SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 11-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended December 31, 2002
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 1-13071
The Hanover Companies Retirement Savings Plan
(Full title of the plan)
Hanover Compressor Company
12001 North Houston Rosslyn, Houston, Texas 77086
(Name of issuer of the securities held pursuant to the plan and the address of
its principal executive office)
Required Information
Item 4. Financial Statements for the Plan
The Hanover Companies Retirement Savings Plan (the "Plan") is subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). In lieu
of the requirements of Items 1-3 of this Form, the Plan is filing its financial
statements prepared in accordance with the financial reporting requirements of
ERISA. The Plan's financial statements have been examined by
PricewaterhouseCoopers LLP, Independent Auditors, and their report is included
herein beginning on page F-1.
Exhibits
Exhibit Number Description
-------------- ------------
23 Consent of PricewaterhouseCoopers LLP
99 Certification Pursuant To 18 U.S.C.(S)1350
2
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan
Administrator for the Hanover Companies Retirement Savings Plan has duly caused
this Annual Report to be signed by the undersigned thereunto duly authorized.
Hanover Companies Retirement Savings Plan
Date: June 30, 2003
By: /s/ Chad C. Deaton
- --------------------------------------------------
Chad C. Deaton
President and Chief Executive Officer
Date: June 30, 2003
By: /s/ John E. Jackson
- --------------------------------------------------
John E. Jackson
Senior Vice President and Chief Financial Officer
3
The Hanover Companies
Retirement Savings Plan
Financial Statements
December 31, 2002 and 2001
F-1
The Hanover Companies Retirement Savings Plan
Contents
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
Page(s)
Report of Independent Auditors ............................................ F-3
Financial Statements
Statements of Net Assets Available for Benefits ........................... F-4
Statement of Changes in Net Assets Available for Benefits ................. F-5
Notes to Financial Statements ............................................. F-6
F-2
Report of Independent Auditors
To the Participants and Plan Administrator of
The Hanover Companies Retirement Savings Plan
In our opinion, the accompanying statements of net assets available for benefits
and the related statement of changes in net assets available for benefits
present fairly, in all material respects, the net assets available for benefits
of The Hanover Companies Retirement Savings Plan (the "Plan") at December 31,
2002 and 2001, and the changes in net assets available for benefits for the year
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Plan'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.
PricewaterhouseCoopers LLP
Houston, Texas
June 30, 2003
F-3
The Hanover Companies Retirement Savings Plan
Statements of Net Assets Available for Benefits
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
2002 2001
Assets
Cash (Note 9) $ - $ 19,819,122
Investments
Hanover Compressor Company common stock,
at fair value 5,270,054 7,726,973
Mutual funds, at fair value 39,141,220 -
Common collective trusts, at fair value 15,536,025 -
Other common stocks, at fair value 90,817 -
Participant loans, at cost 2,393,349 1,838,622
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Total investments 62,431,465 29,384,717
Receivables
Employer contribution 164,665 227,344
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Net assets available for benefits $ 62,596,130 $ 29,612,061
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The accompanying notes are an integral part of these financial statements.
F-4
The Hanover Companies Retirement Savings Plan
Statement of Changes in Net Assets Available for Benefits
Year Ended December 31, 2002
- --------------------------------------------------------------------------------
Additions to net assets attributed to
Investment income (loss)
Net depreciation in fair value of mutual funds $ (5,563,979)
Net appreciation in fair value of common collective trusts 156,014
Net depreciation in fair value of Hanover Compressor Company common stock (5,765,044)
Net appreciation in fair value of other common stocks 7,941
Dividend income 625,048
Interest income 152,334
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Total investment income (loss) (10,387,686)
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Contributions
Employer contributions 1,309,833
Participant contributions 6,336,428
Participant rollover contributions 717,754
Plan mergers (Note 5) 40,202,539
Other 7,253
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Total contributions 48,573,807
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Total additions to net assets 38,186,121
Deductions from net assets attributed to
Benefits paid 5,104,805
Administrative expenses 97,247
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Total deductions from net assets 5,202,052
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Net increase in net assets available for benefits 32,984,069
Net assets available for benefits
Beginning of year 29,612,061
-------------
End of year $ 62,596,130
=============
The accompanying notes are an integral part of these financial statements.
