRINCIPAL OPERATIVE AGREEMENTS.............................. 126
THE EQUIPMENT.......................................................... 132
DESCRIPTION OF CERTAIN INDEBTEDNESS.................................... 133
BOOK-ENTRY; DELIVERY AND FORM.......................................... 135
MATERIAL ERISA CONSIDERATIONS.......................................... 137
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS........................ 139
PLAN OF DISTRIBUTION................................................... 144
VALIDITY OF THE SECURITIES............................................. 145
EXPERTS................................................................ 145
INDEX TO FINANCIAL STATEMENTS.......................................... F-1
i
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-4 (Reg. No.
333- ) with respect to the securities we are offering. This prospectus does
not contain all the information contained in the registration statement,
including its exhibits and schedules. You should refer to the registration
statement, including the exhibits and schedules, for further information about
us and the securities we are offering. Statements we make in this prospectus or
in any document incorporated in this prospectus by reference about any contract
or other document are not necessarily complete. When we make such statements,
you should refer to the copy of the contract or other document filed with the
SEC. The registration statement, including exhibits and schedules, is on file
at the offices of the SEC and may be inspected without charge.
Neither the Issuer nor HCLP is currently subject to the periodic reporting
and other information requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). In connection with the exchange offer, the Issuer
and HCLP will become subject to the information requirements of the Exchange
Act, and will file reports and other information with the SEC. Hanover is
subject to the informational requirements of the Exchange Act. In accordance
with the Exchange Act, Hanover files annual, quarterly and special reports,
proxy statements and other information with the SEC. These SEC filings,
including the registration statement, are available to the public over the
Internet at the SEC's web site at http://www.sec.gov.
You may also read and copy any document the registrants file with the SEC at
its public reference facilities at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can obtain copies of the documents at prescribed
rates by writing to the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the public reference facilities.
Hanover's SEC filings are also available at the offices of the New York Stock
Exchange, Inc., 11 Wall Street, New York, New York 10005.
ii
INCORPORATION OF DOCUMENTS BY REFERENCE
We have incorporated by reference certain reports and other information
Hanover has filed, or will file, with the SEC. The information incorporated by
reference is an important part of this prospectus. In addition, information
that Hanover files with the SEC will automatically update and supersede this
information. Hanover incorporates by reference the documents listed below and
any further filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934 after the date of this prospectus:
. Hanover's Annual Report on Form 10-K for the year ended December 31,
2000;
. Hanover's Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 2001, June 30, 2001 and September 30, 2001;
. Hanover's Current Reports on Form 8-K and 8-K/A filed with the SEC on
November 13, 2000; February 5, 2001; February 27, 2001; March 9, 2001;
March 16, 2001; March 20, 2001; June 29, 2001; August 8, 2001; August 9,
2001; August 17, 2001; September 4, 2001; September 14, 2001; October
18, 2001; November 5, 2001; November 8, 2001; November 9, 2001; December
4, 2001; December 17, 2001; and
. Hanover's Definitive Proxy Statement, dated April 17, 2001, for the
Annual Meeting of Stockholders held on May 17, 2001.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Hanover Compressor Company
12001 North Houston Rosslyn
Houston, Texas 77086
Attention: Corporate Secretary
Telephone: (281) 447-8787
TO OBTAIN TIMELY DELIVERY OF INFORMATION THAT YOU REQUEST FROM US, YOU MUST
REQUEST SUCH INFORMATION NO LATER THAN , 2002.
iii
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all of the information that may be important to
you. You should read this entire prospectus carefully, including the financial
statements and related notes contained in this prospectus, before making an
investment decision. The information provided in this prospectus gives effect
to various internal restructuring transactions that Hanover Compressor Company
and its subsidiaries completed in 1999, 2000 and 2001, which transactions have
had no effect on our business. As a result of these restructuring transactions,
substantially all of our assets and operations are owned or conducted by
Hanover Compression Limited Partnership and its subsidiaries. Except as
described in this paragraph and unless the context requires otherwise,
"Hanover," "we," "us," "our" or similar terms in this prospectus refer to
Hanover Compressor Company and its subsidiaries (including Hanover Compression
Limited Partnership) following completion of these restructuring transactions.
Except as the context requires otherwise, "HCLP" refers to Hanover Compression
Limited Partnership, an indirect wholly owned subsidiary of Hanover. Except as
the context otherwise requires, the "Issuer" refers to Hanover Equipment Trust
2001A. Except as the context otherwise requires, the terms "registrants" or
"registrant" when used in this prospectus means the Issuer (as registrant of
the new notes), HCLP (as registrant of the lease obligations to the Issuer, and
the guarantee obligations with respect to the new notes) and Hanover (as
registrant of the guarantee obligations with respect to the lease obligations
to the Issuer and the new notes). Except as the context requires otherwise,
financial and statistical data described as "pro forma" reflects our
acquisition of the compression services division of Dresser-Rand Company in
September 2000 and our acquisition of the gas compression business of
Schlumberger Limited and its affiliates (which we refer to as "Schlumberger")
in August 2001.
OVERVIEW
This prospectus relates to the offer by Hanover Equipment Trust 2001A to
exchange its registered 8.50% senior secured notes due 2008 (which we refer to
as the "new notes" or the "notes") for all of its outstanding 8.50% senior
secured notes due 2008 (which we refer to as the "old notes"). The terms of the
new notes are identical to the terms of the old notes except that the new notes
are freely transferable under the Securities Act and do not have any exchange
or registration rights. The exchange offer expires at 5:00 p.m., New York City
time, on , 2002, unless extended.
The old notes were issued by the Issuer on August 30, 2001 as part of an
operating lease transaction with HCLP. The Issuer used the proceeds from the
old notes, together with equity financing raised by the Issuer, to purchase
domestic natural gas compression equipment from HCLP and certain of its
subsidiaries, and then leased that equipment to HCLP for a seven-year term. The
Issuer intends to make interest and principal payments on the notes using the
payments received from HCLP under the operating lease.
The notes are obligations of the Issuer. The Issuer's obligations under the
notes are jointly and severally guaranteed, unconditionally and on a senior
subordinated basis, by Hanover and HCLP for an amount up to 77.33% of the
aggregate principal balance of notes outstanding, which is equal to the final
rent payment under the operating lease. If there is an event of default under
the operating lease, Hanover and HCLP guarantee, jointly and severally, on a
senior subordinated basis, all of the Issuer's obligations under the notes. All
of HCLP's obligations under the operating lease are unconditionally guaranteed,
on a senior subordinated basis, by Hanover. The Issuer is not affiliated with
Hanover or HCLP.
HANOVER EQUIPMENT TRUST 2001A
To facilitate the operating lease transaction, Hanover Equipment Trust 2001A
was formed in August 2001 to raise equity financing, issue the old notes and
the new notes and enter into certain contracts described in this
prospectus. Hanover Equipment Trust 2001A is the sole issuer of the notes. The
Issuer used the proceeds of the old notes, together with equity financing
raised by the Issuer, to purchase equipment for lease to HCLP for a seven-year
term. Under the operating lease with HCLP, the Issuer receives lease payments
that are sufficient in amount to pay interest on the notes, and to provide a
return to the equity certificate holder of the Issuer. The Issuer's obligations
under the notes are jointly and severally guaranteed, unconditionally and on a
senior subordinated basis, by Hanover and HCLP for an amount up to 77.33% of
the aggregate principal balance of notes outstanding, which is equal to the
final rent payment under the operating lease. If there is an event of default
under the operating lease, Hanover and HCLP guarantee, jointly and severally,
on a senior subordinated basis, all of the Issuer's obligations under the notes.
Hanover Equipment Trust 2001A is a special purpose business trust formed
under the laws of the State of Delaware. Its principal executive office is
located c/o Wilmington Trust Company, Rodney Square North, 1100 North Market
Street, Wilmington, Delaware 19890, and its telephone number at that address is
(302) 651-1000.
HANOVER COMPRESSOR COMPANY
HANOVER COMPRESSION LIMITED PARTNERSHIP
Hanover Compressor Company, through its indirect wholly-owned subsidiary
Hanover Compression Limited Partnership and its subsidiaries, is a global
market leader in full service natural gas compression and a leading provider of
service, financing, fabrication and equipment for contract natural gas handling
applications. We provide this equipment on a rental, contract compression,
maintenance and acquisition leaseback basis to natural gas production,
processing and transportation companies that are increasingly seeking
outsourcing solutions. Founded in 1990 and a public company since 1997, our
customers include premier independent and major producers and distributors
throughout the Western Hemisphere. In conjunction with our maintenance
business, we have developed our parts and service business to provide solutions
to customers that own their own compression equipment but want to outsource
their operations. Our compression services are complemented by our compressor
and oil and gas production equipment fabrication operations and gas processing
and treating, gas measurement and power generation services, which broaden our
customer relationships both domestically and internationally.
Our products and services are essential to the production, processing,
transportation and storage of natural gas and are provided primarily to energy
producers and distributors of natural gas. Our decentralized operating
structure, technically experienced personnel and high quality compressor fleet
allow us to provide reliable and timely customer service and have enabled us to
maintain an average horsepower utilization rate of approximately 93% from 1994
to 2000, compared to industry rates, which we believe to have been 80% to 85%
for this period. As a result, we have experienced substantial growth over the
past five years and have developed and maintained a number of long-term
customer relationships.
We have successfully and consistently grown our asset base, revenues and
cash flow over time through both acquisitions and expansion of our business.
Since 1992, our compression fleet has grown from 117,000 horsepower to
approximately 3,461,000 horsepower as of November 30, 2001, which represents a
compound annual growth rate ("CAGR") of 46%. Our financial measures have shown
similar growth.
For the Years Ended For the Nine Months Ended
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September 30, September 30,
1992 2000 CAGR 2000 2001 Growth
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Revenue... $33.1 $603.8 43.8% $370.2 $781.6 111.3%
EBITDA.... $ 7.3 $206.7 51.9% $139.4 $227.8 63.4%
Net Income $ 1.0 $ 58.7 66.4% $ 39.3 $ 64.5 64.1%
2
In addition to providing natural gas compression services, we fabricate gas
compressors for sale to third parties and for inclusion in our rental fleet. We
also fabricate, sell and service equipment that separates and treats oil and
gas to facilitate its further processing, transportation and sale. Oil and gas
production and processing equipment is typically installed in the field near
the wellhead and remains at the site for the life of the field. On a pro forma
basis, for the nine months ended September 30, 2001, compression rental and
service, compressor fabrication, production and processing equipment
fabrication and parts and service represented approximately 42%, 19%, 16% and
22% of our revenues, respectively. During the same period, on a pro forma
basis, compression rental and service, compressor fabrication, production and
processing equipment fabrication and parts and service represented
approximately 64%, 8%, 8% and 16% of our gross profit, respectively.
On August 31, 2001, we acquired the gas compression business of
Schlumberger, including Production Operators Corporation (which we refer to as
"POI") and related assets (we refer to our acquisition of the gas compression
business of Schlumberger as the "POI acquisition"), in exchange for total
consideration of $761 million in cash, common stock and indebtedness, subject
to certain post-closing adjustments pursuant to the acquisition agreement that
to date have resulted in an increase in the purchase price to approximately
$779 million due to an increase in net assets acquired and before any reduction
due to the restrictions on the marketability of the common stock. In addition,
we are required under certain circumstances to pay $58 million to Schlumberger
with the proceeds of a refinancing of a South American joint venture acquired
with the POI acquisition. For a period of three years following the closing of
the POI acquisition, Schlumberger is obligated to hold the shares of Hanover
common stock issued to it at closing (equal to approximately 11% of our
outstanding common stock), and Schlumberger has the right to designate one
representative to sit on our board of directors. The POI acquisition increased
our rental compression fleet by more than 800,000 horsepower to approximately
3,461,000 total horsepower. In addition, the POI acquisition provided us with
interests ranging from 30% to 35% in three South American joint ventures
operating approximately 497,000 aggregate horsepower. As a result of the POI
acquisition, our average horsepower per unit increased from 444 at December 31,
2000 to 492 at November 30, 2001 primarily due to POI's focus on the high
horsepower compression segment (greater than 500 horsepower), which typically
commands longer contract terms and has higher utilization rates.
As part of the POI acquisition, we entered into a five-year strategic
alliance with Schlumberger intended to result in the active support of
Schlumberger in fulfilling certain of our business objectives. The principal
components of the strategic alliance include (1) establishing us as
Schlumberger's preferred supplier of compression, natural gas treatment and gas
processing equipment worldwide, (2) Schlumberger's coordination and cooperation
in further developing our international business by placing our personnel in
Schlumberger's offices in six top international markets and (3) providing us
with access to consulting advice and technical assistance in enhancing our
field automation capabilities. We believe that POI's strong relationships with
many leading energy producers, transporters and processors, experienced
operating personnel, and reputation as a leading and well-respected provider of
outsourced compression services will enable us to further expand our business
in the United States, Venezuela and Argentina, and improve our access to
growing markets for outsourced compression and related gas handling sources in
the Middle East, Asia and Africa.
Industry Trends
We compete primarily in the market for transportable natural gas compression
units of up to 4,500 horsepower. We believe that this market, which includes
rental and owner operated units, accounted for approximately 16.3 million
horsepower in the United States in 2000 and has grown from 8.8 million
horsepower, at a CAGR of 8%, since 1992. Despite volatility in most energy
services sectors driven by commodity price changes, the gas compression
industry is relatively insensitive to fluctuations in natural gas prices. We
believe that the domestic natural gas compression market will continue to grow
for the following reasons: (1) domestic natural gas consumption is projected to
grow at a CAGR of 3% over the next five years, (2) the natural gas
3
reserve base is continuing to age and attendant wellhead pressures are
continuing to decline, which requires changing levels of compression to
maintain economic levels of production and (3) new reserves are being
discovered and developed.
We believe that the rental portion of the domestic gas compression market
grew from approximately 1.8 million horsepower at the end of 1992 to
approximately 5.5 million horsepower at the end of 2000, reflecting a CAGR of
15%. We believe that growth of rental compression capacity in the United States
has been driven primarily by the increasing trend toward outsourcing by energy
producers and processors. We believe that outsourcing provides the customer
greater financial and operating flexibility by minimizing the customer's
investment in equipment and enabling the customer to more efficiently resize
compression units to meet changing reservoir conditions. In addition, we also
believe that outsourcing typically provides the customer with more timely and
technically proficient service and maintenance which often reduces operating
costs and increases project revenues by reducing equipment down time.
In addition to benefiting from the industry trends discussed above, we
believe the strong demand for compression equipment and related services will
also benefit from (1) increased opportunities for compressor rental and sales
internationally, (2) the trend of customers increasingly choosing to do more
business with a smaller number of preferred compressor services vendors and (3)
the consolidation of the compression sector into larger companies that can more
effectively serve the needs of large oil and gas producers by offering a wider
range of compression and related services across a larger geographic area.
Unlike most other energy service sectors, the domestic gas compression
industry is relatively insensitive to fluctuations in natural gas commodity
prices, due in large part to the demand characteristics of the industry. Demand
for compression services is driven by the consumption of natural gas, as
compression services are essential to all phases of the production and
transportation of natural gas. The oil and gas production equipment industry is
more sensitive than the gas compression industry to the volatility of oil and
natural gas prices, as the growth of this industry is likely to more closely
track oil and gas exploration activity.
Business Strategy
Historically, we have generated growth in excess of industry averages and
have delivered superior results to our investors. From 1997 through 2000, our
revenue, EBITDA and net income growth have averaged 47%, 48% and 56% per year,
respectively. During this same period, the rental compression market, driven by
growth in consumption and the trend toward outsourcing, has consistently grown
at approximately 15% per year, while natural gas pricing and exploration
activity have been quite volatile. For example, from January 1, 1998 through
September 30, 2001, domestic natural gas prices have ranged from around $1.04
per thousand cubic feet to around $10.50 per thousand cubic feet, while
drilling activity, measured by North American active rig counts, has ranged
from approximately 500 to 1,600.
Our business strategy, includes the following key elements:
. Offer Broad-Based Solutions: We believe that we are the only company in
our industry that offers outsourced rental compression as well as
compressor fabrication and oil and gas production and processing
equipment fabrication and related services. By offering a broad range of
services that complement our historic strengths, we believe that we can
offer more complete solutions to our customers and thereby drive growth
in each of our businesses.
-- Our leading position in the design and fabrication of compressors for
sale helps us meet our rental fleet growth requirements as well as
the needs of energy industry participants who resize or replace units
on existing projects or obtain compression products and services for
new projects.
-- Our compressor services business supplies parts and services and
manages compression units for customers who own their units, thereby
helping us develop relationships for future outsourcing business.
4
-- We design and fabricate oil and gas production equipment and provide
related services essential to the operation of recently completed oil
and gas wells, all of which enhance our opportunity to deliver
compression services and equipment to customers as the need develops
over the useful life of a well.
-- As our customers look to us to provide an ever-widening array of
outsourced services, we continue to build our core business with
emerging business opportunities, such as turnkey gas treatment, gas
measurement and power generation sales and services. As with
compression, these emerging businesses are increasingly being
outsourced by industry participants and represent an additional
opportunity to gain incremental revenue from current and potential
customers.
. Exploit International Opportunities: We believe international markets
represent one of the greatest growth opportunities for our business.
First, although over the last six years our international horsepower has
grown significantly, we continue to believe that the market is
drastically under served. Of total proven worldwide reserves, 97% are
located outside the United States, yet international energy companies
utilized only 35% of worldwide compression capacity. We believe that the
implementation of international environmental and conservation laws
preventing the flaring of natural gas and encouraging the use of
gas-fired electric power generation, coupled with increased worldwide
energy consumption, will continue to drive use of compression by
international energy companies. Second, we typically see higher pricing
relative to the domestic market in international contracts. At November
30, 2001, we had 768,000 horsepower in service internationally, or 22%
of our total horsepower. For the nine months ended September 30, 2001,
approximately 32% of rental revenues were provided by international
horsepower. Moreover, international oil and gas companies have
traditionally purchased compression equipment, but over the past decade,
international energy producers have increasingly chosen to fulfill their
compression requirements through outsourcing. We believe we are well
positioned to exploit the opportunity created by these international
trends.
. Continue to Expand in our Existing Domestic Markets: Since 1992,
approximately 50% of the aggregate horsepower added by the oil and gas
industry has been outsourced to third party rental companies like us.
Consequently, the percentage of aggregate compression horsepower
outsourced by the industry has increased from nearly 20% in 1992 to
approximately 34% in 2000. This move to outsourcing has been driven by,
among other things, the desire of producers and distributors of natural
gas to: (1) maximize production revenue by improving mechanical run-time
and reducing equipment maintenance and personnel costs; (2) increase
capital available for other uses; and (3) improve operating flexibility
by exploiting the rental company's greater asset base and extensive
field service organization to efficiently resize compressor units to
meet changing reservoir conditions. We believe the breadth and quality
of our services, the depth of our customer relationships and our
presence throughout the gas producing regions of the United States
position us to capture additional outsourced business.
. Focus on High Horsepower Units: The high horsepower compression segment,
comprised of units of greater than 500 horsepower, is the fastest
growing segment of the rental compression market. These units are
typically installed on larger wells, gathering systems and processing
and treating facilities whose size and generally more attractive unit
economics largely insulate them from declining commodity prices. As a
result, compressors in this segment tend to realize higher utilization
rates. The greater technical requirements of these larger systems enable
us to differentiate our compression products and services and to offer
related products and services. In addition, most compressors installed
internationally are high horsepower units. As of November 30, 2001,
approximately 78% of our aggregate horsepower consists of high
horsepower compression units. We believe the breadth of our experience,
the quality of our service and of our compressor production and
treatment equipment fabrication operations, and our international
experience will enable us to continue to succeed in this segment of the
market.
5
. Capture Acquisition Leaseback Opportunities: We believe that as of
December 31, 2000, U.S. energy producers, transporters and processors
directly owned and operated approximately 10.8 million horsepower of
compression units, representing about 66% of the total U.S. compression
market. In recent years, more companies have been outsourcing their
compression operations to improve their financial and operating results.
We also offer energy producers, transporters and processors the
opportunity to outsource their operations and reallocate capital to core
activities through our acquisition leaseback program, whereby we
purchase in-place compression equipment and lease the equipment back to
the former owner under long-term operating and maintenance contracts. We
believe that our extensive geographic reach and our experience with a
wide range of compression equipment and operating conditions give us a
competitive advantage in capturing acquisition leaseback opportunities.
Between January 1, 1997 and September 30, 2001, we executed acquisition
leaseback transactions for approximately 530 compression units totaling
306,000 horsepower.
. Selectively Pursue Industry Acquisitions: Since 1992, we have acquired
over three dozen small, well-established, regional companies providing
compressor rental and related services while delivering superior
financial results. In addition, we completed four sizable acquisitions
of compression companies: PAMCO Services International in July 2000, the
compression services division of Dresser-Rand Company in September 2000,
OEC Compression Corporation in March 2001 and the gas compression
business of Schlumberger in August 2001. We also pursue acquisitions to
expand our offerings of related products and services and extend our
geographic scope, such as our June 2000 acquisition of Applied Process
Solutions, Inc., a leader in the design, fabrication and installation of
natural gas treating and processing equipment.
. Capitalize on our Decentralized Management and Operating Structure: We
utilize a decentralized management and operating structure to provide
superior customer service in a relationship-driven, service-intensive
industry. We believe that our regionally based network, local presence,
experience and in-depth knowledge of customers' operating needs and
growth plans provide us with significant competitive advantages and
drive internal growth. To maintain this regional strength and to create
incentives to attract, motivate and retain an entrepreneurial, highly
experienced management team, since 1992 we have offered equity ownership
and stock option programs to create incentives for approximately 300 of
our employees, and our employees own, or have options to purchase, over
9% of our common stock.
We believe the successful execution of our growth strategy, combined with
our focus on and leadership position in the compression industry, will enable
us to continue to differentiate our company and drive future growth and
profitability.
Hanover Compressor Company is a corporation formed under the laws of the
State of Delaware. Its principal executive office is located at 12001 North
Houston Rosslyn, Houston, Texas 77086, telephone (281) 447-8787.
Hanover Compression Limited Partnership is a limited partnership formed
under the laws of the State of Delaware and is an indirect wholly-owned
subsidiary of Hanover Compressor Company. Its principal executive office is
located at 12001 North Houston Rosslyn, Houston, Texas 77086, telephone (281)
447-8787.
THE OPERATING LEASE TRANSACTION
The Issuer used the proceeds from the sale of the old notes and the related
equity certificates to purchase from HCLP and certain of its subsidiaries a
portion of the gas compression assets acquired from Schlumberger in the POI
acquisition and certain other domestic gas compression equipment having an
aggregate appraised fair market value of approximately $309 million (the
"Equipment"). We used the proceeds from the sale of
6
Equipment and other concurrent financing transactions to fund the POI
acquisition. The Issuer then leased the Equipment to HCLP for a seven-year term
under an operating lease (the "Lease").
The parties intend that (i) for purposes of financial accounting, the Lease
will be treated as an operating lease and (ii) for purposes of federal, state
and local income taxes, state laws and federal and state bankruptcy or
insolvency laws, the Lease will be treated as a financing arrangement.
Under the Lease, HCLP pays rent to the Issuer sufficient to enable the
Issuer to make interest payments under the notes. At the end of the term of the
Lease, HCLP has an option to purchase the Equipment from the Issuer for an
amount sufficient to repay the notes in full. In the event that HCLP does not
exercise its option to purchase all the Equipment, HCLP is required to use its
best efforts to sell the Equipment on the Issuer's behalf. In such event, at
the end of the Lease term, HCLP is required to make a payment equal to
approximately $232 million (as such amount may be reduced from time to time
upon purchases of the Equipment by HCLP in accordance with the terms of the
Lease, the "Final Rent Payment") plus the proceeds from the sale of the
Equipment. All of these amounts will be applied to repay the notes. Any excess
amounts will be used to repay the unrecovered amount of the investments made in
the Issuer by its equity certificate holder. Any remaining proceeds will be
returned to HCLP. If the Final Rent Payment and the proceeds from the sale of
the Equipment are insufficient to pay the notes in full, then HCLP will be
liable for an assessment of additional rent with respect to actual excess wear
and tear of the Equipment, as determined by an independent appraisal procedure.
It is possible that the Final Rent Payment, sale proceeds and assessment of
additional rent will be insufficient to repay the notes in full.
Payment of the principal, premium, if any, and interest on the notes is
secured by a perfected first priority security interest in the Issuer's
interest in the Equipment and an assignment of the Lease and the guarantee to
the trustee for the notes. Hanover guarantees, on a senior subordinated basis,
the full payment of the Lease obligations by HCLP (the "Lease Guarantee"). The
notes are jointly and severally guaranteed, unconditionally and on a senior
subordinated basis, by Hanover and HCLP for an amount up to 77.33% of the
aggregate principal balance of notes outstanding, which is equal to the Final
Rent Payment under the Lease. If there is an event of default under the Lease,
Hanover and HCLP guarantee, jointly and severally, on a senior subordinated
basis, all of the Issuer's obligations under the notes (the "Notes Guarantee";
we refer to the Notes Guarantee and the Lease Guarantee collectively as the
"Hanover Guarantee").
At issuance of the old notes on August 30, 2001, certain of Hanover's
domestic subsidiaries were guarantors under the Hanover Guarantee. In December
2001, consistent with the terms of the Lease and the other operative
agreements, Hanover and its subsidiaries completed various internal
restructuring transactions pursuant to which all of the domestic subsidiaries
of Hanover (other than HCLP) that were guarantors of the old notes have been
merged, directly or indirectly, with and into HCLP. As a result, Hanover and
HCLP are the only remaining guarantors under the Hanover Guarantee.
The chart below illustrates the Lease facility, which includes the new notes.
[FLOW CHART]
HANOVER LEASE GUARANTEE
100% NOTES NOTES EQUITY
INDIRECT GUARANTEE HOLDERS CERTIFICATE
OWNERSHIP HOLDER NOTES EQUITY
CERTIFICATES
HCLP LEASE ISSUER
OF
EQUIPMENT
7
THE EXCHANGE OFFER
The Exchange Offer The Issuer is offering to exchange $1,000 principal
amount of new notes in exchange for each $1,000
principal amount of old notes. As of the date hereof,
$300,000,000 in aggregate principal amount of old
notes are outstanding.
Based on the interpretations by the staff of the SEC,
as set forth in no-action letters issued to certain third
parties unrelated to us, we believe that new notes may
be offered for resale, resold or otherwise transferred
by you without compliance with the registration and
prospectus delivery requirements of the Securities
Act, unless you:
. are an "affiliate" of ours within the meaning of
Rule 405 under the Securities Act;
. are a broker-dealer who purchased old notes
directly from us for resale under Rule 144A or
any other available exemption under the
Securities Act;
. acquired the new notes other than in the ordinary
course of your business; or
. have an arrangement with any person to engage in
the distribution of new notes.
The SEC has not considered the exchange offer in the
context of a no-action letter, however, and we cannot
be sure that the staff of the SEC would make a similar
determination with respect to the exchange offer as in
such other circumstances. In order to participate in the
exchange offer, you must make the representations set
forth in the letter of transmittal that we are sending
you with this prospectus.
Registration Rights We sold the old notes on August 30, 2001 in a private
placement in reliance on Section 4(2) of the Securities
Act. The old notes were immediately resold by the
initial purchasers in the United States in reliance on
Rule 144A under the Securities Act and outside the
United States in reliance on Regulation S under the
Securities Act. At the same time, we entered into an
exchange and registration rights agreement with the
initial purchasers requiring us to make this exchange
offer. This exchange offer satisfies those rights, which
terminate upon consummation of the exchange offer.
You will not be entitled to any exchange or
registration rights with respect to the new notes.
Additionally, after completion of the exchange offer,
we will no longer be required to register with the SEC
any transfer of old notes that remain outstanding.
8
Expiration Date............................ The exchange offer will expire at 5:00 p.m.,
, 2002, New York City time, or a later
date and time if we extend it (the "Expiration Date").
Withdrawal................................. You may withdraw the tender of the old notes
pursuant to the exchange offer at any time prior to the
Expiration Date. As soon as practicable after the
expiration or termination of the exchange offer we
will return to you at our expense any old notes not
accepted for exchange for any reason.
Interest on the New Notes and the Old Notes Interest on the new notes will accrue from the date of
the original issuance of the old notes or from the date
of the last payment of interest on the old notes,
whichever is later. No additional interest will be paid
on the old notes tendered and accepted for exchange.
Conditions to the Exchange Offer........... The exchange offer is subject to customary
conditions, some of which may be waived by us. See
"The Exchange Offer--Conditions to the Exchange
Offer."
Procedures for Tendering Old Notes......... If you wish to accept the exchange offer, you must
first complete, sign and date an original or faxed letter
of transmittal, in accordance with the instructions
contained in this prospectus and in the letter of
transmittal. You must then mail, fax or deliver the
letter of transmittal, together with the old notes and
any other required documentation, to Wilmington
Trust FSB at the address set forth in this prospectus.
If you are a person holding the old notes through the
Depository Trust Company and wish to accept the
exchange offer, you must do so through the
Depository Trust Company's Automated Tender
Offer Program, by which you will agree to be bound
by the letter of transmittal. By executing or agreeing
to be bound by the letter of transmittal, you will be
making a number of important representations to us,
as described under the "The Exchange Offer--
Procedures for Tendering" and "--Terms and
Conditions of the Letter of Transmittal."
If you are a broker-dealer that will receive new notes
for your own account in exchange for old notes that
you acquired as a result of your market-making or
other trading activities, you will be required to
acknowledge in the letter of transmittal that you will
deliver a prospectus in connection with any resale of
the new notes.
9
We will accept for exchange any and all old notes that
are properly tendered in the exchange offer prior to
the Expiration Date. The new notes issued in the
exchange offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer--
Terms of the Exchange Offer."
Exchange Agent................... Wilmington Trust FSB is serving as exchange agent
in connection with the exchange offer.
Federal Income Tax Considerations The exchange of old notes for new notes in the
exchange offer will not constitute a sale or an
exchange for federal income tax purposes. Therefore,
you will not have to pay federal income tax as a result
of your participation in the exchange offer. See
"United States Federal Income Tax Considerations."
Effect of Not Tendering.......... Old notes that are not tendered or that are tendered
but not accepted will, following the completion of the
exchange offer, continue to be subject to their existing
transfer restrictions. As a result of those restrictions
and the availability of registered new notes, the old
notes are likely to be much less liquid than before.
We will have no further obligation to provide for
exchange or registration under the Securities Act of
such old notes.
Neither the Delaware General Corporation Law nor
the indenture relating to the old notes gives you any
appraisal or dissenters' rights or any other right to
seek monetary damages in court if you do not
participate in the exchange offer.
10
THE NEW NOTES
The summary below contains basic information about the principal terms of
the new notes and is not intended to be complete. It does not contain all the
information that is important to you. The terms and conditions described below
are subject to important limitations and exceptions. The "Description of Notes"
section of this prospectus contains a more detailed description of the terms
and conditions of the new notes.
The Offering
Issuer...................... Hanover Equipment Trust 2001A.
Notes Offered............... $300,000,000 aggregate principal amount of 8.50%
Senior Secured Notes Due 2008.
Maturity Date............... September 1, 2008.
Interest Rate............... 8.50% per year.
Interest Payment Dates...... March 1 and September 1 of each year, commencing
March 1, 2002. Interest began accruing on August
30, 2001, when the Issuer issued the old notes.
Use of Proceeds............. There will be no cash proceeds from the issuance
of the new notes under this exchange offer. The
Issuer used the proceeds from its offering of the
old notes to purchase the Equipment from HCLP.
The proceeds from the sale of such Equipment,
together with the proceeds from other concurrent
financing transactions, were used by Hanover to
fund the cash portion of the POI acquisition and
to pay expenses incurred in connection with the
acquisition.
Lease....................... HCLP leases the Equipment from the Issuer under
the Lease. Payments under the Lease are senior
subordinated obligations of HCLP. The term of the
Lease started on August 31, 2001, and ends on
September 1, 2008. The Lease is a "triple net
lease." See "Summary of Principal Operative
Agreements--The Lease."
Lease Guarantee............. Hanover and any material domestic subsidiaries
created or acquired by Hanover on or after the
issue date that become guarantors under Hanover's
$350 million bank credit agreement have
guaranteed or will guarantee, as applicable,
jointly and severally and on a senior
subordinated basis, all obligations of HCLP under
the Lease, including all rent payments.
Notes Guarantee............. Hanover, HCLP, and any material domestic
subsidiaries created or acquired by Hanover on or
after the issue date that become guarantors under
Hanover's $350 million bank credit agreement have
guaranteed or will guarantee, as applicable,
jointly and severally, unconditionally and on a
senior subordinated basis, the payment when due
of all amounts required to be paid by the Issuer
under the notes, up to the maximum amount of
77.33% of the aggregate principal balance of
notes outstanding, which is equal to the Final
Rent Payment under the Lease. If there is an
event of default under the Lease, Hanover and
HCLP guarantee, jointly and severally, on a
senior subordinated basis, the payment when due
of all amounts required to be paid by the Issuer
under the notes.
Security and Funds for
Payment................... The notes are obligations of the Issuer. The
Lease is an obligation of HCLP. Payment of the
principal, premium, if any, and interest on the
notes is secured by a perfected first priority
security interest in the
11
Issuer's interest in the Equipment and an
assignment of the Lease and the Hanover Guarantee
to the trustee for the holders of the notes.
Under the Lease, HCLP pays rent to the Issuer
sufficient to enable the Issuer to make interest
payments under the notes. Holders of the notes
have recourse on a secured basis only with
respect to the Equipment and other assets of the
Issuer described under "Description of
Notes--Security."
Ranking..................... The notes are senior secured obligations of the
Issuer, and the Issuer is not permitted to incur
any additional indebtedness. The obligations of
HCLP under the Lease are subordinated in right of
payment to all existing and future senior
indebtedness of HCLP. The obligations of Hanover
and HCLP under the Hanover Guarantee are
subordinated in right of payment to all existing
and future senior indebtedness of Hanover and
HCLP. The Hanover Guarantee ranks equally in
right of payment with all senior subordinated
debt and senior to all subordinated debt of
Hanover and HCLP.
Optional Redemption......... Prior to September 1, 2004, if Hanover raises
proceeds from one or more bona fide underwritten
sales to the public of Hanover's common stock and
Hanover causes HCLP to repurchase Equipment from
the Issuer, the Issuer is required to apply the
proceeds it receives to redeem up to 35% of the
notes at a redemption price of 108.50% of the
principal amount thereof. Otherwise, the Issuer
does not have the right to redeem the notes until
September 1, 2005. After September 1, 2005, the
Issuer may redeem the notes, in whole or in part,
if it pays the redemption premium described under
"Description of Notes--Optional Redemption."
Mandatory Offer to Repurchase If Hanover or any of its restricted subsidiaries
sell certain assets and do not reinvest the
proceeds or pay down debt, or if Hanover
experiences specific changes of control, Hanover
is required to cause HCLP to repurchase the
Equipment from the Issuer. The Issuer is required
to apply the proceeds from the sale of the
Equipment to offer to repurchase the notes for
cash in the amount described under "Description
of Notes--Certain Covenants under the
Participation Agreement--Limitation on Sales of
Assets and Subsidiary Stock" and "Description of
Notes--Change of Control." There can be no
assurance that the Issuer will have sufficient
funds or that the Issuer will be able to arrange
for additional financing to repurchase the notes
tendered following a change in control. See "Risk
Factors" for a description of the possible
effects if the Issuer is unable to purchase the
notes upon a change of control.
Certain Covenants of the
Issuer.................... The Issuer issued the old notes, and will issue
the new notes, under an indenture with Wilmington
Trust FSB, the indenture trustee, and a
12
participation agreement. The indenture governing
the notes contains covenants that limit the
Issuer's ability to, among other things:
. incur liens;
. incur additional indebtedness;
. enter into any other transactions;
. make investments;
. liquidate; and
. engage in non-related lines of business.
These covenants are subject to a number of
important qualifications and limitations. See
"Description of Notes--Certain Covenants Under
the Indenture."
Certain Covenants under the
Participation Agreement..... The participation agreement contains covenants
that limit the ability of Hanover and its
restricted subsidiaries (including HCLP) to,
among other things:
. incur additional indebtedness;
. layer indebtedness;
. pay dividends on or repurchase their capital
stock;
. purchase or redeem subordinated obligations
prior to maturity;
. make investments;
. incur liens;
. permit restrictions on the ability of the
restricted subsidiaries to pay dividends on
their capital stock and to repay
indebtedness, make loans or transfer
property to Hanover or its other
subsidiaries;
. dispose of assets;
. engage in affiliate transactions;
. transfer the capital stock of the restricted
subsidiaries;
. transfer all or substantially all of the assets
of Hanover to another person; and
. engage in non-related lines of business.
These covenants are subject to a number of
important qualifications and limitations. See
"Description of Notes--Certain Covenants Under
the Participation Agreement."
You should refer to the section entitled "Risk Factors" for an explanation
of certain risks of investing in the new notes.
13
SUMMARY FINANCIAL DATA OF
HANOVER COMPRESSOR COMPANY AND
HANOVER COMPRESSION LIMITED PARTNERSHIP
In the table below and the footnotes thereto, we have provided you with
Hanover's and HCLP's summary historical consolidated financial data and pro
forma combined condensed financial data. The historical consolidated financial
data as of and for each of the fiscal years in the three-year period ended
December 31, 2000 were derived from Hanover's and HCLP's audited consolidated
financial statements. The historical consolidated financial data as of and for
the nine months ended September 30, 2001 and 2000 were derived from Hanover's
and HCLP's unaudited condensed consolidated financial statements. In the
opinion of management, such unaudited financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position and results of operations of such interim
periods.
In August 2001, we acquired the gas compression business of Schlumberger for
approximately $761 million in cash, indebtedness, and common stock, subject to
certain post-closing adjustments pursuant to the acquisition agreement that to
date have resulted in an increase in the purchase price to approximately $768
million due to an increase in net assets acquired and before any reduction due
to the restrictions on the marketability of the common stock. In addition, we
are required under certain circumstances to pay $58 million to Schlumberger
with the proceeds of a refinancing of a South American joint venture acquired
with the gas compression business of Schlumberger. The pro forma combined
condensed financial data present our pro forma results of operations as if this
acquisition had occurred on January 1, 2000 and were derived from the pro forma
combined condensed financial statements as of and for the nine months ended
September 30, 2001 and the year ended December 31, 2000 included in this
prospectus. The pro forma financial data also reflects the pro forma effect of
our acquisition of the compression services division of the Dresser-Rand
Company in September 2000 as if it had occurred on January 1, 2000. The pro
forma financial data does not reflect our acquisitions of Applied Process
Solutions, Inc. in June 2000, PAMCO Services International in July 2000, or OEC
Compression Corporation in March 2001, none of which are significant. The pro
forma financial data does not purport to be indicative of the results which
would actually have been obtained had the acquisitions been completed on the
date indicated or which may be obtained in the future.
The information in this section should be read along with Hanover's
consolidated financial statements, accompanying notes and other financial
information, HCLP's consolidated financial statements, accompanying notes and
other financial information, the combined financial statements of the natural
gas compression business of Schlumberger, the combined financial statements of
the compression services division of the Dresser-Rand Company, and related pro
forma financial data that, in each case, are included or incorporated by
reference in this prospectus. See "Where You Can Find More Information" and
"Incorporation of Documents by Reference."
14
Hanover Compressor Company
Year Ended December 31,
-----------------------------------------
Pro Forma
2000(1)(2) 2000(1) 1999(1) 1998(1)
---------- ---------- -------- --------
(in thousands)
INCOME STATEMENT DATA:
Total revenues and other................................................... $807,657 $ 603,829 $323,220 $286,351
Expenses:
Operating................................................................ 458,325 342,545 157,361 155,046
Selling, general and administrative...................................... 74,672 54,606 33,782 26,626
Depreciation and amortization............................................ 71,525 52,882 37,337 37,154
Leasing expense.......................................................... 81,359 45,484 22,090 6,173
Interest expense......................................................... 26,953 8,473 8,786 11,716
Distributions on mandatorily redeemable convertible preferred securities. 6,369 6,369 278
-------- ---------- -------- --------
Total expenses.......................................................... 719,203 510,359 259,634 236,715
-------- ---------- -------- --------
Income before income taxes................................................. 88,454 93,470 63,586 49,636
Provision for income taxes................................................. 32,905 34,771 23,145 19,259
-------- ---------- -------- --------
Net income................................................................. $ 55,549 $ 58,699 $ 40,441 $ 30,377
======== ========== ======== ========
OTHER DATA:
EBITDA(3)................................................................ $274,660 $ 206,678 $132,077 $104,679
Ratio of earnings to fixed charges(4).................................... 1.7x 2.5x 2.9x 3.8x
CASH FLOWS PROVIDED BY (USED IN):
Operating activities..................................................... $ 7,133 $ 68,222 $ 31,147
Investing activities..................................................... (44,868) (92,114) (14,699)
Financing activities..................................................... 77,589 18,218 (9,328)
BALANCE SHEET DATA (END OF PERIOD):
Working capital.......................................................... $ 309,942 $107,966 $113,264
Net property, plant and equipment........................................ 583,586 497,465 392,498
Total assets............................................................. 1,289,521 756,510 614,590
Long-term debt, excluding current maturities............................. 110,935 69,681 156,943
Mandatorily redeemable convertible preferred securities.................. 86,250 86,250
Common stockholders' equity.............................................. 639,993 367,914 315,470
15
Hanover Compressor Company
Nine Months Ended September 30,
---------------------------------
Pro Forma
2001(1)(2) 2001(1) 2000(1)
---------- ---------- ----------
(in thousands)
(unaudited)
INCOME STATEMENT DATA:
Total revenues and other............................................................ $887,294 $ 781,641 $ 370,222
Expenses:...........................................................................
Operating......................................................................... 532,001 475,981 196,326
Selling, general and administrative............................................... 75,065 66,341 34,481
Depreciation and amortization..................................................... 68,385 60,926 36,830
Leasing expense................................................................... 70,959 47,541 29,596
Interest expense.................................................................. 18,818 10,318 5,560
Distributions on mandatorily redeemable convertible preferred securities.......... 4,780 4,780 4,776
Other............................................................................. 11,473 11,473
-------- ---------- ----------
Total expenses................................................................... 781,481 677,360 307,569
-------- ---------- ----------
Income before income taxes.......................................................... 105,813 104,281 62,653
Provision for income taxes.......................................................... 40,202 39,620 23,305
-------- ---------- ----------
Income before cumulative effect of accounting change................................ 65,611 64,661 39,348
Cumulative effect of accounting change for derivative instruments, net of income tax (164)
-------- ---------- ----------
Net income.......................................................................... $ 65,611 $ 64,497 $ 39,348
======== ========== ==========
OTHER DATA:
EBITDA(3)......................................................................... $268,755 $ 227,846 $ 139,415
Ratio of earnings to fixed charges(4)............................................. 2.1x 2.6x 2.5x
CASH FLOWS PROVIDED BY (USED IN):
Operating activities.............................................................. $ 37,141 $ 10,151
Investing activities.............................................................. (299,251) (165,274)
Financing activities.............................................................. 238,968 162,453
BALANCE SHEET DATA (END OF PERIOD):
Working capital................................................................... $ 447,396 $ 224,684
Net property, plant and equipment................................................. 1,022,490 688,588
Total assets...................................................................... 2,189,743 1,271,468
Long-term debt, excluding current maturities...................................... 434,709 173,835
Mandatorily redeemable convertible preferred securities........................... 86,250 86,250
Common stockholders' equity....................................................... 1,038,035 619,838
16
- --------
(1) Substantially all of Hanover's assets and operations are owned or conducted
by HCLP. To the extent there are differences between the consolidated
financial data for Hanover and the consolidated financial data for HCLP,
these arise due to Hanover's mandatorily redeemable convertible preferred
securities, Hanover's 4.75% convertible senior notes due 2008 and Hanover's
outstanding common stock. The following line items would be different with
respect to HCLP's summary consolidated financial data, compared to
Hanover's summary consolidated financial data presented above:
Year Ended December 31,
----------------------------------------
Pro Forma
2000 2000 1999 1998
--------- ---------- -------- --------
Net income (a)........................................ $59,549 $ 62,699 $ 40,617 $ 30,377
OTHER DATA:
Ratio of earnings to fixed charges(4)............... 1.8x 2.8x 2.9x 3.8x
CASH FLOWS PROVIDED BY (USED IN):
Operating activities................................ $ 13,773 $ 68,278 $ 31,307
Investing activities................................ (44,868) (92,114) (14,699)
Financing activities................................ 70,949 18,162 (9,488)
BALANCE SHEET DATA (END OF PERIOD):
Total assets........................................ $1,286,082 $753,199 $614,590
Mandatorily redeemable convertible preferred
securities (b).....................................
Partners' equity.................................... 720,514 451,030 315,470
Nine Months Ended
September 30,
--------------------------------
Pro Forma
2001 2001 2000
--------- ---------- ----------
(in thousands)
(unaudited)
Net income (c)................................................... $71,851 $ 70,738 $ 42,346
OTHER DATA:
Ratio of earnings to fixed charges(4)............................ 2.3x 3.1x 2.8x
CASH FLOWS PROVIDED BY (USED IN):
Operating activities............................................. $ 46,396 $ 15,007
Investing activities............................................. (299,251) (165,274)
Financing activities............................................. 229,713 157,597
BALANCE SHEET DATA (END OF PERIOD):
Total assets..................................................... $2,180,167 $1,268,024
Long-term debt, excluding current maturities (d)................. 242,709 173,835
Mandatorily redeemable convertible preferred securities (b)......
Partners' equity................................................. 1,300,855 699,751
-
(a) Includes the adjustment to remove the distributions on mandatorily
redeemable convertible preferred securities, net of tax, that are
obligations of Hanover but not HCLP.
(b) Mandatorily redeemable convertible preferred securities are
obligations of Hanover but not HCLP.
(c) Includes the adjustment to remove the distributions on mandatorily
redeemable convertible preferred securities, net of tax, and, for the
2001 periods, interest on and amortization of financing costs
associated with the 4.75% convertible senior notes due 2008, net of
tax, both of which are obligations of Hanover but not HCLP.
(d) Includes the adjustment to remove the 4.75% convertible senior notes
due 2008, which are obligations of Hanover but not HCLP.
17
(2) In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible
Assets. Under SFAS 142, amortization of goodwill to earnings will be
discontinued. SFAS 142 is effective for Hanover and HCLP on January 1,
2002. However, under the transition provisions of this statement, goodwill
acquired in a business combination for which the acquisition date is after
June 30, 2001, shall not be amortized. Since the acquisition of the gas
compression business of Schlumberger was consummated after June 30, 2001,
the estimated goodwill related to this acquisition has not been amortized
in the pro forma statements of operations. The goodwill related to business
combinations completed before June 30, 2001 continues to be amortized in
the pro forma presentation because Hanover and HCLP have not adopted SFAS
142.
(3) EBITDA consists of the sum of consolidated net income before interest
expense, leasing expense, distributions on mandatorily redeemable
convertible preferred securities, income tax, and depreciation and
amortization. We believe that EBITDA is a meaningful measure of our
operating performance and is also used to measure our ability to meet debt
service requirements. EBITDA should not be considered as an alternative
performance measure prescribed by generally accepted accounting principles.
(4) For purposes of computing the ratio of earnings to fixed charges:
"earnings" consist of income before income taxes plus fixed charges and
"fixed charges" consist of interest expense (including amortization of debt
discount and expense), leasing expense and the estimated interest factor
attributable to rentals.
18
Summary Financial Data of Hanover Equipment Trust 2001A
In the table below, we have provided you with summary historical financial
data for the Issuer. The historical financial data were derived from the
Issuer's audited financial statements as of September 30, 2001 and for the
period from August 2, 2001 (inception) to September 30, 2001. Operations of the
Issuer commenced on August 2, 2001. The information in this section should be
read along with the Issuer's financial statements, accompanying notes and other
financial information contained in this prospectus.
As of September 30, 2001
and for the period from
August 2, 2001 (inception) to
September 30, 2001
-----------------------------
(in thousands)
OPERATING STATEMENT DATA:
Rental revenues..................................................... $ 2,368
Expenses:...........................................................
Interest expense on rental equipment.............................. 2,267
--------
Excess rental revenue over interest expense on rental equipment.. 101
Operating expense................................................... 6
--------
Income before depreciation.......................................... 95
Depreciation expense................................................ 919
--------
Net loss............................................................ $ (824)
========
OTHER DATA:
Ratio of earnings to fixed charges(1)............................... --
BALANCE SHEET DATA (END OF PERIOD):
Rental equipment.................................................. $309,300
Total assets...................................................... 310,749
8.50% senior secured notes due 2008............................... 300,000
Certificate holder's equity....................................... 8,381
- --------
(1) For purposes of computing the ratio of earnings to fixed charges:
"earnings" consist of net loss plus fixed charges and "fixed charges"
consist of interest expense on rental equipment. Due to the Issuer's loss
in the period from August 2, 2001 (inception) through September 30, 2001,
the ratio coverage was less than 1:1. Additional earnings of $824 thousand
are needed by the Issuer to achieve a one to one ratio.
19
RISK FACTORS
An investment in the notes involves risks. You should carefully consider and
evaluate all of the information in this prospectus, including the following
risk factors, before investing.
Risks Related to Our Business
Short Lease Terms--Many of our compressor leases have short initial terms,
and we cannot be sure that the compressors will stay out on location after the
end of the initial lease term.
The length of our leases varies based on operating conditions and customer
needs, as more fully discussed in "Business of Hanover Compressor Company and
Hanover Compression Limited Partnership--Compression Services and Fabrication"
on page 72 of this prospectus. In most cases, under currently prevailing lease
rates, the initial lease terms are not long enough to enable us to fully recoup
the average cost of acquiring or manufacturing the equipment. We cannot assure
you that a substantial number of our lessees will continue to renew their
leases or that we will be able to re-lease the equipment to new customers or
that any renewals or re-leases will be at comparable lease rates. The inability
to renew or re-lease a substantial portion of our compressor rental fleet would
have a material adverse effect upon our business, results of operations and
financial condition.
Substantial Capital Requirements--We require a substantial amount of capital
to expand our compressor rental fleet and our complementary businesses.
We plan to continue to make substantial capital investments to expand our
compressor rental fleet and our complementary businesses. Including business
acquisitions, we invested approximately $464.7 million in capital expenditures
during the year ended December 31, 2000. On August 31, 2001, we acquired the
gas compression business of Schlumberger for $761 million, subject to certain
post-closing adjustments pursuant to the acquisition agreement that to date
have resulted in an increase in the purchase price to approximately $768
million. As of September 30, 2001, we had invested approximately $857.2 million
in capital expenditures including business acquisitions during 2001 (including
approximately $200 million from the exercise of our purchase option under our
1998 operating lease and without giving effect to any additional material
acquisitions). Our current plans are to spend approximately $75 to $90 million
during the fourth quarter of 2001, and $325 million in 2002, exclusive of any
major acquisitions, in continued expansion of the rental fleet. The amount of
these expenditures may vary depending on their expected rate of return,
conditions in the natural gas industry and the timing and extent of any
significant acquisitions we may make. Historically, we have funded our capital
expenditures through internally generated funds, sale and leaseback
transactions and debt and equity financing. While we believe that cash flow
from our operations and borrowings under our existing $350 million bank credit
agreement will provide us with sufficient cash to fund our planned capital
expenditures in the near term, we cannot assure you that these sources will be
sufficient. As of December 3, 2001, we had approximately $174.5 million of
credit capacity remaining on our $350 million bank credit agreement (4.0% rate
at December 3, 2001). Failure to generate sufficient cash flow, together with
the absence of alternative sources of capital, could have a material adverse
effect on our growth, results of operations and financial condition.
International Operations--There are many risks associated with conducting
operations in international markets.
We operate in many different geographic markets, some of which are outside
the United States. Changes in local economic or political conditions,
particularly in Latin America or Canada, could have a material adverse effect
on our business, results of operations and financial condition. Additional
risks inherent in our international business activities include the following:
. difficulties in managing international operations;
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers which may restrict our ability to enter
into new markets;
. potentially adverse tax consequences;
20
. restrictions on repatriation of earnings;
. the burden of complying with foreign laws; and
. fluctuations in currency exchange rates and the value of the U.S. dollar.
As part of our acquisition of the gas compression business of Schlumberger,
we acquired minority interests in three joint ventures in South America. As a
minority investor in these joint ventures, we will not be able to control their
operations and activities, including without limitation, whether and when they
distribute cash or property to their holders.
Acquisition Strategy--We may not be able to find suitable acquisition
candidates or successfully integrate acquired companies into our business.
As part of our business strategy, we will continue to pursue the selective
acquisitions of other companies, assets and product lines that either
complement or expand our business. Each acquisition involves potential risks,
such as the diversion of management's attention away from current operations,
problems in integrating acquired businesses and possible short-term adverse
effects on our operations as a result of that process. We may be unable to
successfully integrate acquired businesses into our business, or may be able to
do so only at significant expense. We actively review acquisition opportunities
on an ongoing basis, and we may make a new acquisition at any time. Given our
selective approach to acquisitions, we are unable to predict whether or when we
will find suitable acquisition candidates or whether we will be able to
complete a material acquisition. Depending on the size of our potential
acquisitions, we may seek to finance acquisitions with cash or through the
issuance of new debt and/or equity securities.
Industry Conditions--A prolonged, substantial reduction in oil or gas prices
could adversely affect our business.
Our operations depend upon the levels of activity in natural gas
development, production, processing and transportation. In recent years, oil
and gas prices and the level of drilling and exploration activity have been
extremely volatile. For example, from mid-1998 to mid-1999, oil and gas
exploration and development activity and the number of well completions
declined due to a significant reduction in oil and gas prices. As a result, the
demand for our gas compression and oil and gas production equipment was
adversely affected. Any future significant, prolonged decline in oil and gas
prices could have a material adverse effect on our business, results of
operations and financial condition.
Competition--We operate in a highly competitive industry.
We experience competition from companies who may be able to more quickly
adapt to changes within our industry and throughout the economy as a whole,
more readily take advantage of acquisition and other opportunities and adopt
more aggressive pricing policies. There can be no assurance that we will be
able to continue to compete successfully in this market or against such
competition. If we do not compete successfully, our business, results of
operations and financial condition could be adversely affected.
Potential Liability and Insurance--Natural gas operations entail inherent
risks that may result in substantial liability to us.
Natural gas operations entail inherent risks, including equipment defects,
malfunctions and failures and natural disasters, which could result in
uncontrollable flows of gas or well fluids, fires and explosions. These risks
may expose us, as an equipment operator or fabricator, to liability for
personal injury, wrongful death, property damage, pollution and other
environmental damage. We have obtained insurance against liability for personal
injury, wrongful death and property damage, but we cannot assure you that the
insurance will be adequate to cover our liability. Similarly, we cannot assure
you that we will be able to obtain insurance in the future at a reasonable cost
or at all. Our business, results of operations and financial condition could be
adversely affected if we incur substantial liability and the damages are not
covered by insurance or are in excess of policy limits.
21
Terrorist Attacks or Responses Thereto--Terrorist attacks or responses
thereto could adversely affect our business, results of operations and
financial condition.
On September 11, 2001, terrorists carried out attacks that destroyed the
World Trade Center in New York and badly damaged the Pentagon outside of
Washington, D.C. As a result of these attacks, the United States securities
markets were closed for several days. The impact that these terrorist attacks,
or future events arising as a result of these terrorist attacks, including
military or police activities in the United States or foreign countries, future
terrorist activities or threats of such activities, political unrest and
instability, riots and protests, could have on the United States and the global
economy, the United States and global securities markets and our business,
results of operations and financial condition cannot presently be determined
with any accuracy.
Governmental Regulation--Our business is subject to a variety of
governmental regulations relating to the environment, health and safety.
Our business is subject to a variety of federal, state, local and foreign
laws and regulations relating to the environment, health and safety. These laws
and regulations are complex, change frequently and have tended to become more
stringent over time. Failure to comply with these laws and regulations may
result in a variety of civil and criminal enforcement measures, including
assessment of monetary penalties, imposition of remedial requirements and
issuance of injunctions as to future compliance. As part of the regular overall
evaluation of both our current operations and newly acquired operations, we are
in the process of applying for or updating certain facility permits with
respect to stormwater discharges, waste handling and air emissions relating to
painting and blasting. In addition, certain of our customer service
arrangements may require us to operate, on behalf of a specific customer,
petroleum storage units such as underground tanks or pipelines and other
regulated units, all of which may impose additional compliance obligations. We
are evaluating the impact on our operations of recently promulgated air
emission regulations relating to non-road engines. We intend to implement any
equipment upgrades or permit modifications required by these air emission
regulations according to the required schedule. We do not anticipate, however,
that any changes or updates in response to such regulations, or any other
anticipated permit modifications (for stormwater, other air emission sources or
otherwise) or anticipated ongoing regulatory compliance obligations will have a
material adverse effect on our operations either as a result of any enforcement
measures or through increased capital costs. Based on our experience to date,
we believe that the future cost of compliance with existing laws and
regulations will not have a material adverse effect on our business, results of
operations or financial condition. However, future events, such as compliance
with more stringent laws and regulations, a major expansion of our operations
into more heavily regulated activities, more vigorous enforcement policies by
regulatory agencies or stricter or different interpretations of existing laws
and regulations could require us to make material expenditures.
We have conducted preliminary environmental site assessments with respect to
some, but not all, properties currently owned or leased by us, usually in a
pre-acquisition context. Some of these assessments have revealed that soils
and/or groundwater at some of our facilities are contaminated with
hydrocarbons, heavy metals and various other regulated substances. With respect
to newly acquired properties, we do not believe that our operations caused or
contributed to any such contamination and we are not currently under any orders
or directives to undertake any remedial activity. We typically will develop a
baseline of site conditions so we can establish conditions at the outset of our
operations on such property. However, the handling of petroleum products and
other regulated substances is a normal part of our operations, and we have
experienced occasional minor spills or incidental leakage in connection with
our operations. Certain properties previously owned or leased by us were
determined to be impacted by soil contamination. Where such contamination was
identified, we have since conducted remedial activities at these
previously-held properties as we believed necessary to meet regulatory
standards, and either sold the owned properties to third parties or returned
the leased properties to the lessors. We are not currently aware of any further
remedial obligations at such previously-held properties. Based on our
experience to date, and the relatively minor nature of the types of
contamination we have identified to date, we believe that the future cost of
necessary investigation or remediation on our current properties will not have
a material adverse effect on our business, results of operations, or financial
condition. We cannot be certain, however, that cleanup standards will not
become more stringent, or that we will not be required to undertake any
remedial activities involving any substantial costs on any of these current or
previously-held properties in the future or that the discovery of unknown
contamination or third-party claims made with respect to current or previously
owned or leased properties may not result in substantial costs.
22
Concentrated Ownership--A significant amount of our stock is owned by two
stockholders.
GKH Investments, L.P. ("GKH") owned approximately 23% of our common stock as
of September 30, 2001. Schlumberger and its affiliates owned approximately 11%
of our common stock as of September 30, 2001. As holders of large blocks of our
stock, GKH and Schlumberger are in a position to exert substantial influence
over the outcome of many corporate actions requiring stockholder approval,
including the election of directors, the additional issuance of our common
stock or other securities and transactions involving a change of control. The
interests of GKH or Schlumberger could conflict with the interests of our other
stockholders and the holders of the notes.
GKH has advised us that it is in the process of dissolving and "winding up"
its affairs. Although GKH has not advised us of the precise timeline of its
dissolution and "winding-up," we believe that GKH will complete this process
during the next 12 to 24 months. Before the end of the "wind-up" process, GKH
will liquidate or distribute substantially all of its assets, including the
shares of our common stock owned by GKH, to its partners. We cannot predict
whether the partners of GKH who may receive a distribution of shares of our
common stock from GKH would continue to hold those shares or whether the
interests of such partners may conflict with the interests of our other
stockholders and the holders of the notes.
Customer Concentration--Production Operators, Inc. ("POI"), which we
acquired as part of the gas compression business of Schlumberger, is subject to
a higher level of customer concentration than we have historically experienced.
POI generated 43.5% of its revenues in 2000 from its three largest
customers. Williams Field Services, Amoco Production Company and Noram Field
Services accounted for 27.3%, 8.3% and 7.9% of POI's revenues in 2000,
respectively. On a pro forma basis, these three customers would have accounted
for 9.0% of our revenues in 2000. While our historic customer base is more
diverse, the loss of any of the three largest customers or a significant
decrease in demand by any of the three largest customers for the services POI
provides could have an adverse effect on our business, results of operations
and financial condition.
Risks Related to the Notes
Substantial Debt and Operating Leases--We have a substantial amount of debt
and operating lease commitments. Our current debt level could limit our ability
to fund future working capital needs and increase our exposure during adverse
economic conditions.
We have substantial debt and operating lease commitments. As of December 3,
2001, we had approximately $881 million in residual value guarantees that are
due upon termination of our operating leases (including the Lease) and may be
satisfied by a cash payment or the exercise of our purchase options under the
terms of the respective lease agreements, approximately $504 million of
existing indebtedness, and unused availability of approximately $174.5 million
under our $350 million bank credit agreement. The participation agreement
permits us to incur additional indebtedness and enter into other operating
lease commitments generally as long as, after we enter into these transactions,
our ratio of EBITDA, as adjusted, to total interest expense (including capital
and operating lease payments) is greater than 2.25 to 1.0.
Our substantial debt and operating lease commitments could have important
consequences to you. For example, these commitments could:
. make it more difficult for us to satisfy our obligations with respect to
the notes;
. increase our vulnerability to general adverse economic and industry
conditions;
. limit our ability to fund future working capital, capital expenditures,
acquisitions and other general corporate requirements;
23
. increase our vulnerability to interest rate fluctuations because the
interest payments on a portion of our debt are at variable rates;
. limit our flexibility in planning for, or reacting to, changes in our
business and our industry;
. place us at a disadvantage compared to our competitors that have less
debt or operating lease commitments; and
. limit our ability to borrow additional funds.
Additionally, the indenture, the participation agreement and other documents
governing the Lease contain financial and other restrictive covenants. Failing
to comply with those covenants could result in an event of default which, if
not cured or waived, could have a material adverse effect on us. See
"Description of Notes."
We may incur additional debt and increase the amounts under our operating
lease commitments in the future which may intensify the risks described above.
The terms of the indenture and the participation agreement do not prohibit us
or our subsidiaries from incurring additional indebtedness, including
indebtedness that is senior in right of payment to the notes, although the
indenture and the participation agreement do contain certain limitations on
additional indebtedness. For example, as of December 3, 2001, we had
outstanding indebtedness of $149.0 million under our $350 million bank credit
agreement.
Significant Cash Requirements--We will require a significant amount of cash
to service our indebtedness and operating lease commitments and to fund working
capital, and our ability to generate cash depends on many factors beyond our
control.
Our ability to make scheduled payments under the Lease or our other
operating leases, or to refinance our indebtedness, will depend on our ability
to generate cash in the future. This is subject to our operational performance,
as well as general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control.
We cannot assure you that our business will generate sufficient cash flow
from operations or that future borrowings will be available to us under our
$350 million bank credit agreement in an amount sufficient to enable us to pay
our indebtedness, operating lease commitments, or to fund our other liquidity
needs. We cannot assure you that we will be able to refinance any of our
indebtedness on commercially reasonable terms or at all. Our inability to
refinance our debt on commercially reasonable terms could materially adversely
affect our business.
Subordination of the Hanover Guarantee--While the notes will be senior,
secured obligations of the Issuer, the Hanover Guarantee ranks behind Hanover's
and HCLP's existing and future senior indebtedness. Moreover, the obligations
of Hanover and HCLP under the Hanover Guarantee will be structurally
subordinated to all indebtedness and other liabilities of such guarantor's
respective subsidiaries.
As a result of the subordinated nature of the Hanover Guarantee, upon any
distribution to any of the creditors of Hanover or HCLP, as the case may be, in
a bankruptcy, liquidation or reorganization or similar proceeding relating to
Hanover or HCLP or their respective properties, the holders of senior
indebtedness of Hanover or HCLP, as the case may be, will be entitled to be
paid in full in cash before any payment may be made with respect to the Hanover
Guarantee.
Events of default under the indenture differ in certain respects from the
events of default under the Lease. Unless there is an event of default under
the Lease, the Issuer would have recourse under the Hanover Guarantee only up
to the maximum amount of 77.33% of the aggregate principal balance of notes
outstanding, which is equal to the final rent payment under the Lease. As of
September 30, 2001, unless there is an event of default under the Lease, the
Issuer would have recourse under the Hanover Guarantee only to the extent of
approximately $232 million. As a result, the Issuer may not be able to perform
its obligations under the indenture.
24
No payments may be made under the Hanover Guarantee if there is a default in
payment on senior indebtedness of Hanover or HCLP or the maturity of such
senior indebtedness is accelerated. In addition, during the continuance of
certain defaults under certain senior indebtedness of Hanover or HCLP, Hanover
or HCLP, as the case may be, will not be permitted to make payments under the
Hanover Guarantee for a payment blockage period of up to 179 of 360 consecutive
days. In the event that the Issuer is unable to pay the notes, the holders of
the notes would have no recourse under the Hanover Guarantee during any such
payment blockage period. Furthermore, despite the fact that the notes are
secured by the Equipment, any remedies exercisable against such collateral will
also be blocked during such period.
Partial Payment and the Hanover Guarantee--If at the end of the Lease term,
HCLP fails to purchase the Equipment, then HCLP is required to pay an amount
equal to the Final Rent Payment with respect to the Lease plus the proceeds, if
any, from the sale of the Equipment. This amount may be less than the amount
due on the notes.
Hanover and HCLP are obligated under the Hanover Guarantee to guarantee
payment in full on the notes only upon the occurrence of an event of default
under the Lease, which would include, among other things, the failure to make
any rent payments (including the Final Rent Payment) or properly insure or
maintain the Equipment. If, by the end of the term of the Lease, HCLP does not
exercise its option to purchase the Equipment and instead exercises its option
to pay the Final Rent Payment in full, sell the Equipment, and apply the
proceeds from the sale to repay the remainder of the notes, no event of default
under the Lease will have occurred. If the proceeds from the sale of the
Equipment under the Lease are less than $68 million (as such amount may be
reduced from time to time upon purchases of Equipment under the Lease by HCLP
in accordance with the terms of the Lease) and therefore insufficient to pay
the remainder of the notes, the holders of the notes will incur a loss and
neither Hanover nor HCLP will be required to compensate for any such shortfall.
Insufficient Equipment Value--The value of the Equipment securing the notes
may not be sufficient to cover the obligations owed to you under the notes.
The notes are secured by collateral consisting of a perfected first priority
security interest in the Equipment, and an assignment of the Lease and the
Hanover Guarantee to the trustee for the notes. If there is a payment default
under the Lease or the Hanover Guarantee such that we do not have sufficient
cash and capital resources available to pay our obligations, you will have to
look to the value that can be realized from the Equipment with respect to the
notes.
An independent appraisal firm prepared an appraisal of the Equipment to
appraise the value of the Equipment as of August 16, 2001 and as of the end of
the Lease term. The Equipment had an appraised fair market value as of August
16, 2001 of not less than $309 million. You should not place undue reliance on
the appraisal. The appraisal relies on certain assumptions and methodologies
and may not accurately reflect the current or future market value of the
Equipment. Appraisals based on different assumptions or methodologies may
result in materially different valuations.
An appraisal is only an estimate of value. The proceeds realized upon a
future sale of any of the Equipment may be less than the appraised value of the
Equipment. If the remedies after default are exercised under the Lease, the
value of the Equipment will depend on market and economic conditions at that
time, the supply of similar types of equipment, the availability of buyers, the
condition of the Equipment and other factors. Accordingly, there can be no
assurance that the proceeds realized upon any such exercise of remedies would
be sufficient to satisfy in full amounts owing on the notes.
Limited Assets and Revenues--The assets and source of revenue available to
repay the notes and satisfy the claims of holders of the notes are limited, as
the Issuer has no assets other than its interests in the Equipment, and no
source of revenue other than the payments under the Lease and the Hanover
Guarantee.
25
The notes are the obligations of the Issuer and are secured only by a
perfected first priority security interest in the Equipment and an assignment
of the Lease and the Hanover Guarantee to the trustee for the notes. The notes
are not obligations of Hanover or HCLP. The holders of the notes and the
trustee under the indenture will have recourse only against the Issuer, the
collateral for the benefit of the holders of the notes, and Hanover and HCLP to
the extent of the Hanover Guarantee. If HCLP defaults under the Lease and
Hanover and HCLP default under the Hanover Guarantee, the Issuer may not be
able to perform its obligations under the indenture.
Limitations on Amendments and Acceleration--There are some limitations on
the right to amend the participation agreement and the other operative
agreements and to accelerate payments under the Lease and to foreclose on the
Equipment.
During a workout or bankruptcy proceeding, the consent of the Issuer's
equity certificate holder may be required to amend, supplement, waive or modify
provisions of the Lease, the participation agreement, the indenture and each
other operative agreement that is material to such equity certificate holder,
if such amendment, waiver, supplement or modification would materially
adversely affect the equity certificate holder.
Events of default under the indenture are different in some ways from the
events of default under the Lease. Accordingly, even though the trustee under
the indenture will be entitled to accelerate the notes if there is an event of
default under the indenture, the Issuer, as lessor under the Lease, would not
be entitled to accelerate the lease payments or exercise any of its other
remedies under the Lease unless there were an event of default under the Lease.
If a default occurs under the indenture without a corresponding default under
the Lease, the Issuer would have no source of repayment of the notes upon
acceleration of the notes by the trustee. Further, unless there is an event of
default under the Lease, the holders of the notes will have recourse under the
Hanover Guarantee only up to the maximum amount of 77.33% of the aggregate
principal balance of notes outstanding, which is equal to the final rent
payment under the Lease. As of September 30, 2001, unless there is an event of
default under the Lease, the Issuer would have recourse under the Hanover
Guarantee only to the extent of approximately $232 million. As a result, the
Issuer may not be able to perform its obligations under the indenture.
Rejection of the Lease in Bankruptcy--The Lease may be rejected as an
executory contract if HCLP declares bankruptcy.
The parties intend that, for bankruptcy law purposes, the transactions
evidenced by the Lease be regarded as loans made by an unrelated third party
lender to HCLP, secured by a lien on the Equipment. If HCLP were to become a
debtor in a bankruptcy case, the court should agree with this characterization.
If, however, a bankruptcy court determines that the Lease should be
characterized as a true lease, HCLP or its bankruptcy trustee would have the
right to assume or reject the Lease as an executory contract. Regardless of how
the transactions are characterized, however, the right to exercise remedies
against HCLP in a bankruptcy proceeding would be stayed, including the right to
proceed against the Equipment and HCLP under the Lease and Hanover Guarantee,
and may be stayed against Hanover under the Hanover Guarantee. In addition, in
the event of a HCLP bankruptcy, (i) there could be no assurance that
distributions, if any, payable with respect to any claim under the Lease would
be in an amount sufficient to result in a repayment of the notes, and (ii) if,
after obtaining bankruptcy court approval, the Issuer is permitted to foreclose
or otherwise sell the Equipment during a bankruptcy of HCLP, it may not realize
sufficient value to cause the notes to be repaid.
Subordination of HCLP's Lease Commitment--Commitments and payment
obligations under the Lease are subordinated to HCLP's senior obligations as
well as all indebtedness and other liabilities of its subsidiaries.
While the notes are senior secured obligations of the Issuer, the Issuer's
ability to make timely payments under the notes will depend entirely on timely
receipt of payments from HCLP under the Lease. Obligations in respect of the
Lease will rank behind all of HCLP's existing and future senior indebtedness.
HCLP's commitments under the Lease will also be effectively subordinated to all
secured indebtedness of HCLP to the extent of the security. Moreover, HCLP's
commitments under the Lease will be structurally subordinated to all
indebtedness and other liabilities of its subsidiaries.
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Events of default under the indenture differ in certain respects from the
events of default under the Lease. Accordingly, although the trustee for the
notes is entitled to accelerate the maturity of the notes following an event of
default under the indenture, the Issuer is not entitled to accelerate the
payments under the Lease or exercise any of its other remedies under the Lease
unless there is an event of default under the Lease.
No payments may be made under the Lease if there is a default in payment on
senior indebtedness of HCLP or the maturity of such senior indebtedness is
accelerated. In addition, during the continuance of certain defaults under
certain senior indebtedness of HCLP, HCLP is not permitted to make payments
under the Lease for a payment blockage period of up to 179 of 360 consecutive
days. As a result, the Issuer will have insufficient funds to pay the notes.
Despite the fact that the notes are secured by the Equipment of the Issuer, any
remedies exercisable against this collateral will also be blocked during any
payment blockage period.
Limited Rights Against Issuer in Bankruptcy--In addition to the risks
discussed above with respect to bankruptcy of HCLP, if the Issuer declares
bankruptcy, your rights against the Issuer may be limited.
If the Issuer were the subject of a bankruptcy petition, the right to
exercise virtually all remedies against the Issuer would be stayed, including
the right to proceed against the collateral held by the collateral agent
securing the notes. A bankruptcy court may recharacterize the Lease as a
secured financing incurred by HCLP and therefore restrict your ability to
realize on the Equipment in order to satisfy the obligation under the notes. In
addition, the bankruptcy court could permit the use or disposition of payments
made under the Lease for purposes other than making payments on the notes and
could reduce the amount or modify the timing of payments due under the notes or
the Lease, including by rejecting the Lease.
Characterization of the Lease--We and the Issuer intend that the Lease be
treated as an operating lease for financial accounting purposes but as a
financing arrangement for income and certain other tax purposes. Accounting
treatment inconsistent with our intent could adversely affect our other
obligations and tax treatment inconsistent with our intent could have a
material adverse effect on our financial condition and results of operations.
We and the Issuer intend to treat the Lease as a secured financing
arrangement for income and certain other tax purposes, which is consistent with
how the Lease is intended to be treated for bankruptcy law and state law
purposes, but differs from the treatment of the Lease as an operating lease for
financial accounting purposes.
If the Internal Revenue Service or another taxing authority were to
successfully contend that the Lease or any of our other operating leases should
be treated as a sale and leaseback of equipment rather than a secured financing
arrangement, we may owe significant additional taxes. This result may affect
our ability to make payments on the Lease, which in turn may affect the
Issuer's ability to make payments to the holders of the notes.
In addition, if the Lease is treated as indebtedness rather than as an
operating lease for financial accounting purposes, this additional indebtedness
could cause a default with respect to certain of our other obligations. Some of
those obligations, including our bank credit agreement and our other operating
leases, are senior to our obligations with respect to the Lease. A default
under those other obligations could affect our ability to make timely payments
on the Lease, which in turn may affect the Issuer's ability to make timely
payments to the holders of the notes.
Prior Liens--Other creditors may have prior liens on the collateral that
could reduce or eliminate the amount of collateral securing the notes.
In general, the priority of the liens on a particular item of collateral
securing the Lease is determined by the time that the security interest in that
item of collateral is perfected. Creditors such as purchase money lenders may
be entitled to a prior claim to someone, such as the collateral agent, even if
that person has previously perfected a security interest in the collateral.
Furthermore, liens such as landlords', warehousemen's and materialmen's liens
and tax liens may by law have priority over the liens granted for your benefit
in the collateral.
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We do not believe there are any material prior liens on the collateral
securing claims of anyone that is not a party to the Lease. However, additional
prior claims may arise by law and a bankruptcy or other court may refuse, on
equitable or other grounds, to enforce the terms of the Lease and the
participation agreement against the other creditors party to those agreements.
If this were to happen, the claims of the other creditors against the
collateral could be prior to yours.
Fraudulent Transfer--The Hanover Guarantee could be declared void or
subordinate because of federal bankruptcy law or comparable state law
provisions.
Under the federal bankruptcy laws and comparable provisions of state
fraudulent transfer laws, the Hanover Guarantee could be declared void, or
claims in respect of such guarantee could be subordinated to all other debts of
Hanover or HCLP if, among other things, Hanover or HCLP, as the case may be, at
the time it incurred the indebtedness evidenced by the Hanover Guarantee
received less than reasonably equivalent value or fair consideration for the
incurrence of the Hanover Guarantee and
. was insolvent or rendered insolvent by reason of that incurrence;
. was engaged in a business or transaction for which Hanover's or HCLP's
remaining assets constituted unreasonably small capital; or
. intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by Hanover or HCLP pursuant to the Hanover
Guarantee could be declared void and required to be returned to Hanover or
HCLP, as the case may be, or to a fund for the benefit of its creditors.
The measures of insolvency for purposes of the fraudulent transfer laws vary
depending on the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, an entity would be
considered insolvent if:
. the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all of its assets;
. the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liabilities on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
. it could not pay its debts as they become due.
We cannot be sure as to the standard a court would use to determine whether
or not Hanover or HCLP was solvent at the relevant time, or, regardless of the
standard a court uses, that the issuance of the Hanover Guarantee would not be
voided or that the Hanover Guarantee would not be subordinated to Hanover's or
HCLP's other debt.
If the Hanover Guarantee were legally challenged, it could also be subject
to the claim that, because incurred for the benefit of the holders of the
notes, and only indirectly for the benefit of Hanover and HCLP, the obligations
of Hanover or HCLP, as the case may be, were incurred for less than fair
consideration.
A court could thus void the obligations under the Hanover Guarantee with
respect to Hanover or HCLP or subordinate the Hanover Guarantee to Hanover's or
HCLP's other debt or take other action detrimental to holders of the notes.
No Prior Public Trading Market--There currently exists no public market for
the new notes, and we cannot assure you that one will develop.
The new notes are new securities for which there is currently no trading
market. We do not intend to list the new notes on any securities exchange. No
affiliate of the Issuer will make a market in the new notes. Although we expect
the new notes to be eligible for trading in the PORTAL market, an active
trading market for the new notes may never develop.
The liquidity of any market for the new notes will depend upon various
factors, including:
. the number of holders of the new notes;
. the interest of securities dealers in making a market for the new notes;
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. the overall market for high-yield securities;
. our financial performance and prospects; and
. the prospects for companies in our industry generally.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
like the new notes. The market for the new notes, if any, may be subject to
similar disruptions. Any such disruptions could adversely affect you as a
holder of the new notes.
In addition, to the extent that old notes are surrendered and accepted in
the exchange offer, the trading market for unsurrendered old notes and for
surrendered-but-unaccepted old notes could be adversely affected due to the
limited amount of old notes that are expected to remain outstanding following
the exchange offer. Generally, when there are fewer outstanding securities of a
given issue, there is less demand to purchase that security. This results in a
lower price for the security. Conversely, if many old notes are not
surrendered, or are surrendered-but-unaccepted, the trading market for the new
notes could be adversely affected. See "Plan of Distribution" and "The Exchange
Offer" for further information regarding the distribution of the new notes and
the consequences of failure to participate in the exchange offer.
Repayment or Repurchase of Notes--The Issuer may be unable to repay or,
following a change in control, repurchase the notes.
There is no sinking fund with respect to the notes, and at maturity the
entire outstanding principal amount of the notes will become due and payable.
If Hanover experiences a change in control of the type described under
"Description of Notes," you may require the Issuer to repurchase all or a
portion of your notes prior to maturity. We cannot assure you that the Issuer
will have sufficient funds to repay the notes at maturity or to repurchase the
notes tendered following a change in control. The Issuer's failure to
repurchase any tendered notes or to repay the notes upon maturity would
constitute an event of default under the indenture and, upon acceleration of
the notes in accordance with the indenture, would cause a default under the
terms of Hanover's $350 million bank credit agreement, existing operating
leases and 4.75% convertible senior notes due 2008.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this prospectus are "forward-looking
statements" intended to qualify for the safe harbors from liability established
by the Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as "believes," "anticipates," "expects,"
"estimates," or words of similar import. Similarly, statements that describe
our future plans, objectives or goals are also forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those anticipated as of
the date of this prospectus. The risks and uncertainties include:
. the loss of market share through competition;
. the introduction of competing technologies by other companies;
. a prolonged, substantial reduction in oil and gas prices which would
cause a decline in the demand for our compression and oil and gas
production equipment;
. new governmental safety, health and environmental regulations which
could require us to make significant capital expenditures;
. our inability to successfully integrate acquired businesses; and
. changes in economic or political conditions in the countries in which we
operate.
The forward-looking statements included herein are only made as of the date
of this prospectus, and we undertake no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
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THE EXCHANGE OFFER
Purpose of the Exchange Offer
We issued the old notes on August 30, 2001 in a transaction exempt from the
registration requirements of the Securities Act. Accordingly, the old notes may
not be reoffered, resold, or otherwise transferred unless so registered or
unless an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the sale of the old notes, we entered into an exchange
and registration rights agreement, which requires us to:
. file a registration statement with the Securities and Exchange
Commission relating to the exchangeoffer not later than 120 days after
the date of issuance of the old notes;
. use our reasonable best efforts to cause the registration statement
relating to the exchange offer to become effective under the Securities
Act no later than 150 days after the date of issuance of the old notes;
. use our reasonable best efforts to complete the exchange offer no later
than 180 days after the date of issuance of the old notes; and
. to file a shelf registration statement for the resale of the old notes
if we cannot effect an exchange offer within 180 days after the date of
issuance of the old notes and in other designated circumstances.
We have filed a copy of the exchange and registration rights agreement as an
exhibit to the registration statement of which this prospectus is a part. We
are making the exchange offer to satisfy our obligations under the exchange and
registration rights agreement. Other than pursuant to the exchange and
registration rights agreement, we are not required to file any registration
statement to register any outstanding old notes. Holders of old notes who do
not tender their old notes or whose old notes are tendered but not accepted in
the exchange offer must rely on an exemption from the registration requirements
under the federal securities laws if they wish to sell their old notes.
Terms of the Exchange Offer
We are offering to exchange, subject to the conditions described in this
prospectus and in the letter of transmittal accompanying this prospectus,
$1,000 in principal amount of new notes for each $1,000 in principal amount of
the old notes. The terms of the new notes are identical in all material
respects to the terms of the old notes, except that the new notes will
generally be freely transferable by holders of the new notes and will not be
subject to the terms of the exchange and registration rights agreement. The new
notes will evidence the same indebtedness as the old notes and will be entitled
to the benefits of the indenture. For additional information, see "Description
of Notes."
The exchange offer is not conditioned upon the tender of any minimum
principal amount of old notes.
We have not requested, and do not intend to request, an interpretation by
the staff of the Securities and Exchange Commission as to whether the new notes
issued in exchange for the old notes may be offered for sale, resold or
otherwise transferred by any holder without compliance with the registration
and prospectus delivery provisions of the Securities Act. Instead, based on an
interpretation by the staff of the Securities and Exchange Commission set forth
in a series of no-action letters issued to third parties, we believe that new
notes issued in the exchange offer in exchange for old notes may be offered for
sale, resold and otherwise transferred by any holder of new notes, other than
any holder that is a broker-dealer or is an "affiliate" of ours within the
meaning of Rule 405 under the Securities Act, without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that:
. the new notes are acquired in the ordinary course of the holder's business;
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. the holder has no arrangement or understanding with any person to
participate in the distribution of the new notes; and
. the holder is not engaged in, and does not intend to engage in, a
distribution of the new notes.
Because the Securities and Exchange Commission has not considered the
exchange offer in the context of a no-action letter, we can provide no
assurance that the staff of the Securities and Exchange Commission would make a
similar determination with respect to the exchange offer. Any holder who is an
affiliate of ours or who tenders old notes in the exchange offer for the
purpose of participating in a distribution of the new notes cannot rely on the
interpretation by the staff of the Securities and Exchange Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. In connection with
the foregoing, each holder must make certain representations to us to
participate in the exchange offer. See "--Procedures for Tendering Old Notes"
and "--Terms and Conditions of the Letter of Transmittal."
Each broker-dealer that receives new notes for its own account in exchange
for old notes, where such old notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such new notes. See "Plan of Distribution." Broker-dealers who acquired old
notes directly from us and not as a result of market-making activities or other
trading activities may not rely on the staff's interpretations discussed above
or participate in the exchange offer, and must comply with the prospectus
delivery requirements of the Securities Act to sell the old notes.
The new notes will accrue interest from the date of issuance of the old
notes, which was August 30, 2001. Holders whose old notes are accepted for
exchange will be deemed to have waived the right to receive any interest
accrued on the old notes. Tendering holders of the old notes will not be
required to pay brokerage commissions or fees, or transfer taxes, except as
specified in the instructions in the letter of transmittal, with respect to the
exchange of the old notes in the exchange offer.
Expiration Date; Extension; Termination; Amendment
The exchange offer will expire at 5:00 p.m., New York City time, on ,
2002, unless we, in our sole discretion, extend the period of time for which
the exchange offer is open. Such time and date, as it may be extended, is
referred to herein as the "expiration date." The expiration date will be at
least 20 business days after the commencement of the exchange offer in
accordance with Rule 14e-1(a) under the Exchange Act. We expressly reserve the
right, at any time or from time to time, to extend the period of time during
which the exchange offer is open, and thereby delay acceptance for exchange of
any old notes. We will extend the expiration date by giving oral (promptly
confirmed in writing) or written notice of the extension to the exchange agent
and by timely public announcement no later than 9:00 a.m., New York City time,
on the next business day after the previously scheduled expiration date. During
the extension, all old notes previously tendered will remain subject to the
exchange offer unless properly withdrawn. We expressly reserve the right to:
. terminate or amend the exchange offer and not to accept for exchange any
old notes not previously accepted for exchange upon the occurrence of
any of the events specified below under "--Conditions to the Exchange
Offer" below which have not been waived by us; and
. amend the terms of the exchange offer in any manner, whether before or
after any tender of the old notes.
If any termination or amendment occurs, we will notify the exchange agent
and will either issue a press release or give oral or written notice to the
holders of the old notes as promptly as practicable.
For purposes of the exchange offer, a "business day" means any day other
than Saturday, Sunday or a date
32
on which banking institutions are required or authorized by Delaware or New
York State law to be closed, and consists of the time period from 12:01 a.m.
through 12:00 midnight, New York City time. Unless we terminate the exchange
offer prior to 5:00 p.m., New York City time, on the expiration date, we will
exchange the new notes for the old notes promptly following the expiration date.
Procedures for Tendering
Our acceptance of old notes tendered by a holder will constitute a binding
agreement between the tendering holder and us upon the terms and subject to the
conditions described in this prospectus and in the accompanying letter of
transmittal. All references in this prospectus to the letter of transmittal are
deemed to include a facsimile of the letter of transmittal. A holder of old
notes may tender the old notes by:
. properly completing and signing the letter of transmittal or a facsimile
thereof;
. properly completing any required signature guarantees;
. properly completing any other documents required by the letter of
transmittal; and
. delivering all of the above, together with the certificate or certificates
representing the old notes being tendered, to the exchange agent
at its address set forth below on or prior to the expiration date;
or
. complying with the procedure for book-entry transfer described below; or
. complying with the guaranteed delivery procedures described below.
The method of delivery of old notes, letters of transmittal and all other
required documents is at the election and risk of the holders. If the delivery
is by mail, it is recommended that registered mail properly insured, with
return receipt requested, be used. In all cases, sufficient time should be
allowed to ensure timely delivery. Holders should not send old notes or letters
of transmittal to us.
The signature on the letter of transmittal need not be guaranteed if:
. tendered old notes are registered in the name of the signer of the letter of
transmittal;
. the new notes to be issued in exchange for the old notes are to be issued in
the name of the holder; and
. any untendered old notes are to be reissued in the name of the holder.
In any other case, the tendered old notes must be:
. endorsed or accompanied by written instruments of transfer in form
satisfactory to us;
. duly executed by the holder; and
. the signature on the endorsement or instrument of transfer must be
guaranteed by a bank, broker, dealer, credit union, savings association,
clearing agency or other institution, in each case that is an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act and that is a member in good standing of a recognized
medallion signature guarantee program (an "Eligible Institution").
If the new notes and/or old notes not exchanged are to be delivered to an
address other than that of the registered holder appearing on the note register
for the old notes, the signature in the letter of transmittal must be
guaranteed by an Eligible Institution.
The exchange agent will make a request within two business days after the
date of receipt of this prospectus to establish accounts with respect to the
old notes at The Depository Trust Company, the "book-entry transfer facility,"
for the purpose of facilitating the exchange offer, unless suitable accounts
have already been established.
33
We refer to The Depository Trust Company in this prospectus as "DTC." Subject
to establishing the accounts, any financial institution that is a participant
in the book-entry transfer facility's system may make book-entry delivery of
old notes by causing the book-entry transfer facility to transfer the old notes
into the exchange agent's account with respect to the old notes in accordance
with the book-entry transfer facility's procedures for the transfer. Although
delivery of old notes may be effected through book-entry transfer into the
exchange agent's account at the book-entry transfer facility, an appropriate
letter of transmittal with any required signature guarantee and all other
required documents, or an agent's message, must in each case be properly
transmitted to and received or confirmed by the exchange agent at its address
set forth below prior to the expiration date, or, if the guaranteed delivery
procedures described below are complied with, within the time period provided
under such procedures.
The exchange agent and DTC have confirmed that the exchange offer is
eligible for the DTC Automated Tender Offer Program. We refer to the Automated
Tender Offer Program in this prospectus as "ATOP." Accordingly, DTC
participants may, in lieu of physically completing and signing the letter of
transmittal and delivering it to the exchange agent, electronically transmit
their acceptance of the exchange offer by causing DTC to transfer old notes to
the exchange agent in accordance with DTC's ATOP procedures for transfer. DTC
will then send an agent's message. The term "agent's message" means a message
which:
. is transmitted by DTC;
. is received by the exchange agent and forms part of the book-entry
transfer;
. states that DTC has received an express acknowledgment from a
participant in DTC that is tendering old notes which are the subject of
the book-entry transfer;
. states that the participant has received and agrees to be bound by all
of the terms of the letter of transmittal; and
. states that we may enforce such letter of transmittal and the agreements
set forth therein against the participant.
If a holder desires to accept the exchange offer and time will not permit a
letter of transmittal or old notes to reach the exchange agent before the
expiration date or the procedure for book-entry transfer cannot be completed on
a timely basis, the holder may effect a tender if the exchange agent has
received at its address set forth below on or prior to the expiration date, a
letter, telegram or facsimile transmission, and an original delivered by
guaranteed overnight courier, from an Eligible Institution setting forth:
. the name and address of the tendering holder;
. the names in which the old notes are registered and, if possible, the
certificate numbers of the old notes to be tendered; and
. a statement that the tender is being made thereby and guaranteeing that
within three New York Stock Exchange trading days after the expiration
date, the old notes in proper form for transfer, or a confirmation of
book-entry transfer of such old notes into the exchange agent's account
at the book-entry transfer facility, will be delivered by the Eligible
Institution together with a properly completed and duly executed letter
of transmittal or an agent's message and any other required documents.
So long as old notes being tendered by the above-described method are
deposited with the exchange agent within the relevant time period, a tender
will be deemed to have been received as of the date when:
. the tendering holder's properly completed and duly signed letter of
transmittal, or a properly transmitted agent's message, accompanied by
the old notes or a confirmation of book-entry transfer of the old notes
into the exchange agent's account at the book-entry transfer facility is
received by the exchange agent; or
34
. a notice of guaranteed delivery or letter, telegram or facsimile
transmission to similar effect from an Eligible Institution is received
by the exchange agent.
Issuances of new notes in exchange for old notes tendered pursuant to a
notice of guaranteed delivery or letter, telegram or facsimile transmission to
similar effect by an Eligible Institution will be made only against deposit of
the letter of transmittal and any other required documents and the tendered old
notes or a confirmation of book-entry and an agent's message. All questions as
to the validity, form, eligibility (including time of receipt), and acceptance
of old notes tendered for exchange will be determined by us in our sole
discretion, which determination will be final and binding. We reserve the
absolute right to reject any and all tenders of any old notes not properly
tendered or not to accept any old notes which acceptance might, in our judgment
or the judgment of our counsel, be unlawful. We also reserve the absolute right
to waive any defects or irregularities or conditions of the exchange offer as
to any old notes either before or after the expiration date, including the
right to waive the ineligibility of any holder who seeks to tender old notes in
the exchange offer. The interpretation of the terms and conditions of the
exchange offer, including the letter of transmittal and the instructions
contained in the letter of transmittal, by us will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with
tenders of old notes for exchange must be cured prior to the expiration date.
Neither we, the exchange agent nor any other person has any duty to you to give
notification of any defect or irregularity with respect to any tender of old
notes for exchange, nor will any of us incur any liability for failure to give
such notification.
If the letter of transmittal is signed by a person or persons other than the
registered holder or holders of old notes, the old notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the old notes.
If the letter of transmittal or any old notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
us, such persons must submit proper evidence satisfactory to us of their
authority to so act.
By tendering, each holder represents to us that, among other things:
. the new notes acquired pursuant to the exchange offer are being acquired
in the ordinary course of business of the holder;
. the holder is not participating, does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the new notes; and
. the holder is not an "affiliate," as defined under Rule 405 of the
Securities Act, of ours.
Each broker-dealer that receives new notes for its own account in exchange
for old notes, where such old notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such new notes. See "Plan of Distribution." Broker-dealers who acquired old
notes directly from us and not as a result of market-making activities or other
trading activities may not rely on the staff's interpretations discussed above
or participate in the exchange offer, and must comply with the prospectus
delivery requirements of the Securities Act to sell the old notes.
Terms and Conditions of the Letter of Transmittal
The letter of transmittal contains, among other things, the following terms
and conditions, which are part of the exchange offer.
The party tendering old notes for exchange exchanges, assigns and transfers
the old notes to us and
35
irrevocably constitutes and appoints the exchange agent as his agent and
attorney-in-fact to cause the old notes to be assigned, transferred and
exchanged. We refer to the party tendering notes herein as the "transferor."
The transferor represents and warrants that it has full power and authority to
tender, exchange, assign and transfer the old notes and to acquire new notes
issuable upon the exchange of the tendered old notes, and that, when the same
are accepted for exchange, we will acquire good and unencumbered title to the
tendered old notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the exchange agent or us to be necessary or desirable to complete the
exchange, assignment and transfer of tendered old notes or transfer ownership
of such old notes on the account books maintained by a book-entry transfer
facility. The transferor further agrees that acceptance of any tendered old
notes by us and the issuance of new notes in exchange for old notes will
constitute performance in full by us of various of our obligations under the
exchange and registration rights agreement. All authority conferred by the
transferor will survive the death or incapacity of the transferor and every
obligation of the transferor will be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of the
transferor.
The transferor certifies that it is not an "affiliate" of ours within the
meaning of Rule 405 under the Securities Act and that it is acquiring the new
notes offered hereby in the ordinary course of the transferor's business and
that the transferor has no arrangement or understanding with any person to
participate in the distribution of the new notes. Each transferor must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of new notes. Each transferor which is a broker-dealer receiving
new notes for its own account must acknowledge that it will deliver a
prospectus in connection with any resale of the new notes. By so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.
Withdrawal Rights
Tenders of old notes may be withdrawn at any time prior to the expiration
date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission, with receipt confirmed by telephone, or
letter must be received by the exchange agent at the address set forth in this
prospectus prior to the expiration date. Any notice of withdrawal must:
. specify the name of the person having tendered the old notes to be
withdrawn;
. identify the old notes to be withdrawn, including the certificate number
or numbers and principal amount of such old notes;
. specify the principal amount of old notes to be withdrawn;
. include a statement that the holder is withdrawing his election to have
the old notes exchanged;
. be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the old notes were tendered or as
otherwise described above, including any required signature guarantees,
or be accompanied by documents of transfer sufficient to have the
trustee under the indenture register the transfer of the old notes into
the name of the person withdrawing the tender; and
. specify the name in which any such old notes are to be registered, if
different from that of the person who tendered the old notes.
The exchange agent will return the properly withdrawn old notes promptly
following receipt of the notice of withdrawal. If old notes have been tendered
pursuant to the procedure for book-entry transfer, any notice of withdrawal
must specify the name and number of the account at the book-entry transfer
facility to be credited with the withdrawn old notes or otherwise comply with
the book- entry transfer facility procedure. All questions as to the validity
of notices of withdrawals, including time of receipt, will be determined by us
and our determination will be final and binding on all parties.
Any old notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the exchange offer. Any old notes which have been
tendered for exchange but which are not exchanged for any
36
reason will be returned to the holder without cost to the holder. In the case
of old notes tendered by book-entry transfer into the exchange agent's account
at the book-entry transfer facility pursuant to the book-entry transfer
procedures described above, the old notes will be credited to an account with
the book-entry transfer facility specified by the holder. In either case, the
old notes will be returned as soon as practicable after withdrawal, rejection
of tender or termination of the exchange offer. Properly withdrawn old notes
may be retendered by following one of the procedures described under
"--Procedures for Tendering" above at any time prior to the expiration date.
Acceptance of Old Notes for Exchange; Delivery of New Notes
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, on the expiration date, all old notes properly tendered and
will issue the new notes promptly after such acceptance. See "--Conditions to
the Exchange Offer" below for more detailed information. For purposes of the
exchange offer, we will be deemed to have accepted properly tendered old notes
for exchange when, and if, we have given oral (promptly confirmed in writing)
or written notice of our acceptance to the exchange agent.
For each old note accepted for exchange, the holder of the old note will
receive a new note having a principal amount equal to that of the surrendered
old note.
In all cases, issuance of new notes for old notes that are accepted for
exchange pursuant to the exchange offer will be made only after:
. timely receipt by the exchange agent of certificates for the old notes
or a timely book-entry confirmation of the old notes into the exchange
agent's account at the book-entry transfer facility;
. a properly completed and duly executed letter of transmittal, or a
properly transmitted agent's message; and
. timely receipt by the exchange agent of all other required documents.
If any tendered old notes are not accepted for any reason or if old notes
are submitted for a greater principal amount than the holder desires to
exchange, the unaccepted or nonexchanged old notes will be returned without
expense to the tendering holder of the old notes. In the case of old notes
tendered by book-entry transfer into the exchange agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described above, the non-exchanged old notes will be credited to an account
maintained with the book-entry transfer facility. In either case, the old notes
will be returned as promptly as practicable after the expiration of the
exchange offer.
Conditions to the Exchange Offer
Notwithstanding any other provision of the exchange offer, or any extension
of the exchange offer, we will not be required to accept for exchange, or to
issue new notes in exchange for, any old notes and may terminate or amend the
exchange offer, by oral (promptly confirmed in writing) or written notice to
the exchange agent or by a timely press release, if at any time before the
acceptance of the old notes for exchange or the exchange of the new notes for
such old notes, any of the following conditions exist:
. any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in our judgment would be expected to impair our ability to
proceed with the exchange offer; or
. the exchange offer, or the making of any exchange by a holder, violates
applicable law, any applicable interpretation of the staff of the
Securities and Exchange Commission or any order of any governmental
agency or court of competent jurisdiction.
37
The conditions described above are for our sole benefit and may be asserted
by us regardless of the circumstances giving rise to the condition or we may
waive any condition in whole or in part at any time and from time to time in
our sole discretion. Our failure at any time to exercise any of the rights
described above will not be deemed a waiver of the right and each right will be
deemed an ongoing right which we may assert at any time and from time to time.
If we waive or amend the conditions above, we will, if required by law,
extend the exchange offer for a minimum of five business days from the date
that we first give notice, by public announcement or otherwise, of the waiver
or amendment, if the exchange offer would otherwise expire within the five
business-day period. Any determination by us concerning the events described
above will be final and binding upon all parties.
In addition, we will not accept for exchange any old notes tendered, and no
new notes will be issued in exchange for those old notes, if at such time any
stop order shall be threatened or in effect with respect to the registration
statement of which this prospectus constitutes a part or the qualification of
the indenture under the Trust Indenture Act of 1939. In any of those events, we
are required to use every reasonable effort to obtain the withdrawal of any
stop order at the earliest possible time.
The exchange offer is not conditioned upon any minimum principal amount of
old notes being tendered.
Exchange Agent
Wilmington Trust FSB has been appointed as the exchange agent for the
exchange offer. All executed letters of transmittal should be directed to the
exchange agent at one of the addresses set forth below:
By Registered or Certified Mail: By Facsimile: By Hand or Overnight Courier:
Corporate Trust Reorg Services (302) 636-4145 Corporate Trust Reorg Services
Wilmington Trust FSB Wilmington Trust FSB
as Exchange Agent Confirm by Telephone: as Exchange Agent
Mail Drop 1615 Rodney Square North
P.O. Box 8861 (302) 636-6472 1100 North Market Street
Wilmington, DE 19899-8861 Wilmington, DE 19890-1615
Re: Hanover Equipment Trust 2001A Re: Hanover Equipment Trust 2001A
You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for notices of guaranteed delivery to the exchange agent at the
address and telephone number set forth in the letter of transmittal.
Delivery to an address other than as set forth on the letter of transmittal,
or transmissions of the letter by transmittal via a facsimile number other than
the one set forth on the letter of transmittal, will not constitute a valid
delivery.
Solicitations of Tenders; Fees and Expenses
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. However, we will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith. We will also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this and other
related documents to the beneficial owners of the old notes and in handling or
forwarding tenders for their customers.
We will pay the estimated cash expenses to be incurred in connection with
the exchange offer. We estimate the expenses to be approximately $600,000 which
includes fees and expenses of the exchange agent, trustee, registration fees,
accounting, legal, printing and related fees and expenses.
38
No person has been authorized to give any information or to make any
representations in connection with the exchange offer other than those
contained in this prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by us.
Neither the delivery of this prospectus nor any exchange made pursuant to this
prospectus, under any circumstances, create any implication that there has been
no change in our affairs since the respective dates as of which information is
given in this prospectus. The exchange offer is not being made to, nor will
tenders be accepted from or on behalf of, holders of old notes in any
jurisdiction in which the making of the exchange offer or the acceptance of the
exchange offer would not be in compliance with the laws of the jurisdiction.
However, we may, at our discretion, take such action as we may deem necessary
to make the exchange offer in the jurisdiction and extend the exchange offer to
holders of old notes in the jurisdiction. In any jurisdiction in which the
securities laws or blue sky laws of which require the exchange offer to be made
by a licensed broker or dealer, the exchange offer is being made on our behalf
by one or more registered brokers or dealers which are licensed under the laws
of the jurisdiction.
Transfer Taxes
We will pay all transfer taxes, if any, applicable to the exchange of old
notes pursuant to the exchange offer. However, the transfer taxes will be
payable by the tendering holder if:
. certificates representing new notes or old notes for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to
be issued in the name of, any person other than the registered holder of
the old notes tendered; or
. tendered old notes are registered in the name of any person other than
the person signing the letter of transmittal; or
. a transfer tax is imposed for any reason other than the exchange of old
notes pursuant to the exchange offer.
If taxes are payable by the tendering holders, we will bill the amount of
the transfer taxes directly to the tendering holder if satisfactory evidence of
payment of the taxes or exemption therefrom is not submitted with the letter of
transmittal.
Accounting Treatment
For accounting purposes, we will not recognize gain or loss upon the
exchange of the new notes for old notes. We will amortize expenses incurred in
connection with the issuance of the new notes over the term of the new notes.
Consequence of Failure to Exchange
Holders of old notes who do not exchange their old notes for new notes
pursuant to the exchange offer will continue to be subject to the restrictions
on transfer of the old notes as described in the legend on the old notes. Old
notes not exchanged pursuant to the exchange offer will continue to remain
outstanding in accordance with their terms. In general, the old notes may not
be offered or sold unless registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act
and applicable state securities laws. We do not currently anticipate that we
will register the old notes under the Securities Act.
Participation in the exchange offer is voluntary, and holders of old notes
should carefully consider whether to participate. Holders of old notes are
urged to consult their financial and tax advisors in making their own decision
on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered old notes pursuant to the terms of, this exchange offer, we
will have fulfilled our obligations under the exchange and registration rights
agreement. Holders of old notes who do not tender their old notes in the
exchange offer will continue to hold the old notes and will be entitled to all
the rights and limitations applicable to the old notes under the indenture,
39
except for any rights under the exchange and registration rights agreement that
by their terms terminate or cease to have further effectiveness as a result of
the making of this exchange offer. All untendered old notes will continue to be
subject to the restrictions on transfer described in the indenture. To the
extent that old notes are tendered and accepted in the exchange offer, the
trading market for untendered old notes could be adversely affected.
We may in the future seek to acquire, subject to the terms of the indenture,
untendered old notes in open market or privately negotiated transactions,
through subsequent exchange offers or otherwise. We have no present plan to
acquire any old notes which are not tendered in the exchange offer.
Resale of New Notes
We are making the exchange offer in reliance on the position of the staff of
the Securities and Exchange Commission as set forth in interpretive letters
addressed to third parties in other transactions. However, we have not sought
our own interpretive letter and we can provide no assurance that the staff
would make a similar determination with respect to the exchange offer as it has
in such interpretive letters to third parties. Based on these interpretations
by the staff, we believe that the new notes issued pursuant to the exchange
offer in exchange for old notes may be offered for resale, resold and otherwise
transferred by a holder, other than any holder who is a broker-dealer or an
"affiliate" of ours within the meaning of Rule 405 of the Securities Act,
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that:
. the new notes are acquired in the ordinary course of the holder's
business; and
. the holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution of the new notes.
However, any holder who is:
. an "affiliate" of ours;
. who has an arrangement or understanding with respect to the distribution
of the new notes to be acquired pursuant to the exchange offer; or
. any broker-dealer who purchased old notes from us to resell pursuant to
Rule 144A or any other available exemption under the Securities Act,
could not rely on the applicable interpretations of the staff and must comply
with the registration and prospectus delivery requirements of the Securities
Act. A broker-dealer who holds old notes that were acquired for its own account
as a result of market-making or other trading activities may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of new notes. Each such broker-dealer that receives
new notes for its own account in exchange for old notes, where the
broker-dealer acquired the old notes as a result of market-making activities or
other trading activities, must acknowledge, as provided in the letter of
transmittal, that it will deliver a prospectus in connection with any resale of
such new notes. For more detailed information, see "Plan of Distribution."
In addition, to comply with the securities laws of various jurisdictions, if
applicable, the new notes may not be offered or sold unless they have been
registered or qualified for sale in the jurisdiction or an exemption from
registration or qualification is available and is complied with. We have
agreed, pursuant to the exchange and registration rights agreement and subject
to specified limitations therein, to register or qualify the new notes for
offer or sale under the securities or blue sky laws of the jurisdictions as any
holder of the new notes reasonably requests. The registration or qualification
may require the imposition of restrictions or conditions, including suitability
requirements for offerees or purchasers, in connection with the offer or sale
of any new notes.
40
Shelf Registration Statement
If:
. we are not permitted to effect the exchange offer because of any change
in law or applicable interpretations by the staff of the Securities and
Exchange Commission;
. the exchange offer is not consummated for any reason within 180 days
after the date of issuance of the old notes;
. any old notes tendered pursuant to the exchange offer are not exchanged
for new notes within 10 days of being accepted in the exchange offer;
. any of the initial purchasers of the old notes so requests with respect
to old notes not eligible to be exchanged for new notes in the exchange
offer and held by it following the consummation of the exchange offer; or
. any applicable law or interpretations do not permit any holder to
participate in the exchange offer,
then we will file as promptly as practicable and use our reasonable best
efforts to cause the Securities and Exchange Commission to declare effective a
shelf registration statement with respect to the resale of the old notes and
keep the statement effective for up to two years after the effective date of
the shelf registration statement or such shorter period that will terminate
when all the old notes covered by the registration statement have been sold
pursuant to the shelf registration statement. Under certain circumstances, we
may suspend the effectiveness of the shelf registration statement for up to 60
days in any year during the two-year period of effectiveness described above.
Additional Interest
If:
. we fail to consummate the exchange offer on or prior to 180 days after
the date of issuance of the old notes;
. we fail to file the shelf registration statement required by the
exchange and registration rights agreement on or before the date
specified for such filing;
. the shelf registration statement is not declared effective by the
Securities and Exchange Commission on or prior to the date specified for
such effectiveness in the exchange and registration rights agreement; or
. the shelf registration statement is declared effective but thereafter
ceases to be effective without being succeeded within 30 days by an
additional registration statement filed and declared effective (each
such event, a "Registration Default"),
then we are obligated to pay additional interest to each holder of notes,
during the period of one or more such Registration Defaults, in an amount equal
to $0.192 per week per $1,000 principal amount of notes held by such holder.
Following the cure of all Registration Defaults, the accrual of additional
interest will cease.
41
USE OF PROCEEDS
This exchange offer is intended to satisfy the obligations of the Issuer,
Hanover and HCLP under the exchange and registration rights agreement entered
into with the initial purchasers of the old notes concurrently with the
issuance of the old notes. None of the registrants will receive any cash
proceeds from the exchange offer. You will receive, in exchange for old notes
tendered by you in the exchange offer, new notes in like principal amount. The
old notes surrendered in exchange for the new notes will be retired and
cancelled and cannot be reissued. Accordingly, the issuance of the new notes
will not result in any increase of the Issuer's, Hanover's or HCLP's
outstanding debt.
The Issuer used the proceeds from the sale of the old notes, together with
equity financing raised by the Issuer, to purchase domestic gas compression
equipment covered by the operating lease from HCLP and certain of its
subsidiaries. Hanover used the proceeds from the sale of the Equipment covered
by the operating lease to fund the acquisition of the gas compression business
of Schlumberger and to pay related expenses.
42
CAPITALIZATION OF HANOVER COMPRESSOR COMPANY
AND HANOVER COMPRESSION LIMITED PARTNERSHIP
In the table below and the footnotes thereto, we have provided you with
Hanover's and HCLP's total capitalization at September 30, 2001. You should
read this table and the footnotes thereto in conjunction with Hanover's and
HCLP's consolidated financial statements and the notes related thereto, which
are included or incorporated by reference in this prospectus. See "Where You
Can Find More Information" and "Incorporation of Documents by Reference."
As of September 30,
2001(1)
-------------------
(in thousands,
except par value
and share amounts)
(unaudited)
Current maturities of long-term debt............................. $ 5,607
----------
Long-term debt
4.75% Convertible Senior Notes................................ 192,000
$200 million bank credit agreement (2)........................ 85,000
Subordinated acquisition note (3)............................. 150,000
Other......................................................... 7,709
----------
Total long-term debt...................................... 434,709
----------
Joint venture payment (4)........................................ 58,000
----------
Mandatorily redeemable convertible
preferred securities.......................................... 86,250
----------
Common stockholders' equity
Common stock, $.001 par value, 200,000,000 shares authorized;
79,155,497 shares issued and outstanding (5)................ 79
Additional paid-in capital (5)................................ 825,173
Notes-receivable--employee stockholders....................... (1,499)
Accumulated other comprehensive loss.......................... (8,393)
Retained earnings............................................. 223,392
Treasury stock--75,739 common shares, at cost................. (717)
----------
Total common stockholders' equity......................... 1,038,035
----------
Total capitalization...................................... $1,622,601
==========
- --------
(1) The following table reflects the total capitalization of HCLP at September
30, 2001:
As of September 30,
2001
-------------------
(in thousands)
(unaudited)
Current maturities of long-term debt....... $ 5,607
----------
Long-term debt
$200 million bank credit agreement (2).. 85,000
Subordinated acquisition note (3)....... 150,000
Other................................... 7,709
----------
Total long-term debt................. 242,709
----------
Joint venture payment (4).................. 58,000
----------
Partners' equity
Partners' capital....................... 1,309,248
Accumulated other comprehensive loss.... (8,393)
----------
Total partners' equity............... 1,300,855
----------
Total capitalization................. $1,607,171
==========
43
(2) As of September 30, 2001, we had outstanding borrowings of approximately
$85.0 million under our $200 million bank credit agreement (4.6% rate at
September 30, 2001). We refinanced our $200 million bank credit agreement
in December 2001 to increase the borrowing capacity to $350 million and
extend the maturity to November 2004. As of December 3, 2001, we had
approximately $174.5 million of credit capacity remaining on our $350
million bank credit agreement.
(3) As more fully described under "Description of Certain Indebtedness",
amounts outstanding under the subordinated acquisition note accrue
pay-in-kind interest at a fixed rate of 8.5% until six months after the
date of issuance of the note, and thereafter the interest rate increases
periodically in increments of 1% to 2% per annum to a maximum interest rate
42 months after issuance of 15.5%. We are considering alternatives to
prepay the subordinated acquisition note, including the possible sale of
equity securities. In the event that we complete an offering of equity
securities, the terms of the note require us to apply the proceeds of the
offering toward repayment of the note, subject to certain exceptions.
(4) We are required to pay $58 million to Schlumberger with proceeds of a
refinancing of a South American joint venture acquired by Hanover in the
acquisition of the gas compression business of Schlumberger. If the joint
venture fails to execute the refinancing on or before December 31, 2002,
Hanover is obligated to either put its interest in such joint venture back
to Schlumberger or make the joint venture payment using other funds. This
amount is included in "Other liabilities" in Hanover's and HCLP's balance
sheet.
(5) Does not include shares of common stock issuable upon exercise of employee
stock options or exercise of warrants to purchase common stock.
Since January 1999, we have completed five sale and leaseback transactions
(including the Lease) of compression equipment from which we received aggregate
gross proceeds of approximately $1,139.6 million. The leaseback of the
equipment is recorded as an operating lease. Three of these transactions,
completed in 1999 and 2000, have five-year terms and require quarterly rental
payments based on the London Interbank Offered Rate. Under these three leases,
we continue to utilize the equipment and have the option to repurchase the
equipment at any time at fair market value. The Lease has a seven-year term and
requires semi-annual rental payments based upon the amount necessary for the
Issuer to make regularly scheduled payments on the notes and to provide a
return to its equity certificate holder. The fifth transaction, completed
concurrently with the Lease, has a ten-year term and is substantially similar
to the Lease. We have approximately $881 million in residual value guarantees
that are due upon termination of our operating leases (including the Lease),
which may be satisfied by a cash payment or the exercise of our purchase
options under the terms of the respective lease agreements.
44
CAPITALIZATION OF HANOVER EQUIPMENT TRUST 2001A
The following table sets forth the Issuer's capitalization as of September
30, 2001. You should read this table in conjunction with the Issuer's financial
statements and notes thereto, which are included in this prospectus.
As of September
30, 2001
---------------
(in thousands)
Long-term debt:
8.50% Senior Secured Notes due 2008. $300,000
Certificate holder's equity:
Equity certificates................. 9,300
Trust deficit....................... (919)
--------
Certificate holder's equity..... 8,381
--------
Total capitalization......... $308,381
========
45
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
OF HANOVER COMPRESSOR COMPANY
AND HANOVER COMPRESSION LIMITED PARTNERSHIP
In the table below and the footnotes thereto, we have provided you with
Hanover's and HCLP's selected historical consolidated financial data and pro
forma combined condensed financial data. The historical consolidated financial
data of Hanover for each of the fiscal years in the five-year period ended
December 31, 2000 were derived from Hanover's audited consolidated financial
statements. The historical consolidated financial data of HCLP for each of the
fiscal years in the three-year period ended December 31, 2000 were derived from
HCLP's audited consolidated financial statements. The historical consolidated
financial data of HCLP for the fiscal years ended December 31, 1997 and 1996
were derived from HCLP's unaudited consolidated financial statements. The
historical consolidated financial data as of and for the nine months ended
September 30, 2001 and 2000 were derived from Hanover's and HCLP's unaudited
condensed consolidated financial statements. In the opinion of management, such
unaudited financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position and results of operations of such interim periods.
In August 2001, we acquired the gas compression business of Schlumberger for
total consideration of $761 million, consisting of $270 million in cash, $150
million in a long-term subordinated note and approximately 8.7 million shares
of common stock, subject to certain post-closing adjustments pursuant to the
acquisition agreement that to date have resulted in an increase in the purchase
price to approximately $768 million due to an increase in net assets acquired
and before any reduction due to the restrictions on the marketability of the
common stock (the "POI Acquisition"). In addition, we are required under
certain circumstances to pay $58 million to Schlumberger with the proceeds of a
refinancing of a South American joint venture acquired in the POI Acquisition.
In connection with the POI Acquisition, we sold certain gas compression
equipment to the Issuer and to Hanover Equipment Trust 2001B and exercised our
equipment purchase option under an existing operating lease entered into during
1998 (the "1998 Lease") (collectively, the "Transactions"). In September 2000,
Hanover acquired the compression services division of Dresser-Rand Company
("CSD-DR") from Ingersoll-Rand Company for approximately $177 million of the
Company's common stock and cash, subject to certain post-closing adjustments
pursuant to the acquisition agreement that to date have resulted in an increase
in the purchase price to approximately $197 million due to increases in net
assets acquired (the "DR Acquisition"). The pro forma combined condensed
financial data present our pro forma results of operations as if the
Transactions and the DR Acquisition had occurred on January 1, 2000 and were
derived from the pro forma combined condensed financial statements of
operations for the nine months ended September 30, 2001 and the year ended
December 31, 2000 included in this prospectus. The pro forma financial data is
not adjusted to reflect the pro forma effect of our acquisitions of Applied
Process Solutions, Inc., completed in June 2000, PAMCO Services International,
completed in July 2000, or OEC Compression Corporation, completed in March
2001, none of which was significant. The pro forma financial data does not
purport to be indicative of the results that would actually have been obtained
had the POI Acquisition, the Transactions, and the DR Acquisition been
completed on the date indicated or that may be obtained in the future.
The information in this section should be read along with Hanover's
consolidated financial statements, accompanying notes and other financial
information, HCLP's consolidated financial statements, accompanying notes and
other financial information, the combined financial statements of the
compression services division of Dresser-Rand Company, the combined financial
statements of the gas compression business of Schlumberger and related pro
forma financial data, each of which is included or incorporated by reference in
this prospectus. See "Where You Can Find More Information" and "Incorporation
of Documents by Reference."
46
Hanover Compressor Company
Year Ended December 31,
--------------------------------------------------------------
Pro Forma
2000(1)(2) 2000(1) 1999(1) 1998(1) 1997 1996
---------- ---------- -------- -------- --------- --------
(in thousands, except per share amounts)
INCOME STATEMENT DATA:
Total revenues and other.................................. $807,657 $ 603,829 $323,220 $286,351 $ 199,393 $137,544
Expenses:
Operating............................................... 458,325 342,545 157,361 155,046 110,027 76,564
Selling, general and administrative..................... 74,672 54,606 33,782 26,626 21,514 16,711
Depreciation and amortization........................... 71,525 52,882 37,337 37,154 28,439 20,722
Leasing expense......................................... 81,359 45,484 22,090 6,173
Interest expense........................................ 26,953 8,473 8,786 11,716 10,728 6,594
Distributions on mandatorily redeemable convertible
preferred securities................................... 6,369 6,369 278
-------- ---------- -------- -------- --------- --------
Total expenses......................................... 719,203 510,359 259,634 236,715 170,708 120,591
-------- ---------- -------- -------- --------- --------
Income before income taxes................................ 88,454 93,470 63,586 49,636 28,685 16,953
Provision for income taxes................................ 32,905 34,771 23,145 19,259 11,043 6,730
-------- ---------- -------- -------- --------- --------
Net income................................................ $ 55,549 58,699 40,441 30,377 17,642 10,223
========
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment................. (146) (463) 152
---------- -------- -------- --------- --------
Comprehensive income...................................... $ 58,553 $ 39,978 $ 30,529 $ 17,642 $ 10,223
========== ======== ======== ========= ========
Net income available to common stockholders:
Net income.............................................. $ 55,549 $ 58,699 $ 40,441 $ 30,377 $ 17,642 $ 10,223
Dividends on Series A and Series B preferred stock...... (1,773)
Series A preferred stock exchange....................... (3,794)
Series B preferred stock conversion..................... (1,400)
-------- ---------- -------- -------- --------- --------
Net income available to common stockholders............. $ 55,549 $ 58,699 $ 40,441 $ 30,377 $ 17,642 $ 3,256
======== ========== ======== ======== ========= ========
Diluted net income per share:
Net income.............................................. $ 55,549 $ 58,699 $ 40,441 $ 30,377 $ 17,642 $ 3,256
Distributions on mandatorily redeemable convertible
preferred securities, net of income tax................ 4,140 4,140
-------- ---------- -------- -------- --------- --------
Net income for purposes of computing diluted net income
per share.............................................. $ 59,689 $ 62,839 $ 40,441 $ 30,377 $ 17,642 $ 3,256
======== ========== ======== ======== ========= ========
Weighted average common and common equivalent shares:
Basic(3)................................................ 72,486 61,831 57,048 56,936 51,246 40,996
-------- ---------- -------- -------- --------- --------
Diluted(3).............................................. 81,847 71,192 61,054 60,182 54,690 44,046
-------- ---------- -------- -------- --------- --------
Earnings per common share:
Basic(3)................................................ $ 0.77 $ 0.95 $ 0.71 $ 0.53 $ .34 $ .08
======== ========== ======== ======== ========= ========
Diluted(3).............................................. $ 0.73 $ 0.88 $ 0.66 $ 0.50 $ .32 $ .07
======== ========== ======== ======== ========= ========
OTHER DATA:
EBITDA(4)............................................... $274,660 $ 206,678 $132,077 $104,679 $ 67,852 $ 44,269
Ratio of earnings to fixed charges(5)................... 1.7x 2.5x 2.9x 3.8x 3.7x 3.5x
CASH FLOWS PROVIDED BY(USED IN):
Operating activities.................................... $ 7,133 $ 68,222 $ 31,147 $ 32,219 $ 20,276
Investing activities.................................... (44,868) (92,114) (14,699) (164,490) (87,683)
Financing activities.................................... 77,589 18,218 (9,328) 129,510 71,740
BALANCE SHEET DATA(END OF PERIOD):
Working capital......................................... $ 309,942 $107,966 $113,264 $ 58,027 $ 41,513
Net property, plant and equipment....................... 583,586 497,465 392,498 394,070 266,406
Total assets............................................ 1,289,521 756,510 614,590 506,452 341,387
Long-term debt, excluding current maturities............ 110,935 69,681 156,943 158,838 122,756
Mandatorily redeemable convertible preferred securities. 86,250 86,250
Common stockholders' equity............................. 639,993 367,914 315,470 287,028 176,113
47
Hanover Compressor Company
Nine Months Ended September 30,
---------------------------------
Pro Forma
2001(1)(2) 2001(1) 2000(1)
---------- ---------- ----------
(in thousands, except
per share amounts)
(unaudited)
INCOME STATEMENT DATA:
Total revenues and other...................................................................... $887,294 $ 781,641 $ 370,222
Expenses:
Operating................................................................................... 532,001 475,981 196,326
Selling, general and administrative......................................................... 75,065 66,341 34,481
Depreciation and amortization............................................................... 68,385 60,926 36,830
Leasing expense............................................................................. 70,959 47,541 29,596
Interest expense............................................................................ 18,818 10,318 5,560
Distributions on mandatorily redeemable convertible preferred securities.................... 4,780 4,780 4,776
Other....................................................................................... 11,473 11,473
-------- ---------- ----------
Total expenses............................................................................. 781,481 677,360 307,569
-------- ---------- ----------
Income before income taxes.................................................................... 105,813 104,281 62,653
Provision for income taxes.................................................................... 40,202 39,620 23,305
-------- ---------- ----------
Income before cumulative effect of accounting change.......................................... 65,611 64,661 39,348
Cumulative effect of accounting change for derivative instruments, net of income tax.......... (164)
-------- ---------- ----------
Net income.................................................................................... $ 65,611 $ 64,497 $ 39,348
========
Other comprehensive loss, net of tax:
Change in fair value of derivative financial instrument..................................... (7,914)
Foreign currency translation adjustment..................................................... (22) (154)
---------- ----------
Comprehensive income.......................................................................... $ 56,561 $ 39,194
========== ==========
Diluted net income per share:
Net income before cumulative effect of accounting change.................................... $ 65,611 $ 64,661 $ 39,348
Distributions on mandatorily redeemable convertible preferred securities, net of income tax. 3,108 3,108
Cumulative effect of accounting charge, net of income tax................................... (164)
-------- ---------- ----------
Net income for purposes of computing diluted net income per share........................... $ 68,719 $ 67,605 $ 39,348
======== ========== ==========
Weighted average common and common equivalent shares:
Basic(3).................................................................................... 78,080 70,098 60,324
-------- ---------- ----------
Diluted(3).................................................................................. 86,979 78,997 64,619
-------- ---------- ----------
Earnings per common share:
Basic(3).................................................................................... $ 0.84 $ 0.92 $ 0.65
======== ========== ==========
Diluted(3).................................................................................. $ 0.79 $ 0.86 $ 0.61
======== ========== ==========
OTHER DATA:
EBITDA(4)................................................................................... $268,755 $ 227,846 $ 139,415
Ratio of earnings to fixed charges(5)....................................................... 2.1x 2.6x 2.5x
CASH FLOWS PROVIDED BY (USED IN):
Operating activities........................................................................ $ 37,141 $ 7,491
Investing activities........................................................................ (299,251) (162,614)
Financing activities........................................................................ 238,968 (162,453)
BALANCE SHEET DATA (END OF PERIOD):
Working capital............................................................................. $ 447,396 $ 224,684
Net property, plant and equipment........................................................... 1,022,490 688,588
Total assets................................................................................ 2,189,743 1,271,468
Long-term debt, excluding current maturities................................................ 434,709 173,835
Mandatorily redeemable convertible preferred securities..................................... 86,250 86,250
Common stockholders' equity................................................................. 1,038,035 619,838
48
- --------
(1) Substantially all of Hanover's assets and operations are owned or conducted
by HCLP. To the extent there are differences between the selected
consolidated financial data for Hanover and the selected consolidated
financial data for HCLP, these arise due to Hanover's mandatorily
redeemable convertible preferred securities, Hanover's 4.75% convertible
senior notes due 2008, Hanover's outstanding common stock and Series A and
Series B preferred stock. The following line items would be different with
respect to HCLP's selected consolidated financial data, compared to
Hanover's selected consolidated financial data presented above. Earnings
per share data computations are applicable to Hanover only as HCLP is a
limited partnership.
Year Ended December 31,
----------------------------------------------------------
Pro Forma
2000 2000 1999 1998 1997 1996
--------- ----------- -------- -------- --------- --------
(in thousands)
Net income (a).......................... $59,549 $ 62,699 $ 40,617 $ 30,377 $ 17,642 $ 10,223
OTHER DATA:
Ratio of earnings to fixed charges(4). 1.8x 2.8x 2.9x 3.8x 3.7x 3.5x
CASH FLOWS PROVIDED BY
USED IN):
Operating activities.................. $ 13,773 $ 68,278 $ 31,307 $ 32,219 $ 20,276
Investing activities.................. (44,868) (92,114) (14,699) (164,490) (87,683)
Financing activities.................. 70,949 18,162 (9,488) 129,510 71,740
BALANCE SHEET DATA (END OF
PERIOD):
Total assets.......................... $1,286,082 $753,199 $614,590 $ 506,452 $341,387
Mandatorily redeemable convertible
preferred securities (b).............
Partners' equity...................... 720,514 451,030 315,470 287,028 176,113
Nine Months Ended September 30,
---------------------------------
Pro Forma
2001 2001 2000
--------- ---------- ----------
(in thousands)
(unaudited)
Net income (c)................................................ $71,851 $ 70,738 $ 42,346
OTHER DATA:
Ratio of earnings to fixed charges(4)....................... 2.3x 3.1x 2.8x
CASH FLOWS PROVIDED BY (USED IN):
Operating activities........................................ $ 46,396 $ 15,007
Investing activities........................................ (299,251) (165,274)
Financing activities........................................ 229,713 157,597
BALANCE SHEET DATA (END OF PERIOD):
Total assets................................................ $2,180,167 $1,268,024
Long-term debt, excluding current maturities (d)............ 242,709 173,835
Mandatorily redeemable convertible preferred securities (b).