F-5
The Hanover Companies Retirement Savings Plan
Notes to Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
1. Description of Plan
The Hanover Companies Retirement Savings Plan (the "Plan") was adopted
effective January 1, 1994, by Hanover Compressor Company and replaced the
Company's former plan, the Hanover Energy Employee's Savings Plan. On
December 29, 1999, the sponsor of the Plan became Hanover Compression
Limited Partnership (the "Company").
The following description of the Plan provides only general information.
Participants should refer to the Plan document for a more complete
description of the Plan's provisions.
General
The Plan is a defined contribution plan covering all domestic employees of
the Company. It is subject to the provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA").
Participation
A domestic employee of the Company is generally eligible to become a
participant in the Plan upon attainment of eighteen years of age and six
months of service with the Company.
Contributions
Participants may contribute on a pre-tax basis up to 25 percent of their
compensation, as defined in the Plan document. Participants may also elect
to make rollover contributions to the Plan from other qualified retirement
plans. The Company may make discretionary contributions to the Plan in the
form of matching contributions of 35 percent of each participant's
contributions for the Plan year, up to an annual maximum of $1,000 per
individual. Participants who were employed on the last day of the Plan year
or who died, became disabled while an employee of the Company or terminated
employment after obtaining normal retirement age, as defined in the Plan
document, during the Plan year are eligible for an allocation of
discretionary Company contributions. The Company made discretionary
contributions of $1,309,833 during the Plan year ended December 31, 2002.
Participant contributions may not exceed the maximum statutory limit, which
was $11,000 for the Plan year ended December 31, 2002, except that
participants age 50 or older during the Plan year can make a special
"catch-up" contribution not to exceed $1,000 in 2002. Participants may
change their contribution percentage at any time during the Plan year.
All Company matching contributions are made in the form of Hanover
Compressor Company common stock. With regards to the Company matching
contributions, participants may not withdraw or reallocate such amounts to
other Plan investment options until the participant terminates
participation in the Plan. See Note 12.
Participant Accounts
Each participant's account is credited with the participant's
contributions, Company contributions and an allocation of Plan earnings and
forfeitures of terminated participants' nonvested accounts. All Plan assets
are allocated to individual participant account balances. The benefit to
which a participant is entitled is the benefit that can be provided from
the participant's vested account balance.
F-6
The Hanover Companies Retirement Savings Plan
Notes to Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
Vesting
Participants are immediately vested in their voluntary contributions plus
actual earnings thereon. Participants become vested in the Company's
contributions, including reallocated forfeiture accounts, and actual
earnings thereon at the rate of 20 percent per year after two years of
employment with the Company subject to limitations by the Plan document.
See Note 12.
Forfeitures
Forfeited nonvested Company contributions are allocated to current Plan
participants on an annual basis as an additional Company matching
contribution. For the year ended December 31, 2002, forfeited nonvested
amounts totaling $49,404 were allocated to Plan participants. As of
December 31, 2002, there were $141,305 of forfeited nonvested accounts
which had not yet been allocated to Plan participants.
Investment Options
During the year ended December 31, 2002, participants were able to direct
their contributions among 25 different investment options consisting of
Hanover Compressor Company common stock, common collective trusts and
mutual funds.
Payment of Benefits
A participant may elect to withdraw any part of his or her vested account
upon retirement, termination of employment, death or disability or
attainment of age 59-1/2. Benefits may be paid by either a lump-sum payment
in cash or, at the election of the Trustee, in property equal to the value
of his or her account. A lump-sum payment is automatically distributed to
terminated participants with vested balances equal to or less than $5,000.
Withdrawals of vested balances due to immediate and heavy financial need
are also permitted subject to the terms of the Plan document.
Participant Loans
Participants may borrow from their accounts a minimum of $1,000 up to a
maximum of the lesser of $50,000 or 50 percent of the value of the
participant's account vested account balance in the Plan. Loans are secured
by one-half of the vested balance in the participant's account and bear
interest at a rate determined by the Plan administrator in accordance with
the terms of the Plan document. As of December 31, 2002 and 2001, the
interest rate on outstanding loans ranged from 5.25 percent to 10.0 percent
and 5.0 percent to 11.5 percent, respectively. Loan repayments are made
through payroll deductions and interest paid on loans is credited to the
applicable participant's account. Participant loans are generally repaid
over a period not to exceed five years.