Partners' equity............................................ 1,300,855 699,751
-----
(a) Includes the adjustment to remove the distributions on mandatorily
redeemable convertible preferred securities, net of tax, which are
obligations of Hanover but not HCLP. For 1996, includes the adjustment
to remove dividends on Series A and Series B preferred stock, Series A
preferred stock exchange and Series B preferred stock conversion.
(b) Mandatorily redeemable convertible preferred securities are obligations
of Hanover but not HCLP.
(c) Includes the adjustment to remove the distributions on mandatorily
redeemable convertible preferred securities, net of tax, and, for the
2001 periods, interest on and amortization of financing costs associated
with the 4.75% convertible senior notes due 2008, net of tax, both of
which are obligations of Hanover but not HCLP.
(d) Includes the adjustment to remove the 4.75% convertible senior notes due
2008, which are obligations of Hanover but not HCLP.
(2) In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible
Assets. Under SFAS 142, amortization of goodwill to earnings will be
discontinued. However, goodwill will be reviewed for impairment annually or
whenever events indicate impairment may have occurred. SFAS 142 is
effective for Hanover and HCLP on January 1, 2002. Under the transition
provisions of SFAS 142, goodwill acquired in a business combination for
which
49
the acquisition date is after June 30, 2001 shall not be amortized. Because
the POI Acquisition was consummated after June 30, 2001, the estimated
goodwill recognized in our consolidated financial statements related to the
POI Acquisition has not been amortized in our pro forma combined condensed
statements of operations. The goodwill related to business combinations
completed before June 30, 2001 continues to be amortized in the pro forma
combined condensed statements of operations because Hanover and HCLP have
not adopted SFAS 142.
(3) 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
information have been restated for all periods presented to reflect this
stock split.
(4) EBITDA consists of the sum of consolidated net income before interest
expense, leasing expense, distributions on mandatorily redeemable
convertible preferred securities, income tax, and depreciation and
amortization. We believe that EBITDA is a meaningful measure of our
operating performance and is also used to measure our ability to meet debt
service requirements. EBITDA should not be considered as an alternative
performance measure prescribed by generally accepted accounting principles.
(5) For purposes of computing the ratio of earnings to fixed charges:
"earnings" consist of income before taxes plus fixed charges and "fixed
charges" consist of interest expense (including amortization of debt
discount and expense), leasing expense and the estimated interest factor
attributable to rentals.
50
SELECTED HISTORICAL FINANCIAL DATA OF
HANOVER EQUIPMENT TRUST 2001A
In the table below, we have provided you with selected historical financial
data for the Issuer. The historical financial data were derived from the
Issuer's audited financial statements as of September 30, 2001 and for the
period from August 2, 2001 (inception) to September 30, 2001. The Issuer was
organized under the laws of the State of Delaware and commenced business on
August 2, 2001 solely for the purpose of (1) issuing the old notes and the new
notes, (2) executing, delivering and performing the operative documents to
which it is a party and (3) using the proceeds from the issuance of the old
notes and the other financing transactions to purchase the Equipment.
The information in this section should be read along with the Issuer's
financial statements, accompanying notes and other financial information
included in this prospectus.
As of September 30, 2001
and for the period from
August 2, 2001 (inception)
to September 30, 2001
-------------------------
(in thousands)
OPERATING STATEMENT DATA:
Rental revenues............................................................ $ 2,368
Expenses:
Interest expense on rental equipment.................................... 2,267
--------
Excess rental revenue over interest expense on rental equipment..... 101
Operating expense.......................................................... 6
--------
Income before depreciation................................................. 95
Depreciation expense....................................................... 919
--------
Net loss................................................................... $ (824)
========
OTHER DATA:
Ratio of earnings to fixed charges (1)..................................... --
BALANCE SHEET DATA (END OF PERIOD):
Rental equipment........................................................ $309,300
Total assets............................................................ 310,749
8.50% senior secured notes due 2008..................................... 300,000
Certificate holder's equity............................................. 8,381
- --------
(1) For purposes of computing the ratio of earnings to fixed charges:
"earnings" consist of net loss plus fixed charges and "fixed charges"
consist of interest expense on rental equipment. Due to the Issuer's loss
in the period from August 2, 2001 (inception) through September 30, 2001,
the ratio coverage was less than 1:1. Additional earnings of $824 thousand
are needed by the Issuer to achieve a one to one ratio.
51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF HANOVER COMPRESSOR COMPANY
AND HANOVER COMPRESSION LIMITED PARTNERSHIP
Management's discussion and analysis of the financial condition and results
of operations of Hanover Compressor Company and its subsidiaries (including
Hanover Compression Limited Partnership) should be read in conjunction with
Hanover's and HCLP's consolidated financial statements and notes related
thereto included or incorporated by reference in this prospectus. Substantially
all of Hanover's assets and operations are owned or conducted by HCLP. To the
extent there are differences between the consolidated financial data for
Hanover and the consolidated financial data for HCLP, these arise due to
Hanover's mandatorily redeemable convertible preferred securities, Hanover's
4.75% convertible senior notes due 2008 and Hanover's outstanding common stock.
Hanover Compressor Company
Hanover Compressor Company, through its indirect wholly owned subsidiary
Hanover Compression Limited Partnership and its subsidiaries, is a global
market leader in full service natural gas compression and a leading provider of
service, financing, fabrication and equipment for contract natural gas handling
applications. We provide this equipment on a rental, contract compression,
maintenance and acquisition leaseback basis to natural gas production,
processing and transportation companies that are increasingly seeking
outsourcing solutions. Founded in 1990 and a public company since 1997, our
customers include premier independent and major producers and distributors
throughout the Western Hemisphere. In conjunction with our maintenance
business, we have developed our parts and service business to provide solutions
to customers that own their own compression equipment but want to outsource
their operations. Our compression services are complemented by our compressor
and oil and gas production equipment fabrication operations and gas processing
and treating, gas measurement and power generation services, which broaden our
customer relationships both domestically and internationally. Our products and
services are essential to the production, gathering, processing, transportation
and storage of natural gas and are provided primarily to independent and major
producers and distributors of natural gas.
In August 2001, we acquired the gas compression business of Schlumberger
(including Production Operators Corporation and related assets) for total
consideration of $761 million in cash, common stock and indebtedness, subject
to certain post-closing adjustments pursuant to the acquisition agreement that
to date have resulted in an increase in the purchase price to approximately
$768 million due to an increase in net assets acquired and before any reduction
due to the restrictions on the marketability of the common stock. In addition,
we are required under certain circumstances to pay $58 million to Schlumberger
with the proceeds of a refinancing of a South American joint venture acquired
with the natural gas compression business of Schlumberger. In March 2001, we
acquired OEC Compression Corporation for approximately $101 million in common
stock, including the assumption of approximately $62 million of debt. In
September 2000, we acquired the compression services division of Dresser-Rand
Company for $177 million in cash and common stock, subject to certain post
closing adjustments pursuant to the acquisition agreement that to date have
resulted in an increase to the purchase price to approximately $197 million due
to increases in net assets acquired. In July 2000, we acquired PAMCO Services
International for approximately $58 million in cash and notes. In June 2000, we
acquired Applied Process Solutions, Inc. for approximately $71 million in
common stock and debt. These acquisitions were included in the results of
operations from their respective acquisition dates.
52
The following table summarizes revenues, expenses and gross profit
percentages for each of our business segments (Dollars in millions):
Nine Months
Ended September 30, Year Ended December 31,
------------------- ----------------------
2001 2000 2000 1999 1998
------ ------ ------ ------ ------
Revenues:
Rentals--Domestic................... $185.8 $122.8 $173.2 $136.5 $107.4
Rentals--International.............. 89.3 57.4 81.3 56.2 40.2
Compressor fabrication.............. 168.2 60.1 96.8 52.5 67.5
Production and processing equipment. 139.3 53.9 88.6 28.0 37.5
Parts, services and used equipment.. 189.1 64.3 151.7 42.5 29.5
Other............................... 9.9 11.7 12.2 7.5 4.3
------ ------ ------ ------ ------
Total........................... $781.6 $370.2 $603.8 $323.2 $286.4
====== ====== ====== ====== ======
Expenses:
Rentals--Domestic................... $ 63.3 $ 42.2 $ 60.3 $ 46.2 $ 36.6
Rentals--International.............. 29.4 19.9 27.7 18.8 12.8
Compressor fabrication.............. 140.9 50.1 82.0 43.7 58.1
Production and processing equipment. 110.3 41.9 69.3 20.8 25.8
Parts, services and used equipment.. 132.1 42.2 103.3 27.9 21.7
------ ------ ------ ------ ------
Total........................... $476.0 $196.3 $342.6 $157.4 $155.0
====== ====== ====== ====== ======
Gross profit percentage:
Rentals--Domestic................... 65.9% 65.7% 65.2% 66.1% 65.9%
Rentals--International.............. 67.2% 65.3% 66.0% 66.6% 68.2%
Compressor fabrication.............. 16.2% 16.7% 15.3% 16.8% 13.8%
Production and processing equipment. 20.8% 22.2% 21.8% 25.7% 31.2%
Parts, services and used equipment.. 30.1% 34.3% 31.9% 34.3% 26.4%
Nine Months ended September 30, 2001 Compared to Nine Months ended September
30, 2000.
Revenues
Our total revenues increased by $411.4 million, or 111%, to $781.6 million
during the nine months ended September 30, 2001 from $370.2 million during the
nine months ended September 30, 2000.
The increase in revenues resulted from growth in revenues and horsepower
from our natural gas compressor rental fleet, organic growth in our outsourcing
businesses, which now include compression, gas treating, process measurement
and power generation, as well as growth due to business acquisitions completed
in 2001 and 2000.
Revenues from rentals increased by $94.9 million, or 53%, to $275.1 million
during the nine months ended September 30, 2001 from $180.2 million during the
nine months ended September 30, 2000. Domestic revenues from rentals increased
by $63.0 million, or 51%, to $185.8 million during the nine months ended
September 30, 2001 from $122.8 million during the nine months ended September
30, 2000. International rental revenues increased by $31.9 million, or 55%, to
$89.3 million during the nine months ended September 30, 2001 from $57.4
million during the nine months ended September 30, 2000. The increase in both
domestic and international rental revenue resulted from expansion of the our
rental fleet and business acquisitions in 2001 and 2000.
Revenue from parts, service and used equipment increased by $124.8 million,
or 194% to $189.1 million during the nine months ended September 30, 2001 from
$64.3 million during the nine months ended September 30, 2000. This increase is
due in part to an increase in our marketing focus for this business segment, as
well as expansion of business activities through acquisitions. In addition, the
increase is due in part to the sale of two
53
turbines for approximately $32 million during the nine months ended September
30, 2001. Revenues from compressor fabrication increased by $108.1 million, or
180%, to $168.2 million during the nine months ended September 30, 2001 from
$60.1 million during the nine months ended September 30, 2000. This increase is
due to the acquisition of Dresser-Rand Company's compression service division
beginning September 2000. During the nine months ended September 30, 2001, an
aggregate of approximately 424,000 horsepower of compression equipment was
fabricated compared to approximately 205,000 horsepower fabricated during the
nine months ended September 30, 2000.
Revenues from production and processing equipment fabrication increased by
$85.4 million, or 159%, to $139.3 million during the nine months ended
September 30, 2001 from $53.9 million during the nine months ended September
30, 2000. The increase is due primarily to the acquisition of APSI during June
2000 and an improvement in market conditions in the process equipment business
compared to conditions which existed in the prior year.
Equity in earnings in subsidiaries increased $1.8 million, or 92%, to $3.8
million during the nine months ended September 30, 2001, from $2.0 million
during the nine months ended September 30, 2000. This increase is primarily due
to our acquisition of POI, which included interests in certain joint venture
projects in South America.
Expenses
Operating expenses of the rental segments increased by $30.6 million, or
49%, to $92.7 million during the nine months ended September 30, 2001 from
$62.1 million during the nine months ended September 30, 2000. The increase
resulted primarily from the corresponding 53% increase in revenues from rentals
over the corresponding period in 2000. The gross profit percentage from rentals
was 66% during the nine months ended September 30, 2001 and 2000. Operating
expenses of parts, service and used equipment increased by $89.9 million, or
213% to $132.1 million, which relates to the 194% increase in parts, service
and used equipment revenue. The gross profit margin from parts, service and
used equipment was 30% during the nine months ended September 30, 2001 compared
to 34% during the nine months ended September 30, 2000. The decrease in gross
margin in parts, service and used equipment results primarily from the sale of
two turbines for approximately $32 million at a gross margin of approximately
14% and was decreased by approximately 1% by a low margin installation project
in Venezuela which should be completed in the fourth quarter. Operating
expenses of compressor fabrication increased by $90.8 million, or 181%, to
$140.9 million during the nine months ended September 30, 2001 from $50.1
million during the nine months ended September 30, 2000 commensurate with the
corresponding increase in compressor fabrication revenue. The gross profit
margin on compression fabrication was 16% during the nine months ended
September 30, 2001 and 17% during the nine months ended September 30, 2000. The
decrease in gross profit margin for compression fabrication was attributable to
the acquisition of the compression services division of Dresser-Rand Company,
which has lower gross margins than we have historically experienced. The
operating expenses attributable to production equipment fabrication increased
by $68.4 million, or 163%, to $110.3 million during the nine months ended
September 30, 2001 from $41.9 million during the nine months ended September
30, 2000. The gross profit margin attributable to production and processing
equipment fabrication was 21% during the nine months ended September 30, 2001
and 22% during the nine months ended September 30, 2000.
Selling, general and administrative expenses increased $31.8 million, or
92%, to $66.3 million during the nine months ended September 30, 2001 from
$34.5 million during the nine months ended September 30, 2000. The increase is
attributable to increased personnel and other administrative and selling
expenses associated with increased activity in our business segments as
described above as well as acquisitions during 2001 and 2000.
54
We believe that earnings before interest, leasing expense, distributions on
mandatorily redeemable convertible preferred securities, income taxes,
depreciation and amortization ("EBITDA") is a standard measure of financial
performance used for valuing companies in the compression industry. EBITDA is a
useful common yardstick as it measures the capacity of companies to generate
cash without reference to how they are capitalized, how they account for
significant non-cash charges for depreciation and amortization associated with
assets used in the business (the bulk of which are long-lived assets in the
compression industry), or what their tax attributes may be. Additionally,
because EBITDA is a basic source of funds not only for growth but to service
indebtedness, lenders in both the private and public debt markets use EBITDA as
a primary determinant of borrowing capacity. EBITDA for the nine months ended
September 30, 2001 increased 63% to $227.8 million from $139.4 million for the
nine months ended September 30, 2000 primarily due to the increase in our
rental revenue for reasons previously discussed. EBITDA should not be
considered in isolation from, or a substitute for, net income, cash flows from
operating activities or other consolidated income or cash flow data prepared in
accordance with generally accepted accounting principles.
Depreciation and amortization increased by $24.1 million to $60.9 million
during the nine months ended September 30, 2001 compared to $36.8 million
during the nine months ended September 30, 2000. The increase in depreciation
was due to additions to the rental fleet which were partially offset by the
sale of compressor equipment in the equipment leases in March, August and
October 2000 and in August 2001. The increase in amortization was due to the
goodwill recorded from business acquisitions completed during 2001 and 2000.
Effective July 1, 2001, we changed our estimate of the useful life of certain
compression equipment from 15 to 30 years. The effect of this change in
estimate on the nine months ended September 30, 2001 was a decrease in
depreciation expense of approximately $1.5 million and an increase in net
income of approximately $0.9 million ($0.01 per share). We anticipate this
change in estimated useful life will reduce future depreciation expense, based
on our current depreciable assets, by approximately $3 million per quarter.
We incurred leasing expense of $47.5 million during the nine months ended
September 30, 2001 compared to $29.6 million during the nine months ended
September 30, 2000. The increase of $17.9 million resulted from the additional
equipment leases entered into in 2000 and 2001.
Interest expense increased by $4.7 million to $10.3 million during the nine
months ended September 30, 2001 from $5.6 million for the nine months ended
September 30, 2000. The increase in interest expense is due to higher levels of
outstanding debt which was partially offset by lower interest rate.
Other expenses during the nine months ended September 30, 2001 was $11.4
million, which included a $2.8 million bridge loan commitment fee associated
with the POI Acquisition and $8.7 million from the recognition of an unrealized
loss related to the change in fair value of the interest rate swaps as required
under SFAS 133 (as described in "New Accounting Pronouncements").
Income Taxes
The provision for income taxes increased by $16.3 million, or 70%, to $39.6
million during the nine months ended September 30, 2001 from $23.3 million
during the three months ended September 30, 2000. The increase resulted
primarily from the corresponding increase in income before income taxes. The
average effective income tax rates during the three months ended September 30,
2001 and 2000 were 38% and 37%, respectively. The increase in the average
effective income tax rate is due primarily to increased income in foreign tax
jurisdictions.
55
Net Income
Net income increased $25.2 million, or 64%, to $64.5 million during the nine
months ended September 30, 2001 from $39.3 million during the nine months ended
September 30, 2000 due to the increase in revenues and gross profits discussed
above.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999.
Revenues
Our total revenues increased by $280.6 million, or 87%, to $603.8 million
during 2000 from $323.2 million during 1999. The increase resulted from growth
of our natural gas compressor rental fleet and from acquisitions completed
during 2000.
Revenues from rentals increased by $61.8 million, or 32%, to $254.5 million
during 2000 from $192.7 million during 1999. Domestic revenues from rentals
increased by $36.7 million, or 27%, to $173.2 million during 2000 from $136.5
million during 1999. International revenues from rentals increased by $25.1
million, or 45%, to $81.3 million during 2000 from $56.2 million during 1999.
At December 31, 2000 the compressor rental fleet consisted of approximately
2,151,000 horsepower, a 48% increase over the 1,458,000 horsepower in the
rental fleet at December 31, 1999. Domestically, the rental fleet increased by
560,000 horsepower, or 47%, during 2000 and internationally by 133,000
horsepower, or 48%. The increase in both domestic and international rental
revenues resulted primarily from expansion of our rental fleet.
Revenues from parts, service and used equipment increased by $109.2 million,
or 257% to $151.7 million during 2000 from $42.5 million during 1999. This
increase is due primarily to increased marketing focus and partially from
expansion of business activities through recent acquisitions. Revenues from
compressor fabrication increased by $44.3 million, or 84%, to $96.8 million
during 2000 from $52.5 million during 1999. An aggregate of 176,000 horsepower
was sold during 2000. In addition, 118,000 horsepower was fabricated and placed
in the rental fleet during 2000. The increase in horsepower produced during
2000 resulted from an increased demand for compression equipment due to higher
natural gas prices.
Revenues from production and processing equipment fabrication increased by
$60.6 million, or 216%, to $88.6 million during 2000 from $28.0 million during
1999. The increase in revenues from production equipment fabrication is due
primarily to the acquisition of Applied Process Solutions, Inc. in June 2000.
We recognized gains on sales of other assets of $4.1 million during both
2000 and 1999. In 2000, we obtained certain oil and gas interests and related
assets from a customer as payment for trade receivables. We exchanged those oil
and gas interests with a third party for ownership of certain compression
equipment. This exchange resulted in the recognition of a $2.1 million gain.
Also in 2000, we sold a 25% undivided interest in a power generation plant
resulting in the recognition of a $1.3 million gain.
Other revenues increased by $4.7 million, or 137% to $8.1 million during
2000 from $3.4 million during 1999. The increase was due primarily to the sale
of 50% of our ownership interest in a consolidated subsidiary for cash and
notes receivable resulting in a gain on disposition of approximately $2.1
million. Equity in earnings in subsidiaries increased by $2.3 million during
2000 to $3.5 million from $1.2 million during 1999. This increase was primarily
due to our investment in Hanover Measurement Services Company, LP which was
formed in September 1999. In addition, during 2000 we recorded a change in
interest gain of $0.9 million resulting from an unconsolidated subsidiary stock
offering to third parties.
56
Expenses
Operating expenses of the rentals segments increased by $23.0 million, or
36% to $88.0 million during 2000 from $65.0 million during 1999. The increase
resulted primarily from the corresponding 32% increase in revenues from rentals
over the corresponding period in 1999. The gross profit percentage from rentals
was 65% during 2000 and 66% during 1999. Operating expenses of parts, service
and used equipment increased $75.4 million, or 270% to $103.3 million during
2000 from $27.9 million during 1999, which relates to the 257% increase in
parts and service revenue. The gross profit percentage from parts, service and
used equipment was 32% during 2000 and 34% during 1999. Operating expenses of
compressor fabrication increased by $38.3 million, or 88% to $82.0 million from
$43.7 million during 1999. The gross profit margin on compression fabrication
was 15% during 2000 and 17% during 1999. The decrease in gross profit margin
for compression fabrication was attributable to the acquisition of the
compression services division of Dresser-Rand Company. Production and
processing equipment fabrication operating expenses increased by $48.5 million,
or 233%, during 2000 to $69.3 million from $20.8 million during 1999. The gross
profit margin attributable to production and processing equipment fabrication
decreased to 22% during 2000, from 26% during 1999. The decrease in gross
profit margin for production and processing equipment fabrication was
attributable to the acquisition of Applied Process Solutions, Inc. in June
2000, which has lower gross margins than we have historically experienced.
Selling, general and administrative expenses increased by $20.8 million, or
62% to $54.6 million during 2000. The increase is attributable to increased
personnel and other administrative and selling expenses associated with the
acquisitions in 2000 and the increase in operating activity in our rentals
business segments as described above.
Depreciation and amortization expense increased by $15.5 million, or 42%
during 2000 to $52.9 million. The increase in depreciation from the additions
to the rental fleet and acquisitions was offset by the decrease in depreciation
as a result of the equipment leases entered into in June 1999 and during 2000.
Interest expense decreased by $.3 million, or 4% during 2000 to $8.5
million. The decrease in interest expense was due in part to utilization of
proceeds from the equipment leases to reduce indebtedness under our credit
facility and to the capitalization of interest expense on assets that are under
construction.
We incurred compression equipment lease expense of $45.5 million during 2000
and $22.1 million during 1999. The increase is due to having a full year of
lease expense on the equipment lease entered into in June 1999 and the new
equipment leases entered into during 2000. As a result of the equipment leases,
we expect to incur annual operating leasing expense of approximately $60
million.
Income Taxes
The provision for income taxes increased by $11.7 million, or 50%, to $34.8
million during 2000 from $23.1 million during 1999. The increase resulted
primarily from the corresponding increase in income before taxes. Our effective
income tax rate was approximately 37.2% during 2000 and 36.4% during 1999. The
increase in the effective rate was primarily the result of increased income in
foreign tax jurisdictions.
Net Income
Net income increased $18.3 million, or 45%, to $58.7 million for 2000 from
$40.4 million in 1999 for the reasons discussed above.
57
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
Revenues
Our total revenues increased by $36.8 million, or 13%, to $323.2 million
during 1999 from $286.4 million during 1998. The increase resulted from growth
of our natural gas compressor rental fleet but was partially offset by
decreases in compressor fabrication and production equipment fabrication
revenues.
Revenues from rentals increased by $45.1 million, or 31%, to $192.7 million
during 1999 from $147.6 million during 1998. Domestic revenues from rentals
increased by $29.1 million, or 27%, to $136.5 million during 1999 from $107.4
million during 1998. International revenues from rentals increased by $16.0
million, or 40%, to $56.2 million during 1999 from $40.2 million during 1998.
At December 31, 1999, the compressor rental fleet consisted of approximately
1,458,000 horsepower, a 37% increase over the 1,067,000 horsepower in the
rental fleet at December 31, 1998. Domestically, the rental fleet increased by
289,000 horsepower, or 32%, during 1999 and internationally by 103,000
horsepower, or 59%. The increase in both domestic and international rental
revenues resulted primarily from expansion of our rental fleet.
Revenue from parts and service increased by $13.0 million, or 44%, to $42.5
million during 1999 from $29.5 million during 1998. Revenues from the
fabrication and sale of compressor equipment to third parties decreased by
$15.0 million, or 22%, to $52.5 million during 1999 from $67.5 million during
1998. An aggregate of 147,000 horsepower was sold during 1999. In addition,
130,000 horsepower was fabricated and placed in the rental fleet during 1999.
We believe the revenue decrease during 1999 was due in part to a project where
a customer supplied its own engines, where the engines would typically be
provided by us, and in part to lower energy prices earlier in 1999, which
reduced the demand for compressors, thereby adversely impacting sales prices.
Revenues from the fabrication and sale of production equipment decreased by
$9.5 million, or 25%, to $28.0 million during 1999 from $37.5 million during
1998 primarily due to the decline in well completions resulting from lower
energy prices during the first half of 1999.
We recognized gains on sales of assets of $4.1 million during 1999 compared
to $1.3 million during 1998. The increase was primarily due to the increase in
horsepower sold from the rental fleet to customers exercising options to
purchase equipment they previously had rented. During 1999 we sold
approximately 20,000 horsepower compared to 14,000 horsepower during 1998.
Expenses
Operating expenses of the rental segments increased by $15.6 million, or
32%, to $65.0 million during 1999 from $49.4 million during 1998. The increase
resulted primarily from the corresponding 31% increase in revenues from rentals
over the corresponding period in 1998. The gross profit percentage from rentals
was 66% during 1999 and 67% during 1998. Operating expenses of parts and
service increased $6.2 million, or 28%, to $27.9 million during 1999 from $21.7
million during 1998, which relates to the 44% increase in parts and service
revenue. The gross profit percentage from parts and service increased to 34%
during 1999 from 26% in 1998. Operating expenses of compressor fabrication
decreased by $14.4 million, or 25%, to $43.7 million from $58.1 million during
1998. The gross profit margin on compression fabrication increased to 17%
during 1999 from 14% during 1998. Production 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 our rentals business segments, as described
above.
58
Depreciation and amortization expense increased by $.2 million during 1999
to $37.3 million. The increase in depreciation on the additions to the rental
fleet was offset by the decrease in depreciation as a result of the equipment
leases entered into in July 1998 and June 1999.
Interest expense decreased by $2.9 million, or 25%, during 1999 to $8.8
million. The decrease in interest expense was due in part to utilization of
proceeds from the equipment lease to reduce indebtedness under our credit
agreement and the capitalization of interest expense on assets that are under
construction.
We incurred compression equipment lease expense of $22.1 million during 1999
and $6.2 million during 1998.
Income Taxes
The provision for income taxes increased by $3.8 million, or 20%, to $23.1
million during 1999 from $19.3 million during 1998. The increase resulted
primarily from the corresponding increase in income before taxes. Our effective
income tax rate was approximately 36.4% during 1999 and 38.8% during 1998. The
decrease in average effective income rates is due to expected benefits from a
foreign sales corporation established in 1998.
Net Income
Net income increased $10.0 million, or 33%, to $40.4 million in 1999 from
$30.4 million in 1998 for the reasons discussed above.
Hanover Compression Limited Partnership
Management's discussion and analysis of the financial condition and results
of operations of HCLP and its subsidiaries is identical to the discussion and
analysis presented above with respect to Hanover, except for the items
described below. Substantially all of Hanover's assets and operations are owned
or conducted by HCLP. To the extent there are differences between the
consolidated financial data for Hanover and the consolidated financial data for
HCLP, these arise due to Hanover's mandatorily redeemable convertible preferred
securities, Hanover's 4.75% convertible senior notes due 2008 and Hanover's
outstanding common stock.
Nine Months ended September 30, 2001 Compared to Nine Months ended September
30, 2000.
Depreciation
Depreciation and amortization increased by $23.6 million to $60.4 million
during the nine months ended September 30, 2001 compared to $36.8 million
during the nine months ended September 30, 2000. The increase in depreciation
was due to additions to the rental fleet which were partially offset by the
sale of compressor equipment in the equipment leases in March, August and
October 2000 and in August 2001. The increase in amortization was due to the
goodwill recorded from business acquisitions completed during 2001 and 2000.
Effective July 1, 2001, we changed our estimate of the useful life of certain
compression equipment from 15 to 30 years. The effect of this change in
estimate on the nine months ended September 30, 2001 was a decrease in
depreciation expense of approximately $1.5 million and an increase in net
income of approximately $0.9 million. We anticipate this change in estimated
useful life will reduce future depreciation expense, based on our current
depreciable assets, by approximately $3 million per quarter.
Interest expense
Interest expense decreased by $0.1 million to $5.5 million during the nine
months ended September 30, 2001 from $5.6 million for the nine months ended
September 30, 2000.
Income Taxes
The provision for income taxes increased by $18.3 million, or 72%, to $43.4
million during the nine months ended September 30, 2001 from $25.1 million
during the three months ended September 30, 2000. The increase resulted
primarily from the corresponding increase in income before income taxes. The
average effective income
59
tax rates during the three months ended September 30, 2001 and 2000 were 38%
and 37%, respectively. The increase in the average effective income tax rate is
due primarily to increased income in foreign tax jurisdictions.
Net Income
Net income increased $28.4 million, or 67%, to $70.7 million during the nine
months ended September 30, 2001 from $42.3 million during the nine months ended
September 30, 2000 due to the increase in revenues and gross profits discussed
above.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999.
Income Taxes
The provision for income taxes increased by $13.9 million, or 60%, to $37.1
million during 2000 from $23.2 million during 1999. The increase resulted
primarily from the corresponding increase in income before taxes. Our effective
income tax rate was approximately 37.2% during 2000 and 36.4% during 1999. The
increase in the effective rate was primarily the result of increased income in
foreign tax jurisdictions.
Net Income
Net income increased $22.1 million, or 54%, to $62.7 million for 2000 from
$40.6 million in 1999 for the reasons discussed above.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
Income Taxes
The provision for income taxes increased by $3.9 million, or 20%, to $23.2
million during 1999 from $19.3 million during 1998. The increase resulted
primarily from the corresponding increase in income before taxes. Our effective
income tax rate was approximately 36.4% during 1999 and 38.8% during 1998. The
decrease in average effective income rates is due to expected benefits from a
foreign sales corporation established in 1998.
Net Income
Net income increased $10.2 million, or 34%, to $40.6 million in 1999 from
$30.4 million in 1998 for the reasons discussed above.
Liquidity and Capital Resources
Our cash balance amounted to $22.3 million at September 30, 2001 compared to
$45.5 million at
December 31, 2000. Primary sources of cash during the nine months ended
September 30, 2001 were net proceeds of $185.3 million from the issuance of
4.75% convertible senior notes due 2008, $83.9 million through our public
offering of 2,500,000 shares of common stock, $550 million from two
sale-leaseback transactions and operating cash flows of $37.1 million.
Principal uses of cash during the nine months ended September 30, 2001 were
capital expenditures and business acquisitions of $857.2 million (including
$200 million used to exercise our purchase option under our 1998 operating
lease), the net repayment of the revolving credit facility of $17.5 million and
$200.0 million to exercise an equipment purchase option under an existing
operating lease.
Working capital increased to $447.4 million at September 30, 2001 from
$309.9 million at December 31, 2000, primarily as a result of increases in
accounts receivables, inventories, costs in excess of billings and other
current assets. The increase in the balances is due to an increased level of
activity in our lines of business over 2000 as well as from acquisitions. These
increases were partially offset by an increase in current liabilities.
The amount invested in property, plant and equipment through September 30,
2001 was $479.7 million which resulted in the addition of approximately
1,336,000 horsepower to the rental fleet. At September 30, 2001, the rental
fleet consisted of 2,740,000 horsepower domestically and 747,000 in the
international rental fleet. Current plans are to spend approximately $75 to $90
million during the fourth quarter of 2001, and $325 million in 2002, exclusive
of any major acquisition, in continued expansion of the rental fleet.
Historically, we have
60
funded capital expenditures with a combination of internally generated cash
flow, borrowing under the revolving credit facility, sale lease-back
transactions and raising additional equity and issuing long term debt. We
believe that cash flow from operations and borrowing under our existing $350
million bank credit agreement will provide us with adequate capital resources
to fund our estimated level of capital expenditures for the near term. As of
September 30, 2001, we had approximately $94.5 million of credit capacity
remaining on our $200 million revolving credit facility (4.6% rate at September
30, 2001). In December 2001, we increased our $200 million bank credit
agreement to $350 million. As of December 3, 2001, we had approximately $174.5
million of credit capacity remaining on our $350 million bank credit agreement.
In August 2001, we acquired the natural gas compression business of
Schlumberger in exchange for total consideration of $761 million in cash,
common stock and indebtedness. To finance the acquisition, we used $270 million
of the proceeds from the sale of Equipment to the Issuer in combination with
the $150 million subordinated acquisition note and $283 million of common stock.
Since January 1999, we have completed five sale and leaseback transactions
(including the Lease) of compression equipment, from which we received
aggregate gross proceeds of approximately $1,139.6 million. The leaseback
transactions with respect to this equipment are recorded as operating leases.
Three of these transactions, completed in 1999 and 2000, have five-year terms
and require quarterly rental payments based on the London Interbank Offered
Rate. Under these three leases, we continue to utilize the equipment and have
the option to repurchase the equipment at any time at fair market value. The
Lease has a seven-year term and requires semi-annual rental payments based upon
the amount necessary for the Issuer to make regularly scheduled payments on the
notes and to provide a return to its equity certificate holders. The fifth
transaction, completed concurrently with the Lease, has a ten-year term and is
substantially similar to the Lease. We have approximately $881 million in
residual value guarantees that are due upon termination of our operating leases
(including the Lease), which may be satisfied by a cash payment or the exercise
of our purchase options under the terms of the respective lease agreements.
This discussion also describes the liquidity of HCLP and its subsidiaries,
with the exception that the proceeds from the issuance of the 4.75% convertible
senior notes due 2008 and the public offering of 2,500,000 shares of Hanover
common stock were received by Hanover and contributed to HCLP as a capital
contribution. HCLP is dependent on Hanover for funding capital contributions,
which have in the past included the proceeds of Hanover's debt and equity
offerings.
New Accounting Pronouncements
In September 2001, the Financial Accounting Standards Board (''FASB'')
issued Statement of Financial Accounting Standards (''SFAS'') 141, Business
Combinations. This Statement is effective for all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. All business combinations in the scope of this
statement are to be accounted for using one method, the purchase method.
In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets
(''SFAS 142''). Under SFAS 142, amortization of goodwill to earnings will be
discontinued. However, goodwill will be reviewed for impairment annually or
whenever events indicate impairment may have occurred. SFAS 142 is effective
for Hanover on January 1, 2002. However, under the transition provisions of
SFAS 142, goodwill acquired in a business combination for which the acquisition
date is after June 30, 2001, shall not be amortized. Because the acquisition of
POI was consummated after June 30, 2001, the goodwill related to the POI
acquisition will not be amortized. The goodwill related to business
combinations completed before June 30, 2001 continues to be amortized in the
pro forma combined condensed statements of operations because Hanover has not
adopted SFAS 142. At September 30, 2001, we have recorded approximately $222.3
million of goodwill, of which $181.3 million is required to be amortized, at an
annual rate of approximately $9.6 million, under generally accepted accounting
principles. We are current evaluating the effect the implementation of SFAS 142
will have on our financial statements.
61
In June 2001, the FASB issued SFAS 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets ("SFAS 143"). SFAS 143
establishes the accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset retirement cost. This
statement is effective for Hanover effective January 1, 2003. We are presently
evaluating the impact that the implementation of SFAS 143 will have on our
financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144").
SFAS 144 addresses significant issues relating to the implementation of SFAS
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("SFAS 121"), and to develop a single accounting
model, based on the framework established in SFAS 121, for long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired.
This statement is effective for Hanover effective January 1, 2002. We are
presently evaluating the impact that the implementation of SFAS 144 will have
on our financial statements.
We adopted SFAS 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), as amended by SFAS 137 and SFAS 138, effective January
1, 2001. SFAS 133 requires that 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. Prior to
2001, we entered into two interest rate swaps which are outstanding at
September 30, 2001 with notional amounts of $75,000,000 and $125,000,000 and
strike rates of 5.51% and 5.56%, respectively. The difference paid or received
on the swap transactions is recognized in leasing expense. These swap
transactions expire in July 2003. On January 1, 2001, in accordance with the
transition provisions of SFAS 133, we recorded a loss resulting from the
cumulative effect of an accounting change in the statement of income of
approximately $164,000 ($.00 per share), net of tax benefit of $89,000. During
the nine months ended September 30, 2001, we recognized an additional loss of
$8.7 million related to the change in the fair value of these interest rate
swaps. At September 30, 2001, we recorded a liability of $22 million related to
these interest rate swaps in other liabilities. The fair value of these
interest rate swaps will fluctuate with changes in interest rates over their
remaining terms and the fluctuations will be recorded in the statement of
income. During the second quarter of 2001, we entered into three additional
interest rate swaps to convert variable lease payments under certain lease
arrangements to fixed payments as follows:
Maturity Strike Notional
Lease Date Rate Amount
- ------------ -------- ------ ------------
March 2000 3/11/05 5.2550% $100,000,000
August 2000 3/11/05 5.2725% $100,000,000
October 2000 10/26/05 5.3975% $100,000,000
These three swaps meet the specific hedge criteria and any changes in their
fair values have been recognized in other comprehensive income. During the nine
months ended September 30, 2001, we recorded a $7.9 million loss, net of tax in
other comprehensive income, with respect to these three swaps.
62
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate and foreign currency risk. Hanover and its
subsidiaries periodically enter into interest rate swaps to manage its exposure
to fluctuations in interest rates. At September 30, 2001, the fair market value
of these interest rate swaps was approximately $22 million and this amount was
recorded in other liabilities. We are party to five interest rate swaps to
convert variable lease payments under certain lease arrangements to fixed
payments as follows (in thousands):
Fair Value of the
Maturity Company Pays Notional Swap at
Date Fixed Rate Amount September 30, 2001
- ---------- ------------ -------- ------------------
7/20/2003 5.5100% $ 75,000 $(3,320)
7/20/2003 5.5600% $125,000 $(5,657)
3/11/2005 5.2550% $100,000 $(4,078)
3/11/2005 5.2725% $100,000 $(4,120)
10/26/2005 5.3975% $100,000 $(4,894)
The Company is exposed to interest rate risk on borrowings under its
floating rate revolving credit facility. At September 30, 2001, $85 million was
outstanding bearing interest at a weighted average effective rate of 4.60% per
annum. Assuming a hypothetical 10% increase in interest rates from those in
effect at September 30, 2001, the increase in annual interest expense for
advances under this facility would be approximately $0.4 million. At September
30, 2001, the Company is exposed to variable rental rates on the equipment
leases it entered into in September 1999 and October 2000. Assuming a
hypothetical 10% increase in interest rates from those in effect at quarter
end; the increase in annual leasing expense on these equipment leases would be
approximately $1.5 million. The Company does not currently use derivative
financial instruments to mitigate foreign currency risk.
63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF HANOVER EQUIPMENT TRUST 2001A
Management's discussion and analysis of the financial condition and results
of operations of the Issuer should be read in conjunction with the financial
statements of the Issuer and related notes thereto included in this prospectus.
General
Hanover Equipment Trust 2001A, a Delaware special purpose business trust,
was formed in August 2001 solely for the purpose of: (1) issuing the old notes
and the new notes, (2) executing, delivering and performing the operative
documents to which it is a party, and (3) using the proceeds of the issuance of
the old notes and the equity certificates to purchase gas compression equipment
from HCLP and certain of its subsidiaries. The equity funding, issuance of old
notes and equipment purchase occurred on August 30, 2001. The Issuer leases the
gas compression equipment back to HCLP under a seven-year operating lease. In
addition to rental payments, HCLP is obligated to pay supplemental rent, costs,
taxes, indemnities, and other amounts owing under the operating lease.
The trustee of the Issuer is Wilmington Trust Company. General Electric
Capital Corporation ("GE") is the sole equity certificate holder. The initial
equity certificate holder assigned its interest to GE and was repaid its
capital contribution in August 2001.
Period from August 2, 2001 (Inception) to September 30, 2001.
Revenue
The Issuer's total revenue for the period was approximately $2.4 million.
Revenue was not earned until after the purchase of gas compression equipment on
August 30, 2001. The Issuer's rental revenue is based primarily on the interest
accrued on the old notes and the yield payable to the equity certificate
holder. The interest rate on the old notes is fixed at 8.50%. However, the
yield payable on the equity certificates will vary depending upon the
certificate holder yield rate (10.98% as of September 30, 2001). Based on
current interest rates and property balances applicable as of September 30,
2001, future rental revenue is expected to be approximately $6.6 million for
the last quarter 2001.
Interest Expense on Rental Equipment
Interest expense on rental equipment is the interest recorded in connection
with the old notes. Interest expense on rental equipment for the period was
approximately $2.3 million or approximately 95.7% of rental revenue. Due to the
terms of the operating lease with HCLP, interest expense on rental equipment is
expected to remain fairly constant. Based on current interest rates, future
interest expense on rental equipment is expected to be approximately $6.4
million for the last quarter 2001.
Depreciation
The Issuer's depreciation for the period was approximately $0.9 million. The
equipment is being depreciated by the Issuer over the term of the lease using
the straight-line method and assuming a salvage value equal to the final rent
payment required under the lease. Depreciation is expected to be approximately
$2.8 million per quarter.
Liquidity and Capital Resources
Under the triple net lease terms for the Equipment, all of the costs of
maintaining and financing the equipment are borne by HCLP, as the lessee. The
Issuer believes it has adequate capital resources for the nature
64
of its business and that funds from its operations as described in this
prospectus will be sufficient to provide for its operations. Because the Issuer
has agreed to limit its business activities as described in this prospectus,
the Issuer does not believe it will have any need to obtain additional
financing or equity.
The Issuer's cash and cash equivalents balance at September 30, 2001 was $0.
Operating activities provided $0 in cash, investing activities used $309.3
million in cash and financing activities provided $309.3 million in cash. Cash
provided by operating activities was $0 at September 30, 2001 because the
Issuer had yet to receive any payments under the operating lease, which
payments began on December 1, 2001. Cash was used in investing activities for
the purchase of $309.3 million of rental equipment. Cash provided by financing
activities resulted from $9.3 million of equity investment from the Issuer's
equity certificate holder and $300 million in proceeds from the issuance of the
old notes.
Quantitative and Qualitative Disclosures about Market Risk
The Issuer is exposed to market risk due to the variable yield rate on its
equity certificates, however the Issuer's market risk is minimized because
rental revenue would increase or decrease by an equal amount with any change in
the yield on its equity certificates. As of September 30, 2001, the Issuer had
$300 million outstanding principal amount of the old notes, which bear interest
at a fixed rate of 8.50% per annum, and $9.3 million in equity investment under
the Issuer's equity certificates, which accrue yield payments at the
certificate holder yield rate. Yield payments on the equity certificates are
based upon the Eurodollar rate or the prime rate, plus a spread in each case of
7.95% per year (10.98% as of September 30, 2001). An increase in the
certificate holder yield rate by 1% would result in an approximately $93
thousand annual increase in the yield payments on the Issuer's equity
certificates and rental revenue.
65
BUSINESS OF HANOVER COMPRESSOR COMPANY
AND HANOVER COMPRESSION LIMITED PARTNERSHIP
General
Hanover Compressor Company, through its indirect wholly owned subsidiary
Hanover Compression Limited Partnership and its subsidiaries, is a global
market leader in full service natural gas compression and a leading provider of
service, financing, fabrication and equipment for contract natural gas handling
applications. We provide this equipment on a rental, contract compression,
maintenance and acquisition leaseback basis to natural gas production,
processing and transportation companies that are increasingly seeking
outsourcing solutions. Founded in 1990 and a public company since 1997, our
customers include premier independent and major producers and distributors
throughout the Western Hemisphere. In conjunction with our maintenance
business, we have developed our parts and service business to provide solutions
to customers that own their own compression equipment but want to outsource
their operations. Our compression services are complemented by our compressor
and oil and gas production equipment fabrication operations and gas processing
and treating, gas measurement and power generation services, which broaden our
customer relationships both domestically and internationally.
Our products and services are essential to the production, processing,
transportation and storage of natural gas and are provided primarily to energy
producers and distributors of natural gas. Our decentralized operating
structure, technically experienced personnel and high quality compressor fleet
allow us to provide reliable and timely customer service and have enabled us to
maintain an average horsepower utilization rate of approximately 93% from 1994
to 2000, compared to industry rates that we believe to have been 80% to 85% for
this period. As a result, we have experienced substantial growth over the past
five years and have developed and maintained a number of long-term customer
relationships.
We have successfully and consistently grown our asset base, revenues and
cash flow over time. Since 1992, our compression fleet has grown from 117,000
horsepower to approximately 3,461,000 horsepower as of November 30, 2001, which
represents a compound annual growth rate ("CAGR") of 46%. We acquired
approximately 860,000 horsepower in August 2001 when we completed our
acquisition of the gas compression business of Schlumberger (including
Production Operators Corporation and related assets). Our financial measures
have shown similar growth.
As of December 31, For the Nine Months Ended
------------------ ----------------------------------
September 30, September 30,
1992 2000 CAGR 2000 2001 Growth
----- ------ ----- ------------- ------------- ------
Revenue... $33.1 $603.8 43.8% $370.2 $781.6 111.3%
EBITDA.... $ 7.3 $206.7 51.9% $139.4 $227.8 63.4%
Net Income $ 1.0 $ 58.7 66.4% $ 39.3 $ 64.5 64.1%
In addition to providing natural gas compression services, we fabricate gas
compressors for sale to third parties and for inclusion in our rental fleet. We
also fabricate, sell and service equipment that separates and treats oil and
gas to facilitate its further processing, transportation and sale. Oil and gas
production and processing equipment is typically installed in the field near
the wellhead and remains at the site for the life of the field. On a pro forma
basis, for the nine months ended September 30, 2001, compression rental and
service, compressor fabrication, production and processing equipment
fabrication and parts and service represented approximately 42%, 19%, 16% and
$22% of our revenues, respectively. During the same period, compression rental
and service operations, compressor fabrication, production and processing
equipment fabrication and parts and service represented approximately 64%, 8%,
8% and 16% of our gross profit, respectively.
66
Compressor Rental Fleet
The size and horsepower of our compressor rental fleet owned or operated
under lease on November 30, 2001 is summarized in the following table.
Aggregate
Number of Horsepower % of Total
Range of Horsepower per Unit Units (in thousands) Horsepower
- ---------------------------- --------- -------------- ----------
0-100.............. 2,103 150,838 4.36
101-200............ 1,398 215,635 6.23
201-500............ 1,209 389,359 11.25
501-800............ 646 414,789 11.98
801-1100........... 504 497,690 14.38
1101-1500.......... 910 1,218,121 35.20
1501-2500.......... 185 332,180 9.60
2501-UP............ 73 242,424 7.00
----- --------- ------
Total.............. 7,028 3,461,036 100.00
===== ========= ======
Business Strategy
Historically, we have generated growth in excess of industry averages and
have delivered superior results to our investors. From 1998 through 2000, our
revenue, EBITDA and net income growth have averaged 44.7%, 45.0% and 49.3% per
year, respectively. During this same period, the rental compression market,
driven by growth in consumption and the trend toward outsourcing, has
consistently grown at approximately 15% per year, while natural gas pricing and
exploration activity have been quite volatile. For example, from January 1,
1998 through September 30, 2001, average domestic natural gas prices have
ranged from around $1.04 per thousand cubic feet to around $10.50 per thousand
cubic feet, while drilling activity, measured by North American active rig
counts, has ranged from approximately 500 to 1,600.
Our growth strategy includes the following key elements:
. Offer Broad-Based Solutions: We believe that we are the only company in
our industry that offers outsourced rental compression as well as
compressor and oil and gas production and processing equipment
fabrication and related services. By offering a broad range of services
that complement our historic strengths, we believe that we can offer
more complete solutions to our customers and thereby drive growth in
each of our businesses.
-- Our leading position in the design and fabrication of compressors for
sale helps us meet our rental fleet growth requirements as well as
the needs of energy industry participants who resize or replace units
on existing projects or obtain compression products and services for
new projects.
-- Our compressor services business supplies parts and services and
manages compression units for customers who own their units, thereby
helping us develop relationships for future outsourcing business.
-- We design and fabricate oil and gas production equipment and provide
related services essential to the operation of recently completed oil
and gas wells, all of which enhance our opportunity to deliver
compression services and equipment to customers as the need develops
over the useful life of a well.
-- As our customers look to us to provide an ever-widening array of
outsourced services, we continue to build our core business with
emerging business opportunities, such as turnkey gas treatment, gas
measurement and power generation sales and services. As with
compression, these emerging businesses are increasingly being
outsourced by industry participants and represent an additional
opportunity to gain incremental revenue from current and potential
customers.
. Exploit International Opportunities: We believe international markets
represent one of the greatest growth opportunities for our business.
Although our international horsepower has grown significantly over the
last six years, we continue to believe that the market is drastically
under-served. Of total
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proven worldwide reserves, 97% are located outside the United States, yet
international energy companies utilized only 35% of worldwide
compression capacity. We believe that the implementation of
international environmental and conservation laws preventing the flaring
of natural gas and encouraging the use of gas-fired electric power
generation, coupled with increased worldwide energy consumption, will
continue to drive use of compression by international energy companies.
In addition, we typically see higher pricing relative to the domestic
market in international markets. At September 30, 2001, we had 768,000
horsepower in service internationally, or 22% of total horsepower. For
the nine months ended September 30, 2001, approximately 32% of rental
revenue were provided by international horsepower. Moreover,
international oil and gas companies have traditionally purchased
compression equipment, but over the past decade, the international
energy producers have increasingly chosen to fulfill their compression
requirements through outsourcing. We believe we are well positioned to
exploit the opportunity created by these international trends.
. Continue to Expand in our Existing Domestic Markets: Since 1992,
approximately 50% of the aggregate horsepower added by the oil and gas
industry has been outsourced to third party rental companies like us.
Consequently, the percentage of aggregate compression horsepower
outsourced by the industry has increased from nearly 20% in 1992 to
approximately 34% in 2000. This move to outsourcing has been driven by,
among other things, the desire of producers and distributors of natural
gas to: (1) maximize production revenue by improving mechanical run-time
and reducing equipment maintenance and personnel costs; (2) increase
capital available for other uses; and (3) improve operating flexibility
by exploiting the rental company's greater asset base and extensive
field service organization to efficiently resize compressor units to
meet changing reservoir conditions. We believe the breadth and quality
of our services, the depth of our customer relationships and our
presence throughout the gas producing regions of the United States
position us to capture additional outsourced business.
. Focus on High Horsepower Units: The high horsepower compression segment,
comprised of units of greater than 500 horsepower, is the fastest
growing segment of the rental compression market. These units are
typically installed on larger wells, gathering systems and processing
and treating facilities whose size and generally more attractive unit
economics largely insulate them from declining commodity prices. As a
result, compressors in this segment tend to realize higher utilization
rates. The greater technical requirements of these larger systems enable
us to differentiate our compression products and services and to offer
related products and services. In addition, most compressors installed
internationally are high horsepower units. As of November 30, 2001,
approximately 78% of our aggregate horsepower consists of high
horsepower compression units. We believe the breadth of our experience,
the quality of our service and of our compressor production and
treatment equipment fabrication operations and our international
experience will enable us to continue to succeed in this segment of the
market.
. Capture Acquisition Leaseback Opportunities: We believe that as of
December 31, 2000, U.S. energy producers, transporters and processors
directly owned and operated approximately 10.8 million horsepower of
compression units, representing about 66% of the total U.S. compression
market. In recent years, more companies have been outsourcing their
compression operations in order to improve their financial and operating
results. We also offer energy producers, transporters and processors the
opportunity to outsource their operations and reallocate capital to core
activities through our acquisition leaseback program, whereby we
purchase in-place compression equipment and lease the equipment back to
the former owner under long-term operating and maintenance contracts. We
believe that our extensive geographic reach and our experience with a
wide range of compression equipment and operating conditions give us a
competitive advantage in capturing acquisition leaseback opportunities.
Between January 1, 1997 and September 30, 2001, we executed acquisition
leaseback transactions for approximately 530 compression units totaling
306,000 horsepower.
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. Selectively Pursue Industry Acquisitions: Since 1992, we have acquired
over three dozen small, well-established, regional companies providing
compressor rental and related services while delivering superior
financial results. In addition, we completed four sizable acquisitions
of compression companies: PAMCO Services International and the
compression services division of Dresser-Rand Company in 2000, OEC
Compression Corporation in March 2001 and the gas compression business
of Schlumberger in August 2001. We also pursue acquisitions to expand
our offerings of related products and services and extend our geographic
scope, such as our June 2000 acquisition of Applied Process Solutions,
Inc., a leader in the design, fabrication and installation of natural
gas treating and processing equipment.
. Capitalize on our Decentralized Management and Operating Structure: We
utilize a decentralized management and operating structure to provide
superior customer service in a relationship-driven, service-intensive
industry. We believe that our regionally based network, local presence,
experience and in-depth knowledge of customers' operating needs and
growth plans provide us with significant competitive advantages and
drive internal growth. To maintain this regional strength and to create
incentives to attract, motivate and retain an entrepreneurial, highly
experienced management team, since 1992 we have offered equity ownership
and stock option programs to create incentives for approximately 300 of
our employees, and our employees own, or have options to purchase, over
9% of our common stock.
We believe the successful execution of our growth strategy, combined with
our focus on and leadership position in the compression industry, will enable
us to continue to differentiate our company and drive future growth and
profitability.
Industry Overview
Gas Compression
Typically, compression is required several times during the natural gas
production cycle: at the wellhead, at the gathering lines, into and out of gas
processing facilities, into and out of storage and throughout the intrastate
and interstate pipelines.
Over the life of an oil or gas well, natural reservoir pressure and
deliverability typically decline as reserves are produced. As the natural
reservoir pressure of the well declines below the line pressure of the gas
gathering or pipeline system used to transport the gas to market, gas no longer
naturally flows into the pipeline. It is at this time that compression
equipment is applied to economically boost the well's production levels and
allow gas to be brought to market.
In addition to such gas field gathering activities, natural gas compressors
are utilized in a number of other applications, all of which are intended to
enhance the productivity of oil and gas wells, gas transportation lines and
processing plants. Compressors are used to increase the efficiency of a low
capacity gas field by providing a central compression point from which the gas
can be removed and injected into a pipeline for transmission to facilities for
further processing. As gas is transported through a pipeline, compression
equipment is applied to allow the gas to continue to flow in the pipeline to
its destination. Additionally, compressors are utilized to re-inject associated
gas to lift liquid hydrocarbons artificially which increases the rate of crude
oil production from oil and gas wells. Furthermore, compression enables gas to
be stored in underground storage reservoirs for subsequent extraction during
periods of peak demand. Finally, compressors are often utilized in combination
with oil and gas production equipment to process and refine oil and gas into
higher value added and more marketable energy sources.
Changing well and pipeline pressures and conditions over the life of a well
often require producers to reconfigure their compressor units to optimize the
well production or pipeline efficiency. Due to the technical nature of the
equipment, a dedicated local parts inventory, a diversified fleet of natural
gas compressors and a
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highly trained staff of field service personnel are often necessary to perform
such functions in the most economic manner. These requirements, however, have
typically proven to be an extremely inefficient use of capital and manpower for
independent natural gas producers and have caused such firms, as well as
natural gas processors and transporters, to increasingly outsource their
non-core compression activities to specialists such as Hanover.
The advent of rental and contract compression roughly 40 years ago made it
possible for natural gas producers, transporters and processors to improve the
efficiency and financial performance of their operations. Compressors leased
from specialists generally have a higher rate of mechanical reliability and
typically generate greater productivity than those owned by oil and gas
operators. Furthermore, because compression needs of a well change over time,
outsourcing of compression equipment enables an oil and gas operator to better
match variable compression requirements to the production needs throughout the
life of the well. Also, certain major domestic oil companies are seeking to
streamline their operations and reduce their capital expenditures and other
costs. To this end, they have sold certain domestic energy reserves to
independent energy producers and are outsourcing facets of their operations.
Such initiatives, in our opinion, are likely to contribute to increased rental
of compressor equipment.
Natural gas compressor fabrication involves the design, fabrication and sale
of compressors to meet the unique specifications dictated by the well pressure,
production characteristics and the particular applications for which
compression is sought. Compressor fabrication is essentially an assembly
operation in which an engine, compressor, control panel, cooler and necessary
piping are attached to a frame called a "skid." A fabricator typically
purchases the various compressor components from third party manufacturers but
employs its own engineers and design and labor force.
In order to meet customers' needs, gas compressor fabricators typically
offer a variety of services to their customers including: (1) engineering,
fabrication and assembly of the compressor unit; (2) installation and testing
of the unit; (3) ongoing performance review to assess the need for a change in
compression; and (4) periodic maintenance and replacement parts supply.
Production and Processing Equipment
Oil and gas reserves are generally not commercially marketable as produced
at the wellhead. Typically, such reserves must be processed before they can be
transported to market. Oil and gas production equipment and processing plants
are utilized to separate and treat such oil and gas immediately after it is
produced in order to facilitate further processing, transportation and sale of
such fuels and derivative energy sources. Oil and gas production and processing
equipment is typically installed in the field near the wellhead and remains at
the site throughout the life of the field.
Industry Trends
We compete primarily in the market for transportable natural gas compression
units of up to 4,500 horsepower. We believe that this market, which includes
rental and owner operated units, accounted for approximately 16.3 million
horsepower in the United States in 2000 and has grown from 8.8 million
horsepower, at a CAGR of 8%, since 1992. Despite volatility in most energy
services sectors driven by commodity price changes, the gas compression
industry is relatively insensitive to fluctuations in natural gas prices. We
believe that the domestic natural gas compression market will continue to grow
for the following reasons: (1) domestic natural gas consumption is projected to
grow at a CAGR of 3% over the next five years, (2) the natural gas reserve base
is continuing to age and attendant wellhead pressures are continuing to
decline, which requires changing levels of compression to maintain economic
levels of production and (3) new reserves are being discovered and developed.
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We believe that the rental portion of the domestic gas compression market
grew from approximately 1.8 million horsepower at the end of 1992 to
approximately 5.5 million horsepower at the end of 2000, reflecting a CAGR of
15%. We believe that growth of rental compression capacity in the United States
has been driven primarily by the increasing trend toward outsourcing by energy
producers and processors. We believe that outsourcing provides the customer
greater financial and operating flexibility by minimizing the customer's
investment in equipment and enabling the customer to more efficiently resize
compression units to meet changing reservoir conditions. In addition, we also
believe that outsourcing typically provides the customer with more timely and
technically proficient service and maintenance which often reduces operating
costs and increases project revenues.
In addition to benefiting from the industry trends discussed above, we
believe the strong demand for compression equipment and related services will
also benefit from (1) increased opportunities for compressor rental and sales
internationally, (2) the trend of customers increasingly choosing to do more
business with a smaller number of preferred compressor services vendors and (3)
the consolidation of the compression sector into larger companies that can more
effectively serve the needs of large oil and gas producers by offering a wider
range of compression and related services across a larger geographic area.
Unlike most other energy service sectors, the domestic gas compression
industry is relatively insensitive to fluctuations in natural gas commodity
prices, due in large part to the demand characteristics of the industry. Demand
for compression services is driven by the consumption of natural gas, as
compression services are essential to all phases of the production and
transportation of natural gas. The oil and gas production equipment industry is
more sensitive than the gas compression industry to the volatility of oil and
natural gas prices, as the growth of this industry is likely to more closely
track oil and gas exploration activity.
Market Conditions
We believe that the most fundamental force driving the demand for gas
compression and production equipment is the growing consumption of natural gas.
As more gas is consumed, the demand for compression and production equipment
increases.
Additionally, although natural gas has historically been a more significant
source of energy in the United States than in the rest of the world, we believe
that aggregate foreign natural gas consumption (excluding the former Soviet
Union) has recently grown. Despite significant growth in energy demand, most
non-U.S. energy markets, until recently, have typically lacked the
infrastructure necessary to transport natural gas to local markets, and natural
gas historically has been burned at the wellhead. Given recent environmental
legislation and the construction of numerous natural gas-fueled power plants
built to meet international energy demand, we believe that international
compression markets are experiencing growth.
Natural gas is considered to be the "fuel of the future" because it provides
the best mix of environmental soundness, economy and availability of any energy
source. Rising worldwide energy demand, environmental considerations, the
further development of the natural gas pipeline infrastructure and the
increasing use of natural gas as a fuel source in power generation are the
principal reasons for this anticipated steady growth.
While gas compression and production equipment typically must be highly
engineered to meet demanding and unique customer specifications, the
fundamental technology of such equipment has been stable and has not been
subject to significant technological change.
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Property
The following table describes the material facilities owned or leased by
Hanover and its subsidiaries as of September 30, 2001:
Square
Location Feet Status Uses
-------- ------- ------ -------------------------------------------------
Houston, Texas........ 192,000 Owned Corporate headquarters and compressor fabrication
Yukon, Oklahoma....... 11,700 Owned Office and maintenance
Pocola, Oklahoma...... 8,000 Owned Office and maintenance
Midland, Texas........ 12,000 Owned Office and maintenance
Davis, Oklahoma....... 345,000 Owned Manufacturing
Kilgore, Texas........ 16,750 Owned Office and maintenance
Columbus, Texas....... 210,000 Owned Production equipment manufacturing
Broussard, Louisiana.. 35,000 Owned Office and maintenance
Farmington, New Mexico 19,000 Owned Office and maintenance
Broken Arrow, Oklahoma 134,570 Owned Office and compressor fabrication
Tulsa, Oklahoma....... 40,000 Owned Production equipment manufacturing
Aldridge, Walsall, UK. 33,700 Owned Office and maintenance
Alberta, Canada....... 78,000 Owned Office and maintenance
Houston, Texas........ 124,000 Owned Office and compressor fabrication
Houston, Texas........ 190,000 Leased Compressor fabrication
Victoria, Texas....... 19,000 Leased Office and maintenance
Farmington, New Mexico 18,500 Leased Office and maintenance
Neuquen, Argentina.... 32,900 Leased Office and maintenance
El Tigre, Venezuela... 14,300 Leased Office and maintenance
Patio Ocana, Venezuela 26,700 Leased Office and maintenance
Hanover's executive offices are located at 12001 North Houston Rosslyn,
Houston, Texas 77086 and its telephone number is (281) 447-8787.
HCLP's executive offices are located at 12001 North Houston Rosslyn,
Houston, Texas 77086 and its telephone number is (281) 447-8787.
Business Segments
Our revenues and income are derived from five business segments--domestic
compression rentals, international compression rentals, compressor fabrication,
production and processing equipment fabrication and parts and service. The
domestic and international compression rentals segments have operations
primarily in the United States, Canada and South America. For financial data
relating to our business segments, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Hanover Compressor Company and
Hanover Compression Limited Partnership" and the notes to our consolidated
financial statements included in this prospectus.
Compression Services and Fabrication
We provide our customers with a full range of compressor rental, maintenance
and contract compression services. As of November 30, 2001, our compressor
fleet consisted of 7,028 units, ranging from 5 to 4,500 horsepower per unit.
The size, type and geographic diversity of this rental fleet enable us to
provide our customers with a range of compression units that can serve a wide
variety of applications and to select the correct equipment for the job, rather
than trying to "fit" the job to its fleet of equipment.
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We base our gas compressor rental rates on several factors, including the
cost and size of the equipment, the type and complexity of service desired by
the customer, the length of the contract, and the inclusion of any other
services desired, such as installation, transportation and the degree of daily
operation. Substantially all of our units are operated pursuant to "contract
compression" or "rental with full maintenance" contracts under which we perform
all maintenance and repairs on such units while under contract. In the U.S.
onshore market, compression rental fleet units are generally leased under
contract with minimum terms of six months to two years, which convert to
month-to-month at the end of the stipulated minimum period. Historically, the
majority of our customers have extended the length of their contracts, on a
month-to-month basis, well beyond the initial term. Typically, our compression
rental units utilized in offshore and international applications carry
substantially longer lease terms than those for onshore domestic applications.
An essential element to our success is our ability to provide compression
services to customers with contractually committed compressor run-times of
between 95% and 98%. Historically, run-time credits that we have had to issue
to customers for failing to meet contracted mechanical run-times have been
insignificant, due largely to our rigorous preventive maintenance program and
extensive field service network which permits us to promptly address
maintenance requirements. Our rental compressor maintenance services are
performed by over 2,300 experienced and factory-trained maintenance personnel
both at our facilities and in the field. Such maintenance facilities are
situated in close proximity to actual rental fleet deployment to permit
superior service response times.
All rental fleet units are serviced at manufacturers' recommended
maintenance intervals, modified as required by the peculiar characteristics of
each individual job and the actual operating experience of each compressor
unit. Prior to the conclusion of any rental job, our field management evaluates
the condition of the equipment and, where practical, corrects any problems
before the equipment is shipped out from the job site. Although natural gas
compressors typically have a useful life that exceeds 30 years and generally do
not suffer significant technological obsolescence, they do require routine
maintenance and periodic refurbishing to prolong their useful life. Routine
maintenance includes alignment, compression checks and other parametric checks
that indicate a change in the condition of the equipment. In addition, oil and
wear-particle analysis is performed on all units prior to their redeployment at
specific compression rental jobs. Overhauls are done on a condition-based
interval instead of a time-based schedule. In our experience, these rigorous
procedures maximize component life and unit availability and minimize avoidable
downtime. Typically, we overhaul each rental compressor unit for general
refurbishment every 36 to 48 months and anticipate performing a comprehensive
overhaul of each rental compressor unit every 60 to 72 months. This maintenance
program has provided us with a highly reliable fleet of compressors in
excellent condition and, as a result, the value of our compressor assets has
remained relatively stable.
Our field service mechanics provide all operating and maintenance services
for each of our compression units leased on a contract compression or full
maintenance basis and are on-call 24 hours a day. Such field personnel receive
regular mechanical and safety training both from us and our vendors. Each of
our field mechanics is responsible for specific compressor unit installations
and has at his disposal a dedicated local parts inventory. Additionally, each
field mechanic operates from a fully-equipped service vehicle. Each mechanic's
field service vehicle is radio or cellular telephone equipped which allows that
individual to be our primary contact with the customer's field operations staff
and to be contacted at either his residence or mobile phone 24 hours a day.
Accordingly, our field service mechanics are given the responsibility to
promptly respond to customer service needs as they arise based on the
mechanic's trained judgment and field expertise.
We consider ourselves to be unique in our industry in that our sales and
field service organizations enjoy managerial parity within the company,
enabling these two vital organizations to work together in a highly coordinated
fashion in order to deliver maximum customer service, responsiveness and
reliability. The foundation for our successful field operations effort is the
experience and responsiveness of our over 2,300 member compressor rental field
service and shop staff of factory-trained and field-tested compressor
mechanics. Our field service mechanics are coordinated and supported by
regional operations managers who have supervisory responsibility for specific
geographic areas.
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Our compressor fabrication division, doing business as Hanover Maintech,
designs, engineers and assembles compression units for sale to third parties as
well as for placement in our compressor rental fleet. As of September 30,
2001, we had a compressor unit fabrication backlog for sale to third parties of
$16.9 million compared to $13.4 million as of September 30, 2000. Substantially
all backlog is expected to be produced within 90 to 120 days. In general, units
to be sold to third parties are assembled according to each customer's
specifications and sold on a turnkey basis. Components for such compressor
units are acquired from third party suppliers.
Production and Processing Equipment
Through our divisions doing business as Hanover Smith, Hanover Maloney, and
Hanover Russell, we design, engineer, fabricate and either sell or rent a broad
range of standard oil and gas production equipment and high specification,
custom-engineered processing plants. This equipment is designed to heat,
separate, dehydrate, treat, measure and recover crude oil and natural gas. The
product line includes line heaters, oil and gas separators, glycol dehydration
units and plants, gas sweetening plants, sulphur recovery units, hydro carbon
recovery plants, liquid fractionation plants, cyrogenic plants, oil emulsion
treaters, hydrotreaters and crude distillation units. These skid-mounted
production and processing packages are designed for both onshore and offshore
facilities. We generally maintain standard product inventories in excess of $5
million and are therefore able to meet most customers' rapid response
requirements and minimize customer downtime. As of
September 30, 2001, we had a production and processing equipment fabrication
backlog for sale to third parties of $50.1 million compared to $36.8 million as
of September 30, 2000. Substantially all backlog is expected to be produced
within 90 to 120 days.
Parts and Service
We also purchase and recondition used gas compression units, power
generation and treating facilities and production equipment which is then sold
or rented to our customers. Many of our customers prefer to own their
production, gas treating, power generation or compression equipment, but engage
us to operate that equipment on a contract basis. We believe we are
particularly well qualified to provide these services because our operating
personnel have access to the full range of our compression rental, production
processing equipment and power generation equipment and facilities.
As our customers look to us to provide an ever-widening array of outsourced
services, we continue to build our core business with emerging business
opportunities, such as turnkey gas treatment, gas measurement and power
generation sales and services.
Market and Customers
Our customer base consists of approximately 1,450 U.S. and international
companies engaged in all aspects of the oil and gas industry, including major
integrated oil and gas companies, large and small independent producers and
natural gas processors, gatherers and pipelines. Additionally, we have
negotiated more than 19 strategic alliances or preferred vendor relationships
with key customers pursuant to which we receive preferential consideration in
customer compressor and oil and gas production equipment procurement decisions
in exchange for enhanced product availability, product support, automated
procurement practices and limited pricing concessions. No individual customer
accounted for more than 10% of our consolidated revenues during 1999 or 2000.
Production Operators Corporation ("POC"), which we acquired as part of the gas
compression business of Schlumberger, generated 43.5% of its revenues in 2000
from its three largest customers. Williams Field Services, Amoco Production
Company and Noram Field Services accounted for 27.3%, 8.3% and 7.9% of POC's
revenues in 2000, respectively. On a pro forma basis, these three customers
would have accounted for a total of 9.0% of our revenues in 2000.
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Our domestic compressor leasing activities are currently located throughout
the United States and internationally. International locations include Tunisia,
Nigeria, Argentina, Barbados, Egypt, Equatorial Guinea, India, Venezuela,
Colombia, Trinidad, Bolivia, Brazil, Mexico, Indonesia, Spain, Nigeria, United
Kingdom and Canada. In addition, we have representative offices in the
Netherlands, China and the Cayman Islands. As of September 30, 2001,
approximately 7% and 22% of our compressor horsepower was being used in
offshore and international applications, respectively.
Sales and Marketing
Our more than 125 salespeople report to three sales vice presidents. The
sales vice presidents report to the Senior Vice President of Sales and
Marketing. Our salespeople aggressively pursue the rental and sale market in
their respective territories for compressors and production equipment. Each
salesperson is assigned a customer list on the basis of the experience and
personal relationships of the salesperson and the individual service
requirements of the customer. This customer and relationship-focused strategy
is communicated through frequent direct contact, technical presentations, print
literature, print advertising and direct mail. Our advertising and promotion
strategy is a "concentrated" approach, tailoring specific messages into a very
focused presentation methodology.
Additionally, our salespeople coordinate with each other to effectively
pursue customers who operate in multiple regions. The salespeople maintain
intensive contact with our operations personnel in order to promptly respond to
and satisfy customer needs. Our sales efforts concentrate on demonstrating our
commitment to enhancing the customer's cash flow through superior product
design, fabrication, installation, customer service and after-market support.
Upon receipt of a request for proposal or bid by a customer, we assign a
team of sales, operations and engineering personnel to analyze the application
and prepare a quotation, including selection of the equipment, pricing and
delivery date. The quotation is then delivered to the customer, and, if we are
selected as the vendor, final terms are agreed upon and a contract or purchase
order is executed. Our engineering and operations personnel also often provide
assistance on complex compressor applications, field operations issues or
equipment modifications.
Competition
The natural gas compression services and fabrication business is highly
competitive. Overall, we experience considerable competition from companies who
may be able to more quickly adapt to changes within our industry and throughout
the economy as a whole, more readily take advantage of acquisition and other
opportunities and adopt more aggressive pricing policies. We believe that we
are currently the largest natural gas compression company in the United States
on the basis of aggregate rental horsepower.
Compressor industry participants can achieve significant advantages through
increased size and geographic breadth. As the number of rental units increases
in a rental fleet, the number of sales, engineering, administrative and
maintenance personnel required does not increase proportionately. As a result,
due to economies of scale, companies such as Hanover with larger rental fleets
have relatively lower operating costs and higher margins than smaller companies.
One of the significant cost items in the compressor rental business is the
amount of inventory required to service rental units. Each rental company must
maintain a minimum amount of inventory to stay competitive. As the size of the
rental fleet increases, the required amount of inventory does not increase in
the same proportion. The larger rental fleet companies can generate cost of
capital savings through improved purchasing power and vendor support.
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We believe that we compete effectively on the basis of price, customer
service, including the availability of personnel in remote locations,
flexibility in meeting customer needs and quality and reliability of our
compressors and related services.
Our compressor fabrication business competes with other fabricators of
compressor units. The compressor fabrication business is dominated by a few
major competitors, several of which also compete with us in the compressor
rental business. We believe that we are the largest compressor fabrication
company in the United States.
The production equipment business is a highly fragmented business with
approximately eight substantial U.S. competitors. Although sufficient
information is not available to definitively estimate our relative position in
this market, we believe that we are among the top three oil and gas production
equipment fabricators in the United States.
Government Regulation
We are subject to various federal, state, local and foreign laws and
regulations relating to the environment, health and safety, including
regulations regarding air emissions, wastewater and stormwater discharges, as
well as waste handling and disposal. In addition, certain of our customer
service arrangements may require us to operate, on behalf of a specific
customer, petroleum storage units such as underground tanks, or pipelines and
other regulated units, all of which may impose additional compliance
obligations. Certain states have or are considering, and the federal government
has recently passed, more stringent air emission controls on off-road engines.
These laws and regulations may affect the costs of our operations. As with any
owner of property, we are also subject to clean-up costs and liability for
hazardous materials, asbestos or any other toxic or hazardous substance that
may exist on or under any of our properties.
We believe that we are in substantial compliance with environmental laws and
regulations and that the phasing in of recent non-road engine air emission
controls and other known regulatory requirements at the rate currently
contemplated by such laws and regulations will not have a material adverse
effect on our financial condition, results of operations or cash flows.
Notwithstanding, we may not be in compliance with certain environmental
requirements for recently acquired facilities, in part because of our rapid
growth through acquisitions. With respect to newly-acquired facilities, it is
our practice to investigate environmental compliance issues and address any
issues promptly. We cannot be certain, however, that all such issues are
completely resolved in accordance with applicable environmental regulations
prior to our taking over operations, although it is our goal to correct any
deficiencies as quickly as possible.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on persons who are
considered to be responsible for the release of a "hazardous substance" into
the environment. These persons include the owner or operator of the facility or
disposal site or sites where the release occurred and companies that disposed
or arranged for the disposal of the hazardous substances. Under CERCLA, and
similar state laws, such persons may be subject to joint and several liability
for the costs of cleaning up the hazardous substances that have been released
into the environment, for damages to natural resources, and for the costs of
certain health studies. Furthermore, it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by hazardous substances or other pollutants
released into the environment. We are not currently under any order requiring
that we undertake or pay for any cleanup activities, nor are we aware of any
current environmental claims by the government or private parties against us
demanding remedial costs or alleging that we are liable for such costs.
However, we cannot be certain that we will not receive any such claims in the
future.
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The Resource Conservation and Recovery Act ("RCRA"), and regulations
promulgated thereunder, govern the generation, storage, transfer and disposal
of hazardous wastes. We must comply with RCRA regulations for any of our
operations that involve the generation, management or disposal of hazardous
wastes (such as painting activities or the use of solvents). In addition, to
the extent we operate underground tanks on behalf of specific customers, such
operations may be regulated under RCRA. We believe we are in substantial
compliance with RCRA and are not aware of any current claims against us
alleging RCRA violations. We cannot be certain, however, that we will not
receive such notices of potential liability in the future.
Stricter standards in environmental legislation that may affect us may be
imposed in the future, such as more stringent air emission requirements or
proposals to make hazardous wastes subject to more stringent and costly
handling, disposal and clean-up requirements. While we may be able to pass on
the additional costs of complying with such laws to our customers, there can be
no assurance that attempts to do so will be successful. Accordingly, new laws
or regulations or amendments to existing laws or regulations might require us
to undertake significant capital expenditures and otherwise have a material
adverse effect on our business, results of operations, cash flows and financial
condition.
Employees
As of November 30, 2001, we had approximately 4,700 employees, approximately
111 of whom are represented by a labor union. We believe that our relations
with our employees are satisfactory.
Legal Proceedings
From time to time, we may be involved in litigation relating to claims
arising out of the normal course of our business, including environmental
matters. Although occasional adverse decisions or settlements may occur, we
believe that the final disposition of such matters will not have a material
adverse effect on our financial positions, results of operations or liquidity.
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HANOVER COMPRESSION LIMITED PARTNERSHIP
General
Hanover Compression Limited Partnership is a Delaware limited partnership
and an indirect wholly-owned subsidiary of Hanover. HCLP was formed on December
7, 2000 by the filing of a certificate of limited partnership with the
Secretary of State of the State of Delaware. HCLP operates under a limited
partnership agreement between Hanover Compression General Holdings, LLC, a
Delaware limited liability company and a direct wholly-owned subsidiary of
Hanover, as general partner (the "general partner"), and Hanover Compression
Limited Holdings, LLC, a Delaware limited liability company and a direct
wholly-owned subsidiary of Hanover, as limited partner (the "limited partner").
The general partner has exclusive control over the business of HCLP and holds
1% of HCLP's partnership interests. The limited partner has no right to
participate in or vote on the business of HCLP and holds 99% of HCLP's
partnership interests.
Executive Officers and Managers of the General Partner
HCLP's executive officers are appointed by, and serve at the discretion of,
the general partner. HCLP has no directors. The managers of the general partner
are appointed by, and serve at the discretion of, Hanover, the sole member of
the general partner. Set forth below, at the date of this prospectus, are the
names, ages and business experience for the last five years of each of the
executive officers and the managers of the general partner.
Name Age Position
- ---- --- --------
Michael J. McGhan.. 47 President and Chief Executive Officer;
Manager of the General Partner
William S. Goldberg 43 Executive Vice President and Treasurer;
Manager of the General Partner
Charles D. Erwin... 40 Manager of the General Partner
MICHAEL J. McGHAN has served as President and Chief Executive Officer of
HCLP since June 2001.
Mr. McGhan has served as Manager of the general partner since November 2001.
Mr. McGhan has served as President and Chief Executive Officer of Hanover and
as a director of Hanover since March 1992. Mr. McGhan also serves as an officer
and a director of certain of Hanover's other subsidiaries.
WILLIAM S. GOLDBERG has served as Executive Vice President and Treasurer of
HCLP since June 2001. Mr. Goldberg has served as Manager of the general partner
since December 2000. Mr. Goldberg has served as Chief Financial Officer of
Hanover since May 2000. In addition, Mr. Goldberg has served as Executive Vice
President and director of Hanover since May 1991. Mr. Goldberg has been
employed by GKH Investments, L.P., a Delaware limited partnership, and GKH
Private Limited since 1988 and has served as Managing Director of both entities
since June 1990. GKH Investments, L.P. is the largest stockholder of Hanover.
Mr. Goldberg also serves as an officer and a director of certain of Hanover's
other subsidiaries. Mr. Goldberg is also a director of DVI, Inc.
CHARLES D. ERWIN has served as Manager of the general partner since November
2001. Mr. Erwin has also served as Chief Operating Officer of Hanover since May
2001 and as Senior Vice President--Sales and Marketing of Hanover since May
2000. Prior to being named Senior Vice President, Mr. Erwin had served as a
Vice President of Hanover since October 1990.
Compensation of Executive Officers and Managers of the General Partner
HCLP's executive officers and the managers of the general partner do not
receive compensation for serving in such capacities in addition to that earned
with respect to services provided to Hanover and its consolidated subsidiaries.
Certain information with respect to compensation paid by Hanover to such
persons is disclosed in Hanover's Annual Report on Form 10-K for the year ended
December 31, 2000 and Hanover's Definitive Proxy Statement, dated April 17,
2001, for the Annual Meeting of Stockholders held on May 17, 2001, both of
which are incorporated by reference herein. See "Where You Can Find More
Information" and "Incorporation of Documents by Reference."
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HANOVER EQUIPMENT TRUST 2001A
General
The Issuer is a special purpose Delaware business trust formed on August 2,
2001. The Issuer was created under a trust agreement between J.P. Morgan
Leasing, Inc., as initial certificate holder, and Wilmington Trust Company, as
trustee of the Issuer, by the filing of a certificate of trust with the
Secretary of State of the State of Delaware. The Issuer's original trust
agreement was amended and restated in its entirety as of August 30, 2001 and
the initial certificate holder assigned its interest to General Electric
Capital Corporation ("GE") and was repaid its capital contribution.
GE holds all of the Issuer's equity certificates. The equity certificates
represent common undivided beneficial interests in the assets of the Issuer
with an aggregate liquidation amount equal to at least 3% of the total capital
of the Issuer.
The Issuer conducts its business pursuant to the terms of the amended and
restated trust agreement. The Issuer exists for the exclusive purposes of
. issuing the old notes and the new notes;
. issuing the equity certificates to the equity certificate holder;
. investing the gross proceeds of the old notes and the equity
certificates in the Equipment;
. entering into the Lease, a participation agreement and other ancillary
agreements relating to the financing of the Equipment (collectively, the
"Operative Agreements");
. distributing payments received under the Lease to the holders of the old
notes or the new notes, as the case may be, and the equity certificates;
and
. engaging in only those other activities necessary or incidental to such
purposes.
Pursuant to the amended and restated trust agreement, the equity certificate
holder authorized the trustee of the Issuer to execute and deliver each of the
Operative Agreements to which the Issuer is a party and to take such other
actions as required by each of such Operative Agreements. The Issuer holds all
right and title in and to the Equipment, the equity certificate holder
contributions, the proceeds of the old notes, the Operative Agreements and any
other property or payment of any kind for the use and benefit of the equity
certificate holder.
The Issuer does not have officers or directors. Subject to the terms of the
amended and restated trust agreement, the Operative Agreements and applicable
law, the trustee of the Issuer acts on behalf of the Issuer as authorized and
directed by the equity certificate holder. The equity certificate holder has
the right to appoint, remove or replace the trustee of the Issuer.
The address of the principal office of the Issuer is c/o Wilmington Trust
Company, 1100 North Market Street, Wilmington, Delaware 19890, Attention:
Corporate Trust Administration, and its telecopy number is (302) 651-8882.
Financing
To fund the purchase of the Equipment from HCLP, the Issuer issued $300
million aggregate principal amount of old notes and raised $9.3 million in
equity from the Issuer's equity certificate holder. Interest accrues on the
notes at the rate of 8.50% per year, payable semi-annually in arrears on March
1 and September 1 of each year. The notes mature on September 1, 2008. See
"Description of Notes--General--The Notes" and
"--Interest". Return on the equity certificates accrues at the Eurodollar rate
or the prime rate, plus a spread in each case of 7.95% per year, payable
quarterly on March 1, June 1, September 1 and December 1 of each year.
Legal Proceedings
From time to time, the Issuer may be involved in litigation relating to
claims arising out of its operations or in the normal course of its business.
The Issuer is not currently involved in any material litigation or proceeding
and is not aware of any such litigation or proceeding threatened against it.
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DESCRIPTION OF NOTES
The form and terms of the new notes and the old notes are identical in all
material respects, except that the transfer restrictions and registration
rights applicable to the old notes do not apply to the new notes. The Issuer
will issue the new notes under
. an indenture dated as of August 30, 2001 (the "indenture") among itself,
Hanover, HCLP, certain Subsidiary Guarantors, and Wilmington Trust FSB,
as trustee (the "Trustee"), and
. a participation agreement (the "participation agreement") among the
Issuer, HCLP, Hanover, certain Subsidiary Guarantors, Wilmington Trust
FSB, in its individual capacity, as collateral agent and as Trustee,
Wilmington Trust Company, in its individual capacity, and the holder of
the equity certificates (as described below).
The terms of the new notes include those expressly set forth in the
indenture and those made part of such indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act").
In addition, the Issuer issued equity certificates at an aggregate price of
$9.3 million. The equity certificates were issued pursuant to the participation
agreement and the trust agreement (the "trust agreement") between Wilmington
Trust Company, as trustee of the Issuer, and the purchaser of the equity
certificates.
This Description of Notes is intended to be a useful overview of the
material provisions of the notes, the participation agreement and the
indenture. Since this description is only a summary, you should refer to the
participation agreement and the indenture for a complete description of the
obligations of the Issuer and your rights.
You will find the definitions of capitalized terms used in this description
under the heading "Certain Definitions." For purposes of this description,
references to "the Issuer," "we," "our," and "us" refer only to Hanover
Equipment Trust 2001A and not to Hanover, HCLP or any of its subsidiaries.
General
Pursuant to the indenture and the participation agreement, the Issuer issued
the notes in a single series on August 30, 2001 (the "closing date"). On the
closing date, the equity certificate holder of the Trust made its Certificate
Holder Contribution in the aggregate amount of approximately $9.3 million and
the Issuer issued and sold the 8.50% Senior Secured Notes due 2008 in an
aggregate principal amount equal to $300.0 million. On the closing date, the
Issuer purchased all right, title and interest in the Equipment identified by
HCLP for purchase and immediately thereafter leased all of its right, title and
interest in the Equipment to the HCLP by entering into the Lease. As of the
date of this prospectus, there are no Subsidiary Guarantors with respect to the
notes.
The Notes.
The notes:
. are senior secured obligations of the Issuer;
. are limited to an aggregate principal amount of $300 million;
. mature on September 1, 2008;
. are issued in denominations of $1,000 and integral multiples of $1,000;
. are represented by one or more registered notes in global form, but in
certain circumstances may be represented by notes in definitive form.
See "Book-Entry; Delivery and Form";
. are Guaranteed by the Hanover Guarantors on a senior subordinated basis
upon the occurrence of an event of default under the Lease. See
"--Ranking and Priority--The Leases and the Hanover Guarantee"; and
. are expected to be eligible for trading in the PORTAL market.
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Interest. Interest on the notes compounds semi-annually and:
. accrues at the rate of 8.50% per annum;
. accrues from the date of issuance of the old notes or the most recent
interest payment date;
. is payable in cash semi-annually in arrears on March 1 and September 1,
commencing on March 1, 2002;
. is payable to the holders of record on the February 15 and August 15
immediately preceding the related interest payment dates; and
. is computed on the basis of a 360-day year comprised of twelve 30-day
months.
Payments on the Notes; Paying Agent and Registrar
We will pay principal of, premium, if any, and interest on the notes at the
office or agency designated by the Issuer in Wilmington, Delaware, except that
we may, at our option, pay interest on the notes by check mailed to holders of
the notes at their registered address as it appears in the Registrar's books.
We have initially designated the corporate trust office of the Trustee in
Wilmington, Delaware to act as our Paying Agent and Registrar. We may, however,
change the Paying Agent or Registrar without prior notice to the holders of the
notes, and the Issuer may act as Paying Agent or Registrar.
We will pay principal of, premium, if any, and interest on, notes in global
form registered in the name of or held by the Depository Trust Company or its
nominee in immediately available funds to the Depository Trust Company or its
nominee, as the case may be, as the registered holder of such global note.
Transfer and Exchange
A holder of notes may transfer or exchange notes at the office of the
Registrar in accordance with the indenture. The Registrar and the Trustee may
require a holder, among other things, to furnish appropriate endorsements and
transfer documents. No service charge will be imposed by the Issuer, the
Trustee or the Registrar for any registration of transfer or exchange of notes,
but the Issuer may require a holder to pay a sum sufficient to cover any
transfer tax or other similar governmental charge required by law or permitted
by the indenture. The Issuer is not required to transfer or exchange any note
selected for redemption. Also, the Issuer is not required to transfer or
exchange any note for a period of 15 days before a selection of notes to be
redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes.
Optional Redemption
Except as described in the subsequent paragraphs, the notes are not
redeemable until September 1, 2005. On and after September 1, 2005, the Issuer
may redeem all or, from time to time, a part of the notes upon not less than 30
nor more than 60 days' notice, at the following redemption prices (expressed as
a percentage of principal amount) plus accrued and unpaid interest on the
notes, if any, to the applicable redemption date (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the 12-month period
beginning on September 1 of the years indicated below:
Year Percentage
---- ----------
2005............... 104.250%
2006............... 102.125%
2007 and thereafter 100.000%
provided, however, that the Issuer shall only have the option to redeem a part
of the notes so long as no default or event of default under the Lease has
occurred and is continuing unless the redemption is made with proceeds from a
purchase of Equipment that cures a default or event of default under the Lease;
provided, further, that
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during the 12-month period prior to the Stated Maturity of the notes, the
Issuer can optionally redeem only a part of the notes with the proceeds of a
purchase of Equipment by Hanover or any of its subsidiaries only if (i) HCLP
has exercised its Maturity Date Purchase Option under the Lease or (ii) such
purchase cures a default or event of default under the Lease.
Prior to September 1, 2004, to the extent that Hanover raises Net Cash
Proceeds from one or more Public Equity Offerings and such Net Cash Proceeds
are contributed toward an Equipment Purchase (as defined below), the Issuer may
on any one or more occasions redeem up to 35% of the original principal amount
of the notes with the proceeds from an Equipment Purchase at a redemption price
of 108.50% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the redemption date (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant interest
payment date); provided that
. at least 65% of the original principal amount of the notes remains
outstanding after each such redemption; and
. the redemption occurs within 60 days after the closing of such Public
Equity Offering.
If the optional redemption date is on or after an interest record date and
on or before the related interest payment date, the accrued and unpaid
interest, if any, will be paid to the Person in whose name the note is
registered at the close of business on such record date, and no additional
interest will be payable to holders whose notes will be subject to redemption
by the Issuer.
In each case, the Issuer will redeem the notes with proceeds from HCLP's
purchase of the Equipment (the "Equipment Purchase"). Pursuant to the Lease,
HCLP will purchase the amount of Equipment, at such Equipment's Termination
Value, necessary to generate sufficient proceeds for the Issuer to redeem the
notes and a proportionate amount of the equity certificates. Concurrently, the
Issuer will pay any accrued and unpaid interest on the notes to be redeemed and
yield on the equity certificates to be prepaid, as well as any applicable
redemption premium, using proceeds of supplemental rent payments equal to such
amounts, which will be required by the Lease to be paid by HCLP to the Issuer.
In the case of any partial redemption, the Trustee will select the notes for
redemption in compliance with the requirements of the principal national
securities exchange, if any, on which the notes are listed or, if the notes are
not listed, then on a pro rata basis, by lot or by such other method as the
Trustee in its sole discretion will deem to be fair and appropriate, although
no note of $1,000 in original principal amount or less will be redeemed in
part. If any note is to be redeemed in part only, the notice of redemption
relating to that note will state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original note.
Ranking And Priority
The Notes
The payment of the principal of, premium, if any, and interest on the notes
and any other payment obligations in respect of the notes (including any
obligation to repurchase the notes or the equity certificates) are senior
secured obligations of the Issuer. The Issuer's ability to make timely payments
under the notes, however, will depend entirely on timely receipt of payments
from HCLP under the Lease or from the Hanover Guarantors under the Hanover
Guarantee. See "--Ranking and Priority--The Leases and the Hanover Guarantee."
All payments that are received by the Issuer under the Lease or Hanover
Guarantee will be applied first to the notes. The payment of principal, premium
(if any) and interest on the notes will be senior in right of payment to the
payment in full of the equity certificates.
The Lease and the Hanover Guarantee
HCLP's obligations under the Lease and the Hanover Guarantors' obligations
under the Hanover Guarantee are subordinated to the prior payment in full in
cash or Cash Equivalents when due of all Senior Indebtedness or
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Guarantor Senior Indebtedness, as the case may be. HCLP's obligations under the
Lease and the Hanover Guarantors' obligations under the Hanover Guarantee are
also structurally subordinated to all Indebtedness and other liabilities of
their respective non-guarantor subsidiaries. HCLP's obligations under the Lease
and the Hanover Guarantors' obligations under the Hanover Guarantee ranks pari
passu with their respective obligations under the 2011 Lease and the 2011
Guarantee.
Pursuant to the Hanover Guarantee, the Hanover Guarantors guarantee, jointly
and severally, unconditionally and on a senior subordinated basis, to the
Issuer, the noteholders and their successor and assigns the prompt and complete
payment of the unpaid principal of, and interest on, the notes and all other
payment obligations of the Issuer to the Trustee and the noteholders, provided,
that such unconditional guarantee is limited at all times to 77.33% of the
aggregate principal balance of notes outstanding, which is equal to the final
rent payment under the Lease. Upon the occurrence of and during a Lease Event
of Default, the Hanover Guarantors guarantee, jointly and severally, on a
senior subordinated basis, to the Issuer, the noteholders and their successor
and assigns the prompt and complete payment of the entire unpaid principal of,
and interest on, the notes and all other payment obligations of the Issuer to
the Trustee and the noteholders. The Hanover Guarantee is a guarantee of
payment, and not a guarantee of collection or performance.
The Lease, in respect of HCLP, and the Hanover Guarantee, in respect of each
Hanover Guarantor, is subordinated to the prior payment in full of all Senior
Indebtedness or Guarantor Senior Indebtedness, as applicable, and ranks equally
with any Senior Subordinated Indebtedness and Guarantor Senior Subordinated
Indebtedness, as applicable. Only Indebtedness of HCLP or the Hanover
Guarantors that is Senior Indebtedness or Guarantor Senior Indebtedness, as the
case may be, ranks senior to the Lease and the Hanover Guarantee, as
applicable, in accordance with the provisions of the participation agreement.
As described in "Certain Covenants under the Participation
Agreement--Limitation on Layering," no Hanover Guarantor may incur any
indebtedness that is senior in right of payment to its Guarantee of the notes,
but junior in right of payment to Senior Indebtedness or Guarantor Senior
Indebtedness, as the case may be. Unsecured Indebtedness of a Hanover Guarantor
is not deemed to be subordinate or junior to secured Indebtedness merely
because it is unsecured.
As a result of the subordination provisions described below, holders of the
notes may recover less under the Hanover Guarantee than creditors of the
Hanover Guarantors who are holders of Senior Indebtedness or Guarantor Senior
Indebtedness, as the case may be, would recover in the event of an insolvency,
bankruptcy, reorganization, receivership or similar proceedings relating to the
Hanover Guarantors. At September 30, 2001:
. the Issuer had no Indebtedness other than the notes;
. outstanding Senior Indebtedness of Hanover was $192 million;
. Hanover had no Senior Subordinated Indebtedness other than pursuant to
the Hanover Guarantee and the 2011 Guarantee;
. outstanding Guarantor Senior Indebtedness of HCLP was $881 million;
. HCLP had no Guarantor Senior Subordinated Indebtedness other than
pursuant to the Hanover Guarantee and the 2011 Guarantee; and
. no Guarantor Senior Indebtedness, excluding Guarantor Senior
Indebtedness of HCLP, was outstanding.
As of the date hereof, there are no Subsidiary Guarantors other than HCLP.
Although the participation agreement limits the amount of Indebtedness that the
Hanover Guarantors may incur, such Indebtedness may be substantial and all of
it may be Senior Indebtedness or Guarantor Senior Indebtedness, as the case may
be.
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Neither HCLP in respect of the Lease nor the Hanover Guarantors in respect
of the Hanover Guarantee may make payments under the Lease or the Hanover
Guarantee, as the case may be, if:
(1) any Senior Indebtedness or Guarantor Senior Indebtedness, as
applicable, is not paid when due; or
(2) any other default on Senior Indebtedness or Guarantor Senior
Indebtedness, as applicable, occurs and the maturity of such Senior
Indebtedness or Guarantor Senior Indebtedness, as the case may be, is
accelerated in accordance with its terms unless, in either case, the default
has been cured or waived and any such acceleration has been rescinded or
such Senior Indebtedness or Guarantor Senior Indebtedness, as applicable,
has been paid in full.
As a result, in either such case, the Issuer will have insufficient funds to
pay the principal of, premium, if any, or interest on, or other payment
obligations in respect of, the notes or make any deposit pursuant to the
provisions described under "Defeasance" below and may not otherwise purchase,
redeem or retire any of the notes (collectively, "pay the notes"). However,
HCLP may continue to make payments under the Lease, and the Issuer may thus pay
the notes to the extent funds are available from such Lease payments, if HCLP,
the Issuer and the Trustee receive written notice approving such payment from
the Representative of any such Senior Indebtedness or Guarantor Senior
Indebtedness, as applicable, with respect to which either of the events set
forth in clause (1) or (2) of this paragraph has occurred and is continuing.
Each of HCLP and the Hanover Guarantors, as the case may be, also will not
be permitted to make payments under the Lease or the Hanover Guarantee, as the
case may be, for a Payment Blockage Period (as defined below) during the
continuance of any default, on any Designated Senior Indebtedness that permits
the holders of the Designated Senior Indebtedness to accelerate its maturity
immediately without either further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods.
A "Payment Blockage Period" commences on the receipt by Hanover and HCLP
(with a copy to the Trustee and the Issuer) of written notice (a "Blockage
Notice") of a default of the kind described in the immediately preceding
paragraph from the Representative of the holders of such Designated Senior
Indebtedness, specifying an election to effect a Payment Blockage Period and
ends 179 days after receipt of the notice. The Payment Blockage Period will end
earlier if such Payment Blockage Period is terminated:
(1) by written notice to Hanover and HCLP from the Person or Persons who
gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice is no longer
continuing; or
(3) because such Designated Senior Indebtedness has been repaid in full.
During a Payment Blockage Period, HCLP will be unable to make a rental
payment under the Lease, and the Hanover Guarantors will be unable to make
payments under the Hanover Guarantee, as applicable. As a result, the Issuer
will have insufficient funds to pay the notes. Any interest on such deferred
payment (a "Supplemental Rental Payment") must be paid during the rental period
immediately following the Payment Blockage Period. Failure to make the
Supplemental Rental Payment will constitute a Lease Event of Default with
respect to the Lease. During a Payment Blockage Period, the Trustee in its
capacity as collateral agent shall not be permitted to exercise any rights and
powers or pursue any remedies against the Collateral securing the notes. See
"--Security."
After the end of the Payment Blockage Period, HCLP may resume payments under
the Lease and the Issuer may resume payments on the notes, unless the holders
of such Designated Senior Indebtedness or the Representative of such holders
have accelerated the maturity of such Designated Senior Indebtedness or any
Senior Indebtedness or Guarantor Senior Indebtedness is not paid when due. Not
more than one Blockage Notice may be given in any consecutive 360 day period,
irrespective of the number of defaults with respect to Designated Senior
Indebtedness during such period.
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With respect to any obligations under the Lease or the Hanover Guarantee, in
the event of:
(1) a total or partial liquidation or a dissolution of HCLP or any
Hanover Guarantor;
(2) a reorganization, bankruptcy, insolvency, receivership of or similar
proceeding relating to HCLP, a Hanover Guarantor or its respective property;
or
(3) an assignment for the benefit of creditors or marshaling of HCLP's or
a Hanover Guarantor's assets and liabilities, then
the holders of Senior Indebtedness or Guarantor Senior Indebtedness, as
applicable, will be entitled to receive payment in full in cash or Cash
Equivalents in respect of such Senior Indebtedness or Guarantor Senior
Indebtedness, as applicable (including interest accruing after, or which would
accrue but for, the commencement of any proceeding at the rate specified in the
applicable Senior Indebtedness or Guarantor Senior Indebtedness, whether or not
a claim for such interest would be allowed), before the Issuer or the holders
of the notes will be entitled to receive any payment or distribution under the
Lease or the Hanover Guarantee, in the event of any payment or distribution of
the assets or securities of HCLP or such Hanover Guarantor. In addition, until
the Senior Indebtedness or Guarantor Senior Indebtedness, as applicable, is
paid in full in cash or Cash Equivalents, any payment or distribution to which
the Issuer or the holders of the notes would be entitled under the Lease and
the Hanover Guarantee but for these subordination provisions will be made to
holders of Senior Indebtedness or Guarantor Senior Indebtedness, as applicable,
as their interests may appear. If a payment or distribution under the Lease or
the Hanover Guarantee is made to the Issuer, the Trustee or the holders of the
notes that, due to the subordination provisions, should not have been made to
them, such Persons are required to hold it in trust for the holders of Senior
Indebtedness or Guarantor Senior Indebtedness, as applicable, and pay the
payment or distribution over to holders of Senior Indebtedness or Guarantor
Senior Indebtedness, as applicable, as their interests may appear.
The obligations of each Hanover Guarantor under the Hanover Guarantee are
limited as necessary to prevent the Hanover Guarantee from constituting a
fraudulent conveyance or fraudulent transfer under applicable law.
In the event a Subsidiary Guarantor other than HCLP is sold or disposed of
(whether by merger, consolidation, the sale of its Capital Stock or the sale of
all or substantially all of its assets (other than by lease)) and whether or
not the Subsidiary Guarantor is the surviving corporation in such transaction
to a Person which is not Hanover or a Restricted Subsidiary of Hanover (other
than a Receivables Entity), such Subsidiary Guarantor will be released from its
obligations under the Hanover Guarantee and the other Operative Agreements if:
(1) the sale or other disposition is in compliance with the participation
agreement, including the covenants therein. See "Certain Covenants under the
Participation Agreements--Limitation on Sales of Assets and Subsidiary
Stock" and "--Limitation on Sales of Capital Stock of Restricted
Subsidiaries"; and
(2) all the obligations of such Subsidiary Guarantor under the Senior
Credit Agreement and related documentation and any other agreements relating
to any other indebtedness of Hanover or its Restricted Subsidiaries
terminate.
In addition, a Subsidiary Guarantor will be released from its obligations
under the Hanover Guarantee and the other Operative Agreements if Hanover
designates such Subsidiary as an Unrestricted Subsidiary and such designation
complies with the other applicable provisions of the Operative Agreements.
Security
Under the Operative Agreements, the Issuer, together with HCLP, has granted
to the Trustee, in its capacity as collateral agent, for the ratable benefit of
itself and the noteholders, a first lien on and security interest in all right,
title and interest of the Issuer now held or hereafter acquired in and to the
following, except for certain excepted payments with respect thereto: (i) the
Equipment, (ii) all rents and supplemental rent payable under the
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Lease, together with certain related rights of the Issuer, and (iii) the
Hanover Guarantee (collectively, the "Collateral"). The equity certificate
holder has a subordinated right to receive proceeds from the Collateral. Unless
an Event of Default shall have occurred and be continuing, the Issuer has the
right to retain title to the Equipment securing the notes and to lease such
Equipment to HCLP. The rents under the Lease are to be paid directly to the
Trustee pursuant to an assignment of rents consented to by HCLP in order to
make payments on the notes therewith in accordance with "Certain Covenants
under the Indentures." Upon the occurrence of an Event of Default under the
indenture, the Trustee in its capacity as collateral agent shall be entitled to
exercise its customary rights and powers and pursue remedies against the
Collateral, except during a Payment Blockage Period.
All payments received and all amounts held or realized by the Trustee in its
capacity as collateral agent (including amounts realized by the Trustee in such
capacity from the exercise of any remedies) after the occurrence and during the
continuance of an Event of Default, and all payments or amounts then held or
thereafter received by the Trustee in its capacity as collateral agent under
the Lease or under the participation agreement, shall, so long as such Event of
Default continues and shall not have been waived in writing by the Trustee, be
applied on the date first received with respect to the notes as follows: first,
so much of such payments or amounts held or realized by the Trustee in its
capacity as collateral agent as shall be required to reimburse the Trustee, in
its own capacity and in its capacity as collateral agent, for any expenses not
reimbursed by the Issuer in connection with the collection or distribution of
such amounts held or realized by it and in connection with the expenses
incurred in enforcing its remedies and preserving the Collateral; second, to
the Trustee for the benefit of the noteholders for all principal, interest, and
all other amounts, if any, due each such Person under the Operative Agreements,
in each case on a pari passu basis; third, to each Person indemnified by the
Issuer other than the equity certificate holder on a pari passu basis; fourth,
to the Issuer for all amounts then due the Issuer under Section 13 of the
participation agreement; fifth, to the Issuer for the benefit of the equity
certificate holder for all amounts due and payable to such holder; and sixth,
the balance, if any, of such payment remaining thereafter shall be distributed
to HCLP.
Certain Bankruptcy Limitations
The right of the Trustee in its capacity as collateral agent to repossess
and dispose of the Collateral upon the occurrence of an Event of Default would
be significantly impaired by applicable bankruptcy law in the event that a
bankruptcy case were to be commenced by or against the Issuer, HCLP, or any of
the Hanover Guarantors prior to the Trustee in its capacity as collateral agent
having repossessed and disposed of the Collateral. Upon the commencement of a
case for relief under Title 11 of the United States Code, as amended (the
"Bankruptcy Code"), a secured creditor such as the Trustee is prohibited from
repossessing its security from a debtor in a bankruptcy case, or from disposing
of security repossessed from the debtor, without bankruptcy court approval.
Moreover, the Bankruptcy Code permits the debtor to continue to retain and use
collateral even though the debtor is in default under the applicable debt
instruments provided that the secured creditor is given adequate protection.
The meaning of the term "adequate protection" may vary according to
circumstances, but it is intended in general to protect the value of the
secured creditor's interest in the collateral and may include cash payments or
the granting of additional security, if and at such times as the court in its
discretion determines, for any diminution in the value of the collateral as a
result of the stay or repossession or disposition or any use of the collateral
by the debtor during the pendency of the bankruptcy case. A bankruptcy court
may determine that a secured creditor may not require compensation for a
diminution in the value of the collateral if the value of the collateral
exceeds the debt it secures.
In view of the broad equitable powers of a bankruptcy court, it is
impossible to predict how long payments under the notes could be delayed
following commencement of a bankruptcy case, whether or when the Trustee in its
capacity as collateral agent could repossess or dispose of the Collateral, the
value of such Collateral at the time of the bankruptcy petition or whether or
to what extent holders of the notes would be compensated for any delay in
payment or loss of value of the Collateral through the requirement of "adequate
protection." Any disposition of the Collateral during a bankruptcy case would
also require permission from the bankruptcy court.
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Furthermore, in the event a bankruptcy court determines the value of the
Collateral is not sufficient to repay all amounts due on the notes, the holders
of the notes would hold secured claims to the extent of the value of the
respective Collateral to which the holders of the notes are entitled, and
unsecured claims with respect to such shortfall. The Bankruptcy Code only
permits the payment and/or accrual of post-petition interest, costs and
attorney's fees to a secured creditor during a debtor's bankruptcy case to the
extent the value of the Collateral is determined by the bankruptcy court to
exceed the aggregate outstanding principal amount of the notes.
Change of Control
If a Change of Control with respect to Hanover occurs, each registered
holder of notes will have the right to require the Issuer to repurchase all or
any part (equal to $1,000 or an integral multiple thereof) of such holder's
notes, at a purchase price in cash equal to 101% of the principal amount of
such notes plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date). Pursuant to the
Lease, HCLP will purchase the amount of Equipment, at such Equipment's
Termination Value, necessary to generate sufficient proceeds for the Issuer to
purchase the notes and prepay a proportionate amount of the equity
certificates. Concurrently, the Issuer will pay any accrued and unpaid interest
on the notes to be purchased and yield on the equity certificates to be
prepaid, as well as any redemption premium, using proceeds of supplemental rent
payments equal to such amounts, which will be required by the Lease to be paid
by HCLP to the Issuer.
Within 30 days following any Change of Control, the Issuer, at the direction
of Hanover or HCLP, will mail a notice (the "Change of Control Offer") to each
registered holder of the notes with a copy to the Trustee stating:
(1) that a Change of Control has occurred and that such holder has the
right to require such Issuer to purchase such holder's notes at a purchase
price in cash equal to 101% of the principal amount of such notes plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of holders of record on a record date to receive interest on the
relevant interest payment date) (the "Change of Control Payment");
(2) the repurchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed) (the "Change of Control
Payment Date"); and
(3) the procedures determined by the Issuer, consistent with the
indenture, that a holder must follow in order to have the notes repurchased.
On the Change of Control Payment Date, the Issuer will, to the extent lawful:
(1) accept for payment all notes or portions of notes (in integral
multiples of $1,000) properly tendered under the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes so tendered; and
(3) deliver or cause to be delivered to the Trustee the notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of notes or portions of notes being purchased by the Issuer.
The paying agent will promptly mail to each holder of notes so tendered the
Change of Control Payment for such notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; provided that each such new note will be in a principal
amount of $1,000 or an integral multiple of $1,000.
If the Change of Control Payment Date is on or after an interest record date
and on or before the related interest payment date, any accrued and unpaid
interest, if any, will be paid to the Person in whose name a note is registered
at the close of business on such record date, and no additional interest will
be payable to holders who tender pursuant to the Change of Control Offer.
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The Change of Control provisions described above will be applicable whether
or not any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the holders to require that the Issuer
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
The Issuer will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the indenture applicable to a Change of Control Offer made by the
Issuer and purchases all notes validly tendered and not withdrawn under such
Change of Control Offer.
The Issuer will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the indenture, the Issuer will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations described in the indenture by virtue of the conflict.
If a Change of Control Offer is made, there can be no assurance that HCLP
will have available funds to purchase a sufficient amount of Equipment to
enable the Issuer to make the Change of Control Payment for all the notes that
might be delivered by the noteholders seeking to accept the Change of Control
Offer. The Issuer has no source of revenues other than payments received from
HCLP under the Lease or from the Hanover Guarantors under the Hanover
Guarantee. The failure of the Issuer to make or consummate the Change of
Control Offer or make the applicable Change of Control Payment when due would
give the Trustee and the noteholders the rights described under "Events of
Default." Hanover and its subsidiaries have other Indebtedness and operating
leases that contain provisions designating a change of control as an event of
default which would obligate them to repay amounts outstanding thereunder.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving HCLP or Hanover by
increasing the capital required to effectuate such transactions.
The definition of "Change of Control" includes a disposition of all or
substantially all of the property and assets of Hanover and its subsidiaries
taken as a whole to any Person. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, in certain
circumstances there may be a degree of uncertainty as to whether a particular
transaction would involve a disposition of "all or substantially all" of the
property or assets of a Person. As a result, it may be unclear as to whether a
Change of Control has occurred and whether a holder of notes may require the
Issuer to make an offer to repurchase the notes as described above.
The definition of "Change of Control" is limited in scope. The provisions of
the indenture and the participation agreement may not afford the noteholders
the right to require the Issuer to repurchase the notes in the event of a
highly leveraged transaction or certain transactions with Hanover's management
or its affiliates, including a reorganization, restructuring, merger or similar
transaction involving Hanover (including, in certain circumstances, an
acquisition of Hanover by management or its affiliates) that may adversely
affect noteholders, if such transaction is not a transaction defined as a
"Change of Control." A transaction involving Hanover's management or its
affiliates, or a transaction involving a recapitalization of Hanover, would
result in a Change of Control if it were the type of transaction specified in
such definition.
CERTAIN COVENANTS UNDER THE INDENTURE
Application of Proceeds
There will be no cash proceeds from the issuance of the new notes under this
exchange offer. The proceeds of the sale of the old notes and equity
certificates were used solely to finance the Issuer's acquisition of items of
Equipment in accordance with the terms of the participation agreement and for
costs related to such transactions.
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Compliance with Laws
The Issuer has covenanted to comply with all applicable statutes, rules,
regulations, orders and restrictions of the United States of America, all
states and municipalities thereof and of any governmental department,
commission, board, regulatory authority, bureau, agency and instrumentality of
the foregoing, in respect of the conduct of its business and the ownership of
its property. The Issuer shall promptly take, and maintain the effectiveness
of, all action to effectuate the participation agreement, indenture or Lease,
as applicable, or otherwise that may, from time to time, be necessary or
appropriate under applicable law in connection with the performance by the
Issuer of its obligations under the participation agreement, indenture or
Lease, as applicable, or the taking of any action hereby or thereby
contemplated, or necessary for the legality, validity, binding effect or
enforceability of the participation agreement, indenture or Lease, as
applicable, or for the making of any payment or transfer or remittance of any
funds by the Issuer under the participation agreement, indenture or Lease, as
applicable.
Limitation on Liens
The Issuer will not, directly or indirectly, create, incur or suffer to
exist any Lien (other than Permitted Liens) on any of its property or assets.
The Issuer shall duly pay and discharge (i) immediately upon the attachment
thereof, all Liens (other than Permitted Liens) on any Collateral, (ii) as and
when due, all of its Indebtedness and other obligations before the time that
any Lien attaches unless and only to the extent that any such amounts are not
yet due and payable or the validity thereof is being contested in good faith by
appropriate proceedings so long as such proceedings do not involve any danger
of the sale, forfeiture or loss of the items of Equipment or any interest
therein and the Issuer maintains or causes Hanover and HCLP to maintain
appropriate reserves with respect thereto or has made adequate provision for
the payment thereof, in accordance with GAAP and approved by the Trustee and
(iii) all taxes imposed upon or against it or its property or assets, or upon
any property leased by it, prior to the date on which penalties attach thereto.
Limitation on Lines of Business
The Issuer will not (i) enter into any business other than the maintenance
of its corporate existence, the acquisition, leasing, financing and sale of the
Equipment and the taking of such actions as are required to comply with the
other covenants of the Issuer under the indenture, purchase agreement and
registration rights agreement, (ii) create, incur, assume or permit to exist
any Indebtedness, except for the notes, amounts payable under the participation
agreement and ordinary course trade payables which are incidental to the
purposes permitted under the trust agreement, (iii) enter into, or be a party
to, any transaction with any Person, except the transactions set forth in the
participation agreement, indenture or Lease, as applicable, and as expressly
permitted thereby, or
(iv) make any investment in, Guarantee the obligations of, or make or advance
money to any Person, through the direct or indirect lending of money, holding
of securities or otherwise except the transactions set forth in the
participation agreement, indenture or Lease, as applicable, and as expressly
permitted thereby.
Limitation on Liquidation
The Issuer shall not wind up, liquidate or dissolve its affairs or enter
into any merger or consolidation, or convey, sell, lease (substantially as a
whole) or otherwise dispose of (whether in one or in a series of transactions)
its assets, except as expressly permitted by the Lease or the participation
agreement.
CERTAIN COVENANTS UNDER THE PARTICIPATION AGREEMENT
In addition to the covenants under the indenture, the participation
agreement contains, among others, the following covenants with respect to
Hanover and HCLP, which may not be amended or waived without the prior written
consent of the holders of a majority of the principal amount of the notes and
the consent of the equity certificate holder to the extent such amendment or
waiver would adversely affect their interests. A default under these covenants
will constitute a default under the Lease and, therefore, a default under the
indenture.
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Limitation on Indebtedness
Hanover will not, and will not permit any of its Restricted Subsidiaries to,
Incur any Indebtedness; provided, however, that Hanover and its Restricted
Subsidiaries may Incur Indebtedness if on the date thereof:
(1) the Consolidated Coverage Ratio for Hanover and its Restricted
Subsidiaries is at least 2.25 to 1.00; and
(2) no Default or Event of Default will have occurred or be continuing or
would occur as a consequence of Incurring the Indebtedness.
The first paragraph of this covenant will not prohibit the incurrence of the
following Indebtedness:
(1) Indebtedness of Hanover and its Subsidiaries Incurred pursuant to the
Senior Credit Agreement together with the principal component of amounts
outstanding under Qualified Receivables Transactions in an aggregate amount
not to exceed $400.0 million at any time outstanding, less the aggregate
principal amount of repayments with the proceeds from Asset Dispositions
pursuant to the provisions of the participation agreement described under
"--Limitations on Sales of Assets and Subsidiary Stock", and Guarantees of
Restricted Subsidiaries in respect of the Indebtedness Incurred pursuant to
the Senior Credit Agreement;
(2) the Lease, the Hanover Guarantee, the 2011 Lease and 2011 Guarantee;
(3) Indebtedness of Hanover owing to and held by any Wholly-Owned
Subsidiary (other than a Receivables Entity) or Indebtedness of a Restricted
Subsidiary owing to and held by Hanover or any Wholly-Owned Subsidiary
(other than a Receivables Entity); provided, however,
(a) if Hanover is the obligor on such Indebtedness, such Indebtedness
is expressly subordinated to the prior payment in full in cash of all
obligations with respect to the Lease and the Hanover Guarantee; and
(b) (i) any subsequent issuance or transfer of Capital Stock or any
other event which results in any such Indebtedness being beneficially
held by a Person other than Hanover or a Wholly-Owned Subsidiary (other
than a Receivables Entity) of Hanover; and
(ii) any sale or other transfer of any such Indebtedness to a
Person other than Hanover or a Wholly-Owned Subsidiary (other than a
Receivables Entity) of Hanover, shall be deemed, in each case, to
constitute an Incurrence of such Indebtedness by Hanover or such
Subsidiary, as the case may be;
(4) Indebtedness represented by (a) the notes, (b) any Indebtedness
(other than the Indebtedness described in clauses (1), (2), (3), (6) (8),
(9) and (10)) outstanding on the Issue Date, (c) any Indebtedness of
Production Operators Corporation or any of its subsidiaries in existence as
of the Issue Date and (d) any Refinancing Indebtedness Incurred in respect
of any Indebtedness described in this clause (4) or clause (5) or Incurred
pursuant to the first paragraph of this covenant;
(5) Indebtedness of a Restricted Subsidiary Incurred and outstanding on
the date on which such Restricted Subsidiary was acquired by Hanover (other
than Indebtedness Incurred (a) to provide all or any portion of the funds
utilized to consummate the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted Subsidiary
or was otherwise acquired by Hanover or (b) otherwise in connection with, or
in contemplation of, such acquisition); provided, however, that at the time
such Restricted Subsidiary is acquired by Hanover, Hanover would have been
able to Incur $1.00 of additional Indebtedness pursuant to the first
paragraph of this covenant after giving effect to the Incurrence of such
Indebtedness pursuant to this clause (5);
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(6) Indebtedness under Currency Agreements and Interest Rate Agreements;
provided that in the case of Currency Agreements and Interest Rate
Agreements, such Currency Agreements and Interest Rate Agreements are
entered into for bona fide hedging purposes of Hanover or its Restricted
Subsidiaries (as determined in good faith by the Board of Directors or
senior management of Hanover) and substantially correspond in terms of
notional amount, duration, currencies and interest rates, as applicable, to
Indebtedness of Hanover or its Restricted Subsidiaries on customary terms
entered into in the ordinary course of business and Incurred without
violation of the terms of the participation agreement;
(7) the Incurrence by Hanover or any of its Restricted Subsidiaries of
Indebtedness represented by Capitalized Lease Obligations, mortgage
financings or purchase money obligations with respect to assets other than
Capital Stock or other Investments, in each case Incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvements of property used in the business of Hanover or such Restricted
Subsidiary, in an aggregate principal amount not to exceed $75.0 million at
any time outstanding (it being understood that any Indebtedness Incurred
pursuant to this clause (7) shall cease to be deemed to be Incurred or
outstanding for purposes hereof but shall be deemed Incurred for purposes of
the first paragraph of this covenant from and after the first date on which
Hanover or its Restricted Subsidiaries could have Incurred such Indebtedness
under the first paragraph of this covenant without reliance on this clause
(7));
(8) Indebtedness Incurred in respect of workers' compensation claims,
self-insurance obligations, performance, surety and similar bonds and
completion guarantees provided by Hanover or a Restricted Subsidiary in the
ordinary course of business;
(9) Indebtedness arising from agreements of Hanover or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, Incurred or assumed in connection with
the disposition of any business, assets or Capital Stock of a Restricted
Subsidiary;
(10) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument (except in the case of
daylight overdrafts) drawn against insufficient funds in the ordinary course
of business, provided, however, that such Indebtedness is extinguished
within five business days of Incurrence; and
(11) in addition to the items referred to in clauses (1) through (10)
above, Indebtedness of Hanover and its Restricted Subsidiaries in an
aggregate outstanding principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this clause
(11) and then outstanding, will not exceed $75.0 million (it being
understood that any Indebtedness Incurred pursuant to this clause (11) shall
cease to be deemed to be Incurred or outstanding for purposes hereof but
shall be deemed Incurred for purposes of the first paragraph of this
covenant from and after the first date on which Hanover or its Restricted
Subsidiaries could have Incurred such Indebtedness under the first paragraph
of this covenant without reliance on this clause (11)).
For purposes of determining compliance with, and the outstanding principal
amount of any particular Indebtedness Incurred pursuant to, and in compliance
with, this covenant:
(1) (A) Indebtedness permitted by this covenant need not be permitted
solely by reference to one provision permitting such Indebtedness but may be
permitted in part by one such provision and in part by one or more other
provisions of this covenant permitting such Indebtedness and (B) in the
event that Indebtedness meets the criteria of more than one of the types of
Indebtedness described in the first and second paragraphs of this covenant,
Hanover, in its sole discretion, will classify such item of Indebtedness and
only be required to include the amount and type of such Indebtedness in one
of such clauses; and
(2) the amount of Indebtedness issued at a price that is less than the
principal amount thereof will be equal to the amount of the liability in
respect thereof determined in accordance with GAAP.
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Accrual of interest, accrual of dividends, the accretion of accreted value,
the payment of interest in the form of additional Indebtedness and the payment
of dividends in the form of additional shares of Preferred Stock will not be
deemed to be an Incurrence of Indebtedness for purposes of this covenant. The
amount of any Indebtedness outstanding as of any date shall be (i) the accreted
value of the Indebtedness in the case of any Indebtedness issued with original
issue discount and (ii) the principal amount or liquidation preference thereof,
together with any interest thereon that is more than 30 days past due, in the
case of any other Indebtedness.
In addition, Hanover will not permit any of its Unrestricted Subsidiaries to
Incur any Indebtedness or issue any shares of Disqualified Stock, other than
Non-Recourse Debt. If at any time an Unrestricted Subsidiary becomes a
Restricted Subsidiary, any Indebtedness of such Subsidiary shall be deemed to
be Incurred by a Restricted Subsidiary of Hanover as of such date (and, if such
Indebtedness is not permitted to be Incurred as of such date under this
"Limitation on Indebtedness" covenant, Hanover shall be in Default of this
covenant).
For purposes of determining compliance with any U.S. dollar-denominated
restriction on the Incurrence of Indebtedness, the U.S. dollar-equivalent
principal amount of Indebtedness denominated in a foreign currency shall be
calculated based on the relevant currency exchange rate in effect on the date
such Indebtedness was Incurred, in the case of term Indebtedness, or first
committed, in the case of revolving credit Indebtedness; provided that if such
Indebtedness is Incurred to refinance other Indebtedness denominated in a
foreign currency, and such refinancing would cause the applicable U.S.
dollar-dominated restriction to be exceeded if calculated at the relevant
currency exchange rate in effect on the date of such refinancing, such U.S.
dollar-dominated restriction shall be deemed not to have been exceeded so long
as the principal amount of such Refinancing Indebtedness does not exceed the
principal amount of such Indebtedness being refinanced. Notwithstanding any
other provision of this covenant, the maximum amount of Indebtedness that
Hanover may Incur pursuant to this covenant shall not be deemed to be exceeded
solely as a result of fluctuations in the exchange rate of currencies. The
principal amount of any Indebtedness incurred to refinance other Indebtedness,
if Incurred in a different currency from the Indebtedness being refinanced,
shall be calculated based on the currency exchange rate applicable to the
currencies in which such Refinancing Indebtedness is denominated that is in
effect on the date of such refinancing.
Limitation on Layering
Hanover will not Incur any Indebtedness if such Indebtedness is subordinate
or junior in ranking in any respect to any Senior Indebtedness unless such
Indebtedness is Senior Subordinated Indebtedness or is contractually
subordinated in right of payment to Senior Subordinated Indebtedness. Neither
HCLP nor any Subsidiary Guarantor will Incur any Indebtedness if such
Indebtedness is contractually subordinate or junior in ranking in any respect
to any Guarantor Senior Indebtedness of such Subsidiary Guarantor unless such
Indebtedness is Guarantor Senior Subordinated Indebtedness of such Subsidiary
Guarantor or is contractually subordinated in right of payment to Guarantor
Senior Subordinated Indebtedness of such Subsidiary Guarantor.
Limitation on Restricted Payments
Hanover will not, and will not permit any of its Restricted Subsidiaries,
directly or indirectly, to:
(1) declare or pay any dividend or make any distribution on or in respect
of its Capital Stock (including any payment in connection with any merger or
consolidation involving Hanover or any of its Restricted Subsidiaries)
except:
(a) dividends or distributions payable in Capital Stock of Hanover
(other than Disqualified Stock) or in options, warrants or other rights
to purchase such Capital Stock; and
(b) dividends or distributions payable to Hanover or a Restricted
Subsidiary (and if such Restricted Subsidiary is not a Wholly-Owned
Subsidiary, to its other holders of common Capital Stock on a pro rata
basis);
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(2) purchase, redeem, retire or otherwise acquire for value any Capital
Stock of Hanover or any direct or indirect parent of Hanover held by Persons
other than Hanover or a Restricted Subsidiary of Hanover (other than in
exchange for Capital Stock of Hanover (other than Disqualified Stock));
(3) purchase, repurchase, redeem, defease or otherwise acquire or retire
for value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment, any Subordinated Obligations or Guarantor Subordinated
Obligations (other than the purchase, repurchase or other acquisition of
Subordinated Obligations or Guarantor Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of purchase,
repurchase or acquisition); or
(4) make any Restricted Investment in any Person;
(any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Restricted Investment referred
to in clauses (1) through (4) shall be referred to herein as a "Restricted
Payment"), if at the time Hanover or such Restricted Subsidiary makes such
Restricted Payment:
(a) a Default shall have occurred and be continuing (or would result
therefrom); or
(b) Hanover is not able to Incur an additional $1.00 of Indebtedness
pursuant to the first paragraph under the "Limitation on Indebtedness"
covenant after giving effect, on a pro forma basis, to such Restricted
Payment; or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Issue Date would
exceed the sum of
(i) 50% of Consolidated Net Income for the period (treated as one
accounting period) from the Issue Date to the end of the most recent
fiscal quarter ending prior to the date of such Restricted Payment
for which financial statements are in existence (or, in case such
Consolidated Net Income is a deficit, minus 100% of such deficit);
(ii) the aggregate Net Cash Proceeds received by Hanover from the
issue or sale of its Capital Stock (other than Disqualified Stock) or
other capital contributions subsequent to the Issue Date (other than
Net Cash Proceeds received from an issuance or sale of such Capital
Stock to a Subsidiary of Hanover or an employee stock ownership plan,
option plan or similar trust to the extent such sale to an employee
stock ownership plan, option plan or similar trust is financed by
loans from or guaranteed by Hanover or any Restricted Subsidiary
unless such loans have been repaid with cash on or prior to the date
of determination);
(iii) the amount by which Indebtedness of Hanover is reduced on
Hanover's balance sheet upon the conversion or exchange (other than
by a Subsidiary of Hanover) subsequent to the Issue Date of any
Indebtedness of Hanover convertible or exchangeable for Capital Stock
(other than Disqualified Stock) of Hanover (less the amount of any
cash, or other property, distributed by Hanover upon such conversion
or exchange);
(iv) the amount equal to the net reduction in Restricted
Investments made by Hanover or any of its Restricted Subsidiaries in
any Person resulting from
(A) repurchases or redemptions of such Restricted Investments
by such Person, proceeds realized upon the sale of such
Restricted Investment to an unaffiliated purchaser, repayments of
loans or advances or other transfers of assets (including by way
of dividend or distribution) by such Person to Hanover or any
Restricted Subsidiary of Hanover; or
(B) the redesignation of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the
definition of "Investment") not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously
made by Hanover or any Restricted Subsidiary in such Unrestricted
Subsidiary, which amount in each case under this
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clause (iv) was included in the calculation of the amount of
Restricted Payments; provided, however, that no amount will be
included under this clause (iv) to the extent it is already
included in Consolidated Net Income; and
(v) $75.0 million.