Administration
The Plan is sponsored by the Company and certain officers and employees of
the Company serve as the Plan Administrator. The Plan Administrator has the
power and duty to take all actions and make all decisions necessary to
properly carry out the provisions of the Plan subject to the terms of the
Plan document. These powers and duties include, among other things, the
interpretation of Plan provisions and the engagement of a trustee, record
keeper, investment manager, legal counsel, independent accountants and
other such specialists as are deemed necessary for operation of the Plan.
As discussed in Note 9, effective January 1, 2002, the Plan changed
trustees and record keepers to AMVESCAP National Trust Company and INVESCO
Retirement, Inc., respectively.
F-7
The Hanover Companies Retirement Savings Plan
Notes to Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
Expenses of the Plan
Expenses of the Plan are generally paid for by the Company. Administrative
expenses reflected on the accompanying statement of changes in net assets
available for benefits for the year ended December 31, 2002, represent the
sum of charges to individual participant accounts for specific transactions
initiated by the applicable participants in accordance with the Plan
document.
2. Summary of Significant Accounting Policies
The financial statements of the Plan are prepared on an accrual basis in
accordance with accounting principles generally accepted in the United
States of America and in accordance with the provisions of the American
Institute of Certified Public Accountants Statement of Position 99-3,
Accounting for and Reporting of Certain Defined Contribution Plan
Investments and Other Disclosure Matters. The following is a summary of the
Plan's significant accounting policies:
Use of Estimates
The preparation of the Plan's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Plan administrator to make estimates and assumptions that
affect the reported amounts of net assets available for benefits at the
date of the financial statements and changes in net assets available for
benefits during the reporting period and, when applicable, disclosures of
contingent assets and liabilities at the date of the preparation of the
financial statements. Actual results could differ from those estimates.
Payment of Benefits
Benefits are recorded when paid.
Valuation of Investments
The Plan's investments in mutual funds and common stocks are stated at fair
market value based on period ending quoted market prices. Common collective
trusts are stated at fair market value of the applicable trusts' underlying
net assets as determined by the quoted market prices for securities which
market quotations are available. Cash and participant loans are valued at
cost, which approximates fair market value.
Investment Income Recognition
The net appreciation (depreciation) in fair value of investments includes
the realized gain or loss on investments bought and sold during the year as
well as the unrealized change in fair value of such investments during the
year. Purchases and sales of securities are reflected on a trade-date
basis. Dividend income is recorded on the ex-dividend date and interest
income is recorded as earned.
Certain of the Plan's investments pay investment advisory fees and/or 12b-1
fees and administrative expenses. These fees are reflected in the valuation
of these investments.
F-8
The Hanover Companies Retirement Savings Plan
Notes to Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
3. Concentrations of Credit and Market Risk
Certain investments, including the common stock of the Company, potentially
subject the Plan to concentrations of credit and market risk. The Plan does
not obtain or require collateral for these investments. Changes in the
domestic and international economic environment and other factors outside
the control of the Plan have a direct impact on the market value and/or
credit risk of the Plan's investments. It is reasonably possible that
changes in the economic environment will occur in the near term and that
such changes will have a material effect on the market value of the Plan's
investments and/or credit risk relating to such investments.
4. Investments
Plan investments as of December 31, 2002 and 2001, that represent five
percent or more of the Plan's net assets available for benefits are as
follows:
December 31,
---------------------------
2002 2001
Cash (Note 9) $ - $ 19,819,122
Common stock
Hanover Compressor Company 5,002,686 7,726,973
Common/collective trusts
INVESCO Core Fixed Income 5,584,323 -
INVESCO Stable Value 8,810,401 -
Mutual funds
Schlumberger Stock Fund 9,975,534 -
AIM Balanced Fund - A Shares 16,121,667 -
American Growth Fund of America 3,531,475 -
AIM Basic Value Fund - A Shares 4,114,003 -
The Schlumberger stock fund and Transocean stock fund are not available for
future contributions by participants.
The Plan's only investment option which is nonparticipant directed is its
investment in Hanover Compressor Company common stock as it relates to
Company contributions. As follows is a summary of the change in the Plan's
investment in Hanover Compressor Company common stock for the year ended
December 31, 2002:
Net depreciation in fair value of common stock $ (5,761,280)
Interest income on participant loans 23,160
Employer contributions 1,372,375
Employee contributions 1,153,019
Employee rollover contributions 88,722
Other 12,984
Transfers (to) from other investment options, net 603,595
Benefits paid (216,862)
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Net decrease (2,724,287)
Total investment
Beginning of year 7,726,973
------------
End of year $ 5,002,686
============
Additionally, the Plan provides participants with the option of
self-directed investments. As of December 31, 2002, participant
self-directed investments consisted of the following:
Hanover Compressor Company Common Stock $ 267,368
Mutual funds 621,182
Other common stocks 90,817
------------
$ 979,367
============
Prior to 2002, Plan participants did not have the option of self-directed
investments.
5. Plan Mergers
Effective July 1, 2002, the Company merged the assets of two defined
contribution retirement plans into the Plan. Such plans were sponsored by
certain of the Company's operating subsidiaries prior to the Company's
acquisition of these entities. The participants in these plans became
eligible to participate in the Plan in conjunction with the Company's
acquisition of the applicable entity. Such acquisitions were completed by
the Company in July and August, 2001.
6. Plan Termination
Although it has not expressed any intent to do so, the Company has the
right under the Plan to discontinue its contribution at any time and to
terminate the Plan subject to the provisions of ERISA. If the Plan were to
be terminated in the future, all participants would immediately become
fully vested in their entire account balance at the time of the Plan's
termination.
7. Tax Status
The Internal Revenue Service has determined and informed AMVESCAP, the
trustee by a letter dated August 30, 2001, that the Plan is designed in
accordance with applicable sections of the Internal Revenue Code ("IRC").
As a result, it is believed that the Plan is exempt from taxation under the
applicable sections of the IRC. The Plan has not been amended during 2002.
See Note 12, for discussion of amendments made to the Plan subsequent to
December 31, 2002.
F-9
The Hanover Companies Retirement Savings Plan
Notes to Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
8. Party-In-Interest Transactions
Certain of the Plan's investments are managed by AMVESCAP, the trustee of
the Plan. Transactions involving these investments occur at quoted market
values. Consequently, such transactions are permitted under the provisions
of the Plan and are exempt from prohibition of party-in-interest
transactions under ERISA.
Additionally, the Plan provides for investment in shares of the Company's
common stock. As the Company is the parent of the Plan Sponsor, these
transactions qualify as exempt party-in-interest transactions under ERISA.
9. Change of Record Keeper and Trustee
Effective January 1, 2002, the Plan administrator changed the Plan's record
keeper and trustee from Merrill Lynch to INVESCO and AMVESCAP,
respectively. As a result of the change, certain of the Plan's available
investment options were no longer available to participants. In preparation
for the transfer, Merrill Lynch converted all investments, with the
exception of Hanover Compressor Company common stock, to cash on December
31, 2001. The Plan's assets were transferred to AMVESCAP on January 2,
2002. All investment options converted to cash prior to the transfer were
mapped to investments with similar investment objectives upon receipt of
the funds by AMVESCAP.
10. Prohibited Transactions
In 2002, the Department of Labor ("DOL") conducted an audit of the Plan and
reported some Prohibited Transactions relating to the untimely remittances
of 48 employee contributions during the years 1997 to 1999. The
contributions were deposited in the 401k account within 181 days but the
loss of earnings associated with these late deposits were not deposited
until September 23, 2002. The DOL in a letter dated November 26, 2002,
acknowledged that the Plan sponsor had taken corrective measures to restore
the 401k by both depositing the contributions and contributing $31,577 for
interest based on the loss of earnings from the Plan and for excise taxes.
11. Provisions for Estimated Cost of Litigation Settlement
On and after March 26, 2003, three plaintiffs filed separate putative class
actions collectively against the Company, Michael McGhan, Michael O'Connor,
William Goldberg and Chad Deaton (and other purportedly unknown defendants)
in the United States District Court for the Southern District of Texas. The
alleged class is comprised of persons who participated in or were
beneficiaries of the Plan, which was established by the Company pursuant to
Section 401(k) of the United States Internal Revenue Code of 1986, as
amended, during the class period, which is from May 4, 1999 to December 23,
2002. The purported class action seeks relief under the Employee Retirement
Income Security Act (ERISA) based upon the Company's and the individual
defendants' alleged mishandling of Hanover's 401(k) Plan. The three ERISA
putative class actions are entitled: Kirkley v. Hanover, Case No.