The provisions of the preceding paragraph will not prohibit:
(1) any purchase or redemption of Capital Stock or Subordinated
Obligations of Hanover made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of Hanover (other than
Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary or an employee stock ownership plan or similar trust to the
extent such sale to an employee stock ownership plan or similar trust is
financed by loans from or Guaranteed by Hanover or any Restricted Subsidiary
unless such loans have been repaid with cash on or prior to the date of
determination); provided, however, that such purchase or redemption will be
excluded in subsequent calculations of the amount of Restricted Payments;
(2) any purchase or redemption of Subordinated Obligations of Hanover
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, Subordinated Obligations of Hanover that qualifies as Refinancing
Indebtedness; provided, however, that such purchase or redemption will be
excluded in subsequent calculations of the amount of Restricted Payments;
(3) so long as no Default or Event of Default has occurred and is
continuing, any purchase or redemption of Subordinated Obligations from Net
Available Cash to the extent permitted under
"--Limitation on Sales of Assets and Subsidiary Stock" below; provided,
however, that such purchase or redemption will be excluded in subsequent
calculations of the amount of Restricted Payments;
(4) dividends paid within 60 days after the date of declaration if at
such date of declaration such dividend would have complied with this
provision; provided, however, that such dividends will be included in
subsequent calculations of the amount of Restricted Payments;
(5) so long as no Default or Event of Default has occurred and is
continuing,
(a) the purchase, redemption or other acquisition, cancellation or
retirement for value of Capital Stock, or options, warrants, equity
appreciation rights or other rights to purchase or acquire Capital Stock
of Hanover or any Restricted Subsidiary of Hanover or any parent of
Hanover held by any existing or former directors, employees or
management of Hanover or any Subsidiary of Hanover or their assigns,
estates or heirs, in each case in connection with the repurchase
provisions under employee or director stock option or stock purchase
agreements or other agreements to compensate management employees or
directors; provided that such redemptions or repurchases pursuant to
this clause will not exceed $25.0 million in the aggregate during any
calendar year; provided, however, that the amount of any such repurchase
or redemption will be included in subsequent calculations of the amount
of Restricted Payments; and
(b) loans or advances to employees or directors of Hanover or any
Subsidiary of Hanover the proceeds of which are used to purchase Capital
Stock of Hanover, in an aggregate amount not in excess of $25.0 million
at any one time outstanding; provided, however, that the amount of such
loans and advances will be included in subsequent calculations of the
amount of Restricted Payments;
(6) repurchases of Capital Stock deemed to occur upon the exercise of
stock options if such Capital Stock represents a portion of the exercise
price thereof; provided, however, that such repurchases will be excluded
from subsequent calculations of the amount of Restricted Payments; and
(7) payments under the Subordinated Acquisition Note permitted by the
subordination provisions contained therein, which permit repayment only upon
an issuance of equity by Hanover or upon a change of control at Hanover.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of such Restricted Payment of the assets or securities
proposed to be paid, transferred or issued by Hanover or such
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Restricted Subsidiary, as the case may be, pursuant to such Restricted Payment.
The fair market value of any cash Restricted Payment shall be its face amount
and any non-cash Restricted Payment shall be determined conclusively by the
Board of Directors of Hanover acting in good faith whose resolution with
respect thereto shall be delivered to the Trustee (with a copy to the Issuer),
such determination to be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if such
fair market value is estimated to exceed $10.0 million. Not later than the date
of making any Restricted Payment, Hanover shall deliver to the Trustee (with a
copy to the Issuer) an Officer's Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, together with a
copy of any fairness opinion or appraisal required by the participation
agreement.
Limitation on Liens
Hanover will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur or suffer to exist any Lien (other than
Permitted Liens) upon any of its, or any such Restricted Subsidiary's, property
or assets (including Capital Stock), whether owned on the date of the
participation agreement or acquired after that date, securing any Senior
Subordinated Indebtedness, Subordinated Obligations, Guarantor Senior
Subordinated Indebtedness or Guarantor Subordinated Obligations, unless
contemporaneously with the Incurrence of the Liens effective provision is made
to secure the Hanover Guarantee equally and ratably with (or prior to in the
case of Liens with respect to Subordinated Obligations or Guarantor
Subordinated Obligations, as the case may be) the Indebtedness secured by such
Lien for so long as such Indebtedness is so secured.
Limitation on Restrictions on Distributions from Restricted Subsidiaries
Hanover will not, and will not permit any Restricted Subsidiary to, create
or otherwise cause or permit to exist or become effective any consensual
encumbrance or consensual restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock or
pay any Indebtedness or other obligations owed to Hanover or any Restricted
Subsidiary;
(2) make any loans or advances to Hanover or any Restricted Subsidiary; or
(3) transfer any of its property or assets to Hanover or any Restricted
Subsidiary.
The preceding provisions will not prohibit:
(i) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the date of the participation agreement,
including, without limitation, the participation agreement, the
participation agreement with respect to the 2011 Lease, and the Senior
Credit Agreement in effect on such date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by a Restricted Subsidiary on or before the date on which such
Restricted Subsidiary was acquired by Hanover (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the
funds utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by Hanover or in contemplation of
the transaction) and outstanding on such date;
(iii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement effecting a refunding, replacement
or refinancing of Indebtedness Incurred pursuant to an agreement
referred to in clause (i) or (ii) of this paragraph or this clause (iii)
or contained in any amendment to an agreement referred to in clause (i)
or (ii) of this paragraph or this clause (iii); provided, however, that
the encumbrances and restrictions with respect to such Restricted
Subsidiary
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contained in any such agreement are no less favorable in any material
respect to the holders of the notes than the encumbrances and
restrictions contained in such agreements referred to in clauses (i) or
(ii) of this paragraph on the Issue Date or the date such Restricted
Subsidiary became a Restricted Subsidiary, whichever is applicable;
(iv) in the case of clause (3) of the first paragraph of this
covenant, any encumbrance or restriction:
(a) that restricts in a customary manner the subletting,
assignment or transfer of any property or asset that is subject to a
lease, license or similar contract, or the assignment or transfer of
any such lease, license or other contract;
(b) contained in mortgages, pledges or other security agreements
permitted under the participation agreement securing Indebtedness of
Hanover or a Restricted Subsidiary to the extent such encumbrances or
restrictions restrict the transfer of the property subject to such
mortgages, pledges or other security agreements; or
(c) pursuant to customary provisions restricting dispositions of
real property interests set forth in any reciprocal easement
agreements of Hanover or any Restricted Subsidiary;
(v) purchase money obligations for property acquired in the ordinary
course of business that impose encumbrances or restrictions of the
nature described in clause (3) of the first paragraph of this covenant
on the property so acquired;
(vi) any Purchase Money Note or other Indebtedness or contractual
requirements incurred with respect to a Qualified Receivables
Transaction relating exclusively to a Receivables Entity that, in the
good faith determination of the Board of Directors, are necessary to
effect such Qualified Receivables Transaction;
(vii) any restriction with respect to a Restricted Subsidiary (or any
of its property or assets) imposed pursuant to an agreement entered into
for the direct or indirect sale or disposition of all or substantially
all the Capital Stock or assets of such Restricted Subsidiary (or the
property or assets that are subject to such restriction) pending the
closing of such sale or disposition; and
(viii) encumbrances or restrictions arising or existing by reason of
applicable law or any applicable rule, regulation or order.
Limitation on Sales of Assets and Subsidiary Stock
Hanover will not, and will not permit any of its Restricted Subsidiaries to,
make any Asset Disposition unless:
(1) Hanover or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Disposition at least equal to the
fair market value, as determined in good faith by the Board of Directors
(including as to the value of all non-cash consideration), of the shares and
assets subject to such Asset Disposition;
(2) at least 80% of the consideration from such Asset Disposition
received by Hanover or such Restricted Subsidiary, as the case may be, is in
the form of cash or Cash Equivalents; and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by Hanover or such Restricted Subsidiary, as the case
may be:
(a) first, to the extent Hanover or any Restricted Subsidiary, as the
case may be, elects (or is required by the terms of any Senior
Indebtedness) to prepay, repay or purchase Senior Indebtedness or
Indebtedness (other than any Preferred Stock or Guarantor Subordinated
Obligation) of a Restricted Subsidiary that is a Hanover Guarantor (in
each case other than Indebtedness owed to Hanover or an
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Affiliate of Hanover); provided, however, that, in connection with any
prepayment, repayment or purchase of Indebtedness pursuant to this
clause (a), Hanover or such Restricted Subsidiary will retire such
Indebtedness and will cause the related commitment (if any) to be
permanently reduced in an amount equal to the principal amount so
prepaid, repaid or purchased; and
(b) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (a), to the extent Hanover
or such Restricted Subsidiary elects to invest in Additional Assets
within 360 days from the later of the date of such Asset Disposition or
the receipt of such Net Available Cash.
Any Net Available Cash from Asset Dispositions that is not applied or
invested as provided in the preceding paragraph will be deemed to constitute
"Excess Proceeds." On the 361st day after an Asset Disposition, if the
aggregate amount of Excess Proceeds exceeds $25.0 million, Hanover will notify
the Issuer that it will, upon notice by the Trustee, cause HCLP to purchase
Equipment having a Termination Value equal to or less than the amount by which
such excess amount exceeds the portion made available for an "Asset Disposition
Offer" pursuant to the 2011 Indenture. Hanover has the option to apply such
excess amount under the indenture or the 2011 Indenture. Concurrently with the
repurchase of the notes described below, (a) HCLP will purchase the amount of
Equipment, at such Equipment's Termination Value, necessary to generate
sufficient proceeds for the Issuer to prepay a proportionate amount of equity
certificates, and (b) HCLP will make a payment of supplemental rent to the
Issuer sufficient for the Issuer to pay any accrued and unpaid interest on the
notes being repurchased and yield on the equity certificates being prepaid, as
well as any applicable redemption premium.
The Issuer shall promptly make an offer ("Asset Disposition Offer") to all
holders of the notes to purchase the maximum principal amount of notes that may
be purchased out of the Excess Proceeds that have been applied to the purchase
of the Equipment for purposes of such corresponding repurchase of the notes
described in the preceding paragraph, taking into account the proportionate
amount of equity certificates to be repaid, at an offer price in cash in an
amount equal to 100% of the principal amount of the notes, plus accrued and
unpaid interest to the date of purchase, in accordance with the procedures set
forth in the indenture, in each case in multiples of $1,000. To the extent that
the aggregate amount of notes so validly tendered and not properly withdrawn
pursuant to an Asset Disposition Offer and the proportionate amount of equity
certificates to be repaid is less than the Excess Proceeds, Hanover may use any
remaining Excess Proceeds for general corporate purposes, subject to the other
covenants contained in the indenture and the participation agreement. If the
aggregate principal amount of notes surrendered by holders thereof and the
proportionate amount of equity certificates to be repaid exceeds the amount of
Excess Proceeds, the notes and the corresponding amount of equity certificates
shall be purchased and repaid, as applicable, on a pro rata basis. Upon
completion of such Asset Disposition Offer, the amount of Excess Proceeds shall
be reset at zero.
The Asset Disposition Offer will remain open for a period of 20 Business
Days following its commencement, except to the extent that a longer period is
required by applicable law (the "Asset Disposition Offer Period"). No later
than five Business Days after the termination of the Asset Disposition Offer
Period (the "Asset Disposition Purchase Date"), the Issuer will purchase the
principal amount of notes required to be purchased pursuant to this covenant
(the "Asset Disposition Offer Amount") or, if less than the Asset Disposition
Offer Amount has been so validly tendered, all notes validly tendered in
response to the Asset Disposition Offer.
If the Asset Disposition Purchase Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a note is registered at the
close of business on such record date, and no additional interest will be
payable to holders of the notes who tender notes pursuant to the Asset
Disposition Offer.
On or before the Asset Disposition Purchase Date, the Issuer will, to the
extent lawful, accept for payment, on a pro rata basis to the extent necessary,
the Asset Disposition Offer Amount of notes or portions of notes so validly
tendered and not properly withdrawn pursuant to the Asset Disposition Offer, or
if less than the Asset
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Disposition Offer Amount has been validly tendered and not properly withdrawn,
all notes so validly tendered and not properly withdrawn, in each case in
integral multiples of $1,000. The Issuer will deliver to the Trustee an
Officer's Certificate stating that such notes or portions thereof were accepted
for payment by the Issuer in accordance with the terms of this covenant. The
Issuer or the Paying Agent, as the case may be, will promptly (but in any case
not later than five Business Days after termination of the Asset Disposition
Offer Period) mail or deliver to each tendering holder of notes an amount equal
to the purchase price of the notes so validly tendered and not properly
withdrawn by such holder and accepted by the Issuer for purchase, and the
Issuer will promptly issue a new note, and the Trustee, upon delivery of an
Officer's Certificate from the Issuer will authenticate and mail or deliver
such new note to such holder, in a principal amount equal to any unpurchased
portion of the note surrendered; provided that each such new note will be in a
principal amount of $1,000 or an integral multiple of $1,000. Any note not so
accepted will be promptly mailed or delivered by the Issuer to the holder
thereof. The Issuer will publicly announce the results of the Asset Disposition
Offer on the Asset Disposition Purchase Date.
For the purposes of this covenant, the following will be deemed to be cash:
(1) the assumption by the transferee of Senior Indebtedness of Hanover or
Indebtedness (other than Guarantor Senior Subordinated Indebtedness,
Guarantor Subordinated Obligations or Preferred Stock) of any Restricted
Subsidiary of Hanover and the release of Hanover or such Restricted
Subsidiary from all liability on such Senior Indebtedness or Indebtedness in
connection with such Asset Disposition (in which case Hanover will, without
further action, be deemed to have applied such deemed cash to Indebtedness
in accordance with clause (a) above); and
(2) securities, notes or other obligations received by Hanover or any
Restricted Subsidiary of Hanover from the transferee that are promptly
converted by Hanover or such Restricted Subsidiary into cash.
Limitation on Affiliate Transactions
Hanover will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, enter into or conduct any transaction (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of Hanover (an "Affiliate Transaction") unless:
(1) the terms of such Affiliate Transaction are no less favorable to
Hanover or such Restricted Subsidiary, as the case may be, than those that
could be obtained in a comparable transaction at the time of such
transaction in arm's-length dealings with a Person who is not such an
Affiliate;
(2) in the event such Affiliate Transaction involves an aggregate amount
in excess of $10.0 million, the terms of such transaction have been approved
by a majority of the members of the Board of Directors of Hanover and by a
majority of the members of such Board having no personal stake in such
transaction, if any (and such majority or majorities, as the case may be,
determines that such Affiliate Transaction satisfies the criterion in clause
(1) above); and
(3) in the event such Affiliate Transaction involves an aggregate amount
in excess of $25.0 million, Hanover has received a written opinion from an
independent investment banking firm of nationally recognized standing that
such Affiliate Transaction is not materially less favorable than those that
might reasonably have been obtained in a comparable transaction at such time
on an arms-length basis from a Person that is not an Affiliate.
The preceding paragraph will not apply to:
(1) transactions among Hanover, HCLP, the Issuer and the Hanover
Guarantors under the Operative Agreements;
(2) any Restricted Payment (other than a Restricted Investment) permitted
to be made pursuant to the covenant described under "Limitation on
Restricted Payments";
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(3) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans and other reasonable
fees, compensation, benefits and indemnities paid or entered into by Hanover
or its Restricted Subsidiaries in the ordinary course of business to or with
officers, directors or employees of Hanover and its Restricted Subsidiaries;
(4) loans or advances to employees and consultants in the ordinary course
of business of Hanover or any of its Restricted Subsidiaries in an amount
not to exceed $5.0 million in the aggregate during any calendar year;
(5) any transaction between Hanover and a Restricted Subsidiary (other
than a Receivables Entity) or between Restricted Subsidiaries (other than a
Receivables Entity);
(6) the payment of reasonable and customary fees paid to, and indemnity
provided on behalf of, officers, directors or employees of Hanover or any
Restricted Subsidiary of Hanover;
(7) the performance of obligations of Hanover or any of its Restricted
Subsidiaries under the terms of any agreement to which Hanover or any of its
Restricted Subsidiaries is a party on the Issue Date and identified on a
schedule to the participation agreement, as these agreements may be amended,
modified or supplemented from time to time; provided, however, that any
future amendment, modification or supplement entered into after the Issue
Date will be permitted to the extent that its terms are not more
disadvantageous to the holders of the notes in its entirety than the terms
of the agreements in effect on the Issue Date;
(8) sales or other transfers or dispositions of accounts receivable and
other related assets customarily transferred in an asset securitization
transaction involving accounts receivable to a Receivables Entity in a
Qualified Receivables Transaction, and acquisitions of Permitted Investments
in connection with a Qualified Receivables Transaction; and
(9) transactions with joint venture partners in an amount not to exceed
$10.0 million in the aggregate during any calendar year.
Limitation on Sale of Capital Stock of Restricted Subsidiaries
Hanover will not, and will not permit any of its Restricted Subsidiaries to,
transfer, convey, sell, lease or otherwise dispose of any Voting Stock of any
Restricted Subsidiary or to issue any of the Voting Stock of a Restricted
Subsidiary (other than, if necessary, shares of its Voting Stock constituting
directors' qualifying shares) to any Person except:
(1) to Hanover or a Wholly-Owned Subsidiary other than a Receivables
Entity; or
(2) in compliance with the covenant described under "--Limitation on
Sales of Assets and Subsidiary Stock" and, immediately after giving effect
to such issuance or sale, such Restricted Subsidiary would continue to be a
Restricted Subsidiary.
Notwithstanding the preceding paragraph, Hanover may sell all the Voting
Stock of a Restricted Subsidiary as long as Hanover complies with the terms of
the covenant described under "--Limitation on Sales of Assets and Subsidiary
Stock."
SEC Reports
Notwithstanding that Hanover or the Issuer may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, to the
extent permitted by the Exchange Act, Hanover and the Issuer will file with the
Commission, and provide the Trustee with, the annual reports and the
information, documents and other reports (or copies of such portions of any of
the foregoing as the Commission may by rules and regulations prescribe) that
are specified in Sections 13 and 15(d) of the Exchange Act within the time
periods specified
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therein. In the event that Hanover or the Issuer is not permitted to file such
reports, documents and information with the Commission pursuant to the Exchange
Act, Hanover or the Issuer, as applicable, will nevertheless provide such
Exchange Act information to the Trustee as if Hanover or the Issuer, as the
case may be, were subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act within the time periods specified therein.
Merger and Consolidation
Hanover will not consolidate with or merge with or into, or convey, transfer
or lease all or substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") will be a corporation, partnership, trust or limited liability
company organized and existing under the laws of the United States of
America, any State of the United States or the District of Columbia and the
Successor Company (if not Hanover) will expressly assume, by an assumption
agreement supplemental to the participation agreement, executed by the
Successor Company and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of Hanover under the Hanover Guarantee and the
participation agreement;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness that becomes an obligation of the Successor Company or any
Subsidiary of the Successor Company as a result of such transaction as
having been Incurred by the Successor Company or such Subsidiary at the time
of such transaction), no Default or Event of Default shall have occurred and
be continuing;
(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur at least an additional $1.00 of Indebtedness
pursuant to the first paragraph of the "Limitation on Indebtedness"
covenant; and
(4) Hanover shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such assumption agreement (if any) comply with the
participation agreement.
For purposes of this covenant, the sale, lease, conveyance, assignment,
transfer, or other disposition of all or substantially all of the properties
and assets of one or more Subsidiaries of Hanover, which properties and assets,
if held by Hanover instead of such Subsidiaries, would constitute all or
substantially all of the properties and assets of Hanover on a consolidated
basis, shall be deemed to be the transfer of all or substantially all of the
properties and assets of Hanover; provided, however, that a Sale/Leaseback
Transaction involving all or substantially all of the properties and assets of
Hanover or of one or more Subsidiaries of Hanover, which properties and assets,
if held by Hanover instead of such Subsidiaries, would constitute all or
substantially all of the properties and assets of Hanover on a consolidated
basis, shall not be deemed to be the transfer of all or substantially all of
the properties and assets of Hanover, and provided, further, that such
Sale/Leaseback Transaction shall be subject to the covenants under
"--Limitation on Indebtedness" and "--Limitation on Sales of Assets and
Subsidiary Stock".
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, Hanover under the participation agreement,
but, in the case of a lease of all or substantially all its assets, Hanover
will not be released from the obligation to pay the principal of and interest
on the notes pursuant to the Hanover Guarantee.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve "all
or substantially all" of the property or assets of a Person.
Notwithstanding the preceding clause (3), (x) any Restricted Subsidiary of
Hanover may consolidate with, merge into or transfer all or part of its
properties and assets to Hanover and (y) Hanover may merge with an Affiliate
incorporated solely for the purpose of reincorporating Hanover in another
jurisdiction to realize tax or other benefits.
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Future Subsidiary Guarantors
As of the date of this prospectus, there are no Subsidiary Guarantors other
than HCLP with respect to the notes. After the Issue Date, Hanover will cause
each Restricted Subsidiary (other than a Foreign Subsidiary or a Receivables
Entity) that (i) becomes, or upon its creation or acquisition by Hanover or one
or more of its Restricted Subsidiaries is, a Material Subsidiary and (ii)
becomes a guarantor under the Senior Credit Agreement, to execute and deliver
to the Trustee, promptly after becoming a guarantor under the Senior Credit
Agreement, a Guarantee pursuant to which such Restricted Subsidiary will become
a Subsidiary Guarantor with respect to the Hanover Guarantee.
Events of Default
Each of the following is an Event of Default under the indenture:
(1) default in any payment of interest or additional interest (as
required by the Registration Rights Agreement) on any note when due,
continued for 30 days;
(2) default in the payment of principal of or premium, if any, on any
note when due at its Stated Maturity, upon optional redemption, upon
required repurchase, upon declaration or otherwise;
(3) failure by Hanover, HCLP or any other Hanover Guarantor to comply
with its obligations under "Certain Covenants under the Participation
Agreement--Merger and Consolidation";
(4) failure by the Issuer to comply for 30 days after notice with any of
its obligations under the covenants described under "Certain Covenants under
the Indenture" above (other than a failure to purchase notes, which will
constitute an Event of Default under clause (2) above);
(5) failure by the Issuer to comply for 60 days after notice with its
other agreements contained in the indenture or any covenant, representation
or warranty under any of the other Operative Agreements;
(6) the occurrence and continuation of a Lease Event of Default (see
"Summary of Principal Operative Agreements--The Lease--Events of Default");
(7) the Operative Agreements no longer create a first priority lien on
all the Collateral for the benefit of the Trustee in its capacity as
collateral agent (subject to Permitted Liens);
(8) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness
for money borrowed by Hanover or any of its Restricted Subsidiaries (or the
payment of which is Guaranteed by Hanover or any of its Restricted
Subsidiaries), other than Indebtedness owed to Hanover or a Restricted
Subsidiary, whether such Indebtedness or Guarantee now exists, or is created
after the date of the participation agreement, which default:
(a) is caused by a failure to pay principal of, or interest or
premium, if any, on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness ("payment default"); or
(b) results in the acceleration of such Indebtedness prior to its
maturity (the "cross acceleration provision");
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which there
has been a payment default or the maturity of which has been so accelerated,
aggregates $20.0 million or more;
(9) certain events of bankruptcy, insolvency or reorganization of the
Issuer, Hanover, any Significant Subsidiary or a group of Restricted
Subsidiaries that, taken together (as of the latest audited consolidated
financial statements for Hanover and its Restricted Subsidiaries), would
constitute a Significant Subsidiary (collectively, the "bankruptcy
provisions");
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(10) failure by the Issuer, Hanover or any of its Restricted Subsidiaries
to pay final judgments aggregating in excess of $20.0 million (net of any
amounts that a reputable and creditworthy insurance company has acknowledged
liability for in writing), which judgments are not paid, discharged or
stayed for a period of 60 days (the "judgment default provision"); or
(11) the Hanover Guarantee ceases to be in full force and effect (except
as contemplated by the terms of the indenture and the participation
agreement) or is declared null and void in a judicial proceeding with
respect to any of the Hanover Guarantors, or any of the Hanover Guarantors
denies or disaffirms its obligations under the participation agreement or
the Hanover Guarantee.
However, a default under clauses (4) and (5) of this paragraph will not
constitute an Event of Default until the Trustee or the holders of 25% in
principal amount of the outstanding notes notify the Issuer of the default and
the Issuer does not cure such default within the time specified in clauses (4)
and (5) of this paragraph after receipt of such notice.
If an Event of Default (other than an Event of Default described in clause
(9) above) occurs and is continuing, the Trustee by notice to the Issuer, or
the holders of at least 25% in principal amount of such outstanding notes by
notice to the Issuer and the Trustee, may, and the Trustee at the request of
such holders shall, declare the principal of, premium, if any, and accrued and
unpaid interest, if any, on all the notes to be due and payable; provided,
however, that so long as any Bank Indebtedness remains outstanding, no such
acceleration shall be effective until the earlier of (i) two business days
after delivery of written notice to Hanover, HCLP and the Representative under
such Bank Indebtedness and (ii) the day on which any Bank Indebtedness is
accelerated. Upon such a declaration, such principal, premium and accrued and
unpaid interest will be due and payable immediately. In the event of a
declaration of acceleration of the notes because an Event of Default described
in clause (8) under "Events of Default" has occurred and is continuing, the
declaration of acceleration of the notes shall be automatically annulled if the
event of default or payment default triggering such Event of Default pursuant
to clause (8) shall be remedied or cured by Hanover or a Restricted Subsidiary
of Hanover or waived by the holders of the relevant Indebtedness within 20 days
after the declaration of acceleration with respect thereto and if (1) the
annulment of the acceleration of the notes would not conflict with any judgment
or decree of a court of competent jurisdiction and (2) all existing Events of
Default, except nonpayment of principal, premium or interest on the notes that
became due solely because of the acceleration of the notes, have been cured or
waived. If an Event of Default described in clause (9) above occurs and is
continuing, the principal of, premium, if any, and accrued and unpaid interest
on all the notes will become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holders. The holders
of a majority in principal amount of the outstanding notes may waive all past
defaults (except with respect to nonpayment of principal, premium or interest)
and rescind any such acceleration with respect to the notes and its
consequences if (1) rescission would not conflict with any judgment or decree
of a court of competent jurisdiction and (2) all existing Events of Default,
other than the nonpayment of the principal of, premium, if any, and interest on
the notes that have become due solely by such declaration of acceleration, have
been cured or waived.
Subject to the provisions of the indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the indenture
at the request or direction of any of the respective holders unless such
holders have offered to the Trustee reasonable indemnity or security against
any loss, liability or expense. Except to enforce the right to receive payment
of principal, premium, if any, or interest when due, no holder may pursue any
remedy with respect to the indenture or the notes unless:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding notes
have requested that the Trustee pursue the remedy;
(3) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
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(4) the Trustee has not complied with such request within 60 days after
the receipt of the request and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the outstanding
notes have not given the Trustee a direction that, in the opinion of the
Trustee, is inconsistent with such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The indenture
provides that in the event an Event of Default has occurred and is continuing,
the Trustee will be required in the exercise of its powers to use the degree of
care that a prudent person would use in the conduct of its own affairs. The
Trustee, however, may refuse to follow any direction that conflicts with law or
the indenture or that the Trustee determines is unduly prejudicial to the
rights of any other holder or that would involve the Trustee in personal
liability. Prior to taking any action under the indenture, the Trustee will be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.
The indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of, premium, if any, or interest on any note, the Trustee
may withhold notice if and so long as a committee of trust officers of the
Trustee in good faith determines that withholding notice is in the interests of
the holders. In addition, the Issuer is required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. The Issuer also is required to deliver to the Trustee, within 30
days after the occurrence thereof, written notice of any events which would
constitute certain Defaults, their status and what action the Issuer is taking
or proposes to take in respect thereof.
Amendments and Waivers
Subject to certain exceptions, each indenture may be amended with the
consent of the holders of a majority in principal amount of the notes then
outstanding (including without limitation, consents obtained in connection with
a purchase of, or tender offer or exchange offer for, the notes) and, subject
to certain exceptions, any past default or compliance with any provisions may
be waived with the consent of the holders of a majority in principal amount of
the notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, the
notes). However, without the consent of each holder of an outstanding note
affected, no amendment may, among other things:
(1) reduce the amount of notes whose holders must consent to an amendment;
(2) reduce the stated rate of or extend the stated time for payment of
interest on any note;
(3) reduce the principal of or extend the Stated Maturity of any note;
(4) reduce the premium payable upon the redemption or repurchase of any
note or change the time at which any note may be redeemed or repurchased as
described above under "Optional Redemption," "Change of Control," or any
similar provision, whether through an amendment or waiver of provisions in
the covenants, definitions or otherwise;
(5) make any note payable in money other than that stated in the note;
(6) impair the right of any holder to receive payment of, premium, if
any, principal of and interest on such holder's notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on or
with respect to such holder's notes; or
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions.
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Without the consent of any holder, the Issuer and the Trustee may amend the
indenture to:
(1) cure any ambiguity, omission, defect or inconsistency that does not
materially adversely affect the rights of any holder of the notes;
(2) provide for uncertificated notes in addition to or in place of
certificated notes (provided that the uncertificated notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated notes are described in Section 163(f) (2) (B)
of the Code);
(3) add Guarantees with respect to the notes or release a Subsidiary
Guarantor upon its designation as an Unrestricted Subsidiary; provided,
however, that the designation is in accord with the applicable provisions of
the indenture;
(4) further secure the notes;
(5) add to the covenants of the Issuer for the benefit of the holders or
surrender any right or power conferred upon the Issuer;
(6) make any change that does not adversely affect the rights of any
holder; or
(7) comply with any requirement of the SEC in connection with the
qualification of the indenture under the Trust Indenture Act.
The consent of the holders is not necessary under the indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment under the
indenture becomes effective, the Issuer is required to mail to the holders a
notice briefly describing such amendment. However, the failure to give such
notice to all the holders, or any defect in the notice, will not impair or
affect the validity of the amendment.
Pursuant to the participation agreement, the material terms of the
participation agreement, the Lease, the Hanover Guarantee and the assignment of
the Lease may not be amended, supplemented, waived or modified without the
written agreement and consent of, among others, the Trustee acting on behalf of
the holders of a majority of the then outstanding notes; provided, however,
that, without the consent of the Trustee acting on behalf of the holders of a
majority of the then outstanding notes, the applicable Issuer, HCLP and
Hanover, the Trustee may amend, supplement, waive or modify provisions of the
Lease which relate to, among other items, the return and redelivery of the
Equipment at the expiration of the Lease term, use of the Equipment and
subleasing of the Equipment. Notwithstanding the foregoing, such parties may
not, without the consent of each holder affected thereby, amend, change or
modify in any material respect the obligations of HCLP and/or Hanover (or any
of the material provisions or definitions with respect thereto) to (a) make
payments of rent under the Lease or (b) purchase Equipment yielding proceeds
sufficient to enable the Issuer to make and consummate a Change of Control
Offer. Certain provisions of the Lease, the participation agreement, the
indenture and the other Operative Agreements which are material to the equity
certificate holder of the Issuer may not be amended, supplemented, waived or
modified without the equity certificate holder's consent if such amendment,
waiver, supplement or modification would materially adversely affect such
equity certificate holder. No amendment may be made to the subordination
provisions of the Lease or Hanover Guarantee that adversely affects the rights
of any holder of Senior Indebtedness or Guarantor Senior Indebtedness then
outstanding unless the holders of such Senior Indebtedness or Guarantor Senior
Indebtedness, as applicable (or their Representative), consent to such change.
Defeasance
The Issuer at any time may terminate all its obligations under the notes and
the indenture ("legal defeasance"), except for certain obligations, including
those respecting the defeasance trust and obligations to register the transfer
or exchange of the notes, to replace mutilated, destroyed, lost or stolen notes
and to maintain a registrar and paying agent in respect of the notes. If the
Issuer exercises its legal defeasance option, the Hanover Guarantee in effect
at such time will terminate.
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The Issuer at any time may terminate its obligations under covenants
described under "Certain Covenants under the Indenture", the operation of the
cross-default upon a payment default, cross acceleration provisions, the
judgment default provision and the Guarantee provision described under "Events
of Default" above ("covenant defeasance").
The Issuer may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Issuer exercises its
legal defeasance option, payment of the notes may not be accelerated because of
an Event of Default with respect to the notes. If the Issuer exercises its
covenant defeasance option, payment of the notes may not be accelerated because
of an Event of Default specified in clause (4), (5), (6), (7), (9) or (10)
under "Events of Default" above.
In order to exercise either defeasance option, the Issuer must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium, if any, and
interest on the notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel (subject to customary exceptions and exclusions) to the
effect that holders of the notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance
had not occurred. In the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Issuer,
as such, shall have any liability for any obligations of the Issuer under the
notes, indenture or Hanover Guarantee or for any claim based on, in respect of,
or by reason of, such obligations or their creation. Each holder by accepting a
note waives and releases all such liability. The waiver and release are part of
the consideration for issuance of the notes. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of
the SEC that such a waiver is against public policy.
Concerning the Trustee
Wilmington Trust FSB is the Trustee under the indenture and has been
appointed by the Issuer as Registrar and Paying Agent with regard to its
respective notes.
Governing Law
The indenture provides that it and the notes will be governed by, and
construed in accordance with, the laws of the State of New York.
Certain Definitions
The following terms shall have the meanings set forth below in respect of
the indenture and the participation agreement related to the issuance of the
notes.
"2011 Indenture" means the indenture, with terms substantially similar to
the indenture with respect the notes, with respect to Hanover Equipment Trust
2001B's 8.75% Senior Secured Notes due 2011.
"2011 Lease" means the ten-year operating lease, with terms substantially
similar to the Lease, entered into by HCLP with Hanover Equipment Trust 2001B
as of August 31, 2001.
"2011 Guarantee" means the Guarantee, with terms substantially similar to
the Hanover Guarantee, by the Hanover Guarantors with respect to Hanover
Equipment Trust 2001B's 8.75% Senior Secured Notes due 2011 and the 2011 Lease
entered into in connection therewith.
"Additional Assets" means
(1) any property or assets (other than Indebtedness and Capital Stock) to
be used by Hanover or a Restricted Subsidiary in a Related Business;
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(2) the Capital Stock of a Person that becomes a Restricted Subsidiary as
a result of the acquisition of such Capital Stock by Hanover or a Restricted
Subsidiary of Hanover; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary of Hanover;
provided, however, that, in the case of clauses (2) and (3), such Restricted
Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"Asset Disposition" means any direct or indirect sale, lease (other than an
operating lease entered into in the ordinary course of business), transfer,
issuance or other disposition, or a series of related sales, leases, transfers,
issuances or dispositions that are part of a common plan, of shares of Capital
Stock of a Subsidiary (other than directors' qualifying shares), property or
other assets (each referred to for the purposes of this definition as a
"disposition") by Hanover or any of its Restricted Subsidiaries, including any
disposition by means of a merger, consolidation or similar transaction.
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Dispositions:
(1) a disposition by a Restricted Subsidiary to Hanover or by Hanover or
a Restricted Subsidiary to a Restricted Subsidiary in which Hanover will
hold, directly or indirectly, at least the same ownership percentage as it
did prior to such disposition;
(2) the sale of Cash Equivalents in the ordinary course of business;
(3) a disposition of inventory in the ordinary course of business;
(4) a disposition of obsolete or worn out equipment or equipment that is
no longer useful in the conduct of the business of Hanover and its
Restricted Subsidiaries and that is disposed of in each case in the ordinary
course of business;
(5) transactions described under "Certain Covenants under the
Participation Agreements--Merger and Consolidation" (other than with respect
to any Sale/Leaseback Transaction involving all or substantially all of the
properties and assets of Hanover or of one or more Subsidiaries of Hanover,
which properties and assets, if held by Hanover instead of such
Subsidiaries, would constitute all or substantially all of the properties
and assets of Hanover on a consolidated basis);
(6) an issuance of Capital Stock by a Restricted Subsidiary of Hanover to
Hanover or to a Wholly-Owned Subsidiary (other than a Receivables Entity);
(7) for purposes of "Certain Covenants under the Participation
Agreements--Limitation on Sales of Assets and Subsidiary Stock" only, the
making of a Permitted Investment or a disposition subject to "Certain
Covenants under the Participation Agreements--Limitation on Restricted
Payments";
(8) sales of accounts receivable and related assets or an interest
therein of the type specified in the definition of "Qualified Receivables
Transaction" to a Receivables Entity;
(9) dispositions of assets selected by the Board of Directors as not
constituting an Asset Disposition with an aggregate fair market value since
the Issue Date of less than $10.0 million;
(10) dispositions in connection with Permitted Liens;
(11) sales of Equipment pursuant to Sale/Leaseback Transactions;
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(12) the licensing or sublicensing of intellectual property or other
general intangibles and licenses, leases or subleases of other property in
the ordinary course of business which do not materially interfere with the
business of Hanover and its Restricted Subsidiaries; and
(13) foreclosure on assets.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the notes, compounded semi-annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (1) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (2) the sum of all such payments.
"Bank Indebtedness" means any and all amounts, whether outstanding on the
Issue Date or Incurred after the Issue Date, payable by Hanover and/or HCLP or
any Subsidiary of Hanover under or in respect of the Senior Credit Agreement
and any related notes, collateral documents, letters of credit and Guarantees
and any Interest Rate Agreement entered into in connection with the Senior
Credit Agreement, including principal, premium, if any, interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to Hanover and/or HCLP at the rate specified therein
whether or not a claim for post filing interest is allowed in such
proceedings), fees, charges, expenses, reimbursement obligations, Guarantees
and all other amounts payable thereunder or in respect thereof.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation will be the capitalized amount of such obligation at the time
any determination thereof is to be made as determined in accordance with GAAP,
and the Stated Maturity thereof will be the date of the last payment of rent or
any other amount due under such lease prior to the first date such lease may be
terminated without penalty.
"Cash Equivalents" means:
(1) securities issued or directly and fully Guaranteed or insured by the
United States Government or any agency or instrumentality of the United
States (provided that the full faith and credit of the United States is
pledged in support thereof), having maturities of not more than one year
from the date of acquisition;
(2) marketable general obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition of the United States (provided that the full faith and credit of
the United States is pledged in support thereof) and, at the time of
acquisition, having a credit rating of "A" or better from either Standard &
Poor's Ratings Services or Moody's Investors Service, Inc.;
(3) certificates of deposit, time deposits, eurodollar time deposits,
overnight bank deposits or bankers' acceptances having maturities of not
more than one year from the date of acquisition thereof issued by any
commercial bank the long-term debt of which is rated at the time of
acquisition thereof at least "A" or the equivalent thereof by Standard &
Poor's Ratings Services, or "A" or the equivalent thereof by Moody's
Investors Service, Inc., and having combined capital and surplus in excess
of $500.0 million;
107
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (1), (2) and (3)
entered into with any bank meeting the qualifications specified in clause
(3) above;
(5) commercial paper rated at the time of acquisition thereof at least
"A2" or the equivalent thereof by Standard & Poor's Ratings Services or
"P-2" or the equivalent thereof by Moody's Investors Service, Inc., or
carrying an equivalent rating by a nationally recognized rating agency, if
both of the two named rating agencies cease publishing ratings of
investments, and in any case maturing within one year after the date of
acquisition thereof; and
(6) interests in any investment company or money market fund which
invests solely in instruments of the type specified in clauses (1) through
(5) above.
"Certificate Holder Contribution" means the investments of funds in the
Issuer made by the equity certificate holder pursuant to the participation
agreement and the trust agreement.
"Change of Control" means:
(1) any "person" or "group" of related persons (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial
owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that such person or group shall be deemed to have "beneficial ownership" of
all shares that any such person or group has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 51% of the total voting power of the
Voting Stock of Hanover (or its successor by merger, consolidation or
purchase of all or substantially all of its assets) (for the purposes of
this clause, such person or group shall be deemed to beneficially own any
Voting Stock of Hanover held by an entity, if such person or group
"beneficially owns" (as defined above), directly or indirectly, more than
51% of the voting power of the Voting Stock of such parent entity);
(2) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of Hanover
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of Hanover was approved
by a vote of at least a majority of the directors of Hanover then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of Hanover
then in office;
(3) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of Hanover and its
Restricted Subsidiaries taken as a whole to any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act); or
(4) the adoption by the stockholders of Hanover of a plan or proposal for
the liquidation or dissolution of Hanover.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means with respect to any Person, any and all shares,
interest or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of such Person's common stock whether or not
outstanding on the Issue Date, and includes, without limitation, all series and
classes of such common stock.
"Consolidated Coverage Ratio" means as of any date of determination, with
respect to any Person, the ratio of (x) the aggregate amount of Consolidated
EBITDA of such Person for the period of the most recent four consecutive fiscal
quarters ending prior to the date of such determination for which financial
statements are in existence to (y) Consolidated Fixed Charges for such four
fiscal quarters, provided, however, that:
(1) if Hanover or any Restricted Subsidiary:
(a) has Incurred any Indebtedness since the beginning of such period
that remains outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio involves an Incurrence of Indebtedness, Consolidated
EBITDA and Consolidated Fixed Charges for such period will be calculated
after giving effect on a pro forma basis to such
108
Indebtedness as if such Indebtedness had been Incurred on the first day
of such period (except that in making such computation, the amount of
Indebtedness under any revolving credit facility outstanding on the date
of such calculation will be computed based on (i) the average daily
balance of such Indebtedness during such four fiscal quarters or such
shorter period for which such facility was outstanding or (ii) if such
facility was created after the end of such four fiscal quarters, the
average daily balance of such Indebtedness during the period from the
date of creation of such facility to the date of such calculation) and
the discharge of any other Indebtedness repaid, repurchased, defeased or
otherwise discharged with the proceeds of such new Indebtedness as if
such discharge had occurred on the first day of such period; or
(b) has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of the period that is no longer
outstanding on such date of determination or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio involves a
discharge of Indebtedness (in each case other than Indebtedness incurred
under any revolving credit facility unless such Indebtedness has been
permanently repaid and the related commitment terminated), Consolidated
EBITDA and Consolidated Fixed Charges for such period will be calculated
after giving effect on a pro forma basis to such discharge of such
Indebtedness, including with the proceeds of such new Indebtedness, as
if such discharge had occurred on the first day of such period;
(2) if since the beginning of such period Hanover or any Restricted
Subsidiary will have made any Asset Disposition or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Asset
Disposition:
(a) the Consolidated EBITDA for such period will be reduced by an
amount equal to the Consolidated EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset
Disposition for such period or increased by an amount equal to the
Consolidated EBITDA (if negative) directly attributable thereto for such
period; and
(b) Consolidated Fixed Charges for such period will be reduced by an
amount equal to the Consolidated Fixed Charges directly attributable to
any Indebtedness of Hanover or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to Hanover
and its continuing Restricted Subsidiaries in connection with such Asset
Disposition for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Fixed Charges for such period
directly attributable to the Indebtedness of such Restricted Subsidiary
to the extent Hanover and its continuing Restricted Subsidiaries are no
longer liable for such Indebtedness after such sale);
(3) if since the beginning of such period Hanover or any Restricted
Subsidiary (by merger or otherwise) will have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary
or is merged with or into Hanover) or an acquisition of assets, including
any acquisition of assets occurring in connection with a transaction causing
a calculation to be made hereunder, which constitutes all or substantially
all of an operating unit, division or line of business, Consolidated EBITDA
and Consolidated Fixed Charges for such period will be calculated after
giving pro forma effect thereto (including the Incurrence of any
Indebtedness) as if such Investment or acquisition occurred on the first day
of such period; and
(4) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into Hanover or any
Restricted Subsidiary since the beginning of such period) will have made any
Asset Disposition or any Investment or acquisition of assets that would have
required an adjustment pursuant to clause (2) or (3) above if made by
Hanover or a Restricted Subsidiary during such period, Consolidated EBITDA
and Consolidated Fixed Charges for such period will be calculated after
giving pro forma effect thereto as if such Asset Disposition or Investment
or acquisition of assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to
any calculation under this definition, the pro forma calculations will be
determined in good faith by a responsible financial or accounting officer of
Hanover (including pro forma expense and cost reductions calculated on a basis
consistent with
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Regulation S-X under the Securities Act). If any Indebtedness bears a floating
rate of interest and is being given pro forma effect, the interest expense on
such Indebtedness will be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months).
"Consolidated EBITDA" for any period means, without duplication, the
Consolidated Net Income for such period, plus the following to the extent
deducted in calculating such Consolidated Net Income:
(1) Consolidated Interest Expense;
(2) Consolidated Income Taxes;
(3) consolidated depreciation expense;
(4) consolidated amortization of intangibles;
(5) other non-cash charges reducing Consolidated Net Income (excluding
any such non-cash charge to the extent it represents an accrual of or
reserve for cash charges in any future period or amortization of a prepaid
cash expense that was paid in a prior period not included in the
calculation); and
(6) Consolidated Rental Expense.
Notwithstanding the preceding sentence, clauses (2) through (6) relating to
amounts of a Restricted Subsidiary of a Person will be added to Consolidated
Net Income to compute Consolidated EBITDA of such Person only to the extent
(and in the same proportion) that the net income (loss) of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person and, to the extent the amounts set forth in clause (1) and clauses (3)
through (6) are in excess of those necessary to offset a net loss of such
Restricted Subsidiary or if such Restricted Subsidiary has net income for such
period included in Consolidated Net Income, only if a corresponding amount
would be permitted at the date of determination to be paid as a dividend to
Hanover by such Restricted Subsidiary without prior approval (that has not been
obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of Consolidated Interest Expense and
Consolidated Rental Expense.
"Consolidated Income Taxes" means, with respect to any Person for any
period, taxes imposed upon such Person or other payments required to be made by
such Person by any governmental authority which taxes or other payments are
calculated by reference to the income or profits of such Person or such Person
and its Restricted Subsidiaries (to the extent such income or profits were
included in computing Consolidated Net Income for such period), regardless of
whether such taxes or payments are required to be remitted to any governmental
authority.
"Consolidated Interest Expense" means, for any period, the total interest
expense of Hanover and its consolidated Restricted Subsidiaries, whether paid
or accrued, plus, to the extent not included in such interest expense:
(1) interest expense attributable to Capitalized Lease Obligations and
the interest portion of rent expense associated with Attributable
Indebtedness in respect of the relevant lease giving rise thereto to the
extent not already included in Consolidated Rental Expense, determined as if
such lease were a capitalized lease in accordance with GAAP and the interest
component of any deferred payment obligations;
(2) amortization of debt discount and debt issuance cost;
(3) non-cash interest expense;
(4) commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing;
(5) interest actually paid by Hanover or any Restricted Subsidiary under
any Guarantee of Indebtedness or other obligation of any other Person;
(6) net costs associated with Hedging Obligations (including amortization
of fees);
(7) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period;
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(8) the product of (a) all dividends paid or payable in cash, Cash
Equivalents or Indebtedness or accrued during such period on any series of
Disqualified Stock of such Person or on Preferred Stock of its Restricted
Subsidiaries payable to a party other than Hanover or a Wholly-Owned
Subsidiary, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state,
provincial and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with GAAP;
and
(9) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person (other than Hanover) in
connection with Indebtedness Incurred by such plan or trust; provided,
however, that there will be excluded therefrom any such interest expense of
any Unrestricted Subsidiary to the extent the related Indebtedness is not
Guaranteed or paid by Hanover or any Restricted Subsidiary.
For purposes of the foregoing, total interest expense will be determined
after giving effect to any net payments made or received by Hanover and its
Subsidiaries with respect to Interest Rate Agreements.
"Consolidated Net Income" means, for any period, the net income (loss) of
Hanover and its Restricted Subsidiaries determined on a consolidated basis in
accordance with GAAP; provided, however, that there will not be included in
such Consolidated Net Income:
(1) any net income (loss) of any Person if such Person is not a
Restricted Subsidiary, except that:
(a) subject to the limitations contained in clauses (4), (5) and (6)
below, Hanover's equity in the net income of any such Person for such
period will be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by any Person during such
period to Hanover or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
to a Restricted Subsidiary, to the limitations contained in clause (3)
below); and
(b) Hanover's equity in a net loss of any such Person (other than an
Unrestricted Subsidiary) for such period will be included in determining
such Consolidated Net Income to the extent such loss has been funded
with cash from Hanover or a Restricted Subsidiary;
(2) any net income (loss) of any Person acquired by Hanover or a
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition;
(3) any net income (but not loss) of any Restricted Subsidiary if such
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to Hanover, except that:
(a) subject to the limitations contained in clauses (4), (5) and (6)
below, Hanover's equity in the net income of any such Restricted
Subsidiary for such period will be included in such Consolidated Net
Income up to the aggregate amount of cash that could have been
distributed by such Restricted Subsidiary during such period to Hanover
or another Restricted Subsidiary as a dividend (subject, in the case of
a dividend to another Restricted Subsidiary, to the limitation contained
in this clause); and
(b) Hanover's equity in a net loss of any such Restricted Subsidiary
for such period will be included in determining such Consolidated Net
Income;
(4) any gain (loss) realized upon the sale or other disposition of any
property, plant or equipment of Hanover or its consolidated Restricted
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which is
not sold or otherwise disposed of in the ordinary course of business and any
gain (loss) realized upon the sale or other disposition of any Capital Stock
of any Person;
(5) any extraordinary gain or loss; and
(6) the cumulative effect of a change in accounting principles.
"Consolidated Rental Expense" means, for any period, the aggregate of the
rental expense of Hanover and its Restricted Subsidiaries related to Operating
Lease Facilities of Hanover and its Restricted Subsidiaries for such period,
determined on a consolidated basis.
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"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (1) the Bank Indebtedness (to the
extent such Bank Indebtedness constitutes Senior Indebtedness) and the
Synthetic Guarantees and (2) any other Senior Indebtedness or Guarantor Senior
Indebtedness, as applicable, which, at the date of determination, has an
aggregate principal amount outstanding of, or under which, at the date of
determination, the holders thereof are committed to lend up to, at least $25.0
million and is specifically designated in the instrument evidencing or
governing such Senior Indebtedness or Guarantor Senior Indebtedness, as
applicable, as "Designated Senior Indebtedness" for purposes of the
participation agreement.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable for Indebtedness or Disqualified Stock
(excluding Capital Stock which is convertible or exchangeable solely at the
option of Hanover or a Restricted Subsidiary); or
(3) is redeemable at the option of the holder of the Capital Stock
thereof, in whole or in part,
in each case on or prior to the date that is 91 days after the date (a) on
which the notes mature or (b) on which there are no notes outstanding, provided
that only the portion of Capital Stock which so matures or is mandatorily
redeemable, is so convertible or exchangeable or is so redeemable at the option
of the holder thereof prior to such date will be deemed to be Disqualified
Stock; provided, further, that any Capital Stock that would constitute
Disqualified Stock solely because the holders thereof have the right to require
Hanover to repurchase such Capital Stock upon the occurrence of a change of
control or asset sale (each defined in a substantially identical manner to the
corresponding definitions in the participation agreement) shall not constitute
Disqualified Stock if the terms of such Capital Stock (and all such securities
into which it is convertible or for which it is ratable or exchangeable)
provide that Hanover may not repurchase or redeem any such Capital Stock (and
all such securities into which it is convertible or for which it is ratable or
exchangeable) pursuant to such provision prior to compliance by Hanover with
the provisions of the participation agreement described under the caption
"Certain Covenants under the Participation Agreements--Limitation on Sales of
Assets and Subsidiary Stock" and such repurchase or redemption complies with
"Certain Covenants under the Participation Agreements--Restricted Payments."
"Equipment" means the collective reference to all Units that are then owned
by the Issuer and leased to HCLP including all Units that are subsequently
conveyed to the Issuer in substitution of existing Units.
"Foreign Subsidiary" means any Restricted Subsidiary that is not organized
under the laws of the United States of America or any state thereof or the
District of Columbia.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the participation agreement,
including those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations based on GAAP
contained in the participation agreement will be computed in conformity with
GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly Guaranteeing any Indebtedness of any other Person and
any obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise); or
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(2) entered into for purposes of assuring in any other manner the obligee
of such Indebtedness of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" will not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Guarantor Senior Indebtedness" means, with respect to a Subsidiary
Guarantor, the following obligations, whether outstanding on the Issue Date or
thereafter issued, created, Incurred or assumed, without duplication:
(1) the Bank Indebtedness, the Synthetic Guarantees and all Guarantees,
as applicable, by such Subsidiary Guarantor of Senior Indebtedness of
Hanover or Guarantor Senior Indebtedness of any other Subsidiary Guarantor;
and
(2) all obligations consisting of principal of and premium, if any,
accrued and unpaid interest on, and fees and other amounts relating to, all
other Indebtedness of the Subsidiary Guarantor. Guarantor Senior
Indebtedness includes interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Subsidiary
Guarantor regardless of whether postfiling interest is allowed in such
proceeding.
Notwithstanding anything to the contrary in the preceding paragraph,
Guarantor Senior Indebtedness will not include:
(1) any Indebtedness in which, in the instrument creating or evidencing
the same or pursuant to which the same is outstanding, it is provided that
the obligations in respect of such Indebtedness are not superior in right
of, or are subordinate to, payment of the notes and the Hanover Guarantee;
(2) any obligations of such Subsidiary Guarantor to another Subsidiary or
Hanover;
(3) any liability for Federal, state, local, foreign or other taxes owed
or owing by such Subsidiary Guarantor;
(4) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities);
(5) any Indebtedness, Guarantee or obligation of such Subsidiary
Guarantor that is expressly subordinate or junior in right of payment to any
other Indebtedness, Guarantee or obligation of such Subsidiary Guarantor,
including, without limitation, any Guarantor Senior Subordinated
Indebtedness and Guarantor Subordinated Obligations of such Guarantor; or
(6) any Capital Stock.
"Guarantor Senior Subordinated Indebtedness" means, with respect to a
Subsidiary Guarantor, the obligations of such Subsidiary Guarantor under the
Hanover Guarantee and any other Indebtedness of such Subsidiary Guarantor
(whether outstanding on the Issue Date or thereafter Incurred) that
specifically provides that such Indebtedness is to rank equally in right of
payment with the obligations of such Subsidiary Guarantor under the Hanover
Guarantee and is not expressly subordinated by its terms in right of payment to
any Indebtedness of such Subsidiary Guarantor which is not Guarantor Senior
Indebtedness of such Subsidiary Guarantor.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding
on the Issue Date or thereafter Incurred) which is expressly subordinate in
right of payment to the obligations of such Subsidiary Guarantor under the
Hanover Guarantee pursuant to a written agreement.
"Hanover" means Hanover Compressor Company, a Delaware corporation.
"Hanover Guarantee" means the Guarantee of payment of the Lease and the
notes by Hanover and the Subsidiary Guarantors pursuant to the terms of the
indenture and any supplemental indenture thereto or the terms of the
participation agreement and any assumption agreement supplemental thereto. The
Hanover Guarantee is in the form prescribed by the indenture and the
participation agreement.
"Hanover Guarantor" means each of Hanover, HCLP and the Subsidiary
Guarantors.
113
"HCLP" means Hanover Compression Limited Partnership, a Delaware limited
partnership.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Incur" means issue, create, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Restricted Subsidiary
(whether by merger, consolidation, acquisition or otherwise) will be deemed to
be incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary; and the terms "Incurred" and "Incurrence" have meanings correlative
to the foregoing.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal of and premium (if any) in respect of indebtedness of
such Person for borrowed money;
(2) the principal of and premium (if any) in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments;
(3) the principal component of all obligations of such Person in respect
of letters of credit, bankers' acceptances or other similar instruments
(including reimbursement obligations with respect thereto except to the
extent such reimbursement obligation relates to a trade payable and such
obligation is satisfied within 30 days of Incurrence);
(4) the principal component of all obligations of such Person to pay the
deferred and unpaid purchase price of property (except trade payables),
which purchase price is due more than six months after the date of placing
such property in service or taking delivery and title thereto;
(5) Capitalized Lease Obligations and all Attributable Indebtedness of
such Person;
(6) the principal component or liquidation preference of all obligations
of such Person with respect to the redemption, repayment or other repurchase
of any Disqualified Stock or, with respect to any Subsidiary, any Preferred
Stock (but excluding, in each case, any accrued dividends);
(7) the principal component of all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided, however, that the amount of such
Indebtedness will be the lesser of (a) the fair market value of such asset
at such date of determination and (b) the amount of such Indebtedness of
such other Persons;
(8) the principal component of Indebtedness of other Persons to the
extent Guaranteed by such Person;
(9) to the extent not otherwise included in this definition, net
obligations of such Person under Currency Agreements and Interest Rate
Agreements (the amount of any such obligations to be equal at any time to
the termination value of such agreement or arrangement giving rise to such
obligation that would be payable by such Person at such time); and
(10) the obligation to pay the principal and premium (if any) in respect
of any Operating Lease Facility, in an amount, as determined on the date of
incurrence of such obligation, equal to the purchase price of the related
property or assets.
The amount of Indebtedness of any Person at any date will be the outstanding
balance at such date of all unconditional obligations as described above and
the maximum liability, upon the occurrence of the contingency giving rise to
the obligation, of any contingent obligations at such date.
In addition, "Indebtedness" of any Person shall include Indebtedness
described in the preceding paragraph that would not appear as a liability on
the balance sheet of such Person if:
(1) such Indebtedness is the obligation of a partnership or joint venture
that is not a Restricted Subsidiary (a "Joint Venture");
114
(2) such Person or a Restricted Subsidiary of such Person is a general
partner of the Joint Venture (a "General Partner"); and
(3) there is recourse, by contract or operation of law, with respect to
the payment of such Indebtedness to property or assets of such Person or a
Restricted Subsidiary of such Person; and then such Indebtedness shall be
included in an amount not to exceed:
(a) the lesser of (i) the net assets of the General Partner and (ii)
the amount of such obligations to the extent that there is recourse, by
contract or operation of law, to the property or assets of such Person
or a Restricted Subsidiary of such Person; or
(b) if less than the amount determined pursuant to clause (a)
immediately above, the actual amount of such Indebtedness that is
recourse to such Person or a Restricted Subsidiary of such Person, if
the Indebtedness is evidenced by a writing and is for a determinable
amount and the related interest expense shall be included in
Consolidated Interest Expense to the extent actually paid by Hanover or
its Restricted Subsidiaries.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of any direct or
indirect advance, loan (other than advances to customers in the ordinary course
of business) or other extension of credit (including by way of Guarantee or
similar arrangement, but excluding any debt or extension of credit represented
by a bank deposit other than a time deposit) or capital contribution to (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar instruments issued
by, such Person and all other items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; provided that
none of the following will be deemed to be an Investment:
(1) Hedging Obligations entered into in the ordinary course of business
and in compliance with the participation agreement;
(2) endorsements of negotiable instruments and documents in the ordinary
course of business; and
(3) an acquisition of assets, Capital Stock or other securities by
Hanover or a Subsidiary for consideration to the extent such consideration
consists exclusively of common equity securities of Hanover.
For purposes of "Certain Covenants under the Participation
Agreements--Limitation on Restricted Payments",
(1) "Investment" will include the portion (proportionate to Hanover's
equity interest in a Restricted Subsidiary to be designated as an
Unrestricted Subsidiary) of the fair market value of the net assets of such
Restricted Subsidiary of Hanover at the time that such Restricted Subsidiary
is designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, Hanover will be
deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary in an amount (if positive) equal to (a) Hanover's "Investment" in
such Subsidiary at the time of such redesignation less (b) the portion
(proportionate to Hanover's equity interest in such Subsidiary) of the fair
market value of the net assets (as conclusively determined by the Board of
Directors of Hanover in good faith) of such Subsidiary at the time that such
Subsidiary is so redesignated a Restricted Subsidiary; and
(2) any property transferred to or from an Unrestricted Subsidiary will
be valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors of Hanover.
"Issue Date" means August 30, 2001.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
115
"Material Subsidiary" means any Restricted Subsidiary of Hanover for which
the aggregate fair market value of all assets owned by such Restricted
Subsidiary is greater than $20.0 million as of the date of determination.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other non-cash form) therefrom, in each case net
of:
(1) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses incurred, and all Federal,
state, provincial, foreign and local taxes required to be paid or accrued as
a liability under GAAP (after taking into account any available tax credits
or deductions and any tax sharing agreements), as a consequence of such
Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien
upon such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law be repaid
out of the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition; and
(4) the deduction of appropriate amounts to be provided by the seller as
a reserve, in accordance with GAAP, against any liabilities associated with
the assets disposed of in such Asset Disposition and retained by Hanover or
any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, listing fees,
discounts or commissions and brokerage, consultant and other fees and charges
actually incurred in connection with such issuance or sale and net of taxes
paid or payable as a result of such issuance or sale (after taking into account
any available tax credit or deductions and any tax sharing arrangements).
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Hanover nor any Restricted Subsidiary (a)
provides any Guarantee or credit support of any kind (including any
undertaking, Guarantee, indemnity, agreement or instrument that would
constitute Indebtedness) or (b) is directly or indirectly liable (as a
guarantor or otherwise);
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness of Hanover or any Restricted Subsidiary to declare a
default under such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and
(3) the explicit terms of which provide there is no recourse against any
of the assets of Hanover or its Restricted Subsidiaries.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of Hanover or the trustee of the
Issuer, as applicable.
"Officer's Certificate" means a certificate signed by two Officers or by an
Officer and either an Assistant Treasurer or an Assistant Secretary of Hanover
or the trustee of the Issuer, as applicable.
"Operating Lease Facility" means any operating lease transaction entered
into by Hanover or any of its Restricted Subsidiaries (including the 2011
Lease) resulting in the off-balance sheet financing of any of Hanover's or such
Restricted Subsidiary's property or assets, including its gas compression
equipment.
"Operative Agreements" means, collectively, the indenture, the notes, the
Lease, the participation agreement, the Hanover Guarantee, the assignment of
the Lease, the security agreement, the UCC financing
116
statements, the trust agreement, the consent to assignment, the equity
certificates, the Requisition, the bills of sale with respect to the Equipment
and any amendments, supplements or modifications from time to time of any of
the above.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Issuer, the Trustee or Hanover.
"Permitted Investment" means an Investment by Hanover or any Restricted
Subsidiary in:
(1) Hanover, a Restricted Subsidiary (other than a Receivables Entity) or
a Person which will, upon the making of such Investment, become a Restricted
Subsidiary (other than a Receivables Entity); provided, however, that the
primary business of such Restricted Subsidiary is a Related Business;
(2) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, Hanover or a Restricted Subsidiary (other
than a Receivables Entity); provided, however, that such Person's primary
business is a Related Business;
(3) cash and Cash Equivalents;
(4) receivables owing to Hanover or any Restricted Subsidiary created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; provided, however, that such trade
terms may include such concessionary trade terms as Hanover or any such
Restricted Subsidiary deems reasonable under the circumstances;
(5) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of business;
(6) loans or advances to employees made in the ordinary course of
business consistent with past practices of Hanover or such Restricted
Subsidiary;
(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to Hanover or any
Restricted Subsidiary or in satisfaction of judgments or pursuant to any
plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of a debtor;
(8) Investments made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with "Certain
Covenants under the Participation Agreements--Limitation on Sales of Assets
and Subsidiary Stock";
(9) Investments in existence on the Issue Date including those made
through the acquisition of Production Operators Corporation and related
assets from Schlumberger Technology Corporation on the Issue Date;
(10) Currency Agreements, Interest Rate Agreements and related Hedging
Obligations, which transactions or obligations are Incurred in compliance
with "Certain Covenants under the Participation Agreements--Limitation on
Indebtedness";
(11) Investments by Hanover or any of its Restricted Subsidiaries,
together with all other Investments pursuant to this clause (11), in an
aggregate amount at the time of such Investment not to exceed
$25.0 million outstanding at any one time;
(12) Investments made in connection with the performance of obligations
of Hanover or any of its Restricted Subsidiaries under the terms of any
joint venture agreement to which Hanover or any of its Restricted
Subsidiaries is a party on the Issue Date and identified on a schedule to
the participation agreement on the Issue Date, as these agreements may be
amended, modified or supplemented from time to time;
117
provided, however, that no future amendment, modification or supplement will
increase the amount of the Investment in a joint venture that is a Permitted
Investment pursuant to this clause (12) beyond the amount that would have
been a Permitted Investment pursuant to this clause (12) under terms of the
agreements in effect on the Issue Date, and provided, further, that no such
Investments shall exceed $30.0 million in the aggregate;
(13) Guarantees issued in accordance with "Certain Covenants under the
Participation Agreements--Limitations on Indebtedness"; and
(14) Investments by Hanover or a Restricted Subsidiary in a Receivables
Entity or any Investment by a Receivables Entity in any other Person, in
each case, in connection with a Qualified Receivables Transaction, provided,
however, that any Investment in any such Person is in the form of a Purchase
Money Note, or any equity interest or interests in accounts receivable and
related assets generated by Hanover or a Restricted Subsidiary and
transferred to any Person in connection with a Qualified Receivables
Transaction or any such Person owning such accounts receivable.
"Permitted Liens" means, with respect to any Person:
(1) Liens securing Indebtedness and other obligations of Hanover and/or
HCLP under the Senior Credit Agreement and related Interest Rate Agreements
and other Senior Indebtedness and liens on assets of Restricted Subsidiaries
securing Guarantees of Indebtedness and other obligations of Hanover and/or
HCLP under the Senior Credit Agreement and other Guarantor Senior
Indebtedness permitted to be incurred under the participation agreement;
(2) pledges or deposits by such Person under workmen's compensation laws,
unemployment insurance laws or similar legislation, or good faith deposits
in connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to
secure public or statutory obligations of such Person or deposits or cash or
United States government bonds to secure surety or appeal bonds to which
such Person is a party, or deposits as security for contested taxes or
import or customs duties or for the payment of rent, in each case Incurred
in the ordinary course of business;
(3) Liens imposed by law, including carriers', warehousemen's and
mechanics', Liens, in each case for sums not yet due or being contested in
good faith by appropriate proceedings if a reserve or other appropriate
provisions, if any, as shall be required by GAAP shall have been made in
respect thereof;
(4) Liens for taxes, assessments or other governmental charges not yet
subject to penalties for nonpayment or which are being contested in good
faith by appropriate proceedings provided appropriate reserves required
pursuant to GAAP have been made in respect thereof;
(5) Liens in favor of Issuers of surety or performance bonds or letters
of credit or bankers' acceptances issued pursuant to the request of and for
the account of such Person in the ordinary course of its business; provided,
however, that such letters of credit do not constitute Indebtedness;
(6) encumbrances, easements or reservations of, or rights of others for,
licenses, rights of way, sewers, electric lines, telegraph and telephone
lines and other similar purposes, or zoning or other restrictions as to the
use of real properties or liens incidental to the conduct of the business of
such Person or to the ownership of its properties which do not in the
aggregate materially adversely affect the value of said properties or
materially impair their use in the operation of the business of such Person;
(7) Liens securing Hedging Obligations so long as the related
Indebtedness is, and is permitted to be under the indenture or the
participation agreement, as applicable, secured by a Lien on the same
property securing such Hedging Obligation;
(8) leases and subleases of real property which do not materially
interfere with the ordinary conduct of the business of Hanover or any of its
Restricted Subsidiaries;
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(9) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which may
have been duly initiated for the review of such judgment have not been
finally terminated or the period within which such proceedings may be
initiated has not expired;
(10) Liens for the purpose of securing the payment of all or a part of
the purchase price of, or Capitalized Lease Obligations with respect to,
assets or property acquired or constructed in the ordinary course of
business, provided that:
(a) the aggregate principal amount of Indebtedness secured by such
Liens is otherwise permitted to be Incurred under the indenture or the
participation agreement, as applicable, and does not exceed the cost of
the assets or property so acquired or constructed; and
(b) such Liens are created within 180 days of construction or
acquisition of such assets or property and do not encumber any other
assets or property of Hanover or any Restricted Subsidiary other than
such assets or property and assets affixed or appurtenant thereto;
(11) Liens arising solely by virtue of any statutory or common law
provisions relating to banker's Liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a
depositary institution; provided that:
(a) such deposit account is not a dedicated cash collateral account
and is not subject to restrictions against access by Hanover or HCLP in
excess of those set forth by regulations promulgated by the Federal
Reserve Board; and
(b) such deposit account is not intended by Hanover or any Restricted
Subsidiary to provide collateral to the depository institution;
(12) Liens arising from Uniform Commercial Code financing statement
filings regarding operating leases entered into by Hanover and its
Restricted Subsidiaries in the ordinary course of business;
(13) Liens existing on the Issue Date;
(14) Liens on property or shares of stock of a Person at the time such
Person becomes a Restricted Subsidiary; provided, however, that such Liens
are not created, incurred or assumed in connection with, or in contemplation
of, such other Person becoming a Restricted Subsidiary; provided further,
however, that any such Lien may not extend to any other property owned by
Hanover or any Restricted Subsidiary;
(15) Liens on property at the time Hanover or a Restricted Subsidiary
acquired the property, including any acquisition by means of a merger or
consolidation with or into Hanover or any Restricted Subsidiary; provided,
however, that such Liens are not created, Incurred or assumed in connection
with, or in contemplation of, such acquisition; provided further, however,
that such Liens may not extend to any other property owned by Hanover or any
Restricted Subsidiary;
(16) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to Hanover or a Wholly-Owned Subsidiary (other than a
Receivables Entity);
(17) Liens securing the notes and the Hanover Guarantee;
(18) Liens securing Refinancing Indebtedness incurred to refinance
Indebtedness that was previously so secured, provided that any such Lien is
limited to all or part of the same property or assets (plus improvements,
accessions, proceeds or dividends or distributions in respect thereof) that
secured (or, under the written arrangements under which the original Lien
arose, could secure) the Indebtedness being refinanced or is in respect of
property that is the security for a Permitted Lien hereunder;
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(19) Liens on assets transferred to a Receivables Entity or on assets of
a Receivables Entity, in either case incurred in connection with a Qualified
Receivables Transaction;
(20) Liens securing Operating Lease Facilities Incurred in compliance
with "Certain Covenants Under the Participation Agreements--Limitation on
Indebtedness";
(21) the rights of any sublessee or assignee under a sublease or an
assignment or a compressor management agreement expressly permitted by the
terms of the Lease; and
(22) Liens caused by any act or omission of the Issuer, the trustee of
the Issuer, the Trustee, any of the equity certificate holder or any of
their affiliates.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company, government or any agency or political subdivision hereof or
any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Public Equity Offering" means an offering for cash by Hanover of its common
stock, or options, warrants or rights with respect to its common stock pursuant
to a registration statement that has been declared effective by the Securities
and Exchange Commission (other than on Form S-4 or S-8).
"Purchase Money Note" means a promissory note of a Receivables Entity
evidencing a line of credit, which may be irrevocable, from Hanover or any
Restricted Subsidiary of Hanover in connection with a Qualified Receivables
Transaction to a Receivables Entity, which note is repayable from cash
available to the Receivables Entity, other than amounts required to be
established as reserves pursuant to agreements, amounts paid to investors in
respect of interest, principal and other amounts owing to such investors and
amounts owing to such investors and amounts paid in connection with the
purchase of newly generated accounts receivable.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by Hanover or any of its Restricted
Subsidiaries pursuant to which Hanover or any of its Restricted Subsidiaries
may sell, convey or otherwise transfer to (1) a Receivables Entity (in the case
of a transfer by Hanover or any of its Restricted Subsidiaries) and (2) any
other Person (in the case of a transfer by a Receivables Entity), or may grant
a security interest in, any accounts receivable (whether now existing or
arising in the future) of Hanover or any of its Restricted Subsidiaries, and
any assets related thereto including, without limitation, all collateral
securing such accounts receivable, all contracts and all guarantees or other
obligations in respect of such accounts receivable, the proceeds of such
receivables and other assets which are customarily transferred, or in respect
of which security interests are customarily granted in connection with asset
securitization involving accounts receivable.
"Receivables Entity" means a Wholly-Owned Subsidiary of Hanover (or another
Person in which Hanover or any Restricted Subsidiary of Hanover makes an
Investment and to which Hanover or any Restricted Subsidiary of Hanover
transfers accounts receivable and related assets) which engages in no
activities other than in connection with the financing of accounts receivable
and which is designated by the Board of Directors of Hanover (as provided
below) as a Receivables Entity:
(1) no portion of the Indebtedness or any other obligations (contingent
or otherwise) of which:
(a) is guaranteed by Hanover or any Restricted Subsidiary of Hanover
(excluding guarantees of Obligations (other than the principal of, and
interest on, Indebtedness) pursuant to Standard Securitization
Undertakings);
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(b) is recourse to or obligates Hanover or any Restricted Subsidiary
of Hanover in any way other than pursuant to Standard Securitization
Undertakings; or
(c) subjects any property or asset of Hanover or any Restricted
Subsidiary of Hanover, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to Standard
Securitization Undertakings;
(2) with which neither Hanover nor any Restricted Subsidiary of Hanover
has any material contract, agreement, arrangement or understanding (except
in connection with a Purchase Money Note or Qualified Receivables
Transaction) other than on terms no less favorable to Hanover or such
Restricted Subsidiary than those that might be obtained at the time from
Persons that are not Affiliates of Hanover, other than fees payable in the
ordinary course of business in connection with servicing accounts
receivable; and
(3) to which neither Hanover nor any Restricted Subsidiary of Hanover has
any obligation to maintain or preserve such entity's financial condition or
cause such entity to achieve certain levels of operating results.
Any such designation by the Board of Directors of Hanover shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the resolution of
the Board of Directors of Hanover giving effect to such designation and an
Officer's Certificate certifying that such designation complied with the
foregoing conditions.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, exchange, renew, repay or extend (including pursuant to any
defeasance or discharge mechanism) (collectively, "refinance," "refinances,"
and "refinanced" shall have a correlative meaning) any Indebtedness existing on
the date of the participation agreement or Incurred in compliance with the
participation agreement (including Indebtedness of Hanover that refinances
Indebtedness of any Restricted Subsidiary and Indebtedness of any Restricted
Subsidiary that refinances Indebtedness of another Restricted Subsidiary)
including Indebtedness that refinances Refinancing Indebtedness, provided,
however, that:
(1) (a) if the Stated Maturity of the Indebtedness being refinanced is
earlier than the Stated Maturity of the notes, the Refinancing Indebtedness
has a Stated Maturity no earlier than the Stated Maturity of the
Indebtedness being refinanced or (b) if the Stated Maturity of the
Indebtedness being refinanced is later than the Stated Maturity of the
notes, the Refinancing Indebtedness has a Stated Maturity at least 91 days
later than the Stated Maturity of the notes;
(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced;
(3) such Refinancing Indebtedness is Incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue price)
that is equal to or less than the sum of the aggregate principal amount (or
if issued with original issue discount, the aggregate accreted value) then
outstanding of Indebtedness being refinanced (plus, without duplication, any
additional Indebtedness Incurred to pay interest or premiums required by the
instruments governing such existing Indebtedness and fees incurred in
connection therewith); and
(4) if the Indebtedness being refinanced is subordinated in right of
payment to the notes or the Hanover Guarantee, such Refinancing Indebtedness
is subordinated in right of payment to the notes or the Hanover Guarantee on
terms at least as favorable to the holders of notes as those contained in
the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Related Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of Hanover and its
Restricted Subsidiaries on the date of the participation agreement.
"Representative" means any trustee, agent or representative (if any) of an
issue of Senior Indebtedness or Guarantor Senior Indebtedness, as the case may
be; provided that when used in connection with the Senior Credit Agreement, the
term "Representative" shall refer to the administrative agent under the Senior
Credit Agreement.
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"Requisition" shall have the meaning set forth in the participation
agreement.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of Hanover other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Hanover or a Restricted Subsidiary
transfers such property to a Person and Hanover or a Restricted Subsidiary
leases it from such Person.
"Senior Credit Agreement" means, with respect to Hanover and/or HCLP, one or
more debt facilities (including, without limitation, the Amended and Restated
Senior Credit Agreement, dated March 13, 2000, among Hanover, HCLP, The Chase
Manhattan Bank, as administrative agent, and the lenders parties thereto, as
the same may be, and may have been, amended, supplemented or otherwise modified
from time to time) or commercial paper facilities with banks or other
institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time (and whether or not with the original administrative
agent and lenders or another administrative agent or agents or other lenders
and whether provided under the original Senior Credit Agreement or any other
credit or other agreement or indenture).
"Senior Indebtedness" means, whether outstanding on the Issue Date or
thereafter issued, created, Incurred or assumed, the Bank Indebtedness, the
Synthetic Guarantees, Indebtedness relating to Hanover's $192 million aggregate
principal amount 4.75% Convertible Senior Notes due March 15, 2008 and all
other Indebtedness of Hanover, including accrued and unpaid interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to Hanover at the rate specified in the documentation
with respect thereto whether or not a claim for post filing interest is allowed
in such proceeding) and fees and other amounts relating thereto; provided,
however, that Senior Indebtedness will not include:
(1) any Indebtedness in which, in the instrument creating or evidencing
the same or pursuant to which the same is outstanding, it is provided that
the obligations in respect of such Indebtedness are not superior in right
of, or are subordinate to, payment of the notes and the Hanover Guarantee;
(2) any obligation of Hanover to any Subsidiary;
(3) any liability for Federal, state, foreign, local or other taxes owed
or owing by Hanover;
(4) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities);
(5) any Indebtedness, Guarantee or obligation of Hanover that is
expressly subordinate or junior in right of payment to any other
Indebtedness, Guarantee or obligation of Hanover, including, without
limitation, any Senior Subordinated Indebtedness and any Subordinated
Obligations; or
(6) any Capital Stock.
"Senior Subordinated Indebtedness" means the obligations of Hanover under
the Hanover Guarantee and any other Indebtedness of Hanover that specifically
provides that such Indebtedness is to rank equally in right of payment with the
obligations of Hanover under the Hanover Guarantee and is not expressly
subordinated by its terms in right of payment to any Indebtedness or other
obligation of Hanover which is not Senior Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of Hanover within the meaning of Rule 102 under
Regulation S-X promulgated by the SEC.
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"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by Hanover or any Restricted Subsidiary
of Hanover which are reasonably customary in securitization of accounts
receivable transactions.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision, but shall not include any contingent obligations to repay, redeem or
repurchase any such principal prior to the date originally scheduled for the
payment thereof.
"Subordinated Acquisition Note" means the $150.0 million subordinated
promissory note between Hanover and Camco International, Inc., maturing on
December 15, 2005.
"Subordinated Obligation" means any Indebtedness of Hanover (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership,
joint venture, limited liability company or other business entity of which more
than 50% of the total voting power of shares of Capital Stock or other
interests (including partnership and joint venture interests) entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (1) such Person, (2) such Person and one or more
Subsidiaries of such Person or (3) one or more Subsidiaries of such Person.
Unless otherwise specified herein, each reference to a Subsidiary will refer to
a Subsidiary of Hanover, including without limitation, HCLP.
"Subsidiary Guarantor" means each Restricted Subsidiary (other than a
Foreign Subsidiary or a Receivables Entity) that (A) becomes, or upon its
creation or acquisition by Hanover or one or more of its Restricted
Subsidiaries is, a Material Subsidiary and (B) becomes a guarantor under the
Senior Credit Agreement.
"Synthetic Guarantees" means, collectively, (i) the Guarantee, dated as of
October 27, 2000 (as the same may be, and may have been amended, supplemented
or otherwise modified from time to time), among the Lessee, Hanover Equipment
Trust 2000B, Bank Hapoalim B.M. and FBTC Leasing Corp., as investors, the
lenders parties thereto and The Chase Manhattan Bank, as administrative agent;
(ii) the Guarantee, dated as of March 13, 2000 (as the same may be, and may
have been amended, supplemented or otherwise modified from time to time), among
the Lessee, Hanover Equipment Trust 2000A, First Union National Bank and
Scotiabanc Inc., as investors, the lenders parties thereto and The Chase
Manhattan Bank, as administrative agent; and
(iii) the Guarantee, dated as of June 15, 1999 (as the same may be, and may
have been amended, supplemented or otherwise modified from time to time), among
the Lessee, Hanover Equipment Trust 1999A, Societe Generale Financial
Corporation and FBTC Leasing Corp., as investors, the lenders parties thereto
and The Chase Manhattan Bank, as administrative agent.
"Termination Value" means, with respect to all of the Equipment, as of any
determination date, an amount equal to the sum of (i) the aggregate outstanding
principal amount of the notes, accrued and unpaid interest thereon and any
other amounts due under the indenture, plus (ii) the aggregate outstanding
amount of the Certificate Holder Contribution and all unpaid yield thereon plus
(iii) all other amounts due and owing to the equity certificate holder, the
Trustee or the noteholders under any Operative Agreements, including applicable
premiums, if any. Termination Value will only include amounts in excess of the
aggregate outstanding principal amount of the notes and the aggregate
outstanding amount of the Certificate Holder Contribution if such amounts have
not been paid as supplemental rent as required by the Lease (after giving
effect to any concurrent payment of supplemental rent). If it is necessary to
calculate Termination Value for a particular Unit of Equipment, the total
Termination Value will be allocated among the Equipment based upon the relative
cost of each Unit.
"Unit" means each piece of Equipment as specifically scheduled and described
in the Lease.
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"Unrestricted Subsidiary" means:
(1) any Subsidiary of Hanover that at the time of determination shall be
designated an Unrestricted Subsidiary by the Board of Directors of Hanover
in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of Hanover may designate any Subsidiary of Hanover
(including any newly acquired or newly formed Subsidiary or a Person becoming a
Subsidiary through merger or consolidation or Investment therein) to be an
Unrestricted Subsidiary only if:
(1) such Subsidiary or any of its Subsidiaries does not own any Capital
Stock or Indebtedness of or have any Investment in, or own or hold any Lien
on any property of, any other Subsidiary of Hanover which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an
Unrestricted Subsidiary;
(2) all the Indebtedness of such Subsidiary and its Subsidiaries shall,
at the date of designation, and will at all times thereafter, consist of
Non-Recourse Debt;
(3) such designation and the Investment of Hanover in such Subsidiary
complies with "Certain Covenants under the Participation
Agreements--Limitation on Restricted Payments";
(4) such Subsidiary, either alone or in the aggregate with all other
Unrestricted Subsidiaries, does not operate, directly or indirectly, all or
substantially all of the business of Hanover and its Subsidiaries;
(5) such Subsidiary is a Person with respect to which neither Hanover nor
any of its Restricted Subsidiaries has any direct or indirect obligation:
(a) to subscribe for additional Capital Stock of such Person; or
(b) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results;
and
(6) on the date such Subsidiary is designated an Unrestricted Subsidiary,
such Subsidiary is not a party to any agreement, contract, arrangement or
understanding with Hanover or any Restricted Subsidiary with terms
substantially less favorable to Hanover than those that might have been
obtained from Persons who are not Affiliates of Hanover.
Any such designation by the Board of Directors of Hanover shall be evidenced
to the Trustee by filing with the Trustee a resolution of the Board of
Directors of Hanover giving effect to such designation and an Officer's
Certificate certifying that such designation complies with the foregoing
conditions. If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the participation agreement
and any Indebtedness of such Subsidiary shall be deemed to be Incurred as of
such date.
The Board of Directors of Hanover may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided that immediately after giving effect to
such designation, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof and Hanover could incur at
least $1.00 of additional Indebtedness under the first paragraph of "Certain
Covenants under the Participation Agreements--Limitation on Indebtedness" on a
pro forma basis taking into account such designation.
"U.S. Government Obligations" means securities that are (a) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (b) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the Issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act of 1933, as amended), as custodian with respect
to any such U.S. Government Obligations or a specific payment of principal
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or interest on any such U.S. Government Obligations held by such custodian for
the account of the holder of such depository receipt; provided that (except as
required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the U.S. Government Obligations or the
specific payment of principal of or interest on the U.S. Government Obligations
evidenced by such depository receipt.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of Hanover, all of
the Capital Stock of which (other than director's qualifying shares) is owned
by Hanover or another Wholly-Owned Subsidiary.
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SUMMARY OF PRINCIPAL OPERATIVE AGREEMENTS
The following is a summary of certain other principal operative agreements
(together with any ancillary documents, the "Operative Agreements") related to
the financing of the Equipment and should not be considered to be a full
statement of the terms and provisions thereof. Accordingly, the following
summaries are qualified by reference to each agreement and are subject to the
full text of each agreement, a copy of which we have filed as an exhibit to the
registration statement of which this prospectus forms a part.
The Lease
Parties
The Issuer, as Lessor, and HCLP, as Lessee.
Lease Term
The Lease Term commenced on August 31, 2001, and, unless sooner terminated
pursuant to its terms, shall end on the Stated Maturity.
Basic Rent
HCLP will make a payment of Basic Rent to the Issuer each March 1, June 1,
September 1 and December 1, beginning December 1, 2001, in an amount equal to
the interest accrued on the notes that is payable semi-annually and the yield
due on the Certificate Holder Contribution that is payable quarterly.
Supplemental Rent
HCLP will also pay Supplemental Rent in respect of all amounts which HCLP is
obligated to pay, other than Basic Rent, under the Lease and participation
agreement, including, but not limited to, costs, taxes and indemnities.
Equipment Purchases Prior to Stated Maturity
Prior to the Stated Maturity, upon the occurrence of an Optional Redemption
of notes, HCLP shall purchase, and upon the occurrence of a Change of Control
of Hanover or certain Asset Dispositions resulting in Excess Proceeds, HCLP
shall purchase, the Equipment and terminate the Lease with respect to such
purchased Equipment upon payment of an amount equal to the Termination Value
with respect to such Equipment and the related Supplemental Rents. With respect
to the Lease, the purchase by HCLP during the Lease Term of Equipment having an
aggregate Termination Value equal to or greater than 25% of the highest
Termination Value of all Equipment held by the Issuer at any one time during
the period starting on the first anniversary of the commencement of the Lease
and ending 12 months prior to the Stated Maturity shall be deemed an exercise
of the Maturity Date Purchase Option with respect to all the Equipment. See
"--Purchase Option at Maturity."
Purchase upon Optional Redemption of the Notes
The Lease permits HCLP, at its option upon not less than 30 nor more than
60 days' notice to the Issuer, on or after September 1, 2005, to purchase
all the Equipment thereunder or, if no default or event of default under the
Lease has occurred and is continuing, less than all of the Equipment upon
payment of an amount equal to the Termination Value with respect to such
Equipment and the related Supplemental Rent, provided, however, that during
the 12-month period prior to the Stated Maturity of the notes, HCLP can
purchase less than all of the Equipment only if (i) HCLP has exercised its
Maturity Date Purchase Option under the Lease or (ii) such purchase cures a
default or event of default under the Lease. Any applicable premiums with
respect to such purchase shall be payable by HCLP as Supplemental Rent.
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To the extent that Hanover raises Net Cash Proceeds from one or more
Public Equity Offerings, the Lease permits HCLP, at its option upon not less
than 30 nor more than 60 days' notice to the Issuer, prior to September 1,
2004, to purchase one or more Units of Equipment thereunder, if no default
or event of default under the Lease has occurred and is continuing, upon
payment of an amount equal to the Termination Value for such Units and the
related Supplemental Rent; provided, however, the aggregate amount of
Equipment purchased with such Net Cash Proceeds by Hanover with respect to
Lease shall not exceed 35% of the aggregate Termination Value of all the
Equipment thereunder.
Purchase upon Change of Control
In the event the Issuer is required to repurchase notes tendered by the
noteholders pursuant to a Change of Control Offer upon the occurrence of a
Change of Control with respect to Hanover, the Lease requires HCLP, upon not
less than 30 nor more than 60 days' notice to the Issuer, to purchase one or
more Units of the Equipment upon payment of an amount equal to the
Termination Value of such Units; provided that in no event shall HCLP be
permitted to purchase Equipment having an aggregate Termination Value in
excess of the sum of the principal amount of notes tendered by the
noteholders and the equity certificates to be repaid under the Lease. A
premium of 1.0% with respect to such note repurchase shall be payable by
HCLP as Supplemental Rent.
Purchase upon an Asset Disposition
In the event the Issuer is required to repurchase notes tendered by the
noteholders pursuant to an Asset Disposition Offer to the extent Excess
Proceeds are available from Asset Dispositions, the Lease requires HCLP,
upon not less than 30 nor more than 60 days' notice to the Issuer, to
purchase one or more Units of the Equipment upon payment of an amount equal
to the Termination Value of such Units; provided that in no event shall HCLP
be permitted to purchase Equipment having an aggregate Termination Value in
excess of the sum of the principal amount of notes tendered by the
noteholders and the equity certificates to be repaid under the Lease.
Options at Stated Maturity
Twelve months prior to the Stated Maturity of each issuance of notes, HCLP
is required under the Lease either to (i) exercise its Maturity Date Purchase
Option (as defined below) or (ii) exercise its Remarketing Option (as defined
below).
Purchase Option at Maturity
By giving written notice to the Issuer at least 12 months prior to the
Stated Maturity of the notes, HCLP may purchase, or designate another Person
to purchase, on the Stated Maturity of the notes all, but not less than all,
the Equipment then subject to the Lease in an amount equal to the
Termination Value of the Equipment thereunder ("Maturity Date Purchase
Option"). If 12 months prior to the Stated Maturity of the notes, the
aggregate Termination Value of all Equipment then held by the Issuer is less
than 75% of the highest Termination Value of all Equipment held by the
Issuer at any one time during the period starting on the first anniversary
of the Issue Date and ending 12 months prior to the Stated Maturity, then
HCLP will be required to purchase, or cause its designee to purchase, all
remaining Equipment on such Stated Maturity.
Final Rent Payment and Remarketing Option
In the event that HCLP does not exercise its Maturity Date Purchase
Option, then (i) HCLP will be required to pay (in addition to Basic Rent and
as Supplemental Rent) an amount equal to the maximum amount permitted under
SFAS No. 13 which permits HCLP to account for the Lease as an operating
lease (the "Final Rent Payment"), which Final Rent Payment will be used only
to repay a portion of the notes and
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(ii) beginning not later than 12 months prior to the applicable Stated
Maturity, HCLP will be required to use its best efforts to sell (the
"Remarketing Option") the Equipment subject to the Lease on Issuer's behalf
and consummate a sale of all of such Equipment on or prior to the Stated
Maturity. The proceeds from the sale of such Equipment, together with the
Final Rent Payment, will be applied to repay the notes. Any excess proceeds
will be used to repay the unrecovered amount of the equity certificates. Any
remaining proceeds will be returned to HCLP. If the sale proceeds from such
Equipment, together with the Final Rent Payment, are less than the sum of
the amount necessary to pay the notes, then HCLP shall be liable for an
assessment of additional rent with respect to actual excess wear and tear of
such Equipment, as determined by an appraisal procedure; provided, however,
that such assessment shall under no circumstances prevent HCLP from
accounting for such Lease as an operating lease under SFAS No. 13.
If HCLP is unable to sell such Equipment on or prior to the Stated
Maturity, then HCLP shall pay the Final Rent Payment and shall surrender
possession of such Equipment to the Issuer on the Stated Maturity.
So long as HCLP performs its obligations under the Lease by either
exercising the Maturity Date Purchase Option or making the Final Rent
Payment and exercising the Remarketing Option, no Lease Event of Default
will have occurred and the Hanover Guarantee will, by its terms, require no
further payment. If the proceeds from the Remarketing Option are
insufficient to pay the remainder of the notes and the outstanding equity
certificates, the holders of the notes and the equity certificates will
incur a loss and no Hanover Guarantor will be required to compensate for any
such shortfall.
Net Lease
The Lease is a triple net lease and HCLP's obligations to pay all lease
payments are absolute and unconditional.
Event of Loss
An Event of Loss means any of the following events: (i) any damage or taking
of all or any Unit of Equipment as a result of fire, casualty or condemnation
that in the good faith reasonable judgment of HCLP either renders such
Equipment unsuitable for the continued use for its intended purpose immediately
prior to such fire, casualty or condemnation or is such that the restoration of
such Equipment to its condition substantially as it existed immediately prior
to such fire, casualty or condemnation would be impractical or impossible or
(ii) an environmental violation is discovered and HCLP in its good faith
reasonable judgment determines that the cost to remediate will exceed ten
percent of the cost of the Equipment. Upon the occurrence of an Event of Loss,
HCLP shall, unless HCLP exercises its Purchase Option, substitute, replace,
rebuild or restore the affected Equipment with Equipment having a value,
utility and remaining economic life at least equal to that of the Equipment
being replaced, in which case the Lease will continue and the rent payable
under the Lease will not be reduced.
Assignment and Subletting
The Lease permits HCLP to sublease the Equipment but prohibits assignment,
except as permitted by the Operative Agreements. Notwithstanding any sublease,
HCLP remains primarily liable for the performance of all of its obligations
under the Lease.
Quiet Enjoyment
HCLP has the right to peaceably and quietly hold, possess and use the
Equipment during the Lease Term prior to the Stated Maturity so long as no
Event of Default shall have occurred and be continuing under the Lease.
Maintenance
HCLP will cause the Equipment to be kept in good and safe order and
condition, normal wear and tear excepted. The Equipment will be maintained in
all material respects at all times in accordance with applicable law, including
without limitation all environmental laws, and in accordance with all insurance
requirements.
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Insurance
HCLP will keep each Unit of Equipment insured against loss or damage by fire
and other risks on terms and in amounts that are no less favorable than
insurance maintained by owners of similar equipment, that are in accordance
with normal industry practice, are in amounts equal to the greater of (i)
Termination Value and (ii) the actual replacement cost of the Equipment.
Modifications and Substitutions
HCLP has the right to make modifications, alterations or renovations to the
Equipment (the "Modifications") so long as such Modifications do not impair the
value, utility or the useful life of the Equipment.
HCLP has the right to substitute one or more Units of Equipment under the
Lease (i) in the ordinary course of its business, (ii) due to an Event of Loss
and (iii) pursuant to purchases by sublessees of the Equipment in accordance
with the terms of their respective subleases with the Lessee; provided,
however, that, with respect to the Lease, the aggregate fair market value of
all Equipment substitutions shall not exceed 25% of the Termination Value of
all the Equipment thereunder. Any replacement Equipment shall be free and clear
of all Liens (other than Permitted Liens) and have a value, utility and
remaining economic useful life at least equal to the Equipment being replaced
as of the date of the replacement.
On or prior to any date of Equipment replacement permitted under a Lease,
HCLP shall provide, upon the written request of the Trustee or holders of a
majority of aggregate outstanding amount of the related notes, an appraisal
with respect to such replaced Equipment, provided that HCLP shall not be
required to provide more than one appraisal in any 12-month period. If the
aggregate value of such Equipment being replaced from time to time is equal to
or greater than 10% of the aggregate value of the Equipment under the Lease,
then HCLP shall be required to deliver an appraisal of such replaced Equipment
to the Trustee and the equity certificate holder. In the event that the
appraisers determine that replacement Equipment has a lesser value than the
original Equipment, a Lease Event of Default could be declared under the Lease.
Use
HCLP agreed that each item of Equipment will be used in accordance with its
intended purpose and in accordance with its specifications.
Intent
The Issuer and HCLP intend that, (i) for financial accounting purposes with
respect to HCLP, (A) the Lease shall be treated as an "operating lease"
pursuant to Statement of Financial Accounting Standards No. 13, as amended, (B)
the Issuer will be treated as the owner and lessor of the Equipment and (C)
HCLP will be treated as the lessee of the Equipment, but (ii) for federal,
state and local income tax and state law purposes, (A) the Lease will be
treated as a financing arrangement, (B) the noteholders will be treated as
senior lenders making loans to HCLP in an amount equal to the principal amount
of the notes, which notes will be secured by the Equipment, (C) the equity
certificate holder will be treated as a subordinated lender making loans to
HCLP in an aggregate amount equal to the Certificate Holder Contribution, which
loans are secured by the Equipment and (D) HCLP shall be treated as the owner
of the Equipment and will be entitled to all tax benefits ordinarily available
to an owner of property similar to the Equipment for such tax purposes.
Liens
HCLP will keep the Equipment free and clear of all liens except the
following permitted liens and liens caused by the Issuer. Such permitted liens
include, without limitation, (1) the respective rights and interests of the
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parties under the Lease and participation agreement (including any lien created
pursuant to or expressly permitted by the terms of such participation
agreement), (2) liens for taxes that either are not yet due and payable or are
being contested in good faith, (3) any permitted sublease, (4) liens arising by
operation of law, materialmen's, mechanics', workers', repairmen's, employees',
carriers', warehousemen's and other like liens in connection with any
alterations, modifications or replacements to the extent permitted by the Lease
for amounts that are not more than 30 days past due or are being diligently
contested in good faith by appropriate proceedings, so long as such proceedings
satisfy customary conditions for contest proceedings, or that have been bonded,
(5) liens arising out of judgments or awards with respect to which appeals or
other proceedings for review are being prosecuted in good faith and for the
payment of which adequate reserves have been provided as required by GAAP or
other appropriate provisions have been made, and (6) certain other permitted
matters of title and liens resulting from the acts of the Issuer.
Events of Default
The following events (each, a "Lease Event of Default") are events of
default under the Lease:
(a) HCLP shall fail to make payment of (i) any Basic Rent within 30 days
after the same has become due and payable under the Lease or (ii) any Final
Rent Payment, purchase price payable as described under "--The
Lease--Equipment Purchases Prior to Stated Maturity" or Termination Value
after the same has become due and payable under the Lease;
(b) HCLP shall fail to make payment of any Supplemental Rent due and
payable under the Lease to a holder of notes, an equity certificate holder,
the Issuer, the Trustee or the trustee of the Issuer within 30 days after
receipt of notice thereof;
(c) HCLP shall fail to maintain insurance as required by the Lease; or
(d) HCLP or any Hanover Guarantor shall default in the observance or
performance of any term, covenant or condition of HCLP or of such Hanover
Guarantor, respectively, under the Lease, the participation agreement, the
Hanover Guarantee or any other Operative Agreement to which it is a party
(other than those set forth in (a), (b) or (c) above) and such default shall
continue unremedied for a period of 30 days after receipt of notice thereof
or any representation or warranty by HCLP or any Hanover Guarantor,
respectively, set forth in the Lease, the participation agreement, the
Hanover Guarantee or any other Operative Agreement or in any document
entered into in connection therewith or in any documents, certificate or
financial or other statement delivered in connection therewith shall be
false or inaccurate in any material respect; or
(e) an event of default under the indenture that is caused by, or results
from, any action or inaction of HCLP or any other Hanover Guarantors or
relates to HCLP or any other Hanover Guarantor shall have occurred and be
continuing.
If, as of the Stated Maturity, any Lease Event of Default under the Lease
has occurred and is continuing, then HCLP shall be deemed to have exercised the
Maturity Date Purchase Option.
To comply with certain accounting limitations, the amount realizable on
certain nonmonetary, nonperformance events of default may be limited.
Participation Agreement
Parties
HCLP, Hanover and certain of its subsidiaries, the Issuer, the equity
certificate holder, the Trustee, in its individual capacity, as collateral
agent and as Trustee under the indenture, and the trustee of the Issuer, in its
individual capacity.
General
The participation agreement sets forth customary representations, warranties
and covenants of the parties and conditions precedent to the entering into of
the Lease and funding of the notes and the equity certificates. Certain
significant provisions of the participation agreement are summarized below.
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General Indemnity
HCLP will indemnify (the "General Indemnity"), on an after-tax basis, the
Issuer, the trustee of the Issuer, the holder of the equity certificates, the
noteholders and the Trustee and any of such parties' assignees, affiliates and
their officers (the "Indemnified Persons") from and against liabilities, losses
or expenses which may be asserted against any such Person arising out of (i)
the ownership, leasing, maintenance, use or possession of the Equipment; and
(ii) the transactions in connection with the Lease and the notes. The General
Indemnity will exclude claims that (i) are attributable to gross negligence or
willful misconduct of the indemnified party or its affiliates, representatives
or agents, (ii) arise out of events occurring after the discharge of the HCLP's
obligations or (iii) relate to taxes. There will be no structural indemnity
with respect to the tax characterization or accounting treatment of the Lease.
General Tax Indemnity
HCLP will indemnify, on an after-tax basis, the Indemnified Persons against
and will agree to pay any and all taxes payable as a result of ownership,
rental, operation, use, maintenance or sale of the Equipment, including, but
not limited to, rental, withholding, sales, use, gross receipts, personal
equipment, franchise, excise, value added or other taxes, but excluding,
subject to certain exceptions, (i) federal net income taxes and (ii) state and
local net income taxes except taxes imposed by the state where the Equipment is
located (unless such Indemnified Persons were subject to taxes in such
jurisdiction without regard to the transactions contemplated herein).
Security
The provisions of the participation agreement relating to the Collateral
securing the notes are described under "Description of the Notes--Ranking and
Priority."
Hanover Guarantee
The Hanover Guarantee represents both a Guarantee of HCLP's payment
obligations under the Lease and a Guarantee of the Issuer's payment obligations
under the notes. With respect to HCLP's obligations under the Lease, the
Hanover Guarantors guarantee, jointly and severally, fully and unconditionally
and on a senior subordinated basis, all obligations of HCLP under the Lease,
including all rent payments. With respect to the issuer's obligations under the
notes, independent of HCLP's obligations under the Lease, the Hanover
Guarantors guarantee, jointly and severally, unconditionally and on a senior
subordinated basis, the payment when due of all amounts required to be paid by
the Issuer under the notes; provided that such unconditional guarantee is
limited at all times to 77.33% of the aggregate principal balance of notes
outstanding, which is equal to the final rent payment under the Lease. Upon the
occurrence of and during a Lease Event of Default, the Hanover Guarantors
guarantee, jointly and severally, on a senior subordinated basis, the payment
when due of the entire unpaid principal of, and interest on, the notes and all
other payment obligations of the Issuer to the Trustee and the noteholders. The
Hanover Guarantee is in favor of the Trustee for the benefit of the noteholders
and the equity certificate holder. The Hanover Guarantee is subordinated to any
Senior Indebtedness or Guarantor Senior Indebtedness, as applicable, and ranks
equally with any Senior Subordinated Indebtedness and Guarantor Senior
Subordinated Indebtedness, as applicable. The Hanover Guarantee and the 2011
Guarantee rank equally in right of payment to each other.
Assignment of Lease, Rents and Guarantee
The Issuer assigned the Lease and Hanover Guarantee to the Trustee for the
benefit of the noteholders and the equity certificate holder.
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THE EQUIPMENT
The Equipment subject to the Lease is a representative sample of HCLP's
natural gas compression equipment fleet. The Equipment had an appraised value
as of the commencement date of the Lease and an anticipated residual value as
of the Stated Maturity, of no less than $309 million, as determined by American
Appraisal Associates ("AAA"). We selected AAA on the basis of its expertise in
equipment valuations in leasing transactions. AAA is a large independent
valuation firm that has been in business for over 100 years. To our knowledge,
except for appraisal engagements entered into the ordinary course of business
in exchange for customary fees and expenses, there are no material
relationships between AAA, its affiliates and/or unaffiliated representatives
and the registrants or their affiliates. We have paid AAA a fee of $41,000 plus
expenses of $900 for the appraisal of the Equipment. None of the registrants
placed any limitations on the scope of analysis, procedures or methodologies
employed by AAA in the preparation of its appraisal report.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
$350 Million Bank Credit Agreement
We have a bank credit agreement which provides for a revolving credit
facility in an aggregate principal amount of $350 million, including a
commitment to issue letters of credit of up to $75 million by JPMorgan Chase
Bank as agent for several banks and other financial institutions. At December
3, 2001, we had approximately $149 million of outstanding borrowings and $26.5
million of outstanding letters of credit under the bank credit agreement.
Amounts outstanding under our bank credit agreement bear interest at either the
Eurodollar rate plus the spread, the ABR rate plus the spread (each as defined
in the bank credit agreement) or a combination of both. Revolving loans may be
borrowed, repaid and reborrowed from time to time.
Our bank credit agreement also contains various covenants which require,
among other things, that we meet specified quarterly financial ratios,
including cash flow and net worth measurements, and restricts our ability to
incur additional indebtedness.
The revolving loans mature in November 2004. No assurances can be made that
we will be able to refinance the bank credit agreement on commercially
reasonable terms, if at all.
Convertible Senior Notes
In March 2001, Hanover issued $192 million aggregate principal amount of
4.75% Convertible Senior Notes due March 15, 2008. The convertible senior notes
are convertible at the option of the holder into shares of our common stock at
a conversion rate of 22.7596 shares of common stock per $1,000 principal amount
of convertible senior notes. The conversion rate is subject to anti-dilution
adjustment in certain events.
On or after March 15, 2004, we have the right at any time to redeem some or
all of the convertible senior notes. If we experience a specified change in
control, a holder of convertible senior notes may require us to repurchase,
with cash or common stock, some or all of the convertible senior notes at a
price equal to 100% of the principal amount plus accrued and unpaid interest to
the repurchase date.
The convertible senior notes are general unsecured obligations and rank
equally in right of payment with all of our other unsecured senior debt. The
convertible senior notes are effectively subordinated to all existing and
future liabilities of our subsidiaries (including HCLP).
Convertible Preferred Securities
In December 1999, Hanover issued $86,250,000 of unsecured 7 1/4% Mandatorily
Redeemable Convertible Preferred Securities through our subsidiary, Hanover
Compressor Capital Trust, a Delaware business trust and subsidiary of Hanover
(the "Business Trust"). Under a guarantee agreement, we guarantee, on a
subordinated basis, any payments required to be made by the Business Trust to
the extent the Business Trust has funds available to make the payments.
The convertible preferred securities are convertible at the option of the
holder into shares of our common stock and have a liquidation amount of $50 per
security and mature in 30 years, but we may redeem them, in whole or in part,
at any time on or after December 20, 2002. We are required to pay annual cash
distributions at the rate of 7 1/4%, payable quarterly in arrears. However,
such payments may be deferred for up to 20 consecutive quarters subject to
certain restrictions. During any periods in which payments are deferred, in
general, we cannot pay any dividend or distribution on our capital stock or
redeem, purchase, acquire or make any liquidation on any of our capital stock.
With the proceeds from the offering of the convertible preferred securities,
the Business Trust purchased $86,250,000 of our 7 1/4% unsecured subordinated
debentures. When the debentures are repaid in full, either at maturity or
through optional redemption, the proceeds from the repayment will be applied to
redeem, on a pro rata basis, an equivalent liquidation amount of convertible
preferred securities.
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The debentures are subordinated to all of our existing and future senior
debt, and are effectively subordinated to all existing and future liabilities
of our subsidiaries (including HCLP).
Operating Leases
Concurrently with our consummation of the Lease, in August 2001, we entered
into a separate $258 million sale and lease back of certain compression
equipment. This operating lease has a ten-year term and is substantially
similar to the Lease.
In October 2000, we completed a $173 million sale and lease back of certain
compression equipment. In March 2000, we entered into a separate $200 million
sale and lease back of certain compression equipment. Under the March 2000
agreement, we received $100 million in proceeds from the sale of compression
equipment at closing and, in August 2000, we completed the second half of the
equipment lease and received an additional $100 million for the sale of
additional compression equipment. In June 1999, we completed a separate $200
million sale and lease back of certain compression equipment.
The 2000 and 1999 transactions are recorded as a sale and lease back of the
equipment and are recorded as operating leases. Under these lease agreements,
the equipment was sold and leased back by us for a 5 year period and we will
continue to deploy the equipment under our normal operating procedures. At any
time, we have options to repurchase the equipment at fair market value. We have
substantial guarantees under the lease agreements that are due upon termination
of the leases and which may be satisfied by a cash payment or the exercise of
our purchase options. Any gains on the sale of the equipment are deferred until
the end of the respective lease terms. Should we choose not to exercise our
purchase options under the lease agreements, the deferred gains will be
recognized to the extent they exceed any residual value guarantee payments and
any other items required under the lease agreements.
The lease agreements call for variable quarterly rental payments that vary
with the London Interbank Offering Rate. The future minimum lease payments
under the leasing agreements exclusive of any guarantee payments are between
$21 million and $86 million for the years 2001 to 2005.
Subordinated Acquisition Note
In connection with our acquisition of the gas compression business of
Schlumberger, we issued a $150 million subordinated acquisition note to
Schlumberger, which matures December 15, 2005.
Interest on the subordinated acquisition note accrues and is payable-in-kind
at the rate of 8.5% annually for the first six months after issuance and
periodically increases in increments of 1% to 2% per annum to a maximum
interest rate 42 months after issuance of 15.5%. In the event of an event of
default under the subordinated acquisition note, interest will accrue at a rate
of 2% above the applicable rate.
The subordinated acquisition note is subordinated to all of our indebtedness
other than indebtedness to fund future acquisitions. In the event that we
complete an offering of equity securities, we are required to apply the
proceeds of the offering to repay amounts outstanding under the subordinated
acquisition note as long as no default exists or would exist under our other
indebtedness as a result of such payment.
Equity Investment in the Issuer
In connection with the Issuer's acquisition of the Equipment and its
execution of the Operative Agreements, an investor contributed an aggregate
amount of $9.3 million in cash to the Issuer. As described in the "Description
of Notes," such equity certificate holders may receive payments upon certain
repurchases or redemptions of the notes.
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BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the new notes will be issued in fully
registered form without interest coupons. Except as described in
"--Certificated Notes" below, the new notes will be represented by one or more
permanent global certificates in definitive, fully registered form without
interest coupons (the "global notes"). The global notes will be deposited with
the Trustee as custodian for The Depository Trust Company ("DTC") and
registered in the name of a nominee of such depositary.
The Global Notes
The Issuer expects that pursuant to procedures established by DTC (1) upon
the issuance of the global notes, DTC or its custodian will credit, on its
internal system, the principal amount of the individual beneficial interests
represented by such global notes to the respective accounts of persons who have
accounts with such depositary and (2) ownership of beneficial interests in the
global notes will be shown on, and the transfer of such ownership will be
effected only through, records maintained by DTC or its nominee (with respect
to interests of participants) and the records of participants (with respect to
interests of persons other than participants). Ownership of beneficial
interests in the global notes will be limited to persons who have accounts with
DTC ("participants") or persons who hold interests through participants.
So long as DTC, or its nominee, is the registered owner or holder of the new
notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the new notes represented by such global notes for all
purposes under the indenture. No beneficial owner of an interest in the global
notes will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the indenture.
Payments of the principal of, premium, if any, or interest (including
additional interest) on, the global notes will be made to DTC or its nominee,
as the case may be, as the registered owner thereof. None of us, the trustee or
any paying agent will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the global notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interest.
The Issuer expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest (including additional interest) on the
global notes, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the global notes as shown on the records of DTC or its nominee. The Issuer
also expects that payments by participants to owners of beneficial interests in
the global notes held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Those payments will be the responsibility of those participants.
The Issuer expects that transfers between participants in DTC will be
effected in the ordinary way through DTC's same-day funds system in accordance
with DTC rules and will be settled in same-day funds. If a holder requires
physical delivery of a certificated security for any reason, including to sell
new notes to persons in states which require physical delivery of the new
notes, or to pledge such securities, such holder must transfer its interest in
a global note, in accordance with the normal procedures of DTC and with the
procedures set forth in the indenture.
DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of new notes (including the presentation of notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in the global notes are credited and only in
respect of such portion of the aggregate principal amount of new notes as to
which such participant or participants has or have given such direction.
However, if there is an event of default under the indenture, DTC will exchange
the global notes for certificated securities, which it will distribute to its
participants.
DTC has advised us that it is:
. a limited purpose trust company organized under the laws of the State of
New York;
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. a "banking organization" within the meaning of the New York Banking Law;
. a member of the Federal Reserve System;
. a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended; and
. a "clearing agency" registered under Section 17A of the Securities
Exchange Act of 1934.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the global notes among participants of DTC, DTC is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither we nor the trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Notes
Except as described below, owners of beneficial interests in the global
notes will not be permitted to take physical delivery of certificated notes. If:
. DTC notifies the Issuer that it is at any time unwilling or unable to
continue as a depositary or DTC ceases to be registered as a clearing
agency under the Securities Exchange Act of 1934 and a successor
depositary is not appointed within 90 days of such notice or cessation;
. the Issuer, at its option, notifies the trustee in writing that it
elects to cause the issuance of its notes in definitive form under its
indenture; or
. upon the occurrence of some other events as provided in such indenture;
then, upon surrender by DTC of the applicable global notes, certificated notes
will be issued to each person that DTC identifies as the beneficial owner of
the notes represented by the applicable global notes. Upon the issuance of
certificated notes, the trustee is required to register the certificated notes
in the name of that person or persons, or their nominee, and cause the
certificated notes to be delivered thereto.
Neither the Issuer nor the trustee will be liable for any delay by DTC or
any participant or indirect participant in DTC in identifying the beneficial
owners of the related notes and each of those persons may conclusively rely on,
and will be protected in relying on, instructions from DTC for all purposes,
including with respect to the registration and delivery, and the respective
principal amounts, of the respective notes to be issued.
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MATERIAL ERISA CONSIDERATIONS
Certain ERISA Considerations
The following is a summary of certain considerations associated with the
acquisition and holding of the notes by employee benefit plans that are subject
to Title I of the U.S. Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), plans, individual retirement accounts and other arrangements
that are subject to Section 4975 of the Code or provisions under any federal,
state, local, non-U.S. or other laws or regulations that are similar to such
provisions of the Code or ERISA (collectively, "Similar Laws"), and entities
whose underlying assets are considered to include "plan assets" of such plans,
accounts and arrangements (each, a "Plan").
General Fiduciary Matters
ERISA and the Code impose certain duties on persons who are fiduciaries of a
Plan subject to Title I of ERISA or Section 4975 of the Code and prohibit
certain transactions involving the assets of a Plan and its fiduciaries or
other interested parties. Under ERISA and the Code, any person who exercises
any discretionary authority or control over the administration of such a Plan
or the management or disposition of the assets of such a Plan, or who renders
investment advice for a fee or other compensation to such a Plan, is generally
considered to be a fiduciary of the Plan.
In considering an investment in the notes of a portion of the assets of any
Plan, a fiduciary should determine whether the investment is in accordance with
the documents and instruments governing the Plan and the applicable provisions
of ERISA, the Code or any Similar Law relating to a fiduciary's duties to the
Plan including, without limitation, the prudence, diversification, delegation
of control and prohibited transaction provisions of ERISA, the Code and any
other applicable Similar Laws.
Any insurance company proposing to invest assets of its general account in
the notes should consider the extent that such investment would be subject to
the requirements of ERISA in light of the U.S. Supreme Court's decision in John
Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank and under
any subsequent legislation or other guidance that has or may become available
relating to that decision, including the enactment of Section 401(c) of ERISA
by the Small Business Job Protection Act of 1996 and the regulations
promulgated thereunder.
Prohibited Transaction Issues
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, subject to
Title I of ERISA or Section 4975 of the Code from engaging in specified
transactions involving plan assets with persons or entities who are "parties in
interest," within the meaning of ERISA, or "disqualified persons," within the
meaning of Section 4975 of the Code, unless an exemption is available. A party
in interest or disqualified person who engaged in a non-exempt prohibited
transaction may be subject to excise taxes and other penalties and liabilities
under ERISA and the Code. In addition, the fiduciary of the Plan that engaged
in such a non-exempt prohibited transaction may be subject to penalties and
liabilities under ERISA and the Code. The acquisition and/or holding of notes
by a Plan with respect to which the Issuer is considered a party in interest or
a disqualified person may constitute or result in a direct or indirect
prohibited transaction under Section 406 of ERISA and/or Section 4975 of the
Code, unless the investment is acquired and is held in accordance with an
applicable statutory, class or individual prohibited transaction exemption. In
this regard, the U.S. Department of Labor (the "DOL") has issued prohibited
transaction class exemptions, or "PTCEs," that may apply to the acquisition and
holding of the notes. These class exemptions include, without limitation, PTCE
84-14 respecting transactions determined by independent qualified professional
asset managers, PTCE 90-1 respecting insurance company pooled separate
accounts, PTCE 91-38 respecting bank collective investment trust Partnerships,
PTCE 95-60 respecting life insurance company general accounts and PTCE 96-23
respecting transactions determined by in-house asset managers, although there
can be no assurance that all of the conditions of any such exemptions will be
satisfied.
137
Because of the foregoing, the notes should not be purchased or held by any
person investing "plan assets" of any Plan, unless such purchase and holding
will not constitute a non-exempt prohibited transaction under ERISA and the
Code or similar violation of any applicable Similar Laws.
Representations
Accordingly, by acceptance of an old note and exchange of such old note for
a new note, you and your successors and assigns will be deemed to have
represented and warranted that either (i) no portion of the assets used by you
to acquire the notes constitutes assets of any Plan or (ii) the purchase and
holding of the notes by you will not constitute a non-exempt prohibited
transaction under Section 406 of ERISA or Section 4975 of the Code or similar
violation under any applicable Similar Laws.
The foregoing discussion is general in nature and is not intended to be
all-inclusive. Due to the complexity of these rules and the penalties that may
be imposed upon persons involved in non-exempt prohibited transactions, it is
particularly important that fiduciaries, or other persons considering
purchasing the notes on behalf of, or with the assets of, any Plan, consult
with their counsel regarding the potential applicability of ERISA, Section 4975
of the Code and any Similar Laws to such investment and whether an exemption
would be applicable to the purchase and holding of the notes.
138
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
This section discusses the material U.S. federal income tax considerations
relating to the exchange of old notes for new notes and the purchase, ownership
and disposition of the new notes. This summary is based on the following
materials, all as of the date of this prospectus:
. the Internal Revenue Code of 1986, as amended (the "Code"),
. current, temporary and proposed Treasury Regulations promulgated under
the Code,
. current administrative interpretations of the Internal Revenue Service
(the "IRS"), and
. court decisions.
Legislation, judicial decisions or administrative changes may be forthcoming
that could affect the accuracy of the statements included in this summary,
possibly on a retroactive basis. There can be no assurance that the IRS will
not challenge one or more of the tax results described herein, and we have not
obtained, nor do we intend to obtain, a ruling from the IRS with respect to the
U.S. federal tax consequences described below.
This discussion assumes the new notes and the old notes are held as "capital
assets" within the meaning of Section 1221 of the Code (generally, property
held for investment). For purposes of this discussion, "U.S. Holders" are
beneficial owners of the notes that include the following:
. citizens or residents of the United States,
. corporations organized under the laws of the United States or any state,
. estates the income of which is subject to U.S. federal income taxation
regardless of its source, and
. trusts if the administration of the trust is subject to the primary
supervision of a U.S. court and one or more U.S. persons have the
authority to control all substantial decisions of the trust.
A "Non-U.S. Holder" is a beneficial owner of the notes other than a "U.S.
Holder."
If a partnership holds the notes, the tax treatment of a partner will
generally depend upon the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding the notes, you
should consult your own tax advisors as to the tax consequences of the
partnership's purchase, ownership or disposition of the notes.
This discussion does not purport to address all tax considerations that may
be important to a particular holder in light of the holder's circumstances. For
example, special rules not discussed here may apply to a holder who is:
. a broker-dealer, a dealer in securities or a financial institution;
. an insurance company;
. a tax-exempt organization;
. subject to the alternative minimum tax provisions of the Code;
. holding the notes as part of a hedge, conversion or constructive sale
transaction, straddle or other risk reduction transaction;
. a person with a "functional currency" other than the U.S. dollar; or
. a person who has ceased to be a U.S. citizen or ceased to be taxed as a
resident alien.
139
Finally, this discussion does not describe any tax considerations arising under
the laws of any applicable foreign, state, or local jurisdiction.
Investors should consult their own tax advisors regarding the application of
the U.S. federal income tax laws to their particular situations and the
consequences of U.S. federal estate or gift tax laws, foreign, state or local
laws, and tax treaties.
Obligor on the Notes
We intend to treat the notes as obligations of HCLP for federal income tax
purposes, and the following discussion assumes that the notes will be so
treated. If the IRS were to contend successfully that the notes are not
obligations of HCLP, it could contend that the notes are obligations of the
Issuer. Such alternative characterization should not have any material adverse
federal income tax consequences to holders of the notes. Holders of the notes
should consult their own tax advisors as to the tax consequences to them of
such alternative characterization.
Tax Consequences of Exchange of Old Notes for New Notes
The exchange of old notes for new notes pursuant to the exchange offer will
not be treated as a taxable exchange because the new notes do not differ
materially in kind or extent from the old notes. Accordingly:
(1) holders will not recognize taxable gain or loss as a result of
exchanging such holder's old notes for new notes,
(2) the holding period for a new note received will include the holding
period of the old note exchanged therefor, and
(3) the adjusted tax basis of a new note received will be the same as the
adjusted tax basis of the old note exchanged therefor immediately before
such exchange.
U.S. Holders
Interest on Notes
U.S. Holders will be required to recognize as ordinary income any interest
paid or accrued on the notes, in accordance with their regular method of
accounting for federal income tax purposes.
Market Discount
The market discount rules discussed below apply to any note purchased after
original issue at a price less than its stated redemption price at maturity.
If a U.S. Holder purchases a note at a market discount, such holder
generally will be required to treat any principal payments on, or any gain on
the disposition of, such note as ordinary income to the extent of the accrued
market discount (not previously included in income) at the time of such payment
or disposition. In general, subject to a de minimis exception, market discount
is the amount by which the note's stated redemption price at maturity exceeds
the holder's basis in the note immediately after the note is acquired. A note
is not treated as purchased at a market discount, however, if the market
discount is less than 0.25 percent of the stated redemption price at maturity
of the note multiplied by the number of complete years to maturity from the
date when a holder acquired the note. Market discount on a note will accrue on
a straight-line basis, unless a holder elects to accrue such discount on a
constant yield to maturity basis. This election is irrevocable. A U.S. Holder
may also elect to include market discount in income currently as it accrues.
This election, once made, applies to all market discount obligations acquired
on or after the first day of the first taxable year to which the election
applies and may not be revoked without the consent of the IRS. If a U.S. Holder
acquires a note at a market discount and disposes of such note in any
non-taxable transaction (other than a nonrecognition transaction
140
defined in section 1276(c) of the Code), accrued market discount will be
includable as ordinary income to such holder as if such holder had sold the
note at its fair market value. A U.S. Holder may be required to defer until the
maturity of the note or, in certain circumstances, its earlier disposition, the
deduction of all or a portion of the interest expense attributable to debt
incurred or continued to purchase or carry a note with market discount, unless
an election is made to include the market discount in income on a current basis.
Amortizable Bond Premium
If a U.S. Holder purchases a note for an amount in excess of its stated
redemption price at maturity, such holder will generally be considered to have
purchased the note with "amortizable bond premium." The amount of amortizable
bond premium is computed based on the redemption price on an earlier call date
if such computation results in a smaller amortizable bond premium attributable
to the period of such earlier call date. A U.S. Holder generally may elect to
amortize such premium using the constant yield to maturity method. The amount
amortized in any year will generally be treated as a reduction of a holder's
interest income on the note. If the amortizable bond premium allocable to a
year exceeds the amount of interest allocable to that year, the excess would be
allowed as a deduction for that year but only to the extent that a holder's
prior interest inclusions exceed bond premium deductions on the note. The
election to amortize the premium on a constant yield to maturity method, once
made, generally applies to all bonds held or subsequently acquired by a U.S.
Holder on or after the first day of the first taxable year to which the
election applies. A U.S. Holder may not revoke this election without the
consent of the IRS.
Sale or Other Taxable Disposition of Notes
A U.S. Holder will generally recognize capital gain or loss on the sale,
redemption, exchange, retirement or other taxable disposition of a note. The
holder's gain or loss will equal the difference between the holder's adjusted
tax basis in the note and the proceeds received by the holder, excluding any
proceeds attributable to accrued interest which will be recognized as ordinary
interest income to the extent that the holder has not previously included the
accrued interest in income. The proceeds received by the holder will include
the amount of any cash and the fair market value of any other property received
for the note. The holder's tax basis in the note will generally equal the
amount the holder paid for the note, plus any market discount previously
included in income, less any previous deductions of bond premium. The gain or
loss will be long-term capital gain or loss if the holder held the note for
more than one year. The deductibility of capital losses may be subject to
limitation.
Information Reporting and Backup Withholding
Information reporting and backup withholding may apply to payments of
principal and interest on a note or the proceeds from the sale or other
disposition of a note with respect to certain noncorporate U.S. Holders. Such
U.S. Holders generally will be subject to backup withholding unless the U.S.
Holder provides to the payor a correct taxpayer identification number and
certain other information, certified under penalties of perjury, or otherwise
establishes an exemption. Any amount withheld under the backup withholding
rules may be credited against the U.S. Holder's federal income tax liability
and any excess may be refundable if the proper information is provided to the
IRS.
Non-U.S. Holders
Interest on Notes
Payments of interest on the notes to Non-U.S. Holders will generally qualify
as "portfolio interest" and thus will be exempt from the withholding of U.S.
federal income tax if the Non-U.S. Holder properly certifies as to its foreign
status as described below. The portfolio interest exception will not apply to
payments of interest to a Non-U.S. Holder that:
. owns, directly or indirectly, at least 10% of our voting stock (or the
equity of the Issuer or its owners, in the event that the notes are
characterized as obligations of the Issuer), or
. is a "controlled foreign corporation" that is related to us (or to the
Issuer or its owners, in the event that the notes are characterized as
obligations of the Issuer).
141
If the portfolio interest exception does not apply, then payments of interest
to a Non-U.S. Holder will generally be subject to U.S. federal income tax
withholding at a rate of 30%, unless reduced by an applicable tax treaty.
The portfolio interest exception and several of the special rules for
Non-U.S. Holders described below generally apply only if the Non-U.S. Holder
appropriately certifies as to its foreign status. A Non-U.S. Holder can
generally meet this certification requirement by providing a properly executed
Form W-8BEN or appropriate substitute form to us or our paying agent. If the
holder holds the note through a financial institution or other agent acting on
the holder's behalf, the holder may be required to provide appropriate
certifications to the agent. The holder's agent will then generally be required
to provide appropriate certifications to us or our paying agent, either
directly or through other intermediaries. Special rules apply to foreign
partnerships, estates and trusts, and in certain circumstances certifications
as to foreign status of partners, trust owners or beneficiaries may have to be
provided to us or our paying agent. In addition, special rules apply to
qualified intermediaries that enter into withholding agreements with the IRS,
and such intermediaries generally are not required to forward any certification
forms received from Non-U.S. Holders.
Sale or Other Taxable Disposition of Notes
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
on any gain realized on the sale, redemption, exchange, retirement or other
taxable disposition of a note. This general rule, however, is subject to
several exceptions. For example, the gain will be subject to U.S. federal
income tax if
. the gain is effectively connected with the conduct by the Non-U.S.
Holder of a U.S. trade or business,
. the Non-U.S. Holder is an individual that has been present in the United
States for 183 days or more in the taxable year of disposition and
certain other requirements are met, or
. the Non-U.S. Holder was a citizen or resident of the United States and
is subject to special rules that apply to certain expatriates.
Income or Gain Effectively Connected With a U.S. Trade or Business
The preceding discussion of the tax consequences of the purchase, ownership
and disposition of notes by a Non-U.S. Holder generally assumes that the holder
is not engaged in a U.S. trade or business. If any interest on the notes or
gain from the sale, exchange or other taxable disposition of the notes is
effectively connected with a U.S. trade or business conducted by the Non-U.S.
Holder, then the income or gain will be subject to U.S. federal income tax at
regular graduated income tax rates, but will not be subject to withholding tax
if certain certification requirements are satisfied. If the Non-U.S. Holder is
eligible for the benefits of a tax treaty between the United States and the
holder's country of residence, any "effectively connected" income or gain will
generally be subject to U.S. federal income tax only if it is also attributable
to a permanent establishment maintained by the holder in the United States. If
the Non-U.S. Holder is a corporation, that portion of its earnings and profits
that is effectively connected with its U.S. trade or business will generally be
subject to a "branch profits tax" at a 30% rate, although an applicable tax
treaty may provide for a lower rate.
U.S. Federal Estate Tax
If a Non-U.S. Holder qualifies for the portfolio interest exemption under
the rules described above when he or she dies, the notes will not be included
in his or her estate for U.S. federal estate tax purposes, unless the income on
the notes is effectively connected with his or her conduct of a trade or
business in the United States.
142
Information Reporting and Backup Withholding
In general, backup withholding will apply with respect to payments on the
notes made by us or our paying agent unless the Non-U.S. Holder appropriately
certifies as to its foreign status or otherwise establishes an exemption.