H-03-1155; Angleopoulos v. Hanover, Case No. H-03-1064; and Freeman v.
Hanover, Case No. H-03-1095.
On January 24, 2003, Plumbers & Steamfitters, Local 137 Pension Fund and
John Petti filed a putative securities class action against
PricewaterhouseCoopers LLP, which is the Company's independent auditor. The
alleged class was all persons who purchased the equity or debt
F-10
The Hanover Companies Retirement Savings Plan
Notes to Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
securities of Hanover from March 8, 2000 through and including October 23,
2002. On February 13, 2003, the court consolidated this action with certain
putative class actions and shareholder derivative actions against the
Company, which are more fully described in the Company's Form l0-Q for the
quarterly period ending March 31, 2003. PricewaterhouseCoopers LLP is the
independent auditor of the Plan.
On May 12, 2003, the Company reached agreement, subject to court approval,
to settle the ERISA putative class actions as well as the putative class
actions and shareholder derivative actions against the Company. The terms
of the proposed settlement provide for Hanover to: (i) make a cash payment
of approximately $30 million (of which $26.7 million is to be funded by
payments from the Company's directors and officers insurance carriers),
(ii) issue 2.5 million shares of common stock, and (iii) issue a contingent
note with a principal amount of $6.7 million. The note is payable, together
with accrued interest, on March 31, 2007 but can be extinguished (with no
monies owing under it) if the Company's common stock trades at or above the
average price of $12.25 for 15 consecutive days at any time between March
31, 2004 and March 31, 2007. As part of the settlement, the Company has
also agreed to implement corporate governance enhancements, including
allowing large shareholders to participate in the process to appoint two
independent directors to the Company's Board. The Company's auditor,
PricewaterhouseCoopers LLP, is not a party to the settlement and will
continue to be a defendant in the consolidated securities class action.
GKH Investments, L.P., and GKH Private Limited (collectively "GKH") which
together own approximately ten percent of the Company's outstanding common
stock and which sold shares in the Company's March 2001 secondary offering
of common stock are parties to the proposed settlement and have agreed to
settle claims against them that arise out of that offering as well as other
potential securities, ERISA, and derivative claims. The terms of the
proposed settlement provide for GKH to transfer 2.5 million shares of
Hanover's common stock from their holdings or from other sources.
On May 13, 2003, the Company moved to consolidate all of the ERISA actions
and the consolidated shareholder derivative action into the consolidated
securities class action. In addition, the Company, and the other defendants
in the actions, together with the plaintiffs that entered into the
settlement filed a motion in the consolidated securities action pursuant to
which the parties have agreed to seek preliminary approval of the court for
the settlement by September 29, 2003. The settlement is subject to court
approval and could be the subject of an objection by shareholders as well
as from plaintiff's counsel to Harbor Finance in the shareholder derivative
matter and plaintiffs' counsel in the Angleopoulos (H-03-1064) and the
Freeman (H-03-1095) ERISA matters who were not signatories to the agreement
reached among the remaining parties.
To the extent that participants in the Plan who are members of the alleged
class of persons who participated in or were beneficiaries of the Plan
during the class period are entitled to receive a portion of the settlement
amounts, such amounts would be added to their accounts in the Plan at the
time amounts from the settlement are paid to the Plan.
12. Subsequent Event
Effective January 1, 2003, the Company amended its Plan. Under the new
amendment, the Company increased its contribution to 50 percent per dollar
up to a maximum of 6 percent of employee's initial compensation per pay
period, and eliminated the annual maximum of $1,000
F-11
The Hanover Companies Retirement Savings Plan
Notes to Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
per individual. The vesting period was reduced form 6 years to 5 years.
Further, all Company matching contributions will be made in the form of
cash that will be invested in the individuals current investment fund
elections. Also, any existing current balances that are in the matching
Hanover common stock may be transferred to other investment funds in the
Plan.
F-12
EXHIBIT INDEX
Exhibit Number Description
-------------- ------------
23 Consent of PricewaterhouseCoopers LLP
99 Certification Pursuant To 18 U.S.C.(S)1350