Information reporting on IRS Form 1042-S may apply to payments even if the
certification is provided.
Information reporting requirements and backup withholding tax generally will
not apply to any payment of the proceeds of the sale of a note effected outside
the United States by a foreign office of a foreign "broker" (as defined in
applicable Treasury regulations). However, unless the foreign office of a
broker has documentary evidence in its records that the beneficial owner is a
Non-U.S. Holder and certain other conditions are met, or the beneficial owner
otherwise establishes an exemption, information reporting (but not backup
withholding) will apply to any payment of the proceeds of the sale of a note
effected outside the United States by such a broker if it
. is a U.S. person
. is a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United
States,
. is a controlled foreign corporation for U.S. federal income tax
purposes, or
. is a foreign partnership that, at any time during its taxable year, has
50% or more of its income or capital interests owned by U.S. persons or
is engaged in the conduct of a U.S. trade or business.
Payment of the proceeds of a sale of a note effected by the U.S. office of a
broker will be subject to information reporting requirements and backup
withholding tax unless the Non-U.S. Holder properly certifies under penalties
of perjury as to its foreign status and certain other conditions are met or it
otherwise establishes an exemption. The Treasury regulations governing
withholding and backup withholding provide certain rules on the reliance
standard, under which a certification may not be relied upon if the person
relying on such certification has actual knowledge (or reason to know) that the
certification is false.
Any amount withheld under the backup withholding rules may be credited
against the Non-U.S. Holder's U.S. federal income tax liability and any excess
may be refundable if the proper information is provided to the IRS.
The preceding discussion of certain U.S. federal income tax considerations
is for general information only and is not tax advice. Each prospective
investor should consult its own tax advisor regarding the particular U.S.
federal, state, local, and foreign tax consequences of purchasing, holding, and
disposing of the notes, including the consequences of any proposed change in
applicable laws.
143
PLAN OF DISTRIBUTION
We are not using any underwriters for this exchange offer. We are bearing
all expenses of this exchange offer.
Each broker-dealer that receives new notes for its own account pursuant to
this exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
Expiration Date, we will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 2002, all dealers effecting transactions in the new notes
may be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to this exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the new notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer or the purchasers of any such new notes. Any broker-dealer
that resells new notes that were received by it for its own account pursuant to
this exchange offer and any broker or dealer that participates in a
distribution of such new notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit on any such resale of new notes
and any commission or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the letter of
transmittal. We have agreed to pay all expenses incident to this exchange offer
(including the expenses of one counsel for the holders of the old notes) other
than commissions or concessions of any broker-dealers and will indemnify the
holders of the old notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
144
VALIDITY OF THE SECURITIES
The validity of the new notes, the lease obligations and the guarantee
obligations will be passed upon by Latham & Watkins, Chicago, Illinois. Richard
S. Meller, a partner at Latham & Watkins, is Secretary of Hanover Compressor
Company and Hanover Compression Limited Partnership and owns 30,304 shares of
Hanover Compressor Company's common stock. In addition, other partners of
Latham & Watkins own or have an interest in additional shares of Hanover
Compressor Company's common stock.
EXPERTS
The audited financial statements of Hanover Equipment Trust 2001A as of
September 30, 2001 and for the period from August 2, 2001 (inception) to
September 30, 2001, included in this prospectus, have been so included in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The audited consolidated financial statements of Hanover Compressor Company
as of December 31, 2000 and 1999 and for each of the three years in the period
ended December 31, 2000, incorporated in this prospectus by reference to
Hanover Compressor Company's Annual Report on Form 10-K, for the year ended
December 31, 2000, and of the Gas Compression Business of Schlumberger as of
December 31, 2000 and 1999 and for each of the three years in the period ended
December 31, 2000, incorporated in this prospectus by reference to Item 7(a) of
Hanover Compressor Company's Current Report on Form 8-K/A filed on November 9,
2001, have been so incorporated in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The audited consolidated financial statements of Hanover Compression Limited
Partnership as of December 31, 2000 and 1999 and for each of the three years
in the period ended December 31, 2000 included in this prospectus, have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
145
INDEX TO FINANCIAL STATEMENTS
Pages
-----
I. Hanover Equipment Trust 2001A
Report of Independent Accountants........................................................ F-2
Balance Sheet as of September 30, 2001................................................... F-3
Statement of Operations.................................................................. F-4
Statement of Cash Flows.................................................................. F-5
Statement of Certificate Holder's Equity................................................. F-6
Notes to Financial Statements............................................................ F-7
II. Hanover Compressor Company
(incorporated by reference)
III. Pro Forma Combined Condensed Statements of Operations of Hanover Compressor
Company and Hanover Compression Limited Partnership (unaudited)............................. F-12
Pro Forma Combined Condensed Statement of Operations for the Nine Months Ended
September 30, 2001..................................................................... F-13
Pro Forma Combined Condensed Statement of Operations for the Year Ended December 31,
2000................................................................................... F-14
Notes to Pro Forma Combined Condensed Statements of Operations........................... F-15
IV. Hanover Compression Limited Partnership
December 31, 2000, 1999 and 1998
Report of Independent Accountants..................................................... F-18
Consolidated Balance Sheet............................................................ F-19
Consolidated Statement of Income and Comprehensive Income............................. F-20
Consolidated Statement of Cash Flows.................................................. F-21
Consolidated Statement of Partners' Equity............................................ F-23
Notes to Consolidated Financial Statements............................................ F-24
Nine months ended September 30, 2001 and 2000
Condensed Consolidated Balance Sheet.................................................. F-42
Condensed Consolidated Statement of Income and Comprehensive Income................... F-43
Condensed Consolidated Statement of Cash Flows........................................ F-44
Notes to Condensed Consolidated Financial Statements.................................. F-45
Selected quarterly unaudited financial data.............................................. F-53
F-1
Report of Independent Accountants
To Management and the Equity Certificate Holder of
Hanover Equipment Trust 2001A:
In our opinion, the accompanying balance sheet and the related statements of
operations, of certificate holder's equity and of cash flows present fairly, in
all material respects, the financial position of Hanover Equipment Trust 2001A
at September 30, 2001 and the results of its operations and its cash flows for
the period from August 2, 2001 (inception) to September 30, 2001 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Trust's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit 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 audit provides a
reasonable basis for our opinion.
/S/PRICEWATERHOUSECOOPERS LLP
Houston, Texas
December 20, 2001
F-2
HANOVER EQUIPMENT TRUST 2001A
BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(in thousands of dollars)
ASSETS
Current assets:
Cash and cash equivalents............................................... $
Accounts receivable -- rentals.......................................... 2,368
--------
Total current assets......................................... 2,368
Rental equipment........................................................ 309,300
Less accumulated depreciation........................................... (919)
--------
Rental equipment, net................................................... 308,381
--------
Total assets................................................. $310,749
========
LIABILITIES AND CERTIFICATE HOLDER'S EQUITY
Current liabilities:
Accrued liabilities..................................................... $ 6
Interest payable........................................................ 2,267
Equity certificate yield payable........................................ 95
--------
Total current liabilities.................................... 2,368
Notes payable.............................................................. 300,000
--------
Total liabilities............................................ 302,368
Commitments and contingencies (Note 5)
Certificate holder's equity:
Equity certificates..................................................... 9,300
Trust deficit........................................................... (919)
--------
Certificate holder's equity........................................... 8,381
--------
Total liabilities and certificate holder's equity............ $310,749
========
The accompanying notes are an integral part of these financial statements.
F-3
HANOVER EQUIPMENT TRUST 2001A
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM AUGUST 2, 2001 (INCEPTION) TO SEPTEMBER 30, 2001
(in thousands of dollars)
Rental revenue..................................................... $2,368
Interest expense on rental equipment............................... 2,267
------
Excess rental revenue over interest expense on rental equipment. 101
Operating expense.................................................. 6
------
Income before depreciation......................................... 95
Depreciation expense............................................... 919
------
Net loss........................................................... $ (824)
======
The accompanying notes are an integral part of these financial statements.
F-4
HANOVER EQUIPMENT TRUST 2001A
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 2, 2001 (INCEPTION) TO SEPTEMBER 30, 2001
(in thousands of dollars)
Cash flows from operating activities:
Net loss.................................................................. $ (824)
Adjustments:
Depreciation....................................................... 919
Changes in assets and liabilities:
Accounts receivable -- rents....................................... (2,368)
Interest payable................................................... 2,267
Accrued liabilities................................................ 6
---------
Net cash provided by (used in) operating activities............
---------
Cash flows from investing activities:
Purchase of rental equipment.............................................. (309,300)
---------
Net cash used in investing activities.......................... (309,300)
---------
Cash flows from financing activities:
Issuance of senior secured notes.......................................... 300,000
Issuance of equity certificates........................................... 9,300
---------
Net cash provided by financing activities...................... 309,300
---------
Net increase (decrease) in cash and cash equivalents.........................
Cash and cash equivalents at inception.......................................
---------
Cash and cash equivalents at end of period................................... $
=========
Supplemental disclosure of cash flow information:
Interest paid......................................................... $
Income taxes paid.....................................................
The accompanying notes are an integral part of these financial statements.
F-5
HANOVER EQUIPMENT TRUST 2001A
STATEMENT OF CERTIFICATE HOLDER'S EQUITY
FOR THE PERIOD FROM AUGUST 2, 2001 (INCEPTION) TO SEPTEMBER 30, 2001
(in thousands of dollars)
Equity Certificates
Issuance of equity certificates $9,300
------
Balance at September 30, 2001.. $9,300
======
Trust Deficit
Balance at inception........... $
Net loss....................... (824)
Equity yield payable........... (95)
------
Balance at September 30, 2001.. $ (919)
======
The accompanying notes are an integral part of these financial statements.
F-6
HANOVER EQUIPMENT TRUST 2001A
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
1. The Trust, Business and Significant Accounting Policies
Hanover Equipment Trust 2001A (the "Trust") is a Delaware special purpose
business trust which was formed in August 2001. The Trust was formed solely to:
1) issue the 2008 senior secured notes (the "Notes") (see Note 2), 2) execute,
deliver and perform the operating agreements to which it is a party, and 3) use
the proceeds of the Notes and the related equity certificates to purchase
approximately $309 million of gas compression equipment from Hanover
Compression Limited Partnership ("HCLP") and certain of its subsidiaries. The
equity funding, Notes issuance and equipment purchase occurred on August 30,
2001. The Trust leased its gas compression equipment back to HCLP under a
seven-year operating lease (see Note 4). In addition to rental payments, HCLP
is obligated to pay supplemental rent, costs, taxes, indemnities, and other
amounts owing under the operating lease. In addition, HCLP paid the
underwriting, legal, accounting and other costs of the transactions for the
Trust.
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 Trust considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Revenue Recognition
Revenue from compression equipment rentals is recorded when earned over the
period of the seven-year operating lease which began on August 30, 2001. Rental
revenues are based on the current rental rates and estimated supplemental rent
payable by HCLP under the operating lease (see Note 4).
Concentrations of Credit Risk
Financial instruments that potentially subject the Trust to concentrations
of credit risk consist of cash, cash equivalents and accounts receivable. The
Trust's management believes that the credit risk in temporary cash investments
that it has with financial institutions is minimal. Trade accounts receivable
are due from HCLP and are due on a short-term basis. The Trust does not obtain
collateral for receivables. The recorded assets, obligations and operations of
the Trust could be adversely affected if the Trust's relationship with and/or
the financial position of HCLP is adversely affected.
Rental Equipment
Rental equipment consists of domestic gas compression equipment and is
recorded at cost. The equipment is being depreciated by the Trust over the term
of the lease using the straight-line method and assuming a salvage value equal
to the final rent payment required under the lease (see Note 4).
F-7
HANOVER EQUIPMENT TRUST 2001A
NOTES TO FINANCIAL STATEMENTS--(Continued)
Long-Lived Assets
The Trust reviews for the impairment of long-lived assets, including rental
equipment, 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 asset's carrying value
as compared to its estimated fair market value.
Income Taxes
No provision has been made for federal or state income taxes because the
parties will treat the Trust as a financing vehicle for income tax purposes.
The Trust is not a business trust for tax purposes. To the extent the Trust is
not considered a mere financing vehicle, then solely for income and franchise
tax purposes, the Trust would be treated as a grantor trust. Each certificate
holder will include in its gross income such certificate holder's share of the
Trust's net income.
2. Notes Payable
Notes payable at September 30, 2001 consisted of the following (in
thousands):
Senior Secured Notes--fixed rate of 8.5% due September 1, 2008, interest payable semi-
annually on March 1 and September 1................................................. $300,000
The Notes are obligations of the Trust and are collateralized by all of the
equipment, rents and supplemental rents covered by the operating lease
agreement (see Note 4). In addition, the Trust's obligations under the Notes
are jointly and severally guaranteed, unconditionally and on a senior
subordinated basis, by Hanover Compressor Company ("Hanover"), the ultimate
parent company of HCLP, HCLP and certain domestic subsidiaries of HCLP for an
amount up to 77.33% of the aggregate principal balance of Notes outstanding,
which is equal to the final rent payment under the Lease. If there is an event
of default under the operating lease, Hanover, HCLP and certain domestic
subsidiaries of HCLP guarantee, jointly and severally, on a senior subordinated
basis, all of the Trust's obligations under the Notes. All of HCLP's
obligations under the operating lease are unconditionally guaranteed, on a
senior subordinated basis, by Hanover and certain domestic subsidiaries of
HCLP. The obligations of HCLP under the lease are subordinated in right of
payment to all existing and future senior indebtedness of HCLP. The obligations
of Hanover, HCLP and certain domestic subsidiaries of HCLP under the guarantee
are subordinated in right of payment to all existing and future senior
indebtedness of such guarantor. The guarantee ranks equally in right of payment
with all senior subordinated debt and senior to all subordinated debt of such
guarantor.
All payments that are received by the Trust under the operating lease or
guarantee will be applied first to the Notes. The payment of principal, premium
(if any) and interest on the Notes will be senior in right of payment to the
payment in full of the equity certificates.
Prior to September 1, 2004, if Hanover raises proceeds from one or more bona
fide underwritten sales to the public of Hanover's common stock and Hanover
causes HCLP to repurchase equipment from the Trust, the Trust is required to
apply the proceeds it receives to redeem up to 35% of the Notes at a redemption
price of 108.50% of the principal amount thereof. Otherwise, the Trust does not
have the right to redeem the Notes until
F-8
HANOVER EQUIPMENT TRUST 2001A
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 1, 2005. After September 1, 2005, the Trust may redeem the notes, in
whole or in part, if the Trust pays the redemption prices indicated below:
Percentage
----------
After Sept 1, 2005 104.250%
After Sept 1, 2006 102.125%
After Sept 1, 2007 100.000%
The Trust is not affiliated with Hanover or HCLP. The indenture and
participation agreement governing the Notes contains covenants that restrict
the Trust's ability to, among other things: incur liens, incur additional
indebtedness, enter any other transactions, make investments, liquidate, and
engage in non-related lines of business. In addition, the indenture and
participation agreement governing the Notes contains covenants that limit
Hanover, HCLP and certain subsidiaries to engage in certain activities and
transactions.
The Notes have not been registered under the Securities Act of 1933 or any
state securities laws. The Notes are subject to restrictions on transferability
and resale. However, the Trust has agreed to use its reasonable best efforts to
register notes with the Securities and Exchange Commission that have
substantially identical terms as the Notes issued by the Trust in August 2001
and to offer to exchange the registered freely exchangeable notes for the Notes
(see Note 7).
3. Equity Certificates
The Trust raised approximately $9.3 million from equity certificates issued
during the period from August 2, 2001 (inception) through September 30, 2001.
The Trust's equity certificates were issued to General Electric Capital
Corporation ("GE"). The original certificate holder assigned its interest to GE
and was repaid its capital contribution of $1 in August 2001. Equity
certificate holders may receive return of capital payments for their equity
investment in the Trust, after full payment of the Notes. The Trust will make a
quarterly payment (on the first day of March, June, September, and December) to
equity certificate holders equal to the certificate holder yield rate (10.98%
as of September 30, 2001) multiplied by the aggregate outstanding certificate
holder contributions. As of September 30, 2001, approximately $95,000 was
payable to the certificate holder. Equity certificate capital repayment may be
made from the proceeds from sale of equipment to HCLP or, on the expiration
date or earlier termination of the lease, from the proceeds from the final rent
payment and the sale of equipment (see Note 4).
4. Lease Transaction
The Trust's equipment is rented to HCLP under a seven-year operating lease
(the "Lease"). The basic rent payments equal the interest payable on the Notes
and the yield payable to the equity certificate holder. In addition, HCLP will
also pay supplemental rent in respect of all amounts which HCLP is obligated to
pay, other than basic rent, under the Lease and participation agreement,
including, but not limited to, operating costs of the trust such as audit fees,
legal fees, general administrative fees, certain taxes and indemnities.
F-9
HANOVER EQUIPMENT TRUST 2001A
NOTES TO FINANCIAL STATEMENTS--(Continued)
The future minimum rental payments to be received by the Trust under the
Lease are estimated using interest rates and rental equipment balances
applicable as of September 30, 2001, as follows (in thousands):
Period ending December 31:
2001 (3 months)........... $ 6,630
2002...................... 26,521
2003...................... 26,521
2004...................... 26,521
2005...................... 26,521
2006...................... 26,521
Thereafter................ 44,203
--------
$183,438
========
Prior to the stated maturity, HCLP may be required to purchase or shall have
the option to purchase the equipment and terminate the Lease under certain
conditions and after making the required payments as detailed in the Lease.
Twelve months prior to the end of the lease term, HCLP may (a) elect to
purchase all of the equipment on the maturity date of the Notes, for an amount
sufficient to repay the Notes, equity certificates and any other amounts owed
under the Lease in full or (b) begin selling the equipment on behalf of the
Trust. Upon the expiration of the lease term, if HCLP has elected to sell the
equipment on behalf of the Trust, HCLP is required to pay the Trust a final
rent payment (the "Final Rent Payment") of approximately $232 million as
determined by and subject to limitations and adjustments as detailed in the
Lease. The proceeds from the sale of equipment together with the Final Rent
Payment will be applied to repay all amounts payable under the Notes. Any
remaining proceeds will first be used to repay the unrecovered amount of the
equity certificates and any excess will then be returned to HCLP. If the sale
proceeds from the equipment together with the Final Rent Payment are less than
the amount necessary to repay the Notes, HCLP will be liable for an assessment
of additional rent with respect to excess wear and tear of such equipment as
determined by an independent appraisal process and subject to limitations
detailed in the Lease. The future minimum rental schedule above includes the
future amounts HCLP is required to pay under the Lease exclusive of any Final
Rent Payment or purchase option payment.
5. Commitments and Contingencies
In the ordinary course of business the Trust may be involved in various
pending or threatened legal actions. The Trust has no commitments or contingent
liabilities which, in the judgment of the trustee of the Trust, would result in
losses that would materially affect the Trust's financial position, operating
results or cash flows.
6. New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
143, Accounting for Obligations Associated with the Retirement of Long-Lived
Assets. SFAS 143 establishes the accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. This statement is effective for the Trust beginning January 1,
2003. The Trust does not believe the adoption of SFAS 143 will have a material
effect on its financial statements.
In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 addresses significant issues relating
to the implementation of SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and to develop a single
accounting model, based on the framework established in SFAS 121, for
long-lived assets to be disposed of by
F-10
HANOVER EQUIPMENT TRUST 2001A
NOTES TO FINANCIAL STATEMENTS--(Continued)
sale, whether previously held and used or newly acquired. This statement is
effective for the Trust beginning January 1, 2002. The Trust does not believe
that the adoption of SFAS 144 will have a material effect on its financial
statements.
7. Subsequent Event
In December 2001, HCLP and its subsidiaries completed various internal
restructuring transactions pursuant to which all of the domestic subsidiaries
of HCLP that were guarantors of the Notes have been merged, directly or
indirectly, with and into HCLP.
In December 2001, the Trust filed a registration statement on Form S-4
offering to exchange its registered 8.50% senior secured notes due 2008 for all
of its outstanding Notes. The terms of the new notes are identical to the terms
of the Notes except that the new notes are freely transferable under the
Securities Act and do not have any exchange or registration rights.
F-11
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS OF
HANOVER COMPRESSOR COMPANY AND
HANOVER COMPRESSION LIMITED PARTNERSHIP
(unaudited)
Hanover Compression Limited Partnership ("HCLP") is an indirect wholly-owned
subsidiary of Hanover Compressor Company ("Hanover" or "Ultimate Parent").
Substantially all of Hanover's assets and operations are owned or conducted by
HCLP and its subsidiaries.
On August 31, 2001, HCLP acquired the Production Operators Corporation
natural gas compression business, ownership interests in certain joint venture
projects in South America, and related assets (collectively, "POI" and formerly
"The Gas Compression Business of Schlumberger") from Schlumberger for $761
million in cash, Hanover common stock and indebtedness, subject to certain
post-closing adjustments pursuant to the purchase agreement (the "POI
Acquisition") which to date have resulted in an increase in the purchase price
to approximately $768 million due to an increase in the assets acquired. The
POI Acquisition was accounted for as a purchase and is included in HCLP's
financial statements commencing on September 1, 2001.
In September 2000, HCLP acquired the compression services division of
Dresser-Rand Company ("CSD-DR") from Ingersoll-Rand Company for approximately
$177 million of the Hanover's common stock and cash, subject to certain
post-closing adjustments pursuant to the acquisition agreement which to date
have resulted in an increase in the purchase price to approximately $197
million due to the increase in net assets acquired ("the DR Acquisition"). The
DR Acquisition was accounted for as a purchase and the results of operations
for the acquired business have been included in HCLP's historical financial
statements commencing September 1, 2000. The pro forma financial data is not
adjusted to reflect the pro forma effect of HCLP's acquisitions of Applied
Process Solutions, Inc., completed in June 2000, PAMCO Services International,
completed in July 2000, or OEC Compression Corporation, completed in March
2001, none of which are significant, either individually or in the aggregate.
In addition, on August 31, 2001, HCLP completed two sale-leaseback
transactions totaling $567 million (the "Sale-leaseback Transactions"). Under
the terms of the transactions, Hanover Equipment Trust 2001A and Hanover
Equipment Trust 2001B (the "Trusts") purchased equipment from HCLP that was
then leased back to HCLP pursuant to two operating leases for a 7-year period
and a 10-year period, respectively. The equipment will continue to be deployed
in HCLP's normal operations. HCLP used approximately $321 million of the
proceeds of the sale to fund the cash portion of the POI Acquisition including
the post closing adjustment related to the increase in assets and to pay
expenses of the acquisition and the Sale-leaseback Transactions and used $200
million to exercise its equipment purchase option under an existing operating
lease entered into in 1998. HCLP intends to use the remaining $46 million of
the proceeds for general corporate purposes.
The accompanying unaudited pro forma combined condensed statements of
operations for the nine months ending September 30, 2001 and for the year ended
December 31, 2000 have been prepared as if the POI Acquisition, the sale of
equipment and exercise of HCLP's equipment purchase option under the existing
operating lease (collectively, the "Transactions") had occurred on January 1,
2000. The accompanying unaudited pro forma combined condensed statement of
operations for the year ended December 31, 2000 present the pro forma results
of operations of Hanover as if the DR Acquisition had also occurred on Janaury
1, 2000.
The accompanying unaudited pro forma combined condensed statements of
operations should be read in conjunction with Hanover's consolidated financial
statements and related notes thereto for the year ended December 31, 2000
included in the Hanover's Annual Report on Form 10-K and Hanover's Quarterly
Report on Form 10-Q for the nine months ended September 30, 2001; HCLP's
financial statements for the year ended December 31, 2000 and for the nine
months ended September 30, 2001 attached herewith; POI's combined financial
statements for the year ended December 31, 2000 and the six months ended June
30, 2001 included in Hanover's Current Report on Form 8-K/A dated November 9,
2001; and CSD-DR's combined financial statements for the year ended December
31, 1999 and the six months ended June 30, 2000, included in Hanover's Current
Report on Form 8-K/A dated November 13, 2000.
F-12
Unaudited Pro Forma Combined Condensed Statement of Operations
Nine Months Ended September 30, 2001
(in thousands, except per share amounts)
Historical Pro Forma
----------------- -----------------------------------------------
POI & Sale-
leaseback Hanover HCLP HCLP
Hanover POI(a) Adjustments Combined Adjustments(a) Combined
-------- -------- ----------- -------- -------------- --------
Revenues and other.................. $781,641 $105,653 $887,294 $887,294
Expenses:
Operating........................ 475,981 59,357 $ (3,337)(d) 532,001 532,001
Selling, general and
administrative................. 66,341 8,724 75,065 75,065
Depreciation and amortization.... 60,926 12,324 (12,324)(e) 68,385 (472)(p) 67,913
4,222 (f)
3,781 (g)
(544)(o)
Leasing expense.................. 47,541 18,545 (i) 70,959 70,959
15,567 (i)
(10,694)(j)
Interest expense................. 10,318 (25) 8,525 (k) 18,818 (4,813)(p) 14,005
Distributions on mandatorily
redeemable convertible
preferred securities........... 4,780 4,780 (4,780)(q)
Other............................ 11,473 11,473 11,473
-------- -------- -------- -------- -------- --------
677,360 80,380 23,741 781,481 (10,065) 771,416
-------- -------- -------- -------- -------- --------
Income before income taxes.......... 104,281 25,273 (23,741) 105,813 10,065 115,878
Provision (benefit) for income taxes 39,620 7,886 (7,304)(1) 40,202 3,825 (1) 44,027
-------- -------- -------- -------- -------- --------
Income before cumulative effect of
accounting change................. $ 64,661 $ 17,387 $(16,437) $ 65,611 $ 6,240 $ 71,851
======== ======== ======== ======== ======== ========
Weighted average common and
common equivalent shares
outstanding:......................
Basic............................ 70,098 7,982 (m) 78,080
Diluted.......................... 78,997 7,982 (m) 86,979
Earnings per common share:(r).......
Basic............................ $ 0.92 $ 0.84
Diluted.......................... $ 0.86 $ 0.79
The accompanying notes are an integral part of these unaudited pro forma
combined condensed
statement of operations.
F-13
Unaudited Pro Forma Combined Condensed Statement of Operations
Year Ended December 31, 2000
(in thousands, except per share amounts)
Historical Pro Forma
- - ------------------------- -----------------------------------------------------------------
POI & Sale-
leaseback CSD-DR Hanover HCLP HCLP
Hanover POI(a) CSD-DR Adjustments Adjustments(a) Combined Adjustments(a) Combined
- - -------- -------- ------- ----------- -------------- -------- -------------- --------
Revenues and other........... $603,829 $147,364 $61,056 $(4,592)(b) $807,657 $807,657
Expenses:
Operating................... 342,545 78,129 52,263 $ (4,698)(d) (5,368)(b) 458,325 458,325
(3,418)(c)
(1,128)(d)
Selling, general and
administrative............ 54,606 13,445 7,578 (957)(c) 74,672 74,672
Depreciation and
amortization.............. 52,882 18,555 (18,555)(e) 4,375 (c) 71,525 71,525
7,129 (f) (4,375)(e)
5,672 (g) 4,302 (f)
1,540 (h)
Leasing expense............. 45,484 27,817 (i) 81,359 81,359
23,352 (i)
(15,294)(j)
Interest expense............ 8,473 1,774 12,750 (k) (1,774)(e) 26,953 26,953
5,730 (k)
Distributions on mandatorily
redeemable convertible
preferred securities...... 6,369 6,369 (6,369)(q)
-------- -------- ------- -------- ------- -------- ------- --------
510,359 110,129 61,615 38,173 (1,073) 719,203 (6,369) 712,834
-------- -------- ------- -------- ------- -------- ------- --------
Income (loss) before income
taxes...................... 93,470 37,235 (559) (38,173) (3,519) 88,454 6,369 94,823
Provision (benefit) for 34,771 14,166 200 (14,515)(1) (1,717)(1) 32,905 2,369 (1) 35,274
income taxes............... -------- -------- ------- -------- ------- -------- ------- --------
Net income (loss)............ $ 58,699 $ 23,069 $ (759) $(23,658) $(1,802) $ 55,549 $ 4,000 $ 59,549
======== ======== ======= ======== ======= ======== ======= ========
Weighted average common
and common equivalent
shares outstanding:
Basic................... 61,831 8,708 (m) 1,947 (m) 72,486
Diluted................. 71,192 8,708 (m) 1,947 (m) 81,847
Earnings per common
share(r)
Basic................... $ 0.95 $ 0.77
Diluted................. $ 0.88 $ 0.73
The accompanying notes are an integral part of these unaudited pro forma
combined condensed statement of operations.
F-14
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS OF
HANOVER COMPRESSOR COMPANY AND HANOVER COMPRESSION LIMITED PARTNERSHIP
The accompanying unaudited pro forma combined condensed statements of
operations for Hanover and HCLP have been prepared based upon certain pro forma
adjustments to the historical consolidated financial statements of Hanover and
HCLP for the year ended December 31, 2000 and the historical unaudited
condensed consolidated financial statements for the nine months ended September
30, 2001. The historical information for POI has been obtained from the
historical combined financial statements of POI for the year ended December 31,
2000 included in Hanover's Current Report on Form 8-K/A dated November 9, 2001
and the historical unaudited combined financial statements of POI for the eight
months ended August 31, 2001. The historical information for CSD-DR is for the
eight months ended August 31, 2000. Historical financial statements for CSD-DR
as of June 30, 2000 and December 31, 1999 have been included in Hanover's
Current Report on Form 8-K/A dated November 13, 2000.
The POI purchase price allocation is based on preliminary assumptions and
estimates which will change as more information becomes available following the
completion of third party valuations of the acquired assets. Therefore, the pro
forma statements of operations are based on certain assumptions and preliminary
estimates that are subject to change. The pro forma statements of operations do
not purport to be indicative of the results which would actually have been
obtained had the acquisitions been completed on the date indicated or which may
be obtained in the future.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible
Assets. Under SFAS 142, amortization of goodwill to earnings will be
discontinued. However, goodwill will be reviewed for impairment annually or
whenever events indicate impairment may have occurred. SFAS 142 is effective
for Hanover and HCLP on January 1, 2002. However, under the transition
provisions of SFAS 142, goodwill acquired in a business combination for which
the acquisition date is after June 30, 2001, will not be amortized. Since the
acquisition of POI was consummated after June 30, 2001, the estimated goodwill
of $40 million related to the POI acquisition has not been amortized in the pro
forma combined condensed statements of operations. The goodwill related to
business combinations completed before June 30, 2001 continues to be amortized
in the pro forma combined condensed statements of operations since Hanover and
HCLP have not adopted SFAS 142.
The pro forma adjustments to the accompanying unaudited Pro Forma Combined
Condensed Statements of Operations are described below:
a) The historical results of operations of POI have been reclassified to
conform with Hanover and HCLP's presentation. These reclassifications had no
impact on net income. The column labeled HCLP adjustments when combined with
the historical results of Hanover would reflect the historical results of HCLP.
b) Reflects the adjustment to CSD-DR's historical revenue and operating
expenses to conform to Hanover and HCLP's accounting policy to recognize
revenue from compressor and equipment fabrication utilizing the
percentage-of-completion method. CSD-DR recognized revenue from compressor and
equipment fabrication on the completed contract method.
c) Reflects the reclassification of CSD-DR's depreciation expense to conform
to Hanover and HCLP's financial statement presentation.
d) Reflects the reversal of certain POI and CSD-DR historical operating
expenses to conform to Hanover and HCLP's accounting policies for
capitalization of fixed assets.
e) Reflects the elimination of POI and CSD-DR historical depreciation and
amortization expense and interest expense.
F-15
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS OF
HANOVER COMPRESSOR COMPANY AND HANOVER COMPRESSION LIMITED
PARTNERSHIP--(Continued)
f) Reflects the depreciation expense on the fair value of POI and CSD-DR's
property, plant and equipment. The preliminary estimate of the fair value of
POI's property, plant and equipment is $493 million which could change
following the completion of third party valuations of the acquired assets. The
depreciation for POI was based on the estimated value of property, plant and
equipment acquired, net of the sale of $367 million of compression equipment to
the Trusts. The recorded fair value of CSD-DR's property, plant and equipment
was $121 million. For the purposes of this adjustment, Hanover and HCLP
utilized a fifteen-year average depreciable life through June 30, 2001, a
thirty-year average depreciable life after June 30, 2001, and a twenty-percent
salvage value for compression equipment. There estimates are consistent with
Hanover and HCLP's estimate for similar equipment and facilities for the
periods included in these pro forma combined condensed financial statements.
g) Reflects the amortization of $8.8 million of identifiable intangibles
over the estimated lives of these intangible assets which ranges from eighteen
months to five years. The estimated value of and the estimated life of the
intangible assets could change upon completion of third party valuations of the
acquired assets. In addition, this adjustment reflects the amortization of the
excess of the estimated fair value of the joint venture investments acquired
from Schlumberger over HCLP's share of the underlying net assets, which is
currently estimated to be approximately $8 million. This balance will be
amortized over a period of 15 years, which reflects the estimated lives of the
joint venture agreements.
h) Reflects the amortization of approximately $46 million of goodwill
recorded from the acquisition of CSD-DR. The goodwill is being amortized over a
20-year period on a straight-line basis.
i) Reflects the operating lease expenses related to the sale and lease back
of equipment from the Trusts, including the amortization of estimated deferred
lease transaction costs of $10.7 million over the seven year lease term and
$8.0 million over the ten year lease term with interest rates of 8 1/2% and 8
3/4% on the 2008 and 2011 notes, respectively.
j) Reflects the reversal of the historical leasing expense related to the
1998 operating lease, including the amortization of the related deferred lease
transaction costs.
k) Reflects the interest expense resulting from the $150 million
subordinated acquisition note issued to Schlumberger and approximately $112
million of borrowings on HCLP's credit facility in connection with the
acquisition of CSD-DR. The interest rate on the subordinated acquisition note
is initially set at 8.5%. The interest rate on HCLP's credit facility at the
date of the CSD-DR acquisition was approximately 7.5%.
l) Reflects the adjustment to the pro forma combined provision for income
taxes related to the foregoing adjustments based on the statutory rate.
m) Reflects the additional weighted average common and common equivalent
shares outstanding as if the common stock issued for the acquisition of POI and
the common stock issued for the acquisition of CSD-DR occurred on January 1,
2000. The total number of shares of Hanover common stock that were issued for
the POI acquisition was 8.7 million shares.
n) For the purposes of calculating diluted net income per share, the
distributions on mandatorily redeemable convertible preferred securities have
been added back to net income. The after tax impact of this adjustment was $3.1
million and $4.1 million for the nine months ended September 30, 2001 and the
year ended December 31, 2000, respectively.
o) Reflects the write off of unamortized deferred lease transaction costs of
$544,000, relating to the 1998 operating lease.
F-16
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS OF
HANOVER COMPRESSOR COMPANY AND HANOVER COMPRESSION LIMITED
PARTNERSHIP--(Continued)
(p) Reflects the removal of interest expense and amortization of deferred
issuance costs on the 4.75% convertible senior notes since issuance in March
2001 which are obligations of the Ultimate Parent of HCLP.
(q) Reflects the removal of distributions on mandatorily redeemable
convertible securities held by the Ultimate Parent of HCLP.
(r) Earnings per share data are applicable to Hanover only as HCLP is a
limited partnership.
F-17
Report of Independent Accountants
To the Managers of the General Partner of
Hanover Compression Limited Partnership:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and comprehensive income, of cash flows and
of partners' equity present fairly, in all material respects, the financial
position of Hanover Compression Limited Partnership and its subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States
of America. 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.
/S/PRICEWATERHOUSECOOPERS LLP
Houston, Texas
December 20, 2001
F-18
HANOVER COMPRESSION LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
December 31,
------------------------
2000 1999
---------- --------
(in thousands of dollars
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 45,484 $ 5,756
Accounts receivable, net.................................................... 242,526 93,715
Inventory................................................................... 139,248 66,562
Costs and estimated earnings in excess of billings on uncompleted contracts. 38,665 4,782
Prepaid taxes............................................................... 19,948 16,430
Other current assets........................................................ 12,384 5,287
---------- --------
Total current assets.................................................... 498,255 192,532
Property, plant and equipment, net............................................. 583,586 497,465
Goodwill, net.................................................................. 141,973 29,791
Intangible and other assets.................................................... 62,268 33,411
---------- --------
Total assets......................................................... $1,286,082 $753,199
========== ========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................................ $ 2,423 $ 15,967
Short-term notes payable.................................................... 10,073
Accounts payable, trade..................................................... 88,651 32,308
Accrued liabilities......................................................... 49,024 21,787
Advance billings............................................................ 32,292 13,328
Billings on uncompleted contracts in excess of costs and estimated earnings. 5,669 898
---------- --------
Total current liabilities............................................... 188,132 84,288
Long-term debt................................................................. 110,935 69,681
Other liabilities.............................................................. 158,661 82,566
Deferred income taxes.......................................................... 107,840 65,634
---------- --------
Total liabilities....................................................... 565,568 302,169
---------- --------
Commitments and contingencies (Note 15)
Partners' equity:
Partners' capital........................................................... 720,971 451,341
Accumulated other comprehensive income...................................... (457) (311)
---------- --------
Total partners' equity.................................................. 720,514 451,030
---------- --------
Total liabilities and partners' equity............................... $1,286,082 $753,199
========== ========
The accompanying notes are an integral part of these financial statements.
F-19
HANOVER COMPRESSION LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(in thousands of dollars)
Revenues and other:
Rentals.................................................. $254,515 $192,655 $147,609
Parts, service and used equipment........................ 151,707 42,518 29,538
Compressor fabrication................................... 96,838 52,531 67,453
Production and processing equipment fabrication.......... 88,572 28,037 37,466
Gain on sale of other assets............................. 4,113 4,062 1,278
Equity in income of non-consolidated affiliates.......... 3,518 1,188 1,369
Gain on change in interest in non-consolidated affiliate. 864
Other.................................................... 3,702 2,229 1,638
-------- -------- --------
603,829 323,220 286,351
-------- -------- --------
Expenses:
Rentals.................................................. 87,992 64,949 49,386
Parts, service and used equipment........................ 103,276 27,916 21,735
Compressor fabrication................................... 81,996 43,663 58,144
Production and processing equipment fabrication.......... 69,281 20,833 25,781
Selling, general and administrative...................... 54,606 33,782 26,626
Depreciation and amortization............................ 52,882 37,337 37,154
Leasing expense.......................................... 45,484 22,090 6,173
Interest expense......................................... 8,473 8,786 11,716
-------- -------- --------
503,990 259,356 236,715
-------- -------- --------
Income before income taxes.................................. 99,839 63,864 49,636
Provision for income taxes.................................. 37,140 23,247 19,259
-------- -------- --------
Net income.................................................. 62,699 40,617 30,377
-------- -------- --------
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment.................. (146) (463) 152
-------- -------- --------
Comprehensive income........................................ $ 62,553 $ 40,154 $ 30,529
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-20
HANOVER COMPRESSION LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
(in thousands of dollars)
Cash flows from operating activities:
Net income................................................................ $ 62,699 $ 40,618 $ 30,377
Adjustments:
Depreciation and amortization......................................... 52,882 37,337 37,154
Amortization of debt issuance costs and debt discount................. 550 884 852
Bad debt expense...................................................... 3,198 1,475 349
Gain on sale of property, plant and equipment......................... (16,696) (5,927) (2,552)
Equity in income of nonconsolidated affiliates........................ (3,518) (1,188) (1,369)
Gain on change in interest in non-consolidated affiliate.............. (864)
Deferred income taxes................................................. 33,176 11,497 12,358
Changes in assets and liabilities, excluding business
combinations:
Accounts receivable................................................ (109,653) (23,974) (28,337)
Inventory.......................................................... (32,580) (1,918) (24,169)
Costs and estimated earnings versus billings on
uncompleted contracts............................................ (21,653) 3,293 (3,000)
Accounts payable and other liabilities............................. 48,290 11,691 14,358
Advance billings................................................... (4,031) 3,634 2,942
Other.............................................................. 1,973 (9,144) (7,656)
--------- --------- ---------
Net cash provided by operating activities...................... 13,773 68,278 31,307
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures...................................................... (268,103) (282,940) (169,498)
Proceeds from sale of property, plant and equipment....................... 425,144 223,037 208,644
Cash used for business acquisitions, net.................................. (196,562) (35,311) (42,581)
Cash returned from unconsolidated subsidiary.............................. 8,000
Cash used to acquire investments in unconsolidated subsidiaries........... (5,347) (4,900) (11,264)
--------- --------- ---------
Net cash used in investing activities.......................... (44,868) (92,114) (14,699)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on revolving credit facility.................. 40,400 (64,400) (4,700)
Proceeds from issuance of long-term debt.................................. 2,825
Partners' contribution (distribution), net................................ 58,244 90,919 (5,387)
Repayment of long-term debt and short-term notes.......................... (27,695) (8,357) (2,226)
--------- --------- ---------
Net cash provided by (used in) financing activities............ 70,949 18,162 (9,488)
--------- --------- ---------
Effect of exchange rate changes on cash and equivalents...................... (126) (73) (178)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents......................... 39,728 (5,747) 6,942
Cash and cash equivalents at beginning of year............................... 5,756 11,503 4,561
--------- --------- ---------
Cash and cash equivalents at end of year..................................... $ 45,484 $ 5,756 $ 11,503
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-21
HANOVER COMPRESSION LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31,
----------------------------
2000 1999 1998
--------- ------- --------
(in thousands of dollars)
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized amounts..... $ 8,874 $ 7,897 $ 10,992
--------- ------- --------
Income taxes paid............................. $ 1,639 $12,065 $ 2,249
--------- ------- --------
Supplemental disclosure of noncash transactions:
Debt issued for property, plant and equipment. $ 12,922
---------
Assets sold in exchange for note receivable... $ 2,783 $ 3,538 $ 1,500
--------- ------- --------
Acquisitions of businesses:
Property, plant and equipment acquired........ $ 202,893 $39,105 $ 31,015
--------- ------- --------
Other assets acquired, net of cash acquired... $ 89,989 $ 2,784 $ 4,320
--------- ------- --------
Goodwill...................................... $ 117,262 $ 6,927 $ 20,680
--------- ------- --------
Liabilities assumed........................... $ (64,679) $(1,567) $ (1,261)
--------- ------- --------
Deferred taxes................................ $ (9,029) $(8,627) $(12,174)
--------- ------- --------
Partners' noncash capital contributions....... $(139,874) $(3,311) $ (3,300)
--------- ------- --------
The accompanying notes are an integral part of these financial statements.
F-22
HANOVER COMPRESSION LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
(in thousands of dollars)
Accumulated
other
Partners' comprehensive
capital income (loss)
--------- -------------
Balance at January 1, 1998...................... $287,028
Partners' distributions, net.................... (2,087)
Other comprehensive income...................... $ 152
Net income...................................... 30,377
-------- -----
Balance at December 31, 1998.................... $315,318 $ 152
Partners' contributions, net.................... 94,230
Other comprehensive loss........................ (463)
Income tax benefit from stock options exercised. 1,176
Net income...................................... 40,617
-------- -----
Balance at December 31, 1999.................... $451,341 $(311)
Partners' contributions, net.................... 198,118
Other comprehensive loss........................ (146)
Income tax benefit from stock options exercised. 8,813
Net income...................................... 62,699
-------- -----
Balance at December 31, 2000.................... $720,971 $(457)
======== =====
The accompanying notes are an integral part of these financial statements.
F-23
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
1. The Company, Business and Significant Accounting Policies
Hanover Compression Limited Partnership ("HCLP" or the "Company") is a
Delaware limited partnership and an indirect wholly-owned subsidiary of Hanover
Compressor Company ("Hanover"). HCLP was formed on December 7, 2000 by the
filing of a certificate of limited partnership with the Secretary of State of
the State of Delaware. HCLP operates under a limited partnership agreement
between Hanover Compression General Holdings, LLC, a Delaware limited liability
company and a direct wholly-owned subsidiary of Hanover, as general partner
(the "general partner"), and Hanover Compression Limited Holdings, LLC, a
Delaware limited liability company and a direct wholly-owned subsidiary of
Hanover, as limited partner (the "limited partner"). The general partner has
exclusive control over the business of HCLP and holds 1% of HCLP's partnership
interests. The limited partner has no right to participate in or vote on the
business of HCLP and holds 99% of HCLP's partnership interests. Prior to
December 7, 2000, the Company operated under various legal forms. These
financial statements reflect HCLP's historical operations in its current legal
form.
HCLP and its subsidiaries are a leading provider of a broad array of natural
gas compression, gas handling and related services in the United States and
international markets. HCLP provides compressor fabrication and oil and gas
production equipment fabrication operations in addition to gas processing, gas
treatment, gas measurement and power generation services to complement its
compression services.
Principles of Consolidation
The accompanying consolidated financial statements include HCLP and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Investments in affiliated
entities in which the Company owns more than a 20% interest and does not have a
controlling interest are accounted for using the equity method.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets, liabilities, revenues
and expenses, as well as the disclosures of contingent assets and liabilities.
Because of the inherent uncertainties in this process, actual future results
could differ from those expected at the reporting date. Management believes
that the estimates are reasonable.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Revenue Recognition
Revenue from equipment rentals is recorded when earned over the period of
rental and maintenance contracts which generally range from one month to five
years. Parts, service and used equipment revenue is recorded as products are
delivered or services are performed for the customer.
Compressor, production and processing equipment fabrication revenue is
recognized using the percentage-of-completion method. The Company estimates
percentage-of-completion for compressor and processing equipment fabrication on
a direct labor hour-to-total labor hour basis. Production equipment fabrication
percentage-of-completion is estimated using the cost-to-total cost basis.
F-24
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents, accounts receivable and
notes receivable. The Company believes that the credit risk in temporary cash
investments that the Company has with financial institutions is minimal. Trade
accounts receivable are due from companies of varying size engaged principally
in oil and gas activities throughout the world. The Company reviews the
financial condition of customers prior to extending credit and generally does
not obtain collateral for receivables. Payment terms are on a short-term basis
and in accordance with industry standards. The Company considers this credit
risk to be limited due to these companies' financial resources. Trade accounts
receivable is recorded net of estimated doubtful accounts of $3,265,000 and
$1,730,000 at December 31, 2000 and 1999, respectively.
Inventory
Inventory consists of parts used for fabrication or maintenance of natural
gas compression equipment and facilities, processing and production equipment,
and also includes compression units and production equipment that are held for
sale. Inventory is stated at the lower of cost or market using the average-cost
method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated using
the straight-line method over their estimated useful lives as follows:
Compression equipment and facilities.... 4 to 25 years
Buildings............................... 30 years
Transportation, shop equipment and other 3 to 12 years
Major improvements that extend the useful life of an asset are capitalized.
Repairs and maintenance are expensed as incurred. When property, plant and
equipment is sold, retired or otherwise disposed of, the cost, net of
accumulated depreciation is recorded in parts, service and used equipment
expenses. Sales proceeds are recorded in parts, service and used equipment
revenues. Interest is capitalized in connection with the compression equipment
and facilities that are constructed for the Company's use in its rental
operations. The capitalized interest is recorded as part of the assets to which
it relates and is amortized over the asset's estimated useful life.
Long-Lived Assets
The Company reviews for the impairment of long-lived assets, including
property, plant and equipment, and goodwill whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss exists when estimated undiscounted cash flows
expected to result from the use of the asset and its eventual disposition are
less than its carrying amount. The impairment loss recognized represents the
excess of the assets carrying value as compared to its estimated fair market
value.
Goodwill
The excess of cost over net assets of acquired businesses is recorded as
goodwill and amortized on a straight-line basis over 15 or 20 years commencing
on the dates of the respective acquisitions. Accumulated amortization was
$8,902,000 and $3,822,000 at December 31, 2000 and 1999, respectively.
Amortization of goodwill totaled $5,080,000, $2,048,000 and $981,000 in 2000,
1999 and 1998, respectively.
F-25
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123 (FAS
123) ''Accounting for Stock-Based Compensation,'' the Company measures
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed in APB Opinion No. 25 (APB 25), ''Accounting
for Stock Issued to Employees,'' and has provided in Note 13, pro forma
disclosures of the effect on net income and earnings per share as if the fair
value-based method prescribed by FAS 123 had been applied in measuring
compensation expense.
Income Taxes
The Company's operating results historically have been included in Hanover's
consolidated US and state income tax returns. The provision for income taxes
reflected in the Company's consolidated financial statements has been
determined on a separate return basis. The Company accounts for income taxes
using an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
In estimating future tax consequences, all expected future events are
considered other than enactments that would change the tax law or rates. A
valuation allowance is recognized for deferred tax assets if it is more likely
than not that some portion or all of the deferred tax asset will not be
realized.
Foreign Currency Translation
The financial statements of subsidiaries outside the U.S., except those
located in 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.
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 cash flow from hedges is classified in the
Consolidated Statements of Cash Flows under the same category as the cash flows
from the underlying assets, liabilities or anticipated transactions. The
carrying amounts reported in the balance sheet for all financial instruments
approximate fair value. See Notes 8 and 9.
F-26
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Accounting for Derivatives
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities(''SFAS 133''). SFAS 133, as amended by SFAS
137 and SFAS 138, requires that, upon adoption, all derivative instruments
(including certain derivative instruments embedded in other contracts) be
recognized in the balance sheet at fair value, and that changes in such fair
values be recognized in earnings unless specific hedging criteria are met.
Changes in the values of derivatives that meet these hedging criteria will
ultimately offset related earnings effects of the hedged item pending
recognition in earnings. The Company adopted SFAS 133 beginning January 1,
2001, and the initial adoption of SFAS 133 did not have a material effect on
the Company's results of operations, cash flows or financial position. However,
the impact on our results of operations in the first quarter of 2001 and
subsequent periods could be material due to fluctuations in the fair value of
an option held by the counterparty to our interest rate swaps which will be
recorded in our results of operations until this option is exercised or expires
in July 2001.
Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 2000 financial statement classification. These
reclassifications have no impact on net income.
2. Business Combinations
Acquisitions were accounted for under the purchase method of accounting.
Results of operations of companies acquired are included from the dates of such
acquisitions. The Company allocates the cost of the acquired business to the
assets acquired and the liabilities assumed based upon fair value estimates
thereof. These estimates are revised during the allocation period as necessary
when information regarding contingencies becomes available to define and
quantify assets acquired and liabilities assumed. The allocation period varies
for each acquisition but does not exceed one year. To the extent contingencies
are resolved or settled during the allocation period, such items are included
in the revised purchase price allocation. After the allocation period, the
effect of changes in such contingencies is included in results of operations in
the periods the adjustments are determined. The Company's management does not
believe potential deviations between its estimates and actual values to be
material.
Year Ended December 31, 2000
In November 2000, the Company purchased the common stock of Servicios TIPSA
S.A. for approximately $7,175,000 in cash and a $7,750,000 note payable. The
note payable was repaid in January 2001.
In September 2000, the Company purchased the Dresser-Rand Company's
compression services (''DR'') division for $177,000,000 including approximately
$1,200,000 of acquisition costs. Under the terms of the agreement, $95,000,000
of the purchase price was paid in cash with the balance being paid through the
issuance to Ingersoll-Rand of 2,919,681 shares of Hanover's newly issued
restricted common stock.
The estimated value of the stock issued was approximately $80,539,000, based
upon quoted market price for the Hanover's common stock reduced by a discount
due to the restriction on the stock's marketability based upon a third party
appraisal. The purchase price is subject to certain post-closing adjustments
pursuant to the acquisition agreement which to date have resulted in
approximately $20 million increase in the purchase price due to increases in
the net assets acquired. The final purchase price is still subject to
adjustments which the
F-27
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Company expects will not exceed approximately $2,000,000. In connection with
the acquisition, the Company has agreed to purchase under normal business terms
$25,000,000 worth of products, goods and services from Dresser-Rand Company
over a three-year period beginning December 2001.
In September 2000, the Company acquired the common stock of Gulf Coast
Dismantling, Inc. for approximately $2,947,000 in cash and 9,512 shares of
Hanover's treasury stock valued at $300,000.
In July 2000, the Company completed its acquisition of PAMCO Services
International's natural gas compressor assets for approximately $45,210,000 in
cash and a $12,922,000 note payable due on April 10, 2001. The note is payable
periodically as idle horsepower is contracted. Approximately $10,599,000 of the
note payable was repaid in 2000. In connection with the acquisition, the
Company agreed to purchase under normal business terms specified levels of
equipment over a three-year period beginning October 2000.
In June 2000, the Company purchased common stock of Applied Process
Solutions, Inc. (''APSI'') for 2,303,294 shares of Hanover's common stock and
assumption of $16,030,000 of APSI's outstanding debt. The estimated value of
the stock issued was approximately $54,816,000, based upon quoted market price
for Hanover's common stock reduced by a discount due to the restriction on the
stock's marketability based upon a third party appraisal. The assumed debt has
been repaid.
In June 2000, the Company purchased the assets of Rino Equipment, Inc. and
K&K Compression, Ltd. for approximately $15,679,000 in cash and 54,810 shares
of Hanover's treasury stock valued at $2,000,000.
In June 2000, the Company purchased the common stock of Compression
Components Corporation for approximately $7,972,000 in cash and 27,405 shares
of Hanover's treasury stock valued at $1,000,000.
In March 2000, the Company purchased the common stock of Southern
Maintenance Services, Inc. (''SMS'') for approximately $1,500,000 in cash,
46,512 shares of Hanover's common stock valued at $1,000,000 and $1,000,000 in
notes payable that mature on March 1, 2003.
Year Ended December 31, 1999
In July 1999, the Company purchased preferred stock and a purchase option
for the common stock of CDI Holdings, Inc. and its subsidiary Compressor
Dynamics, Inc. (''CDI''). In August 1999, the Company exercised its option to
purchase CDI. The total cost for CDI was approximately $18,525,000 in cash.
In August 1999, the Company purchased the stock of Victoria Compression
Services, Inc., Contract Engineering and Operating, Inc. and Unit Partners,
Inc. for approximately $16,786,000 in cash, 183,700 shares of Hanover'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.
Pro Forma Information
The pro forma information set forth below assumes the acquisitions of APSI
and DR in 2000 and the 1999 acquisitions are accounted for had the purchases
occurred at the beginning of 1999. The remaining acquisitions
F-28
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
were not considered material for pro forma purposes. The pro forma information
is presented for informational purposes only and is not necessarily indicative
of the results of operations that actually would have been achieved had the
acquisitions been consummated at that time (in thousands):
Years Ended
December 31,
-----------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
Revenue... $699,260 $562,184
Net income 61,481 47,615
3. Inventory
Inventory consisted of the following amounts (in thousands):
December 31,
----------------
2000 1999
-------- -------
Parts and supplies $ 87,114 $44,058
Work in progress.. 47,193 18,677
Finished goods.... 4,941 3,827
-------- -------
$139,248 $66,562
======== =======
4. Compressor and Production Equipment Fabrication Contracts
Costs, estimated earnings and billings on uncompleted contracts are as
follows (in thousands):
December 31,
-----------------
2000 1999
-------- -------
Costs incurred on uncompleted contracts $ 72,811 $11,041
Estimated earnings..................... 12,594 2,150
-------- -------
85,405 13,191
Less--billings to date................. (52,409) (9,307)
-------- -------
$ 32,996 $ 3,884
======== =======
Presented in the accompanying financial statements as follows (in thousands):
December 31,
---------------
2000 1999
------- ------
Costs and estimated earnings in excess of billings on uncompleted contracts $38,665 $4,782
Billings on uncompleted contracts in excess of costs and estimated earnings (5,669) (898)
------- ------
$32,996 $3,884
======= ======
F-29
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
5. Property, plant and equipment
Property, plant and equipment consisted of the following (in thousands):
December 31,
------------------
2000 1999
-------- --------
Compression equipment and facilities $587,387 $520,403
Land and buildings.................. 35,233 19,000
Transportation and shop equipment... 44,202 27,616
Other............................... 15,279 10,029
-------- --------
682,101 577,048
Accumulated depreciation............ (98,515) (79,583)
-------- --------
$583,586 $497,465
======== ========
Depreciation expense was $46,211,000, $34,696,000 and $35,768,000 in 2000,
1999 and 1998, respectively. Assets under construction of $24,777,000 and
$18,937,000 are included in compression equipment at December 31, 2000 and
1999, respectively. In 2000 and 1999, $1,535,000 and $1,533,000 of interest
cost was capitalized. No interest was capitalized for 1998.
6. Intangible and Other Assets
Intangible and other assets consisted of the following (in thousands):
December 31,
----------------
2000 1999
------- -------
Investments in unconsolidated subsidiaries......... $27,728 $18,892
Deferred debt issuance and other transactions costs 12,152 7,006
Notes receivable................................... 14,975 9,214
Other.............................................. 12,828 1,862
------- -------
67,683 36,974
Accumulated amortization........................... (5,415) (3,563)
------- -------
$62,268 $33,411
======= =======
Amortization of intangible and other assets totaled $1,591,000, $593,000 and
$405,000 in 2000, 1999 and 1998, respectively, exclusive of amortization of
debt issuance costs.
The Company holds a non-controlling 60% interest in the Hanover/Enron Joint
Venture. In September 2000, the Company acquired a 25% interest in the Hampton
Roads Joint Venture for the purpose of owning and operating a gas processing
facility in Nigeria for $1,250,000. In June 2000, the Company sold 50% of the
common stock of its wholly-owned Venezuelan subsidiary, Servicompressores, to
Gaspetrol International S.A., an affiliate of Cosacol, for $3,133,000. The sale
price was comprised of $350,000 in cash and a note receivable of $2,783,000
that is payable over 5 years at the greater of $300,000 per year or 50% of the
profits of Servicompressores. The balance is due in June 2005. The transaction
resulted in a gain of $2,133,000. In June 2000, the Company sold a 25%
undivided interest in a power generation plant for $5,000,000 resulting in a
gain on disposition of approximately $1,300,000.
In May 2000, the Company acquired 10% of the common stock of Aurion
Technologies, Inc. (''Aurion'') for $2,511,000 in cash. Aurion sells and
services remote monitoring equipment and software. The investment is accounted
for using the cost method.
F-30
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
In September 1999, the Company acquired a 20% interest in Meter Acquisition
Company LP, LLLP for approximately $2,200,000 and a non-controlling 52.5%
interest in Hanover Measurement Services Company, LP for approximately
$2,700,000.
In December 1998, the Company restructured its relationship in the
Consortium Cosacol/Hanover (the ''Corsortium''), a joint venture in which the
Company owned a 35% interest. The Company purchased all of the capitalized
construction from the Consortium for 300,000 shares of Hanover common stock
valued at $3,300,000. The capitalized construction was transferred to property,
plant and equipment in 1999. In addition, the Company acquired a 10% interest
in Cosacol for $2,000,000 in cash. During 2000, the Company acquired the
remaining 65% interest in the Consortium for $600,000.
In November 1997, Hanover acquired 35% of the common stock of Collicutt
Mechanical Services, Ltd. (''CMS'') for approximately $5,608,000 in cash. The
investment is accounted for using the equity method of accounting. The excess
of the Company's investment over the underlying net equity of $703,000 is being
amortized on a straight-line basis over ten years and is included in other
assets at December 31, 2000 and 1999. During 2000, CMS sold additional shares
that reduced the Company's ownership percentage to approximately 24%,
accordingly, a change in interest gain of $864,000 was recorded in the
statement of income.
The notes receivable result primarily from customers for sales of equipment
or advances to other parties in the ordinary course of business. The notes vary
in length, bear interest at rates ranging from prime to 15% and are
collateralized by equipment.
7. Accrued Liabilities
Accrued liabilities are comprised of the following (in thousands):
December 31,
---------------
2000 1999
------- -------
Accrued salaries, bonuses and other employee benefits $ 5,039 $ 1,893
Accrued income and other taxes....................... 1,400 8,033
Accrued leasing expense.............................. 3,389 3,496
Accrued warranty..................................... 1,607 758
Additional purchase price for DR (Note 2)............ 16,562
Accrued other........................................ 21,027 7,607
------- -------
$49,024 $21,787
======= =======
8. Long-Term Debt
Long-term debt consisted of the following (in thousands):
December 31,
------------------
2000 1999
-------- --------
Revolving credit facility............................................................. $102,500 $ 62,100
Subordinated promissory notes, net of unamortized discount of $0 and $289............. 15,364
Real estate mortgage, interest at 7.5%, collateralized by certain land and buildings,
payable through 2002................................................................ 4,000 4,250
Other, interest at various rates, collateralized by equipment and other assets, net of
unamortized discount................................................................ 6,858 3,934
-------- --------
113,358 85,648
Less--current maturities.............................................................. (2,423) (15,967)
-------- --------
$110,935 $ 69,681
======== ========
F-31
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The Company's primary credit agreement provides for a $200,000,000 revolving
credit facility that matures on December 17, 2002. Advances bear interest at
the bank's prime or a negotiated rate (7.5% and 7.7% at December 31, 2000 and
1999, respectively). A commitment fee of 0.35% per annum on the average
available commitment is payable quarterly. The credit agreement contains
certain financial covenants and limitations on, among other things,
indebtedness, liens, leases and sales of assets. The credit agreement also
limits the payment of cash dividends on the Company's common stock to 25% of
net income for the respective period.
The subordinated promissory notes matured and were repaid on December 31,
2000. Approximately $11,191,000 of the subordinated promissory notes were owed
to related parties and the Company incurred interest to these parties of
$784,000 during 2000, 1999 and 1998.
Maturities of long-term debt at December 31, 2000 are (in thousands of
dollars): 2001--$2,423; 2002--$107,456; 2003--$670; 2004--$600; 2005--$435 and
$1,774 thereafter.
9. Leasing Transactions
In October 2000, the Company completed a $172,589,000 sale and lease back of
certain compression equipment. In March 2000, the Company entered into a
separate $200,000,000 sale and lease back of certain compression equipment.
Under the March agreement, the Company received $100,000,000 proceeds from the
sale of compression equipment at closing and in August 2000, the Company
completed the second half of the equipment lease and received an additional
$100,000,000 for the sale of additional compression equipment. In June 1999 and
in July 1998 the Company completed two other separate $200,000,000 sale and
lease back transactions of certain compression equipment. All transactions are
recorded as a sale and lease back of the equipment and are recorded as
operating leases. Under all the lease agreements, the equipment was sold and
leased back by the Company for a 5 year period and will continue to be deployed
by the Company under its normal operating procedures. At any time, the Company
has options to repurchase the equipment at fair market value. The Company has
substantial residual value guarantees under the lease agreements that are due
upon termination of the leases and which may be satisfied by a cash payment or
the exercise of the Company's purchase options. Any gains on the sale of the
equipment are deferred until the end of the respective lease terms. Should the
Company not exercise its purchase options under the lease agreements, the
deferred gains will be recognized to the extent they exceed any residual value
guarantee payments and any other items required under the lease agreements. The
Company incurred transaction costs of approximately $4,532,000, $1,799,000 and
$1,423,000 for the 2000, 1999 and 1998 transactions, respectively. These costs
are included in intangible and other assets and are being amortized over the
respective lease terms. The following table summarizes the proceeds, net book
value of equipment sold, deferred gain on equipment sale and the residual value
guarantee for each equipment lease (in thousands of dollars):
Residual
Sale Net Book Deferred Value
Lease Proceeds Value Gain Guarantee
- ----- -------- -------- -------- ---------
July 1998............ $200,000 $158,007 $41,993 $167,000
June 1999............ 200,000 162,014 37,986 166,000
March and August 2000 200,000 162,522 37,478 166,000
October 2000......... 172,589 134,918 37,671 142,299
The lease agreements call for variable quarterly rental payments that vary
with the London Interbank Offering Rate. The future minimum lease payments
under the leasing agreements exclusive of any residual value guarantee payments
(in thousands of dollars): 2001--$59,100; 2002--$60,100; 2003--$52,000;
2004--$36,600; 2005--$15,400.
F-32
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
In July 1998 and in connection with the 1998 lease agreement, the Company
entered into two swap transactions to manage lease rental exposure with
notional amounts of $75,000,000 and $125,000,000 and strike rates of 5.51% and
5.56%, respectively. The differential paid or received on the swap transactions
is recognized as an adjustment to leasing expense. These swap transactions
expire in July 2001 unless they are extended for an additional two year term at
the option of the counterparty. The counterparty to this contractual
arrangement is a major financial institution with which the Company also has
other financial relationships. The Company is exposed to credit loss in the
event of nonperformance by this counterparty. The fair value of these interest
rate swaps and the options to extend their maturity is approximately $241,000
at December 31, 2000.
10. Income Taxes
The components of income before income taxes were as follows (in thousands):
Year ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
Domestic $79,575 $48,019 $39,160
Foreign. 20,264 15,845 10,476
------- ------- -------
$99,839 $63,864 $49,636
======= ======= =======
The provision for income taxes consisted of the following (in thousands):
Year ended December 31,
------------------------
2000 1999 1998
------- ------- -------
Current tax expense (benefit):
Federal....................... $ 6,026 $ 6,958 $ 3,421
State......................... 499 1,412 1,741
Foreign....................... (2,561) 3,379 1,739
------- ------- -------
Total current................. 3,964 11,749 6,901
------- ------- -------
Deferred tax expense:
Federal....................... 21,578 10,772 10,312
State......................... 151 85
Foreign....................... 11,598 575 1,961
------- ------- -------
Total deferred................ 33,176 11,498 12,358
------- ------- -------
Total provision............... $37,140 $23,247 $19,259
======= ======= =======
The income tax expense for 2000, 1999 and 1998 resulted in effective tax
rates of 37.2%, 36.4% and 38.8%, respectively. The reasons for the differences
between these effective tax rates and the U.S. statutory rate of 35% are as
follows (in thousands):
Year ended December 31,
------------------------
2000 1999 1998
------- ------- -------
Federal income tax at statutory rates................ $34,944 $22,352 $17,373
State income taxes, net of federal income tax benefit 324 1,016 1,187
Foreign income taxes................................. 1,241 211 33
Other, net........................................... 631 (332) 666
------- ------- -------
$37,140 $23,247 $19,259
======= ======= =======
F-33
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
December 31,
-------------------
2000 1999
--------- --------
Deferred tax assets:
Net operating losses................. $ 23,567 $ 7,393
Alternative minimum tax carryforward. 17,123 19,005
Other................................ 3,120 2,342
--------- --------
Gross deferred tax assets............... 43,810 28,740
Deferred tax liabilities:
Property, plant and equipment........ (145,892) (82,764)
Other................................ (5,758) (11,610)
--------- --------
Gross deferred tax liabilities.......... (151,650) (94,374)
--------- --------
$(107,840) $(65,634)
========= ========
The Company has net operating loss carryforwards at December 31, 2000 of
$67,000,000 expiring in 2006 to 2020. In addition, the Company has an
alternative minimum tax credit carryforward of $17,123,000 that does not expire.
In 2000, the Company recorded approximately $9,029,000 of additional
deferred income tax liabilities resulting from the 2000 acquisition
transactions. In 1999, the company recorded approximately $8,627,000 additional
deferred income tax liability resulting from the 1999 acquisitions. See Note 2
for a description of the transactions.
The Company has not recorded a deferred income tax liability for additional
income taxes that would result from the distribution of earnings of its foreign
subsidiaries if they were actually repatriated. The Company intends to
indefinitely reinvest the undistributed earnings of its foreign subsidiaries.
11. Partners' Capital
Partners' capital consists of capital contributions from partners and
undistributed partnership income.
12. Stock Options
Certain Company employees participate in stock option plans that provide for
the granting of options to purchase Hanover common shares. The options are
generally issued with an exercise price equal to the fair market value on the
date of grant and are exercisable over a ten-year period. Vesting of stock
options issued prior to June 1997 was accelerated as a result of completion of
the initial public offering. No compensation expense related to stock options
was recorded in 2000, 1999 and 1998.
Of the options granted in 1999 and 1998, 700,000 vest 100% on July 1, 2001
and 320,000 vested immediately. The remaining options granted vest over the
following schedule, which may accelerate upon a change in the Hanover's
controlling ownership.
Year 1 10%
Year 2 30%
Year 3 60%
Year 4 100%
F-34
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
In June 2000, the Company purchased APSI that had existing stock option
programs in place. The Company converted the outstanding APSI stock options
into the Hanover's stock options as of the purchase date at a conversion ratio
equal to the exchange ratio under the merger agreement. As a result, 127,813
options were converted at a weighted-average per share exercise price of
approximately $12.88. Approximately 60,307 of the options vested at acquisition
with the remaining options vesting at varying dates through 2003.
The following is a summary of stock option activity for the years ended
December 31, 2000, 1999 and 1998:
Weighted Average
Shares price per share
--------- ----------------
Options outstanding, December 31, 1997 6,828,718 4.70
Options granted...................... 2,095,366 10.13
Options canceled..................... (84,008) 10.61
Options exercised.................... (49,646) 2.40
---------
Options outstanding, December 31, 1998 8,790,430 5.95
---------
Options granted...................... 272,156 13.79
Options canceled..................... (68,230) 9.72
Options exercised.................... (197,352) 2.76
---------
Options outstanding, December 31, 1999 8,797,004 6.24
---------
Options granted......................
APSI acquisition..................... 127,813 12.88
Options canceled..................... (11,562) 9.78
Options exercised.................... (994,572) 3.68
---------
Options outstanding, December 31, 2000 7,918,683 6.63
=========
Options Outstanding at December 31, 2000
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 2000:
Options outstanding Options exercisable
-------------------------------- -------------------
Weighted Weighted Weighted
average average average
remaining exercise exercise
Range of exercise prices Share life in years price Shares price
- ------------------------ --------- ------------- -------- --------- --------
$0.01.............. 76,886 1.4 $ 0.01 76,886 $ 0.01
$2.30--$3.48....... 3,378,062 0.7 2.37 3,378,062 2.37
$4.57--$6.96....... 297,989 3.6 5.26 285,956 5.29
$9.57--$14.50...... 4,117,146 7.2 10.19 1,703,507 9.93
$20.09............. 48,600 9.3 20.09 8,598 20.09
--------- ---------
7,918,683 5,453,009
========= =========
F-35
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The weighted-average fair value at date of grant for options where the
exercise price equals the market price of Hanover's stock on the grant date was
$6.10 and $4.16 per option during 1999 and 1998, respectively. The Company did
not grant any stock options in 2000. The fair value of options at date of grant
was estimated using the Black-Scholes model with the following weighted average
assumptions:
2000 1999 1998
---- ------- -------
Expected life. N/A 6 years 6 years
Interest rate. N/A 6.0% 4.8%
Volatility.... N/A 29.4% 32.6%
Dividend yield N/A 0% 0%
Stock-based compensation costs computed in accordance with FAS 123, would
have reduced net income by $4,598,000, $2,194,000 and $825,000 in 2000, 1999
and 1998, respectively. The pro forma effect on net income for 2000, 1999 and
1998 is not representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma compensation
expense related to grants made prior to 1995.
13. Benefit Plans
The Company's domestic employees participate in a 401(k) retirement plan
which provides for optional employee contributions up to the IRS limitation and
discretionary employer matching contributions. The Company made matching
contributions of $594,000, $399,000 and $273,000 during the years ended
December 31, 2000, 1999 and 1998, respectively.
14. Related Party Transactions
HCLP and GKH Partners, L.P. (''GKH''), a major stockholder of Hanover,
entered into an agreement whereby in exchange for investment banking and
financial advisory services rendered by the major stockholder, the Company
agreed to pay a fee to GKH. Approximately $2,048,000 of the fees payable to GKH
is included in accrued liabilities at December 31, 2000 and 1999. This
liability was paid in 2001 and the agreement is no longer in effect.
The Company has advanced cash to certain management employees in return for
notes. The notes receivable totaled $1,589,000, bear interest at the prime
rate, mature in June 2004 and are collateralized by Hanover common stock owned
by the employees with full recourse. The notes and related interest will be
forgiven over a four-year period should the employee continue their employment
with the Company. The forgiveness will accelerate upon a change in control of
Hanover. During 2000, the Company recognized compensation expense related to
the forgiveness of these notes receivable that totaled $105,000.
In connection with stock offerings of Hanover common stock to management,
the Company has received notes from employees for shares purchased. The total
amounts owed to the Company at December 31, 2000 and 1999 are $1,531,000 and
$3,387,000, respectively. Total interest accrued on the loans is $106,000 and
$203,000 as of December 31, 2000 and 1999, respectively.
The Company also leases compressors to affiliates of Enron Capital and Trade
Resources Corp. (''Enron''), an affiliate of a major stockholder of Hanover.
Rentals of $18,586,000, $8,776,000 and $6,801,000 were paid by affiliates of
Enron in 2000, 1999 and 1998, respectively. The Company sold equipment of
approximately
F-36
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
$17,293,000 to affiliates of Enron in 2000. Compression fabrication of
$6,320,000 was purchased by affiliates of Enron in 1999. An affiliate of Enron
also owns interest in Meter Acquisition Company LP, LLLP and Hanover
Measurement Services Company, L.P. (''HMS''). The Company charged HMS $312,000
for general and administrative services during 2000.
In July 2000, the Company entered into a definitive merger agreement to
purchase the outstanding stock of OEC Compression Corporation. In the third
quarter of 2000, the Company and OEC entered into a management agreement under
which OEC engaged HCLP to provide day to day management services for OEC's
field and shop operations. In connection with the management agreement, the
Company billed and collected management fees that totaled $2,700,000 that are
included in parts and service revenue. See footnote 16 for subsequent events.
The Company leases compressors to other companies owned or controlled by or
affiliated with related parties. Rental and maintenance revenues billed to
these related parties totaled $936,000, $902,000 and $859,000 during 2000, 1999
and 1998, respectively.
See Note 6 for related party investments.
HCLP is dependent on its Ultimate Parent in funding capital contributions,
which have in the past included proceeds from its Ultimate Parent's debt and
equity offerings. Furthermore, HCLP may in the future be required to make
distributions to its Ultimate Parent for repayment of its Ultimate Parent's
debt or other commitments.
15. Commitments and Contingencies
Rent expense, excluding lease payments for the leasing transactions
described in Note 9 for 2000, 1999 and 1998 was approximately $2,159,000,
$1,320,000 and $455,000, respectively. Commitments for future minimum rental
payments exclusive of those disclosed in Note 9 under noncancelable operating
leases with terms in excess of one year at December 31, 2000 are (in thousands
of dollars): 2001--$2,951; 2002--$2,362; 2003--$2,156; 2004--$1,949;
2005--$1,574.
In the ordinary course of business the Company is involved in various
pending or threatened legal actions, including environmental matters. 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 2001, the Company completed its purchase of OEC Compression
Corporation for approximately 1.1 million shares of common stock and assumption
of approximately $62 million in debt.
In August 2001, the Company acquired the gas compression business of
Schlumberger for approximately $761 million in cash, indebtedness, and common
stock, subject to certain post-closing adjustments pursuant to the acquisition
agreement which to date have resulted in an increase in the purchase price to
approximately $779 million (the "POI Acquisition").
F-37
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
In addition, on August 30, 2001, HCLP completed two sale-leaseback
transactions totaling $567 million (the "Sale-leaseback Transactions"). Under
the terms of the transactions, Hanover Equipment Trust 2001A and Hanover
Equipment Trust 2001B purchased equipment from the Company that was then leased
back to the Company pursuant to two operating leases for a 7-year period and a
10-year period, respectively. The equipment will continue to be deployed in the
Company's normal operations. The Company used approximately $305 million of the
proceeds of the sale to fund the cash portion of the POI Acquisition from
Schlumberger and to pay expenses of the acquisition and the sale-leaseback
transaction and $200 million of the proceeds to exercise its equipment purchase
option under an existing operating lease entered into in 1998. Hanover intends
to use the remaining $62 million of the proceeds for general corporate purposes.
Prior to July 1, 2001, the Company's compression equipment in the rental
fleet was depreciated using the straight-line method over an estimated useful
life that ranged from 4 to 25 years. Effective July 1, 2001, the Company
changed its estimate of the useful life of certain compression equipment from
15 to 30 years. The Company anticipates this change in estimated useful life
will reduce future depreciation expense, based on the Company's current
depreciable assets, by approximately $12 million on an annual basis.
In December 2001, the Company amended its credit agreement to extend the
maturity date until November 30, 2004, and to increase the credit facility from
$200 million to $350 million.
In December 2001, HCLP and its subsidiaries completed various internal
restructuring transactions pursuant to which certain of the domestic
subsidiaries of HCLP were merged, directly or indirectly, with and into HCLP.
17. Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, Business
Combinations. The Statement is effective for all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. All business combinations in the scope of this
statement are to be accounted for using one method, the purchase method.
In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible
Assets. Under SFAS 142, amortization of goodwill to earnings will be
discontinued. However, goodwill will be reviewed for impairment annually or
whenever events indicate impairment may have occurred. SFAS 142 is effective
for HCLP on January 1, 2002. However, under the transition provisions of SFAS
142, goodwill acquired in a business combination for which the acquisition date
is after June 30, 2001, shall not be amortized. Since the POI Acquisition was
consummated after June 30, 2001, the goodwill related to the POI Acquisition
will not be amortized. The goodwill related to business combinations completed
before June 30, 2001 continues to be amortized since HCLP has not adopted SFAS
142.
At September 30, 2001, HCLP has recorded approximately $222.3 million of
goodwill, of which $181.3 million is required to be amortized, at an annual
rate of approximately $9.6 million, under generally accepted accounting
principles. The Company is currently evaluating the effect the implementation
of SFAS 142 will have on its financial statements.
In June 2001, the FASB issued SFAS 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets. SFAS 143 establishes the
accounting standards for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. This statement is
effective for HCLP effective January 1, 2003. The Company is presently
evaluating the impact that the implementation of SFAS 143 will have on its
financial statements.
F-38
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
In October 2001, the Financial Accounting Standards Board issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144
addresses significant issues relating to the implementation of SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and to develop a single accounting model, based on the
framework established in SFAS 121, for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired. This statement is
effective for HCLP effective January 1, 2002. The Company is presently
evaluating the impact that the implementation of SFAS 144 will have on its
financial statements.
18. Industry Segments and Geographic Information
The Company manages its business segments primarily on the type of product
or service provided. The Company has five principal industry segments:
Rentals--Domestic, Rentals--International, Parts, Service and Used Equipment,
Compressor Fabrication and Production and Processing Equipment Fabrication. The
Rentals segments provide natural gas compression rental and maintenance
services to meet specific customer requirements. The Compressor Fabrication
Segment involves the design, fabrication and sale of natural gas compression
units to meet unique customer specifications. The Production and Processing
Equipment Fabrication Segment designs, fabricates and sells equipment utilized
in the production of crude oil and natural gas. Prior periods have been
restated to reflect the expansion in 2000 of the Parts, Service and Used
Equipment segment.
The Company evaluates the performance of its segments based on segment gross
profit. Segment gross profit for each segment includes direct operating
expenses. Costs excluded from segment gross profit include selling, general and
administrative, depreciation and amortization, leasing, interest, distributions
on mandatorily redeemable convertible preferred securities and income taxes.
Amounts defined as ''Other'' include equity in income of nonconsolidated
affiliates, results of other insignificant operations and corporate related
items primarily related to cash management activities. Revenues include sales
to external customers and intersegment sales. Intersegment sales are accounted
for at cost 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 $41,200,000 and
$32,300,000 of the Company's purchases in 2000 and 1998, respectively.
F-39
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The following tables present sales and other financial information by industry
segment and geographic region for the years ended December 31, 2000, 1999 and
1998.
Parts,
service Production
Domestic International and used Compressor equipment
rentals rentals equipment fabrication fabrication Other Eliminations Consolidated
Industry Segments -------- ------------- --------- ----------- ----------- ------- ------------ ------------
(in thousands of dollars)
2000:
Revenues from external
customers............ $173,195 $ 81,320 $151,707 $ 96,838 $ 88,572 $12,197 $ 603,829
Intersegment sales..... 1,200 31,086 83,395 3,653 7,413 $(126,747)
-------- -------- -------- -------- -------- ------- --------- ----------
Total revenues..... 173,195 82,520 182,793 180,233 92,225 19,610 (126,747) 603,829
Gross profit........... 112,859 53,664 48,431 14,842 19,291 12,197 261,284
Identifiable assets.... 521,195 270,334 34,937 312,894 104,676 42,046 1,286,082
Capital expenditures... 207,705 58,801 874 723 268,103
Depreciation and
amortization......... 30,102 15,117 160 4,381 3,122 52,882
1999:
Revenues from external
customers............ $136,430 $ 56,225 $ 42,518 $ 52,531 $ 28,037 $ 7,479 $ 323,220
Intersegment sales..... 1,200 38,656 75,139 4,821 $(119,816)
-------- -------- -------- -------- -------- ------- --------- ----------
Total revenues..... 136,430 57,425 81,174 127,670 32,858 7,479 (119,816) 323,220
Gross profit........... 90,246 37,460 14,602 8,868 7,204 7,479 165,859
Identifiable assets.... 529,667 149,968 47,608 23,511 2,445 753,199
Capital expenditures... 180,593 99,535 1,469 1,343 282,940
Depreciation and
amortization......... 24,448 11,158 702 1,029 37,337
1998:
Revenues from external
customers............ $107,420 $ 40,189 $ 29,538 $ 67,453 $ 37,466 $ 4,285 $ 286,351
Intersegment sales..... 1,200 7,792 54,369 2,902 $ (66,263)
-------- -------- -------- -------- -------- ------- --------- ----------
Total revenues..... 107,420 41,389 37,330 121,822 40,368 4,285 (66,263) 286,351
Gross profit........... 70,850 27,374 7,803 9,309 11,685 4,284 131,305
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
F-40
HANOVER COMPRESSION LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
United
States International Consolidated
Geographic Data -------- ------------- ------------
(in thousands of dollars)
2000:
Revenues from external customers. $472,391 $131,438 $ 603,829
Identifiable assets.............. $974,952 $311,130 $1,286,082
1999:
Revenues from external customers. $263,082 $ 60,138 $ 323,220
Identifiable assets.............. $600,057 $153,142 $ 753,199
1998:
Revenues from external customers. $234,999 $ 51,352 $ 286,351
Identifiable assets.............. $484,269 $130,321 $ 614,590
F-41
HANOVER COMPRESSION LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
(in thousands of dollars)
September 30, December 31,
2001 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 22,306 $ 45,484
Accounts receivable trade, net.............................................. 345,563 242,526
Inventory................................................................... 214,925 139,248
Costs and estimated earnings in excess of billings on uncompleted contracts. 77,343 38,665
Prepaid taxes............................................................... 32,066 19,948
Other current assets........................................................ 27,356 12,384
----------- ----------
Total current assets.................................................... 719,559 498,255
Property, plant and equipment, net.......................................... 1,022,490 583,586
Goodwill, net............................................................... 200,292 141,973
Intangible and other assets................................................. 54,652 34,540
Investment in nonconsolidated affiliates.................................... 183,174 27,728
----------- ----------
Total assets............................................................ $ 2,180,167 $1,286,082
=========== ==========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................................ $ 5,607 $ 2,423
Short-term notes payable.................................................... 10,073
Accounts payable, trade..................................................... 108,717 88,651
Accrued liabilities......................................................... 97,207 49,024
Advance billings............................................................ 48,386 32,292
Billings on uncompleted contracts in excess of costs and estimated earnings. 11,805 5,669
----------- ----------
Total current liabilities............................................... 271,722 188,132
Long-term debt.............................................................. 242,709 110,935
Other liabilities........................................................... 225,856 158,661
Deferred income taxes....................................................... 139,025 107,840
----------- ----------
Total liabilities....................................................... 879,312 565,568
Commitments and contingencies
Partners' equity:
Partners' capital........................................................... 1,309,248 720,971
Accumulated other comprehensive loss........................................ (8,393) (457)
----------- ----------
Total partners' equity.................................................. 1,300,855 720,514
----------- ----------
Total liabilities and partners' equity.................................. $ 2,180,167 $1,286,082
=========== ==========
The accompanying notes are an integral part of these financial statements.
F-42
HANOVER COMPRESSION LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(in thousands of dollars)
Nine months ended
September 30,
------------------
2001 2000
-------- --------
Revenues and other:
Rentals.......................................................................... $275,120 $180,210
Parts, service and used equipment................................................ 189,063 64,293
Compressor fabrication........................................................... 168,168 60,146
Production and processing equipment fabrication.................................. 139,296 53,870
Equity in income of non-consolidated affiliates.................................. 3,751 1,953
Other............................................................................ 6,243 9,750
-------- --------
781,641 370,222
-------- --------
Expenses:
Rentals.......................................................................... 92,663 62,104
Parts, service and used equipment................................................ 132,126 42,202
Compressor fabrication........................................................... 140,915 50,082
Production and processing equipment fabrication.................................. 110,277 41,938
Selling, general and administrative.............................................. 66,341 34,481
Depreciation and amortization.................................................... 60,454 36,830
Leasing expense.................................................................. 47,541 29,596
Interest expense................................................................. 5,505 5,560
Other............................................................................ 11,473
-------- --------
667,295 302,793
-------- --------
Income before income taxes.......................................................... 114,346 67,429
Provision for income taxes.......................................................... 43,444 25,083
-------- --------
Net income before cumulative effect of accounting change............................ 70,902 42,346
Cumulative effect of accounting change for derivative instruments, net of income
tax............................................................................ (164)
-------- --------
Net income.......................................................................... 70,738 42,346
-------- --------
Other comprehensive income (loss), net of tax:
Adjustment to record changes in fair value of derivative financial instruments... (7,914)
Foreign currency translation adjustment.......................................... (22) (154)
-------- --------
Comprehensive income................................................................ $ 62,802 $ 42,192
======== ========
The accompanying notes are an integral part of these financial statements.
F-43
HANOVER COMPRESSION LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(in thousands of dollars)
Nine Months Ended
September 30,
--------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income...................................................................... $ 70,738 $ 42,346
Adjustments:
Depreciation and amortization............................................... 60,454 36,830
Amortization of debt issuance costs and debt discount....................... 975 479
Bad debt expense............................................................ 1,608 840
Gain on sale of property, plant and equipment............................... (107) (10,657)
Equity in income of nonconsolidated affiliates.............................. (3,751) (1,953)
Loss on derivative instruments.............................................. 8,976
Deferred income taxes....................................................... 28,804 9,560
Changes in assets and liabilities, excluding impact of business
combinations:
Accounts receivable...................................................... (57,708) (28,014)
Inventory................................................................ (49,581) (34,814)
Costs and estimated earnings in excess of billings on uncompleted
contracts.............................................................. (32,541) (23,169)
Accounts payable and other liabilities................................... 7,573 25,219
Advance billings......................................................... 16,094 2,749
Other.................................................................... (5,138) (4,409)
--------- ---------
Net cash provided by operating activities.......................................... 46,396 15,007
--------- ---------
Cash flows from investing activities:
Capital expenditures............................................................ (479,696) (199,676)
Deferred leasing transaction costs.............................................. (17,738) (2,660)
Proceeds from sale of property, plant and equipment............................. 582,497 220,609
Cash used for business combinations, net of cash acquired....................... (377,537) (174,827)
Cash used to acquire investments in nonconsolidated affiliates.................. (6,777) (8,720)
--------- ---------
Net cash used in investing activities.............................................. (299,251) (165,274)
--------- ---------
Cash flows from financing activities:
Net borrowing (repayment) on revolving credit facility.......................... (17,500) 102,900
Repayment of long-term debt and short-term notes................................ (14,920) (4,290)
Partners' contribution (net).................................................... 262,133 58,987
--------- ---------
Net cash provided by financing activities.......................................... 229,713 157,597
--------- ---------
Effect of exchange rate changes on cash and cash equivalents....................... (36) (44)
--------- ---------
Net increase (decrease) in cash and cash equivalents............................... (23,178) 7,286
Cash and cash equivalents at beginning of period................................... 45,484 5,756
--------- ---------
Cash and cash equivalents at end of period......................................... $ 22,306 $ 13,042
========= =========
Acquisitions of businesses:
Property, plant and equipment acquired.......................................... $ 605,581 $ 190,521
Other assets acquired, net of cash acquired..................................... 247,510 92,905
Goodwill........................................................................ 64,742 106,777
Liabilities..................................................................... (64,264) (60,343)
Debt issued..................................................................... (215,305)
Deferred taxes.................................................................. (6,802) (15,167)
Partners' noncash capital contributions......................................... (253,925) (139,866)
The accompanying notes are an integral part of these financial statements.
F-44
HANOVER COMPRESSION LIMITED PARTNERSHIP
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Hanover Compression Limited Partnership ("HCLP" of the "Company"), a indirectly
wholly owned subsidiary of Hanover Compressor Company ("Hanover"), included
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. It is the opinion of management that the information furnished
includes all adjustments, consisting only of normal recurring adjustments,
which are necessary to present fairly the financial position, results of
operations, and cash flows of the Company for the periods indicated. The
financial statement information included herein should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 2000. These interim results are not necessarily indicative of
results for a full year.
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 30 years
Buildings............................... 30 years
Transportation, shop equipment and other 3 to 12 years
Major improvements that extend the useful life of an asset are capitalized.
Repairs and maintenance are expensed as incurred. When property, plant and
equipment is sold, retired or otherwise disposed of, the cost, net of
accumulated depreciation is recorded in parts, service and used equipment
expenses. Sales proceeds are recorded in parts, service and used equipment
revenues. Interest is capitalized in connection with the compression equipment
and facilities that are constructed for the Company's use in its rental
operations. The capitalized interest is recorded as part of the assets to which
it relates and is amortized over the asset's estimated useful life.
Prior to July 1, 2001, compression equipment in the rental fleet was
depreciated using the straight-line method over an estimated useful life that
ranged from 4 to 25 years. Effective July 1, 2001, the Company changed its
estimate of the useful life of certain compression equipment from 15 to 30
years. The effect of this change in estimate on the quarter ended September 30,
2001 was a decrease in depreciation expense of approximately $1.5 million and
an increase in net income of approximately $0.9 million. The Company
anticipates this change in estimated useful life will reduce future
depreciation expense, based on the Company's current depreciable assets, by
approximately $3 million per quarter.
Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 2001 financial statement classification. These
reclassifications have no impact on net income.
2. BUSINESS COMBINATIONS
In March 2001, the Company purchased OEC Compression Corporation ("OEC") in
an all-stock transaction for approximately $100.7 million, including the
payment of approximately $63.0 million of OEC indebtedness. The Company paid an
aggregate of approximately 1,145,000 shares of Hanover common stock to
stockholders of OEC. The acquisition was accounted for under the purchase
method of accounting and is included in HCLP's financial statements commencing
in April 2001.
F-45
In August 2001, the Company acquired 100% of the issued and outstanding
shares of the Production Operators Corporation natural gas compression
business, ownership interests in certain joint venture projects in South
America, and related assets ("POI") from Schlumberger for $761 million in cash,
Hanover common stock and indebtedness, subject to certain post-closing
adjustments pursuant to the purchase agreement (the "POI Acquisition") that to
date have resulted in an increase in the purchase price to approximately $779
million due to an increase in net assets acquired. Under the terms of the
definitive agreement, Schlumberger received approximately $270 million in cash
(excluding the amounts paid for the increase in net assets), $150 million in a
long-term subordinated note and approximately 8,708,000 Hanover common shares,
or approximately 11% of the outstanding shares, of Hanover common stock which
are required to be held by Schlumberger for at least three years following the
closing date. The ultimate number of shares issued under the purchase agreement
was determined based on the nominal value of $283 million divided by the 30 day
average closing price of Hanover common stock as defined under the agreement
and subject to a collar of $41.50 and $32.50. The estimated fair value of the
stock issued was $212.5 million, based on the market value of the shares at the
time the number of shares issued was determined reduced by an estimated 20%
discount due to the restrictions on the stock's marketability. Additionally,
under the terms of the agreement, the Company is required to pay $58 million
upon the occurrence of certain events (see Note 12) relating to one of the
joint ventures acquired by HCLP in the transaction. The purchase price was a
negotiated amount between the Company and Schlumberger and the Company expects
the acquisition to be accretive to earnings in future periods. The Company
believes the purchase price represents the fair value of the POI business
acquired based upon its assets, customer base, reputation, market position
(domestic and international) and potential for long-term growth. The POI
Acquisition was accounted for as a purchase and is included in HCLP's financial
statements commencing on September 1, 2001.
As of September 30, 2001 the Company has recorded approximately $36 million
in goodwill related to the acquisition which will not be amortized in
accordance with the transition provisions of SFAS 142 (See Note 10). In
addition, as of September 30, 2001, the Company recorded $18.3 million in
estimated value of identifiable intangible assets. The purchase price is
subject to certain post-closing adjustments and a contingent payment by HCLP to
Schlumberger based on the realization of certain tax benefits by HCLP over the
next 15 years. This final amount of goodwill and identifiable intangible assets
could differ from the amount recorded upon completion of third party valuations
of the acquired assets and any required purchase price adjustment under the
agreement.
The pro forma information set forth below assumes the acquisitions of OEC
and POI completed in 2001, and the acquisitions of the Dresser-Rand Company's
compression services division and Applied Process Solutions, Inc. ("APSI")
completed in 2000 are accounted for as if the purchases had occurred at the
beginning of 2000. The pro forma information is presented for informational
purposed only and is not necessarily indicative of the results of operations
that would have been achieved had the acquisitions been consummated at that
time (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenue................................................... $324,996 $217,495 $891,054 $594,919
Net income before cumulative effect of accounting change * $ 22,879 $ 16,123 $ 68,814 $ 39,749
* Net income includes other expense of $2.8 million for the three and nine
months ended September 30, 2001, respectively (see note 6).
F-46
3. INVENTORIES
Inventory consisted of the following amounts (in thousands):
Sepember 30, December 31,
2001 2000
------------ ------------
Parts and supplies $153,713 $ 87,114
Work in progress. 54,356 47,193
Finished goods... 6,856 4,941
-------- --------
$214,925 $139,248
======== ========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
September 30, December 31,
2001 2000
------------- ------------
Compression equipment and facilities. $1,028,544 $587,387.
Land and buildings................. 50,367 35,233
Transportation and shop equipment.. 60,114 44,202
Other.............................. 21,138 15,279
---------- --------
1,160,163 682,101
Accumulated depreciation........... (137,673) (98,515)
---------- --------
$1,022,490 $583,586
========== ========
In August 2001, the Company exercised its purchase option under the 1998
operating lease for $200 million. The depreciable basis of the compressors
purchased has been reduced by the deferred gain of approximately $42 million
which was recorded at inception of the lease and previously included as an
other liability on the Company's balance sheet (see note 8).
5. INVESTMENTS IN NONCONSOLIDATED AFFILIATES
In connection with the POI Acquisition in August 2001, the Company acquired
ownership interests in certain joint venture projects in South America. The
investments in joint ventures are accounted for using the equity method of
accounting as the Company has ability to exercise significant influence over
each joint venture. The Company's preliminary estimate of the fair value of
these long-term investments totals $147 million but could change subject to
completion of the third party appraisal of the joint ventures. The Company's
ownership interest and the location of each joint venture is as follows:
Ownership
Interest Location
--------- ---------
Wilpro-Pigap II... 30.0% Venezuela
Wilpro-El Furrial. 33.3% Venezuela
Simco............. 35.5% Venezuela
6. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
Septmber 30, December 31,
2001 2000
------------ ------------
Revolving credit facility............................................................. $ 85,000 $102,500
Schlumberger note, interest at 8.5%................................................... 150,000
Real estate mortgage, interest at 7.5%, collateralized by certain land and buildings,
payable through 2002................................................................ 3,667 4,000
Other, interest at various rates, collateralized by equipment and other assets, net of
unamortized discount................................................................ 9,649 6,858
-------- --------
248,316 113,358
Less--current maturities.............................................................. (5,607) (2,423)
-------- --------
$242,709 $110,935
======== ========
F-47
The Company's credit agreement provides for a $200 million revolving credit
facility that matures on December 17, 2002. Advances bear interest at the
bank's prime or a negotiated rate (4.60% and 7.5% at September 30, 2001 and
December 31, 2000, 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 (See Note 13).
In connection with the POI Acquisition on August 31, 2001, the Company
issued a $150 million subordinated acquisition note to Schlumberger, which
matures December 15, 2005. Interest on the subordinated acquisition note
accrues and is payable-in-kind at the rate of 8.5% annually for the first six
months after issuance and periodically increases in increments of 1% to 2% per
annum to a maximum interest rate 42 months after issuance of 15.5%. In the
event of an event of default under the subordinated acquisition note, interest
will accrue at a rate of 2% above the then applicable rate. The subordinated
acquisition note is subordinated to all of the Company's indebtedness other
than indebtedness to fund future acquisitions. In the event that the Company
completes an offering of equity securities, the Company is required to apply
the proceeds of the offering to repay amounts outstanding under the
subordinated acquisition note as long as no default exists or would exist under
our other indebtedness as a result of such payment. In August of 2001, the
Company recorded in other expense a $2.8 million charge related to a bridge
loan commitment fee associated with HCLP's recent acquisition of POI.
Maturities of long-term debt at September 30, 2001 are (in thousands of
dollars): 2001--$613; 2002--$90,423; 2003--1,364; 2004--$1,053; 2005--$150,871;
2006--$546 and $195,446 thereafter.
7. LEASING TRANSACTION
In August 2001 and in connection with the POI Acquisition, the Company
completed two sale and lease back transactions involving certain compression
equipment. Concurrent with the transactions, the Company exercised its purchase
option under its 1998 operating lease for $200,000,000. Under one transaction,
the Company received $309,300,000 proceeds from the sale of compression
equipment. Under the second transaction, the Company received $257,750,000 for
the sale of additional compression equipment. Both transactions are recorded as
a sale and lease back of the equipment and are recorded as operating leases.
Under the $309,300,000 transaction, the equipment was sold and leased back by
the Company for a 7 year period and will continue to be deployed by the Company
under its normal operating procedures. The agreement calls for semi-annual
rental payments of approximately $12,750,000 in addition to quarterly rental
payments of approximately $268,000. Under the $257,750,000 transaction, the
equipment was sold and leased back by the Company for a 10 year period and will
continue to be deployed by the Company under its normal operating procedures.
The agreement calls for semi-annual rental payments of approximately
$10,938,000 in addition to quarterly rental payments of approximately $232,000.
The Company has options to repurchase the equipment under certain conditions as
defined by the lease agreement. The Company incurred transaction costs of
approximately $17,700,000 related to the transactions. These costs are included
in intangible and other assets and are being amortized over the respective
lease terms.
In October 2000, the Company completed a $172,589,000 sale and lease back of
certain compression equipment. In March 2000, the Company entered into a
separate $200,000,000 sale and lease back of certain compression equipment.
Under the March agreement, the Company received $100,000,000 proceeds from the
sale of compression equipment at closing and in August 2000, the Company
completed the second half of the equipment lease and received an additional
$100,000,000 for the sale of additional compression equipment. In June 1999 and
in July 1998 the Company completed two other separate $200,000,000 sale and
lease back transactions of certain compression equipment. Under the 2000 and
1999 lease agreements, the equipment was sold and leased back by the Company
for a 5 year period and will continue to be deployed by the Company under its
normal operating procedures. At any time, the Company has options to repurchase
the equipment under the 2000 and 1999 leases at fair market value. The 2000 and
1999 lease agreements call for variable quarterly payments that fluctuate with
the London Interbank Offering Rate.
F-48
The following table summarizes the proceeds, net book value of equipment
sold, deferred gain on equipment sale and the final rent payment for each
equipment lease (in thousands of dollars):
RESIDUAL
SALE NET BOOK DEFERRED VALUE
PROCEEDS VALUE GAIN GUARANTEE
LEASES -------- -------- -------- ---------
June 1999............. $200,000 $162,014 $37,986 $166,000
March and August 2000. 200,000 162,522 37,478 166,000
October 2000.......... 172,589 134,918 37,671 142,299
August 2001........... 567,050 540,342 26,708 407,000
All transactions are recorded as a sale and lease back of the equipment and
the leases are treated as operating leases. The Company has substantial
guarantees under the lease agreements that are due upon termination of the
leases and which may be satisfied by a cash payment or the exercise of the
Company's purchase options under the terms of the lease agreements. Any gains
on the sale of the equipment are deferred until the end of the respective lease
terms. Should the Company not exercise its purchase options under the lease
agreements, the deferred gains will be recognized to the extent they exceed any
final rent payments and any other payments required under the lease agreements.
Upon exercise of the purchase option under the 1998 operating lease, the
Company reduced its depreciable basis by the gain of approximately $42 million
previously deferred. The following future minimum lease payments are due under
the leasing arrangements exclusive of any final rent payments or purchase
option payments (in thousands): 2001 --$21,458; 2002 -- $85,833; 2003 --
$85,833; 2004 -- $80,248; 2005 -- $63,474; 2006 --$49,375.
8. ACCOUNTING FOR DERIVATIVES
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
as amended by SFAS 137 and SFAS 138, effective January 1, 2001. SFAS 133
requires that 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. Prior to 2001, the
Company entered into two interest rate swaps which are outstanding at September
30, 2001 with notional amounts of $75,000,000 and $125,000,000 and strike rates
of 5.51% and 5.56%, respectively. The difference paid or received on the swap
transactions is recognized in leasing expense. The interest rate swaps expire
in July 2003. On January 1, 2001, in accordance with the transition provisions
of SFAS 133, the Company recorded an unrealized loss resulting from the
cumulative effect of an accounting change in the statement of income of
approximately $164,000 ($.00 per share), net of tax benefit of $89,000. During
the three and nine months ended September 30, 2001, the Company recognized
additional unrealized loss of $5.7 million and $8.7 million, respectively,
related to the change in the fair value of these interest rate swaps in other
expense in the statement of income. The fair value of these interest rate swaps
will fluctuate with changes in interest rates over their remaining terms and
these changes in fair value will be recorded in the statement of income.
During the second quarter of 2001, the Company entered in three additional
interest rate swaps to convert variable lease payments under certain operating
lease arrangements to fixed payments as follows:
Maturity Strike Notional
Date Rate Amount
Lease ---------- ------- ------------
March 2000.. 3/11/2005 5.2550% $100,000,000
August 2000. 3/11/2005 5.2725% $100,000,000
October 2000 10/26/2005 5.3975% $100,000,000
F-49
These three swaps meet the specific hedge criteria and any changes in their
fair values have been recognized in other comprehensive income. During the
three months and nine months ended September 30, 2001, the Company recorded a
$8.7 million and $7.9 million loss, net of tax in other comprehensive income.
At September 30, 2001 the Company has approximately $22 million recorded in
other liabilities related to interest rate swaps.
9. ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards("SFAS") 141, Business Combinations.
The Statement is effective for all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001, or
later. All business combinations in the scope of this statement are to be
accounted for using one method, the purchase method.
In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible
Assets. Under SFAS 142, amortization of goodwill to earnings will be
discontinued. However, goodwill will be reviewed for impairment annually or
whenever events indicate impairment may have occurred. SFAS 142 is effective
for HCLP on January 1, 2002. However, under the transition provisions of SFAS
142, goodwill acquired in a business combination for which the acquisition date
is after June 30, 2001, shall not be amortized. Since the POI Acquisition was
consummated after June 30, 2001, the goodwill related to the POI Acquisition
will not be amortized. The goodwill related to business combinations completed
before June 30, 2001 continues to be amortized since HCLP has not adopted SFAS
142.
At September 30, 2001, HCLP has recorded approximately $222.3 million of
goodwill, of which $181.3 million is required to be amortized, at an annual
rate of approximately $9.6 million, under generally accepted accounting
principles. The Company is currently evaluating the effect the implementation
of SFAS 142 will have on its financial statements.
In June 2001, the FASB issued SFAS 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets. SFAS 143 establishes the
accounting standards for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. This statement is
effective for HCLP effective January 1, 2003. The Company is presently
evaluating the impact that the implementation of SFAS 143 will have on its
financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144
addresses significant issues relating to the implementation of SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and to develop a single accounting model, based on the
framework established in SFAS 121, for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired. This statement is
effective for HCLP effective January 1, 2002. The Company is presently
evaluating the impact that the implementation of SFAS 144 will have on its
financial statements.
10. RELATED PARTY TRANSACTIONS
During the quarter ended June 30, 2001, the Company sold a turbine for
approximately $16.1 million to an entity controlled by the father of an
operational vice president of the Company which resulted in a gain of
approximately $1.5 million. Approximately $14.5 million is included in accounts
receivable-trade at September 30, 2001 related to this transaction. In August
2001, the Company paid $4.7 million to GKH Partners, L.P., a major stockholder
of the Company, as payment for services rendered in connection with the POI
Acquisition.
HCLP is dependent on its Ultimate Parent in funding capital contributions,
which have in the past included proceeds from its Ultimate Parent's debt and
equity offerings. Furthermore, HCLP may in the future be required to make
distributions to its Ultimate Parent for repayment of its Ultimate Parent's
debt or other commitments.
F-50
11. COMMITMENTS AND CONTINGENCIES
As part of the POI Acquisition, the Company is required to make a payment of
$58 million due upon the completion of a refinancing of a South American joint
venture acquired by HCLP. If the joint venture fails to execute the refinancing
on or before December 31, 2002, HCLP will be obligated to either put its
interest in such joint venture back to Schlumberger or make the joint venture
payment using other funds. This obligation is recorded in other liabilities in
the accompanying balance sheet. The purchase price is also subject to certain
post-closing adjustments and a contingent payment by HCLP to Schlumberger based
on the realization of certain tax benefits by HCLP over the next 15 years.
In January 2001, the Company entered into a facilitation agreement with
Bellili Energy SRL ("Bellili"), a fabrication company based in Italy. In
connection with the agreement, the Company agreed to provide Bellili with
project financing including necessary guarantees, bonding capacity and other
collateral on an individual project basis. Under the agreement, Bellili must
present each project to the Company which must be approved at the Company's
sole discretion. At September 30, 2001, no amounts were outstanding under the
facilitation agreement.
Under a separate agreement with Bellili, the Company has guaranteed
performance bonds on Bellili's behalf totaling approximately $9.3 million at
September 30, 2001.
In the ordinary course of business the Company is involved in various
pending or threatened legal actions, including environmental matters While
management is unable to predict the ultimate outcome of these actions, it
believes that any ultimate liability arising from these actions will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
12. REPORTABLE SEGMENTS
The Company manages its business segments primarily on the type of product
or service provided. The Company has five principal industry segments:
Rentals-- Domestic; Rentals--International; Parts, Service and Used Equipment;
Compressor Fabrication and Production and Processing Equipment Fabrication. The
Rentals segments provide natural gas compression rental and maintenance
services to meet specific customer requirements. Parts, Service and Used
Equipment segment provides used equipment, both new and used parts directly to
customers, as well as complete maintenance services for customer owned
packages. The Compressor Fabrication Segment involves the design, fabrication
and sale of natural gas compression units to meet unique customer
specifications. The Production and Processing Equipment Fabrication Segment
designs, fabricates and sells equipment utilized in the production of crude oil
and natural gas. Prior periods have been restated to reflect the expansion in
2000 of the Parts, Service and Used Equipment segment.
The Company evaluates the performance of its segments based on segment gross
profit. Segment gross profit for each segment includes direct operating
expenses. Costs excluded from segment gross profit include selling, general and
administrative, depreciation and amortization, leasing, interest, distributions
on mandatorily redeemable convertible preferred securities and income taxes.
Amounts defined as "Other" include equity in income of non-consolidated
affiliates, results of other insignificant operations and corporate related
items primarily related to cash management activities. Revenues include sales
to external customers and inter-segment sales. Inter-segment 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.
F-51
The following table presents sales and other financial information by
industry segment for the three and nine months ended September 30, 2001 and
2000 (in thousands):
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
------------------------------- --------------------------------
Sales to Sales to
External Intersegment Total External Intersegment Total
Business Segment Customers Total Revenues Customers Sales Revenues
------------------------------- --------------------------------
Domestic rentals................ $ 72,033 $ 72,033 $ 45,533 $ 45,533
International rentals........... 32,962 $ 711 33,673 20,776 $ 300 21,076
Parts, service & used equipment. 84,608 13,460 98,068 28,743 2,452 31,195
Compressor fabrication.......... 55,678 12,884 68,562 30,975 16,640 47,615
Production equipment fabrication 50,363 2,531 52,894 32,759 32,759
Other........................... 3,155 1,261 4,416 3,795 884 4,679
Eliminations.................... (30,847) (30,847) (20,276) (20,276)
-------- -------- -------- -------- -------- ---------
Total consolidated revenues..... $298,799 $298,799 $162,581 $ 162,581
======== ======== ======== ======== ======== =========
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
----------------------------------- -----------------------------------
Business Segment Sales to Sales to
External Intersegment Total External Intersegment Total
Customers Sales Revenues Customers Sales Revenues
----------------------------------- -----------------------------------
Domestic rentals................ $ 185,822 $ 185,822 $ 122,761 $ 122,761
International rentals........... 89,298 $ 2,845 92,143 57,449 $ 900 58,349
Parts, service & used equipment. 189,063 37,428 226,491 64,293 22,155 86,448
Compressor fabrication.......... 168,168 49,606 217,774 60,146 68,943 129,089
Production equipment fabrication 139,296 4,763 144,059 53,870 1,747 55,617
Other........................... 9,994 3,507 13,501 11,703 2,477 14,180
Eliminations.................... (98,149) (98,149) (96,222) (96,222)
---------- ------------- --------- ---------- ------------- ---------
Total consolidated revenues..... $ 781,641 $ 781,641 $ 370,222 $ 370,222
========== ============= ========= ========== ============= =========
Gross Profit
-------------------------------------------------------
Three Months Ended Nine Months Ended Identifiable Assets
--------------------------- --------------------------- ---------------------------
September 30, September 30, September 30, September 30, September 30, September 30,
Business Segment 2001 2000 2001 2000 2001 2000
--------------------------- --------------------------- ---------------------------
Domestic rentals...... $ 46,144 $29,550 $122,485 $ 80,592 $1,240,582 $ 688,010
International rentals. 23,461 13,496 59,972 37,514 462,075 164,021
Parts, service & used
equipment........... 22,892 10,792 56,937 22,091 82,992 24,037
Compressor fabrication 9,781 4,767 27,253 10,064 255,859 279,084
Production equipment
fabrication......... 10,532 7,239 29,019 11,932 125,927 103,274
Other................. 3,155 3,795 9,994 11,703 12,732 9,598
-------- ------- -------- -------- ---------- ----------
Total................. $115,965 $69,639 $305,660 $173,896 $2,180,167 $1,268,024
======== ======= ======== ======== ========== ==========
13. SUBSEQUENT EVENT
In December 2001, the Company amended its credit agreement to extend the
maturity date until November 30, 2004, and to increase the credit facility from
$200 million to $350 million.
In December 2001, HCLP and its subsidiaries completed various internal
restructuring transactions pursuant to which certain of the domestic
subsidiaries of HCLP were merged, directly or indirectly, with and into HCLP.
F-52
HANOVER COMPRESSION LIMITED PARTNERSHIP
SELECTED QUARTERLY UNAUDITED FINANCIAL DATA
The table below sets forth selected unaudited financial information for each
quarter for the nine months ended September 30, 2001 and for the years ended
December 31, 2000 and 1999:
1st 2nd 3rd 4th
quarter quarter quarter quarter
-------- -------- -------- --------
(in thousands of dollars)
2001:
Revenue.................................................. $219,764 $263,078 $298,799
Gross profit............................................. 89,733 99,962 115,965
Net income before cumulative effect of accounting change. 19,936 25,818 25,149
2000:
Revenue.................................................. $ 90,557 $117,084 $162,581 $233,607
Gross profit............................................. 48,326 55,931 69,639 87,388
Net income............................................... 12,165 13,773 16,410 20,351
1999:
Revenue.................................................. $ 66,694 $ 73,875 $ 87,269 $ 95,382
Gross profit............................................. 36,947 38,681 43,373 46,858
Net income............................................... 8,639 8,482 10,388 13,109
F-53
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$300,000,000
8.50% Senior Secured Notes Due 2008
that have been registered under the Securities Act of 1933
for
All outstanding unregistered 8.50% Senior Secured Notes Due 2008
($300,000,000 principal amount outstanding)
of
Hanover Equipment Trust 2001A
payable from lease obligations of
and guaranteed by
Hanover Compression Limited Partnership
which lease obligations and notes are guaranteed by
Hanover Compressor Company
-----------------
PROSPECTUS
, 2002
-----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Idemnification of Directors and Officers
Hanover Equipment Trust 2001A
Hanover Equipment Trust 2001A is a Delaware business trust. Section 3817 of
the Delaware Business Trust Act permits a business trust to indemnify and hold
harmless any trustee or beneficial owner or other person from and against any
and all claims and demands whatsoever.
Section 4.3 of the Issuer's trust agreement provides that the trustee need
not take any action under the trust agreement unless the trustee has been
indemnified by HCLP, or if the trustee believes that such indemnity is
inadequate, by the Issuer's equity certificate holder against any liability,
fee, cost or expense (including reasonable attorneys' fees) that may be
incurred or charged in connection with such action, except for liability
resulting from the willful misconduct or gross negligence of the Issuer or the
trustee or from the failure of the Issuer or the trustee to use ordinary care
in the receiving, handling and disbursement of funds received by it in
accordance with the terms of the trust agreement.
Hanover Compressor Company
Hanover Compressor Company is a Delaware corporation. It is empowered by
Section 145 of the Delaware General Corporation Law (the "DGCL"), subject to
the procedures and limitations stated therein, to indemnify any person who was
or is a party, or is threatened to be made a party, to any threatened, pending
or completed action, suit or proceeding by reason of the fact that such person
is or was a director, officer, employee or agent of the company, or is or was
serving at the request of the company as a director, officer, employee or agent
of another corporation or other enterprise, against reasonable expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually incurred by him in connection with such action, suit or proceeding, if
such director, officer, employee or agent acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Hanover is required by
Section 145 to indemnify any person against reasonable expenses (including
attorneys' fees) actually incurred by him in connection with an action, suit or
proceeding in which he is a party because he is or was a director, officer,
employee or agent of the company or is or was serving at the request of the
company as a director, officer, employee or agent of another corporation or
other enterprise, if he has been successful, on the merits or otherwise, in the
defense of the action, suit or proceeding. Section 145 also allows a
corporation to purchase and maintain insurance on behalf of any such person
against any liability asserted against him in any such capacity, or arising out
of his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of Section 145. In
addition, Section 145 provides that indemnification pursuant to its provisions
is not exclusive of other rights of indemnification to which a person may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors, or otherwise.
Article Eight of Hanover's charter provides that it shall indemnify and hold
harmless all of its officers and directors and advance expenses reasonably
incurred by such officers and directors in defending any civil, criminal,
administrative or investigative action, suit or proceeding, in accordance with
and to the fullest extent permitted by Section 145 of the DGCL. Hanover
maintains directors and officers insurance covering them for certain
liabilities, including liabilities under the securities laws.
Hanover Compression Limited Partnership
Hanover Compression Limited Partnership is a Delaware limited partnership.
Section 17-108 of the Delaware Revised Uniform Limited Partnership Act (the
''DRULPA'') permits a limited partnership to indemnify and hold harmless any
partner or other person from and against any and all claims and demands
whatsoever.
II-1
Article VII of HCLP's limited partnership agreement provides that HCLP shall
indemnify and hold harmless each general partner and limited partner and its
respective equity holders, members, directors, officers, employees, agents and
affiliates (each a ''Covered Person'') against claims or liabilities, including
legal fees and other expenses reasonably incurred, arising out of the
activities of HCLP or any action taken by the Covered Person on behalf of HCLP
pursuant to authority granted by HCLP's limited partnership agreement. This
indemnification does not cover claims or liabilities (i) incurred as a result
of the gross negligence, willful misconduct or bad faith of a Covered Person,
or a knowing and material violation of the provisions of HCLP's limited
partnership agreement, (ii) as to which indemnification is barred under federal
securities law, the DRULPA or other applicable law, or (iii) as to a Covered
Person's share as partner in any losses or expenses of HCLP.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
No. Description of Exhibit
- --- ----------------------
3.1 Certificate of Trust of Hanover Equipment Trust 2001A *
3.2 Amended and Restated Trust Agreement of Hanover Equipment Trust 2001A, dated as of August 30,
2001, between General Electric Capital Corporation, as Certificate Holder, and Wilmington Trust
Company, as Trustee *
3.3 Certificate of Limited Partnership of Hanover Compression Limited Partnership *
3.4 Certificate of Amendment to Certificate of Limited Partnership of Hanover Compression Limited
Partnership, dated as of January 2, 2001 *
3.5 Certificate of Amendment to Certificate of Limited Partnership of Hanover Compression Limited
Partnership, dated as of August 20, 2001 *
3.6 Limited Partnership Agreement of Hanover Compression Limited Partnership *
3.7 Amendment to Limited Partnership Agreement of Hanover Compression Limited Partnership *
4.1 Indenture, dated as of August 30, 2001, between Hanover Equipment Trust 2001A, the Hanover
Guarantors parties thereto, and Wilmington Trust FSB, as Trustee and Collateral Agent, with
respect to the 8.50% Senior Secured Notes due 2008 (1) [10.69]
4.2 Exchange and Registration Rights Agreement with respect to the 8.50% Senior Secured Notes due
2008, dated as of August 30, 2001, among Hanover Equipment Trust 2001A, Hanover Compressor
Company, certain Guarantors party thereto, Goldman, Sachs & Co., J.P. Morgan Securities, Inc.,
Salomon Smith Barney, Inc. and Credit Suisse First Boston Corporation *
4.3 Participation Agreement, dated as of August 30, 2001, among Hanover Compression Limited
Partnership, as Lessee, Hanover Equipment Trust 2001A, as Lessor, General Electric Capital
Corporation, as Certificate Holder, certain Guarantors party thereto, Wilmington Trust FSB, as
Indenture Trustee, Collateral Agent under the Indenture, and in its individual capacity, only to the
extent expressly set forth therein, and Wilmington Trust Company, in its individual capacity, only
to the extent expressly set forth therein (1) [10.66]
4.4 Annex A to Participation Agreement and other Operative Agreements, containing certain Rules of
Usage and Definitions *
4.5 Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001A, as Lessor, and
Hanover Compression Limited Partnership, as Lessee (1) [10.64]
4.6 Guarantee, dated as of August 31, 2001, made by Hanover Compression Limited Partnership,
Hanover Compressor Company, certain Guarantors party thereto, and certain Beneficiaries party
thereto (1) [10.65]
4.7 Security Agreement, dated as of August 31, 2001, made by Hanover Equipment Trust 2001A in favor
of Wilmington Trust FSB, as Collateral Agent (1) [10.67]
4.8 Assignment of Lease, Rents and Guarantee, dated as of August 31, 2001, from Hanover Equipment
Trust 2001A to Wilmington Trust FSB, as Collateral Agent (1) [10.68]
II-2
Exhibit
No. Description of Exhibit
- --- ----------------------
5.1.. Opinion of Latham & Watkins **
12.1.. Computation of Ratio of Earnings to Fixed Charges for Hanover Compressor Company *
12.2.. Computation of Ratio of Earnings to Fixed Charges for Hanover Equipment Trust 2001A *
12.3.. Computation of Ratio of Earnings to Fixed Charges for Hanover Compression Limited Partnership *
21.1.. List of Subsidiaries of Hanover Compressor Company *
23.1.. Consent of Latham & Watkins (included as part of its opinion filed as Exhibit 5.1) **
23.2.. Consent of PricewaterhouseCoopers LLP *
23.3.. Consent of PricewaterhouseCoopers LLP *
23.4.. Consent of PricewaterhouseCoopers LLP *
23.5.. Consent of PricewaterhouseCoopers LLP *
23.6.. Consent of American Appraisal Associates, Inc. *
24.1.. Powers of Attorney (included on the signature page of this Registration Statement)
25.1.. Statement of Eligibility of Trustee on Form T-1 *
99.1.. Form of Letter of Transmittal for 8.50% Senior Secured Notes due 2008 *
99.2.. Form of Notice of Guaranteed Delivery of 8.50% Senior Secured Notes due 2008 *
99.3.. Form of Letter to DTC Participants *
99.4.. Form of Letter to Beneficial Owners *
99.5.. Guidelines for Certification of Taxpayer Identification Number on Form W-9 *
99.6.. Form of Exchange Agent Agreement *
- --------
(1) Such exhibit previously filed as an exhibit to Hanover's Quarterly Report
on Form 10-Q for the period ended September 30, 2001, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
* Filed herewith.
** To be filed by amendment.
(b) Financial Statement Schedules
All schedules are omitted because the required information is inapplicable
or is presented in the consolidated financial statements or related notes.
Item 22. Undertakings.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof; and
II-3
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrants' annual reports pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrants pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrants of expenses
incurred or paid by a director, officer or controlling person of the
registrants in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrants will, unless in the opinion of
their counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
them is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, 13, or 19(c) of this form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired therein, that was not the subject of and included in the
registration statement when it became effective.
II-4
SIGNATURES
Signatures of Hanover Compressor Company
Pursuant to the requirements of the Securities Act of 1933, as amended,
Hanover Compressor Company has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, State of Texas, on December 21, 2001.
Hanover Compressor Company
By: /s/ Michael J. McGhan
-----------------------------------
Michael J. McGhan
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael J. McGhan and William S. Goldberg or
either of them, his true and lawful attorney-in-fact and agent, with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 21st day of December, 2001.
Signature Title
--------- -----
/s/ Michael J. McGhan President and Chief Executive Officer and Director
- ----------------------- (Principal Executive Officer)
Michael J. McGhan
/s/ William S. Goldberg Chief Financial Officer and Director (Principal Financial
- ----------------------- and Accounting Officer)
William S. Goldberg
/s/ Ted Collins, Jr. Director
- -----------------------
Ted Collins, Jr.
/s/ Michael A. O'Connor Director
- -----------------------
Michael A. O'Connor
/s/ Melvyn N. Klein Director
- -----------------------
Melvyn N. Klein
/s/ Alvin V. Shoemaker Director
- -----------------------
Alvin V. Shoemaker
/s/ Robert R. Furgason Director
- -----------------------
Robert R. Furgason
/s/ Rene J. Huck Director
- -----------------------
Rene J. Huck
II-5
Signatures of Hanover Compression Limited Partnership
Pursuant to the requirements of the Securities Act of 1933, as amended,
Hanover Compression Limited Partnership has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on December 21, 2001.
HANOVER COMPRESSION LIMITED
PARTNERSHIP
/S/ MICHAEL J. MCGHAN
By:__________________________________
Michael J. McGhan
President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael J. McGhan and William S. Goldberg or
either of them, his true and lawful attorney-in-fact and agent, with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 21st day of
December 2001.
Signature Title
--------- -----
/S/ MICHAEL J. MCGHAN
- ----------------------- President and Chief Executive Officer (Principal Executive
Michael J. McGhan Officer) and Manager of the General Partner
/S/ WILLIAM S. GOLDBERG Executive Vice President and Treasurer and Manager of the
- ----------------------- General Partner (Principal Financial and Accounting
William S. Goldberg Officer)
/S/ CHARLES D. ERWIN Manager of the General Partner
- -----------------------
Charles D. Erwin
II-6
Signatures of Hanover Equipment Trust 2001A
Pursuant to the requirements of the Securities Act of 1933, as amended,
Hanover Equipment Trust 2001A has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, State of Texas, on December 21, 2001.
HANOVER EQUIPMENT TRUST 2001A
By: Wilmington Trust Company, not in
its individual capacity but solely
as Trustee
By: /S/ DAVID A. VANASKEY, JR.
----------------------------------
David A. Vanaskey, Jr.,
Vice President
II-7
EXHIBIT INDEX
3.1 Certificate of Trust of Hanover Equipment Trust 2001A *
3.2 Amended and Restated Trust Agreement of Hanover Equipment Trust 2001A, dated as of August 30,
2001, between General Electric Capital Corporation, as Certificate Holder, and Wilmington Trust
Company, as Trustee *
3.3 Certificate of Limited Partnership of Hanover Compression Limited Partnership *
3.4 Certificate of Amendment to Certificate of Limited Partnership of Hanover Compression Limited
Partnership, dated as of January 2, 2001 *
3.5 Certificate of Amendment to Certificate of Limited Partnership of Hanover Compression Limited
Partnership, dated as of August 20, 2001 *
3.6 Limited Partnership Agreement of Hanover Compression Limited Partnership *
3.7 Amendment to Limited Partnership Agreement of Hanover Compression Limited Partnership *
4.1 Indenture, dated as of August 30, 2001, between Hanover Equipment Trust 2001A, the Hanover
Guarantors parties thereto, and Wilmington Trust FSB, as Trustee and Collateral Agent, with respect
to the 8.50% Senior Secured Notes due 2008 (1) [10.69]
4.2 Exchange and Registration Rights Agreement with respect to the 8.50% Senior Secured Notes due 2008,
dated as of August 30, 2001, among Hanover Equipment Trust 2001A, Hanover Compressor
Company, certain Guarantors party thereto, Goldman, Sachs & Co., J.P. Morgan Securities Inc.,
Salomon Smith Barney, Inc. and Credit Suisse First Boston Corporation *
4.3 Participation Agreement, dated as of August 30, 2001, among Hanover Compression Limited
Partnership, as Lessee, Hanover Equipment Trust 2001A, as Lessor, General Electric Capital
Corporation, as Certificate Holders, certain Guarantors party thereto, Wilmington Trust FSB, as
Indenture Trustee, Collateral Agent under the Indenture, and in its individual capacity, only to the
extent expressly set forth therein, and Wilmington Trust Company, in its individual capacity, only to
the extent expressly set forth therein (1) [10.66]
4.4 Annex A to Participation Agreement and other Operative Agreements, containing certain Rules of
Usage and Definitions *
4.5 Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001A, as Lessor, and Hanover
Compression Limited Partnership, as Lessee (1) [10.64]
4.6 Guarantee, dated as of August 31, 2001, made by Hanover Compression Limited Partnership, Hanover
Compressor Company, certain Guarantors party thereto, and certain Beneficiaries party thereto (1) [10.65]
4.7 Security Agreement, dated as of August 31, 2001, made by Hanover Equipment Trust 2001A in favor of
Wilmington Trust FSB, as Collateral Agent (1) [10.67]
4.8 Assignment of Lease, Rents and Guarantee, dated as of August 31, 2001, from Hanover Equipment
Trust 2001A to Wilmington Trust FSB, as Collateral Agent (1) [10.68]
5.1 Opinion of Latham & Watkins **
12.1 Computation of Ratio of Earnings to Fixed Charges for Hanover Compressor Company *
12.2 Computation of Ratio of Earnings to Fixed Charges for Hanover Equipment Trust 2001A *
12.3 Computation of Ratio of Earnings to Fixed Charges for Hanover Compression Limited Partnership *
21.1 List of Subsidiaries of Hanover Compressor Company *
23.1 Consent of Latham & Watkins (included as part of its opinion filed as Exhibit 5.1) **
23.2 Consent of PricewaterhouseCoopers LLP *
23.3 Consent of PricewaterhouseCoopers LLP *
23.4 Consent of PricewaterhouseCoopers LLP *
23.5 Consent of PricewaterhouseCoopers LLP *
23.6 Consent of American Appraisal Associates, Inc. *
24.1 Powers of Attorney (included on the signature page of this Registration Statement)
25.1 Statement of Eligibility of Trustee on Form T-1 *
99.1 Form of Letter of Transmittal for 8.50% Senior Secured Notes due 2008 *
99.2 Form of Notice of Guaranteed Delivery of 8.50% Senior Secured Notes due 2008 *
99.3 Form of Letter to DTC Participants *
99.4 Form of Letter to Beneficial Owners *
99.5 Guidelines for Certification of Taxpayer Identification Number on Form W-9 *
99.6 Form of Exchange Agent Agreement *
- --------
(1) Such exhibit previously filed as an exhibit to Hanover's Quarterly Report
on Form 10-Q for the period ended September 30, 2001, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
* Filed herewith.
** To be filed by amendment.